RMR Group is an asset management company providing management services to four publicly traded REITs (HPT, SNH, SIR and GOV), three real estate operating companies and one mutual fund.

The company trades at a substantial and unwarranted discount principally due to technical trading factors, limited marketing and timing of its December 2015 spinoff/ IPO listing. Lack of sell-side coverage and the controversial controlling Portnoy family added to the disconnect. Given managements’ history of acting in a less than friendly manner to shareholders, our diligence efforts were focused on evaluating the corporate structure and how we could lose. Our work led us to conclude that the Portnoy’s incentives were sufficiently aligned with those of the other shareholders.

Incidentally, I personally led several IPOs for the RMR companies over a decade ago when I was an investment banking analyst—providing additional insights into the modus operandi of these operators. Despite the stock’s appreciation to date, we still believe that it offers an attractive upside.

Given the quality of its cash flows (20-year management contracts from a relatively diversified asset base), we value RMR at a 5% FCF yield or 12x EV/ EBITDA (excluding potential inventive fees) which equates to $40 per share versus its trading price of $31 at June 30.

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