The RMR Group Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2019; comparable period is the three months ended December 31, 2018. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where appropriate.
Business context
RMR Inc. is a holding company whose business is conducted substantially through majority-owned RMR LLC, an external manager of real estate and related businesses. At quarter-end, RMR LLC managed more than 2,100 properties in 49 states, Washington, D.C., Puerto Rico and Canada. Its clients include four publicly traded equity REITs and several operators and advisory clients. RMR Inc. owned 52.1% of RMR LLC’s economic interest; ABP Trust held the remaining 47.9% noncontrolling interest.
Financial performance
| Metric | Quarter ended Dec. 31, 2019 | Prior-year quarter |
|---|---|---|
| Total revenue | $159.9 million | $280.3 million |
| Management and advisory services revenue | $48.1 million | $168.4 million |
| Operating income | $21.8 million | $138.3 million |
| Net income | $21.6 million | $118.1 million |
| Net income attributable to RMR Inc. | $9.4 million | $52.2 million |
| Diluted earnings per share | $0.58 | $3.22 |
| Cash from operating activities | $41.9 million | $54.1 million |
- Total revenue fell 43.0%; management and advisory services revenue declined 71.4%. The comparison is dominated by $120.1 million of incentive management fees recognized in the prior-year quarter and none in the current quarter.
- Base management and property management fees from the Managed Equity REITs totaled $39.4 million, versus $39.6 million. Total reimbursable costs of $111.8 million were substantially matched by reimbursable revenue and expense.
- Reported operating margin was approximately 13.6% of total revenue, versus 49.3% in the prior-year quarter; those ratios are materially affected by incentive fees and gross presentation of reimbursable costs.
- Current-quarter income included a $1.4 million unrealized gain on the TA investment, compared with a $2.8 million unrealized loss in the prior-year quarter. Tax expense was $3.7 million, and the effective tax rate was 14.7%.
Balance sheet, cash flow and liquidity
- Cash and cash equivalents were $385.7 million at December 31, 2019, up from $358.4 million at September 30, 2019. Operating cash flow was $41.9 million; investing cash outflow was $0.1 million and financing cash outflow was $14.5 million.
- Total assets were $705.1 million and total liabilities were $168.4 million. The filing reports no debt or credit facilities; RMR states that it does not currently maintain credit facilities.
- Adoption of the lease accounting standard added $36.9 million of operating lease right-of-use assets and $38.6 million of lease liabilities. The filing reports $4.1 million of current lease liabilities and $34.5 million of long-term lease liabilities.
- Management believes cash on hand and operating cash flow will meet operating needs for the next 12 months and the reasonably foreseeable future. The company expects cash to fund operations, dividends, tax-related obligations and new ventures.
- RMR LLC has a $100 million commitment to the Open End Fund, which may be drawn depending on acquisitions and third-party capital raising. A $32.1 million tax receivable agreement liability was recorded, including $2.1 million expected to be paid in fiscal 2020’s fourth quarter.
Material changes, outlook and risks
- Management attributed lower base fees in part to declines in DHC and OPI market capitalizations and OPI property dispositions. Growth in ILPT and SVC fees, including from acquisitions, partly offset those declines.
- Compensation expense increased $2.2 million, mainly due to merit increases and anticipated bonus inflation. Separation costs declined to $0.3 million from $6.4 million in the prior-year quarter.
- RIF announced in December 2019 its intention to convert from a registered investment company to a commercial mortgage REIT; RMR Advisors committed to pay costs related to the proposed transaction. Centre Street became a Tremont advisory client in December 2019.
- The company declared a subsequent quarterly dividend of $0.38 per Class A and Class B-1 share, expected to be paid around February 20, 2020. Management describes this as its current intention, not a guarantee; the board may reduce or eliminate dividends.
- No specific earnings or revenue guidance was provided. Management said real estate conditions vary by property type and market, and characterized acquisitions and dispositions as requiring careful consideration. It cited risks including client-company market capitalization or operating declines, management-contract termination, client concentration, conflicts of interest, litigation, and execution of new initiatives.
- Substantially all revenue came from related parties (99.6% in the quarter). The filing describes extensive overlapping ownership, governance and management relationships involving ABP Trust, RMR executives and client companies. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- How recurring management-fee revenue and profitability trend without incentive fees, and how much results depend on client REIT market values and property activity.
- Whether client concentration, related-party arrangements and overlapping leadership create material governance or contract-renewal risks.
- Potential timing and use of the $100 million Open End Fund commitment, and the progress and costs of RIF’s proposed conversion.
- Cash generation and the capacity to sustain dividends alongside lease, tax receivable agreement and other obligations.
- Whether the reported $41.9 million of operating cash flow is representative, given quarter-to-quarter working-capital movements and the unusually large prior-year incentive-fee cash and earnings comparison.