The RMR Group Inc. — Form 10-Q Summary
Reporting period: Three months ended December 31, 2015 (fiscal 2016 first quarter). The comparative period is the three months ended December 31, 2014. Amounts below are in millions unless otherwise noted. RMR is a holding company; substantially all operations are conducted through RMR Group LLC, which manages REITs and other businesses.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $110.130 | $46.836 |
| Operating income | $81.668 | $18.281 |
| Net income | $70.379 | $19.648 |
| Net income attributable to RMR Inc. | $17.054 | Not provided on a comparable basis |
| RMR Inc. diluted EPS | $1.07 | Not provided |
| Cash from operating activities | $14.459 | $45.229 |
| Cash and cash equivalents, quarter end | $25.081 | Not provided as a comparable quarter-end balance |
- Revenue grew 135.1%, largely reflecting a $62.263 annual incentive management fee earned from HPT. Management services revenue was $102.059; reimbursable payroll and related costs were $7.490; advisory revenue was $0.581.
- Operating margin was approximately 74.2%, compared with 39.0% a year earlier; the current-period margin benefited substantially from the incentive fee. The filing reports no debt or credit facilities. The $64.905 tax receivable agreement liability is not described as borrowings.
- Adjusted EBITDA, a non-GAAP measure, was $23.288 versus $19.502. The filing cautions that this measure is not a substitute for GAAP results or operating cash flow.
- At December 31, current assets were $110.712 and current liabilities were $50.212. Current assets included $82.253 due from related parties, including $69.069 from HPT; the HPT incentive fee receivable was paid in January 2016.
Changes, unusual items, and context
- Operating income rose $63.387 year over year, principally due to the HPT incentive fee and growth in managed REIT fees. Base business management fees from the REITs were $25.176, up from $23.378; property management fees were $8.336, up from $6.334.
- The $62.263 incentive fee was allocated in part to ABP Trust: $26.611 was assigned to the noncontrolling interest under the Up-C transaction arrangements. Consolidated net income therefore differs materially from the $17.054 attributable to RMR Inc.
- Results reflect the June 2015 Up-C transaction, which made RMR Inc. a taxable corporation on its share of RMR LLC income. Income tax expense was $11.314 versus none in the prior period. The transaction also created an asset being amortized against revenue; $2.354 was recognized as a revenue reduction this quarter, and $0.858 of transaction-related costs was included in general and administrative expense.
- Operating cash flow fell to $14.459 from $45.229, primarily reflecting working-capital movements, including the increase in due-from-related-party balances. Financing cash outflows were $23.079, including $8.416 of common-share distributions and $14.663 distributed to noncontrolling interests.
- RMR declared and paid a $0.5260-per-share dividend during the quarter. Management intended to pay regular quarterly dividends of $0.25 per Class A share and expected the next dividend to be $0.2993 per share, including a prorated amount. Future dividends remain at the board’s discretion.
Outlook and principal risks
Management expected operating cash flow to cover working-capital needs and commitments for the next 12 months and the foreseeable future. It cited possible growth in selected property types and locations, but said expectations of rising interest rates could temper real estate valuations and supported selective acquisitions and financial flexibility. RMR’s revenues depend on the financial performance, assets, and market capitalizations of a limited number of clients. Management agreements may be terminable in specified circumstances, and incentive fees are performance-dependent and not assured to recur. The company also noted related-party relationships and transactions, foreign-exchange exposure, and that some bank balances exceed FDIC coverage limits. No material changes to previously disclosed risk factors were reported.
Investor facts to verify
- How much of reported earnings and revenue growth is attributable to the one-time HPT incentive fee, and what recurring fee trends remain after excluding it?
- Whether the HPT receivable was collected as disclosed and how related-party balances and revenue concentration evolve.
- The cash-flow implications of the Up-C structure, quarterly distributions, taxes, and the tax receivable agreement.
- Whether the stated dividend plan is supported by recurring earnings and cash generation; the filing does not guarantee future dividends.
- How interest rates and client REIT performance could affect management fees, market-capitalization-based fee calculations, and future incentive fees.