Good day and welcome to RMR's Fiscal Fourth Quarter 2021 Earnings Conference Call. All participants will be in a 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 Michael Kodesch. Please go ahead.

Good morning and thank you for joining RMR's fourth quarter of fiscal 2021 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 quarterly results 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, November 16, 2021 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 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. Reconciliation of net income determined in accordance with U.S. Generally Accepted Accounting Principles to adjusted net income, adjusted earnings per share, adjusted EBITDA, and the calculation of adjusted EBITDA margin can be found in our earnings release. And now, I would like to turn the call over to Adam.

Thank you, Michael, and thank you all for joining us this morning. I'm pleased to report that RMR finished the fiscal year on a high note as we delivered yet another strong quarter financially. This quarter, we reported adjusted net income of $0.50 per share, which was at the high-end of our guidance, represents a 28% increase on a year-over-year basis. Adjusted EBITDA this quarter was $26.3 million, which represents a 27% increase compared to last year. Subsequent to quarter end one of our managed clients, ILPT, announced a $4 billion acquisition of Monmouth Real Estate Investment Corporation. Monmouth owns a portfolio of 126 Class A industrial and logistics properties that are largely occupied by tenants whose businesses are driven by e-commerce. This acquisition is expected to be immediately accretive to ILPT and will be funded through a combination of joint venture equity and debt. The Monmouth acquisition is the largest single transaction ever announced by an RMR managed company. Not only will the transaction significantly grow RMR's AUM, but it also highlights RMR's alignment with ILPT shareholders. For example, ILPT does not plan to raise common equity to fund this transaction and equity for this transaction will come from forming a joint venture with institutional private investors. As a result, this transaction also highlights the success RMRs had with building out our private capital fundraising capabilities and demonstrates how quickly RMR can scale its business with the current infrastructure. Our ability to further expand our private capital relationships comes from our commercial real estate expertise, operational excellence, and world-class client service. This quarter, despite the pandemic related headwinds, our organization again delivered another strong quarter of leasing activity. As we arranged almost 2.9 million square feet of leases on behalf of our clients, an increase of 40% sequentially. More…

Thanks Adam. Good morning, everyone. This quarter's results continue to demonstrate strong momentum across many of our key operating and financial metrics. We again recorded sequential and year-over-year increases in every headline metric. The majority of which were also in line with our guidance for the quarter. Before I discuss our results and expectations for the next quarter, I'd like to touch on the Monmouth transaction. Monmouth is expected to close in the first half of calendar 2022 and we'll generate incremental annual run rate revenues. So the ultimate amounts are subject to how much joint venture capital is raised and how many properties are ultimately disposed of. While there will be incremental overhead costs, our historical investments in people, processes and technology will substantially minimize these costs. We expect to have more definitive guidance on Monmouth related fees and any incremental costs on our next earnings call. Turning to this quarter’s results and our expectations for next quarter, management and advisory service revenues increased for the fifth straight quarter with revenues reaching $46.8 million, a $1.3 million increase on a sequential quarter basis. This increase is attributable to property management fees from recent REIT acquisitions, increased construction management fees tied to our expanded oversight of client redevelopment activities and revenue growth at our Managed Operating Companies. Looking ahead to next quarter, we expect revenues to be flat based upon October average enterprise values that are Managed Equity REITs and seasonal declines that are Managed Operating Companies that will be offset by increases in construction management revenues. As it relates to incentive fees, OPI continues to accrue an incentive fee for calendar 2021. As we highlighted on our last earnings call, S&P Global discontinued the SNL indices that we historically benchmarked our REITs against. As a result, we agreed with…

We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from Bryan Maher with B. Riley FBR. Please go ahead.

Good morning, Matt, and Adam. Thanks for all that color. Two questions for me this morning. One on the MNR acquisition at the end of the day, when all said and done, Adam, what would you anticipate ends up in JV? What ends up being sold and when ends up being kept by ILPT?

Sure. Thanks for that question, Bryan. Yes. We don’t know precisely how it’s all going to shake out. I can tell you sort of the two, I think there’s sort of two base cases or two different ways it could shake out. One, the entire portfolio could end up in a JV with probably two or more partners with ILPT retaining a co-investment in that JV. That’s sort of one extreme. The other extreme is probably that we keep it on balance sheet. We only move forward with one JV partner that we’ve essentially lined up today for a significant equity investment in it. If that’s the case, the portfolio – the $4 billion portfolio would probably shrink by about $1.5 billion or $1.6 billion. In either case, the transaction will be a accretive fairly sizably accretive to ILPT. And that’s sort – it will sort of leverage will sort of be between 6- and 8-times debt-to-EBITDA for ILPT and it sort of depends on where it shakes out. That’s sort of where it shakes out. I call it in and around closing, longer-term, depending on how much leverage we have, it may make sense to try to sell additional assets longer-term that may be not part of the Monmouth portfolio and/or bringing in additional equity partners post-closing that we could bring in as well. But sort of those are the sort of two ends of the benchmark. It’s either the full thing goes into JV. It’s still accretive for – it’s very creative for ILPT or we’ve sort of go into a partial JV where it remains on the balance sheet, but all the equity is raised from just one partner. And another thing to highlight that I think is very important and it sort of alluded in your question, we’re not raising any – have no plans to raise any equity capital from share issuance in ILPT. We think this highlights the high alignment of interest between ILPT and RMR and how we structured this. The fact that we were able to find third-party capital, there was able to – there was interest in this to partner with us to do this deal also highlights, we think the strength of the RMR platform and the success we have had in building out those relationships over the last couple of years. So I think there’s positives – a lot of positives for ILPT, it’s a lot of positives for RMR, sort of – I look at it as it’s a really great transaction to a really good transaction, either way, it’s a win-win for both. It’s just a matter of exactly how it’s going to shake out.

And in your discussions with Sovereign Wealth Fund, what would you characterize is their appetite to do more of these deals, above and beyond MNR. And what is there – how are they viewing this? Is it simply that it’s better relative risk adjusted returns and a fairly simple process since they’ve gotten to know RMR of deploying capital into certain industries through you. And do you suspect we might see any other similar type deals, maybe not of that size across the other managed REITs?

Yes. I would say the appetite from Sovereign Wealth Funds generally is pretty robust to continue to invest in commercial real estate in the United States and certain sectors, especially in and around industrial. I think the fact that we have had a successful joint venture get off the ground so far with a couple of sovereigns at ILPT, certainly was helped us get this deal – announced this deal as well. Yes, I think this relationship with what I’d call permanent capital providers, equity capital providers, like the sovereigns is going to continue to grow for our company at RMR. And I think there are going to be ways that we’re going to be able to do deals and transactions sort of with the REITs – not with the REITs. I think there’s going to be a lot of different ways, we’re going to grow this way. With regards to their appetite to put money to work in different asset classes, yes, I think generally industrial multifamily specials within sectors of office, they’re very focused on putting money out to work. I’d even say in sectors of retail, you might be surprised that they have appetite to put money to work. So the only place I think they’re probably a little shy to put money to work today is probably within hotels, some downtown office towers, their general office probably the senior living sector is an area that they’re probably a little shy to put money to work. Those are the areas we’re involved in, but that’s where it gives you a feel for what their appetites like.

Thank you, Adam.

The next question comes from Ronald Kamdem with Morgan Stanley. Please go ahead.

Hey, just sticking on the ILPT deal. Maybe if you provide just any color in your conversations with your private capital partners, what are they sort of evaluating to decide how much to participate within this deal? If you could just give us a sense of – is that their own capital sources? Is that how much industrials they want? Is it quality? Is it markets just – what would make uptake on more of this deal and less of this deal? What are the factors? Thanks.

Yes. So, thank you for that question. They’re very – the partners we’re talking to there’s generally speaking, most institutions went into the last – if you started in 2019, they were almost all across the board. If you look at institutions’ investments in commercial real estate, there were all underweight industrial, everybody this is pre-pandemic wanting to increase the allocations from industrial. That just became almost on steroids as we got into the pandemic. And so there’s even more desire to increase their exposure to industrial. I think the things that got were attractive about the Monmouth transaction for the partners we are talking with and the things we’ve talked about at ILPT when it announced the transaction. Very high quality real estate, the average age of the buildings is about nine years. The average lease term is about eight years, it’s almost 100% leased. It’s over 80% investment grade rated. In some ways, it’s a high core – core portfolio of industrial, almost super core portfolio of industrial assets. And I think they appropriately were thinking about what type of returns they wanted to get on that type of investment, which allowed us working with them to ultimately win the portfolio. And I think they also leaned a lot on us because we are very close to the ground with regards to what’s going on in the industrial sector. There’s been a lot of press written about how ILPT was the successful bidder for Monmouth, but there were other bidders that are better known than us. They were also bidding and that they – and we outbid them. I would argue that we actually, because of the way we’re set up and the amount – and the number of transactions we look at from an industrial perspective, I…

Great. And then just my second one was just, so to the extent that this goes mostly on balance sheet, I think the presentation talked about anywhere from $0 billion to $1.6 billion of sales of assets. I was just curious on that if, you know, to the extent that it is going that route, what’s – what sort of the high level, how you decide, which assets to keep, which assets to sell? Are there just obvious sell candidates geographic wise, or how do you go about sort of parsing, which ones you keep, which ones you sell?

Sure. It’s a great question. It’s a question we’re still working our way through in this – we obviously entered the transaction with a idea of which properties we would look, think about selling, but we haven’t finalized that process yet. The hard thing with this portfolio and your –people are going to think I’m being cute, but the whole portfolio is really high quality. And so when we talk about selling assets, general view is, we’d like to sell the lower quality assets within the portfolio, but that is on a relative basis within the portfolio. So, not quote me specifically on these numbers, but for example, if the whole portfolio’s being bought at a four cap, there’s some buildings that like are probably worth three and a half and there’s some buildings worth four and a half. We’re probably going to migrate towards a majority of the portfolio that we think about selling is going to be more in the four, the little – the lesser quality within the portfolio. So more of the properties that might be at the four and a half cap rate. Now that all being said, that’s with the value we put on them. We honestly believe that if we go out the market on an individual basis or small portfolio, we’ll probably do better than that just because what we’re seeing in the market. But I think that sort of gives you a sense of how we’re looking at the portfolio for the potential sales.

That’s super helpful. If I could sneak in one more just on senior housing, because you touched on it, and we’ve obviously seen sort of the occupancy pickup from this data, maybe what are you seeing in terms of labor cost, we heard about labor shortages, just any color there. Thanks

Sure. Within the senior living business, our – the company we oversee five star is clearly experiencing the same things that you hear about throughout the industry. There are labor issues in filling open positions they’ve been addressing that, partly addressing that by increasing wages. It’s not a one size fits all in all markets, because we have a portfolio in several different markets. They’re sort of – it sort of depends on the prevailing wage in that market. What are your competitors? I mean, I think what the team is doing is even providing more flexibility out to regions and to community leaders to sort of have more discretion in terms of trying to increase wages if necessary to try to fill some of those labor shortages throughout the portfolio. But it’s real. We don’t only see labor shortages in a wage inflation in senior living. We obviously run a large hotel portfolio within the organization. We also run a large, a large number of truck stops that have a large number of employees. This is pervasive, not just in senior living, but sort of across the cross industries. And it’s sort of the same story across the board that we’re seeing

Helpful. Thank you.

The next question comes from Jim Sullivan with BTIG. Please go ahead.

Thank you. Adam, just continuing with some questions on the private capital initiatives. I'm not sure you may have disclosed this, but the – I think you've indicated you have one definite sovereign wealth investor for the ILPT transaction. Did you indicate whether that sovereign wealth investor had also done business on the prior JV you had structured with ILPT?

Sure. I'm not sure if we've disclosed it, but I'm happy to tell you that, that sovereign investor. Yes, we have done business with them before and they are involved with us in the prior ILPT joint adventure. Yes. So they have a long history with us. Yes.

Yes. Okay, good. Thanks. And I was interested in your comment about building a private sourcing group – private capital sourcing group internally going after different pockets of capital that you put together, I guess this quarter, maybe last quarter as well. And I wonder kind of two part question a really kind of a three part question, but do you have a kind of target amount of capital that you would like that group to raise? number one. Number two, what is the incremental cost for putting together this group that you have? And then thirdly is there – is there a specific vehicle that the group will be raising capital for, for example, an open-ended fund of some sort, what is the shape of this to come that we should expect?

Yeah. So thanks, Jim to sort of answer your three part question, the target capital raise. I don't think we have a specific number out there other than multi-billions of dollars. We wouldn't be taking this on unless we could get well north of $1 billion raised this way. We actually feel pretty bullish that we're going to able to raise significant amounts of capital away from the public markets in private from private investors going forward, sovereign wealth funds being one source of the capital, but I think there's going to be opportunities in other channels as well. And so there's no real ceiling to the amount of capital, but we certainly have pretty high hopes that it will be in the billions. The incremental cost, today it's not very much at all. It consists of one dedicated resource internally. As that group gains more success, I think you'll see the number of resources sort of grow. I think the – I don't believe, let me put this way. I don't think you're going to see us adding a term – a significant amount of cost before we start seeing significant amount of dollars raise. So, it's going to be sort of incremental costs along the way. And as their – as they have more success the costs will probably go, will increase for that group, but it's not going to be front-end loaded if you understand what I mean. In terms of the vehicles, yes, we have a couple of vehicles that we are very focused on approaching the market with today. I'm not going to get too specific about the vehicles out of the say, that they're structured like an open-end fund, meaning they're permanent capital vehicles. So, they do provide some liquidity, but they’re not, but…

And just I’m curious, given the liquidity on the RMR balance sheet, as well as the liquidity that’s available with either operators or manage rates, would you expect that any of that will be sourced for to put skin in the game as it were before you market the product – before we start to market the product directly to family offices, et cetera?

Yes, I – the short answer is yes, that’s really, as I think about the liquidity on our balance sheet, that’s primarily where I think about it might be being used as co-investment into some of these vehicles as we get them going. As the – as sort of how we view our market in terms of when the money comes in. I don’t think from a timing perspective, just the way these vehicles we’re sort of thinking about them. They would – the money would probably come in simultaneously, the co-investment would come in simultaneously with the sort of the investment from third parties. I don’t think it would be an advance of. It would be sort of lined up to come in at the same time as the third party capital comes in. So that’s the way we’re thinking about it.

Okay. Then finally for me, the private equity platform acquisition idea that has been talked about for several quarters now, but you haven’t been able to find the right fit. Is this new platform instead of that, or are you still looking to acquire a private equity platform?

Sure. Yes. We’ve talked about it. You’re right, Jim. We’ve talked about for many quarters, a couple of years probably we’ve been talking about it. I don’t know if it’s instead of, but it’s certainly where our focus is now is trying to – we’ve had a fair amount of success. I think, we’re going to have more success in the coming months and quarters around the private capital capabilities in organically growing it. So that is clearly where our focus is. We were very focused for about two years on acquiring a platform. When I say focused, we were actively; I don't know how else to say it, hunting for a platform, actively reaching out to different firms, identifying firms. We were working with third-party advisors to help us do this, and we pretty much scoured the universe of potential partners. We got down the road three different times with three different partners where we had reached agreement on principle, the economics were done and all three deals sort of unraveled over social issues. Essentially the founders of the businesses decided that they did not want to exit and they wanted to, and so they ended up not doing a deal with anybody. It's not just with us. They just didn't do a deal with anybody and it wasn't overpriced. It was over so social issues. So we sort of spent two years, had three bites at three different apples, tried to make it happen. And we, after the third one, which really happened this summer, sort of walked away from us after we reached agreement, had a term sheet agreed to, we sort of stepped back and said, we probably should not be focused on as much proactive energy around M&A. So that's really the change, meaning we're not actively sort of going out there. We don't have any third-party advisors on retention that are helping us seek out those type of partners. That all being set for the last two years, we've met a lot of people, so we know a lot of folks and we just in the last quarter, we were approached by a group that has indicated that it's interesting in selling that we had not talked to before, and they approached us because they knew we were active in the marketplace. It's probably not a transaction. It's going to work for us, but just the fact that they reached out to us and I don't think they reached out to many groups. I think it was a very small group of folks they reached out to is sort of indicative of the – we're out there. People know we're there. I think we'll have continue to evaluate M&A. We're not adverse to it. We'd like to do it. I just think it's going to be more reverse inquiry, it's going to come to us, more than us sort of seeking it out on our own.

Okay. Very good. Thanks for that answer

[Operator Instructions] The next question comes from Kenneth Lee with RBC Capital Market. Please go ahead.

Hi, thanks for taking my question. Just one on the ILPT monist announcement there; could just talk broadly how the economics could potentially differ for RMR just based on the two scenarios that that you outlined. Whether the assets still on the JV or retain on the balance sheet? Thanks.

Hey, Ken, clearly given all the variables, Adam outlined the range is pretty wide, but just to give you ballpark from a gross fee run rate, it could be as low as $7 million based on the facts as we know today to as high as $22 million. And as we highlighted in our prepared remarks, I think over the next few months before our next call, we'll have more clarity to provide, but that is the range as we see it today.

Great. Very helpful. And then just one follow-up around the prepared remarks that you talked about construction revenues and seeing some potential impact from supply chain. Wondering if you could just further elaborate upon that? Thanks.

I don't think it's anything different than what you're hearing in the news or seeing elsewhere. I just think we, in the numbers I quoted, we wanted to be clear that we've hedged those a bit. Our hope is to exceed those ranges, but those numbers reflect some of the delays we're seeing and getting product in the price inflation we're seeing on the jobs and the construction we're doing. And as we, I'm giving you forecast out into late into 2022. There's just so many variables that we just wanted to make clear the $150 million per quarter in calendar 2022 is obviously subject to change, but nonetheless we're hoping we can beat those numbers.

Got it. Very helpful. Thanks again.

The next question comes again from Jim Sullivan with BTIG. Please go ahead.

Sure. Thanks for allowing another follow-up here. The – and very specific question you've talked previously in terms of densification projects about a former a travel center site in Nashville or, maybe an existing travel center site in Nashville. And I just wonder if you could give us an update as to if there is one for what your plans are around that location?

Sure. Specifically, around the Nashville site, that is a project that is, still, I would say relatively early days, we are – we have gotten broad sort of first round approvals from the city. I think in terms of how large it could be, it could be as large as upwards of 4 million square feet of mixed use. It's a 20-acre site. It's got four basically city blocks that you could think about that are available for redevelopment. What we are in the process of trying to figure out now is obviously it'd be at stage development and we're trying to figure out, what is the first stage. The good news is, I can just tell you at a high level, there's been a lot of interest from both I call office and retail, tenants that are interested in anchoring the first phase of that project. I think that is a project that, at its earliest, we would not be talking about kicking-off actual construction until late into 2022 or sometime, well into 2022 before it could really get going. But it is a project that is progressing. We are continuing to do a lot of work on it. We feel very bullish about the national market. Generally, we feel very bullish about the East Bank and what's going on that side of the river next to where the Titans play. And there's a lot of different development projects. We're not the only parcel, large parcel that is being planned for redevelopment over there for investors listening in on this call, maybe the closest analogy that we see to the East Bank. And it's very, it's actually very analogous to us is, is here in the Boston market. It's a lot like the Seaport district, so across the river in an area that if you looked at, here in Boston, 10, 15 years ago was nothing but a bunch of parking lots. And today it's a really well-developed mix to use almost second downtown to Boston. It feels very similar down there in the East Bank. When you go there and you look at it and you talk about, and you see what's happening in Nashville and arguably, Boston's got a lot of very positive attributes, but Nashville's clearly a market that's growing and we feel pretty good about the prospects for a development on these banks there.

Okay. Thanks.

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

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

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.