RMR Group Inc (RMR) Q3 2021 Earnings Call Transcript

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RMR Group Inc (RMR 0.29%)
Q3 2021 Earnings Call
Aug 6, 2021, 1:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to The RMR Group Fiscal Third Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]

I would now like to turn the conference over to Michael Kodesch, Director of Investor Relations. Please go ahead, sir.

Michael Kodesch -- Director of Investor Relations

Good afternoon, and thank you for joining RMR's third quarter of fiscal 2021 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, 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 6th, 2021 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 measures during this call including adjusted net income, adjusted earnings per share, adjusted EBITDA, and adjusted EBITDA margin.

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. And now, I would like to turn the call over to Adam.

Adam Portnoy -- President and Chief Executive Officer

Thank you, Michael. Good afternoon, thank you all for joining us. This quarter, I'm pleased to report adjusted net income of $0.47 per share, an increase of 27% on a sequential quarter basis and 24% on a year-over-year basis. Further, adjusted EBITDA of $24.4 million represents a 16% increase on a sequential quarter basis and a 25% increase on a year-over-year basis. Our results this quarter highlight the significant progress we've made over the past year navigating the pandemic. As I reflect on the last 15 months, one of the lasting impressions I come away with is the resiliency of our platform and the commitment of our people to this organization.

To begin today's quarterly commentary, I want to start by discussing what we're seeing across the commercial real estate sectors we manage and how some of our key operating metrics are trending. As of today, over 70% of the U.S. adult population has received at least one dose of the COVID vaccine. U.S. airline traveler totals are at the highest level seen since the beginning of the pandemic and we are experiencing increased office utilization rates at the properties we manage.

In terms of organic AUM growth, due to the combination of increasing levels of capital being allocated to commercial real estate investments generally and historically low interest rates, we continue to experience significant competition for acquisition at our client companies, most notably in the industrial, life science and high-quality office property sectors. Illustrations of the competitive landscape for deploying capital are most impactful at our company ILPT, our private industrial fund and the Tremont Mortgage platform as each of these groups has over $500 million of dry powder to put to work.

For example, this quarter alone, our organization has screened over $6.6 billion in industrial deals and we underwrote approximately $3.5 billion of debt financing opportunities. Nevertheless, we continue to remain disciplined in our underwriting in the face of a very competitive market environment. From an operating perspective this quarter, we saw many positive signs, most notably, continued leasing momentum across our platform.

This quarter, we arranged over 2 million square feet of leases on behalf of our client companies with a weighted average lease term of over 11 years and an average roll up in rent of just over 9%. We believe the office workplace remains a critical part of most businesses and our continued leasing velocity reinforces this belief. I also would like to take a moment to highlight our expanded development capabilities, which is important as growth through acquisitions becomes more difficult.

Over the last few years we have taken on increasingly larger scale development projects with OPI's 20 Mass Av redevelopment, a great current example of our expanding capabilities. This project is 427,000 square foot RMR-managed redevelopment project in Washington, D.C., with total costs of approximately $200 million that is expected to be delivered in the first quarter of 2023.

Finally, as it relates to the strength of our tenants, we remain pleased with cash collection rates that continue to hover at approximately 99%. Additionally, in an environment of elevated inflation, our clients remain well-positioned with over 80% of our leases at RMR managed assets having inflation protection measures such as contractual rent bumps or CPI adjustments.

I'd now like to highlight some of the recent notable activities at our client companies. In May, OPI raised $300 million of senior unsecured notes and used the proceeds to pay down higher cost debt. This offering was 6 times oversubscribed, which is a positive indication of interest in OPI and commercial office real estate generally. In June, OPI acquired two Class A office properties for a total of $550 million and commenced the redevelopment of 20 Mass Av, which I highlighted earlier. We expect OPI will continue its successful strategy of recycling capital into higher quality and better performing assets, which has increased the portfolio's weighted average lease term, decreased OPI's capex burden and expanded the company's footprint into faster-growing markets.

As previously announced, DHC and Five Star amended their management agreements, which allows for the transition of 108 senior living communities from Five Star to a diverse group of best-in-class operators. This process is well underway and should be completed by calendar year-end as DHC has already announced that 76 communities are under agreement to be managed by four new operators. The transition of these communities should ultimately be mutually beneficial and leave each respective client company better positioned.

DHC same-property SHOP occupancy experienced its first sequential quarter increase since the pandemic began. We believe senior living will benefit from many fundamental tailwinds including limited supply growth and a rapidly growing target demographic that supports demand for senior living over the next decade.

Turning to SVC and more specifically it's hotel portfolio that is managed primarily by Sonesta. Since the conversion of 205 hotels over the past three quarters, Sonesta has been able to deliver significant improvements in occupancy, room rates, and RevPAR. These positive trends which have occurred despite the ongoing pandemic and the disruption of transitioning hotels from other managers have resulted in SVC reporting positive hotel EBITDA this quarter for the first time since the first quarter of 2020. As currently one of the largest hotel brands in the United States, Sonesta continues to invest in its infrastructure and franchising capabilities, positioning it very well for the future.

At TravelCenters of America, which is also one of SVC's largest tenants. They reported adjusted EBITDA of $73.5 million this past quarter, an increase of 82% compared to the same period in 2019. These results highlight the progress TA has made in its business since the beginning of 2020. Before I turn to our cash deployment initiatives, I want to note that RMR Mortgage Trust and Tremont Mortgage Trust remain on track to complete their merger with shareholder votes scheduled for mid-September.

As a reminder, we expect the combined platform to benefit benefit from enhanced scale with fully invested assets expected to approach $1 billion as well as to be immediately accretive to both sets of shareholders, provide increased shareholder liquidity, and reduce the respective cost of capital.

We ended the quarter with approximately $400 million in cash and as mentioned last quarter, our Board continues to assess potential alternatives for excess cash beyond what is required to fund growth initiatives. It remains our expectation that the most likely form of a return of capital to shareholders will be in the form of a special one-time dividend later this year.

With regards to our growth initiatives, we remain committed to organically building relationships with providers of private LP capital and we continue to dialog with a handful of potential real estate private M&A targets. We are hopeful to announce progress on each of these initiatives for growth in the coming months. Finally, as I mentioned last quarter, we have begun building our own internal capital markets team to expand into other sources of private capital such as family offices and high net worth investors and expect to announce more regarding this initiative on our next quarterly earnings call. I'll now turn the call over to Matt Jordan, our Chief Financial Officer, who will review our financial results for the quarter.

Matthew Jordan -- Executive Vice President, Chief Financial Officer & Treasurer

Thanks, Adam and good afternoon everyone. This quarter's results were robust characterized by strong momentum across many of our key operating and financial metrics. We recorded sequential quarter and year-over-year increases in every headline metric, the majority of which were also in line with our guidance for the quarter. I plan to spend most of my prepared remarks detailing the drivers behind our results as well as expectations for the fourth fiscal quarter.

Management and advisory services revenues increased for the fourth straight quarter with revenues reaching $45.5 million, a $3.5 million increase on a sequential quarter basis. This increase was primarily driven by the following factors. First, the average enterprise value at OPI, DHC, and SVC increased meaningfully this quarter adding almost $1.9 million in incremental revenues. Secondly, for many of the reasons articulated by Adam earlier, our managed operators had strong operating results, which in turn led to approximately $1.6 million of incremental fees. And lastly, as typically occurs over the course of each calendar year, construction activity across our clients increased sequentially which in turn generated approximately $800,000 in incremental construction management fees [Phonetic].

Looking ahead to next quarter, we expect management and advisory service revenues to be between $46.0 million and $47.5 million under the following assumptions. First, no material changes from July 2021 average enterprise values across our Managed Equity REITs. Secondly, revenues from our managed operators are expected to be flat as growth at Sonesta and TA is expected to be muted by declines at Five Star as they transition DHC communities to other operators. And lastly, continued increases in construction activity across the platform that should generate approximately $1 million in incremental revenues.

This meaningful increase in construction management fees is primarily due to next quarter being our first full quarter realizing incremental fees from recent amendments to our management agreements with DHC and SVC that provides for RMR to oversee all major capital projects and repositionings at hotels and senior living communities for a 3% fee.

Moving to incentive fees from our Managed Equity REITs, OPI continues to accrue an incentive fee for calendar 2021. As a reminder, we only record incentive fee revenue at December 31st of each year. However, if June 30th had been the end of a measurement period, we would have earned an annual incentive fee of approximately $22.2 million. With regards to the calculation of our incentive fees, we were recently informed by S&P Global that the SNL indices we benchmark our REITs against will be discontinued effective August 7th. We are currently working with S&P to identify an alternative with the goal of finding REIT indices that most closely replicate the performance of the expiring legacy SNL benchmark.

Turning to expenses for the quarter. Cash compensation of $30.5 million and our cash reimbursement rate of 43% this quarter were both flat on a sequential quarter basis. Based on our headcount assumptions, statutory payroll payroll tax withholding limits being reached, and post-pandemic vacation usage, next quarter, we expect cash compensation to be approximately $30 million. As it relates to equity-based compensation with our fiscal year-end approaching, RMR share awards to officers and employees will occur in September. Based on RMR's historical grant levels, we expect approximately $500,000 in incremental equity compensation next quarter, the large majority of which is not recoverable.

As Adam noted earlier, adjusted EBITDA this quarter was $24.4 million, an increase of 16% on a sequential quarter basis. Our adjusted EBITDA margin this quarter was 51.1%, a sequential quarter increase of 300 basis point. Our adjusted EBITDA margin getting back over 50% illustrates the operating leverage of the platform and our earnings potential as we experience service revenue growth. Looking ahead to next quarter, we expect adjusted earnings per share to range from $0.48 to $0.51 per share and adjusted EBITDA to be between $24.5 million and $26.5 million.

Before we go to questions, I would like to highlight that we recently ranked first on the BOMA International 360 Performance Program standings. We always look to highlight our vertically integrated platform and believe this to be a differentiator when meeting with potential sources of private capital. RMR's national real estate operations teams focus solely on our clients' assets and we remain proud of our investments in sustainability, continual education and training of our team members, and maintaining superior relationships with our tenants. That concludes our formal remarks. Operator, would you please open the line to questions.

Questions and Answers:

Operator

[Operator Instructions] Today's first question comes from Bryan Maher with B. Riley FBR. Please go ahead.

Bryan Maher -- B. Riley FBR -- Analyst

Good afternoon, everyone. A couple of questions from me. And first of all congratulations on what seems like we're turning the corner on a lot of different levels here. Given we've listened to obviously all of the calls, most of your Managed REITs have sizable chunks of liquidity and we continue to hear as you mentioned Adam, the difficulty in buying assets at reasonable prices. That all being said and with ILPT and TA and others having some land available, how deep is the appetite or willingness to develop ground up at RMR versus continuing to chase assets at really low cap rates?

Adam Portnoy -- President and Chief Executive Officer

Thanks, Bryan and good afternoon. That's a really good question and I'm glad you picked up on it from the prepared remarks because it is a growing part, development activity, redevelopment activity has been becoming a bigger part of the whole RMR story. I would say it's still a minority part of our story. It's still a small part, but I think it's going to grow over time.

At the very least, I think to be a significant or a major commercial real estate operator, investor, manager in this country, you have to have significant development capabilities sort of as a minimum and we sort of been developing that internally through hires and growing a much larger department within RMR that's focused on development.

I would say in the short to medium-term, most of the development activity that is occurring is sort of ancillary to our existing real estate holdings and that's in the form of when you have 2,200 properties in every state in the country and then also in Canada and the Caribbean, you have a lot of different properties, a lot of different period -- going through a lot of different cycles and there is obviously a handful of properties that their useful life may have expired and that the area around them have developed into other locales that would mean that that real estate would become much more valuable if it was converted into something else and that's sort of the what I call the low-hanging fruit that we've been most focused on.

That's what you're seeing at 20 Mass Av, that's what we saw when we talked about the Torrey Pines redevelopment that happened at DHC that's largely completed. It was over $100 million. That's what you see when you hear SVC talk about doing something in the Nashville market on a site that is currently a travel center that site itself could be upwards of $1 billion mixed use, 4 million to 5 million square foot redevelopment.

So I think it is going to become a bigger part of what we do. In the industrial side, you'll probably notice, we have -- our first what I'd call a relatively modest development going on down in the Dallas market that we indicated at ILPT, we bought the land from an affiliate company and are going to be developing that into industrial. I think it will continue to be a growing part of our business going forward. I don't think it's going to overtake just the traditional buying core real estate, managing core real estate.

I think that's going to be the lion's share of what we do for the foreseeable future, but I do think there'll be more and more sort of opportunities to what I call build to core and that's really what we're doing, we're building products to core real estate with pretty healthy returns.

Eventually medium to long-term, this is probably years away, I could see us deploying -- buying vacant lots vacant land, buying property specifically with the idea that you would tear it down or redevelop or to develop something on that. I think that's more longer-term. You could see us do it maybe the first place you might start to see us do something like that on a limited basis might be in and around industrial and what we're seeing there just because of the competition for industrial acquiring industrial properties, but that's sort of gives you a flavor for what we're doing around development and redevelopment.

Bryan Maher -- B. Riley FBR -- Analyst

Do you think we could see a scenario where within your private investment vehicles or yourself personally buying developing land of the various uses that the Managed REITs target with the end game that the Managed REITs are a take out such that the REITs don't have the overhang of non-EBITDA generating capital at work.

Adam Portnoy -- President and Chief Executive Officer

It's certainly possible, Bryan. I put that is less likely and I'll tell you why, it's not because I'm not confident in our development capabilities or being able to do it. It's obviously a related party transaction if RMR was to build something and then try to sell it into the REITs and fortunately or unfortunately, we have a lot of related party existing relationships and whenever we engage in further related party transactions, they are generally difficult to explain in the marketplace and for whatever reason they are often looked at -- some groups of investors look at them skeptically.

So I'm not sure that's really the way we're thinking about it or plan to do it. If we did start buying greenfield, again, the first place you might see it and this is not going to be meaningful might be in and around industrial, but if we did that, it would be on ILPT's balance sheet. We probably won't do that, let's say on RMR or personally or outside and then try to sell it to ILPT.

Bryan Maher -- B. Riley FBR -- Analyst

Okay and just shifting gears, so clearly, it looks like from this week's earnings the DHC and SVC have probably turned the corner here with a lot more positive outlook for the next 12 to 18 months. With what you're seeing kind of internally, who do you think accelerates faster out of the downturn? DHC or SVC?

Adam Portnoy -- President and Chief Executive Officer

I love your question Bryan. It's a funny way -- I haven't thought of it that way, but it's -- [Speech Overlap]. Yeah, it's like a horse race. Look, both of them, you're right DHC and SVC are the two REITs, they have most been negatively impacted by what's happened with COVID and they're both going through, you're correct. The second calendar quarter results for both those companies was very good and we are, as you're right, it does feel like we sort of turned the corner and things are getting better.

There are so many variables that are at play as we think through the fall and into 2022 that affect how both those companies come out. And of course it all comes back the COVID. On the SVC side, it's about how fast does business travel come back and does the delta variant sort of make that harder as we get into the fall for business travel to come back and the question -- the answer is nobody really knows, but everyone suspects it's going to have some impact.

On the DHC side, it's the same thing. If COVID becomes a bigger part of the story in the U.S. economy, then does that hinder the ability to see occupancy grow. The good news is I think both businesses are going to improve as we get further into '21 and certainly into '22. It's very hard to say at what rate. That's I think what we debate and what we spent a lot of times thinking about is the speed of which the recovery will happen in both. Both are recovering and both are expected to keep recovering and getting positive. It's just very hard to say which one is going to do it faster. And so that's the basic answer.

Bryan Maher -- B. Riley FBR -- Analyst

Great. Thanks, Adam. That's all from me.

Operator

And our next question today comes from Jim Sullivan of BTIG. Please go ahead.

Jim Sullivan -- BTIG -- Analyst

Thank you. So Adam, I'd like to just kind of follow on to some of the questions that Bryan had and start with capital allocation in terms of the development activity as opposed to acquisitions. Presumably there is a risk premium there and I'm curious if you could explain to us how you think about that? What kind of hurdle rate do you have for development number one. And then I guess when you think about in connection with the alternative of acquisitions in a very expensive environment where you're -- how far off are you from the market. If you've underwritten a lot of products and maybe advanced to the second and third rounds, how far off do you find the market from where you're willing to put capital into acquisitions?

Adam Portnoy -- President and Chief Executive Officer

Thanks, Jim. I think we are not far off and we are winning transactions. It's just it's a very broad funnel at the top and you have to basically go through a lot of processes some more widely marketed than others to sort of get to that deals that we win. Obviously, this past quarter we bought $550 million of very high quality office properties and we announced some small acquisitions at ILPT and the industrial side. So we are able to make acquisitions and I think we will be able to grow through acquisitions going forward.

In terms of our capital allocation risk premium, again, the reason I said to the earlier question about focused on development, have incumbent legacy properties is we have a built-in often low basis in the land and the product in the real estate as it exists today on the balance sheet and so it helps us in terms of getting that good return on a development meaning if we were to just buy a vacant parcel in the same location of some of these properties, the development potential would be factored into the cost of the land or the greenfield and so that can eat into your returns.

So part of the reason we're focused on trying to do development activities are what I call incumbent properties is because we have that built-in low basis and it's easier to get to the hurdle. Generally speaking, what are we building toward? High-single digits on a core return for development, high-single digits. Does it depend on if it's industrial or if it's office or even if it's going to be mixed use or even if it's some other asset side, but it sort of varies, but generally speaking across the board, we are targeting high-single digits but that's incorporating the fact that we already have a low basis in the real estate. So that's how it helps to get a good return for that client company when we put the additional capital to work. Hopefully that answers your question.

Jim Sullivan -- BTIG -- Analyst

One other alt. Yeah, thank you for that. One other alternative in terms of capital allocation and obviously we've seen it especially in some of the multifamily REITs is to have an active developer capital program or structured finance book. We've seen companies like SL Green do it in office and Main Street retail and UDR and others do it in multifamily. and you have your mortgage rates REITs which do a different type of business, I believe, but I'm just curious whether you have kind of taken a serious look at starting a developer capital program. Will you provide that mezz [Phonetic] level to the developers and sometimes retain an option to buy the property at the end of the state [Phonetic]. That's something that you're looking at?

Adam Portnoy -- President and Chief Executive Officer

Jim, it's something we're not seriously looking at. We have looked more, it's related to what you're talking about takeout commitments meaning rather than just providing the financing as part of the development phase with a takeout attached. We have looked in circumstances of just committing to a forward takeout for a developer. I think we probably do that before we commit to the financing, especially if it's on a spec basis even the forward commitments that we've looked at and haven't done. I'm just telling what we've looked at has been around developments that have usually a tenant in tow meaning it's a build-to-suit and or subject to getting the building leased before we could take it to takeout.

Yes, you can get some cap rate discount or however you want to think about, it's a little better, but of course it's the time value of money. You know it's when is that takeout going to be done is how we've thought about. So specifically answer your question. No, we haven't looked at it that way in terms of prime mezz financing for development. We still on the lending side, which you are right, it's related to what you're talking about, we find we have a pretty robust pipeline. Think we can get a lot of money out to work looking just sort of at this transitional value-add, light value-add bridge loans and we're seeing on a risk-adjusted basis, we feel more comfortable putting money there at the moment.

Jim Sullivan -- BTIG -- Analyst

Okay and then final question from me regarding the PE platform. When RMR was talking about major investment in PE platform a while ago, ultimately, you scaled that back to the point where the lion's share of the cash will go toward a special dividend. And I'm just curious, you guys have investigated presumably a lot of opportunities in terms of a PE platform. And I'm just curious, whether the issue was that pricing expectations for the sellers were just too rich or whether there was simply an absence of opportunities, whether it would be kind of a good meeting of the minds or marriage in terms of the personnel that -- whose platform you'd be buying?

Adam Portnoy -- President and Chief Executive Officer

Sure. It's a good question. Just to be clear, I would not say it's completely off the table. I was more optimistic that, that was going to be our primary way of growing the private capital business some quarters ago.

My think -- our thinking around that has shifted a little bit more, where I think we have a very good opportunity, and we will be successful growing it internally or organically ourselves. I mean, we talked about that in the prepared remarks. We are having advanced discussions with being able to put hopefully together and I still believe this number -- billions of dollars to work in and around private capital that we will organically place.

That all being said, we haven't completely put aside the idea of doing something with -- through M&A. And to date, the reason we haven't done something is not because of price. I would say, to date, we entered this market; it's now several quarters, maybe a year or two that we've been doing this now. And we had lots of discussions, I would say as much of this has been about us being very choosy about what we want to acquire.

And more specifically, I don't think you're going to see us buy, and this gets really nuanced within the industry a shop that is heavily reliant on closed-end funds that do opportunistic investing in real estate. That's a bridge too far from what we do and shops that are focused on that, and that's the majority of the private real estate shops that exist out there.

Our focus has been just we are more interested in dealing with folks that are more -- they're investing sort of more core real estate, less closed-end funds, maybe more separate managed accounts. And that just fits better, it just -- it's a better, there's a lot more synergies with what we do in our organization with a firm like that.

And so, we've narrowed the focus to be that. And I think it took us a while to figure this out that this is what we wanted to do as an organization, if we were going to do this from an M&A perspective and be successful at an M&A from doing this -- on an M&A's perspective. And so, to date, the firms we have talked to that sort of meet -- check all the boxes, meet that criteria have been -- it has not been about price. It's been more about we want to do a control transaction. And that's not just financially, but to a certain extent operationally.

We think we can bring, for example, significant synergies to bear on an organization like I've identified on expenses. And so, the seller has to be comfortable with that sort of arrangement as we go forward. And so, it hasn't been price. It's just been more meeting of the minds, culturally getting together with groups and also us being more picky and being very choosy about what it is we are willing to buy.

Jim Sullivan -- BTIG -- Analyst

Okay, very good. Thanks for that, Adam.

Operator

And our next question today comes from Kenneth Lee at RBC Capital Markets. Please go ahead.

Kenneth Lee -- RBC Capital Markets -- Analyst

Hi, thanks for taking my question. Just one about the larger-scale developments. You mentioned that this is an area that could grow over time. And you also mentioned that you are right now ramping up your capability. Just wondering, if you could just perhaps give us a better sense of the potential time frames involved where you can reach that level of capability and where we could start to see more meaningful contributions? Thanks.

Adam Portnoy -- President and Chief Executive Officer

Yeah. I don't want to put too much -- I don't want to overstate the level of contribution that this business could be providing here in the short to medium term as we get in. When I say short to medium term, 2021, 2022, probably well into 2023. This is -- one development takes a long time when -- and the specialty type of developments we're talking about.

For example, 20 Mass Ave development we mentioned in our prepared script, this is something that's a $200 million project, it's started, it's not going to be delivered till Q1 2023. We have a handful of other projects of sort of the same scale that's as I think about it, those projects, they will start in the coming years as we get into '22 and to '23, those projects will begin on the scale like what we're talking about.

So, I think it's an important capability for an organization like ourselves. And I think as time goes on, as -- years from now, I think this could be something that's quite -- that could become more meaningful. Maybe we're somewhat around conservative. What I'm trying -- what we're trying to do is sort of build up our capabilities over time. And I think it also sort of helps legitimize us in the eyes of investors that we're sort of a full service vertically integrated real estate company that can do all stripes of things real estate with the focus generally -- that we're generally focused on core real estate, either buying, managing or building the core of real estate. That's really our focus.

And so, I don't want to overstate it. Again, not to pick on industrial, but that could be the one place that you could see a small uptick in the stuff, where we could start maybe doing some more development there. And again, it'd be development of the core. I like to see us walk before we run. We have one development project going on down in Dallas. It's going to be -- it's a $10 million project all-in, if that. And I really like to see us do it successfully before we start green lighting many more projects. So it's going to be a process we go through, but I do think it will be an -- it's important for us for multiple reasons and someday could be a bigger part of our story.

Kenneth Lee -- RBC Capital Markets -- Analyst

Got you. That's very helpful. And one follow-up question, if I may. You mentioned in the prepared remarks about the S&P REIT indexes being discontinued. Could you just talk a little bit more about what you see could be the potential impact to incentive fees, given the calculations uses three-year measurement periods? Thanks.

Matthew Jordan -- Executive Vice President, Chief Financial Officer & Treasurer

Yeah. Good question, Ken. So, pretty similar to our prepared remarks, this is something we've learned from S&P in the last three or four weeks. We're in the process of assessing alternatives. To be fair, the ultimate goal is to find an index, an alternative with S&P or otherwise that very closely mirrors what we have today with the hope that there will not be a significant change to where the current incentive fee is trending, whether it'd be the SNL index or a replacement index.

So, that's our goal and I think we'll have more to say on this at our next earnings call or in advance of our next earnings call, but we need to go through a process where we talk to both the RMR boards and the respective REIT boards over the next few weeks as we identify alternatives.

Kenneth Lee -- RBC Capital Markets -- Analyst

Got you. Very helpful. Thanks again.

Operator

Our next question today comes from Ronald Kamdem with Morgan Stanley. Please go ahead. Hello, Ronald. Your line is open, or you're on mute, perhaps. Yeah. Can you hear me now?

Adam Portnoy -- President and Chief Executive Officer

Yes.

Ronald Kamdem -- Morgan Stanley -- Analyst

Okay, great. Sorry about that. Just had a quick follow-up on sort of the S&P index expiration. And I can appreciate you guys are still sort of in the middle of conversations, so you may not know. But would the idea be finding a new index for calculation for the remaining of the year or is there a chance to just redo the calculation even for sort of the time that's already passed with the current index? Hopefully, that made sense.

Matthew Jordan -- Executive Vice President, Chief Financial Officer & Treasurer

I think both alternatives are a possibility, Ron. I think we just need to go through the process of assessing what the alternative is and then what the process of adoption will be with each respective board and the RMR Board.

Ronald Kamdem -- Morgan Stanley -- Analyst

Got it. Makes sense. Just -- one of the things I wanted to follow up on is the conversation earlier about private capital vehicles. I know you talked about historically maybe get -- potentially getting exposure to multifamily sector. Just curious, how much of that has played into sort of the search in terms of a core real estate manager? And if not, realistically, what's the path to maybe executing on something on the multi-family side if you're still contemplating it?

Adam Portnoy -- President and Chief Executive Officer

Yeah. I would say that it hasn't been, let's say, a requirement or a criteria that the firm must be in the multi-family space. But that all being said, most core private equity firms have a multi-family aspect to them. And I think just about everyone we've talked to had some level of multi-family, either that's one of their core competencies or they have some amount of it.

And so, I think if we were to do anything in and around that, let's say, make an acquisition, I think it would likely come with some multi-family expertise. And, of course, that would be obviously an area we could try to grow around that. If we don't make -- do something in multi-family in terms of a M&A, I think we would have to explore building it out on our own and without require is -- supplementing some of the folks here at RMR that have a little bit more expertise in and around multi-family and basically building it. And that could be reusing some of our capital to seed a fund of some sort or an initiative or a vehicle hopefully with some outside capital alongside us to sort of get it up and going, but that would be probably the way we would think about doing it. I don't -- just to be clear though, that's not something that we are actively trying to set up today. So I don't want you to think that you're going to see a multi-family platform suddenly announced at RMR that we're going to organically build.

That's not something we are actively trying to build. I think based on the handful of conversations, where shorter one is run to ground to the very end these conversations with a handful of folks and see if we can get one across the line. And if we do, then it likely will come with a multi-family aspect to it and sort of build from there. So, that's how we're thinking about it.

Ronald Kamdem -- Morgan Stanley -- Analyst

Helpful. Thank you.

Operator

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

Owen Lau -- Oppenheimer & Co. -- Analyst

Thank you for taking my question. I want to go back to special dividend. I think, Adam, you mentioned RMR is still considering paying special dividend by the end of this year. I think last quarter, you mentioned a decision may be made by September and RMR could return 50% of cash on hand. I'm asking because in your prepared remark, you also mentioned RMR may announce something, like some growth initiatives in the coming months. I just want to see whether September and 50% are still valid here. Thank you.

Adam Portnoy -- President and Chief Executive Officer

Thanks, Owen. Yes. So, our thinking and timing and sizing around the dividend since our last quarterly call really hasn't changed. We continue to think that it could be up to half, let's say, of our cash, which is roughly half of our cash is today $200 million and our plan is to still hopefully make a decision by September or by our fiscal year-end, which is September 30th.

Owen Lau -- Oppenheimer & Co. -- Analyst

Okay. Got it. That's very helpful. And then, a quick modeling question on Sonesta. I think it has been doing quite well. Last quarter, you mentioned the revenue of Sonesta will go up to like $1.6 million in the fourth fiscal quarter, I think which is $500,000 higher. And I think this quarter, Matt, you mentioned something like you are expecting this to be flat from this quarter or next quarter. I just want to make sure I understand the dynamic here. Thank you.

Adam Portnoy -- President and Chief Executive Officer

Hi, Owen. Yes, thank you. I know you're largely asking a very specific modeling question, but let me just say a couple of things about Sonesta, which I'm glad you opened up the floor to that. Sonesta is doing very, very well. SVC, one of our largest clients announced its earnings earlier today. First time, it's announced positive hotel EBITDA since the pandemic began for the quarter and that's largely because of the performance of Sonesta, which has been very, very strong, probably stronger than we initially thought it would be.

It's been so far -- it's been so strong at Sonesta that you also heard SVC talk this morning about how they were marketing 69 hotels for sale and they mentioned that they are selling them initially with the idea that they will be encumbered by brand. It is -- the response in the marketplace to Sonesta has been so robust that when we went out to brokers to talk about valuations for potential selling of the hotels, and this was a little bit of a surprise even to myself and to others, we heard back that they thought that selling them encumbered by Sonesta would be very little, if no discount to showing them unencumbered.

And I point that out because it speaks to the marketplace opportunity that SVC and Sonesta are experiencing, which is -- and I don't think any of us have fully realized it when we bought, let's say, Red Lion and put the whole Sonesta business together largely on necessity because of our managers defaulted on us. But today in the marketplace, we are now one of the largest hotel companies. And as we go out to talk to folks about franchising, the reception we are getting is incredibly robust. And it's because, one, we may not charge the same rate that a Marriott would, but maybe more importantly two factors.

One, Sonesta is an owner, operator, not just a franchise company. And two, it's much more getting in on the early days of what could be a potential major brand. It's the way I -- the analogy I use is, you're sort of getting in as a franchisee with Sonesta sort of the third, the fourth inning. If you're jumping in with Marriott, you're in the eighth or ninth inning. I mean, they saturate the market. So, if you're an extended stay hotel and you want to buy one of the hotels we're selling at SVC, it's -- you're going to be maybe the 20th Marriott or the 15th Hilton or the 10th Hyatt in that marketplace on extended stay. You might be the only Sonesta or one of three Sonestas and you might -- and we may not charge as much.

So, it's been really interesting to see the response we're getting in the marketplace, which explains why I think SVC is going to be able to hopefully sell the hotels encumbered and likely not pay -- and not realize any discount in the pricing, which at first might be a little bit of a surprise to people, but it also speaks to the power of the Sonesta brand in this marketplace today. Matt, why don't you talk about the specifics?

Matthew Jordan -- Executive Vice President, Chief Financial Officer & Treasurer

Yeah. So, Owen to your specific on the modeling. So, this quarter, Sonesta generated about $1.5 million in fee revenue based on where they see leisure travel and hopefully some resumption post Labor Day of business travel, we're modeling them out at about $1.8 million next quarter. Now, please keep in mind in my prepared remarks, we're net-net, while they are up, the operators as a whole should end up, all things being equal, back at $7 million, which is where they are this quarter.

Owen Lau -- Oppenheimer & Co. -- Analyst

Got it. So, $1.8 million from $1.5 million. Okay. Got it. And then just one final clarification on the SNL benchmark, will S&P discontinue all the benchmarks you're using or just one specific benchmark? I'm trying to understand better.

Matthew Jordan -- Executive Vice President, Chief Financial Officer & Treasurer

No. They've had some business transactions and mergers on their side, and they need to discontinue any index that's tied to the SNL brand name. So, all of them...

Owen Lau -- Oppenheimer & Co. -- Analyst

Okay. Thank you very much.

Operator

And our next question is a follow-up from Bryan Maher with B. Riley FBR. Please go ahead.

Bryan Maher -- B. Riley FBR -- Analyst

Great. Thanks. That Sonesta discussion got me thinking. And one thing that jumps to my mind is, can you maybe explain the advantage to the franchisees other than the getting in at the early innings? As far as the fee or a marketing fee standpoint, what's the advantage to that, and if you could quantify it in any way? And secondarily, Red Lion came with a lot of brand. I'm guessing that the focus really is on Sonesta and maybe Red Lion itself, do you think you might prune any of the other brands that came along with that transaction?

Adam Portnoy -- President and Chief Executive Officer

Sure. In terms of the brands themselves, at Red Lion, there could be one or two brands that over time -- we would prune over time. In terms of franchising, it's still very much a focus on the Red Lion brands themselves. There's a couple of large brands within Red Lion, Americas Best Value Inn that does very well, that continues to generate interest in the marketplace. That -- but you're right that the focus has now been shifting toward Sonesta. And when we shift the focus to Sonesta, it's been around more, what I'd call, the extended stay in the select service product. So, what we have today is the ES Suites -- Sonesta ES Suites, the Sonesta Simply Suites, which is the extended stay product, and Sonesta Select, which is these limited service product.

There is a lot of interest and that happens to be the vast majority of the 69 hotels that SVC is selling is extended stay under select service. There is a vast amount of interest in talking to Sonesta about those transactions, those hotels, but also just franchising in general. And I think SVC talked about this on this call this morning, but they're going through the franchising, getting the franchise disclosure documents filed and -- on file where they have to be and also working through at Sonesta sort of finalizing brand standard. So, this can all sort of be rolled out to potential franchisees.

Look, in the beginning, I'm not going to put specific numbers on it, but you can think it's going to be a little modestly less expensive than it would be for, let's say, a Marriott, which has sort of historically been the most expensive with regards to fees in the marketplace. Again, reiterating what I said before and again I -- this also was not something I think we fully realized the benefit of and -- when we put Sonesta together with Red Lion. We thought on a stand-alone Red Lion was going to do very fine on its own. I don't think we fully appreciated the benefit that Sonesta is going to realize by tacking on that franchise system, which we have now done. Because franchisees, they really like not so much that it's less cost. I mean, of course, people like that. But it's really that Sonesta is also an owner operator. I can't underestimate this enough. You can -- the big brands have all gone so massively asset-light. That is very pleasing to the investor community, is very un-pleasing to the franchise community that they have done that.

And so, the franchisees feel very put upon from the larger brand owners about being forced to hit brand standards. And the fact that Sonesta itself manages and operates on behalf of SVC many of the hotels, the franchisees feel that, hey, there's a kindred spirit here. If they put a brand standard in place on the franchisees, they got to do it themselves at their own hotels. And that -- they like that because they think that we just will think more in line with franchisees along those lines. And again, it's the whole idea that you're getting in with Sonesta. And if you franchise, let's say, an extended stay hotel with us, you might be one of three in the entire marketplace, the whole metropolitan area where it's located. You'll be one of 25 for Marriott. And so, that itself is also very exciting for franchisees.

And so, look, I think the potential for Sonesta is pretty robust. That all being said, we have to fully get through COVID and it is impacting the hotel industry and -- but no different for us than anybody else in the marketplace, but there really is a competitive advantage. And I don't think we really fully grasp the competitive advantage that exists until we sort of put this all together and started talking the potential franchisees.

Bryan Maher -- B. Riley FBR -- Analyst

Right. You keep referencing Marriott and you could probably throw Hilton in the same basket, and we've heard a lot of pushback from owners about brand standards as it relates to over the past year with COVID. But when we think about Sonesta and the fact you have the Royal Sonesta brand too, which I think if memory serves me, you're putting on in the 20 Mass Ave property in DC. Doesn't the Royal Sonesta full service and luxury resorts give kind of an uplift to the whole brand? And it just kind of resonates a little bit like Hyatt, which also historically has had skin in the game and you have Park Hyatt and you have all the different types of Hyatts, Hyatt Place, etc. Is that maybe the direction that Sonesta skews toward?

Adam Portnoy -- President and Chief Executive Officer

Yes. The short answer is yes, Bryan. The fact that we have the high-end product, the Royal Sonesta, Sonesta hotels and resorts definitely benefits the overall brand -- collection of brands at Sonesta that we have. And so, yes, it's definitely part of our strategy. I think not unlike the big brands, you're going to see more of our hotel units will be extended stay select service, but you will definitely see us grow the Royal Sonesta and Sonesta hotels and resort.

I think we're basically going after the lowest hanging fruit upfront just because we have gotten a lot of reverse inquiry on the extended stay and select service, and we got to get that sort of up and going. But -- yes, we will lapse -- we will naturally move up the ladder and eventually start doing deals with Sonesta resort and hotels and Royal Sonestas. I just think we don't even have to go there quite yet because there's so much opportunity in the extended stay and select service that we try to work toward over the next several months, year or so.

Bryan Maher -- B. Riley FBR -- Analyst

Right. Thank you.

Operator

And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Adam Portnoy for closing remarks.

Adam Portnoy -- President and Chief Executive Officer

Thank you all for joining us today. Operator, that concludes our call.

Operator

[Operator Closing Remarks]

Duration: 58 minutes

Call participants:

Michael Kodesch -- Director of Investor Relations

Adam Portnoy -- President and Chief Executive Officer

Matthew Jordan -- Executive Vice President, Chief Financial Officer & Treasurer

Bryan Maher -- B. Riley FBR -- Analyst

Jim Sullivan -- BTIG -- Analyst

Kenneth Lee -- RBC Capital Markets -- Analyst

Ronald Kamdem -- Morgan Stanley -- Analyst

Owen Lau -- Oppenheimer & Co. -- Analyst

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