Detailed narrative
Managed REIT Performance & Deleveraging
RMR actively assisted its managed REITs in deleveraging efforts through strategic asset sales, refinancing debt, and driving property NOI growth. DHC saw significant operating improvement in its senior housing segment and materially improved its balance sheet with over $600 million in non-core asset sales. ILPT achieved record leasing and refinanced $1.6 billion of debt at an attractive 5.7% interest rate, doubling its quarterly dividend. SVC strengthened its balance sheet with over $900 million in non-core asset sales and $650 million in capital improvements, leading to early benefits in RevPAR and Hotel EBITDA growth. OPI emerged from bankruptcy, with RMR continuing as manager for an initial five-year term.
Private Capital Growth Strategy
RMR continues to pursue growth in its private capital business, which has grown to over $12 billion in AUM from nearly zero in 2020. The company has built a global in-house sales and marketing team to increase brand awareness and tailor opportunities to partners' capital allocation strategies. Despite a challenging fundraising environment, RMR recently closed a joint venture acquisition in Greenwich, Connecticut, for approximately $350 million, retaining a 5% general partner interest and earning acquisition, asset management, and property management fees.
Multifamily Portfolio Performance
RMR wholly owns three multifamily communities encompassing 781 units, which are almost 92% occupied. These assets are performing in line with their value-add business plans, showing operating fundamental improvements as supply eases. This includes a continued trend of rental rate improvements (3-4% on renewals) and easing tenant concessions, with renovations generating high-teen ROIs. The company aims to generate promote income from these transactions in four to five years.
Valuation & Share Attractiveness
Management highlighted that RMR shares trade at a material discount relative to peers. Backing out the carrying value of investments and wholly-owned real estate/JV interests, RMR shares trade at just over five times the EBITDA generated primarily by its 20 evergreen management contracts. This is significantly below the 16.5 times average multiple at which its peers trade, underscoring the attractiveness of RMR's shares at current levels.
Real Estate Market Conditions
The commercial real estate market is experiencing a broad slowdown in capital flows and transaction volumes, running at about 50% of normal levels. While pricing has not seen significant deterioration, with cap rates remaining relatively stable, some sectors like data centers, senior living, industrial, and retail are seeing better capital flows and transaction activity. Office sector cap rates are coming down but from a very high point.
OPI Post-Bankruptcy Strategy
Following its emergence from bankruptcy, OPI is focused on increasing free cash flow, optimizing its portfolio, and further deleveraging its balance sheet. The company is in the process of selling some real estate. RMR, as a long-term holder of a 2% equity stake in the new entity, is actively involved in these strategic initiatives, with further details on a management incentive plan still under discussion.