The RMR Group Inc. — Form 10-Q summary
Reporting period: Fiscal second quarter and six months ended March 31, 2016. Unless stated otherwise, amounts are in thousands of dollars. RMR provides management and advisory services, principally to related REITs and operating businesses; substantially all operations are conducted through RMR Group LLC.
Key financial results
| Metric | Three months ended March 31, 2016 | Year-over-year change | Six months ended March 31, 2016 | Year-over-year change |
|---|---|---|---|---|
| Total revenue | $48,333 | Down 3.0% | $158,463 | Up 64.0% |
| Operating income | $19,783 | Down 17.1% | $101,451 | Up 140.8% |
| Net income | $15,748 | Down 37.5% | $86,127 | Up 92.1% |
| Net income attributable to RMR Inc. | $6,114 | Comparable-period value not clearly presented | $23,168 | Comparable-period value not clearly presented |
| Basic and diluted EPS attributable to RMR Inc. | $0.38 | Comparable-period value not clearly presented | Not clearly provided | Not clearly provided |
| Cash from operating activities | Not presented quarterly | Not applicable | $71,895 | Down from $75,419 |
Quarterly operating margin was approximately 40.9%, compared with 47.9% a year earlier. Six-month operating margin was approximately 64.0%, compared with 43.6%; the 2016 period includes a substantial one-time incentive fee. Margins are calculated from reported revenue and operating income.
Revenue, earnings and period comparisons
- Quarterly management services revenue decreased $3,109 to $39,014. The filing attributes the decline principally to $2,354 of amortization related to the Up-C transaction and the end of transition services for Equity Commonwealth (EQC); growth in REIT base and property management fees partly offset the decline.
- Six-month management services revenue rose to $141,073, primarily because RMR earned a $62,263 incentive fee from Hospitality Properties Trust (HPT) for 2015 performance. Of that fee, $26,611 was allocated to ABP Trust under the Up-C arrangements.
- Quarterly general and administrative expense rose 38.9% to $6,488, reflecting public-company costs, transaction costs and higher subcontracted property-management expense. Six-month G&A increased 34.2% to $13,000.
- Six-month results are not directly comparable with 2015: RMR Inc. was formed in 2015, the Up-C transaction occurred in June 2015, and the company became publicly owned in December 2015. The incentive fee and the change in tax status also affect comparisons.
Cash, liquidity and debt
- Cash and cash equivalents were $70,568 at March 31, 2016, up from $34,497 at September 30, 2015. Operating cash flow was $71,895; investing activities used $950, and financing activities used $34,890, including shareholder and noncontrolling-interest distributions.
- Current assets were $97,322 and current liabilities were $29,464, implying working capital of approximately $67,858 and a current ratio of approximately 3.3.
- The filing reports no outstanding credit facility and says the company does not maintain one. It reports no material off-balance-sheet arrangements. The balance sheet does not list interest-bearing debt; the $64,905 tax receivable agreement liability is a separate obligation, not identified as debt.
- Management believes operating cash flow will cover operating needs and commitments for the next 12 months and foreseeable future. Liquidity depends substantially on collecting fees from managed companies. Cash includes $66,046 invested in money market funds; some U.S. bank balances exceed FDIC coverage limits.
Outlook, risks and notable items
- Management expects a regular quarterly dividend of $0.25 per Class A and Class B-1 share, but emphasizes dividends remain at the board’s discretion. After quarter-end, the board declared a $0.2993-per-share dividend, including a prorated amount for the period after the prior dividend period; payment was expected around May 19, 2016.
- Management cautions that expected increases in interest rates may pressure REIT valuations and says acquisitions should be selective. It sees potential growth in selected property types and locations and emphasizes maintaining financial flexibility.
- RMR’s fee base is concentrated among a limited number of Client Companies. Managed REIT fees depend partly on market capitalization, while other fees depend on client revenues; deterioration in client businesses or loss or termination of management contracts could reduce RMR’s revenue, profits and cash flow. The filing states that long-term REIT agreements have specified termination rights and, in certain cases, termination fees.
- Related-party relationships are extensive: founders hold management and ownership roles involving RMR, ABP Trust and client companies, and the Managed REITs collectively owned a majority of RMR’s Class A shares at quarter-end. The company also owes ABP Trust 85% of qualifying realized tax savings under the tax receivable agreement.
- The company recognized $15,400 of income tax expense for the six months, following its transition to corporate taxation for RMR Inc.’s share of RMR LLC income. Management reported effective disclosure controls and no material change in internal control over financial reporting; no material risk-factor changes were reported.
Important facts for investors to verify
- How much of future earnings and cash generation depends on incentive fees, especially the $62,263 HPT fee recognized for 2015, versus recurring base and property-management fees.
- The impact of the $4,708 six-month amortization of the Up-C-related asset on reported revenue and the remaining $186,099 unamortized balance, scheduled to be amortized through 2035.
- Client concentration, related-party governance and the termination terms of management agreements, including the extent to which RMR depends on the Managed REITs.
- The ability to sustain the stated dividend and meet tax-distribution and tax receivable agreement obligations if client fees or market capitalizations decline.
- Whether rising interest rates, client operating performance or market conditions affect managed-company valuations and therefore RMR’s fee revenue.