RMR GROUP INC. Q4 FY2024 earnings call

Adam Portnoy mentioned fourth quarter results were generally in line with expectations, with adjusted net income per share of $0.34, distributable earnings per share of $0.51, and adjusted EBITDA of $21.8 million. RMR continued investment in private capital business while supporting public clients through challenging commercial real estate environment. There were increased signs of a more favorable market environment, progress on strategic initiatives like fundraising for private debt vehicle and Denver multifamily acquisition, and actions on public managed REITs. RMR delivered solid finish to fiscal 2024 and positioned for fiscal 2025 with growth opportunities.

Recurring service revenues were $48 million this quarter, a decrease of approximately $900,000 sequentially. The mortgage loans closed in July contributed approximately $1.3 million in adjusted EBITDA this quarter. The Denver multifamily acquisition generated approximately $900,000 in net operating income this quarter.

Next quarter, assuming enterprise values at Managed Equity REITs remain static, service revenues expected to remain at current levels. Matt Jordan expects adjusted earnings per share next quarter to range from $0.34 to $0.36, adjusted EBITDA from $21 million to $22 million, and distributable earnings from $0.46 to $0.48 per share. Matt Jordan expects cash to increase to approximately $150 million by December 31, 2024, with acceleration in strategic actions in 2025.

Forward-looking statements based on current beliefs and expectations, actual results may differ. Elongated fundraising cycle in the industry.

Q: Good morning, Adam and Matt. Just a couple for me today, when we look at your cash position, I think its $130 something million, what percentage of that do you think you’ll end up deploying in RMR Residential and the other private capital AUM initiatives? And maybe asked a different way, how much do you think you need to retain just to kind of run RMR ops from day to day?

A: Sure. Bryan, good to talk with you. I think a good amount of that money is open for investment in different initiatives. We’re very much focused on sort of pivoting the platform and seeding new investments. I expect you’ll see investments like that, maybe in those sectors as well as other sectors going forward. As to how much we really sort of need to hold on to for just general operations, I’ll let Matt answer that.

Q: Yes, Bryan, that’s probably $5 million to $10 million. And I guess I would also highlight, we’re still a business that’s generating $90 million or so of adjusted EBITDA, and about $20 million of that is really growth capital after taxes and dividends. So I would say no more than $5 million to $10 million.

Q: And then when we think about syndicating out equity stakes like in RMR Residential example being the Denver acquisition, what’s been the receptivity of that to date? And what percentage equity stake do you think you retain in each of these investments?

A: Sure. So as I talked about in my prepared remarks, we don’t have anything to announce today in terms of syndicating the equity. But what we can talk about is there’s been sort of, I would say, over the last 3 months really when the Fed started reducing rates, sort of a little bit of a sea change in the market environment where we have a lot more active conversations happening with potential partners. And so I feel – we feel optimistic that we will be able to eventually syndicate either the equity or get those funds off the ground. Timing is a very difficult thing to predict precisely. I can say, generally, and again, I said this in my prepared remarks, it is elongated. Investors, LPs are taking a longer time to make decisions. They have advantages in their court because there’s not a lot of money going out and those that are putting money out can be very judicious around it. And so they’re taking their time in terms of making evaluations and making decisions. And I don’t think this is unique to us. This is across the sector. In terms of what our retention will be in these vehicles, our equity, I don’t believe it will be more than 20%. I expect it will likely be on average, less than 20%. But I don’t – I think the upper limit would be 20%.

Q: Okay. And just last for me, when we look at the public managed REITs and kind of the shrinking AUM there through the asset sales, which basically will lower your base management fees there, how do you think about that relative to the potential upside from incentive management fees in the next 1, 2, 3 years from – for lack of a better phrase, doing the right thing by these public entities and sacrificing in the near term, potentially making it up in the incentive fee side. How do you think through that process?

A: Sure. So I think we’re primarily focused on doing what is in the best interest of those public vehicles. And generally speaking, as a theme across all of the public vehicles, public equity REITs, for example, I think the theme is deleveraging and reducing leverage and rightsizing the balance sheet. That’s a general theme across all the equity REITs. And that’s our primary objective. And our view is, as you delever those vehicles, that you should get rewarded in the stock price. Generally speaking, lower levered equity REITs trade at a better – trade better than highly leveraged equity REITs, and that’s a general statement. So our hope is that over time, that’s a way to increase stock price performance, and we’ll pick that up hopefully over time as we deleverage these REITs, that we’ll pick that up both in the base management fee. As you know, Bryan, we get our fee base, not just – AUM is the lower of enterprise value or gross investments in assets. So even though the gross investments in assets is going down, all of our equity REITs are being paid on the lower of enterprise value. And so there’s the potential, and our hope is that any reduction in, let’s say, AUM, will be more than made up or, let’s say, real estate AUM will be more than made up than hopefully, stock price performance. And eventually, that will drive the increase in both base management fee and incentive fee. It’s going to take time. We have to execute on these strategies with our equity reach, and we understand that. So a little bit of what you said is true. We are taking some short-term paying at RMR, but it’s the right thing to do for these equity REITs, and that’s primarily what we’re focused on is doing the right thing and making those recommendations to the Boards of those equity REITs in terms of what’s the best thing and best course of actions with those businesses.

Q: Hey, just two quick ones. Just going back to the pipeline for RMR Residential as well as the private lending vehicle, maybe can you just talk a little bit through sort of the opportunities that you are looking at, should we expect anything to close by sort of year-end, or is it all sort of a 2025 story now at this point?

A: On the lending vehicle itself, the credit vehicle, it’s probably more of a 2025 story in terms of bringing in partners there. That being said, again, as I have said in my prepared remarks, we are, I would say, picking up traction there. It’s obviously an attractive investment sector for many investors if they are focused on investing in real estate, commercial real estate. And we have a very strong performance track record there, and we also have a seed portfolio that we think position us very well to attract investors into that vehicle. So, I do think it’s a 2025 event more than it is likely a 2024 event.

Q: And then on the residential, I think it’s fair to say that is also an early ‘25 event, but the momentum is far accelerating now that started in late summer with the interest rate cuts and now the elections behind us, we have definitely seen our legacy partners and frankly, new partners come back to the table. So, we are feeling good heading into ‘25 on the residential front, too.

Q: Great. Just – and my second question was just on the cash balance. Obviously, it goes down as you are sort of investing, but then you could sort of lever up things and so forth. Just curious where you would expect cash to end sort of at the end of this year? Any sort of high-level comments for next year in terms of what cash is going to go out and what’s going to come in? Thanks.

A: Yes. Longer term, it’s going to be a function of what strategic investments start to get executed upon as I look at where we are going to land at December 31st, frankly, I am expecting our cash to increase to approximately $150 million just because we don’t expect anything significant on the strategic front to close in the next – in this upcoming quarter, but expect that to accelerate into calendar ‘25. And I think you will start to see us draw down some of that cash to execute on strategic actions.

Q: Thanks. Are there additional loan and multifamily investments that you are targeting? I mean, two in loan and one in multifamily, is that enough to attract investors to think about setting up a larger venture?

A: So, on those two specific strategies, I think we originally said anywhere from two to four credit – loans in the credit vehicle. So, we could do more in the credit vehicle over the coming months that you could see on our balance sheet to step that up. I think we are probably at the higher – on the upper end would be four loans. And maybe it would be a little more than $100 million that we have targeted, but it wouldn’t be much more than $100 million more that we have targeted. On the residential side, there is also a possibility that there could be – I am picking a number here, one or two more investments that could happen that we put on our balance sheet. But again, that’s an area where我们 talked about on our – both in the prepared remarks. Matt mentioned it too before. We are seeing significant interest in and around residential. And while we may put more money out to work in that strategy, there is an opportunity that we won’t have to put it on our balance sheet. In other words, we will be able to syndicate the equity before closing as we move forward with those sort of acquisitions. And so I expect we will be making more acquisitions there, but it’s less likely we are going to have to put it on our balance sheet. I don’t rule it off the table. We may still put one or two more investments there. I will also – you didn’t ask this, Mitch, but I will tell you, there are other strategies we are pursuing, and I sort of hinted at it in my prepared remarks, we spent a lot of time talking about the credit vehicle and the residential vehicle. There are other strategies we are pursuing where we may put the asset on our balance sheet to help seed those investments. And to sort of go there without anyone asking, I will say, generally speaking, it’s sort of in the areas that, if you were paying attention to commercial real estate, which all of you are, in the areas that are most favorable to folks, things like industrial parts of retail, some development activities that have high returns that gives you a flavor for some of the other things that we are looking at that may also go on our balance sheet in the coming months. So, that’s a little more than你 asked, Mitch, but it gives you a feel.

Q: Well, you actually answered my second question. There you go, Adam. Maybe shifting over to Matt, just in thinking about base management fees, obviously, you still have a little time before this quarter is over. But we saw a drop in price of one of the managed REITs. We saw some increases in the other. You have got some planned asset sales. So, obviously, what are the different machinations that you are paying attention to with regards to thinking about what they will equal kind of quarter-over-quarter?

A: Yes, we are guiding to flat because I think, to your point, the puts and takes tend to all wash, whether it’s construction volumes, given calendar fourth quarter is always our strongest as people execute on utilizing their capital budgets or some of the sales impacting enterprise value from a debt perspective and seasonality in our operators. But net-net, the expectation is it will all wash to get us back to a flat answer for next quarter.

Q: That’s super helpful. And then maybe last one for me and maybe just kind of moves over to Adam. In terms of how should we be thinking about the sustainability of revenues associated with OPI? Obviously, it’s very early stages in terms of how that process could play out as you near the refinancing date. But I think given how things are structured, it seems like business as usual for RMR at least initially, is that how we should think about it?

A: Yes. I think if you – it’s a broader question about what’s going on with OPI. All I can really – it’s not exactly what你 asked, Mitch, but I will just say it anyways. As OPI said on its earnings call, it is engaged in discussions with its bondholders. Those conversations are constructive. That being said, we continue to plan that we will be operating and managing OPI for the foreseeable future. That is the way RMR is the way我们 are planning it, and it’s the way我们 are thinking about the business.