The RMR Group Inc. (RMR) Earnings Call Transcript & Summary

Good day, and welcome to the RMR Group Fiscal First Quarter 2022 Earnings Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Michael Kodesch, Director of Investor Relations. Please go ahead.

Good morning, and thank you for joining RMR's First Quarter of Fiscal 2022 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, January 28, 2022, 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 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 calculation of adjusted EBITDA margin can be found in our earnings release. And now I would like to turn the call over to Adam.

Thank you, Michael, and thank you all for joining us this morning. For the first quarter of fiscal 2022, which ended on December 31, we reported adjusted net income of $0.46 per share and adjusted EBITDA of $23.3 million. We ended calendar year 2021 with $33.4 billion of assets under management and remain well capitalized with over $181 million of cash and no debt. As we begin calendar year 2022, we are increasingly optimistic about our business. Despite the continued headwinds and certain of our clients are facing related to COVID-19 variance, over 87% of the adult population is at least partially vaccinated in the United States, recent consumer spending has trended higher, and the fourth quarter GDP growth was approximately 7%. Real estate fundamentals are generally healthy and continue to be supported by a strong commercial real estate market, as fourth quarter transaction volumes increased 97% year-over-year. These trends are influencing the strong fundamentals across the majority of the real estate portfolio that RMR manages. From an operational perspective, our organization continued its focus on delivering high-quality, wellness-focused and amenity-rich buildings to our tenants. This was evidenced by leasing volumes this quarter. They were at the highest levels over the last decade as RMR arranged approximately 4 million square feet of leases for an average term of 8.5 years and with an average GAAP rent roll-up in excess of 7%. These leasing levels represented an increase of 39% sequentially and a 35% increase over pre-pandemic 2019 comparable period leasing volumes. While the industrial sector remains robust, this quarter's leasing activity was spread broadly across all the real estate sectors we manage. We also remain confident in the future of office and the prospect of increased business travel to fuel increased hospitality and leisure spending in the coming months. Before moving to some of the notable private capital announcements of the quarter, I wanted to first highlight some significant strategic steps taken to best position our client companies for success. As a reminder, we are limited as to what we can discuss this quarter regarding our public clients as we are reporting results in advance of them. First, despite tracking ahead of its peers on a 3-year total return basis throughout most of the year, market volatility in the fourth quarter adversely impacted OPIs total return relative to its peer group, resulting in no incentive fee for calendar year 2021. While we were disappointed, we remain highly encouraged by OPI's 3-year total return of 14.4%, which reflects OPI's successful deleveraging and capital recycling initiatives over the last 3 years. Similarly, ILPT's total return over the past 3 years was 43.9%. And we are excited to continue utilizing private capital partners to grow this company meaningfully without the need for dilutive equity raises. SVC continues to hit strategic repositioning milestones as the overall economy continues to improve. Earlier this year, SVC announced the expected sale of 68 Sonesta Hotels in the first quarter of 2022 in order to create a stronger hotel portfolio and enhance overall liquidity. Operationally, Sonesta, which assumed management of over 200 SVC owned hotels in 2021, has produced occupancy, run rate and RevPAR metrics that remain on par with its peer set. DHC is in a similar phase of repositioning its business as the company completed over 100 senior living operator transitions and continues to take proactive measures to improve its balance sheet. Following DHC's recent joint venture announcement, which I will discuss in more detail in a moment, the company is currently well capitalized to reduce leverage and invest meaningfully in its portfolio. At both DHC and SVC, we believe the future reinstatement of dividends will significantly help to increase total shareholder returns in the future. Finally, we are pleased with the recent activity at our managed commercial mortgage REIT, Seven Hills Realty Trust, and continue to believe that the business has attractive long-term prospects. During the fourth quarter, Seven Hills raised its dividend 67% on the heels of another quarter of record originations, and at this pace, we expect they will fully deploy the remaining dry powder by this summer. Seven Hills leverages RMR's best-in-class originations platform that touts a strong default-free track record, which we believe will enable RMR to raise meaningful capital for this business line moving forward. I'd now like to turn to the more significant developments made within our private capital platform this quarter, starting with our industrial REIT, ILPT. The pending $4 billion acquisition of Monmouth Real Estate Investment Corporation is currently expected to close this quarter. This portfolio is comprised of 126 Class A industrial and logistics properties that are largely occupied by tenants whose businesses are driven by e-commerce. As a result, ILPT does not plan to raise common equity to fund this transaction and expects to fund a portion of the acquisition with private capital raise via large institutional joint venture partners. Not only does this transaction grow RMR's assets under management, but also highlights RMR's alignment our client shareholders by expanding access to capital and growth opportunities with high-quality assets. In addition to the pending Monmouth acquisition, ILPT also announced that it contributed 6 industrial properties to its existing industrial joint venture for $206 million. This transaction effectively raises equity capital at net asset value versus at a discount at the corporate level for ILPT, which will be used to reduce leverage and fund future growth. Finally, just before the end of the year, DHC announced a $378 million joint venture sale of a 35% equity interest in its two-building life science property in the Seaport District of Boston. DHC acquired this property for $1.1 billion in 2014, and the current valuation of the property is $1.7 billion, underscoring the attractive return on investment achieved in a relatively short period of time. We have repeatedly stated that our ability to further expand our private capital relationships comes from our commercial real estate expertise, operational excellence and world-class client service. The transactions announced in the fourth quarter collectively raises our private capital assets under management from $1.3 billion to $3.2 billion this quarter, or an increase of 139%. We believe this firmly highlights the organic success RMR has had building out our private capital fundraising capabilities and demonstrates how quickly RMR can scale its business with its current infrastructure. I'll now turn the call over to Matt Jordan, our Chief Financial Officer, who will review our financial results for the quarter.

Thanks, Adam, and good morning, everyone. As Adam highlighted earlier, this quarter we reported adjusted net income of $0.46 per share and adjusted EBITDA of $23.3 million, with both of these measures being slightly below our quarterly guidance primarily due to cash compensation coming in higher than our expectations. Management and advisory service revenues were $46 million, which was in line with our guidance for the quarter. Revenues this quarter represent an increase of $4.7 million on a year-over-year basis and a sequential quarter decline of approximately $800,000. The sequential quarter decline was primarily attributable to a reduction in business management fees at SVC and DHC as share price declined throughout the quarter adversely impacted their respective enterprise values. I would continue to highlight our expectations of revenue growth from construction management fees as this quarter includes fees of $3.2 million, a 31% sequential quarter increase. As we highlighted last quarter, construction volumes are expected to further increase throughout the fiscal year as many of our clients embark on redevelopment and repositioning activities within their respective portfolios. Looking ahead to next quarter, we expect revenues to be between $48 million and $49 million, driven by the following factors. First, we are driving base business management fees from projected enterprise values at DHC, SVC and OPI using recent share price levels, and factoring in the deconsolidation of $620 million in joint venture mortgage debt at DHC. Secondly, the Monmouth transaction is expected to generate approximately $2 million in incremental business and property management fees per month. Over time, these amounts are subject to change based on how much joint venture capital is raised and property disposition activity occurs. Third, private capital joint venture activity is expected to generate approximately $1 million in incremental fees next quarter. And lastly, the continued increases in construction management fees I previously highlighted will generate approximately $1.5 million in incremental revenues next quarter. Turning to expenses. Cash compensation of $31.8 million represented an increase of approximately $2.8 million sequentially, which was driven by annual merit increases, bonus inflation, as well as an unexpected slowdown in vacation usage most likely tied to the recent COVID variant surge. Looking ahead, we expect cash compensation to be approximately $32.5 million next quarter, driven primarily by payroll tax and 401(k) contributions resetting on January 1, along with continued investments in roles to support the growth of the organization. G&A was $7.7 million this quarter and represents run rate levels for the organization. With that said, as in previous years, we expect our Board of Directors will be issued annual share grants in March, which will result in next quarter including incremental G&A costs of approximately $600,000 beyond our run rate levels. Aggregating these collective insights on next quarter we expect adjusted earnings per share to range from $0.48 to $0.50 per share, and adjusted EBITDA to range from $24.5 million to $25.5 million, both of which represent meaningful sequential quarter increases. We closed the quarter with over $181 million in cash and continue to have no debt. We believe our balance sheet leaves us well positioned to pursue a variety of strategies to expand our private capital business. That concludes our formal remarks. Operator, would you please open the line to questions?

[Operator Instructions] Our first question comes from Bill Katz with Citigroup.

Your guidance. Maybe a big picture question to get started. Just sort of curious, as you migrate the capital from the managed REIT to the private markets, at what point do you think that actually it becomes a net contribution to the firm from here? And do the economics, is there any sort of arbitrage in the economics as the dollars move from the public REIT into the private space?

Sure. Bill. From a big picture perspective, generally speaking, the way those deals are structured, there's not a meaningful difference in the expected fees that we will generate, whether they're in the REIT or in the private vehicle. We've been embarking for the last few years on a comp effort to try to get more and more private capital AUM under management. And as coincided, especially in the last couple of years, with the need for some of our REITs to delever, given largely what's happened in some instances with COVID and what's happened to their businesses. So it's sort of a perfect situation where we were able to take some assets at some of our REITs that needed to delever and in some instances, due to an increase in value and then put them into a private vehicle that we can continue to manage. And you're right that, that doesn't effectively increase AUM in the short term. But really, what we've been trying to do for the last couple of years is build a base, and that's really what we did over the last few years with the deals that has been -- that have already occurred, the $3.2 billion. I think the Monmouth transaction is really a demarcation or sort of a different sort of indicates sort of the beginning of when it's going to start to grow net AUM going forward. To put it in perspective, the Monmouth transaction is the largest transaction that the organization is 6 years of history has ever taken on, it's $4 billion. It's also the only transaction of any size that we've ever done that we are not raising public company equity to fund it. That's pretty remarkable. I say it a lot around the organization. That's a pretty remarkable change for us. We are largely raising all the equity there from private institutional partners. And the only way we could do that is from the relationships we've built over the last few years in sort of building up the current AUM. So I look at the Monmouth transaction, is hopefully all incremental assets under AUM that would not have been able to occur if we hadn't built out those relationships. And so I see that as sort of a watershed moment this transaction. And I think that going forward, this is the beginning of us being able to actually grow AUM within the private sector -- private side of the business meaningfully, rather than just taking assets, let's say, from existing vehicles and sort of putting it from one pocket into the other and not really growing AUM. I do think going forward, we're now at that point where I do think it's going to start to accelerate, and we're going to be able to do more and more, grow AUM net on the private side. Matt, do you want to talk -- I said, largely, we try to keep the fee that's generally in line. But why don't you talk on the short term what's going on?

Yes. So in my prepared remarks, we highlighted next quarter, we're going to see incremental fees of about $1 million. That is largely -- even though the arrangements are intended to be largely neutral. There is a step-up in fair value ignite that Adam highlighted at the Vertex building. And then you also have the phenomenon right now in the case of DHC where they're paying us on a base -- fee basis on an enterprise value basis, which is the lower measure and on an implied fee basis that they're paying at about 32 basis points. So under the joint venture agreement, there's an inherent step up in the short term given where DHC's enterprise value currently sits. So we're going to see $1 million sequential increase quarter-over-quarter that should normalize over time.

Okay. That's helpful. Maybe just a follow-up. On Monmouth, any updated guidance in terms of how you think that the funding mix will play through? And then, Adam, maybe one last big picture question for you. On one hand, your net cash, your balance sheet is clean and net cash built sequentially, but it also sounds like deal multiples out there might be a bit on the higher side. So can you give us a sense of how to think about capital deployment from here?

Sure. So Bill, on the Monmouth transaction, this is -- unfortunately, we can't say much more than what's been already publicly announced. And obviously, ILPT hasn't announced its earnings yet. We're making public further disclosures around the transaction. I can tell you the following: the shareholder vote in Monmouth is scheduled currently for February 17, and the closing is expected to occur shortly thereafter. When we announced the Monmouth transaction, there were sort of two big ranges we told the marketplace or ILPT to the market. It said we'd raise between $430 million and $1.3 billion of equity and that it would sell between $0 million and $1.6 billion of sales. What I can tell you definitively is we're going to be off sort of the -- we're not going to be at the worst-case scenarios of those ranges. We will raise more than $430 million of equity, and we will sell less than $1.6 billion. So I can directionally tell you things are going to be better we think, than sort of the outlier worst-case funding scenarios that we outlined. But I can't really go much further than that. With regards to big picture net cash and what we're -- how we're thinking about cash, as you know, we obviously in the third quarter announced and paid a large onetime special dividend of $7 a share. That got our retained cash down by roughly $400 million to about $180 million today, and we have no debt outstanding. For the last few years, we've been talking a lot about how we want to retain a cash balance so that we could do two things, look at two different things to deploy that cash: one, to think about strategic M&A; and two, to invest -- co-investments for new vehicles, neither of which we've had to do. On one side, we've actually been very fortunate in the fact that we've gotten as of today, $3.2 billion of AUM under management on the private capital side, we've not had to use $1 of co-investment dollars. That's been very fortunate for RMR, but I'm not sure that's going to continue that way as we continue to grow the business and launch new vehicles. On the strategic M&A side, I think we talked a lot about this in the last quarter, especially we are not proactively looking for acquisitions. For a couple of years, we are very proactively looking for acquisitions. We've sort of had -- we had many conversations with folks. As I said on the last quarter, we went down the road pretty far with 3 different parties entered into LOI, start negotiating the contract. All those 3 deals came apart, not because of economics, but really over social issues. We feel pretty good that we have scarred universe of potential partners that we would like to partner with or buy. They know we're out there. I'm not ruling out M&A, but I think it's going to be more inbound or reverse inquiry, things that come to us. We receive phone calls. I think we are very much in the deal flow now because we were so proactive for over 2 years out in the marketplace that companies and advisers and brokers know about us and our appetite, but we are much more sort of sitting back and waiting for to see if an opportunity presents itself. And so I am less optimistic because we are not proactively doing it, that that's going to be a source of our -- where to use capital that way. I can't rule it out. Something might show up that we would be very accretive and attractive for us. But we're not -- that's not something we're proactively looking at every day.

Our next question comes from Bryan Maher with B. Riley Securities.

Thanks for that information so far. Two kind of bigger picture questions for me. As it comes down to DHC and SVC, which has been challenged for the past 2 years with COVID. And I know you can't give us specifics related to occupancy trends maybe at DHC or the hotel component of SVC. But would you expect with the trend of what you're seeing at those 2 managed REITs that maybe by the back half of 2022, it starts to become a little bit more business as usual as opposed to all of the transitions that have been going on more recently?

Sure. From a big picture perspective, you're absolutely right, Brian. Those two vehicles, DHC and SVC have been the most severely hit by COVID and have suffered the most specifically within their portfolios at SVC hotels and within DHC, the senior living communities. Yes, overall, we are generally optimistic things are going to get better in the second half of 2022 for both those sectors, senior living as well as hotels. If I had to put my thumb up in the air and decide which one was going to get better faster, I'm a little bit more optimistic that the hotels can come back faster and may come back faster. We're pretty -- we're fairly optimistic that hotel business travel may rebound better than people think as we enter the second and third quarters and especially in the second half of the year. And that's sort of informed by two data points that we've been able to observe over the last couple of years and especially by the fact that now with Sonesta affiliated company that we can now get data daily now versus the way we were getting data -- good data -- hotel data before, but now we get it obviously much more frequently. What's -- we think when you look back at 2021 in hotels, for example, if you look back at Q3, really this summer, and that's when COVID was waning and business channel picked up much faster than people originally thought it was going to pick up and even trail into parts of Q4. And the hotel occupancy actually rebounded better than all the prognosticators out there we're talking about how fast it was going to come back. Obviously, things have sort of go back now with the Omicron variant since December and into January. The second thing that gives us -- or data point that gives us some optimism is unlike the first half of '21, where large group events, corporate events were largely just being canceled. We're not seeing cancellations. In fact, some are going off there in the hotel industry last -- earlier this week was the ALIS Conference, in the healthcare industry, the ASHA Conference went off this week. So there are conferences happening. But we're seeing folks in the hotel space, not canceled, just push it out by a quarter, pushing out events 1, 2 quarters. That also gives us a sense of optimism. So we're seeing -- we have specific data points that we've now seen over the last 18 months within hotels, that gives us a fair amount of optimism that things might get better, much faster in hotels in the second half than some of the prognosticators out there are talking about. Senior living is a little more difficult. There, I think the trends that were occurring before COVID have just been accelerated like many things have during covering trends got accelerated. One of those trends that got accelerated was people staying at home longer and being able to deliver and get their services in the home or where they are for much longer than they used to or realizing they can and COVID sort of fed this. And I think what you're seeing at one of our affiliated companies, AlerisLife, used to be called Five Star, is that they have really take a focus on recognizing this trend and trying to address that. Now what does that mean for DHC and occupancy, I think it's going to take -- it's not going to snap back as fast in senior living. It's going to be a little bit more gradual and take time to get the occupancy to grow. We are seeing growth in occupancy at senior being. It certainly is above where it was in the depth of, let's say, March and April of '21, which is really the low point in senior living occupancy and it has improved steadily since then. It's just a much more gradual improvement. And so I do think things will get better, but I think it's going to take us beyond '22 into '23 until we really start to see meaningful improvement in the senior living space.

And my second question relates to -- you talked a lot about your leasing results, and we've been hearing that from other companies we cover as well, including office, most importantly. Can you talk a little bit about the skepticism that we keep hearing out there from some investors related to people actually returning to office relative to what we're seeing in medical office building and regular office building, leasing activity in real terms every quarter that you and others keep reporting?

Yes, you're right. There's us and I think the industry had a record fourth quarter in terms of leasing activity. There's a lot of things that you can read into that. I imagine many tenants were looking at the market and thought this was a pretty good time to lock in a long-term lease given the state of their office market, for example. And so that led to a lot of that leasing activity in the fourth quarter. But generally, I think our -- what we're seeing in terms of true occupancy and there's a lot of different data points out there, including our own portfolio. The metric that we -- I've been focused on was around Labor Day, we were seeing in September around 30% of buildings, office buildings in our portfolio had people in them or 30% occupied, you could almost say with 30% capacity. That was slowly creeping up. And by the time we got to Thanksgiving beginning of December, that was about 40% is what we saw. That's obviously come back as we've gotten into January. But I would say that our view firmly in the fall, and I think it's going to be this case as we get into the spring as well. The delay in return to office is less and less about health and safety and more and more around employee work preferences. And I think many employers, especially larger employers, the larger the employer, the more this is becoming an issue is just in such a tight labor market -- many employees have been working from home and be able to have a very flexible schedule for 2 years now. It's -- many of them in a tight labor market are not eager to return to the office full time. And I think many companies are trying to work through what is their hybrid workplace environment going to look like. And I think that is really what's going to happen. And I do think you're going to see that play out in the spring. That is -- that's what we think. That all being said, I'll just give a quick commercial on our portfolio. Look, we own a large number of MOBs. We own a large number of life science buildings. We own a large number -- those buildings themselves, obviously, are work-from-home resistant. You basically have to be occupied the folks that do the work there. What we've been doing over the last couple of years in our office portfolio at OPI specifically hasn't really trying to think about -- we don't think office is going away. But we do think in this environment, it's just going to be actuated. The better located, the newer buildings with more amenities are going to be what tenants want. And so we've been pretty active, and you saw that at OPI last year, buying newer, modern, well amenitized, well-located office buildings, divesting of maybe buildings in the suburbs that are older that aren't as well amenitized. That is what we've been doing at OPI for some time. I imagine we're going to continue to do that because in the current office environment, I think it's as important ever -- as ever to have a portfolio that way.

Our next question comes from James Sullivan with BTIG.

I just wanted to talk with Matt here about the guide for next quarter in terms of the top line guide, that guide, I think, is $48 million to $49 million. Now back with the fourth quarter, obviously, you had provided a guide that assumed that first quarter would be flat with fourth quarter, came in a little below that. And as I understand your prepared comments, that was because of two of the REITs, management fees and two of the rates declining. So the question, in providing the guide for the second quarter, what are you assuming regarding the two REITs that had -- that were the source of the negative comp? And how do you factor that into these quarterly guides, the share price changes, which have obviously been pretty significant year-to-date?

It's a great question, Jim, and we try and do our best to prognosticate where share prices will land, especially if those two REITs. And what we've done in our guide this quarter is we've looked back over the last 7 or so weeks given the significant volatility in both directions to try and come up with an average, and that is what we've based our guide on in our forecast number. So just around $9 for SVC and just around $3 per share for DHC.

Okay. So you take the kind of the average close or the average trading range and just provide an average for that and build that into the model?

Correct. And in periods of greater stability, quite frankly. If I look back to last quarter, we'll use, say, the current month as a proxy since that is the first -- typically, we're reporting results at the end of the first quarter -- first month of the quarter that's coming up. But given the volatility we're seeing, we took a little more of a conservative approach this quarter.

Okay. Fair enough. Appreciate that. And then a question for Adam. Obviously, you talked in answering the prior question about the outlook over the course of the year. The topic that there over the last several weeks, of course, has been the rate of inflation. And clearly, the hotel portfolio is probably very well positioned for an inflationary environment. And I'm curious, when you think about your more triple net lease portfolios as opposed to the more active portfolio like the hotel portfolio currently. How do you feel about your exposure to rising inflation overall? And really, I'm looking here at the net lease portfolio, the office portfolio as well as the health care?

Sure. So thanks, Jim. Yes, I think generally speaking, we have a very diverse portfolio that runs the gamut, all the way at one extreme, as you pointed out, in hotels where rates are set daily, all the way to the other extreme where you have long-term 15-year net lease, let's say, in an office building. And in between, we have everything in between two, obviously. For example, in the senior housing assets, rates are monthly, but they're usually reset annually, if not quarterly. So you have fairly -- often, you can reset rates there. I will tell you, in the -- what you categorize broadly is within retail, industrial office portfolio. You're right, we tend to have a well-occupied longer lease term than, let's say, many of our peers, with the exception maybe at OPI where the average lease term, I believe, is about 5 years, so it's not quite as long. Obviously, at ILPT in the industrial, it is a little longer, pushing up to 10 years on the retail portfolio, it is pushing up the 10 years. At DHC on the MOB and life science portfolio, I think it's also maybe just over 5 years. So it's not -- one, I want to point out that it's not overwhelmingly a 10-, 15-year net lease portfolio. That all being said, 80% of what you -- what's in that retail broadly industrial, broadly office and including an office, general office, MOBs, life science buildings, we have in 80% of those leases, either CPI adjustments and/or fixed step-ups. So I think we feel pretty good that, that will largely cover us in this, what hopes to be a short- to medium-term period of high inflation. And obviously, commercial real estate and especially core commercial real estate have traditionally been a very good hedge in a high inflationary environment, especially if you're willing to hold it for 5 to 10 years, which is our typical hold period, for us in our REITs as well as in our joint ventures. So I think overall, we feel pretty good. Look, we've been in -- we've held a pretty diverse portfolio. And part of what we try to do from RMR's perspective is make sure we have a diverse portfolio. So we're not sort of all of our eggs in one sort of sector and doing one type of -- or one lease type. And that served us pretty well over the last 36 years of being operations. We've obviously operated in many cycles. And I think that diversity has served us well, granted, we're probably in a higher inflationary environment than we've seen in a long time. But I think we are reasonably, if not well positioned to deal with it in the coming years.

Just a follow-up on that. You mentioned CPI adjustments, which are typical -- I guess, typically annual adjustments. Is it not true though, in health care that oftentimes the CPI adjustments were capped at either a specific rate or a specific percentage of CPI, or was it -- is it in fact full CPI adjustments?

Sometimes they're capped, sometimes they're fixed rates. Jim, honestly, it's -- different markets have different conventions. The industry doesn't necessarily follow one convention. As you know, within -- generally within office and within MOB specifically as well, you will have a different market convention, let's say, in the Boston market than you might have in the Dallas market versus you might have in the Denver market. That's an old saying that all real estates are sort of local. Real estate leasing is hyper local in terms of how it gets structured we talk all the time about net effective rents. When you cut through it all, that's what we are always looking at RMR and when we're looking through everything because we look at a nationwide portfolio we have to adjust all these different variable nuances as leases are negotiated by different market convention to get down to the effect -- net effective rents. And so generally, it's all over the place. It's not necessarily one way, let's say, in MOBs versus it really depends on the market.

Okay. And then final question for me. Adam, the company is obviously a enviable position with no debt and plenty of cash on the balance sheet. And you made mention in the prepared comments about how many transactions the company has been involved in the portfolio of companies have been involved in. And given what has been kind of a significant pivot here, in terms of the macro variables, inflation higher interest rates moving up. Can you share with us your sense as to where cap rates are going? Do you have a sense that cap rates are finally going to start moving higher along with interest rates and inflation or not?

They feel like it's hard to see them go any lower, let me put it that way. I think they were modestly -- my view is they have got to go up a little bit. I think they're going to be tempered in their raise. I don't think you're going to see a one-for-one correlation to increased cost for, let's increased debt costs and inflation, having a meaningful impact on increases in cap rates. And the reason I say that we're pretty active in the market. There is a tremendous amount of capital trying to be put to work in real estate. -- just to make a quick anecdote. Yesterday, Blackstone announced their earnings, they talked a lot about the BREIT. They're raising $5 billion a month just in their BREIT. That money has got to be deployed -- that is just a fraction of what needs to be deployed market-wise. And unfortunately, folks are more and more, including us focused on certain sectors over other sectors. And so that sort of demand for the real estate and supply of money looking for a home is going to temper that growth in cap rates. So I think cap rates are probably going to moderate, they're going to come up a little bit because debt costs are going to move. But look, before the current -- and I'll give you an anecdote, we don't play a lot in the multifamily space, but we lend against multifamily projects. We have lent money. This is prior to the run-up in rates or expected run-up in rates prior to the announcements of increase in inflation. This was 6 months ago. We were lending money out to certain hotel -- I'm sorry, to certain multifamily owners at higher rates than the cap rate that they were going into the deal. Now of course, these were value-add plays. They were planning to turn it around over a period of time. But that just gives you a sense, and we're making first lien mortgages against a multifamily. Our rates, I'm going to make it up 3.5% and the cap rate going in is 3%. And we would spend a lot of time looking at that, and that just gives you a feel for the amount of money trying to be put to work in the space. Now of course, there was a business plan there, and they're planning to increase NOI over the 2 to 3 years. But they have to do it going in the debt cost more than the cap rate. That gives you a sense of how much money is out there and is going to temper those cap rate expansions.

Next question from Ronald Kamdem at Morgan Stanley.

Great. Just going back to sort of the private capital transactions that happened during the quarter, just trying to get a sense of how much more is there to come down the road. Are there sort of other assets that sort of would make sense for these types of transactions, both at ILPT and DHC? And is this something where we could see happen in the other two REITs, the office and OPI and SEC?

Sure. Generally speaking, we are having conversations with private capital partners pretty much on all types of commercial real estate that we manage, every sector. So you can go the gamut. It can be office, industrial, hotels, senior living and service retail. Every type of sector we are in, we are having some level of conversation with others around that. Some of those conversations would involve vehicles that potentially could include our REITs and some of those conversations are involving vehicles that would not include our REITs. The overwhelming -- what's going on at our REITs? And so the question is, could you see other things happen at the other REITs? This is all sort of tied together. What we are very focused on in, we haven't collected an incentive fee for 2 years at RMR. And so I want to point out that we're very focused on the fact that we haven't collected incentive fees. And so one of the things that we think we need to do with those REITs is delever because we are running at a little bit higher leverage than we have typically run, especially -- and that's across the board. At DHC and SVC, the two things that I think will do the most to increase the shareholder return in addition to deleveraging is also to reinstate the dividend. And I can't really give guidance on when that's going to happen, but we hope it's going to happen sooner rather than later. And because I think the faster we can reinstate the dividend and delever, better returns we get. I tell you all that story as it relates to private capital because it plays into -- yes, we could, if it made sense for our other REITs enter into additional joint ventures because it behooves them to delever because again, by deleveraging and getting the dividends reinstated, especially DHC and SVC, it behooves everybody so that those companies total shareholder returns are improved. I think I'm talking -- what I'm really saying is a high alignment of interest between RMR, our actions and the shareholders of the different REITs. And that's really what I'm trying to talk about. But at the same time, it does lead to, yes, we could be doing additional joint ventures at the other vehicles, but it's because we want to delever and get those shareholder returns to improve so we can start earning incentive fees.

Great. That's helpful. And then just back on ILPT. I think you talked about private capital getting involved, whether it's one, two or three. Just any color on what sort of the debate, what's driving the decision, either to get involved or not involved? And what's driving the amount of capital commitments they're willing to put there? I can appreciate conversations are still fluid, but just sort of curious what that money is debating.

The ILPT, I think the question is really the capital partners that we're out talking to about that. I think the conversations are overall going well. And I really can't say much more than what I said before in the sense that when we announced the transaction, we said that we would be raising private capital at the smallest amount of $430 million and the greatest amount, $1.3 billion. What I think we feel comfortable saying definitively here in this form before ILPT announces its earnings and before there's a shareholder vote, at Monmouth is that we will raise more than $430 million of private capital. And so I think generally, the conversations are going well, and we feel optimistic that we will close -- on not only close but funded largely along the lines that we hope to.

Great. And then I want to switch gears to expenses a little bit, thinking about sort of wage pressures. Just what are you seeing on the ground in sort of the construction business in terms of wages for workers? And if you can give us a sense of sort of magnitude of what increases -- what wage increases are there, that would be great?

Sure. So I don't have great insight to what we're seeing specifically with contractors. I can give you anecdotes more generally around what we're seeing across our platform. Remember, RMR, we're a commercial real estate company, alternative asset management company, principally, that's where we generate the large majority of our revenues. That all being said, we do have affiliated operating businesses. And if you look at those affiliate operating businesses, if they're fully employed, they have 45,000 employees. We currently have about 20% open positions, roughly or 8,000 job openings across the board, about 2.5x the normal job openings. So that just gives you a sense. That's not necessarily construction necessarily, but that gives you a sense on the broader economy, what we're seeing across the board. Generally speaking, at our operating companies in the fourth quarter, and this is a very general statement, depends on the market presents on the position, about 5% growth in wages. I'll let Matt talk about what we saw in the fourth quarter here at RMR.

Yes. So while wage inflation is definitely real Ron, and I'll come back to that in a second. I do want to just reinforce this quarter, comp -- cash comp came in higher than where we had guided primarily due to vacation usage, believe it or not, which was a sizable amount of the miss, over $0.5 million just not being where it normally would be in a non-COVID, especially COVID variant environment. and that was the driver. Now we are at September 30 year-end, as you know, merit increases go effective October 1. So they were baked into our forecast. I will tell you that wage inflation is real. So incorporating normal merit increases plus market adjustments, we averaged about 7%. Going forward, what I would just piggyback off of Adam's point, while salary inflation continues to be real, I would say the thing that will create the most volatility in our forecasting of cash comp and what probably keeps me up at night is labor shortage. As we're growing as an organization, as we're creating new roles, finding the talent, which creates -- we do our best in our forecasting to predict when jobs will be filled and at what rates. Finding that talent and when it will come on board to support this organization and the growth, we're going to experience with Monmouth and the other private capital transactions, is probably the biggest variable that we're experiencing as a firm.

[Operator Instructions] Our next question comes from Owen Lau with Oppenheimer.

Going back to the comp and competition, you just mentioned a lot of openings, a lot of competition I don't think it's specific to RMR, but how do you tackle this rising labor costs at the same time being competitive to hire people? I would love to get your thoughts about how you manage that.

Yes. So number one, Greater Boston is incredibly competitive, and that's where the bulk of our corporate level employees that are overhead costs, if you will, to RMR reside. So obviously, we're in the fortunate position of being profitable, having strong operating margins, which allows us to compete and stay commensurate with the market as we're seeing the inflation, especially in the more specialized roles, whether it be technology, and frankly, we're seeing it across all disciplines in the Greater Boston market. But I think it comes back to the employee wellness and the different programs we've employed as an organization to make this a place people want to come work at through career growth and opportunities as well as our benefits programs and the amenities we provide, whether it be here at our corporate office or across the country. It's just a collective battle, I think all of leadership and our HR organization takes the heart every day to make sure we're an employer of choice.

Yes. Owen, the only thing I would add is that our -- while we have -- we do have a challenge filling open roles. Our retention rate is pretty high in our corporate office. I haven't seen specific statistics, but I just anecdotally think it's much higher than many of our peers in this market. What Matt is talking about, we have normal attrition that happens every year, but we have nothing outside of the normal attrition. Our metrics are -- in fact, we're probably stronger this year in terms of retention than we were in some of the years in '18 and '19. So we actually feel pretty good about retention. It's really filling new roles, and we have had a handful of new roles that we've created as we've been growing and diversifying the portfolio that we're trying to fill, and they've become challenging in this environment. But our retention is very good, and I think it's important to point that out also.

Got it. That's very helpful. And then Matt, you talked about the guide in terms of incremental revenue. I think that's very helpful. But could you please remind us how much revenue RMR will generate from the private real estate fund? My understanding is you charge 100 basis points on contributed capital, but how much is the base of these contributed capital? And then more broadly, strategically speaking, Adam, you talked about the limitation and the leverage on maybe some of the REITs like DHC and SVC. Is there any other major world block to present you from raising additional funds from asset owners and how traction and conversation with investors on that front?

Yes. Let me take the first question in terms of growing the REITs. The principal issue with growing the REITs is the stock price. It's hard for us to compete for assets, especially high-quality assets, and that's what we are focused on, very high-quality assets. And unfortunately, they trade at low cap rates. And so given our cost of equity capital where those REITs are trading, we can't effectively grow them given where their stock prices are. Some of the REITs are closer to a point where perhaps we could think about equity raises versus others, but none of them are at a point where we would feel comfortable, I think, raising equity today. That's the biggest prohibitor. It's not necessarily that we can't buy things. It's just that we have to be able to fund it competitively on an equity basis. And one of the things that I think we've done successfully by doing these joint ventures not only has it delevered these companies, which is very important. I think long term, you can look at lots of stats and we've been in the REIT business for a long time. Lower leverage REITs tend to outperform higher leverage REITs. We've been able to raise the equity effectively by selling assets at NAV, which is very important from a REIT perspective. So versus selling equity at the corporate level at much below NAV because that's where their stocks are trading. And so it's actually, I think, behooves the REITs to do this because it effectively raises equity capital without taking a discount and delevers. Eventually, look, we are thinking these stock prices are going to get better. And once they do get better, we'll start earning incentive fees, and we can then think about hopefully growing and raising equity to grow those vehicles on their own. But it's also important I think for the REIT shareholders and investors to understand, and this is another reason that private capital is important. It's important for those shareholders to understand that RMR can grow without raising equity at the REITs. That's an important element. And that's -- and if shareholders understand that we don't have to raise equity and dilutive deals to grow that we have other avenues to grow the business, that actually helps, I believe, long term with the stock price performance because there's not this overhang that we're going to do an equity deal because it's maybe the only way to grow our AUM. And so I think there's all sorts of reasons why it's important for us to build out the private capital. But the principal prohibitor is not structural. It's really just -- we're not willing to issue equity at a very dilutive price at the REITs to fund growth.

And then, Owen, I guess, from a modeling perspective, the way I would think about it is the $3.2 billion in gross private capital, we've disclosed this quarter on a fee-paying basis, that number is just over $1.5 billion. And then our arrangements, which include some legacy arrangements range anywhere from 50 to 100 basis points on that fee paying capital with a weighted average based on the arrangements we have today of about 60 basis points. So that gets you to just over $9 million in annual run rate base fees from that fee-paying capital. And then as you model and think forward, most of our current JVs will be levered or levered at around 60% and will fall somewhere in that fee paying range of 50 to 100 basis points.

This concludes the 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.