Good day, and welcome to the RMR Fiscal Third Quarter 2022 Earnings Conference Call. [Operator Instructions]. Please note, today's event is being recorded. 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 Third 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. 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, August 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 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.

Thanks, Michael, and thank you for joining us this afternoon. We are pleased to report another strong quarter of financial results with adjusted net income of $0.59 per share and adjusted EBITDA of $29.4 million.representing sequential quarter increases of 18% and 14%, respectively. As an alternative asset manager focused primarily on core commercial real estate, RMR's unique structure remains highly attractive in today's operating environment. Our competitive advantage is rooted in over 35 years of experience in managing commercial real estate as well as our large size and scale, which includes over 2,100 properties located throughout North America. This expertise is especially important today as we navigate the ongoing macroeconomic challenges related to rising inflation, increasing interest rates and slowing economic activity. These trends have resulted in significant reductions in commercial real estate transaction activity as buyers and sellers adjust to this new environment. While we have historically seen increases in AUM from growth in our existing publicly traded equity REITs. The last 2 years have demonstrated our success in raising private capital to grow our AUM away from these equity REITs. From almost $0 of private capital under management just 2 years ago, we have built a platform that currently has almost $4 billion of private capital assets under management. Access to private capital markets gives RMR an additional path for continued growth, especially during times like these with pronounced market volatility. With that said, there remains significant revenue opportunity within our publicly traded equity REITs. For the third fiscal quarter, almost 75% of our revenues came from our managed public real estate capital clients. With our publicly traded equity reach representing the vast majority of these revenues. Based on the capital structures of these equity REITs today, there is significant durability and limited downside to the revenues we…

Thanks, Adam, and good afternoon, everyone. In the third fiscal quarter, we reported adjusted net income of $9.8 million or $0.59 per share and adjusted EBITDA of $29.4 million, both representing significant sequential quarter increases in each metric finishing above the midpoint of our guidance. Total revenues were $53 million this quarter, which was over $7 million higher on a year-over-year basis and almost $4 million higher on a sequential quarter basis. The sequential quarter increase in revenues was primarily attributable to the full quarter impact of ILPT's Monmouth acquisition, increases in construction management fees and fee growth tied to the continued strong operating performance of Sonesta and TA. Looking ahead to the fourth quarter, we expect to generate between $50 million and $52 million of revenues based on the current enterprise values of our managed equity REITs as well as our expectations of continued increases in construction management fees. Turning to expenses for the quarter. Cash compensation this quarter was $32.2 million, which was an increase of $500,000 sequentially and our corresponding cash reimbursement rate improved slightly this quarter to approximately 44%. While wage inflation and labor scarcity both remain a headwind, especially in Greater Boston, our employee retention rates have remained ahead of industry benchmarks, and we continue to leverage technology, secondary hiring locations and select outsourcing solutions to mitigate these headwinds. Looking ahead, we expect cash compensation to remain at approximately $32 million for the fourth quarter and our reimbursement rate to remain at 44%. As a result of these collective expectations, guidance for the fourth quarter remains unchanged with adjusted earnings per share forecasted to range from $0.57 to $0.60 per share and adjusted EBITDA should range from $28 million to $30 million. RMR's quarterly dividend of $0.40 per share remains well covered at a current payout ratio of approximately 55%. We closed the quarter with almost $200 million in cash and continue to have no debt. We believe our balance sheet leaves us position to pursue a variety of strategies to expand our platform. Before we begin the question-and-answer portion of the call, I would like to first acknowledge RMR's recently published sustainability report. Our sustainability report provides a comprehensive overview of our long-term ESG goals, including RMR's 0 emission promise, whereby we have pledged to reach net 0 greenhouse gas emissions across the properties we directly managed by 2050, with a target of reaching a 50% reduction by 2030. We would encourage those listening to go to RMR sustainability website where readers can see a collective overview of the successes we've had thus far in driving energy, emissions, water and waste reductions, as well as our contributions to the communities we operate in and the investments we are making in our people. That concludes our formal remarks. Operator, would you please open the line to questions.

[Operator Instructions]. Today's first question comes from Bryan Maher with B. Riley FBR.

A couple of questions for me. On the Sonesta front, we know that you bought, well, Sonesta bought four properties in Manhattan earlier this year in conjunction with SVC's contribution. Do you have any thoughts on Sonesta's growth trajectory kind of going forward over the next year or 2 as it relates to buying more hotels in gateway markets?

Sure. Bryan, thanks for that question about Sonesta. Yes. Sonesta, you're right to focus on Sonesta, it's really had a great quarter and really showcasing the improvements they're having in the operations, especially over the last quarter into the summer. With regards specifically to your question about how it's planning to grow, I would say the real focus at Sonesta is on growing its franchising business. We're not ruling out that it could also make acquisitions -- outright acquisitions of hotels. But I would say the focus is really on growing its franchise, the number of hotels that franchise. It has a really good base, about 1,200 hotels, roughly 300 that manages itself and then around 900 that are franchises. Its franchising business is really starting to pick up pace. And I expect that's going to be the majority of where you'll see unit growth coming. And again, just to tie it all back together, that's, of course, as we grow revenues at Sonesta that benefits RMR. And of course, as we grow cash flow at Sonesta that indirectly helps SVC through its 34% ownership in Sonesta. So that's principally how we're thinking about growing at Sonesta, and we feel pretty good about it.

Okay. And then over the years you've talked a lot about acquisition opportunities, you have a lot of cash on the balance sheet. I think if memory serves me that might have slowed down a little bit, but you were getting inbound inquiries that you were looking at. Is there anything going on there given the capital markets dislocation of the past a couple few months and talk on Wall Street of weakness because there's no deal activities. Is that ramping up at all with people approaching you to revisit some of that?

I'm not sure the ramping up is the right word, but we are in discussions or had discussions with groups. Just to recap for you, maybe less so, but for others, Bryan, in 2020, 2021, we had a very concerted outgoing engagement where we were actively calling on partners. We were calling them, we were asking for meetings. Really beginning in the last 6 months or so, we've been stepping back and not so much go making outbound calls, we're getting -- we're sort of sitting back and waiting for inbound calls. And they have been occurring. I would say every quarter, we get 1, 2, 3 inquiries either from groups that we've talked to in the past that circle back and want to check in and/or talk at a high level about something and/or there's something going on where potential acquisition has actually retained an adviser and is engaged in a process. And of course, we're on the short list of folks that they would call. So there's nothing imminent to speak of in terms of, we're not in the process of negotiating a PSA, a purchase and sale agreement or anything like that. But we have a pretty regular dialogue. It's -- it comes and goes. But I'd say, on average, every quarter, there's at least a couple of conversations that occur.

Yes. Just two more for me. On the JV front, which you referenced in your prepared comments, which has really grown quite a bit over the past couple few years. Can you talk a little bit more about the JV partners or potential partners? Has that broadened out over the past year or 2 as whatever sovereign wealth funds or other large private capital sources have seen what you've done and want to participate in that, can you give us some more color on that?

Well, there's nothing to point to specifically in terms of we're suddenly taking on a mandate with a new partner to speak of. But I can tell you that, yes, very much so we have had increasing dialogue over time with groups. I would say the groups that we are focused on talking to what we've had the most conversations with tend to be other sovereign wealth funds, and that's because -- and I think this is a good thing. The sovereign wealth funds we are doing business with us have referred us to other sovereign wealth funds and sometimes without our prompting, which is no greater complement than that, that they say they're enjoying the relationship with us and they suggest us to others. And so we immediately get a pretty good audience through that. And that's happened on a handful of occasions already. And so we are in dialogue with other folks. We mentioned several -- a couple of few quarters ago that we have had a more direct and focused effort in and around family offices and high net worth individuals. There's definitely been several conversations with that sort of constituent of potential partners that have occurred as well. And so I'd say the dialogue is progressing well. And that's why you've heard us tactfully a couple of quarters ago, say things like we're more focused on sort of growing it internally or organically ourselves rather than relying on having to jump start it through M&A. It doesn't mean you won't engage in M&A. Just means that we are increasingly gaining confidence that we are going to be able to continue to grow the business or grow that sort of AUM growth through that means in that channel, just doing it ourselves.

Okay. And just last for me. You're sitting on almost $200 million in cash. Thinking about a year ago, you did that big $7 per share special dividend. Clearly, you don't have the nearly $400 million you had a year ago. But is there any thought as we look out over the next quarter or 2 of a potential special dividend or otherwise return capital?

Yes. It's probably a little early for us to have any sort of serious dialogue around that at the Board. I think what we've been thinking about is using that capital sort of similar, just sort of ties back to your private capital sourcing question prior. As we think about growing private capital AUM and additional separate managed accounts, joint ventures, possibly engaging in fund raising around the specific fund of some sort, I think we more and more in that some of that capital could be used for co-investment. Typically, if you're going to put a vehicle together in the simplest example, you put a couple of hundred million dollars of equity together as a sponsor, they typically look for some sort of investment. As you sort of start off in that business, your co-investment is probably going to be a little larger than it might be when you're more established. And so that's sort of why we keep that money in reserve is sort of to help us think through those types of strategies and they have it there as those opportunities present. We also, as I said, we're not -- when we talk about M&A and it's opportunistic, but we do get inbound calls. Some of them are interesting conversations. We like to keep that liquidity if any of those conversations actually came to fruition.

[Operator Instructions]. And ladies and gentlemen, this concludes our question-and-answer session. I'd 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.

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.