Business context and reporting period
The RMR Group Inc. is a holding company whose business is primarily conducted by The RMR Group LLC. This Form 10-K covers the fiscal year ended September 30, 2018; it is not a standalone calendar fourth-quarter report. RMR manages five equity REITs and several operating, advisory and investment businesses, with $30.1 billion of assets under management and more than 1,700 properties at year-end. The filing reports that 89.9% of fiscal 2018 revenue came from the Managed Equity REITs.
Financial performance and condition
Amounts below are in millions, except per-share data and percentages.
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Total revenue | $405.0 | $271.7 | +49.0% |
| Operating income | $252.0 | $135.6 | +85.9% |
| Net income | $217.4 | $108.7 | +100.1% |
| Net income attributable to RMR Inc. | $96.0 | $42.3 | +127.1% |
| Diluted EPS | $5.92 | $2.63 | +$3.29 |
| Adjusted EBITDA | $120.3 | $107.2 | +12.2% |
| Cash from operating activities | $228.5 | $125.9 | +$102.5 |
Operating margin was approximately 62.2%, compared with 49.9% in FY 2017. Adjusted EBITDA is a non-GAAP measure that excludes incentive business management fees and other items; it should not be treated as cash flow or a substitute for GAAP earnings.
At September 30, 2018, cash and cash equivalents were $256.8 million, total assets $504.4 million, and total liabilities $69.8 million. RMR reported no debt outstanding and no credit facility. Cash increased $148.2 million during the year. Cash used in investing activities was $0.6 million and cash used in financing activities was $79.6 million. The company said available cash and operating cash flow should meet foreseeable needs, including its planned dividend and investment commitments.
Material changes versus the prior comparable period
- Incentive business management fees rose to $155.9 million from $52.4 million, largely reflecting calendar 2017 performance fees from HPT, SIR and SNH. These contingent fees are variable; RMR’s estimate of $118.9 million for calendar 2018 was not recognized revenue and was not assured.
- Base management and property management revenue increased, primarily following GOV’s acquisition of First Potomac Realty Trust and growth in managed properties. Reimbursable payroll-related revenue also rose as staffing and managed-property counts increased.
- Operating expenses increased 12.4% to $153.0 million, including higher compensation and benefits and $3.2 million of separation costs. Transaction and acquisition costs declined to $1.7 million from $9.2 million.
- Cash from operations benefited from collection of the prior calendar year’s incentive fee. RMR’s year-end cash balance consequently rose substantially.
Outlook, risks, contingencies and unusual items
- Management described selective acquisition opportunities but cautioned that some property valuations may exceed replacement cost. Rising interest rates could weigh on client REIT market values, funding costs, returns and, consequently, RMR’s fees.
- GOV and SIR announced a proposed merger, subject to approval. RMR agreed to waive SIR’s termination fees if the merger closes; the combined company would continue under RMR’s existing GOV management agreement. The companies said they may consider dispositions of up to $750 million of assets, which could reduce RMR fees.
- RMR committed up to $100 million to the newly formed private office-property fund, expected to be called and invested within 12 months. ABP Trust contributed office properties valued at $206 million. RMR disclosed limited experience managing a private real estate fund.
- RMR recorded a $4.4 million impairment on its TRMT investment after determining the decline in fair value was other than temporary. Tremont Advisors waived TRMT base management fees from July 2018 through June 2020 and waived incentive fees for 2018 and 2019.
- The Tax Cuts and Jobs Act led to a $19.95 million deferred-tax-asset adjustment and increased tax expense. Separately, remeasurement of the tax receivable agreement reduced its liability and generated a $24.71 million income benefit. The year-end tax receivable agreement liability was $34.3 million.
- Five Star Senior Living disclosed substantial doubt about its ability to continue as a going concern, citing industry conditions, recurring losses and funding risk. Five Star is SNH’s largest tenant and manages SNH senior-living communities; deterioration could affect RMR’s revenue.
- RMR said it intends to pay a regular quarterly dividend of $0.35 per Class A and Class B-1 share, increased from $0.25, beginning with the November 2018 payment. The board retains discretion to change or discontinue dividends.
- Revenue and client relationships are highly concentrated: 99.6% of fiscal 2018 revenue was from related parties, and substantially all revenue depends on a limited number of clients. The filing also highlights related-party conflicts, management-agreement termination risk, key-personnel dependence and market, regulatory and litigation risks.
Most important facts for investors to verify
- How much future revenue and earnings depend on incentive fees, and whether comparable performance fees are earned in subsequent measurement periods.
- Status and terms of the GOV-SIR merger, any asset sales, and the effect on management fees and RMR’s client concentration.
- Five Star’s liquidity and going-concern outlook, and any resulting effects on SNH and RMR.
- Timing and funding of the $100 million private-fund commitment, along with related-party governance and investment performance.
- Cash generation and dividend coverage excluding unusually high incentive fees and the tax-receivable-agreement remeasurement benefit.
- Future impact of the Tax Act, the $34.3 million tax receivable agreement liability, and the possibility that payments could exceed realized tax savings in specified circumstances.