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Edited Transcript of RMR earnings conference call or presentation 22-Nov-19 7:00pm GMT

Q4 2019 RMR Group Inc Earnings Call

NEWTON Nov 25, 2019 (Thomson StreetEvents) -- Edited Transcript of RMR Group Inc earnings conference call or presentation Friday, November 22, 2019 at 7:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Adam David Portnoy

The RMR Group Inc. - CEO, President, MD & Director

* Matthew P. Jordan

The RMR Group Inc. - Executive VP, CFO & Treasurer

* Timothy A. Bonang

RMR Advisors LLC - SVP and IR Officer

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Conference Call Participants

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* Bryan Anthony Maher

B. Riley FBR, Inc., Research Division - Analyst

* Dean M Stephan

BofA Merrill Lynch, Research Division - Analyst

* Kwun Sum Lau

Oppenheimer & Co. Inc., Research Division - Associate

* Mitchell Bradley Germain

JMP Securities LLC, Research Division - MD and Senior Research Analyst

* Ronald Kamdem

Morgan Stanley, Research Division - Research Associate

* William R. Katz

Citigroup Inc, Research Division - MD

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Presentation

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Operator [1]

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Good day, and welcome to the RMR Group Fourth Quarter 2019 Financial Results Conference Call. (Operators Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Tim Bonang, Senior Vice President. Please go ahead.

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Timothy A. Bonang, RMR Advisors LLC - SVP and IR Officer [2]

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Thank you, and good afternoon, everyone. With me on the 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 performance for the fourth quarter and full year of fiscal 2019. They will then take questions.

I would like to note that the recording and retransmission of today's conference call is prohibited without the prior written consent of the company. Also note that 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 22, 2019, 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, or SEC, which can be accessed from our website, rmrgroup.com, or the SEC's website. 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 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 earnings per share, adjusted EBITDA and the calculations of adjusted EBITDA margin can be found in the news release we issued this morning.

And now I would like to turn the call over to Adam Portnoy to begin our quarterly review. Adam?

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Adam David Portnoy, The RMR Group Inc. - CEO, President, MD & Director [3]

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Thanks, Tim, and thank you for joining us this afternoon. For the fourth quarter of fiscal 2019, which ended on September 30, we reported adjusted net income of $9.6 million or $0.59 per share, adjusted EBITDA of $28.6 million and adjusted EBITDA margin of 60.2%, our highest reported margin since we became a public company in 2015. In addition, we ended the quarter with gross assets under management of $32.8 billion, a $2.7 billion increase from a year ago. This quarter, over 80% of our revenues continued to come from our 4 managed equity REITs, all of which represent permanent capital vehicles with 20-year contractual arrangements. These contracts continue to reinforce the alignment of interest between our client companies and RMR. Specifically, the low share prices of our managed REITs is causing our recurring revenues to be less than they could be if our revenues were based on gross AUM at these REITs. Said more simply, while our gross AUM stands at $32.8 billion, our fee-paying AUM was $26 billion at the end of the quarter. As a result, we are focused on improving the share prices of each of these entities, which in turn will drive additional recurring revenues and possibly generate incentive fees for RMR in the future. Furthermore, any additional revenues we generate from increasing our managed REITs' share prices will have 100% flow-through to our cash flows.

From an operations perspective, this quarter, we remain very busy with our organization arranging approximately 1.3 million square feet of leases on behalf of our client companies with a weighted average lease term of 10.6 years and a weighted

average roll up in rent of 5.8%. We also directly supervised approximately $43 million in capital improvements in our client companies during the quarter. There's been a lot of activity at our client companies since our last earnings call, and I would like to bring up -- bring you up-to-date on some of the more significant matters.

In September, HPT announced the completion of its acquisition of a net lease portfolio of 767 service-oriented retail properties from Spirit MTA REIT, or SMTA, for $2.4 billion. At the same time, HPT changed its name to Service Properties Trust, which, we believe, better captures the nature of its tenants businesses and represents its broader portfolio composition of hotels and net lease service and necessity-based retail properties. It now trades on the NASDAQ under the ticker SVC.

In connection with the SMTA transaction, SVC committed to sell approximately $800 million in assets, comprised of $500 million of the properties acquired from SMTA and $300 million in lower-performing hotels. Subsequent to quarter end, SVC has already sold, or has under agreement to sell, approximately $500 million in assets.

In October, ILPT obtained a $350 million 10-year mortgage loan secured by 11 of its mainland industrial properties. This financing was a fixed rate, interest-only loan at a very attractive 3.33% interest rate. To give you a sense of how attractive this financing was for ILPT, the interest rate on this loan was lower than the floating rate interest rate under ILPT's current bank credit facility. This loan is a precursor to hopefully completing a joint venture transaction that ILPT currently expects will occur by the end of calendar year 2019.

Since the beginning of the year, OPI has been executing on a disposition program to address its leverage levels. Since January 1, OPI has sold or has entered agreements to sell 60 properties for $731.5 million at an average cap rate of 5.6%. Additionally, OPI has eliminated more than $170 million of capital costs over the next 5 years as a result of these asset sales. With this successful repositioning program largely behind it, OPI has begun transitioning its focus towards a capital recycling program to accretively grow its portfolio in 2020.

From an operating perspective, OPI continued its leasing momentum this quarter. OPI entered new and renewal leases for 759,000 square feet and consolidated occupancy increased 170 basis points sequentially to 93.3%. OPI's dividend rate also remains comfortably below its targeted 75% CAD payout ratio. SNH is also engaged in the disposition program that will reduce its financial leverage and best position its portfolio for the future. The disposition program commenced in early April in conjunction with the announcement of SNH's restructuring with its largest tenant, Five Star Senior Living. The final closing of this transaction, which includes converting all the triple net lease communities operated by Five Star to management contracts, is expected to be completed on January 1, 2020.

The interest in the properties SNH has been marketing for sale has been robust and exceeded our expectations to date. Thus far, SNH has approximately $564 million of assets sold or under agreement to sell and an additional $180 million of assets in first and second round offer stages. SNH remains on pace to have approximately $900 million of assets sold or under agreement to sell by the end of calendar year 2019. Across our client companies, as of September 30, in total, we have $2.1 billion of anticipated property sales we expect to close by midyear 2020. While these asset sales will reduce our gross AUM, our fee-paying AUM is unlikely to decline because of them and may actually increase as a result.

Turning to our efforts to expanding and growing the RMR platform. We continue to spend time focused on expanding our private capital asset management business. Our leadership team continues to develop relationships with large sources of private capital, such as sovereign wealth funds as part of both identifying possible joint venture opportunities at our client companies and possible separate managed account opportunities for RMR. In addition, we continue exploring opportunities to accelerate our private capital fundraising capabilities through possible M&A activities. We are engaged in discussions with private real estate groups that could result in us acquiring a firm that may help accelerate the growth of our private capital asset management business. That said, these discussions continue to remain preliminary in nature and no transaction's close to being agreed.

I'll now turn the call over to Matt Jordan, our Chief Financial Officer, who will review our financial results for the quarter.

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Matthew P. Jordan, The RMR Group Inc. - Executive VP, CFO & Treasurer [4]

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Thanks, Adam, and good afternoon, everyone. As Adam highlighted earlier, we reported adjusted net income of $9.6 million or $0.59 per share this quarter. In addition to adjustments for unrealized losses on our TA investment and transaction-related costs, adjusted earnings per share this quarter includes an add-back of $0.03 per share, due to bonus payments coming in higher than our estimated accrual rates throughout the year. Total management and advisory service revenues were $45.2 million this quarter, which represents a $4.8 million decrease on a year-over-year basis, primarily from lower business management fees at OPI and SNH, partially offset by acquisition-related fee growth at ILPT.

On a sequential quarter basis, revenues increased approximately $700,000 due to acquisition-related fee growth at FCC and increased construction management fees. For the first quarter of fiscal 2020, we are projecting total management and advisory service revenues to be approximately $49 million based on current REIT share prices, projections regarding dispositions and estimated capital spend. This projection includes the impact of the SMTA portfolio acquisition, which we expect will result in an approximately $12 million of incremental annual revenue on a run rate basis.

For the quarter ended September 30, 2019, all our managed equity REITs, except for ILPT, are currently paying base business management fees on a market capitalization basis. As Adam highlighted earlier, our fee-paying AUM is almost $7 billion lower than our gross AUM, resulting in a lost revenue opportunity of approximately $35 million annually. As our REITs execute on their strategic repositioning efforts, fee-paying AUM may increase and allow us to recover portions of this lost revenue.

As it relates to incentive fees, if October 31 had been the end of the measurement period, we would have earned approximately $4 million in incentive fees on a full year basis from SVC, as it relates to the measurement period that ends on December 31, 2019.

Turning to expenses for the quarter. Cash compensation of $29 million this quarter represents an increase of $3.1 million on a year-over-year basis. The year-over-year increase is primarily driven by headcount additions, merit increases, and the bonus compensation adjustment I discussed earlier. In aggregate, fiscal 2019 bonus compensation was approximately $29 million, an overall decline of almost $2 million compared to the prior year due to executive retirements over the last 12 months.

Looking ahead, we expect cash compensation to be approximately $30.5 million in the first quarter of fiscal 2020 as a result of annual merit increases that took effect October 1, staffing associated with the SMTA acquisition and bonus inflation. It's important to note that we will continue recovering approximately 45% of these costs from our client companies.

Equity-based compensation this quarter includes $1.2 million related to RMR share awards and $3.5 million related to client company share awards. In September, RMR made annual share grants to officers and employees that vest in 5 equal installments, with the first tranche vesting at grant date. In this quarter's earnings release, we've added a disclosure regarding expected equity-based compensation expense over the next 4 years for unvested RMR shares at September 30, 2019.

G&A of $6.6 million represents a decrease of approximately $300,000 on a year-over-year basis and approximately $1 million on a sequential quarter basis. The sequential quarter decrease is primarily driven by annual share grants to our directors of approximately $800,000 last quarter. Going forward, we expect G&A costs to trend closer to $7 million per quarter. Based on our expectations for recurring revenues and cash compensation, we expect adjusted earnings per share to be between $0.57 and $0.60 per share and adjusted EBITDA to be between $27.5 million and $29.5 million next quarter. We ended the quarter with approximately $358 million in cash, and we continue to have no debt. As a reminder, our September 30 cash balances have historically represented our lowest cash levels as annual bonuses are paid each September. Management and our Board of Directors continue to believe that our balance sheet leaves us well positioned to assess strategic opportunities for future growth.

That concludes our formal remarks. Operator, would you please open the line to questions.

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Questions and Answers

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Operator [1]

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[Operators Instructions) Your first question today comes from Owen Lau of Oppenheimer.

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Kwun Sum Lau, Oppenheimer & Co. Inc., Research Division - Associate [2]

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First of all, I have a modeling question. I think, Matt, you just mentioned the EPS guidance, $0.57 to $0.60. And then I think you also disclosed that your 2019 pro forma adjusted EBITDA was $140 million. But based on my math, all else being equal, your 2020 full year EPS should be about to $2.90, and the consensus is still at $2.23 for your 2020 number. I mean I just want to get a better sense of your synergy from SMTA portfolio. Does the consensus still underestimate your earnings power for 2020? Could you please add more color on that?

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Matthew P. Jordan, The RMR Group Inc. - Executive VP, CFO & Treasurer [3]

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Yes. Well, first, let me just clarify. On adjusted EBITDA, our guidance is $27.5 million to $29.5 million for next quarter. So on a run rate basis, we'll probably be somewhere between $110 million and $120 million. Just -- I thought we might have heard you say $140 million. In terms of...

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Kwun Sum Lau, Oppenheimer & Co. Inc., Research Division - Associate [4]

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$140 million.

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Matthew P. Jordan, The RMR Group Inc. - Executive VP, CFO & Treasurer [5]

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Yes. In terms of -- for EPS, in terms of the full year, we would agree with you. And we highlighted extensively in our prepared remarks that there is clearly lost revenue opportunity that we believe if the repositioning efforts take hold this year, you should see the revenue number that most folks are projecting should be exceeded, never mind any potential M&A accretion that could come. That being said, if all things stay flat where they are today, current REIT prices offset to some degree by wage inflation and those headwinds, $2.23 is not unreasonable. But we clearly believe that the repositioning efforts and some of that lost revenue is clearly recoverable or should be recoverable over the next 12 months.

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Kwun Sum Lau, Oppenheimer & Co. Inc., Research Division - Associate [6]

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And then follow-up on that. The additional or incremental expense you would add to surface your SMTA REIT portfolio. I think you were assuming the current RMR adjusted EBITDA margin by 56% in the past. But now your adjusted EBITDA margin is like 60% or so. Can you talk about your progress of adding staff to service that portfolio? And is there any lever you can put to kind of make the adjusted -- incremental adjusted EBITDA margin better?

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Matthew P. Jordan, The RMR Group Inc. - Executive VP, CFO & Treasurer [7]

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Good question, Owen. The 60% margin, while something we're very proud of, on a steady-state basis, will probably stabilize somewhere in the high 50s. We are still staffing up for Spirit. That -- those revenues should clearly be more profitable than some of our historical relationships. But we're also going to be facing, over the next 12 months, as I highlighted in my prepared remarks, wage inflation at both the salary level and the bonus level as well as filling some open positions right now that will mitigate keeping those 60% margins in future periods.

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Kwun Sum Lau, Oppenheimer & Co. Inc., Research Division - Associate [8]

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And then just final question for me. I think, Matt, you also mentioned your incentive fee. It's estimated to be $4 million in 2019. I think there was a substantial turnaround. And can you talk about the magnitude -- or if you can talk about, what is the estimated incentive fee going into 2020 if -- or everything else is equal, the stock price and the index price stay the same.

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Matthew P. Jordan, The RMR Group Inc. - Executive VP, CFO & Treasurer [9]

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So the $4 million is SVC, heading into 2020, and again, there's a long way to go, SVC would also probably be the only one of our client companies. As of today, that would have a high probability of an incentive fee. Looking out to 2021, I think we are already starting to see some of the positive impacts of the repositioning at OPI. But that's still a very long way away. So right now, we're focused on this calendar year. And we're pleased to see where SVC is trending.

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Operator [10]

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The next question today comes from Mitch Germain of JMP Securities.

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Mitchell Bradley Germain, JMP Securities LLC, Research Division - MD and Senior Research Analyst [11]

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I guess, Adam, you talked about some M&A in the asset management sector. And I'm curious if what you're targeting is complementary to the business lines that you are already in? Or does it mainly bring you into new business lines?

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Adam David Portnoy, The RMR Group Inc. - CEO, President, MD & Director [12]

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Great question, Mitch. We -- as we've been looking at lots of different things over the -- more than a year now, I would say the focus has become -- if you look at our existing portfolio of assets that we manage, I think most people would call it a core portfolio, stable core real estate. And so thinking about that, I think the most complementary type of group we would buy would have a large component. if not all of its components, be focused on core real estate. So it would be very complementary to what we do. I think what we'd be most focused on is how they access their capital, where they get their LPs, where the LP money comes from and is it true LP money and sovereign wealth money. I think that's sort of the focus of the M&A discussions that we're having and the most attractive groups that we find attractive. In terms of asset costs, the only thing I will say the obvious hole in our portfolio, we touch all types of commercial real estate except for multifamily in a material way. And I think everyone that we have been talking to has a significant presence or some presence in multifamily. So that would be complementary, meaning we'll be filling out sort of a hole that we have in terms of the type of assets we invest in. So I think that sort of gives you a flavor of how we're thinking about it and the things we're focused on.

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Mitchell Bradley Germain, JMP Securities LLC, Research Division - MD and Senior Research Analyst [13]

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Great. And one more for me. Obviously, it seems like the office fund -- the fundraising, stalling a bit. Maybe if you could just kind of address where that stands and what the outlook is there?

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Adam David Portnoy, The RMR Group Inc. - CEO, President, MD & Director [14]

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Sure. So it was our first-time fund. And I think we learned a tremendous amount through that effort. And I think we've learned a lot over the last 1.5 years. Today, the marketplace is very focused on value-add, opportunistic investing within -- across the board. They're also very focused on investing in loans, commercial loans. And then within asset types, I would say that the ones that overlap the most with us and what we do is the industrial is very much in favor, multifamily is very much in favor. But obviously, we don't have much of a presence there. And then with an overlap with us, it would be the lending business. That's also something that we find LPs and large pools of private capital are interested in talking to us about on a separate managed account basis or a JV basis.

On the office side, I think we just sort of hit -- we just had the wrong product for the market at this time. Office is not the most sought-after asset class at this time by LPs. The lot of LPs feel that they have -- already have a full allocation or a large allocation to office. And then on top of that, our fund was focused on core. And I would say that if you're going to invest in office, most of the money has been targeted towards value-add or opportunistic or turnaround. And so we just didn't have the right product for the times that we're in. We have pivoted, I think, pretty smartly and are now focused much better on the areas that I think are attractive to the market. And within our portfolio, those areas are industrial and the lending business. Those are 2 areas that I think we are having the most successful conversations with private capital sources around raising money.

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Mitchell Bradley Germain, JMP Securities LLC, Research Division - MD and Senior Research Analyst [15]

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So basically, any upside from that office fund seems to be eliminated from the model at this point?

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Adam David Portnoy, The RMR Group Inc. - CEO, President, MD & Director [16]

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I think that's probably true. But I think it will be replaced, hopefully, by an even larger amount in other private capital sources, meaning a separate managed account, joint ventures, things like that in a different asset class.

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Operator [17]

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The next question today comes from Bill Katz of Citigroup.

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William R. Katz, Citigroup Inc, Research Division - MD [18]

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Okay. I appreciate all the guidance and everything. Just sort of coming back to the M&A backdrop a little bit. You mentioned that things are still more in a preliminary stage. Can you give us a sense of, over the last few months or so, what may have shifted? Is the -- I don't want to say lack of progress, as it may not be fair, but is the -- sort of the -- sort of what looks to be a relatively static update. Is it pricing? Is it capability? Is it availability? What seems to be the sticking points as you sort of think about some of these opportunities?

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Adam David Portnoy, The RMR Group Inc. - CEO, President, MD & Director [19]

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Yes. It's a great question. I, too, don't -- I sound a little bit like a broken record in the last couple of quarters, giving the same update, I agree. I can tell you that we are moving the ball down the field. We are further down the field in terms of progressing towards something than we have been in the last couple of calls. I'm not sure it's necessarily pricing. It's really a cultural and strategic fit issues that are really driving most -- all of the conversations. And it's -- like anything, these are private organizations we're talking with largely. And there are large social issues involved in terms of who is going to be involved going forward and who's not going to be involved going forward. And I think those are the things that take time. I wouldn't say they're -- I wouldn't say they're roadblocks you cannot get over. But those are the things that just take time to sort of work their way -- work themselves out. I'm hopeful that we will do something on the M&A front. I think we're getting closer. I think it's also -- we've become -- we have become more picky about what we are willing to spend money on to buy. I mean I should point out, we've had many a conversation that we've walked away from, that we said that this didn't make sense for us, either social issues didn't make sense, maybe pricing didn't make sense, maybe the type of assets they invested in or the type of focus that they had didn't make sense. We're being pretty picky in terms of being very careful about how we spend shareholders' money on an M&A transaction.

And we're sort of doing this dual path, we're talking about it through M&A, but we're also very much focused on trying to grow it organically. And then the last question I answered, I focused on the areas that we're trying to do it organically. I'm hopeful, we can do it simultaneously and do both. But maybe if we fall down and don't get the M&A, if we don't do something on an M&A front, I'm hopeful we'll get it done organically on our own. That being said, we're further down the field on these discussions than we were the last time we had this call.

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William R. Katz, Citigroup Inc, Research Division - MD [20]

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Okay. That's very helpful. And just my follow-up question. Just to play devil's advocate for a moment, where -- help us think this through a little bit. If I look at your revenue opportunity from this presentation for November versus the previous one that was available, it looks like it actually got a bit worse. And then if I look at what's happened through September 30 versus June 30, and if I look at what's happened, I think quarter-to-date, that gap probably has widened out even more. What in your minds will be the levers to help sort of close this gap from the investment community?

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Adam David Portnoy, The RMR Group Inc. - CEO, President, MD & Director [21]

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So I think the -- it's a great question, and I'm glad you asked it. And we tried to address it a few different times in our prepared remarks. Our REITs are going through -- most of them -- all -- basically, 3 out of the 4 are going through -- the 3 biggest of our 4 managed REITs are going through strategic repositionings, massive strategic repositionings, in the case of SNH, in the case of OPI. OPI is the furthest along in that repositioning. And it's probably the -- and because it's the furthest along, call it, the seventh or eighth inning of its restructuring -- of its repositioning. As it is announced, successfully disposed of selling properties, we have seen a very nice rebound in its stock price. Basically, as we've been able to successfully execute on selling assets and reduce leverage, the stock price, as we performed well there. That's our one example to date that we can point to because it's the furthest along in the repositioning.

The others, specifically SNH, and to a certain extent, SVC as well, they, over the next 1, 2, 3 quarters, as we execute on the disposition plan, delever, I am hopeful it'll -- the same thing that happened with OPI will happen with them, and their stock prices will recover. I really do believe that where our stock prices are with these REITs is a floor. I mean I can never say they won't ever go further down, but they're pretty low right now. And it's hard to imagine them going any lower. And I think as we execute on these business plans and have more announcements over the coming couple of quarters, I'm hopeful that the same thing we saw happen in OPI will happen there, and the stock prices will rebound. That's the reason for our optimism and why we keep saying we think it's going to get better on the revenue side. And again, that revenue is 100% flow-through revenue, if it happens.

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William R. Katz, Citigroup Inc, Research Division - MD [22]

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Okay. And just a follow-up. Matt, your commentary around the outlook for both the upcoming quarter and maybe the full year is static to that revenue opportunity? In other words that there'd be no improvement in that revenue opportunity?

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Matthew P. Jordan, The RMR Group Inc. - Executive VP, CFO & Treasurer [23]

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That's correct. We're using today's share prices. We are baking in the impact of dispositions, at least, as best we can project when deals will close. But from a share price perspective, it's today's prices.

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Operator [24]

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The next question today comes from Ronald Kamdem of Morgan Stanley.

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Ronald Kamdem, Morgan Stanley, Research Division - Research Associate [25]

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Just wanted to go back to the conversation with private capital. I think you provided really some great color in terms of some of the asset classes that you thought was resonating, but sort of beyond that, I guess, the question really is, what is sort of the last hurdle to get somebody to come onto the platform, right? So what sort of that last gating factor? So they like the asset classes, you have a relationship with them. What would be the last hurdle before we can get them on the platform? And the follow-up to that would be, can you give us a sense of what the lead time is, right? Are these conversations that you have for 2 to 3 years before something happens? Is it 6 to 18 months? How should we think about that?

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Adam David Portnoy, The RMR Group Inc. - CEO, President, MD & Director [26]

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So the last hurdle with some of these is just diligence on us as a sponsor, as a manager. And I'm confident that we've been a fiduciary for well over 33 years, and they'll get very comfortable that we've been a good fiduciary for the last 33 years in managing these types of commercial real estate. That's sort of the last hurdle you talk about. In terms of how fast some of these things come online, some conversations, you have to establish relationships, and they do take a long time. And they're sort of long lead time items. And I can tell you for sure that I have embarked on some conversations that I know will probably take several months to come to fruition. That all say -- that all being said, we are -- have been doing this now for some time, for well over a year, and we're close on a couple of things. And while I have nothing to announce here, we are getting closer, both -- again, the ball is much further down the field than we were during the last call, both in raising private capital on our own as well as with regards to M&A conversations.

So I am optimistic that in 2020 that -- fiscal year 2020, there's going to be -- we're going to have an up and running of some size private capital business, either through M&A and/or through growing in ourselves. And so I feel pretty good about where we're at. I, too, wish it was happening faster. I can tell you that it's a new initiative for the organization. And because it's a new initiative, it takes a tremendous amount of my own personal time to get the organization focused on it. And so I can guarantee that I'm trying as hard as I can to make it happen as fast as I can.

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Ronald Kamdem, Morgan Stanley, Research Division - Research Associate [27]

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And my one quick follow up was, I think, Matt, you mentioned that, I think, this quarter is usually sort of a seasonal low in terms of the cash on the balance sheet. I think I heard that right?

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Matthew P. Jordan, The RMR Group Inc. - Executive VP, CFO & Treasurer [28]

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You're correct.

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Ronald Kamdem, Morgan Stanley, Research Division - Research Associate [29]

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My question is as you're sort of going through and the cash balance is building up, when does the buyback equation come back into the picture, right? Obviously, you're trying to balance the cash you want to be able to invest in these other growth opportunities. But when -- how do you think about potentially looking to buy back stock given the depressed valuation?

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Adam David Portnoy, The RMR Group Inc. - CEO, President, MD & Director [30]

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Yes. It's a great question. Thank you for asking it. It's -- I would say, today, our focus at the Board level and at the senior management level is very focused on trying to, first and foremost, think about ways to use that cash strategically to grow the platform. That's still our primary focus. I think if we get -- if we go a few more quarters, get well into 2020, and we are, for whatever reason, wholly unsuccessful in putting a large portion of that cash to work, either through M&A and/or co-investing, to get a private capital business up and going, I think then, this is dependent on where the stock price is, of course, we would think about returning cash to shareholders in the form of either a dividend and/or stock buyback. I mean I can't take it off the table completely at any time, meaning stock price gets to a certain point, which I can't tell you what that price would be, even today. I think we'll think about it, but where we are today, I think we are primarily focused for the next -- well into 2020, trying to use that cash strategically.

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Operator [31]

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The next question today comes from Mike Carrier of Bank of America Merrill Lynch.

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Dean M Stephan, BofA Merrill Lynch, Research Division - Analyst [32]

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This is Dean Stephan on for Mike Carrier. Just a question around the recapital repositioning. I know you guys touched on it a bit. But just wondering if you can provide some additional detail on kind of the timing of the REITs besides OPI moving from that delevering stage to, again, growing your portfolios?

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Adam David Portnoy, The RMR Group Inc. - CEO, President, MD & Director [33]

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Sure. So OPI, again, is probably the furthest along. I think, beginning in -- early in 2020, OPI will be well on its way towards putting the deleveraging behind it and then turning its focus towards recycling capital and even acquiring properties as part of that recycling effort, I think starting in early 2020. So we're very far along in OPI. It's, again, seventh or eighth inning and I think it's going to -- that's sort of behind -- really behind the starting in 2020. The next one behind that is probably SVC. It is probably -- it's our biggest REIT that we manage. In some ways, we've already announced their $500 million of $800 million that is under contract or have already sold. I think we're going to be well along our way before the end of 2019. I don't know if we'll -- we are not probably going to be completely done with all the dispositions there, maybe until the first and second calendar quarters of 2020. But I'm not so sure that really prohibits it from thinking to become more offensive in nature because it will largely have sold a large majority of the assets that it hopes to sell. And it's so big that it can sell -- it can be in the process of selling $200 million or $300 million and be buying $200 million or $300 million at the same time. So it's -- I call OPI very close to being done. I think SVC is sort of right behind it.

The one that's going to take a little longer is SNH. It's going to probably take us into the second quarter of calendar year 2020 until we sort of really start to have all the dispositions and repositioning sort of behind us there. I think we're making great progress. We had a lot of properties under contract. We've got a lot of properties in the market. It's been a real big -- strategically what's going on there, operationally what's going on there at Five Star, I think, that's sort of the last of the REITs going through the repositioning that's going to sort of come out of it. And I really think it's probably going to take us to mid-calendar year 2020 until we sort of get that behind us at SNH. So that's sort of the time line, as I see it, as I look at the 3 REITs.

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Operator [34]

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The next question today comes from Bryan Maher of B. Riley FBR.

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Bryan Anthony Maher, B. Riley FBR, Inc., Research Division - Analyst [35]

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Adam and Matt, I think you guys should take great comfort in the fact that this call is so well populated with analysts. I remember not too long ago there was barely a one. So kudos. Moving on, SMTA and SVC, is there anything that's come into that equation that has surprised you, more staffing costs than necessary, kind of, higher or lower? What are your takeaways from doing that large deal?

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Matthew P. Jordan, The RMR Group Inc. - Executive VP, CFO & Treasurer [36]

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From a staffing perspective, I can say, I think, we've actually been very pleased with the power of our platform, for lack of a better term, and our ability to absorb and people to step up and dive right into the service retail asset class. And I think we're finding overall that our planned and expected cost burden is actually going to probably come in lighter than we originally might have expected, though, we didn't talk about it publicly. So that's from a cost perspective.

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Adam David Portnoy, The RMR Group Inc. - CEO, President, MD & Director [37]

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Yes. I think, as an organization, I'd just say, culturally, I think it's a pretty exciting time. I think people like doing new and different things, and taking on a new asset class has been very exciting for the organization, overall. And I think spirits are pretty high internally around it. So I think, overall, we've been pretty excited about it. And from the nuts and bolts business of it, I mean, we are in the process now of selling some assets and getting into the market and trying to learn more about acquisitions in that market. That's a little bit of a learning curve, but I think it's one that we're going to get up very, very quickly, as we start to look at pruning the portfolio even more and think about making additional acquisitions in that space. So that's sort of, again, exciting because we're all learning a little bit about something of new asset class that we have spent a lot of time in historically. So it's all been very positive.

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Bryan Anthony Maher, B. Riley FBR, Inc., Research Division - Analyst [38]

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And kind of my follow up there. Is there any asset classes within that lease that you've experienced with SVC and the SMTA portfolio that you think you're going to gravitate towards in the future? And which do you think you might shy away from? And then just lastly, do you anticipate a change in the benchmark index for SVC?

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Adam David Portnoy, The RMR Group Inc. - CEO, President, MD & Director [39]

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I'll take the last one first. I think while we're still majority hotels, likely to keep the hotel index. If we get really -- if it's really a stone's throw away from 50-50, we're going to have to think about doing something else. But as long as we're still about 60% today, hotels, I think, it's probably the appropriate index. That could change as -- if that portfolio mix becomes 50-50, and if it ever became more than 50% leased then I think we'd obviously have to change. But right now, where we're at, I don't think we're thinking about changing it.

In terms of types of assets, it's not -- in many ways, it's very similar to other types of asset classes, which, as you know, it's a lot about location, it's a lot about -- if we're -- types of assets, I would say, it's not too different than the portfolio we bought. We're very focused on necessity-based assets. If we are buying something that is focused more, let's say, in an industry that we might be a little bit more nervous about than another industry, then I think we're probably just more focused on coverage ratio there and the credit of the actual tenant, who might be backing it up and who's the guarantor. I guess what I'm saying is what has been a little different around the acquisitions is not so much the asset type other than we're probably shying away from apparel and electronics, but has really been a very big focus around credit. It is real estate, but it's all absolute net lease and it's long-term leases and folks in this space, the way the industry seems to have evolved, it's very much a credit analysis more than is a bricks and sticks analysis. So we do a replacement cost analysis around it. But it's maybe not as useful if you want to be competitive in that space, as you might find it than, let's say, investing in an office building. This is sort of a meandering answer for you, Bryan, but that's sort of what we're learning about that space.

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Operator [40]

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[Operators Instructions) The next question is a follow-up from Bill Katz of Citigroup.

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William R. Katz, Citigroup Inc, Research Division - MD [41]

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Okay. Couple of questions. Two disparate questions, Matt, to you. Within your guidance for both, maybe the first quarter and your qualitative thoughts on 2020, how should we be thinking about the ratio of reimbursable compensation? Is there anything in the business that would sort of continue to enhance that ratio to your favor?

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Matthew P. Jordan, The RMR Group Inc. - Executive VP, CFO & Treasurer [42]

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No. The way we see the workforce evolving, which is pretty static based on our projections for this year. And again, it's critical that you bifurcate compensation between cash and equity based. And on the cash, it's going to stay at 45%.

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William R. Katz, Citigroup Inc, Research Division - MD [43]

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Okay. And then just a big picture one, excuse me, I had to ask the question, but if we're in a more of a static rate backdrop for 2020, how does that impact the platform either way, if at all?

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Adam David Portnoy, The RMR Group Inc. - CEO, President, MD & Director [44]

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I'm not sure it has a meaningful impact on the platform because I think there are such unique things going on, specifically at our REITs that are driving the share price more than changes in interest rates today. Obviously, REITs are very interest rate sensitive, but I think in our specific companies, there's a lot going on. And as we execute on that, that will have a bigger impact on their share prices, in my view, than maybe changes in interest rates or static interest rates.

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Operator [45]

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As 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.

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Adam David Portnoy, The RMR Group Inc. - CEO, President, MD & Director [46]

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Thank you all for joining us. We look forward to updating you on our progress during the first quarter conference call in early February. Operator, that concludes our call.

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Operator [47]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.