RMR Group Inc (RMR) 2016 Q3 法說會逐字稿

Good afternoon and welcome to the RMR Group's third-quarter 2016 financial results call. Please note, this event is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to the Senior Vice President, Mr. Tim Bonang.

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 third 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, August 9, 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 EBITDA and adjusted EBITDA margin. A reconciliation of net income determined in accordance with US Generally Accepted Accounting Principles, or GAAP, to 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?

Thanks, Tim, and thank you to everyone for joining us this afternoon. Before I begin with our third-quarter results, I would like to discuss our recently announced acquisition. Yesterday we announced the purchase of Tremont Realty Capital, a firm that specializes in commercial real estate finance.

Tremont principally raises debt and equity capital for owners of commercial real estate and serves as a manager of private funds invested in commercial real estate loans. Since its founding in 2000, Tremont has completed over $4.6 billion worth of commercial real estate transactions and it currently has over $200 million of real estate loans under management. Tremont is headquartered in Boston and has offices in New York; Chicago; Newport Beach, California; Hartford, Connecticut, and Annapolis, Maryland.

RMR's majority-owned subsidiary, the RMR Group, LLC, acquired the business of Tremont in an asset purchase transaction for an up-front payment of $2.2 million, excluding transaction costs. Tremont also has the right to receive an earn-out over the next two years based on a portion of payments that RMR receives from Tremont's historical business. This is RMR's first acquisition since becoming a public company late last year.

We believe that the commercial real estate finance business is a logical extension of our existing operations and may provide RMR with a platform for additional growth. We also think this acquisition may enable RMR to participate in what we believe is a growing need for lending to middle-market commercial real estate borrowers, at a time when banks and certain other traditional lenders have pulled back from this market, as a result of increased regulation. I would like to welcome the Tremont team from RMR and look forward to supporting their growth and expanding their operations as part of our Company.

Now moving to our third-quarter results, for the third quarter of FY16, which ended on June 30th, we recorded net income attributable to RMR of $6.7 million or $0.42 per share, which is 10.5% -- which is a 10.5% sequential increase in earnings-per-share. As a reminder, the RMR Group completed its listing of common shares on the NASDAQ stock exchange on December 14th, 2015. Because of this, certain comparisons of our financial results of operations to prior periods may not be meaningful.

At the end of the third-quarter of FY16, our assets under management were approximately $23.4 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. Hospitality Properties Trust reported a 10.1% year-over-year increase in normalized FFO per share and hotel RevPAR grew 4.9% during the quarter.

Same property hotel RevPAR growth at HPT exceeded the hotel industry's average for the 14th consecutive quarter. Also during the quarter, HPT was recognized by Forbes magazine as one of the 100 most trustworthy companies in America for 2016, and it was the only REIT selected to this year's list.

Senior Housing Properties Trust reported a 6.8% year-over-year increase in normalized FFO per share and cash basis NOI grew 7% during the quarter. SNH continues to lead the four largest healthcare REITs with the highest percentage of private paid properties in its portfolio, which have limited exposure to government reimbursement programs such as Medicare and Medicaid.

Select Income REIT reported a 2.9% year-over-year increase in normalized FFO per share and same property cash-basis NOI grew 0.7% during the quarter. As of the quarter end of June 30th, SIR's portfolio is 96.8% leased for an average lease term of over 10 years. SIR also increased its dividend for the sixth time since it's IPO in 2012 by $0.04 per share per year to $2.04 per annum, while maintaining one of the strongest dividend coverage ratios in the net lease sector.

Government Properties Income Trust reported a 1.7% year-over-year increase in normalized FFO per share and same property cash-basis NOI grew 3% during the quarter. As of the quarter end, GOV's portfolio is 94.2% leased for an average lease term of approximately five years. On a combined basis, RMR arranged almost 900,000 square feet of leasing -- of leases during the quarter ended June 30th, on behalf of our managed REITs. These leases resulted in average rental rates that were approximately 4% higher than prior rents for the same space and average terms for these leases were 9.5 years.

On behalf of our managed REITs, RMR ranged the acquisition of 12 properties for approximately $177 million and arranged the sale of six properties for approximately $33 million since April 1, 2016. RMR also arranged almost $1 billion of debt financing on behalf of its managed REITs during the quarter, including a $620 million mortgage and a $310 million senior unsecured debt financing. As you can see, RMR was active in operating its 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 advisors subsidiary.

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.

Thanks, Adam. Good afternoon, everyone. This morning we reported adjusted EBITDA of $26.1 million for the third quarter of FY16, which when measured against our recurring contractual management and advisory fees of $44.8 million resulted in adjusted EBITDA margin of 58.3%.

On a sequential quarter basis, adjusted EBITDA increased $3 million and adjusted EBITDA margin increased 310 basis points. These significant improvements in adjusted EBITDA and operating margin reflect the growth in our management fee revenues due to increases in the market capitalization of HPT, SIR and SNH over the course of the last quarter. We believe this quarter's operating results demonstrates the strong alignment of interest that is inherent within our management agreements with our client companies.

On a year-over-year basis, adjusted EBITDA increased $2.8 million and our adjusted EBITDA margin increased 330 basis points. These increases were the result of growth in property management revenues and increased recoveries of payroll and related costs from certain of our client companies.

For the three months ended June 30th, 2016, net income was $17.4 million and net income attributable to the RMR Group was $6.7 million or $0.42 per share. Net income includes $1.2 million in separation costs and net income attributable to the RMR Group includes $600,000 of separation cost or $0.02 per share.

For the third quarter, we reported quarterly management services revenue of $41.9 million, which was an increase of $800,000 on a year-over-year basis and $2.9 million on a sequential quarter basis. The sequential quarter increase in management services revenue of $2.9 million, is primarily due to share price appreciation driving growth in the market capitalization of HPT, SNH and SIR, as well as non-fuel sales increases at TravelCenters of America.

For the third quarter of FY16, approximately 83%, or $34.9 million, of our management services revenue was earned from the managed REITs. Of the revenues we earned from the managed REITs, $26.6 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 cost of assets under management, or the average total market capitalization.

For the quarter ended June 30, 2016, base business management fees were calculated using total market capitalization for HPT and SIR, and historical costs of assets under management was used for GOV. Because of the increase in SNH's share price during the quarter, SNH began paying fees to RMR based on historical cost of assets under management in June 2016.

Also, starting in July, 2016, SIR is now paying base business management fees on its historical cost of assets under management. As of today, only HPT is paying its base business management fees based on total market capitalization.

As a reminder regarding incentive business management fees, we are only able to record GAAP revenues for any incentive fees we earn as of December 31st, of each year, the date on which the measurement period for our incentive fee evaluation ends. If June 30, 2016, had been the end of a measurement period, we would have earned $31.2 million in incentive fees.

Turning to expenses for the quarter, our largest operating expenses are compensation and benefits and general and administrative expenses. Compensation and benefits expense for the quarter is comprised of $20.6 million in employee wages and benefits, a portion of which is reimbursed by our client companies, and $2.1 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.

Compensation and benefits expense for the quarter, excluding non-cash share-base payments, increased $900,000 on a year-over-year basis and $400,000 on a sequential quarter basis. These increases are primarily due to head count additions to support the growth and operations of our client companies. We are currently at employment levels across the organization that are consistent with historic levels of normalized employment. Absent any significant changes to the actively management property portfolio, we believe the $20.6 million in cash compensation and benefits for the quarter is a reasonable proxy for future quarters.

Our general and administrative expense for the quarter was $6.1 million, which includes $327,000 of transaction and acquisition-related costs. Our recurring G&A expense of $5.8 million increased approximately $300,000 on a year-over-year basis and decreased $250,000 on a sequential quarter basis. The year-over-year increase in recurring G&A expenses was primarily attributable to costs related to our becoming a publicly traded company in FY16.

The sequential quarter decrease is primarily attributable to annual meeting costs recognized in the second quarter of FY16. We continue to believe recurring G&A expenses of approximately $6 million represents an appropriate proxy of our quarterly run-rate.

Our effective tax rate for the quarter ended June 30, 2016, was 20.6%, which we currently expect to approximate our normalized effective tax rate. On July 12th, we declared a cash dividend on RMR's common shares of $0.25 per share. This dividend will be paid on or about August 18th, to shareholders of record as of the close of business on July 22nd.

We ended the third quarter with cash and cash equivalents of approximately $81 million and no debt. Following the acquisition of Tremont discussed earlier, we have a remaining cash position of over $78 million.

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

Thank you.

(Operator Instructions)

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

Good afternoon, guys. A couple of questions.

Can you go over, Adam, briefly and at a very high level what you think about the growth prospects for each of the externally managed, publicly traded REITs.

Sure, Brian.

I think all of the externally managed REITs have had modest growth so far this year, in 2016. And I imagine that, that would be the trend for the balance of the year. We've only done about -- less than $200 million year to date. I guess during the quarter, we did about $177 million. We've done about double that year to date.

That's about the run-rate across the board, I think, for the companies, for the four REITs. Really what's driving the modest growth -- external growth is what I'm talking about at the four REITs -- it is just pricing has become -- is very elevated for real estate assets across the board. And so it's tough to find assets at REITs low prices that we can finance at a reasonable cost to capital.

Thanks. And then on Tremont, do you consider that a national platform or a regional platform? I see it's got offices in New York and Chicago and a handful of other cities. And if you consider it regional, would you be using the RMR platform to make it a national company?

I think they are a national company today. They originate mortgages across the country. They have offices in California, New York, Chicago, Hartford, and Annapolis and, obviously, here in Boston.

But, yes, what you're alluding to is, I think adding Tremont to the RMR platform, I think we can make them even more of a national player. Meaning, with their five offices today, it's not to say we could not open up additional offices that could focus on the Tremont business at some of our existing 30 offices around the country. We have 30 offices, away from Tremont, that we currently are operating at RMR. There's nothing that could prohibit us from expanding some of the business in those offices to add Tremont personnel or expand the business there. But today I currently believe they're national. I think we can make them even more national.

Thanks. And then, lastly, I know that you guys calculated that if the year were to end today, the incentive fee payment -- and this would be coming from HPT -- is about $31.2 million and we do see that in HPT's financial statements from this morning. But as we calculate the model, we're seeing about 26 percentage points of outperformance at HPT relative to the SNL Hotel REIT index. And by our calculations and our model, if the year were to end performance-wise today, but at December 31, that incentive fee would be materially higher, approaching $71 million, which is actually the capped level because it would otherwise be over $120 million.

Does that kind of jibe with how you're thinking about it if the year ended today, but on December 31?

Brian, it's Matt.

That's correct. HPT is accruing that number throughout the year. So essentially, $31 million is half of what they project for the full year. And as of the end of July, your number is in the ballpark of where it would be if all things stayed constant for the full year.

Right. So that's an incremental couple-of-bucks a share when you factor in the RMR, the entities there are totally diluted.

Okay. That's all I had. I appreciate it.

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

Thank you all for joining us this morning. We look forward to updating you on our progress during our fourth-quarter conference call in November. Operator, that concludes our call.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.