RMR Group Inc (RMR) 2020 Q3 法說會逐字稿

Good day, and welcome to the RMR Group Fiscal Q3 2020 Earnings Conference Call. (Operator Instructions)

Please note that today's event is being recorded. At this time, I would like to turn the conference over to Michael Kodesch, Director of Investor Relations. Please proceed.

Good afternoon, and thank you for joining RMR's Third Quarter Fiscal 2020 Conference Call. With me on today's call are President and CEO, Adam Portnoy; and Chief Financial Officer, Matt Jordan. In just a moment, they will provide details about our business and performance, followed by a question-and-answer session.

We'd like to note that the recording and retransmission of today's conference call is prohibited without the prior written consent of the company. Today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward-looking statements are based on RMR's beliefs and expectations as of today, August 7, 2020, and actual results may differ materially from those that we project.

The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call. Additional information concerning factors that could cause those differences is contained in our filings with the Securities and Exchange Commission, or SEC, which can be found on our website at www.rmrgroup.com.

Investors are cautioned not to place undue reliance upon any forward-looking statements. In addition, we may discuss non-GAAP numbers during this call, including adjusted net income, adjusted earnings per share, adjusted EBITDA and adjusted EBITDA margin. A reconciliation of net income determined in accordance with U.S. generally accepted accounting principles to adjusted net income, adjusted earnings per share, adjusted EBITDA and the calculation of adjusted EBITDA margin can be found in the news release we issued this morning.

And now I would like to turn the call over to Adam.

Thanks, Michael, and good afternoon, everyone. I'd like to begin today's call by recognizing the immense effort and dedication we've seen across our organization, despite the impact of the COVID-19 crisis on our businesses. While the last 4 months have been extraordinarily challenging, 100% of our managed office and industrial assets have remained operational and available to our tenants, though approximately half remain lightly utilized. With a nationwide platform of over 2,100 properties across multiple commercial real estate sectors, I'd like to first share some insights regarding the sectors we operate in.

As it relates to commercial real estate investment sales, we've witnessed transaction volume declines across all sectors. As a point of reference, the volume of transactions screened by our acquisitions team decreased by over 40% relative to the average volume of transactions screened in a typical quarter. With overall volume down, private capital dry powder earmarked for commercial real estate, coupled with historical low interest rates, has helped properties hold their value and keep cap rates close to pre-pandemic levels, especially in the top-performing sectors such as industrial and net lease office.

In each of these highly sought-after sectors, we have experienced competitive bidding processes with buyers getting close to brokers' expectations. With that said, values in the more negatively impacted sectors, such as hospitality, senior living and nonessential retail, will take longer to recover and we expect there may be select acquisition opportunities with these types of properties at distressed prices in the future.

These same trends have impacted many of our managed equity REITs' disposition programs, as we have seen a reduction in the number of buyers available for hotel, senior living and nonessential service retail dispositions. In many cases, we have pulled prospective transactions due to buyers seeking price reductions, or because we had concerns around the viability of buyer financing. While transaction volume has slowed considerably, it is worth noting that in aggregate, our client companies have closed on the sale of 18 properties for proceeds of $176 million since the beginning of March.

Turning to industry and tenant behavior. I'm pleased to report that across our platform, we collected over 90% of rents each month in the fiscal third quarter. And in July, we collected approximately 99% of rents. The majority of uncollected rents have been addressed through rent relief discussions, mostly in the form of rent deferrals. As it relates to rent deferrals, we remain committed to working with the tenants of our client companies by providing short-term relief to allow them to successfully navigate this pandemic.

This collaborative approach to working with our tenants should help upon a return to normal in making sure we are a preferred and trusted landlord for longer-term real estate needs. To date, we have granted net rent relief to over 300 tenants, with the pace of rent deferral requests across our client companies declining over the course of the quarter. We believe the higher volume of deferral requests in March and April was partially a result of tenants not yet receiving government support, and the uncertainty of reopening time lines.

As government support and partial reopenings have improved tenant confidence, over 50 tenants have rescinded rent deferral requests. During the third quarter, we arranged over 3.2 million square feet of leases and rent resets on behalf of our client companies with a weighted average lease term of 11 years and a weighted average roll up in rent of almost 8%. Leasing activity was primarily driven by near-term expirations or rent abatements given in exchange for extended lease terms. Given the market uncertainty and the impact of work-from-home orders, we are seeing a mix of tenant behaviors across industries.

Many tenants that were in the market to relocate or renew, have chosen to sign short-term or blend and extend renewals, whereas industrial and government tenants have mostly proceeded as they would normally. Finally, as it relates to construction activity at our client companies, the initial stages of the pandemic caused some markets to slow or stop construction activity altogether. As markets began to reopen, bans on construction have been lifted and municipalities have adopted measures to continue with plan reviews, permitting and inspections. Most large-scale development projects managed by RMR remain on schedule, with the impacts of the pandemic being far less dramatic than we had thought during our last earnings call.

This quarter, RMR directly supervised over $40 million in capital improvements at our client companies, an increase of almost $10 million on a year-over-year and sequential quarter basis. Moving to some of the more significant highlights at our client companies during the quarter, industrial real estate remains firmly in favor, as warehouse demand remains well-supported by continued growth in e-commerce and the related needs of our tenants for logistics and distribution support. ILPT was a direct beneficiary of this trend, delivering same-property cash basis NOI growth of 3.4% on a year-over-year basis, and over 1.9 million square feet of leasing and rent reset activity with a 23% roll up in rents. ILPT also continues to benefit from a tenant base where investment-grade rated tenants or Hawaii ground leases represent approximately 75% of annualized rents.

With RMR's help, ILPT also continues to explore the possibility of expanding the joint venture it announced last quarter with another direct capital investor. It is also -- it is our expectation that this vehicle would make additional acquisitions in the future, which in turn would help scale -- to add scale to ILPT and result in a new RMR-managed private vehicle. Switching gears to our office REIT, OPI's diverse portfolio of high credit quality and government tenants has remained resilient throughout the pandemic.

While much has been made regarding the future of office space, we believe it is too early to conclude on where tenant behaviors will ultimately land. To date, requests from tenants for changes to their footprint to support flexibility with remote work have been minimal. We continue to believe dedensification, employee development and collaboration and the need for an office touchpoint will largely outweigh the current temporary work-from-home trends. OPI's same-property cash basis NOI increased 2.5% over the prior year, with 642,000 square feet of leases executed at a 3.9% roll up in rent.

OPI recently issued $162 million of 30-year senior unsecured notes and used the proceeds to pay down its revolving credit facility. With nearly 63% of its annualized revenue derived from investment-grade rated tenants, OPI remains well positioned to weather the current economic environment. This quarter, DHC completed 2 important transactions, as it has issued $1 billion of senior unsecured notes and amended its credit facility and term loan agreements. Completion of these transactions should ensure GHD has sufficient liquidity to meet the unique challenges presented by the pandemic, pay down near-term maturities, provide flexibility in meeting debt covenants and allow it to continue investing in its portfolio.

While DHC continues to experience pandemic-related headwinds at its senior living communities, it's important to remember that almost 60% of DHC's NOI comes from its office segment. The office segment continues to benefit from a healthy biotech and lab real estate market, as pharmaceutical and medical device manufacturers experience surges in demand associated with COVID-19 test- and vaccine-related research.

Excluding reductions in parking income as a result of the pandemic, DHC's office segment same-property cash basis NOI increased 10 basis points year-over-year. SBC continues to face the most significant pandemic-related challenges amongst all our managed businesses, as the hospitality and service retail sectors have been some of the hardest-hit. To help ensure SVC can weather the current environment, SVC issued $800 million of senior unsecured notes and obtained waivers from certain financial covenants applicable to its bank facilities.

Most recently, SVC sent a notice to IHG to terminate agreements covering 103 hotels. While we hope that IHG honors its contractual arrangements with SVC, we are assessing alternative strategies to protect SVC's cash flows and to maximize flexibility regarding these important assets. By potentially rebranding these hotels as Sonesta Hotels, SVC would also benefit via its 34% ownership of Sonesta, and leverage Sonesta's track record of improving returns at hotels where it assumes management.

Operationally, SVC has seen signs of recovery throughout the quarter, with hotel occupancy steadily increasing each month to a high of 35.5% in June and service retail rent collections of 80% for the month of July. While these are positive trends, there remains a long road ahead for SVC to get back to pre-pandemic operating results. Lastly, TravelCenters of America, which continues to support the critical work of professional truck drivers transporting vital goods across the country, reported strong diesel fuel volume and adjusted fuel gross margins despite the ongoing pandemic.

TA was also able to successfully close on an $85.4 million public stock offering in early July, with the proceeds expected to fund capital expenditures and implement growth initiatives. Turning to our efforts to expand and grow the RMR platform, we continue exploring opportunities to grow our private capital management business. We are having productive conversations with direct private capital investors in an effort to internally build this business.

With regards to strategic M&A opportunities, diligence efforts regained some momentum towards the end of the quarter, as some of our potential targets have begun stabilizing their portfolios and we're in a position to revisit possible transactions. While the overall process is playing out slower than we would like, we remain confident that our RMR private capital management business will get off the ground in 2020, either through building it ourselves and/or through strategic M&A. As in prior earnings calls, we cannot speak directly to any specific transaction at this time.

In closing, the actions we've taken in reaction to the ongoing pandemic have positioned our client companies to weather a prolonged recovery. At RMR, our operations remain well-fortified by our 20-year evergreen contracts with the managed equity REITs and our healthy operating cash flows.

I'll now turn the call over to Matt Jordan, our Chief Financial Officer.

Thanks, Adam. Good afternoon, everyone. Since our last earnings call, our organization's operational focus has turned to ensuring our tenants return to safe environments, as well as continuing to care for our employees' health and safety. Across the country, our operations teams are engaging with tenants regarding their plans to bring their workforces back to the office. This tenant engagement and our health and safety efforts have led to many tenants sharing positive feedback regarding our protocols and procedures.

Where buildings continue to remain underutilized, we have kept our focus on mitigating unnecessary costs, which includes energy savings and the reduction of nonessential building services. Turning to our financial results. For the fiscal third quarter, we reported adjusted net income of $6.2 million or $0.38 per share and adjusted EBITDA of $19.6 million. Over the course of the quarter, we were pleased to see a sequential increase of almost $600 million in our fee-paying assets under management which, in turn, helped drive our monthly management services revenues higher each successive month in the quarter.

Management and advisory services revenues were $39.3 million this quarter, which represents a decrease of $4.9 million on a sequential quarter basis. This decrease is due to declines in the market capitalization of our managed equity REITs and the adverse impact of the pandemic on our managed operators. Revenues of $39.3 million exceeded the high end of our guidance, due in part to our managed equity REIT share price improvements this quarter, as well as tenant rent deferrals and construction delays being less impactful than initially projected.

As it relates to our monthly base business management fees, the majority of our managed equity REITs continue paying these fees on an enterprise value basis. The impact of being on this lower measure results in annual lost revenues of over $50 million. Using July average share prices, coupled with an assumption that there is not another COVID-related shutdown in significant parts of the country, we are projecting total management and advisory services revenues to be approximately $39 million to $41 million per quarter for the remainder of the calendar year.

Turning to expenses. Cash compensation of $29.6 million was down approximately $550,000 on a sequential quarter basis, which reflects a favorable employee mix and reduced overtime costs. Cash compensation reimbursements grew modestly on a sequential quarter basis to 44%. While we continue to resist short-term reductions that would otherwise disrupt the scalable infrastructure we've built, we have added processes to reassess all open roles and challenge replacement staffing decisions.

As a result of these efforts, we expect this level of cash compensation to reflect our run rate into next quarter. G&A expense this quarter was $6.3 million, a decrease of approximately $1 million on a sequential quarter basis. This decrease is being driven by almost $500,000 of annual share grants to our Board of Directors last quarter, as well as our ongoing efforts to manage discretionary spending. We ended the quarter with approximately $394 million in cash, and we continue to have no debt. Our adjusted EBITDA, after considering our cash tax obligations, continues to ensure our dividend remains well covered.

Finally, our strong balance sheet leaves us readily prepared to take advantage of strategic opportunities and invest in new business initiatives. Before we go to questions, I would like to highlight that we recently published our inaugural sustainability report, which can be found on our website. This report provides immense detail regarding our strategic focus on long-term sustainability goals across RMR and our client companies, in addition to the charitable contributions we make in our communities, and our focus on the organization's most critical asset, our people. That concludes our formal remarks. Operator, would you please open the line to questions.

(Operator Instructions)

Today's first question comes from Owen Lau with Oppenheimer.

Could you please give us a little bit more color on your hotel and senior living portfolio? And I think you shared some of it in your prepared remarks, but if you can also share the latest trend of the occupancy rate, that would be great.

Sure. On the hotel portfolio, we've seen a steady increase in occupancy through -- from April through July. I think it's starting to level off, or it feels like it started to level off as we've gotten into July. And that not surprisingly corresponds with the increase in COVID cases through large parts of the country, which has sort of put a damper on some of the growth that we were experiencing. Our working assumption is that any occupancy growth from here will be pretty slow through the remainder of the year and/or until there's perhaps a vaccine widely available and/or therapy is widely available, because I believe that is sort of the gating item. At least we think it might be the gating item before hotels really start to come back.

So we saw steady improvement through the middle of the summer, July, and it feels like it's sort of leveling off here, and we expect it may level off here for some time. The length of that time is unknown. With regards to senior living, again, I would say, a slowdown in the deterioration is maybe the best way to say it. There, we've also, as you've probably seen, had occupancy deterioration throughout the quarter.

The rate of deterioration, though, was slowing each quarter and was actually getting almost stable as we got into June. Again, similar to what I said about hotels, as we've seen a rise in COVID cases in those communities, not just the ones we operate, but industry-wide, that has also sort of had a direct corollary (sic) [correlation] with sort of increasing deterioration or accelerating deterioration in occupancy. It is not deteriorating at the levels at which it was in April and May, but it's sort of sort of peaked or say, it sort of got as best as we saw in June.

And since then, it sort of deteriorated a little bit. That's an industry, I think, that is going to lag or maybe take perhaps one of the longest industries to recover, just given the fact that is servicing a very vulnerable population that's affected by COVID. The long-term good news around senior living is that all the demographics that were there prior to COVID continue to be there. A large amount of that business is needs-based. It's folks that essentially need the services, and that drives a large majority of new move-ins.

And so I think as COVID recedes and we get back to a more normal state, that industry -- our expectation is it will eventually return largely to where we were. Again, the amount of time it takes for that to happen, whether that's 3 months or a year, it's sort of hard to know once we sort of get on the other side of COVID.

That's very helpful. And then for G&A. So again, G&A is down this quarter sequentially, just like many other companies. So what's your thought about the operating model of RMR going forward? How much of the expense sale can be permanent? And how much of that is temporary? And for how long?

Yes. Great question, Owen. This quarter's rate at $6.3 million is definitely something I believe we will sustain through the end of the calendar year. And then as we look into 2021 in a hopefully vaccine environment, I think similar to a lot of companies in Corporate America, we are assessing some of our controllable costs like travel, and challenging weather are historical levels, can be scaled back through technologies and less in-person visits and things of that ilk.

So I think going forward, for the remainder of this year, this run rate should hold. And going forward, we're hoping not to give back all of the G&A costs. And hopefully, we can stay well under $7 million on a run rate basis in a post-COVID world.

Okay. Got it. And then finally, so extending from what you just said, how should that -- or how would that impact the revenue from OPI longer-term? What's your thoughts on that?

You're talking about, Owen, the future revenues from OPI to RMR?

Yes. Yes. OPI because of work from home environment, did that impact some of the revenue from OPI, and then that would flow back to RMR?

Sure. No, I understand your question better now. Yes. Again, in our prepared remarks, there is a lot of discussion and talk about the long-term impact to office as a result of what's happened in the pandemic and work-from-home. It's important to stress it's all talk at the moment. We have not seen any of it materialize in our conversations with tenants, and that's an important distinction. We have not seen tenants come to us to date since the pandemic with significant changes in plans because of work-from-home environments. I suspect that most companies are going to -- most, maybe not all, but most -- companies are going to wait to sort of get through the pandemic and reassess on the back end, what they need to do and will they have an increased number of employees, I think, partially work from home. A lot of people cite the Bureau of Labor statistics on this: Pre the pandemic, about 15% of office workers were at least partially working from home.

And within that, about 3% -- 2% or 3% were permanently working from home. Do we think that number could increase? Sure. That could increase, maybe it goes to 20% or maybe it goes to 25%. We don't believe, though, in our view, for all the reasons that we talked about in our prepared remarks, that an environment where people are together -- and the dedensification and training and mentoring and having a touchpoint where people get together, building a culture -- I think at the end of the day, the vast majority of office workers will still work in office.

But I think there will be some movement away. There should be some increase in work from home. It is really hard to gauge how that's going to impact OPI. OPI benefits from having a very large -- having a pretty long average weighted lease term, having most of its leases with large blocks of space with investment-grade-rated high-credit-quality tenants. I think it's more -- what I think about more than the work-from-home element in office actually is, is there any sort of shift that's being accelerated from urban to suburban office?

That is something I think I personally, and I think the company, we think a lot about. We don't have an office portfolio that's heavily weighted in urban downtown markets. Ours is actually more close-in suburbs or suburban. There is an interesting question, especially in some of the larger, what you call gateway cities in America, whether there will be a tendency that more space will be needed outside of those urban centers, and less in the urban centers.

We are well positioned to benefit from that trend, if that's true. But I actually think more about that than the work-from-home trend. Is there a trend to move out of downtown urban environments in some of these gateway cities into more close-in suburbs, or even other states? That's something I think we're closely watching.

Our next question comes from Kenneth Lee with RBC Capital Markets.

You mentioned in the prepared remarks, seeing some declines in terms of rent relief, and part of that was due to benefit from the government relief programs. Just wondering if you could just share with us some of your thoughts, what could be the implications for RMR should any of the government relief programs start to tail off?

Yes. That's a really interesting question. It's hard to know exactly why some of the rent reliefs have trailed off. I think, as I mentioned in my prepared remarks, we feel very good about our rent collections, across the platform for July was 99%. That's pretty much just normal course. I mean it's close to normal course. So we think that -- we feel very good about our rent collections today. In terms of in the future, in the second half of '20, if that could have an implication? We're watching it very closely.

I'll tell you in the first few days of August, we have not seen any sort of uptick in rent deferral requests. It's very early into August, but we haven't seen any uptick. And of course, that relief program is winding down. It's really hard to say how many of our tenants are really benefiting or using the relief program from the government. It's mostly our smaller tenants, we find.

It's most prevalent in sort of the smaller tenants. We have some smaller tenants in Hawaii, and we have some smaller retail tenants. They are the ones that seem to be the most benefiting from it. But the vast majority of the rents we collect across the platform, the vast majority are from large, well-capitalized investment-grade rated companies. So it could have an impact, but I don't believe the impact will be significant if there is not additional government assistance in the second half of the year.

And I guess the only thing I would add, Ken, just to add some color around the magnitude. In the quarter, deferred rent was about $17 million on assets we directly manage, which cost us about $500,000 in property management fees that will be recovered later on in the deferral period. So it would take a significant change in the volume of deferrals to get to a number that would have a material impact on our results.

Got you. That's very helpful color there. And just 1 follow-up, if I may. Wondering if you could just talk about any updated expectations for time frames in terms of asset dispositions within the managed equity REITS, specifically OPI and DHC?

Sure. I think we'll continue to have dispositions across the platforms, across the managed companies. I think it will be less than what we saw -- what we embarked -- what we talked about embarking on at the beginning of the calendar year.

But there is a [farring] that is going on in the market. To date -- or since the pandemic began, there's really been a dearth of investment opportunities. But that said, there's a tremendous amount of capital available for investment in real estate. Interest rates are incredibly low. Debt financing is largely available. It's not as available as it was prior to the pandemic, but it's available. And so we think we will -- whereas in April and May we were pretty down on our view that we were going to be able to sell anything in the near term, I think we're slightly more optimistic that we will be able to get some transaction sold in the second half of calendar year '20. With regards to OPI and DHC, OPI specifically, any disposition there would be 100% opportunistic. And we don't really need to sell anything there. And so we might market some properties for sale. And if we don't get the price we want, there is no -- we don't have to sell it. At DHC, we have a stated disposition plan. I think we will chip away at that in 2020.

We're being very thoughtful in terms of what we pursue in that disposition plan, some -- especially around the senior living assets. We're very focused on the ability of the potential buyer to actually perform. And also, you didn't ask about it, but in the hotel space we're also active and thinking about dispositions, but there, even more importantly, if we're engaged in anything through our disposition activity, we would not probably engage there with somebody that had a financing contingency, let's say. We would only deal or engage with somebody who was an all-cash buyer. So it's sort of case by case, and we're being thoughtful in the way we approach it.

But I do think we'll sell more and be able to sell more than maybe we originally thought when we announced earnings in -- last time on our earnings call late April, early May.

The next question comes from Bryan Maher with B. Riley FBR.

Quick question on your cash hoard, which continues to grow, and how you're thinking about allocating that? We know you've been in the market for a long time, looking for something on the private capital management front. But with what's going on with SVC and Intercontinental, to the extent that they can't come to some kind of a deal and maybe an awful lot, maybe a 100-plus Intercontinental hotels become Sonestas, have you thought about taking some of that money and maybe ramping up Sonesta as a hotel management company to a pretty formidable competitor, since you'll have a lot of assets now in that portfolio?

Sure. Sonesta, specifically regarding your question, RMR has a management agreement with Sonesta but Sonesta as a private company has its own shareholders, and I guess what I'd say, to answer your question on point, if Sonesta is going to take back hotels and start managing them on behalf of S -- more hotels on behalf of SVC, it will need to ramp up, but I think that the investors in Sonesta are more than capable and have the liquidity, that they would be able to do that without the need for RMR to invest directly into Sonesta on that question.

With regards to your more general question around the cash buildup at RMR, I agree, we are in a very fortuitous position of having no debt and almost $400 million of cash. We are still generating cash after we pay our dividend and pay taxes, albeit less than we were at the beginning of the year, but we are still generating some cash. This is a unique time. The way I would have thought about using capital at RMR pre-pandemic, I think has changed as we've gotten into the pandemic.

I see the pandemic as perhaps once-in-a-generational opportunity from an investment perspective, to take advantage of opportunities that may present themselves. And I think companies that are low leverage, and we have no leverage, have significant liquidity, are best prepared to take advantage of those opportunities. And I think some of those opportunities may not necessarily present themselves early in the downturn.

And I still think, unfortunately, we're early in the downturn. They may present themselves more midway through the downturn or on the back half or as you come out of this downturn. So whereas I might have had a different view in time line and using that cash at the beginning of the year, I think we're going to be a little bit more patient, as we are in this COVID period and thinking that this could really present us a real opportunity to do something pretty special in RMR in terms of a possible future large strategic M&A that could transform the trajectory of the company, let's say. And I just want the -- I think it's important that the company stay liquid, no leverage and well positioned to take advantage of that.

I firmly believe we -- these are the times when there's such a pullback in the market and the economy, that opportunities present themselves and a lot of money can be made in these types of times. And so I just think it's important that we keep RMR flexible, liquid to be able to take advantage of that.

Right. And that's a great answer. But to that point, I don't know how sitting on $400 million in cash, you, Adam Portnoy, can resist when you see where some of these stocks traded down to in the second quarter, not allocating $50 million or $100 million to just buying some of those managed equities just outright. And I know you've said in the past, you don't necessarily want to use that money to double down on those 4 managed REITS, but the share prices in the second quarter got like stupid cheap and you know what these are worth in the real world. It seems like it might have been and possibly can still even be, opportunistic to maybe allocate some of that cash to buying some of these managed equities. Any thoughts on that after what you've seen in the second quarter?

Bryan, I understand your perspective. I think others may share it as well. I do believe that stock prices have been beat up pretty bad. At RMR, we've certainly felt the pain of that.

As you know, our management contracts are directly tied to that. And we're taking a big haircut as a result of those stock prices coming down, and we're highly aligned and incentivized to try to get those stock prices to improve, because we directly benefit from that because our management fees go up. So you're correct that we are well aware and agree with you that those stock prices are badly beaten up, and that our hope and desire is that we can improve them through the good management of those companies.

With regards to your specific question about investing in those, what I'd call, historical, well-established vehicles, I don't think there's much appetite at the RMR level to do that. I think we continue to be very focused on using our capital specifically to grow the platform and be very forward-thinking in terms of how we deploy that capital in terms of diversifying the revenues. There is a -- I agree with you, perhaps an opportunity to take advantage of some low stock prices. But we have to weigh that versus using that capital to potentially grow the platform and really diversify our client base in the future.

And so -- I don't think there's a real change in thinking around that, but I understand your point.

And just last for me. As it relates to the ILPT JV partner and the likelihood of another JV partner joining that entity, do you see any other -- I mean you have relationships around the world with private capital. Do you see that maybe unfolding with any of the other externally managed REIT platforms? Or do you think that, that's kind of mostly just an ILPT thing?

No. I think that there's something there that could unfold with the other managed vehicles as well. I think first course, we're very -- I think we're getting close on this ILPT project. Hopefully, we'll have something to announce on that soon. And if we get that behind us, I think there could be follow-on opportunities at the other managed REITs as well. And so that is something we are thinking about.

The next question comes from Bill Katz with Citigroup.

So just coming back to the opportunity to deploy capital through M&A. In early part of your commentary, I sort of heard you want to get something off the ground in the second half of the year, either de novo or through deals. And then just sort of listening to the commentary on capital management being patient. Can you talk a little bit about the time line there? And then maybe what kind of milestones should we be looking for from some of the data that might suggest you might be getting closer to deploying some of that capital?

Yes. Bill, I think 2 fronts which we're working very -- there's 2 parallel paths we've been going down to try to get a private capital management business up and going. And I'm confident that in calendar 2020, there will be announcements that largely establish that business or at least get largely off the ground. We are having very productive conversations in both fronts.

I would say that the speed of the -- we seem to be having accelerated conversations with regards to the ability to raise the direct capital ourselves and form the vehicles on our own. That's not to say we aren't in discussions regarding strategic M&A at the same time. And so I think there'll be announcements on -- either on either strategy or both in calendar 2020, is what I think. And I think that in those announcements, there could be an allocation of some of the capital. Or obviously, if it's strategic M&A, I think we'd be using some of the capital. If it's launching a vehicle, it may or may not have a component where RMR is contributing capital.

But I think you'll see announcements in the second half of 2020 on both or one of those sort of strategies. As -- and then I think it's hard for me to imagine in 2020, we would earmark all $400 million of our cash. Nor, by the way, do I think we'd ever spend all $400 million of it. But we would -- I think there would be some amount of it that's still there to be deployed as we got into '21.

And again, I think the opportunities that could present themselves around what I'd call a meaningful and transformational perhaps M&A opportunity, may not appear until late '20 or into '21. And again, I think it's important for us to sort of remain liquid and be there to take advantage of that. There's a lot of -- some of our competitors that are not as a fortunate position as us. And I think there could be opportunities to engage with those competitors and do something pretty interesting. Now that may not happen. But I just -- I think, again, we're in such a unique period in such a unique time, that I would really hope that we would try -- we remain flexible and liquid enough to take advantage of any of those opportunities.

Okay. That's helpful. So just on that, as you look at your footprint today and assume that you have something going on in the private market side, when you said transformational, can you maybe expand a little bit on your thinking about how you could foresee that transformation?

Sure. Well, the easiest example would be a very large private -- real estate private equity shop, let's say, that we could buy, that has the ability to add significant AUM to our platform. That would be the most obvious. I'm confident we will build -- if we don't buy it, we will build. It may take some time, but we will build a multibillion-dollar private capital platform. We can accelerate that growth and maybe -- and expand upon that growth through potential M&A. And there could be potential for substantially sizable M&A that we could think about. There's nothing sizable that would use up all of our capital today that we are actively looking at. I just want to be clear.

But I want to be in a position, I think it's important for the company to be in a position given the environment we're in, that we could be able to look at something like that, if it were to present itself. And so that's how we're thinking about it.

(Operator Instructions)

Our next question comes from Mike Carrier with Bank of America.

This is Dean Stephan on for Mike Carrier. You guys did a good job of raising capital and increasing liquidity at the managed REITs throughout the quarter. Just wondering if you can provide any more color on the current liquidity positions at the REITS? Any near-term debt maturities we should be aware of? And if you anticipate raising any additional capital moving forward?

Sure. We think all of our managed businesses, including the equity REITS, probably specifically, have tremendous -- have good liquidity. We have dealt with all -- essentially all maturities through '21. Our 2 biggest vehicles, DHC and SVC, are sitting on both over a $1 billion of liquidity, and no maturities or no meaningful maturities through '21. I feel -- we feel very good about their liquidity position. The other businesses also remain very liquid. And so we don't we don't believe we need to raise additional liquidity anywhere. That doesn't mean that on an opportunistic basis, if we might raise additional capital at some of the vehicles, but it would not be based on a need to increase liquidity, it would be much more around being opportunistic around raising liquidity.

Got it. That's helpful. And then just as a follow-up, given the sustainability report that Matt talked about, can you provide -- or can you talk about the impact ESG has had on the overall business, how you're seeing that impacting the business longer-term? And what sort of client demand there's been for ESG transparency at either the RMR or the managed REIT level?

So ESG is becoming more and more important across the platform. It's important to investors in our vehicles. It's important to tenants that lease space from us. It's important as we think about expanding into the private capital business, for potential investors in that space, the direct capital providers, are more and more focused on ESG. As a real estate company up until the pandemic, I would say the E in ESG was probably the most focused on, because we're real estate companies. So we are most focused on the environmental aspect of it.

Being a public company, being public companies, I think governance has become more and more important. But in the world we live in today, I guess the S, the social, has become more important, too. And I think that's been something that investors, tenants, our employee base are all focused on, and it's something that we have to devote -- and we should, and I believe we're good at it - are devoting more effort and resources around. Matt, do you have anything to add?

Yes. I guess the only other thing I would highlight, we used the word inaugural sustainability report, but this is not a new concept for us, and we've tried to highlight that throughout our report, that these concepts have been in place as part of our infrastructure for over a decade now. And I think we took great pride in finally getting to a point where we put it all in one report, to tell the world about all the great things we do. But it's clearly an underpinning of our organization and something we're really excited about getting out there in the public domain.

This concludes our question-and-answer session. At this time, I would like to turn the conference back over to Adam Portnoy for any closing remarks.

Thank you for joining us on today's earnings call. Operator, that concludes our call.

The conference is now concluded. Thank you for attending today's presentation, and you may now disconnect.