RMR Group Inc (RMR) 2016 Q4 法說會逐字稿

Good morning and welcome to the RMR Group fourth-quarter 2016 conference call.

(Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Tim Bonang, Senior Vice President.

Please go ahead.

Thank you, Chad.

Good morning, 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 fourth quarter and year end 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, December 15, 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 in our filings with the Securities and Exchange Commission, or SEC, which can be accessed from our website, www.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 the 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.

Thank you to everyone for joining us this morning. For the fourth quarter of FY16, which ended on September 30, we reported net income attributable to RMR of $7.4 million, or $0.46 per share, which is a 15% year-over-year increase in earnings per share. At the end of the fourth quarter, our assets under management were approximately $26.9 billion, compared to $25.5 billion for the same period last year.

RMR's results were highlighted by continued strong operating performance by our largest client companies, which contributed to a 17% growth in our revenues on a quarterly basis compared to last year. For the fourth quarter, approximately 84% of our management services revenue was earned from our four managed REITs.

Hospitality Properties Trust reported a 4% year-over-year increase in normalized FFO per share, and hotel RevPAR grew 3.8% during the quarter. Same-property hotel RevPAR growth at HPT exceeded the hotel industry average for the 15th consecutive quarter. Also during the quarter, HPT raised $372 million of net proceeds from an equity offering, which was principally used to repay debt.

Senior Housing Properties Trust focused on internal growth and more efficient operations, which included some strategic dispositions. Subsequent to quarter end, SNH acquired one medical office building for $18.5 million, bringing its year-to-date total acquisitions to approximately $207 million.

Select Income REIT was active with leasing during the quarter, entering approximately 1 million square feet of leases that were 4.9% higher than previous rents for the same space. Since June 30, SIR has acquired two properties for $18 million, primarily with internally-generated free cash flow.

Government Properties Income Trust continued to focus on leasing its properties and managing its growth. During the quarter, GOV completed 136,000 square feet of leases for rents that were 2% higher than previous rents for the same space, and increased consolidated occupancy by 150 basis points year over year to 95% at quarter end. On a combined basis, RMR arranged almost 1.3 million square feet of leases during the quarter on behalf of our managed REITs. These leases resulted in average rental rates that were approximately 1.5% higher than prior rents for the same space, and average terms for these leases were 8.7 years.

As of December 14, all four managed REITs have outperformed their SNL peer index on a total-return basis year to date. HPT by approximately 6%, SNH by over 24%, GOV by over 22%, and SIR by over 29%. The majority of our remaining revenues during the quarter came from our three real estate-related 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.

Turning to growth initiatives, during the fourth quarter, we acquired the business of Tremont Realty Capital. Which specializes in commercial real estate finance, principally by providing capital to commercial real estate owners and developers, and serving as an advisor to private funds that principally make commercial real estate debt investments. Based on Tremont's current operating run rate, it is today contributing over $3 million in annual revenues and approximately $400,000 of annual operating income to RMR. We believe the combination of Tremont's historical expertise in commercial real estate lending -- coupled with RMR's existing commercial real estate platform, management team and nationwide reach -- positions us well to grow this business in the future.

In addition to trying to grow our existing client companies, we remain focused on using our capital resources, including our cash on hand, to consider ways to grow and diversify our business in the future, all with a focus on real estate or related businesses. We are currently assessing opportunities to establish new client companies and further diversify our revenue base. We are also starting to selectively pursue alternative sources of capital in an effort to possibly diversify the sources of funds for our client companies.

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 morning, everyone. This morning we reported adjusted EBITDA of $27.4 million for the fourth quarter of FY16. Which, when measured against our recurring contractual management and advisory fees of $47 million, resulted in adjusted EBITDA margin of 58.3%.

On a sequential-quarter basis, adjusted EBITDA increased $1.2 million, and adjusted EBITDA margin remained consistent at 58.3%. The increase in adjusted EBITDA is primarily the result of continued business management fee increases related to growth in the market capitalization of HPT, SIR and SNH over the course of the last quarter. These increases in revenues were partially offset by increased compensation costs.

On a year-over-year basis, adjusted EBITDA increased $3.1 million, and our adjusted EBITDA margin increased 140 basis points. These increases were primarily the result of growth in business and property management fees from the managed REITs and increased payroll reimbursements from our client companies.

For the fourth quarter, we reported management services revenue of $43.7 million, which was an increase of $3.9 million, or 10%, on a year-over-year basis, and $1.8 million, or 4.4%, on a sequential-quarter basis. The year-over-year and sequential-quarter growth in management services revenue is primarily due to base business management fee increases as a result of growth in the market capitalization of HPT, SNH and SIR. As well as modest growth in property management revenues generated from the managed REITs. Of the revenues earned from the managed REITs, $28 million represents base business management fees.

As a reminder, these fees are calculated monthly, and are primarily based on the lower of the average historical cost of assets under management or the average total market capitalization. For each month in the quarter ended September 30, 2016, base business management fees were calculated using total market capitalization for HPT, and historical cost of assets under management for GOV, SIR and SNH. With the decline in REIT share prices this fall, SIR reverted back to paying its monthly base business management fees based on market capitalization basis starting in October. The same change occurred for SNH's monthly base business management fees in November. As of today, only GOV is paying its base business management fees based on its historical costs of assets.

As a reminder regarding incentive business management fees we may receive from the managed REITs, we are only able to record revenue on December 31 of each year, the date on which of the measurement period for our incentive fee evaluation ends. If September 30, 2016 had been the end of a measurement period, we would have earned approximately $75 million in incentive fees from HPT. With recent post-election market improvements driving share price appreciation at HPT's peer companies within the SNL Hotel REIT Index, any incentive fee we may earn could be significantly less than this amount.

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 $22.8 million in employee wages and benefits, a portion of which is reimbursed by our client companies. And $3.6 million in non-cash share-based payments made by both our client companies and us to certain of our officers and employees, a significant portion of which is reimbursed by our client companies.

Compensation and Benefits expense for the quarter, excluding non-cash share-based payments, increased $5 million on a year-over-year basis and $2.2 million on a sequential-quarter basis. The year-over-year increase is primarily due to headcount additions of approximately 70 employees to support the growth and operations of our client companies and the Tremont acquisition.

The sequential-quarter increase is primarily due to the final determination of our year-end bonus payments to officers and employees, which resulted in the fourth quarter being inclusive of $1.1 million, or $0.02 per share, in compensation expense that relate to the first three quarters of the fiscal year. The increase in bonus payments was largely the result of an increase in bonus-eligible employees, as bonus-per-employee remained consistent with historical levels.

Our General and Administrative expense for the quarter was $6 million, which includes a $326,000 of transaction- and acquisition-related costs. Our recurring G&A expense of $5.7 million decreased approximately $230,000 on a year-over-year basis and $90,000 on a sequential-quarter basis. These decreases in recurring G&A expenses are primarily attributable to declines in temporary staffing and third-party service contract costs.

We continue to maintain a conservative balance sheet, with $65.8 million in cash and no debt as of September 30, 2016. We believe it's important to note that we pay a significant portion of employee compensation as annual cash bonuses each September, which results in our cash balances being at their lowest point each September 30. On October 11, 2016, we declared a cash dividend on RMR common shares of $0.25 per share. This dividend was paid to shareholders on November 17, 2016.

Overall, we are pleased with our quarterly results and believe we remain well-positioned for additional growth opportunities. That concludes our formal remarks for this quarter.

Operator, would you please open the line to questions?

(Operator Instructions)

Mitch Germain, JMP Securities.

Hey, guys, it's Peter on for Mitch. Congrats on the quarter and one year here as a public Company.

Thanks, Peter.

I just wanted to get your thoughts on capital deployment going forward, given the little capital need here, $66 million cash on hand and what might be a material incentive payment expected at year end? Thanks.

Sure. Well, to touch on the incentive payment, Matt, I think, did a pretty good job in his prepared remarks talking about how our best guess today is that we will likely receive a benefit fee payment from HPT. We're not sure how big it's going to be. It all depends where the stock market ends at the end of the year. But based on where things have shaken out since September 30, it's likely to be less than what was calculated as of September 30. But we expect to get something, but it could be -- I don't think it's going to be the $75 million that it was recorded at September 30. It's somewhere between zero and $75 million, and unfortunately I just -- I don't know what is going to be.

But that being said, in terms of cash deployment, you're right. We get this question often from investors about what we're going to do with our buildup of cash on the balance sheet. Look, we have a current dividend at $0.25 a share per quarter. I imagine that will stay in place for the foreseeable future. But at the same time, whereas we think about growing our business and, let's say, starting new client companies, or funding or help launching new strategies, we've often talked about how we'd like to use our excess cash to help bring in additional capital.

So if we're able to, let's say, get a third party, whether that be private or public capital to get behind a new strategy of some sort, or to fund a new business for us in some sort, it's likely that we will be required or asked to put in 10%, 20% of the capital to start that new business. And that's how we've been thinking about earmarking the money that we've been building up on our balance sheet.

Now, that all said, I really look at the next 12 months as, we are going to see if we can get some of these initiatives off the ground. If we end the next year at the end of 2017 and we're continuing to build up cash and we have not launched any of these investment strategies, well, then, I think a lot of different options become available to us.

Personally, as being one of the larger shareholders in the Company, I have every incentive in the world also to recommend to the Board that we maybe increase the return of cash to shareholders. And if we were to do something like that, again, I think we'd have to see where we are at the end of 2017, if we have used any of that cash to help grow the business. My current bias is, I think about maybe increasing the dividend at that point, or maybe a special dividend at that point. But again, I'm speculating, it's a long way -- we've got to see where we are at the end of 2017 and if we've been successful/unsuccessful in using that cash to help grow our business.

Great. Thanks so much.

Yes.

(Operator Instructions)

Bryan Maher, FBR & Company.

Good morning, Adam and Matt. Two questions, one a little bit longer than the other. And by the way, we're calculating $65 million for the incentive fee, as of this morning. When you look at what's going on with the interest rates here recently, how do you think about changes in the acquisition environment for the four externally managed REITs? And more specifically, are you seeing any early indications of cap rate movement in those sectors which you operate?

Sure. Thanks for that question, Bryan. Within the sections we operate, within the four managed REITs, we have not been a particularly large acquirer of property over the last year. You look over the last 12 months, it's probably less than $0.5 billion that we've acquired across the companies. Given historical rates of which we've acquired things over the last -- looking at the past three, four, five years, that's actually a very small amount of acquisitions.

So we've already have taken a position over the last year that the acquisition market was getting a little frothy, and that we were not being particularly aggressive in chasing acquisitions. With the move in interest rates, I think it bodes well for us through 2017, meaning there could be an opportunity for movement in cap rates. But that's something I would see in 2017 which might provide us an ability to be a little bit more acquisitive next year. We have historically been very acquisitive at the RMR managed companies when others in the marketplace have pulled back. And we have not seen, short-term here in the last couple months, a big pullback in the marketplace.

Because we are pretty active in looking and keeping abreast of what's going on. There's still a lot of bidders in the marketplace, and we haven't really seen a movement, or a significant movement, in cap rates at all. And I think that's attributable to the fact that there's still a lot of money on the sidelines waiting to be put to work, from a lot of different sources.

But I do think eventually some of the rise in interest rates is going to have an affect on the cap rates, and I think it is going to drive some of the levered buyers out of the market. And when that happens, we could be in a position to be a little bit more acquisitive in 2017. I haven't -- this is also speculative. I haven't seen it really play out in the last couple months. But I think it might play out in 2017.

Thanks for that. And then my second question is, when we look at something like Tremont, and we look at your national footprint, how long do you think it would take to grow that business, not necessarily entirely across your national footprint, but substantially? Is that a one- to two-year process, or a three- to five-year process? How are you thinking about growing that business?

I think we'd like to significantly grow it in 2017. We are starting early days on some initiatives to try to raise some capital around that business. And I hope we are successful sometime in 2017 to raise some significant capital around that business. I'd like to think that we are well on our way in 2017 to making that a significant business within the RMR family of companies. But that's the way I'm thinking about it.

We're putting a lot of effort behind it. But we're also very focused on growing our existing client companies and help financing our existing client companies. And seeking out, I said in my prepared remarks, [a pall] from alternative sources of funds for our existing client companies, to help them grow. So we're doing a lot of things at once. I think we can do it. I think we can do a lot of things at once. But specifically around Tremont, we're putting a significant push into that business in 2017.

And just one other thing while I have you on the line, Adam. You've talked in the past about growing the platform, and whether that's managing some sovereign wealth money or doing something with private equity, or maybe going into another real estate sector that you're not currently in. Has that thought process evolved at all over the last three to four months?

Yes, we've narrowed it down a little bit, and we're becoming a little bit more focused on certain strategies. I mean, I think it's still early days, and I don't want to let the cat out of the bag in terms of exactly what we are pursuing. But it's safe to say that, yes, we have a handful of initiatives that we're very focused on as we go into 2017, that we're going to spend a lot of energy around, one of them being trying to grow the Tremont business. I've alluded to it a couple of times. Alternative sources of funds for our existing client companies, being another. And there's a handful of initiatives around that.

We have narrowed our thinking a little bit. We're trying to strike where we think we have the highest likelihood of success. And that is how we have narrowed our thinking. I think it's safe to say over the last 2016, we cast a pretty wide net. I had a lot of conversations with a lot of different folks, and I tried to figure out what was going to be the most successful strategy for us as a business. And I think we are starting to narrow that down. And look, I hope will have some announcements in 2017 that will bear fruit on some of this.

Thank you, and congratulations on a successful year.

Thank you.

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

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

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