RMR Group Inc (RMR) 2017 Q4 法說會逐字稿

Good morning, and welcome to the RMR Group Fourth Quarter and Year-End 2017 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, 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'll provide details about our business and our performance for the fourth quarter and year-end fiscal 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, December 12, 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 may be discussing non-GAAP numbers during this call, including adjusted EBITDA and adjusted EBITDA margin. A reconciliation of net income determined in accordance with U.S. 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'd like to turn the call over to Adam to begin our review. Adam?

Thanks, Tim, and thank you to everyone for joining us this morning.

For the fourth quarter fiscal 2017, which ended on September 30, we reported net income per share attributable to RMR of $0.31 per share and ended the fiscal year with assets under management of approximately $28.5 billion, a $1.6 billion increase from the same time last year. It's also worth noting that we expect to end the calendar year at close to $30 billion in assets under management as a result of recent acquisitions by our client companies. Most notably GOV's acquisition of First Potomac Realty Trust, or FPO, on October 2, for approximately $1.4 billion.

I'm pleased to report that the integration of FPO into our real estate management services platform as well as the onboarding of a number of talented FPO employees has gone very well. We are realizing the synergies and operating leverage we expected heading into the acquisition and believe this transaction will be accretive to RMR's operating margins in fiscal year 2018.

From an operations perspective, at our managed equity REITs, we arranged over 1 million square feet of leases during the quarter at a weighted average lease term of approximately 8 years. We also supervised approximately $18 million in capital improvements at our managed equity REITs during the quarter.

Some highlights from the most recently reported quarterly earnings from our managed equity REITs includes the following: HPT reported a 4% year-over-year increase in normalized FFO per share and further strengthened its balance sheet through a $400 million offering of 3.95%, 10-year unsecured senior notes. During the quarter, HPT also acquired 16 hotels for $231 million.

SNH continued to generate stable operating results, despite continued headwinds facing the senior living industry. SNH recently closed a put under agreement, 5 medical office buildings for approximately $125 million and 16 [living] communities for approximately $105 million.

SIR continued its leasing momentum this quarter, entering into leases for approximately 266,000 square feet with a weighted average lease term of approximately 9 years. SIR also saw same-property cash basis NOI increase by approximately 2% on a year-over-year basis and completed an office property acquisition for a purchase price of $41 million.

GOV continued to focus on effectively managing occupancy and the operations of its properties. During the quarter, GOV entered into leases for over 435,000 square feet. GOV also generated solid property-level operating results with both third quarter same-property NOI and cash basis NOI up 2.6% and 4.5%, respectively, as compared to the prior year.

As we discussed in prior earnings calls, it's been a strategic goal of ours to both diversify our revenues and help grow our client companies. In addition to the FPO transaction, we made significant strides towards these goals this quarter.

In September, Tremont Mortgage Trust successfully completed its Initial Public Offering or IPO. Tremont focuses on originating and investing in floating-rate first-mortgage loans secured by middle market and transitional commercial real estate. Tremont made $62 million in proceeds and should be able to put almost $200 million to work with the use of leverage. Tremont will be managed by an SEC-registered investment advisory subsidiary of RMR.

Also in September, the RMR Real Estate Income Fund, or RIF, completed a $45 million rights offering, which will increase RIF's total managed assets by approximately $75 million after including the effects of additional leverage. The Tremont and RIF transactions will result in accretive growth to RMR via additional revenues going forward, and we plan to leveraging the RMR shared services model to minimize related costs. To help launch these strategies, RMR funded a collective $6.7 million or $0.13 per share, a onetime organizational and underwriting cost during the quarter. In addition to these costs, RMR also invested $12 million in Tremont as part of its IPO.

In late November, one of our operating companies announced some executive changes. Tom O'Brien, the President and CEO of TravelCenters of America, or TA, is retiring effective December 31 after nearly 11 years of running the company. Tom has been with RMR for more than 20 years in a number of executive roles, and we thank Tom for his excellent service to RMR and in being a key contributor to growth -- to its growth over this period.

One of the great things about RMR's structure is the excellent bench strength that it creates. The TA board has appointed Andy Rebholz, a 20-year veteran of TA and current Senior Vice President of RMR and CFO of TA, to become TA's new Chief Executive Officer. In addition, the board appointed Barry Richards to be TA's new president and Chief Operating Officer; and Bill Myers to be TA's new CFO. I will be assuming Tom's position on TA's Board of Directors.

Also in November, SIR announced that its subsidiary, Industrial Logistics Properties Trust, or ILPT, filed a registration statement with the SEC for an Initial Public Offering of common shares. ILPT will own almost all of SIR's industrial properties located in Hawaii, totaling 226 properties, as well as 40 industrial and logistics properties located in 24 other states. Upon completion of the IPO, it is expected that SIR will continue to own a majority of ILPT's outstanding common shares. Because we are in registration for ILPT with the SEC, we are unable to provide additional comment regarding this possible IPO until the registration period ends and cannot respond to any questions about this potential transaction during today's call.

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. As Adam highlighted earlier, we reported net income attributable to RMR of $5 million or $0.31 per share this quarter. Management services revenues were $44.3 million this quarter, which represents a $550,000 increase on a year-over-year basis, primarily due to business management fee growth at the managed equity REITs. Management services revenue decreased $400,000 on a sequential quarter basis primarily due to lower construction volume at GOV and the related reduction in construction management fees.

As a reminder, we are only able to record GAAP revenues for incentive fees at December 31 of each year. If September 30 had been the end of a measurement period, we would've earned $63.6 million in incentive fees as it relates to the measurement period that ends December 31, 2017, or $84.8 million on a full year basis. Through the end of November, 3 of our management equity REITs have continued generating a total return that exceeds their respective benchmarks. The incentive fees due as of November 30 would be approximately $142 million on a full year basis.

Turning to expenses for the quarter. Total compensation and benefits expense was $27.2 million, comprised of $23.9 million in cash compensation and $3.3 million of noncash share-based payments. Cash compensation of $23.9 million represents an increase of $1.1 million on a year-over-year basis and $150,000 on a sequential quarter basis. Both increases are primarily driven by personnel-related costs associated with headcount additions, bonus costs and merit increases over the course of fiscal 2017. Overall, we continue to recover approximately 37% of our cash compensation from our client companies.

Noncash compensation of $3.3 million this quarter reflects the annual grants of restricted share awards by RMR in certain of our client companies. The restricted share awards vested 5 tranches with the first tranche vesting at grant date, which, in turn, results in each fiscal fourth quarter having unusually high noncash compensation expense. In aggregate, approximately 70% of our noncash compensation this quarter was reimbursed by our client companies.

G&A expense for the quarter was $6.1 million, an increase from approximately $400,000 on a year-over-year basis, primarily attributable to growth at our managed REITs with recurring G&A expense flat on a sequential basis.

Looking ahead to next quarter. As a result of the Tremont IPO, we anticipate that the incremental impact to RMR's first quarter fiscal 2018 will be approximately $230,000 in advisory revenues and approximately $375,000 in reimbursable revenues. Additionally, GOV's acquisition of FPO will generate approximately $12 million in annual revenues before the impact of any potential strategic asset sales by GOV. To support the FPO acquisition, we anticipate full year normalized increases in unreimbursed personnel of approximately $2 million, infrastructure costs of approximately $1 million and $11 million in fully reimbursed payroll costs.

Finally, in regards to cash compensation cost in the first quarter of fiscal 2018, we would highlight the fact that merit increases take effect on October 1 of each year, and our average merit increases were 4% or approximately $2.4 million on an annual basis. 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 to questions?

(Operator Instructions) Our first question comes from Mitch Germain with JMP securities.

Just a quick question on -- just, in terms of kind of the strategy going forward. Adam, you've been able to create a lot of diversification of revenues without a significant investment by you guys, right. A lot of that was just kind of growing AUM through using the mechanisms that you already kind of have at play. So just a question about capital allocation strategy and, obviously, the cash balance continues to grow. We've got some incentives, obviously, that Matt referenced. How should we think about when cash hits a certain point where you start to consider special dividends or other mechanisms of utilizing that cash?

Great. Thanks, Mitch. It's a great question. It's something I can tell you we've spent a lot of time thinking about. First off, I'll make a couple points. One, yes, we are tracking the incentive fees and where cash is, but we really don't know until the end of the year. So a lot of what we've been thinking about is, obviously, speculative. We won't -- we really can't do anything until we know where we are at the end of the year. That, also -- that said, also, important to reiterate for everybody that, of course, everyone knows I'm a very large shareholder of the company myself. I am highly aligned with shareholders and clearly would benefit from any sort of onetime dividend or change in dividend policy that we could consider. So that all being said, I think, generally speaking, our thinking around growth and deploying or using cash hasn't really changed over the last several quarters, and you'll hear me say the same thing I've said in prior quarters, which is that we have a preference for using excess cash to invest in growth initiatives that will increase fee revenues for RMR. That all being said, if we're unable to invest in growth initiatives or don't -- or run out of opportunistic ways to do that, yes, I think we would think about a dividend -- we would think about the dividend. But I will tell you, I think it's important to point out, the way we're thinking more about the dividend is if we were to make any changes around the dividend, I think we're more focused on would we change -- the rate of the dividend, the regular dividend rate rather than any sort of onetime dividend. I think that's the way we have thought about it or are thinking about it now especially. But that all being said, I still want to reiterate, we are still very focused on trying to come up with ways, if we can, to accretively deploy that capital and growth initiatives that generate additional fee revenue. So that's where we're at.

The -- about a year ago, you -- when asked a question about the different avenues of growth, you mentioned mortgage REIT. And that's clearly been a success. You mentioned growing your AUM and your investment platform. That clearly was done with RIF. You're growing AUM through the ILPT-FPO deal. What am I missing? Is -- what other areas of commercial real estate interest you? Is it really more, maybe, an area to focus going forward would be maybe a traditional office fund? Is that something that -- or do you think that was somewhat accomplished with FPO?

Yes. Thanks, Mitch. I think the one area that we've talked about in the past, you're correct, we've talked about the mortgages. We've talked about growing the securities management platform. And we've also talked about raising private capital. And you mentioned, perhaps there's a way to do that around office. I think the one area we have, yes, we've been able to do something in the mortgage space. We've been able to do something in the security space. And I even said on the last quarterly call an area that we are spending a lot of time thinking about is on the private capital side. And I think we continue to spend a lot of time thinking about that. So that's one area, you asked what are you missing. That's the one area, I'd say, right on the [stool,] that we haven't really done anything around yet. So I'd still say that's something we're still trying to figure out how to accomplish that.

And would that be pure third-party capital? Or do you think there'll be some sort of minority investment by RMR?

I think if we were to do something, we'd love to have -- we try to run, as you've seen, pretty asset-light, and I think our preference would be to have third-party capital. But that being said, I think to get that business, especially sort of off the ground, I think any third-party capital that came in would likely prefer that RMR were to invest some capital in. So I think -- if we were to launch a strategy there, I wouldn't be surprised to see some RMR capital dedicated towards it.

Great. Last one from me. Matt, did I hear you right that the full 6 -- you guys get the fee on the full $62 million, not just the $50 million that is kind of owned by other investors? Is that the way to think about it?

Correct, the whole $62 million.

(Operator Instructions) Our next question comes from Bryan Maher with B. Riley FBR.

This is actually Wendy Ma for Bryan's line. So I just have a quick question about the incentive fee you talked about. So you have talked about the incentive fee on a full year basis if September 30 had been the end of the [measurement] period. So could you please provide more details on that, like the [breakdown] amount for managing REITs?

Yes. I guess what I would probably say is even more relevant is where we are at the end of November, which is I talked about in our prepared remarks, was $142 million. All of our REITs would be paying a fee as of the end of November except GOV. SIR is outperforming its benchmark by just under 10%. SNH is underperforming its benchmark by just under 7%. HPT is outperforming its benchmark by 12.5%. So that gets you those 3 fees. SIR would pay about $25 million. If November were the end of the period, and I can't stress enough, December could evolve in a way that changes these numbers. SNH would pay almost $43 million and HPT would be at $73 million, which is the cap. Was that helpful?

Oh, yes. That's helpful. That's enough for me.

Our next question comes from Chris Kotowski with Oppenheimer.

Most of my questions were asked. Just -- not sure to what extent you can say, but any guidance you could give on how quickly you expect the proceeds from Tremont to be fully deployed?

When we were conducting the IPO for Tremont, we talked about having the money out roughly around 6 months from the close of the IPO. So that call -- call 6 months March time frame on the IPO. That would -- because we closed the IPO in September. I think we are still focused on that. There's no change. We continue to be focused on that time line.

Okay, good. And then the reimbursable payroll-related revenues, the $11.3 million, that was a bit more than we're looking for. And I'm just curious is that -- is there a seasonal component to that?

No, you got to remember, as I talked about in my prepared marks, the reimbursable revenue would also include cash and stock-based compensation. So given the stock awards, restricted share awards we issue every fourth quarter -- and this quarter has $3 million of it, which includes RMR shares, $2.4 million of that is recovered. So you're going to see a significant pop every Q4, based on the way the initial tranche vests. So if you look historically, every fourth quarter has a pretty significant impact on the reimbursable and the comp line, and then next quarter, we should go back on a stock-based comp reimbursable line, we should get back to about $1.3 million, $1.5 million on a normalized basis. So it's just the effects of the stock awards driving that up.

Okay, all right -- yes, it looks like it was a seasonal pattern.

This concludes the question-and-answer session. I would now like to turn the call back over to Adam Portnoy for any closing remarks.

Thank you for joining us this morning. Operator, that concludes our call.

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