The RMR Group Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2017; comparative periods ended March 31, 2016. Amounts below are in millions unless otherwise indicated. RMR Inc. is a holding company; substantially all operations are conducted through RMR LLC, which manages real estate and related businesses. RMR Inc. owned 51.8% of RMR LLC’s economic interest; ABP Trust held the remaining 48.2% as a noncontrolling interest.
Financial performance and liquidity
| Metric | Three months ended Mar. 31, 2017 | Six months ended Mar. 31, 2017 | Comparable prior period |
|---|---|---|---|
| Total revenue | $54.3 | $159.6 | $48.3 quarterly; $158.5 six months |
| Operating income | $22.1 | $97.7 | $19.8 quarterly; $101.5 six months |
| Operating margin | 40.6% | 61.2% | 40.9% quarterly; 64.0% six months |
| Net income | $17.7 | $77.9 | $15.7 quarterly; $86.1 six months |
| Net income attributable to RMR Inc. | $6.9 | $30.4 | $6.1 quarterly; $23.2 six months |
| Diluted earnings per share | $0.43 | $1.89 | $0.38 quarterly; $1.45 six months |
- Quarterly revenue rose 12.3% year over year, driven mainly by higher management fees. Six-month revenue increased 0.7%; management services revenue declined 1.9%.
- Six-month operating cash flow was $101.1, compared with $71.9 in the prior-year period. Investing cash outflow was $0.3, and financing cash outflow was $33.6, principally distributions.
- Cash and cash equivalents were $133.1 at March 31, 2017, versus $65.8 at September 30, 2016. Current assets were $161.4 and current liabilities $33.3. The filing reports no credit facilities and no off-balance-sheet arrangements expected to have a material effect.
- The balance sheet reports no debt balance. It includes a $64.9 tax receivable agreement liability, of which $2.9 was expected to be paid to ABP Trust in fiscal Q4 2017.
- RMR paid $0.25 per Class A and Class B-1 share in each of the first two fiscal quarters and declared another $0.25 quarterly dividend in April 2017.
Material changes and unusual items
- Quarterly management services revenue increased $4.2, largely from higher base management fees as certain Managed REIT market capitalizations grew, and higher property management fees.
- Six-month management services revenue fell $2.7, principally because incentive fees from HPT were $9.9 lower than in the prior-year period. This was partly offset by $6.2 higher base management fees.
- RMR recognized a $52.4 HPT incentive fee for calendar 2016 in the six-month period, compared with $62.3 for calendar 2015 in the prior-year period. Management estimated that $30.7 of incentive fees would have been earned if March 31, 2017 had ended a measurement period; this was not recognized revenue and is not a forecast of fees ultimately earned.
- Compensation and benefits rose 11.5% for the six months, mainly due to staffing growth associated with properties transitioned to RMR’s management and annual compensation increases. The Tremont business, acquired in August 2016, added advisory revenue.
- Six-month net income declined 9.5%, while income attributable to RMR Inc. increased 31.2%. The comparison is affected by the prior-year allocation of $26.6 of an incentive fee to ABP Trust and by the prior-year period’s different noncontrolling-interest attribution.
Outlook, risks and contingencies
- Management said operating cash flow should be sufficient for operating needs and commitments over the next 12 months and the reasonably foreseeable future. No numerical earnings or revenue guidance was provided.
- Management noted that low financing rates may have pushed some real estate valuations above replacement cost and said acquisitions should be selective. It sees potential growth in selected property types and locations and emphasizes financial flexibility.
- Revenue is highly dependent on a limited number of client companies, including related parties. Fee income may fall if client businesses, assets, revenues or market capitalizations decline, or if management agreements are terminated. Rising interest rates, conflicts-of-interest allegations, key-person retention, litigation and regulatory compliance are identified risks.
- Incentive fees depend on client total returns relative to specified indices, which RMR says it has limited control over; future incentive fees are not assured. The board may reduce or eliminate dividends.
- The filing reports no material changes to the risk factors in the prior annual report and no material off-balance-sheet arrangements. No specific material litigation contingency is described in the supplied filing text.
Important facts for investors to verify
- How recurring base and property management fees are trending versus contingent incentive fees, particularly given the concentration of incentive-fee income in HPT.
- Whether revenue and cash flow remain resilient if client market capitalizations, property activity or operator revenues weaken.
- The related-party structure, including ABP Trust’s 48.2% RMR LLC economic interest, the tax receivable agreement, and management’s relationships with client companies.
- The timing and cash impact of the $64.9 tax receivable agreement liability, including the expected $2.9 fiscal Q4 payment.
- Whether quarterly dividends remain supported by cash flow and board decisions; the filing states that dividends are discretionary.