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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, 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)
 
Maryland47-4122583
(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 ClassTrading SymbolName Of Each Exchange On Which Registered
Class A common stock, $0.001 par value per shareRMRThe 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 1, 2021, there were 15,395,641 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, 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)
December 31,September 30,
20202020
Assets
Current assets:
Cash and cash equivalents$383,213 $369,663 
Due from related parties68,445 82,605 
Prepaid and other current assets5,615 3,877 
Total current assets457,273 456,145 
Property and equipment, net2,345 2,299 
Due from related parties, net of current portion11,289 7,764 
Equity method investment7,874 7,467 
Equity method investment accounted for under the fair value option20,274 12,152 
Goodwill1,859 1,859 
Intangible assets, net of amortization266 277 
Operating lease right of use assets33,561 34,663 
Deferred tax asset22,279 23,900 
Other assets, net of amortization141,373 143,727 
Total assets$698,393 $690,253 
Liabilities and Equity
Current liabilities:
Other client company reimbursable expenses$44,619 $56,079 
Accounts payable and accrued expenses27,879 16,984 
Operating lease liabilities4,463 4,407 
Employer compensation liability3,350 4,298 
Total current liabilities80,311 81,768 
Operating lease liabilities, net of current portion30,887 32,030 
Amounts due pursuant to tax receivable agreement, net of current portion27,789 27,789 
Employer compensation liability, net of current portion11,289 7,764 
Total liabilities150,276 149,351 
Commitments and contingencies
Equity:
Class A common stock, $0.001 par value; 31,600,000 shares authorized; 15,395,641 shares issued and outstanding
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 capital107,634 106,622 
Retained earnings295,146 286,249 
Cumulative common distributions(103,213)(96,983)
Total shareholders’ equity299,598 295,919 
Noncontrolling interest248,519 244,983 
Total equity548,117 540,902 
Total liabilities and equity$698,393 $690,253 
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 December 31,
20202019
Revenues:
Management services$40,747 $47,275 
Advisory services586 847 
Total management and advisory services revenues41,333 48,122 
Reimbursable compensation and benefits13,225 12,847 
Reimbursable client company equity based compensation3,003 948 
Other client company reimbursable expenses99,385 97,975 
Total reimbursable costs115,613 111,770 
Total revenues156,946 159,892 
Expenses:
Compensation and benefits29,494 30,197 
Equity based compensation3,561 1,582 
Separation costs4,159 260 
Total compensation and benefits expense37,214 32,039 
General and administrative6,260 7,046 
Other client company reimbursable expenses99,385 97,975 
Transaction and acquisition related costs117 796 
Depreciation and amortization238 256 
Total expenses143,214 138,112 
Operating income13,732 21,780 
Interest and other income231 1,875 
Equity in earnings of investees424 255 
Unrealized gain on equity method investment accounted for under the fair value option8,122 1,438 
Income before income tax expense22,509 25,348 
Income tax expense(2,756)(3,724)
Net income19,753 21,624 
Net income attributable to noncontrolling interest(10,856)(12,175)
Net income attributable to The RMR Group Inc.$8,897 $9,449 
Weighted average common shares outstanding - basic16,252 16,177 
Weighted average common shares outstanding - diluted31,252 16,177 
Net income attributable to The RMR Group Inc. per common share - basic
$0.54 $0.58 
Net income attributable to The RMR Group Inc. per common share - diluted
$0.51 $0.58 
See accompanying notes.
4

Table of Contents
    
The RMR Group Inc.
Condensed Consolidated Statements of Shareholders’ Equity
(dollars in thousands)
(unaudited)
Class A Common StockClass B-1 Common StockClass B-2 Common StockAdditional Paid In CapitalRetained EarningsCumulative Common DistributionsTotal Shareholders' EquityNoncontrolling InterestTotal Equity
Balance at September 30, 2020$15 $1 $15 $106,622 $286,249 $(96,983)$295,919 $244,983 $540,902 
Share grants, net— — — 1,012 — — 1,012 — 1,012 
Net income— — — — 8,897 — 8,897 10,856 19,753 
Tax distributions to Member— — — — — — — (2,820)(2,820)
Common share distributions— — — — — (6,230)(6,230)(4,500)(10,730)
Balance at December 31, 2020$15 $1 $15 $107,634 $295,146 $(103,213)$299,598 $248,519 $548,117 

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 
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,
20202019
Cash Flows from Operating Activities:
Net income$19,753 $21,624 
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization238 256 
Straight line office rent15 35 
Amortization expense related to other assets2,354 2,354 
Deferred income taxes1,621 427 
Operating expenses paid in The RMR Group Inc. common shares1,012 634 
Equity in earnings of investees(424)(255)
Distributions from equity method investment17 352 
Unrealized gain on equity method investment accounted for under the fair value option(8,122)(1,438)
Changes in assets and liabilities:
Due from related parties13,212 16,007 
Prepaid and other current assets(1,738)835 
Other client company reimbursable expenses(11,460)(14,201)
Accounts payable and accrued expenses11,182 15,290 
Net cash from operating activities27,660 41,920 
Cash Flows from Investing Activities:
Purchase of property and equipment(560)(148)
Net cash used in investing activities(560)(148)
Cash Flows from Financing Activities:
Distributions to noncontrolling interest(7,320)(8,330)
Distributions to common shareholders(6,230)(6,195)
Net cash used in financing activities(13,550)(14,525)
Increase in cash and cash equivalents13,550 27,247 
Cash and cash equivalents at beginning of period369,663 358,448 
Cash and cash equivalents at end of period$383,213 $385,695 
Supplemental Cash Flow Information and Non-Cash Activities:
Income taxes paid$1,802 $165 
Fair value of share based payments recorded$3,003 $948 
Recognition of right of use assets and related lease liabilities$ $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, 2020, RMR Inc. owned 15,395,641 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 52.2% of the economic interest of RMR LLC as of December 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 47.8% of the economic interest of RMR LLC as of December 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 December 31, 2020, managed a diverse portfolio of real estate and real estate related businesses. RMR LLC provides management services to four publicly traded equity 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. DHC, ILPT, OPI and SVC are collectively referred to as the Managed Equity REITs.
RMR LLC also provides management services to three real estate operating companies: 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, and many of whose U.S. hotels are owned by SVC; and TravelCenters of America Inc., or TA, an operator and franchisor of travel centers primarily along the U.S. interstate highway system, many of which are owned by SVC, and standalone truck service facilities and standalone restaurants. Hereinafter, Five Star, Sonesta and TA are collectively referred to as the Managed Operating Companies.
In addition, RMR LLC provides management services to private capital vehicles, including ABP Trust and its subsidiaries, or collectively ABP Trust, and as of November 18, 2020, The Industrial Fund REIT LLC, or the Industrial Fund, a private fund which owns industrial and logistics properties throughout the United States and of which ILPT owns a 22% equity interest. RMR LLC also 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.
As of December 31, 2020, RMR LLC had two wholly owned subsidiaries, each an investment adviser registered with the Securities and Exchange Commission, or SEC: Tremont Realty Advisors LLC, or Tremont Advisors, and RMR Advisors LLC, or RMR Advisors.
Tremont Advisors provides advisory services for two publicly traded mortgage REITs: RMR Mortgage Trust, or RMRM, and Tremont Mortgage Trust, or TRMT. RMRM, TRMT and the Managed Equity REITs are collectively referred to as the Managed REITs. RMRM and TRMT focus primarily on originating and investing in first mortgage whole loans secured by middle market and transitional commercial real estate. Tremont Advisors has in the past and may in the future manage additional accounts that invest in commercial real estate debt, including secured mortgage debt. Employees of Tremont Advisors also act as a transaction originator for non-investment advisory clients for negotiated fees, which we refer to as the Tremont business.
On January 5, 2021, RMRM received its requested order from the SEC deregistering RMRM as an investment company under the Investment Company Act of 1940. Effective as of that time, RMRM’s investment advisory agreement with RMR
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The RMR Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except per share amounts)
Advisors was terminated and RMRM entered into a new management agreement with Tremont Advisors. On January 6, 2021, RMR Advisors merged with and into Tremont Advisors with Tremont Advisors as the surviving entity.
In these financial statements, we refer to the Managed REITs, the Managed Operating Companies, AIC, ABP Trust, the Industrial Fund, the Open End Fund and the clients of the Tremont business as our Client Companies. The Managed REITs are also referred to as the Managed Public Real Estate Capital companies. AIC, ABP Trust, the Industrial Fund, the Open End Fund and the clients of the Tremont business are referred to as the Managed Private Real Estate Capital companies.
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, 2020, or our 2020 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. Recently Adopted Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or 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. On October 1, 2020, we adopted ASU No. 2016-13. We have not historically experienced credit losses from our Client Companies and as a result, the adoption of ASU No. 2016-13 did not have a material impact on our condensed consolidated financial statements.
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 the three months ended December 31, 2020 and 2019, we earned aggregate base business management fees from the Managed Equity REITs of $21,555 and $27,391, 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
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The RMR Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except per share amounts)
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.
We did not earn incentive business management fees from the Managed Equity REITs for the three months ended December 31, 2020 and 2019.
Other Management Agreements
Managed Operating Companies
We earn management fees by providing continuous services pursuant to the management agreements from the Managed Operating Companies 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; and (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. These fees are estimated and payable monthly in advance.
We earned aggregate fees from the Managed Operating Companies of $5,638 and $6,126 for the three months ended December 31, 2020 and 2019, respectively.
ABP Trust, AIC, the Industrial Fund and the Open End Fund
Management fees earned from ABP Trust and the Industrial Fund (beginning November 18, 2020) are equal to 0.5% and 1.0%, respectively, of average invested capital, as defined in the applicable management agreements. Until November 18, 2020, the Industrial Fund was a consolidated subsidiary of ILPT; as a result, any management fees payable to us with respect to the Industrial Fund were included as part of the management fees we earned pursuant to ILPT’s business management agreement as described above. On November 18, 2020, the Industrial Fund ceased to be a consolidated subsidiary of ILPT. As a result, we now earn management fees from the Industrial Fund separate from the management fees we earn from ILPT and ILPT does not pay us management fees based on the Industrial Fund’s assets. These management fees are paid monthly in arrears. Until December 31, 2019, management fees earned from ABP Trust were equal to 0.6% of revenues from all sources reportable under GAAP.
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.
Until it’s dissolution on July 28, 2020, we earned fees from the Open End Fund pursuant to an administration services agreement equal to 1.0% of the Open End Fund’s net asset value, as defined, annually. In connection with the dissolution of the Open End Fund, the Transaction Agreement, dated as of July 31, 2018, between ABP Trust and RMR LLC was terminated and all of the properties that ABP Trust initially contributed to the Open End Fund were transferred back to ABP Trust and became a part of our management agreements with ABP Trust.
We earned aggregate fees from ABP Trust, AIC, the Industrial Fund and the Open End Fund of $916 and $553 for the three months ended December 31, 2020 and 2019, respectively.
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The RMR Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except per share amounts)
Property Management Fees
We earn property management fees by providing continuous services pursuant to property management agreements with the Managed Equity REITs, ABP Trust and the Industrial Fund. We also earned property management fees from the Open End Fund until its dissolution. 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 $12,379 and $12,525 for the three months ended December 31, 2020 and 2019, respectively.
Other Agreements
Tremont Advisors is primarily compensated pursuant to its management agreements with RMRM (beginning January 6, 2021) and TRMT at an annual rate of 1.5% of RMRM’s and TRMT’s equity, as defined in the applicable agreements. Tremont Advisors may also earn an incentive fee under these management agreements for RMRM (beginning the first full calendar quarter of 2021) and TRMT (beginning the calendar quarter ending December 31, 2018). Tremont Advisors 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 aggregate advisory services revenue from TRMT of $37 and $36 for the three months ended December 31, 2020 and 2019, respectively, in each case net of the fee waiver referenced above, as applicable.
RMR Advisors, which previously provided advisory services for RMRM until it merged into Tremont Advisors on January 6, 2021, was 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 included the net asset value attributable to RMRM’s outstanding common shares and cash on hand, plus the liquidation preference of RMRM’s outstanding preferred shares and 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 $549 and $811 for the three months ended December 31, 2020 and 2019, respectively.
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 $259 and $680 for the three months ended December 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 our employees provide pursuant to our property management agreements at the assets of our Client Companies. A significant portion of these compensation and benefits 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 on behalf of our Client Companies. We realized reimbursable compensation and benefits of $13,225 and $12,847 for the three months ended December 31, 2020 and 2019, respectively.
Reimbursable Client Company Equity Based Compensation
Reimbursable client company equity based compensation 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 from our Client Companies of $3,003 and $948 for the three months ended December 31, 2020 and 2019, respectively.
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The RMR Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except per share amounts)
Other Client Company Reimbursable Expenses
Other client company reimbursable expenses include reimbursements that arise from services we provide pursuant to our property management agreements, which include third party costs related to matters such as maintenance and repairs, security and cleaning services, 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 $99,385 and $97,975 for the three months ended December 31, 2020 and 2019, respectively.
Note 4. Investments
Equity Method Investment
As of December 31, 2020, Tremont Advisors owned 1,600,100, or approximately 19.3%, 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 $424 and $255 for the three months ended December 31, 2020 and 2019, respectively. We received aggregate distributions from TRMT of $17 and $352 during the three months ended December 31, 2020 and 2019, respectively.
Equity Method Investment Accounted for Under the Fair Value Option
As of December 31, 2020, we owned 621,853, or approximately 4.3%, of TA’s outstanding common shares. 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 as of the end of the period, which is a Level 1 fair value input. The market value of our investment in TA at December 31, 2020 and September 30, 2020, based on quoted market prices, was $20,274 and $12,152, respectively. The unrealized gain in our condensed consolidated statements of income related to our investment in TA was $8,122 and $1,438 for the three months ended December 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.
For the three months ended December 31, 2020 and 2019, we recognized estimated income tax expense of $2,756 and $3,724, respectively, which includes $2,024 and $2,777, respectively, of U.S. federal income tax and $732 and $947, respectively, of state income taxes.
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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,
20202019
Income taxes computed at the federal statutory rate21.0 %21.0 %
State taxes, net of federal benefit3.1 %3.6 %
Permanent items0.5 %0.2 %
Net income attributable to noncontrolling interest(10.1)%(10.1)%
Other (1)
(2.3)% %
Total12.2 %14.7 %
(1)     In December 2020, the Internal Revenue Service and Department of Treasury released final regulations which, among other clarifications, established the effective date as it relates to limitations on the deductibility of certain executive compensation. The final regulations provide that the application of the limit applies to deductions after December 18, 2020. As such, during the three months ended December 31, 2020, we reduced our provision for income taxes for limitations applied prior to the effective date by $520, or $0.02 per diluted share, which reduced the effective income tax rate for the quarter by 2.3%.
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, 2020, we had no uncertain tax positions.
Note 6. Fair Value of Financial Instruments
As of December 31, 2020 and September 30, 2020, the fair values of our financial instruments, which include cash and cash equivalents, amounts due from related parties and accounts payable and accrued expenses, which include liabilities related to other Client Company reimbursable expenses, were not materially different from their carrying values due to the short term nature of these financial instruments.
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.
The following are our assets and liabilities that have been measured at fair value using Level 1 inputs in the fair value hierarchy as of December 31, 2020 and September 30, 2020:
December 31,September 30,
20202020
Money market funds included in cash and cash equivalents$351,848 $341,612 
Current portion of due from related parties related to share based payment awards3,350 4,298 
Long term portion of due from related parties related to share based payment awards11,289 7,764 
Current portion of employer compensation liability related to share based payment awards3,350 4,298 
Long term portion of employer compensation liability related to share based payment awards11,289 7,764 
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, 2020, Adam D. Portnoy beneficially owned, in aggregate, (i) 157,502 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
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The RMR Group Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except per share amounts)
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 and TA, a director of Sonesta (and its parent) and the controlling shareholder of Sonesta, and a managing trustee of RMRM. Jennifer B. Clark is a managing trustee of DHC, a managing director of Five Star and a director of Sonesta (and its parent), and until January 5, 2021, she served as a managing trustee of RMRM. Ms. Clark also serves as the secretary of all the publicly traded client companies to which we provide management services and 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. In addition, Mr. Portnoy and Ms. Clark were officers of the general partner of the Open End Fund.
As of December 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, 4.5% of TA’s outstanding common shares (including through RMR LLC), 2.3% of RMRM’s outstanding common shares, and 19.4% of TRMT’s outstanding common shares (including through Tremont Advisors). Until its dissolution on February 13, 2020, ABP Trust owned 14.3% of AIC. Until its dissolution on July 28, 2020, ABP Trust owned 100% of the limited partner units and controlled all of the assets of the Open End Fund.
The Managed REITs all have no employees, and the Open End Fund and AIC had no employees. RMR LLC provides or arranges for all the personnel, overhead and services required for the operation of the Managed Equity REITs, and did the same for the Open End Fund (until its dissolution on July 28, 2020) and AIC (until its dissolution on February 13, 2020), pursuant to management agreements with them. All the officers of the Managed Equity REITs are, and all of the officers of AIC and the Open End Fund were, officers or employees of RMR LLC. All the officers, overhead and required office space of TRMT and RMRM are provided or arranged by Tremont Advisors. All of TRMT’s and RMRM’s officers are officers or employees of Tremont Advisors or RMR LLC. Many of the executive officers of the Managed Operating Companies are officers or employees of RMR LLC. Some of our executive officers are also managing directors or managing trustees of certain of the Managed REITs and the Managed Operating Companies.
Additional information about our related person transactions appears in Note 8, Shareholders’ Equity, below and in our 2020 Annual Report.
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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, 2020 and 2019, we recognized revenues from related parties as set forth in the following table:
Three Months Ended December 31, 2020Three Months Ended December 31, 2019
TotalTotal
ManagementManagement
and AdvisoryTotaland AdvisoryTotal
ServicesReimbursableTotalServicesReimbursableTotal
RevenuesCostsRevenuesRevenuesCostsRevenues
Managed Public Real Estate Capital:
DHC$8,922 $42,284 $51,206 $9,955 $33,602 $43,557 
ILPT4,874 5,191 10,065 5,574 10,767 16,341 
OPI9,267 55,527 64,794 10,163 54,720 64,883 
SVC10,217 5,012 15,229 13,673 5,451 19,124 
Total Managed Equity REITs33,280 108,014 141,294 39,365 104,540 143,905 
RMRM549  549 811  811 
TRMT37 966 1,003 36 661 697 
Total Managed REITs33,866 108,980 142,846 40,212 105,201 145,413 
Managed Private Real Estate Capital:
ABP Trust1,056 5,217 6,273 223 3,094 3,317 
AIC    91 91 
Industrial Fund514 1,035 1,549    
Open End Fund   840 3,156 3,996 
1,570 6,252 7,822 1,063 6,341 7,404 
Managed Operating Companies:
Five Star1,976 70 2,046 2,252 24 2,276 
Sonesta353  353 579 46 625 
TA3,309 311 3,620 3,295 150 3,445 
5,638 381 6,019 6,126 220 6,346 
Total revenues from related parties41,074 115,613 156,687 47,401 111,762 159,163 
Revenues from unrelated parties259  259 721 8 729 
$41,333 $115,613 $156,946 $48,122 $111,770 $159,892 
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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, 2020September 30, 2020
AccountsReimbursableAccountsReimbursable
ReceivableCostsTotalReceivableCostsTotal
Managed Public Real Estate Capital:
DHC$5,180 $17,309 $22,489 $5,548 $22,035 $27,583 
ILPT2,314 4,348 6,662 3,089 5,791 8,880 
OPI6,713 24,899 31,612 7,883 30,529 38,412 
SVC4,624 5,215 9,839 4,258 6,326 10,584 
Total Managed Equity REITs18,831 51,771 70,602 20,778 64,681 85,459 
RMRM26  26    
TRMT4 504 508 19 614 633 
Total Managed REITs18,861 52,275 71,136 20,797 65,295 86,092 
Managed Private Real Estate Capital:
ABP Trust978 2,393 3,371 1,106 2,364 3,470 
Industrial Fund435 519 954    
1,413 2,912 4,325 1,106 2,364 3,470 
Managed Operating Companies:
Five Star96 536 632 149 102 251 
TA106 3,535 3,641 176 380 556 
202 4,071 4,273 325 482 807 
$20,476 $59,258 $79,734 $22,228 $68,141 $90,369 
Leases
As of December 31, 2020, 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 $1,383 and $1,433 for the three months ended December 31, 2020 and 2019, 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, 2020, our condensed consolidated balance sheet reflects a liability related to the tax receivable agreement of $29,950, including $2,161 classified as a current liability that we expect to pay to ABP Trust during the fourth quarter of fiscal year 2021.
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, 2020 and 2019, pursuant to the RMR LLC operating agreement, RMR LLC made required quarterly tax distributions to holders of its membership units totaling $5,855 and $7,993, respectively, of which $3,035 and $4,163, respectively, was distributed to us and $2,820 and $3,830, 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.
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Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except per share amounts)
Separation Arrangements
We entered into retirement agreements with certain of our former executive officers. 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. All costs associated with separation arrangements, for which there remain no substantive performance obligations, are recorded in our condensed consolidated statements of income as separation costs.
In October 2020, we entered into a retirement agreement with David M. Blackman, a former Executive Vice President of RMR LLC. Mr. Blackman, at the time, also served as president, chief executive officer and a director of Tremont Realty Advisors LLC, president, chief executive officer and managing trustee of TRMT, president, chief executive officer and managing trustee of OPI, and executive vice president of RMR Advisors LLC. Pursuant to his retirement agreement, Mr. Blackman remained in his officer, director and trustee roles with RMR LLC, Tremont Realty Advisors LLC, TRMT, OPI and RMR Advisors through December 31, 2020 and he will continue to serve as a managing trustee of OPI until June 30, 2021 or such earlier time as his successor managing trustee is elected to OPI’s board of trustees. In addition, Mr. Blackman will continue to serve as an employee of RMR LLC through June 30, 2021. Under Mr. Blackman’s retirement agreement, RMR LLC agreed to pay Mr. Blackman combined cash payments in the amount of $2,850. We paid half of that amount on February 1, 2021, and we expect to pay the other half on or about July 31, 2021. In addition, in October 2020, our Compensation Committee approved the acceleration of all 9,400 unvested shares owned by Mr. Blackman of us as of his retirement date, June 30, 2021, subject to applicable conditions.
For the three months ended December 31, 2020 and 2019, we recognized cash and equity based separation costs as set forth in the following table:
Three Months Ended December 31,
20202019
Former executive officers:
Cash separation costs$2,900 $260 
Equity based separation costs295  
3,195 260 
Former nonexecutive officers:
Cash separation costs (1)
805  
Equity based separation costs159  
964  
Total separation costs$4,159 $260 
(1)During the three months ended December 31, 2020, we were indemnified for a withdrawal liability of $515 that we had recorded during the three months ended September 30, 2020 related to a prior Client Company’s shared pension plan accounted for as a multiemployer benefit plan.
Note 8. Shareholders’ Equity
We grant our Class A Common Shares to our Directors, officers and employees under the 2016 Omnibus Equity Plan adopted in 2016, or the 2016 Plan. Shares issued to Directors in that capacity vest immediately. Shares issued to employees in that capacity vest in five equal, consecutive, annual installments, with the first installment vesting on the date of grant. We recognize share forfeitures as they occur. Compensation expense related to share grants is determined based on the market value of our shares on the date of grant, with the aggregate value of the granted shares amortized to expense over the related vesting period. Expense recognized for shares granted to Directors in that capacity are included in general and administrative expenses and for shares granted to employees in that capacity are included in equity based compensation in our condensed consolidated statements of income.
Equity based compensation expense related to shares granted to certain officers and employees was $558 and $634 for the three months ended December 31, 2020 and 2019, respectively. As of December 31, 2020, we had 129,570 unvested shares outstanding, net of 14,420 shares, the vesting for which was accelerated during the three months ended December 31, 2020. The unvested shares at December 31, 2020 are scheduled to vest as follows: 45,020 shares in 2021, 37,550 shares in 2022, 29,660 shares in 2023 and 17,340 in 2024.
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