The RMR Group Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended September 30, 2019. The filing also reports fourth-quarter results; this is an annual report, not a standalone quarterly filing. Dollar amounts below are in millions unless stated otherwise.
Business context
RMR is an asset and property manager whose business is conducted primarily through The RMR Group LLC. At year-end it reported $32.8 billion of assets under management and managed 12 client companies. Its largest clients include four public REITs and three operating companies. Fees from Managed Equity REITs were 90.1% of total revenue in FY2019, and substantially all revenue came from related parties.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Total reported revenue | $713.4 | $405.0 |
| Management and advisory services revenue | $301.3 | $351.8 |
| Operating income | $197.8 | $252.0 |
| Net income | $169.0 | $217.4 |
| Net income attributable to RMR Inc. | $74.6 | $96.0 |
| Diluted earnings per share | $4.59 | $5.92 |
| Adjusted EBITDA | $108.4 | $120.3 |
| Cash from operating activities | $198.2 | $228.5 |
Reported revenue rose 76.1%, largely because adoption of ASC 606 required $354.5 million of third-party client expenses and matching reimbursements to be presented gross; this changed neither net income nor cash flow. Management and advisory services revenue fell 14.4%, while operating income and net income each declined 21.5%. Adjusted EBITDA is a non-GAAP measure and excludes incentive business management fees and other specified items.
Cash and cash equivalents were $358.4 million at year-end, versus $256.8 million a year earlier. The company reported no debt outstanding and no credit facility. Total liabilities were $138.8 million; the tax receivable agreement liability was $32.1 million, including $2.1 million expected to be paid in FY2020. Operating cash flow declined mainly with lower base and incentive management fee income. Investing activities used $14.7 million, including investments in TA and TRMT. The filing states that cash on hand and operating cash flow should cover operating needs for the next 12 months and the foreseeable future.
The company declared $1.40 per share in FY2019 distributions. After year-end, it paid a quarterly dividend of $0.38 per Class A and Class B-1 share, equivalent to a stated annual rate of $1.52, subject to board discretion.
Material changes and unusual items
- Incentive business management fees decreased 23.0% to $120.1 million. These variable fees depend on client REIT shareholder returns relative to benchmarks; they are not assured in future periods.
- Base and property management revenue from Managed Equity REITs declined, in part due to lower market capitalizations at OPI and SNH and OPI asset dispositions. ILPT and the Open End Fund partly offset the decline.
- RMR recorded a $6.2 million impairment of its TRMT investment and a $4.7 million unrealized loss on its TA investment.
- Separation costs were $7.1 million, compared with $3.7 million in FY2018. FY2018 also included a $24.7 million favorable tax receivable agreement remeasurement that did not recur.
- On December 31, 2018, SIR merged into OPI; RMR waived SIR’s otherwise payable termination fee. SVC acquired a $2.4 billion portfolio of net-leased properties in September 2019.
- RMR adopted ASC 606 effective October 1, 2018. The resulting gross presentation increased both revenue and expense by $354.5 million.
Fourth-quarter FY2019: Revenue was $159.2 million, net income was $18.9 million, net income attributable to RMR Inc. was $8.4 million, and diluted EPS was $0.51. The first fiscal quarter included the year’s $120.1 million of incentive fees.
Outlook, risks, and contingencies
No quantified earnings or revenue guidance is provided. Management describes careful property acquisition and disposition decisions, financial flexibility, and growth through existing and new client relationships as priorities. RMR committed up to $100 million to the Open End Fund; the commitment may be drawn as acquisitions and third-party fundraising allow. Management cautions that this fund and the newer TRMT business may not achieve their objectives.
Key risks include dependence on a limited number of clients, variable fees tied to REIT market capitalizations and performance, possible termination of management agreements, client asset sales, real estate and interest-rate conditions, and the ability to retain key personnel. Conflicts and related-party transactions are significant considerations: Adam D. Portnoy controlled 91.4% of voting power at September 30, 2019. The filing also notes the planned SNH–Five Star restructuring, expected January 1, 2020 but subject to conditions. RMR reported no litigation expected to have a material adverse effect and no off-balance-sheet arrangements expected to be material other than the Open End Fund commitment.
Important facts for investors to verify
- How much recurring fee revenue can offset the year-to-year variability of incentive fees, and whether client REIT market values or asset sales further reduce fees.
- The economics and draw schedule of RMR’s $100 million Open End Fund commitment, and the performance and impairment outlook for TRMT and TA investments.
- Whether the planned SNH–Five Star restructuring closes as expected and how it affects RMR’s fees and client relationships.
- The sustainability of the $0.38 quarterly dividend relative to recurring cash generation, distributions, and potential investment commitments.
- Related-party governance, the tax receivable agreement, and RMR’s concentration of revenue among affiliated clients.