Good morning, and welcome to the RMR Fiscal Fourth Quarter 2022 Earnings Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Michael Kodesch, Director of Investor Relations. Please go ahead.

Good morning, and thank you for joining RMR's Fourth 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'd 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 15, 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 all for joining us this morning. For the fourth quarter, we reported adjusted net income of $0.57 per share and adjusted EBITDA of $29.5 million, both increases of at least 12% on a year-over-year basis. This quarter's results are indicative of RMR's resilient business model, which can perform well in all economic cycles. While commercial real estate transaction activity has slowed meaningfully, we think there remains a strong investment case to be made for RMR and its clients, as our collective organization continues to proactively work through the ongoing headwinds related to inflation, increasing interest rates and capital markets volatility. From a leasing perspective, fundamentals across our managed assets continue to trend favorably as we arranged 2.7 million square feet of leases on behalf of our clients, which resulted in a 23% roll up in rents and a weighted average lease term of 5.8 years. For the entire fiscal year 2022, leasing volumes exceeded 13.5 million square feet, a 28% increase compared to fiscal year 2021 and a 78% increase compared to pre-pandemic levels in fiscal year 2019. Historically, real estate has performed well through inflationary environments. Also, most real estate leases typically have mechanisms to reprice rents to offset cost increases. This is especially true for shorter lease term asset types such as hospitality and senior living. Additionally, a majority of the leases within our managed office, industrial and service retail portfolios currently have expense recovery provisions that largely offset the effects from the current inflationary environment on property operating expenses. Before turning it over to Matt, I want to briefly touch upon some highlights across our platform. First, at ILPT, we continue to experience strong operating fundamentals. ILPT's portfolio is over 99% leased. And this quarter, we facilitated new and renewal leases for…

Thanks, Adam, and good morning, everyone. For the fourth quarter, we reported adjusted net income of $9.4 million, or $0.57 per share and adjusted EBITDA of $29.5 million, with both of these measures being in line with our quarterly guidance. Total management and advisory service revenues were $52 million this quarter, which was almost $5 million higher on a year-over-year basis, though down approximately $1 million sequentially. The sequential quarter decrease was primarily attributable to enterprise value declines at the managed equity REITs due to deleveraging and share price declines, partially offset by increases in construction management fees. As it relates to our construction and development efforts across the platform, this past quarter, we oversaw approximately $116 million in directly managed projects, which brought the cumulative fiscal year capital oversight to over $350 million. Looking ahead to next fiscal year, we expect this direct oversight to expand and, in aggregate, approach almost $500 million. For the first fiscal quarter of 2023, we expect to generate between $49.5 million and $51.5 million of management and advisory service revenues based on the current enterprise value at our managed equity REITs and normal seasonal declines at some of our managed operating companies, both of which are expected to be partially offset by continued growth in construction management fees. Turning to expenses. Recurring cash compensation this quarter was approximately $31.6 million after excluding $2.6 million from our annual true-up to RMR's discretionary bonus program paid each September. This quarter's recurring cash compensation represented a decline of approximately $500,000 on a sequential basis due to favorable headcount mix and vacation utilization. As it relates to our discretionary bonus program and the resulting annual true-up that was recorded this quarter, throughout the fiscal year, we accrued at a rate that reflected our best estimate of where…

[Operator Instructions] Our first question will come from Bryan Maher with B. Riley FBR.

Two questions from me this morning. First of all, thanks for that outlook, particularly on the construction oversight for next year. I think you said $500 million in projects. With 20 Mass Ave and Seattle winding down in the second quarter, how should we expect that $500 million to kind of flow through the year? Or do you have some pretty big projects behind that in the back half of next year?

Bryan, the $500 million is fairly ratable. And you're right, it will transition from OPI spend. And I think you'll see more of that spend start occurring at DHC and SVC due to senior living and hotel renovations and the projects they've embarked on and I think they've each publicly spoken to. So I think you'll see the $500 million occur at $130 million to $120 million a quarter and generate about $5 million in construction management fees each quarter.

Okay. And then maybe for Adam, when you're talking to your private capital partners or prospects, are you getting a sense of what their appetite is for 2023 when it comes to acquisitions and investments? And kind of how are you and they thinking about commercial real estate in general over the next 12 to 18 months? So I'm not really talking about RMR specifically, but as it relates to growth within the managed REITs or within the private capital or with beefing up the JVs.

Sure. So thanks for the question, Bryan. You're right. We are in pretty regular dialogue with a host of different capital providers. We obviously have a handful of existing relationships, which are weighted towards sovereign wealth funds. I would say, in general, they are still very much open to put capital out, especially groups we are dealing with in the sovereign wealth world. In some ways, they see some of the market dislocation occurring in other parts of the market to be an opportunity for them to come in because they have significant amounts of capital that they've earmarked to invest in commercial real estate in the United States. I would say if there's any questions around that, it's around level setting on price expectations. And while they're still putting capital out today, I think they are most focused as we get into '23 that we might have a more stable, albeit maybe higher interest rate environment, which might lead to a more stable cap rate environment. And I think they're positioning themselves to put significant capital to work. We've been talking to them about these types of things. I would say the types of assets that they're most interested in are not too different than what they were interested in the past, broadly speaking, industrial, warehouse, multifamily. There's different segments within that, of course, within warehouse, cold storage, some people think of data centers as an outgrowth of that. Within other sectors, specialty sectors like student housing or life science buildings, perhaps medical office buildings, sort of subsectors within office they're interested in. But that's generally what we're seeing. I will tell you, away from the sovereign wealth funds, there's very much a feeling of, I don't want to say freezing but sort of waiting to get through this…

[Operator Instructions] Our next question will come from Kenneth Lee with RBC Capital Markets.

Wondering if you could just share your thoughts on how you view share repurchases within the context of capital allocation plans for RMR.

Sure. So in terms of returning share -- capital to shareholders, we have biased ourselves a little bit towards dividends over share repurchases. That's not to say that we couldn't do a share repurchase in the future. I would also say that we talked about this in meetings with prior investors and on calls, we're still very focused on maintaining significant liquidity to take advantage of opportunities that may present themselves. We are in a -- clearly, in a dislocated market environment. We're probably going to be there for some period of time. Whenever there's this type of dislocation, there's typically opportunities for companies, and we hope that there could be an opportunity for us to maybe expand our platform through some sort of strategic M&A that may present itself in this type of environment that may normally not present itself. And so we're just trying to, especially over the next coming quarters, stay pretty liquid. And so we can be in a position to trounce on those sort of opportunities if they present themselves. That's really how we're thinking about capital allocation. We currently have a regular dividend. It's well covered at around 50% of our, call it, distributable earnings. And so there could be opportunities to do something there. But in terms of specifically your question, stock buyback, it's not top of mind. It's not something I take off the table ever, but it's not top of mind of what we're thinking about today.

Got you. That's very helpful there. And then one follow-up. And this is just a follow-up on the question for the managed equity REITs, and you touched upon this. It sounds like some of the key factors that could drive potential improvements in the share prices in the near term for the managed equity REITs is going to depend on operational improvements in the REITs. Is this something that you view sort of like a multi-quarter kind of time frame? Just wondering if you could just talk a little bit more about a couple of like either milestones we can look forward to. Or what are you looking forward to help drive improvement in the managed equity REITs share prices in the near term?

Sure. So it's a combination of 2 things: improving operating performance as well as addressing some of the balance sheet issues at the REITs. Let's -- I can go each REIT and I'll do it very quickly. SVC, our biggest REIT, probably the furthest along in the recovery. We've reinstated the dividend. We're hopeful that we can increase that dividend going forward. I highlighted that the FFO payout ratio is very low. It's less than 40%. It's about 37% based on Q3 numbers, I believe. And there's a lot of room to grow that dividend. We -- and that's based on just seeing continued improvement in the operating performance of the hotels in that portfolio, which we are seeing and have been seeing for several quarters now. So that's sort of the furthest along. And as that continues to progress, I think that will lead to continued, hopefully, improvement in the stock price. As a management team, the most effective thing we can do to change the stock price performance is operate the companies really well. If we can operate them well and they can outperform on operating metrics, eventually, our belief is the share price will respond to that. And so that's what we're focused on. Touching on DHC, it's an operating issue. There, it's taking longer. The DHC, we have a senior living recovery that is taking longer than expected as an industry, but we also have some unique issues to our portfolio that we are addressing in terms of the operating performance of AlerisLife and how it's been performing on its portfolio it manages for DHC. There's been a lot of management changes at AlerisLife. In the last couple of quarters, there's been a lot of focus on writing the operations in that company. And I believe…

It appears there are no further questions. 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 all 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.