The RMR Group Inc. — Form 10-Q Summary
Reporting period: Fiscal quarter and nine months ended June 30, 2018; comparisons are with the periods ended June 30, 2017. Unless noted otherwise, financial amounts below are in millions of dollars. RMR Inc. is a holding company whose business is conducted primarily through RMR LLC, which provides management and advisory services to real estate and operating businesses.
Financial performance
| Metric | Three months 2018 | Three months 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $62.1 | $55.5 | $339.9 | $215.1 |
| Operating income | $21.8 | $21.7 | $226.7 | $119.5 |
| Net income attributable to RMR Inc. | $8.4 | $6.9 | $87.9 | $37.3 |
| Diluted earnings per share | $0.52 | $0.43 | $5.42 | $2.31 |
| Cash from operating activities | Not provided for quarter | Not provided for quarter | $228.7 | $122.9 |
Quarterly revenue increased 11.9%, but operating income was nearly unchanged as expenses rose 19.2%; operating margin was approximately 35.1%, versus 39.1%. For the nine-month period, revenue increased 58.0% and operating margin was approximately 66.7%, versus 55.5%, reflecting a substantial increase in incentive fees.
Nine-month earnings included a $24.7 million gain from remeasuring the tax receivable agreement liability after the Tax Act and a $19.8 million tax expense to remeasure deferred tax assets. These discrete tax-related items make reported year-over-year earnings less indicative of recurring operations.
Liquidity, cash flow and capital
- Cash and cash equivalents were $280.5 million at June 30, 2018, up from $108.6 million at September 30, 2017. Operating cash flow was $228.7 million; investing cash use was $0.5 million and financing cash use was $56.3 million for the nine months.
- Current assets were $314.8 million and current liabilities $51.0 million. Total liabilities were $93.2 million. The filing reports no credit facilities and no material off-balance-sheet arrangements; it does not report debt as a balance-sheet line item.
- Cash growth principally reflected operating cash generation, including collection of $155.9 million of incentive fees earned for calendar 2017. Management said cash on hand and operating cash flow should cover operating needs for at least the next 12 months.
- RMR paid $0.25 per Class A and Class B-1 share in each of the first three fiscal quarters and declared a further $0.25 dividend after quarter-end. Future dividends remain at the board’s discretion.
Material changes and management commentary
- Nine-month incentive business management fees were $155.9 million, versus $52.4 million in the prior-year period, earned from HPT, SIR and SNH for calendar 2017 performance. No incentive fees were recorded in the June quarter; the fees are contingent and recognized when earned.
- Recurring management-services revenue increased 9.1% for the nine months. The company attributed much of the growth to GOV’s acquisition of First Potomac Realty Trust and an increase in properties and construction activity managed. Reimbursable payroll-related and other costs also rose as managed property counts and staffing increased.
- Compensation expense increased with staffing and annual compensation increases; separation costs were $1.9 million for the nine months. The company also reported increased equity-based compensation.
- On July 31, 2018, RMR LLC agreed to contribute up to $100 million and ABP Trust to contribute $206 million of office properties to a new private office-property fund. RMR LLC expects its commitment to be drawn and invested within 12 months, but says the fund may not invest all or any of the capital within that timeframe. RMR LLC is to manage the fund and earn administration and property-management fees.
- RMR LLC waived TRMT business-management fees from July 1, 2018 through June 30, 2020; no incentive fee is payable by TRMT for calendar 2018 or 2019.
Risks, contingencies and unusual items
- Revenue is highly dependent on a limited number of Client Companies: related parties generated 99.7% of nine-month revenue. Fee levels can be affected by client performance, property values, market capitalization, rents and operator revenues; management agreements may be terminated in specified circumstances.
- Incentive fees are volatile, depend on client total returns relative to benchmarks, and may not recur. Management estimated $95.0 million of potential incentive fees as of June 30 if that date had ended a measurement period, but did not recognize that estimate and cautioned it may not be earned.
- Management cited rising interest rates, real estate valuation and market conditions, client-company performance, key-person retention, litigation, regulatory compliance and related-party conflicts as risks. The filing reports no material changes to previously disclosed risk factors.
- The tax receivable agreement requires payments to ABP Trust equal to 85% of specified realized tax savings. The liability was $37.3 million at June 30, including $2.9 million expected to be paid in fiscal Q4. The company disclosed extensive related-party relationships, including common officers and an influential controlling shareholder.
- The filing identifies executive retirement-related payments and accelerated share vesting; separation costs were recorded. Management stated 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 nonrecurring incentive fees, and whether any 2018 measurement-period fees are ultimately earned.
- Underlying operating performance excluding incentive fees and the Tax Act-related tax and tax-receivable-agreement remeasurement effects.
- Exposure to the small number of related-party clients, management-contract termination provisions, and governance safeguards for related-party transactions.
- Funding, timing, investment activity and risks of RMR LLC’s commitment of up to $100 million to the new office-property fund.
- Cash needs for tax distributions, tax receivable agreement payments and dividends, and the sustainability of the stated quarterly dividend.