Earnings Call Transcript - RMR Q2 2020

Operator, Operator

Good day, and welcome to The RMR Group's Second Quarter Fiscal 2020 Conference Call. I would now like to turn the conference over to Michael Kodesch, Director of Investor Relations. Please go ahead, sir.

Michael Kodesch, Director of Investor Relations

Good afternoon, and thank you for joining RMR's second quarter fiscal 2020 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 performance, 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, May 11, 2020, 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 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 US generally accepted accounting principles to adjusted net income, adjusted earnings per share, adjusted EBITDA, and the calculations of adjusted EBITDA margin can be found in the news release we issued this morning. Due to the current unique circumstances, the management team is conducting today's call from several locations and asks that listeners on the call bear with us should any technical difficulties arise. And now, I would like to turn the call over to Adam.

Adam Portnoy, President and CEO

Thanks, Michael, and thank you for joining us this afternoon. The fiscal second quarter of 2020 truly marked an unprecedented time for our business, the economy, and the world at large. Given the gravity of the COVID-19 pandemic, over the last several weeks, we have been monitoring the pandemic's impact on our client companies as well as all of our stakeholders, including most importantly our employees. To this end, we have invested significant time ensuring the safety, health, and wellness of our employees and their families. These workforce efforts included ensuring we preserve business continuity with the organization rapidly adjusting to working remotely. While Matt will provide more detailed insights on the steps our organization has taken in response to this pandemic, including the numerous protocols being utilized to protect the health and safety of our property management staff, I am proud to report that 100% of our managed office and industrial assets are operational and available to our tenants but in most cases are being lightly utilized. I would also be remiss if I did not use this opportunity to acknowledge the efforts of RMR's property management team in keeping our buildings functioning and supporting our tenants throughout this pandemic. Facilities management has been deemed an essential service from day one of the pandemic, and our people have executed flawlessly. I've also taken great pride in seeing two of RMR's client companies on the frontlines of our nation's response to this pandemic. TravelCenters of America has kept their truck stops open for business to support the critical work, and professional truck drivers as they transport vital goods around the country. In addition, Five Star Senior Living has been dedicated to protecting the health and well-being of our nation's seniors, who may be the most at risk from the effects of COVID-19. In terms of the state of the commercial real estate market, while leasing activity remained strong for the quarter, we saw a significant decline in activity beginning in late March, though we continued to close many of the deals negotiated before the crisis unfolded. Non-essential construction activity has also slowed or stopped completely in several markets where we operate, which impacts redevelopment in building and tenant improvement work that was in process or planned at several of our managed assets. In terms of transaction activity, as of late March, property sales have slowed considerably, and we have seen several offerings withdrawn. As it relates to our Managed Equity REITs, for many of the disposition transactions we had underway, we have seen a reduction in the number of buyers, and we have pulled some transactions due to buyers seeking price reductions or because we had concerns around the viability of buyer financing. For our Managed Equity REITs, we're looking at possible acquisition opportunities. We continue to be active in the market, especially concerning office and industrial properties, but there are limited opportunities to currently evaluate and we are proceeding cautiously. While the transaction markets have slowed considerably, it is worth noting that in aggregate, our client companies have closed on the sale of eight properties for proceeds of $111 million since the beginning of March. Considering the challenges posed by this crisis, our business remains well positioned given the underlying security of our 20-year evergreen contracts with Managed Equity REITs, and we continue to generate healthy operating cash flows. We ended the quarter with approximately $377 million in cash, and we continue to have no debt. As a result, our organization is well prepared for what may be a very long recovery. Moving to our results for the quarter. For the second quarter of fiscal year 2020, we reported adjusted net income per share of $0.46, adjusted EBITDA of $23.9 million, and adjusted EBITDA margin of 51.3%. From an operations perspective this quarter, our organization remained very busy arranging 1.1 million square feet of leases on behalf of our client companies with a weighted average lease term of almost six years and a weighted average roll up in rent of 5.8%. We also directly supervised approximately $32 million in capital improvements at our client companies. As I previously highlighted, I expect leasing volumes and capital spending to slow next quarter as a result of shelter-in-place orders and the expected slow reopening of the economy. I'm pleased to report that across our platform, we collected almost 90% of April rents. The majority of the outstanding April rents have been addressed through rent relief discussions with the tenants of our managed equity REITs. To date, we have granted rent relief to almost 300 tenants or less than 4% of contractual rents for the months of April through July 2020. As an organization, I believe it is important to partner with tenants experiencing financial hardships, thus preserving our tenant relationships, retention, and portfolio stabilities. Moving to some noteworthy highlights across our client companies. ILPT reported strong results this quarter with normalized FFO of $30.2 million, a 12% increase on a year-over-year basis, and adjusted EBITDA of $45.9 million, a 35% increase year-over-year. More importantly, ILPT's portfolio has several important qualities that will help mitigate the disruptions we are currently experiencing, which include overall occupancy of 99% and approximately 75% of annualized rent coming from investment-grade rated tenants or highly secure Hawaii land leases. Further, nearly 80% of ILPT's annual rent comes from logistics properties used for warehouse and distribution purposes, which has remained in strong demand with increased reliance on e-commerce. Additionally, during the quarter, ILPT closed on a previously announced joint venture transaction raising net proceeds of approximately $108 million. ILPT was able to leverage RMR's historical relationship with a sovereign wealth investor, and we fully expect that ILPT should be able to grow this relationship to support future industrial and logistics acquisitions. OPI announced earnings that reinforces the strength of its portfolio and balance sheet with normalized FFO of $1.40 per share, exceeding consensus estimates and same-property cash basis NOI increasing 1.2% year-over-year. The strength of OPI's balance sheet is further highlighted by a net debt-to-EBITDA ratio of only 5.9 times, and almost $400 million of availability under its unsecured revolving credit facility. OPI also recently had its investment-grade ratings reaffirmed with stable outlooks. OPI is well positioned for the future given its well-diversified portfolio of properties with one of the highest percentages of rents paid by investment-grade rated tenants in the office sector at 62.2% of annualized rent, and approximately 78% of annualized rent is paid by tenants operating in industries deemed essential. While ILPT and OPI have seen limited initial impacts from the current economic conditions, DHC and SVC are each facing more significant headwinds. As a result, each of these REITs has announced plans to reduce their dividends to $0.01 per share and deferred previously planned non-essential capital investments to conserve cash and liquidity. As it relates to DHC, earlier this year, it completed its restructuring transaction with Five Star Senior Living and in the early part of calendar 2020, continued to make progress on its disposition program. Despite the advent of the COVID-19 pandemic, DHC maintained strength in its medical office and life science portfolio, generating a 2.6% increase in cash basis NOI on a year-over-year basis. With regard to its senior living communities, DHC has had significant challenges in attracting new tenants to its communities, which in turn has led to occupancy declines. The adverse financial impact of these occupancy challenges is also coupled with growing operating expenses. Additionally, DHC has seen the volume of patients at their medical office tenants reduced, and some non-essential businesses have closed their doors entirely. Even with these headwinds, I'm confident that the reductions in DHC's dividend and capital spending, it has the appropriate liquidity to weather current disruptions to its business. SVC is facing the most significant pandemic-related challenges among all of our managed businesses as the impacts of shelter-in-place orders across the country have disproportionately negatively impacted the hospitality and service retail sectors. SVC's previously announced disposition program was building momentum as buyers have been selected for a number of Wyndham and Marriott branded hotels. SVC was in the process of launching the marketing of its Sonesta ES Suites hotels before COVID-19 began to materially affect hotel operations. As a result of the pandemic, lending for the hotel transactions has effectively ceased, and we now expect these transactions will be delayed until later in 2020 or 2021, if at all, which may delay SVC's planned leverage reduction initiatives. While I highlighted rent collections for the month of April were almost 90% across the RMR platform, April rent collections for SVC's service retail portfolio was only 45%. As most of the economy remains closed, the service retail sector has been hit especially hard, and we have granted rent relief to numerous tenants to assist them through this difficult time. Similar to DHC, with its reduction of its dividend and capital spending, I'm confident SVC has the appropriate liquidity to withstand the downturn in its business. Finally, while they represent less than 20% of our revenues, I did want to briefly highlight some items of note relating to our mortgage origination platform and certain of our managed operators. I continue to believe our mortgage origination platform has significant untapped potential. While Tremont has fully invested its capital, it remains focused on asset managing its investments, the quality of our underwriting and asset management is reflected in the fact that we have not taken any loan impairments or loan loss reserves to date. With that said, Tremont and its board believed it was prudent to conserve cash by reducing its dividend to $0.01 per share to preserve cash and maximize liquidity. We also recently received shareholder approval from the RMR Real Estate Income Fund to convert from the mutual fund investing in real estate securities to a commercial mortgage REIT. This change in strategy will help further expand our mortgage origination capabilities within RMR. Lastly, at TravelCenters of America, the new TA management team has brought renewed energy to the organization. While the COVID-19 pandemic will hamper this renewed momentum, TA recently announced a reorganization of its leadership team and staff reductions, both important steps in its repositioning efforts. Additionally, despite the ongoing pandemic, TA saw fuel sales volume during the first quarter increase 3.6% and total fuel gross margin increased 9.6%, both on a year-over-year basis. Turning to our efforts to expand and grow the RMR platform. We continue to spend time focused on a private capital asset management business, including transactions involving our Managed Equity REITs such as the ILPT joint venture I mentioned before. We believe these types of ventures demonstrate that our relationships with large sources of private capital such as sovereign wealth funds have only grown stronger and may lead to separately managed account opportunities for RMR in the future. In addition, we continue to explore opportunities to grow AUM and accelerate our private capital fundraising capabilities through possible M&A activities. The current environment has been disruptive to our efforts as any diligence efforts in negotiations cannot happen in live settings. While the overall process has slowed, we remain confident that an accretive transaction can be executed. With that said, as in prior earnings calls, we cannot speak to any specific transactions at this time. Before I turn it over to Matt, I want to reiterate that despite the ongoing crisis, I remain optimistic about RMR's ability to both weather the current market disruptions and pursue new opportunities for growth that may present themselves in the future. I'll now turn the call over to Matt Jordan, our Chief Financial Officer.

Matt Jordan, Chief Financial Officer

Thanks, Adam, and good afternoon, everyone. As Adam suggested in his prepared remarks, I wanted to first talk about some of the detailed actions we've taken as an organization to ensure the health and safety of our employees, tenants, service providers, and visitors. Over the last two months, our organization, leveraging the advice of outside experts in industrial hygiene, has designed standard operating procedures to assist to address such items as air filtration, janitorial products and procedures, social separation, and the use of personal protective equipment. In addition to implementing these procedures, we have also focused on mitigating unnecessary costs at many of our managed assets given temporary reductions in usage, which includes the implementation of energy reduction protocols and the reduction of non-essential building services. In addition to implementing enhanced operating protocols, our property management teams have established business continuity plans to ensure operational stability. Non-critical travel has been suspended, regional leadership has not been allowed to work in the same location at the same time, and personal protective equipment is required for all property management employees. At this time, our operations team has turned their attention to preparing for tenants to re-occupy our managed assets as various states across the country ease shelter-in-place orders. We will continue to leverage outside experts and best practices from our national platform and look forward to providing an update on these efforts in future calls. Turning to this quarter's financial results. The market disruptions caused by the pandemic have led to material declines in the share prices of our client companies and in fee-paying assets under management, which in turn has led to reductions in our base business management fees. As Adam discussed, our Managed Equity REITs have agreed to rent deferrals with certain of their tenants, and some construction activities will either be delayed or canceled altogether as our Managed Equity REITs look to conserve capital. These rent deferrals will have a temporary adverse impact on our property management fees as the fee is calculated on a cash basis, and any reduced capital spending will lead to lower construction management fees in future quarters. Considering these uncertainties, we withdrew our previously issued guidance and do not expect to issue new guidance until the current situation stabilizes. So, I will look to provide insights on what future revenue and costs could be if current economic and operating conditions continue. For the fiscal second quarter, we reported adjusted net income of $7.6 million, or $0.46 per share, and adjusted EBITDA of $23.9 million. Adjusted earnings this quarter add back an aggregate of $0.07 per share for unrealized losses on our investment in TA and separation and transaction costs. Management and advisory services revenues were $44.1 million this quarter, which represents a $740,000 increase on a year-over-year basis, primarily from acquisition-related fee growth at ILPT and SVC, partially offset by lower business management fees from DHC and OPI as a result of declines in their market capitalization. On a sequential quarter basis, revenues decreased $4 million primarily due to share price declines at our Managed Equity REITs. For the quarter ended March 31, 2020, all of our Managed Equity REITs are currently paying base business management fees on a market capitalization basis. The impact of being on this lower measure for the determination of our base business management fees results in a lost revenue opportunity of approximately $55 million using March average share prices. As a reminder, our base business management fees are calculated monthly; thus, the declines in our Managed Equity REITs share prices resulting from the pandemic were limited to the month of March. Assuming our REIT share prices remain at April average levels, coupled with the adverse impacts of the rent deferrals and declines in construction that we previously highlighted, we are projecting total management and advisory service revenues to be between $36 million and $39 million per quarter for the remainder of the fiscal year. Turning to expenses for the quarter. Cash compensation of $30.1 million was flat on a sequential quarter basis, and our cash compensation reimbursements from our client companies remained at 43%. While we have looked at our staffing levels, we have decided against making rash short-term reductions that would otherwise disrupt the scalable infrastructure we've built. We expect this level of cash compensation to reflect our run rate for the remainder of the fiscal year. G&A expenses this quarter were $7.3 million, which includes almost $500,000 or $0.01 per share from annual share grants to our Board of Directors in March. For the remainder of the fiscal year, we will be looking to minimize unnecessary G&A costs and expect the ongoing pandemic to naturally limit discretionary expenditures such as travel. We ended the quarter with approximately $377 million in cash, and we continue to have no debt. We believe our balance sheet continues to leave us with ample operating liquidity, as well as positioning us to take advantage of strategic opportunities and invest in new business initiatives. Before we go to questions, I want to acknowledge the hard work of a number of people across the organization who have helped in having RMR recognized for the second year in a row with the ENERGY STAR Partner of the Year Award by the US Department of Energy. That concludes our formal remarks. Operator, would you please open the line to questions?

Operator, Operator

Today's first question comes from Bill Katz with Citigroup. Please go ahead.

Bill Katz, Analyst

Okay. Thank you very much for the update. I appreciate all the commentary. I hope everyone is doing okay. Just sort of thinking through China, and I appreciate sort of how you sort of feel the short-term view of the different REITs, if you will. Just trying to understand when I look at them, I sort of see some very high leverage across them. How should we think about sort of fee-paying AUM from here? I appreciate your guidance for the next couple of quarters on the management revenues, but sort of wondering you have some things where you were looking to potentially dispose and restructure, but also I just think ahead here, how should we be thinking about just the outlook for fee-paying AUM? Thank you.

Adam Portnoy, President and CEO

Sure. Hi, Bill. So with regards to the fee-paying AUM, given where we are with the share prices of our REITs, first of all, I do think what our contracts are demonstrating is the complete alignment of interests between RMR and the managed REITs. RMR is taking a significant fee reduction, which is resulting in significant declines in G&A at the managed REITs as a result of their share declines. Specifically, with regards to your question around leverage, yes, at SVC and DHC, leverage levels are higher or more elevated than we would typically run those companies. And you're right, both those companies were sort of midway through disposition programs to reduce leverage. That being said, given where we are today with those companies, both of them are in a position that I think given the fact that we've reduced the dividend to $0.01 a share per quarter and substantially curtailed capital expenditures, they have more than enough or ample liquidity to make it through at least 2021, if not beyond. And so, we feel pretty good about where those two companies are specifically. And as it relates to RMR and fee-paying AUM, nobody knows exactly where share prices move, but given that how much those two companies’ share prices have declined in the last several weeks, it's hard for me to imagine they continue to decline further. I think there was sort of a knee-jerk reaction to the dividend reductions and the fact that both those companies were sort of midway through a disposition effort. I think a lot of that's been reflected in the stock, and I think from this point forward, they're both in very, very liquid positions and able to withstand the downturn and certainly have enough financial flexibility through '21.

Bill Katz, Analyst

That's helpful. I have a quick follow-up question. In both the press release where you revised the guidance and today’s call, you mentioned some potential risks associated with the long-term contracts. I'm curious how much of that is standard precautionary language versus any changes in relationships with some of the REITs that could affect these long-term contracts.

Adam Portnoy, President and CEO

Yes, Bill, I think that's just boilerplate language that I believe it's often and I think always in our press releases and announcements. There is no shift in relationship between RMR and the managed REITs at all. If anything, I think, today those REITs are benefiting handsomely from the expertise and the breadth and the depth of the RMR organization. And again, they are also benefiting from the fact of the great alignment of interest between the REITs and RMR. Those REITs have had significant reductions in G&A far more than many of their peers have experienced in the marketplace. And so, I don't think there is any deterioration in relationship. In fact, if I would characterize it anyway, I'd say it's probably stronger today than it's been ever in the past.

Bill Katz, Analyst

Okay, great. Thank you very much.

Adam Portnoy, President and CEO

Yes.

Operator, Operator

And our next question today comes from Owen Lau with Oppenheimer. Please go ahead.

Owen Lau, Analyst

Good afternoon, Adam and Matt. Thank you for taking my questions. So given the COVID situation, could you please update us on your thoughts about the timing of your strategic acquisition? And then in the meantime, do you need to preserve some capital for your managed REITs like for the lending purpose? And then, is there any JV or other initiatives that RMR could potentially pursue in the meantime?

Adam Portnoy, President and CEO

Thank you, Owen. Regarding our strategic M&A activities, our overall strategy at RMR remains unchanged due to the pandemic. Prior to the pandemic, we aimed to diversify and grow our business, and this focus continues. We were exploring a few M&A opportunities when the pandemic hit, and those discussions have been paused as both parties need to concentrate on immediate business needs. However, I'm cautiously optimistic that we can proceed with these opportunities as we move through 2020, and I believe there’s a fair chance we could achieve some progress this year. Over the past few years, we've prioritized financial flexibility, which has served us well as we entered the pandemic with substantial cash reserves and no debt. Maintaining this financial flexibility is even more crucial now, especially given the potential for a significant recession. Historically, after events like the one we're experiencing, companies with liquidity often find new opportunities, and I believe we may encounter options that weren't previously available as we navigate this downturn. I'm hopeful that we can leverage our financial position to take advantage of these opportunities in the near future. As for joint venture opportunities, we have been making progress, particularly with one of our Managed REITs, ILPT, which recently entered into a joint venture with a sovereign wealth investor with whom we have a long-standing relationship. Our connections with this type of capital are strengthening, and I see potential for more joint venture opportunities in the coming months, especially in certain asset types that we currently invest in. RMR generally focuses on what is known as core real estate—established or mature real estate—which tends to perform better during recessions, providing us an advantage in the current environment.

Owen Lau, Analyst

Okay. That's very helpful. So I know it's a tough environment for your hotel and senior living businesses, but how do you think about the potential change in consumer behavior? What are some of the things you are doing or could potentially do to convince your customers to come back in the future? Thank you.

Adam Portnoy, President and CEO

Certainly. In terms of the hotel and senior living sectors, these are among the hardest hit by the pandemic. Each sector has a unique situation. For hotels, we primarily collaborate with major brand owners like Marriott, InterContinental, Hyatt, and Radisson, as most of our hotels are operated by them. Our focus is on the hotel operators rather than franchisees, which means we align closely with these brands. Companies like Marriott and InterContinental are actively considering what the new normal will be as we emerge from this pandemic. They have the advantage of learning from their operations in regions like Asia or China, where the recovery process began earlier than in the U.S. While no one can predict exactly how the hotel industry will evolve, it's clear that it will look different moving forward. On the other hand, the senior living sector will likely experience the impacts of COVID-19 for an extended period, particularly due to the demographic it serves. Even after other regions begin to reopen, nursing homes, assisted living, and independent living facilities will probably remain under strict protocols for much longer than other sectors of the economy. The recovery in this space is heavily influenced by the nature of the virus, meaning that as the virus diminishes, the senior living industry should see improvements more so than from broader economic trends.

Owen Lau, Analyst

Okay, that's it for me. Thank you very much.

Operator, Operator

And our next question today comes from Bryan Maher with B. Riley FBR. Please go ahead.

Bryan Maher, Analyst

Good afternoon, Adam and Matt. On the deferrals that you guys struck with the Managed REITs and their tenants, how did you come up with your decision to kind of go one to three months and paybacks beginning in September for 12 months? And when you look forward and you think about all the tenants that deferrals have been granted to, where lies your concern with actually getting repayments? And to what level do you think that there could be non-repayments within the deferrals that have been struck to date?

Adam Portnoy, President and CEO

Sure. So every case was handled individually. We have a pretty large and robust asset management group within RMR that handles all those requests as they come in, and we've also reached out to many tenants as well along the way. Basically, we took the view that most of the tenants that we have worked with, we started with one month deferrals. We have gone as far as three, maybe even four months in limited cases depending on the nature of the business. And we basically decided early on that we didn't know how long this was going to require, how long people need deferrals, but we thought it probably made sense to push people out to the fourth quarter until they had to start repaying us, just seems like a reasonable timeline to pick. And most people reacted positively to that timeline, meaning back in April, we said if you didn't pay, we'll give you a deferral on April rent, but you don't have to start paying that until, let's say, October 1, and you'll pay that April rent in 12 equal installments starting in October for the next year. As we look out today, across the Board, the tenants that obviously we worry the most about are somewhat talked about in my prepared remarks, the service retail, net retail tenants within the SVC portfolio. We only collected 45% of the rents in April; it's trending as we are 10, 11 days into May, very similar to that trend so far. We are basically at the same point we were in April as we stand here in May. And so, I suspect that's the area that we are probably the most concerned about or we worry that there would be perhaps a permanent impairment of some rents there. In the other portfolios that we manage, it's largely not a very material number. This pandemic obviously in the downturn has disproportionately affected smaller tenants, and we don't have a lot of small tenants in our office portfolio, industrial portfolio, our medical office buildings, life science buildings, so they just don't exist. There are some, and where we do have them, that's where we are tending to get the requests in a general sense, but it's not a very meaningful piece of the revenues we generate in those other portfolios. So, Bryan, if I had to say outright the area that we are most worried about is the retailer.

Bryan Maher, Analyst

Right. But do you get the sense though that the market as it relates to SVC may have overreacted given the fact that the net lease component of that portfolio excluding TA which is fully paying is only something like 14% of annual minimum rents?

Adam Portnoy, President and CEO

Short answer, Bryan, yes. I believe the market has overreacted negatively with SVC based on the fact that you're right, TA is fully paying on our hospitality side; we have guarantees and security deposits outside and large portfolios with brand owners. So yes, I do believe the market has overshot to the downside in both SVC and DHC. Yes.

Bryan Maher, Analyst

Okay. And kind of shifting gears a little bit, where are you seeing in this kind of morass of real estate at the moment, opportunity starting to pop up where you Adam and the C-Suite at RMR are spending the most time? Is it in kind of the better performers like office and industrial where you might want to grab more, because it's doing well, or is it in the more dire markets like hotel and net lease where there could be really meaningful opportunities? Where are you guys spending your time to maximize the longer-term results at the four Managed REITs?

Adam Portnoy, President and CEO

Yes. I would say, today, with the opportunities that are available for us to spend time on are in the office and industrial side. Transaction volume is a fraction of what it was. Our opportunities are a fraction of what they were before the pandemic, but the opportunities that are out there tend to be around industrial, well-leased office. We don't do much in multifamily, but there are some multifamily opportunities in the market as well. With regards to retail and hotels, there could be opportunities there, but there's none to act on at the moment. And typically, when you have a pullback like this, it takes a while for the sellers to get to the point where they're willing to sell at distressed pricing, if they have to, and we're not at that point yet. I don't know when it will be, but we're not there yet. And so, we're not seeing many opportunities like that. That doesn't mean they won't present themselves in the future and we won't try to take advantage of them. But today, what we're seeing is really limited to basically industrial and well-leased office.

Bryan Maher, Analyst

Thanks, Adam. That's all for me.

Operator, Operator

And our next question today comes from Kenneth Lee with RBC Capital Markets. Please go ahead.

Kenneth Lee, Analyst

Hi, thanks for taking my question. Just a follow-up on the last one in terms of the SVC and what you're seeing in terms of that 45% rent collections in the month of April. Just wondering if you see the potential for any kind of meaningful increase in the percentage of rent deferrals in the near-term or do you think this is sort of like a good level that's being currently hit right now? Thanks.

Adam Portnoy, President and CEO

Sure. So the best answer I can give you is that we're currently trending 10, 11 days into May exactly where we were 10, 11 days into April on that net lease retail portfolio. We generally thought May will probably be the low watermark for that portfolio. And so, it could be worse than April. That's just given the fact that most states are just starting to open up. It's our general view that we thought that probably by June, most states will have opened up in some form or fashion and some of these retail tenants or most of these retail tenants will likely be able to be back up and operating, and there'll be more economic activity starting in June. So we are bracing ourselves that May could be worse than April, but so far it's tracking right in line.

Kenneth Lee, Analyst

Got you, very helpful. And then just one follow-up, if I may. Just given the current economic conditions and you mentioned this within the prepared remarks, but just wondering if you see any change in terms of the growth opportunity specifically within the commercial mortgage REITs as well as the Tremont versus what you saw like maybe six months earlier. Thanks.

Adam Portnoy, President and CEO

Yes, that's a great question. There are really a lot of opportunities, I think, for us in our mortgage origination platform. We're one of the few platforms in the United States today that, Ken, has the ability to deploy capital in mortgage investments, whole loans. There are very few firms that are still deploying capital; most alternative lenders in the mortgage REIT space have stopped deploying capital. They're in a situation where they're dealing with their repo lenders in terms of having to provide capital, excess capital in response to capital calls from those banks, and so they've basically shut down new origination. So, I think we're in a pretty unique circumstance, where as I mentioned in the prepared remarks, one of our managed companies, the RMR Real Estate Income Fund, which is a mutual fund business, shareholders approved converting that business into a mortgage, commercial mortgage REIT. And so we have the opportunity now to redeploy about $150 million of equity before leverage into commercial mortgages. And today, given that there are so few competitors in the marketplace, I think, we have the opportunity to basically get outsized returns while taking lower risk. We don't have to maybe chase the sort of value-add transitional bridge loans the same way we were, let's say, before the pandemic. We might have the opportunity to lend against more stable properties that have sort of been caught up in a lack of ability to refinance in the current environment just because there's very few folks that can put on permanent financing. The CMBS market, for example, banks, while they're starting to open, the level of activity in those markets is very small. And so, I do think there's a real opportunity for RMR and our platform to take advantage of the current environment. We hope to, in the coming months.

Kenneth Lee, Analyst

Great. Very helpful. Thank you very much and hope everyone stays safe.

Operator, Operator

Our next question today comes from Mike Carrier, Bank of America. Please go ahead.

Dean Stephan, Analyst

Hey, guys. This is Dean Stephan on for Mike Carrier. Just a quick question from me. Given the tougher environment for strategic acquisitions or partnerships in the near and maybe medium-term moving forward and the healthy cash balance, just wondering what's the minimum cash balance needed for liquidity purposes at RMR and have any of your thoughts changed in regards to returning some excess capital to shareholders moving forward? Thanks.

Adam Portnoy, President and CEO

Sure. I'm not certain about the minimum cash balance required, but I believe we could comfortably run the business with less than $100 million in cash. Our discussions about returning cash to shareholders have been overshadowed by our need for financial flexibility. We tried to balance these priorities as we faced the pandemic, and now we are leaning more towards maintaining that flexibility. It’s important for us to be well positioned to seize any potential opportunities. Companies lacking financial flexibility often struggle to access capital, while we can act swiftly when the right opportunities arise. This could be a once-in-a-generation chance for us to pursue possibilities we may not encounter again. We want to ensure that the company is ready to take advantage of this. That said, we have kept our dividend stable for the current quarter and intend to maintain that stability for the remainder of the year, despite the likelihood of reduced cash flow in the third and fourth quarters, depending on stock price movements in our Managed Equity REITs. You could interpret this as a willingness to return more capital than in the past since we will be distributing a larger share of our free cash flow. However, we will still be under 100% payout of our free cash flow. While we are increasingly focused on financial flexibility, our decision to keep the dividend stable reflects our commitment, and we aim to maintain that stability in the upcoming quarters with a higher percentage payout than before, though still under 100%.

Dean Stephan, Analyst

Makes sense. That's it for me.

Operator, Operator

And our next question today comes from Ronald Kamdem with Morgan Stanley. Please go ahead.

Ronald Kamdem, Analyst

Thank you for taking my questions. I want to revisit the topic of asset classes from a different angle. Considering the lessons learned during this pandemic, which is still in the early stages, you've experienced various property types and observed their performances firsthand. Have you thought about which asset classes you might want to engage with more or reduce involvement in? Additionally, are there asset classes that you're not currently invested in that could be easy to add to your portfolio? I'm just curious about your medium to long-term outlook on this.

Michael Kodesch, Director of Investor Relations

Sure. As I mentioned earlier, we continue to see potential in the industrial sector. Our joint venture at ILPT with a sovereign wealth fund offers us significant growth opportunities in that area. On the office front, we are being selective, focusing on well-leased properties that make sense. One notable area where we have not established a strong presence is multifamily housing, which we see as a potential opportunity to expand our footprint. We are actively looking to gain a stronger foothold in that sector as opportunities arise. Like many others in the market, we are trying to understand what the new normal will be post-pandemic. There's considerable discussion about the trend over the past two decades emphasizing urban density, where people favor living, working, and playing close together. I find myself pondering whether this trend will persist or shift. For example, will there be a renewed demand for office space that is less dense? We're considering these dynamics carefully. We have a substantial suburban office portfolio that could benefit from these changes, and we may look to invest more in this area going forward. These are the topics we are currently evaluating.

Ronald Kamdem, Analyst

Right. And then, my second question was just piggybacking on sort of the private capital conversations. Just sort of curious to get a sense of what's the pulse right now out of those investors, right? To some extent, there may be some deer in the headlights given the unknown of the pandemic, but can you give the sense that there is also investors out there looking to be maybe more opportunistic and trying to do the work now to position themselves on the back of this? Just trying to get a sense of has conversations even started, or is it still too soon?

Adam Portnoy, President and CEO

Yes, that's a great question. In our discussions with sovereign wealth investors managing large capital pools, I've noticed that most of them are very much open for business and eager to seize opportunities. This has been a consistent theme we’ve seen among large private capital groups. They are enthusiastic about investing and are keen to take advantage of the current environment. While their perspectives on certain asset classes may have shifted—such as a decreased interest in retail or hotels—I believe there is still investment potential in sectors like office, industrial, multifamily, and other niche markets. Contrary to my initial thoughts that investors might take a cautious, wait-and-see approach due to uncertainty, we have found that they are indeed ready to engage. They recognize that this could be a unique opportunity, possibly occurring once every century, to leverage the current situation.

Ronald Kamden, Analyst

Helpful. Thanks. That's all from me.

Operator, Operator

And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Portnoy for any closing remarks.

Adam Portnoy, President and CEO

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

Operator, Operator

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.