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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 March 31, 2020
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 May 8, 2020, there were 15,314,479 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

March 31, 2020
 
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)
 
 
March 31,
 
September 30,
 
 
2020
 
2019
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
377,362

 
$
358,448

Due from related parties
 
74,150

 
93,521

Prepaid and other current assets
 
5,046

 
5,848

Total current assets
 
456,558

 
457,817

 
 
 
 
 
Property and equipment, net
 
2,200

 
2,383

Due from related parties, net of current portion
 
4,978

 
9,238

Equity method investment
 
6,532

 
6,658

Equity method investment accounted for under the fair value option
 
2,920

 
3,682

Goodwill
 
1,859

 
1,859

Intangible assets, net of amortization
 
300

 
323

Operating lease right of use assets
 
36,878

 

Deferred tax asset
 
25,264

 
25,729

Other assets, net of amortization
 
148,435

 
153,143

Total assets
 
$
685,924

 
$
660,832

 
 
 
 
 
Liabilities and Equity
 
 
 
 
Current liabilities:
 
 
 
 
Other client company reimbursable expenses
 
$
50,577

 
$
65,909

Accounts payable and accrued expenses
 
22,074

 
20,266

Operating lease liabilities
 
4,302

 

Employer compensation liability
 
1,665

 
4,814

Total current liabilities
 
78,618

 
90,989

 
 
 
 
 
Deferred rent payable, net of current portion
 

 
1,620

Operating lease liabilities, net of current portion
 
34,268

 

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

 
29,950

Employer compensation liability, net of current portion
 
4,978

 
9,238

Total liabilities
 
147,814

 
131,797

 
 
 
 
 
Commitments and contingencies
 


 


 
 
 
 
 
Equity:
 
 
 
 
Class A common stock, $0.001 par value; 31,600,000 shares authorized; 15,314,479 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
 
105,265

 
103,360

Retained earnings
 
273,374

 
257,457

Cumulative common distributions
 
(84,583
)
 
(72,194
)
Total shareholders’ equity
 
294,087

 
288,654

Noncontrolling interest
 
244,023

 
240,381

Total equity
 
538,110

 
529,035

Total liabilities and equity
 
$
685,924

 
$
660,832

See accompanying notes.

3

Table of Contents

The RMR Group Inc.
Condensed Consolidated Statements of Income
(amounts in thousands, except per share amounts)
(unaudited)
 
 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
 
2020
 
2019
 
2020
 
2019
Revenues:
 
 
 
 
 
 
 
 
Management services
 
$
43,321

 
$
42,600

 
$
90,596

 
$
90,088

Incentive business management fees
 

 

 

 
120,094

Advisory services
 
780

 
761

 
1,627

 
1,543

Total management and advisory services revenues
 
44,101

 
43,361

 
92,223

 
211,725

Reimbursable compensation and benefits
 
12,533

 
13,412

 
26,328

 
27,285

Other client company reimbursable expenses
 
84,227

 
73,323

 
182,202

 
171,399

Total reimbursable costs
 
96,760

 
86,735

 
208,530

 
198,684

Total revenues
 
140,861

 
130,096

 
300,753

 
410,409

Expenses:
 
 
 
 
 
 
 
 
Compensation and benefits
 
30,122

 
28,981

 
60,319

 
56,993

Equity based compensation
 
302

 
1,204

 
1,884

 
3,015

Separation costs
 
385

 
414

 
645

 
6,811

Total compensation and benefits expense
 
30,809

 
30,599

 
62,848

 
66,819

General and administrative
 
7,297

 
7,122

 
14,343

 
14,442

Other client company reimbursable expenses
 
84,227

 
73,323

 
182,202

 
171,399

Transaction and acquisition related costs
 
373

 
47

 
1,169

 
231

Depreciation and amortization
 
246

 
257

 
502

 
512

Total expenses
 
122,952

 
111,348

 
261,064

 
253,403

Operating income
 
17,909

 
18,748

 
39,689

 
157,006

Interest and other income
 
1,500

 
2,468

 
3,375

 
3,994

Equity in earnings of investees
 
324

 
109

 
579

 
144

Unrealized (loss) gain on equity method investment accounted for under the fair value option
 
(2,200
)
 
522

 
(762
)
 
(2,247
)
Income before income tax expense
 
17,533

 
21,847

 
42,881

 
158,897

Income tax expense
 
(2,612
)
 
(3,139
)
 
(6,336
)
 
(22,109
)
Net income
 
14,921

 
18,708

 
36,545

 
136,788

Net income attributable to noncontrolling interest
 
(8,453
)
 
(10,540
)
 
(20,628
)
 
(76,411
)
Net income attributable to The RMR Group Inc.
 
$
6,468

 
$
8,168

 
$
15,917

 
$
60,377

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding - basic
 
16,186

 
16,120

 
16,181

 
16,120

Weighted average common shares outstanding - diluted
 
31,186

 
16,147

 
31,181

 
16,140

 
 
 
 
 
 
 
 
 
Net income attributable to The RMR Group Inc. per common share - basic
 
$
0.40

 
$
0.50

 
$
0.98

 
$
3.72

Net income attributable to The RMR Group Inc. per common share - diluted
 
$
0.39

 
$
0.50

 
$
0.96

 
$
3.72

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 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

Share grants, net
 

 

 

 
1,271

 

 

 
1,271

 

 
1,271

Net income
 

 

 

 

 
6,468

 

 
6,468

 
8,453

 
14,921

Tax distributions to Member
 

 

 

 

 

 

 

 
(4,156
)
 
(4,156
)
Common share distributions
 

 

 

 

 

 
(6,194
)
 
(6,194
)
 
(4,500
)
 
(10,694
)
Balance at March 31, 2020
 
$
15

 
$
1

 
$
15

 
$
105,265

 
$
273,374

 
$
(84,583
)
 
$
294,087

 
$
244,023

 
$
538,110

See accompanying notes.

5

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, 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

Share grants, net
 

 

 

 
862

 

 

 

 
862

 

 
862

Net income
 

 

 

 

 
8,168

 

 

 
8,168

 
10,540

 
18,708

Tax distributions to Member
 

 

 

 

 

 

 

 

 
(11,616
)
 
(11,616
)
Common share distributions
 

 

 

 

 

 

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

 

 

 

 

 
(5
)
 

 
(5
)
 
(5
)
 
(10
)
Reclassification due to disposition of our Australian operations
 

 

 

 

 

 
(75
)
 

 
(75
)
 

 
(75
)
Balance at March 31, 2019
 
$
15

 
$
1

 
$
15

 
$
101,670

 
$
243,254

 
$

 
$
(60,827
)
 
$
284,128

 
$
249,650

 
$
533,778

See accompanying notes.


6

Table of Contents

The RMR Group Inc.
Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)
 
 
Six Months Ended March 31,
 
 
2020
 
2019
Cash Flows from Operating Activities:
 
 
 
 
Net income
 
$
36,545

 
$
136,788

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
 
Depreciation and amortization
 
502

 
512

Straight line office rent
 
72

 
123

Amortization expense related to other assets
 
4,708

 
4,707

Deferred income taxes
 
465

 
363

Operating expenses paid in The RMR Group Inc. common shares
 
2,000

 
2,431

Equity in earnings of investees
 
(579
)
 
(144
)
Distributions from equity method investments
 
705

 
66

Unrealized loss on equity method investment accounted for under the fair value option
 
762

 
2,247

Changes in assets and liabilities:
 
 
 
 
Due from related parties
 
16,223

 
(36,762
)
Prepaid and other current assets
 
802

 
3,579

Other client company reimbursable expenses
 
(15,332
)
 
44,321

Accounts payable and accrued expenses
 
1,863

 
17,639

Net cash from operating activities
 
48,736

 
175,870

 
 
 
 
 
Cash Flows from Investing Activities:
 

 

Purchase of property and equipment
 
(352
)
 
(125
)
Equity method investment in TravelCenters of America Inc.
 

 
(8,382
)
Net cash used in investing activities
 
(352
)
 
(8,507
)
 
 
 
 
 
Cash Flows from Financing Activities:
 
 
 
 
Distributions to noncontrolling interest
 
(16,986
)
 
(28,653
)
Distributions to common shareholders
 
(12,389
)
 
(11,360
)
Repurchase of common shares
 
(95
)
 

Net cash used in financing activities
 
(29,470
)
 
(40,013
)
 
 
 
 
 
Effect of exchange rate fluctuations on cash and cash equivalents
 

 
(85
)
Increase in cash and cash equivalents
 
18,914

 
127,265

Cash and cash equivalents at beginning of period
 
358,448

 
256,848

Cash and cash equivalents at end of period
 
$
377,362

 
$
384,113

 
 
 
 
 
Supplemental Cash Flow Information:
 
 
 
 
Income taxes paid
 
$
6,320

 
$
15,399

Supplemental Schedule of Non-Cash Activities:
 
 
 
 
Fair value of share based payments recorded
 
$
658

 
$
2,072

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

 
$

See accompanying notes.

7


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 March 31, 2020, RMR Inc. owned 15,314,479 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 March 31, 2020. 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 March 31, 2020, 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 March 31, 2020, 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, 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, until its dissolution on February 13, 2020, 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. On April 16, 2020, RIF’s shareholders approved its plan to convert from a registered investment company to a commercial mortgage REIT and RIF is in the preliminary stages of implementing a plan to execute this conversion.
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, and, as of December 18, 2019, Centre Street Finance LLC, or Centre Street, a private fund. Both TRMT and Centre Street focus primarily on originating and investing in first mortgage whole loans secured by middle market and transitional commercial real estate. Centre Street is a direct wholly owned subsidiary of ABP Trust. TRMT, together with

8

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

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.
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 determines 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 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.

9

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 March 31, 2020 and 2019, we earned aggregate base business management fees from the Managed Equity REITs of $24,527 and $25,536, respectively. For the six months ended March 31, 2020 and 2019, we earned aggregate base business management fees from the Managed Equity REITs of $51,918 and $53,807, 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 calendar 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 six months ended March 31, 2020 and 2019, 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 until December 31, 2019, 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. Effective January 1, 2020,

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

management fees earned from ABP Trust are equal to 0.5% of ABP Trust’s average invested capital, as defined in the management agreement. These fees are estimated and payable monthly in advance.
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 through AIC’s dissolution on February 13, 2020.
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.
We earned aggregate fees from the Managed Operators, ABP Trust, AIC and the Open End Fund of $6,984 and $6,752 for the three months ended March 31, 2020 and 2019, respectively, and $13,663 and $14,147 for the six months ended March 31, 2020 and 2019, 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. We earned aggregate property management fees of $11,708 and $10,207 for the three months ended March 31, 2020 and 2019, respectively, and $24,233 and $21,977 for the six months ended March 31, 2020 and 2019, 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 $743 and $725 for the three months ended March 31, 2020 and 2019, respectively, and $1,554 and $1,458 for the six months ended March 31, 2020 and 2019, 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. Tremont Advisors has waived any business management and incentive fees otherwise due and payable by TRMT pursuant to the management agreement for the period beginning July 1, 2018 until June 30, 2020.
Tremont Advisors earned advisory services revenue from the Tremont Advisory Clients of $37 and $36 for the three months ended March 31, 2020 and 2019, respectively, and $73 and $85 for the six months ended March 31, 2020 and 2019, 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. The Tremont business earned fees for such origination services of $102 and $105 for the three months ended March 31, 2020 and 2019, respectively, and $782 and $157 for the six months ended March 31, 2020 and 2019, respectively, which amounts are included in management services revenue in our condensed consolidated statements of 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. We realized reimbursable compensation and benefits of $12,533 and $13,412 for the three months ended March 31, 2020 and 2019, respectively, and $26,328 and $27,285 for the six months ended March 31, 2020 and 2019, respectively. Included in reimbursable compensation

11

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

and benefits are shared services fees we earn from the Tremont Advisory Clients for compensation and other costs related to the operation of the Tremont business. We earned shared services fees from the Tremont Advisory Clients of $368 and $370 for the three months ended March 31, 2020 and 2019, respectively, and $714 and $706 for the six months ended March 31, 2020 and 2019, 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 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 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 (income) and related reimbursements of $(290) and $756 for the three months ended March 31, 2020 and 2019, respectively, and $658 and $2,072 for the six months ended March 31, 2020 and 2019, respectively. During the three months ended March 31, 2020, prior period equity based compensation for unvested shares was reversed as a result of Client Company share price declines from December 31, 2019 to March 31, 2020.
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 $84,227 and $73,323 for the three months ended March 31, 2020 and 2019, respectively, and $182,202 and $171,399 for the six months ended March 31, 2020 and 2019, respectively.
Note 4. Investments
Equity Method Investments
As of March 31, 2020, 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 income was $324 and $109 for the three months ended March 31, 2020 and 2019, respectively, and $579 and $144 for the six months ended March 31, 2020 and 2019, respectively.
Equity Method Investment Accounted for Under the Fair Value Option
As of March 31, 2020, 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 March 31, 2020 and September 30, 2019, based on quoted market prices, was $2,920 and $3,682, respectively. The unrealized (loss) gain in our condensed consolidated statements of income related to our investment in TA was $(2,200) and $522 for the three months ended March 31, 2020 and 2019, respectively, and $(762) and $(2,247) for the six months ended March 31, 2020 and 2019, 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.

12

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

For the three months ended March 31, 2020 and 2019, we recognized estimated income tax expense of $2,612 and $3,139, respectively, which includes $1,901 and $2,290, respectively, of U.S. federal income tax and $711 and $849, respectively, of state income taxes. For the six months ended March 31, 2020 and 2019, we recognized estimated income tax expense of $6,336 and $22,109, respectively, which includes $4,678 and $16,132, respectively, of U.S. federal income tax and $1,658 and $5,977, respectively, of state income taxes.
A reconciliation of the statutory income tax rate to the effective tax rate is as follows:
 
 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
 
2020
 
2019
 
2020
 
2019
Income taxes computed at the federal statutory rate
 
21.0
 %
 
21.0
 %
 
21.0
 %
 
21.0
 %
State taxes, net of federal benefit
 
3.9
 %
 
3.7
 %
 
3.7
 %
 
2.9
 %
Permanent items
 
0.1
 %
 
(0.2
)%
 
0.2
 %
 
0.1
 %
Net income attributable to noncontrolling interest
 
(10.1
)%
 
(10.1
)%
 
(10.1
)%
 
(10.1
)%
Total
 
14.9
 %
 
14.4
 %
 
14.8
 %
 
13.9
 %

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 results in increases to our effective income tax rate.
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 March 31, 2020, we had no uncertain tax positions.
Note 6. Fair Value of Financial Instruments
As of March 31, 2020 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.

13

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

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 March 31, 2020 and September 30, 2019:
 
 
March 31,
 
September 30,
 
 
2020
 
2019
Money market funds included in cash and cash equivalents
 
$
298,240

 
$
357,526

Current portion of due from related parties related to share based payment awards
 
1,665

 
4,814

Long term portion of due from related parties related to share based payment awards
 
4,978

 
9,238

Current portion of employer compensation liability related to share based payment awards included in accounts payable and accrued expenses
 
1,665

 
4,814

Long term portion of employer compensation liability related to share based payment awards
 
4,978

 
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 March 31, 2020, Adam D. Portnoy beneficially owned, in aggregate, (i) 147,502 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 Sonesta (and its parent) and is a controlling shareholder of Sonesta. Jennifer B. Clark, our other Managing Director, is a managing trustee of DHC and RIF, a managing director of FVE and a director of Sonesta. Prior to its dissolution on February 13, 2020, Mr. Portnoy was a director of AIC and Ms. Clark was the president and chief executive officer of AIC. As of March 31, 2020, Adam D. Portnoy beneficially owned, in aggregate, 6.3% of Five Star’s outstanding common shares, 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 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 (until its dissolution on February 13, 2020), pursuant to management agreements with them. All the officers of the Managed Equity REITs 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. RIF has no employees. All officers, overhead and required office space of RIF are provided or arranged by RMR Advisors. 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 March 31, 2020, ABP Trust owned 100% of Centre Street and 206,300 limited partnership units, or 100%, of the Open End Fund and RMR LLC owned no limited partnership units of, 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. Until its dissolution on February 13, 2020, ABP Trust owned 14.3% of AIC.
Additional information about our related person transactions appears in Note 8, Shareholders’ Equity, below and in our 2019 Annual Report.

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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 and six months ended March 31, 2020 and 2019, we recognized revenues from related parties as set forth in the following table:
 
 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
 
2020
 
2019
 
2020
 
2019
 
 
$
 
%
 
$
 
%
 
$
 
%
 
$
 
%
Managed Equity REITs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
DHC (1)
 
$
41,047

 
29.1
%
 
$
36,851

 
28.3
%
 
$
84,604

 
28.1
%
 
$
122,830

 
29.9
%
ILPT
 
10,274

 
7.3

 
6,874

 
5.3

 
26,615

 
8.8

 
15,334

 
3.7

OPI (2)
 
56,569

 
40.2

 
58,114

 
44.7

 
121,452

 
40.4

 
114,357

 
27.9

SIR (1) (2)