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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 June 30, 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 August 6, 2020, there were 15,315,025 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

June 30, 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)
 
 
June 30,
 
September 30,
 
 
2020
 
2019
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
393,655

 
$
358,448

Due from related parties
 
79,312

 
93,521

Prepaid and other current assets
 
3,595

 
5,848

Total current assets
 
476,562

 
457,817

 
 
 
 
 
Property and equipment, net
 
2,148

 
2,383

Due from related parties, net of current portion
 
5,837

 
9,238

Equity method investment
 
6,974

 
6,658

Equity method investment accounted for under the fair value option
 
4,598

 
3,682

Goodwill
 
1,859

 
1,859

Intangible assets, net of amortization
 
288

 
323

Operating lease right of use assets
 
35,755

 

Deferred tax asset
 
24,621

 
25,729

Other assets, net of amortization
 
146,081

 
153,143

Total assets
 
$
704,723

 
$
660,832

 
 
 
 
 
Liabilities and Equity
 
 
 
 
Current liabilities:
 
 
 
 
Other client company reimbursable expenses
 
$
59,127

 
$
65,909

Accounts payable and accrued expenses
 
30,858

 
20,266

Operating lease liabilities
 
4,343

 

Employer compensation liability
 
998

 
4,814

Total current liabilities
 
95,326

 
90,989

 
 
 
 
 
Deferred rent payable, net of current portion
 

 
1,620

Operating lease liabilities, net of current portion
 
33,156

 

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

 
29,950

Employer compensation liability, net of current portion
 
5,837

 
9,238

Total liabilities
 
164,269

 
131,797

 
 
 
 
 
Commitments and contingencies
 


 


 
 
 
 
 
Equity:
 
 
 
 
Class A common stock, $0.001 par value; 31,600,000 shares authorized; 15,315,445 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
 
105,863

 
103,360

Retained earnings
 
280,091

 
257,457

Cumulative common distributions
 
(90,783
)
 
(72,194
)
Total shareholders’ equity
 
295,202

 
288,654

Noncontrolling interest
 
245,252

 
240,381

Total equity
 
540,454

 
529,035

Total liabilities and equity
 
$
704,723

 
$
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
 
Nine Months Ended
 
 
June 30,
 
June 30,
 
 
2020
 
2019
 
2020
 
2019
Revenues:
 
 
 
 
 
 
 
 
Management services
 
$
38,625

 
$
43,641

 
$
129,221

 
$
133,729

Incentive business management fees
 

 

 

 
120,094

Advisory services
 
625

 
802

 
2,252

 
2,345

Total management and advisory services revenues
 
39,250

 
44,443

 
131,473

 
256,168

Reimbursable compensation and benefits
 
13,749

 
13,583

 
40,077

 
40,868

Other client company reimbursable expenses
 
85,650

 
85,689

 
267,852

 
257,088

Total reimbursable costs
 
99,399

 
99,272

 
307,929

 
297,956

Total revenues
 
138,649

 
143,715

 
439,402

 
554,124

Expenses:
 
 
 
 
 
 
 
 
Compensation and benefits
 
29,569

 
28,530

 
89,888

 
85,523

Equity based compensation
 
1,299

 
1,334

 
3,183

 
4,349

Separation costs
 

 
239

 
645

 
7,050

Total compensation and benefits expense
 
30,868

 
30,103

 
93,716

 
96,922

General and administrative
 
6,335

 
7,670

 
20,678

 
22,112

Other client company reimbursable expenses
 
85,650

 
85,689

 
267,852

 
257,088

Transaction and acquisition related costs
 
427

 
42

 
1,596

 
273

Depreciation and amortization
 
229

 
250

 
731

 
762

Total expenses
 
123,509

 
123,754

 
384,573

 
377,157

Operating income
 
15,140

 
19,961

 
54,829

 
176,967

Interest and other income
 
727

 
2,408

 
4,102

 
6,402

Impairment loss on Tremont Mortgage Trust investment
 

 
(6,213
)
 

 
(6,213
)
Equity in earnings of investees
 
458

 
174

 
1,037

 
318

Unrealized gain (loss) on equity method investment accounted for under the fair value option
 
1,678

 
(731
)
 
916

 
(2,978
)
Income before income tax expense
 
18,003

 
15,599

 
60,884

 
174,496

Income tax expense
 
(2,608
)
 
(2,226
)
 
(8,944
)
 
(24,335
)
Net income
 
15,395

 
13,373

 
51,940

 
150,161

Net income attributable to noncontrolling interest
 
(8,678
)
 
(7,524
)
 
(29,306
)
 
(83,935
)
Net income attributable to The RMR Group Inc.
 
$
6,717

 
$
5,849

 
$
22,634

 
$
66,226

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding - basic
 
16,198

 
16,137

 
16,187

 
16,126

Weighted average common shares outstanding - diluted
 
31,198

 
16,149

 
31,187

 
16,142

 
 
 
 
 
 
 
 
 
Net income attributable to The RMR Group Inc. per common share - basic
 
$
0.41

 
$
0.36

 
$
1.39

 
$
4.08

Net income attributable to The RMR Group Inc. per common share - diluted
 
$
0.41

 
$
0.36

 
$
1.37

 
$
4.08

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

Share grants, net
 

 

 

 
598

 

 

 
598

 

 
598

Net income
 

 

 

 

 
6,717

 

 
6,717

 
8,678

 
15,395

Tax distributions to Member
 

 

 

 

 

 

 

 
(2,949
)
 
(2,949
)
Common share distributions
 

 

 

 

 

 
(6,200
)
 
(6,200
)
 
(4,500
)
 
(10,700
)
Balance at June 30, 2020
 
$
15

 
$
1

 
$
15

 
$
105,863

 
$
280,091

 
$
(90,783
)
 
$
295,202

 
$
245,252

 
$
540,454

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

Share grants, net
 

 

 

 
1,177

 

 

 

 
1,177

 

 
1,177

Net income
 

 

 

 

 
5,849

 

 

 
5,849

 
7,524

 
13,373

Tax distributions to Member
 

 

 

 

 

 

 

 

 
(8,819
)
 
(8,819
)
Common share distributions
 

 

 

 

 

 

 
(5,684
)
 
(5,684
)
 
(4,500
)
 
(10,184
)
Balance at June 30, 2019
 
$
15

 
$
1

 
$
15

 
$
102,847

 
$
249,103

 
$

 
$
(66,511
)
 
$
285,470

 
$
243,855

 
$
529,325

See accompanying notes.


6

Table of Contents

The RMR Group Inc.
Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)
 
 
Nine Months Ended June 30,
 
 
2020
 
2019
Cash Flows from Operating Activities:
 
 
 
 
Net income
 
$
51,940

 
$
150,161

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
 
Depreciation and amortization
 
731

 
762

Straight line office rent
 
124

 
166

Amortization expense related to other assets
 
7,062

 
7,062

Deferred income taxes
 
1,108

 
(293
)
Operating expenses paid in The RMR Group Inc. common shares
 
2,658

 
3,764

Impairment loss on Tremont Mortgage Trust investment
 

 
6,213

Equity in earnings of investees
 
(1,037
)
 
(318
)
Distributions from equity method investments
 
721

 
198

Unrealized (gain) loss on equity method investment accounted for under the fair value option
 
(916
)
 
2,978

Changes in assets and liabilities:
 
 
 
 
Due from related parties
 
10,393

 
(50,183
)
Prepaid and other current assets
 
2,253

 
3,012

Other client company reimbursable expenses
 
(6,782
)
 
53,375

Accounts payable and accrued expenses
 
10,535

 
16,956

Net cash from operating activities
 
78,790

 
193,853

 
 
 
 
 
Cash Flows from Investing Activities:
 

 

Purchase of property and equipment
 
(404
)
 
(299
)
Equity method investment in TravelCenters of America Inc.
 

 
(8,382
)
Equity method investment in Tremont Mortgage Trust
 

 
(5,650
)
Advances to Tremont Mortgage Trust under the credit agreement
 

 
(14,220
)
Repayments from Tremont Mortgage Trust under the credit agreement
 

 
14,220

Net cash used in investing activities
 
(404
)
 
(14,331
)
 
 
 
 
 
Cash Flows from Financing Activities:
 
 
 
 
Distributions to noncontrolling interest
 
(24,435
)
 
(41,972
)
Distributions to common shareholders
 
(18,589
)
 
(17,044
)
Repurchase of common shares
 
(155
)
 
(156
)
Net cash used in financing activities
 
(43,179
)
 
(59,172
)
 
 
 
 
 
Effect of exchange rate fluctuations on cash and cash equivalents
 

 
(85
)
Increase in cash and cash equivalents
 
35,207

 
120,265

Cash and cash equivalents at beginning of period
 
358,448

 
256,848

Cash and cash equivalents at end of period
 
$
393,655

 
$
377,113

 
 
 
 
 
Supplemental Cash Flow Information and Non-Cash Activities:
 
 
 
 
Income taxes paid
 
$
6,385

 
$
22,185

Fair value of share based payments recorded
 
$
1,394

 
$
2,954

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 June 30, 2020, RMR Inc. owned 15,315,445 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 June 30, 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 June 30, 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 June 30, 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 ABP Trust and its subsidiaries, or collectively ABP Trust, and provided management services to Affiliates Insurance Company, or AIC, an Indiana insurance company, until its dissolution on February 13, 2020, and RMR Office Property Fund LP, or the Open End Fund, until its dissolution on July 28, 2020.
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 Mortgage Trust (formerly known as RMR Real Estate Income Fund), or RMRM. RMRM is currently a closed-end investment company. On April 16, 2020, shareholders of RMRM approved its conversion from a registered investment company to a commercial mortgage REIT and amended RMRM’s fundamental investment policies and restrictions to permit RMRM to pursue its new business. RMRM is focused on realigning its portfolio so that it is no longer an “investment company” under the Investment Company Act of 1940, or the 1940 Act, and has applied to the SEC to deregister as an investment company under the 1940 Act.
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, RMRM, 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.
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 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 June 30, 2020 and 2019, we earned aggregate base business management fees from the Managed Equity REITs of $21,010 and $24,833, respectively. For the nine months ended June 30, 2020 and 2019, we earned aggregate base business management fees from the Managed Equity REITs of $72,928 and $78,640, 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 business management 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 business management fee, if any, payable thereunder.
For the nine months ended June 30, 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,

10

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. The Open End Fund was dissolved on July 28, 2020. As a result, we will not earn any fees subsequent to that date.
We earned aggregate fees from the Managed Operators, ABP Trust, AIC and the Open End Fund of $5,963 and $7,145 for the three months ended June 30, 2020 and 2019, respectively, and $19,626 and $21,292 for the nine months ended June 30, 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 $11,618 and $11,626 for the three months ended June 30, 2020 and 2019, respectively, and $35,851 and $33,603 for the nine months ended June 30, 2020 and 2019, respectively.
Advisory Services and Other Agreements
RMR Advisors is compensated pursuant to its agreement with RMRM at an annual rate of 0.85% of RMRM’s average daily managed assets. Average daily managed assets includes the net asset value attributable to RMRM’s outstanding common shares, plus the liquidation preference of RMRM’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 RMRM. RMR Advisors earned advisory services revenue of $585 and $767 for the three months ended June 30, 2020 and 2019, respectively, and $2,139 and $2,225 for the nine months ended June 30, 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 December 31, 2020.
Tremont Advisors earned advisory services revenue from the Tremont Advisory Clients of $40 and $35 for the three months ended June 30, 2020 and 2019, respectively, and $113 and $120 for the nine months ended June 30, 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 for non-investment advisory clients. The Tremont business earned fees for such origination services of $34 and $37 for the three months ended June 30, 2020 and 2019, respectively, and $816 and $194 for the nine months ended June 30, 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 $13,749 and $13,583 for the three months ended June 30, 2020 and 2019, respectively, and $40,077 and $40,868 for the nine months ended June 30, 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 $250 and $370 for the three months ended June 30, 2020 and 2019, respectively, and $964 and $1,076 for the nine months ended June 30, 2020 and 2019, respectively.
Reimbursable compensation and benefits also includes grants of common shares from Client Companies directly to certain of our officers and employees in connection with the provision of management services to those companies. 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 and related reimbursements of $736 and $882 for the three months ended June 30, 2020 and 2019, respectively, and $1,394 and $2,954 for the nine months ended June 30, 2020 and 2019, 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 certain of 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 $85,650 and $85,689 for the three months ended June 30, 2020 and 2019, respectively, and $267,852 and $257,088 for the nine months ended June 30, 2020 and 2019, respectively.
Note 4. Investments
Equity Method Investments
As of June 30, 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 $458 and $174 for the three months ended June 30, 2020 and 2019, respectively, and $1,037 and $318 for the nine months ended June 30, 2020 and 2019, respectively. We received aggregate distributions from TRMT of $16 and $132 during the three months ended June 30, 2020 and 2019, respectively, and $721 and $198 during the nine months ended June 30, 2020 and 2019, respectively.
Equity Method Investment Accounted for Under the Fair Value Option