RMR Beats Its Own Guidance, Then Maps a Two-Year Hotel Exit

Distributable earnings of $17.2 million, or $0.53 per share, and adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $21.5 million put The RMR Group (NASDAQ:RMR) above its own fiscal fourth-quarter guidance. The alternative asset manager also recorded a GAAP net loss of $12.4 million, driven primarily by unrealized losses on investments. The quarter, in short, rewarded shareholders on one measure and accountants on none.

For fiscal 2027, RMR forecasts adjusted EBITDA of $77 million to $81 million, excluding potential incentive fees. Next quarter it expects adjusted EBITDA of $18.5 million to $19.5 million and distributable earnings of $0.42 to $0.44 per share.

What did the CEO say about the SVC hotel exit?

President and CEO Adam Portnoy devoted much of the call to the plan for SVC, a managed real estate investment trust, to transition from a hotel-focused REIT into a pure-play triple-net lease REIT (a structure where the tenant, not the landlord, covers property costs). RMR expects SVC to begin selling its 77 retained hotels in 2027, with a goal of selling substantially all of them by the end of calendar 2028.

Portnoy said SVC would likely obtain higher proceeds by selling individual hotels or small portfolios rather than the entire collection in one transaction. Timing depends on improvements in hotel earnings, and he cautioned against SVC becoming a forced seller. Patience, apparently, still has a price tag.

The numbers behind that patience:

• SVC has spent $628 million renovating the retained hotels over the past three years.
• Operating initiatives could add approximately $109 million of EBITDA over the next 12 to 24 months.
• Management estimates the hotels could be worth $3 billion to $4.1 billion in aggregate with the increased cash flow — projections, not completed sale prices.

Asked by an analyst, Portnoy estimated that more than 90% of the anticipated EBITDA improvement would come from operational changes and capital spending rather than a stronger hotel market. Most renovation spending has already occurred, though additional expenditures are planned.

SVC has already sold 142 mostly select-service hotels for $1.1 billion over the past three years, largely using the proceeds to repay debt. Its objective is to reduce leverage from approximately nine times net debt to adjusted EBITDA to no more than five times.

Why did the board reject a $2 billion offer?

Portnoy said SVC's board, including all six independent trustees, unanimously rejected a $2 billion offer from TKO for the hotel portfolio. The reason: the bid was significantly below the value management and the board believe the assets could command after earnings improve.

He also addressed a public letter from investment firm Blackwells calling for SVC to sell its remaining hotels immediately at the highest available price. SVC issued a response as RMR's call began. Neither TKO nor Blackwells contacted SVC or RMR before issuing their public communications, according to Portnoy, and TKO provided no additional materials nor sought discussions.

The door is not closed. Portnoy said SVC would seriously consider an earlier unsolicited offer from a credible party if its price was close to the value management expects after hotel cash flows improve. He noted that RMR's management and potential incentive fees, along with a recent $50 million equity investment in SVC, align its interests with SVC shareholders.

How did revenue and fees shape up?

Chief Financial Officer Matt Brown said fourth-quarter recurring service revenue was $45.2 million, down modestly from the preceding quarter. He expects it to decline to approximately $43.9 million next quarter, mainly because of recent declines in the total market capitalization of certain managed equity REITs.

RMR recorded a $22.7 million loss on investments during the quarter, largely reflecting noncash unrealized changes in share prices. Those losses were excluded from adjusted EBITDA and distributable earnings, Brown said.

The company remains on pace to earn nearly $38 million in aggregate incentive fees in the quarter ending Dec. 31, primarily reflecting the performance of managed REITs DHC and ILPT. The amount remains subject to change and is excluded from quarterly and full-year guidance.

RMR ended the fiscal year with approximately $103 million in liquidity, including $48 million in cash and $55 million of revolving credit capacity. Its quarterly dividend was $0.45 per share.

Is fundraising getting any easier?

It is not. Chief Operating Officer Matt Jordan said higher interest rates, inflation and geopolitical uncertainty have weighed on commercial real estate fundraising. Fundraising for RMR-sponsored vehicles has been muted, though the company continues to invest in capital formation and institutional investor relationships.

Jordan said RMR manages $12 billion in private capital and has contacted 105 of 131 identified non-U.S. limited partners (investors in private funds) with more than $50 billion in investable assets. "We're playing the long game," he said.

RMR has also reduced resources in parts of its organization following asset sales by clients. Those actions and expense discipline lifted its adjusted EBITDA margin by 460 basis points sequentially to 45.9% in the fourth quarter, Jordan said. The RMR Group provides management services — property and business management, asset management, leasing, acquisitions and dispositions, financing, development and advisory support — to publicly traded REITs, real estate operating companies and private capital vehicles across sectors including senior living, healthcare, office, industrial and retail.