Good afternoon, and welcome to the RMR Group Third Quarter 2019 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. Mr. Bonang, please go ahead.

Good afternoon 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 third quarter of fiscal 2019. They will then take questions from analysts. 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, 2019. 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 Web site rmrgroup.com or the SEC's Web site. Investors are cautioned that not to place undue reliance upon any forward-looking statements. In addition, we may be discussing non-GAAP numbers during this call including adjusted net income, adjusted EBITDA, and adjusted EBITDA margin. A reconciliation of net income determined in accordance with U.S. Generally Accepted Accounting Principles to adjusted earnings per share, 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 everyone for joining us this afternoon. For the third quarter of fiscal year 2019, we reported adjusted net income of $8.6 million or $0.53 per share, which is an increase of $0.03 per share on a sequential quarter basis. We also generated $26.5 million of adjusted EBITDA which is a sequential quarter increase of 7.2% and adjusted EBITDA margin 56.6% which his a sequential quarter increase of 250 basis points. As a reminder during last quarter's earnings call, we highlighted that RMR and its client companies were well positioned to benefit from the repositioning and restructuring actions we had facilitated over the last year. And as such, we believe last quarter's results represented a low watermark. The sequential growth I just highlighted in some of our key operating metrics, all reinforce that we are generating positive momentum across the organization. Since our last earnings call, there have been two significant events impacting RMR and certain of our client companies. First in June, Hospitality Properties Trust announced it had entered into a definitive agreement to acquire a high quality net lease portfolio of 774 service-oriented retail properties for $2.4 billion from Spirit MTA REIT or SMTA. The acquisition, which will be funded entirely with unsecured debt, will provide HPT with increased scale and more secured financial profile and greater diversity in tenant based property type and geography. The SMTA shareholders will vote on the transaction on September 4. And assuming a favorable outcome, HPT will close before the end of September. This acquisition is expected to generate approximately $12 million in annual revenues for RMR. The second event of note relates to RMR's recent secondary offering. Since we went public in December 2015, the most consistent question asked during investor meetings has been about the prospect…

Thanks, Adam. Good afternoon, everyone. As Adam highlighted earlier, we reported adjusted net income attributable to RMR of $8.6 million or $0.53 per share this quarter. In addition to recurring adjustments, the separation costs and unrealized gains and losses on our investment's TA adjusted earnings per share this quarter included an ad back of $0.14 per share due to an impairment of our investment in Tremont Mortgage Trust. Total management and advisory service revenues were $44.4 million this quarter, which represents a $3.9 billion decrease on a year-over-year basis primarily from lower based business management fees at OPI and SNH partially offset by acquisition related fee growth at ILPT. On a sequential quarter basis, revenues increased approximately $1 million to the acquisition related fee growth at ILPT and increased construction and development activities at our client companies. The quarter ended June 30, 2019. All our managed equity REIT except for ILPT are currently paying based business management fees on a market capitalization basis. The impact of being on this lower measure resulted in lost revenue opportunity of approximately $8.7 million this quarter. Next quarter, we are projecting total management and advisory service revenues to be approximately $45 million. Based on where the manage equity REIT share prices are today. Projections around when strategic acquisition and disposition activity will occur in estimated capital expense. Turning to expenses for the quarter, cash compensation of $28.5 million this quarter is a modest decline both on a year-over-year and sequential quarter basis due to favorable changes in our workforce mix driven by leadership retirements. This favorable shift in our workforce also impacts cash compensation reimbursements with our recovery rate increasing to 45%. Looking ahead, we expect fourth quarter cash compensation to be consistent with this quarter and increase to approximately $30.5 million per quarter…

Yes. We will now begin the question-and-answer session. [Operator Instructions] Our first question today comes from Owen Lau with Oppenheimer. Please go ahead.

Thank you. Hi, Adam, hi, Matt, thank you for taking my questions. So given that you have a high cash balance, stable base earnings, and increased public float, how should we think about capital return in terms of buybacks versus dividend? And also, with the addition of Spirit MTA REIT your base EPS should be much higher than your $0.53 this quarter. I mean, it seems to me there is room for dividend raise next quarter. How should we think about that? Thank you.

Sure. Thank you for those questions, Owen. The first, around allocation of capital, as Matt said in his remarks, overarching theme is we believe using our capital today, which is about $377 million of cash on the balance sheet, for growth initiatives is probably the highest and best use today, in our view, for using that cash. You are right that we have a regular recurring dividend that we increased about 40% about nine months ago, and we could think about that in increasing our recurring dividend in the coming quarters. That's something I think we would debate and think about as management and the Board as something we could consider doing. But I think the overall focus on using our capital right now is I think it's very important for RMR to work towards diversifying its revenue streams, and grow. While all REITs in our primary clients today are fantastic clients, and we're very focused on them performing well, I think for the medium to long-term outlook of RMR it's in the best interest of us to try to diversify our revenues, especially into private sources of capital that we can raise. And so that's why I think we've very -- you hear us talk about it pretty often, that's been pretty much the focus in terms of where will I take the company strategically. And that's why we're sitting on cash. We want to use that cash very prudently and strategically to help us achieve our strategic goal of growing our asset base and growing the types of clients that we service. Does that answer your question, Owen?

Yes, I think it's very helpful. But I think adding to that; sort of get your sense about the macro view about the interest rate direction. So what is your expectation about the interest rate movement for the rest of this year? And given your cash level, I'm not sure whether that drives your decision about your having high cash level, but how are you going to position RMR and your managed companies to go through that movement indicated by the U curve right now. And I guess maybe, what are the recent opportunities you're seeing if the fed doesn't cut as many times as the market it's predicting?

Yes, great questions. I think of myself as a little bit of a -- as an operator of real estate and a manager of real estate. I'm not great at predicting interest rate movements. But that being said, if you'd ask me at the beginning of the year I would have said that it was more likely interest rates are going up over the course of the year. If you ask me now, it looks like they're probably going down. The market has change so radically so fast. Just think about where we were at the beginning of the year where the 10-year treasury yield was and where we are seven to eight months into the year. I think there were very few people that thought the interest rates would be 100 basis points lower than where they were at the beginning of the year at that time. So, it's hard to make a lot of strategic decisions about interest rate movements. I will say, generally, as interest rates go down historically REITs have performed better. They can be -- they can get some tailwind from that, and that can be helpful for our stock prices and our REITs, that then can benefit our revenues because we are currently receiving revenues based off the lower of market, rather than historical cost of assets. So that's -- that could be a benefit if interest rates continue to go down, and that's my best guess. But we're not really changing, honestly, the strategy so much based on that environment. It's more -- there's been a lot of strategic changes we've made that I think we're on the back-end of and most of our -- and our client companies over the last 12 months. And I think we just have to follow through on a lot of those strategic initiatives through the remainder of this year, and a little bit into 2020. And I think if we execute well on that, which I think we will, then our operating businesses will perform well in return. So that's really how we're thinking about things. And the only other part of our business that is affected by our interest rates, it's not a big part of our business, is our mortgage lending. But we -- all the mortgage lending we do is floating rate, and we also match fund it on a floating rate basis, so the movement of interest rates actually has very little impact on the earnings we receive from that business.

That's great. Final question for me, going back to some of your maybe potential strategic actions, I think you kind of alluded to the joint venture opportunities with sovereign funds or maybe pension funds. I think in the past you indicated that you are more interested in controlling stake. I guess my question is what makes you to kind of change your direction a little bit? Thank you.

Sure. It's a great question. You know, let's back up. For the first 33 years of this company's existence, RMR's existence, we have been wholly focused on accessing capital in the public markets. It's really only been in the last six to nine months that there's been a real strategic effort in sort of sourcing private capital. And there's been a lot, what I'd say, a lot of irons that we have put in the fire, and we've had a tremendous amount of activity around this effort in terms of learning about the market, understanding the market better. I think, given that we are new to that type of fundraising, the most likely type of partner that's willing to work with us and I think we will match up well with are big pools of capital, sovereign wealth funds, pension plans that are willing to work with us, let's say, on a separate account basis going forward. I think there's some real opportunity to do things in that front. Separately, and I think this gets a little bit to what you were talking about, we are at the same time, and this is simultaneous, it's sort of we're doing two things at once, we're sourcing private capital directly to start managing those funds, but then separately we're having M&A discussions with multiple parties. And these are all early stage, but we are having M&A discussions with multiple parties about the possibility of integrating them into our platform. And in those conversations, let's say when we're buying a platform or an existing business that, let's say, has several billion of AUM already under management that would be a control transaction. We've been very clear about that in the market that we'd only be interested and a controlled transaction if we engage in something like that. So that's what's going on, on the private capital front, and when you reference controlled transactions that's what we're talking about.

That's it from me. Thank you very much.

[Operator Instructions] The next question comes from Bryan Maher with B. Riley FBR. Please go ahead.

Good afternoon, Adam. Following up on Owen's question a little bit, because I was a little confused to when you discussed it in your comments section. Are you now -- correct me if I'm wrong? Are you not contributing the $100 million now to that fund through our mark?

No, we're not saying we're not. What we're saying is until we get some -- till we get some better traction from investors. We're holding off and so that fund has been making some investments. And it's actually continuing to look at investments. And we're still very focused on it. And it still exists. It is just -- to be very candid, I said in my prepared remarks, we're no longer marketing it through a third-party distributor, that third-party distributor was very focused on tapping into the ROI A channel in high network individuals and sort of looking it at raising funds, call it sub $5 million per chunk per commitment. We thought, for various reasons that might work well for us, it is turned out after having well over 100 conversations and meetings in that market that's probably not going to be the most effective way to grow that business. And in fact, we think it makes more sense to pivot and to focus on trying to raise capital in that fund, through a big ticket investors basically, looking for an anchor investor that might invest 10s of millions of dollars, if not hundreds of millions of dollars, to help to go side-by-side with us in that fund. Since this is sort of a new strategic initiative for us. This also requires a lot of my personal time. Because, it's the first time we're getting involved in it. So it's requiring me myself, to take a lot of these meetings and to take and to interact with a lot of these folks. And it's also just very efficient, since it's involving a lot of my time to go after larger pools of capital at this time, until we should get some traction. And shall I say, we are just, we're holding off by making that investment until we sort of find that big anchor investor to come in side-by-side with us.

Okay. And how are those meetings being sourced? Is it just your relationships with these entities? Is it through investment banks that you deal with on a regular basis? How are these meetings getting set up with the Sovereign Wealth Funds and Pensions, et cetera?

Both. We have contacts into several of them that we've been, we have been approached -- we've been -- we've had reverse inquiries into us over the time and it's sort of mining going back to those reverse inquiries that we've had. And we have some relationships existing at the REITs. But also, we're getting introductions to third parties like investment bankers as well.

Okay. And then shifting gears to the HPT Spirit transaction. That's a lot of properties, the 770 properties. And I know that some will be divested in the fourth quarter. So I don't know what that brings it down to, is it 600 or 650, but it's still a lot of properties. How are you internally planning on -- I know, you're just collecting rent checks, and it's triple net and what have you, but you still have to monitor kind of the credit, quality or the credit profile, or how a lot of these entities are doing and some of them are in whether it's fair to say it or not businesses that some people have concerns about maybe that could get Amazon or whatever. So how are you internally staffing or thinking about taking on so many new properties into the RMR Group?

Hey, Bryan, it's Matt. We clearly going to add incremental staffing and bring on some additional real retail experience. But I think the benefit of the RMR platform is the national offices, we've got people across the country and a lot of the markets that these assets will reside in, that will be able to touch and feel them every day and they assess what we've acquired here in this transaction. And I think we will be a very active manager. And on top of that you have our corporate infrastructure that this set of properties will quite easily roll into. We will build additional credit capabilities and monitoring techniques, but you have the technology and the asset management platform that these can slide into. So outside of adding additional manpower, we're pretty comfortable that we can take this on and execute.

Okay. Great. And then just last from me. Adam, I think you've talked about possibly taking a controlling position in a private equity shop or platform now for at least a quarter or two probably been thinking about a lot longer than that. What inning would you say you're in, in making kind of the go/no-go decision? And what do you think the probability is that you find something that you consummate?

I think it's truly 50-50 Bryan, that we find something we have several, it's hard to predict on what inning. Now, these are private enterprises, the vast majority of everyone we're talking to is private. And there's often when we gain the most traction, or get the most interest is firms that and let's say are going through a generational leadership change. And so, the older generations thinking about exiting and they have, a good amount, they have a good staff and this could be a way for them to exit. And so, there's obviously social issues involved with them getting comfortable, that it's might be the end of their career. And so, and then there's also groups that we're talking to that are not, don't fit that profile, but let's say they might have professional managers that are running the firm day-in and day-out and there's a group of invest -- let's call it the founders that are not active anymore, but they own the firm. And, the social issues of how are you going to integrate all those professional managers there now at the firm into our firm, I think the best way to characterize it is, it's 50-50, it really could go either way, we have some pretty interesting conversations that we're having. But we -- it's just as likely that we -- it's just as likely we find groups that are interested in us that we don't want to move forward with as it is finding groups that want to work with, it has to be the right fit on many different levels. And then it's got to make sense economically on top of that, but I do think. Look, in today's market, there's a lot of talk about what's happening in private equity and a…

Thanks. That's helpful. And just lastly, what's the bigger holdup do you see, is it price or control?

I probably price, it's probably a little bit of both.

Yes.

I'm not sure there is a hang-up. These are -- these conversations are ongoing and if it's a -- we make it, let me put it this way. We tackle the control question early in upfront. And so if somebody's just not interested in that, there's just no discussion, so that makes it quite easy. And so that's why I say if they make it through that threshold, then I guess it becomes down the price.

Okay, great. Thank you, Adam.

Yes.

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

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

This conference is now included. Thank you for attending today's presentation. You may now disconnect.