Good morning, and welcome to The RMR Group's Fiscal Second Quarter 2025 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I'd now like to turn the call over to Matt Murphy, Manager of Investor Relations. Please go ahead.

Good afternoon and thank you for joining RMR's second quarter fiscal 2025 conference call. With me on today's call are President and CEO, Adam Portnoy; and Chief Financial Officer, Matt Jordan. In just a moment, they will provide details about our business and quarterly results, followed by a question-and-answer session. I would also like to note that the recording and retransmission of today's conference call is prohibited without the prior written consent of the company. Today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward-looking statements are based on RMR's beliefs and expectations as of today, May 7, 2025, 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 rmrgroup.com. Investors are cautioned not to place undue reliance upon any forward-looking statements. In addition, we may discuss non-GAAP numbers during this call, including adjusted net income, adjusted earnings per share, distributable earnings, and adjusted EBITDA. A reconciliation of net income determined in accordance with U.S. generally accepted accounting principles to these non-GAAP figures can be found in our financial results. I will now turn the call over to Adam.

Thanks Matt and thank you all for joining us this afternoon. Yesterday we reported second quarter results that were slightly below our expectations with adjusted net income coming in at $0.28 per share and distributable earnings of $0.40 per share. The shortfall to our expectations primarily related to our managed equity REIT spending less on capital expenditures given the more uncertain economic environment and deleveraging activities adversely impacting RMR's revenues. While in recent months we've been forced to navigate economic volatility, we continue to engage with private capital investors regarding our various investment initiatives across the residential sector, credit strategies, and select development opportunities. While we found most partners ready to start investing significantly in the latter part of 2024 and into early 2025, recent market volatility has modestly tempered enthusiasm and caused some investors to temporarily pause new allocations. With that said, across many of our investment strategies, we believe now is the time to take advantage of opportunities when others are pulling back. As an example, we are already seeing new supply decrease in the residential sector, which bodes well for rent growth and occupancy gains heading into 2026. With the recent tariff actions, we believe this will further slow new construction starts and strengthen residential fundamentals in many of our Sunbelt markets where migration trends continue to drive housing shortages. During the quarter, we closed two joint venture acquisitions of residential communities in South Florida, for an aggregate transaction value of approximately $196 million. RMR raised an aggregate $64.3 million in equity from institutional investors to capitalize these joint ventures, with RMR acting as the general partner and contributing a total of $11 million, or retaining a weighted average 15% interest in the combined ventures. Another example of a real estate sector where we have conviction and believe an opportunity exists in today's turbulent market. In April, we closed on a $21 million value-add community shopping center located outside of Chicago. This center is currently 77% occupied, and our business plan includes leasing up current vacancy while also rolling up rents for existing tenants, which today are almost 20% below market. Our target returns over the projected five-year hold period are in the mid-to-high-teens. Our value-add retail strategy is centered on leveraging the experienced retail team we have in place at RMR, to establish a track record within the value-add retail sector that we can then fundraise around in the future. This initial purchase in Chicago is expected to be part of a small portfolio of value-add retail properties we acquire using RMR's balance sheet over the next six to twelve months that will aggregate to approximately $100 million. On-balance sheet investments, such as this value-add retail acquisition, are all part of our continued strategy to diversify our client base and grow our private capital AUM. While the current fundraising environment may be challenging, we remain confident in our ability to grow private capital AUM in the future. As a reminder, in less than five years' time, our private capital assets under management have grown from essentially $0 to over $12 billion, and we believe it could comprise over half of RMR's total AUM in the next five years. Turning to a few notable updates at our public capital clients; DHC posted solid first-quarter results, with revenue, normalized FFO per share, and adjusted EBITDA, all handily beating consensus estimates. These strong results were led by DHC's SHOP segment, which saw consolidated NOI improve 49% year-over-year because of active asset management and the positive impact of capital deployed to upgrade many of the communities over the last few years. At SVC, first-quarter results also exceeded consensus expectations. RevPAR at SVC's hotel portfolio improved 2.6% year-over-year and outpaced the industry by 40 basis points, despite meaningful revenue displacement from renovation activity. SVC also continues to benefit from the stable cash flows generated from its triple-net lease assets, led by its $3.3 billion investment in travel centers, which are currently leased to investment-grade-rated BP. In terms of its deleveraging efforts, we are pleased to report that SVC remains on track to sell 123 non-core hotels for approximately $1.1 billion this year. Despite the ongoing macroeconomic uncertainty, the sales process generated significant interest and pricing that met or exceeded our expectations. ILPT reported first quarter results that highlight the quality of its portfolio as tenants continue to renew in place while also delivering meaningful roll-ups in rent. ILPT completed 2.3 million square feet of leasing activity in the quarter and weighted average rental rates that were approximately 19% higher than prior rents. Although ILPT has no final debt maturities until 2027, it continues to explore ways to delever its balance sheet while also looking to refinance its current debt with longer-term fixed rate debt. Lastly, OPI continues to face headwinds associated with its nationwide portfolio of office properties. OPI, along with its advisers, continues to explore all options to address its upcoming debt obligations. To conclude, we are pleased with the progress we have made assisting our clients with their financial and strategic objectives. We also believe that RMR operates a durable business model supported by clients with a nationwide portfolio of real estate across multiple sectors. This durable business model, with almost 70% of our AUM coming from perpetual capital, enables us to drive new initiatives forward in a volatile economic environment. We look forward to updating you on our progress in the coming quarters. With that, I'll now turn the call over to Matt Jordan, Executive Vice President and our Chief Financial Officer.

Thanks, Adam. Good afternoon, everyone. As Adam highlighted earlier, this quarter's results were slightly below our expectations, as RMR generated adjusted net income of $0.28 per share and distributable earnings of $0.40 per share. Recurring service revenues were $45.5 million this quarter, a sequential quarter decrease of approximately $1.8 million, driven primarily by lower-than-expected capital spend as well as declines in the enterprise values of the managed equity REITs, both of which were partially offset by $700,000 in acquisition fees earned from the two residential joint ventures Adam discussed earlier. Next quarter, based on the current enterprise values of our managed equity REITs and continued muted levels of capital spend, we expect recurring service revenues to be between $44 million and $45 million. As it relates to the value-add shopping center in Chicago that Adam highlighted earlier, we expect this acquisition to generate EBITDA of approximately $350,000 per quarter in fiscal 2025. Turning to expenses. Recurring cash compensation was $42.1 million this quarter, a decline of approximately $500,000 sequentially, which reflects the impact of headcount actions taken in recent quarters. Looking ahead to next quarter, we expect recurring cash compensation to decrease to approximately $39 million through continued cost containment measures driven by strategic asset sales. Given that a significant number of the headcount actions were associated with strategic asset sales and were thus reimbursable roles, next quarter's cash compensation reimbursement rate is expected to decline to 48%. Recurring G&A this quarter was $10.7 million after excluding $600,000 in annual director share grants. Recurring G&A of $10.7 million represents a modest sequential quarter decrease due to lower third-party construction costs and continued expense management. Next quarter, we expect recurring G&A to be closer to $10.5 million. Aggregating these collective assumptions, next quarter we expect adjusted earnings per share to be between $0.28 and $0.30 per share, adjusted EBITDA to be between $19 million and $20 million, and distributable earnings to be between $0.42 and $0.44 per share. Our dividend remains well covered with a payout ratio of approximately 79%, which is shown on Page 12 of our financial results. With $137 million of cash on hand and no corporate debt, we remain poised to take advantage of strategic opportunities. Before we take questions, I would like to highlight the recent publication of our annual sustainability report. This report provides a comprehensive overview of our commitment to addressing sustainability across our portfolio of approximately 2,000 properties. A link to the report can be found on our website at rmrgroup.com. That concludes our prepared remarks. Operator, please open the line for questions.

Thank you. And today's first question comes from Tyler Batory with Oppenheimer. Please go ahead.

Hey. Good afternoon. Thank you. My first question I thought the value-add retail acquisition was interesting. So could you give a little bit more details on the strategic rationale for doing this? I think you talked about using the balance sheet to do about $100 million over the next six to 12 months. So, why keep these on balance sheet? And just talk a little bit more about plans for this area of the business.

Thank you for your question. The retail value-add acquisition this quarter is a bit different for us because we haven't typically purchased much value-add retail or community shopping centers before. We're leveraging our extensive expertise in retail, built over 15 years, with a current portfolio of about $5 billion in retail, which includes over 500 properties. We believe we have a strong understanding of the market and have observed a significant turning point in certain retail sectors, particularly community shopping centers that are grocery or drugstore-anchored. Recently, we've noted very low vacancy rates and substantial positive absorption in both the market and our portfolio. Typically, when a space becomes available in one of our retail locations, we have a ready list of prospective tenants who not only fill the vacancy but often pay higher rents. The driving factor behind this trend is a shortage of supply, as there hasn't been much retail construction in the past decade, and demand has now risen sharply. We see this as an opportune moment, especially since we don't anticipate major developments in retail that could increase vacancies. Regarding the use of our balance sheet, since we haven't invested in value-add retail previously, we think it's prudent to make initial investments on our balance sheet. While we may eventually move these investments off-balance sheet, they will likely remain on the balance sheet until we've established a solid track record with a small portfolio. This experience will help us raise additional third-party capital in the future, leveraging our balance sheet to initiate investment strategies that could deliver strong returns. It's worth noting that the return profile of our investments tends to focus on core and core+ properties, which are stable and high-occupancy with minimal active management. We currently apply this strategy in the residential sector and are beginning to do more in retail, with plans to expand similar strategies to other asset classes over time. While this is a detailed response, I hope it addresses your question.

No. That's very good detail. I appreciate it. A specific question on the quarter and the outlook. A little bit of a surprise perhaps to see the lower construction fees, the REIT spending a little bit less on CapEx. So just talk a little bit more about that? Is this a good run rate here? And how do you also think about seasonality quarter-to-quarter in terms of some of that spending and how it flows through?

The first calendar quarter of each year is typically a low season as people tend to spend their budgets in the last quarter of the previous year. Unfortunately, I believe this trend will continue for a couple of quarters due to some spending restrictions and capital constraints faced by our REIT clients at the moment.

Okay. Makes sense. Last one for me. I'll be getting a few questions from folks on the dividend. I think you added a new slide in the presentation that helps address that. But I'm curious if you can just talk a little bit more about how you feel about coverage for the dividends. And when you look at capital allocation broadly, I mean, with stock yielding where it is right now, are you kind of thinking about other uses for capital instead of the dividend? Just kind of walk through some of the thinking there if you could please.

Sure. I'll let Matt explain some of the information we've included in the slide and how we calculate our payout ratio. Overall, we feel very comfortable with our current payout ratio, and Matt will go into detail shortly. Regarding capital allocation, we have no corporate level debt, a substantial amount of cash, and an unused corporate credit facility. We believe we have a significant capacity for new investments on our balance sheet. When considering capital allocation, it's vital to provide a return to our shareholders since we operate a high margin, high cash-flowing business. We’ve always thought the best approach is to return some of that to shareholders through dividends. Additionally, the investments we are making with our cash and liquidity are expected to yield high returns, potentially delivering strong returns in the short-term, within two to five years at most. As we think about capital allocation going forward, until we approach the limits of our liquidity, which is still quite distant, we will continue to focus on capital allocation and maintaining a stable dividend.

From a coverage perspective and the questions you may be getting, as we illustrated in our earnings, the dividend is covered at about 79%. I guess what I would remind folks is this is always the low point for us for a number of seasonal reasons both on the top line and in the expense line for compensation. As you look at our guidance at $0.42 to $0.44 and further out as we get some of this AUM growth happening in the residential side, and REIT share price improving, I really think this is a low point. We're still covered at 79%, so any risk around the dividend is not something we're focused on right now.

Okay. I appreciate all the details. That’s all for me. Thank you.

Thank you. Our next question comes from John Massocca with B. Riley Securities. Please go ahead.

Good afternoon. As you kind of talk to your potential partners on either the JV side or some of these potential future funds you might see, what are they looking for, in either the macro environment or the real estate environment, before they get comfortable again? And maybe kind of what are you thinking in terms of a timeline for when that kind of equity capital might be available again?

Sure. So the short answer is that our partners, generally speaking, the private capital LPs of the world are seeking a higher return on their dollars than they were, let's say, five years ago. This partly explains why we as a firm have decided to invest and devote more resources into what we call value-add investments. That's a strategy that's typically going to generate a mid-teen to high-teen return for investors. So that's what we're seeing from LPs, generally speaking, that would come into our funds. The good thing is that investors are still investing. Just in our last quarter, we brought in tens of millions of dollars in JV capital for two properties we bought down in Florida. Investors are willing to open their checkbooks and make investments. In terms of when we think we could see a substantial increase in the amount of AUM and fees we generate, I think we're in a one of the most difficult fundraising environments for private equity, especially around real estate private equity, that has existed since the great financial crisis more than 15 years ago. I think it's going to take probably another short period of time. As the world becomes more stable and there's more stable outlooks around interest rates, I think LPs will be more interested in opening up their checkbooks and allocating more resources to that. With regards to RMR itself, we expect and we said this during our last earnings call that upwards of $1 billion in calendar year 2025 will be spent in and around private capital initiatives. What do we mean by that? That's total assets. That's us putting JVs together and that's also buying some properties on our balance sheet. That's what I think we'll do this year and I think it ramps from there.

Is there potential for you to put more on your balance sheet as you look at it this quarter versus last quarter just given the appetite you're seeing for LPs today?

I think it's entirely possible in the residential space. As Adam highlighted, we're going to look for a couple more value-add retail centers. But the key to our growth and accelerating AUM growth is going to be raising third-party capital with RMR co-investing as most third-party capital partners request.

Okay. And then I may have missed it, but the value-add shopping centers beyond the one you closed in April what's the size of that portfolio? Apologies I didn’t have the prepared remarks.

Sure. It's a $21 million investment. It's about 204,000 square feet. I think we could grow it to about $100 million in aggregate assets.

Are those $100 million figures that are actually under contract, or are they more of a projected pipeline number? Is that indicating something that is under contract or under a letter of intent?

That's a pipeline number. We have nothing under LOI or contract at this moment in addition to what we've closed on, but we're actively underwriting, bidding, and evaluating those types of investments.

Okay. And then lastly on kind of the construction supervision revenue. As we think about the March 31 number as a run rate is that taking into account some of the disposition activity particularly from DHC and SVC? Essentially is that already accounted for given maybe capital isn't being put into assets they're going to sell? Or could that further decline as they look to dispose of some assets for capital recycling and deleveraging purposes?

No fair question. It is all inclusive and would consider all planned spend and all active disposition activity.

I appreciate the color. That's if for me.

Thank you. This concludes our question-and-answer session. I'd like to turn the conference back over to Adam Portnoy for closing remarks.

Thank you all for joining our call today. We look forward to seeing many of you at the upcoming NAREIT conference in June. Institutional investors should contact RMR Investor Relations if you would like to schedule a meeting with management. Operator, that concludes our call.

Thank you sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.