RMR Group Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2022; filed August 4, 2022. Amounts below are in millions of dollars unless noted. RMR is a management and advisory business whose revenue is substantially earned from related parties. Reported revenue includes substantial reimbursable costs passed through to clients.
Financial performance
| Metric | Three months ended June 30, 2022 | Three months ended June 30, 2021 | Nine months ended June 30, 2022 | Nine months ended June 30, 2021 |
|---|---|---|---|---|
| Total revenue | $211.1 | $145.2 | $590.3 | $433.8 |
| Management and advisory revenue | $53.0 | $45.5 | $148.3 | $128.8 |
| Operating income | $25.4 | $20.9 | $67.0 | $51.0 |
| Net income | $17.3 | $19.0 | $50.1 | $50.3 |
| Net income attributable to RMR Inc. | $7.6 | $8.2 | $22.0 | $22.1 |
| Diluted EPS | $0.46 | $0.50 | $1.33 | $1.31 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $89.9 | $72.4 |
- Quarterly management and advisory revenue rose 16.4%; operating income increased 21.8%. For the nine-month period, these measures rose 15.1% and 31.5%, respectively. Operating income was approximately 48% of management and advisory revenue in the quarter, versus 46% a year earlier; the comparable nine-month figures were about 45% and 40%.
- Total revenue growth substantially reflects reimbursable costs, which are matched by reimbursable expenses and therefore do not contribute equivalently to operating profit.
- Quarterly net income declined despite stronger operating income, principally due to a $5.5 million unrealized loss on equity-method investments measured at fair value, versus a $1.3 million unrealized gain in the prior-year quarter. The nine-month comparison likewise included an $8.9 million unrealized loss versus a $6.0 million gain.
Liquidity, cash flow and capital
- Cash and cash equivalents were $195.9 million at June 30, 2022, up from $159.8 million at September 30, 2021. Current assets were $295.9 million and current liabilities $107.1 million.
- Nine-month operating cash flow was $89.9 million. Investing used $10.4 million, including $9.5 million to acquire additional SEVN shares. Financing used $43.4 million, principally distributions to shareholders and noncontrolling interests. Cash increased $36.1 million during the period.
- The filing reports no credit facilities and no material off-balance-sheet arrangements. No borrowings are reported; liabilities include operating leases and a $27.8 million tax receivable agreement obligation, of which $2.2 million was expected to be paid in fiscal Q4 2022.
- RMR paid $1.16 per Class A and Class B-1 share in dividends over the nine months. After quarter end, it declared a $0.40-per-share dividend, expected to total approximately $11.4 million.
Key changes and management commentary
- Management-services revenue increased in part from ILPT’s acquisition of Monmouth Real Estate Investment Corporation, higher construction supervision activity, and improved travel-related business at Sonesta and TA. The Monmouth acquisition closed February 25, 2022.
- Compensation expense increased with headcount, wage inflation and bonus costs; general and administrative expense rose due to technology, construction oversight, recruiting and professional fees. Nine-month separation costs fell to $0.6 million from $4.2 million a year earlier.
- RMR said its cash position supports operations and obligations for the next 12 months and leaves capacity to consider capital allocation, with a focus on growing its private-capital business. It gave no specific earnings or revenue guidance.
Risks, contingencies and unusual items
- Management cited inflation, wage and supply costs, rising interest rates and possible recession as risks to clients’ property values, borrowing costs, rents, construction activity and operating revenues, which could reduce RMR’s fees. COVID-19 effects and disruptions remain risks.
- Revenue depends heavily on a limited number of clients, and substantially all revenue is from related parties. Client agreement termination, weak client performance and lower market capitalization can reduce fees. RMR noted it has limited control over clients’ shareholder returns and does not assure incentive fees.
- Related-party governance warrants attention: RMR purchased 882,407 SEVN shares from the mother of chair and managing director Adam Portnoy for $9.5 million; the filing describes extensive overlapping leadership and ownership relationships among RMR, ABP Trust and clients.
- RMR’s base management fees from its public REIT clients use the lower of specified asset-cost and market-capitalization measures. Management noted that market capitalization was below asset cost for all four Managed Equity REITs at June 30, 2022.
- The board retains discretion over dividends. The filing reports effective disclosure controls and no material changes in internal control over financial reporting; no material risk-factor changes from the prior annual report were reported.
Important facts for investors to verify
- How much fee growth is recurring, versus reimbursable pass-through revenue, construction activity or client-specific acquisitions and operating recovery.
- The sensitivity of base management fees to client market capitalizations, and the impact of rising rates, inflation and potential client weakness on RMR’s fee base.
- The valuation and volatility of the SEVN and TA investments, which materially affected reported net income in the period.
- Related-party transaction terms, governance safeguards and the concentration of revenue among affiliated clients.
- Cash available at the parent versus RMR LLC, upcoming tax receivable agreement payments, and the sustainability of the declared dividend.