Good morning. And welcome to the RMR Group Fiscal Third Quarter 2024 Earnings Conference Call. All participants will be in listen only mode [Operator Instructions]. Please note that 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 morning. And thank you for joining RMR's third 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. 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, August 2, 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 this morning. Yesterday, we reported third quarter results that were in line with our expectations, which included adjusted net income per share of $0.37 distributable earnings per share of $0.45 and adjusted EBITDA of $21 million. Our quarterly dividend remains well covered with a payout ratio of approximately 70%. We believe these results continue to underscore the durability of the RMR platform. As a highly scalable alternative asset manager RMR's recurring management fees has stability to our business for over 35 years. We have evolved throughout our history to changing industry conditions and market cycles, while generating strong cash flows with limited ongoing capital needs. Assets under management of $41 billion reflects a broadly diversified portfolio across all major real estate sectors with investments in both equity and debt, and managing both public and private vehicles. Adding to the foundational stability of the business, our balance sheet remains strong with substantial cash on hand and no corporate debt. At a macro level, over the past few years, valuations have declined across the U.S. real estate industry, as the Federal Reserve took aggressive action to combat inflation. Clearly, this dynamic has adversely impacted the enterprise values of our public clients, and as a result, weighed on RMR's based management fees. Fortunately, inflation continues to ease and there is once again growing investor consensus that the Fed will begin to reduce interest rates in the coming months. This favorable shift in sentiment bodes well for the real estate industry and our clients. Along those lines, over the past few months, we began executing on strategic initiatives to best position RMR to capture the significant opportunity that exists within the private capital markets, with a near term emphasis on real estate credit and multifamily…

Thanks, Adam, and good morning, everyone. For the third quarter, we reported adjusted net income of $0.37 per share, adjusted EBITDA of $21 million and distributable earnings of $0.45 per share, all of which were in line with our expectations for the quarter. Recurring service revenues were $49 million, a decrease of approximately $700,000 sequentially, primarily due to expected declines in management fee revenues from our managed equity REITs, partially offset by seasonal improvements in Sonesta related management fees. Next quarter, we expect recurring service revenues to be down slightly at an expected range of $47.5 million to $49 million. This range assumes enterprise values at our managed equity REIT stay at their current levels and construction volumes slow further as our clients thoughtfully manage capital spending. Turning to expenses. Cash compensation was approximately $45 million an increase of $863,000 sequentially, which mainly reflects the impact of a favorable bonus true up last quarter offset by seasonal vacation usage. Looking ahead to next quarter, we expect cash compensation to decline to approximately $44 million. This projected decline reflects a tough decision we made in June in light of the continued challenges within the real estate sector to selectively make headcount reductions that will generate $4 million in corporate level annual cost savings. Consistent with this quarter, we expect our cash reimbursement rate to remain at approximately 50.5% going forward. Recurring G&A expenses this quarter were $11.2 million, which represents our expectation for next quarter as well. I would also like to highlight the expected financial impacts to RMR of the strategic transactions Adam highlighted earlier. First, as it relates to the Denver value add multifamily investment, while RMR owns 100% of this asset, we are expecting the investment to contribute approximately $250,000 per quarter in pretax income and over $750,000 in adjusted EBITDA per quarter on a run rate basis or the equivalent of a 12.5% cash on cash return. Secondly, as it relates to the mortgage loans we closed in July, we expect those loans to contribute approximately $600,000 in pretax income and adjusted EBDITA per quarter on a run rate basis, which represents cash-on-cash returns of approximately 14%. Aggregating these collective assumptions, next quarter we expect adjusted earnings per share to range between $0.37 and $0. 39 per share using a share count of 16,500,000 shares, adjusted EBITDA to range from $21 million to $22 million, and distributable earnings to range from $0.47 to $0.49 per share. In closing, we ended the quarter with over $200 million in cash and no corporate debt. After giving consideration to the strategic transactions outlined earlier and the fact that annual bonuses are paid each September, we still expect to end next quarter with approximately $150 million of cash providing us ample flexibility to continue investing strategic growth initiatives. That concludes our formal remarks. Operator, would you please open the line to questions?

Thank you. [Operator Instructions]. Our first question today will come from Bryan Maher with B. Riley Securities. Please go ahead.

Thanks. Just a couple from me this morning. When you talk about the 125 deals that are in various stages of looking at, can you maybe break down with a little bit more granularity what type of deals those are maybe by asset type, region, the country etc.?

Sure, Brian. Good morning. Those 125 deals generally fit the criteria of value add multifamily investments, similar dynamic or characteristics to the investment we made in Denver. They typically they are primarily in the Sunbelt markets, again leveraging the expertise of the RMR Residential platform, which is that's where they have their $5 billion plus of assets that they are currently managing sort of throughout the Sunbelt. So it's mostly value add. It's Sunbelt multifamily, typical garden style community, real apartment complexes.

And what is the motivation of the sellers that you're coming across on these deals?

A lot of it can be debt maturity can drive a lot of it. That's actually what drove the transaction that we put on our balance sheet and really created in some ways an opportunity because we had to close on a very specific shortened timeframe in order to meet the sellers need to repay debt and that actually opened up an opportunity for us. That's the most typical sort of driving factor. The other thing is, it could be an -- it could be a property that is not quite through its business plan to renovate and improve the operations or the cash flow and the landlord is becoming cash constrained for some reason and so they're looking to offload the property sort of earlier than they probably would have liked to because they've become cash constrained. So sort of little bit of forced selling, I would say is what you're seeing. We do see part of the challenge for the team is that there's a lot of potential sellers that are exploring the market meaning they get BOVs, they hire brokers, they explore, they get first round bids and even get second, or third round bids and then they pull back. They decide not to transact. So unfortunately, we're it's also hard to know if somebody actually will transact when they put a property out.

Thanks for that. Just shifting gears, I don't think I heard you say anything about ILPT in your prepared comments. I'm not sure if that was intentional or not, but it would seem to me with the sharper decline in interest rates fairly recently and including today that that's really despite the fact that we know it's over levered and we're waiting for a JV opportunity, etc., but it seems to me like sharply lower interest rates on an entity that's got great fundamentals, great assets, but just kind of suffers from the leverage and the interest expense, that that's got to start to tee up maybe some opportunity on that managed to read. Do you have any thoughts there that you could add?

Yes. I largely agree with everything you said, Bryan. I think lower -- maybe all of our REITs, all of our businesses are going to benefit from lower interest rates, but you're right to specifically highlight ILPT. You're right. We didn't talk about in the prepared remarks, but you're right to point out that lower interest rates will definitely have an outsized impact on that company because of the high amount of leverage it has and debt it has. As those interest rates come down, it really will have a positive impact on not only the cash flow, but our ability to refinance out of the existing debt in more favorable terms. So you're right that company ILPT has great tailwinds, Fundamentals are very strong. Occupancy is very high, rolling up rents as they come due. So we're -- it's a company that is naturally deleveraging just from rent roll and increasing cash flow from that and if you can add an extra boost of lower interest rates on top of it, you're right that company is well positioned to benefit maybe in an outsized manner from lower interest rates.

Thanks. And just last for me, maybe for Matt. When I look at the adjusted EBITDA margin on Page 20 of the presentation, we see this kind of decline from 49% to 41%. Do you think that lower 40s is the new run rate on adjusted EBITDA margin or are the efforts that you've taken with some headcount reduction and other things going to drive that back up to some degree? And that's all for me.

No, Bryan, we definitely want to get back to what we're used to in the 50% range. I think the cost containment measures will clearly help, but the big driving force right now is the RMR Residential business and the acquisition we did last year is a breakeven business right now. So you've got $5 million to $6 million of revenue each quarter that is zero margin business and that's driving those margins down to the low 40s right now. So I'm very hopeful this is temporary as markets rebound and transaction volumes come back later this year, that that business will return RMR.

Perfect. Thank you.

Our next question will come from Ronald Kamdem with Morgan Stanley. Please go ahead.

Hey, just two quick ones for me. Back to the multifamily pipeline, the 135 deals, but any sort of thoughts on just in terms of dollars out the door, what that could look like this year, what you're going to keep on balance sheet? And I think you said in the opening comments, returns are sort of in the teens. Is that sort of the right range that we should be thinking about going forward? Thanks.

Sure. So with regards to the multifamily investments going forward, yes, in terms of the return profile, those they are value add investments where we expect to get outsized returns on because we're adding value in terms of repositioning the property and getting higher rents, and so I think that's clearly sort of the sweet spot for us and as Matt highlighted on a cash-on-cash basis, it's generating on an EBITDA 14% to the bottom -- to contribution to RMR as a whole. In terms of the pipeline, the 125 deals, it's a little hard to peg how many we're going to be able to do this year. It's a little bit -- if we have to continue to put them on our balance sheet and then syndicate afterwards, the pace will be slower than if we are fortunate enough to be able to syndicate the equity prior to putting it on our balance sheet and that might be a very nuanced answer, but basically what happened with the Denver deal and I will give you some context, is we really had an opportunity because I said before in answering the other question that we had debt coming due. So we had a very motivated seller. We had a very fixed timeframe. Because of that, we had a shortened period of time to syndicate the equity and so we ended up -- because we thought it was such a strong investment, we just said, look, let's be opportunistic. Let's just take it down on our balance sheet. We'll syndicate afterwards. That uses up capacity at RMR. We're confident we'll be able to syndicate it, but going forward, I would imagine that most deals will put will be syndicated before we put it -- before we actually close. So the more we're able to syndicate deals prior to closing, the higher the volume. We end up having to close them like this and it might be that we end up closing one or two more deals having to use our balance sheet because of just the natural constraints of the balance sheet and how much cash we have, we won't be able to do as much. So I would put the range and this is going to be a wide range. It's somewhere between two and 10 more deals that we could do, depending on whether we're putting them on balance sheet and then syndicating afterwards or whether we are able to syndicate it prior to closing. That really drives the velocity more than anything else.

Helpful. And then if I could switch gears on the lending ventures, two deals $40 million and $27 million. Maybe can you any comments on the pipeline there and sort of opportunities? And again same question just in terms of getting volume through to the door, what's a good sort of run rate we should be thinking about?

Yes. So that's a little bit different situation. What we're doing there is we're actually seeding a fund that we are actually out in the market talking to LPs about and we think since this is our first private fund focused on -- lending, real estate lending. Given it's a crowded market for lending and we're tuned to what's happening in the market, what differentiates us is that we actually have a portfolio of loans that an investor can underwrite and invest into. We think this will benefit us and be make it more likely that we are able to raise the money and not only raise the money, but raise it faster. I give you all that history because we don't need to have a large pool of loans on balance sheet. I think we are thinking somewhere between two to four. We already have two. So maybe there is another two we put on the balance sheet, which again very focused on seeding, having a seed portfolio that LP investors can then underwrite and then accelerate the fundraising around that strategy. So I don't see us -- the short answer is, I can't imagine it will be more than two more loans and it may just be one more loan. We end up putting on the balance sheet over the next six to nine months.

Helpful. That's it for me. Thank you.

This will conclude our question and answer session. I'd like to turn the conference back over to Adam Portnoy, President and Chief Executive Officer for any closing remarks.

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

[Operator Closing Remarks].