THE RMR GROUP INC. The following information should be read in conjunction with our condensed consolidated financial statements and accompanying notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our 2021 Annual Report. OVERVIEW (dollars in thousands)RMR Inc. is a holding company and substantially all of its business is conducted byRMR LLC .RMR Inc. has no employees, and the personnel and various services it requires to operate are provided byRMR LLC .RMR LLC manages a diverse portfolio of real estate and real estate related businesses. As ofDecember 31, 2021 ,RMR LLC managed approximately 2,100 properties in 47 states,Washington, D.C. ,Puerto Rico andCanada that are principally owned by the Managed Equity REITs. Business Environment and Outlook The continuation and growth of our business depends upon our ability to operate the Managed REITs so as to maintain, grow and increase the value of their businesses, to assist our Managed Operating Companies to grow their businesses and operate profitably and to expand successfully ourManaged Private Real Estate clients through the execution of new business ventures we may pursue. Our business and the businesses of our clients generally follow the business cycle of theU.S. real estate industry, but with certain property type and regional geographic variations. Typically, as the generalU.S. economy expands, commercial real estate occupancies increase and new real estate development occurs; new development frequently leads to increased real estate supply and reduced occupancies; and then the cycle repeats. These general trends can be impacted by property type characteristics or regional factors; for example, demographic factors such as the agingU.S. population, the growth of e-commerce retail sales or net in migration or out migration in different geographic regions can slow, accelerate, overwhelm or otherwise impact general cyclical trends. Because of such multiple factors, we believe it is often possible to grow real estate based businesses in selected property types or geographic areas despite general national trends. We try to take account of industry and general economic factors as well as specific property and regional geographic considerations when providing services to our clients. We, on behalf of our clients and ourselves, also attempt to take advantage of opportunities in the real estate market when they arise. For example: (i) onMarch 31, 2020 , ILPT completed a$680 million joint venture with an unrelated third party institutional investor, which was expanded to include a large, top tier global sovereign wealth fund, as a second outside investor to this joint venture onNovember 18, 2020 and has subsequently grown by new acquisitions of industrial properties; (ii) SVC transitioned over 200 hotels from other hotel operators to Sonesta, which onMarch 17, 2021 , completed its acquisition ofRLH Corporation , establishing it as one of the largest hotel companies in theU.S. and expanding its franchising capabilities; (iii) onSeptember 30, 2021 , SEVN and TRMT merged, resulting in a larger, more diversified mortgage REIT with an expanded capital base; and (iv) onNovember 5, 2021 , ILPT entered into a definitive agreement to acquire 126 new, Class A, single tenant, net leased, e-commerce focused industrial properties from Monmouth Real Estate Investment Corporation, or MNR, in an all-cash transaction valued at approximately$4.0 billion . In addition, we balance our pursuit of growth of our and our clients' businesses by executing, on behalf of our clients, prudent capital recycling or business arrangement restructurings in an attempt to help our clients prudently manage leverage and to reposition their portfolios and businesses when circumstances warrant such changes or when other more desirable opportunities are identified. The COVID-19 pandemic and the various governmental and market responses intended to contain and mitigate the spread of the virus and its detrimental public health impact have had a significant impact on the global economy, including theU.S. economy. In addition, the COVID-19 pandemic and related public health restrictions have had a particularly severe impact on certain industries in which our clients operate, including, hospitality, travel, service retail, senior housing and rehabilitation services. Many of the restrictions that had been imposed in theU.S. during the COVID-19 pandemic have since been lifted and commercial activity in theU.S. has generally increasingly returned to pre-pandemic practices and operations, although recent variants of the virus have caused increased infections and resulted in governments and businesses implementing or adopting certain requirements, including proof of vaccinations and mask wearing. There remains uncertainty as to the ultimate duration and severity of the COVID-19 pandemic, including risks that may arise from mutations or related strains of the virus, the ability to successfully administer vaccinations to a sufficient number of persons or attain immunity to the virus by natural or other means to achieve herd immunity, and the impact on theU.S. economy that may result from the inability of other countries to administer vaccinations to their citizens or their citizens' ability to otherwise achieve immunity to the virus. For further information and risks related to the COVID-19 pandemic on us and our business, see "Risk Factors" included in Part I, Item 1A of our 2021 Annual Report. 21 -------------------------------------------------------------------------------- Table of Contents While our clients continue to face challenges related to the COVID-19 pandemic, we continue to believe that our current financial resources enable us to withstand the COVID-19 pandemic. As ofDecember 31, 2021 , we had$181,887 in cash and cash equivalents, no debt and for the three months endedDecember 31, 2021 , we generated cash from operations of$34,968 . Managed Equity REITs The base business management fees we earn from the Managed Equity REITs are calculated monthly in accordance with the applicable business management agreement and are based on a percentage of the lower of (i) the average historical cost of each REIT's properties and (ii) each REIT's average market capitalization. The property management fees we earn from the Managed Equity REITs are principally based on a percentage of the gross rents collected at certain managed properties owned by the REITs, excluding rents or other revenues from hotels, travel centers, senior living properties and wellness centers, which are separately managed by our Managed Operating Companies or a third party. Also under the terms of the property management agreements, we receive construction supervision fees in connection with certain construction activities undertaken at the properties owned by the Managed Equity REITs based on a percentage of the cost of such construction. For further information regarding the fees we earn, see Note 2, Revenue Recognition, to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. The following table presents for each Managed Equity REIT a summary of its primary strategy and the lesser of the historical cost of its assets under management and its market capitalization as ofDecember 31, 2021 and 2020, as applicable: Lesser of Historical Cost of Assets Under Management or Total Market Capitalization as of December 31, REIT Primary Strategy 2021 2020 Medical office and life science properties, senior DHC living communities and wellness centers$ 4,457,630 $ 4,523,958 ILPT Industrial and logistics properties 1,897,426 1,963,013 Office properties primarily leased to single tenants, OPI including the government 3,813,203 3,340,627 Hotels and net lease service and necessity-based retail SVC properties 8,651,159 8,158,795$ 18,819,418 $ 17,986,393 A Managed Equity REIT's historical cost of assets under management includes the real estate it owns and its consolidated assets invested directly or indirectly in equity interests in or loans secured by real estate and personal property owned in connection with such real estate (including acquisition related costs which may be allocated to intangibles or are unallocated), all before reserves for depreciation, amortization, impairment charges or bad debts or other similar non-cash reserves. A Managed Equity REIT's average market capitalization includes the average value of the Managed Equity REIT's outstanding common equity value during the period, plus the daily weighted average of each of the aggregate liquidation preference of preferred shares and the principal amount of consolidated indebtedness during the period. The table above presents for each Managed Equity REIT, the lesser of the historical cost of its assets under management and its market capitalization as of the end of each period. The basis on which our base business management fees are calculated for the three months endedDecember 31, 2021 and 2020 may differ from the basis at the end of the periods presented in the table above. As ofDecember 31, 2021 , the market capitalization was lower than the historical cost of assets under management for DHC, OPI and SVC; the historical cost of assets under management for DHC, OPI and SVC as ofDecember 31, 2021 , were$7,364,743 ,$6,117,252 and$12,306,220 , respectively. For ILPT, the historical cost of assets under management were lower than its market capitalization of$2,470,395 as ofDecember 31, 2021 . 22 -------------------------------------------------------------------------------- Table of Contents The fee revenues we earned from the Managed Equity REITs for the three months endedDecember 31, 2021 and 2020 are set forth in the following tables: Three Months Ended December 31, 2021
Three Months Ended
Base Business Property Base Business Property
Management Management Management Management
REIT Revenues Revenues Total Revenues Revenues Total
DHC $ 5,866 $ 3,259 $ 9,125 $ 5,165 $ 3,757 $ 8,922
ILPT 2,768 1,747 4,515 3,099 1,775 4,874
OPI 4,574 5,990 10,564 3,895 5,372 9,267
SVC 10,446 1,224 11,670 9,396 821 10,217
$ 23,654 $ 12,220 $ 35,874 $ 21,555 $ 11,725 $ 33,280
Managed Operating Companies and Managed Private Real Estate Capital
We provide business management services to the Managed Operating Companies. ALR
operates senior living communities throughout the United States , many of which
are owned by and managed for DHC. Sonesta manages and franchises hotels, resorts
and cruise ships in the United States , Latin America , the Caribbean and the
Middle East ; many of the U.S. hotels that Sonesta operates are owned by SVC. TA
operates, leases and franchises travel centers along the U.S. interstate highway
system, many of which are owned by SVC, and standalone truck service facilities.
Generally, our fees earned from business management services to the Managed
Operating Companies are based on a percentage of certain revenues.
In addition, we also provide management services to the Managed Private Real
Estate Capital clients and earn fees based on a percentage of average invested
capital, as defined in the applicable agreements, property management fees based
on a percentage of rents collected from managed properties and construction
management fees based on a percentage of the cost of construction activities.
Our fee revenues from services to the Managed Operating Companies and the
Managed Private Real Estate Capital clients for the three months ended December
31, 2021 and 2020, are set forth in the following tables:
Three Months Ended December 31, 2021 Three Months Ended December 31, 2020
Base Business Property Base Business Property
Management Management Management Management
Revenues Revenues Total Revenues Revenues Total
ABP Trust $ 589 $ 507 $ 1,096 $ 583 $ 473 $ 1,056
Other private entities 812 492 1,304 333 181 514
ALR 1,145 - 1,145 1,976 - 1,976
Sonesta 1,814 - 1,814 353 - 353
TA 3,611 - 3,611 3,309 - 3,309
$ 7,971 $ 999 $ 8,970 $ 6,554 $ 654 $ 7,208
Advisory Business
Tremont Realty Capital provides management services to SEVN, a publicly traded
mortgage REIT that focuses on originating and investing in first mortgage whole
loans secured by middle market and transitional commercial real estate. Tremont
Realty Capital also provided management services to TRMT until September 30,
2021 , when it merged with and into SEVN. Tremont Realty Capital is primarily
compensated pursuant to its management agreements with SEVN (beginning January
6, 2021 ) and TRMT (until September 30, 2021 ) based on a percentage of SEVN's and
TRMT's equity, as defined in the applicable agreements.
RMR Advisors merged into Tremont Realty Capital on January 6, 2021 and
previously provided advisory services for SEVN (then RMRM), when it was a
registered investment company. Until January 5, 2021 , RMR Advisors was
compensated pursuant to its agreement with SEVN (then RMRM) at a percentage of
SEVN's average daily managed assets, as defined in the agreement.
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Tremont Realty Capital or RMR Advisors , as applicable, earned management and
advisory services revenue from SEVN and TRMT of $1,118 and $586 for the three
months ended December 31, 2021 and 2020, respectively.
The Tremont business acts as a transaction broker for non-investment advisory
clients for negotiated fees. The Tremont business earned fees for such brokerage
services of $53 and $259 for the three months ended December 31, 2021 and 2020,
respectively, which amounts are included in management services revenue in our
condensed consolidated statements of income.
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RESULTS OF OPERATIONS (dollars in thousands)
Three Months Ended December 31, 2021 , Compared to the Three Months Ended
December 31, 2020
The following table presents the changes in our operating results for the three
months ended December 31, 2021 compared to the three months ended December 31,
2020 :
Three Months Ended December 31,
2021 2020 $ Change % Change
Revenues:
Management services $ 44,897 $ 40,747 $ 4,150 10.2%
Advisory services 1,118 586 532 90.8%
Total management and advisory services
revenues 46,015 41,333 4,682 11.3%
Reimbursable compensation and benefits 14,397 13,225 1,172 8.9%
Reimbursable equity based compensation 1,598 3,003 (1,405) (46.8)%
Other reimbursable expenses 119,558 99,385 20,173 20.3%
Total reimbursable costs 135,553 115,613 19,940 17.2%
Total revenues 181,568 156,946 24,622 15.7%
Expenses:
Compensation and benefits 31,791 29,494 2,297 7.8%
Equity based compensation 2,219 3,561 (1,342) (37.7)%
Separation costs - 4,159 (4,159) n/m
Total compensation and benefits expense 34,010 37,214 (3,204) (8.6)%
General and administrative 7,671 6,260 1,411 22.5%
Other reimbursable expenses 119,558 99,385 20,173 20.3%
Transaction and acquisition related
costs - 117 (117) n/m
Depreciation and amortization 236 238 (2) (0.8)%
Total expenses 161,475 143,214 18,261 12.8%
Operating income 20,093 13,732 6,361 46.3%
Interest and other income 57 231 (174) (75.3)%
Equity in earnings of investees - 424 (424) n/m
Unrealized gain on equity method
investments accounted for under the fair
value option 1,196 8,122 (6,926) (85.3)%
Income before income tax expense 21,346 22,509 (1,163) (5.2)%
Income tax expense (3,054) (2,756) (298) (10.8)%
Net income 18,292 19,753 (1,461) (7.4)%
Net income attributable to
noncontrolling interest (10,250) (10,856) 606 5.6%
Net income attributable to The RMR Group
Inc. $ 8,042 $ 8,897 $ (855) (9.6)%
n/m - not meaningful
Management services revenue. Management services revenue increased $4,150
primarily due (i) increases in the average enterprise value of DHC, OPI and SVC
resulting in increases to base business management fees of $701 , $679 and
$1,050 , respectively, (ii) increases in construction supervision fees earned
from OPI and SVC aggregating $912 due in part to increased development activity,
and (iii) an increase in management fees earned from Sonesta of $1,461 primarily
resulting from an increase in the number of hotels that it manages and
franchises during the current period, partially offset by a decline in
management fees earned from ALR of $831 driven by COVID-19 pandemic related
adverse impacts to its business and the transition of senior living communities
to other operators during the second half of calendar 2021.
Advisory services revenue. Advisory services revenue increased $532 primarily
due to the expiration of the fee waiver that was previously provided to TRMT in
effect until December 31, 2020 .
Reimbursable compensation and benefits. Reimbursable compensation and benefits
include reimbursements, at cost, that arise primarily from services our
employees provide pursuant to our property management agreements at the
properties of our clients. A significant portion of these compensation and
benefits are charged or passed through to and were paid by tenants of
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our clients. Reimbursable compensation and benefits increased $1,172 primarily
due to annual increases in employee compensation and benefits for which we
receive reimbursement.
Reimbursable equity based compensation. Reimbursable equity based compensation
includes awards of common shares by our clients directly to certain of our
officers and employees in connection with the provision of management services
to those clients. We record an equal, offsetting amount as equity based
compensation expense for the value of these awards. Reimbursable equity based
compensation decreased $1,405 as a result of decreases in our clients'
respective share prices.
Other reimbursable expenses. For further information about these reimbursements,
see Note 2, Revenue Recognition, to our condensed consolidated financial
statements included in Part I, Item 1 of this Quarterly Report on Form 10Q.
Compensation and benefits. Compensation and benefits consist of employee
salaries and other employment related costs, including health insurance expenses
and contributions related to our employee retirement plan. Compensation and
benefits expense increased $2,297 primarily due to merit increases effective on
October 1, 2021 and estimated bonus cost increases for the current fiscal year.
Equity based compensation. Equity based compensation consists of the value of
vested shares awarded to certain of our employees under our equity compensation
plan and by our clients. Equity based compensation decreased $1,342 primarily
due to decreases in our clients' respective share prices.
Separation costs. Separation costs consist of employment termination costs. For
further information about these costs, see Note 6, Related Person Transactions,
to our condensed consolidated financial statements included in Part I, Item 1 of
this Quarterly Report on Form 10Q.
General and administrative. General and administrative expenses consist of
office related expenses, information technology related expenses, employee
training, travel, professional services expenses, director compensation and
other administrative expenses. General and administrative costs increased $1,411
primarily due to increased third-party costs related to our expanded role in
hotel and senior living construction oversight, in addition to increases in
technology infrastructure costs, travel and recruiting fees.
Transaction and acquisition related costs. Transaction and acquisition related
costs decreased $117 primarily due to costs incurred in the prior period in
connection with RMRM's conversion from a registered investment company to a
commercial mortgage REIT.
Depreciation and amortization. Depreciation and amortization expense was
relatively unchanged from the prior period.
Interest and other income. Interest and other income decreased $174 primarily
due to lower interest earned during the current period as a result of lower
interest rates and average cash balances invested, compared to the prior period.
Equity in earnings of investees. Equity in earnings of investees represents our
proportionate share of earnings from our equity interest in TRMT until September
30, 2021 , when it merged with and into SEVN. For further information, see Note
3, Equity Method Investments, to our condensed consolidated financial statements
included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Unrealized gain on equity method investments accounted for under the fair value
option. Unrealized gain on equity method investments accounted for under the
fair value option represents the gain or loss on our investments in SEVN and TA
common shares. For further information, see Note 3, Equity Method Investments,
to our condensed consolidated financial statements included in Part I, Item 1 of
this Quarterly Report on Form 10-Q.
Income tax expense. The increase in income tax expense of $298 is primarily
attributable to a one-time reduction in our income tax provision recorded during
the prior period of $520 related to final tax regulations released in December
2020 . For further information, see Note 4, Income Taxes, to our condensed
consolidated financial statements included in Part I, Item 1 of this Quarterly
Report on Form 10-Q.
LIQUIDITY AND CAPITAL RESOURCES (dollars in thousands, except per share amounts)
Our current assets have historically been comprised predominantly of cash, cash
equivalents and receivables for business management, property management and
advisory services fees. As of December 31, 2021 and September 30, 2021 , we had
cash and cash equivalents of $181,887 and $159,835 , respectively, of which
$22,685 and $23,338 , respectively, was held by RMR Inc. , with the remainder
being held at RMR LLC . Cash and cash equivalents include all short term, highly
liquid investments that are readily convertible to known amounts of cash and
have original maturities of three months or less from the date of
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purchase. As of December 31, 2021 and September 30, 2021 , $131,109 and $131,065 ,
respectively, of our cash and cash equivalents were invested in money market
funds. Our cash and cash equivalents leave us well positioned to pursue a range
of capital allocation strategies, with a focus on the growth of our private
capital business, in the next twelve months.
Our liquidity is highly dependent upon our receipt of fees from the businesses
that we manage. Historically, we have funded our working capital needs with cash
generated from our operating activities and we currently do not maintain any
credit facilities. We expect that our future working capital needs will relate
largely to our operating expenses, primarily consisting of employee compensation
and benefits costs, our obligation to make quarterly tax distributions to the
members of RMR LLC , our plan to make quarterly distributions on our Class A
Common Shares and Class B-1 Common Shares and our plan to pay quarterly
distributions to the members of RMR LLC in connection with the quarterly
dividends to RMR Inc. shareholders. Our management fees are typically payable to
us within 30 days of the end of each month or, in the case of annual incentive
business management fees earned from the Managed Equity REITs, within 30 days
following each calendar year end. Quarterly incentive fees earned from SEVN, if
any, are payable generally within 30 days following the end of the applicable
quarter. Historically, we have not experienced losses on collection of our fees
and have not recorded any allowances for bad debts.
On November 5, 2021 , ILPT entered into a definitive agreement to acquire all of
the outstanding shares of MNR for $21.00 per share in an all-cash transaction
valued at approximately $4.0 billion . This acquisition will add 126 new, Class
A, single tenant, net leased, e-commerce focused industrial properties to ILPT's
existing high-quality portfolio. ILPT expects to fund the transaction with a
combination of debt and joint venture equity investments. This acquisition is
subject to customary closing conditions, including MNR shareholder approval, and
is expected to close in the first half of calendar 2022. We expect this
acquisition to result in incremental increases in business management and
property management fees which will vary based on how ILPT ultimately funds the
transaction. There can be no assurance that the acquisition will close on the
current terms, anticipated timing or at all.
During the three months ended December 31, 2021 , we paid cash distributions to
the holders of our Class A Common Shares, Class B-1 Common Shares and to the
other owner of RMR LLC membership units in the aggregate amount of $10,764 . On
January 13, 2022 , we declared a quarterly dividend on our Class A Common Shares
and Class B-1 Common Shares to our shareholders of record as of January 24, 2022
in the amount of $0.38 per Class A Common Share and Class B-1 Common Share, or
$6,264 . This dividend will be partially funded by a distribution from RMR LLC to
holders of its membership units in the amount of $0.30 per unit, or $9,446 , of
which $4,946 will be distributed to us based on our aggregate ownership of
16,485,011 membership units of RMR LLC and $4,500 will be distributed to ABP
Trust based on its ownership of 15,000,000 membership units of RMR LLC . The
remainder of this dividend will be funded with cash accumulated at RMR Inc. We
expect the total dividend will amount to approximately $10,764 and we expect to
pay this dividend on or about February 17, 2022 . See Note 7, Shareholders'
Equity, to our condensed consolidated financial statements included in Part I,
Item 1 of this Quarterly Report on Form 10-Q for more information regarding
these distributions.
For the three months ended December 31, 2021 , pursuant to the RMR LLC operating
agreement, RMR LLC made required quarterly tax distributions to its holders of
its membership units totaling $4,158 , of which $2,179 was distributed to us and
$1,979 was distributed to ABP Trust , based on each membership unit holder's then
respective ownership percentage in RMR LLC . The $2,179 distributed to us was
eliminated in our condensed consolidated financial statements included in Part
1, Item 1 of this Quarterly Report on Form 10-Q, and the $1,979 distributed to
ABP Trust was recorded as a reduction of their noncontrolling interest. We
expect to use a portion of these funds distributed to us to pay our tax
liabilities and amounts due under the Tax Receivable Agreement described in Note
6, Related Person Transactions, to our condensed consolidated financial
statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. We
expect to use the remaining funds distributed to us to fund our long-term tax
liabilities and pay dividends.
Cash Flows
Our changes in cash flows for the three months ended December 31, 2021 compared
to the three months ended December 31, 2020 were as follows: (i) net cash from
operating activities increased $7,308 from $27,660 in the prior period to
$34,968 in the current period; (ii) net cash used in investing activities
decreased $395 from $560 in the prior period to $165 in the current period; and
(iii) net cash used in financing activities decreased $799 from $13,550 in the
prior period to $12,751 in the current period.
The increase in cash from operating activities for the three months ended
December 31, 2021 , compared to the prior year period primarily reflects
increases in net income, excluding the impacts of non-cash gains, and changes in
working capital. The decrease in cash used in investing activities for the three
months ended December 31, 2021 compared to the prior year period was due to a
decrease in purchases of property and equipment. Cash used in financing
activities for the three months ended December 31, 2021 decreased primarily due
to lower tax distributions based on current estimates for taxable income in this
fiscal year.
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As of December 31, 2021 , we had no off-balance sheet arrangements that have had
or that we expect would be reasonably likely to have a material effect on our
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources.
Tax Receivable Agreement
We are party to a Tax Receivable Agreement which provides for the payment by RMR
Inc. to ABP Trust of 85.0% of the amount of savings, if any, in U.S. federal,
state and local income tax or franchise tax that RMR Inc. realizes as a result
of (a) the increases in tax basis attributable to RMR Inc.'s dealings with ABP
Trust and (b) tax benefits related to imputed interest deemed to be paid by it
as a result of the Tax Receivable Agreement. See Note 6, Related Person
Transactions, to our condensed consolidated financial statements included in
Part I, Item 1 of this Quarterly Report on Form 10-Q and "Business-Our
Organizational Structure-Tax Receivable Agreement" in our Annual Report on Form
10-K for the fiscal year ended September 30, 2019 . As of December 31, 2021 , our
condensed consolidated balance sheet reflects a liability related to the Tax
Receivable Agreement of $27,792 , of which we expect to pay $2,215 to ABP Trust
during the fourth quarter of fiscal year 2022.
Market Risk and Credit Risk
We have not invested in derivative instruments, borrowed through issuing debt
securities or transacted in foreign currencies. As a result, we are not now
subject to significant direct market risk related to interest rate changes,
changes to the market standard for determining interest rates, commodity price
changes or credit risks; however, if any of these risks were to negatively
impact our clients' businesses or market capitalization, our revenues would
likely decline. To the extent we change our approach on the foregoing
activities, or engage in other activities, our market and credit risks could
change. See Part I, Item 1A "Risk Factors" of our 2021 Annual Report for the
risks to us and our clients related to the COVID-19 pandemic.
Risks Related to Cash and Short Term Investments
Our cash and cash equivalents include short term, highly liquid investments
readily convertible to known amounts of cash that have original maturities of
three months or less from the date of purchase. We invest a substantial amount
of our cash in money market funds. The majority of our cash is maintained in
U.S. bank accounts. Some U.S. bank account balances exceed the Federal Deposit
Insurance Corporation insurance limit. We believe our cash and short term
investments are not subject to any material interest rate risk, equity price
risk, credit risk or other market risk.
Related Person Transactions
We have relationships and historical and continuing transactions with Adam D.
Portnoy , one of our Managing Directors, as well as our clients. For further
information about these and other such relationships and related person
transactions, please see Note 6, Related Person Transactions, to our condensed
consolidated financial statements included in Part I, Item 1 of this Quarterly
Report on Form 10-Q, our 2021 Annual Report, our definitive Proxy Statement for
our 2022 Annual Meeting of Shareholders and our other filings with the SEC . In
addition, see the section captioned "Risk Factors" in our 2021 Annual Report for
a description of risks that may arise as a result of these and other related
person transactions and relationships. We may engage in additional transactions
with related persons, including businesses to which RMR LLC or its subsidiaries
provide management services.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Quantitative and Qualitative disclosures about market risk are set forth above
in "Item 2-Management's Discussion and Analysis of Financial Condition and
Results of Operation-Market Risk and Credit Risk."
Item 4. Controls and Procedures
As of the end of the period covered by this report, our management carried out
an evaluation, under the supervision and with the participation of our President
and Chief Executive Officer and our Executive Vice President, Chief Financial
Officer and Treasurer, of the effectiveness of our disclosure controls and
procedures pursuant to Rules 13a-15 and 15d-15 under the Securities Exchange Act
of 1934, as amended. Based upon that evaluation, our President and Chief
Executive Officer and our Executive Vice President, Chief Financial Officer and
Treasurer concluded that our disclosure controls and procedures are effective.
There have been no changes in our internal control over financial reporting
during the quarter ended December 31, 2021 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
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WARNING CONCERNING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 and other
securities laws. Our forward-looking statements reflect our current views,
intents and expectations with respect to, among other things, our operations and
financial performance. Our forward-looking statements can be identified by the
use of words such as "outlook," "believe," "expect," "potential," "will," "may,"
"estimate," "anticipate" and derivatives or negatives of such words or similar
words. Such forward-looking statements are subject to various risks and
uncertainties. Accordingly, there are or will be factors that could cause actual
outcomes or results to differ materially from those stated or implied in these
statements. We believe these factors include, but are not limited to the
following:
•the duration and severity of the negative economic impact of COVID-19 and the
resulting disruptions on us and our clients;
•substantially all of our revenues are derived from services to a limited number
of clients;
•our revenues may be highly variable;
•changing market conditions, practices and trends may adversely impact our
clients and the fees we receive from them;
•potential terminations of our management agreements with our clients;
•our ability to expand our business depends upon the growth and performance of
our clients and our ability to obtain or create new clients for our business and
is often dependent upon circumstances beyond our control;
•the ability of our clients to operate their businesses profitably and to grow
and increase their market capitalizations and total shareholder returns;
•litigation risks;
•risks related to acquisitions, dispositions and other activities by or among
our clients, such as ILPT's recent agreement to acquire MNR including, among
other things, whether such transaction will close on the current terms,
anticipated timing or at all, or that there will be any incremental increases in
our business management and property management fees as a result of this
transaction;
•allegations, even if untrue, of any conflicts of interest arising from our
management activities;
•our ability to retain the services of our managing directors and other key
personnel;
•risks related to supply chain constraints, commodity pricing and other
inflation, including inflation impacting wages and employee benefits; and
•risks associated with and costs of compliance with laws and regulations,
including securities regulations, exchange listing standards and other laws and
regulations affecting public companies.
For example:
•We have a limited number of clients. We have long term contracts with our
Managed Equity REITs; however, the other contracts under which we earn our
revenues are for shorter terms, and the long term contracts with our Managed
Equity REITs and our other contracts with other clients may be terminated in
certain circumstances. The termination or loss of any of our management
contracts may have a material adverse impact upon our revenues, profits, cash
flows and business reputation;
•Our base business management fees earned from our Managed Equity REITs are
calculated monthly based upon the lower of each REIT's cost of its applicable
assets and such REIT's market capitalization. Our business management fees
earned from our Managed Operating Companies are calculated based upon certain
revenues from each operator's business. Accordingly, our future revenues, income
and cash flows will decline if the business activities, assets or market
capitalizations of our clients decline;
•The fact that we have earned significant incentive business management fees
from certain of our Managed Equity REITs in previous years may imply that we
will earn incentive business management fees in future years. The incentive
business management fees that we may earn from our Managed Equity REITs are
based upon total returns
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realized by the REITs' shareholders compared to the total shareholders return of
certain identified indices. We have only limited control over the total returns
realized by shareholders of the Managed Equity REITs and effectively no control
over indexed total returns. There can be no assurance that we will earn any
incentive business management fees from our Managed Equity REITs in the future;
•We currently intend to pay a regular quarterly dividend of $0.38 per Class A
Common Share and Class B-1 Common Share. Our dividends are declared and paid at
the discretion of our board of directors. Our board may consider many factors
when deciding whether to declare and pay dividends, including our current and
projected cash flows and alternative uses for any available cash. Our board may
decide to lower or even eliminate our dividends. There can be no assurance that
we will continue to pay any regular dividends or with regard to the amount of
dividends we may pay;
•We balance our pursuit of growth of our and our clients' businesses by
executing, on behalf of our clients, prudent capital recycling or business
arrangement restructurings in an attempt to help our clients prudently manage
leverage and to reposition their portfolios and businesses when circumstances
warrant such changes or when other more desirable opportunities are identified.
However, these efforts may not be successful and, even if they are successful,
they may not be sufficient to prevent our clients from experiencing increases in
leverage, to adequately reposition our clients' portfolios and businesses, or to
enable our clients to execute successfully on desirable opportunities;
•Our attempts to take into account industry and economic factors as well as
specific property and regional geographic considerations when providing services
to our clients may not be successful;
•We have undertaken new initiatives and are considering other initiatives to
grow our business and any actions we may take to grow our business may not be
successful or we may elect to abandon pursuing some or all of those initiatives
in order to pursue other initiatives or for other reasons. In addition, any
investments or repositioning of the properties we or our clients may make or
pursue may not increase the value of the applicable properties, offset the
decline in value those properties may otherwise experience, or increase the
market capitalization or total shareholder returns of our clients;
•We state that our cash and cash equivalents balance leaves us well positioned
to pursue a range of capital allocation strategies, with a focus on the growth
of our private capital business, in the next 12 months. This statement may imply
that we will successfully identify and execute one or more capital allocation
strategies in the next 12 months and that any capital allocation strategy we may
pursue will be successful and benefit us and our shareholders. However,
identifying and executing on capital allocation strategies are subject to
various uncertainties and risks and may take an extended period to realize any
resulting benefit to our business. In addition, we may elect to not pursue a
capital allocation strategy or abandon any such strategy we may pursue; and
•The COVID-19 pandemic may have lasting affects on our business and the
businesses of our clients. Our business is dependent on revenue generated from
sectors that have been and may continue to be adversely impacted by COVID-19 to
a greater degree than other sectors. Further, our revenues from other sectors
may become increasingly adversely impacted by COVID-19. Accordingly, there can
be no assurances that we will be able to successfully manage through the
COVID-19 pandemic, resulting market disruptions and their aftermath, or that we
will be able to take advantage of any resulting opportunities.
There are or will be additional important factors that could cause business
outcomes or financial results to differ materially from those stated or implied
in our forward-looking statements. For example, the COVID-19 pandemic and its
aftermath may reduce or limit any growth in the market value of our Managed
Equity REITs or cause their rent receipts or construction activities to decline
or cause the revenues of our Managed Operating Companies to significantly
decline and, as a result, our revenues and cash flows may be adversely impacted.
We have based our forward-looking statements on our current expectations about
future events that we believe may affect our business, financial condition and
results of operations. Because forward-looking statements are inherently subject
to risks and uncertainties, some of which cannot be predicted or quantified, our
forward-looking statements should not be relied on as predictions of future
events. The events and circumstances reflected in our forward-looking statements
may not be achieved or occur and actual results could differ materially from
those projected or implied in our forward-looking statements. The matters
discussed in this warning should not be construed as exhaustive and should be
read in conjunction with the other cautionary statements that are included in
this Quarterly Report on Form 10-Q and in our 2021 Annual Report, including the
"Risk Factors" section of our 2021 Annual Report. We undertake no obligation to
update any forward-looking statement, whether as a result of new information,
future developments or otherwise, except as required by law.
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