RMR GROUP INC. quarterly report, Q1 FY2021

Business context and reporting period

The RMR Group Inc. (RMR) is a holding company whose business is primarily conducted through RMR Group LLC, which manages real estate investment trusts, operating companies and private real estate vehicles. This Form 10-Q covers the fiscal first quarter ended December 31, 2020; comparisons are with the three months ended December 31, 2019. RMR managed more than 2,100 properties across 47 states, Washington, D.C., Puerto Rico and Canada. Figures below are in U.S. dollars; financial statement amounts are shown in millions unless noted.

Financial performance and position

• Total revenue declined 1.8%, while management and advisory revenue fell 14.1%. Total revenue includes reimbursed client costs, which are substantially offset by matching expenses.
• Operating margin was 8.7% of reported total revenue, compared with 13.6% a year earlier; the gross-revenue measure includes reimbursable pass-through costs. Operating income declined 37.0%.
• Net income included an $8.1 million unrealized gain on RMR’s investment in TravelCenters of America (TA), compared with a $1.4 million gain in the prior-year quarter.
• Cash and cash equivalents were $383.2 million at December 31, 2020, versus $369.7 million at September 30, 2020. RMR reported no debt and no credit facilities. Current assets were $457.3 million and current liabilities $80.3 million.
• Operating cash flow decreased $14.3 million year over year. Investing cash outflow was $0.6 million and financing cash outflow was $13.6 million, primarily distributions. RMR paid a $0.38-per-share quarterly dividend during the period and declared another $0.38 dividend in January 2021.
• Total liabilities were $150.3 million, including a $30.0 million tax receivable agreement liability; $2.2 million was expected to be paid in fiscal Q4 2021. RMR reported no off-balance-sheet arrangements.

Material changes versus the prior period

• Management services revenue declined $6.5 million, mainly as lower market capitalizations at DHC, OPI and SVC reduced their base management fees. Fees from managed operating companies also declined, primarily reflecting pandemic-related impacts on Five Star and Sonesta.
• Equity-based compensation rose $2.0 million and separation costs rose $3.9 million; total separation costs were $4.2 million, largely associated with executive and employee departures. The quarter also included accelerated vesting of client-company shares.
• Interest and other income fell $1.6 million, mainly due to lower interest rates. The income tax provision declined $1.0 million, including a $0.5 million benefit from final tax regulations.
• Reported diluted EPS includes the assumed conversion of the 15 million RMR LLC units held by the noncontrolling owner; diluted weighted-average shares were 31.3 million versus 16.2 million basic shares.

Outlook, commentary and risks

Management said it had sufficient financial resources to withstand the pandemic, while noting that the ultimate impact remained uncertain. COVID-19 continues to affect hospitality, travel, service retail, senior housing and rehabilitation businesses, and could reduce client market capitalizations, rents collected, construction activity and RMR’s related fees. As of January 29, 2021, client companies had granted temporary rent assistance of $20.1 million to 239 tenants, generally involving deferred rent repayable over about 12 months; RMR earns related property-management fees when the deferred rent is collected.

• RMR’s base business management fees from most managed equity REITs depend on the lower of asset cost and market capitalization; property management fees depend largely on rents collected. Client performance and tenant collections therefore affect RMR’s revenue and cash flow.
• Management identified risks from client concentration, contract termination, pandemic uncertainty, market volatility, client access to capital and debt-covenant compliance, and the ability to retain key personnel. Most revenue comes from a limited number of related client companies.
• The board retains discretion over dividends; RMR stated its intent to pay a regular quarterly dividend of $0.38 per Class A and Class B-1 share but gave no assurance of future payments or amounts.
• RMR disclosed extensive related-party relationships and transactions, including with ABP Trust and managed companies. On January 5–6, 2021, RMRM deregistered as an investment company, entered a new management agreement with Tremont Advisors, and RMR Advisors merged into Tremont Advisors.
• Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing reported no material changes to the risk factors in the 2020 Form 10-K.

Important facts for investors to verify

• Whether lower client REIT market capitalizations and ongoing pandemic effects continue to reduce recurring management fees.
• Collection status and timing of the $20.1 million in tenant rent assistance, and the resulting effect on property-management fees and client liquidity.
• How much of earnings reflects recurring operations versus the $8.1 million unrealized TA investment gain and the tax benefit; also assess the $4.2 million separation costs.
• The sustainability of cash generation and the $0.38 quarterly dividend, including obligations for tax distributions and payments under the tax receivable agreement.
• Client concentration, related-party governance and contract-renewal or termination provisions, plus the impact of RMR LLC unit conversion on diluted share count and per-share results.