RMR Group Inc.

RMR Group Inc. (Company) owns a 52.1% economic interest in RMR LLC (RMR), which provides services to various REITS and real-estate businesses. It services assets of $32bn across 2,100 properties. The non-controlling interest is held by ABP Trust – controlled by Adam D. Portnoy.

RMR provides management services to four publicly listed REITs – ILPT, OPI, SNH, and SVC – in the industrial, office, senior housing, and hospitality sectors. It also provides services to three real-estate related operating companies, one real estate securities mutual fund, and one firm specializing in commercial real estate finance.

It earns fees in the form of base management fees (ranging from 0.6% to 1.7% of asset values), incentive business management fees (for beating the REIT benchmarks), and advisory fees. These are incorporated in 20-year agreements with the REITs.

The company has generated average underlying pre-tax earnings, excluding incentive management fees, of $100-120m. Incentive management fees have averaged $75m/year for the last five years. The incentive fees are apparently lumpy and relatively unpredictable – it may be viewed as a bonus.

The company has no debt and a cash hoard of $386m – parked mostly in money market funds. The book value of the non-controlling interest (NCI), however, is $244m. For the rest of our analysis, we assume this cash more than offsets this NCI.

The equity sells for $512m or $30/share. Excluding incentive fees, and applying a 21% tax rate, underlying after-tax earnings would amount to $80-95m. This yields over 15% on the current market price without counting the excess cash. Adding in incentive Fees would increase earnings by at least 50%.

Management have distributed $0.35/share in dividends every quarter, yielding just under 5% on the current price, and maintained it even after Covid-19 broke out.

There are serious questions on the future of the office and hospitality sectors following Covid-19. The nature of work could undergo a significant change. The value of the serviced REITs may be impaired and earnings, particularly incentive fees, could deteriorate substantially.

The investment at current prices, however, appears reasonably priced at worst - and appears to contain that margin of safety a conservative investor would demand.