The RMR Group Inc. — Form 10-Q
Reporting period: Fiscal third quarter ended June 30, 2023; comparative periods are the three and nine months ended June 30, 2022. Dollar amounts are in thousands, except per-share data. RMR is an asset manager whose revenue depends substantially on fees from related-party real estate and other businesses.
Financial performance
| Metric | Three months ended June 30, 2023 | Year-over-year change | Nine months ended June 30, 2023 | Year-over-year change |
|---|---|---|---|---|
| Total revenue | $280,225 | Up 32.8% | $739,384 | Up 25.3% |
| Operating income | $60,889 | Up 139.6% | $98,944 | Up 47.6% |
| Net income attributable to RMR | $24,641 | Up 225.5% | $49,451 | Up 124.7% |
| Basic earnings per share | $1.48 | Compared with $0.46 | $2.98 | Compared with $1.33 |
| Operating margin on total revenue | 21.7% | Compared with 12.0% | 13.4% | Compared with 11.4% |
Total revenue includes reimbursable costs that are offset by corresponding expenses, so reported margins on total revenue are affected by pass-through activity. The quarter’s management and advisory services revenue was $92,487, including a $45,282 termination fee from TravelCenters of America (TA) and a $192 incentive fee from Seven Hills Realty Trust (SEVN). Excluding those two fees, management and advisory services revenue was below the prior-year quarter.
For the nine months, operating cash flow was $113,692, compared with $89,856 in 2022. Investing activities provided $50,252, principally reflecting $53,479 received for RMR’s TA shares; financing activities used $57,609. Cash and cash equivalents increased by $106,335 to $295,423 from September 30, 2022.
At June 30, 2023, total assets were $601,385 and total liabilities were $176,020. The filing reports no credit facilities and no material debt borrowings; liabilities include operating lease obligations and a $25,583 tax receivable agreement liability. Current assets were $404,010 against current liabilities of $120,674. RMR reported no interest expense in the income statement and earned $6,837 of interest income for the nine months.
Material changes and notable items
- Quarterly operating income and RMR-attributable earnings rose sharply, mainly reflecting the TA termination fee, higher interest income, and a more favorable result on fair-value-option investments. Nine-month investment gains were $23,513, versus losses of $8,853 in the prior-year period.
- Management services revenue fell 11.5% in the quarter, as lower fees from TA and the Managed Equity REITs outweighed other changes. For the nine months, management services revenue declined 2.3%; lower fees from DHC, OPI, SVC and TA were partly offset by growth at ILPT and higher construction supervision fees.
- TA was acquired by BP on May 15, 2023. RMR received $53,479 for its TA shares, recognized a $45,282 management-agreement termination fee, and ceased managing TA. The filing reports a $39,778 gain on the sale of the shares.
- DHC and OPI agreed to merge, with OPI as the surviving entity. The merger was expected to close in calendar Q3 2023, subject to conditions. RMR agreed to waive DHC management-agreement termination fees and continue managing the combined entity if the merger closes.
- After quarter-end, on July 29, 2023, RMR LLC agreed to acquire CARROLL for $80,000 in cash, subject to customary adjustments, plus up to $20,000 in contingent consideration. The proposed acquisition is expected to be funded with cash on hand and remains subject to closing conditions.
- On March 20, 2023, ABP Trust, RMR’s controlling shareholder’s trust, acquired AlerisLife. RMR waived the termination fee associated with that transaction under amended management arrangements.
Outlook, risks and governance
Management said cash resources support operations and potential capital allocation, including growth of the private-capital business and technology investment. The filing provides no formal quantitative earnings or revenue guidance. Management highlighted higher interest rates, inflation and labor costs, macroeconomic uncertainty, reduced commercial real estate transactions, and possible constrained lending following 2023 bank failures. These conditions can affect clients’ finances and property markets, and ultimately RMR’s fees.
RMR’s revenue is highly dependent on a limited number of clients, substantially all revenue is from related parties, and management fees can be affected by client market capitalizations and agreement terminations. Related-party relationships and transactions, including those involving ABP Trust and RMR’s managed entities, present potential conflicts of interest. The filing states that there were no material changes to previously disclosed risk factors. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- How much of reported earnings growth is attributable to the one-time TA termination fee and investment gains, versus recurring management and advisory fees.
- The effect of the DHC-OPI merger and TA’s departure on ongoing fees, client concentration and management agreements.
- Whether the CARROLL acquisition closes on the disclosed terms, its final purchase price and contingent consideration, and its impact on cash and future earnings.
- Developments in Managed Equity REIT market capitalizations, property activity and ability to pay fees amid higher financing costs and real estate market volatility.
- The scale and terms of related-party transactions, including the tax receivable agreement and distributions to ABP Trust.