RMR Group Inc (RMR) 2018 Q2 法說會逐字稿

Good morning, and morning welcome to the RMR Group Second Quarter 2018 Financial Results Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Tim Bonang, Senior VP. Please go ahead.

Good morning, and 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 performance for the second quarter of fiscal 2018. 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, 2018, 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 on any forward-looking statements.

In addition, we will be discussing non-GAAP numbers during this call, including adjusted earnings per share, 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 earnings per share, adjusted EBITDA and the calculations 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 morning.

For the second quarter of fiscal year 2018, which ended on March 31, we reported net income attributable to RMR Inc. of $8.4 million or $0.52 per share, which represents a 21% increase compared to the same period last year. After excluding $900,000 or $0.02 per share of onetime costs, adjusted earnings this quarter would have been $0.54 per share. As of March 31, RMR had approximately $30 billion of assets under management, which is an increase of over $2 billion as compared to the same period last year.

During the quarter, we continued our efforts to help our client companies grow and improve operations. In January, we launched our fifth managed equity REIT, Industrial Logistics Properties Trust, or ILPT, with an initial public offering of 20 million common shares and $24 per share. ILPT is focused on owning and operating industrial properties throughout the U.S. and has a large concentration of properties located in Hawaii.

From an operations perspective, our client companies had another strong quarter. On a combined basis, we arranged over 800,000 square feet of leases during the quarter on behalf of our managed REITs for a weighted average lease term of just under 15 years. We also supervised approximately $12 million in capital improvements at our managed equity REITs during the quarter. ILPT recently published its first quarterly results since its IPO. On a year-over-year basis, ILPT increased cash basis NOI by 1.7% and executed leases for almost 300,000 square feet, which resulted in rent roll-offs of 46% and a weighted average lease term of over 30 years.

Hospitality Properties Trust reported a year-over-year increase in RevPAR of 2% despite the challenges of increased competition and a significant renovation activity at its hotels. During the quarter, HPT also issued $400 million of 4 3/8% senior notes due in the year 2030. Senior Housing Properties Trust continue to effectively recycle the proceeds generated from asset sales. Since the beginning of 2017, SNH has sold over $800 million of assets and accretively recycled proceeds into more than $300 million of acquisitions, including 4 medical office buildings and 2 senior living communities that were acquired during the quarter. Also during the quarter, SNH issued $500 million of 4 3/4% senior unsecured notes due in the year 2028.

Select Income REIT utilized the ILPT transaction to position itself for future growth and to redeem $350 million in senior notes and a $350 million unsecured term loan.

Government Properties Income Trust saw continued leasing momentum during the quarter with over 280,000 square feet of leasing activity, which resulted in rent rate roll-offs of almost 5%. We have also been actively helping GOV execute on its property disposition plans with approximately $20 million in sales and $125 million in dispositions under agreement.

Lastly, this quarter, RMR collected $156 million in incentive management's fees that we earned in calendar year 2017. We ended the quarter with $276 million of cash and no debt outstanding. We continue to work towards finding opportunities to put this capital to work with strategic growth initiatives. We hope to make some announcements to this end in the coming months. We also regularly evaluate possible acquisition opportunities, but any acquisition would will have to be complementary to our existing operations and generate accretive returns. Finally, depending upon our use of capital in the coming months, we are also considering possibly returning some of our cash to shareholders in the form of a higher dividend rate.

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.

Management services revenues were $46.6 million this quarter, a $3.3 million increase on a year-over-year basis, driven primarily by incremental business and property management revenues from GOV's acquisition of FPO. On a sequential quarter basis, management services revenues were down $2 million due to continued headwinds facing the managed equity REIT share prices and seasonal declines adversely impacting construction spend at our managed equity REITs. Unfortunately, the share prices of REITs in general, including our managed REITs, have declined since the beginning of the calendar year. As many of you know, RMR earns a base business management fee on the lower of the average historical cost of assets under management or average total market capitalization. At the end of the second quarter of fiscal 2018, 3 of our managed REITs were paying base business management fees based on a market capitalization basis. If these same fees have been based upon the average historical cost of assets under management, we would have recognized an additional $2.8 million in revenue for the quarter or $14 million on an annualized basis.

Total reimbursed payroll and other costs were $11.7 million for the quarter, of which $11.5 million represents reimbursed cash compensation. Reimbursed cash compensation represented a 41% recovery rate, which is consistent sequentially and an increase of over 300 basis points on a year-over-year basis. The year-over-year increase recoveries are primarily driven by recoverable headcount increases in our property operations group due to GOV's acquisition of FPO in October 2017 as well as the fact that we are now earning a share service fee of $375,000 per quarter from Tremont.

Turning to expenses for the quarter. Total compensation and benefits expense was $29.4 million, which includes recurring cash compensation of $28.1 million, $1.2 million in noncash share-based payments and $136,000 of separation costs. Cash compensation of $28.1 million is an increase of $5.1 million on a year-over-year basis and $1.9 million on a sequential quarter basis. Both increases are due to headcount additions to support growth of the managed REITs, most notably the onboarding of property management employees to support GOV's recently acquired FPO properties.

Looking ahead to next quarter, we expect to incur an additional $1.7 million in separation costs or approximately $0.05 per share as a retiring executive of RMR completes his service to our organization. G&A expense of $7 million represents an increase of almost $600,000 on a year-over-year basis due to appreciation in the value of annual share awards granted to directors each March as well as modest inflation and professional fees. On a sequential quarter basis, G&A expense increased approximately $300,000 due primarily to the impact of annual director share awards.

In terms of our tax rates, I want to reiterate the benefits of the Tax Cut and Jobs Act to RMR as our growth effective tax rate for each quarter in fiscal 2018 is 30% or 15.6% when our noncontrolling interest is applied. In fiscal 2019, our gross effective tax rate will decline further to 26.8% or 13.9% when our noncontrolling interest is applied.

Lastly, as it relates to incentive fees, we are only able to record revenue for incentive fees at December 31 of each year. If March 31 had been the end of the measurement period, we would've earned approximately $23 million in incentive fees as it relates to the measurement period that ends on December 31, 2018, or over $90 million on a full year basis.

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

(Operator Instructions) The first question comes from Bryan Maher with B. Riley FBR.

You touched about it in your prepared comments the -- either identifying the new businesses to grow into -- that would be complementary or potentially returning some of the cash in the form of a higher dividend. Can you drill down on that a little bit more with respect to the type of assets you're looking at, kind of the timing that we might hear something and maybe the potential level of the dividend increase?

Sure. And thanks for the question. Yes. It's something that we imagine shareholders are thinking about. We are -- in terms of strategic growth, we've talked in past quarters about sort of the 1 big open area for us strategically is to raise additional funds to invest in real estate from a private capital source, that's sort of a big white area to the board for us. And we think that's something we're trying to get in place over the coming months. And so that's something you've heard us talk about for several quarters. It's something that I can tell you that we're actively exploring, and we hope to be in a position in the coming months to make an announcement around that. We are -- I also mentioned acquisitions. There is nothing obviously pending that -- or imminent to speak of in -- with regards to acquisitions. But I just want the market to know, obviously, a part of our job is we do evaluate quite a bit of acquisitions. A lot of folks share with us opportunities or presented to us, and so we do take a look at a lot of stuff. But so far, nothing has really has risen to the level that's actionable. And with regards to the dividend, it really depends on how things shake out over the coming months in terms of how much capital we're going to invest in some of these initiatives that we're talking about and depending upon how much money we put to work, then we can turn our focus to the dividend and think about an increase there. Unfortunately, I really don't have a feel for what it could be because things are a little bit flux in terms of what are we going to be announcing, when we're going to be announcing it, how much capital is going to be required as part of the announcement. So those are all sort of open-ended questions that I can tell you we are working on. And I believe we'll have announcements in the coming months. I don't think we're -- I don't think this is -- I believe well before the end of the year, we'll have -- we'll either have made an announcement around this or we'll address the dividend.

Okay. So to be clear, if you do go the route of kind of going into that private capital sourcing, that would be more organic growth within RMR whereby that cost would be, what, predominantly headcount additions to service that, but not something like a major investment? Or would you invest capital of your own into that business alongside other private capital sources?

I think if we were to go into that business, we would likely invest some amount of capital from RMR alongside others. So I think -- and that's the question that I keep alluding to, meaning how much capital will be available to think about possibly addressing the dividend. So that's the open question. And that's -- it's an open question, are we going to go into that business? I can tell you, we're actively thinking about that business, raising capital privately. And as part of that, there likely be some commitment from RMR, the amount of commitment is a little bit open-ended at the moment. We haven't nailed it down. And then once we get through that, if we get through that, then we turn to dividend and say, okay, based on how much money we invest in this initiative, how much money is left behind and how do we want to think about the dividend. So they sort of -- they're tied together.

Okay. And then last from me, and it's a question we get here a lot is for Adam, how do you think about the valuation of your company relative to where it's trading, relative to the growth potential? I think people are really surprised the stocks are probably sixfold since you became publicly traded. How do you look at that metric?

Thanks for the question, Bryan. It's -- look, I don't -- of course, I think about it. But the focus for me every day is to come in to work and try to grow, honestly, the cash flows and to try to diversify our revenue streams. And I think -- I spent a far more amount of time thinking about how to grow the business and how to grow cash flows and how to diversify the business segments we're in, far more time spent on that than thinking about how to value RMR. I think my view is if I do a good -- if we do a good job as an organization growing cash flows, diversifying our revenues, exploring, going into new businesses, the stock price will react positively. And so that's how I focus on it. In terms of the valuation of the company, there's several different ways to do it. And I've often taken approached look I'm management. Yes. I own a large amount of shares. The share price is important to me. But my job is to run the company, it's -- people who invest in the company, they should spend a lot more time thinking about relative value in the marketplace. So I'm not really addressing your question, but that's how I think about it.

(Operator Instructions) 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. Matt, Tim, will be presenting at the B. Riley FBR Conference in Santa Monica on June -- on May 23 and 24, and at the Mizuho Global Real Estate REIT Conference on June 27. We also look forward to updating you on our progress during our third quarter conference call. Operator, that concludes our call.

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