RMR Group Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended September 30, 2020. This is an annual filing; fourth-quarter figures are identified separately below. Unless noted otherwise, dollar amounts are in millions. RMR is an asset and property manager whose fees depend on a concentrated group of real estate companies and operators; it reported $32.3 billion of gross assets under management and managed 11 client companies at year-end.
Financial performance and liquidity
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Total revenue | $589.5 | $713.4 | (17.4%) |
| Management and advisory services revenue | $171.7 | $301.3 | (43.0%) |
| Operating income | $68.7 | $197.8 | (65.2%) |
| Net income | $66.3 | $169.0 | (60.8%) |
| Net income attributable to RMR Inc. | $28.8 | $74.6 | (61.4%) |
| Diluted EPS attributable to RMR Inc. | $1.75 | $4.59 | (61.9%) |
| Adjusted EBITDA (non-GAAP) | $90.7 | $108.4 | (16.3%) |
| Cash from operating activities | $77.5 | $198.2 | (60.9%) |
- FY2020 operating margin was approximately 11.7% of reported revenue, versus 27.7% in FY2019. These margins are affected by gross presentation of reimbursable client expenses; the $360.6 million of such expenses in FY2020 was matched by expense and had no net income effect.
- Revenue and earnings fell principally because RMR earned no incentive business management fees in FY2020, compared with $120.1 million in FY2019. The prior-year incentive fees related to 2018 calendar-year performance. Management said it did not expect incentive fees for calendar 2020.
- Cash and cash equivalents were $369.7 million at September 30, 2020, compared with $358.4 million a year earlier. RMR reported no debt and no credit facilities. Total assets were $690.3 million and total liabilities were $149.4 million; liabilities include operating lease obligations and the tax receivable agreement.
- Cash used in investing activities was $5.9 million and cash used in financing activities was $60.4 million. RMR paid $42.8 million in distributions during the year. The declared annual dividend was $1.52 per share ($0.38 quarterly), up from $1.40 in FY2019.
- Fourth quarter: total revenue was $150.1 million, net income $14.4 million, net income attributable to RMR Inc. $6.2 million, and diluted EPS $0.38. Quarterly dividend declared was $0.38 per share.
Material changes and business developments
- Base management fees from the Managed Equity REITs declined as DHC and OPI market capitalizations fell. The REITs’ combined fee-basis assets under management (the lower of historical cost and market capitalization) were $17.8 billion at September 30, 2020, down from $23.3 billion a year earlier.
- Management services revenue decreased $9.3 million. Declines in DHC and OPI base fees, OPI property dispositions, and COVID-related weakness at managed operators were partly offset by ILPT and SVC acquisition-related fee growth.
- Advisory services revenue was $2.9 million, down from $3.2 million, principally because RMRM’s average net asset value declined. RMRM shareholders approved its conversion toward a commercial mortgage REIT; it applied to deregister as an investment company.
- The Open End Fund and Affiliates Insurance Company were dissolved in July 2020 and February 2020, respectively. RMR’s $100 million commitment to the Open End Fund was terminated upon dissolution.
- RMR adopted the lease accounting standard in October 2019, recording lease assets and liabilities; the adoption did not affect reported income or cash flows. The filing also reports a change in independent auditor: Deloitte audited FY2020, after Ernst & Young served through FY2019.
Outlook, risks and unusual items
- COVID-19 materially affected client businesses and RMR fees. Hospitality, travel, service retail, senior living and rehabilitation were particularly exposed. Further infection waves, restrictions, recession, tenant defaults, reduced capital spending, lower REIT share prices, financing constraints and changed demand for offices, hotels and senior living could prolong or deepen impacts.
- As of November 13, 2020, client companies had granted temporary rent assistance totaling $22.1 million to 276 tenants, generally deferring about one month of rent for repayment over roughly 12 months. RMR’s property fees depend in part on rents collected, and collection of deferred rent is uncertain.
- Management said RMR’s cash resources supported its ability to withstand the pandemic, but could not determine the ultimate impact or timing of recovery. The filing provides no quantified earnings or revenue guidance. RMR stated it currently intended to maintain a $0.38 quarterly dividend, subject to board discretion and cash needs.
- Revenue concentration is significant: Managed Equity REITs generated 81.5% of management and advisory services revenue. Nearly all reported revenue was from related parties, and management agreements may be terminated under specified conditions. Fees are variable and tied to market capitalization, rents, construction activity, or client revenues.
- Other material risks include related-party and conflict-of-interest concerns, controlling-shareholder voting power, client-company interdependence, regulatory and REIT-compliance requirements, cybersecurity, personnel retention, and potential impairment or declines in RMR’s equity investments.
- Unusual items include the FY2019 $120.1 million incentive-fee contribution to earnings, the FY2020 $3.2 million unrealized gain on the TA investment, and the FY2020 gross-up of $360.6 million in client expense reimbursements. In October 2020, RMR agreed to retirement payments of $2.85 million to an executive and anticipated approximately $2.9 million of related cash separation costs plus about $0.3 million of equity costs in the following quarter.
Investor verification priorities
- Confirm subsequent trends in client market capitalizations, rent collections, tenant assistance repayments, operator revenues and RMR fee revenue.
- Review client REIT dispositions, leverage, debt covenant compliance and capital access, particularly at DHC, OPI and SVC.
- Assess whether the $369.7 million cash balance and operating cash flow can sustain dividends, tax distributions, lease payments and other obligations if fees decline further.
- Verify the assumptions and timing behind management’s dividend intention and the absence of quantified forward guidance.
- Review RMR’s related-party governance, management-agreement termination provisions, tax receivable agreement obligations and executive succession arrangements.