Release Date: November 12, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- The RMR Group Inc (RMR, Financial) reported fourth quarter results that were generally in line with expectations, with adjusted net income per share of $0.34 and adjusted EBITDA of $21.8 million.
- The company is seeing increased transaction activity and a more energized fundraising environment, with heightened interest from legacy institutional partners and potential new capital partners.
- RMR's real estate lending platform, Tremont Realty Capital, has originated $67 million in aggregate commitments for its private debt vehicle, expected to generate returns in the mid-teens.
- The RMR Residential platform is expanding, with the acquisition of a 240-unit garden-style community in Denver, showing increased rental rates as leases roll.
- RMR is actively assisting its managed equity REITs with operational and financial strategies, including significant leasing arrangements and strategic asset sales to improve liquidity and reduce leverage.
Negative Points
- The commercial real estate industry continues to experience an elongated fundraising cycle, posing challenges for RMR's capital raising efforts.
- Recurring service revenues decreased by approximately $900,000 sequentially, primarily driven by declines in Managed Equity REIT share prices and construction supervision fees.
- Adjusted earnings per share were adversely impacted by depreciation and amortization costs from the Denver multifamily acquisition and year-end tax rate true-ups.
- The company anticipates that recurring G&A expenses will increase to approximately $11 million next quarter due to higher third-party construction oversight costs.
- RMR's public managed REITs are experiencing a shrinking AUM through asset sales, which could lower base management fees in the near term.
Q & A Highlights
Q: When we look at your cash position, what percentage do you think you'll deploy in RMR Residential and other private capital AUM initiatives? How much do you need to retain for RMR operations?
A: A significant portion of our cash is available for investment in various initiatives. We are focused on pivoting the platform and seeding new investments. For general operations, we need to retain about $5 million to $10 million. We are generating around $90 million of adjusted EBITDA, with about $20 million available for growth capital after taxes and dividends.
Q: Regarding syndicating equity stakes like in the Denver acquisition, what's been the receptivity, and what percentage equity stake do you expect to retain?
A: We have seen increased interest from potential partners, especially since the Fed started reducing rates. We are optimistic about syndicating equity or getting funds off the ground, though the process is elongated. We expect to retain no more than 20% equity in these investments, likely less.
Q: How do you view the shrinking AUM of public managed REITs due to asset sales relative to potential upside from incentive management fees?
A: Our focus is on deleveraging and rightsizing the balance sheet of public vehicles, which should improve stock price performance over time. Although AUM may decrease, we hope to offset this with improved stock prices, benefiting both base and incentive management fees. This strategy may cause short-term pain but is the right approach for long-term value.
Q: Can you discuss the pipeline for RMR Residential and the private lending vehicle? Should we expect closures by year-end or is it a 2025 story?
A: The credit vehicle is likely a 2025 event for bringing in partners, though we are gaining traction. The residential pipeline is also expected to see more activity in early 2025, with increased interest from partners following recent interest rate cuts and elections.
Q: Are there additional loan and multifamily investments you're targeting? Is the current portfolio enough to attract investors for a larger venture?
A: We may add more loans to the credit vehicle, potentially reaching four loans. For Residential, we might make one or two more investments, but we are seeing significant interest, which may allow us to syndicate equity before closing. We are also exploring other strategies, such as industrial and retail, which may involve balance sheet investments.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
