Business context and reporting period
The RMR Group Inc. is a holding company whose business is conducted mainly through RMR LLC, an asset manager serving publicly traded REITs, operators and other clients. This unaudited Form 10-Q reports the three and nine months ended June 30, 2016, compared with the corresponding 2015 periods. RMR manages more than 1,300 properties across 48 states, Washington, D.C., Puerto Rico and Canada. Comparisons are affected by the June 2015 Up-C transaction and the company’s subsequent public-company structure.
Financial performance and position
Amounts below are in millions, except per-share data and percentages.
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue, 2016 | $52.2 | $210.7 |
| Revenue, 2015 | $48.2 | $144.8 |
| Operating income, 2016 | $21.8 | $123.3 |
| Operating income, 2015 | $18.1 | $60.2 |
| Net income, 2016 | $17.4 | $103.5 |
| Net income attributable to RMR Inc., 2016 | $6.7 | $29.9 |
| Net income attributable to RMR Inc., 2015 | $1.0 | $1.0 |
| RMR Inc. diluted EPS, 2016 | $0.42 | $1.87 |
| RMR Inc. diluted EPS, 2015 | $0.06 | $0.06 |
- Quarterly revenue increased 8.4%; operating income rose 20.6%. Operating margin was approximately 41.8%, versus 37.6% a year earlier.
- Nine-month revenue increased 45.5% and operating income more than doubled. However, results include a $62.3 million HPT incentive management fee earned for calendar 2015; $26.6 million was allocated to ABP Trust. Excluding that incentive fee, reported revenue growth is not a like-for-like measure of underlying growth.
- Quarterly revenue growth reflected higher property-management fees and reimbursed payroll costs, partly offset by greater amortization of the Up-C-related asset. Compensation rose 10.3%, including higher share-based compensation and staffing; separation expense was $1.2 million. General and administrative expense fell 31.9%, largely because the prior-year quarter included $3.5 million of Up-C transaction costs.
- Cash from operations was $97.4 million for nine months, compared with $93.6 million. Investing used $1.0 million, versus $42.6 million in the prior period; financing used $49.8 million, versus $166.2 million. Cash and equivalents increased to $81.1 million from $34.5 million at September 30, 2015.
- Current assets were $108.6 million and current liabilities $35.1 million at June 30. The filing reports no credit facilities and no material off-balance-sheet arrangements. It does not identify interest-bearing debt on the balance sheet. The $65.8 million Tax Receivable Agreement liability is a significant obligation, not described as borrowing.
- RMR LLC generated $123.2 million of nine-month operating income; the company reports one business segment. Adjusted EBITDA, a non-GAAP measure, was $26.1 million for the quarter and $72.6 million for nine months; the nine-month figure adjusts out the incentive fee and should be read with GAAP results.
Outlook, risks and unusual items
- Management said operating cash flow should be sufficient for operating needs and commitments over the next 12 months and foreseeable future. It intends to pay a regular quarterly dividend of $0.25 per Class A and Class B-1 share, but the board may reduce or discontinue dividends. A $0.25 dividend was declared July 12, payable after quarter-end.
- Management cited low financing rates and potential opportunities in selected property types and locations, while cautioning that valuations may exceed replacement cost in some markets and acquisitions should be selective. It favors maintaining financial flexibility and reasonable debt levels.
- Revenue depends heavily on fees from a limited group of clients. Managed REIT fees depend partly on asset costs or market capitalization; operator fees depend on client revenues. Client business or market-value declines, rising rates, or loss or termination of management contracts could reduce RMR’s revenue and cash flow. Incentive fees are performance-based and not assured.
- Related-party and governance concentration is substantial: the Founders control ABP Trust, have leadership roles at RMR and several clients, and the Managed REITs collectively held a majority of RMR Inc.’s Class A shares as of June 30. The Tax Receivable Agreement requires RMR Inc. to pay ABP Trust 85% of specified realized tax savings.
- After quarter-end, RMR LLC acquired Tremont Realty Capital assets on August 5 for $2.2 million plus transaction costs, with a potential two-year earn-out. The company also expects to pay $0.9 million under the Tax Receivable Agreement in fiscal Q4. Management reported no material change to previously disclosed risk factors and concluded disclosure controls were effective.
Important facts for investors to verify
- How much of reported growth and earnings is recurring after separating the $62.3 million incentive fee, its allocation to ABP Trust, and Up-C-related amortization?
- Whether client concentration, related-party arrangements and management-contract termination provisions create material conflicts or threaten fee stability.
- The future timing and amount of Tax Receivable Agreement payments, tax distributions, dividends and Tremont earn-out consideration.
- Whether the stated cash-flow outlook remains supported by collections from client companies and by operating cash flow after distributions and acquisition spending.
- Comparability of the 2015 periods with 2016: the filing notes that RMR Inc. began operating in June 2015, and the Up-C transaction changed ownership, taxation and reporting structure.