Good morning, welcome to the RMR First Quarter of Fiscal 2023 Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star than two. Please note this event is being recorded. I would now like to turn the conference over to Melissa McCarthy, Manager of Investor Relations. Please go ahead.
Good morning, thank you for joining RMR's First Quarter of Fiscal 2023 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 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 3rd, 2023, 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 those 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 www.rmrgroup.com. Investors are cautioned not to place undue reliance upon any forward-looking statements. In addition, we may discuss non-GAAP numbers during this call, including adjusted net income, adjusted earnings per share, Adjusted EBITDA, and Adjusted EBITDA margin. A reconciliation of net income determined in accordance with U.S. Generally Accepted Accounting Principles to adjusted net income, adjusted earnings per share, Adjusted EBITDA, and the calculation of Adjusted EBITDA margin can be found in our earnings release. Now I would like to turn the call over to Adam.
Thanks, Melissa, and thank you for joining us this morning. Before we discuss the first quarter results, I would like to start by highlighting the enhanced earnings release format that we issued last night. This enhanced format is intended to align more closely with our alternative asset manager peers, and we expect it to be easier for investors and analysts to efficiently digest our results and make comparisons to our peer group. We have also evolved the way we define our clients. As a result, throughout our earnings release and 10-Q, you will see them presented as either perpetual capital clients or private capital clients. As I sit here today and survey the overall economic environment, the ongoing market uncertainty, driven in large part by the Fed's rapid interest rate increases, has created significant headwinds for the commercial real estate industry.
This market uncertainty has significantly slowed real estate transaction volumes, with many, including our organization, taking a more wait-and-see approach. The impact on the publicly traded REIT industry has also been significant, with the U.S. REIT Index down over 24% in 2022, and each respective publicly traded REIT sector generating negative returns since returns last year. In light of these challenges, RMR's strong first quarter financial results are a testament to the diversity of our clients and the durability of our business model. We ended the calendar year 2022 with $37.4 billion in assets under management, with $30 billion representing perpetual capital. Over the course of 2022, our fee-earning AUM increased almost 10% to end the year at $26.9 billion.
This quarter, we reported adjusted net income of $0.51 per share, distributable earnings of $0.58 per share, Adjusted EBITDA of $26.4 million, and Adjusted EBITDA margin of 50.8%. Finally, we again declared our dividend of $0.40 per share this quarter, which remains secure and well covered, as evidenced by our 62.4% distribution payout ratio. From an operational perspective, our organization continued its focus on delivering high quality and amenity-rich buildings to our tenants. Despite a slowing and cautious commercial real estate market, from a leasing perspective, fundamentals across our managed assets remained favorable.
Our portfolio of managed real estate ended the quarter at nearly 96% leased, and during the quarter, we helped arrange 2.5 million sq ft of leases on behalf of our clients, which resulted in a combined 2% roll-up in rents and a weighted average lease term of almost nine years. As a reminder, we are limited as to what we can discuss this quarter regarding our publicly traded clients as we are reporting results in advance of them. With that said, I want to highlight some items of note across our perpetual capital clients. In October, SVC amended its revolving credit facility to extend the facility's maturity date to July 2023, and remove restrictions on paying dividends and issuing secure debt.
With the amendment behind them, SVC's board increased the quarterly cash dividend from $0.01 Per share to 20 cents per share, which is well covered at a conservative 37% payout ratio. SVC management is currently focused on refinancing $500 million in bonds that will mature this June, with multiple options currently available to them. Bond refinancing discussions at SVC have also been helped because all aspects of its business continue to perform well. In the hotel sector, fundamentals remain solid, as evidenced by higher TSA checkpoint travel volumes and increasing occupancy and RevPAR levels across the industry. This positive momentum was evident this past week at the ALIS conference in Los Angeles, a major hotel industry event that included representation from both SVC and Sonesta, where the mood was the most upbeat since the beginning of the pandemic.
As it relates to the retail portion of SVC's business, this same positive momentum is also evident as discretionary consumer spending continues to remain resilient across all income levels. Household cash cushions remain well above pre-pandemic levels, the majority of SVC's retail tenants remain current on their lease obligations. Turning to our real estate lending platform, Seven Hills Realty Trust, our publicly traded mortgage REIT, continues to be a growth story for the organization as its loan book approaches $1 billion. In uncertain times like these, lending against commercial real estate, as compared to owning the equity in the same real estate, is an attractive way to generate high risk-adjusted returns. Seven Hills' default-free track record, coupled with the ability to access the broader RMR real estate platform, continues to be a differentiating factor for us.
In January, Seven Hills' board declared a 40% increase in its quarterly dividend from $0.25 per share to $0.35 per share. This new dividend rate is a strong signal of our confidence in the company's momentum and the stability of its loan portfolio. At OPI, occupancy remains above 90% despite headwinds from hybrid work arrangements and cost-cutting measures across corporate America. While national indicators suggest office usage is improving, our internal data shows OPI's assets tracking ahead of national averages, which most likely reflects the diverse geographic nature of OPI's portfolio and its limited reliance on gateway markets. Given the current environment, we expect office fundamentals to remain subdued, specifically rent growth and rent growth, and leasing velocity.
As such, the organization is focused on getting ahead of OPI's upcoming 2023 and 2024 lease expirations by actively engaging tenants and thoughtfully investing in OPI's properties. At DHC, we are working with its senior living operators to improve DHC's operating performance. As a reminder, in the third calendar quarter, DHC reported its sixth consecutive quarter of occupancy growth in its senior living communities. That trend is consistent with the broader industry, though inflationary pressures and labor supply challenges remain a headwind to margin and profitability for the entire industry. These efforts are critical to DHC's long-term success and its ability to refinance upcoming debt maturities in 2024. With over $800 million in cash as of September 30th, we are confident DHC can both weather these near-term challenges and continue strategically investing in its assets.
I'll close with our private capital business, which ended the year at over $7 billion in managed assets, including the Mountain joint venture that was created when ILPT acquired Monmouth REIT in early 2022. The private capital portion of our business now represents 20% of our consolidated overall AUM and 15% of our fee-earning AUM. Both significant milestones, given this portion of our business is only about five years old. At this time, we are simultaneously pursuing organic private capital growth with our existing capital partners, developing new private capital vehicles, and assessing strategic M&A opportunities as they present themselves. With over $200 million in cash and no debt, we believe we are well-positioned to take advantage of strategic opportunities that we believe will result from the ongoing market volatility.
I'll now turn the call over to Matt Jordan, our Chief Financial Officer.
Thanks, Adam, good morning, everyone. For the first quarter of fiscal 2023, we reported adjusted net income of $8.7 million, or $0.51 per share, and Adjusted EBITDA of $26.4 million, with both financial measures being in line with our quarterly guidance. Total management and advisory service revenues were $49.6 million this quarter, which was almost $4 million higher on a year-over-year basis, though down approximately $2 million sequentially. The sequential quarter decrease was primarily attributable to enterprise value declines at the managed equity REITs. Normal seasonal declines at TA and Sonesta, partially offset by increases in construction supervision fees. Construction supervision fees almost doubled from the same period last year as RMR continues to look for ways to maximize value at our clients' assets through redevelopment and repositioning efforts.
For the second fiscal quarter of 2023, we expect to generate between $48 million and $49.5 million of management and advisory service revenues based upon the current enterprise values of our managed equity REITs. As it relates to incentive fees, which as a reminder, are based on a comparison of our managed equity REITs' three-year total shareholder return to their respective peer groups, we unfortunately did not earn any incentive fees for calendar 2022. With that said, OPI's three-year total return exceeded its peer group by over 800 basis points. Though cumulative returns for OPI in the office sector were negative, given the headwinds broadly facing the office sector, which resulted in no incentive fees being due from OPI.
Additionally, both OPI and SVC's total shareholder return for calendar 2022 exceeded their respective peer groups by over 500 basis points, which hopefully creates a foundation for future incentive fees. Turning to expenses. Recurring cash compensation this quarter was approximately $33.3 million, an increase of $1.7 million on a sequential quarter basis, due primarily to annual merit increases that were effective October 1st. While wage inflation and labor scarcity are moderating, we remain vigilant in continually assessing staffing levels and continue to look to secondary hiring locations and select outsourcing solutions to mitigate further expense growth. Looking ahead to next quarter, we expect recurring cash compensation to increase to approximately $34.5 million due to payroll tax and 401(k) contributions resetting on January 1st, and then moderating at approximately $34 million each quarter thereafter.
G&A expense of $9.2 million this quarter includes approximately $400,000, or $0.01 per share, of technology transformation costs, which were excluded from Adjusted EPS and Adjusted EBITDA. Over the next two years, we have committed up to $10 million to our technology infrastructure to ensure we harness the breadth of the data we generate internally to aid strategic decision-making, as well as ensure we have an operating environment that leverages technology to drive innovation and efficiencies. At this time, it's still early in our technology transformation journey, so we are unable to speak to the exact pattern of spend over the next 18 months. It's worth noting that a portion of these technology investments will be both capitalizable and reimbursed by our clients.
On a normalized basis, G&A should be approximately $9 million next quarter, excluding both technology investments and annual share grants to our board of directors in March. Given the rising interest rate environment we currently operate in, we generated interest income this quarter of approximately $1.8 million and expect this number to exceed $2 million per quarter throughout the remainder of fiscal 2023. Aggregating all the prospective assumptions I previously outlined, next quarter, we expect adjusted earnings per share to range from $0.46-$0.49 per share, and Adjusted EBITDA should range from $24.5 million-$26.5 million. That concludes our formal remarks. Operator, would you please open the line to questions?
We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Bryan Maher of B. Riley FBR. Please go ahead.
Good morning, Adam and Matt, appreciate those comments. Can you give us an update on what you're seeing or hearing from the sovereign wealth funds that you've dealt with in kind of private capital and as it relates to potentially re-engaging this year on, either a second partner for ILPT and/or some asset sales?
Sure. Good morning, Brian. Thank you for that question. With regard specifically to the partners we're dealing with at the sovereign wealth funds, I would say they are very much open for business. That happens to be a little bit unique, I think, to the relationships we have, specifically with those groups, which I can't name, but not all sovereign wealth funds are open for business. The ones we are dealing with very much are open for business. I think, not surprisingly, they are focused on the favored asset classes that most institutional investors are focused on, which would be industrial real estate, residential or multifamily real estate, and then sort of more niche-y sectors like, you know, data centers and/or MOBs or life science buildings.
With regards to specifically our platform and the ability to grow AUM with them this year, I think there will be opportunities to grow with them this year. If I had to put sort of a timeline around it, I think there'll be more opportunities to do it in the second half of the year than there would be in the first half of the year. I just think given the nature of what's going on in the portfolios that we manage, and what's going on more broadly in the market, it's probably more likely that you would see growth in those vehicles if it were to occur in 2023 in the second half of the calendar year rather than the first half.
That's a little bit more driven by things going on at our firm than by their appetite because they are very much open to doing things. That's sort of where we're at. I think they, in some ways, they see this as their real opportunity to aggregate assets because to be perfectly frank, some of the non-traded REITs that have existed were also competing for the same assets and may have largely exited the market. They are now largely the only buyers or the largest buyer of what I would call core plus real estate in the market today. I think from their perspective, if you were to ask them, they'd say this is a real opportunity for them because they have less competition to deal with.
I think it will turn into opportunities for us in the future.
That segues well into my second question is, we've been getting questions from investors regarding the managed REITs, whether it's cash on hand. Obviously, I think that you have some set aside for certain things, whether it's CapEx, et cetera, or refinancing or availability to borrow to make acquisitions. What is, you know, kind of the appetite of the four managed REITs this year for acquisitions on their balance sheet? Or is it just a function of you're keeping that cash powder for refinances, CapEx, et cetera? Maybe you can address that.
Sure. I think across the board, there's limited acquisitions that you will see across the board at the four REITs for various reasons. I think there's different reasons why that is the case at each one of the REITs. Broadly speaking, limited acquisition appetite. If there are some acquisitions, they could be smaller acquisitions and/or related to, you know, properties in and around existing properties. Let's say, you know, an add-on from an adjacent property that adds the value to an existing property or something like that. We are very focused certainly the first half of this year, and you can see it in our numbers around construction management supervision fees.
You know, there's a lot of development activity we're looking at to deploy capital this year across the REITs, especially in our senior living portfolio, in our hotel portfolio, you know, well into the hundreds of millions of dollars that we plan to be putting to work. There's a lot of effort underway in that respect, which does create fees for RMR itself because we're working on the construction management side of that. That all being said, depending on timing around debt repayments, specifically at some of the REITs for 2023 maturities, and as they may have more cash on hand, there could be opportunities, especially at the end of the second half of the year, to actually open up to do some acquisition opportunities at the REITs in the second half of the year.
Thanks. Just last for me, I mean, I would be remiss not to mention the AlerisLife acquisition announced this morning. Any extra color you can give us on that? You know, what the plan might be there? Is RMR gonna be involved at all? Is there any impact on DHC? That's all for me. Thanks.
Sure. Thanks for that question, Bryan. We fully anticipated getting a question like that. It was really a coincidence. This was not planned to have that announcement out this morning on the same day we did our earnings release. We anticipated the question. Unfortunately, I've been advised by council that this is not the proper form to go into what that announcement is. There will be in relation to that transaction, a Schedule TO or tender offer document that will be filed with the SEC in the coming days, which will have a lot of information in it. I encourage you to review that document when it's filed because I anticipate it will answer most, if not all, of your questions related to that transaction.
The only other thing I think we can say about the transaction, 'cause it really just directly from RMR's perspective, maybe Matt address the fee impact.
Yeah. There will be no impact to RMR's revenues as it relates to AlerisLife. That's pretty much all we can say.
Okay. Thank you.
Yep. Mm-hmm.
Once again, if you would like to ask a question, please press star then one. Our next question will come from Ronald Kamdem of Morgan Stanley. Please go ahead.
Hey, good morning. Just a couple of quick ones. Can you just update us on... you in the past, had sort of looked at smaller potential acquisitions, of these smaller asset managers maybe. Can you just update us where we are in that process and where your head's at today?
Sure. Thanks for that question. We continue to evaluate opportunities as they present themselves. There are, have been anecdotally, a couple more opportunities that have presented themselves in the last couple of months that, you know, were opportunities that have sort of come around again. Where we were involved in discussions they have reappeared. I think it's a pretty interesting environment we are entering into in 2023. There I anticipate that there will be some. I don't know if it's gonna be distressed sales, but there's gonna be opportunities where people are gonna be looking to perhaps exit or more importantly, join a larger firm because it's a difficult operating environment.
You know, to give you an example, a firm that might have, let's say, a larger portion or of their assets in and around office real estate, which is not a favorite asset class at the moment, might be more inclined to join a larger firm that's more diversified. There could be opportunities, for example, around that sort of theoretical situation. I think there's nothing imminent that is to be announced, certainly, but we have sort of ongoing regular dialogue with folks, and I anticipate that to continue. I'm hopeful that, you know, as we get later into 2023, that some of that dialogue will turn into actionable items and we could see some M&A activity, which would be a, you know, one of the primary earmarked uses for our cash on our balance sheet.
We are hopeful that something like that will materialize in the coming year.
Great. My last one would just be if you can just comment on sort of on the office side. You know, sort of talked about the return to office. Got a couple data points about, you know, job losses and tenants potentially reducing space. Just curious where, what you guys are hearing, what you guys are seeing on the office side. Thanks.
Yeah. We spend an enormous amount of time thinking and discussing and talking about what's going on in our office portfolio. It's a very large portion of the real estate we manage across, not just OPI, but other vehicles as well. At a high level, you know, it's almost like an analogy to the waters are calm today, meaning occupancy is pretty high, people are paying their rent. We've been leasing space at a pretty regular clip. Things are okay. That all being said, we all are looking to 2020 later this year, 2023, 2024, and all the signs are from a macro perspective that things are gonna slow. It's almost like you're looking into the horizon, you see storm clouds. You just don't know if we're going into a Category 1 storm or a Category 5 storm.
The market, if you look at the office sector, office REITs, I think investors are assuming going into a Category 5 storm. They're just assuming the worst. I will tell you from a planning perspective, we're obviously planning, you know, as we think about our office portfolio, we do the best we can to plan for. It's going to be a very rough environment and hope that it's not as rough as we're planning for. You sort of plan for the worst and hope for the best. We know it's going to be a difficult operating environment because you have the triple threat of, you know, a slowing economy, rising interest rates, and work from home that's just sort of not abating in a major way. That's having an impact across the whole industry.
Even if you have a portfolio of properties that have higher occupancy or utilization than the industry as a whole, which we do, nonetheless, because the whole market sort of recedes or go backward, we get affected by that. That's what we're seeing. We know it's gonna slow down. We just don't know by how much. We're planning, you know, it's gonna slow down quite a bit and hope that it's not quite as bad as we planned for. In my prepared remarks, we talked about how we're very focused at OPI, for example, our largest portfolio of office buildings. You know, dealing with our 2023, 2024 and even 2025 lease expirations, that's a real big focus for the company. And we have, you know, varying views on where those leases are gonna shake out.
It's hard to know precisely where we sit today. It's gonna shake out, but at a macro level, yes, so it's gonna be lower occupancy. There will be rent rolldowns on a general basis. The whole industry is sort of facing that. We just don't have a good sense by how much, and that's what I. I don't think anyone in the industry really knows precisely where it's gonna be.
Which, by the way, conversely presents some opportunities at the same time, because, you know, when the marketplace is so negative and sort of assumes the worst as we get further along into 2023 and into 2024, especially as there's so much debt that comes due in the industry around office buildings, it does present an interesting opportunity, not just for ourselves, but others in the marketplace that might take a slightly contrarian view for certain office properties. Very specifically, they may be sort of caught in the downdraft of the industry, but might be great assets that you can buy at a good price. That's the converse, you know, the opportunity, the other side of the coin, let's say, to the downturn in what's going on in office.
Helpful. Thank you.
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 us today. Operator, that concludes our call.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.