The RMR Group Inc. — Form 10-Q Summary
Business context and period: This fiscal second-quarter 2020 report covers the three and six months ended March 31, 2020. RMR is a holding company whose business is primarily conducted by RMR Group LLC, which manages real estate investment trusts and other real estate-related businesses. Nearly all reported revenue came from related parties; the four Managed Equity REITs accounted for about 89% of six-month revenue.
Financial performance
Amounts below are in millions of dollars unless otherwise noted. Total revenue includes reimbursable costs recorded gross, with corresponding expenses; management and advisory service revenue is a more informative indicator of fee activity.
| Metric | Three months ended Mar. 31, 2020 | Prior year | Six months ended Mar. 31, 2020 | Prior year |
|---|---|---|---|---|
| Total revenue | $140.9 | $130.1 | $300.8 | $410.4 |
| Management and advisory revenue | $44.1 | $43.4 | $92.2 | $211.7 |
| Operating income | $17.9 | $18.7 | $39.7 | $157.0 |
| Net income attributable to RMR | $6.5 | $8.2 | $15.9 | $60.4 |
| Basic / diluted EPS | $0.40 / $0.39 | $0.50 / $0.50 | $0.98 / $0.96 | $3.72 / $3.72 |
| Cash from operating activities | Not stated for quarter | Not stated for quarter | $48.7 | $175.9 |
- Quarterly operating margin was approximately 12.7% of total revenue, compared with 14.4% a year earlier; the gross presentation of reimbursable costs affects this ratio.
- At March 31, cash and cash equivalents were $377.4 million, total assets $685.9 million, total liabilities $147.8 million, and equity $538.1 million. The company reported no debt.
- Current assets were $456.6 million and current liabilities $78.6 million. The balance sheet included $38.6 million of operating lease liabilities, following adoption of the lease accounting standard.
- Six-month cash flows: $48.7 million provided by operations, $0.4 million used in investing, and $29.5 million used in financing. Cash increased $18.9 million from September 30, 2019.
Material changes and unusual items
- Six-month total revenue fell 26.7%, operating income 74.7%, and RMR-attributable net income 73.6%. The main comparison effect was $120.1 million of incentive management fees earned in the prior-year period, with none earned for calendar 2019.
- Excluding that prior-year incentive fee, management and advisory revenue was broadly stable: management services increased $0.5 million and advisory services increased $0.1 million. Growth from ILPT and SVC was substantially offset by lower fees associated with declines in DHC and OPI market capitalizations.
- In the current quarter, an unrealized $2.2 million loss on RMR’s TA investment, compared with a $0.5 million gain a year earlier, contributed to lower earnings. Lower interest income also weighed on results.
- The 2020 six-month period had $0.6 million of separation costs versus $6.8 million in the prior year. Transaction and acquisition-related costs rose to $1.2 million, mainly for RIF’s proposed conversion to a commercial mortgage REIT.
- Basic weighted-average shares were about 16.2 million. Diluted shares were about 31.2 million in 2020 because the calculation assumed redemption of 15 million noncontrolling Class A units; this makes diluted EPS materially different from basic EPS.
Outlook, risks and contingencies
- Management said the duration and economic effects of COVID-19 were uncertain and that it could not determine the ultimate impact. It expected the pandemic’s effect to be substantial and disclosed declines in fees, with possible further material declines.
- Risks include lower REIT market capitalizations reducing base management fees; rent assistance, tenant defaults and reduced construction spending lowering property management fees; and weaker revenues at hospitality, senior living and service-retail clients reducing management fees. Client-company access to capital, debt covenant compliance, and tenant and borrower solvency were also concerns.
- As of May 7, client companies had granted temporary rent assistance of $17.4 million to 298 tenants, generally deferring about one month’s rent. Repayment was expected to begin in September 2020 over 12 months; timing or collection could affect fee revenue and liquidity.
- Management believed RMR’s cash and operating cash flow would cover operating needs for at least 12 months and the foreseeable future. The company had no credit facilities and no debt, but its liquidity depends substantially on fees from a concentrated client base. It also had a $100 million commitment to the related Open End Fund.
- A $0.38-per-share quarterly dividend was declared after quarter-end on April 16, 2020. Management stated dividends remain subject to board discretion and may be reduced or suspended.
- RMR has a $32.1 million tax receivable agreement liability, including $2.1 million expected to be paid in fiscal Q4 2020; the agreement provides for payment to ABP Trust of 85% of specified tax savings. The filing also describes extensive related-party relationships and transactions.
Investor verification priorities
- Track management and property fee trends, REIT market capitalizations, rent collections and tenant assistance repayments as the pandemic’s effects develop.
- Assess earnings excluding the unusually large prior-year incentive fee, and distinguish recurring fee income from reimbursable revenue and investment fair-value changes.
- Review liquidity needs and commitments, including the $100 million Open End Fund commitment, lease obligations, tax receivable agreement payments and dividends.
- Monitor the financial health, debt covenants and capital access of the client companies, particularly in hospitality, senior living and service retail.
- Verify related-party governance and the effect of the 15 million noncontrolling units on diluted share count and per-share results.