Good morning and welcome to The RMR Group's second quarter 2018 financial results 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 this event is being recorded. I would now like to turn the conference over to Tim Bonang, Senior Vice President. 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 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 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 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 one-time 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 at $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-ups 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…

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 that we have seen 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, three of our managed REITs were paying base business management fees based on a market capitalization basis. If the 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 shared 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 non-cash…

[Operator Instructions]. Your first question comes from Bryan Maher with B. Riley FBR.

Good morning Adam. You touched about it in your prepared comments, either identifying 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 are looking at, kind of the timing that we might hear something and maybe the potential level of the dividend increase?

Sure. And thanks for that question. Yes, it's something that we imagine shareholders are thinking about. In terms of strategic growth, we have talked in past quarters about sort of the one 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 that's something we are trying to get in place over the coming months. And so, that's something you have heard us talk about for several quarters. It's something that I can tell you that we are actively exploring and we hope to be in a position in the coming months to make an announcement around that. I also mentioned acquisitions. There is nothing obviously pending or imminent to speak of with regards to acquisitions. But I just want the market to know, obviously, part of our job is we do evaluate quite a bit of acquisitions. A lot of folks share with us opportunities or present it to us and so we do take a look at a lot of stuff. But so far nothing has really risen to the level that's actionable. As regards to the dividend, it really depends on how things shake out over the coming months in terms of how much capital we are going to invest in some of these initiatives that we are talking about and depending upon how much money we put to work. Then we can turn our focus to the dividend and think about and increase there. Unfortunately, I really don't have a feel for what it could be because things are a little bit in flux in terms of, what are we going to be announcing, when we are 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. But I can tell you, in the year we will either have made an announcement around this or we will address the dividend.

Okay. So to be clear, if you do go the route 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. 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 it's an open question, are we going to go into that business? I can tell you we are actively thinking about that business, raising capital privately. And as part of that, there would likely be some commitment from RMR. It's not a commitment, so a little bit open-ended at the moment. We have to nail 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 it's sort of tied together.

Okay. And last for 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 stock's at probably six-fold since you became publicly traded. How do you look at that metric?

Thanks for the question, Bryan. 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 have spent a far more a lot of time thinking about how to grow the business and how to grow cash flows and how to diversify the business segments we are in. Far more time spent on that than thinking about how to value RMR. My view is, if we do a good job as an organization, growing cash flows, diversifying our revenues, exploring and going into 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 is several different ways to do it. And I have often the approach, look, I am management, yes, I own a large amount of shares, the share price is important to me. But my job is to run the company. People who invest in a company, they just spend a lot more time thinking about relative value in the marketplace. So, I am not really addressing your question, but that's how I think about it.

Fair enough. Thanks Adam.

[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 and Tim will be presenting at the B. Riley FBR Conference in Santa Monica on May 23 and 24 and at the Mizuho Global Real Estate and 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.