Hello, and welcome to The RMR Group's Earnings Conference Call for the Fiscal Third Quarter of 2023. I would now like to turn the call over to Kevin Barry, Director of Investor Relations. Please proceed.

Good morning, and thank you for joining RMR's Third Quarter and Fiscal 2023 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, August 10, 2023, 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. A 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 financial results. I will now turn the call over to Adam.

Thank you, Kevin, and thank you all for joining us this morning. On July 31, RMR announced an agreement to acquire CARROLL, a vertically integrated multifamily platform with approximately $7 billion in assets under management. RMR acquired 100% of the equity interest in CARROLL for $80 million in cash with a potential earn-out consideration of up to an additional $20 million based on the deployment of future capital. With approximately 700 employees and long-term relationships with high-quality global institutional partners, the CARROLL platform gives us access to market knowledge and expertise. The business also has a pipeline of attractive opportunities to further diversify RMR's capabilities beyond core plus real estate. We expect the transaction to close this fall, at which time the founder will step down, and the CARROLL platform will be integrated into our organization with the current management team remaining in place. As we have discussed in the past, an important aspect of RMR's growth strategy involves utilizing our strong balance sheet to pursue strategic acquisitions. Our focus when assessing these opportunities has been to ensure any transaction complements our already considerable scale by further diversifying our platform, increasing our private capital AUM and providing us access to new institutional relationships. We believe the CARROLL transaction achieves these objectives and is a great strategic fit for the following reasons. First, the transaction provides us an attractive opportunity to enter the multifamily space, which is the only major commercial real estate sector that we do not have a significant presence. After the closing of the acquisition, multifamily AUM will represent approximately 16% of RMR's total AUM. Outside of the industrial real estate sector, multifamily has some of the stronger tailwinds given the continued shortage of new housing in the U.S. In addition, CARROLL has been focused on deploying capital to multifamily investments in Sunbelt markets, some of the strongest overall markets in the U.S. Second, expanding our private capital AUM has been a key strategic priority for us, and the CARROLL acquisition doubles our private capital AUM to approximately $15 billion. RMR's total AUM will increase nearly 20% to approximately $44 billion, further advancing our position as a leading alternative asset management platform. Our institutional relationships will also increase substantially from the capital partners to invest in CARROLL's funds and its managed properties. The existing CARROLL fund series currently has the potential to make in excess of $3 billion of additional multifamily investments, putting us in a position to continue to scale a platform in the near term. Given the historical track record of generating returns to investors in excess of 30%, we believe deployment of this capital is achievable within the next couple of years. Third, we plan to drive growth by leveraging CARROLL's vertically integrated capabilities that address all aspects of multifamily investments from acquisitions and property management through asset management and innovative marketing strategies. CARROLL's presence in the markets they operate has been achieved through their successful consumer brand, ARIUM Living, which we believe has strong market awareness and a track record of exceptional resident experiences. The success of its vertically integrated platform has been demonstrated to the growth of CARROLL's third-party management portfolio, which should only accelerate once this transaction closes. In addition to driving revenue growth, the third-party management business also provides critical insights into the markets in which CARROLL operates. We anticipate that the successful operating aspects of the CARROLL platform will also benefit the broader RMR platform. Lastly, the acquisition is expected to be immediately accretive and presents a tremendous opportunity to create long-term value for our shareholders. Like RMR, CARROLL is a profitable, scalable and asset-light business with a recurring revenue stream and longer-term upside potential from promote fees on any new investments made after the transaction closes. Over time, we believe there is the potential to create revenue synergies as we integrate capabilities across the broader platform, including multifamily lending and new development opportunities. In summary, we believe this transaction is directly aligned with our strategic objectives to further diversify RMR and drive future growth. It is highly complementary to our current platform and represents a compelling redeployment of the $100 million in proceeds we generated from the recent TravelCenters of America transaction. We have been impressed throughout the diligence process with the management team and their commitment to the platform, their employees and their capital partners. We think this is an incredible opportunity for both sides, and we are excited to welcome the entire CARROLL organization to RMR. Now turning to our third quarter results. Our results once again highlight RMR's resilient business model, especially amid the current unsettled market conditions and commercial real estate volatility. This quarter, we reported adjusted earnings per share of $0.48 and adjusted EBITDA of $24.6 million, with our quarterly dividend remaining well covered in a payout ratio of approximately 67% of distributable earnings. From a macro perspective, commercial real estate conditions continue to be impacted by market volatility and interest rate uncertainty during the quarter. While real estate transaction volume remains slower than last year, it is recovering modestly as market participants gain more confidence in transacting with improved visibility to the possible end of the Federal Reserve's current interest rate hike cycle. Organization's focus continues to be on executing the strategic plans of our clients with the goal of delivering shareholder returns that will ultimately benefit both our clients and RMR. We are highly incentivized to improve the equity values of the public equity REIT we manage as it has a direct impact on RMR's potential revenue growth. To put this in context, if we close the gap between enterprise value and historical cost of the equity REIT's underlying assets, we could generate approximately $65 million of incremental revenues annually with close to 100% flow-through to adjusted EBITDA. With respect to operating fundamentals, leasing activity across our platform remains strong, as a result of the hard work and commitment of our experienced real estate professionals nationwide. Despite the challenging macro conditions impacting commercial real estate, our team arranged nearly 5 million square feet of commercial leases on behalf of our clients, which resulted in over 15% roll-up in rents and a weighted average lease term of more than 10 years. These leasing results continue to demonstrate our organization's ability to deliver value to our managed assets through creative leasing strategies and a continuous focus on tenant retention. In closing, we made some progress on our strategic objectives during the quarter despite ongoing volatility in the commercial real estate market, and we took an exciting step forward on our private capital growth strategy with the acquisition of the CARROLL platform. With a healthy balance sheet and strong financial profile, we are well positioned to pursue further opportunistic growth strategies, and we remain confident in the long-term trajectory of RMR's business. With that, I'll now turn the call over to Matt Jordan, our Chief Financial Officer, who will review our financial results for the quarter.

Thanks, Adam, and good morning, everyone. For the third quarter, we reported adjusted net income of $8 million or $0.48 per share and adjusted EBITDA of $24.6 million, with both measures finishing at the higher end of our quarterly guidance. In addition to recurring adjustments for separation costs, equity method investments and technology transformation costs, adjusted earnings this quarter excludes $1.05 per share of termination and incentive fees and an add-back of $0.03 per share for transaction costs associated with strategic transactions, including the CARROLL platform. As Adam highlighted earlier, we expect the CARROLL transaction to be immediately accretive. In the first full year after closing, it is our expectation that the CARROLL platform's recurring fee business will contribute between $11 million and $13 million of adjusted EBITDA and $0.22 to $0.26 of distributable earnings per share. Given the uncertainty of when the CARROLL transaction may close, any guidance for the next quarter that I provide will be focused solely on RMR's legacy business. Management and advisory service revenues were $47 million this quarter, which was down approximately $1 million sequentially. This decrease was in line with expectations and was primarily attributable to the completion of the TA transaction on May 15. As it relates to next quarter, based upon the current average enterprise values of our managed equity REITs, a full quarter impact of the TA transaction and lower projected construction volumes, we expect revenues to be between $43 million and $46 million next quarter. Turning to expenses. Recurring cash compensation this quarter was approximately $34 million, a decrease of $300,000 sequentially due primarily to statutory caps being met for taxes and benefits and a favorable head count mix. Looking ahead to next quarter, we expect recurring cash compensation to be closer to $33 million based on employees continuing to reach statutory tax and benefit caps as well as some strategic restructuring of corporate office roles we've undertaken, all of which will help drive an increase in our projected reimbursement rate to 46%. G&A costs of $9.6 million this quarter include approximately $400,000 or $0.01 per share of technology transformation costs. On a normalized basis, G&A should be approximately $9 million next quarter, excluding continued technology investments, aggregating all the prospective assumptions I outlined earlier, next quarter, we expect adjusted earnings per share to range from $0.43 to $0.47 per share and adjusted EBITDA should range from $23 million to $25 million. We closed the quarter with almost $300 million in cash. After the closing of the CARROLL acquisition, we expect to continue to have no debt and over $200 million in cash on hand for further opportunistic growth strategies which gives us tremendous flexibility to continue to take advantage of additional opportunities to deliver attractive risk-adjusted returns for our shareholders. That concludes our formal remarks. Operator, would you please open the line to questions.

The first question comes from Bryan Maher with B. Riley FBR.

Adam, can you maybe touch upon the CARROLL transaction? And what set that particular opportunity apart from other multifamily opportunities you were looking at? And how quickly do you think you can implement the EBITDA savings that you discussed in your PowerPoint that you guys put out, which would effectively reduce the EBITDA multiple costs on the transaction?

Sure. Bryan, thanks for that question. Look, we've looked at a lot of opportunities over the last several years, as we've talked about in prior calls and in meetings with investors. I think what we really liked about CARROLL is it checked a lot of boxes for us that we've talked about. And I said in my prepared remarks, they're vertically integrated multifamily platform. So it checks the box that they're vertically integrated like us. We think that's actually a competitive advantage in the marketplace that we run our real estate. We don't outsource the running of the real estate. They also are, obviously, multifamily is the one hole in the piece of the puzzle for our commercial real estate platform. It fills that. They're the right size, $7 billion of AUM is sort of the sweet spot. We've been talking about sizes of organizations that would be sort of the perfect fit given where we are in our life cycle, something between $5 billion and $10 billion was always sort of the sweet spot for us. They're private capital relationships. Our strategic objective was to always grow our relationships. They have over 20 very deep relationships with very well-established institutional investors that we hope will become our clients and we can maybe do more with them in the future. And then maybe I expect that they were sort of additive that we maybe weren't necessarily looking for but is really the fact that they focus the majority of their investments, not all of it, but the majority of what we would call value add, you buy, you fix, you sell, and that's how you get a return for their investors. We're much more of a long-term hold core plus, core real estate shop. They do some of that investing, that core real estate investing. I think that sort of expertise that they bring to the table is a real complement to what we do. And so I think it just checked every box possible for us, and that's what just made it very compelling. In terms of the EBITDA, I'll turn it over to Matt to discuss that.

I would say we feel pretty good that we're going to hit the $11 million to $13 million in year 1, and we're aligned with the management team and how we're going to get there through a combination of the business performance, getting this transaction behind them will be critical and has been critical because it's put the business on hold in a lot of ways. And they are aligned with us in identifying synergies, closing open roles and looking for economies of scale across the combined platform. So I think we feel really good about the numbers we've publicly disclosed and getting that in the first full year of operation.

And Adam, you discussed in your prepared comments, continuing to pursue other growth opportunities, can you be a little bit more specific there? Would it be more multifamily? Or would it be in any other particular sector?

Sure. It's an interesting environment right now. Given the challenges in commercial real estate, we are encountering more opportunities than we have in years, with several propositions currently under evaluation. Although it's an intriguing time, we are not certain if we will pursue any of these opportunities. In response to your question about multifamily, we do not intend to focus on that for follow-on acquisitions since CARROLL already meets our needs in that area. CARROLL will serve as the foundation for our future multifamily investments. One aspect we appreciate about CARROLL is its management team, particularly those who will remain with us. Their competence became evident during our due diligence and they are held in high esteem by their investors. We plan to retain the entire team, which is a significant reason we are enthusiastic about CARROLL. Consequently, I don't believe we will be looking to expand further into multifamily, as we have the right team with the CARROLL platform to drive our multifamily investments.

Okay. And just last for me. Usually, in your comments, you talked about kind of the highlights of the 4 managed REITs during the quarter. I'm going to assume for the sake of this call that you're probably not going to want to go down the DHC OPI road. But is there anything that stood out particularly good or bad among your 4 managed REITs that you might want to highlight?

I want to address all of them. For those listening, I believe SVC, OPI, and ILPT had strong quarters for various reasons. At DHC, we saw some positive results in our SHOP portfolio, but those were counterbalanced by some unfortunate challenges in other areas. Regarding the potential merger between OPI and DHC, from RMR's viewpoint, we are indifferent. We are neutral about whether the deal happens or not, and we've expressed this clearly. The REITs have also made it known that we are neutral; the revenues we would collect as managers in a merged entity compared to two separate entities would be nearly the same. Therefore, we don't have a strong stake in that situation from RMR's perspective.

The next question comes from Ronald Kamdem with Morgan Stanley.

Going back to CARROLL, you provided some additional insights. It seems that the general and administrative aspects and the structure will remain the same. Is the plan to expand the platform by adding more value in the multifamily sector? It would be helpful if you could elaborate on the operating structure, the core principles, and the strategy for growing CARROLL.

Sure. In the short term, over the next few years, we will maintain the current operations of that business, focusing on what they have been doing successfully. They excel in their area, and we expect them to concentrate on value-add multifamily investments. This has been the foundation of their relationships with partners, and I don’t anticipate any changes in this approach. However, I believe that over time, perhaps in two to three years, we could enhance the CARROLL platform with more core or core plus investments. Our relationships, especially with our limited partners, provide insights into interests in holding assets for such real estate investments. We see potential opportunities to introduce new investments at CARROLL that extend beyond multifamily core or core plus. So, in the immediate future, the focus will remain on value-add investing, continuing their established practices. We aim to broaden this strategy to include core or core plus investments. Additionally, RMR operates nationally with 2,200 assets across all states, Canada, and the Caribbean, while CARROLL is currently concentrated in the Sunbelt. In the short to medium term, they will maintain this focus, but there is potential for geographical expansion to other regions of the country.

Great. And then my follow-up was about the $11 million to $13 million of adjusted EBITDA, which includes $5 million to $6 million of synergies. Where are these synergies coming from? If it seems that they are not from general and administrative costs, what are the other opportunities for synergies?

A portion of it will be related to general and administrative expenses. You'll notice some of that will come from technology costs and economies of scale with various service providers. Additionally, there will likely be adjustments to back office personnel, which might involve closing certain positions that are currently available across CARROLL or reorganizing the teams. This isn't solely CARROLL's responsibility; there may be opportunities for us to reconsider our approach at RMR to achieve those synergies together. Much of this is currently underway and will be revealed during the integration phase and as we move forward toward closing.

Okay. Great. So my last one was just on, I think historically, you talked about sort of private capital raise and doing sort of joint venture of assets. Wondering if there's any sort of more conversations happening on sort of JVs of assets across any other REITs?

We're consistently communicating with our partners regarding potential opportunities. Currently, there isn't anything significant in the works. Our partners are interested in expansion, but most of the growth in our current joint ventures is likely to come through external acquisitions rather than reallocating assets from our existing REITs. As we've noted, the marketplace isn't experiencing much transaction activity at the moment. Although conditions are improving, only a few asset classes are appealing to our partners for expansion. One area where we have substantial capital invested is industrial, and we potentially see growth through external acquisitions in those joint ventures in the upcoming quarters. However, there haven't been many large transactions lately, aside from a few headlines about significant deals involving major private equity firms, which tend to be isolated occurrences. Therefore, I do not anticipate significant growth in those joint ventures in the next few quarters, but that doesn't imply our partners aren't open to growth. There may be modest opportunities, and circumstances could arise that enable more aggressive expansion than I've mentioned.

And this concludes the question-and-answer session. I would like to turn the call to Adam Portnoy, President and Chief Executive Officer, for any closing comments.

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

Thank you. As mentioned, the conference has concluded. Thank you for attending today's presentation, and you may now disconnect your lines.