The RMR Group Inc. — Q1 FY2017 Form 10-Q
Reporting period: Three months ended December 31, 2016; comparisons are with the three months ended December 31, 2015. Amounts below are in millions of dollars unless otherwise stated. RMR is an asset-light manager whose business is conducted principally through majority-owned RMR LLC.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Total revenue | $105.3 | $110.1 | Down 4.4% |
| Operating income | $75.7 | $81.7 | Down 7.3% |
| Operating margin | 71.8% | 74.2% | Down about 2.3 percentage points |
| Net income, consolidated | $60.2 | $70.4 | Down 14.5% |
| Net income attributable to RMR Inc. | $23.5 | $17.1 | Up 37.9% |
| EPS, basic and diluted | $1.46 | $1.07 | Up $0.39 |
| Cash from operating activities | $24.4 | $14.5 | Up $9.9 |
Management services revenue was $95.1 million, down 6.8%; reimbursable payroll revenue rose 22.2% to $9.2 million, and advisory revenue rose 73.8% to $1.0 million. Compensation and benefits increased 9.0% to $23.2 million; general and administrative expense fell 12.5% to $5.8 million. The filing does not present a separate net margin measure.
Cash and cash equivalents were $74.8 million at December 31, 2016, versus $65.8 million at September 30, 2016. Total assets were $392.7 million and total liabilities were $101.3 million. The company reported no borrowings or credit facilities; its liquidity principally depends on collecting management fees from clients. Related-party receivables were $82.3 million, including $60.0 million due from HPT. The balance sheet included a $64.9 million Tax Receivable Agreement liability, of which $2.9 million was expected to be paid in fiscal Q4 2017.
Operating cash flow was $24.4 million; investing activities used $0.03 million and financing activities used $15.3 million. Cash flow benefited in part from working-capital changes, including higher accrued liabilities, and was reduced by a $50.7 million increase in amounts due from related parties.
Material changes and notable items
- Management services revenue declined $6.9 million, principally because the HPT calendar-year incentive fee fell by $9.9 million, from $62.3 million to $52.4 million. Higher base fees at the Managed REITs partly offset the decline.
- The incentive fee was earned from HPT on December 31, 2016 and paid in January 2017. Incentive fees depend on client total returns relative to specified indices and are not assured in future periods.
- RMR Inc. attributable net income increased despite lower consolidated net income. The prior-year comparison included a $26.6 million allocation of the 2015 HPT incentive fee to ABP Trust under the Up-C arrangements; this made the periods less directly comparable.
- The August 2016 Tremont business acquisition contributed $0.6 million of management and advisory revenue in the quarter. Contingent consideration had a fair value of $1.1 million at December 31, 2016, with a possible additional payment of up to $1.3 million.
- Approximately 99.4% of quarterly revenue came from related parties. Managed REITs contributed 91.7% of revenue; HPT alone contributed 59.6%.
Outlook, risks and contingencies
The company provided no quantified earnings or revenue guidance. Management stated that operating cash flow should be sufficient for operating needs and commitments for the next 12 months and the foreseeable future. It intends to use cash for working capital, quarterly dividends and potential new ventures. A $0.25 per-share dividend was declared in January 2017, payable in February; future dividends remain at the board’s discretion.
Management highlighted rising interest rates and possible pressure on client market values and revenues, which could reduce RMR’s fees. Other key risks include dependence on a limited number of clients, possible termination of management agreements, uncertain incentive fees, client and real-estate market performance, litigation, conflicts-of-interest allegations, and retention of key personnel. Management noted that low financing rates may have pushed some property values above replacement cost and advocated selective acquisitions and financial flexibility.
The company disclosed extensive related-party relationships and transactions involving its Managing Directors, ABP Trust, Managed REITs and Managed Operators. The Tax Receivable Agreement requires payment to ABP Trust of 85% of specified tax savings. The filing reported no material changes to previously disclosed risk factors, no material off-balance-sheet arrangements, and effective disclosure controls.
Investor facts to verify
- Whether the $60.0 million HPT receivable and other related-party balances were collected promptly after quarter-end.
- How HPT’s and the other Managed REITs’ performance affects future incentive fees; the filing gives no assurance of future fees.
- Revenue and fee concentration, particularly HPT’s 59.6% share and related parties’ 99.4% share of quarterly revenue.
- Timing and amount of Tax Receivable Agreement payments, including the expected $2.9 million fiscal Q4 payment, and the effect on cash available for dividends.
- Whether the declared $0.25 quarterly dividend remains supported by operating cash flow and board policy.
- Governance implications of the Managing Directors’ ownership and overlapping roles, including their control-related interests in Five Star and the reported long-term standstill and lock-up arrangements.