The RMR Group Inc. Announces Second Quarter Fiscal 2018 Results

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May 10, 2018

The RMR Group Inc. Announces Second Quarter Fiscal 2018 Results

Total Revenues of $59.3 Million, a 9% Increase from the Second Quarter Last Year

Net Income Attributable to The RMR Group Inc. of $0.52 Per Share and Adjusted Net Income Attributable to The RMR Group Inc. of $0.54 Per Share, Both Increases of over 20% from the Second Quarter Last Year

NEWTON, Mass.--(BUSINESS WIRE)-- The RMR Group Inc. (Nasdaq: RMR) today announced its financial results for the fiscal quarter ended March 31, 2018.

Adam Portnoy, President and Chief Executive Officer, made the following statement regarding the second quarter fiscal 2018 results:

"During the second quarter we increased revenues by 9%, net income attributable to The RMR Group Inc. by 21% and Adjusted EBITDA by 6% as compared to a year ago. These operating results are even more noteworthy considering the headwinds facing REIT share prices and the $0.02 per share impact this quarter from one-time items associated with separation costs and share award accelerations.

This quarter, we continued positioning ourselves for further growth by helping Select Income REIT complete the IPO of our fifth Managed Equity REIT, Industrial Logistics Properties Trust, which is an industrial REIT. With more than $250 million of cash on hand and no debt, we are well positioned to consider a number of new opportunities for growth in the future."

Second Quarter Fiscal 2018 Highlights:

  • Total revenues for the quarter ended March 31, 2018 were $59.3 million, compared to total revenues for the quarter ended March 31, 2017 of $54.3 million.
  • For the three months ended March 31, 2018, net income was $19.6 million and net income attributable to The RMR Group Inc. was $8.4 million, or $0.52 per diluted share, compared to net income of $17.7 million and net income attributable to The RMR Group Inc. of $6.9 million, or $0.43 per diluted share, for the three months ended March 31, 2017. Net income this quarter included $0.9 million, or $0.02 per share, for the accelerated vesting of The RMR Group Inc. share awards and separation expenses related to former employees and officers. Net income in the second quarter last year included $0.7 million, or $0.01 per share, of transaction and acquisition related costs.
  • The RMR Group Inc. earned management services revenues for the three months ended March 31, 2018 and 2017 from the following sources (dollars in thousands):
         
Three Months Ended March 31,
2018     2017
Managed Equity REITs (1) $ 39,460     84.8 % $ 36,715     84.9 %
Managed Operators (2) 6,339 13.6 % 6,091 14.1 %
Other 760   1.6 % 452   1.0 %
Total Management Services Revenues 46,559 100.0 % 43,258 100.0 %
(1)     Managed Equity REITs collectively refers to: Government Properties Income Trust (GOV), Hospitality Properties Trust (HPT), Industrial Logistics Properties Trust (ILPT), Select Income REIT (SIR) and Senior Housing Properties Trust (SNH). ILPT was a wholly-owned subsidiary of SIR until the completion of ILPT's initial public offering on January 17, 2018.
 
(2) Managed Operators collectively refers to: Five Star Senior Living Inc. (FVE), Sonesta International Hotels Corporation and TravelCenters of America LLC (TA).
 
  • For the three months ended March 31, 2018, Adjusted EBITDA was $28.3 million and Adjusted EBITDA Margin was 56.5%, compared to Adjusted EBITDA of $26.6 million and Adjusted EBITDA Margin of 57.0% for the three months ended March 31, 2017. Adjusted EBITDA Margin equals Adjusted EBITDA divided by the contractual management and advisory fees earned from The RMR Group LLC’s client companies. These contractual management and advisory fees are calculated pursuant to The RMR Group LLC’s contracts with its client companies and do not deduct non-cash asset amortization recognized in accordance with U.S. generally accepted accounting principles, or GAAP, as a reduction to management services revenues. Adjusted EBITDA and Adjusted EBITDA Margin are calculated on recurring revenues and do not include incentive business management fees earned.
  • As of March 31, 2018, The RMR Group Inc. had approximately $30.0 billion of total assets under management, compared to total assets under management of $27.6 billion as of March 31, 2017.
  • As of March 31, 2018, The RMR Group Inc. had approximately $276 million in cash and cash equivalents on a consolidated basis with no outstanding debt obligations.

Reconciliations to GAAP:

Adjusted net income attributable to The RMR Group Inc., EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin are non-GAAP financial measures. Reconciliations of net income determined in accordance with GAAP to Adjusted net income attributable to The RMR Group Inc., EBITDA and Adjusted EBITDA as well as calculations of Adjusted EBITDA Margin appear later in this press release. Also, comparisons of The RMR Group Inc.'s revenues, Adjusted net income attributable to The RMR Group Inc., EBITDA, Adjusted EBITDA, Adjusted EBITDA Margin, net income and net income attributable to The RMR Group Inc. for the three and six months ended March 31, 2018 to the three and six months ended March 31, 2017 are presented later in this press release.

Total Assets Under Management:

The calculation of total assets under management includes: (i) the gross book value of real estate and related assets, excluding depreciation, amortization, impairment charges or other non-cash reserves, of the Managed Equity REITs and ABP Trust, plus (ii) the gross book value of real estate assets, property and equipment of the Managed Operators, excluding depreciation, amortization, impairment charges or other non-cash reserves, plus (iii) the fair value of investments of Affiliates Insurance Company, the managed assets of RMR Real Estate Income Fund and the equity of Tremont Mortgage Trust (TRMT), plus (iv) the contributed capital of and outstanding principal of loans serviced for certain private clients. This calculation of total assets under management may include amounts in respect of the Managed Equity REITs that are higher than the calculations of assets under management used for purposes of calculating fees under the terms of the business management agreements, which are based, in part, upon the lesser of the historical cost of real estate assets or total market capitalization. For information on the calculation of assets under management of the Managed Equity REITs for purposes of the fee provisions of the business management agreements, see The RMR Group Inc.'s Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC. The RMR Group Inc.'s SEC filings are available at the SEC website: www.sec.gov.

Conference Call:

At 10:00 a.m. Eastern Time this morning, President and Chief Executive Officer, Adam Portnoy, and Chief Financial Officer and Treasurer, Matt Jordan, will host a conference call to discuss The RMR Group Inc.’s fiscal second quarter ended March 31, 2018 financial results.

The conference call telephone number is (877) 329-4297. Participants calling from outside the United States and Canada should dial (412) 317-5435. No pass code is necessary to access the call from either number. Participants should dial in about 15 minutes prior to the scheduled start of the call. A replay of the conference call will be available through 11:59 p.m. Eastern Time on Thursday, May 17, 2018. To access the replay, dial (412) 317-0088. The replay pass code is 10118600. The transcription, recording and retransmission in any way of The RMR Group Inc.'s fiscal second quarter ended March 31, 2018 financial results conference call are strictly prohibited without the prior written consent of The RMR Group Inc.

About The RMR Group Inc.

The RMR Group Inc. is a holding company, and substantially all of its business is conducted by its majority-owned subsidiary, The RMR Group LLC. The RMR Group LLC is an alternative asset management company that primarily provides management services to publicly traded REITs and real estate operating companies. As of March 31, 2018, The RMR Group LLC had approximately $30.0 billion of total assets under management, including more than 1,700 properties, and employed over 550 real estate professionals in more than 35 offices throughout the United States; and the companies managed by The RMR Group LLC collectively had approximately 52,000 employees. The RMR Group Inc. is headquartered in Newton, Massachusetts.

WARNING CONCERNING FORWARD LOOKING STATEMENTS

THIS PRESS RELEASE CONTAINS FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND OTHER SECURITIES LAWS. FORWARD LOOKING STATEMENTS CAN BE IDENTIFIED BY USE OF WORDS SUCH AS “OUTLOOK”, “BELIEVE”, “EXPECT”, “POTENTIAL”, “WILL”, “MAY”, “ESTIMATE”, “ANTICIPATE”, AND DERIVATIVES OR NEGATIVES OF SUCH WORDS OR SIMILAR WORDS. FORWARD LOOKING STATEMENTS IN THIS PRESS RELEASE ARE BASED UPON PRESENT BELIEFS OR EXPECTATIONS. HOWEVER, FORWARD LOOKING STATEMENTS AND THEIR IMPLICATIONS ARE NOT GUARANTEED TO OCCUR AND MAY NOT OCCUR FOR VARIOUS REASONS, INCLUDING SOME REASONS BEYOND THE RMR GROUP INC.'S CONTROL. FOR EXAMPLE:

  • MR. PORTNOY STATES THAT THE RMR GROUP INC., OR RMR, CONTINUED POSITIONING ITSELF FOR FURTHER GROWTH BY HELPING SELECT INCOME REIT, OR SIR, COMPLETE THE IPO OF ITS FIFTH MANAGED EQUITY REIT, INDUSTRIAL LOGISTICS PROPERTIES TRUST, OR ILPT. THIS MAY IMPLY THAT RMR WILL BE ABLE TO CONTINUE GROWING AND DIVERSIFYING ITS BUSINESS IN THE FUTURE. HOWEVER, THERE CAN BE NO ASSURANCE THAT RMR WILL BE ABLE TO GROW AND DIVERSIFY ITS BUSINESS IN THE FUTURE. IN FACT, RMR'S BUSINESS COULD BECOME SMALLER AND LESS DIVERSIFIED IN THE FUTURE. IN ADDITION, ANY FURTHER REVENUE STREAM DIVERSIFICATION THAT RMR MAY REALIZE MAY NOT IMPROVE ITS PROFITABILITY OR GROWTH.
  • MR. PORTNOY STATES THAT RMR HAS MORE THAN $250 MILLION OF CASH ON HAND AND NO DEBT, AND THAT RMR IS WELL POSITIONED TO CONSIDER A NUMBER OF NEW OPPORTUNITIES FOR GROWTH IN THE FUTURE. THIS MAY IMPLY THAT RMR WILL IDENTIFY AND SUCCESSFULLY IMPLEMENT AND EXECUTE ANY NEW OPPORTUNITIES THAT IT MAY DECIDE TO PURSUE. HOWEVER, RMR MAY NOT SUCCEED IN THIS REGARD.

THE INFORMATION CONTAINED IN THE RMR GROUP INC.’S FILINGS WITH THE SEC, INCLUDING UNDER THE CAPTION “RISK FACTORS” IN THE RMR GROUP INC.’S PERIODIC REPORTS, OR INCORPORATED THEREIN, IDENTIFIES IMPORTANT FACTORS THAT COULD CAUSE DIFFERENCES FROM THE FORWARD LOOKING STATEMENTS IN THIS PRESS RELEASE. THE RMR GROUP INC.’S FILINGS WITH THE SEC ARE AVAILABLE ON ITS WEBSITE AT WWW.SEC.GOV.

EXCEPT AS REQUIRED BY LAW, THE RMR GROUP INC. UNDERTAKES NO OBLIGATION TO UPDATE ANY FORWARD LOOKING STATEMENT, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.

 

The RMR Group Inc.
Condensed Consolidated Statements of Income
(amounts in thousands, except per share amounts)
(unaudited)

             
Three Months Ended March 31, Six Months Ended March 31,
2018     2017 2018     2017
Revenues
Management services (1) $ 46,559 $ 43,258 $ 95,129 $ 85,985
Incentive business management fees — — 155,881 52,407
Reimbursable payroll related and other costs 11,657 10,034 24,365 19,184
Advisory services 1,065   1,004   2,447   2,014  
Total revenues 59,281   54,296   277,822   159,590  
Expenses
Compensation and benefits 28,073 22,983 54,270 45,287
Equity based compensation 1,217 1,566 3,938 2,494
Separation costs 136   —   136   —  
Total compensation and benefits expense 29,426 24,549 58,344 47,781
General and administrative 7,024 6,453 13,730 12,294
Transaction and acquisition related costs — 693 142 693
Depreciation and amortization 372   528   752   1,083  
Total expenses 36,822   32,223   72,968   61,851  
Operating income 22,459 22,073 204,854 97,739
Interest and other income 1,076 450 1,860 657
Tax receivable agreement remeasurement —   —   24,710   —  
Income before income tax expense and equity in losses of investees 23,535 22,523 231,424 98,396
Income tax expense (3,681 ) (4,610 ) (52,024 ) (20,283 )
Equity in losses of investees (212 ) (165 ) (434 ) (165 )
Net income 19,642 17,748 178,966 77,948
Net income attributable to noncontrolling interest (11,286 ) (10,865 ) (99,490 ) (47,555 )
Net income attributable to The RMR Group Inc. 8,356   6,883   79,476   30,393  
 

Weighted average common shares outstanding - basic

16,069   16,025   16,064   16,025  
Weighted average common shares outstanding - diluted 16,105   16,042   16,095   16,036  
 
Net income attributable to The RMR Group Inc. per common share - basic $ 0.52   $ 0.43   $ 4.92   $ 1.89  
Net income attributable to The RMR Group Inc. per common share - diluted $ 0.52   $ 0.43   $ 4.91   $ 1.89  
(1)     Includes business management fees earned from the Managed Equity REITs based upon the lower of (i) the average historical cost of each REIT’s properties and (ii) each REIT’s average market capitalization. The following table presents for each Managed Equity REIT: a summary of its primary strategy and the lesser of the historical cost of its assets under management and its market capitalization as of March 31, 2018 and 2017, as applicable:
 
       
Lesser of Historical Cost of Assets
Under Management or Market Capitalization (a)
As of March 31,
REIT Primary Strategy 2018     2017
GOV Office properties leased to government and private sector tenants $ 3,584,960 $ 2,223,261
HPT Hotels and travel centers 8,300,521 8,909,423
ILPT Industrial and logistics properties 1,452,901 —
SIR Land and properties primarily leased to single tenants 3,437,363 4,693,229
SNH Senior living, medical office and life science properties 7,405,208   8,241,673
$ 24,180,953   $ 24,067,586
(a)     The basis on which our base business management fees are calculated for the three and six months ended March 31, 2018 and 2017 may differ from the basis at the end of the periods presented in the table above. As of March 31, 2018, the market capitalization was lower than the historical costs of assets under management for HPT and SNH; the historical costs of assets under management for HPT and SNH as of March 31, 2018, were $9,991,688 and $8,543,018, respectively. For GOV, ILPT and SIR, the historical costs of assets under management were lower than their market capitalization of $3,616,572, $1,672,952 and $3,462,202, respectively, calculated as of March 31, 2018.
 

 

The RMR Group Inc.
Calculation of Adjusted Net Income Attributable to The RMR Group Inc.
(dollars in thousands, except per share amounts)
(unaudited)

 
The RMR Group Inc. is providing the below information regarding certain individually significant items occurring or impacting its financial results for the three months ended March 31, 2018 and 2017 for supplemental informational purposes and to enhance understanding of The RMR Group Inc.'s condensed consolidated statements of income and to facilitate a comparison of The RMR Group Inc.'s current operating performance with its historical operating performance. This information should be considered in conjunction with net income, net income attributable to The RMR Group Inc. and operating income as presented in The RMR Group Inc.'s condensed consolidated statements of income.
 
          Three Months Ended March 31, 2018

Impact on Net Income
Attributable to The RMR
Group Inc.

   

Impact on Net Income
Attributable to The RMR
Group Inc. Per Common
Share - Diluted

Net income attributable to The RMR Group Inc. $ 8,356 $ 0.52
Share accelerations, net of noncontrolling interest (1) 284 0.02
Separation costs, net of noncontrolling interest (2) 50   —
Adjusted net income attributable to The RMR Group Inc. $ 8,690   $ 0.54
(1)     Includes $466 from the acceleration of Barry Portnoy's unvested common share awards and $316 from the acceleration of David Hegarty's unvested common share awards, adjusted to reflect amounts attributable to the noncontrolling interest and for tax at a rate of approximately 15.6%.
 
(2) Includes $136 of separation costs, adjusted to reflect amounts attributable to the noncontrolling interest and for tax at a rate of approximately 15.6%.
 
Three Months Ended March 31, 2017

Impact on Net Income
Attributable to The RMR
Group Inc.

   

Impact on Net Income
Attributable to The RMR
Group Inc. Per Common
Share - Diluted

Net income attributable to The RMR Group Inc. $ 6,883 $ 0.43
Transaction and acquisition related costs, net of noncontrolling interest (1) 216   0.01
Adjusted net income attributable to The RMR Group Inc. $ 7,099   $ 0.44
(1)     Includes $693 of transaction and acquisition related costs, adjusted to reflect amounts attributable to the noncontrolling interest and for tax at a rate of approximately 20.6%.
 
 

The RMR Group Inc.
Reconciliation of EBITDA and Adjusted EBITDA from Net Income
and Calculation of Adjusted EBITDA Margin (1)
(dollars in thousands)
(unaudited)

 

             
Three Months Ended March 31, Six Months Ended March 31,
2018     2017 2018     2017
Reconciliation of EBITDA and Adjusted EBITDA from net income:
Net income $ 19,642 $ 17,748 $ 178,966 $ 77,948
Plus: income tax expense 3,681 4,610 52,024 20,283
Plus: depreciation and amortization 372   528   752   1,083  
EBITDA 23,695 22,886 231,742 99,314
Plus: other asset amortization 2,354 2,354 4,708 4,708
Plus: operating expenses paid in The RMR Group Inc.'s common shares 1,901 737 2,467 875
Plus: separation costs 136 — 136 —
Plus: transaction and acquisition related costs — 693 142 693
Plus: business email compromise fraud costs — — 225 —
Less: tax receivable agreement remeasurement due to the Tax Cuts and Jobs Act — — (24,710 ) —
Less: incentive business management fees earned — — (155,881 ) (52,407 )
Certain other net adjustments 165   (95 ) (38 ) (503 )
Adjusted EBITDA $ 28,251   $ 26,575   $ 58,791   $ 52,680  
 

Calculation of Adjusted EBITDA Margin:

Contractual management and advisory fees (excluding any incentive business management fees)(2)

$ 49,978 $ 46,616 $ 102,284 $ 92,707
Adjusted EBITDA $ 28,251 $ 26,575 $ 58,791 $ 52,680
Adjusted EBITDA Margin 56.5 % 57.0 % 57.5 % 56.8 %
(1) EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin are non-GAAP financial measures calculated as presented in the tables above. The RMR Group Inc. considers EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin to be appropriate supplemental measures of its operating performance, along with net income, net income attributable to The RMR Group Inc. and operating income. The RMR Group Inc. believes that EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin provide useful information to investors because by excluding the effects of certain amounts, such as income tax expense, depreciation and amortization, other asset amortization, operating expenses paid in The RMR Group Inc.'s common shares, separation costs, transaction and acquisition related costs, business email compromise fraud costs, tax receivable agreement remeasurement due to the Tax Cuts and Jobs Act, incentive business management fees earned, and certain other net adjustments, EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin may facilitate a comparison of current operating performance with The RMR Group Inc.’s historical operating performance and with the performance of other asset management businesses. In addition, The RMR Group Inc. believes that providing Adjusted EBITDA Margin may help investors assess The RMR Group Inc.’s performance of its business by providing the margin that Adjusted EBITDA represents to its contractual management and advisory fees (excluding any incentive business management fees). EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin do not represent cash generated by operating activities in accordance with GAAP and should not be considered as alternatives to net income, net income attributable to The RMR Group Inc. or operating income as an indicator of The RMR Group Inc.’s financial performance or as a measure of The RMR Group Inc.’s liquidity. These measures should be considered in conjunction with net income, net income attributable to The RMR Group Inc. and operating income as presented in The RMR Group Inc.'s condensed consolidated statements of income. Also, other asset management businesses may calculate EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin differently than The RMR Group Inc. does.
 
(2) These contractual management fees are the base business management fees, property management fees and advisory fees The RMR Group Inc. earns pursuant to its management and investment advisory agreements with its client companies. These amounts are calculated pursuant to the contractual formulas and do not deduct other asset amortization of $2,354 for each of the three months ended March 31, 2018 and 2017 and $4,708 for each of the six months ended March 31, 2018 and 2017, required to be recognized as a reduction to management services revenues in accordance with GAAP and do not include the incentive business management fees of $155,881 and $52,407 that The RMR Group Inc. recognized under GAAP during the six months ended March 31, 2018 and 2017, respectively, which were earned for the calendar years 2018 and 2017, respectively.
 
 

The RMR Group Inc.
Condensed Consolidated Balance Sheets
(dollars in thousands, except per share amounts)
(unaudited)

 

         

 

   

 

March 31,
2018

September 30,
2017

Assets
Current assets:
Cash and cash equivalents $ 276,360 $ 108,640
Due from related parties 24,721 25,161
Prepaid and other current assets 8,428   7,092  
Total current assets 309,509 140,893
 
Total property and equipment, net 2,728 3,276
Due from related parties, net of current portion 6,502 7,551
Equity method investments 11,585 12,162
Goodwill 1,859 1,859
Intangible assets, net of amortization 418 462
Deferred tax asset 25,092 45,541
Other assets, net of amortization 167,268   171,975  
Total assets $ 524,961   $ 383,719  
 
Liabilities and Equity
Current liabilities:
Accounts payable and accrued expenses $ 50,212   $ 26,414  
Total current liabilities 50,212 26,414
Long term portion of deferred rent payable, net of current portion 1,117 1,028
Amounts due pursuant to tax receivable agreement, net of current portion 34,354 59,063
Employer compensation liability, net of current portion 6,502   7,551  
Total liabilities 92,185 94,056
 
Commitments and contingencies
 
Equity:
Class A common stock, $0.001 par value; 31,600,000 shares authorized; 15,174,463 shares issued and outstanding 15 15
Class B-1 common stock, $0.001 par value; 1,000,000 shares authorized, issued and outstanding 1 1
Class B-2 common stock, $0.001 par value; 15,000,000 shares authorized, issued and outstanding 15 15
Additional paid in capital 98,217 95,878
Retained earnings 166,312 86,836
Cumulative other comprehensive income 83 84
Cumulative common distributions (41,379 ) (33,298 )
Total shareholders’ equity 223,264 149,531
Noncontrolling interest 209,512   140,132  
Total equity 432,776   289,663  
Total liabilities and equity $ 524,961   $ 383,719  

Source: The RMR Group Inc.

The RMR Group Inc.

Timothy A. Bonang, 617-796-8230

Senior Vice President

RMR Group