RMR Group Inc (RMR) 2020 Q2 法說會逐字稿

Good day, and welcome to the RMR Group's Second Quarter Fiscal 2020 Conference Call. (Operator Instructions)

I would now like to turn the conference over to Michael Kodesch, Director of Investor Relations. Please go ahead, sir.

Good afternoon, and thank you for joining RMR Second Quarter Fiscal 2020 Conference Call. With me on today's call are President and CEO, Adam Portnoy, and Chief Financial Officer, Matthew Jordan. In just a moment, they will provide details about our business and performance, followed by a question-and-answer session. I would 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, May 11, 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 defenses 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 calculations of adjusted EBITDA margin can be found in the news release we issued this morning.

Due to the current unique circumstances, the management team is conducting today's call from several locations and asks that listeners on the call bear with us, should any technical difficulties arise.

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

Thanks, Michael, and thank you for joining us this afternoon. The fiscal second quarter of 2020 truly marked an unprecedented time for our business, the economy and the world at large. Given the gravity of the COVID-19 pandemic, over the last several weeks, we have been monitoring the pandemic's impact on our client companies as well as all of our stakeholders, including, most importantly, our employees. To this end, we have invested significant time in ensuring the safety, health and wellness of our employees and their families. These workforce efforts included ensuring we preserve business continuity with the organization rapidly adjusting to working remotely. While Matt will provide more detailed insights on the steps our organization has taken in response to this pandemic, including the numerous protocols being utilized to protect the health and safety of our property management staff, I'm proud to report that 100% of our managed office and industrial assets are operational and available to our tenants but in most cases are being lightly utilized.

I would also be remiss if I did not use this opportunity to acknowledge the efforts of RMR's property management team in keeping our buildings functioning and supporting our tenants throughout this pandemic. Facilities management has been deemed an essential service from day 1 of the pandemic, and our people have executed flawlessly. I've also taken great pride in seeing 2 of RMR's client companies on the front lines of our nation's response in this endemic. TravelCenters of America has kept their truck stops open for business to support the critical work of professional truck drivers as they transport vital goods around the country. In addition, Five Star Senior living has been dedicated to protecting the health and well-being of our nation seniors, who may be the most at risk from the effects of COVID-19.

In terms of the state of the commercial real estate market, while leasing activity remained strong for the quarter, we saw a significant decline in activity beginning in late March, though we continue to close many of the deals negotiated before the crisis unfolded. Nonessential construction activity has also slowed or stopped completely in several markets where we operate, which impacts redevelopment and building and tenant improvement work that was in process or planned at several of our managed assets.

In terms of transaction activity, as of late March, property sales have slowed considerably, and we have seen several offerings withdrawn. As it relates to our managed equity REITs, from many of the disposition transactions we had underway, we have seen a reduction in the number of buyers, and we have pulled some transactions due to buyers seeking price reductions or because we had concerns around the viability of buyer financing.

For our managed equity REITs that we're looking at possible acquisition opportunities, we continue to be active in the market, especially with regards to office and industrial properties, but there are limited opportunities to currently evaluate, and we are proceeding cautiously.

While the transaction markets have slowed considerably, it is worth noting that, in aggregate, our client companies have closed on the sale of 8 properties for proceeds of $111 million since the beginning of March. Considering the challenges posed by this crisis, our business remains well positioned given the underlying security of our 20-year evergreen contracts with the managed equity REITs, and we continue to generate healthy operating cash flows. We ended the quarter with approximately $377 million in cash, and we continue to have no debt. As a result, our organization is well prepared for what may be a very long recovery.

Moving to our results for the quarter. For the second quarter of fiscal year 2020, we ended -- which ended on March 31, we reported adjusted net income per share of $0.46, adjusted EBITDA of $23.9 million and adjusted EBITDA margin of 51.3%. From an operations perspective, this quarter, our organization remained very busy arranging 1.1 million square feet of leases on behalf of our client companies with a weighted average lease term of almost 6 years and a weighted average roll up in rent of 5.8%. We also directly supervised approximately $32 million in capital improvements at our client companies. As I previously highlighted, I expect leasing volumes and capital spending to slow next quarter as a result of shelter-in-place orders and the expected slow reopening of the economy.

I'm pleased to report that across our platform, we collected almost 90% of April rents. Majority of the outstanding April rents have been addressed through rent relief discussions with the tenants of our managed equity REITS. To date, we have granted rent relief almost 300 tenants or less than 4% of contractual rents for the months of April through July 2020. As an organization, I believe it is important to partner with tenants experiencing financial hardships, thus, preserving our tenant relationships retention and portfolio stabilities.

Moving to some noteworthy highlights across our client companies. ILPT reported strong results this quarter with normalized FFO of $30.2 million, a 12% increase on a year-over-year basis and adjusted EBITDA of $45.9 million, a 35% increase year-over-year. More importantly, ILPT's portfolio has several important qualities that will help mitigate the disruptions we are currently experiencing, which include overall occupancy of 99% and approximately 75% of annualized rent coming from investment-grade rated tenants or highly secure Hawaii land leases. Further, nearly 80% of ILPT's annual rent comes from logistics properties used for warehouse and distribution purposes, which remains in strong band with the increased reliance on e-commerce.

Additionally, during the quarter, ILPT closed on a previously announced joint venture transaction, raising net proceeds of approximately $108 million. ILPT was able to leverage RMR's historical relationship with a sovereign wealth investor, and we fully expect that ILPT should be able to grow this relationship to support future industrial and logistics acquisitions.

OPI announced earnings that reinforced the strength of its portfolio and balance sheet with normalized FFO of $1.4 per share exceeding consensus estimates and same-property cash basis NOI increasing 1.2% year-over-year. The strength of OPI's balance sheet is further highlighted by a net debt-to-EBITDA ratio of only 5.9x and almost $400 million of availability under its unsecured revolving credit facility. OPI also recently had its investment-grade ratings reaffirmed with stable outlooks.

OPI is well positioned for the future given its well-diversified portfolio of properties with one of the highest percentages of rents paid by investment-grade rated tenants in the office sector at 62.2% of annualized rent, and approximately 78% of annualized rent is paid by tenants operating in industries deemed essential.

While ILPT and OPI have seen limited initial impacts from the current economic conditions, DHC and SVC are each facing more significant headwinds. As a result, each of these REITs has announced plans to reduce their dividends to $0.01 per share and defer previously planned nonessential capital investments to conserve cash and liquidity.

As it relates to DHC, earlier this year, concluded -- it completed its restructuring transaction with Five Star Senior Living, and in the early part of calendar 2020, continued to make progress on its disposition program. Despite the advent of the COVID-19 pandemic, DHC maintained strength in its medical office and life science portfolio, generating a 2.6% increase in cash basis NOI on a year-over-year basis.

With regards to its senior living communities, DHC has had significant challenges in attracting new tenants to its communities, which is turn -- which, in turn, has led to occupancy declines. The adverse financial impact of these occupancy challenges is also coupled with growing operating expenses. Additionally, DHC has seen the volume of patients at their medical office tenants reduced, and some nonessential businesses have closed their doors entirely. Even with these headwinds, I'm confident that with the reductions in DHC's dividend and capital spending, it has the appropriate liquidity to weather current disruptions to its business.

SVC is facing the most significant pandemic-related challenges among all of our managed businesses as the impacts of shelter-in-place orders across the country have disproportionately negatively impacted the hospitality and service retail sectors. SVC's previously announced disposition program was building momentum as buyers had been selected for a number of Wyndham and Marriott-branded hotels, and SVC was in the process of launching the marketing of its Sonesta ES Suites hotels before COVID-19 began to nearly affect -- materially affect hotel operations. As a result of the pandemic, lending for the hotel transactions has effectively ceased, and we now expect these transactions will be delayed until later in 2020 or 2021, if at all, which may delay SVC's planned leverage reductions initiatives.

While I highlighted rent collections for the month of April were almost 90% across the RMR platform, April rent collections for SVC's service retail portfolio was only 45%. As most of the economy remains closed, the service retail sector has been hit especially hard, and we have granted rent relief to numerous tenants to assist them through this difficult time. Similar to DHC, with its reduction of its dividend and capital spending, I'm confident SVC has the appropriate liquidity to withstand the downturn in its business.

Finally, while they represent less than 20% of our revenues, I did want to briefly highlight some items of note relating to our mortgage origination platform and certain of our managed operators. I continue to believe our mortgage origination platform has significant untapped potential. While Tremont has fully invested its capital, remains focused on asset managing its investments, the quality of our underwriting and asset management is reflected in the fact that we have not taken any loan impairments on loan loss reserves to date. With that said, Tremont and its Board believed it was prudent to conserve cash by reducing its dividend to $0.01 per share to preserve cash and maximize liquidity.

We also recently received shareholder approval from the RMR Real Estate Income Fund to convert from a mutual fund investing in real estate securities to a commercial mortgage REIT. This change in strategy will help further expand our mortgage origination capabilities within RMR.

Lastly, at TravelCenters of America, the new TA management team has brought a renewed energy to the organization. While the COVID-19 pandemic will hamper this renewed momentum, TA recently announced the reorganization of its leadership team and staff reductions, both important steps in its repositioning efforts. Additionally, despite the ongoing pandemic, TA saw fuel sales volume during the first quarter increased 3.6%, and total fuel gross margin increased 9.6%, both on a year-over-year basis.

Turning to our efforts to expand and grow the RMR platform, we continue to spend time focused on our private capital asset management business, including transactions involving our managed equity REITs, such as the ILPT joint venture I mentioned before. We believe these types of ventures demonstrate that our relationships with large sources of private capital, such as sovereign wealth funds, have only grown stronger and may lead to separately managed account opportunities for RMR in the future.

In addition, we continue exploring opportunities to grow AUM and accelerate our private capital fundraising capabilities through possible M&A activities. The current environment has been disruptive to our efforts as any diligence efforts and negotiations cannot happen in live settings. While the overall process has slowed, we remain confident that an accretive transaction can be executed. With that said, as in prior earnings calls, we cannot speak to any specific transactions at this time.

Before I turn it over to Matt, I want to reiterate that despite the ongoing crisis, I remain optimistic about RMR's ability to both weather the current market disruptions and pursue new opportunities for growth that may present themselves in the future.

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

Thanks, Adam, and good afternoon, everyone. As Adam suggested in his prepared remarks, I wanted to first talk about some of the detailed actions we've taken as an organization to ensure the health and safety of our employees, tenants, service providers and visitors. Over the last 2 months, our organization, leveraging the advice of outside experts in industrial hygiene, have designed standard operating procedures to assist -- to address such items as air filtration, janitorial products and procedures, social separation and the use of personal protective equipment.

In addition to implementing these procedures, we have also focused on mitigating unnecessary costs and many of our managed assets, given temporary reductions in usage, which includes the implementation of energy reduction protocols and the reduction of nonessential building services.

In addition to implementing enhanced operating protocols, our property management teams have established business continuity plans to ensure operational stability. Noncritical travel has been suspended. Regional leadership have not been allowed to work in the same locations at the same time, and personal protective equipment is required of all property management employees.

At this time, our operations team has turned their attention to preparing for tenants to reoccupy our managed assets as various states across the country use shelter-in-place orders. We will continue to leverage outside experts and best practices from our national platform and look forward to providing an update on these efforts in future calls.

Turning to this quarter's financial results. The market disruptions caused by the pandemic have led to material declines in the share prices of our client companies and its fee-paying assets under management, which in turn has led to reductions in our base business management fees.

As Adam discussed, our managed equity REITs have agreed to rent deferrals with certain of their tenants, and some construction activities will either be delayed or canceled altogether as our managed equity REITs look to conserve capital. These rent deferrals will have a temporary adverse impact on our property management fees, as the fee is calculated on a cash basis. And any reduced capital spending will lead to lower construction management fees in future quarters. Considering these uncertainties, we withdrew our previously issued guidance and do not expect to issue new guidance until the current situation stabilizes.

So I will look to provide insights on what future revenue and costs could be if current economic and operating conditions continue. For the fiscal second quarter, we reported adjusted net income of $7.6 million or $0.46 per share and adjusted EBITDA of $23.9 million. Adjusted earnings this quarter adds back an aggregate of $0.07 per share for unrealized losses on our investment in TA and separation and transaction costs.

Management and advisory services revenues were $44.1 million this quarter, which represents a $740,000 increase on a year-over-year basis, primarily from acquisition-related fee growth at ILPT and SVC, partially offset by lower business management fees from DHC and OPI as a result of declines in their market capitalization. On a sequential quarter basis, revenues decreased $4 million, primarily due to share price declines at our managed equity REITs. For the quarter ended March 31, 2020, all of our managed equity REITs are currently paying base business management fees on a market capitalization basis.

The impact of being on this lower measure for the determination of our base business management fees results in a loss revenue opportunity of approximately $55 million, using March average share prices. As a reminder, our base business management fees are calculated monthly, thus, the declines in our managed equity REIT share prices resulting from the pandemic was limited to the month of March. Assuming our REIT share prices remain at April average levels, coupled with the adverse impacts of the rent deferrals and declines in construction that we previously highlighted, we are projecting total management and advisory service revenues to be between $36 million and $39 million per quarter for the remainder of the fiscal year.

Turning to expenses for the quarter. Cash compensation of $30.1 million was flat on a sequential quarter basis and our cash compensation reimbursements from our client companies remind -- remained at 43%. While we have looked at our staffing levels, we have decided against making rash short-term reductions that would otherwise disrupt the scalable infrastructure we've built. We expect this level of cash compensation to reflect our run rate for the remainder of the fiscal year.

G&A expenses this quarter was $7.3 million, which includes almost $500,000 or $0.01 per share from annual share grants to our Board of Directors in March. For the remainder of the fiscal year, we will be looking to minimize unnecessary G&A costs and expect the ongoing pandemic to naturally limit discretionary expenditures such as travel.

We ended the quarter with approximately $377 million in cash, and we continue to have no debt. We believe our balance sheet continues to leave us with ample operating liquidity as well as positioning us to take advantage of strategic opportunities and invest in new business initiatives.

Before we go to questions, I want to acknowledge the hard work of a number of people across the organization who have helped in having RMR recognized for the second year in a row with the ENERGY STAR Partner of the Year award by the U.S. Department of Energy.

That concludes our formal remarks. Operator, would you please open the line to questions?

(Operator Instructions) Today's first question comes from Bill Katz with Citigroup.

Just sort of thinking through China, and I appreciate sort of how you sort of feel the short-term view of the different REITs, if you will. Just trying to understand when I look at them, I sort of see some very high leverage across them. How should we think about sort of fee-paying AUM from here? Appreciate your guidance for the next couple of quarters on the management revenues. But just sort of wondering, you have some things where you were looking to potentially dispose and restructure, but also I think ahead here, how should we be thinking about just the outlook for fee-paying AUM?

Sure. Bill, so with regards to fee-paying AUM, given where we are with the share prices of our REITs, first of all, I do think what our contracts are demonstrating is the complete alignment of interests between RMR and the managed REITs. RMR is taking a significant fee reduction, which is resulting in significant declines in G&A at the managed REITs as a result of their share declines. Specifically, with regards to your question around leverage. Yes, in SVC and DHC, leverage levels are higher or more elevated than we would typically run those companies. And you're right, both those companies were sort of midway through disposition programs to reduce leverage. That being said, given where we are today with those companies, both of them are in a position that I think, given the fact that we've reduced the dividend to $0.01 a share per quarter and substantially curtailed capital expenditures that they have more than enough or ample liquidity to make it through at least 2021, if not beyond. And so we feel pretty good about where those 2 companies are specifically. And as it relates to RMR and fee-paying AUM, nobody knows exactly where share prices move. But given how much those 2 companies' share prices have declined in the last several weeks, it's hard for me to imagine they continue to decline further. I think there was sort of a knee-jerk reaction to the dividend reductions and the fact that both those companies were sort of midway through a disposition effort. I think a lot of that's been reflected in the stock. And I think from this point forward, they're both in very, very liquid positions and able to withstand the downturn and certainly have enough financial flexibility through '21.

Okay. That's helpful. And just a quick follow-up and maybe I'm reading too much into it. In your -- both in the press release where you pulled the guidance and again, today, you sort of mentioned that there's some potential risk on the long-term contracts. I'm sort of wondering how much of that is just boiler plate risk versus sort of any kind of sort of shift in relationships with some of the REITs that might otherwise compromise some of these longer-term contracts?

Yes. Bill, I think that's just literally the language that I believe is often, I think always, in our press releases and announcements. There's no shift in relationship between RMR and the managed REITs at all. If anything, I think, today, those REITs are benefiting handsomely from the expertise and the breadth and the depth of the RMR organization, and again, they are also benefiting from the fact of the great alignment of interest between the REITs and RMR. Those REITs have had significant reductions in G&A. Far more than many of their peers have experienced in the marketplace. And so I don't think there's any deterioration in relationship. In fact, if I would characterize it anyway, I'd say it's probably stronger today than it's been ever in the past.

And our next question today comes from Owen Lau with Oppenheimer.

So given the COVID situation, could you please update us on your thoughts about the timing of your strategic acquisition? And then in the meantime, do you need to preserve some capital for your managed REITs like for the lending purpose? And then, is there any JV or other initiatives that RMR could potentially pursue in the meantime?

Great. Thanks, Owen. With regards to our strategic M&A activities, big picture, the strategy of RMR has not changed as a result of the pandemic. Going before the pandemic struck, our strategy was to try to diversify and grow our business and that continues to be our strategy. With regards to specific M&A opportunities, we had -- we were moving down the road with a couple of opportunities right when the pandemic sort of struck. Those opportunities, I would say, have been paused, not largely because both sides need to focus on their business at hand for the short term. I'm reasonably optimistic that those opportunities will continue to go forward through the balance of 2020. So I think there's still a decent chance that we'll get something accomplished in 2020.

With regards to financial flexibility, we've been, for the last couple of years, putting financial flexibility as sort of our -- one of our priorities, and I think it's benefited us because we're going into the pandemic with a lot of cash and no debt at RMR. I think now, even more so than before, financial flexibility is very important, especially in what could be a pretty deep recession. And so I think we have -- we were focused on maintaining financial flexibility before. I think we're even more focused on it now.

That being said, often on the back end of an event like what we're going through now and as you go through a recession and then as you emerge from the recession, there often are many opportunities for companies that are flush with liquidity and that companies like ourselves could take advantage of. And so I think there could be an opportunities for even us to do even more than I thought -- was thinking about we could do as we went into this downturn. And so I'm fairly optimistic that -- I'm not sure exactly when or how, but I'm pretty optimistic that there will be opportunities presented to us that may not have otherwise been there that we, hopefully, can take advantage of using our financial flexibility in the coming months, if not years.

With regards to JV opportunities, we sort of alluded to it with what we've done with one of our managed REITS, our industrial REIT, ILPT. There, we closed on a joint venture -- or that REIT closed on a joint venture with a sovereign wealth investor that RMR had a -- has a historical relationship with. I think our relationships with those -- that type of capital is only getting stronger. And I think in this current environment, for certain asset types, many of which that we currently invest in, I think we will be able to take advantage of that through even more JV opportunities in the coming months.

RMR itself pretty much focuses primarily, not exclusively, but primarily on what people would call core real estate or what people might define as established and mature real estate. That type of commercial real estate investing tends to be more in favor in a recession than when you're not in a recession. And so that could play to our hand also very well in the current environment.

Okay. That's very helpful. So I know it's a tough environment for your hotel and senior living businesses. But how do you think about the potential change in consumer behavior? What are some of the things you are doing or could potentially do to convince your customers to come back in the future?

Sure. With regards to -- you're right, the 2 sectors that are facing the toughest or among the toughest effects of the current downturn or the pandemic are hotels or hospitality and our senior living space. I think it's 2 different stories with each. With the hotels, we largely partner -- all of our hotels are operated by -- most of our hotels, if not all of our hotels, are operated by very large brand owners. For example, Marriott and Intercontinental Hotel Group, Hyatt, Radisson are among the majority of the hotels we operate. And again, we deal with the hotel operator and brand owner, we're not dealing with franchisees. And so I think we largely draft behind them. And I can tell you a company like Marriott or Intercontinental, they're extremely focused on what the new normal is going to be as you emerge from this pandemic. And they also are global hospitality companies that had the benefit of seeing somehow their hotels have opened up, let's say, in Asia or China specifically, have they -- as they have emerged from the pandemic a little bit ahead of the United States. So they can draw on those lessons and try to apply them perhaps here in the United States. Nobody knows or is sure for how the hotel space will be -- how the hotel space is going to operate, but everyone knows it's going to probably be different going forward.

With regards to the senior living space, it's a different story there. I think that space is going to be dealing probably with the effects of COVID-19 probably much longer than maybe any other sector just because of the population, its services. Long after states may start to open up, you're still going to see, I think, in nursing homes and assisted living and independent living very much in lockdown. They're going to still have a lot of protocols that have been in place probably for a lot longer than the rest of the economy as a whole. And I think it's going to take a while for that space to sort of come back. I think that space is much more tied to -- less around the economy and more around the nature of the virus itself. As the virus itself subsides, I think that will have a direct impact on that industry more so than, let's say, what's happening generally in the economy.

And our next question today comes from Bryan Maher with B. Riley FBR.

On the deferrals that you guys struck with the managed REITs and their tenants, how did you come up with your decision to kind of go 1 to 3 months in paybacks beginning in September for 12 months? And when you look forward and you think about all the tenants that deferrals have been granted to, where lies your concern with actually getting repayments? And to what level do you think that there could be nonrepayments within the deferrals that have been struck to date?

Sure. So every case was handled individually. We have a pretty large and robust asset management group within RMR that handles all those requests as they come in and we've also reached out the many tenants as well along the way. Basically, we took the view that we were going to -- most of the tenants that we have worked with, we started with 1-month deferrals. We have gone as far as 3, maybe even 4 months in limited cases, depending on the nature of the business. And we basically decided early on that we didn't know how long this was going to require, how long people need deferrals, but we thought it probably made sense to push people out to the fourth quarter until they had to start repaying us. That just seems like a reasonable time line to pick, and most people have reacted fairly positive to that time line. Meaning, back in April, we said if you didn't pay, we'll give you a deferral on April rent, but you don't have to start paying that till, let's say, October 1, and you'll pay that April rent in 12 equal installments, starting in October for the next year. As we look out today, across the board, the tenants that, obviously, we worry the most about are some that I've talked about in my prepared remarks, the service retail, net retail tenants within the SVC portfolio. We only collected 45% of the rents in April. It's trending, as we are 10, 11 days into May, very similar to that trend, so far. We are basically at the same point we were in April as we stand here in May. And so I suspect that's the area that we are probably the most concerned about or we worry that there will be perhaps a permanent impairment of some rents there.

In the other portfolios that we manage, it's largely not a very material number. This pandemic, obviously, and the downturn has disproportionately affected smaller tenants, and we don't have a lot of small tenants in our office portfolio, industrial portfolio, our medical office buildings, life science buildings, so they just don't exist. There are some, and where we do have them, that's where we're tending to get the requests in a general sense, but it's not a very meaningful piece of the revenues we generate in those other portfolios. So Bryan, if I had to say outright, the area that's probably we're most worried about is in the retail area.

Right. But do you get the sense, though, that the market, as it relates to SVC, may have overreacted given the fact that the net lease component of that portfolio, excluding TA, which is fully paying, is only something like 14% of annual minimum rents?

Short answer, Bryan, yes, I believe the market has over negatively reacted at SVC based on the fact that you're right, TA is fully paying on our hospitality side. We have guarantees and security deposits and credit support and large portfolios with brand owners. So yes, I do believe the market has overshot to the downside at both SVC and DHC, yes.

Okay. And kind of shifting gears a little bit. Where are you seeing in this kind of morass of real estate at the moment opportunities starting to pop up where you, Adam, in the C-suite at RMR, are spending your most time? Is it in kind of the better performers, like office and industrial, where you might want to grab more because it's doing well? Or is it in the more dire markets like hotel and net lease where there could be really meaningful opportunities? Where are you guys spending your time to maximize the longer-term results at the 4 managed REITs?

Yes. I would say today, the opportunities that are available for us to spend time on are in the office and industrial side. Transaction volume is a fraction of what it was. Our opportunities are a fraction of what they were before the pandemic. But the opportunities that are out there tend to be around industrial, well-leased office. We don't do much in multifamily, but there are some multifamily opportunities in the market as well. With regards to retail and hotels, there could be opportunities there, but there's none to act on at the moment. And typically, when you have a pullback like this, it takes a while for the sellers to get to the point where they're willing to sell at distressed pricing if they have to, and we're not at that point yet. I don't know when it will be, but we're not there yet. And so we're not seeing many opportunities like that. That doesn't mean they won't present themselves in the future and we won't try to take advantage of them, but today, what we're seeing is really limited to basically industrial and well-leased office.

And our next question today comes from Kenneth Lee with RBC Capital Markets.

Just a follow-up on the last one in terms of the SVC and what you're seeing in terms of that 45% rent collections in the month of April. Just wondering if you see the potential for any kind of meaningful increase in the percentage of rent deferrals in the near term. Or do you think this is sort of like a good level that's being currently hit right now?

Sure. So the best answer I can give you is that we're currently trending 10, 11 days into May, exactly where we were 10, 11 days into April on that net lease retail portfolio. We generally thought it May will probably be the low watermark for that portfolio, and so it could be worse than April. That's just given the fact that most states are just starting to open up. It's our general view that we thought that probably by June most states will have -- be opened up in some form or fashion, and some of these retail tenants -- or most of these retail tenants will likely be able to be back up and operating and there'll be more economic activity starting in June. So we're bracing ourselves that May could be worse than April, but so far, it's tracking right in line.

Got you. Very helpful. And then just one follow-up, if I may. Just given the current economic conditions, and you mentioned this within the prepared remarks, but just wondering if you see any change in terms of the growth opportunities, specifically within the commercial mortgage REITs as well as the Tremont versus what you saw, like, maybe 6 months earlier.

Yes. That's a great question. There are a real lot of opportunities, I think, for us in our mortgage origination platform. We're one of the few platforms in the United States today that it can -- has the ability to deploy capital and mortgage investments, whole loans. There's a very small number of firms that are still deploying capital. Most alternative lenders in the mortgage REIT space have stopped deploying capital. They're in a situation where they're dealing with their repo lenders in terms of having to provide capital, excess capital in response to capital calls from those banks. And so they've basically shut down new originations. So I think we're pretty -- in a pretty unique circumstance where, as I mentioned in the prepared remarks, one of our managed companies, the RMR Real Estate Income Fund, which is a mutual fund business, shareholders approved converting that business into more just commercial mortgage REIT. And so we have the opportunity now to redeploy about $150 million of equity before leverage into commercial mortgages. And today, given that there's so few competitors in the marketplace, I think we have the opportunity to basically get outsized returns with taking lower risk. We don't have to maybe chase these sort of value-add transitional bridge loans the same way we were, let's say, before the pandemic. We might have the opportunity to lend against more stable properties that have sort of been caught up in a lack of ability to refinance in the current environment just because there's very few folks that can put on permanent financing. The CMBS market, for example, banks, while they're starting to open, the level of activity in those markets is very small. And so I do think there's a real opportunity for RMR and our platform to take advantage of the current environment, and we hope to in the coming months.

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

This is Dean Stephan on for Mike Carrier. Just a quick question for me. Given the tougher environment for strategic acquisitions or partnerships in the near, maybe medium term, moving forward and the healthy cash balance, just wondering what's the minimum cash balance needed for liquidity purposes at RMR. And have any of your thoughts changed in regards to returning some excess capital to shareholders moving forward?

Sure. Well, minimum, I'm not sure what the minimum is. I mean I'm sure we could operate the business with less than $100 million of cash on the balance sheet comfortably. I think our thinking around returning cash to shareholders has been outweighed by the desire to maintain financial flexibility. We're sort of trying to balance the 2 as we went into the pandemic, and I would say the scale is tipped a little bit towards financial flexibility, maintaining financial flexibility. And again, it's being well positioned to take -- trying to make sure we're well positioned to take advantage of any opportunity that might present itself. Companies that have financial flexibility, have access to capital, no leverage, lots of cash on its balance sheet, we can move very quickly if opportunities present themselves. And this is the type of environment, maybe once in a generation, maybe once in 100-year environment, where we might be able to take advantage of opportunities that we would never maybe have seen before. And so I'm trying -- we're trying to make sure that the company is in a position that it can do that. That all being said, you will note -- we will note that we kept our dividend stable or consistent. We did not touch our dividend for the current quarter, and our intention is to, hopefully, keep that dividend stable and consistent for the rest of the year. That's in light -- even though our cash flow, as Matt has gone through the numbers, is likely to diminish or go down in the third and fourth quarters, depending on where stock prices move in our managed equity REITs. So in some ways, you could interpret that as a willingness to actually return more capital than maybe prior -- than the prior mentality because we are going to be paying out a greater proportion of our free cash flow than we have in the past. That said, we will still be paying less than 100% of our free cash flow. We're not going to be paying more than 100%, but it is going to be more. And so you could look at it as sort of 2 sides of a coin. We're still -- we're more focused now probably than before on financial flexibility, but at the same time, we decided to keep the dividend stable. And our hope is to do that to the third and fourth quarter, and that is a higher percentage payout of our free cash flow. Not over 100%, but it is higher.

And our next question today comes from Ronald Kamdem with Morgan Stanley.

Just going back to some of the -- going back to the question on asset classes, just asking it in a different way, just in terms of just lessons learned during this pandemic, obviously, still very early. You guys have had the benefit of being in different sort of property types and have seen sort of firsthand how they performed. Has there been any thought about which asset classes maybe you'd want to get more involved in or less involved in, and potentially maybe asset classes that you're not involved in currently that may be easy to add on? Just sort of curious thinking medium to longer term here.

Sure. As I said before, I think industrial is a place that we continue to like to add on. Entering into that joint venture there at ILPT with the sovereign wealth investor, I think, gives us some capacity to grow that and grow that significantly. On the office side, I think we can pick our spots carefully. Well-leased office buildings makes a lot of sense. An area that we for long -- the only significant area that we don't have a significant presence in that could present itself as an opportunity could be multifamily as part of this whole -- as part of what's going on. That's an area that we were focused on trying to get more of a foothold in, and we might have opportunities to even get a greater foothold now as things present themselves. Us like, I think, everybody in the marketplace are trying to figure out what is the new normal when we emerge from this pandemic. There's so much people think about, write about in terms of things like for the last 20 years, urban density has been something that in the commercial real estate market has been sort of paramount, right? People wanted to be in sort of live-work-play environments in close density to each other. Every -- I, for one, spend a lot of time thinking, well, is that going to continue? Or is that going to all change? Are people going to want a suburban office, suddenly going to be much more in favor than it was before because you can -- because it won't be in a dense area? So we're thinking about things like that. We have a large suburban office portfolio. So it might benefit from this. It might be an area where we should maybe invest even more going forward. But those are the things we're thinking about right now.

Great. And then my second question was just piggy backing on sort of the private capital conversations. Just sort of curious to get a sense of what's the pulse right now out of those investors, right? To some extent, maybe some deer in the headlights given the unknown of the pandemic, but can you give the sense that there's also investors out there looking to be maybe more opportunistic and trying to do the work now and position themselves on the back of this? Just trying to get a sense of have conversations even started, or is it still too soon?

Yes. That's a really good question. In the conversations we've had with, let's say, sovereign wealth investors in large pools of capital, I would say the majority of everyone we talked to is very much open for business and very much wanting to try to take advantage of the opportunities. I would say that that's been the overwhelming theme that we've come across with -- in conversations with large pools of private capital. They're very keen to try to put money to work, very keen to try to take advantage of the current environment. Now they might have a different view -- they might have -- their views on certain asset classes might have changed. For example, there's not a lot of folks, I think, trying to put money to work in retail or hotels at the moment. But I think in office, in industrial, in multifamily and select other segments, niche segments, I think there is money, and I think people are very, very much open and want to put money to work. So I, like you, a little bit was thinking that maybe investors were going to have deer-in-the-headlights reaction to all this and would not be want -- they want to be -- really wait and see what happens. That's not been the case in our experience. In talking with these folks, they're very much open for business. They very much want to see opportunities. They very much recognize this, again, could be once-in-a-lifetime, if not once-in-100-year, opportunity to take advantage of the situation.

(Operator Instructions) And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Portnoy for any closing remarks.

Thank you, everyone, for joining us today for our earnings call. Operator, that concludes our call.

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.