RMR Group, Inc. Class A Aktie

Good afternoon, and welcome to the RMR Group Fiscal Second Quarter 2026 Earnings Conference Call.

[Operator Instructions] Please note today's event is being recorded.

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

Good afternoon, and thank you for joining RMR's Fiscal Second Quarter 2026 Conference Call. With me on today's call are President and CEO, Adam Portnoy; Chief Operating Officer, Matt Jordan; and Chief Financial Officer, Matt Brown. 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, 2026, 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 differences is contained in our filing with the SEC, 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 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'll now turn the call over to Adam.

Thanks, Bryan, and thank you all for joining us this afternoon. Yesterday, we reported second quarter results, reflecting distributable earnings and adjusted EBITDA at the high end of our expectations despite operating in what remains an unsettled economic environment. Our second quarter results were highlighted by distributable earnings of $0.44 per share and adjusted EBITDA of $18.5 million.

Although we continue to navigate market volatility and geopolitical uncertainty, RMR has been very active this year executing on our clients' strategic initiatives. The markets continue to recognize our efforts as both DHC and ILPT remain among the best performing REITs in 2026 from a total shareholder return standpoint, extending the significant outperformance they each achieved in 2025. As a result, RMR earned incentive fees for 2025 of $23.6 million, and we are on track to earn incentive fees again this year as both DHC and ILPT accrued incentive fees this quarter.

I would now like to go over some recent highlights at our managed REITs before turning the call over to Matt Jordan to provide an update on our private capital initiatives. At DHC, following the successful transition of 116 senior living communities to new operators in the back half of 2025, it has continued to focus on improving SHOP operating performance while also strengthening its balance sheet. In the first quarter, DHC generated normalized FFO of $33 million or $0.14 per share and adjusted EBITDA of $74 million, both exceeding analyst consensus estimates.

SHOP performance showed positive momentum with year-over-year same-property NOI growth of 13.5% and occupancy increasing by 110 basis points. In March, DHC completed the sale of 13 unencumbered noncore communities for gross proceeds of approximately $23 million. Following an active 2025 in which DHC completed approximately $605 million of asset sales, we expect asset sales to decelerate in 2026 with management focused on improving NOI across the retained portfolio. Lastly, in April, Moody's upgraded DHC's debt ratings and revised its outlook to positive from stable, underscoring the company's improving operating performance and balance sheet.

At SVC, we recently made significant progress improving its balance sheet and covenant ratios. RMR was instrumental in helping SVC complete a $575 million equity offering, which accelerated its deleveraging strategy, eliminated near-term refinancing risk and provided SVC additional flexibility to optimize its hotel performance and execute further asset sales. With the net proceeds, SVC eliminated all of its unsecured debt maturities until 2028. As it relates to SVC's equity offering, I would highlight that RMR participated with a $50 million anchor investment, further aligning our interest with shareholders and demonstrating our confidence in SVC's business plan. Following several years of strategic capital investments to reposition the retained hotel portfolio, SVC is now transitioning toward an earnings recovery phase, supported by new hotel leadership at Sonesta that is focused on improving operating performance.

ILPT continues to deliver strong results with first quarter normalized FFO of $0.33 per share and adjusted EBITDA of $87 million, both exceeding the high end of management's guidance. ILPT also executed approximately 862,000 square feet of leasing during the quarter at rental rates 26% higher than prior rents. Additionally, RMR recently assisted ILPT with the refinancing of $1.6 billion of new debt for its consolidated Mountain joint venture, which replaces floating rate and amortizing debt with interest-only fixed rate and an attractive 5.7% interest rate while also extending ILPT's debt maturity profile.

Seven Hills, our mortgage REIT, has been actively deploying capital from its December rights offering. During the quarter, Seven Hills originated 3 loans totaling $67.5 million and generated distributable earnings of $0.24 per share. Total loan commitments increased to approximately $776 million in the first quarter, achieving a record high for the portfolio. Originations thus far in 2026 are at the highest net interest margins achieved over the past 4 years, which reflects the benefits of our focus on middle market lending where there tends to be less competition for high-quality loans.

Lastly, OPI recently received court approval for its plan of reorganization, and we expect it to emerge from bankruptcy by the end of the second quarter and for its shares to be publicly traded. We also expect RMR's contract with OPI to be consistent with our previously disclosed terms. More specifically, RMR will continue managing OPI for a 5-year term with RMR receiving a flat business management fee during the first 2 years of $14 million per year and our property management agreement economics will remain unchanged.

To conclude, we are pleased with the progress RMR has made assisting our clients with their financial and strategic objectives. While there remains more work to do, we are encouraged that the markets recognize the significant improvements at both DHC and ILPT. It is important to remember that our publicly traded perpetual capital clients provide RMR with stable cash flows, which we are using to pursue new growth initiatives in the private capital space. The private capital segment of our business has grown from essentially 0 AUM in 2020 to nearly $12 billion today, and we anticipate this segment will be a key driver of our future revenue and earnings growth.

With that, I'll now turn the call over to Matt Jordan to provide added insights on our platform and private capital growth initiatives.

Thanks, Adam. As it relates to our private capital initiatives, with a global in-house sales team firmly in place, we are spending the necessary time building RMR brand awareness. As an example, I recently had the privilege of joining Peter Welch, who leads our international fundraising efforts in Southeast Asia, meeting with potential partners and participating in events where RMR stood side-by-side with larger, more well-established international brands. In aggregate, our international outreach has resulted in our leaders meeting with almost 200 global investors, representing almost $7 trillion in AUM.

With that said, the ongoing conflict in the Middle East has disrupted fundraising. This disruption has played out in the global fundraising data as fundraising in the first quarter of 2026 dropped 50% from the same time last year. The positive news for RMR is that North American real estate still garnered 65% of all dollars raised and value-add strategies represented 56% of all fundraising. Within our residential business, which today represents over $4.7 billion in value-add residential real estate across 18,500 owned and managed units.

In April, we closed on the acquisition of a multifamily portfolio in Greenwich, Connecticut for almost $350 million. The transaction was sourced off-market and marks our entry into one of the most supply-constrained and affluent housing markets in the country. RMR Residential will assume property management and will execute a multiyear strategy focused on modernizing the communities, enhancing the resident experience and unlocking embedded efficiencies. The acquisition is part of a joint venture where RMR is a co-general partner and in that capacity, made a $6 million investment for a 5% ownership interest.

The remaining equity of approximately $120 million was raised from 2 institutional partners. RMR will recognize revenues from this transaction of $600,000 in our third fiscal quarter. And as general partner, we will earn ongoing operating fees of approximately $750,000 annually. Longer term, the venture is expected to generate annual cash-on-cash returns of approximately 7.5%, and we expect to receive carried interest from the venture as certain investment hurdles are met. Finally, the venture will not be consolidated given our ownership is limited to 5% and a portion of our GP interest may become part of RMR's enhanced growth venture.

As it relates to the enhanced growth venture, which was launched last fall with the goal of raising approximately $250 million of third-party equity, there remains significant interest in both U.S. value-add multifamily real estate and our seeded portfolio of assets. This interest has resulted in ongoing diligence with a number of potential investors with the hope that we can provide a more meaningful update on our next earnings call.

As it relates to the operating performance within our Residential business, we, along with our joint venture partners remain pleased as occupancy approaches 94% with resident retention currently over 70% and retained residents absorbing rental rate increases of over 3%. Operating performance at these levels will continue to help with the fundraising in the highly competitive residential space.

I'd like to also highlight a new disclosure we've made in our investor presentation that emphasizes the discount our shares trade at when looking at our business from a sum of the parts perspective. As we illustrate, if one were to back out the cash and investments held by RMR, our shares are currently trading at only 5x the EBITDA generated from the durable cash flows associated with our 20-year evergreen management contracts from our perpetual capital vehicles. This is materially below EBITDA multiples at which our peers trade. We are hopeful this new slide illustrates the significant upside embedded in our shares.

In closing, it remains an active time for our organization as we continue to invest in our people, technology and brand awareness. We are leveraging these investments to reinvent our operating structure, materially increase productivity and ultimately drive down operating costs to deliver meaningful EBITDA growth.

With that, I'll now turn the call over to Matt Brown.

Thanks, Matt, and good afternoon, everyone. For our fiscal second quarter, we reported adjusted EBITDA of $18.5 million and distributable earnings of $0.44 per share, which exceeded or at the high end of our guidance. I'd also like to note that we reported adjusted net income of $0.11 per share, which fell $0.01 short of our guidance. Going forward, we will no longer provide guidance on adjusted net income as our investments in leveraged real estate have significantly reduced the usefulness of this metric as we incur depreciation and interest expense on these investments.

Recurring service revenues were $42 million, a sequential quarter decrease of approximately $1 million, driven primarily by hotel sales, a decrease in the enterprise values of SVC and DHC as they strategically paid off debt and the wind down of AlerisLife's business. Next quarter, we expect recurring service revenues to increase to approximately $44 million, driven by approximately $600,000 of revenue from the multifamily portfolio acquisition in Greenwich, Connecticut that Matt discussed, increased construction management fees and enterprise value improvements at certain of our managed REITs.

Turning to expenses. Recurring cash compensation was $37.7 million, a modest sequential quarter increase driven by calendar 2026 payroll tax and benefit resets. Looking ahead to next quarter, we expect recurring cash compensation to remain consistent with the second quarter. Recurring G&A this quarter was $10.1 million, after excluding $600,000 in annual director share grants, which is a slight sequential quarter decrease driven by a reduction in normal course legal and professional fees. We expect recurring G&A to remain at these levels for the remainder of the fiscal year.

It is also worth noting that this quarter's income tax rate was elevated at 22%, driven by the impact of certain fair value adjustments that we recognized during the quarter, mainly our investment in Seven Hills that are subject to different statutory rates than our ordinary income. For modeling purposes, we may continue to see fluctuations in our income tax rate each quarter as these adjustments impact the timing of tax expense recognition. However, these fluctuations are not expected to materially impact our full year estimated tax rate of 17% to 18%. Aggregating the collective assumptions I've outlined, next quarter, we expect adjusted EBITDA to be approximately $19 million to $21 million and distributable earnings to be between $0.48 and $0.50 per share.

As Adam and Matt highlighted earlier, subsequent to quarter end, we participated in SVC's equity offering by acquiring nearly 42 million shares for $50 million and acquired a $6 million co-GP equity interest in the Greenwich, Connecticut multifamily joint venture. Our investment in SVC will result in approximately $420,000 of incremental quarterly dividends. Accounting for these transactions, our current liquidity is approximately $133 million, including $75 million of capacity on our revolving credit facility. We continue to be well capitalized with a strong dividend and look forward to executing on our strategic objectives and taking advantage of opportunistic investments as they arise.

That concludes our prepared remarks. Operator, please open the line for questions.

[Operator Instructions] And today's first question comes from Mitch Germain at Citizens Bank.

Adam, there's a whole bunch of multifamily assets that are owned in different syndication. I'm curious, is there -- is the expectation of one transaction if you can lock in a larger fund, is the expectation that this all kind of cleans up with that? Or is there the potential for some of these to just continue to remain as one-off investments?

Mitch, thank you for that question. So it's a good question. I think you got to keep in mind, part of the way you answer that question is how we put together the portfolio that is our multifamily portfolio. It's the only asset class that we manage that's 100% private.

We don't have a public vehicle around multifamily. And that portfolio was originally -- mostly constructed as part of acquisition of our Residential platform about -- little over 2 years ago. Most of those investments are in joint ventures, one-off joint ventures per investment. A few of them are small portfolios. And that's how that whole business has been structured similar to the way we bought it.

I expect that we will continue to have many of those joint ventures be the form of the investments we make, especially over the short term. But I think what you're seeing in terms of the enhanced growth fund that Matt Jordan talked about, and we've talked about on many calls, is we're starting to try to put together a portfolio among that $4.7 billion, which is mostly joint ventures of, let's say, a fund that we can raise money around.

So we're trying to do both. I don't think you will see a transaction that will suddenly, let's say, roll up all $4.7 billion into a new public vehicle. I'm not sure if that was your question, but that's not where we're going with that. It's likely to all stay private, likely to continue to be joint ventures, one-offs, small portfolio joint ventures. And our hope is that we can start to build a more dedicated fund around that strategy as well.

Taking that a little bit further, I think last couple of quarters, you seemed a little bit more positive on potential venture in, I guess, we'll call it commercial mortgage as well as I think you've mentioned development. Are those 2 products just a little bit behind multifamily right now with regards to your priorities?

They're all top priorities. I will tell you, I just think it's -- and we are continuing to talk to investors and partners about development projects. I think in the current market environment, the returns required for development projects are pretty high and development is always difficult when you have a lot of uncertainty, and it's hard to predict the next -- it's hard to predict the next quarter, let alone 18 months from now, which is typically what you got to do to sign off on development projects.

So we are continuing to work on those. I expect we will, in the course of the year or so, have some joint venture development projects underway. It's just that today, in the multifamily space, with the portfolio that we've assembled, we are generating the highest amount of interest around that. One comment on the credit that you mentioned, Mitch. We are also very active in talking to investors around credit as well. We are not -- I wouldn't say it's less of a priority, but we have a lot of money to put out in our Seven Hills mortgage REIT right now.

And I think the number is close to $0.5 billion of capacity over the next year of new investments that we are going to be able to make between new money coming into that vehicle and expected loan payoffs. So we have a pretty good pipeline and capacity with our existing vehicles there. But we are still talking to investors around credit. There's been a general pullback around credit given what's going on in the marketplace around some other funds that are in the credit space, especially retail-oriented funds. And so there's been some hesitancy among investors to take those conversations further at the moment. But that's okay from our perspective because we have a lot -- we can do a lot of work there anyways. We can put a lot of AUM to work otherwise.

Got you. Last one for me. I think at one point, you might have had close to $300 million or so million of cash on hand. I think that -- obviously, that balance has come down a bit as you're buying some of these assets and warehousing them on balance sheet in anticipation of some of your fundraising. Where are you -- and I know you're getting some benefit of these incentive fees, which is kind of renewed to the story more recently. But where are you with regards to kind of what -- how much sort of cash do you want to keep on hand for some sort of rainy day basically. So I mean, are we getting close to an amount where you're starting to become a little bit more conservative with allocating capital? Or are you still all systems go if the right opportunities are presented?

More of the -- all systems go if the right opportunities present ourselves. We have about over $100 million of liquidity between cash on hand and undrawn capacity on our revolver. We are also fairly optimistic that we will be getting some cash back, especially as we are hopefully successful in syndicating the enhanced growth value, the fund that we have built up around the multifamily strategy. We have $100 million of capital committed to that venture or just under $100 million. And if we are successful in syndicating that and getting that fund launched, which we are optimistic that we will get it done, that will be a lot of cash flow will also be coming back to us, we think.

[Operator Instructions] Our next question today comes from Christopher Nolan at Ladenburg Thalmann.

Adam, is the Seven Hills participating in this Greenwich project providing debt financing?

Chris, no, Seven Hills is not providing any sort of financing with that -- with the multifamily acquisition in Greenwich, No.

Okay. And then I guess, Matt Brown, did you say adjusted Net income in the second -- in the next quarter will be $19 million to $21 million? Or did I mishear you?

Adjusted EBITDA in the fiscal third quarter, $19 million to $21 million.

Great. I guess as a follow-up in the general, Adam, how would you characterize the market for raising equity for commercial real estate as opposed to raising debt for commercial real estate?

It's a great question. First, I'm going to let Matt Jordan to answer the question. Go ahead, Matt.

Well, in terms of the debt, there is a lot of debt available to lend against real estate. We have no lack of interest just having done this on the Greenwich asset. Adam touched on fundraising around credit, which is very challenging right now for a number of reasons, including a lot of supply in the market in terms of organizations like ours going out with credit vehicles. Fundraising for equity is a very challenging effort right now. The volatility in the Middle East has taken a large number of folks that were putting a lot of money out and put them on the sidelines. Volatility is not a good thing for those that are fiduciaries of deploying capital. The money and the allocations to real estate will be there in the long term. But right now, a lot of the conversations we've had are continuing but have slowed significantly.

And to Adam's point on the enhanced growth venture, I just think it's elongating the fundraising cycle for what we're doing. But there continues to be significant allocations. As we highlighted, we've met with a significant number of global LPs. RMR itself is still a new brand. So we're spending a lot of time getting our name out there and people are amazed at the capabilities we bring and the breadth of our organization, but things are just going to take longer until the Middle East settles down.

Okay. And then I guess as a final question, you're seeing with some private equity shops, they're setting up distressed commercial real estate funds. Is that a potential strategy that you would consider? And in my view, that tends to be the preparing for some sort of down cycle.

Chris, it's not something we're actively pursuing at the moment in terms of setting up a distressed real estate fund. We have limited pockets within RMR and the different funds that we manage in groups that I think have a really attractive distressed opportunity presented itself to us. We could seriously consider about -- consider executing on it. But we don't -- we are not building out a strategy around that today.

And our next question today comes from John Massocca of B. Riley.

Maybe kind of sticking with the big picture kind of fundraising theme. You've seen some pullback in some other types of kind of credit funds, right, private lending being the most notable. Are you seeing any indications of that capital potentially being reallocated to things that are a little more tangible like real estate? Or is that just an unrelated phenomenon in your mind?

Yes. I don't think it's unrelated. I don't think they're related. We actually -- it's interesting when you meet with LPs, lending may not even sit in the real estate bucket. It may be in fixed income and other pockets within these large organizations. So we have not yet experienced where credit allocations have been redeployed in a way that's benefited us on the equity side.

Okay. And maybe switching gears a little bit. Going back to a little bit Mitch's last question but what's the appetite today for more kind of wholly owned assets or at least consolidated assets on balance sheet to help kind of create the base for funding either the multifamily-focused fund or even maybe a retail fund going forward? Just kind of curious if you think you're at a good point in terms of the wholly owned assets you have today or there's more capacity to continue to add to that?

Yes. I think there's a little more capacity to add to it. I don't think we'll be adding until we are successful syndicating the enhanced growth venture to add wholly owned multifamily assets on the balance sheet. But you mentioned retail. Retail is an area that we could maybe add a couple more assets to the balance sheet if there's the right type of assets. So that's an area that you could see us do some more asset level acquisitions on the RMR balance sheet to help sort of get that retail strategy further along.

Okay. And then thinking about kind of the quarterly financials, kind of you predicted it a little bit, but construction supervision revenues were down pretty big, certainly quarter-over-quarter, but even year-over-year. Just kind of trying to think of how much of that is just the new normal? How much of that is maybe one-offs? How much of that is seasonality? Just kind of any color on how you would expect that to kind of trend over the remainder of the year?

Yes. So I think when you look at our construction management fee revenue sequentially, it's really just driven by the start of the year is generally a little bit slower for us as budgets are just reset. As we look year-over-year, the decline at some of our managed public vehicles, we had some pretty extensive capital improvement projects going on, mainly within DHC and SVC that have largely wound down. Those REITs are now forecasting less capital spend in '26 than they were. But we will see a little bit of a ramp expected. It's going to be a benefit to us for the next quarter as we just start to progress throughout the year.

But maybe is kind of the year-over-year decline as you think about comparing it to the comparable quarter in '25 kind of a good way to think about it going forward?

Yes, I think that's a good run rate.

Thank you. And that does conclude our question-and-answer session. I'd like to turn the conference back over to President and CEO, Adam Portnoy, for any closing remarks.

Thank you all for joining our call today. We look forward to seeing many of you at our upcoming industry conferences, including NAREIT in June, and we encourage institutional investors to contact RMR Investor Relations if you would like to schedule a meeting with management.

Operator, that concludes our call.

Yes, sir. Thank you very much, and we thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.

Good morning, and welcome to the RMR Group Fiscal First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.

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

Thank you. Good morning, and thank you for joining RMR's fiscal first quarter 2026 conference call. With me on today's call are President and CEO, Adam Portnoy; Chief Operating Officer, Matt Jordan; and Chief Financial Officer, Matt Brown. 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, February 5, 2026, 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 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 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'll now turn the call over to Adam.

Thanks, Bryan, and thank you all for joining us this morning. Yesterday, we reported first quarter results that exceeded or at the high end of our expectations, highlighted by distributable earnings of $0.47 per share, adjusted net income of $0.20 per share and adjusted EBITDA of $19.5 million. I'm also happy to highlight that the strategic actions we have undertaken over the past two years at DHC and ILPT helped drive continued share price improvements at each REIT, and, in turn, resulted in RMR receiving $23.6 million in incentive fees for calendar year 2025. While there is more work ahead, the strategic steps taken thus far have helped generate significant positive returns for shareholders of DHC and ILPT.

In 2025, DHC and ILPT were the #1 and #3 best-performing REITs in the United States as measured by total shareholder return. Although, the economic environment continues to experience elevated uncertainty, RMR remained active this past quarter, executing on our clients' strategic initiatives. While we are limited in what we can discuss today because we are reporting results in advance of our publicly traded client companies, I'd like to highlight several noteworthy accomplishments from the quarter.

DHC continued its focus on improving SHOP NOI margins and selling noncore assets to further delever its balance sheet. In the fourth quarter, DHC completed its sale of 37 properties for gross proceeds of approximately $250 million. And for the full year, DHC sold 69 properties for approximately $605 million. Partially using these asset sales proceeds, DHC also fully repaid its zero coupon senior secured notes due in 2026. Leaving DHC with no debt maturities until 2028. This repayment further strengthens DHC's balance sheet, increased financial flexibility and unencumbered 45 collateral properties, representing $850 million in gross book value.

During the quarter, DHC also completed its announced transition of 116 SHOP communities from AlerisLife to new operators that have proven track records and well-established regional footprints. DHC anticipates material SHOP NOI improvements as these new operators increase revenues and rightsize operations. SVC continues to make significant progress selling noncore hotels to delever its balance sheet. During the quarter, SVC completed the sale of 66 hotels for approximately $534 million and sold a total of 112 hotels in 2025 for $859 million. SVC also announced the early redemption of $300 million of its senior unsecured notes due February 2027, using these proceeds from hotel sales.

Beyond the deleveraging efforts, we remain focused on helping SVC drive EBITDA growth across its hotel portfolio despite ongoing revenue displacement from renovation activity. Sonesta, which manages the majority of SVC's owned hotels and which is 34% owned by SVC, recently announced the appointment of Keith Pierce and Jeff Leer as Co-CEOs effective April 1st. These individuals will be instrumental in growing the Sonesta platform, while also working to improve EBITDA margins at the SVC-owned hotels.

ILPT had a successful year of leasing activity and indicated during its third quarter earnings call that it was expecting a strong end to the year as it finalized a large number of lease renewals. The REIT successfully refinanced over $1.2 billion of debt in 2025 and materially increased its dividend. ILPT is actively exploring the refinancing of its remaining $1.4 billion of floating rate debt, which currently has a final maturity date of March 2027.

Seven Hills, our mortgage REIT, completed a rights offering in December that raised gross proceeds of $65.2 million. This new capital should allow for over $200 million in gross loan investments. RMR agreed to backstop the offering, acquiring any rights not exercised as a demonstration of our confidence in Seven Hills and our Tremont lending platform. The offering resulted in subscriptions for approximately 5.5 million shares or 73.2% of the common shares offered. The RMR purchased the remaining 2 million shares for $17.4 million. With a pipeline of approximately $1 billion in potential lending opportunities, I'm confident our organization will quickly deploy these new proceeds in an accretive manner. In the fourth quarter alone, Seven Hills deployed $101 million into three new loans, which will complement its existing fully performing loan portfolio.

Lastly, as we noted on our fourth quarter earnings call on October 30, 2025, OPI filed Chapter 11 bankruptcy. The bankruptcy process remains ongoing, and we will update investors as new information becomes available. We are hopeful the process will be concluded by the summer. And in the meantime, we remain committed to supporting the assets, vendors and tenants of OPI.

To conclude, we are pleased with the progress RMR has made over the past quarter, assisting our public and private company clients with their financial and strategic objectives. Importantly, our perpetual capital clients provide RMR with stable cash flows, which we have used to pursue new growth initiatives in the private capital space to drive future revenue and earnings growth.

With that, I'll now turn the call over to Matt Jordan, Executive Vice President and Chief Operating Officer, to provide added insights on our platform and private capital growth initiatives.

Thanks, Adam, and good morning, everyone. Despite continued economic uncertainty for the full year, RMR arranged nearly 10 million square feet of leasing at rental rates approximately 13% higher than previous rents for the same space. These results continue to demonstrate the strong relationships our leasing and property management teams have with our tenants and the brokerage community. On the private capital side of our business, we continue to make the investments necessary to further scale our platform and reduce the use of third-party placement agents. To that end, we recently announced the hiring of Peter Welch to lead International Capital Formation. Peter is an experienced real estate and capital markets executive, there will be a strong complement to Mary Smendzuik, who leads our North American Capital Formation efforts. Peter is based in Australia and joins RMR with a mandate to expand RMR's brand globally, and help raise capital for current and future strategies.

Although the fundraising environment remains challenging, our current efforts are primarily focused on residential and select development opportunities, though the depth of our platform will allow us to pivot based on investor feedback. At RMR Residential, which represents $4.5 billion in value-add residential real estate across over 18,000 owned and managed units, our portfolio ended the year on a strong note. Our managed portfolio is approximately 93% occupied with resident retention for the year coming in at over 70% and resident delinquencies at nominal levels.

We are seeing similar trends within RMR's owned residential portfolio with each of the five communities remaining on track with their stated business plans. As it relates to RMR's enhanced growth venture fundraising, which launched in September, our goal remains to partner with a select group of investors to raise approximately $250 million. As we've noted before, we believe this venture is unique in the current competitive marketplace, as it provides investors with the ability to share in property level and general partner economics. We look forward to providing further updates related to this important initiative on future calls.

Turning to the retail sector. We continue to underwrite investment opportunities as we work to build a portfolio of value-add retail properties on our balance sheet to generate a track record we can raise money around in future years. Our first investment, the previously disclosed $21 million shopping center outside of Chicago, is ahead of our -- of its business plan, given our retail team's successful leasing efforts. As it relates to our credit strategy, we recently closed on the sale of two loans totaling $61.7 million, which netted RMR $16.6 million in proceeds after repaying the associated secured financing facility.

During our approximate 1.5 years holding period, these loans generated returns to RMR of just over 14%. While RMR continues to invest in our people, technology and brand building, we remain committed to improving our adjusted EBITDA margins. We have been steadfast in controlling costs and have made significant strides in headcount rationalization through process improvement, the implementation of AI initiatives and reducing functional redundancies across our more than 30 locations nationwide.

With that, I'll now turn the call over to Matt Brown, Executive Vice President and our Chief Financial Officer.

Thanks, Matt, and good morning, everyone. For our first quarter, we reported adjusted EBITDA of $19.5 million, distributable earnings of $0.47 per share and adjusted net income of $0.20 per share, all of which exceeded or are at the high end of our guidance. Recurring service revenues were approximately $43 million, a sequential quarter decrease of approximately $2.5 million, driven primarily by the wind down of AlerisLife's business and a decrease in SVC's enterprise value as proceeds from hotel sales were used to repay debt. As Adam noted earlier, we earned aggregate incentive fees of $23.6 million for the year ending December 31st, including $17.9 million from DHC and $5.7 million from ILPT, as these REITs respective total returns per share exceeded the applicable benchmark total return for the 3-year measurement period. These fees were paid in January, adding to our overall liquidity and further improving our dividend coverage.

Next quarter, we expect recurring service revenues to decrease to approximately $41 million, driven by lower construction supervision fees as calendar first quarter spend is often lower for our clients as well as decreases in certain of our managed REITs enterprise values and property management fees from strategic asset sales that were used to repay debt. During the quarter, we earned approximately $400,000 of fees from AlerisLife that will impact results in the second quarter as the business was substantially sold by December 31st. Our wholly owned portfolio of residential properties and one retail property contributed $1.4 million of increased net operating income in the quarter, mainly driven by the two residential acquisitions completed last quarter.

Turning to expenses. Recurring cash compensation was $37.4 million, a sequential quarter decrease of approximately $1 million, driven by our emphasis on cost containment and aligning our employees' total rewards to overall results. Looking ahead to next quarter, we expect recurring cash compensation to remain at or slightly below this level with a cash compensation reimbursement rate of approximately 45% as compared to 46% this quarter. Recurring G&A this quarter was $10.5 million, a modest sequential quarter increase, driven by normal course legal and professional fees. Excluding the impact of annual director share grants we expect to make in March, we expect recurring G&A to remain at these levels over the next couple of quarters.

Interest expense this quarter increased to $2.6 million as we incurred a full quarter of interest expense on the two leveraged residential properties acquired last quarter. Interest expense is expected to remain at current levels going forward. It is also worth noting that this quarter's income tax rate of 14.8% reflects the impact of incentive fees. For modeling purposes, we expect our tax rate to increase to approximately 17% in the second quarter. During the quarter, we sold two existing RMR loan investments to Seven Hills which, prior to the sale, contributed $411,000 to earnings in the quarter. In addition, we participated in Seven Hills rights offering by exercising RMR subscription rights and backstopping the transaction, which increased our ownership to 20.3%.

Beginning next quarter, we expect to see an increase of $800,000 in quarterly adjusted EBITDA from additional dividends on this increased investment. Aggregating the collective assumptions I've outlined, next quarter, we expect adjusted EBITDA to be approximately $17 million to $19 million, distributable earnings to be between $0.41 and $0.43 per share and adjusted net income to be between $0.12 and $0.14 per share. As we have stated on previous earnings calls, while our wholly owned portfolio is contributing to adjusted EBITDA and distributable earnings, it is negatively impacting adjusted net income as we incur depreciation and interest expense, which will continue to impact us until these investments are sold into private capital strategies. We ended the quarter with nearly $150 million of total liquidity, including nearly $50 million in cash and $100 million of capacity on our undrawn revolving credit facility. With the $23.6 million in incentive fees collected in January, our liquidity profile leaves us well positioned to execute on our strategic objectives.

That concludes our prepared remarks. Operator, please open the line for questions.

[Operator Instructions] The first question today is from Mitch Germain with Citizens Bank.

Peter's addition, Adam, I think the comments from either you or Matt, I apologize where it was complementing your existing fundraising efforts. But is this really kind of globalizing what you're doing currently, or was that already part of kind of what you were trying to accomplish with your fundraising?

Sure. Good morning, Mitch. It's a good question. Let me put some context around Peter's hire. So if you go back almost 6 months ago, we had no dedicated folks focused on private capital fundraising. And now we have, including Peter and Mary, which are senior folks, and there are some people working for them. We have four dedicated people now at the RMR Group dedicated wholly to raising capital privately. If you -- if I had to very simply describe Mary and Peter and sort of, again, very senior roles, Mary's very focused sort of U.S.-focused capital raising. And Peter is very focused ex-U.S. and with a real focus on Asia and Middle East. To get to the heart of your question, is this sort of a change? No, it's not really a change. It's just sort of bolstering what we were trying to do. Again, we didn't have people dedicated 6 months ago to raise capital. But that being said, on an ad hoc basis, we were meeting with folks in Asia and the Middle East or out of those parts of the region -- those parts of the globe. I think Peter's hire really sort of supercharges that and have someone dedicated with a really, for lack of a better word, a Rolodex that -- and experience in that market raising capital from those types of sources. So we just -- we don't think it's a real change. We just think it's sort of bolstering what we've been trying to do. And look, I think as a firm, we feel really good about the team we've assembled, and we're hopeful as the year progresses, we're going to see some results.

Great. Last one for me. I think the comments were multifamily and development were initial focus or maybe that's where you're seeing the most interest, but you do have a retail asset, you talked about $1 billion debt pipeline. So can you just kind of describe to us kind of what sort of products you're looking to raise capital for in the market today?

Yes. Sure, Mitch. I think being a vertically integrated sort of middle market-oriented focused nationwide player in commercial real estate that touches all sort of major sectors. We can deploy capital for clients pretty much in any sector. And I think when we're out talking to clients or potential clients, that's a really attractive attribute about RMR and sort of our positioning in the marketplace. There's not a lot of firms to sort of check the boxes that we check. And so we're a very attractive sort of place for folks that want to deploy capital, especially in the U.S. middle market and want to pick a manager that can do lots of different things for them. That all being said, based on our conversations that are going on today and where we're focused, for 2026, we're very focused on getting our multifamily fund off the ground. As Matt highlighted, we have close to $100 million on our balance sheet deployed to sort of see that effort. We feel good and optimistic that as 2026 continues to come along that we will be able to be -- have some successes there in trying to launch that fund or that separate -- large separate account that we think we're going to put together around multifamily. In terms of deploying capital at the RMR level, as we think about across all of our clients, I think you've touched on it. As I think about 2026, I think we'll continue to put more money out multifamily. I think we'll continue to put money out on the loan side making loans. I think we will continue to put money out in retail. We talked a little bit about that, and what we're doing on our balance sheet. And I think there's going to be a select number of development opportunities that we might embark on to. So those are sort of the focuses we have. I will tell you just in conversations in the marketplace over the last -- since this year began. What's sort of interesting to me, big picture, a little less interest or people talking about industrial, a little less interest, people talking about lending, a little more interest in people talking about office and a continued interest in talking about multifamily, which has been strong throughout the cycle. So I hope that gives you some context.

[Operator Instructions] The next question is from John Massocca with B. Riley.

How would you kind of view the performance of the multifamily assets on balance sheet, maybe even relative to expectations when we were talking last quarter, it seemed like that was called out as part of the driver of relative outperformance to kind of what you were expecting at the time of the 4Q '25 earnings call.

Yes. Just -- this is Matt. It's a great question and something we did intentionally highlight. So most of the five assets are still early in their life cycle. And again, those are all value-add residential communities in the Sunbelt. So you're looking at a 3- to 5-year business plan, all targeted mid- to high-teen returns by the end of that business plan. And so again, as we look at most of those being at year-end, we're seeing really strong operational results. We're seeing the capital improvements we're making, resulting in premiums on the rent as we underwrote. We highlighted some of the key measures. A 70% tenant retention or resident retention rate is incredibly important in this market right now. You read a lot of headlines about oversupply in the multifamily space. But if you're holding on to tenants and residents, you're seeing rent growth that in our portfolio is approaching 5% versus new tenancy being rolled down in rent of 4% to 5%. So all of that has played really well in our favor, and we like where things are trending right now on those business plans.

And I guess maybe as you think about -- I mean, it's a small sample set of assets, but as you think about where your properties are performing. I mean, is that product you think of maybe a stronger performance in kind of the broader Sunbelt market than was expected when you were underwriting, or is it something property specific that's causing the outperformance?

I think that's part of the secret sauce. We're trying to fund raise around that our folks have a long history, the team we acquired back in December '23. They know those markets well. We have a long tenured management team, who knows within each submarket, where -- what intersections, what streets, where are you going to see the best demographic trends and the best resident retention and rent growth possibilities, so that -- you hit the nail on the head. We believe what we have in-house and the data we're able to maximize is something we can fund raise around and find unique opportunities even in a very challenging market like we're in right now.

Okay. And then maybe for Matt, can you maybe walk us through how you kind of get from the $0.20 of adjusted net income in kind of 1Q '26 to the $0.12 to $0.14 you're guiding for. I mean, I imagine there's some tax impact in there. And I was kind of curious on the depreciation side that got called out just given -- if you give -- basically the same amount of assets -- real estate assets on balance sheet as you did at 4Q '25. Just kind of curious what the pushes and pulls there are.

Sure. So it's a good question. A couple of things that I noted in the prepared remarks. We earned in the quarter about $400,000 on our AlerisLife contract. That business, all the assets were substantially sold by December 31st. So that's a headwind heading into the second quarter for us. The loan portfolio, we earned about $400,000 on that as well. Those loans were sold in mid-quarter, so mid-November. And then in addition to that, construction management fees are expected to be lower in the calendar first quarter. That's a normal trend we see. And then we are expecting with debt pay downs at DHC and SVC that have occurred towards the end of calendar 2025, that's going to impact management fees as well. And then lastly, in March of each year, we generally grant shares to our trustees. So that's a couple of cents impact as well in the second quarter.

Okay. I appreciate that. And then in terms of kind of the investment outlook, you mentioned loans again. What's the appetite for loan investments and just kind of the long-term strategy there, especially given the recent sale of kind of the loans you had on balance sheet at 4Q '25 and to Seven Hills?

Sure. So from a lending perspective or credit perspective, it's -- we consider it a growth engine for the RMR Group. I mean at Seven Hills, we had a very successful rights offering that we completed in December. RMR participated in that. We now own about 20% of Seven Hills, but Seven Hills has about over $200 million of new loans that it can put the work based on that rights offering, and it has just regular course loans maturing that required to be -- required capital to be reinvested. So we expect to have a pretty active 2026 in terms of new loans being put to work or are being underwritten in 2026, most of which I think will occur at the Seven Hills mortgage REIT. As we sit here today, I don't think we're planning -- there's no plan to put additional loans on the RMR balance sheet. We originally did that because we were trying to seed a vehicle around loans. As we were out in the marketplace talking to private capital about funding a vehicle, for whatever reason, it became evident to us that we didn't really need to seed the vehicle on our balance sheet. I think we are still having conversations with groups about managing a credit strategy for them, but it's less required, I guess is the right word, that we seed a portfolio on our balance sheet. I think we will have some success in the future raising capital around credit. But that all being said, even if we don't raise any additional private capital around credit 2026, I think we're going to have an active year. And I think we're going to be putting a lot of money out to work in the year, but it's mostly, if not all going to be going through the Seven Hills mortgage REIT.

Okay. I appreciate that clarity. And then one last one for me. I know you kind of mentioned the focus is really on the multifamily fund. Is there some kind of time line in your mind or expectations for when you would expect that capital to be fully raised and maybe even start thinking about moving some of those assets off RMR's balance sheet?

So not to sound flippant, but ASAP, meaning we want to do it as fast as possible. It's really the #1 focus in terms of our private capital raising discussions in the marketplace. Again, we have lots of discussions on different strategies, but where we are being the most proactive in talking to folks and having conversations is around the multifamily platform and creating a vehicle and offloading those assets from RMR's balance sheet into the -- to seed the vehicle. Look, it's very hard to put an exact pin into exactly what's going to happen. I would say the management team, myself, we would expect it to happen in fiscal year 2026. I don't know if that's early in fiscal year 2026 or late. And when we say fiscal year, we're talking September 30th. So sometime between now and the end of the fiscal year, we would like to have that vehicle funded and those assets move, but it's very hard to put a precise time line on it. But I can tell you, there's a lot of effort going in towards it. It's sort of the #1 thing that our private capital group we've invested a lot in, our private capital Capital Markets, Investor Relations group and bringing talent on board, and I'm hopeful that we will meet that time line.

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 our call today. Institutional investors should contact RMR Investor Relations if you would like to schedule a meeting with management. Operator, that concludes our call.

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

Good morning, and welcome to The RMR Group Fiscal Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.

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

Thank you, and good morning. Thank you for joining RMR's fiscal fourth quarter 2025 conference call. With me on today's call are President and CEO, Adam Portnoy; Chief Operating Officer, Matt Jordan; and Chief Financial Officer, Matt Brown. 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, November 13, 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 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, Bryan, and thank you all for joining us this morning. Yesterday, we reported fourth quarter results that were in line with our expectations, highlighted by distributable earnings of $0.44 per share, adjusted net income of $0.22 per share and adjusted EBITDA of $20.5 million.

Despite a continued unsettled economic environment, RMR was active this past quarter executing on our clients' strategic initiatives. The majority of these activities took place in our managed equity REITs, where we completed nearly $2 billion of accretive debt financings at attractive rates and we completed over $300 million in asset sales.

We believe these efforts are being recognized in the public markets, as demonstrated by the share price improvements at both DHC and ILPT. These share price improvements have resulted in DHC and ILPT both accruing potential incentive fees for RMR, which highlights the alignment of interest RMR has with the shareholders of our managed equity REITs. While subject to change, these potential incentive fees could be approximately $22 million in 2025.

Turning to a few notable updates at our perpetual capital clients. DHC posted solid quarterly results led by strong sector tailwinds benefiting DHC's senior housing segment as well as the significant capital that has been invested in DHC's communities. Consolidated SHOP NOI increased 8% year-over-year to $29.6 million, led by a 210-basis point increase in occupancy to 81.5%, a 5.3% increase in average monthly rates.

Beyond its continued focus on SHOP operations, DHC has also been executing on its strategic transformation. More specifically, DHC announced the successful sale of non-core assets at attractive valuations as it further deleverages its balance sheet.

During the quarter, DHC also began executing on its announced transition of 116 SHOP communities from AlerisLife to new operators that have proven track records and well-established regional footprints. The transition of all 116 communities is expected to occur by year-end 2025.

SVC continues to make significant progress selling non-core hotels to delever its balance sheet. During the quarter, SVC completed the sale of 40 hotels for over $292 million and is on pace to sell a total of 121 hotels in 2025 for $959 million. SVC also successfully completed a 0-coupon bond offering that raised $490 million in net proceeds that were used to repay SVC's revolving credit facility and retire the remainder of SVC's 2026 debt maturities.

Beyond the deleveraging efforts, we remain focused on helping SVC drive EBITDA growth across its hotel portfolio, despite softening demand and ongoing revenue displacement from renovation activity. Further, our organization continues to keep SVC's triple net lease portfolio, which is anchored by the travel centers leased to investment-grade rated BP, well leased to ensure SVC benefits from the stable cash flows these assets generate.

Seven Hills, our mortgage REIT, delivered another solid quarter, supported by a fully performing $642 million loan portfolio. Seven Hills has been exploring ways to generate new equity capital to ensure the REIT can continue to capitalize on the robust pipeline of investment opportunities our Tremont commercial lending team generates. To that end, Seven Hills recently announced a rights offering to raise approximately $65 million in new equity, which should allow for over $200 million in gross new loan investments.

The rights offering is structured so that shareholders of record on November 10 were given a transferable right to buy 1 new share for every 2 shares they currently own. Importantly, RMR, which is Seven Hills largest shareholder, has agreed to backstop this offering, essentially acquiring any unexercised rights as a demonstration of our confidence in Seven Hills business prospects going forward.

Lastly, in late October, OPI, after exploring all possible strategies to address its capital structure, entered into a restructuring support agreement, or RSA, with certain holders of its senior secured notes to restructure its corporate debt. As part of the RSA, OPI voluntarily initiated a court supervised process under Chapter 11 of the U.S. Bankruptcy Code. This agreement will meaningfully strengthen OPI's financial position and delever the balance sheet.

As part of the RSA, RMR has agreed to continue managing OPI for a 5-year term that starts upon OPI's emergence from bankruptcy. RMR will receive a flat business management fee during the first 2 years of $14 million per year, and our property management agreement will remain unchanged.

To support OPI's operations during this process, OPI entered into a debtor in possession financing of $125 million. We remain committed to supporting the assets, vendors and tenants of OPI throughout this process and look forward to updating you as new information becomes available in the future.

To conclude, we are pleased with the progress RMR has made over the past quarter, assisting our public company clients with their financial and strategic objectives. Our perpetual capital clients also provide RMR with stable cash flows, which we can use to pursue new growth initiatives in the private capital space to drive future revenue and earnings growth.

With that, I'll now turn the call over to Matt Jordan, Executive Vice President and Chief Operating Officer, to provide added insights on our platform and private capital growth initiatives.

Thanks, Adam, and good morning, everyone. As Adam mentioned, this past quarter was active on a number of fronts across the RMR platform. From a non-residential leasing perspective, despite continued headwinds, this past quarter, RMR arranged almost 1.4 million square feet of leases, and for the full fiscal year, almost 8 million square feet of leases at rental rates approximately 14% higher than previous rents for the same space. We believe these results speak to the hard work of our people, proactively engaging both tenants and the brokerage community.

Beyond leasing, the platform continues to invest in our people, technology and brand building to ensure we stand out in a competitive fundraising environment. While fundraising remains challenging, we believe 2026 will be a better year for institutional investments in real estate, as recent conversations our capital formation team is having with potential partners have reinforced commitments to the United States in many of the sectors we operate in.

Further, while many private capital investors are limiting how many new manager relationships they form given the effort associated with underwriting a new manager, the breadth and scale of our platform remains an attractive differentiator.

Our current fundraising efforts remain focused on residential, credit and select development opportunities. Though as I noted, the diversity and scale of our platform will allow us to pivot quickly based on investor feedback.

As it relates to RMR Residential, which currently manages almost $5 billion in value-add residential real estate, we formally launched fundraising for the enhanced growth venture in early September. Our efforts are focused on finding up to 3 large investors to invest approximately $250 million in multifamily real estate. This venture is targeting value-add returns and provides investors the ability to share in property level and general partner economics.

RMR's commitment via almost $100 million in seed investments provides investors certainty that committed monies can be immediately put to work as well as providing them a portfolio they can readily underwrite. The seed investments include the 2 acquisitions closed this quarter for a gross aggregate cost of $143.4 million. One is a 266-unit property near Raleigh, North Carolina, and the other is a 275-unit property near Orlando, Florida. We expect there to be meaningful updates regarding the enhanced growth venture by early spring.

Within the retail sector, we continue to source investment opportunities as we build a portfolio of value-add multi-tenant retail properties as part of establishing a track record in this sector. Our first investment, a $21 million community shopping center outside of Chicago, closed earlier this year and is executing on its underwritten business plan. We are currently assessing market opportunities with the goal of adding at least 2 more similarly sized deals.

As it relates to our credit strategy, although we expect to close on the sale of 2 loans that are on our balance sheet later this month, we continue to explore opportunities to form a strategic venture with institutional capital. Real estate credit remains a high conviction strategy, and we believe Tremont's track record, middle market focus and strong underwriting and asset management teams are attractive differentiators.

With that, I'll now turn the call over to Matt Brown, Executive Vice President and our Chief Financial Officer.

Thanks, Matt, and good morning, everyone. As Adam highlighted, this quarter, we reported adjusted EBITDA of $20.5 million, distributable earnings of $0.44 per share and adjusted net income of $0.22 per share, all of which were in line with our expectations.

Recurring service revenues were approximately $45.5 million, a sequential quarter increase of approximately $1.5 million, driven primarily by increases in enterprise values at DHC, ILPT and SVC and higher construction supervision fees.

Next quarter, we expect recurring service revenues to decrease to approximately $42.5 million, driven by lost fee revenue from the announced sale of AlerisLife's business and decreases in certain of our managed REITs enterprise values from accretive debt financings and asset sales as we strategically manage their debt levels.

Turning to expenses. Recurring cash compensation was $38.5 million this quarter, which was consistent with the prior quarter. Looking ahead to next quarter, we expect cash compensation to decline to approximately $37 million as recent cost containment measures continue to positively impact earnings. We expect our cash compensation reimbursement rate to be between 46% and 47% going forward.

Recurring G&A this quarter was $10.1 million, a modest sequential quarter increase driven by costs associated with our ongoing private capital fundraising efforts. We expect recurring G&A to remain at these levels over the next couple of quarters.

Interest expense this quarter increased to $1.7 million following the acquisitions of 2 leveraged residential properties that Matt highlighted. Interest expense next quarter is expected to increase to approximately $2.6 million as we incur a full quarter of interest on these new mortgages.

It is also worth noting that this quarter's income tax rate of 21.4% reflects year-end adjustments primarily related to stock-based compensation. For modeling purposes, we expect our tax rate to decline to approximately 15% in Q1 based on our current forecast for incentive fees we may earn for calendar year 2025 and to approximately 18% for Q2 to Q4.

As Matt mentioned on the call last quarter, we believe cash flow measures such as adjusted EBITDA and distributable earnings per share are becoming more relevant when comparing our results to prior periods and other alternative asset managers.

Our private capital business is accretive to our cash flow, but as we continue to use RMR's strong balance sheet for strategic growth initiatives, expenses such as depreciation and interest will have an adverse impact on certain financial metrics, such as adjusted net income per share.

Aggregating the collective assumptions I've outlined, next quarter, we expect adjusted EBITDA to be between $18 million to $20 million, distributable earnings to be between $0.42 and $0.44 per share and adjusted net income to be between $0.16 and $0.18 per share. This expected decline in quarterly results is mainly due to the sale of AlerisLife's business.

For the fiscal fourth quarter and full year, we earned $1.4 million and $5.7 million, respectively, of fee revenue on the AlerisLife contract. We expect to offset this lost revenue with increases in DHC's enterprise value, as new operators that have well-established regional footprints and proven track records should help drive NOI growth.

We ended the quarter with $162 million of total liquidity, including $62 million in cash and $100 million of capacity on our undrawn revolving credit facility.

Finally, as Adam mentioned, if September 30 was the end of the measurement period, we would earn incentive fees from DHC and ILPT of approximately $22 million in the aggregate.

That concludes our prepared remarks. Operator, please open the line for questions.

[Operator Instructions] The first question comes from Mitch Germain with Citizens Bank.

I'm curious about OPI's fee. Does it in effect go up quarter-over-quarter?

Mitch, I think your question -- you broke up for me -- is about OPI's fees. See, effectively, it's pretty much flat. We were earning just under $14 million a year on a business management basis. It was like $13 million and change over the last 12 months, give or take. And so we have a contract that we'll be earning $14 million fixed fee for the first 2 years per year, $14 million. On the property management agreement, nothing's changed. All the economics are the exact same as they were prior to the filing.

During -- just to be very clear, during the pendency of the bankruptcy itself, we are operating under the existing contract. So we probably will earn a little bit less than a $14 million run rate during the pendency of the bankruptcy. But upon emergence from the bankruptcy, that's when the clock starts and that's when the $14 million per year goes into effect.

I'll just say -- it might be a correlator to your question. Look, the fact that we entered into what we call a restructuring support agreement, we think leads to hopefully a much faster bankruptcy process and allows us to get out of bankruptcy, hopefully, faster than if we had not entered with an RSA. So it's a little unclear exactly when we'll emerge, but I think roughly speaking, it's first half of 2026 we'll emerge.

Got you. I think, Adam, you mentioned where your focus is on the private capital side in terms of fundraising. Maybe I missed it, but I didn't hear you mention shopping centers as a competency that you're raising capital for. Yet you guys are -- obviously, you own one and you're looking to allocate capital to others. So maybe just kind of go over where that sits with regards to your private capital strategy.

Sure. Sure, Mitch. So it's a great question. Matt touched a little bit on this in his prepared remarks. But you're right, we have it on our balance sheet. We think we have a lot of core competency in retail. We run a very large multibillion-dollar existing retail portfolio. Today, we have a very large, very competent retail asset management team on staff.

We -- it's not front and center, but already in parts of our organization, given the size and breadth of the different portfolios. We do actually run shopping centers in different parts of the business, let's say, buried within some other asset classes or buried within some of the portfolios. So we do have experience there.

We think for a lot of reasons investing in neighborhood and grocery-anchored specifically shopping centers is a great thing to be doing right now. Retail has really gone through transformation over the last 10 to 15 years, and we really have a pretty good supply-demand dynamic going on, where there's not a lot of new supply, and demand has sort of finally caught up with the existing supply.

And so we see a lot of interesting opportunities to basically put money to work. And through either capital improvements or re-tenanting a center, we can generate outsized returns. And we're doing that first on our balance sheet, but we're pretty confident that we're going to be successful with that and that we'll be able to then take that -- demonstrate that track record and raise more capital around that going forward. Matt, do you want to add anything to that?

No. And I think, Mitch, we have the one asset outside of Chicago. And the point we were making in the prepared remarks is we're hoping to at least add a couple more of similar sized scale to build a fulsome track record that we can go out and fundraise around in hopefully a couple of years from now.

Got you. And then did I hear that you guys have a couple of additional loan investments that are under agreement? Did I mishear that?

We don't have new -- at RMR itself, we do not have any new loan investments. We are -- I don't think we discussed in our prepared remarks, but it is in our public disclosures. We are selling or have an agreement to sell the 2 loans that we have on our balance sheet. Those are being sold. There's currently no plan to put more loans on RMR's balance sheet.

What I did mention in my prepared remarks is we have a rights offering that we're in the middle of occurring at Seven Hills. And we expect, as a result of that, we'll have about $65 million of equity, which provides for about $200 million in additional loan investments that we plan to deploy over the following, call it, 6 months to get that money out. If your average loan size is $25 million, that's, call it, 8 loans, 8 to 10 loans, give or take, that will be new loans that we will be putting money out at Seven Hills.

Last one for me. Matt, maybe just kind of go through the puts and takes to get you to your forecast in the first quarter, maybe a bridge from where you ended the fiscal fourth quarter to how you get to the first quarter in terms of your guidance, please?

Sure. I'll focus on adjusted EBITDA for that. So fiscal fourth quarter was $20.5 million. Our forecast for fiscal Q1 is $18 million to $20 million. The major impact of that is the sale of AlerisLife's business and the wind down of that. Today, we earn 60 basis points on the revenue of our senior living communities. And as that winds down, we're expecting revenues to decrease about $1 million for that alone. So that's the major headline from the decrease from fiscal Q4 to fiscal Q1.

[Operator Instructions] The next question comes from John Massocca with B. Riley.

Maybe just sticking with that question quickly. Is there any expected additional negative flow through from the loss of managing AlerisLife as we think beyond next quarter?

So the full wind down should happen by the end of this year. So while we're expecting about $1 million decrease in fee revenue this coming quarter, we will -- we did earn $1.4 million in fiscal Q4. So there'll be another kind of $400,000 deduct when we roll forward to fiscal Q2.

Okay. And then maybe moving on to OPI. Can you just walk through what the advisory agreement looks like after 2 years? If you're still managing that portfolio?

Sure. So it's a 5 -- it's a term sheet we entered into with the -- what will be likely the new equity owners of OPI upon emergence. It's a 5-year term. The first 2 years are set at $14 million per year in the business management fees. The property management stays unchanged. And during the first 2 years, if -- now that $14 million stays the same, whether the portfolio shrinks or grows. It doesn't matter what the size of the portfolio is, that sort of stays in place at $14 million per year.

After 2 years, we -- there's a negotiation. And I think -- look, the reason it was set up that way is with the new owners of OPI, I think there's a little bit of a hesitancy about how to structure the fee in terms of what it should be based on because we're not quite sure exactly the size and the makeup of OPI, let's say, over the next couple of years.

We're confident and I think the new investors or new owners of OPI are confident that we will still be managing it over the next 2 to 3 years. But as part of that, I think they just want to see how the next couple of years play out, what's the size of the company. It could shrink from the size it is today. It could also grow from the size it is today.

I mean part of what we've had discussions with the new owners about is that this vehicle might be used -- and I'm not saying this will be used, I'm saying it might be used as a vehicle to roll up other distressed office portfolios in the marketplace.

I mean we're pretty encouraged that we found a group of investors. They currently own the debt. They wanted to equitize their debt and really want to go long on office because they really see as a great opportunity, both from a macro perspective -- and I think they also feel pretty good about the portfolio itself. Meaning there's a lot of pain that the OPI portfolio has gone through, but the vast majority of that pain is behind us.

Looking forward, it looks much better than what we've gone through over the last 2 or 3 years in terms of leasing prospects and cash flow or NOI that's going to be coming out from the property.

The other thing I'll mention, in the term sheet that's on file and is public is it also contemplates a significant incentive fee to be structured for RMR as well. It's anticipated that upfront, we will be getting 2% of the reorganized company and then another 8% that's a little bit more ambiguous but will be benchmarked to sort of outperforming benchmarks. Basically, think about it as sort of structured like a classic promote that you might see in a private equity type investment. That's what I think the other 8% will be structured like.

So I think there's going to also be a higher degree of alignment between the manager and the new equity owners in terms of performing -- doing a good job in managing the portfolio and generating a healthy return for those equity holders.

Okay. Kind of longer-term question given -- you have the 2-year contract, locked-in contract in place. But how kind of flexible is G&A spending to managing OPI? I guess, how much could you potentially bring down G&A if for whatever reason at the end of 2 years post emerging from bankruptcy, the portfolio goes in a different direction or the owners want to go a different way? Like is there kind of a high amount of leverage into how you can kind of pull down G&A if you're not managing OPI here in a couple of years?

The short answer is, we spend a lot of time thinking about that. As you know, John, we don't have P&Ls by business line, right? That's one of the advantages of the economies of scale for our clients that they basically manage with RMR. And we get those economies because we get the spread costs across the entire structure.

So we don't have P&Ls, let's say, by business line or client. But I can tell you this much, office as an asset class is probably the most management-intensive asset class that we manage at RMR. And so while I don't believe this will be the case, if we were to not be managing, let's say, a large office portfolio at the company, I do think there would be significant cost cuts that we could take. I don't believe to even go even further.

We're not quite sure what would happen to margins, but there's a scenario where we might have less cash flow but higher margins, if you can follow me, because we just know intuitively there's a lot of people that work on the office portfolio versus other portfolios we run.

So I think we would be able to -- in the unlike -- what I believe is unlikely situation where we are no longer managing a large office portfolio, I think we would be able to correspondingly reduce costs at the organization.

You touched on it a little bit with Mitch's question, but thinking about kind of the Seven Hills and selling kind of the loans that were on RMR's balance sheet to Seven Hills, what was kind of the logic there? Maybe I'm misremembering past calls, but it felt like there might have been an opportunity to grow the loan book within -- on the RMR balance sheet. Is there some kind of change strategically where you're no longer seeing that as attractive? Just kind of curious the thought process behind that transaction.

Yes, John, it's Matt. So if we go back in time about a year ago when we put these loans on our balance sheet, the goal was for them to be part of a seed portfolio to help us with the fundraising process. And they've been well-performing, incredibly strong loans that have contributed to RMR's earnings, quite frankly, in a significant way. But it's now been 12 to 18 months since those loans were initiated. And as we fund raise in a very competitive environment, I think it's fair to say -- one of the loans actually matures next July, I believe. So their attractiveness from a seed perspective had fallen off.

And at the same time, you have Seven Hills that's raising this significant money. We want to make sure they can quickly deploy those proceeds. And by selling these loans at par to Seven Hills, it allows them to start quickly deploying, secure their dividend, which is also critical to this rights offering. And it just was a successful transaction for both sides.

Okay. With Seven Hills in mind, any updates you can provide on how the rights offering is looking at this moment? I know it's -- obviously, there's moving pieces and things you might not be able to talk about. But just was kind of curious if there was any outlook on the amount of the rights offering you expect RMR to participate in.

Sure, John. So you mentioned it is sort of early. And the way these rights –- the way rights offerings typically work, not just this company, but the way they always do is, unfortunately, you really don't -- everyone sort of waits till the last minute, which you have to keep the rights out -- you have to have the -- about a month outstanding before people have a deadline to exercise the right.

And so for whatever reason -- and I guess it's people like to keep their options open till the very last minute. You just don't know till the very end how many people are going to be exercising their rights.

What I can tell you is that as part of the rights offering, we retained UBS Investment Bank as the dealer manager. And part of their job -- and one of their jobs is to basically solicit interest from outside investors that might want to buy the rights that other shareholders want to sell, meaning shareholders that don't want to exercise. And while there's been very little trading, it's only been a few days in the rights themselves.

What has been encouraging is that we have had quite a bit of interactions with share -- new shareholders that are interested in perhaps buying rights from other shareholders that don't want to exercise them. Existing shareholders decide they don't want to exercise them, so they want to sell them. And we are working with UBS to try to help identify potential buyers of those. And what I'm saying is it's too early to tell, but we're having lots of meetings, right? And so there is interest out there.

To get to the heart of your question, which is, well, how much is RMR going to have to spend here, or do we have to spend any? I think our base case assumption is that we don't expect that we're going to have to drop -- basically pull on the backstop beyond our 11% ownership. Meaning we own 11% today. We expect to exercise up to that 11%.

It could be that we end up exercising some amount. I think it would be less than, let's say, half, if I had to guess. And so there's a possibility somewhere between 11% and 50% of the offering itself we might have to backstop.

But again, it's very early. I mean, I do not believe it would be more than half the offering. I think that's pretty -- I don't want to say locked in stone, but it's hard to imagine that scenario. And I think it's -- our base case is that we will just be exercised -- just exercising up to the 11%. Could we end up exercising a little bit over that to fill out the backstop? Yes. But it's very hard to know for sure where the numbers are going to shake out.

We now have a follow-up from Mitch Germain with Citizens Bank.

Just quickly on the -- I know that, Matt, you talked about a bit of a true-up on interest expense because you've got a -- had it in place for a sub-quarter. Do we have a similar true-up for the -- what's the true-up for the rental income associated with the 2 residential assets that were acquired mid-quarter? How should we think about that?

Yes. I think the best way to think about our wholly-owned portfolio, which includes the 2 residential acquisitions from the quarter, is we're expecting about $3.2 million of NOI to be contributed on a quarterly basis for those while they remain on the balance sheet.

So that's aligned with this quarter. Is that the way to think about it? I think we're at $3.2 million right now.

The owned real estate contributed about $650,000 of EBITDA in Q4. So that will grow to just over $3 million on a run rate basis.

Okay. And then how should we think about -- you guys are pretty flushed with cash, but obviously, with the rights offering and some acquisitions that you're making. So how should we think about that balance on a go-forward basis?

So you're right to point out the rights offering. I think it's hard for us to put a stake in the ground to say exactly where we think things will be. As we sit today, we don't believe based on all the actions we have underway that we will be drawing on the revolver. That's not something we think. But it could be that we use more cash, obviously, than we have on the balance sheet today.

We will be getting proceeds from the sale of the loans themselves. There will be a liquidity event, we hope and think, as we get into 2026 as we sell the enhanced growth fund. What?

Plus incentive fees.

Plus incentive fees that we'll be getting, hopefully, at the end of the year. So we don't think we'll be drawing on the revolver, if that's maybe the question. It's hard to know exactly where the cash balance will be.

I will say that we're not -- we don't feel cash constrained. We're still very active in terms of all of our initiatives in terms of continuing to look at other retail properties. We continue to look at sort of JV investments, GP investments on the residential side. So I think we feel that we're not constrained in our ability to continue to do things. But we are waiting to see where the rights offering shakes out and whether incentive fees actually shake out for the year.

This concludes our question-and-answer session. I would like to turn the conference back over to Adam Portnoy, President and Chief Executive Officer, for any closing remarks.

Thank you all for joining our call today. Institutional investors should contact RMR Investor Relations if you would like to schedule a meeting with management. Operator, that concludes our call.

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

Good afternoon, and welcome to the RMR Group Fiscal Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Matt Murphy, Manager of Investor Relations. Please go ahead, sir.

Good afternoon, and thank you for joining RMR's Third 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, August 6, 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 third quarter results that were in line with our expectations, highlighted by adjusted net income of $0.28 per share, distributable earnings of $0.43 per share and adjusted EBITDA of $20.1 million. Despite ongoing economic uncertainty, we have remained focused on the strategic initiatives of our managed REITs and RMR's private capital business.

For the managed REITs, these initiatives have included deleveraging actions through a combination of asset sales and accretive refinancings. We have been pleased with the public market reactions to these initiatives as the share prices of certain of our REITs, most notably DHC and ILPT have increased substantially year-to-date. Further, as a demonstration of the alignment of interest we have with our clients, these share price improvements have also resulted in our client companies accruing potential incentive fees this past quarter which could result in a payment to RMR at year-end that is in excess of $17 million. While potential incentive fees are subject to change, this is encouraging for RMR and its shareholders at this point in the calendar year.

As it relates to our private capital initiatives, this aspect of our platform now totals over $12 billion. We continue to engage with investors regarding our platform's capabilities and the real estate strategies we are fundraising for and/or investing in, which includes retail, residential, credit, and select development opportunities. Within the retail sector, a sector in which we have continued conviction, we are sourcing opportunities to accumulate a portfolio of value-add multi-tenant retail assets of approximately $100 million in gross asset value as a mean to build a track record in this sector.

Our first investment, a $21 million community shopping center located outside of Chicago closed this past quarter. We plan to leverage our in-house retail team to execute the value-add business plan at this property, which is primarily focused on capital improvements to enhance the curb appeal of the center and strategic leasing. Upon execution of this value-add business plan, we expect to generate mid-teen returns. In terms of our residential and credit platforms, each of these sectors continue to benefit from market tailwinds which is illustrated by each having robust pipelines of approximately $1 billion in possible deals.

On the residential side, we anticipate closing 2 value-add acquisitions in August for an all-in cost of $147 million. One is a 266-unit property near Raleigh, North Carolina, and the other is a 275-unit property near Orlando, Florida. These 2 properties, along with the 2 properties we acquired in the joint venture earlier this year in Florida, as well as our currently owned multifamily asset in Denver will be the seed properties for our recently launched RMR Residential enhanced growth venture. While it is early in the fundraising process, our conviction around the residential sector remains supported by decelerating supply growth and favorable migration trends both of which will drive rent growth and occupancy gains for well-positioned assets, particularly across the Sun Belt.

This venture is targeting returns in the mid-teens to high teens. The investments we've made using our balance sheet such as our value-add retail and residential acquisitions are part of our continued strategy to diversify our client base and grow our private capital AUM. While the fundraising environment remains challenging, we are confident in our ability to grow private capital AUM over the long term. To that end, this past quarter, Mary Smendzuik joined RMR as a Senior Vice President and Head of Capital Formation. Mary has a successful track record of raising institutional capital, and we believe she will expand the sources of capital available to our various strategies.

Turning to a few notable updates on our public capital clients. DHC posted solid second quarter results with almost all financial measures beating consensus estimates. DHC's strong results continue to be led by the SHOP segment, which saw same-property cash basis NOI and increased 18.5% year-over-year. This growth was a direct result of strong sector fundamentals, the strategic capital deployed across the portfolio over the last several years and our active asset management. DHC has also been successful in selling assets at attractive valuations in an effort to delever.

At SVC, results were in line with consensus expectations with RevPAR across SVC's hotel portfolio increasing 40 basis points year-over-year and outpacing the industry by 90 basis points. Despite meaningful revenue displacement from renovation activity during the quarter. SVC continues to benefit from the stable cash flows of its triple-net lease assets which are anchored by SVC's $3.3 billion investment in travel centers, which are leased to investment-grade BP through 2033. SVC has also made significant progress with its hotel sales with 114 hotels now earmarked for sale in the second half of 2025 with over $900 million currently under binding agreement.

ILPT's results were highlighted by continued strong operating results and ILPT's refinancing of $1.2 billion of floating rate debt with new 5-year fixed rate debt at a weighted average interest rate of 6.4%. The refinancing and continued strength of ILPT's industrial portfolio helps support the decision of ILPT's Board to increase its dividend to $0.05 per share per quarter. Lastly, OPI continues to face headwinds and 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 the company has made over the past quarter, assisting our clients with their financial and strategic objectives. We continue to believe RMR operates a durable business model supported by clients with a nationwide portfolio of real estate, spanning multiple commercial real estate sectors. Our perpetual capital clients provides RMR with stability while also allowing us to pursue new growth initiatives to drive revenue and earnings growth. 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, we reported adjusted net income of $0.28 per share, adjusted EBITDA of $20.1 million and distributable earnings of $0.43 per share, all of which were in line with our expectations. Recurring service revenues were approximately $44 million, a sequential quarter decrease of approximately $1.5 million, driven primarily by lower property management fees at RMR Residential as managed assets realized their respective business plans, which was partially offset by seasonal improvements in Sonesta-related management fees. Next quarter, we expect service revenues to increase to approximately $45 million based on favorable trends in the enterprise values of our managed REITs as well as construction and property management fees that are expected to remain consistent with this past quarter.

Turning to expenses. Recurring cash compensation was $38.6 million this quarter, a decline of approximately $3.5 million sequentially which reflects the impact of recent cost containment measures. Looking ahead to next quarter, we expect cash compensation to remain at this level. As it relates to equity-based compensation with our fiscal year-end approaching, RMR share awards to employees are expected to occur in September. Based on historical grants, we expect approximately $600,000 in incremental equity compensation next quarter. Recurring G&A this quarter was $9.5 million, a sequential quarter decrease of $1.2 million as we continue to minimize discretionary spending. We expect recurring G&A to remain at these levels.

As it relates to the upcoming Sun Belt residential acquisitions, we expect these assets to generate incremental adjusted EBITDA of approximately $900,000 next quarter. In aggregate, our owned real estate is expected to generate adjusted EBITDA of approximately $2.2 million next quarter. Interest expense this past quarter was $1.1 million. Given that our 2 pending residential acquisitions will each use leverage to fund their respective purchases, interest expense next quarter is expected to increase to $1.7 million. It is worth noting that as RMR uses its balance sheet to acquire real estate as part of our strategic growth initiatives, certain financial metrics like adjusted earnings per share will be adversely impacted by expenses RMR has not historically incurred such as depreciation and interest expense.

Accordingly, we believe cash flow measures such as adjusted EBITDA and distributable earnings are becoming more relevant when comparing our results to prior periods and/or other alternative asset managers. Aggregating the collective assumptions I've outlined next quarter, we expect adjusted EBITDA to be approximately $20.5 million, distributable earnings to be between $0.44 and $0.46 per share and adjusted earnings per share to be between $0.21 and $0.23 per share. In closing, after giving consideration to the cash outlay for our upcoming residential acquisitions and annual bonuses that are paid each September, we expect to end the fiscal year with approximately $60 million of cash and no borrowings on our $100 million line of credit.

That concludes our prepared remarks. Operator, please open the line for questions.

[Operator Instructions] And our first question today will come from Tyler Batory with Oppenheimer.

Mostly big picture questions from me. And my first one on the fundraising environment, specifically on the private capital side. It sounds like it's still a bit challenging out there. Conditions are maybe a little bit tough, but I'm not sure if you're seeing any green shoots more recently. I'm not sure if there's some optimism around lower interest rates and perhaps that can contribute to a more constructive backdrop for raising capital on that side?

Sure, Tyler. Thanks for that question. Yes, you're correct that the fundraising environment continues to be overall challenging, especially for private capital. But I would say it is improving. I think it is -- we have had by just judging sort of meetings with potential providers of capital. It's ramped up a lot this year compared to last year. And as I look out over the next 6 months, I expect us to continue to see that ramp up. So I do think we're starting to see some thawing.

I think it's just conjecture, but I think you're right. The possibility of lower interest rates may be moving some folks off the sidelines. There's also a lot of groups we talk to pension plans, insurance, even some sovereigns that they have a lot of capital tied up that hasn't been returned to them. And we're starting to see a little bit of thawing in the transaction market as well. And as more money is returned to these call it, direct capital providers, I think it's easier for them then to allocate more money out. So things are overall still challenging. There's no question of that and it will take time to raise capital and obviously probably longer than we would like to raise capital, but it is improving, if that's your question. It is improving.

Okay. Perfect. Then a couple of questions on the residential side and the RMR resi enhanced growth feature that you just discussed. Can you expand on that a little bit more in terms of the mechanics, the rationale, how that's going to work? I'm assuming all of the residential properties that you've done so far. And then the 2 deals that are still upcoming. I'm assuming that all of those are going to fold into that feature. But I just want to be clear just kind of what's going on with that?

Yes. You basically have it correct, Tyler. What we're trying to do is take effectively 5 assets, 3 of which are wholly owned, 2 of which are in joint ventures and taking, let's say, our GP interest in those. And including those GP interests for 2 of those assets with the 3 wholly owned assets, so it's 5 assets in total and taking that out to market. In total, RMR, when you look at all 5 direct assets, GP investments, it's just under $100 million of equity that we have invested in those 5 assets, whether it be direct fully owned or JVs and GP interests. And we're taking that group of assets out to market as sort of a seeded portfolio.

One of the ways we think we can distinguish ourselves or differentiate ourselves in this market, and we hear this from investors quite a bit. So we somewhat tailored this to what we heard from investors over the last several months and quarters is they are less inclined to fund a blind pool. I'm not saying they won't, but less inclined and a lot more open to underwriting committed capital, meaning they want to be able to put their money to work day 1. I think there is a little bit of a -- you read this in the popular press quite a bit. There's a lot of money that's been committed that's not working. And I think as investors think about deploying capital in funds like ourselves or others, they're much more open or like the idea of being able to invest in something where the money immediately works.

And so by seeding the portfolio, with $100 million of effectively equity investments. That allows them to effectively buy out the majority or the vast majority of what we've already invested, take replace us, let's say, as the equity holder in those -- in the venture, we will likely retain some piece as the GP, let's call it 5% to 10% of the venture somewhere around there. And then you use that as to seed a venture, which will eventually go on and make more acquisitions. So it's hopefully on top of this $100 million, our hope is that maybe we can put a venture together that in the beginning would be another $300 million of equity that gets us to about $1 billion of buying power.

We then now put that to work and then that might roll to the next fund eventually. And then really, it's -- eventually, you get to the point where you're hopefully raising fully discretionary closed-end funds that are focused, let's say, on residential investing. And just to pull up that a little bit, that's that same business model, that same strategies, is a lot of what we're doing in the credit side because we have a couple of loans on our balance sheet and we're trying to do the same thing. And we talk about what we're doing on the retail side around value-add multi-tenant retail. We're trying to build up the portfolio to again, to provide seed investments for hopefully a venture which will then lead to a larger pool of capital we're managing. Hopefully, that makes sense and answers your question.

[Operator Instructions] Our next question will come from Mitch Germain with Citizens.

Adam, I might have missed it. Do you have a sizing of what you're looking to fund raise on the residential side?

Yes. We would be -- our hope is to do about $300 million of equity. Again, we've seeded it with just under $100 million of assets. It would go into the venture day 1. But the goal would be for that venture about $300 million. On the credit side, we're also out with a venture about the same size, $300 million that's been seeded -- it's about just under $70 million has been seeded there, but the same strategy.

Okay. Great. And you referenced a billion dollar pipeline. But I suspect you're probably not going to act on that though you might look at something on the credit side, but it seems like on the multifamily side, until that fund raising really begins, and you start to see the fruits of some of those efforts, you're probably not going to act on any of those acquisitions yet. Is that the way to kind of think about it?

Not exactly, Mitch. We probably won't act on them to put them on our balance sheet as wholly owned assets, but we'd be very open and we'd be -- we could continue to do joint venture deals where we come in as the GP and fund a sliver of the equity. Though -- so I think we'll still be active in acquiring residential while we're in this fundraising mode, but there'll just be a lot more joint ventures is what we'll be doing.

And Mitch, this is Matt, just to add in. I think it's really important when we're out fundraising that capital partners see a very active and current pipeline because to Adam's point, they want to know you can deploy capital quickly. So that -- keeping that pipeline fresh is critical to our residential team.

Can you align the interest of those LP investors with fund investors? How does that -- or they would be separate from the fund going forward?

Those would be, I mean, likely separate. I mean, those would be very general terms, many of our LPs in our joint ventures are other asset managers, private equity firms that we partner with. I think the likely investor in our funds would not be other asset managers. They would be more like traditional pension plans, insurance companies, sovereign wealth funds. So it's a different investor group we're approaching for each type of deal.

Got you. Just a couple more for me. The performance of RMR Residential, I guess you kind of characterized them that as business plan conclusion or something? Like is this an appropriate run rate? And kind of what is truly driving the change in terms of what your service revenues are, adviser revenues are quarter-over-quarter?

Yes. Look, their business plan is value add. So the normal cycle is 3 to 5 years. So what we acquired was -- when we bought the CARROLL platform, you had a series of assets, say, $5.5 billion that were in various stages of their life cycle. So we're seeing some of those assets realize their full potential and the respective LPs initiating a sales transaction. So AUM, to some degree, is shrinking, which means our service revenues are shrinking. And in the current fundraising environment, that flywheel has not refilled itself. So right now, this is kind of our run rate for the near term until the fundraising environment returns to closer to normal levels.

Okay. That's super helpful. And then --got it. I think you said $2.2 million run rate for acquisitions EBITDA. Is that -- am I wrong on that? I apologize.

And they show the EBITDA contribution...

From the acquisition...

For our 3 owned pieces of real estate, Lowry, the Denver deal we did last summer and then the 2 deals that are pending.

Okay. Wait, I just -- that's just on the multifamily side or help me out...

Correct.

Okay. And then you have the retail asset and then you have the credit assets. So when you kind of put all that together...

Well, credit assets are on a separate line. That's -- the loans are presented separately. And then you have the retail, which is in that $2.2 million, so I apologize.

Okay. So it's multifamily and retail, okay. Okay. Great. And I apologize, I got a lot of questions here. Last one for me is just -- listen, this is a pretty complicated corporate structure, and I know it's not straightforward, but maybe if you can provide some perspective and insight on the dividend. I recognize kind of your view toward coverage, but it's not so direct when you're looking at the analysis or -- and I know a lot of it is in the footnotes and the complications around the structure, but maybe you can provide some kind of a quick rationale as to how we should be thinking about the dividend and coverage here?

Fair question, Mitch, and it's one we got from -- we get regularly from investors. So I believe 2 or 3 quarters ago, we added a slide, Page 12, to our results that I'm happy to summarize that really speaks to how the dividend is funded and how we get comfortable when we say our dividend is well covered. The dividend is funded through 2 different sources. You have RMR LLC, which is the operating business. $0.32 of our $0.45 dividend is coming from the operating business. And when we think about the operating business and the distributable earnings that the operating partnership generates we look at that coverage ratio at 74%. At the same time, $0.13 of our dividend is also coming from RMR Inc., the holding company and RMR Inc., and this is why we bifurcated it on our balance sheet is sitting on $22 million of cash.

So that $22 million is also -- it has no other purpose than basically to help fund the dividend because it can't be used in the operating business. So that -- when we look at -- and this is what we try and articulate that $22 million at a $0.13 level per quarter has over 3 years of life to it. And we're hoping over that 3-year period, LLC's contribution to the dividend simultaneously increases and minimizes the need for the $0.13. But in the near term, we feel really good about the $0.45 dividend based on the contribution from the operating partnership as well as the monies at Inc. and we try to spell that out in visual form on Page 12 of our results pack.

Okay. So the money is that -- I think it's about $120 million or so, give or take, that is -- that balance doesn't change, though, meaning it's only going to shrink over time, correct?

The -- well, based on what we do for strategic growth initiatives, the Inc. balance, the $22 million...

I'm sorry, the $22 million balance in Inc., my bad. I was looking at the $121 million in RMR LLC, I'm sorry about that. The amount that's in Inc., that $22 million, that's just going to shrink over time. That doesn't get replenished, correct?

It does get -- that's what takes 3-plus years to burn it down because every quarter, we're making RMR LLC has to make tax distributions to its various members and its members are ABP Trust and RMR Inc. So there is tax distributions going to each of the members. And in the case of RMR Inc., it's going up to RMR Inc. at a rate that is higher than what it needs to pay for its federal obligation as a C-Corp. So there is some leakage that's continuing to add to the cash at RMR Inc. over time. So yes, it will bleed down over 3-plus years but it's going to take a while because we're simultaneously adding some incremental money every quarter because we're distributing cash taxes at about 37%, and their C-Corp rate is lower than that.

Okay. So 3-plus years at current economics, but as the LLC contribution grows, that 3-plus years becomes 4-plus years or more. I got you.

It could, and that's when we continually with the Board, look at our dividend levels because we don't want that RMR Inc. level, the cash to get too big.

And our next question will come from John Massocca with B. Riley Securities.

Good afternoon. Maybe kind of continuing to talk about the RMR Residential contribution or deduction that came in, in the quarter. I guess kind of why you wouldn't we expect that to maybe continue going forward, right? If they're seeing kind of a little bit of a reduction in AUM as things get kind of redistributed back to investors, is that a trend that should continue? I guess, kind of why would it stay like steady at the current level?

We have very active relationships with our LP partners and have line of sight into where they may feel an asset has maximized value. And when we look out 12 to 18 months we don't see a lot of pending sales transactions coming. And that could be because we obviously know where the business plan stand and/or there might have been a recent refinancing in an asset where the partner is in this now for the long haul. So we feel the AUM, which now sits at about $4.6 billion at RMR Residential across just under 60 assets should not materially move in the next 9 to 12 months.

Okay. That makes sense. And then thinking about the growth side in terms of the retail investments, how big -- I mean, do you think that portfolio needs to get to about the size where kind of the on-balance sheet and JV multifamily portfolio is before you similarly went out and tried to kind of look for additional sources of capital? Or is it -- you'd be larger or smaller? I'm just kind of thinking, what's kind of the time line to get that into a similar place as the residential growth vehicle?

Yes. John, I think the short answer is generally yes. So think about $100 million of cash used of cash at RMR to grow the retail portfolio. We would probably -- in terms of timing, I mean, -- this is a matter of quarters, not years, as the way I'd measure it. So I think we've probably -- it's not going to take us years to deploy that. It's going to take quarters though, multiple quarters to get there.

Okay. And then thinking ahead, would there be a view to creating maybe additional platforms? Or do you think kind of trying to build up both of these 2 vehicles and obviously, all the other activity going on, but build up those 2 vehicles on the private side is kind of going to be the focus here in the next couple of years? Or could there be kind of multiple new similar type of vehicles being seeded and kind of trying to capital raise off those?

So right now, we've got 3 strategies that are being -- we're seeding and trying to raise money -- we're -- 3 strategies that are seeded, 2 of which we're trying to raise money. We have obviously, the residential and multifamily. We have credit. Both of those are seeded and we're trying to raise money. The third one is the retail side, which you're right. We're not really going to market yet with that strategy, but I imagine in the coming -- in the future, we will. The other areas that we are open currently is there's a lot of potential development activity that we could be seeding and/or participating in some ventures around real estate development activities. That's probably a little longer out. That's maybe the fourth leg of that table as I look out today.

But I think that's -- as I -- as we look today, that's probably where those are sort of the strategies. But to answer your question more generally, we're trying to demonstrate a track record in a few sectors. And hopefully, we're successful in raising money and then we take that same formula and use it to other sectors that are attractive in the marketplace. Let's say, 2, 3 years from now, industrial might be a lot more attractive to folks. And we could maybe see a value-add industrial portfolio. That's not something on the table today, but that's something to give you an example of what we could continue to do. That is what we're trying to like to build as a business and to try to help jump start the capital raise.

So yes, there could be other verticals and other sectors we'll focus on. And I think that's one of the advantages of RMR, obviously, the fact that we're in every -- almost every sector of commercial real estate and have a sizable portfolio. And we just do commercial real estate, right? We're not a multi-platform diversified asset manager where an asset -- alternative asset manager just does real estate. So I think that really does distinguish us or differentiate us and it is appealing to investors.

And then just a quick detail one on the modeling. As we think about the kind of potential incentive fee payout that you talked about in prepared remarks, is that assuming the maximum incentive fee from DHC and ILPT at this point?

Yes.

This will conclude our question-and-answer session. I'd like to turn the conference back over to Adam Portnoy, President and Chief Executive Officer, for any closing remarks.

Thank you all for joining our call today. Institutional investors should contact RMR Investor Relations if you'd like to schedule a meeting with management. Operator, that concludes our call.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.