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 2020 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, 2020 ,RMR LLC managed over 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 successfully execute on new business ventures and investments we may pursue. Our business and the businesses of our Client Companies 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 also believe that these regional or special factors can be reinforced or sometimes overwhelmed by general economic factors; for example, increases or decreases inU.S. interest rates may cause a general decrease, or increase, in the value of securities of real estate businesses or in their value relative to other types of securities and investments, including those real estate businesses that use large amounts of debt and that attract equity investors by paying dividends such as REITs. 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 Client Companies. 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, as well as the general uncertainty surrounding the dangers and impact of the pandemic, continue to have 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 Client Companies operate, including, hospitality, travel, service retail, senior housing and rehabilitation services. We continue to closely monitor the impact of the COVID-19 pandemic and the resulting market disruptions on all aspects of our business and our Client Companies' businesses including: •the impact of volatility in our Managed Equity REITs' share prices and the related impacts to our business management fee revenues, as the majority of our Managed Equity REITs are currently paying business management fees on a total market capitalization basis; •tenants of our Client Companies' ability to withstand the current economic conditions and continue as going concerns, including possible adverse impacts to our future property management fee revenues due to declines in our Client Companies' tenant rental receipts; •our Client Companies' operations, liquidity and capital needs and resources, including possible reductions in our construction management fees as a result of the Managed Equity REITs reducing or delaying their capital spending in order to conserve capital; •our Client Companies' ability to comply with financial covenants under their debt agreements; •our Client Companies' ability to access debt and equity capital; and •possible government relief funding sources and other programs that may be available to us and our Client Companies. As a result of the COVID-19 pandemic and resulting market disruptions, some of our Client Companies' tenants have requested rent assistance. As ofJanuary 29, 2021 , our Client Companies have granted temporary rent assistance totaling$20,124 to 239 tenants. This assistance generally entails a deferral of rent, in most cases one month of rent, after which the 22 -------------------------------------------------------------------------------- Table of Contents deferred rent amounts become payable generally over a 12-month period. Our revenues have been and will continue to be impacted by these rent deferrals as we earn our property management fee revenue based on gross rents collected. As such, our property management fees related to these deferred amounts will be earned when our Client Companies' tenants pay these deferred amounts. While our Client Companies continue to face many 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, 2020 , we had$383,213 in cash and cash equivalents, no debt and for the three months endedDecember 31, 2020 , we generated cash from operations of$27,660 . Further, we believe that, because of the diversity of properties that our Client Companies own and operate, there may be opportunities for growth in select property types and locations as this pandemic ebbs. We, on behalf of our Client Companies and ourselves, attempt to take advantage of opportunities in the real estate market when they arise. For example: (i) onJanuary 17, 2018 , Select Income REIT, or SIR, launched an equity REIT, ILPT, that it formed to focus on the ownership and leasing of industrial and logistics properties throughout theU.S. ; (ii) onDecember 31, 2018 , Government Properties Income Trust and SIR merged to form OPI, a REIT with a broader investment strategy than its predecessor companies and ultimately a stronger combined entity positioned for future growth; (iii) onSeptember 20, 2019 , SVC acquired a net leased portfolio of 767 service oriented retail properties, providing SVC with a greater diversity in tenant base, property type and geography; and (iv) onMarch 31, 2020 , ILPT completed a$680 million joint venture with an Asian 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 . In addition, we balance our pursuit of growth of our and our Client Companies' businesses by executing, on behalf of our Client Companies, prudent capital recycling or business arrangement restructurings in an attempt to help our Client Companies prudently manage leverage and to reposition their portfolios and businesses when circumstances warrant such changes or when other more desirable opportunities are identified. There are extensive uncertainties surrounding the COVID-19 pandemic, and as a result, we are unable to determine what the ultimate impact will be on our Client Companies and our financial position. For further information and risks related to the COVID-19 pandemic on us and our business, see "COVID-19 Pandemic" in Item 1 and "Risk Factors" in Item 1A of our 2020 Annual Report. 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 one of our Managed Operating Companies or a third party. 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, 2020 and 2019, as applicable: Lesser of Historical Cost of Assets Under Management or Total Market Capitalization as of December 31, REIT Primary Strategy 2020 2019 Medical office and life science properties, senior DHC living communities and wellness centers$ 4,523,958 $ 5,543,586 ILPT Industrial and logistics properties 1,963,013 2,538,189 Office properties primarily leased to single tenants, OPI including the government 3,340,627 3,935,421 Hotels and net lease service and necessity-based retail SVC properties 8,158,795 10,130,161$ 17,986,393 $ 22,147,357 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 23 -------------------------------------------------------------------------------- Table of Contents 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, 2020 and 2019 may differ from the basis at the end of the periods presented in the table above. As ofDecember 31, 2020 , the market capitalization was lower than the historical costs of assets under management for DHC, OPI and SVC; the historical costs of assets under management for DHC, OPI and SVC as ofDecember 31, 2020 , were$8,405,068 ,$5,783,978 and$12,271,160 , respectively. For ILPT, the historical costs of assets under management were lower than its market capitalization of$2,391,860 as ofDecember 31, 2020 . The fee revenues we earned from the Managed Equity REITs for the three months endedDecember 31, 2020 and 2019 are set forth in the following tables: Three Months Ended December 31, 2020
Three Months Ended
Base Business Property Base Business Property
Management Management Management Management
REIT Revenues Revenues Total Revenues Revenues Total
DHC $ 5,165 $ 3,757 $ 8,922 $ 6,632 $ 3,323 $ 9,955
ILPT 3,099 1,775 4,874 3,392 2,182 5,574
OPI 3,895 5,372 9,267 4,890 5,273 10,163
SVC 9,396 821 10,217 12,477 1,196 13,673
$ 21,555 $ 11,725 $ 33,280 $ 27,391 $ 11,974 $ 39,365
Managed Operating Companies, ABP Trust , AIC, the Industrial Fund and the Open
End Fund
We provide business management services to the Managed Operating Companies. Five
Star 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 Sonesta's U.S. hotels 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 and
standalone restaurants. Generally, our fees earned from business management
services to the Managed Operating Companies are based on a percentage of certain
revenues.
In addition, we provide or provided management services to ABP Trust , AIC, the
Industrial Fund and the Open End Fund . The fees we earn from ABP Trust and the
Industrial Fund include management fees that are 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. Prior to January 1, 2020 , the business management fees
we earned from ABP Trust were based on a percentage of revenues. The fees we
earned from AIC were based on a percentage of total premiums paid for insurance
arranged by AIC. AIC's property insurance program expired on June 30, 2019 and
was not continued. AIC was dissolved on February 13, 2020 . Until its dissolution
on July 28, 2020 , the fees we earned from the Open End Fund included
administrative service fees based on a percentage of the Open End Fund's net
asset value, 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. In connection with the dissolution of
the Open End Fund , the Transaction Agreement, dated as of July 31, 2018 , between
ABP Trust and RMR LLC was terminated and all of the properties that ABP Trust
initially contributed to the Open End Fund were transferred back to ABP Trust ,
and those properties are now a part of our management agreements with ABP Trust .
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Our fee revenues from services to the Managed Operating Companies, ABP Trust ,
the Industrial Fund and the Open End Fund for the three months ended December
31, 2020 and 2019, are set forth in the following table:
Three Months Ended
2020 2019
ABP Trust $ 1,056$ 223 Industrial Fund 514 - Open End Fund - 840 1,570 1,063 Managed Operating Companies: Five Star 1,976 2,252 Sonesta 353 579 TA 3,309 3,295 5,638 6,126 $ 7,208$ 7,189 Other AgreementsTremont Advisors manages two publicly traded mortgage REITs: RMRM and TRMT. RMRM and TRMT focus primarily on originating and investing in first mortgage whole loans secured by middle market and transitional commercial real estate.Tremont Advisors is primarily compensated pursuant to its management agreements with RMRM (beginningJanuary 6, 2021 ) and TRMT based on a percentage of RMRM's and TRMT's equity, as defined in the applicable agreements.Tremont Advisors earned aggregate advisory services revenue from TRMT of$37 and$36 for the three months endedDecember 31, 2020 and 2019, respectively, in each case net of the fee waiver referenced above, as applicable.RMR Advisors , which previously provided advisory services for RMRM until it merged intoTremont Advisors onJanuary 6, 2021 , was compensated pursuant to its agreement with RMRM based on a percentage of RMRM's average daily managed assets, as defined in the agreement. The value of RMRM's assets, as defined by the investment advisory agreement, managed byRMR Advisors was$192,902 and$360,001 as ofDecember 31, 2020 and 2019, respectively. The advisory fees earned byRMR Advisors included in our revenue were$549 and$811 for the three months endedDecember 31, 2020 and 2019, respectively. OnJanuary 5, 2021 , RMRM received its requested order from theSEC deregistering RMRM as an investment company under the Investment Company Act of 1940. Effective as of that time, RMRM's investment advisory agreement withRMR Advisors was terminated and RMRM entered into a new management agreement withTremont Advisors . OnJanuary 6, 2021 ,RMR Advisors merged with and intoTremont Advisors withTremont Advisors as the surviving entity. The Tremont business acts as a transaction originator for non-investment advisory clients for negotiated fees. The Tremont business earned fees for such origination services of$259 and$680 for the three months endedDecember 31, 2020 and 2019, respectively, which amounts are included in management services revenue in our condensed consolidated statements of income. 25 -------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS (dollars in thousands) Three Months EndedDecember 31, 2020 , Compared to the Three Months EndedDecember 31, 2019 The following table presents the changes in our operating results for the three months endedDecember 31, 2020 compared to the three months endedDecember 31, 2019 :
Three Months Ended
2020 2019 $ Change % Change
Revenues:
Management services$ 40,747 $ 47,275 $ (6,528) (13.8)% Advisory services 586 847 (261) (30.8)% Total management and advisory services revenues 41,333 48,122 (6,789) (14.1)% Reimbursable compensation and benefits 13,225 12,847 378 2.9% Reimbursable client company equity based compensation 3,003 948 2,055 n/m Other client company reimbursable expenses 99,385 97,975 1,410 1.4% Total reimbursable costs 115,613 111,770 3,843 3.4% Total revenues 156,946 159,892 (2,946) (1.8)% Expenses: Compensation and benefits 29,494 30,197 (703) (2.3)% Equity based compensation 3,561 1,582 1,979 125.1% Separation costs 4,159 260 3,899 n/m Total compensation and benefits expense 37,214 32,039 5,175 16.2% General and administrative 6,260 7,046 (786) (11.2)% Other client company reimbursable expenses 99,385 97,975 1,410 1.4% Transaction and acquisition related costs 117 796 (679) (85.3) Depreciation and amortization 238 256 (18) (7.0)% Total expenses 143,214 138,112 5,102 3.7% Operating income 13,732 21,780 (8,048) (37.0)% Interest and other income 231 1,875 (1,644) (87.7)% Equity in earnings of investees 424 255 169 66.3% Unrealized gain on equity method investment accounted for under the fair value option 8,122 1,438 6,684 n/m Income before income tax expense 22,509 25,348 (2,839) (11.2)% Income tax expense (2,756) (3,724) 968 26.0% Net income 19,753 21,624 (1,871) (8.7)% Net income attributable to noncontrolling interest (10,856) (12,175) 1,319 10.8% Net income attributable to The RMR Group Inc.$ 8,897 $ 9,449 $ (552) (5.8)% n/m - not meaningful Management services revenue. For the three months endedDecember 31, 2020 and 2019, we earned base business and property management services revenue from the following sources: Three Months Ended December 31, 2020 2019 Change Managed Equity REITs$ 33,280 $ 39,365 $ (6,085) Managed Private Real Estate Capital 1,829 1,784 45 Managed Operating Companies 5,638 6,126 (488) Total$ 40,747 $ 47,275 $ (6,528) Management services revenue decreased$6,528 primarily due to (i) declines in the market capitalization of DHC, OPI and SVC resulting in decreases to base business management fees of$1,467 ,$995 and$3,081 , respectively, and (ii) declines in 26 -------------------------------------------------------------------------------- Table of Contents management fees earned from the Managed Operating Companies of$488 , primarily driven by COVID-19 pandemic related adverse impacts on FVE's and Sonesta's businesses. Advisory services revenue. Advisory services revenue for the three months endedDecember 31, 2020 and 2019 includes the feesRMR Advisors earned for managing RMRM and the feesTremont Advisors earns for managing TRMT. Advisory services revenues decreased by$261 primarily due to decreases in the average net asset value of RMRM's portfolio sinceApril 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 Client Companies. A significant portion of these compensation and benefits are charged or passed through to and were paid by tenants of our Client Companies. Reimbursable compensation and benefits increased$378 primarily due to annual increases in employee compensation and benefits for which we receive reimbursement. Reimbursable client company equity based compensation. Reimbursable client company equity based compensation includes grants of common shares from Client Companies directly to certain of our officers and employees in connection with the provision of management services to those companies. We record an equal offsetting amount as equity based compensation expense for the value of the grants of common shares from our Client Companies to certain of our officers and employees. Reimbursable client company equity based compensation increased$2,055 primarily due to the acceleration of unvested shares granted by our Client Companies to certain of our officers in connection with their retirements and increases in share based compensation granted to our employees by our Client Companies as a result of increases in their respective share prices. Other client company reimbursable expenses. For further information about these reimbursements, see Note 3, 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 decreased$703 primarily due to lower estimated bonus costs in the 2020 period primarily due to officer retirements and lower mortgage origination commission costs, partially offset by annual employee merit increases onOctober 1, 2020 . Equity based compensation. Equity based compensation consists of the value of vested shares granted to certain of our employees under our equity compensation plan and by our Client Companies. Equity based compensation increased$1,979 primarily due to the acceleration of unvested shares of our Client Companies owned by certain of our officers in connection with their retirements and increases in share based compensation granted to our employees by our Client Companies as a result of increases in their respective share prices. Separation costs. Separation costs consist of employment termination costs. For further information about these costs, see Note 7, 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 decreased$786 primarily due to decreases in travel expenses, temporary staffing and recruiting fees as a result of the ongoing COVID-19 pandemic. Depreciation and amortization. Depreciation and amortization expense was relatively unchanged from the prior period. Transaction and acquisition related costs. Transaction and acquisition related costs decreased$679 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. Interest and other income. Interest and other income decreased$1,644 primarily due to lower interest earned during the three months endedDecember 31, 2020 , as compared to the three months endedDecember 31, 2019 , as a result of lower interest rates during the 2020 period. Equity in earnings of investees. Equity in earnings of investees represents our proportionate share of earnings from our equity interest in TRMT. Unrealized gain on equity method investment accounted for under the fair value option. Unrealized gain on equity method investment accounted for under the fair value option represents the gain or loss on our investment in TA common shares. The 27 -------------------------------------------------------------------------------- Table of Contents gain for the three months endedDecember 31, 2020 , as compared to the three months endedDecember 31, 2019 , is a result of recent increases in TA's share price and additional shares of TA purchased subsequent toDecember 31, 2019 . For further information, see Note 4, 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 decrease in income tax expense of$968 is primarily attributable to lower taxable income for the three months endedDecember 31, 2020 , as compared to the same period in the prior year and a reduction in our income tax provision recorded during the three months endedDecember 31, 2020 of$520 related to final tax regulations released inDecember 2020 . For further information, see Note 5, 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) Total assets were$698,393 as ofDecember 31, 2020 , an increase of$8,140 fromSeptember 30, 2020 . Our current assets have historically been comprised predominantly of cash, cash equivalents and receivables for business management, property management and advisory services fees. As ofDecember 31, 2020 andSeptember 30, 2020 , we had cash and cash equivalents of$383,213 and$369,663 , respectively, of which$25,407 and$25,498 , respectively, was held byRMR Inc. , with the remainder being held atRMR 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 purchase. As ofDecember 31, 2020 andSeptember 30, 2020 ,$351,848 and$341,612 , respectively, of our cash and cash equivalents were invested in money market funds. Total liabilities were$150,276 as ofDecember 31, 2020 , an increase of$925 fromSeptember 30, 2020 . 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. As noted earlier in this Quarterly Report on Form 10-Q, the market disruptions resulting from the COVID-19 pandemic are having adverse impacts on our business management fees, property management fees and construction management fees generated from our Client Companies. The market turmoil created by COVID-19 may have lasting effects on our business and the businesses of our Client Companies; however, we cannot predict the extent and duration of the pandemic or the severity and duration of its economic impact on us and our Client Companies. 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 ofRMR 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 ofRMR LLC in connection with the quarterly dividends toRMR 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, within 30 days following each calendar year end. Historically, we have not experienced losses on collection of our fees and have not recorded any allowances for bad debts. During the three months endedDecember 31, 2020 , we paid cash distributions to the holders of our Class A Common Shares, Class B-1 Common Shares and to the other owner ofRMR LLC membership units in the aggregate amount of$10,730 . OnJanuary 14, 2021 , we declared a quarterly dividend on our Class A Common Shares and Class B-1 Common Shares to our shareholders of record as ofJanuary 25, 2021 in the amount of$0.38 per Class A Common Share and Class B-1 Common Share, or$6,230 . This dividend will be partially funded by a distribution fromRMR LLC to holders of its membership units in the amount of$0.30 per unit, or$9,419 , of which$4,919 will be distributed to us based on our aggregate ownership of 16,395,641 membership units ofRMR LLC and$4,500 will be distributed toABP Trust based on its ownership of 15,000,000 membership units ofRMR LLC . The remainder of this dividend will be funded with cash accumulated atRMR Inc. We expect the total dividend will amount to approximately$10,730 and we expect to pay this dividend on or aboutFebruary 18, 2021 . See Note 8, 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 endedDecember 31, 2020 , pursuant to theRMR LLC operating agreement,RMR LLC made required quarterly tax distributions to its holders of its membership units totaling$5,855 , of which$3,035 was distributed to us and$2,820 was distributed toABP Trust , based on each membership unit holder's then respective ownership percentage inRMR LLC . The$3,035 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$2,820 distributed toABP 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 7, 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. 28 -------------------------------------------------------------------------------- Table of Contents Cash Flows Our changes in cash flows for the three months endedDecember 31, 2020 compared to the three months endedDecember 31, 2019 were as follows: (i) net cash from operating activities decreased$14,260 from$41,920 in the 2019 period to$27,660 in the 2020 period; (ii) net cash used in investing activities increased$412 from$148 in the 2019 period to$560 in the 2020 period; and (iii) net cash used in financing activities decreased$975 from$14,525 in the 2019 period to$13,550 in the 2020 period. The decrease in cash from operating activities for the three months endedDecember 31, 2020 , compared to the same period in 2019 primarily reflects the net effect of declines in net income and changes in working capital. The increase in cash used in investing activities for the three months endedDecember 31, 2020 compared to the same period in 2019 was due to an increase in our purchases of property and equipment in the 2020 period. The decrease in cash used in financing activities for the three months endedDecember 31, 2020 compared to the same period in 2019 was primarily due to lower tax distributions based on current estimates for taxable income in this fiscal year. Off Balance Sheet Arrangements We have no off balance sheet arrangements. Tax Receivable Agreement We are party to a tax receivable agreement, or Tax Receivable Agreement, which provides for the payment byRMR Inc. toABP Trust of 85.0% of the amount of savings, if any, inU.S. federal, state and local income tax or franchise tax thatRMR Inc. realizes as a result of (a) the increases in tax basis attributable toRMR Inc.'s dealings withABP 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 7, 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 endedSeptember 30, 2019 . As ofDecember 31, 2020 , our condensed consolidated balance sheet reflects a liability related to the tax receivable agreement of$29,950 , of which we expect to pay$2,161 toABP Trust during the fourth quarter of fiscal year 2021. Market Risk and Credit Risk We have not invested in derivative instruments, borrowed through issuing debt securities or transacted a significant part of our businesses 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 Client Companies' 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 2020 Annual Report for the risks to us and our Client Companies 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 inU.S. bank accounts. SomeU.S. bank account balances exceed theFederal 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 withAdam D. Portnoy , one of our Managing Directors, as well as our Client Companies. Our other Managing Director and our executive officers have historical and continuing relationships with our Client Companies and several of our Client Companies have material historical and ongoing relationships with other Client Companies. For further information about these and other such relationships and related person transactions, please see Note 7, Related Person Transactions, to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which is incorporated herein by reference, the section captioned "Business" in Part I, Item 1 of our 2020 Annual Report, our other filings with theSEC and our definitive Proxy Statement for our 2021 Annual Meeting of Shareholders. In addition, for more information about these transactions and relationships and about the risks that may arise as a result of these and other related person transactions and relationships, please see elsewhere in our 2020 Annual Report, including "Warning Concerning Forward-Looking Statements" and Part I, Item 1A "Risk Factors." We may engage in 29 -------------------------------------------------------------------------------- Table of Contents additional transactions with related persons, including businesses to whichRMR 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 endedDecember 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 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 Client Companies; •substantially all of our revenues are derived from services to a limited number of Client Companies; •our revenues are highly variable; •changing market conditions that may adversely impact our Client Companies and our business with them; •potential terminations of our management agreements with our Client Companies; •our ability to expand our business depends upon the growth and performance of our Client Companies 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 Client Companies 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 Client Companies; •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; 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. 30 -------------------------------------------------------------------------------- Table of Contents For example: •We have a limited number of Client Companies. 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 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 Client Companies decline; •The fact that we earned significant incentive business management fees from certain Managed Equity REITs in previous years may imply that we will earn incentive business management fees in future years. The incentive business management fees which we may earn from our Managed Equity REITs are based upon total returns 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 our 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 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; •Our liquidity will be temporarily impacted by rent deferrals our Client Companies have granted to their tenants because our property management fee revenues are based on gross rents collected and we will not begin to earn fees related to these deferred amounts until the tenants begin to pay the deferred amounts to the Client Companies. However, these tenants may be unable to repay those amounts when due. Further, these and other tenants of our Client Companies may be unable to pay other rent amounts and they may default on those payments or our Client Companies may grant them relief, any of which may reduce or delay the fees we earn and negatively impact our liquidity; •We balance our pursuit of growth of our and our Client Companies' businesses by executing, on behalf of our Client Companies, prudent capital recycling or business arrangement restructurings in an attempt to help our Client Companies 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 Client Companies from experiencing increases in leverage, to adequately reposition our Client Companies' portfolios and businesses, or to enable our Client Companies to execute successfully on desirable opportunities; •Our belief that, because of the diversity of properties that our Client Companies own and operate, there should be opportunities for growth in select property types and locations as the COVID-19 pandemic ebbs may prove unfounded or we and our Client Companies may not succeed in executing on those 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 Client Companies 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 Client Companies 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 Client Companies; and •The market turmoil created by COVID-19 may have lasting effects on our business and the businesses of our Client Companies. 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 31 -------------------------------------------------------------------------------- Table of Contents 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 market turmoil created by the COVID-19 pandemic and its aftermath, including the current market conditions, may further lower 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 continue to 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 2020 Annual Report, including the "Risk Factors" section of our 2020 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. Part II. Other Information Item 1A. Risk Factors There have been no material changes to the risk factors from those we previously provided in our 2020 Annual Report. 32 --------------------------------------------------------------------------------
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Item 6. Exhibits
Exhibit
Number Description
3.1 Articles of Amendment and Restatement of the Registrant. (1)
3.2 Articles of Amendment, filed July 30, 2015. (1)
3.3 Articles of Amendment, filed September 11, 2015. (1)
3.4 Articles of Amendment, filed March 9, 2016. (2)
3.5 Fourth Amended and Restated Bylaws of the Registrant
adopted
4.1 Form of The RMR Group Inc. Share Certificate for Class A Common Stock. (4)
4.2 Registration Rights Agreement, dated as of June 5 , 2015, by and between the Registrant and
ABP Trust (formerly known as Reit Management and
10.1 Letter Agreement, dated as of October 9, 2020 , by
and among
Blackman. (5)
31.1 Rule 13a-14(a) Certification. (Filed herewith.)
31.2 Rule 13a-14(a) Certification. (Filed herewith.)
32.1 Section 1350 Certification. (Furnished herewith.)
101.INS XBRL Instance Document - the instance document doesnot appear in the Interactive Data File
because its XBRL tags are embedded within the Inline XBRL document.
101.SCH XBRL Taxonomy Extension Schema Document. (Filed herewith.)
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document. (Filed herewith.)
101.DEF XBRL Taxonomy Extension Definition Linkbase Document. (Filed herewith.)
101.LAB XBRL Taxonomy Extension Label Linkbase Document. (Filed herewith.)
101.PRE XBRL Taxonomy Extension Presentation LinkbaseDocument. (Filed herewith.)
104 Cover Page Interactive Data File. (formatted as InlineXBRL and contained in Exhibit 101.)
(1) Incorporated by reference to the Registrant's Registration Statement on Form S-1 (File No.
333-207423) filed with the U.S. Securities and
(2) Incorporated by reference to the Registrant's CurrentReport on Form 8-K (File No.
001-37616) filed with the U.S. Securities and Exchange
Commission on
(3) Incorporated by reference to the Registrant's CurrentReport on Form 8-K (File No.
001-37616) filed with the U.S. Securities and Exchange
Commission on
(4) Incorporated by reference to the Registrant's Amendment No. 1 to Registration Statement on
Form S-1 (File No. 333-207423) filed with the U.S. November 2, 2015 . (5) Incorporated by reference to the Registrant's Annual
Report on Form 10-K (File No.
001-37616) filed with the U.S. Securities and Exchange
Commission on
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