The RMR Group Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2020; comparisons are with the corresponding 2019 periods. Amounts below are in millions unless noted. RMR is an asset manager whose subsidiary manages real estate and related businesses; nearly all revenue comes from related-party clients.
Financial performance
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Total revenue | $138.6 vs. $143.7 (-3.5%) | $439.4 vs. $554.1 (-20.7%) |
| Management and advisory revenue | $39.3 vs. $44.4 (-11.7%) | $131.5 vs. $256.2 (-48.7%) |
| Operating income | $15.1 vs. $20.0 (-24.2%); reported operating margin 10.9% vs. 13.9% | $54.8 vs. $177.0 (-69.0%); reported operating margin 12.5% vs. 31.9% |
| Net income attributable to RMR | $6.7 vs. $5.8 | $22.6 vs. $66.2 |
| RMR earnings per share | Basic and diluted: $0.41 vs. $0.36 | Basic: $1.39 vs. $4.08; diluted: $1.37 vs. $4.08 |
| Cash from operations | Not reported separately for the quarter | $78.8 vs. $193.9 |
Reported revenue includes substantial reimbursed client costs: $99.4 million in the quarter and $307.9 million for nine months, with corresponding expenses. Operating margins calculated on total revenue therefore include these pass-through amounts.
Liquidity, cash flow and balance sheet
- Cash and cash equivalents were $393.7 million at June 30, up from $358.4 million at September 30, 2019. Nine-month investing cash outflow was $0.4 million and financing cash outflow was $43.2 million. Cash increased $35.2 million.
- The company reported no debt and no credit facilities. It said cash on hand and operating cash flow should be sufficient for operating needs for the next 12 months and the foreseeable future.
- Total assets were $704.7 million and total liabilities were $164.3 million. Operating lease liabilities totaled $37.5 million, including $4.3 million current; lease commitments extend through 2030. Adoption of lease accounting added $39.7 million of right-of-use assets and lease liabilities.
- Cash distributions to shareholders were $18.6 million for the nine months; the quarterly dividend was $0.38 per Class A and Class B-1 share. A further $0.38 dividend was declared in July, payable in August.
Changes versus prior year
- Nine-month revenue fell primarily because RMR recorded no incentive business management fees in 2020, versus $120.1 million in 2019, including fees earned for calendar 2018. RMR earned no incentive fees for calendar 2019.
- Quarterly management-services revenue declined as lower market capitalizations at DHC, OPI and SVC reduced base fees, and COVID-19 hotel closures and lower occupancy reduced Managed Operator fees, particularly from Sonesta. For nine months, growth in fees from ILPT and SVC partly offset declines.
- Quarterly operating income declined, but net income attributable to RMR increased year over year. The comparison benefited from the absence of a $6.2 million TRMT investment impairment recorded in 2019 and a $1.7 million unrealized gain on TA shares, compared with a $0.7 million loss in the 2019 quarter.
- Nine-month operating cash flow was lower, primarily reflecting lower net income. Prior-year investing outflows included purchases of TA and TRMT investments.
Outlook, risks and notable items
- COVID-19: Management described substantial uncertainty and expected the pandemic’s adverse impact on RMR and its clients to be significant. Risks include reduced REIT market capitalizations and management fees, tenant rent nonpayment or relief, lower construction activity, and weaker hotel, senior living and service-retail operations. The company could not determine the pandemic’s ultimate financial impact.
- As of August 3, client companies had granted temporary rent assistance totaling $22.4 million to 311 tenants, generally deferring about one month of rent. RMR’s property management fees depend partly on rents collected, and the company cautioned that repayment was not assured.
- RMR stated that 99.8% of nine-month revenue came from related parties and that its fees depend on a limited number of clients. Related-party governance and client concentration are material investor considerations.
- RMR reported no formal earnings guidance. It intends to use cash for working capital, dividends and new ventures; the board may reduce or eliminate dividends. Fee revenue may decline further if client businesses or market values weaken.
- After quarter-end, RMR purchased an additional $3.1 million of TA shares on July 6, maintaining its approximately 3.6% ownership. The Open End Fund dissolved July 28, terminating RMR’s prior $100 million contribution commitment. These are post-quarter events.
- Other notable items: RMR’s tax receivable agreement liability was $32.1 million, including $2.1 million expected to be paid in fiscal Q4. RMRM’s shareholders approved its conversion to a commercial mortgage REIT; RMR expects to bear associated transaction costs. A letter concerning TRMT’s management agreement was filed as an exhibit.
Investor verification priorities
- Assess how much of the revenue and earnings trend reflects recurring management fees versus the absent prior-year incentive fees and investment valuation changes.
- Track client REIT market capitalizations, tenant rent collections and assistance repayments, and the impact of COVID-19 on hotel, senior living and retail-related clients.
- Review the concentration of revenue among related-party clients and the related-party governance arrangements.
- Confirm liquidity, dividend coverage, lease obligations and the timing of tax receivable agreement payments.
- Monitor the RMRM conversion, TRMT management-agreement developments, and the effects of the Open End Fund dissolution and TA share purchase.