The RMR Group Inc. — Form 10-Q summary
Reporting period: Fiscal second quarter and six months ended March 31, 2023. Dollar amounts below are in millions unless noted. RMR is an asset manager whose business is conducted primarily through RMR LLC; it manages real estate and related businesses, including four publicly traded REITs. Substantially all revenue is from related parties.
Financial performance
- Quarter revenue: $208.4, up 5.4% year over year. This includes $160.2 of reimbursable costs, which are recorded as both revenue and expense. Management and advisory services revenue—the more direct measure of fee activity—was $48.2, down 2.2%.
- Quarter earnings: Operating income was $17.8, down 17.4%. Net income was $41.3, versus $14.6, and net income attributable to RMR Inc. was $18.5, versus $6.4; diluted EPS was $1.11, versus $0.39. The increase was primarily driven by a $28.2 unrealized gain on equity-method investments, compared with a $4.6 loss in the prior-year quarter. These gains are market-value changes, not operating fees.
- Six-month results: Revenue was $459.2, up 21.1%, including $361.3 of reimbursable costs. Management and advisory services revenue increased 2.7% to $97.8. Operating income fell 8.6% to $38.1; net income attributable to RMR Inc. rose 71.9% to $24.8, and diluted EPS was $1.48 versus $0.88, reflecting investment gains and higher interest income.
- Cash flow: Operating cash flow for the six months was $42.1, down from $50.3. Investing cash outflow was $1.9, principally property and equipment purchases tied largely to technology investments. Financing cash outflow was $31.3, including shareholder and noncontrolling-interest distributions.
- Liquidity and obligations: Cash and cash equivalents were $198.0 at March 31, 2023, versus $189.1 at September 30, 2022. Current assets were $322.4 and current liabilities $118.1. The company reported no credit facilities and no debt securities or other borrowings. A $25.6 tax receivable agreement liability was recorded, including $2.3 expected to be paid in fiscal Q4.
- Distributions: RMR declared a quarterly dividend of $0.40 per Class A and Class B-1 share after quarter-end, consistent with the rate paid in the quarter. The board retains discretion to change or discontinue dividends.
Changes, outlook and notable events
- Quarterly management services revenue declined mainly because lower market values at DHC and SVC reduced base management fees; growth at ILPT, including following its acquisition of Monmouth properties, partly offset the decline. For the six-month period, ILPT growth, construction supervision activity and higher TA fees more than offset lower DHC and SVC fees.
- Compensation, equity-based compensation and general and administrative costs increased. Management cited annual merit increases, client share awards and share-price changes, technology investment, and costs associated with expanded construction oversight. Six-month separation costs were $0.9.
- Management identified higher interest rates, inflation, possible recession, reduced real estate transactions and potential constraints on bank lending as risks to clients and, in turn, to RMR’s fees and cash flows. Fee revenue depends on client market capitalization, asset values, rents, revenues and construction activity. The company has a concentrated, related-party client base.
- TA had agreed to be acquired by BP for $86 per share in cash, subject to closing conditions; RMR expected approximately $53.5 for its TA shares and an estimated $45.0 management-agreement termination fee upon completion. The filing expected closing on or about May 15, 2023; completion was not assured. RMR would lose TA management revenue, which was $15.9 in fiscal 2022.
- After quarter-end, DHC and OPI agreed to merge, with OPI surviving. RMR agreed to waive termination fees from DHC and continue managing the combined entity if the transaction closes, then expected in calendar Q3 2023. These transactions involve related parties and present execution and potential fee-change risks. AlerisLife was acquired by an ABP Trust subsidiary on March 20, 2023; RMR waived its termination fee and amended its management arrangement.
- No formal earnings or revenue guidance was provided. Management said cash supported operations, technology investment and potential capital allocation initiatives over the next 12 months, while cautioning that execution and benefits are uncertain. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Most important facts for investors to verify
- Whether TA’s BP acquisition closed, the actual proceeds and termination fee received, and the resulting impact of lost recurring TA fees.
- Whether the DHC–OPI merger closed and how the surviving management and property-management agreements affect recurring fees.
- Underlying fee growth and operating costs, excluding reimbursed expenses and volatile unrealized investment gains; also assess whether cash flow remains below reported net income.
- Client concentration, related-party governance and the collectability and timing of the $147.5 due from related parties, including reimbursable costs.
- Cash deployment, dividend sustainability, tax receivable agreement payments, and the effects of interest rates and client financial conditions on fee revenue.