Good day, and welcome to The RMR Group's Second Quarter Fiscal 2020 Conference Call. [Operator Instructions] I would now like to turn the conference over to Michael Kodesch, Director of Investor Relations. Please go ahead, sir.

Good afternoon, and thank you for joining RMR's second quarter fiscal 2020 conference call. With me on today's 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, followed by a question-and-answer session. 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. 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 11, 2020 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 those differences is contained in our filings with the Securities and Exchange Commission, or SEC, which can be found on our website at www.rmrgroup.com. Investors are cautioned not to place undue reliance upon any forward-looking statements. In addition, we may discuss non-GAAP numbers during this call, including adjusted net income, adjusted earnings per share, adjusted EBITDA and adjusted EBITDA margin. A reconciliation of net income determined in accordance with US generally accepted accounting principles to adjusted net income, adjusted earnings per share, adjusted EBITDA and the calculations of adjusted EBITDA margin can be found in the news release we issued this morning. Due to the current unique circumstances, the management team is conducting today's call from several locations and ask that listeners on the call bear with us should any technical difficulties arise. And now, I would like to turn the call over to Adam.

Thanks, Michael, and thank you for joining us this afternoon. The fiscal second quarter of 2020 truly marked an unprecedented time for our business, the economy, and the world at large. Given the gravity of the COVID-19 pandemic, over the last several weeks, we have been monitoring the pandemic's impact on our client companies as well as all of our stakeholders, including most importantly our employees. To this end, we have invested significant time ensuring the safety, health, and wellness of our employees and their families. These workforce efforts included ensuring we preserve business continuity with the organization rapidly adjusting to working remotely. While Matt will provide more detailed insights on the steps our organization has taken in response to this pandemic, including the numerous protocols being utilized to protect the health and safety of our property management staff, I am proud to report that 100% of our managed office and industrial assets are operational and available to our tenants but in most cases are being lightly utilized. I would also be remiss if I did not use this opportunity to acknowledge the efforts of RMR's property management team in keeping our buildings functioning and supporting our tenants throughout this pandemic. Facilities management has been deemed an essential service from day one of the pandemic, and our people have executed flawlessly. I've also taken great pride in seeing two of RMR's client companies on the frontlines of our nation's response to this pandemic. TravelCenters of America has kept their truck stops open for business to support the critical work, and professional truck drivers as they transport vital goods around the country. In addition, Five Star Senior Living has been dedicated to protecting the health and well-being of our nation's seniors, who may be the most at risk from the effects…

Thanks, Adam and good afternoon, everyone. As Adam suggested in his prepared remarks, I wanted to first talk about some of the detailed actions we've taken as an organization to ensure the health and safety of our employees, tenants, service providers and visitors. Over the last two months, our organization, leveraging the advice of outside experts and industrial hygiene, have designed standard operating procedures to assist -- to address such items as air filtration, janitorial products and procedures, social separation and the use of personal protective equipment. In addition to implementing these procedures, we have also focused on mitigating unnecessary costs at many of our managed assets given temporary reductions in usage, which includes the implementation of energy reduction protocols and the reduction of non-essential building services. In addition to implementing enhanced operating protocols, our property management teams have established business continuity plans to ensure operational stability. Non-critical travel has been suspended, regional leadership have not been allowed to work in the same location at the same time and personal protective equipment is required for all property management employees. At this time, our operations team has turned their attention to preparing for tenants to re-occupy our managed assets as various states across the country ease shelter-in-place orders. We will continue to leverage outside experts and best practices from our national platform and look forward to providing an update on these efforts in future calls. Turning to this quarter's financial results. The market disruptions caused by the pandemic have led to material declines in the share prices of our client companies and in fee-paying assets under management, which in turn has led to reductions in our base business management fees. As Adam discussed, our Managed Equity REITs have agreed to rent deferrals with certain of their tenants and some construction activities…

[Operator Instructions] Today's first question comes from Bill Katz with Citigroup. Please go ahead.

Okay. Thank you very much for the update. I appreciate all the commentary. I hope everyone is doing okay. Just sort of thinking through China, and I appreciate sort of how you sort of feel the short-term view of the different REITs, if you will. Just trying to understand when I look at them, I sort of see some very high leverage across them. How should we think about sort of fee-paying AUM from here? I appreciate your guidance for the next couple of quarters on the management revenues, but sort of wondering you have some things where you were looking to potentially dispose and restructure, but also I just think ahead here, how should we be thinking about just the outlook for fee-paying AUM? Thank you.

Sure. Hi, Bill. So with regards to the fee-paying AUM, given where we are with the share prices of our REITs, first of all, I do think what our contracts are demonstrating is the complete alignment of interests between RMR and the managed REITs. RMR is taking a significant fee reduction, which is resulting in significant declines in G&A at the managed REITs as a result of their share declines. Specifically, with regards to your question around leverage, yes, at SVC and DHC, leverage levels are higher or more elevated than we would typically run those companies. And you're right, both those companies were sort of midway through disposition programs to reduce leverage. That being said, given where we are today with those companies, both of them are in a position that I think given the fact that we've reduced the dividend to $0.01 a share per quarter and substantially curtailed capital expenditures, they have more than enough or ample liquidity to make it through at least 2021 if not beyond. And so, we feel pretty good about where those two companies are specifically. And as it relates to RMR and fee-paying AUM, nobody knows exactly where share prices move, but given that how much those two companies’ share prices have declined in the last several weeks, it's hard for me to imagine they continue to decline further. I think, there was sort of a knee-jerk reaction to the dividend reductions and the fact that both those companies were sort of midway through a disposition effort. I think a lot of that's been reflected in the stock, and I think from this point forward, they're both in very, very liquid positions and able to withstand the downturn and certainly have enough financial flexibility through '21.

Okay, that's helpful. And just a quick follow-up and maybe I'm reading too much into it. In your -- both in the press release where you pulled the guidance and again today, you sort of mentioned that there is some potential risk on the long-term contracts. I'm sort of wondering how much of that is just boilerplate risk versus sort of any kind of sort of shift in relationships with some of the REITs that might otherwise compromise some of these longer-term contracts?

Yes, Bill, I think that's just boilerplate language that I believe it's often and I think always in our press releases and announcements. There is no shift in relationship between RMR and the managed REITs at all. If anything, I think, today those REITs are benefiting handsomely from the expertise and the breadth and the depth of the RMR organization. And again, they are also benefiting from the fact of the great alignment of interest between the REITs and RMR. Those REITs have had significant reductions in G&A far more than many of their peers have experienced in the marketplace. And so, I don't think there is any deterioration in relationship. In fact, if I would characterize it anyway, I'd say it's probably stronger today than it's been ever in the past.

Okay, great. Thank you very much.

Yes.

And our next question today comes from Owen Lau with Oppenheimer. Please go ahead.

Good afternoon, Adam and Matt. Thank you for taking my questions. So given the COVID situation, could you please update us on your thoughts about the timing of your strategic acquisition? And then in the meantime, do you need to preserve some capital for your managed REITs like for the lending purpose? And then, is there any JV or other initiatives that RMR could potentially pursue in the meantime?

Great. Thanks, Owen. With regards to our strategic M&A activities, big picture, the strategy of RMR has not changed as a result of a pandemic. Going before the pandemic struck, our strategy was to try to diversify and grow our business, and that continues to be our strategy. With regards to specific M&A opportunities, we had -- we were moving down the road with a couple of opportunities right when the pandemic sort of struck. Those opportunities, I would say, had been paused not -- largely because both sides need to focus on their business at hand for the short term. I'm reasonably optimistic that those opportunities will continue to go forward through the balance of 2020. So, I think there is still a decent chance that we will get something accomplished in 2020. With regards to financial flexibility, we've been for the last couple of years putting financial flexibility as sort of our -- one of our priorities, and I think it's benefited us because we're going into the pandemic with a lot of cash and no debt at RMR. I think now, even more so than before financial flexibility is very important, especially in what could be a pretty deep recession. And so, I think, we had -- we were focused on maintaining financial flexibility before. I think we're even more focused on it now. That being said, often on the back end of an event like what we're going through now and as you go through the recession and then as you emerge from the recession, there often are many opportunities for companies that are flush with liquidity, and the companies like ourselves could take advantage of. And so, I think there could be an opportunities for even us to do even more than I thought --…

Okay. That's very helpful. So I know it's a tough environment for your hotel and senior living businesses, but how do you think about the potential change in consumer behavior? What are some of the things you are doing or could potentially do to convince your customers to come back in the future? Thank you.

Sure. With regards to -- you're right, the two sectors that are facing the toughest or among the toughest effects of the current downturn of the pandemic are hotels or hospitality and our senior living space. I think it's two different stories with each. With the hotels, we largely partner more -- all of our hotels are operated by -- most of our hotels, if not all our hotels are operated by very large brand owners. For example, Marriott and InterContinental Hotel Group, Hyatt, Radisson are among the majority of the hotels we operate. And again, we deal with the hotel operator and brand owner, we're not dealing with franchisees. And so, I think, we largely draft behind them. I can tell you a company like Marriot or InterContinental, they're extremely focused on what the new normal is going to be as you emerge from this pandemic. And they also are global hospitality companies that had the benefit of seeing somehow their hotels have opened up, let's say, in Asia or China specifically as they have emerged from the pandemic a little bit ahead of the United States. So they can draw on those lessons and try to apply them perhaps here in the United States. Nobody knows assure for how the hotel space will be -- how the hotel space is going to operate, but everyone knows it's going to probably be different going forward. With regards to the senior living space, it's a different story there. I think, that space is going to be dealing probably with the effects of COVID-19 probably much longer than maybe any other sector just because of the population it services. Long after states may start to open up, you're still going to see I think in nursing homes and assisted living and independent living very much in lockdown. They're going to still have a lot of protocols that have been in place probably for a lot longer than the rest of the economy as a whole. And I think it's going to take a while for that space to sort of come back. I think that space is much more tied to less around the economy and more around the nature of the virus itself. As the virus itself subsides, I think, that will have a direct impact on that industry more so than, let's say, what's happening generally in the economy.

Okay, that's it for me. Thank you very much.

And our next question today comes from Bryan Maher with B. Riley FBR. Please go ahead.

Good afternoon, Adam and Matt. On the deferrals that you guys struck with the Managed REITs and their tenants, how did you come up with your decision to kind of go one to three months and paybacks beginning in September for 12 months? And when you look forward and you think about all the tenants that deferrals have been granted to, where lies you're concerned with actually getting repayments? And to what level do you think that there could be non-repayments within the deferrals that have been struck to-date?

Sure. So every case was handled individually. We have a pretty large and robust asset management group within RMR that handles all those requests as they come in and we've also reached out to many tenants as well along the way. Basically, we took the view that we were going to -- most of the tenants that we have worked with, we started with one month deferrals. We have gone as far as three maybe even four months in limited cases depending on the nature of the business. And we basically decided early on that we didn't know how long this was going to require, how long people need deferrals, but we thought it probably made sense to push people out to the fourth quarter until they had to start repaying us, just seems like a reasonable timeline to pick. And most people has reacted clearly positive to that timeline, meaning back in April, we said if you didn't pay, we'll give you a deferral on April rent but you don't have to start paying that till, let's say, October 1, and you'll pay that April rent in 12 equal installments starting in October for the next year. As we look out today, across the Board, the tenants that obviously we worry the most about are somewhat talked about in my prepared remarks, the service retail, net retail tenants within the SVC portfolio. We only collected 45% of the rents in April, it's trending as we are 10, 11 days into May, very similar to that trend so far. We are basically at the same point we were in April as we stand here in May. And so, I suspect that's the area that we are probably the most concerned about or we worry that there would be perhaps a permanent impairment of some rents there. In the other portfolios that we manage, it's largely not a very material number. This pandemic obviously in the downturn has disproportionately affected smaller tenants and we don't have a lot of small tenants in our office portfolio, industrial portfolio, our medical office buildings, life science buildings, so they just don't exist, there are some. And where we do have them, that's where we are tending to get the requests in a general sense, but it's not a very meaningful piece of the revenues we generate in those other portfolios. So, Bryan, if I had to say outright the area that's probably we're most worried about is in the retailer.

Right. But do you get the sense though that the market as it relates to SVC may have overreacted given the fact that the net lease component of that portfolio excluding TA which is fully paying is only something like 14% of annual minimum rents?

Short answer, Bryan, yes. I believe, the market has over negatively reacted SVC based on the fact that you're right, TA is fully paying on our hospitality side we have guarantees and security deposits export and large portfolios with brand owners. So yes, I do believe the market has overshot to the downside at both SVC and DHC. Yes.

Okay. And kind of shifting gears a little bit, where are you seeing in this kind of morass of real estate at the moment, opportunity starting to pop up where you Adam and the C-Suite at RMR are spending in most time? Is it in kind of the better performers like office and industrial where you might want to grab more, because it's doing well, or is it in the more dire markets like hotel and net lease where there could be really meaningful opportunities? Where are you guys spending your time to maximize the longer term results at the four Managed REITs?

Yes. I would say, today, with the opportunities that are available for us to spend time on are in the office and industrial side. Transaction volume is a fraction of what it was. Our opportunities are a fraction of what they were before the pandemic, but the opportunities that are out there tend to be around industrial, well-leased office. We don't do much in multifamily, but there is some multifamily opportunities in the market as well. With regards to retail and hotels, there could be opportunities there, but there's none to act on at the moment. And typically, when you have a pullback like this, it takes a while for the sellers to get to the point where they're willing to sell at distressed pricing, if they have to, and we're not at that point yet. I don't know when it will be, but we're not there yet. And so, we're not seeing many opportunities like that. That doesn't mean they won't present themselves in the future and we won't try to take advantage of them. But today, what we're seeing is really limited to basically industrial and well-leased office.

Thanks, Adam. That's all for me.

And our next question today comes from Kenneth Lee with RBC Capital Markets. Please go ahead.

Hi, thanks for taking my question. Just a follow-up on the last one in terms of the SVC and what you're seeing in terms of that 45% rent collections in the month of April. Just wondering if you see the potential for any kind of meaningful increase in the percentage of rent deferrals in the near-term or do you think this is sort of like a good level that's being currently hit right now? Thanks.

Sure. So the best answer I can give you is that we're currently trending 10, 11 days into May exactly where we were 10, 11 days into April on that net lease retail portfolio. We generally thought it May will probably be the low watermark for that portfolio. And so, it could be worse than April. That's just given the fact that most states are just starting to open up. It's our general view that we thought that probably by June, most states will have be opened up in some form or fashion and some of these retail tenants or most of these retail tenants will likely be able to be back up and operating and there'll be more economic activity starting in June. So we are bracing ourselves that May could be worse than April, but so far it's tracking right in line.

Got you, very helpful. And then just one follow-up, if I may. Just given the current economic conditions and you mentioned this within the prepared remarks, but just wondering if you see any change in terms of the growth opportunity specifically within the commercial mortgage REITS as well as the Tremont versus what you saw like maybe six months earlier. Thanks.

Yes, that's a great question. There are really lot of opportunities, I think, for us in our mortgage origination platform. We're one of the few platforms in the United States today that, Ken, has the ability to deploy capital and mortgage investments, whole loans. There is a very small number of firms that are still deploying capital, most alternative lenders in the mortgage REIT space have stopped deploying capital. They're in a situation where they're dealing with their repo lenders in terms of having to provide capital, excess capital in response to capital calls from those banks and so they've basically shut down new origination. So, I think we're in a pretty unique circumstance, where as I mentioned in the prepared remarks, one of our managed companies, the RMR Real Estate Income Fund, which is a mutual fund business, shareholders approved converting that business into a mortgage, commercial mortgage REIT. And so we have the opportunity now to redeploy about $150 million of equity before leverage into commercial mortgages. And today, given that there's so few competitors in the marketplace, I think, we have the opportunity to basically get outsized returns with taking lower risk. We don't have to maybe chase the sort of value-add transitional bridge loans the same way we were, let's say, before the pandemic. We might have the opportunity to lend against more stable properties that have sort of been caught up in a lack of ability to refinance in the current environment, just because there's very few folks that can put on permanent financing. The CMBS market, for example, banks, while they're starting to open, the level of activity in those markets is very small. And so, I do think there's a real opportunity for RMR and our platform to take advantage of the current environment. We hope to, in the coming months.

Great. Very helpful. Thank you very much and hope everyone stays safe.

Our next question today comes from Mike Carrier, Bank of America. Please go ahead.

Hey, guys. This is Dean Stephan on for Mike Carrier. Just a quick question from me. Given the tougher environment for strategic acquisitions or partnerships in the near and maybe medium-term moving forward and the healthy cash balance, just wondering what's the minimum cash balance needed for liquidity purposes at RMR and have any of your thoughts change in regards to returning some excess capital to shareholders moving forward? Thanks.

Sure. Well, minimum -- I'm not sure what the minimum is. I mean, I'm sure we could operate the business with less than $100 million of cash on the balance sheet comfortably. I think, our thinking around returning cash to shareholders has been outweighed by the desire to maintain financial flexibility. We were sort of trying to balance the two as we went into the pandemic. And I would say the scale has tipped a little bit towards financial flexibility, maintaining financial flexibility. And again, it's being well positioned to take -- trying to make sure we're well positioned to take advantage of any opportunity that might present itself. Companies that don't have financial flexibility have access to capital, no leverage, lots of cash on its balance sheet. We can move very quickly if opportunities present themselves. And this is the type of environment maybe once in a generation, maybe once in a 100-year environment, where we might be able to take advantage of opportunities that we would never maybe have seen before. And so, I'm trying -- we're trying to make sure that the Company is in a position that it can do that. That all being said, we will note that we kept our dividend stable or consistent. We did not touch our dividend for the current quarter, and our intention is to hopefully keep that dividend stable and consistent for the rest of the year. That's in light, even though our cash flow as Matt has gone through the numbers, is likely to diminish or go down in the third and fourth quarters, depending on where stock prices move in our Managed Equity REITs. So in some ways you could interpret that as a willingness to actually turn more capital than maybe prior -- than the prior mentality, because we are going to be paying out a greater proportion of our free cash flow than we have in the past. That said, we will still be paying less than a 100% of our free cash flow. We're not going to be paying more than 100%, but it is going to be more. And so, you could look at it sort of two sides of a coin. We're still -- we're more focused now probably than before on financial flexibility, but at the same time, we decided to keep the dividend stable and our hope is to do that to the third and fourth quarter. And that is a higher percentage payout of our free cash flow not over 100% but it is higher.

Makes sense. That's it for me.

And our next question today comes from Ronald Kamdem with Morgan Stanley. Please go ahead.

Hey, thanks for taking my questions. Just going back to some of the -- going back to the question on asset classes. Just asking in a different way. Just in terms of just lessons learned during this pandemic, obviously still very early, you guys have had the benefit of being in different sort of property types and have seen sort of first-hand how they perform. Has there been any thought about which asset classes maybe you'd want to get more involved in or less involved in and potentially maybe asset classes that you're not involved in currently, that may be easy to add on just sort of curious thinking medium to longer term here.

Sure. Which -- as I said before, I think industrial is a place that we continue to like to add on. Entering into that joint venture there at ILPT with the sovereign wealth investor, I think, gives us some capacity to grow that and grow that significantly. On the office side, I think, we can pick our spots carefully, well-leased office buildings makes a lot of sense. An area that we for long -- the only significant area that we don't have a significant presence and that could present itself as an opportunity could be multifamily. As part of this whole -- as part of what's going on, that's an area that we were focused on trying to get more of a foothold in, and we might have opportunities to even get a greater foothold now as things present themselves. Us, like I think everybody in the marketplace are trying to figure out what is the new normal when we emerge from this pandemic. There's so much people think about, write about in terms of things like, for the last 20 years, urban density has been something that in the commercial real estate market has been sort of paramount, right, people want to be in sort of live, work, play environments in close density to each other. Every -- I, for one spend a lot of time thinking well, is that going to continue or is that going to all change. Our people going to want is to build an office suddenly going to be much more in favor than it was before, because you can't -- because it won't be in a dense area. So we're thinking about things like that. We have a large suburban office portfolio. So it might benefit from this, it might be an area where we should maybe invest even more going forward. But those are the things we're thinking about right now.

Right. And then, my second question was just piggybacking on sort of the private capital conversations. Just sort of curious to get a sense of what's the pulse right now out of those investors, right? To some extent, there may be some deer in the headlights given the unknown of the pandemic, but can you give the sense that there is also investors out there looking to be maybe more opportunistic and trying to do the work now to position themselves on the back of this? Just trying to get a sense of has conversations even started or is it still too soon?

Yes, that's a really good question. In the conversations we've had with, let's say, sovereign wealth investors in large pools of capital, I would say the majority of everyone we talk to is very much open for business and very much wanting to try to take advantage of the opportunities. I would say that that's been the overwhelming theme that we've come across in conversations with large pools of private capital. They are very keen to try to put money to work, very keen to try to take advantage of the current environment. Now, they might have a different view. They might have -- their views on certain asset classes might have changed. For example, there is not a lot of folks, I think, trying to put money to work in retail or hotels at the moment, but I think in office and industrial and multifamily and select other segments, niche segments, I think, there is money and I think people are very, very much open and want to put money to work. So, I like you a little bit was thinking that maybe investors are going to have deer in the headlights reaction to all this and would not be want to -- they'd want to be really wait and see what happens. That's not been the case in our experience. And talking with these folks, they are very much open for business. They very much want to see opportunities, they very much recognize this again could be a once-in-a-lifetime if not once-in-100-year opportunity to take advantage of the situation.

Helpful. Thanks. That's all from me.

[Operator Instructions] And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Portnoy for any closing remarks.

Thank you, everyone, for joining us today for our earnings call. Operator, that concludes our call.

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.