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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-37616
 
THE RMR GROUP INC.
(Exact Name of Registrant as Specified in Its Charter)
 
Maryland
47-4122583
(State of Organization)
(IRS Employer Identification No.)
 
Two Newton Place, 255 Washington Street, Suite 300, Newton, MA 02458-1634
(Address of Principal Executive Offices)                            (Zip Code)
Registrant’s Telephone Number, Including Area Code 617-796-8230
Securities registered pursuant to Section 12(b) of the Act:
Title Of Each Class
 
Trading Symbol
 
Name Of Each Exchange On Which Registered
Class A common stock, $0.001 par value per share
 
RMR
 
The Nasdaq Stock Market LLC
 
 
 
 
(Nasdaq Capital Market)
Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes   No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
Accelerated filer
 
 
 
 
 
Non-accelerated filer
 
Smaller reporting company
 
 
 
 
 
Emerging growth company
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided in Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No
As of February 5, 2020, there were 15,300,302 shares of Class A common stock, par value $0.001 per share, 1,000,000 shares of Class B-1 common stock, par value $0.001 per share and 15,000,000 shares of Class B-2 common stock, par value $0.001 per share outstanding.



Table of Contents

THE RMR GROUP INC.

FORM 10-Q

December 31, 2019
 
Table of Contents

 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

Table of Contents

PART I. Financial Information
Item 1. Financial Statements
The RMR Group Inc.
Condensed Consolidated Balance Sheets
(dollars in thousands, except per share amounts)
(unaudited)
 
 
December 31,
 
September 30,
 
 
2019
 
2019
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
385,695

 
$
358,448

Due from related parties
 
76,264

 
93,521

Prepaid and other current assets
 
5,013

 
5,848

Total current assets
 
466,972

 
457,817

 
 
 
 
 
Property and equipment, net
 
2,315

 
2,383

Due from related parties, net of current portion
 
9,001

 
9,238

Equity method investment
 
6,561

 
6,658

Equity method investment accounted for under the fair value option
 
5,120

 
3,682

Goodwill
 
1,859

 
1,859

Intangible assets, net of amortization
 
312

 
323

Operating lease right of use assets
 
36,899

 

Deferred tax asset
 
25,302

 
25,729

Other assets, net of amortization
 
150,789

 
153,143

Total assets
 
$
705,130

 
$
660,832

 
 
 
 
 
Liabilities and Equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable and accrued expenses
 
$
94,944

 
$
90,989

Total current liabilities
 
94,944

 
90,989

 
 
 
 
 
Deferred rent payable, net of current portion
 

 
1,620

Operating lease liabilities, net of current portion
 
34,467

 

Amounts due pursuant to tax receivable agreement, net of current portion
 
29,950

 
29,950

Employer compensation liability, net of current portion
 
9,001

 
9,238

Total liabilities
 
168,362

 
131,797

 
 
 
 
 
Commitments and contingencies
 


 


 
 
 
 
 
Equity:
 
 
 
 
Class A common stock, $0.001 par value; 31,600,000 shares authorized; 15,301,767 and 15,302,710 shares issued and outstanding, respectively
 
15

 
15

Class B-1 common stock, $0.001 par value; 1,000,000 shares authorized, issued and outstanding
 
1

 
1

Class B-2 common stock, $0.001 par value; 15,000,000 shares authorized, issued and outstanding
 
15

 
15

Additional paid in capital
 
103,994

 
103,360

Retained earnings
 
266,906

 
257,457

Cumulative common distributions
 
(78,389
)
 
(72,194
)
Total shareholders’ equity
 
292,542

 
288,654

Noncontrolling interest
 
244,226

 
240,381

Total equity
 
536,768

 
529,035

Total liabilities and equity
 
$
705,130

 
$
660,832

See accompanying notes.

3

Table of Contents

The RMR Group Inc.
Condensed Consolidated Statements of Comprehensive Income
(amounts in thousands, except per share amounts)
(unaudited)
 
 
Three Months Ended December 31,
 
 
2019
 
2018
Revenues:
 
 
 
 
Management services
 
$
47,275

 
$
47,488

Incentive business management fees
 

 
120,094

Advisory services
 
847

 
782

Total management and advisory services revenues
 
48,122

 
168,364

Reimbursable compensation and benefits
 
13,795

 
13,873

Other client company reimbursable expenses
 
97,975

 
98,076

Total reimbursable costs
 
111,770

 
111,949

Total revenues
 
159,892

 
280,313

Expenses:
 
 
 
 
Compensation and benefits
 
30,197

 
28,012

Equity based compensation
 
1,582

 
1,811

Separation costs
 
260

 
6,397

Total compensation and benefits expense
 
32,039

 
36,220

General and administrative
 
7,046

 
7,320

Other client company reimbursable expenses
 
97,975

 
98,076

Transaction and acquisition related costs
 
796

 
184

Depreciation and amortization
 
256

 
255

Total expenses
 
138,112

 
142,055

Operating income
 
21,780

 
138,258

Interest and other income
 
1,875

 
1,526

Equity in earnings of investees
 
255

 
35

Unrealized gain (loss) on equity method investment accounted for under the fair value option
 
1,438

 
(2,769
)
Income before income tax expense
 
25,348

 
137,050

Income tax expense
 
(3,724
)
 
(18,970
)
Net income
 
21,624

 
118,080

Net income attributable to noncontrolling interest
 
(12,175
)
 
(65,871
)
Net income attributable to The RMR Group Inc.
 
$
9,449

 
$
52,209

Other comprehensive loss:
 
 
 
 
Foreign currency translation adjustments
 
$

 
$
(4
)
Other comprehensive loss
 

 
(4
)
Comprehensive income
 
21,624

 
118,076

Comprehensive income attributable to noncontrolling interest
 
(12,175
)
 
(65,869
)
Comprehensive income attributable to The RMR Group Inc.
 
$
9,449

 
$
52,207

 
 
 
 
 
Weighted average common shares outstanding - basic
 
16,177

 
16,120

Weighted average common shares outstanding - diluted
 
16,177

 
16,131

 
 
 
 
 
Net income attributable to The RMR Group Inc. per common share - basic and diluted
 
$
0.58

 
$
3.22

See accompanying notes.

4

Table of Contents

The RMR Group Inc.
Condensed Consolidated Statements of Shareholders’ Equity
(dollars in thousands)
(unaudited)
 
 
Class A Common Stock
 
Class B-1 Common Stock
 
Class B-2 Common Stock
 
Additional Paid In Capital
 
Retained Earnings
 
Cumulative Other Comprehensive Income
 
Cumulative Common Distributions
 
Total Shareholders' Equity
 
Noncontrolling Interest
 
Total Equity
Balance at September 30, 2019
 
$
15

 
$
1

 
$
15

 
$
103,360

 
$
257,457

 
$

 
$
(72,194
)
 
$
288,654

 
$
240,381

 
$
529,035

Share grants, net
 

 

 

 
634

 

 

 

 
634

 

 
634

Net income
 

 

 

 

 
9,449

 

 

 
9,449

 
12,175

 
21,624

Tax distributions to Member
 

 

 

 

 

 

 

 

 
(3,830
)
 
(3,830
)
Common share distributions
 

 

 

 

 

 

 
(6,195
)
 
(6,195
)
 
(4,500
)
 
(10,695
)
Balance at December 31, 2019
 
$
15

 
$
1

 
$
15

 
$
103,994

 
$
266,906

 
$

 
$
(78,389
)
 
$
292,542

 
$
244,226

 
$
536,768


Balance at September 30, 2018
 
$
15

 
$
1

 
$
15

 
$
99,239

 
$
182,877

 
$
82

 
$
(49,467
)
 
$
232,762

 
$
201,899

 
$
434,661

Share grants, net
 

 

 

 
1,569

 

 

 

 
1,569

 

 
1,569

Net income
 

 

 

 

 
52,209

 

 

 
52,209

 
65,871

 
118,080

Tax distributions to Member
 

 

 

 

 

 

 

 

 
(8,037
)
 
(8,037
)
Common share distributions
 

 

 

 

 

 

 
(5,680
)
 
(5,680
)
 
(4,500
)
 
(10,180
)
Other comprehensive loss
 

 

 

 

 

 
(2
)
 

 
(2
)
 
(2
)
 
(4
)
Balance at December 31, 2018
 
$
15

 
$
1

 
$
15

 
$
100,808

 
$
235,086

 
$
80

 
$
(55,147
)
 
$
280,858

 
$
255,231

 
$
536,089

See accompanying notes.


5

Table of Contents

The RMR Group Inc.
Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)
 
 
Three Months Ended December 31,
 
 
2019
 
2018
Cash Flows from Operating Activities:
 
 
 
 
Net income
 
$
21,624

 
$
118,080

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
 
Depreciation and amortization
 
256

 
255

Straight line office rent
 
35

 
54

Amortization expense related to other assets
 
2,354

 
2,354

Deferred income taxes
 
427

 
(76
)
Operating expenses paid in The RMR Group Inc. common shares
 
634

 
1,569

Equity in earnings of investees
 
(255
)
 
(35
)
Distributions from equity method investments
 
352

 

Unrealized (gain) loss on equity method investment accounted for under the fair value option
 
(1,438
)
 
2,769

Changes in assets and liabilities:
 
 
 
 
Due from related parties
 
16,007

 
(161,939
)
Prepaid and other current assets
 
835

 
5,910

Accounts payable and accrued expenses
 
1,089

 
85,137

Net cash from operating activities
 
41,920

 
54,078

 
 
 
 
 
Cash Flows from Investing Activities:
 

 

Purchase of property and equipment
 
(148
)
 
(170
)
Equity method investment in TravelCenters of America Inc.
 

 
(8,382
)
Net cash used in investing activities
 
(148
)
 
(8,552
)
 
 
 
 
 
Cash Flows from Financing Activities:
 
 
 
 
Distributions to noncontrolling interest
 
(8,330
)
 
(12,537
)
Distributions to common shareholders
 
(6,195
)
 
(5,680
)
Net cash used in financing activities
 
(14,525
)
 
(18,217
)
 
 
 
 
 
Effect of exchange rate fluctuations on cash and cash equivalents
 

 
2

Increase in cash and cash equivalents
 
27,247

 
27,311

Cash and cash equivalents at beginning of period
 
358,448

 
256,848

Cash and cash equivalents at end of period
 
$
385,695

 
$
284,159

 
 
 
 
 
Supplemental Cash Flow Information:
 
 
 
 
Income taxes paid
 
$
165

 
$
332

Supplemental Schedule of Non-Cash Activities:
 
 
 
 
Fair value of share based payments recorded
 
$
948

 
$
1,316

Recognition of right of use assets and related lease liabilities
 
$
39,746

 
$

See accompanying notes.

6


The RMR Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
(dollars in thousands, except per share amounts)



Note 1. Basis of Presentation
The RMR Group Inc., or RMR Inc., is a holding company and substantially all of its business is conducted by its majority owned subsidiary The RMR Group LLC, or RMR LLC. RMR Inc. is a Maryland corporation and RMR LLC is a Maryland limited liability company. RMR Inc. serves as the sole managing member of RMR LLC and, in that capacity, operates and controls the business and affairs of RMR LLC. In these financial statements, unless otherwise indicated, “we”, “us” and “our” refer to RMR Inc. and its direct and indirect subsidiaries, including RMR LLC.
As of December 31, 2019, RMR Inc. owned 15,301,767 class A membership units of RMR LLC, or Class A Units, and 1,000,000 class B membership units of RMR LLC, or Class B Units. The aggregate RMR LLC membership units RMR Inc. owns represented 52.1% of the economic interest of RMR LLC as of December 31, 2019. We refer to economic interest as the right of a holder of a Class A Unit or Class B Unit to share in distributions made by RMR LLC and, upon liquidation, dissolution or winding up of RMR LLC, to share in the assets of RMR LLC after payments to creditors. A wholly owned subsidiary of ABP Trust, a Maryland statutory trust, owns 15,000,000 redeemable Class A Units, representing 47.9% of the economic interest of RMR LLC as of December 31, 2019, which is presented as a noncontrolling interest within the condensed consolidated financial statements. Adam D. Portnoy, one of our Managing Directors, is the sole trustee of ABP Trust, and owns all of ABP Trust’s voting securities.
RMR LLC was founded in 1986 to manage public investments in real estate and, as of December 31, 2019, managed a diverse portfolio of publicly owned real estate and real estate related businesses. RMR LLC provides management services to four publicly traded real estate investment trusts, or REITs: Diversified Healthcare Trust (formerly known as Senior Housing Properties Trust), or DHC, which owns medical office and life science properties, senior living communities and wellness centers; Industrial Logistics Properties Trust, or ILPT, which owns and leases industrial and logistics properties; Office Properties Income Trust, or OPI, which owns office properties primarily leased to single tenants and those with high quality credit characteristics, including the government; and Service Properties Trust, or SVC, which owns a diverse portfolio of hotels and net lease service and necessity-based retail properties. Until December 31, 2018, RMR LLC provided management services to Select Income REIT, or SIR. On December 31, 2018, SIR merged with and into a subsidiary of OPI (then named Government Properties Income Trust, or GOV), or the GOV/SIR Merger, which then merged with and into OPI, with OPI as the surviving entity. The combined company continues to be managed by RMR LLC pursuant to OPI’s business and property management agreements with RMR LLC. DHC, ILPT, OPI, SVC and, until December 31, 2018, SIR, are collectively referred to as the Managed Equity REITs.
RMR LLC also provides management services to other publicly traded and private businesses, including: Five Star Senior Living Inc., or Five Star, a publicly traded operator of senior living communities, many of which are owned by DHC; Sonesta International Hotels Corporation, or Sonesta, a privately owned franchisor and operator of hotels, resorts and cruise ships in the United States, Latin America, the Caribbean and the Middle East, many of whose U.S. hotels are owned by SVC; and TravelCenters of America Inc., or TA, an operator and franchisor of travel centers along the U.S. Interstate Highway System, many of which are owned by SVC, standalone truck service facilities and restaurants. Hereinafter, Five Star, Sonesta and TA are collectively referred to as the Managed Operators. In addition, RMR LLC also provides management services to certain related private companies, including Affiliates Insurance Company, or AIC, an Indiana insurance company, ABP Trust and its subsidiaries, or collectively ABP Trust, and RMR Office Property Fund LP, or the Open End Fund.
RMR Advisors LLC, or RMR Advisors, is an investment adviser registered with the Securities and Exchange Commission, or SEC. RMR Advisors is a wholly-owned subsidiary of RMR LLC and is the adviser to RMR Real Estate Income Fund, or RIF. RIF is currently a closed end investment company focused on investing in real estate securities, including REITs and other dividend paying securities, but excluding our Client Companies, as defined below. In December 2019, RIF announced its intention to convert from a registered investment company to a commercial mortgage REIT.
Tremont Realty Advisors LLC, or Tremont Advisors, an investment adviser registered with the SEC, was formed in connection with the acquisition of certain assets of Tremont Realty Capital LLC, or the Tremont business. Tremont Advisors is a wholly owned subsidiary of RMR LLC that manages Tremont Mortgage Trust, or TRMT, a publicly traded mortgage real estate investment trust that focuses primarily on originating and investing in first mortgage whole loans secured by middle market and transitional commercial real estate and, as of December 18, 2019, Centre Street Finance LLC, or Centre Street, a private fund focused on originating and investing in mortgage loans. Centre Street is a direct wholly owned subsidiary of ABP Trust. TRMT, together with Centre Street, are referred to as the Tremont Advisory Clients. The Tremont business also acts as a transaction originator for non-investment advisory clients for negotiated fees.

7

Table of Contents
The RMR Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except per share amounts)

In these financial statements, we refer to the Managed Equity REITs, the Managed Operators, RIF, TRMT, AIC, ABP Trust, the Open End Fund, Centre Street and the clients of the Tremont business as our Client Companies. We refer to the Managed Equity REITs and TRMT collectively as the Managed REITs.
The accompanying condensed consolidated financial statements of RMR Inc. are unaudited. Certain information and disclosures required by U.S. Generally Accepted Accounting Principles, or GAAP, for complete financial statements have been condensed or omitted. We believe the disclosures made are adequate to make the information presented not misleading. However, the accompanying condensed consolidated financial statements should be read in conjunction with the financial statements and notes contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019, or our 2019 Annual Report. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of results for the interim period have been included. All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated. Our operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. Reclassifications have been made to the prior year’s condensed consolidated financial statements to conform to the current year’s presentation.
Preparation of these financial statements in conformity with GAAP requires our management to make certain estimates and assumptions that may affect the amounts reported in these financial statements and related notes. The actual results could differ from these estimates.
Note 2. Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2016-02, Leases, as amended, or ASU No. 2016-02, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). ASU No. 2016-02 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right of use asset and a lease liability for all leases with a term of greater than twelve months regardless of their classification.
On October 1, 2019, we adopted ASU No. 2016-02 along with certain allowable practical expedients using the modified retrospective transition approach. We elected to apply the guidance to each lease that had commenced as of the adoption date. We also elected a package of practical expedients that allowed us not to reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) the recognition requirements for initial direct costs for any expired or existing leases. Additionally, we elected to account for the lease and non-lease components as a single lease component.
The adoption of ASU No. 2016-02 did not affect our condensed consolidated statements of comprehensive income and cash flows. See Note 10, Leases, for further information regarding the adoption of ASU No. 2016-02.
Recent Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, or ASU No. 2016-13, which requires that entities use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowance for credit losses. The measurement of expected credit losses is based upon historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU No. 2016-13 will become effective for fiscal years beginning after December 15, 2019. The effective date for us is the first day of fiscal year 2021 (October 1, 2020). We are continuing to assess this guidance, but we have not historically experienced credit losses from our Client Companies and do not expect the adoption of ASU No. 2016-13 to have a material impact on our condensed consolidated financial statements.

8

Table of Contents
The RMR Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except per share amounts)

Note 3. Revenue Recognition
Base Business Management Fees—Managed Equity REITs
We earn annual base business management fees from the Managed Equity REITs by providing continuous services pursuant to business management agreements equal to the lesser of:
the sum of (a) 0.5% of the historical cost of transferred real estate assets, if any, as defined in the applicable business management agreement, plus (b) 0.7% of the average invested capital (exclusive of the transferred real estate assets), as defined in the applicable business management agreement, up to $250,000, plus (c) 0.5% of the average invested capital exceeding $250,000; and
the sum of (a) 0.7% of the average market capitalization, as defined in the applicable business management agreement, up to $250,000, plus (b) 0.5% of the average market capitalization exceeding $250,000.
The foregoing base business management fees are paid monthly in arrears. For purposes of these fees, a Managed Equity REIT’s assets under management do not include shares it owns of another Client Company.
For the three months ended December 31, 2019 and 2018, we earned aggregate base business management fees from the Managed Equity REITs of $27,391 and $28,271, respectively.
Incentive Business Management Fees—Managed Equity REITs
We also may earn annual incentive business management fees from the Managed Equity REITs under the business management agreements. The incentive business management fees, which are payable in cash, are contingent performance based fees recognized only when earned at the end of each respective measurement period. Incentive business management fees are excluded from the transaction price until it becomes probable that there will not be a significant reversal of cumulative revenue recognized.
The incentive fees are calculated for each Managed Equity REIT as 12.0% of the product of (a) the equity market capitalization of the Managed Equity REIT, as defined in the applicable business management agreement, on the last trading day of the year immediately prior to the relevant measurement period and (b) the amount, expressed as a percentage, by which the Managed Equity REIT’s total return per share, as defined in the applicable business management agreement, exceeded the applicable benchmark total return per share, as defined in the applicable business management agreement, of a specified REIT index identified in the applicable business management agreement for the measurement period, as adjusted for net share issuances during the period and subject to caps on the values of the incentive fees. The measurement period for the annual incentive business management fees is defined as the three year period ending on December 31 of the year for which such fee is being calculated, except for ILPT, whose annual incentive business management fee is based on a shorter period from its initial public offering on January 12, 2018 through the applicable calender year end. On December 31, 2018, RMR LLC’s business management agreements with ILPT and OPI were amended to provide that, for periods beginning on and after January 1, 2019, the SNL U.S. Industrial REIT Index and the SNL U.S. Office REIT Index will be used by ILPT and OPI, respectively, rather than the SNL U.S. REIT Equity Index, to calculate the benchmark return per share, as defined, for purposes of determining the incentive management fee, if any, payable thereunder.
For the three months ended December 31, 2019 and 2018, we recognized aggregate incentive business management fees earned from the Managed Equity REITs of zero and $120,094, respectively.
Management Agreements—Managed Operators, ABP Trust, AIC and the Open End Fund
We earn management fees by providing continuous services pursuant to the management agreements from the Managed Operators and ABP Trust equal to 0.6% of: (i) in the case of Five Star, Five Star’s revenues from all sources reportable under GAAP, less any revenues reportable by Five Star with respect to properties for which it provides management services, plus the gross revenues at those properties determined in accordance with GAAP; (ii) in the case of Sonesta, Sonesta’s revenues from all sources reportable under GAAP, less any revenues reportable by Sonesta with respect to hotels for which it provides management services, plus the gross revenues at those hotels determined in accordance with GAAP; (iii) in the case of TA, the sum of TA’s gross fuel margin, as defined in the applicable agreement, plus TA’s total nonfuel revenues; and (iv) in the case of ABP Trust, revenues from all sources reportable under GAAP. These fees are estimated and payable monthly in advance.

9

Table of Contents
The RMR Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except per share amounts)

Until June 30, 2019, we earned fees from AIC pursuant to a management agreement equal to 3.0% of its total premiums paid under active insurance underwritten or arranged by AIC. AIC’s property insurance program expired on June 30, 2019 and was not continued. As a result, we have not earned any management fees from AIC since that date.
We earn fees from the Open End Fund by providing a continuing and suitable real estate investment program consistent with the Open End Fund’s real estate investment policies and objectives pursuant to an administration services agreement. We earn fees equal to 1.0% of the Open End Fund’s net asset value, as defined, annually. These fees are payable quarterly in arrears.
For the three months ended December 31, 2019 and 2018, we earned aggregate fees from the Managed Operators, ABP Trust, AIC and the Open End Fund of $6,679 and $7,395, respectively.
Property Management Fees
We earn property management fees by providing continuous services pursuant to property management agreements with certain Client Companies. We generally earn fees under these agreements equal to 3.0% of gross collected rents. Also, under the terms of the property management agreements, we receive additional fees for construction supervision in connection with certain construction activities undertaken at the managed properties equal to 5.0% of the cost of such construction. For the three months ended December 31, 2019 and 2018, we earned aggregate property management fees of $12,525 and $11,770, respectively.
Advisory Services and Other Agreements
RMR Advisors is compensated pursuant to its agreement with RIF at an annual rate of 0.85% of RIF’s average daily managed assets. Average daily managed assets includes the net asset value attributable to RIF’s outstanding common shares, plus the liquidation preference of RIF’s outstanding preferred shares, plus the principal amount of any borrowings, including from banks or evidenced by notes, commercial paper or other similar instruments issued by RIF. RMR Advisors earned advisory services revenue of $811 and $733 for the three months ended December 31, 2019 and 2018, respectively.
Tremont Advisors is primarily compensated pursuant to its management agreements with TRMT and Centre Street at an annual rate of 1.5% of TRMT’s and Centre Street’s equity, respectively, as defined in the applicable agreements. Tremont Advisors may also earn an incentive fee under these management agreements for TRMT and (beginning the first full calendar quarter of 2021) Centre Street. In June 2018, Tremont Advisors agreed to waive any business management fees otherwise due and payable by TRMT pursuant to the management agreement for the period beginning July 1, 2018 until June 30, 2020. In addition, no incentive fee was paid or will be payable by TRMT to Tremont Advisors for the 2018 or 2019 calendar years, respectively.
Tremont Advisors earned advisory services revenue of $36 and $49 for the three months ended December 31, 2019 and 2018, respectively, in each case net of the fee waiver referenced above, as applicable.
The Tremont business earns between 0.5% and 1.0% of the aggregate principal amounts of any loans it originates. For the three months ended December 31, 2019 and 2018, the Tremont business earned fees for such origination services of $680 and $52, respectively, which amounts are included in management services revenue in our condensed consolidated statements of comprehensive income.
Reimbursable Compensation and Benefits
Reimbursable compensation and benefits include reimbursements, at cost, that arise primarily from services we provide pursuant to our property management agreements, a significant portion of which are charged or passed through to and were paid by tenants of our Client Companies. We recognize the revenue for reimbursements when we incur the related reimbursable compensation and benefits and other costs on behalf of our Client Companies. For the three months ended December 31, 2019 and 2018, we realized reimbursable compensation and benefits of $13,795 and $13,873, respectively. Included in reimbursable compensation and benefits are shared services fees we earn from TRMT for compensation and other costs related to the operation of the Tremont business. We earned shared services fees from TRMT of $346 and $336 for the three months ended December 31, 2019 and 2018, respectively.
Reimbursable compensation and benefits include grants of common shares from Client Companies directly to certain of our officers and employees in connection with the provision of management services to those companies. The revenue in

10

Table of Contents
The RMR Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except per share amounts)

respect of each grant is based on the fair value as of the grant date for those shares that have vested, with subsequent changes in the fair value of the unvested grants being recognized in our condensed consolidated statements of comprehensive income over the requisite service periods. We record an equal offsetting amount as equity based compensation expense for the value of the grants of common shares from our Client Companies to certain of our officers and employees. We realized equity based compensation expense and related reimbursements of $948 and $1,316 for the three months ended December 31, 2019 and 2018, respectively.
Other Client Company Reimbursable Expenses
Other client company reimbursable expenses include reimbursements that arise from services we provide pursuant to our property management agreements, a significant portion of which are charged or passed through to and were paid by tenants of our Client Companies. We have determined that we control the services provided by third parties for our Client Companies and therefore we account for the cost of these services and the related reimbursement revenue on a gross basis.
We realized other client company reimbursable expenses reflecting corresponding amounts in revenue and expense of $97,975 and $98,076 for the three months ended December 31, 2019 and 2018, respectively.
Note 4. Investments
Equity Method Investments
As of December 31, 2019, Tremont Advisors owned 1,600,100, or approximately 19.4%, of TRMT’s outstanding common shares. We account for our investment in TRMT using the equity method of accounting because we are deemed to exert significant influence, but not control, over TRMT’s most significant activities. Our share of earnings from our investment in TRMT included in equity in earnings of investees in our condensed consolidated statements of comprehensive income for the three months ended December 31, 2019 and 2018 was $255 and $35, respectively.
Equity Method Investment Accounted for Under the Fair Value Option
As of December 31, 2019, we own 298,538, or approximately 3.6%, of TA’s outstanding common shares. We purchased these shares on October 10, 2018 for $8,382. We account for our investment in TA using the equity method of accounting because we are deemed to exert significant influence, but not control, over TA’s most significant activities. We elected the fair value option to account for our equity method investment in TA and determine fair value using the closing price of TA’s common shares, which is a Level 1 fair value input. The market value of our investment in TA as of December 31, 2019 and September 30, 2019, based on quoted market prices, was $5,120 and $3,682, respectively. The unrealized gain (loss) in our condensed consolidated statements of comprehensive income for the three months ended December 31, 2019 and 2018 related to our investment in TA was $1,438 and $(2,769), respectively.
Note 5. Income Taxes
We are the sole managing member of RMR LLC. We are a corporation subject to U.S. federal and state income tax with respect to our allocable share of any taxable income of RMR LLC and its tax consolidated subsidiaries. RMR LLC is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. As a partnership, RMR LLC is generally not subject to U.S. federal and most state income taxes. Any taxable income or loss generated by RMR LLC is passed through to and included in the taxable income or loss of its members, including RMR Inc. and ABP Trust, based on each member’s respective ownership percentage.
For the three months ended December 31, 2019 and 2018, we recognized estimated income tax expense of $3,724 and $18,970, respectively, which includes $2,777 and $13,842, respectively, of U.S. federal income tax and $947 and $5,128, respectively, of state income taxes.

11

Table of Contents
The RMR Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except per share amounts)

A reconciliation of the statutory income tax rate to the effective tax rate is as follows:
 
 
Three Months Ended December 31,
 
 
2019
 
2018
Income taxes computed at the federal statutory rate
 
21.0
 %
 
21.0
 %
State taxes, net of federal benefit
 
3.6
 %
 
3.0
 %
Permanent items
 
0.2
 %
 
(0.1
)%
Net income attributable to noncontrolling interest
 
(10.1
)%
 
(10.1
)%
Total
 
14.7
 %
 
13.8
 %

In December 2019, the Internal Revenue Service and Department of the Treasury released regulations expanding the applicability of limits on executive compensation deductions to more taxpayers, including executive compensation allocated to publicly held corporations by a partnership. The expanded application of these regulations result in the effective tax rate of RMR Inc. increasing to 14.7% for the full fiscal year.
ASC 740, Income Taxes, provides a model for how a company should recognize, measure and present in its financial statements uncertain tax positions that have been taken or are expected to be taken with respect to all open years and in all significant jurisdictions. Pursuant to this topic, we recognize a tax benefit only if it is “more likely than not” that a particular tax position will be sustained upon examination or audit. To the extent the “more likely than not” standard has been satisfied, the benefit associated with a tax position is measured as the largest amount that is greater than 50.0% likely to be realized upon settlement. As of December 31, 2019, we had no uncertain tax positions.
Note 6. Fair Value of Financial Instruments
As of December 31, 2019 and September 30, 2019, the fair values of our financial instruments, which include cash and cash equivalents, amounts due from related parties and accounts payable and accrued expenses, were not materially different from their carrying values due to the short term nature of these financial instruments.
Recurring Fair Value Measures
On a recurring basis, we measure certain financial assets and financial liabilities at fair value based upon quoted market prices. ASC 820, Fair Value Measurements, establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1), and the lowest priority to unobservable inputs (Level 3). A financial asset’s or financial liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
Level 1 Estimates
The following are our assets and liabilities that all have been measured at fair value using Level 1 inputs in the fair value hierarchy as of December 31, 2019 and September 30, 2019:
 
 
December 31,
 
September 30,
 
 
2019
 
2019
Money market funds included in cash and cash equivalents
 
$
384,400

 
$
357,526

Current portion of due from related parties related to share based payment awards
 
3,563

 
4,814

Long term portion of due from related parties related to share based payment awards
 
9,001

 
9,238

Current portion of employer compensation liability related to share based payment awards included in accounts payable and accrued expenses
 
3,563

 
4,814

Long term portion of employer compensation liability related to share based payment awards
 
9,001

 
9,238


Note 7. Related Person Transactions
Adam D. Portnoy, one of our Managing Directors, is the sole trustee of our controlling shareholder, ABP Trust, and owns all of ABP Trust’s voting securities and a majority of the economic interests of ABP Trust. As of December 31, 2019, Adam D.

12

Table of Contents
The RMR Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except per share amounts)

Portnoy beneficially owned, in aggregate, (i) 144,502 shares of Class A common stock of RMR Inc., or Class A Common Shares; (ii) all the outstanding shares of Class B-1 common stock of RMR Inc., or Class B-1 Common Shares; (iii) all the outstanding shares of Class B-2 common stock of RMR Inc., or Class B-2 Common Shares; and (iv) 15,000,000 Class A Units of RMR LLC. Adam D. Portnoy and Jennifer B. Clark, our other Managing Director, are also officers of ABP Trust and RMR Inc. and officers and employees of RMR LLC. Matthew P. Jordan, our Executive Vice President, Chief Financial Officer and Treasurer is also an officer of ABP Trust and an officer and employee of RMR LLC.
Adam D. Portnoy is also the chair of the board of trustees of each of the Managed Equity REITs, the chair of the board of directors of each of Five Star and TA, a managing trustee or managing director of each of the Managed REITs, Five Star, RIF and TA, a director of AIC and the majority owner and director of Sonesta. Jennifer B. Clark, our other Managing Director, is a managing trustee of DHC and RIF, president and chief executive officer of AIC and a director of Sonesta. As of December 31, 2019, Adam D. Portnoy beneficially owned, in aggregate, 35.3% of Five Star’s outstanding common shares (6.3% as of January 1, 2020), 1.1% of SVC’s outstanding common shares, 1.2% of ILPT’s outstanding common shares, 1.5% of OPI’s outstanding common shares, 1.1% of DHC’s outstanding common shares, 4.0% of TA’s outstanding common shares (including through RMR LLC), 2.3% of RIF’s outstanding common shares, and 19.5% of TRMT’s outstanding common shares (including through Tremont Advisors).
The Managed Equity REITs and AIC have no employees. RMR LLC provides or arranges for all the personnel, overhead and services required for the operation of the Managed Equity REITs and AIC pursuant to management agreements with them. All the officers of the Managed Equity REITs, AIC and the Open End Fund are officers or employees of RMR LLC. TRMT has no employees. All the officers, overhead and required office space of TRMT are provided or arranged by Tremont Advisors. All of TRMT’s officers are officers or employees of Tremont Advisors or RMR LLC. Many of the executive officers of the Managed Operators are officers or employees of RMR LLC. All of RIF’s officers are officers or employees of RMR Advisors or RMR LLC. Some of our executive officers are also managing directors or managing trustees of certain of the Managed REITs, the Managed Operators and RIF.
As of December 31, 2019, ABP Trust owned 100% of Centre Street, 14.3% of AIC and 206,300 limited partner units, or 100%, of the Open End Fund and RMR LLC owned no limited partnership units, but has committed to contributing $100,000 to the Open End Fund. The general partner of the Open End Fund is a subsidiary of ABP Trust and is not entitled to any compensation for services rendered to the Open End Fund in its capacity as general partner.
Additional information about our related person transactions appears in Note 8, Shareholders’ Equity, below and in our 2019 Annual Report.

13

Table of Contents
The RMR Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except per share amounts)

Revenues from Related Parties
For the three months ended December 31, 2019 and 2018, we recognized revenues from related parties as set forth in the following table:
 
 
Three Months Ended December 31, (1)
 
 
2019
 
2018
 
 
$
 
%
 
$
 
%
Managed Equity REITs:
 
 
 
 
 
 
 
 
DHC (2)
 
$
43,557

 
27.2
%
 
$
85,979

 
30.7
%
ILPT
 
16,341

 
10.2

 
8,460

 
3.0

OPI (3)
 
64,883

 
40.6

 
56,243

 
20.1

SIR (2) (3)
 

 

 
47,843

 
17.1

SVC (2)
 
19,124

 
12.0

 
66,395

 
23.7

 
 
143,905

 
90.0

 
264,920

 
94.6

 
 
 
 
 
 
 
 
 
Managed Operators:
 
 
 
 
 
 
 
 
Five Star
 
2,276

 
1.4

 
2,413

 
0.9

Sonesta
 
625

 
0.4

 
757

 
0.3

TA
 
3,445

 
2.2

 
3,853

 
1.4

 
 
6,346

 
4.0

 
7,023

 
2.6

 
 
 
 
 
 
 
 
 
Other Client Companies:
 
 
 
 
 
 
 
 
ABP Trust
 
3,317

 
2.1

 
3,335

 
1.2

AIC
 
91

 
0.1

 
60

 

Open End Fund
 
3,996

 
2.5

 
3,477

 
1.2

RIF
 
811

 
0.5

 
733

 
0.2

TRMT
 
697

 
0.4

 
695

 
0.2

 
 
8,912

 
5.6

 
8,300

 
2.8

Total revenues from related parties
 
159,163

 
99.6

 
280,243

 
100.0

Revenues from unrelated parties
 
729

 
0.4

 
70

 

 
 
$
159,892

 
100.0
%
 
$
280,313

 
100.0
%

(1)
Revenues from related parties for the three months ended December 31, 2019 and 2018 include (i) reimbursable compensation and benefits of $13,795 and $13,873, respectively, and (ii) other client company reimbursable expenses of $97,975 and $98,076, respectively.
(2)
The amounts for the three months ended December 31, 2018 include incentive business management fees of $40,642, $25,817 and $53,635, which RMR LLC earned from DHC, SIR and SVC, respectively, and which were paid in January 2019.
(3)
SIR merged with and into a subsidiary of OPI on December 31, 2018, which subsidiary then merged into OPI, and SIR’s separate business and property management agreements with RMR LLC were terminated. The combined company continues to be managed by RMR LLC pursuant to OPI’s business and property management agreements with RMR LLC. This table presents the management services, reimbursable compensation and benefits and other client company reimbursable expenses revenues from SIR separately as they relate to periods prior to the merger with OPI.

14

Table of Contents
The RMR Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except per share amounts)

Amounts Due From Related Parties
The following table represents amounts due from related parties as of the dates indicated:
 
 
December 31,
 
September 30,
 
 
2019
 
2019
Managed Equity REITs:
 
 
 
 
DHC
 
$
25,197

 
$
25,505

ILPT
 
7,748

 
10,630

OPI
 
34,717

 
39,233

SVC
 
10,988

 
18,933

 
 
78,650

 
94,301

 
 
 
 
 
Managed Operators:
 
 
 
 
Five Star
 
181

 
136

Sonesta
 
13

 
37

TA
 
618

 
392

 
 
812

 
565

 
 
 
 
 
Other Client Companies:
 
 
 
 
ABP Trust
 
2,338

 
2,580

AIC
 
7

 
7

Open End Fund
 
2,647

 
4,567

RIF
 
39

 
75

TRMT
 
772

 
664

 
 
5,803

 
7,893

 
 
$
85,265

 
$
102,759


Leases
As of December 31, 2019, we leased from ABP Trust and certain Managed Equity REITs office space for use as our headquarters and local offices. We incurred rental expense under related party leases aggregating $1,433 and $1,287 for the three months ended December 31, 2019 and 2018, respectively.
Tax-Related Payments
Pursuant to our tax receivable agreement with ABP Trust, RMR Inc. pays to ABP Trust 85.0% of the amount of cash 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 our dealings with ABP Trust and (b) tax benefits related to imputed interest deemed to be paid by us as a result of the tax receivable agreement. As of December 31, 2019, our condensed consolidated balance sheet reflects a liability related to the tax receivable agreement of $32,061, including $2,111 classified as a current liability that we expect to pay to ABP Trust during the fourth quarter of fiscal year 2020.
Under the RMR LLC operating agreement, RMR LLC is also required to make certain pro rata distributions to each member of RMR LLC quarterly on the basis of the estimated tax liabilities of its members estimated quarterly, subject to future adjustment based on actual results. For the three months ended December 31, 2019 and 2018, pursuant to the RMR LLC operating agreement, RMR LLC made required quarterly tax distributions to holders of its membership units totaling $7,993 and $16,722, respectively, of which $4,163 and $8,685, respectively, was distributed to us and $3,830 and $8,037, respectively, was distributed to ABP Trust, based on each membership unit holder’s respective ownership percentage. The amounts distributed to us were eliminated in our condensed consolidated financial statements, and the amounts distributed to ABP Trust were recorded as a reduction of its noncontrolling interest. We used funds from these distributions to pay certain of our U.S. federal and state income tax liabilities and to pay part of our obligations under the tax receivable agreement.

15

Table of Contents
The RMR Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except per share amounts)

Separation Arrangements
David J. Hegarty, Mark L. Kleifges, Bruce J. Mackey Jr., Thomas M. O’Brien and John C. Popeo, each a former Executive Vice President of RMR LLC, retired from and resigned their RMR LLC officer positions between November 29, 2017 and December 31, 2018. We entered into retirement agreements with these former officers in connection with their retirements. Pursuant to these agreements, we made various cash payments and accelerated the vesting of unvested shares RMR Inc. previously awarded to these retiring officers. We also enter into separation arrangements from time to time with other nonexecutive officers and employees of ours. There remains no further substantive performance obligations with respect to any such arrangements, and we in turn recognized all applicable provisions in our condensed consolidated statements of comprehensive income as separation costs.
In December 2019, we entered into a retirement agreement with TA and a former executive officer of RMR LLC, Andrew J. Rebholz. Mr. Rebholz was also a managing director and chief executive officer of TA. Pursuant to his retirement agreement, Mr. Rebholz will continue to serve as an employee of RMR LLC through June 30, 2020. Under Mr. Rebholz’s retirement agreement, consistent with past practice, RMR LLC and TA will continue to pay Mr. Rebholz his current aggregate annual base salary of $375 until June 30, 2020 and RMR LLC and TA paid him an aggregate cash bonus in respect of 2019 of $1,250 in December 2019. RMR LLC and TA also agreed to pay Mr. Rebholz a combined cash payment of $1,250 in 2020, subject to certain conditions. Pursuant to the retirement agreement, TA has paid or will pay 80.0% of the above referenced amounts to Mr. Rebholz and RMR LLC has paid or will pay the remaining 20.0%, including any payroll taxes due. In addition, in January 2020, our Equity Plan Committee approved the acceleration of all 7,300 unvested shares owned by Mr. Rebholz of us as of his retirement date, June 30, 2020. We expect to record approximately $324 of equity based separation costs related to the acceleration of these shares in the quarter ending March 31, 2020.
For the three months ended December 31, 2019 and 2018, we recognized cash and equity based separation costs as set forth in the following table:
 
 
Three Months Ended December 31,
 
 
2019
 
2018
Former executive officers:
 
 
 
 
Cash separation costs
 
$
260

 
$
5,312

Equity based separation costs
 

 
1,074

 
 
260

 
6,386

Former nonexecutive officers:
 
 
 
 
Cash separation costs
 

 
11

 
 

 
11

Total separation costs
 
$
260

 
$
6,397


Note 8. Shareholders’ Equity
Repurchases
In December 2019, we withheld and repurchased 133 of our Class A Common Shares valued at $45.67 per share, the closing price of our Class A Common Shares on Nasdaq on the date of purchase, from one employee of RMR LLC in satisfaction of tax withholding and payment obligations in connection with the issuance of awards of our common shares. The aggregate value of the withheld and repurchased shares was $6. In connection with the acquisition of these Class A Common Shares, and as required by the RMR LLC operating agreement, RMR LLC concurrently acquired an identical number of Class A Units from RMR Inc.
Distributions
During the three months ended December 31, 2019 and 2018, we declared and paid dividends on our Class A Common Shares and Class B-1 Common Shares as follows:

16

Table of Contents
The RMR Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except per share amounts)

Declaration
 
Record
 
Paid
 
Distributions
 
Total
Date
 
Date
 
Date
 
Per Common Share
 
Distributions
Three Months Ended December 31, 2019
 
 
 
 
10/17/2019
 
10/28/2019
 
11/14/2019
 
$
0.38

 
$
6,195

Three Months Ended December 31, 2018
 
 
 
 
10/18/2018
 
10/29/2018
 
11/15/2018
 
$
0.35

 
$
5,680

These dividends were funded in part by distributions from RMR LLC to holders of its membership units as follows:
 
 
 
 
 
 
Distributions Per
 
Total
 
RMR LLC
 
RMR LLC
Declaration
 
Record
 
Paid
 
RMR LLC
 
RMR LLC
 
Distributions
 
Distributions
Date
 
Date
 
Date
 
Membership Unit
 
Distributions
 
to RMR Inc.
 
to ABP Trust
Three Months Ended December 31, 2019
 
 
 
 
 
 
 
 
10/17/2019
 
10/28/2019
 
11/14/2019
 
$
0.30

 
$
9,391

 
$
4,891

 
$
4,500

Three Months Ended December 31, 2018
 
 
 
 
 
 
 
 
10/18/2018
 
10/29/2018
 
11/15/2018
 
$
0.30

 
$
9,369

 
$
4,869

 
$
4,500


The remainder of the above noted dividends that were paid were funded with cash accumulated at RMR Inc.
On January 16, 2020, we declared a quarterly dividend on our Class A Common Shares and Class B-1 Common Shares to our shareholders of record as of January 27, 2020, in the amount of $0.38 per Class A Common Share and Class B-1 Common Share, or $6,194. 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 $9,390, of which $4,890 will be distributed to us based on our aggregate ownership of 16,300,302 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 to pay this dividend on or about February 20, 2020.
Note 9. Per Common Share Amounts
Earnings per common share reflects net income attributable to RMR Inc. divided by our weighted average common shares outstanding. Basic and diluted weighted average common shares outstanding represents our outstanding Class A Common Shares and our Class B-1 Common Shares during the applicable periods. Our Class B-2 Common Shares, which are paired with ABP Trust’s Class A Units, have no independent economic interest in RMR Inc. and thus are not included as common shares outstanding for purposes of calculating our net income attributable to RMR Inc. per common share.
Unvested Class A Common Shares granted to our employees are deemed participating securities for purposes of calculating earnings per common share because they have dividend rights. We calculate earnings per share using the two-class method. Under the two-class method, we allocate earnings proportionately to vested Class A Common Shares and Class B-1 Common Shares outstanding and unvested Class A Common Shares outstanding for the period. Earnings attributable to unvested Class A Common Shares are excluded from earnings per share under the two-class method as reflected in our condensed consolidated statements of comprehensive income.

17

Table of Contents
The RMR Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except per share amounts)

The calculation of basic and diluted earnings per share is as follows:
 
 
Three Months Ended December 31,
 
 
2019
 
2018
Basic EPS
 
 
 
 
Numerator:
 
 
 
 
Net income attributable to The RMR Group Inc.
 
$
9,449

 
$
52,209

Income attributable to unvested participating securities
 
(73
)
 
(353
)
Net income attributable to The RMR Group Inc. used in calculating basic EPS
 
$
9,376

 
$
51,856

Denominator:
 
 
 
 
Weighted average common shares outstanding - basic
 
16,177

 
16,120

Net income attributable to The RMR Group Inc. per common share - basic
 
$
0.58

 
$
3.22


Diluted EPS
 
 
 
 
Numerator:
 
 
 
 
Net income attributable to The RMR Group Inc.
 
$
9,449

 
$
52,209

Income attributable to unvested participating securities
 
(73
)
 
(353
)
Net income attributable to The RMR Group Inc. used in calculating diluted EPS
 
$
9,376

 
$
51,856

Denominator:
 
 
 
 
Weighted average common shares outstanding - basic
 
16,177

 
16,120

Dilutive effect of incremental unvested shares
 

 
11

Weighted average common shares outstanding - diluted
 
16,177

 
16,131

Net income attributable to The RMR Group Inc. per common share - diluted
 
$
0.58

 
$
3.22


The 15,000,000 Class A Units that we do not own may be redeemed for our Class A Common Shares on a one-for-one basis, or upon such redemption, we may elect to pay cash instead of issuing Class A Common Shares. Upon redemption of a Class A Unit, the Class B-2 Common Share “paired” with such unit is canceled for no additional consideration. If all outstanding Class A Units that we do not own had been redeemed for our Class A Common Shares in the periods presented, our Class A Common Shares outstanding as of December 31, 2019, would have been 30,301,767. In computing the dilutive effect, if any, that the aforementioned redemption would have on earnings per share, we considered that net income available to holders of our Class A Common Shares would increase due to elimination of the noncontrolling interest (including any tax impact). For the periods presented, such redemption is not reflected in diluted earnings per share as the assumed redemption would be anti-dilutive.
Note 10. Leases
We enter into operating leases, as the lessee, for office space and determine if an arrangement is a lease at inception of the arrangement. Operating lease liabilities and right of use assets are recognized based on the present value of the future minimum lease payments over the lease term using our estimated incremental borrowing rate. Operating lease expense associated with minimum lease payments is recognized on a straight line basis over the lease term and was $1,603 for the three months ended December 31, 2019. Minimum lease payments for leases with an initial term of twelve months or less are not recorded on our condensed consolidated balance sheet. Lease expense for leases with an initial term of twelve months or less was $15 for the three months ended December 31, 2019. As of December 31, 2019, our operating leases expire on various dates through 2030, the weighted average remaining lease term was 9.6 years and the determination of the present value of the remaining lease payments utilized a weighted average discount rate of 3.1%.

18

Table of Contents
The RMR Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except per share amounts)

The following table presents the undiscounted cash flows on an annual basis for our operating lease liabilities as of December 31, 2019:
2020
 
$
3,916

2021
 
5,272

2022
 
5,343

2023
 
4,708

2024
 
4,205

Thereafter
 
21,283

Total lease payments (1)
 
44,727

Less: imputed interest
 
(6,173
)
Present value of operating lease liabilities
 
38,554

Less: current portion of operating lease liabilities
 
(4,087
)
Operating lease liabilities, net of current portion
 
$
34,467

(1)
Excludes $1,052 of lease payments for signed leases that have not yet commenced.

19

Table of Contents
The RMR Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except per share amounts)

Note 11. Segment Reporting
We have one reportable business segment, which is RMR LLC. In the tables below, our All Other Operations includes the operations of RMR Inc., RMR Advisors and Tremont Advisors.
 
 
Three Months Ended December 31, 2019
 
 
 
 
All Other
 
 
 
 
RMR LLC (1)
 
Operations
 
Total
Revenues:
 
 
 
 
 
 
Management services
 
$
46,595