The RMR Group Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended September 30, 2017. The filing also reports fourth-quarter results; this is an annual report, not a standalone quarterly filing. Unless stated otherwise, financial amounts below are in millions of dollars.
Business context
RMR provides management and advisory services to four publicly traded equity REITs, three managed operators and other clients. It reported $28.5 billion of assets under management and more than 1,400 properties. RMR Inc. is a holding company that owns a 51.9% economic interest in and manages The RMR Group LLC. The business is highly concentrated: the four managed equity REITs generated 86.9% of FY 2017 revenue, and related parties accounted for 99.2%.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Total revenue | $271.7 | $266.9 | +1.8% |
| Operating income | $135.6 | $146.7 | -7.6% |
| Net income | $108.7 | $122.4 | -11.2% |
| Net income attributable to RMR Inc. | $42.3 | $37.2 | +13.6% |
| Adjusted EBITDA | $107.2 | $100.1 | +7.1% |
| Cash from operating activities | $125.9 | $99.7 | +$26.2 |
Management services revenue was $227.3 million, reimbursable payroll and other costs were $40.3 million, and advisory revenue was $4.1 million. Operating margin was approximately 49.9%, versus 54.9% in FY 2016; net margin was approximately 40.0%, versus 45.8%. Adjusted EBITDA is a non-GAAP measure and excludes, among other items, incentive fees and certain transaction and fraud costs.
At September 30, 2017, cash and cash equivalents were $108.6 million, total assets were $383.7 million, and total liabilities were $94.1 million. RMR reported no debt outstanding and no available credit facility. Cash used in investing activities was $12.8 million, principally reflecting its $12.0 million investment in Tremont Mortgage Trust (TRMT); cash used in financing activities was $70.3 million. Operating cash flow increased partly because RMR collected the prior calendar year’s incentive fee.
RMR Inc. reported basic and diluted EPS of $2.63, compared with $2.33. Fourth-quarter FY 2017 revenue was $56.6 million, net income was $13.1 million, net income attributable to RMR Inc. was $5.0 million, and EPS was $0.31.
Material changes and unusual items
- Managed equity REIT incentive fees fell to $52.4 million from $62.3 million, all earned from HPT and recognized in the first fiscal quarter. Base management and property management fees increased, largely offsetting the incentive-fee decline.
- Operating expenses rose 13.2% to $136.2 million. Compensation and benefits increased 8.4%, while transaction and acquisition costs rose to $9.2 million, mainly due to the TRMT IPO and RIF rights offering.
- RMR’s FY 2017 results included $0.8 million of business email compromise fraud costs: a $0.59 million wire-fraud loss and $0.18 million of related expenses. The company says it strengthened payment controls.
- TRMT completed its IPO in September 2017. RMR’s subsidiary held approximately 19.4% of TRMT at year-end; its investment had a $12.0 million carrying value and a $10.0 million quoted market value.
- GOV acquired First Potomac Realty Trust for approximately $1.4 billion on October 2, 2017, after the reporting period. RMR expects this may increase fees, but says added costs or weaker performance could prevent an earnings benefit.
Outlook, risks and contingencies
Management expects operating cash flow to cover operating needs and commitments for the next 12 months and foreseeable future. It currently intends to pay a quarterly dividend of $0.25 per Class A and Class B-1 share, or $1.00 annually; payment remains at the board’s discretion. Management sees selective growth opportunities, including in middle-market commercial real estate lending and industrial and logistics properties, but provides no numerical earnings guidance.
- Revenue depends heavily on a small number of clients and can fluctuate with REIT market capitalizations, client revenues, property activity and performance-based fees. Management estimated $63.6 million of potential incentive fees as of September 30, 2017, but cautioned that this was not a forecast or assurance of fees at the December measurement date.
- Management agreements with the equity REITs extend on rolling 20-year terms but may be terminated in specified circumstances. Losing a major client could materially reduce revenue and cash flow.
- Rising interest rates, weaker real estate markets, competition, client capital constraints, regulatory changes and client operating performance could pressure fees.
- Founder-related concentration and conflicts warrant attention: the founders controlled 91.4% of RMR Inc.’s voting power, and the business has extensive related-party relationships. The tax receivable agreement requires payment to ABP Trust of 85% of specified tax savings; the recorded liability was $62.0 million, with $2.9 million expected to be paid in FY 2018.
- RMR reported no litigation expected to have a material adverse effect. Management assessed disclosure controls and internal control over financial reporting as effective; the auditor did not provide an internal-control attestation because RMR was an emerging growth company.
Important facts for investors to verify
- How much of future earnings depends on recurring base fees versus volatile incentive fees, and what incentive fees were ultimately earned for calendar 2017?
- Whether GOV’s FPO acquisition increases RMR’s net earnings after the costs of managing the expanded portfolio.
- TRMT’s subsequent performance, RMR’s investment value, and the potential for advisory or incentive fees as the mortgage REIT develops.
- The amount and timing of tax receivable agreement payments, including potential accelerated payments and the possibility that payments exceed realized tax savings.
- Whether the $0.25 quarterly dividend remains supported by recurring cash generation, particularly if client market values or fee income decline.
- Controls implemented after the wire fraud and the ongoing risks from concentrated clients, related-party arrangements and founder voting control.