The RMR Group Inc. — Form 10-Q summary
Reporting period: Quarter and nine months ended June 30, 2019. Amounts below are in millions of dollars unless otherwise noted. RMR is a manager of publicly traded real estate and related businesses; it reported more than 1,500 managed properties. Its subsidiary RMR LLC conducts substantially all operations, and RMR Inc. owned 52% of RMR LLC’s economic interest at quarter-end. Almost all revenue came from related parties.
Financial performance and liquidity
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Total revenue, 2019 / 2018 | $143.7 / $62.1 | $554.1 / $339.9 |
| Operating income, 2019 / 2018 | $20.0 / $21.8 | $177.0 / $226.7 |
| Net income attributable to RMR Inc., 2019 / 2018 | $5.8 / $8.4 | $66.2 / $87.9 |
| Diluted EPS, 2019 / 2018 | $0.36 / $0.52 | $4.08 / $5.42 |
| Cash from operating activities, 2019 / 2018 | Not presented quarterly | $193.9 / $228.7 |
- Reported revenue rose 131.5% for the quarter and 63.0% for the nine-month period, largely because adoption of ASC 606 added reimbursable client-company expenses and matching costs on a gross basis: $85.7 million and $257.1 million, respectively. This presentation change had no net-income impact; revenue excluding these new pass-through amounts was lower year over year.
- Management and advisory service revenue fell 8.1% in the quarter and 15.1% for the nine months. Nine-month incentive management fees were $120.1 million versus $155.9 million; these fees are contingent and recognized when earned.
- Quarterly operating income declined 8.5%; RMR-attributable net income fell 30.2%. Nine-month operating income declined 21.9% and RMR-attributable net income declined 24.6%. The prior-year nine-month comparison included a $24.7 million tax receivable agreement remeasurement benefit.
- Quarterly results included a $6.2 million impairment of the TRMT investment and a $0.7 million unrealized loss on TA shares. The nine-month amounts were $6.2 million and $3.0 million, respectively. RMR also incurred $7.1 million of separation costs over nine months, chiefly related to former executive officers.
- Cash and cash equivalents were $377.1 million at June 30, 2019, up from $256.8 million at September 30, 2018. Current assets were $459.5 million and current liabilities $94.6 million. Operating cash flow was $193.9 million; investing and financing used $14.3 million and $59.2 million, respectively.
- The filing reports no debt or credit facilities maintained by RMR. It says working capital is funded from operating cash flow and that cash on hand and operating cash flow should cover needs for the next 12 months and the reasonably foreseeable future.
Changes, outlook and risks
- Management attributed lower base and property management fees mainly to declines in market capitalization at OPI, SNH and HPT, and OPI asset sales. ILPT acquisitions and increased SNH redevelopment spending partly offset the declines. TA management fees also decreased following its sale of standalone convenience stores.
- RMR expects future revenue to remain sensitive to the business, asset values and share prices of its managed companies. OPI planned asset dispositions of up to $700 million and SNH up to $900 million to reduce leverage, which could reduce RMR fees.
- HPT had agreed to acquire a net-leased portfolio for about $2.4 billion, with closing expected by September 30, 2019, subject to conditions. HPT intended to finance it with unsecured borrowings and sell about $800 million of assets afterward. RMR’s illustrative estimate of incremental annual management and property fees was about $12.1 million before added operating costs; the filing cautions that closing, timing, dispositions and fee estimates were uncertain.
- RMR had a $100 million commitment to the Open End Fund, potentially drawable depending on acquisitions and third-party fundraising. It also reported a $34.3 million tax receivable agreement liability, including $2.3 million expected to be paid in fiscal Q4.
- Key risks include dependence on a limited number of clients, possible termination of management agreements, volatile incentive fees, market and interest-rate effects on clients, client asset sales, investment impairment, and conflicts-of-interest concerns arising from extensive related-party relationships. The board may reduce or eliminate dividends; the declared quarterly dividend was $0.35 per Class A and Class B-1 share.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. The filing provided no quantitative earnings guidance.
Important facts for investors to verify
- Separate recurring management and advisory fees from incentive fees and ASC 606 pass-through reimbursements when assessing underlying revenue trends and margins.
- Track managed-company share prices, asset dispositions and related effects on RMR’s fee base, particularly at OPI, SNH and HPT.
- Review the valuation and subsequent performance of the TRMT and TA investments after the reported impairment and market-value losses.
- Check the status, financing, asset sales and actual fee contribution of HPT’s proposed acquisition, and whether the Open End Fund draws RMR’s commitment.
- Assess related-party governance and concentration: 99.9% of nine-month revenue was from related parties, and RMR’s contracts and leadership overlap across client companies.
- Confirm cash generation, tax receivable agreement payments and the sustainability of the $0.35 quarterly dividend.