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 Xa

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, 2015

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

(State of Organization)

47-4122583
(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

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes   No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

 

 

Large accelerated filer

 

Accelerated filer

 

 

 

Non-accelerated filer

 

Smaller reporting company

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No

 

As of February 5, 2016, there were 15,000,000 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.

 

 


 

THE RMR GROUP INC.

 FORM 10-Q

December 31, 2015

 

INDEX

 

 

 

 

 

 

 

 

Page

PART I 

Financial Information

 

Item 1. 

Financial Statements (unaudited)

 

 

Condensed Consolidated Balance Sheets — December 31, 2015 and September 30, 2015

 

Condensed Consolidated Statements of Comprehensive Income — Three Months Ended December 31, 2015 and 2014

 

Condensed Consolidated Statement of Shareholders’ Equity — Three Months Ended December 31, 2015

 

Condensed Consolidated Statements of Cash Flows —Three Months Ended December 31, 2015 and 2014

 

Notes to Unaudited Condensed Consolidated Financial Statements

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

31 

Item 4. 

Controls and Procedures

31 

 

Warning Concerning Forward Looking Statements

32 

PART II 

Other Information

 

Item 1A. 

Risk Factors

33 

Item 6. 

Exhibits

33 

 

Signatures

35 

 

 

 

 


 

PART I.       Financial Information

 

Item 1.  Financial Statements

 

The RMR Group Inc.

Condensed Consolidated Balance Sheets

 (dollars in thousands, except share amounts)

(unaudited)

 

 

 

 

 

 

 

 

 

 

December 31,

 

September 30,

Assets

 

2015

 

2015

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

25,081

 

$

34,497

Due from related parties

 

 

82,253

 

 

17,986

Prepaid and other current assets

 

 

3,378

 

 

2,863

Total current assets

 

 

110,712

 

 

55,346

 

 

 

 

 

 

 

Furniture and equipment

 

 

5,675

 

 

5,307

Leasehold improvements

 

 

852

 

 

852

Capitalized software costs

 

 

4,312

 

 

4,292

Total property and equipment

 

 

10,839

 

 

10,451

Accumulated depreciation

 

 

(6,255)

 

 

(5,772)

 

 

 

4,584

 

 

4,679

Due from related parties, net of current portion

 

 

6,075

 

 

6,446

Deferred tax asset

 

 

46,270

 

 

46,614

Other assets, net of amortization

 

 

188,453

 

 

190,807

Total assets

 

$

356,094

 

$

303,892

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable, accrued expenses and deposits

 

$

23,601

 

$

18,439

Due to related parties

 

 

26,611

 

 

 -

Total current liabilities

 

 

50,212

 

 

18,439

Long term portion of deferred rent payable, net of current portion

 

 

552

 

 

450

Amounts due pursuant to tax receivable agreement

 

 

64,905

 

 

64,905

Employer compensation liability, net of current portion

 

 

6,075

 

 

6,446

Total liabilities

 

 

121,744

 

 

90,240

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

Class A common stock, $0.001 par value; 31,000,000 shares authorized; 15,000,000 shares

 

 

 

 

issued and outstanding at December 31, 2015 and September 30, 2015, respectively

 

 

15

 

 

15

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

 

 

 

 

 

 

issued and outstanding at December 31, 2015 and September 30, 2015, respectively

 

 

1

 

 

1

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

 

 

 

 

 

 

issued and outstanding at December 31, 2015 and September 30, 2015, respectively

 

 

15

 

 

15

Additional paid in capital

 

 

93,425

 

 

93,425

Retained earnings

 

 

24,357

 

 

7,303

Cumulative other comprehensive income

 

 

78

 

 

73

Cumulative common distributions

 

 

(8,416)

 

 

 -

Total shareholders’ equity

 

 

109,475

 

 

100,832

Noncontrolling interest

 

 

124,875

 

 

112,820

Total equity

 

 

234,350

 

 

213,652

Total liabilities and equity

 

$

356,094

 

$

303,892

See accompanying notes.

1


 

 

The RMR Group Inc.

Condensed Consolidated Statements of Comprehensive Income

 (dollars in thousands, except per share amounts)

(unaudited)

 

 

 

 

 

 

 

 

Three Months Ended December 31,

Revenues

2015

 

2014

Management services

$

102,059

 

$

39,210

Reimbursable payroll and related costs

 

7,490

 

 

7,034

Advisory services

 

581

 

 

592

Total revenues

 

110,130

 

 

46,836

Expenses

 

 

 

 

 

Compensation and benefits

 

21,304

 

 

22,845

Separation expense

 

163

 

 

116

General and administrative

 

6,512

 

 

5,015

Depreciation expense

 

483

 

 

579

Total expenses

 

28,462

 

 

28,555

Operating income

 

81,668

 

 

18,281

Interest and other income

 

25

 

 

498

Unrealized gains attributable to changes in fair value of stock

 

 

 

 

 

accounted for under the fair value option

 

 -

 

 

841

Income before income tax expense and equity in earnings

 

 

 

 

 

of investee

 

81,693

 

 

19,620

Income tax expense

 

(11,314)

 

 

 -

Equity in earnings of investee

 

 -

 

 

28

Net income

 

70,379

 

$

19,648

Net income attributable to noncontrolling interest

 

(53,325)

 

 

 

Net income attributable to RMR Inc.

$

17,054

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

Foreign currency translation adjustments

 

9

 

 

(131)

Unrealized loss in investment in available for sale securities

 

 -

 

 

(4)

Equity interest in investee’s unrealized gains (losses)

 

 -

 

 

(6)

Other comprehensive income (loss)

 

9

 

 

(141)

Comprehensive income

 

70,388

 

$

19,507

Comprehensive income attributable to noncontrolling interest

 

(53,329)

 

 

 

Comprehensive income attributable to RMR Inc.

$

17,059

 

 

 

 

 

 

 

 

 

Weighted average common stock outstanding - basic and diluted

 

16,000

 

 

 

 

 

 

 

 

 

Net income attributable to RMR Inc. per share of common stock - basic and diluted

$

1.07

 

 

 

 

 

 

 

 

 

See accompanying notes.

2


 

The RMR Group Inc.

Condensed Consolidated Statement of Shareholders’ Equity

 (dollars in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative

 

 

 

 

 

 

 

 

 

 

Class A

 

Class B-1

 

Class B-2

 

Additional

 

 

 

Other

 

Cumulative

 

Total

 

 

 

 

 

 

Common

 

Common

 

Common

 

Paid In

 

Retained

 

Comprehensive

 

Common

 

Shareholders'

 

Noncontrolling

 

Total

 

Stock

 

Stock

 

Stock

 

Capital

 

Earnings

 

Income

 

Distributions

 

Equity

 

Interest

 

Equity

Balance at September 30, 2015

$

15

 

$

1

 

$

15

 

$

93,425

 

$

7,303

 

$

73

 

$

 -

 

$

100,832

 

$

112,820

 

$

213,652

Net income

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

17,054

 

 

 -

 

 

 -

 

 

17,054

 

 

53,325

 

 

70,379

Incentive fee allocable to ABP Trust

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(26,611)

 

 

(26,611)

Tax distributions to Member

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(6,773)

 

 

(6,773)

Common share distributions

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(8,416)

 

 

(8,416)

 

 

(7,890)

 

 

(16,306)

Other comprehensive income

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

5

 

 

 -

 

 

5

 

 

4

 

 

9

Balance at December 31, 2015

$

15

 

$

1

 

$

15

 

$

93,425

 

$

24,357

 

$

78

 

$

(8,416)

 

$

109,475

 

$

124,875

 

$

234,350

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

3


 

The RMR Group Inc.

Condensed Consolidated Statements of Cash Flows

 (dollars in thousands)

(unaudited)

 

 

 

 

 

 

 

 

Three Months Ended December 31,

 

2015

 

2014

Cash Flows from Operating Activities

 

 

 

 

 

Net income

$

70,379

 

$

19,648

Adjustments to reconcile net income to net cash from operating activities:

 

 

 

 

 

Depreciation expense

 

483

 

 

579

Straight line office rent amortization

 

102

 

 

13

Amortization expense related to other asset

 

2,354

 

 

 -

Deferred income taxes

 

344

 

 

 -

Unrealized gains attributable to changes in fair value of stock accounted for

 

 

 

 

 

under the fair value option

 

 -

 

 

(841)

Dividend income

 

 -

 

 

(379)

Revenues paid in common shares of Managed REITs

 

 -

 

 

(2,272)

Equity in earnings of investee

 

 -

 

 

(28)

Changes in assets and liabilities:

 

 

 

 

 

Due from related parties

 

(64,400)

 

 

339

Accounts receivable

 

 -

 

 

24,983

Prepaid and other current assets

 

(514)

 

 

289

Accounts payable, accrued expenses and deposits

 

5,711

 

 

2,568

Due to related parties

 

 -

 

 

330

Net cash from operating activities

 

14,459

 

 

45,229

Cash Flows from Investing Activities

 

 

 

 

 

Purchase of property and equipment

 

(806)

 

 

(218)

Dividends received from investment in REITs

 

 -

 

 

368

Net cash (used in) provided by investing activities

 

(806)

 

 

150

Cash Flows from Financing Activities

 

 

 

 

 

Distributions to noncontrolling interest

 

(14,663)

 

 

 -

Members' distribution

 

 -

 

 

(6,395)

Distribution to common shareholders

 

(8,416)

 

 

 -

Net cash used in financing activities

 

(23,079)

 

 

(6,395)

Effect of exchange rate fluctuations on cash and cash equivalents

 

10

 

 

(145)

(Decrease) increase in cash and cash equivalents

 

(9,416)

 

 

38,839

Cash and cash equivalents at beginning of year

 

34,497

 

 

141,731

Cash and cash equivalents at end of year

$

25,081

 

$

180,570

Supplemental cash flow information

 

 

 

 

 

Income taxes paid

$

7,154

 

$

23

 

 

 

 

 

 

See accompanying notes.

 

 

4


 

Table of Contents

The RMR Group Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands)

 

Note 1 - Basis of Presentation

 

The RMR Group Inc., or RMR Inc., a Maryland corporation, is a holding company and substantially all of its business is conducted by its majority owned subsidiary The RMR Group LLC, or RMR LLC, historically a Delaware limited liability company and, as of June 5, 2015, a Maryland limited liability company. In these financial statements, “we,” us” and “our” refer to RMR Inc. and its direct and indirect subsidiaries. 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. RMR Inc. was incorporated in Maryland on May 28, 2015 in contemplation of the June 5, 2015 transaction described in Note 6, or the Up-C Transaction. Prior to the Up-C Transaction, RMR Inc. had not engaged in any business or other activities, except in connection with its incorporation.

 

The Up-C Transaction and preceding reorganization transactions resulted in a change in the reporting entity for periods prior to June 5, 2015 due to the contribution to RMR LLC of operating entities under common control as described in our Annual Report on Form 10-K for the year ended September 30, 2015, or our Annual Report. These operating entities were then wholly owned by ABP Trust (formerly known as Reit Management & Research Trust), historically a Massachusetts business trust, and as of January 20, 2016, a Maryland statutory trust, or by Barry M. Portnoy and Adam D. Portnoy, our Founders, who are the beneficial owners of ABP Trust. ABP Trust and its beneficial owners are referred to herein collectively as the Members. The operating entities include RMR Advisors LLC, a Maryland limited liability company which was formerly a Massachusetts corporation named RMR Advisors, Inc., or RMR Advisors, and RMR Intl LLC, a Maryland limited liability company, or RMR Intl. These transactions among entities under common control have been accounted for using the pooling method of accounting as if the operations of RMR Advisors and RMR Intl were consolidated as of the beginning of the earliest period presented in our condensed consolidated financial statements and the ownership structure as of June 5, 2015 has been in existence throughout the periods covered by our condensed consolidated financial statements.

 

RMR Inc. owns 15,000,000 class A membership units and 1,000,000 class B membership units of RMR LLC. The aggregate RMR LLC membership units RMR Inc. owns represent 51.6% of the economic interest of RMR LLC. ABP Trust owns 15,000,000 redeemable class A membership units of RMR LLC, representing 48.4% of the economic interest of RMR LLC, which is presented as a noncontrolling interest within the condensed consolidated financial statements.

 

RMR LLC was founded in 1986 to manage public investments in real estate and, as of December 31, 2015, managed a diverse portfolio of publicly owned real estate and real estate related businesses. RMR LLC manages: Government Properties Income Trust, or GOV, a publicly traded real estate investment trust, or REIT, that primarily owns properties that are majority leased to government tenants; Hospitality Properties Trust, or HPT, a publicly traded REIT that primarily owns hotels and travel centers; Select Income REIT, or SIR, a publicly traded REIT that primarily owns properties leased to single tenants throughout the United States and leased lands in Hawaii; and Senior Housing Properties Trust, or SNH, a publicly traded REIT that primarily owns senior living communities and medical office buildings. Hereinafter, GOV, HPT, SIR and SNH are collectively referred to as the Managed REITs. RMR LLC also provides management services to other publicly traded and private businesses, including: Five Star Quality Care, Inc., or Five Star, an operator of senior living communities, many of which are owned by SNH; Sonesta International Hotels Corporation, or Sonesta, a privately owned manager and franchisor of hotels, resorts and cruise ships in the United States, Latin America and the Middle East, some of whose U.S. hotels are owned by HPT; and TravelCenters of America LLC, or TA, an operator of travel centers along the U.S. Interstate

 

5


 

Table of Contents

The RMR Group Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands)

 

Highway System, many of which are owned by HPT, and convenience stores with retail gas stations. Hereinafter, Five Star, Sonesta and TA are collectively referred to as the Managed Operators. In addition, RMR LLC also provided management services to certain related private companies, including Affiliates Insurance Company, or AIC, an Indiana insurance company, and ABP Trust and its subsidiaries. During the periods presented, RMR LLC provided transition services to Equity Commonwealth, or EQC, a publicly traded REIT that primarily owns office properties.

 

RMR Advisors was founded in 2002. RMR Advisors is the advisor to RMR Real Estate Income Fund, or RIF. RIF is 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.

 

RMR Intl was founded in 2012 and is the owner of RMR Australia Asset Management Pty Ltd, or RMR Australia, a company founded in 2012 to manage properties owned by EQC located in Australia. RMR Australia holds an Australian financial services license granted by the Australian Securities & Investments Commission.

 

In these financial statements, we refer to the Managed REITs, the Managed Operators, RIF, AIC and ABP Trust as our Client Companies.

 

For periods prior to June 5, 2015, Members’ profit sharing was determined based on federal income tax concepts, including our historical cash method of accounting for tax purposes. The condensed consolidated statements of comprehensive income do not reflect an accrual for Members profit sharing, as the determination of any profit sharing payments were made annually in the fourth quarter of our fiscal year after an assessment of our tax basis earnings. Any profit sharing payments were discretionary in nature and determined solely by our Founders after the assessment of tax basis earnings and the capital requirements of the business.

 

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.  In the opinion of management, all adjustments, which include only normal recurring adjustments considered necessary for a fair presentation, 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

In May 2014, the FASB issued Accounting Standards Update, or ASU, No. 2014-09, Revenue from Contracts with Customers, or ASU 2014-09. The main provision of ASU 2014-09 is to recognize revenue when control of the goods or

 

6


 

Table of Contents

The RMR Group Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands)

 

services transfers to the customer, as opposed to the existing guidance of recognizing revenue when the risk and rewards transfer to the customer. In July 2015, the FASB approved a one year deferral of the effective date for this ASU to interim and annual reporting periods beginning after December 15, 2017. We have not yet determined the effects, if any, that the adoption of ASU 2014-09 may have on our financial position, results of operations, cash flows or disclosures.

 

In November 2015, the FASB issued ASU No. 2015-17, Income Taxes: Balance Sheet Classification of Deferred Taxes, which is intended to improve how deferred taxes are classified on organizations’ balance sheets by eliminating the current requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet.  We adopted this ASU effective October 1, 2015 and have applied the requirements retrospectively to all periods presented. The adoption of this standard resulted in the reclassification of $3,398 from prepaid and other current assets to deferred income tax assets in the condensed consolidated balance sheet as of September 30, 2015.

 

 

Note 3. Revenue Recognition

Revenues from services that we provide are recognized as earned in accordance with contractual agreements. In the periods presented, management and advisory services revenue consists principally of business management fees, property management fees and advisory fees earned from our Client Companies.

Business Management and Incentive Fees—Managed REITs

We earn base business management fees from the Managed REITs 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, based on the REIT’s monthly financial statements and average market capitalization during the month.

On June 5, 2015, as part of the Up‑C Transaction, which is more fully described in our Annual Report, RMR LLC and each of the Managed REITs entered into amended and restated business management agreements and amended and restated property management agreements. Each of our amended management agreements have terms that end on December 31, 2036, and automatically extend on December 31st of each year so that the terms of the agreements thereafter end on the 20th anniversary of the date of the extension. Each of the Managed REITs has the right to terminate each amended management agreement: (i) at any time on 60 days’ written notice for convenience, (ii) immediately upon written notice for cause, as defined therein, (iii) on 60 days’ written notice given within 60 days after the end of an applicable calendar year for a performance reason, as defined therein, and (iv) by written notice during the 12 months following a change of control of

 

7


 

Table of Contents

The RMR Group Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands)

 

RMR LLC, as defined therein. We have the right to terminate the amended management agreements for good reason, as defined therein.

If the Managed REITs terminate one or both of our amended management agreements for convenience, or if we terminate one or both of our amended management agreements with a Managed REIT for good reason, the Managed REITs have agreed to pay us a termination fee in an amount equal to the sum of the present values of the Managed REIT’s monthly future fees, as defined therein, for the terminated amended management agreement(s) for the remaining term. If a Managed REIT terminates one or both of our amended management agreements for a performance reason, as defined therein, the Managed REITs have agreed to pay to us the termination fee calculated as described above, but assuming a remaining term of 10 years. The Managed REITs are not required to pay any termination fee if a Managed REIT terminates its amended management agreements for cause or as a result of a change of control of us.

During the period January 1, 2014 until June 5, 2015, the base business management fee was paid 90.0% in cash and 10.0% in the applicable REIT’s common shares, which were fully vested when issued. The number of the REIT’s common shares issued in payment of the base business management fee for each month equaled 10.0% of the total base management fee for the REIT for that month divided by the average daily closing price on the New York Stock Exchange, or the NYSE, of its common shares during that month. The amended management agreements require that all of the management fees payable from the Managed REITs to us after June 5, 2015 be paid in cash.

Under the business management agreements, we also have the ability to earn annual incentive business management fees from the Managed REITs. The incentive business management fees are contingent performance based fees which are only recognized when earned at the end of each respective measurement period or termination of the related management agreement. The incentive fees are calculated for each REIT as 12.0% of the product of (a) the equity market capitalization of the REIT, as defined in the applicable business management agreement, and (b) the amount, expressed as a percentage, by which the REIT’s total return per share, as defined in the applicable business management agreement, exceeded the 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, subject to caps on the values of the incentive fees. The measurement period for the annual incentive fee in respect of calendar 2015 is the two year period that ended on December 31, 2015 and for calendar years thereafter, the three year period ended on December 31 of that calendar year. The amended management agreements require that any incentive fee payable by the Managed REITs to us after June 5, 2015 be paid in cash.

For the three months ended December 31, 2015 and 2014, we earned aggregate base business management fees of $25,176 and $23,378, respectively, from the Managed REITs. For the three months ended December 31, 2015 and 2014, we earned aggregate incentive business management fees from the Managed REITs of $62,263 and zero, respectively. Incentive business management fees recognized as earned in the three months ended December 31, 2015, were earned in respect of the 2015 calendar year. Under the agreements entered into for the Up-C Transaction, ABP Trust is entitled to receive a pro rata share of any incentive business management fee earned for the 2015 calendar year, based on the number of days in 2015 to June 5, 2015, the effective date of the Up-C Transaction. Accordingly, $26,611 of the incentive business management fee is allocated to ABP Trust.  See Note 6, Related Person Transactions below.

 

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Table of Contents

The RMR Group Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands)

 

Business Management Fees—Managed Operators, ABP Trust and AIC

We earn business management fees from the Managed Operators and ABP Trust pursuant to business management agreements equal to 0.6% of: (i) in the case of Five Star, Five Star’s revenues from all sources reportable under U.S. generally accepted accounting principles, or 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 non fuel revenues and (iv) in the case of ABP Trust, revenues from all sources reportable under GAAP. These fees are estimated and payable monthly in advance. We earn business management 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. For the three months ended December 31, 2015 and 2014, we earned aggregate business management fees from the Managed Operators, ABP Trust and AIC of $6,226 and $5,898, respectively.

Property Management Fees

We earned property management fees pursuant to property management agreements with certain Client Companies. We generally earn fees under these agreements for property management services equal to 3.0% of gross collected rents. Also, under the terms of the property management agreements, we receive additional property management fees for construction supervision in connection with certain construction activities undertaken at the managed properties equal to 5.0% of the cost of such construction. For the three months ended December 31, 2015 and 2014, we earned aggregate property management fees of $8,336 and $6,334, respectively.

Reimbursable Payroll and Related Costs

Pursuant to certain of our management agreements, the companies to which we provide management services pay or reimburse us for expenses incurred on their behalf. In accordance with ASC 605 Revenue Recognition, we present certain payroll and related cost reimbursements we receive as revenue. A significant portion of these reimbursable payroll and related costs arises from services we provided pursuant to our property management agreements that were paid by tenants of our Client Companies.

Our reimbursable payroll and related costs also 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 the consolidated statements of comprehensive income over the requisite service period. We record an equal offsetting amount as compensation and benefits expense for all of our payroll and related cost revenues. For the three months ended December 31, 2015 and 2014, equity based compensation expense and related reimbursements were $1,485 and $2,120, respectively.

 

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The RMR Group Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands)

 

We report all other expenses we incur on behalf of our Client Companies on a net basis as the management agreements provide that reimbursable expenses are to be billed directly to the client. This net basis accounting method is supported by some or all of the following factors, which we have determined defines us as an agent rather than a principal with respect to these matters:

·

reimbursement to us is generally completed prior to payment of the related expenses;

 

·

the property owner is contractually obligated to fund such operating costs of the property from existing cash flow or direct funding from its building operating account and we bear little or no credit risk;

 

·

our clients are the primary obligor in relationships with the affected suppliers and service providers; and

 

·

we earn no margin on the reimbursement aspect of the arrangement, obtaining reimbursement only for actual costs incurred.

For the three months ended December 31, 2015 and 2014, we realized reimbursable payroll and related costs of $7,490 and $7,034, respectively.

Advisory Fees—RIF

We earn advisory fees pursuant to an advisory agreement with RIF at the annual rate of 0.85% of RIF’s average daily managed assets, as defined in the agreement. 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 evidenced by notes, commercial paper or other similar instruments issued by RIF. For the three months ended December 31, 2015 and 2014, we earned advisory fees of $581 and $592, respectively, under this advisory agreement.

EQC Termination and Cooperation Agreement

Pursuant to a Termination and Cooperation Agreement dated September 30, 2014, or the Termination and Cooperation Agreement, EQC and RMR LLC terminated RMR LLC’s business and property management agreements with EQC. Pursuant to the Termination and Cooperation Agreement, RMR LLC assisted EQC in the transition of EQC’s management and operations through February 28, 2015, and EQC paid RMR LLC $3,600 for the three months ended December 31, 2014 for these transition services. Also, we continued to provide certain services for EQC in Australia until October 31, 2015 and earned $58 for the three months ended December 31, 2015 for these services.

Note 4. Income Taxes

As a result of the Up‑C Transaction, RMR Inc. became the sole managing member of RMR LLC. RMR LLC is treated as a partnership for U.S. federal and most applicable state and local income tax purposes. In addition, on June 1, 2015 and June 3, 2015, respectively, RMR Intl and RMR Advisors became wholly owned disregarded subsidiaries of RMR LLC.

 

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The RMR Group Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands)

 

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. RMR Inc. is a corporation subject to U.S. federal and state income tax with respect to its allocable share of any taxable income of RMR LLC and its wholly owned subsidiaries.

For the three months ended December 31, 2015, we recognized income tax expense of $11,314, of which $9,979 is U.S. federal income tax and $1,335 is state income tax.

A reconciliation of the statutory income tax rate to the effective tax rate is as follows:

 

 

 

 

 

December 31,

 

 

2015

 

Income taxes computed at the federal statutory rate

35.0

%

 

State taxes, net of federal benefit

4.8

%

 

Net income attributable to non-controlling interest

(26.0)

%

 

Total

13.8

%

 

 

Prior to June 5, 2015, RMR LLC was a single member limited liability company, and it was generally disregarded for federal and most state income tax purposes. Prior to June 5, 2015 the sole member of RMR LLC was ABP Trust. ABP Trust elected to be treated as an S corporation for income tax purposes and is generally not subject to federal and most state income taxes. RMR LLC and ABP Trust, however, are subject to certain state income taxes. In states where RMR LLC incurs income taxes, it may be subject to audit for tax years ending September 30, 2012 through its most recent filings. For the three months ended December 31, 2014, RMR LLC had no provision for income tax expense.

Prior to June 5, 2015, RMR Advisors elected to be treated as an S corporation for income tax purposes and was also generally not subject to federal and most state income taxes. RMR Advisors was, however, subject to certain state income taxes. RMR Advisors may be subject to audit for tax years ending September 30, 2012 through its most recent filings. For the three months ended December 31, 2014, RMR Advisors had no provision for income tax expense.

Prior to June 5, 2015, RMR Intl was a partnership for U.S. income tax purposes and was not subject to federal and state income tax. RMR Intl conducted business in Australia through a foreign entity that was subject to Australian income tax that was disregarded for U.S. income tax purposes. RMR Intl, and its foreign subsidiary, may be subject to audit for tax years ending September 30, 2013 through its most recent filings. For the three months ended December 31, 2014, RMR Intl had no provision for foreign income tax expense.

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,

 

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The RMR Group Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands)

 

the benefit associated with a tax position is measured as the largest amount that is greater than 50% likely of being realized upon settlement. As of December 31, 2015 and September 30, 2015, we have no uncertain tax positions.

Note 5. Fair Value of Financial Instruments

As of December 31, 2015 and September 30, 2015, the fair values of our financial instruments, which include cash and cash equivalents, amounts due from related parties, accounts payable and amounts due to related parties, were not materially different from their carrying values due to the short term nature of these financial instruments.

The following are our assets and liabilities that all have been measured at fair value using Level 1 in the fair value hierarchy as of December 31, 2015 and September 30, 2015:

 

 

 

 

 

 

 

December 31,

 

September 30,

 

2015

 

2015

Money market funds included in cash and cash equivalents

$

13,251

 

$

33,241

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

 

4,133

 

 

4,267

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

 

6,075

 

 

6,446

Current portion of accounts payable, accrued expenses and deposits related to share based payment awards

4,133

 

 

4,267

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

 

6,075

 

 

6,446

 

 

 

 

 

 

 

Note 6. Related Person Transactions

Our Founders are the beneficial owners and trustees of ABP Trust, which for the periods prior to June 5, 2015 was the sole owner of RMR LLC. ABP Trust owns all of RMR Inc.’s outstanding Class B1 and Class B2 Common Shares and 15,000,000 class A membership units of RMR LLC. For the periods prior to June 5, 2015, our Founders also were the owners of RMR Advisors and RMR Intl. For the periods presented, our Founders are directors of AIC and the shareholders and directors of Sonesta. Our Founders are directors and officers of RMR Inc. and officers of RMR LLC. Our Founders are also managing trustees of each of the Managed REITs. Barry M. Portnoy is a managing director of Five Star and of TA. All of the executive officers of the Managed REITs and many of the executive officers of the Managed Operators are also officers of RMR LLC.

Revenues from Related PartiesFor the three months ended December 31, 2015 and 2014, we recognized revenues from related parties as set forth in the following table:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Revenues

 

 

 

For the Three Months Ended December 31,

 

 

 

2015

 

2014

 

 

 

$

 

%

 

$

 

%

 

 

Managed REITs:

 

 

 

 

 

 

 

 

 

 

 

GOV

$

7,211

 

6.5%

 

$

7,595

 

16.2%

 

 

HPT

 

71,823

 

65.2%

 

 

10,477

 

22.4%

 

 

SIR

 

9,723

 

8.8%

 

 

4,904

 

10.5%

 

 

SNH

 

13,422

 

12.2%

 

 

12,619

 

26.9%

 

 

 

 

102,179

 

92.7%

 

 

35,595

 

76.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Managed Operators:

 

 

 

 

 

 

 

 

 

 

 

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The RMR Group Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands)

 

 

Five Star

 

2,412

 

2.2%

 

 

2,362

 

5.0%

 

 

Sonesta

 

484

 

0.4%

 

 

459

 

1.0%

 

 

TA

 

3,599

 

3.3%

 

 

3,437

 

7.3%

 

 

 

 

6,495

 

5.9%

 

 

6,258

 

13.3%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other:

 

 

 

 

 

 

 

 

 

 

 

AIC

 

60

 

0.1%

 

 

60

 

0.1%

 

 

RIF

 

581

 

0.5%

 

 

592

 

1.3%

 

 

ABP Trust

 

757

 

0.7%

 

 

731

 

1.6%

 

 

 

 

1,398

 

1.3%

 

 

1,383

 

3.0%

 

 

Other unrelated parties

 

58

 

0.1%

 

 

3,600

 

7.7%

 

 

 

$

110,130

 

100.0%

 

$

46,836

 

100.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

On December 31, 2015, RMR LLC earned a $62,263 annual incentive business management fee from HPT pursuant to our business management agreement with HPT. Under the RMR LLC Operating Agreement, ABP Trust is entitled to receive a pro rata share of any incentive business management fee earned by RMR LLC for the 2015 calendar year based on the number of days in 2015 to June 5, 2015, the effective date of the Up-C Transaction; the portion of the $62,263 incentive fee allocated solely to ABP Trust pursuant to this provision is $26,611. As of December 31, 2015, this $62,263 incentive fee due to us from HPT was included in due from related parties and was paid in January 2016.  We earned no other incentive fees for the periods presented.

Investments in Managed REITs, RIF and AIC

For the periods prior to June 5, 2015, we were paid a part of our base business management fees from the Managed REITs in common shares of each Managed REIT. For the three months ended December 31, 2014, we received shares for such services as follows:

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

 

 

December 31, 2014

 

 

 

 

No. of

 

 

 

 

 

REIT

 

Shares

 

Value

 

 

GOV

 

11,456

 

$

262

 

 

HPT

 

32,695

 

 

940

 

 

SIR

 

10,208

 

 

249

 

 

SNH

 

37,476

 

 

821

 

 

 

 

 

 

$

2,272

 

 

 

 

 

 

 

 

 

Cash dividends that we received on the shares of the Managed REITs which we owned during the three months ended December 31, 2014 totaled $368 and are reported as interest and other income in our condensed consolidated statements of comprehensive income.

 

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The RMR Group Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands)

 

We also historically owned shares of RIF, for which our quarterly dividend distributions were reinvested in purchasing additional RIF shares.  For the three months ended December 31, 2014, we purchased 559 shares for $11 pursuant to this dividend reinvestment program.   

AIC was formed in 2008 and provides a combined property insurance program for its shareholders, which are comprised of companies to which we provide management services. For the three months ended December 31, 2014, RMR LLC, the Managed REITs,  Five Star and TA each owned 14.3% of AIC.

Our investments in the Managed REITs, RIF and AIC were distributed by RMR LLC to ABP Trust at their respective carrying values prior to the Up-C Transaction. 

 

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Table of Contents

The RMR Group Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands)

 

Amounts due from or due to related parties

The following table represents amounts due from and to related parties as of the dates listed:

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

September 30,

 

 

 

 

2015

 

2015

 

 

Amounts due from:

 

 

 

 

 

Managed REITs:

 

 

 

 

 

GOV

 

$

4,414

 

$

3,506

 

 

HPT

 

 

69,069

 

 

6,990

 

 

SIR

 

 

5,269

 

 

4,741

 

 

SNH

 

 

7,308

 

 

6,853

 

 

 

 

 

86,060

 

 

22,090

 

 

 

 

 

 

 

 

 

 

 

Managed Operators:

 

 

 

 

 

Five Star

 

 

648

 

 

1,361

 

 

Sonesta

 

 

 -

 

 

16

 

 

TA

 

 

1,089

 

 

821

 

 

 

 

 

1,737

 

 

2,198

 

 

 

 

 

 

 

 

 

 

 

Other Client Companies:

 

 

 

 

AIC

 

 

20

 

 

22

 

 

ABP Trust

 

 

478

 

 

122

 

 

RIF

 

 

33

 

 

 -

 

 

 

 

 

531

 

 

144

 

 

 

 

$

88,328

 

$

24,432

 

 

 

 

 

 

 

 

 

 

 

Amounts due to:

 

 

 

 

 

ABP Trust

 

$

26,611

 

$

 -

 

 

 

 

$

26,611

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

Leases

As of December 31, 2015, we leased from ABP Trust and certain Managed REITs office space for use as our headquarters and local offices under 19 different leases. During the three months ended December 31, 2015 and 2014, we incurred rental expense under related party leases aggregating $1,072 and $950, respectively. Our related party leases have various termination dates and many have renewal options. Some of our related party leases are terminable on 30 days’ notice and many allow us to terminate early if our management agreements for the buildings in which we lease space are terminated.

 

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The RMR Group Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands)

 

The Up-C Transaction

On June 5, 2015, we were a party to a transaction with ABP Trust and the Managed REITs, or the Up-C Transaction. In the Up-C Transaction: (a) ABP Trust contributed $11,520 in cash to RMR Inc. which RMR Inc. subsequently contributed to RMR LLC; (b) GOV contributed 700,000 of its common shares and $3,917 in cash to RMR Inc., HPT contributed 1,490,000 of its common shares and $12,622 in cash to RMR Inc., SIR contributed 880,000 of its common shares and $15,880 in cash to RMR Inc. and SNH contributed 2,345,000 of its common shares and $13,967 in cash to RMR Inc.; (c) RMR Inc. issued 1,000,000 shares of Class B-1 common stock of RMR Inc., or Class B-1 Common Shares, and 15,000,000 shares of Class B-2 common stock of RMR Inc., or Class B-2 Common Shares, to ABP Trust; (d) RMR Inc. issued 1,541,201 shares of Class A common stock, par value $0.001 per share, of RMR Inc., or Class A Common Shares, to GOV, 5,019,121 Class A Common Shares to HPT, 3,166,891 Class A Common Shares to SIR and 5,272,787 Class A Common Shares to SNH; (e) ABP Trust delivered to RMR Inc. 15,000,000 of the 30,000,000 class A membership units of RMR LLC it then owned; and (f) RMR Inc. delivered to ABP Trust the shares and cash which had been contributed to RMR Inc. by the Managed REITs. Pursuant to the transaction agreements, the Managed REITs agreed to distribute approximately half of our Class A Common Shares they acquired in the Up-C Transaction to their respective shareholders as a special distribution, and we agreed to facilitate this distribution by filing a registration statement with the Securities and Exchange Commission to register those Class A Common Shares to be distributed and by seeking a listing of those shares on a national stock exchange. This distribution took place on December 14, 2015. As a result of the Up-C Transaction, RMR LLC became a subsidiary of RMR Inc., RMR Inc. became the Managing Member of RMR LLC and each Managed REIT became the owner of more than 5.0% of the outstanding Class A Common Shares of RMR Inc. For further information regarding the Up-C Transaction, please refer to our Annual Report.

In the Up‑C Transaction, the Managed REITs contributed cash and shares of the Managed REITs with a combined value of $167,764 to RMR Inc. The transaction agreements calculated the value of the Managed REITs’ common shares using a 20 business day volume weighted average trading price, or $126,400. For accounting purposes, the common shares were valued at the closing price of those shares on the date of the Up‑C Transaction, or $121,378. For purposes of GAAP, we concluded that the consideration received from the Managed REITs for our Class A Common Shares represented a discount to the fair value of RMR Inc.’s Class A Common Shares. As a result, we recorded $193,806 in other assets under ASC 605‑50, Consideration Given to a Customer. The consideration received from the Managed REITs was allocated to the 15,000,000 Class A Common Shares and the 20 year management agreements under the relative selling price method in accordance with ASC 605‑25, Multiple Element Arrangements, using our best estimate of selling price for each of the deliverables. The other assets of $193,806 is being amortized against revenue recognized related to the management agreements with the Managed REITs using the straight line method through the period ended December 31, 2035. For the three months ended December 31, 2015, we reduced revenue by $2,354 related to the amortization of these other assets.

Pursuant to the transaction agreements, on December 14, 2015, GOV, HPT, SIR and SNH distributed 768,032,  2,515,344,  1,580,055 and 2,635,379 Class A Common Shares, respectively, to their respective shareholders, which represented approximately half of the Class A Common Shares that each received in the Up-C Transaction.  We facilitated this distribution by filing a registration statement with the SEC to register the Class A Common Shares being distributed and by listing those shares on The NASDAQ Stock Market LLC. 

 

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Table of Contents

The RMR Group Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands)

 

Tax Related Payments

In the Up-C Transaction, we entered into the Tax Receivable Agreement with ABP Trust which provides for the payment by RMR Inc. to ABP Trust of 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 its 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. 

Under the RMR LLC Operating Agreement, RMR LLC is required to make certain pro rata distributions to each member of RMR LLC quarterly on the basis of the assumed tax liabilities of its members.  During the quarter ended December 31, 2015, we distributed $6,773 to ABP Trust pursuant to this requirement. 

Other

We and six companies to which we provide management services (i.e., the Managed REITs, Five Star and TA) participate in a combined directors’ and officers’ liability insurance policy providing for $10,000 of combined primary coverage.  The combined policy expires in 2017.  In connection with that policy, we also secured an additional $25,000 of secondary combined coverage, which expires in September 2016. The premium for the combined policy was allocated among the insured companies after consultation with our insurance broker and approved by each company’s board and independent trustees or directors as applicable. RMR Inc. paid aggregate premiums of $402 for these policies.

For the period October 1, 2014 through June 5, 2015, amounts were periodically advanced and repaid between ABP Trust and its then 100.0% owned subsidiary RMR LLC. These advances were due on demand without interest. There were no advances outstanding between ABP Trust and RMR LLC as of December 31, 2015 and September 30, 2015. Also, for the period October 1, 2014 through June 5, 2015, our Founders periodically made loans for working capital to RMR LLC which loans were due on demand and required interest at the minimum monthly adjustable federal rate required for tax reporting. At December 31, 2015 and September 30, 2015, respectively, no loans were outstanding from our Founders to RMR LLC. 

Note 7. Shareholders’ Equity

Common Shares

RMR Inc.’s authorized capital stock consists of 31,000,000 Class A Common Shares, par value $0.001 per share, 1,000,000 Class B‑1 Common Shares, par value $0.001 per share and 15,000,000 Class B‑2 Common Shares, par value $0.001 per share.

Class A Common Shares entitle holders to one vote for each share held of record on all matters submitted to a vote of shareholders. Class B-1 Common Shares entitle holders to ten votes for each share held of record on all matters submitted to a vote of shareholders. Each Class B-1 Common Share may, at the option of its holder, be converted into a Class A Common Share, on a one for one basis. Class B-2 Common Shares are entitled to ten votes for each share held of record on all matters submitted to a vote of shareholders. RMR Inc.'s Class B-2 Common Shares are paired with class A membership units of RMR LLC held by ABP Trust. The class A membership units of RMR LLC may, at the option of the holder, be redeemed for Class A Common Shares on a one to one basis, and upon such redemption our Class B-2 Common Shares that

 

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Table of Contents

The RMR Group Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands)

 

are paired with the class A membership units are automatically cancelled. RMR Inc. has the option to settle the redemption in cash. Holders of our Class A Common Shares, Class B‑1  Common Shares and Class B-2 Common Shares vote together as a single class on all matters submitted to a vote of our common shareholders except as required by law and except for amendments to our charter that materially and adversely affect a single class of common shares, in which case, the affected class of shares shall have the right to vote separately on such amendments.

Distributions.  

On November 13, 2015, we declared a dividend on our Class A Common Shares and Class B-1 Common Shares payable to our shareholders of record as of November 25, 2015, in the amount of $0.5260 per Class A Common Share and Class B-1 Common Share, or $8,416.  The amount of this distribution was calculated as $0.25 per share per quarter for the period June 5, 2015 to December 14, 2015. We paid this dividend on December 15, 2015.  This dividend was funded by a distribution from RMR LLC to holders of its membership units in the amount of $0.5260 per unit, or $16,306, of which $8,416 was distributed to us based on our aggregate ownership of 16 million membership units of RMR LLC and $7,890 was distributed to ABP Trust based on its ownership of 15 million membership units of RMR LLC.

On December 10, 2015, pursuant to RMR LLC’s Operating Agreement, RMR LLC made required quarterly tax distributions to its holders of its membership units of $13,995, of which $7,222 and $6,773 was distributed to us and ABP Trust, respectively, based on each membership unit holder’s respective ownership.  The $7,222 distributed to us was eliminated in our condensed consolidated financial statements, and the $6,773 distributed to ABP Trust was recorded as a reduction of their noncontrolling interest.

Other Comprehensive Income (Loss).

Other comprehensive income for the three months ended December 31, 2015 represents foreign currency translation adjustments derived from our Australian subsidiary.  Other comprehensive loss for the three months ended December 31, 2014 represents net unrealized losses on the shares of EQC and our share of the comprehensive loss of AIC we owned during that period, in addition to foreign currency translation adjustments.

Note 8.  Per Common Share Amounts

Earnings per common share for the three months ended December 31, 2015 reflects net income attributable to RMR Inc. divided by our weighted average common shares outstanding. Basic and diluted weighted average common shares outstanding represents our 15,000,000 Class A Common Shares and our 1,000,000 Class B‑1 Common Shares. Our Class B‑2 Common Shares, which are paired with ABP Trust’s class A membership units, have no independent economic interest in RMR Inc. and thus are not included as common stock outstanding for purposes of calculating our net income attributable to RMR Inc. per share.

 

The 15,000,000 RMR LLC class A membership units that we do not own may be redeemed for our Class A Common Shares on a one for one basis, or upon such redemption, we may elect to pay cash instead of issuing Class A Common Shares. Upon redemption of a RMR LLC class A membership unit, our Class B‑2 Common Share “paired” with such unit is cancelled for no additional consideration. If all outstanding RMR LLC class A membership units were redeemed for our Class A Common Shares in the periods presented our Class A Common Shares outstanding would have been

 

18


 

Table of Contents

The RMR Group Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands)

 

30,000,000. In computing the dilutive effect, if any, that the aforementioned redemption would have on earnings per share, attributable to RMR Inc., we considered that net income available to holders of our Class A Common Shares would increase due to elimination of the noncontrolling interest (including any tax impact). For the period presented, such redemption is not reflected in diluted earnings per share as the assumed redemption would be anti‑dilutive.

 

 

Note 9. Net Income Attributable to RMR Inc.

Net income attributable to RMR Inc. for three months ended December 31, 2015, is derived as follows:

 

 

 

 

 

 

 

Net income before income tax expense

$

81,693

 

 

Less: incentive fee allocable to ABP Trust

 

(26,611)

 

 

Net income before non-controlling interest

 

55,082

 

 

Less: non-controlling interest (48.4%)

 

(26,714)

 

 

Net income attributable to RMR Inc. before income tax expense

 

28,368

 

 

Less: income tax expense attributable to RMR Inc.

 

(11,314)

 

 

Net income attributable to RMR Inc.

$

17,054

 

 

 

 

 

Note 10. Segment Reporting

We have one reportable business segment, which is RMR LLC. In the table below, All Other Operations includes the operations of RMR Inc., RMR Advisors and RMR Intl.

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended December 31, 2015

 

 

 

 

 

All Other

 

 

 

Revenues

 

RMR LLC(1)

 

Operations

 

Total

Management services

 

$

102,001

 

$

58

 

$

102,059

Reimbursable payroll and related costs

 

 

7,490

 

 

 -

 

 

7,490

Advisory services

 

 

 -

 

 

581

 

 

581

Total revenues

 

 

109,491

 

 

639

 

 

110,130

Expenses

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

 

20,981

 

 

323

 

 

21,304

Separation expense

 

 

163

 

 

 -

 

 

163

General and administrative

 

 

6,162

 

 

350

 

 

6,512

Depreciation expense

 

 

483

 

 

 -

 

 

483

Total expenses

 

 

27,789

 

 

673

 

 

28,462

Operating income (loss)

 

 

81,702

 

 

(34)

 

 

81,668

Interest and other income

 

 

25

 

 

 -

 

 

25

Income before income tax expense

 

 

81,727

 

 

(34)

 

 

81,693

Income tax expense

 

 

(1)

 

 

(11,313)

 

 

(11,314)

Net income (loss)

 

$

81,726

 

$

(11,347)

 

$

70,379

 


(1)

Intersegment revenues of $182 recognized by RMR LLC for services provided to the All Other Operations segment have been eliminated in the condensed consolidated financial statements.

 

19


 

Table of Contents

The RMR Group Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended December 31, 2014

 

 

 

 

 

All Other

 

 

 

Revenues

 

RMR LLC(1)

 

Operations

 

Total

Management services

 

$

39,210

 

$

 -

 

$

39,210

Reimbursable payroll and related costs

 

 

7,034

 

 

 -

 

 

7,034

Advisory services

 

 

 -

 

 

592

 

 

592

Total revenues

 

 

46,244

 

 

592

 

 

46,836

Expenses

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

 

22,311

 

 

534

 

 

22,845

Separation expense

 

 

116

 

 

 -

 

 

116

General and administrative

 

 

4,894

 

 

121

 

 

5,015

Depreciation expense

 

 

579

 

 

 -

 

 

579

Total expenses

 

 

27,900

 

 

655

 

 

28,555

Operating income (loss)

 

 

18,344

 

 

(63)

 

 

18,281

Interest and other income

 

 

475

 

 

23

 

 

498

Unrealized gains attributable to changes in fair value of stock

 

 

 

 

 

 

 

 

 

accounted for under the fair value option

 

 

775

 

 

66

 

 

841

Income before income tax expense and equity in earnings

 

 

 

 

 

 

 

 

 

of investee

 

 

19,594

 

 

26

 

 

19,620

Equity in earnings of investee

 

 

28

 

 

 -

 

 

28

Net income

 

$

19,622

 

$

26

 

$

19,648

 

 

 

 

 

 

 

 

 

 


(1)

Intersegment revenues of $258 recognized by RMR LLC for services provided to the All Other Operations segment have been eliminated in the condensed consolidated financial statements.

 

 

20


 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 

The following information should be read in conjunction with our condensed consolidated financial statements and accompanying notes included in Part 1, Item 1 of this Quarterly Report on Form 10-Q and with our Annual Report.

OVERVIEW (dollar amounts in thousands)

RMR Inc. was incorporated in Maryland on May 28, 2015 in contemplation of the Up-C Transaction. For more information about the Up-C Transaction and the Up-C Transaction agreements, please see Note 6, Related Person Transactions in our condensed consolidated financial statements in Part I, Item 4 above and Note 6, Related Person Transactions included in the audited consolidated financial statements included in our Annual Report.

RMR Inc. is a holding company; substantially all of its business is conducted by RMR LLC. RMR Inc. has no employees and the personnel and various services it requires to operate are provided by RMR LLC. As of December 31, 2015, the over 1,300 properties which RMR LLC manages are located in 48 states, Washington, DC, Puerto Rico and Canada and they are principally owned by the four Managed REITs. 

The consolidated financial information in this section include accounts of RMR Inc. or its predecessors, and periods presented in these statements prior to the Up‑C Transaction are presented as if our predecessor entities, which were not then owned by a single entity, were wholly owned within a single legal entity.

Substantially all of our revenues are derived from providing business and property management services to our clients. We also earn revenue from advisory services to RIF, a closed end mutual fund.

Managed REITs

The business management fees we earn from the Managed REITs are principally based upon the lower of (i) the historical cost of each REIT’s properties or (ii) each REIT’s total market capitalization. The property management fees we earn from the Managed REITs are principally based upon the gross rents collected at certain managed properties owned by the REITs, excluding rents or other revenues from hotels, travel centers, senior living properties and wellness centers. The following table presents a summary of the REITs we managed at December 31, 2015 and 2014, the historical cost of their properties or their total market capitalization, as applicable, on which the fees we earned were calculated for those periods and the fees we earned from those REITs for those periods (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Historical Cost of Assets Under Management or

 

 

 

Total Market Capitalization(1)

 

 

 

December 31,

 

December 31,

REIT Name