RMR Group Inc. — Q2 FY2018 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2018. Dollar amounts below are in millions unless stated otherwise. RMR is an asset and business manager; substantially all operations are conducted through RMR Group LLC. At quarter-end, RMR Inc. held 51.9% of RMR LLC’s economic interest; ABP Trust held the remaining 48.1% as noncontrolling interest.
Financial performance and liquidity
| Metric | Three months ended Mar. 31, 2018 | Six months ended Mar. 31, 2018 |
|---|---|---|
| Total revenue | $59.3 million, up 9.2% | $277.8 million, up 74.1% |
| Operating income | $22.5 million, up 1.7% | $204.9 million, up 109.6% |
| Operating margin | 37.9%, versus 40.7% | 73.7%, versus 61.2% |
| Net income attributable to RMR Inc. | $8.4 million, up 21.4% | $79.5 million, up 161.5% |
| Diluted EPS | $0.52, versus $0.43 | $4.91, versus $1.89 |
| Operating cash flow | Not presented by quarter | $206.2 million, versus $101.1 million |
Quarterly management services revenue rose 7.6% to $46.6 million, while reimbursable payroll and other costs increased 16.2% to $11.7 million. Compensation and benefits rose 22.1% to $29.4 million, contributing to lower quarterly operating margin. The six-month results include $155.9 million of incentive business management fees, compared with $52.4 million in the prior-year period; these fees were recognized in the first fiscal quarter for calendar-year performance.
At March 31, cash and cash equivalents were $276.4 million, compared with $108.6 million at September 30, 2017. Current assets were $309.5 million and current liabilities were $50.2 million. Total liabilities were $92.2 million; the filing reports no borrowings or available credit facilities. Six-month investing cash outflow was $0.3 million and financing cash outflow was $38.2 million, including distributions to noncontrolling interests and common shareholders.
Material changes and unusual items
- Six-month revenue and earnings benefited materially from $155.9 million of incentive fees earned from HPT, SIR and SNH for 2017 calendar-year performance. RMR cautions that future incentive fees are uncertain.
- The Tax Act prompted a $19.8 million deferred tax asset remeasurement charge and a $24.7 million reduction in the tax receivable agreement liability, recognized as income. These nonrecurring tax-related items materially affected the six-month comparison; the filing does not present a normalized earnings measure.
- Management services revenue growth reflected higher property-management activity and GOV’s acquisition of First Potomac Realty Trust. ILPT became a fifth Managed Equity REIT following its January 2018 launch.
- Cash from operations increased substantially, reflecting working-capital movements and collection of incentive fees. The company said the higher cash balance principally reflects operating cash generation, including those fee collections.
Outlook, risks and contingencies
Management expects cash on hand and operating cash flow to cover operating needs for the next 12 months and the foreseeable future. It intends to use cash for working capital, dividends and new business ventures. The company declared a $0.25-per-share quarterly dividend in April 2018, payable in May; future dividends remain at the board’s discretion. No quantified revenue or earnings guidance was provided.
Management described real estate acquisition opportunities as selective, noting that low financing rates may have pushed some property values above replacement cost. It cited possible growth opportunities in selected property types and locations, including industrial and logistics properties, while emphasizing financial flexibility and reasonable debt levels.
Key risks include substantial revenue dependence on a limited number of client companies, variable performance-based fees, potential loss or termination of management agreements, and exposure to client-company market capitalizations and operating results. Rising interest rates could pressure client values and revenue. Nearly all revenue came from related parties (99.7% for the six-month period), and extensive overlapping ownership, governance and management relationships create related-party and conflict-of-interest risks. The company reported no material off-balance-sheet arrangements and no material changes to previously disclosed risk factors.
Unusual personnel matters included the February 2018 death of Managing Director Barry Portnoy, which accelerated vesting of awards, and David Hegarty’s planned retirement, associated with $0.1 million of separation costs recognized through March 31 and two planned $1.25 million cash payments subject to releases. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- How much future revenue and earnings depend on recurring management fees versus unpredictable annual incentive fees.
- The underlying and normalized earnings impact of the Tax Act deferred-tax charge and tax receivable agreement remeasurement.
- Whether client-company performance, market capitalizations, acquisitions and property-management volumes support continued fee growth.
- The sustainability of the $0.25 quarterly dividend given the board’s discretion and the company’s reliance on client-derived fees.
- The terms, governance safeguards and potential financial effects of related-party arrangements, including the tax receivable agreement.