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 ofJune 30, 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 successfully execute on new business ventures and investments 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 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 clients. 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 inthe United States during the COVID-19 pandemic have since been lifted and commercial activity inthe United States has increasingly returned to pre-pandemic practices and operations. 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. 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 ofJune 30, 2021 , we had$397,801 in cash and cash equivalents, no debt and for the nine months endedJune 30, 2021 , we generated cash from operations of$72,371 . Further, we believe that, because of the diversity of properties that our clients own and operate, there may be opportunities for growth in select property types and locations as this pandemic ebbs. We, on behalf of our clients 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 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. 26 -------------------------------------------------------------------------------- Table of Contents 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 clients 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 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 managed properties, including senior living communities owned by DHC and managed by Five Star and hotels owned by SVC and managed by Sonesta, based on a percentage of the cost of such construction. For further information regarding the fees that we earn, see Note 3, 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 ofJune 30, 2021 and 2020, as applicable: Lesser of Historical Cost of Assets Under Management or Total Market Capitalization as of June 30, REIT Primary Strategy 2021 2020 Medical office and life science properties, senior DHC living communities and wellness centers$ 5,337,144 $ 4,596,718 ILPT Industrial and logistics properties 1,997,990 2,612,328 Office properties primarily leased to single tenants, OPI including the government 3,962,573 3,474,277 Hotels and net lease service and necessity-based retail SVC properties 9,277,211 7,400,127$ 20,574,918 $ 18,083,450 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 and nine months endedJune 30, 2021 and 2020 may differ from the basis at the end of the periods presented in the table above. As ofJune 30, 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 ofJune 30, 2021 , were$8,414,221 ,$6,151,466 and$12,287,857 , respectively. For ILPT, the historical cost of assets under management were lower than its market capitalization of$2,601,308 as ofJune 30, 2021 . 27 -------------------------------------------------------------------------------- Table of Contents The fee revenues we earned from the Managed Equity REITs for the three and nine months endedJune 30, 2021 and 2020 are set forth in the following tables: Three Months Ended June 30, 2021
Three Months Ended
Base Business Property Base Business Property
Management Management Management Management
REIT Revenues Revenues Total Revenues Revenues Total
DHC $ 6,478 $ 3,221 $ 9,699 $ 4,995 $ 3,440 $ 8,435
ILPT 2,652 1,591 4,243 3,353 1,859 5,212
OPI 4,417 4,903 9,320 4,080 5,077 9,157
SVC 10,924 1,076 12,000 8,582 731 9,313
$ 24,471 $ 10,791 $ 35,262 $ 21,010 $ 11,107 $ 32,117
Nine Months Ended June 30, 2021
Nine Months Ended
Base Business Property Base Business Property
Management Management Management Management
REIT Revenues Revenues Total Revenues Revenues Total
DHC $ 17,110 $ 10,163 $ 27,273 $ 17,550 $ 9,985 $ 27,535
ILPT 8,330 4,960 13,290 10,127 5,964 16,091
OPI 12,361 14,854 27,215 13,447 15,353 28,800
SVC 30,798 2,700 33,498 31,804 2,959 34,763
$ 68,599 $ 32,677 $ 101,276 $ 72,928 $ 34,261 $ 107,189
As of June 30, 2021 , we estimate that we would have earned an incentive business
management fee from OPI of $22,222 for calendar 2021 if June 30, 2021 had been
the end of the next measurement period. However, incentive business management
fees from the Managed Equity REITs are contingent performance based fees which
are only recognized when earned at the end of the respective measurement period.
There can be no assurance that we will in fact earn the estimated amount of, or
any, incentive business management fees for calendar 2021, from OPI, or any
Managed Equity REIT. Accordingly, this estimated amount of incentive business
management fees for calendar 2021 which would have been earned if the
measurement period ended on June 30, 2021 , is not included in the fees listed in
the tables above or in our condensed consolidated financial statements included
in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Managed Operating Companies and Managed Private Real Estate Capital
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.
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.
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Our fee revenues from services to the Managed Operating Companies and the
Managed Private Real Estate Capital clients for the three and nine months ended
June 30, 2021 and 2020, are set forth in the following tables:
Three Months Ended June 30, 2021 Three Months Ended June 30, 2020
Base Business Property Base Business Property
Management Management Management Management
Revenues Revenues Total Revenues Revenues Total
ABP Trust $ 580 $ 493 $ 1,073 $ 173 $ 173 $ 346
Other private entities 696 369 1,065 513 338 851
Five Star 1,794 - 1,794 2,123 - 2,123
Sonesta 1,522 - 1,522 113 - 113
TA 3,660 - 3,660 3,041 - 3,041
$ 8,252 $ 862 $ 9,114 $ 5,963 $ 511 $ 6,474
Nine Months Ended June 30, 2021 Nine Months Ended June 30, 2020
Base Business Property Base Business Property
Management Management Management Management
Revenues Revenues Total Revenues Revenues Total
ABP Trust $ 1,737 $ 1,434 $ 3,171 $ 375 $ 543 $ 918
Other private entities 1,726 945 2,671 1,551 1,006 2,557
Five Star 5,573 - 5,573 6,726 - 6,726
Sonesta 2,511 - 2,511 1,259 - 1,259
TA 9,904 - 9,904 9,715 - 9,715
$ 21,451 $ 2,379 $ 23,830 $ 19,626 $ 1,549 $ 21,175
Advisory Services and Other
Tremont 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 (beginning January 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 $377
and $40 for the three months ended June 30, 2021 and 2020, respectively, and
$792 and $113 for the nine months ended June 30, 2021 and 2020, respectively.
Incentive business management fees earned from TRMT were zero and $620 for the
three and nine months ended June 30, 2021 , respectively. Tremont Advisors did
not earn incentive fees from TRMT during the three and nine months ended June
30, 2020 .
RMR Advisors , which previously provided advisory services for RMRM until RMRM
deregistered as an investment company with the SEC on January 5, 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 advisory fees
earned by RMR Advisors or Tremont Advisors , as applicable, included in our
revenue were $757 and $585 for the three months ended June 30, 2021 and 2020,
respectively, and $2,057 and $2,139 for the nine months ended June 30, 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 zero and $34 for the three months ended June 30, 2021 and 2020,
respectively, and $259 and $816 for the nine months ended June 30, 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 June 30, 2021 , Compared to the Three Months Ended June 30,
2020
The following table presents the changes in our operating results for the three
months ended June 30, 2021 compared to the three months ended June 30, 2020 :
Three Months Ended June 30,
2021 2020 $ Change % Change
Revenues:
Management services $ 44,376 $ 38,625 $ 5,751 14.9%
Advisory services 1,134 625 509 81.4%
Total management and advisory services
revenues 45,510 39,250 6,260 15.9%
Reimbursable compensation and benefits 13,069 13,013 56 0.4%
Reimbursable equity based compensation 1,402 736 666 90.5%
Other reimbursable expenses 85,263 85,650 (387) (0.5)%
Total reimbursable costs 99,734 99,399 335 0.3%
Total revenues 145,244 138,649 6,595 4.8%
Expenses:
Compensation and benefits 30,530 29,569 961 3.3%
Equity based compensation 1,954 1,299 655 50.4%
Total compensation and benefits expense 32,484 30,868 1,616 5.2%
General and administrative 6,320 6,335 (15) (0.2)%
Other reimbursable expenses 85,263 85,650 (387) (0.5)%
Transaction and acquisition related
costs 61 427 (366) (85.7)%
Depreciation and amortization 245 229 16 7.0%
Total expenses 124,373 123,509 864 0.7%
Operating income 20,871 15,140 5,731 37.9%
Interest and other income 179 727 (548) (75.4)%
Equity in earnings of investees 28 458 (430) (93.9)%
Unrealized gain on equity method
investment accounted for under the fair
value option 1,312 1,678 (366) (21.8)%
Income before income tax expense 22,390 18,003 4,387 24.4%
Income tax expense (3,361) (2,608) (753) (28.9)%
Net income 19,029 15,395 3,634 23.6%
Net income attributable to
noncontrolling interest (10,797) (8,678) (2,119) (24.4)%
Net income attributable to The RMR Group
Inc. $ 8,232 $ 6,717 $ 1,515 22.6%
n/m - not meaningful
Management services revenue. For the three months ended June 30, 2021 and 2020,
we earned base business and property management services revenue from the
following sources:
Three Months Ended June 30,
2021 2020 Change
Managed Equity REITs $ 35,262 $ 32,117 $ 3,145
Managed Private Real Estate Capital 2,138 1,231 907
Managed Operating Companies 6,976 5,277 1,699
Total $ 44,376 $ 38,625 $ 5,751
Management services revenue increased $5,751 primarily due to the economic
recovery following the easing of pandemic related restrictions across the
country, which were most impactful on our managed assets within the senior
living, service retail and hospitality sectors. The increase in management
services revenue was due to (i) increases in the average enterprise value of DHC
and SVC resulting in increases to base business management fees of $1,483 and
$2,342 , respectively, and (ii) increases in
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management fees earned from the Managed Operating Companies of $1,699 , primarily
driven by continued improvements in operating performance at Sonesta and TA.
Advisory services revenue. Advisory services revenue represents fees earned for
managing RMRM and TRMT. Advisory services revenues increased by $509 primarily
due to an increase of $337 in fees earned from TRMT as a result of the fee
waiver Tremont Advisors previously provided to TRMT expiring on 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 our
clients. Reimbursable compensation and benefits increased $56 primarily due to
annual increases in employee compensation and benefits for which we receive
reimbursement.
Reimbursable equity based compensation. Reimbursable equity based compensation
includes grants of common shares from 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 the grants of common shares from our
clients to certain of our officers and employees. Reimbursable equity based
compensation increased $666 as a result of increases in our clients' respective
share prices.
Other 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 increased $961 primarily due to merit increases and higher
estimated bonus costs for the current fiscal year, partially offset by higher
vacation deferrals and business continuity payments resulting from the COVID-19
pandemic during the prior period.
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 clients. Equity based compensation increased $655 primarily due
to increases in our clients' respective share prices for the share awards
granted to our employees by our clients.
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 was relatively
unchanged from the prior period.
Transaction and acquisition related costs. Transaction and acquisition related
costs decreased $366 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 $548 primarily
due to lower interest earned during the current period as a result of lower
interest rates 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.
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 on our investment in TA common shares. 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 increase in income tax expense of $753 is primarily
attributable to higher taxable income for the current period compared to the
prior period.
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Nine Months Ended June 30, 2021 , Compared to the Nine Months Ended June 30, 2020
The following table presents the changes in our operating results for the nine
months ended June 30, 2021 compared to the nine months ended June 30, 2020 :
Nine Months Ended June 30,
2021 2020 $ Change % Change
Revenues:
Management services $ 125,365 $ 129,221 $ (3,856) (3.0)%
Incentive business management fees 620 - 620 n/m
Advisory services 2,849 2,252 597 26.5%
Total management and advisory services
revenues 128,834 131,473 (2,639) (2.0)%
Reimbursable compensation and benefits 39,453 38,683 770 2.0%
Reimbursable equity based compensation 5,611 1,394 4,217 n/m
Other reimbursable expenses 259,856 267,852 (7,996) (3.0)%
Total reimbursable costs 304,920 307,929 (3,009) (1.0)%
Total revenues 433,754 439,402 (5,648) (1.3)%
Expenses:
Compensation and benefits 90,610 89,888 722 0.8%
Equity based compensation 7,267 3,183 4,084 128.3%
Separation costs 4,159 645 3,514 n/m
Total compensation and benefits expense 102,036 93,716 8,320 8.9%
General and administrative 19,684 20,678 (994) (4.8)%
Other reimbursable expenses 259,856 267,852 (7,996) (3.0)%
Transaction and acquisition related costs 474 1,596 (1,122) (70.3)%
Depreciation and amortization 734 731 3 0.4%
Total expenses 382,784 384,573 (1,789) (0.5)%
Operating income 50,970 54,829 (3,859) (7.0)%
Interest and other income 614 4,102 (3,488) (85.0)%
Equity in earnings of investees 755 1,037 (282) (27.2)%
Unrealized gain on equity method
investment accounted for under the fair
value option 6,032 916 5,116 n/m
Income before income tax expense 58,371 60,884 (2,513) (4.1)%
Income tax expense (8,109) (8,944) 835 9.3%
Net income 50,262 51,940 (1,678) (3.2)%
Net income attributable to noncontrolling
interest (28,192) (29,306) 1,114 3.8%
Net income attributable to The RMR Group
Inc. $ 22,070 $ 22,634 $ (564) (2.5)%
n/m - not meaningful
Management services revenue. For the nine months ended June 30, 2021 and 2020,
we earned base business and property
management services revenue from the following sources:
Nine Months Ended June 30,
2021 2020 Change
Managed Equity REITs $ 101,276 $ 107,189 $ (5,913)
Managed Private Real Estate Capital 6,101 4,332 1,769
Managed Operating Companies 17,988 17,700 288
Total $ 125,365 $ 129,221 $ (3,856)
Management services revenue decreased $3,856 primarily due to (i) declines in
the average enterprise value of OPI and SVC resulting in decreases to base
business management fees of $1,086 and $1,006 , respectively, (ii) decreases in
property management fees earned from OPI and SVC of $499 and $259 , respectively,
primarily due to strategic property dispositions
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and (iii) a decline in management fees earned from Five Star of $1,153 driven by
COVID-19 pandemic related adverse impacts to its business, partially offset by
an increase in management fees earned from Sonesta of $1,252 primarily resulting
from an increase in the number of hotels that it manages and franchises during
the current period.
Incentive business management fees. Incentive business management fees for the
current period include fees earned by Tremont Advisors from TRMT of $620 .
Tremont Advisors could not earn any incentive fees from TRMT in the prior period
due to the fee waiver in effect for the period beginning July 1, 2018 until
December 31, 2020 . For further information about TRMT's incentive fees and the
fee waiver, see Note 3, Revenue Recognition, to our condensed consolidated
financial statements included in Part I, Item 1 of this Quarterly Report on Form
10Q.
Advisory services revenue. Advisory services revenue increased $597 primarily
due to an increase of $679 in fees earned from TRMT as a result of the fee
waiver Tremont Advisors previously provided to TRMT expiring on December 31,
2020 .
Reimbursable compensation and benefits. Reimbursable compensation and benefits
increased $770 primarily due to annual increases in employee compensation and
benefits for which we receive reimbursement.
Reimbursable equity based compensation. Reimbursable equity based compensation
increased $4,217 as a result of increases in our clients' respective share
prices.
Other 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 expense increased $722
primarily due to higher estimated bonus costs for the current fiscal year and
annual employee merit increases effective on October 1, 2020 , largely offset by
higher mortgage broker commissions, vacation deferrals and business continuity
payments during the prior period.
Equity based compensation. Equity based compensation increased $4,084 primarily
due to increases in our clients' respective share prices for the share awards
granted to our employees by our clients.
Separation 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 costs decreased $994
primarily due to decreases in travel, temporary staffing and recruiting fees
largely as a result of the pandemic, partially offset by an increase in the
value of annual share grants awarded to our Directors.
Transaction and acquisition related costs. Transaction and acquisition related
costs decreased $1,122 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 $3,488 primarily
due to lower interest earned during the current period as a result of lower
interest rates 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.
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 on our investment in TA common shares. 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 $835 is primarily
attributable to lower taxable income during the current period compared to the
prior period, and a reduction in our income tax provision recorded during the
three months ended December 31, 2020 of $520 related to final tax regulations
released in December 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.
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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 June 30, 2021 and September 30, 2020 , we had cash
and cash equivalents of $397,801 and $369,663 , respectively, of which $24,487
and $25,498 , 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 purchase. As of
June 30, 2021 and September 30, 2020 , $357,187 and $341,612 , respectively, of
our cash and cash equivalents were invested in money market funds. Our cash and
cash equivalents leave us well positioned to pursue numerous capital allocation
strategies, including the potential return of shareholder capital in the form of
a special dividend, 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 RMRM or
TRMT, 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.
During the nine months ended June 30, 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 $32,197 . On
July 15, 2021 , we declared a quarterly dividend on our Class A Common Shares and
Class B-1 Common Shares to our shareholders of record as of July 26, 2021 in the
amount of $0.38 per Class A Common Share and Class B-1 Common Share, or $6,235 .
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 $9,422 , of which
$4,922 will be distributed to us based on our aggregate ownership of 16,407,933
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 $10,735 and we expect to pay this dividend
on or about August 19, 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 nine months ended June 30, 2021 , pursuant to the RMR LLC operating
agreement, RMR LLC made required quarterly tax distributions to its holders of
its membership units totaling $23,201 , of which $12,327 was distributed to us
and $10,874 was distributed to ABP Trust , based on each membership unit holder's
then respective ownership percentage in RMR LLC . The $12,327 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 $10,874
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 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.
Cash Flows
Our changes in cash flows for the nine months ended June 30, 2021 compared to
the nine months ended June 30, 2020 were as follows: (i) net cash from operating
activities decreased $6,419 from $78,790 in the 2020 period to $72,371 in the
2021 period; (ii) net cash used in investing activities increased $536 from $404
in the 2020 period to $940 in the 2021 period; and (iii) net cash used in
financing activities increased $114 from $43,179 in the 2020 period to $43,293
in the 2021 period.
The decrease in cash from operating activities for the nine months ended June
30, 2021 , compared to the same period in 2020 primarily reflects the net effect
of declines in net income, excluding the impacts of non-cash gains, and changes
in working capital. The increase in cash used in investing activities for the
nine months ended June 30, 2021 compared to the same period in 2020 was due to a
modest increase in purchases of property and equipment to support our operations
in the 2021 period. Cash used in financing activities for the nine months ended
June 30, 2021 increased nominally compared to the same period in 2020.
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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 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 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 ended September
30, 2019 . As of June 30, 2021 , 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 to ABP 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 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 2020
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 7, Related Person Transactions, to our condensed
consolidated financial statements included in Part I, Item 1 of this Quarterly
Report on Form 10-Q, our 2020 Annual Report, our definitive Proxy Statement for
our 2021 Annual Meeting of Shareholders and our other filings with the SEC . In
addition, see the section captioned "Risk Factors" in our 2020 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 June 30, 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 COVID-19 pandemic 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 are highly variable;
•changing market conditions that may adversely impact our clients and our
business with 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;
•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.
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 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 and the fact that we
estimate we would have earned an incentive business management fee for calendar
2021 from one of our Managed Equity REITs of $22.2 million as of June 30, 2021 ,
if that date had been the end of the next measurement period, may imply that we
will earn incentive business management fees for calendar 2021 or in future
years. The incentive business management fees that 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 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;
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•The fact that we have earned a $0.6 million incentive fee from TRMT during the
nine months ended June 30, 2021 may imply that we will earn incentive business
management fees from TRMT and RMRM in future periods. However, there can be no
assurance that we will earn any incentive business management fees from TRMT or
RMRM 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 belief that, because of the diversity of properties that our clients 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
clients 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 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 numerous capital allocation strategies, including the potential return
of shareholder capital in the form of a special dividend, in the next 12 months.
This statement may imply that we will successfully identify and execute one or
more capital allocation strategies, including that we will return capital to
shareholders in the form of a special dividend, 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, including returning
shareholder capital in the form of a special dividend, 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 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
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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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer purchases of equity securities.
The following table provides information about our purchases of our equity
securities during the quarter ended June 30, 2021 :
Maximum
Total Number of Approximate Dollar
Shares Purchased Value of Shares that
Number of Average as Part ofPublicly May Yet Be Purchased
Shares Price Paid Announced Plans Under the Plans or
Calendar Month Purchased (1) per Share or Programs Programs
June 2021 5,258 $ 38.64 N/A N/A
Total 5,258 $ 38.64 N/A N/A
(1)These Class A Common Share withholdings and purchases were made to satisfy
tax withholding and payment obligations in connection with the vesting of awards
of our Class A Common Shares. We withheld and purchased these shares at their
fair market values based upon the trading prices of our Class A Common Shares at
the close of trading on Nasdaq on the purchase dates.
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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 Third Amended and Restated Property Management
Agreement, dated as of
between The RMR Group LLC and Diversified Healthcare Trust. (Filed herewith.)
10.2 Third Amended and Restated Property Management
Agreement, dated as of
and between The RMR Group LLC and Service Properties Trust. (Filed herewith.)
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 does not 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 . 39
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