RMR Group Inc (RMR) 2016 Q1 法說會逐字稿

Good day and welcome to The RMR Group second-quarter 2016 conference call.

(Operator Instructions)

I would now like to turn the conference over to Mr. Tim Bonang, Senior Vice President. Please go ahead, sir.

Thank you and good afternoon, everyone. Thank you for joining us today. With me on the 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 our performance for the second quarter of FY16. They will then take questions. 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.

Also note that 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 10, 2016, 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 any differences is contained on our filings with the Securities and Exchange Commission, or SEC, which can be accessed from our website, rmrgroup.com, or the SEC's website. Investors are cautioned not to place undue reliance upon any forward-looking statements.

In addition, we will be discussing non-GAAP numbers during this call, including adjusted revenues, adjusted EBITDA and adjusted EBITDA margin. A reconciliation of net income determined in accordance with US Generally Accepted Accounting Principles, or GAAP, to adjusted revenues, adjusted EBITDA, and a 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 Portnoy to begin our quarterly review. Adam?

Thank you, Tim, and thank you to everyone for joining us today.

For the second quarter of FY16, which ended on March 31, we reported net income attributable to RMR of $6.1 million, or $0.38 per share. As a reminder, the RMR Group completed its listing of common shares on the NASDAQ stock exchange on December 14, 2015. Because of this, certain comparisons of our financial results of operations to prior periods may not be meaningful.

At the end of the second quarter of FY16, our assets under management were approximately $22 billion, compared to $21.7 billion at the same period last year. RMR's results were highlighted by strong operating performance by our largest client companies, the declaration of our initial dividend for the 2016 second quarter, and an increased cash position that further strengthens RMR's balance sheet.

As an alternative asset management company, we primarily provide management services to our client companies. In the second quarter, approximately 84% of our revenues were derived from four publicly traded managed REITs, which include Hospitality Properties Trust, Senior Housing Properties Trust, Select Income REIT, and Government Properties Income Trust. These four REITs recently announced strong operating results for the quarter ending March 31. We believe these strong results highlights the strength of RMR's operating platform and speaks well of our over 400 real estate professionals working in 25 offices throughout the US.

Hospitality Properties Trust reported a 12% year-over-year increase in normalized FFO per share and hotel RevPAR grew 4.4% during the quarter. Same property hotel RevPAR growth at HPT exceeded the hotel industry average for the 13th consecutive quarter.

Senior Housing Properties Trust reported a 6.7% year-over-year increase in normalized FFO per share and same property cash basis NOI grew 1.7% during the quarter. SNH continues to lead its healthcare REIT peers with the highest percentage of private properties in its portfolio, which have limited exposure to government reimbursement programs, such as Medicare and Medicaid.

Select Income REIT reported a 5.7% year-over-year increase in normalized FFO per share and same property cash basis NOI grew 1.8% during the quarter. As of the quarter ended March 31, SIR's portfolio was 97.8% leased for an average lease term of over 10 years.

Government Properties Income Trust reported a 6.9% year-over-year increase in normalized FFO per share and same property cash basis NOI grew 2.4% during the quarter. As of quarter end, GOV's portfolio is 94.9% leased for an average lease term of approximately five years.

On a combined basis, RMR arranged 1.3 million square feet of leases during the quarter ended March 31 on behalf of our managed REITs. These leases resulted in average rental rates that were approximately 10% higher than prior rents for the same space and average terms for these leases were 11.7 years.

On behalf of our managed REITs, RMR arranged the acquisition of eight properties for an aggregate of approximately $305 million and arranged the sale of four properties for an aggregate of approximately $29.5 million since January 1, 2016. RMR also arranged a total of $1 billion of senior unsecured debt financings on behalf of our managed REITs during the quarter.

As you can see, RMR is active in operating our managed REITs to the highest standards in the industry, and we think the recently reported strong operating results at our client companies proves this point. Our remaining revenues during the quarter came from our three real estate-based operating companies, which includes TravelCenters of America, Five Star Quality Care, and Sonesta International Hotels Corporation, as well as from managing the RMR Real Estate Income Fund through our wholly-owned SEC registered investment advisor subsidiary.

On April 13, we declared a cash dividend on RMR's common shares of approximately $0.30 per share, which represents a regular quarterly dividend of $0.25 per share for the quarter ended March 31 plus a pro rata dividend of approximately $0.05 per share for the period from December 14 to December 31, 2015. This dividend will be paid on or about May 19 to shareholders of record as of the close of business on April 25.

We ended the second quarter with cash and cash equivalents of approximately $71 million and no debt. We continue to consider ways to both grow our business with our existing client companies, as well as consider ways to diversify our revenues from possibly acquiring or creating new client companies in the future.

I'll now turn the call over to our Chief Financial Officer, Matt Jordan, who will review our financial results for the quarter.

Thank you, Adam. Good afternoon, everyone. As a reminder, investors should be aware that The RMR Group was not formed until May 28, 2015 and became a publicly traded company on December 14, 2015. As a result, prior to these dates, the Company's assets, structure and operations differed in several respects from those subsequent to these dates, which may materially impact comparisons between the periods discussed in this call or those presented in our public filings.

This morning we reported adjusted EBITDA of $23.1 million for the second quarter of FY16, which when measured against our adjusted revenues of $41.9 million results in an adjusted EBITDA margin of 55.2%. On a sequential quarter basis, adjusted EBITDA was flat and adjusted EBITDA margin increased 70 basis points, with this improvement in margin largely reflective of increased recoveries of payroll-related costs from certain of our client companies.

On a year-over-year basis, adjusted EBITDA decreased $2 million and our adjusted EBITDA margin decreased 370 basis points. These decreases are primarily due to the second quarter of FY15 marking the last quarter we provided services to Equity Commonwealth, or EQC, as well as increased general and administrative costs associated with our becoming a publicly traded company and increases in staffing to support growth at the manage REITs.

RMR reported quarterly management services revenues of $39 million, which was a decrease of $3.1 million on a year-over-year basis. The year-over-year decline in management services revenue is primarily due to the wind down of services to EQC and non-cash amortization of $2.4 million that was not in our results for the comparable period, partially offset by growth at the managed REITs driven by acquisitions over the last 12 months.

The sequential quarter decreased in management services revenue of $63 million is primarily due to the $62.3 million incentive management fee we earned from HPT in the first quarter of FY16. As a reminder, we are only able to earn and record GAAP revenues for incentive management fees at December 31 of each year. If March 31, 2016 had been the end of a measurement period, we would have earned $5.3 million in incentive management fees.

For the second quarter of FY16, approximately 84%, or $32.7 million, of our management services revenue was earned from the managed REITs, with the remainder coming from our managed operators. Of the revenues we earned from the managed REITs, $24.8 million represents base business management fees. As a reminder, these fees are calculated and paid monthly and are primarily based on the lower of the average historical costs of assets under management or average total market capitalization.

For the second quarter of FY16, three of our managed REITs, HPT, SNH and SIR, were paying base business management fees based on average total market capitalization. If these same fees have been based upon the average historical costs of access under management, our revenue for the quarter would have been approximately $3 million higher, or $12 million higher on an annualized basis. Base business management fees from the managed REITs declined approximately $400,000 on a sequential basis, due to the second quarter of FY16 having one less day in the period, as well as declines in the monthly average total market capitalization of HPT during the quarter.

As of March 31, 2016, the average total market capitalization on which the fees for HPT, SNH and SIR were calculated was approximately 5% higher than that of December 31, 2015, due to overall improvements in the share prices of our managed REITs during the latter half of the second fiscal quarter. These improvements in the managed REITs equity prices has continued into April, 2016 and may have a positive impact on our management services revenues on a prospective sequential quarter basis.

In terms of expenses for the quarter, our largest operating expenses are compensation and benefits and general and administrative expenses. Compensation and benefits expense for the quarter increased $847,000 on a year-over-year basis and increased $257,000 on a sequential quarter basis, to $21.6 million.

Compensation and benefits expense is comprised of $20.2 million in wages and benefits for our employees, a portion of which is reimbursed by our client companies, and $1.4 million in non-cash share-based payments made by our client companies to certain of our officers and employees, all of which is reimbursed by our client companies. The year-over-year increase in compensation and benefits expense is primarily due to increases in headcount to support the growth and operations of our client companies and annual merit increases provided to our workforce. The sequential quarter increase in compensation and benefits expense is primarily due to headcount additions and increases in payroll taxes.

Our G&A expense for the quarter was $6.5 million, which includes approximately $455,000 of transaction and acquisition-related costs. Our recurring G&A expense of $6 million increased $1.3 million on a year-over-year basis and increased $400,000 on a sequential quarter basis.

The year-over-year increase in our recurring G&A expense is primarily attributable to costs related to our being a publicly traded company in FY16; and the sequential quarter increase is primarily attributable to annual meeting costs and independent director share awards in the second quarter of FY16. We believe our recurring G&A expense of $6 million represents an appropriate proxy of our quarterly run rate. Our effective tax rate for the quarter ended March 31, 2016, was 20.6%, which we currently expect to approximate our normalized effective tax rate.

Regarding our balance sheet, we continue to maintain a conservative balance sheet. As of the end of the quarter, we had approximately $71 million of cash and cash equivalents and we had no debt. As Adam previously discussed, on or about May 19, 2016, we will be using a portion of our cash and cash equivalents to fund our dividend obligation of approximately $9.5 million.

Overall, we are pleased with our quarterly results and believe we are well-positioned for future growth. That concludes our formal remarks for this quarter. Operator, would you please open the line for questions?

Absolutely. We will now begin the question-and-answer session.

(Operator Instructions)

Our first question comes from Bryan Maher of FBR and Company. Please go ahead.

Good afternoon, guys.

Hello, Brian.

A couple of questions on the managed REITs. So they've made, as you stated in the prepared comments, particularly in the past calendar quarter, a pretty good comeback. Can you talk a little bit about what you attribute the weakness in several of those to in 2015, and in your view, is it predominantly related to the reorganization and the preparing for the IPO?

Yes. That's a good question, Bryan. I don't have an exact answer. I can just give you maybe some of my thoughts about maybe what was driving some of that. And the short answer is, yes, it had something to do with getting ready for the IPO.

We went public through a pretty odd process, where we didn't raise any new capital in the listing and we didn't have any banks that were underwriters. The four REITs were distributing shares of RMR out to their shareholders. As a result, the four REITs themselves were technically underwriters in the eyes of the SEC. So we were in a pretty odd position for the second half of 2015, where we weren't really able to effectively go out and talk about the transaction that had occurred very openly because we were in a quiet period, we were in registration.

I think one of the good things that's come about after getting the Company listed in the middle of December is we can now go out and talk a lot more with investors, both at RMR and at the REITs. And the one thing, I think -- this is my own observation -- that I don't think investors, especially in the REITs, appreciated was the change in the management agreement between RMR and the REITs, where we get paid on the lower of 50 basis points times the lower of either historical gross real estate asset value or market cap.

And as Matt has highlighted, as the stock prices go down, the fees to RMR went down. And for some reason, there was a lot of misinformation in the marketplace that just thought it didn't matter what the stock price did, our fees were the same. They went up or were tied to just gross real estates value.

And I think people now have a better appreciation for the fact that I think we've done a pretty good job over the last several years of really aligning the interests between RMR and the REITs. And one of those aligning interests is setting that structure up so that if the stock price goes down, RMR gets less fees. And now we have every incentive in the world to have good stock prices at the REITs.

I guess investors will see more of yourself and the managed REIT executives on the road meeting with investors, I suppose?

Yes.

Can you talk a little bit -- a lot of us know about HPT -- can you talk a little bit about GOV, SNH, and SIR and the acquisition outlook for those three managed REITs going forward?

Sure. For specifically GOV, SIR and SNH, I guess I'll start with SNH. SNH -- all the companies are not buying a lot of real estate right now. You saw it in the prepared remarks. We've only bought about $300 million across the board since the beginning of the year. We're into May now.

That said, I don't see robust acquisition activities at those three REITs. I see a little bit of acquisition activity. And that's largely driven by just where we are in the cycle.

It feels like pricing for real estate is pretty healthy, given the economic backdrop. For example, in the office sector, our view is cap rates have stayed relatively -- have gone really kind of sideways for the last 6 months or 12 months in first tier markets or first year properties.

You get outside first tier markets or first year properties, and I'm talking about office, and this applies to SIR and to GOV, generally speaking, you are seeing cap rates move. And where we're able to find good risk adjusted returns, we are making acquisitions at those two companies focused on the office sector. That applies a little bit to SNH, as well, and the MOBs.

On the senior housing side of SNH, we're still acquisitive. But again, I think it's tempered again, given where pricing is in the marketplace. There still seems to be a lot of private pools of capital that are willing to pay what we think are high prices for senior living properties.

That's helpful. And the last for me, when we think about growth avenues for RMR, and those could be managing for institutional owners, private equity, sovereign wealth funds, creating additional client companies, is there one or two of those, at this point in the cycle and in this environment, that you're leaning towards over others?

The honest answer is, no. We have a lot of irons in the fire. I think you could see that in our financial -- if you read through our press release, and Matt even said it in our prepared remarks -- we had about $400,000 of what was termed acquisition-related costs.

We have no acquisitions that we're announcing. But that's obviously indicating that we are looking at some things early on. And I think it's safe to say that all of the above things that we would be looking at. But there is nothing that's close to definitive or close to an announcement at this point.

But you know, we do have a lot of cash. We are very focused on our existing businesses. But it is a mandate for the Company to think about ways to diversify our revenue streams.

We have 84% of our revenues coming from four clients. And I think it's prudent for us to think about creating new clients or acquiring new clients or entering into new strategies. And so we are thinking about all those things going forward.

Thanks. That's helpful. That's all for me.

And our next question comes Mitch Germain of JMP. Please go ahead.

Adam, if you could just expand on that last question and thought with regards to specifically some of the things that -- or ways that you want to diversify the revenue stream.

Sure. I'll give you some examples. And these are -- and we've talked about this with other investors of areas that I think are natural outgrowths for what RMR does today. But I caveat all these statements with that none of it may happen and we have nothing pending or definitive at this time.

But I think a logical place for RMR to think about expanding into that we should think about, and we are thinking about it, is does it make sense for us to think about expanding into the commercial real estate mortgage market? Is that something that we can -- is it something that we can easily migrate into and take on, given our expertise and breadth and size of organization? And so that's something we're thinking about.

Whether now is the right time to start a mortgage REIT or commercial mortgage REIT is another question. Whether we would build it internally or whether we would hire a team or buy a small company, those are all things we're still trying to figure out if it makes sense for us. But just big picture thinking, I think it's a logical area for RMR to think about expanding into.

The other area that I think makes a lot of sense for us to think about expanding into is in our mutual fund business or our investment advisor business. For 12 years now, we've been in the mutual fund business. We used to run seven different closed-end 40 Act mutual funds through a series of mergers. We now just have one. It's called the RMR Real Estate Income Fund; the ticker is RIF. It's about $250 million in assets, around there.

I think a logical place for us to think about growing is in that area. And there's multiple ways you could do that. You could do that by trying to come up with more retail product that you would sell into retail channels. The obvious example would be an open end fund, an interval fund, another a closed end fund, if the markets were there for that.

You could also think about raising -- using private capital to do a long-short fund of some sort. These are all sorts of the ideas that we're thinking about that would be a logical place for us to expand into for us.

And then the third area is something that I know some folks have talked about in the past that they think seems to make a lot of sense for us is to continue to do exactly what we're doing in the sense that buy, manage, operate, sell commercial real estate. But instead of raising the funds for it, let's say, through a traditional real estate vehicle or REIT vehicle through Wall Street, try to tap into private capital, raise institutional money in either joint ventures. It could be a co-mingled fund. I'm not sure that would make -- I'm not sure that would be the best use of our time to start a co-mingled fund today. But maybe you start with a joint venture or something like that with a large institutional partner. And you go and do exactly what we're doing every day at RMR, except you tap private capital.

So that gives you three examples, again, of things we're thinking about. But none of which -- they're all things we're thinking about. I can't tell you whether any of them or all of them may occur.

And any restrictions from you investing or establishing products in any of the segments that you currently manage right now, i.e, government or healthcare or lodging net lease?

There's no covenant or contractual restriction, but we would obviously have some issues. For example, I think we'd think long and hard if we were going to start a private pool of capital that was going to compete directly head on with one of the mandates of our existing managed REITs. Even though we have the right to do it, I just think we'd be really careful about that. And I'm not sure we would do it, just because it would create such a potential conflict.

But I think there's a lot of types of commercial real estate that we could still explore on the private side that would not overlap, or types of strategies we could deploy that would not overlap with the existing mandates for the currently managed REITs.

Thank you.

Yes.

This concludes the question-and-answer session. I'd like to turn the conference back over to Adam Portnoy for any closing remarks.

Thank you for joining us this afternoon. We look forward to updating you all on our progress during our third quarter conference call in August. Operator, that concludes our call.

Thank you, sir. Today's conference has now concluded and we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.