Many investment firms, REITs (real estate investment trusts), and hedge funds manage their portfolio of real estate or real estate debt in house. But some outsource this facet of its business to a third-party asset management company, like RMR Group (NASDAQ: RMR).
At first glance, this seems like it could be an appealing and unique way to diversify a portfolio into real estate, but there are factors to consider before investing. Continue reading to learn more about RMR Group and see if it's a buy today.
The case against RMR Group
RMR Group manages over $32.4 billion worth of real estate assets for its clients, which include public and private companies in a wide range of industries. Normally this diversification would be a benefit, but in this case, it's tough timing. Of its assets under management, 83% are in senior housing, retail, office, and hotel, four of the sectors hardest hit by the coronavirus pandemic.
Since RMR Group earns revenues on a performance basis, its growth relies on the growth of the companies under management -- many of which are struggling. REITs including Diversified Healthcare Trust (healthcare and senior housing), Service Properties Trust (hotel and retail), Office Properties Income Trust (office), and operating company Five Star Senior Living (senior housing), although improving, have all had a tough few quarters.
This unsurprisingly resulted in a decrease in revenues and adjusted EBITDA from RMR Group in 2020 and 2021. Q3 2021 earnings showed a 24% increase in net income year over year and a 25% increase in adjusted EBITDA year over year. While this is an improvement, revenues are still down 1.3% for the nine months ended 2021 when compared to 2020. This isn't a huge loss, but as the Delta variant makes its debut in the U.S., there is concern for more pandemic-related challenges ahead.
The case for RMR Group
On the flip side, the company also manages the portfolio of Travel Centers of America, Industrial Logistics Property Trust, RMR Mortgage Trust, and Tremont Mortgage Trust, all of which have done surprisingly well over the past year despite pandemic impacts and certainly helped give the company a much-needed boost during a challenging year.
The strongest case for RMR Group is its financial position. The company holds no debt, a rarity in the world of investment companies, and has $400 million in cash and cash equivalents on hand to help it cover dividend payouts and business operations.
Is RMR a buy?
The challenge facing RMR Group today and in the near future is the opportunity to grow. This can be accomplished by increasing its fees from its clients and growing each client's revenues, both of which can be tricky in a down economy. The company has stated its plan to use excess funds to seed new ventures, growing its portfolio through new clients, a strong move in the current climate.
Share prices have fallen steadily over the past three years and are currently hovering around 14% less than pre-pandemic highs. Dividend payouts have been stable for the past three years, providing investors with a consistent return despite ups and downs of the marketplace.
Personally, I think RMR Group has a bright future. I feel the current pressure the company is seeing is temporary. I believe the company has the opportunity for expansion and recovery for its clients, which could lead to a nice boost for investors over the next few years, but there is definitely an element of risk here, meaning this is best for patient investors with a higher risk tolerance.