The RMR Group Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended September 30, 2016. The filing also reports fourth-quarter results. Unless noted otherwise, dollar amounts below are in millions. Comparisons are affected by RMR’s June 2015 Up-C transaction and its transition to a publicly traded company; earlier periods are not necessarily comparable.
Business context and reporting period
RMR is primarily a real estate and business manager. It held a 51.7% economic interest in, and managed, The RMR Group LLC. Its clients included four public REITs, three operating companies, advisory clients and related entities. Assets under management were approximately $26.9 billion across more than 1,400 properties. The Managed REITs generated 87.9% of FY 2016 revenue; HPT alone accounted for 38.1%.
Key financial metrics
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Total revenue | $266.9 | $192.9 |
| Management services revenue | $226.7 | $162.3 |
| Operating income | $146.7 | $80.7 |
| Net income | $122.4 | $77.4 |
| Net income attributable to RMR Inc. | $37.2 | $7.3 |
| Net income per RMR Inc. common share, diluted | $2.33 | $0.46 |
| Adjusted EBITDA, non-GAAP | $100.1 | $92.3 |
| Cash provided by operating activities | $98.8 | $102.1 |
Operating margin was approximately 55% of revenue. Adjusted EBITDA was approximately 37.5% of revenue; RMR’s non-GAAP measure excludes, among other items, incentive management fees. FY 2016 revenue included $37.7 million of reimbursable payroll and related costs, recognized at cost.
Fourth-quarter FY 2016 revenue was $56.3 million, net income was $18.8 million, net income available for common shareholders was $7.4 million, and diluted earnings per share was $0.46.
At September 30, 2016, cash and cash equivalents were $65.8 million, current assets were $95.4 million and current liabilities were $20.6 million. Total assets were $337.5 million and total liabilities were $91.1 million. RMR reported no debt outstanding and no available credit facility. Operating cash flow was $98.8 million; investing activities used $3.5 million and financing activities used $64.0 million. The company said operating cash flow should be sufficient for its needs and commitments for the next 12 months and the foreseeable future.
Reported liabilities included $64.9 million under the Tax Receivable Agreement (TRA), with $2.9 million expected to be paid in FY 2017. The balance sheet also included $181.4 million of other assets associated with the Up-C transaction, amortized against revenue through 2035.
Material changes versus the prior comparable period
- Revenue rose 38.4% and operating income rose 81.8%. A $62.3 million HPT incentive management fee, recognized for calendar 2015 performance, was a major contributor. RMR also cited growth in REIT base fees and property management fees.
- Adjusted EBITDA increased to $100.1 million from $92.3 million, a smaller increase than reported operating income because Adjusted EBITDA deducts the $62.3 million incentive fee.
- Net income attributable to RMR Inc. increased to $37.2 million from $7.3 million. Total net income includes the portion attributable to ABP Trust and other noncontrolling interests.
- Operating cash flow declined to $98.8 million from $102.1 million. Cash at year-end increased to $65.8 million from $34.5 million, principally reflecting operating cash generation and receipt of the incentive fee.
- RMR acquired certain Tremont Realty Capital assets on August 5, 2016, adding a commercial real estate finance and advisory business. The acquisition cost $2.5 million in cash, excluding transaction costs; estimated contingent consideration was $1.3 million, with a stated maximum of $4.0 million.
Outlook, commentary, risks and unusual items
- RMR provided no numerical earnings or revenue guidance. Management described selective acquisition opportunities, noted that low financing rates may have pushed some property values above replacement cost, and emphasized financial flexibility and reasonable use of debt.
- Management estimated that a $75.0 million incentive fee would have been earned by a Managed REIT if September 30, 2016 had ended the applicable measurement period. It was not recognized, and RMR cautioned that the amount was not assured at the actual December 31, 2016 measurement date.
- Revenue is highly dependent on a limited number of clients and on their assets, market capitalizations, revenues and investment performance. Client terminations or declines in their businesses could materially reduce RMR’s fees. Rising interest rates could pressure client valuations, financing costs and access to capital.
- The Managed REIT management agreements generally run on renewing 20-year terms, but allow termination in specified circumstances. The Managed Operators’ agreements are generally renewable annually and have shorter termination provisions.
- The TRA requires RMR Inc. to pay ABP Trust 85% of qualifying realized tax savings. Payments may be substantial and, in some circumstances, may exceed actual tax savings, including upon specified acceleration events.
- Related-party and governance risks are significant: the Founders control approximately 91.5% of RMR Inc.’s voting power, and RMR has extensive affiliated relationships and potential conflicts of interest. The filing also describes a Five Star shareholder nomination and the Founders’ November 2016 tender-offer acquisition of Five Star shares.
- RMR said it was not party to litigation expected to have a material adverse effect. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not provide an internal-control attestation because RMR qualified for the emerging-growth-company exemption.
Important facts for investors to verify
- Whether the estimated incentive fee materialized at the December 31, 2016 measurement date, and how much of future earnings depends on such fees.
- Client concentration and the durability of fee revenue, particularly exposure to HPT and the Managed REITs’ market capitalization and performance.
- The terms, cash timing and possible acceleration exposure of the $64.9 million TRA liability, alongside the $181.4 million Up-C-related asset and its revenue amortization.
- Cash-flow coverage of the intended $0.25 quarterly dividend, tax distributions and related-party obligations; the board retains discretion to reduce or discontinue dividends.
- The Tremont business’s subsequent performance, integration costs and earn-out payments, and the effect of related-party governance arrangements on business decisions.