RMR Group Inc (RMR) 2017 Q1 法說會逐字稿

Good day, and welcome to the RMR Group First Quarter 2017 Conference Call and Webcast. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Mr. Tim Bonang, Senior Vice President. The floor is yours, sir.

Thank you, and 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 first quarter 2017. 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, February 9, 2017, 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 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, adjusted EBITDA margin and the impact of incentive business management fees earned this quarter on a per share basis. A reconciliation of net income determined in accordance with US Generally Accepted Accounting Principles or GAAP to adjusted EBITDA and calculations of the earnings per share impact with the incentive business management fees earned and adjusted EBITDA margin could 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 morning. For the first quarter of fiscal 2017, which ended on December 31, we reported net income attributable to RMR of $23.5 million or $1.46 per share, which is a 36% increase in earnings per share, compared to last year. During the quarter, we also recognized $52.4 million of incentive business management fees for calendar year 2016.

Last year, we recognized $62.3 million of incentive business management fees. Net income attributable to RMR for the quarter ended December 31, excluding incentive business management fees was $7.2 million or $0.45 per share compared to $6 million or $0.38 per share for the same period last year.

At the end of the first quarter, our assets under management were approximately $27.2 billion compared to $25.9 billion for the same period a year ago. Excluding incentive business management fees, recurring management services revenues for the first quarter were $42.7 million, an increase of $2.9 million or 7% on a year-over-year basis. The year-over-year increase in revenues is primarily due to the growth in the market capitalization at some of our managed REITs, specifically at HPT, SNH and SIR.

At this point of the call, I usually talk about our managed REIT's operating results in some detail. However, because RMR has a September 30 year-end and our managed REITs in operating companies have December 31 year-ends, we are reporting RMR's quarterly results in advance of our client companies this quarter.

That said, I can talk about some aggregate leasing results and some activities that have been publicly announced. On a combined basis, RMR ranged almost 1 million square feet of leases during the quarter on behalf of our managed REITs. These leases resulted in average rental rates that were approximately 7.8% higher than prior rents for the same space based on GAAP. Average terms for these leases were 9.5 years based on square feet.

In January, HPT issued $600 million of unsecured senior notes at a weighted average interest rate of 4.8%. HPT subsequently announced plans to redeem $290 million of preferred shares with a coupon of 7.125%. Growing our existing client companies continues to be a priority for us, but our ability to grow these businesses is tampered by the continued high cost of assets in the marketplace today, and our client companies cost of capital. We also continue to look to take advantage of our strong operating cash flows and solid balance sheet in exploring possible future strategic growth opportunities.

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

Thanks, Adam. Good morning, everyone. This morning, we reported net income attributable to RMR of $23.5 million or $1.46 per share for the quarter-ended December 31, 2016. As Adam highlighted earlier, we earned an incentive business management fee of $52.4 million this quarter or $1.01 per share.

For the quarter-ended December 31, 2016, we generated adjusted EBITDA of $26.1 million, which when measured against our recurring contractual management and advisory fees of $46.1 million, resulted in an adjusted EBITDA margin of 56.6%. On a year-over-year basis, adjusted EBITDA increased $2.8 million or 12.1%, and our adjusted EBITDA margin increased 210 basis points. These increases were primarily the result of growth in revenues from our client companies and an increase in compensation and benefits recoveries from our managed REITs.

On a sequential quarter basis, adjusted EBITDA decreased $1.3 million or 4.6% and our adjusted EBITDA margin decreased 170 basis points. These decreases were primarily the result of declines in the market capitalization of certain of our managed REITs, adversely impacting our base business management revenues.

Recurring management service revenues earned from the managed REITs was $35.8 million or approximately 84% of total recurring service revenues. Of the revenues earned from the managed REITs, $27.8 million represents base business management fees. For the quarter ended December 31, base business management fees were calculated for each month in the quarter using total market capitalization for HPT and SIR, while GOV was calculated using the historical cost of assets into management each month in the quarter. SNH's base business management fees were based on historical costs of assets under management in October, while SNH share price declined thereafter resulting in fees being calculated using the total market capitalization for the months of November and December.

Turning to expenses for the quarter, compensation and benefits expense is primarily comprised of employee wages and benefits, a portion of which is reimbursed by our client companies. Cash compensation and benefits expense increased $2.2 million on a year-over-year basis and declined $800,000 on a sequential quarter basis. The year-over-year increase is primarily due to headcount additions of approximately 60 employees, the majority of which are reimbursed by our managed REITs. The growth in our employees is the result of both growth at our client companies and the expansion of our operations eliminating the need for certain third-party property managers in certain markets across the United States.

The sequential quarter decrease is primarily due to the final determinations of the year-end bonus compensation to officers and employees that adversely impacted our prior period quarter. Our recurring G&A expense including transaction cost was $5.8 million, which is an increase of approximately $200,000 both year-over-year and sequentially.

These increases are primarily attributable to modest inflation in professional fees and other public company costs. We continue to maintain a conservative balance sheet with almost $75 million in cash and cash equivalents and no debt as of December 31, 2016. In January, we collected the incentive business management fee of $52.4 million, providing us additional capacity to pursue possible strategic growth opportunities.

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

(Operator Instructions) Brandon Dobell, William Blair.

Thanks guys, good morning. Couple ones, maybe if you could give us some color around the breadth of different opportunities you guys are looking at to deploy capital or just to grow the service offerings, that breadth now compared to -- what it was at fiscal year-end or even maybe two quarters ago, still same opportunity set or has the environment given you some different ideas on where to and how to deploy capital?

Sure. I think what has changed over the last year or maybe even the last couple of quarters is, we started a year ago 2016, we became a public company at the end of 2015 and we really talked at that time about looking at ways to expand our service offerings. We had a lot -- we've explored a lot of different paths in 2016 and I think it's safe to say that we're starting to narrow our focus a little bit on what we are trying to do, it's within the same things or same realm of opportunities that we've been talking about over the last year, which is the logical place for us to think about expanding, it's obviously trying to grow our mortgage business, the Tremont Realty Capital business that we bought. So, obviously, that's a strategic growth opportunity that we've talked about and continue to focus on.

We're also very focused on trying to raise different sources of capital to manage investments in real estate, obviously historically almost all of our assets under management is publicly owned vehicles or vehicles that are publicly traded. It's about 90% to 95% of the assets we manage will fall into that realm. The logical place for us to think about expanding into is to manage more private capital in and around investments in commercial real estate. And so, I think it's safe to say that, broad-brush strokes, we're still going down the same path, but I can tell you without going into any too much detail, because we have nothing to specifically announce today. I can tell you that we are becoming a little bit more focused.

We have become a little bit more narrow within those paths in terms of what we're going to be doing in that. And look, we're hopeful that we'll have stuff to announce in 2017. Nothing can be guaranteed. We're working very hard to try to get some of these initiatives off the ground in 2017, but until they are done, I can't really announce them.

Okay. Maybe, I'm not sure that you -- given the timing around your report versus the managed REITs, if you can answer this in full or not. But, as you think about the leverage that those companies are carrying right now in the current rate environment, and just with what the regulations are going through with financial service companies, et cetera, how do you guys view the leverage situation or the opportunity to deploy more or less debt capital at the managed REITs?

Yes. I think, at the managed REITS -- almost maybe three out of the four are getting close to the upper-end of the historical range that we've typically operated the REITs. And those REITs have probably got SIR and SNH. HPT, probably has a little bit more room on its leverage compared to the other three REITs. I guess the way we're thinking about leverage is, we still have a little bit of room on leverage, we think we can comfortably take leverage up a little bit more if we had to and not risk the investment grade ratings that those vehicles have.

So, I don't think we're concerned about the level of leverage, but we are getting to the upper end of the range, where we probably feel comfortable. So, yes, we would like to be able to take leverage down if we could at some of those REITs to take advantage of opportunities going forward, but you have the other side of the equation which is the cost of our equity at those REITs. And unfortunately, we have a few REITs that are trading 8% plus dividend yield, that's pretty pricey cost of equity. So, it's hard for us to take leverage down through a traditional means of issuing equity.

We've always been pretty creative at the RMR Company, if you look at historically over the last 30 years. We've done interesting things and raised money in interesting ways, and used that capital to basically reduce leverage at the REITs over time. And we think if it's our job to constantly think about ways; okay, if we can't just do a regular equity offering and we wanted to bring leverage down, what do we do? (inaudible) leverage that we think about. Again, nothing to announce today, but that's how we think about it, that's how we approach it.

Okay. And then maybe for Matt or Tim, obviously we were calculating an incentive fee that was much higher than what the final result was. Is there anything, I don't know, calculation wise, mechanics wise, that surprised you guys and how that number turned out relative to your expectations or anything that was, maybe that 30-day average price kind of thing. We're just trying to figure out where we were off on our calculation, any color there?

Yes. I think there is two primary differences when we think of how our contract is structured versus the peer SNL. Number one is the closing price at the end of the period. When you aren't using just the December 31 price and you are using the highest 10-day consecutive average over the last 30 trading days that costs us about $0.75.

And then when you think of how the SNL handles dividends versus how the contract requires we handle dividends, the SNL is assuming dividends are used to purchase additional shares as they're issued. First is, we do total return and add total dividends paid at the end. So, those were the two primary movers and then you have the impact of any issuances that happen throughout the period in pro rating them for the applicable period.

Bryan Maher, FBR.

Yes, good morning. So a couple of quick questions there from prior person. Kind of, when you look at where the three externally managed REITs are trading, specifically, SIR, GOV and SNH, not really talking about HPT here. And their discount, when you look at EBITDA multiple relative to their peers. Are you surprised that, that has not narrowed more over the past year with RMR being public and really open kimono with respect to the numbers in the fees and the ability to calculate those. Do you find that discount to be unwarranted?

Bryan, yes, thank you for the call. Yes, if you ask me personally, yes, I mean we were surprised the stock prices haven't reacted better. We have not raised equity, it's going to be close to two years other than at HPT in any of our REITs. We've been pretty subdued on the acquisition front, partly because the assets are pretty pricey, but also partly because we don't have a great way to fund it. Because we know, it's hard to underwrite large acquisitions if we're not confident, we can raise equity at an acceptable price. And so, yes, it is a little frustrating, and our hope is that over time the REIT share prices that specifically the three you mentioned and even HPT for that matter, we'll perform better.

That being said, we got to ask a lot by investors about these incentive management fees. These REITs have been outperforming their indices, they did outperform in 2016 first five, six weeks here, they're outperforming their indices as well, but they still have to do even -- they're doing a good job outperforming their peers, but they have to do even a better job to make up for the discount from where they're trading.

So, we are directionally going in the right direction and stock prices are doing better than their peers. But you're right, we need to do better. But again, what we talk about, and I answered this in the last call too. It's a priority to grow our existing businesses. We love to grow our existing businesses, in many ways, it would be the easiest way to grow RMR. But if those opportunities aren't there, we will look to other areas to grow the business.

We will diversify, we will hopefully start other vehicles, we'll start new strategies that is the way I approach the business. I say to myself, okay, I love to get the stock prices up, it would be good for everybody, it's good for us, it's good for shareholders, it's good for the companies and then [held] because we get the stock prices up, maybe we can try to grow these vehicles.

But if that's not going to happen, well, then we're also exploring lots of alternative ways to grow RMR and its fee revenue and the number of clients it has. So, that's how we approach the business, but yes, to get back to your basic question, it is frustrating for us that the stock prices are where they are and our hope is that they continue to outperform the benchmarks, which they have been doing, but they continue to do it.

And then as [in a side] question, when you look at the four externally managed REITs, where -- given what's transpired, given the economy and the outlook since the election, where among the four do you see more opportunity, whether it's prices for acquisitions closer to where you think you could execute, whether it's administrative changes, regulation, new regulation, where do you of the four do you think you see the most opportunity? And then as it relates to SIR and we've seen some pretty decent moves in industrial REITs which own warehouse space, that's particularly in gateway markets with the e-commercing of the world or at least this country, do you see some opportunities for SIR to get more aggressive on the industrial side of the portfolio?

Sure, with regards to our four REITs, I mean, it's pretty easy mathematically; HPT has, among the four REITS, the lowest cost of capital. And you can just look at the dividend yields alone, you'll see that. So that's -- if I do look at it from that perspective of the four REITS, we have the easiest time figuring out how to accretively buy things at HPT.

That said, we've seen generally a movement, I would say, a little bit of movement in cap rates across the board, especially outside of gateway markets around the country, across all of the assets that we invest, in healthcare, hotels, office and industrial. That said, there is, transaction volumes have declined for the first -- if you look at the first sort of five, six weeks of 2017 versus what we were looking at 2016, there is less stuff that we have been looking at, there is less stuff out there in the market. We still have a very deep reach and see a lot of things. But I will tell you, there is less that we have been able to see over the last, call it, several weeks compared to, let's say a year ago same period. So, cap rates have moved a little bit and there's just not as many opportunities as we saw even a year ago.

So, that's basically the landscape. With regards to SIR itself, historically we haven't been buying lot of SIR, just given where the cost of capital is. We have been very -- picking our spots very carefully. We have found better value for SIR specifically in today's environment, net lease single tenant office buildings, is where we think we have been able to find better value than in the warehouse space at SIR.

That's not to say, we certainly can do. We certainly know how to buy warehouses or industrial buildings, we just think in the value spectrum, we're getting more value looking at single-tenant net leased office buildings at SIR today.

All right. Thanks, that's helpful Adam. Bye.

Mitch Germain, JMP Group.

Good morning, guys. I just want to phrase on Bryan's question a little differently in terms of opportunity. Some of the property service, and I know, it's not exactly what they're looking at, for sure, if some of the property service companies, clearly management teams talking about pricing in terms of capital deployment has gotten a bit out of hand, is that helping? Is that slowing your efforts down in terms of thinking about your growth moving forward or you're not really seeing the same kind of elevated pricing?

Yes, pricing in the gateway markets which is still very elevated. We have seen -- I think cap rates have moved actually in our favor -- many of the sectors, we focus on outside of the gateway markets, and I would say generally around 50 basis points. And look, I am basing this around the fact that we haven't been buying a lot, but the few things we have been buying, almost all of them have come through a circumstance where we were not the winning bidder and somebody goes with a higher bid. It's a levered bid and they can't get the financing or something happens when the deal falls apart.

And so, the deals we are getting are almost, they're coming back to us after they were awarded to somebody else and they're being awarded to us at a lower price than what they were originally awarded to somebody else. And so, I'm not seeing that and as I said in the last call, transaction volume, there are still very healthy amount of deals to look at and our acquisitions group stays very busy looking at stuff. But if you did look, if you cut through the raw numbers, the number of deals is a little less than it was about a year ago and especially large portfolios. You are not seeing many large portfolios the way you did about a year ago, a lot of single asset transactions -- as a disproportionally higher proportion of the deals that are presented out there, at least our experience.

What about deployment for RMR specifically, something that you guys would be looking at rather than the managed REITs?

For RMR specifically, yes, we would be looking to deploy capital. Think of it side-by-side with launching a new strategy. So, let's say we work for some reason, we're going to start a new REIT or we're going to start -- invest in managing some sort of private capital of some sort. You would likely see us use our capital to help launch one of those strategies. So, we would be, let's say, a seed investor or we would put some money in side-by-side with, let's say, a large institutional investor.

So, that's how we are trying to leverage the capital of RMR to be used to launch new strategies, new fee streams for the Company and that's how we look at it. We're not specifically looking at, I mean, we haven't spent a lot of time looking at a lot of large acquisitions, per se, of businesses at RMR. We certainly are open to it and could do it, but we haven't spent a lot of time doing that.

We think, we will be more successful. We have been more successful sort of the DNA of the business. We have traditionally built the businesses that we are now running, and we think we've done a pretty good job of building and launching these vehicles. Not all of them, some of them we bought, but the majority of the vehicles and strategies we're running today are we built them. And so, we're trying to figure out ways to build new fee streams.

Great, that's helpful. And then last one from me. Obviously, it seems like there is a bunch of incentive fees that could be coming your way, a year from now. If some of these efforts to create new fee streams slow a bit, how do you think about your capital allocation strategy given the fact that you can have a pretty significant buildup of cash?

Yes, good question. Mitch, we get asked that a lot. So, what we are going to do with all the cash, if we don't actually use it to grow the business. If we are unsuccessful in getting some or any of these strategies that we are hopeful to get off the ground in 2017 done, look, I think we'll have a serious conversation at the Board at the end of the year about whether a special dividend or some sort of dividend out to shareholders makes sense. Obviously, myself, I'm a very large shareholder in the shares and so I have every incentive that if -- if we can't find a good use to put the money to work to grow the business, we would obviously, seriously consider whether to make some sort of distribution back to shareholders. And again, for shareholders, I'm very aligned with them on this point because I would obviously be the beneficiary of that dividend as well.

Bryan Maher, FBR.

Mitch had a good question there as it relates to other opportunities and your response as it relates to potentially feeding maybe a new fund. When you look back at the last 18 months, relative to your expectations then, and what we've seen now, would you structure a new externally managed fund the same or is there something that you might change relative to what you have in place now?

Bryan, look I'd love to have all the funds with the same contract, adding new strategy at the same contract that we have with our existing REITs. That would be ideal. It would very much depend on the circumstances and specifically what we were trying to do. For example, I'm not -- if we were to launch, let's say, a vehicle that invested private capital, obviously, I don't think we would be able to attract private capital to agree to a 20-year contracts where we have with the managed REITs. So, it would not be this under the same terms.

If we were to launch another REIT, it would sort of depend how that REIT was launched or whether we could and where the market would bear the same terms that we have with the management contracts. I think that's the nature of your question. It really depends what the vehicle is, who are the investors. At the end of the day, in many ways, I think we can still make a lot -- we can still launch profitable strategies that would generate lots of fees for RMR and it doesn't have to be the same type of contract we have today, that's for new vehicles going forward. That's my hope.

Right, I guess what I was driving at is, in hindsight now, kind of a year and a half into this, is there anything in the structure that you set up back in 2015, that you wish you would have tweaked one way or the other?

Bryan, no, not really. If anything, it's grown on me. I've thought it's a very good structure. I think we really aligned everybody's interest. I mean, the REITs own shares of RMR, the principles of RMR on large amounts of shares in the REITs. Shareholders can have perfect transparency into the manager. They can buy shares into the manager. I feel pretty good about the structure we've put in place. I think, since the announcement, the share price, while taking for most of our managed companies, once RMR got public and became public in December 2015, since that period, the share prices have largely outperformed.

I'm talking about the client companies, especially managed REITs have largely outperformed their peers since that period. And so, I still feel very good about the transaction, there is a formation transaction we did, now it's a year and a half ago. So, no regrets and honestly nothing that I could think of. I will stop my head (inaudible) want to change.

And just lastly, you guys in the managed REITs, were all pretty visible in 2016 out meeting with investors, et cetera. Do you expect to have the same level of visibility in 2017 as in 2016?

The answer is yes, and probably more. We're trying to even do better than what we did in 2016.

Thanks Adam.

Well, at this time, we have no further questions, we'll go ahead and conclude our question-and-answer session. I would now like to turn the conference call back over to Mr. Adam Portnoy for any closing remarks. Sir?

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

And we thank you, sir and to the rest of the management team for your time also today. The conference call is now concluded. Again, we thank you all for attending today's presentation. At this time, you may disconnect your lines. Thank you. Take care and have a great day everyone.