The RMR Group Inc. (RMR) Q2 2016 Earnings Report, Transcript and Summary

Good day and welcome to The RMR Group Second Quarter 2016 Conference Call. 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, today’s event is being recorded. I would now like to turn the conference over to Mr. Tim Bonang, Senior Vice President. Please go head, sir.

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 second quarter of fiscal 2016. 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 our remarks, beliefs and expectations as of today, May 10, 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 revisions of 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 we 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 revenues, 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 revenues, 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 today. For the second quarter of fiscal 2016, which ended on March 31, we reported net income attributable to RMR of $6.1 million, or $0.38 per share. As a reminder, The RMR Group completed its listing of common shares in the NASDAQ Stock Exchange on December 14, 2015. Because of the certain comparisons of our financial results of operations, the prior periods may not be meaningful. At the end of the second quarter of fiscal 2016, our assets under management were approximately $22 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, the declaration of our initial dividend for the 2016 second quarter, and an increased cash position that further strengthens RMR’s balance sheet. As an alternative asset management company, we primarily provide management services to our client companies. In the second quarter, approximately 84% of our revenues were derived from four publicly traded Managed REITs, which include Hospitality Properties Trust, Senior Housing Properties Trust, Select Income REIT and Government Properties Income Trust. These four REITs recently announced strong operating results for the quarter ended March 31. We believe these strong results highlights the strength of RMR’s operating platform and speaks well of our over 400 real estate professionals working in 25 offices throughout the U.S. Hospitality Properties Trust reported a 12% year-over-year increase in normalized FFO per share and hotel RevPAR grew 4.4% during the quarter. Same property hotel RevPAR growth at HPT exceeded the hotel industry average for the 13th consecutive quarter. Senior Housing Properties Trust reported a 6.7% year-over-year increase in normalized FFO per share and same property cash basis NOI grew 1.7% during the quarter. SNH continues to lead it’s healthcare REIT peers with the highest percentage of private play properties in its portfolio, which has limited exposure to government reimbursement programs such as Medicare and Medicaid. Select income REIT reported a 5.7% year-over-year increase, a normalized FFO per share and same property cash basis NOI grew 1.8% during the quarter. As of the quarter ended March 31, SIRs portfolio was 97.8% lease for an average lease terms of over 10 years. Government Properties Income Trust reported a 6.9% year-over-year increase in normalized FFO per share and same property cash basis NOI grew 2.4% during the quarter. As of quarter end, GOV portfolio was 94.9% least for an average lease term of approximately five years. On a combined basis, RMR range 1.3 million square feet of leases during the quarter ended March 31, on behalf of our managed REITs. These leases resulted in average rental rates to approximately 10% higher then prior rents for the same space and average terms for these leases were 11.7 years. On behalf of our managed REITs RMR range the acquisition of eight properties for an aggregate of approximately $305 million and range for sale of four properties, were in aggregate of approximately $295 million since January 1, 2016. RMR also range the total of $1 billion of senior unsecured debt financings on behalf of our managed REITs during the quarter. As you can see RMR was active and operating our Managed REITs to the highest standards in the industry, and we think the recently reported strong operating results at our clients company’s proves this point. Our remain 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 front through our wholly owned SEC registered investment advisor subsidiary. On April 13, we declared a cash dividend on RMR’s common shares of approximately $0.30 per share, which represent a regular quarterly dividend of $0.25 per share for the quarter ended March 31, plus a pro rata dividend of approximately $0.05 per share for the period from December 14 to December 31 2015. This dividend will be paid on or about May 19 to shareholder of record as of the close business on 25. We ended the second quarter, cash and cash equivalents of approximately $71 million and no debt. We continue to consider ways to both grow our business with our existing client company as well as consider ways to diversify our revenues from 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. As a reminder, investor should be aware that the RMR Group was formed until May 28, 2015 and became a publicly traded company on December 14, 2015. As a result prior to the states the companies assets, structure and operations, deferred in several respect from no subsequent to theses days, which may materially impact comparisons between the periods discussed in the is call, who those presented in a public files. This morning we’ve reported adjusted EBITDA of $23.1 million for the second quarter of fiscal 2016, which were measure against our adjusted revenue of $41.9 million resulted in adjusted EBITDA margin of 55.2%. On a sequential quarter basis, adjusted EBITDA was flat and adjusted EBITDA margin increased 70% basis points. With this improvement in margin largely reflect the increased recoveries of payroll related costs from certain of our clients companies. On a year-over-year basis, adjusted EBITDA decreased $2 million and our adjusted EBITDA margin decreased 370 basis points. These decreases are primarily due to the second quarter of fiscal 2015, marking the last quarter we provided services, Equity Commonwealth or EQC. are : The sequential quarter decrease in management services revenue of $63 million is primarily due to the $62.3 million incentive management fee we earned from HPT in the first quarter of fiscal 2016. As a reminder, we are only able to earn and record GAAP revenues for incentive management fees at December 31of each year. If March 31, 2016 has been the end of a measurement period, we would have earned $5.3 million in incentive management fees. For the second quarter of fiscal 2016 approximately 84%, or $32.7 million of our management services revenue was earned from the Managed REITs with the remainder coming from our Managed Operators. Of the revenues we earned from the Managed REITs, $24.8 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 average total market capitalization. For the second quarter of fiscal 2016, three of our Managed REITs HPT, SNH and Star were paying base business management fees based on average total market capitalization. If the same fees have been based upon the average of total cost of assets under management, our revenue for the quarter would have been approximately $3 million higher, or $12 million higher on an annualized basis. Base business management fees from the Managed REITs declined approximately $400,000 on a sequential basis due to the second quarter of fiscal 2016 having one less day in the period, as well as the declines in the monthly average total market capitalization of HPT during the quarter. As of March 31, 2016, the average total market capitalization on which the fees for HPT, SNH, and SIR were calculated was approximately 5% higher than that of December 31, 2015, due to overall improvements in the share prices of our Managed REITs during the latter half of the second fiscal quarter. These improvements in the Managed REITs equity prices has continued into April 2016 and May have a positive impact on our management services revenues on a prospective sequential quarter basis. In terms f the expenses for the quarter, our largest operating expenses are compensation and benefits and general and administrative expenses. Compensation and benefits expense for the quarter increased $847,000 on a year-over-year basis and increased $257,000 on a sequential quarter basis to $21.6 million. Compensation and benefits expenses comprised of $20.2 million in wages and benefits for our employees, a portion of which is reimbursed by a client company and $1.4 million in non-cash share-based payments made by our client company to certain of our officers and employees all of which is reimbursed by client companies. The year-over-year increase in compensation and benefits expense is primarily due to increases in headcount to support the growth and operations of our client companies and annual NAREIT increases provided to our workforce. The sequential quarter increase in compensation and benefits expense is primarily due to headcount additions and increases in payroll taxes. Our G&A expense for the quarter was $6.5 million, which includes approximately $455,000 of transaction and acquisition related cost. Our recurring G&A expense of $6 million increased $1.3 million on a year-over-year basis and increased $400,000 on a sequential quarter basis. The year-over-year increase in our recurring G&A expense is primarily attributable to costs related throughout being a publicly traded company in fiscal 2016, and the sequential quarter increase is primarily attributable to annual meeting cost and independent director share awards in the second quarter of fiscal 2016. We believe, our recurring G&A expense of $6 million represents an appropriate proxy of our quarterly run rate. Our effective tax rate for the quarter ended March 31, 2016 was 20.6%, which we currently expect to approximate our normalized effective tax rate. Regarding our balance sheet, we continue to maintain a conservative balance sheet. As of the end of the quarter, we had approximately $71 million of cash and cash equivalents and we had no debt. As Adam previously discussed on or about May 19, 2016, we will be using a portion of our cash and cash equivalents to fund our dividend obligation of approximately $9.5 million. Overall, we’re pleased with our quarterly result and believe we are well positioned for future growth. That concludes our formal remarks for this quarter. Operator, would you please open the lines to questions

We’ll now begin the question-and-answer session [Operator Instructions]. Our first question comes from Bryan Maher of FBR & Company. Please go ahead.

Good afternoon guys.

Hey, Bryan.

Quick couple of questions on the Managed REITs, so they made as you stated in the prepared comments particular in the past calendar quarter, a pretty good comeback. Can you talk a little bit about what you attribute the weakness in several of those two in 2015. And in your review is, it predominantly related to kind of the reorganization and the preparing for the IPO?

Yes, it’s a good question Bryan. I don’t have an exact answer. I can just give you maybe some of my thoughts about maybe what was driving some of that and the short answer is yes. We had some stuff to do. We had something to do with getting ready for the IPO. We went public to a pretty odd process where we didn’t raise any new capital in the listings and we didn’t have any banks that were underwriters, the four REITs we’re distributing shares of our more out to their shareholders. And as a result the four REIT s themselves were technically underwriters in the eyes of the SEC. So we were in a pretty odd position for the second-half of 2015. We weren’t really able to effectively go out and talk about the transaction that had occurred very openly. Because we were in a quiet period new registration I think one of the good things that’s come about after getting the company listed in middle of December as we can now go out and talk a lot more with investors both in our RMR and at the REITs. And one thing I think this is my own observation that I don’t think investors especially in the REITs appreciated was the change in the management agreement between RMR and the REITs where we get paid on the lower of 50 basis points time the lower with a historical gross real estate asset value or market cap. And as Matt has highlighted as the stock prices went down are to feast on a morrow went down and that for some reason there was a lot of misinformation in the marketplace just that did matter what the stock price did, our fees were the same it went up or tied to just gross real estate value. And I think people now had a better appreciation for the fact that I think we done a pretty good job of last several years of doing of really aligning the interest between RMR and REITs and one of those alignment lining interests is saying that the structure up so that stock price goes down, RMR gets less fees and now we have every incentive in the world to have good stock prices at the REITs.

So I guess investors will see more of the – your stock in the Managed REIT executives on the road meeting with investors I suppose?

Yes.

Can you talk a little bit I mean a lot of us know about HPT. Can you talk a little bit about GOV, SNH and SIR and kind of the acquisition outlook for those three Managed REITs going forward?

Sure this is on GOV, SIR, and SNH, I’ll take each one, I guess I’ll start with SNH. SNH, it’s all the companies that are finding a lot of real estate right now, you saw it in the prepared remarks we have not – we’ve only bought about $300 million across the Board since the beginning of the year to laying out. That said I don’t see a robust acquisition activities at those three weeks, I see a little bit of acquisition activity and that’s largely driven by just where we are in the cycle, it feels like pricing for real estate is pretty healthy given the economic back dropped for example in the office sector our view is cap rates have stayed relative – have gone really kind of sideways since for the last six months or 12 months. In first year markets or first year properties you get outside our first year markets or first year properties, and I’m talking about office, and this sort of applies to serving to gov generally speaking. You are seeing cap rates move, where we’re able to define good risk adjusted returns. We are making acquisitions of those two companies, focused on the office sector, that applies a little bit to SNH as well and the MOBs. On the Senior Housing side, it’s SNH. We’re still acquisitive, but again I think it’s temporary again given where pricing is in the marketplace. There still seems to be a lot of private pools of capital that are willing to pay what we think are high prices for senior living properties.

That’s helpful. And then the last for me, when we think about growth avenues for RMR and those I guess could be managing for institutional owners, private equity, sovereign wealth fund, creating additional client companies, is there one or two of those at this point in this cycle and in this environment that you are leaning towards over others?

The honest answer is no. We have a lot of irons in the fire. I think you could see that in our – as you read through our press release and math, we even said in our previous prepared remarks, we have about $400,000 of what was termed acquisition related costs. We have no acquisitions that we are announcing, but that’s obviously indicating that we are looking at some things early on. And I think it’s safe to say that, all of the above things that we would be looking at, but there is nothing that’s close to definitive or close to an announcement at this point. But we are – we do have a lot of cash. We are very focused on our existing businesses, but it is a mandate for the company to think about ways to diversify our revenue streams. We have 84% of our revenues coming from four clients. And I think it’s prudent for us to think about creating new clients or acquiring new clients or entering into new strategies. And so we are thinking about all those things going forward.

Thanks. That’s helpful. That’s all from me.

And our next question comes from Mitch Germain of JMP. Please go ahead.

Adam, if you could just expand on that last question and thought with regards to specifically some of the things that or ways that you want to diversify the revenue stream?

Sure. I’ll give you some examples, and these are – we talked about this with other investors of areas that I think are natural outgrowth for what RMR does today. But I caveat all these statements with that nor will may happen and we have nothing pending or definitive at this time. But I think a logical place for RMR to think about expanding into – that we should think about and we are thinking about is doesn’t make sense for us to think about expanding into the commercial real estate mortgage market. It’s that something that, we can – it is something that we can easily migrate into and take on given our expertise and breadth and size of organization. And so that’s something we are thinking about whether now is the right time to start a mortgage REIT or a commercial mortgage REIT, is another question, whether we can – whether we would built it internally or we would hire a team or hire or buy a small company. Those are all things we are still trying to figure out if it make sense for us. But just big picture thinking, I think it’s a logical area for RMR to think about expanding into. The other area that I think makes a lot of sense for us to think about expanding into is, in our mutual fund business, our investment advisor business, we have for maybe 12 years now we’ve been in the mutual fund business. We used to run seven different closed end 40 Act mutual funds to see the mergers were now just have one. It’s called the RMR Real Estate Income Fund, ticker is RIF, it’s about $250 million in assets around there. I think a logical place for us to think about growing is in that area. And there is multiple ways you could do that. You could do that by trying to come up with more retail products that you would sell into retail channels, the obvious example would be an open end fund, an integral fund and other close end fund, if the markets were there for that, you could also think about raising on a – this in private capital that you are long short fund at some short. These are all sorts of the ideas that we are thinking about that we have logical place for us to expand into – for us. And then the third area is something I know – some folks have talked about in the past, if they think seems to make a lot of sense for us is to continue to do exactly what we’re doing in the sense that buy, manage, operates, sell, commercial real estate, but instead of raising the funds for it, I’d say through the traditional real estate vehicle or REIT vehicle to Wall Street try to cap into private capital. Raise institutional money, need a joint ventures, it could be a comingled fund, I’m not sure that would make – I’m not sure that would be the best use of our ton start comingled fund today. But maybe start with the joint venture something like that with a large institutional partner and you go and do exactly what we’re doing everyday at our large safety Tampa private capital. So those gives you – that gives you exactly the three example again a things we’re thinking about, but another which they all think good thing about I can’t tell you whether any of them or all of them may occur.

And any restrictions from you investing or establishing products in any of these segments that you currently manage right now i.e. government or healthcare or lodging net lease?

There is no covenant or contractual restriction, but we would obviously have some issues for example I think we think one hard if we were going to start a private pool of capital that was going to compete directly head on with one of the mandates of our existing Managed REIT. That would even though we have the right to do it I just think we really careful about that and I’m not sure we would do just, because we create such a potential conflict. But I think there is a lot comprising commercial real estate that we could still explore in the private site that would not overlap or tie to strategies we could deploy that would not overlap with the existing mandates for the currently Managed REITs.

Thank you.

Yes.

This concludes the question-and-answer session. I’d like to turn the conference back over to Adam Portnoy for any closing remarks.

Thank you for joining us this afternoon. We look forward to updating you on our progress on our third quarter conference call in August. Operator, that concludes our call.

Thank you, sir. Today’s conference has now concluded and we thank you all for attending today’s presentation. You may now disconnect your lines and have a wonderful day.