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overview
Typically, investment firms, hedge funds, and real estate funds manage their portfolio in-house. In contrast, some outsource portfolio management to outside asset management firms such as The RMR Group (NASDAQ: RMR). Headquartered in Newton, Massachusetts, RMR was founded in 1986. The Company is a leading US asset management firm focused on commercial real estate (CRE) and other related businesses. The company employs more than 37,000 people in 30 offices nationwide and has over $32.7 billion in assets under management. The company has more than three decades of experience in buying, operating, financing and selling CRE.
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Although RMR Group is not well known, it can generate high returns with steady dividends over the long term. It offers a unique opportunity to diversify any portfolio around real estate. Considering the factors discussed in this article, investors might consider this steadily growing company as a low-risk addition to their portfolio.
Long-term contracts pave the way for cash flows
RMR operates a simple and predictable business which is good for stability. The company manages commercial real estate for large institutions. RMR’s most significant advantage is that the company has built a strong position in commercial real estate management and has secured long-term (20-year) contracts with several large REITs, commercial real estate firms and closed-end funds. The long-term contracts help make the company’s operations predictable over the next ten years. This helps predict the baseline cash flow level for the next 20 years, even if no new customers are won in the worst case. These long-term contracts benefit the RMR Group and ensure the stability of the investors.
Getting large commercial properties to enter into long-term property management contracts is a major challenge. While any company can become a real estate manager, only the best with a long track record of stable performance can secure massive multi-billion dollar real estate management deals with major institutions. In this regard, RMR has been very successful, as their long-term evergreen contracts account for a massive portion of their revenue.
While RMR Group has some major competitors in commercial real estate management, such as Jones Lang LaSalle (NYSE: JLL) and CBRE Group (NYSE: CBRE), the relationship nature of their business gives investors the confidence that their clients are likely to remain and such ensure stable basic income over the years. Given these customer relationships coupled with long-term contracts, RMR has a level of stability not seen at most of its competitors when looking at their balance sheet history.
A diverse portfolio without direct commitment
As a real estate management company, RMR Group has no direct real estate exposure, which works to its advantage. The key asset on RMR’s balance sheet is cash, with the company having approximately $254 million in cash on hand and just $2.2 million in “real estate and equipment” as of Q3 2021.
RMR’s contracts with its clients include a property management fee and an incentive and asset management fee. The asset management fee is set at 0.5% to 0.7% of the acquisition cost of the asset, regardless of the market value of the asset. We can conclude that RMR’s only real estate exposure comes from the incentive fee, which accounts for about 0.5% of the managed REIT’s stock market performance. It should be noted that the incentive fee benefits the RMR as there is no disincentive for negative performance. With vaccine deployment picking up steam and the Omicron wave showing signs of slowing down, RMR is in a great position heading into 2022 as it seeks to capitalize on management and stimulus fees.
The RMR Group manages a strong portfolio of commercial real estate companies including RMR Mortgage Trust, Travel Centers of America, Tremont Mortgage Trust and Industrial Logistics Properties Trust (NASDAQ: ILPT), all of which have performed well despite the economic impact of the pandemic. This gave RMR a much-needed boost during the challenging years of the pandemic.
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It should be noted that properties are located throughout the United States, spread across 47 states and overseas in Canada and Puerto Rico. The Company provides management services for a wide range of commercial real estate investments, including senior living communities, healthcare facilities, office buildings, hotels, leasehold properties, on-demand retail centers and specialty government buildings. The diversity of the portfolio ensures that RMR Group enjoys a balance even when the impact on different real estate sectors differs.
Another significant benefit of investing in RMR Group is its financial position. The company has no debt, which is a rarity in the investment company space. In addition, the company has sufficient cash reserves to handle business operations and cover dividend payments. In combination with the diversity in the portfolio, this alone reduces the company’s risk considerably.
risk analysis
RMR has over $32.7 billion in real estate assets under management and its portfolio includes over 2,100 private and public properties across a variety of verticals. The company’s real estate portfolio is shown below:
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Typically, we would view this diversification to the company’s advantage. However, with the pandemic still ongoing, the particular diversification lies in several troubled sectors. As we can see, almost 76% of total assets under management are in hotels, office complexes, retail properties and senior living communities – four of the sectors hardest hit by the Covid-19 pandemic. Office complexes and hotels are the biggest Achilles heel in RMR’s portfolio as offices herald permanent home office options.
Because RMR’s revenue is performance-based, the company’s growth depends on the development of the properties it manages. Most of these properties — particularly offices and hotels — are struggling to get back on their feet in the wake of the pandemic. These commercial properties had some challenging quarters, which impacted RMR’s earnings. While hotels don’t make up a notable portion of the company’s portfolio, it’s definitely a risk to consider should the hospitality industry not fully recover in the near future.
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Unsurprisingly, RMR Group reported a drop in sales in 2021. The company reported net income of $30.8 million for the fourth quarter of 2021 ended September 30. Though this is a 6% increase sequentially and a 28% year-over-year increase, revenue is still down from pre-pandemic levels. However, it should be noted that revenue has risen steadily in recent quarters as the impact of the pandemic eases and economic activity picks up.
Conclusion
RMR is positioned with unique growth opportunities. Increasing customer revenue alongside customer fees can then increase overall revenue in this economy. The company recently announced its plans to divert excess funds into new ventures and thereby attract new customers.
The company’s biggest advantage is that it has no debt and is a growing wealth manager with minimal reliance on clients’ property valuations. In addition, RMR’s incentive fee collection is expected to increase and grow its revenue in 2022. Despite being a commercial real estate management firm, it doesn’t have the exposure to a flagging hospitality industry like many of its peers, which works to its advantage. For the above reasons, RMR is undervalued and offers investors an excellent opportunity to invest in a company that has the potential to generate strong risk-adjusted returns.
source https://www.bisayanews.com/2022/01/31/rmr-group-a-stable-way-to-diversify-through-real-estate-nasdaqrmr/
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