Business context and reporting period
The RMR Group Inc. (RMR) filed this unaudited Form 10-Q for its first fiscal quarter, the three months ended December 31, 2018, compared with the three months ended December 31, 2017. RMR is a holding company; substantially all operations are conducted through RMR LLC, which manages real estate and related businesses. RMR owned 52% of RMR LLC’s economic interest at quarter-end, with the remaining 48% reported as noncontrolling interest.
Financial performance and liquidity
Amounts below are in millions, except per-share data and ratios.
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Total revenue | $280.3 | $218.5 |
| Management and advisory services revenue | $168.4 | $205.8 |
| Operating income | $138.3 | $182.4 |
| Net income | $118.1 | $159.3 |
| Net income attributable to RMR | $52.2 | $71.1 |
| Diluted EPS | $3.22 | $4.39 |
| Operating cash flow | $54.1 | $40.5 |
- Reported operating margin was 49.3%, versus 83.5% a year earlier; the comparison is significantly affected by the adoption of ASC 606, which added $98.1 million of reimbursable client expenses to both revenue and expense, with no net income effect. Excluding that pass-through gross-up, the operating margin was approximately 76.0% versus 88.6%.
- Cash and cash equivalents were $284.2 million at December 31, up from $256.8 million at September 30, 2018. Current assets were $481.8 million and current liabilities $115.7 million, a reported current ratio of about 4.2x. Current assets include $190.8 million due from related parties.
- The filing reports no debt or credit facilities maintained by RMR. Total liabilities were $154.2 million; these include a $34.3 million tax receivable agreement liability.
- Operating cash flow increased year over year, primarily reflecting working-capital changes. Investing cash outflow was $8.6 million, including the $8.4 million TA share purchase; financing cash outflow was $18.2 million. Cash increased by $27.3 million during the quarter.
Material changes versus the prior comparable period
- Management and advisory services revenue declined 18.2%, mainly as incentive business management fees fell $35.8 million (23.0%) to $120.1 million. Base and property management revenue also declined modestly.
- RMR-attributable net income fell 26.6% and diluted EPS declined from $4.39 to $3.22. The prior-year comparison included a $24.7 million tax receivable agreement remeasurement benefit; the current quarter included a $2.8 million unrealized loss on RMR’s TA investment.
- Total reported revenue rose 28.3% despite lower core management and advisory revenue because ASC 606 required $98.1 million of client-company reimbursable expenses and matching revenue to be reported gross. The adoption did not affect net income.
- Compensation expense included $6.4 million of separation costs related primarily to executive departures and retirements.
- On December 31, SIR merged into OPI. RMR waived termination fees that otherwise would have been payable when SIR’s management agreements ended; the combined company continues to be managed under OPI’s agreements.
Outlook, commentary, risks and unusual items
- Management said cash on hand and operating cash flow should be sufficient for operating needs for the next 12 months and the foreseeable future. It gave no quantified earnings or revenue guidance.
- RMR intended to continue a quarterly dividend of $0.35 per Class A and Class B-1 share, subject to board discretion. A $0.35 dividend was declared in January 2019.
- RMR LLC has committed $100 million to the Open End Fund, which management expected to be drawn and invested within 12 months. The filing cautions the fund may not invest all or any of that capital on that timetable.
- After quarter-end, Tremont Advisors entered into an agreement to lend TRMT up to $25 million in unsecured loans at 6.5%, subject to the agreement’s terms. Repayment and interest collection are not assured.
- Management identified sensitivity to client company performance and share prices, interest rates, management contract terminations, and the concentration of revenue among a limited number of clients. OPI’s planned asset sales to reduce leverage could also reduce RMR management revenue. Incentive fees are variable and may not recur.
- RMR highlighted related-party relationships and transactions, including its tax receivable agreement with ABP Trust and its close operational ties to managed clients. It reported no material changes to the risk factors in its latest annual report.
Important facts for investors to verify
- Whether the $190.8 million due from related parties was collected on schedule, particularly incentive fees and reimbursements accrued at quarter-end.
- How much future revenue and earnings depend on performance-based incentive fees, which declined year over year and are not assured to recur.
- The underlying trend in management revenue and margins after separating ASC 606 reimbursable pass-through amounts from economic revenue.
- The financial and governance implications of RMR’s related-party arrangements, including the $34.3 million tax receivable agreement liability and the waived SIR termination fees.
- Progress and funding needs for the $100 million Open End Fund commitment and any TRMT lending under the $25 million facility.