Good day and welcome to The RMR Group Fiscal Second Quarter 2022 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Michael Kodesch, Director of Investor Relations. Please go ahead.

Good afternoon and thank you for joining RMR’s second quarter of fiscal 2022 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, May 5, 2022 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. 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 calculation of adjusted EBITDA margin can be found in our earnings release. And now, I would like to turn the call over to Adam.

Thanks, Michael and thank you for joining us this afternoon. We are pleased to report improved results this quarter that included adjusted net income of $0.50 per share and adjusted EBITDA of $25.7 million, both meaningful sequential quarter increases. This quarter was highlighted by ILPT’s $4 billion acquisition of Monmouth Real Estate Investment Corporation, which resulted in assets under management at the end of the quarter, reaching almost $38 billion. Since becoming a public company at the end of 2015, our assets under management have grown almost 50% in just 6.5 years. The closing of the Monmouth transaction was the result of the tireless commitment of many parts of the RMR organization, ensuring a seamless integration of Monmouth’s 126 high-quality e-commerce-focused properties. The transaction provides ILPT with increased scale and greater tenant and geographic diversity while also ensuring ILPT is well positioned to take advantage of the current industrial market dynamics. Turning to real estate fundamentals and highlights this quarter from some of the other clients, historically, real estate has proven to be resilient during inflationary environments, and we believe our portfolio is well positioned to weather market volatility. Approximately 85% of leases at properties RMR manages have annual rent escalators, CPI adjustments or percentage rent provisions. Further, over 60% of our managed leases have operating expense recoveries that should further mitigate inflationary risks. As new and prospective tenants become increasingly active in securing their long-term real estate needs and office building utilization levels increase, we were not surprised to see strong leasing momentum carry into the second fiscal quarter. RMR arranged almost 2 million square feet of leases on behalf of our clients this quarter with a weighted average lease term of approximately 9 years and a weighted average roll up in rent at over 10%. Additionally, we continue…

Thanks, Adam and good afternoon everyone. In the second fiscal quarter, we reported adjusted net income of $8.2 million or $0.50 per share and adjusted EBITDA of $25.7 million, with both metrics finishing at the higher end of our guidance. Total revenues were $49.3 million this quarter, which was approximately $7 million higher on a year-over-year basis and over $3 million higher on a sequential quarter basis. The sequential increase in revenues was primarily attributable to ILPT’s February 25 acquisition of Monmouth and continued increases in construction management fees. Looking ahead to the remainder of our fiscal year, we expect further increases in our revenues with each of the remaining quarters in the fiscal year expected to generate revenues of between $52 million and $54 million. This guidance is impacted most notably by the following assumptions. First, base management fee projections are based on enterprise values at DHC, SVC and OPI that reflects recent market volatility as well as expectations for modest debt reduction at DHC and SVC over the remainder of the fiscal year. Secondly, a full quarter of the Monmouth transaction is expected to generate approximately $3 million in additional fees next quarter. And lastly, continued increases in construction activity across the platform should generate approximately $750,000 in incremental revenues each successive quarter. As it relates to construction management fees, I did want to highlight that in response to investor feedback, we have added additional disclosure in our 10-Q filing, differentiating construction fees from property management fees. Turning to expenses for the quarter, cash compensation of $31.7 million was flat sequentially as cost increases related to payroll tax and 401(k) contributions resetting on January 1 were offset by 2 fewer days in the quarter and favorable headcount mix. Looking ahead, we expect cash compensation to remain at approximately…

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

Okay, thank you very much and thank you for taking the questions. I appreciate the updated guidance. Let me start there. Just sort of looking at how some of the REITs have performed quarter-to-date. I guess, I’m surprised by the resiliency on the revenue side. How should we be thinking about – and maybe it’s already embedded in your response to some modest deleveraging. But just looking at the equity values dropping as much as they have dropped incrementally since the end of March, how should we be thinking about any kind of further deleveraging? And how does that spill back, if at all, back to RMR absent just sort of a revenue hit? Is there any sort of capital at risk here?

Sure. Thanks, Bill. This is Adam. I don’t think there is any capital at risk. In terms of the performance of the REITs themselves, the most effective thing we can do as a manager of these REITs is continue to try and focus on their operations and also prudently manage their balance sheets. And I think some of our REITs that we manage are going to benefit, I think, quite a bit as we come out of COVID, especially, I think, of SVC, for example, as hotel utilization increases in the coming quarters, I think that’s going to have a market improvement on the financial performance of SVC. And remember, SVC still doesn’t pay a meaningful dividend. We’re still not in compliance with our debt covenants. But I think we’re optimistic about being able to do getting compliance at least by the third quarter of this year and then hopefully soon thereafter, we can think about the dividend there. And those are things, for example, at SVC that would, I think, have a meaningful impact on the stock price for that company. A company like ILPT, I’m just going to – going through the list, that company is obviously dealing with excessive leverage at the moment, which we anticipate will come down in the coming quarters as we de-lever that company by bringing additional equity investors in the joint venture that we set up with regards to the Monmouth acquisition. DHC, somewhat similar to SVC in the sense that as there is an improvement, especially at the SHOP portfolio and some of the actions that I highlighted in my prepared remarks that have occurred just this week, with a change in leadership in AlerisLife, which is the largest manager for the SHOP portfolio, DHC bringing in an outside consultant. That has all been done geared towards very much improving operations at AlerisLife, but also the SHOP portfolio. And again, as that performance improves, we expect it to get in compliance with its debt covenants and eventually be able to reinstate its dividend. As those things occur in the coming quarters, I think it will have a positive impact on those businesses.

Okay. That’s helpful, thank you so much. And then maybe one for Matt, I just want to make sure I understand your guidance. So the revenue guidance of $52 million to $54 million, is that an all-in number? I apologize. Or is the guidance on Monmouth and the construction revenue is incremental to that? And then maybe more broadly as you look out into fiscal ‘23, I guess, early calendar ‘23, how are you thinking about construction revenues post the sort of activity level?

So let me start with the first one. The $52 million to $54 million is all in, all service and advisory. So that – we’re trying to give you some of the piece parts to get to that growth, which is largely from where we are today anyway, which is largely Monmouth and then some of the construction activity you highlighted. And then in terms of the construction – and frankly, it’s development dollars that are driving our guidance. So this quarter, we managed approximately $80 million in construction and development. We’re projecting in that guidance, those numbers increasing to about $100 million to $120 million. And I would expect that will continue based on the ongoing projects across the companies we manage.

Thanks so much.

The next question comes from Kyle Menges with B. Riley FBR. Please go ahead.

Hi, this is Kyle on for Bryan. I was hoping you could touch on the Sonesta brand a little bit, kind of how the transition of 200 hotels to the Sonesta brand over at SVC has disrupted their operations within the hotel portfolio? But it seems like there is meaningful opportunity for those to ramp up in 2022. And then maybe just more broadly, could you talk about John Murray’s strategy to grow the brand over the next few years?

Sure. Hi, Kyle, thank you for that question. Yes, I think Sonesta is ramping quite nicely. And really, from the public markets perspective, really, the only way to see that is through – looking through SVC sort of two different ways. One, you look at the performance of the hotels that SVC owns that are being managed by Sonesta and then – but also through its 34% ownership that effectively flows through to SVC as well. Everyone probably knows SVC owns 34% of Sonesta and Sonesta itself is a private company. Sonesta is growing quite a bit. And it’s not just growing at all really on the back of SVC. Just earlier last week, on its balance sheet, it bought four hotels in New York City, which was a great entry way into that gateway city for the brand that’s been – was done on Sonesta’s balance sheet. You also have to remember that while there is 200 hotels being managed by Sonesta for SVC, we have almost 1,200 hotels that are within the family of Sonesta is well over 900 that are being franchised that are effectively coming off of the – as a result of the Red Lion acquisition. So Sonesta has a lot going on in it right now away from just managing the hotels for SVC. That being said, the management of the hotels is significant for Sonesta. And I’m pretty optimistic, and I think the team at Sonesta is pretty optimistic that over the coming year, we are going to meaningfully improve the margin. Over time, I think SVC will also quite a bit benefit from that 34% ownership. And as an SVC investor, I really do hope the market looks through not only at the margins of the hotels, what they are producing, but…

Great. Thanks for all that color. That’s all for me.

[Operator Instructions] The next question comes from Ronald Kamdem with Morgan Stanley. Please go ahead.

Hi, thanks for taking the questions. Just the first one on ILPT, I think you hit on a few comments just about, I think the – congrats on closing the acquisition. I think the plan is sort of to de-lever that. Maybe a little bit just more color on conversations that you may be having in terms of third-party capital to come in and how you think about sort of refinancing some of that there would be helpful? Thanks.

Sure. So thank you for that question. So at ILPT, sort of in the wake of their public announcements last week when they announced earnings, they are in having very productive – we are having very productive discussions with additional equity providers into that joint venture. We remain confident, if not optimistic, that we will have additional equity investors into that joint venture. And by doing that alone, it will deconsolidate that joint venture off of the ILPT balance sheet. And just doing that alone will, on a headline number on its balance sheet, reduce leverage significantly. And the other thing that is going on there, more specific to the ILPT balance sheet post, let’s say, a deconsolidation of the joint venture is also deleveraging through asset sales. And I think as ILPT said on their call last week, they are moving forward. We are moving forward very well. We continue to be confident, again, optimistic that we will sell the real – the assets as outlined since we made the acquisition. In our experience at RMR, the good news from our perspective, the depth of our platform, the type of real estate market, the different sectors we work in, we see – we’re buying and selling assets across the board every week. And so we have a pretty good feel for what’s going on in the market. And so generally speaking, we remain confident those sales will occur largely as we said they would, and that onto itself will be a deleveraging event for ILPT. So those two things, which we continue to feel confident about are what we think is going to happen in ILPT and will result in what I believe to be significant deleveraging before the end of the year.

Great. And if I could just follow-up on that with obviously, the Amazon news about sort of overcapacity, does something like that impact conversations or willingness to do deals in the market or just the capital is to long-term focus and is just industrial fundamentals remain too attractive for that to matter? Just trying to get a sense of the timing could be impacted at all just from that news if there is a ripple effect that made sense?

Yes. I think the Amazon comments last week from their earnings announcement obviously rippled through sort of the industrial REIT sector and industrial markets as a whole. Look, I don’t think the long-term fundamentals and thesis around the growth in – need for growth in industrial space has changed. We have seen some of the highest rent increases over the last couple of quarters. We’re running in our portfolio close to 100% occupied. Everything we see points to have continued double-digit rent growth in the coming quarters. To be honest with you, I think the bigger impact, which we haven’t seen yet, but I’m looking out for is less what Amazon said and more just a movement in interest rates, and is that eventually going to have an impact on cap rates. I think it could be said it’s certainly in the industrial sector. Large portfolios, very large portfolios, I think it has had some impact on pricing. I’ve yet to see meaningful changes in pricing on an individual asset by asset basis in industrial. But the Fed made an announcement yesterday and they have indicated where interest rates are going. And we – that’s something I think we look out on or focus on. The counter to that is just what you said, there is so much capital looking to invest in this sector. There is only a few real estate sectors that most people want to invest in. Industrial is one of them. There is many that have been red lined by many investors, retail, office, hospitality. And so there is not many left to invest in. Multifamily, industrial being two of the biggest that people are still focused on. And so part of what we’ve – the counter to the fact that interest rates might be going up and that could affect industrial cap rates is we just look at the multifamily sector. And while in that sector, we continue to see very low cap rates in that sector and maybe that’s a precursor to what is going to continue to happen in the industrial, even with rising interest rates, maybe industrial cap rates do not move meaningfully. But to be honest with you, I’m less concerned about the Amazon announcement, I’m more thinking about what’s happening to interest rates and does that affect the cap rates for industrial.

Helpful. That’s it for me. Thanks so much.

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

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

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.