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 ofMarch 31, 2021 ,RMR LLC managed approximately 2,100 properties in 47 states,Washington, D.C. ,Puerto Rico andCanada that are principally owned by the Managed Equity REITs. Business Environment and Outlook The continuation and growth of our business depends upon our ability to operate the Managed REITs so as to maintain, grow and increase the value of their businesses, to assist our Managed Operating Companies to grow their businesses and operate profitably and to 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, 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 clients operate, including, hospitality, travel, service retail, senior housing and rehabilitation services. Recently, theU.S. economy has been growing as COVID-19 vaccinations are increasingly administered, commercial activities increasingly return to pre-pandemic practices and operations, and as a result of recent and expected future government spending on COVID-19 pandemic relief, infrastructure and other matters. However, there remains uncertainty as to the ultimate duration and severity of the COVID-19 pandemic on commercial activities, 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 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 ofMarch 31, 2021 , we had$376,252 in cash and cash equivalents, no debt and for the six months endedMarch 31, 2021 , we generated cash from operations of$36,105 . 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 25 -------------------------------------------------------------------------------- Table of Contents 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. 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. 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 ofMarch 31, 2021 and 2020, as applicable: Lesser of Historical Cost of Assets Under Management or Total Market Capitalization as of March 31, REIT Primary Strategy 2021 2020 Medical office and life science properties, senior DHC living communities and wellness centers$ 5,780,436 $ 4,444,325 ILPT Industrial and logistics properties 1,963,244 2,514,092 Office properties primarily leased to single tenants, OPI including the government 3,571,910 3,566,743 Hotels and net lease service and necessity-based retail SVC properties 9,154,813 7,095,656$ 20,470,403 $ 17,620,816 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 six months endedMarch 31, 2021 and 2020 may differ from the basis at the end of the periods presented in the table above. As ofMarch 31, 2021 , the market capitalization was lower than the historical cost of assets under management for DHC, OPI and SVC; the historical cost of assets under management for DHC, OPI and SVC as ofMarch 31, 2021 , were$8,438,364 ,$5,650,680 and$12,280,777 , respectively. For ILPT, the historical cost of assets under management were lower than its market capitalization of$2,377,412 as ofMarch 31, 2021 . 26 -------------------------------------------------------------------------------- Table of Contents The fee revenues we earned from the Managed Equity REITs for the three and six months endedMarch 31, 2021 and 2020 are set forth in the following tables: Three Months Ended March 31, 2021
Three Months Ended
Base Business Property Base Business Property
Management Management Management Management
REIT Revenues Revenues Total Revenues Revenues Total
DHC $ 5,467 $ 3,185 $ 8,652 $ 5,923 $ 3,222 $ 9,145
ILPT 2,579 1,594 4,173 3,382 1,923 5,305
OPI 4,049 4,579 8,628 4,477 5,003 9,480
SVC 10,478 803 11,281 10,745 1,032 11,777
$ 22,573 $ 10,161 $ 32,734 $ 24,527 $ 11,180 $ 35,707
Six Months Ended March 31, 2021
Six Months Ended
Base Business Property Base Business Property
Management Management Management Management
REIT Revenues Revenues Total Revenues Revenues Total
DHC $ 10,632 $ 6,942 $ 17,574 $ 12,555 $ 6,545 $ 19,100
ILPT 5,678 3,369 9,047 6,774 4,105 10,879
OPI 7,944 9,951 17,895 9,367 10,276 19,643
SVC 19,874 1,624 21,498 23,222 2,228 25,450
$ 44,128 $ 21,886 $ 66,014 $ 51,918 $ 23,154 $ 75,072
As of March 31, 2021 , we estimate that we would have earned an incentive
business management fee from OPI of $20,801 for calendar 2021 if March 31, 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 March 31, 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 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 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.
27
--------------------------------------------------------------------------------
Table of Contents
Our fee revenues from services to the Managed Operating Companies and the
Managed Private Real Estate Capital clients for the three and six months ended
March 31, 2021 and 2020, are set forth in the following table:
Three Months Ended March 31, Six Months Ended March 31,
2021 2020 2021 2020
ABP Trust and other private
entities $ 2,134 $ 1,215 $ 3,704 $ 2,278
Five Star 1,803 2,351 3,779 4,603
Sonesta 636 567 989 1,146
TA 2,935 3,379 6,244 6,674
$ 7,508 $ 7,512 $ 14,716 $ 14,701
Other Agreements
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 $378
and $37 for the three months ended March 31, 2021 and 2020, respectively, and
$415 and $73 for the six months ended March 31, 2021 and 2020, respectively.
Incentive business management fees earned from TRMT were $620 for the three and
six months ended March 31, 2021 . Tremont Advisors did not earn incentive fees
from TRMT during the three and six months ended March 31, 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 $751 and $743 for the three months ended March 31, 2021 and 2020,
respectively, and $1,300 and $1,554 for the six months ended March 31, 2021 and
2020, respectively.
The Tremont business acts as a transaction broker for non-investment advisory
clients for negotiated fees. The Tremont business earned fees for such brokerage
services of zero and $102 for the three months ended March 31, 2021 and 2020,
respectively, and $259 and $782 for the six months ended March 31, 2021 and
2020, respectively, which amounts are included in management services revenue in
our condensed consolidated statements of income.
28
--------------------------------------------------------------------------------
Table of Contents
RESULTS OF OPERATIONS (dollars in thousands)
Three Months Ended March 31, 2021 , Compared to the Three Months Ended March 31,
2020
The following table presents the changes in our operating results for the three
months ended March 31, 2021 compared to the three months ended March 31, 2020 :
Three Months Ended
2021 2020 $ Change % Change
Revenues:
Management services$ 40,242 $ 43,321 $ (3,079) (7.1)% Incentive business management fees 620 - 620 n/m Advisory services 1,129 780 349 44.7% Total management and advisory services revenues 41,991 44,101 (2,110) (4.8)% Reimbursable compensation and benefits 13,159 12,823 336 2.6% Reimbursable equity based compensation 1,206 (290) 1,496 n/m Other reimbursable expenses 75,208 84,227 (9,019) (10.7)% Total reimbursable costs 89,573 96,760 (7,187) (7.4)% Total revenues 131,564 140,861 (9,297) (6.6)% Expenses: Compensation and benefits 30,586 30,122 464 1.5% Equity based compensation 1,752 302 1,450 n/m Separation costs - 385 (385) n/m Total compensation and benefits expense 32,338 30,809 1,529 5.0% General and administrative 7,104 7,297 (193) (2.6)% Other reimbursable expenses 75,208 84,227 (9,019) (10.7)% Transaction and acquisition related costs 296 373 (77) (20.6)% Depreciation and amortization 251 246 5 2.0% Total expenses 115,197 122,952 (7,755) (6.3)% Operating income 16,367 17,909 (1,542) (8.6)% Interest and other income 204 1,500 (1,296) (86.4)% Equity in earnings of investees 303 324 (21) (6.5)% Unrealized loss on equity method investment accounted for under the fair value option (3,402) (2,200) (1,202) (54.6)% Income before income tax expense 13,472 17,533 (4,061) (23.2)% Income tax expense (1,992) (2,612) 620 23.7% Net income 11,480 14,921 (3,441) (23.1)% Net income attributable to noncontrolling interest (6,539) (8,453) 1,914 22.6% Net income attributable to The RMR Group Inc.$ 4,941 $ 6,468 $ (1,527) (23.6)% n/m - not meaningful Management services revenue. For the three months endedMarch 31, 2021 and 2020, we earned base business and property management services revenue from the following sources: Three Months Ended March 31, 2021 2020 Change Managed Equity REITs$ 32,734 $ 35,707 $ (2,973) Managed Private Real Estate Capital 2,134 1,317 817 Managed Operating Companies 5,374 6,297 (923) Total$ 40,242 $ 43,321 $ (3,079) 29
-------------------------------------------------------------------------------- Table of Contents Management services revenue decreased$3,079 primarily due to (i) declines in the average market capitalization of DHC, OPI and SVC resulting in decreases to base business management fees of$456 ,$428 and$267 , respectively, (ii) decreases in property management fees earned from OPI and SVC of$424 and$229 , respectively, primarily due to property dispositions, and (iii) declines in management fees earned from the Managed Operating Companies of$923 , primarily driven by COVID-19 pandemic related adverse impacts on each of their respective businesses. Incentive business management fees. Incentive business management fees for the three months endedMarch 31, 2021 include fees earned byTremont Advisors from TRMT of$620 .Tremont Advisors did not earn any incentive fees from TRMT in the prior year period due to the fee waiver in effect for the period beginningJuly 1, 2018 untilDecember 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 for the three months endedMarch 31, 2021 and 2020 includes the business management feesTremont Advisors orRMR Advisors , as applicable, earned for managing RMRM and TRMT. Advisory services revenues increased by$349 primarily due to an increase of$341 in fees earned from TRMT as a result of the fee waiverTremont Advisors previously provided to TRMT expiring onDecember 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$336 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$1,496 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$464 primarily due to higher estimated bonus costs for the 2021 period, as compared to the 2020 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$1,450 primarily due to increases in the respective share prices of our clients. 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$193 primarily due to decreases in travel, temporary staffing and recruiting fees largely as a result of the ongoing 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$77 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$1,296 primarily due to lower interest earned during the 2021 period as a result of lower interest rates, as compared to 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. 30 -------------------------------------------------------------------------------- Table of Contents Unrealized loss on equity method investment accounted for under the fair value option. Unrealized loss on equity method investment accounted for under the fair value option represents the loss on our investment in TA common shares. The loss for the three months endedMarch 31, 2021 , as compared to the three months endedMarch 31, 2020 , is a result of recent decreases in TA's share price. 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$620 is primarily attributable to lower taxable income for the three months endedMarch 31, 2021 , as compared to the same period in the prior year. Six Months EndedMarch 31, 2021 , Compared to the Six Months EndedMarch 31, 2020 The following table presents the changes in our operating results for the six months endedMarch 31, 2021 compared to the six months endedMarch 31, 2020 : Six
Months Ended
2021 2020 $ Change % Change
Revenues:
Management services$ 80,989 $ 90,596 $ (9,607) (10.6)% Incentive business management fees 620 - 620 n/m Advisory services 1,715 1,627 88 5.4% Total management and advisory services revenues 83,324 92,223 (8,899) (9.6)% Reimbursable compensation and benefits 26,384 25,670 714 2.8% Reimbursable equity based compensation 4,209 658 3,551 n/m Other reimbursable expenses 174,593 182,202 (7,609) (4.2)% Total reimbursable costs 205,186 208,530 (3,344) (1.6)% Total revenues 288,510 300,753 (12,243) (4.1)% Expenses: Compensation and benefits 60,080 60,319 (239) (0.4)% Equity based compensation 5,313 1,884 3,429 182.0% Separation costs 4,159 645 3,514 n/m Total compensation and benefits expense 69,552 62,848 6,704 10.7% General and administrative 13,364 14,343 (979) (6.8)% Other reimbursable expenses 174,593 182,202 (7,609) (4.2)% Transaction and acquisition related costs 413 1,169 (756) (64.7)% Depreciation and amortization 489 502 (13) (2.6)% Total expenses 258,411 261,064 (2,653) (1.0)% Operating income 30,099 39,689 (9,590) (24.2)% Interest and other income 435 3,375 (2,940) (87.1)% Equity in earnings of investees 727 579 148 25.6% Unrealized gain (loss) on equity method investment accounted for under the fair value option 4,720 (762) 5,482 n/m Income before income tax expense 35,981 42,881 (6,900) (16.1)% Income tax expense (4,748) (6,336) 1,588 25.1% Net income 31,233 36,545 (5,312) (14.5)% Net income attributable to noncontrolling interest (17,395) (20,628) 3,233 15.7% Net income attributable to The RMR Group Inc.$ 13,838 $ 15,917 $ (2,079) (13.1)% n/m - not meaningful 31
-------------------------------------------------------------------------------- Table of Contents Management services revenue. For the six months endedMarch 31, 2021 and 2020, we earned base business and property management services revenue from the following sources: Six Months Ended March 31, 2021 2020 Change Managed Equity REITs$ 66,014 $ 75,072 $ (9,058) Managed Private Real Estate Capital 3,963 3,101 862 Managed Operating Companies 11,012 12,423 (1,411) Total$ 80,989 $ 90,596 $ (9,607) Management services revenue decreased$9,607 primarily due to (i) declines in the average market capitalization of DHC, OPI and SVC resulting in decreases to base business management fees of$1,923 ,$1,423 and$3,348 , respectively, (ii) decreases in property management fees earned from OPI and SVC of$325 and$604 , respectively, primarily due to property dispositions, and (iii) declines in management fees earned from the Managed Operating Companies of$1,411 , primarily driven by COVID-19 pandemic related adverse impacts on each of their respective businesses. Incentive business management fees. Incentive business management fees for the six months endedMarch 31, 2021 include fees earned byTremont Advisors from TRMT of$620 .Tremont Advisors did not earn any incentive fees from TRMT in the prior year period due to the fee waiver in effect for the period beginningJuly 1, 2018 untilDecember 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$88 primarily due to an increase of$342 in fees earned from TRMT as a result of the fee waiver in effect during the prior year period but only in effect for half of the 2021 period, largely offset by a decrease in fees earned from RMRM as a result of declines in the average net asset value of RMRM's portfolio in calendar 2020. Reimbursable compensation and benefits. Reimbursable compensation and benefits increased$714 primarily due to annual increases in employee compensation and benefits for which we receive reimbursement. Reimbursable equity based compensation. Reimbursable equity based compensation increased$3,551 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 decreased$239 primarily due to lower mortgage brokerage commissions, largely offset by annual employee merit increases onOctober 1, 2020 and higher estimated bonus costs for the 2021 period, as compared to the 2020 period. Equity based compensation. Equity based compensation increased$3,429 due to increases in share based compensation granted to our employees by our clients as a result of increases in their respective share prices. 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$979 primarily due to decreases in travel, temporary staffing and recruiting fees largely as a result of the ongoing 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$756 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$2,940 primarily due to lower interest earned during the 2021 period as a result of lower interest rates, as compared to the 2020 period. 32 -------------------------------------------------------------------------------- Table of Contents Equity in earnings of investees. Equity in earnings of investees represents our proportionate share of earnings from our equity interest in TRMT. Unrealized gain (loss) on equity method investment accounted for under the fair value option. The gain for the six months endedMarch 31, 2021 is a result of increases in TA's share price during the 2021 period as compared to TA share price declines in the 2020 period. 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$1,588 is primarily attributable to lower taxable income for the six months endedMarch 31, 2021 , 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) Our current assets have historically been comprised predominantly of cash, cash equivalents and receivables for business management, property management and advisory services fees. As ofMarch 31, 2021 andSeptember 30, 2020 , we had cash and cash equivalents of$376,252 and$369,663 , respectively, of which$24,480 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 ofMarch 31, 2021 andSeptember 30, 2020 ,$357,041 and$341,612 , respectively, of our cash and cash equivalents were invested in money market funds. 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 clients. The market turmoil created by COVID-19 may have lasting effects on our business and the businesses of our clients; however, we cannot predict the extent and duration of the pandemic or the severity and duration of its economic impact on us and our clients. 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 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 six months endedMarch 31, 2021 , we paid cash distributions to the holders of our Class A Common Shares, Class B-1 Common Shares and to the other owner ofRMR LLC membership units in the aggregate amount of$21,460 . OnApril 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 ofApril 26, 2021 in the amount of$0.38 per Class A Common Share and Class B-1 Common Share, or$6,237 . 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$9,424 , of which$4,924 will be distributed to us based on our aggregate ownership of 16,413,191 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$10,737 and we expect to pay this dividend on or aboutMay 20, 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 six months endedMarch 31, 2021 , pursuant to theRMR LLC operating agreement,RMR LLC made required quarterly tax distributions to its holders of its membership units totaling$15,426 , of which$8,147 was distributed to us and$7,279 was distributed toABP Trust , based on each membership unit holder's then respective ownership percentage inRMR LLC . The$8,147 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$7,279 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 33 -------------------------------------------------------------------------------- Table of Contents 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 six months endedMarch 31, 2021 compared to the six months endedMarch 31, 2020 were as follows: (i) net cash from operating activities decreased$12,631 from$48,736 in the 2020 period to$36,105 in the 2021 period; (ii) net cash used in investing activities increased$406 from$352 in the 2020 period to$758 in the 2021 period; and (iii) net cash used in financing activities decreased$712 from$29,470 in the 2020 period to$28,758 in the 2021 period. The decrease in cash from operating activities for the six months endedMarch 31, 2021 , compared to the same period in 2020 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 six months endedMarch 31, 2021 compared to the same period in 2020 was due to an increase in our purchases of property and equipment in the 2021 period. The decrease in cash used in financing activities for the six months endedMarch 31, 2021 compared to the same period in 2020 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 ofMarch 31, 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 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 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 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 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 theSEC . 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 34 -------------------------------------------------------------------------------- Table of Contents may engage in 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 endedMarch 31, 2021 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 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. 35 -------------------------------------------------------------------------------- Table of Contents 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$20.8 million as ofMarch 31, 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; •The fact that we have earned a$0.6 million incentive fee from TRMT this quarter may imply that we will earn incentive business management fees from TRMT and RMRM in future quarters. 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; and •The market turmoil created by COVID-19 may have lasting effects 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. 36 -------------------------------------------------------------------------------- Table of Contents 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. Item 2. Unregistered Sales ofEquity 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 endedMarch 31, 2021 : Maximum Total Number of Approximate Dollar Shares Purchased Value of Shares that Number of Average as Part of
Publicly May Yet Be Purchased
Shares Price Paid Announced Plans Under the Plans or
Calendar Month Purchased (1) per Share or Programs Programs
March 2021 450 $ 42.85 N/A N/A
Total 450 $ 42.85 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.
37
--------------------------------------------------------------------------------
Table of Contents
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
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 . 38
--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
