RMR Group Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2019. Unless noted otherwise, amounts are in millions of dollars. RMR is a holding company; substantially all operations are conducted by RMR Group LLC, which manages real estate and related businesses, including publicly traded REITs and operators. At quarter-end it managed more than 1,500 properties. Nearly all revenue came from related parties.
Financial results and liquidity
| Metric | Three months ended March 31, 2019 | Prior-year period | Six months ended March 31, 2019 | Prior-year period |
|---|---|---|---|---|
| Total revenue | $130.1 | $59.3 | $410.4 | $277.8 |
| Management and advisory services revenue | $43.4 | $47.6 | $211.7 | $253.5 |
| Operating income | $18.7 | $22.5 | $157.0 | $204.9 |
| Net income attributable to RMR Inc. | $8.2 | $8.4 | $60.4 | $79.5 |
| Diluted earnings per share | $0.50 | $0.52 | $3.72 | $4.91 |
| Cash from operating activities | Not separately provided | Not separately provided | $175.9 | $206.2 |
- The reported quarterly revenue increase mainly reflects adoption of ASC 606, which added $73.3 million of reimbursable client-company expenses to both revenue and expense, with no effect on net income. Excluding that gross presentation change, management and advisory services revenue declined 9.0% in the quarter.
- For the six months, incentive business management fees fell to $120.1 million from $155.9 million. Operating income declined 23.4% and RMR-attributable net income declined 24.0%. The prior-year comparison included a $24.7 million tax receivable agreement remeasurement benefit; the current period also included a $2.2 million unrealized loss on RMR’s TA investment.
- Quarterly operating margin was about 14.4% versus 37.9% in the prior-year quarter, but the comparison is distorted by the new gross presentation of reimbursable expenses. The filing does not provide a directly comparable adjusted margin.
- Cash and cash equivalents were $384.1 million at March 31, 2019, up from $256.8 million at September 30, 2018. Six-month investing cash outflow was $8.5 million, including $8.4 million to buy TA shares; financing outflow was $40.0 million, principally distributions.
- Current assets were $453.4 million and current liabilities $87.3 million. The company reported no debt or credit facilities. It had a $34.3 million tax receivable agreement liability, including $2.3 million expected to be paid in fiscal Q4.
Changes, outlook and risks
- Management attributed lower management-services revenue to reduced market capitalizations at OPI and SNH, OPI asset sales, and lower fees following the OPI merger with SIR. ILPT growth partly offset the declines. Incentive fees recognized in the six-month period related to 2018 performance.
- RMR said cash on hand and operating cash flow should meet needs for the next 12 months and the foreseeable future. It expects its $100 million commitment to the Open End Fund and authority to lend TRMT up to $50 million to be drawn within 12 months. These are commitments, not reported borrowings by RMR.
- RMR intended to continue a quarterly dividend of $0.35 per Class A and Class B-1 share, subject to board discretion; a dividend at that rate was declared in April 2019. The filing provides no earnings or revenue guidance.
- Management warned that asset dispositions and lower share prices at managed REITs may reduce management fees and incentive fees. The business depends on a limited number of client companies, and incentive revenue is variable and not assured. Rising interest rates, contract termination, litigation, conflicts-of-interest allegations, and retention of key personnel are also cited risks.
- Five Star disclosed substantial doubt about its ability to continue as a going concern, citing industry pressures, recurring losses and funding uncertainty. Five Star is SNH’s largest tenant and manager; proposed changes to their arrangements were subject to conditions and approvals.
- RMR has extensive related-party relationships and governance links with clients, including ABP Trust. The filing also reports the sale of its Australian operations in February 2019 and executive separation costs of $6.8 million for the six months.
Important facts for investors to verify
- Whether the gross reimbursable-expense presentation is correctly separated from underlying fee growth when assessing revenue and margins.
- Future managed-REIT market capitalizations, asset-sale plans and incentive-fee performance, particularly at OPI and SNH.
- Five Star’s liquidity and going-concern status, and whether the proposed Five Star–SNH changes are completed.
- Timing and funding of the Open End Fund and TRMT commitments, and the collectability and repayment terms of any TRMT lending.
- The sustainability of the $0.35 quarterly dividend given variable earnings, cash flows and board discretion, as well as related-party governance and tax-receivable-agreement obligations.