Rmr Group Inc. Q1 FY2022 Earnings Call

Good day, and welcome to The RMR Group's Fiscal First Quarter 2022 Earnings Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. 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 first 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 would 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, January 28, 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. 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.

Thank you, Michael, and thank you all for joining us this morning. For the first quarter of fiscal 2022, which ended on December 31, we reported adjusted net income of $0.46 per share, and adjusted EBITDA of $23.3 million. We ended calendar year 2021 with $33.4 billion of assets under management, and remain well-capitalized with over $181 million of cash, and no debt. As we begin calendar year 2022, we are increasingly optimistic about our business. Despite the continued headwinds certain of our clients are facing related to COVID-19 variants, over 87% of the adult population is at least partially vaccinated in the United States. Recent consumer spending has trended higher, and the fourth quarter GDP growth was approximately 7%. Real estate fundamentals are generally healthy, and continue to be supported by a strong commercial real estate market as fourth quarter transaction volumes increased 97% year-over-year. These trends are influencing the strong fundamentals across the majority of the real estate portfolio that RMR manages. From an operational perspective, our organization continued its focus on delivering high-quality wellness-focused and amenity-rich buildings to our tenants. This was evidenced by leasing volumes this quarter that were the highest levels over the last decade, as RMR arranged approximately four million square feet of leases for an average term of 8.5 years, and with an average rent roll-up in excess of 7%. These leasing levels represented an increase of 39% sequentially, and a 35% increase over pre-pandemic 2019 comparable period leasing volumes. While the industrial sector remains robust, this quarter's leasing activity was spread broadly across all the real estate sectors we manage. We also remain confident in the future of office and the prospect of increased business travel to fuel increased hospitality and leisure spending in the coming months. Before moving to some of the notable private capital announcements of the quarter, I wanted to first highlight some significant strategic steps taken to best position our client companies for success. As a reminder, we are limited as to what we can discuss this quarter regarding our public clients as we are reporting results in advance of them. First, despite tracking ahead of its peers on a three-year total return basis throughout most of the year, market volatility in the fourth quarter adversely impacted OPI's total return relative to its peer group, resulting in no incentive fee for calendar year 2021. While we were disappointed, we remain highly encouraged by OPI's three-year total return of 14.4%, which reflects OPI's successful deleveraging and capital recycling initiatives over the last three years. Similarly, ILPT's total return over the past three years was 43.9%. And we are excited to continue utilizing private capital partners to grow this company meaningfully, without the need for dilutive equity raises. SVC continues to hit strategic repositioning milestones as the overall economy continues to improve. Earlier this year, SVC announced the expected sale of 68 Sonesta hotels in the first quarter of 2022 in order to create a stronger hotel portfolio and enhance overall liquidity. Operationally, Sonesta, which assumed management of over 200 SVC-owned hotels in 2021, has produced occupancy, room rate, and RevPAR metrics to remain on par with its peer set. DHC is in a similar phase of repositioning its business, as the company completed over 100 senior living operator transitions, and continues to take proactive measures to improve its balance sheet. Following DHC's recent joint venture announcement, which I will discuss in more detail in a moment, the company is currently well-capitalized to reduce leverage and invest meaningfully in its portfolio. At both DHC and SVC, we believe the future reinstatement of dividends will significantly help to increase total shareholder returns in the future. Finally, we are pleased with recent activity at our managed commercial mortgage REIT, Seven Hills Realty Trust, and continue to believe that the business has attractive long-term prospects. During the fourth quarter, Seven Hills raised its dividend 67% on the heels of another quarter of record originations. And at this pace, we expect they will fully deploy the remaining dry powder by this summer. Seven Hills leverages RMR's best-in-class originations platform, which has a strong default-free track record, which we believe will enable RMR to raise meaningful capital for this business line moving forward. I'd now like to turn to the more significant developments made within our private capital platform this quarter. Starting with our industrial REIT, ILPT, the pending $4 billion acquisition of Monmouth Real Estate Investment Corporation is currently expected to close this quarter. This portfolio is comprised of 126 Class A industrial logistics properties that are largely occupied by tenants whose businesses are driven by e-commerce. As a result, ILPT does not plan to raise common equity to fund this transaction, and expects to fund a portion of the acquisition with private capital raised via large institutional joint venture partners. Not only does this transaction grow RMR's assets under management, but also highlights RMR's alignment with our client shareholders by expanding access to capital and growth opportunities with high-quality assets. In addition to the pending Monmouth acquisition, ILPT also announced that it contributed six industrial properties due to existing industrial joint venture for $206 million. This transaction effectively raises equity capital at net asset value, versus at a discount at the corporate level for ILPT, which will be used to reduce leverage and fund future growth. Finally, just before the end of the year, DHC announced a $378 million joint venture sale of a 35% equity interest in its two building Life Science property in the Seaport district of Boston. DHC acquired this property for $1.1 billion in 2014 and the current valuation of the property is $1.7 billion, underscoring the attractive return on investment achieved in a relatively short period. We have repeatedly stated that our ability to further expand our private capital relationships comes from our commercial real estate expertise, operational excellence, and world-class client service. The transactions announced in the fourth quarter collectively raised our private capital assets under management from $1.3 billion to $3.2 billion this quarter for an increase of 139%. We believe this firmly highlights the organic success RMR's had in building out our private capital fundraising capabilities and demonstrates how quickly RMR can scale its business with its current infrastructure. I'll now turn the call over to Matt Jordan, our Chief Financial Officer, to review our financial results for the quarter.

Thanks, Adam and good morning, everyone. As Adam highlighted earlier this quarter, we reported adjusted net income of $0.46 per share and adjusted EBITDA of $23.3 million, with both of these measures being slightly below our quarterly guidance, primarily due to cash compensation coming in higher than our expectations. Management and advisory service revenues were $46 million, which was in line with our guidance for the quarter. Revenues this quarter represent an increase of $4.7 million on a year-over-year basis and a sequential quarter decline of approximately $800,000. The sequential quarter decline was primarily attributable to a reduction in business management fees at SBC and DHC as share price declines throughout the quarter adversely impacted their respective enterprise values. I would continue to highlight our expectations of revenue growth from construction management fees as this quarter includes fees of $3.2 million, a 31% sequential quarter increase. As we highlighted last quarter, construction volumes are expected to further increase throughout the fiscal year, as many of our clients embark on redevelopment and repositioning activities within their respective portfolios. Looking ahead to next quarter, we expect revenues to be between $48 million and $49 million driven by the following factors. First, we're deriving base business management fees from projected enterprise values at DHC, SBC and OPI using recent share price levels and factoring in the deconsolidation of $620 million in joint venture mortgage debt at DHC. Secondly, the Monmouth transaction is expected to generate approximately $2 million in incremental business and property management fees per month. Over time, these amounts are subject to change based on how much joint venture capital is raised and property disposition activity occurs. Third, private capital joint venture activity is expected to generate approximately $1 million in incremental fees next quarter. And lastly, the continued increases in construction management fees I previously highlighted will generate approximately $1.5 million in incremental revenues next quarter. Turning to expenses, cash compensation of $31.8 million represented an increase of approximately $2.8 million sequentially, which was driven by annual merit increases, bonus inflation, as well as an unexpected slowdown in vacation usage most likely tied to the recent COVID variant surge. Looking ahead, we expect cash compensation to be approximately $32.5 million next quarter, driven primarily by payroll tax and 401(k) contributions resetting on January 1, along with continued investments in roles to support the growth of the organization. D&A was $7.7 million this quarter, and represents run rate levels for the organization. With that said, as in previous years, we expect our Board of Directors will be issuing annual share grants in March, which will result in next including incremental G&A costs of approximately $600,000 beyond our run rate levels. Aggregating these collective insights in next quarter, we expect adjusted earnings per share to range from $0.48 to $0.50 per share, and adjusted EBITDA to range from $24.5 million to $25.5 million, both of which represent meaningful sequential quarter increases. We closed the quarter with over $181 million in cash, and continue to have no debt. We believe our balance sheet leaves us well-positioned to pursue a variety of strategies to expand our private capital business. That concludes our formal remarks. Operator, would you please open the line for questions.

We will now begin the question-and-answer session. Our first question comes from Bill Katz with Citigroup. Please go ahead.

Morning. And thank you very much for taking the questions, and your guidance. Maybe a big picture question to get started. Just sort of curious, as you migrate the capital from the managed REIT to the private markets, at what point do you think that it actually becomes a net contribution to the firm from here? And do the economics; is there any sort of arbitrage in economics as the dollars move from the public REIT into the private space?

Good morning, Bill. From a broader perspective, there isn't a significant difference in the expected fees we will generate whether the deals are in the REIT or in the private vehicle. Over the past few years, we have focused on increasing our private capital assets under management. In recent years, this has coincided with the need for some of our REITs to reduce leverage due to the impacts of COVID and other business challenges. This created an opportunity to transfer certain assets from our REITs that needed to reduce leverage into a private vehicle, often at an increased value, which we can continue to manage. While this may not immediately increase our assets under management, our goal over the past few years has been to establish a solid foundation. This is exemplified by the $3.2 billion in deals we've completed, with the Monmouth transaction marking a significant turning point for our net assets under management moving forward. The Monmouth transaction is the largest in our 36-year history at $4 billion and notably, it is the only sizable transaction we have undertaken without raising public equity for funding. This shift is a remarkable achievement for us, as we are primarily sourcing equity from private institutional partners. The success of this endeavor results from the relationships we have developed in building our current assets under management. I view the Monmouth transaction as a pivotal moment that will enable us to grow our private business assets effectively, rather than merely reallocating existing assets without true growth. I believe we are now at a point where we can begin to accelerate and expand our assets under management on the private side significantly. Matt, would you like to discuss what's happening in the short-term regarding fees?

Yes. In my remarks, I mentioned that next quarter we expect to see an increase in fees of about $1 million. Although the arrangements are designed to be roughly neutral, we observed a significant step up in fair value at the Monmouth building, as Adam pointed out. Additionally, with DHC, they are currently compensating us on a fee basis tied to enterprise value, which is the lower measure, and they are paying about 32 basis points on an applied fee basis. Under the joint venture agreement, there is an inherent short-term increase given DHC's current enterprise value. Therefore, we anticipate a $1 million sequential increase quarter-over-quarter that should stabilize over time.

Okay, that's helpful. And maybe just a follow-up on Monmouth, any updated guidance in terms of how you think that the funding mix will play through? And then, Adam, maybe one last big picture question for you. On one hand your net cash, your balance sheet is clean, your net cash built sequentially, but also sounds like your multiples out there might be a bit on the higher side. So, give us a sense of how to think about capital deployment from here? Thank you. And thanks for taking all the questions.

Sure. Regarding the Monmouth transaction, unfortunately, I can't provide more details beyond what has already been made public. ILPT has not yet released its earnings, which limits additional disclosures about the transaction. I can share that the shareholder vote at Monmouth is set for February 17, with the closing expected to happen shortly after that. When we initially announced the Monmouth transaction, we indicated that we would raise between $430 million and $1.3 billion of equity and anticipate sales between zero and $1.6 billion. I can confirm that we will exceed the low end of those equity projections and will have sales below $1.6 billion. So, I can confidently say that our outcomes will be better than the worst-case scenarios we described, but I cannot elaborate further. Regarding our cash position, we announced a one-time special dividend of $7.00 per share in the third quarter, which reduced our retained cash by about $400 million to approximately $180 million. We currently have no outstanding debt. For the past few years, we have aimed to maintain a cash balance for two main purposes: to explore strategic M&A and to support co-investments for new vehicles, neither of which we have pursued recently. We are fortunate to have $3.2 billion of AUM in private capital without needing to use any co-investment funds. However, I am uncertain whether this will continue as we expand and launch new vehicles. On the M&A front, we have discussed our previous proactive search for acquisitions, which we have shifted away from. In prior quarters, we had engaged in negotiations with three different parties, but those deals fell apart due to social issues rather than economic ones. We have established a network of potential partners or acquisition targets, and while we are not actively seeking M&A opportunities, we are open to them if they come our way. We are currently more focused on waiting for opportunities to arise rather than pursuing them directly. While I cannot completely discount the possibility of an attractive acquisition opportunity, it is not something we are actively exploring each day.

Thank you.

Our next question comes from Bryan Maher with B. Riley Securities. Please go ahead.

Good morning, Adam and Matt. And thanks for that information so far. Two kind of bigger picture questions for me, as it comes down to DHC and SVC, which has been challenged for the past two years with COVID. And I know you can't give us specifics related to occupancy trends, maybe at DHC or the hotel's component of SVC. But would you expect with the trend of what you're seeing at those two managed REITs that maybe by the back half of 2022, it starts to become a little bit more business as usual, as opposed to all of the transitions that have been going on more recently?

You're absolutely correct, Bryan. The two vehicles, DHC and SVC, have been heavily impacted by COVID, particularly their portfolios at SVC Hotels and DHC senior living communities. Overall, we are optimistic that conditions will improve in the second half of 2022 for both sectors, Senior Living and Hotels. If I had to choose which might recover faster, I believe hotels are likely to bounce back sooner. We're hopeful that hotel business travel will rebound more robustly than anticipated as we move into the second and third quarters and especially later in the year. This optimism is supported by two observations we've made over the past couple of years. With data now available daily from our Sonesta affiliated company, we can track hotel performance more frequently. For instance, during the summer of 2021, when COVID was subsiding, hotel performance improved much quicker than expected, continuing into parts of Q4. Hotel occupancy rebounded better than many had predicted. Although the situation has stabilized recently due to the Omicron variant, we are noticing that unlike the first half of 2021 when large group events were mostly canceled, today we are seeing events occur, such as the ASIA Conference this week in the healthcare sector. Many events are simply being postponed rather than canceled. This indicates a positive trend. Our data from the past 18 months gives us strong reason to believe that hotel recovery in the second half of the year could exceed some forecasts. The situation in Senior Living is more complex. Trends that were already in motion before COVID have been accelerated, with people opting to stay at home longer and receiving services at home, a shift influenced by COVID. Our affiliate, AlerisLife, has recognized this trend and is working to adapt to it. However, for DHC's occupancy, I believe recovery won't be as quick in Senior Living; it will be a slower, more gradual process. We are seeing occupancy increase compared to the low points in March and April of 2021 and it has been improving steadily. Nonetheless, I foresee that significant recovery in Senior Living will extend beyond 2022 into 2023, with noticeable improvement emerging then.

Thank you for that. My second question is about the leasing results you mentioned, which we are also hearing from other companies, especially in the office sector. Can you discuss the skepticism from some investors regarding the actual return of people to the office, in contrast to the leasing activity we are seeing in both medical office buildings and traditional office buildings each quarter?

Yes, you're correct. Our company and the industry experienced a record fourth quarter in leasing activity. Many tenants likely viewed the market as a favorable time to secure long-term leases, especially considering the current state of the office market. This contributed significantly to the leasing activity we observed in the fourth quarter. In terms of actual occupancy, we have a variety of data points, including those from our own portfolio. Around Labor Day, we noted that in September, approximately 30% of the office buildings in our portfolio were occupied, which gradually increased to about 40% by Thanksgiving and the beginning of December. This trend has continued into January. Looking into the future, I believe the delay in returning to the office is increasingly influenced by employee work preferences rather than just health and safety concerns. In today’s tight labor market, many employees who have enjoyed the flexibility of working from home for the past two years are hesitant to return to the office full time. Companies, particularly larger ones, are navigating how their hybrid workplaces will function. I foresee this dynamic will evolve in the spring as well. Regarding our portfolio, we own a substantial number of medical office and life science buildings, which are naturally resistant to work-from-home trends since they require on-site personnel. Over the past couple of years, we've been strategic with our office portfolio at OPI. We believe that offices are not disappearing, but the current environment will highlight the demand for well-located, modern buildings with ample amenities. Therefore, we've been active in acquiring newer, well-amenitized office properties while divesting older, less desirable suburban buildings. I anticipate we will continue this approach, as it's increasingly important to maintain a portfolio that aligns with current office market trends.

Great. Thanks, Adam.

Our next question comes from James Sullivan with BTIG. Please go ahead.

Thank you. I wanted to discuss the guidance for the next quarter concerning the top-line forecast, which I believe is between 48 and 49. In the fourth quarter, you provided a guidance that assumed the first quarter would remain stable, but it came in slightly below expectations. From your prepared comments, it seems this was due to declines in two of the rates, specifically management fees and another rate. My question is about the guidance for the second quarter. What assumptions are you making regarding the two REITs that contributed to the negative comparison, and how do you incorporate the changes in share prices, which have been quite significant year-to-date, into these quarterly forecasts?

A great question, Jim, and we try and do our best to prognosticate where share prices will land especially for those two REITs and what we've done in our guide this quarter is we've looked back over the last seven or so weeks, given the significant volatility in both directions to try and come up with an average and that is what we've based our guide on in our forecast number, so just around $9 for SVC and just around $3 per share for DHC.

Okay. So, you think the kind of the average close or the average trading range and just provide an average for that and build that into the month?

Correct. And in periods of greater stability, quite frankly, if I look back to last quarter, we'll use say the current month as a proxy since that is the first. Typically, we're reporting results at the end of the first quarter, first month of the quarter. That's coming up, but given the volatility we're seeing, we took a little more of a conservative approach this quarter.

Okay, fair enough. I appreciate that. And then question for Adam, obviously, you talked and in answering the prior question about the outlook over the course of the year. The topic, inflation over the last several weeks, of course, has been the rate of inflation. And clearly the hotel portfolio is probably very well positioned for an inflationary environment. And I'm curious, when you think about your more triple net lease portfolios, as opposed to the more active portfolio like the hotel portfolio currently. How do you feel about your exposure to rising inflation overall? And really I'm looking here at the net lease portfolio, the office portfolio as well as the healthcare?

Thank you, Jim. Overall, we have a diverse portfolio that spans from daily rate-setting hotels to long-term net leases, such as 15-year leases in office buildings, with a variety of options in between. For instance, senior housing assets have monthly rates that are usually adjusted annually or quarterly, allowing for frequent rate resets. In our retail, industrial, and office segments, we maintain a well-occupied longer lease term, especially compared to many of our peers, except maybe OPI, where the average lease term is around five years. At ILPT in the industrial sector, lease terms can reach up to ten years, and similarly, our retail portfolio also trends toward ten years. At DHC, the medical office and life science portfolio averages just over five years, emphasizing that we don't predominantly focus on long-term 10-15 year leases. Importantly, 80% of our leases in the broadly defined retail, industrial, and office sectors, which include general offices, medical office buildings, and life science facilities, feature either CPI adjustments or fixed step-ups. This positions us well to navigate what we expect to be a short to medium-term phase of high inflation. Historically, core commercial real estate has provided a solid hedge against inflation, particularly when held for five to ten years, aligning with our typical investment horizon in our REITs and joint ventures. Consequently, we feel confident in our strategy. We've maintained a diverse portfolio, which is a key aspect of our approach to ensure we aren't overly concentrated in one sector or lease type, a strategy that has proven effective over the past 36 years as we have traversed various economic cycles. While we are currently facing a higher inflationary environment than in recent history, we believe we are well-prepared to address it in the upcoming years.

Just to follow up on that, you mentioned CPI adjustments, which are usually annual. Is it true, though, in healthcare that CPI adjustments are often capped at a specific rate or percentage of CPI, or are they actually full CPI adjustments?

Sometimes the rates are capped, and other times they are fixed. Different markets tend to have different practices, and the industry doesn't adhere to a single standard. For instance, the conventions in the Boston market may differ from those in Dallas or Denver. Real estate leasing is very localized and varies significantly in its structure. We frequently discuss net effective rents, which is what we focus on at RMR. Since we manage a nationwide portfolio, we need to account for the varying nuances as leases are negotiated based on local market conventions to determine the net effective rents. Overall, it's quite variable and not uniform, particularly when comparing medical office buildings; it really depends on the market.

Okay. And then final question from me, Adam, the company is obviously in an enviable position with no debt and plenty of cash on the balance sheet and you mentioned in the prepared comments about how many transactions the company has been involved in, and the portfolio of companies have been involved in and given what has been kind of a significant pivot here in terms of the macro variables inflation higher interest rates moving up. Can you share with us your sense as to where cap rates are going? Do you have a sense that that cap rates are finally going to start moving higher along with interest rates and inflation or not?

It seems difficult to envision cap rates dropping much further. I believe they are going to rise slightly, but that increase will be moderated. The connection between rising costs, such as debt expenses and inflation, and significant changes in cap rates won't be one-to-one. We're actively engaged in the market, and there's a substantial amount of capital seeking investment opportunities in real estate. For example, Blackstone recently announced their earnings and revealed they are raising $5 billion a month through their BREIT, which has to be deployed, and this represents just a small portion of the total capital needing to be invested. Many, including us, are focusing on specific sectors over others, which means the demand for real estate coupled with the available capital will likely slow down the growth of cap rates. I expect cap rates will likely increase slightly due to rising debt costs, but let's consider an example. While we generally don't invest heavily in the multifamily sector, we do lend to multifamily projects. Six months ago, before the anticipated rate hikes and the recent inflation announcements, we were providing loans to some multifamily owners at higher rates than the cap rate they were using for their investments. These were value-add projects that we intended to improve over time. For instance, we provided a first-lien mortgage with a rate of around 3.5% for a project with a 3% cap rate. This indicates how much capital is available for investment in this sector. Though there was a plan in place to increase net operating income over two to three years, they had to manage a situation where the debt cost exceeded the cap rate. This illustrates the significant amount of money in the market, which is likely to temper the expansion of cap rates.

Sure. Okay. Well, listen, that's great. Thanks. Thanks, Adam.

Our next question comes from Ronald Kamdem at Morgan Stanley. Please go ahead.

Great, just going back to sort of the private capital transactions that happened during the quarter, trying to get a sense of how much more there to come down the road. Are there sort of other assets that sort of would make sense for these types of transactions, both at ILPT and DHC and is this something where we could see happen in the other two REITs, the office and OPI and SVC? Thanks.

Sure, generally speaking, we're having conversations with private capital partners, pretty much on all types of commercial real estate that we manage, every sector. So, you can go the gamut. It can be office, industrial, hotels, senior living, and service retail, every type of sector we are in, we are having some level of conversation with others around that. Some of those conversations would involve vehicles that potentially could include our REITs. And some of those conversations are involving vehicles that would not include our REITs, the overwhelming, what's going on at our REITs. And so the question is, could you see other things happen at the other REITs? This is all sort of tied together, what we are very focused on and we haven't collected an incentive fee for two years at RMR and so I want to point out that we're very focused on the fact that we haven't collected incentive fees. And so one of the things that we think we need to do with those REITs is de-lever because we are running at a little bit higher leverage than we have to typically run, especially and that's across the board. At DHC and SVC, the two things that I think will do the most to increase the shareholder return in addition to de leveraging is also to reinstate the dividend and I can't really give guidance on when that's going to happen, but we hope it's going to happen sooner rather than later. And because I think the faster we can reinstate the dividend and de-lever better returns we get, I tell you all that story as it relates to private capital, because it plays into yes, we could if it made sense, where are other REITs enter into additional joint ventures, because it behooves them to de-lever, because it again by de-leveraging and getting the dividends reinstated, especially DHC and SVC, it behooves everybody so that those companies' total shareholder returns are improved. I think I'm talking, what I'm really saying is a high alignment of interest between RMR actions and the shareholders of the different REITs. And that's really what I'm trying to talk about. At the same time, it does lead to yes, we could be doing additional joint ventures at the other vehicles, but it's because we want to de-lever and get those shareholder returns to improve so we can start earning incentive fees.

Great, and that's helpful. And then just back on ILPT. I think you talked about private capital getting involved, whether it's one, two or three, just any color on what sort of the debate, what's driving the decision either to get involved or not involved and what's driving the amount of capital commitments they're willing to put there. I can appreciate conversation is still fluid, but just sort of curious, what that money is debating?

ILPT, I think the question is really the capital partners that we're out talking to about that. I think the conversations are overall going well, and I really can't say much more than what I've said before in the sense that, when we announced the transaction, we said that we would be raising private capital at the smallest amount of $430 million, at the greatest amount $1.3 billion. Well, I think we could feel comfortable saying definitively here in this form, before ILPT announces its earnings, and before there's a shareholder vote at Monmouth is that we will raise more than $430 million of private capital. And so I think generally the conversations are going well, and we feel optimistic that we will close, what not only closed but funded, largely long lines that we hope to.

Great, and then I want to switch gears to expenses a little bit. Thinking about sort of wage pressures, just what are you seeing on the ground and sort of the construction business in terms of wages for workers and if you can give us a sense of sort of magnitude of what increases, what wage increases are there? That'd be great.

Sure, so I don't have great insight to what we're seeing specifically with contractors, but I can give you an anecdote more generally around what we're seeing across our platform. Remember, RMR, we're a commercial real estate company, alternative asset management company, principally, that's where we generate the bulk of our revenues. That all being said, we do have affiliate operating businesses and if you look at those affiliate operating businesses, if they're fully employed, they have 45,000 employees. We currently have about 20% open positions, roughly or 8,000 job openings across the board, that is about 2.5 times the normal job openings. So, that just gives you a sense. That's not necessarily construction, necessarily. But that gives you a sense in the broader economy, what we're seeing across the board, generally speaking in our operating companies in the fourth quarter; and this is a very general statement, depends on the market, presents on the position of 5% growth in wages. I'll let Matt talk about what we saw in the fourth quarter here at RMR.

Yes, so while wage inflation is definitely real, Ron, and I'll come back to that in a second. I do want to just reinforce this quarter comp, cash comp came in higher than where we had guided primarily due to vacation usage, believe it or not, which was a sizable amount of the miss over $0.5 million, just not being where it normally would be in a non-COVID especially COVID variant environment. And that was the driver. Now we are September 30 year-end, as you know, merit increases go effective October 1, so they were baked into our forecast, I will tell you that wage inflation is real. So, incorporating normal merit increases plus market adjustments, we averaged about 7%. Going forward, I would just to piggyback off Adam's point, while salary inflation continues to be real, I would say the thing that will create the most volatility in our forecasting of cash compensation, and what probably keeps me up at night is labor shortage. As we're growing as an organization, as we're creating new roles, finding the talent which creates, we do our best in our forecasting to predict when jobs will be filled and at what rates, finding that talent and when it will come on board to support this organization. And the growth we're going to experience with Monmouth and the other private capital transactions is probably the biggest variable that we're experiencing as a firm.

Great, that's it for me; helpful, thank you.

Our next question comes from Owen Lau with Oppenheimer. Please go ahead.

Good morning and thank you for taking my question. Going back to the comp and competition, you just mentioned a lot of openings, a lot of competition. I don't think it's specific to RMR. But how do you tackle these rising labor costs at the same time being competitive to hire people? I would love to get your thoughts about how you manage that? Thank you.

Yes, so well, number one, Greater Boston is incredibly competitive, and that's where the bulk of our corporate level employees that their overhead costs, if you will, to RMR reside. So, obviously, we're in the fortunate position of being profitable, having a strong operating margins, which allows us to compete and stay commensurate with the market as we're seeing the inflation especially in the more specialized roles, whether it be technology and frankly, we're seeing it across all disciplines in the Greater Boston Market. But I think it comes back to the employee wellness and the different programs, we've employed as an organization to make this a place people want to come work at through career growth and opportunities, as well as our benefits programs, and the amenities we provide, whether it'd be here at our corporate office or across the country. It's just a collective battle. I think all of leadership in our HR organization takes to heart every day to make sure we're an employer of choice.

Yes, Owen, I want to add that we are facing challenges in filling open positions. Our retention rate in the corporate office is quite high. While I don't have specific statistics, I believe it's significantly better than many of our peers in the market. What Matt mentioned is that we experience normal annual attrition, but we have not seen anything beyond that. In fact, our retention metrics this year are likely stronger than in 2018 and 2019. Overall, we feel positive about our retention, although filling new roles has been challenging as we've created several new positions while diversifying our portfolio. Despite this, our retention remains very good, and I think it's important to highlight that.

Got it, that's very helpful. And Matt, you talked about the guide in terms of incremental revenue. I think that's very helpful, but could you please remind us how much revenue RMR will generate from the private real estate fund? My understanding is you charge 100 basis points on contributed capital, but how much is the base of this contributed capital? And then, more broadly, strategically speaking, Adam, you talk about the limitation and the leverage on maybe some of the REITs. Is there any other major roadblock to prevent you from raising additional funds from asset owners, and how subtraction and compensation with investors on their front? Thank you.

Sure. Let me address the first question regarding the growth of the REITs. The main challenge in growing the REITs is the stock price. Competing for high-quality assets is difficult for us, as they typically trade at low cap rates. Given our cost of equity capital in relation to where the REITs are valued, effective growth is challenging due to their stock prices. Some REITs are getting closer to a point where equity raises might be considered, but overall, none are at a level where we are comfortable raising equity at this time. This is the primary obstacle. It’s not that we can't acquire assets, but we need to be able to fund these acquisitions competitively through equity. One successful approach has been our joint ventures, which not only help to reduce leverage—a crucial long-term goal—but also enable us to raise equity effectively by presenting assets at NAV. This is important for REITs, as selling equity at the corporate level would mean doing so well below NAV, where their stocks are currently trading. It's beneficial for the REITs as it allows for capital raising without discounts and helps in reducing leverage. We remain optimistic that stock prices will improve, which will lead to incentive fee earnings and enable us to grow the REITs more independently. It is also vital for REIT shareholders and investors to recognize that RMR can grow without needing to raise equity within the REITs. If shareholders understand this, we can avoid diluting our growth through equity deals, and we have alternative ways to expand the business. This strategy positively impacts long-term stock performance, as it removes concerns about impending equity deals being our sole growth strategy. The key barrier isn’t necessarily structural; it's that we are not willing to issue equity at significantly diluted prices to support growth in the REITs.

From a modeling perspective, the 3.2 billion in gross private capital, assets under management, that we disclosed this quarter reflects just over a billion and a half on a fee-paying basis. Our arrangements, which include some legacy agreements, vary from 50 to 100 basis points on that fee-paying capital, with a weighted average of about 60 basis points based on our current arrangements. This translates to just over 9 million in annual run rate base fees from that fee-paying capital. As you project forward, most of our current joint ventures are leveraged at around 60% and will typically fall within that fee-paying range of 50 to 100 basis points.

Got it. That's very helpful. Thank you very much.

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.