Good afternoon, and welcome to the RMR Group Fiscal Second Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Kevin Barry, Senior Director of Investor Relations. Please go ahead.

Good afternoon, and thank you for joining RMR's Second Quarter of Fiscal 2024 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. First, I would like to note that management will not be answering questions about the debt exchange offer that its client, Office Properties Income Trust, announced last week as the offering period is currently open. I would also 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 8, 2024, 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, distributable earnings and adjusted EBITDA. A reconciliation of net income determined in accordance with U.S. generally accepted accounting principles to these non-GAAP figures can be found in our financial results. I will now turn the call over to Adam.

Thanks, Kevin, and thank you all for joining us today. Since our last earnings call, we have continued to advance our business and support our clients through the current headwinds facing many aspects of commercial real estate. Overall real estate transaction volumes have remained subdued for over a year, largely a result of an increase in interest rates, persistent inflation and uncertainty regarding whether the Federal Reserve will cut interest rates later this year. While interest rates may remain higher for longer, we do remain cautiously optimistic about an improving market environment later this year and into 2025. The resiliency and strength of the RMR platform over many years and through numerous business cycles, gives us a solid foundation to continue creating long-term value for all our stakeholders. Last night, we reported second quarter results that reflect both revenue growth driven by our recent residential platform acquisition and investments we are making to ensure RMR remains well positioned to take advantage of growth opportunities in the future. This quarter, we generated distributable earnings per share of $0.51 and adjusted EBITDA of $22.7 million. With nearly $200 million of cash and no corporate debt, we have ample flexibility to continue making the necessary investments to further our strategic objectives. The strength of our balance sheet and the durability of our cash flows also led to our recent announcement regarding an increase to our recurring dividend by 12.5% to $0.45 per quarter which remains well covered in a 64% payout ratio. We ended the quarter with AUM of over $41 billion, broadly diversified across all major commercial real estate sectors. While perpetual capital accounts for approximately 68% of our AUM, over the past 4 years, we have strategically focused on increasing our private capital AUM from essentially 0 to more than $13…

Thanks, Adam, and good afternoon, everyone. For the second quarter, we reported adjusted net income of $0.39 per share, adjusted EBITDA of $22.7 million and distributable earnings of $0.51 per share. This quarter's results were in line with our guidance and reflect the balance of cost containment and necessary platform-level investments to support long-term growth. This quarter, we continued the integration of the RMR Residential platform and remain on track to identify the synergies outlined at the time we announced the acquisition. The realization of the synergies and the related impact on our financials will occur in varying periods over the next 2 years. Given the expectations around multifamily capital markets activity that Adam highlighted earlier, we expect RMR Residential to remain largely breakeven through at least next quarter. Turning to this quarter's results. Recurring service revenues were $49.6 million, an increase of $3.4 million sequentially and in line with our expectations. The sequential increase reflects the full quarter impact of RMR Residential, partially offset by declines in construction management fees as a result of slowing construction spend at our clients. Next quarter we expect recurring service revenues to remain relatively flat at an expected range of $48 million to $50 million. This estimated range assumes enterprise values at our managed equity REITs stay at their current levels, normal seasonal improvements in Sonesta related management fees and consistent levels of construction spend. Cash compensation was approximately $44 million, which includes the full quarter impact of RMR Residential as well as the adverse impacts of payroll tax and 401(k) contributions resetting on January 1. Both of which were partially offset by strategic restructuring actions taken over the last 12 months. Looking ahead to next quarter, we expect cash compensation to remain at the same levels and our cash reimbursement rate to…

[Operator Instructions] Our first question is from Bryan Maher with B. Riley Securities.

Just two for me today. I was hoping you could elaborate a little bit more on what you were talking about as it relates to the residential and the uptick in deals that you're seeing? And how specifically that feeds through and will benefit RMR over the next couple of years?

I'll talk about it generally, and I'll let Matt maybe get a little bit more details on how it can affect the financials. But generally speaking, generally over the last, I'd say, 2 to 3 months, it has been an uptick in, what I would say, marketing activities in terms of transaction or deals coming to market, especially -- that's actually happened across the board, but most pronounced in the residential area or multifamily space and specifically in the markets that we're targeting throughout the Sun Belt region. There's a lot of reasons maybe for why that's happening. There hasn't been a lot of deal activity for several quarters now. I think there's -- I think, buyers and sellers are starting to converge on pricing. I think sellers are getting a lot of pressure from, let's say, what's going on in the lending market. Broadly speaking, I think buyers are getting some pressure. There's a lot of money on the sidelines and some buyers are anxious to put that money to work before their investment period ends. So I think they're starting to be a convergence on pricing. We do expect to see more transaction volume to occur. We expect we will actually engage in transactions throughout the calendar year. I'll let Matt talk about what that could mean for the company's financials.

Yes. And Bryan, getting deals done are really the stimulus we need to get residential beyond breakeven. It is a platform built to handle much more AUM than the $5.5 billion it's currently managing. So in terms of the way the business is structured today, every deal should generate an acquisition fee of about 62 to 65 basis points. So just getting a deal done has a very sizable impact to RMR's P&L because we'll recognize those acquisition fees immediately. And then obviously, this property management that comes with that new deal, the way I like to think about it between property management and construction, every $1 billion of new AUM in the residential platform should equal about $1 million of new property management and construction management fees per quarter. So deal volume is really the thing we need to start to see come through. And a lot of that will flow to the bottom line. And I think what Adam highlighted, we hope by the back half of this year, we'll see some of that come through because we've clearly made the investments in people, getting the right acquisitions professionals in place and have a cost structure to support that growth when it starts occurring.

That's really helpful. And the second question for me and understanding fully that you can't comment on the OPI deal, but you do see a lot of transactions and financing activity, can you speak broadly as to what you're seeing in the commercial real estate financing market currently kind of across categories and how that can positively impact your managed REITs over the next years? And maybe specifically touch upon CMBS.

Sure. So I'll start with CMBS. I would say the secured market in especially CMBS market, broadly speaking, for well-leased assets across segments is open. It's open to do through conduits where you can do one-off transactions. You can also do large single issuer transactions as well. So generally, markets are open, they're more expensive than typically what people have been paying on their debt. So if they're refinancing debt, you're paying more for it, but the market is definitely open. Generally speaking, what you see in the capital markets in terms of debt availability and financing largely trends overall sentiment, people are more open to financing apartments, multifamily, industrial, and then there's pockets of other sort of niche assets around that, life science buildings, medical office buildings, hotels, believe it or not, are very much somewhat in favor in the investment community. Probably the toughest market or toughest segment defined financing is in and around general multi-tenant office buildings. But even there, if it's the right asset, newer building, well-located, well-leased, there is financing available. It's expensive, but it's available. So markets are open. Everything in general, it just costs more.

[Operator Instructions] The next question is from Mitch Germain with Citizens JMP.

Matt, I appreciate the comments on residential and profitability or AUM growth and acquisition fees. I guess I'm trying to gain insight. The near-term profitability of residential is driven by additional synergies and acquisition fees, meaning the recurring income is already recognized in the numbers today, if you don't get any more AUM growth? Is that the way to think about it?

Yes, the way I would think about it, the AUM we have today pays for the business, but that's about it. And the way their business works as value-add deals season, they ultimately do get sold. So it is critical, the acquisitions activity pick back up later this year.

Got you. And Adam, we've been, I guess, you've got a full quarter of the team in the RMR platform. I'd love to get some initial thoughts about kind of where things are versus your original expectations?

So I think we're very pleased with the integration of the folks from RMR Residential into the broader RMR platform. And I think we're very pleased with many of the synergies that we planned on realizing and acquiring the business, we are clearly behind on the revenue side, Matt's alluding to it in terms of we need more transaction volume. I think everyone is acutely focused on it. And I think, unfortunately, it's a little bit or maybe materially impacted by just market environment. We are working really hard and the acquisitions team that's focused on residential is working really hard at finding deals and sourcing them. I am optimistic that we will be able to close on transactions in the second half of this year. So overall, I'm pretty pleased. But yes, there's no question from a revenue side, we're behind where we'd want to be. But on the cost side, I think we're right where we thought we'd be. And I think from an integration, just generally, social issues, I think, are great. I mean I think we're well integrated. I think the team is working well -- the teams are working well and integrated well. So that's how -- that's how I'm looking at it, and I feel good about the business going forward.

Great. Last for me. I recall about -- must have been like probably 2017, '18. Adam, you tried to incubate a similar type of vehicle for the office sector, given your capability and the fact that you had some office assets that were held outside of the managed REITs. I'm curious how this is a little bit different and how you're approaching this new debt vehicle differently?

Yes. So at the time, you're right, you have a good memory, Mitch, in terms of we tried something like this. It's similar, 2 different -- 1 different asset class, obviously, different time. Second, we have -- we're working with a very reputable placement agent on this capital raise that we're engaged in right now. We've also learned a lot, including from that exercise that you're mentioning from 6, 7 years ago about how is the best way to organically create a fund and I think we've learned from all those experiments and all those twists and turns, especially what we did several years ago that you're referencing. I feel very good about our ability to be able to raise this capital. There was also the biggest -- maybe the biggest difference is the return profile. We were trying to raise, at the time, a core office fund, core, meaning high single-digit return IRRs. Here, what we're talking about on a levered base -- on a levered basis, we're talking about mid-teens IRRs. And so it's a different investment profile, different return expectation, which is partly based on what we learned in talking to the market. I feel very good about our ability to execute on this. Timing, how long it's going to take, that's a little bit of a wildcard. I can't -- could it be one quarter, could it take 4 quarters? I don't know until we actually get all the money in, but I'm confident we will raise money, is the best way to say it. And I wouldn't be putting the RMR balance sheet at use here unless I have some pretty strong conviction that we were able to use it to start one of these funds.

The next question is from Ronald Kamdem with Morgan Stanley.

Great. Just a couple of quick ones for me. Just staying with the sort of capital raising for Tremont, you talked about sort of $100 million. Just trying to get a sense of what the opportunity set, what the pipeline is, and what's -- is there sort of a target? Is this something that could be $200 million, $300 million? What's sort of the thought of how this is going to evolve over time?

Sure. So just to be clear, we talked about up to $100 million gross investment that will use our balance sheet. It's a little confusing when I say that, we're going to -- that's inclusive of leverage. We're going to use leverage on these loans. So let's just use the round number, $100 million of our gross investments, $70 million of which will be debt, $30 million of which will be equity in the loan or use of our cash. That is to seed the portfolio or a fund that is not the total fund itself. We expect that the fund itself from an equity perspective will be $200 million to $400 million in equity, use leverage on that, and you're talking about total investments of around, call it, $1 billion, give or take. So that -- I just want to be clear, that's what we're trying to do with the balance sheet to see the portfolio, but the ultimate size in this first fundraise, I should point out, is about $1 billion. In terms of the pipeline, again, we feel very good about the pipeline. Yes, there is less transaction volume going on in the marketplace today. As a result of less transaction volume, there are less loans being originated. Fully half of what you used to see in originations of loans was new acquisition financing. Well, here, there's not a lot of new acquisition financing. There is some, but not much. It's a lot of refinancings that we're underwriting. But from a risk return perspective, we're making first lien secured mortgages against performing real estate that's going to go through a value-add or a light value-add repositioning. And it doesn't really matter what type of real estate because we'll lend against almost anything and that type of investment introduces mid-teen returns. The pipeline is very strong. It's -- and we also think we differentiate ourselves in the marketplace. Look, there's a lot of folks that are talking about private credit and private credit real estate. What really differentiates us in the marketplace is we are a real estate operating platform. So we have perhaps a more robust underwriting of the loan itself. But also we are able, given our scale to be much more middle market focused. So our average loan size could be $20 million, $30 million versus many of the larger players are focused on, let's say, $100 million larger loans. So when we play in what we call that middle market tier, there's a tremendous amount of transaction volume and not as many players. So we don't have as much competition and actually leads to a little bit higher returns for the investors. So yes, we feel good about the pipeline, we feel good about the investment opportunity we're presenting to potential LPs.

Great. And then my second one was just going back to RMR Residential. I think you made some comments about dry powder potentially sort of opportunities in the second half of the year and tracking 100 deals. Just can you talk a little bit about sort of the return profile of those deals? And is there any sort of thematics across those 100 deals and the type of properties you're looking at?

Sure. So we're targeting, again, sort of value-add turnaround or like turnaround properties in the multifamily space, so apartment buildings in the Sun Belt region where we currently operate. The return hurdle -- when I -- when we referenced that 100 deals in the pipeline, we're talking about that type of characteristic deal that is going to hopefully produce a mid- to high-teen IRR for the investor. So that's a general outline of the type of deals we're looking at. And when I said 100, they serve all in mixed fashion meet those criteria in some way.

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.