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The RMR Group(RMR) - 2021 Q1 - Quarterly Report

Part I. Financial Information Item 1. Financial Statements (unaudited) The unaudited condensed consolidated financial statements for the quarter ended December 31, 2020, show a slight decrease in total revenues to $156.9 million, primarily due to lower management services fees Condensed Consolidated Balance Sheets As of December 31, 2020, total assets increased slightly to $698.4 million, driven by a $13.5 million rise in cash and cash equivalents to $383.2 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2020 | Sep 30, 2020 | | :--- | :--- | :--- | | Total Assets | $698,393 | $690,253 | | Cash and cash equivalents | $383,213 | $369,663 | | Due from related parties | $68,445 | $82,605 | | Total Liabilities | $150,276 | $149,351 | | Total Equity | $548,117 | $540,902 | Condensed Consolidated Statements of Income For the three months ended December 31, 2020, total revenues decreased by 1.8% to $156.9 million, leading to a 37.0% drop in operating income to $13.7 million, despite an $8.1 million unrealized gain on an equity investment Condensed Consolidated Statement of Income Highlights (in thousands, except per share amounts) | Metric | Q1 FY2021 (ended Dec 31, 2020) | Q1 FY2020 (ended Dec 31, 2019) | | :--- | :--- | :--- | | Total Revenues | $156,946 | $159,892 | | Management and advisory services revenues | $41,333 | $48,122 | | Operating Income | $13,732 | $21,780 | | Net Income | $19,753 | $21,624 | | Net Income Attributable to RMR Inc. | $8,897 | $9,449 | | Diluted EPS | $0.51 | $0.58 | - Separation costs increased significantly to $4.2 million from $260 thousand in the prior-year period, heavily impacting operating income11 - An unrealized gain of $8.1 million on an equity method investment (TA) accounted for under the fair value option bolstered pre-tax income, compared to a $1.4 million gain in the prior year11 Condensed Consolidated Statements of Cash Flows Net cash from operating activities for the quarter was $27.7 million, a decrease from $41.9 million in the prior-year period, primarily due to changes in working capital and lower net income Cash Flow Summary (in thousands) | Cash Flow Activity | Three Months Ended Dec 31, 2020 | Three Months Ended Dec 31, 2019 | | :--- | :--- | :--- | | Net cash from operating activities | $27,660 | $41,920 | | Net cash used in investing activities | ($560) | ($148) | | Net cash used in financing activities | ($13,550) | ($14,525) | | Increase in cash and cash equivalents | $13,550 | $27,247 | Notes to Unaudited Condensed Consolidated Financial Statements The notes detail the company's business structure, revenue sources, and related-party transactions, with over 99% of total revenues derived from related parties - RMR LLC provides management services to four publicly traded Managed Equity REITs (DHC, ILPT, OPI, SVC) and three Managed Operating Companies (Five Star, Sonesta, TA)2122 Management & Advisory Services Revenue Breakdown (Q1 FY2021, in thousands) | Revenue Source | Amount | | :--- | :--- | | Base Business Management Fees (Managed Equity REITs) | $21,555 | | Property Management Fees | $12,379 | | Fees from Managed Operating Companies | $5,638 | | Advisory Services (RMRM & TRMT) | $586 | - For the three months ended December 31, 2020, revenues from related parties totaled $156.7 million, representing over 99% of total revenues75 - The company recorded separation costs of $4.2 million, primarily related to retirement agreements with former executive and non-executive officers8284 - A quarterly dividend of $0.38 per share was declared and paid during the quarter, totaling $6.2 million88 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the significant impact of the COVID-19 pandemic on its Client Companies, leading to a decline in management services revenue, while maintaining a strong liquidity position Overview and Business Environment The company's business is closely tied to the U.S. real estate cycle and has been significantly impacted by the COVID-19 pandemic, particularly in hospitality, travel, and senior housing sectors - The COVID-19 pandemic has had a particularly severe impact on industries where Client Companies operate, including hospitality, travel, service retail, and senior housing107 - The majority of Managed Equity REITs are currently paying business management fees based on their total market capitalization, making revenues susceptible to share price volatility108 - Client Companies have granted temporary rent deferrals totaling $20.1 million to 239 tenants, which delays the recognition of property management fees for RMR108109 Results of Operations Comparing Q1 FY2021 to Q1 FY2020, management services revenue decreased by $6.5 million, while total compensation and benefits expense rose by $5.2 million, leading to a 37.0% fall in operating income Change in Operating Results (Q1 FY2021 vs Q1 FY2020, in thousands) | Line Item | $ Change | % Change | | :--- | :--- | :--- | | Management services revenue | $(6,528) | (13.8)% | | Total compensation and benefits expense | $5,175 | 16.2% | | Operating income | $(8,048) | (37.0)% | | Net income attributable to The RMR Group Inc. | $(552) | (5.8)% | - The decrease in management services revenue was primarily due to lower base business management fees from DHC ($1.5 million), OPI ($1.0 million), and SVC ($3.1 million) resulting from declines in their market capitalizations127 - Equity-based compensation expense increased by $2.0 million, mainly due to the acceleration of unvested shares for retiring officers and higher share prices of Client Companies126134 Liquidity and Capital Resources The company maintains a strong liquidity position with $383.2 million in cash and cash equivalents and no debt as of December 31, 2020, continuing to pay quarterly dividends - As of December 31, 2020, the company had $383.2 million in cash and cash equivalents and no outstanding debt142 - In January 2021, a quarterly dividend of $0.38 per share was declared, expected to total approximately $10.7 million in aggregate distributions to shareholders and RMR LLC members145 - The company has a liability of $29.95 million related to the Tax Receivable Agreement, of which $2.2 million is expected to be paid in fiscal year 202179150 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is not subject to significant direct market risk from interest rates, commodity prices, or credit risk, but its revenues are indirectly exposed to market conditions affecting Client Companies - The company does not invest in derivative instruments or issue debt securities, limiting direct market risk151 - Indirect market risk exists because if Client Companies are negatively impacted by market conditions, the company's revenues would likely decline151 Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2020, with no material changes to internal control over financial reporting during the quarter - Management concluded that the company's disclosure controls and procedures are effective as of December 31, 2020155 - There were no changes in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, internal controls156 Part II. Other Information Item 1A. Risk Factors The company states that there have been no material changes to the risk factors from those previously disclosed in its Annual Report on Form 10-K for the fiscal year ended September 30, 2020 - There have been no material changes to the risk factors from those provided in the 2020 Annual Report165 Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications by the principal executive and financial officers, and XBRL data files Signatures The report is signed by Matthew P. Jordan, Executive Vice President, Chief Financial Officer and Treasurer, on behalf of the registrant, dated February 2, 2021