Good afternoon and welcome to The RMR Group Third Quarter 2017 Conference Call. All participants will be in listen-only mode. [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, sir.

Thank you, Laura 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 third quarter of 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, August 9 of 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 revisions 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 EBITDA and adjusted EBTIDA margin. The reconciliation of net income determined in accordance with US Generally Accepted Accounting Principles or GAAP to adjusted EBITDA and the calculations of adjusted EBTIDA 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 afternoon. For the third quarter of fiscal 2017, which ended on June 30, we reported net income attributable to RMR of $6.9 million or $0.43 per share. As of June 30th, RMR had approximately $27.9 billion of total assets under management, which is an increase of over $1.1 billion in AU and as compared to the same period last year. During the quarter RMR active assisting its client companies to grow their businesses and [Technical Difficulty] simultaneously pursuing our long-term goal to diversify revenues. During the quarter one of our managed REITs Government Properties Income Trust or GOV entered a definitive agreement to acquire all of the outstanding common shares of First Potomac Realty Trust or FPO, for the aggregate consideration of approximately $1.4 billion. The transaction with FPO will enable GOV to expand its business strategy to include the acquisition, ownership and operation of office properties leased to both government and private sector tenants in the metropolitan Washington D.C. market area. This area is one of the largest office markets in the U.S. and the nation's largest beneficiary of spending by the U.S. government. Furthermore because of the synergies available to our client companies by contracting with RMR for management services, GOV expects to realize approximately $11 million of the annual G&A expense savings compared to FPO on a standalone basis. GOV's acquisition of FPO is subject to the approval of at least the majority of FPOs common shareholders and other customary conditions, but we are targeting at closing prior to year end 2017. In preparation for closing the FPO acquisition, GOV has raised almost $800 million of both equity and debt capital and now has the necessary funds available to close the transaction without having to draw…

Thanks, Adam. Good afternoon, everyone. We reported net income of $6.9 million of or $0.43 per share for the quarter ended June 30, 2017. As Adam highlighted earlier net income this quarter includes approximately $2.5 million or $0.05 per share of cost associated with activities outside of our current operations. Accordingly, without these costs, earnings per share in the quarter would have been $0.48 per share. Adjusted EBITDA was $27.4 million, resulting in an adjusted EBITDA margin of 57.2%. Adjusted EBITDA of $27.4 million represents an increase on both the year-over-year and sequential quarter basis, primarily due to revenue growth of the managed REIT. Management Services revenues of $44.6 million this quarter represented $2.8 million increase on a year-over-year basis, primarily due to share price appreciation of the managed REIT, most significantly HBT and SNH. Management Services revenue increased $1.4 million on a sequential quarter basis, primarily due to the favourable impact of seasonality at certain of our managed operators, as well growth in our property management fees, driven from increases in development and construction activities of the managed REIT. As a reminder, we are only able to record GAAP revenues for incentive fees at December 31 of each year. If June 30, 2017 is in the end of a measurement period, we would have round approximately $61 million incentive fees as it relates to the three year measurement period at end of December 31, 2017 or over $122 million on a full year basis. Turning to the expenses for the quarter. Total compensation and benefits expense was $24.8 million comprised of $23.7 million in cash compensation and $1.1 million in non-cash share based payments. Cash compensation of $23.7 million represents an increase of $3.1 million on a year-over-year basis and approximately $700,000 on a sequential quarter basis. These increases…

Thank you. [Operator Instructions] And our first question will come from Bryan Maher of FBR Capital Markets.

Good afternoon, Adam and Matt. Couple of questions. You know, your cash is starting to build fairly meaningfully. And I guess my question on that regard would be are you more inclined to think that that would be reinvested in growth initiatives or do you suspect there might be some return of capital associated with that cash?

Hi, Bryan. It's Adam. Thanks for that question. I guess, the short answer is my hope is that we will be able to find growth initiatives that we can use a good portion of that cash to invest in to help us launch, so that we can create you know, recurring fee streams for the business that you know, for going forward. That all being said you know, I'm not sure we will find enough growth initiatives to put all that cash to work. And. I think as Matt pointed out, we also are a little bit wait to see mode in terms of where we end up at the end of the year with incentive fees. It's different if we have let's say $138 million of cash as we do right now or is it 138, plus 122 that Matt talked about you know, come the beginning of 2018. So you know, in a perfect world, my bias is I'd love to invest the cash into businesses that I believe are synergistic to our existing operation and that we can grow those businesses and add additional fee revenue and assets under management. But I'm not sure there's going to be enough initiatives like that to put the cash to work and it depends on how much cash we have.

Got it. And then my second question is you know, Adam you have insight into a lot of what's going on in the commercial real estate world with your four externally managed REIT. Are you seeing anything out there you know, here as we ended the third quarter? That's particularly alarming to you or where there's more opportunities than not?

You're right, we do see a lot and touch a lot of different parts of the real estate sector. I don't see anything alarming or particularly you know, noteworthy. I will tell you that in the areas of the real estate we’ve touched, and I'll just go through them you know, the areas that you know cap rates are probably the lowest that we touched, the industrial world or industrial real estate and the MOBs are two areas where we see very aggressive pricing still. Areas where I'd say there's you know, people are being a little bit more cautious and it really depends on where the asset is located, is more office, hotel, senior living and then the area where I think you know, we probably play the least in, is retail, but what would you see in the retail space, personally is that if there's any activity going on its really sort of folks bottom fishing, looking for bargains if they exist, given all the dislocation there. The one area we don't touch is apartments or multifamily. I really don’t have good insight into that, but that's sort of a rundown of what we're seeing in the marketplace.

Thanks. That's helpful. Thank you.

And the next question will come from Chris Kotowski of Oppenheimer.

Yeah, I wonder when the GOV acquisition closes, let's just for it to make life easy, assume closes December 31st, 2017. Maybe I missed it. But what is the impact of that on RMR space management fee and does it in any way change the calculation of the incentive. And I guess my understanding is that it wouldn't because the incentive is kind of done on a all-in per-share basis, right?

Yes. It’s Matt. Let me answer in two parts. So as we talked about in our prepared remarks, we expect on a full year basis FPO, before any possible strategic sales of legacy GOV assets or FPO assets that it will contribute $12 million, which roughly is $7 million in business management fees and approximately say $5 million in property management and construction fees. And then secondly the incentive fee, nothing – it wouldn't have a direct impact other than how the share price is reacting in the measurement period.

Okay. Right. So it is purely on the per share basis?

Correct.

Right. Okay. And $122 million that you suggested, that is just assuming the share prices at June 30, carried through to year end?

Yes, as well - and the market stay stable.

Right, right. Okay. All right. That's it for me. Thank you.

And our next question comes from Brandon Dobell of William Blair.

Thanks, guys. Good afternoon. First just a real quick one, should we expect any even small and a non-recurring one-time charges in the next quarter, just as kind of a you know, an overhang from what's already happened with the fraud stuff and the things you dealt with this quarter?

Definitely not in the fraud. I think based on how the mortgage REIT rate plays out, there will be transaction costs associated with that.

Got it. Try to put any kind of sizing around that on the mortgage REIT side?

It's too early. We just can't comment on that at this point.

Got it. Yes, no worries, okay. From a broader picture perspective, only other publicly traded peers that you guys have in the market has made some investments in start-ups of companies that sell into or service into their operating businesses or REITs that they manage. Have you guys thought about that, I guess potential use of capital or that is a strategy given the types of properties you manage and what either technology companies could be involved with those properties or something similar?

Hi. Hi, it’s Adam. Yes, we have thought a lot about that and we certainly get pitched on those types of opportunities quite often. To be honest with you, I've been a little reluctant in pushing those types of opportunities, because my view is being on most of them, the amount of effort required both, maybe capital and also just time for the organization and people’s effort in it, isn’t worth the investment today. We're much more focused I think as an organization on trying to build out you know, the true assets under management, diversifying the type of real estate assets that we're managing. You know, the stuff you're talking about, let's say investing, let's say real estate tech company, we've been pitched that quite often and some of it can be - some of it can be interesting. But again you know, the amount of time that would be devoted to doing something like that for the organization, the staff, I'm just not sure it's the best use of energy in the organization today. But that's not to say we won’t do it and there might be cases where something comes along that could be quite compelling for us to think about, so I will tell you yes, we pitched it, we look at it quite often, but I have sort of discouraged that type of growth sort of in the short to medium term.

Got it. And then final one for me. And on the multifamily space where we spend more time and we've heard, some of the software companies talk about the US-based Multifamily REITs looking into UK in particular, but also continental Europe for growth opportunities in ways supply capital et cetera. Have you guys thought about that non-US and maybe it's just Canada or maybe the UK, the non-US opportunities the various businesses that you guys deal with relative to deploying capital, especially as things get pricey in some parts of the US, there are opportunities to look outside of your typical agents to put money or work at the REITs?

Yes. Thanks for that question. We do – we have looked quite often. We have looked at opportunities on the office side, on healthcare side, in the hotel side, outside the United States. Historically we have owned RMRs managed assets in Australia, historically we currently have a couple of assets up in Canada. I'll tell you that you know, from short to medium term outlook, it’s not a priority for us in terms to look outside the US. And the reason for that is that we continue to find quite a number of opportunities to evaluate here domestically. We’re able to take advantage I think of a pretty broad reach within the US. We got 36 offices. We got close to 500 people. We see a lot of different opportunities here, so no shortage of opportunities. And then on top of that, when we have looked overseas, sometimes we have seen some compelling opportunities, but they always sort of get – you got to hedge against them because you’re often dealing with – if you got, say deal in Europe, oftentimes, you're dealing in multiple jurisdictions in terms tax regimes, which can be complicated for investment and let's say just one country. But if you make an investment you know PAN European portfolio, you're dealing with all bunch of tax regimes. And the other obvious issue is currency risk, then you end taking and you know, how do deal with that, you hedge against it, you put sort of natural hedge of debt. It's just - it's compelling if the opportunities have been, they are always sort of you know, additional costs layered into them by just going overseas. And so there is always tempered our enthusiasm for it. And I think the fact that we have no shortage of things to do here in the US.

Thanks. Got it. Okay, appreciate it. That’s it from me.

Yes.

The next question will come from Michael Kodesch of Canaccord Genuity.

Hey, guys. Thanks for taking my question. Great quarter. First one as it relates to the business incentive fees, the accruals in particular, so $61 million year-to-date has been accrued. But I'm wondering you know, can you give us some insight into that process. I mean are you looking at 6.30 [ph] and then you know, taking that number or you know because you have a month of visibility I guess until you report earnings. I mean does that go into the process as well? Do you build any conservative - conservatism in there?

We are purely reporting the June numbers, which the REITs have generally spoken to as well as they've had to accrue. We obviously and as you can imagine are looking at the incentive fee every month, and it can be quite volatile, as you well now. So yes, we're watching both. And I don't think we have any reason to believe at this time that the $122 million will materially change at this point, but it could.

Okay. That's helpful. And then I guess moving on to transaction costs, just to follow up on an earlier question. Can you can you quantify maybe what that might look like in the fourth quarter, will be more or less than what we saw in the third quarter? And then is there any interest in presenting that – presenting EPS on an adjusted basis, just to kind of normalize for those on- offs?

Sure. This is Adam. Unfortunately it's really hard to predict those costs. You know, we make - in the beginning of this call, we have forward-looking statement, which says that this is our view as of today. Our view as of today is that- I think it might be lower than it was in the third quarter. But that is as of this point in time today. And I can't even really say by how much. Now that could all change depending on what happens with the mortgage REIT and/or other opportunities that might present themselves. But I’ve given you my best guess as of today what I think it would be. I think it might be lower that it was in the third quarter. And what was the second part of your questions, I am sorry.

Any interest in presenting EPS on an adjusted basis, just to sort of normalize for that?

Sure. We'll take that - we'll consider it. I've often thought about doing that. Me and Matt have – is that me and Matt have talked about that a few times, should we do that, yes we'll take that under consideration.

I mean, we do try and articulate in our press release the impact on a per share basis for each of these items, but we can definitely take that under advisement.

Great. And then just one last one if I might, for FPO you talked about bringing some FPO employees into RMR. I was wondering if you could quantify the impact, both the compensation benefits into G&A of kind of bringing that platform on.

We still - as we talked about in the prepared remarks, we’re not comfortable at this point speaking to exact numbers. But I would - I guess I would broadly guide is all the personnel that impact the properties will be fully reimbursable just like they are today for the properties we currently manage. So the bulk of the employees coming over from FPO will be those that manage the assets on a daily basis and will now be our employees. So those will be fully recoverable. And then on the corporate overhead type roles and other related G&A cost, we are still in the process of working through the integration and we’ll probably update you next quarter on what those costs are.

All right, guys. Appreciate the color. Thanks again and great quarter.

And the next question comes from Mitch Germain of JMP Securities.

Good afternoon, guys. So just Matt, if you could. I'm just trying to understand what the G&A number was this quarter on a more normalized basis, you had the legal and other third party costs. Is there anything else in there that I need to think about?

We have the 1.8 of transaction and then you had the fraud item that was approximately 700,000. So the recurring G&A number is $6.1 million.

And that's kind of where you think is you know, an appropriate run rate, excluding any costs associated with the mortgage REIT in the fourth quarter?

Correct. And I think we've been pretty good about hitting that number. Give or take 100,000 here or there, but 6 million is our run rate.

And then in the - in 3Q or is it in 4Q or I guess your fiscal one where there is some comp related charges?

In this upcoming 9 September 30 quarter, our fiscal Q4 there will be stock comp charges for employees, but that will be in the compensation and benefits line and as you - the only other – the only time stock hits the G&A line is the annual director awards that happens in the March 31st quarter each year. And I think we covered that on our prepared remarks last quarter, I think it was about $0.5 million in our G&A line last quarter.

Great. And then maybe being a little more director Adam, you've been talking about the mortgage REIT almost since you took or some sort of mortgage product I should say as you know, since listing or taking on more public, what's next. I mean, is it really looking at maybe a commingled fund. You know, you talked about you're seeing a lot of opportunities. I'm just trying to maybe you know, put some meat behind, specifically where your head is with regards to what might be the next move here?

Sure, Mitch. I think the other thing that we're thinking about are very similar or right down the middle of the fairway in terms of what we have talked about, I have talked about for the last several quarters. And to give you an example of something that we're spending some time - a lot time thinking about is, is there an ability to continue you know, to focus on our core competency around you know, buying, operating, managing commercial real estate, but accessing capital differently. So instead of doing it through a public vehicle is there an opportunity to raise private capital around doing that. I would say that's something that we're spending a lot of time thinking about. I think there is also – and we spend a lot of time trying to figure out how to grow the securities management business. That's probably the toughest nut to crack of our business, but it's something I do think we want to try to grow because I think it's a core competency of ours and something that is natural synergy to what we do everyday in terms of managing real estate. So those are two areas that you know, I'll tell you today, I'm spending a lot of time thinking about.

Great. And then last, maybe Matt I just want to - just verify here. I apologize if it was in the press release. Which ones are earning fees based on market cap versus historical cost?

So on a market cap, HPT and SIR, as of June 30th we're paying business management fees on that basis and SNH and GOV as of June 30th we're on an invested capital. In the month of July SNH has flipped to market cap.

Thanks so much.

And 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 afternoon. We look forward to updating you on our earnings during our fourth quarter conference call. Operator, that concludes our call.