2023-06-05 04:34:36 ET
Summary
- RMR Group is undervalued with a 7.08% annualized forward dividend yield, the highest since the company went public in December 2015.
- The company has faced criticism due to high management fees and perceived non-shareholder-friendly management actions.
- Despite the controversy, RMR's shares represent some value here and come with a potential tailwind from the recovery of its REITs.
RMR Group ( RMR ) is undervalued. The Newton, Massachusetts-based alternative asset manager last declared a quarterly cash dividend of $0.40 per share , in line with its prior payout and for a 7.08% annualized forward yield. This yield has been pushed up to its highest level since RMR when public in December 2015. The reasons for the decline are multifaceted, with a 24% fall in the commons over the last year and a broader stock market for REITs characterized by disruption and chaos as the Fed funds rate was hiked to new highs. RMR manages four publicly listed equity REITs; Diversified Healthcare Trust ( DHC ), Industrial Logistics Properties ( ILPT ), Office Properties Income Trust ( OPI ), and Service Properties Trust ( SVC ). Office Properties and Diversified Healthcare are set to merge but the transaction is currently facing some opposition and is not entirely certain. The company also manages Seven Hills Realty Trust ( SEVN ), a mortgage REIT, and used to manage TravelCenters of America until it was acquired by BP ( BP ) in a $1.3 billion deal .
Critically, RMR has become one of the most unpopular external REIT managers due to the aggregate of high base management fees, intense value destruction, and some perceived non-shareholder-friendly management actions. For example, the proposed buyout of Diversified Healthcare by Office Properties likely materially undervalues the senior housing market owner according to one of its major investors opposed to the deal. Diversified Healthcare is currently trading at $1.69, around 16 cents on the dollar and the proposed all-share acquisition was initially announced at an implied value of $1.70 per share.
Total price performance across most of its REITs has also been poor with Industrial Logistics down 90% over the last 3 years and Office Properties down 72%. Whilst both of these REITs have seen their average diluted shares outstanding stay relatively constant over the same time frame, Industrial Logistics has seen its dividend slashed by 97% over the last year with shareholders of Office Properties recently seeing their quarterly dividend cut by 55% .
The Economics Of RMR's Asset Management
The RMR Group Fiscal 2023 Second Quarter Form 10-Q
RMR's fiscal 2023 second-quarter earnings which ended on March 31, 2023, saw revenue come in at $208.43 million , an increase of 5.5% over its year-ago comp but a miss of $31.79 million on consensus estimates. The company charges a range of fees to its managed assets from base business management and advisory fees to reimbursable compensation and benefits. Assets under management as of the end of the second quarter were $37.3 billion, broadly unchanged sequentially from $37.4 billion in the prior first quarter.
The RMR Group Fiscal 2023 Second Quarter Form 10-Q
RMR also manages several private entities, these generated total revenue of $24.5 million during the second quarter, up $1.02 million versus the year-ago comp and forming 11.75% of total revenue. The asset manager has a great business model with large base fees charged to REITs regardless of how torrid their total return performance has been. Roughly 75% of RMR service revenues are generated from 20-year evergreen contracts with fixed base management fees. There is of course an upside to incentive fee revenue when these share prices recover as it would allow RMR to issue more shares to buy more properties and increase the gross assets that its fees are chargeable against.
Highly Profitable And A Record High Yield
RMR generated a net income of $18.47 million during the quarter, a growth of 189% over the year-ago comp and sequentially from $6.3 million in the first quarter. However, these gains were driven by unrealized non-cash gains on investments. RMR realized an adjusted EBITDA of $25.3 million during the second quarter on the back of an adjusted EBITDA Margin of 50%. As RMR held cash and equivalents of $198 million as of the end of the quarter and no debt, it saw an interest income of $2.23 million during the quarter, up from $66,000 in the year-ago comp.
RMR owns 621,853 shares, around 4.1%, of TravelCenters of America whose buyout by BP at $86 per share should see RMR realize $53.5 million in gross proceeds. The acquisition closed post-period end in May and should boost the company's fiscal 2023 third-quarter cash position. RMR generated an adjusted net income of $8.1 million, around $0.49 per share during the second quarter enough to support the quarterly dividend with a 81.6% payout ratio. That the company has been able to maintain its dividend even against collapsing equity values for its managed REITs underlies the strength of the business model. Shareholders of the REITs which recently saw dividend cuts would be best placed to swap their positions for the external manager. The 7% yield is the highest it has ever been and is set against a forward non-GAAP price-to-earnings ratio of 11.62x , around 62% lower than its peer group median. Whilst the external manager is controversial with investors, I think shares represent some value here and would rate it as a buy with a potential recovery of its REITs set to form another possible tailwind.
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The RMR Group: Undervalued With A 7% Yield