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EX-31.2 - EX-31.2 - RMR GROUP INC.rmr-20160630ex3121297d3.htm
EX-31.1 - EX-31.1 - RMR GROUP INC.rmr-20160630ex311afae7d.htm

 

 

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 June 30, 2016

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 August 8, 2016, there were 15,007,500 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.

 

 

X


 

THE RMR GROUP INC.

FORM 10-Q

June 30, 2016

 

INDEX

 

 

 

 

 

 

 

 

Page

PART I 

Financial Information

 

Item 1. 

Financial Statements (unaudited) 

 

 

Condensed Consolidated Balance Sheets — June 30, 2016 and September 30, 2015

 

Condensed Consolidated Statements of Comprehensive Income — Three And Nine Months Ended June 30, 2016
and 2015

 

Condensed Consolidated Statement of Shareholders’ Equity —  Nine Months Ended June 30, 2016

 

Condensed Consolidated Statements of Cash Flows — Nine Months Ended June 30, 2016 and 2015

 

Notes to Unaudited Condensed Consolidated Financial Statements

Item 2. 

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

22 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

34 

Item 4. 

Controls and Procedures

34 

 

Warning Concerning Forward Looking Statements

36 

PART II 

Other Information

 

Item 1A. 

Risk Factors

38 

Item 6. 

Exhibits

38 

 

Signatures

39 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


 

PART I. Financial Information

 

Item 1. Financial Statements

 

The RMR Group Inc.

Condensed Consolidated Balance Sheets

(dollars in thousands, except share amounts)

(unaudited)

 

 

 

 

 

 

 

 

 

 

June 30, 

 

September 30, 

Assets

 

2016

 

2015

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

81,137

 

$

34,497

Due from related parties

 

 

22,516

 

 

17,986

Prepaid and other current assets

 

 

4,920

 

 

2,863

Total current assets

 

 

108,573

 

 

55,346

 

 

 

 

 

 

 

Furniture and equipment

 

 

4,900

 

 

5,307

Leasehold improvements

 

 

1,077

 

 

852

Capitalized software costs

 

 

4,250

 

 

4,292

Total property and equipment

 

 

10,227

 

 

10,451

Accumulated depreciation

 

 

(6,192)

 

 

(5,772)

 

 

 

4,035

 

 

4,679

Due from related parties, net of current portion

 

 

4,846

 

 

6,446

Deferred tax asset

 

 

45,383

 

 

46,614

Other assets, net of amortization

 

 

183,745

 

 

190,807

Total assets

 

$

346,582

 

$

303,892

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable, accrued expenses and deposits

 

$

35,147

 

$

18,439

Total current liabilities

 

 

35,147

 

 

18,439

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

 

 

707

 

 

450

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

 

 

64,905

 

 

64,905

Employer compensation liability, net of current portion

 

 

4,846

 

 

6,446

Total liabilities

 

 

105,605

 

 

90,240

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

Class A common stock, $0.001 par value; 31,600,000 and 31,000,000 shares authorized; 15,007,500  and

 

 

 

 

15,000,000 shares issued and outstanding at June 30, 2016 and September 30, 2015, respectively

 

15

 

 

15

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

 

 

1

 

 

1

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

 

 

15

 

 

15

Additional paid in capital

 

 

93,600

 

 

93,425

Retained earnings

 

 

37,169

 

 

7,303

Cumulative other comprehensive income

 

 

80

 

 

73

Cumulative common distributions

 

 

(13,207)

 

 

 -

Total shareholders’ equity

 

 

117,673

 

 

100,832

Noncontrolling interest

 

 

123,304

 

 

112,820

Total equity

 

 

240,977

 

 

213,652

Total liabilities and equity

 

$

346,582

 

$

303,892

See accompanying notes.

 

 

1


 

The RMR Group Inc.

Condensed Consolidated Statements of Comprehensive Income

(amounts in thousands, except per share amounts)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Nine Months Ended June 30, 

Revenues

2016

 

2015

 

2016

 

2015

Management services

$

41,867

 

$

41,156

 

$

182,940

 

$

122,489

Reimbursable payroll and related costs

 

9,744

 

 

6,427

 

 

25,993

 

 

20,535

Advisory services

 

600

 

 

596

 

 

1,741

 

 

1,801

Total revenues

 

52,211

 

 

48,179

 

 

210,674

 

 

144,825

Expenses

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

22,719

 

 

20,596

 

 

65,584

 

 

64,155

Separation expense

 

1,195

 

 

 -

 

 

1,358

 

 

116

General and administrative

 

6,110

 

 

8,970

 

 

19,110

 

 

18,657

Depreciation expense

 

349

 

 

512

 

 

1,333

 

 

1,662

Total expenses

 

30,373

 

 

30,078

 

 

87,385

 

 

84,590

Operating income

 

21,838

 

 

18,101

 

 

123,289

 

 

60,235

Interest and other income

 

68

 

 

535

 

 

144

 

 

1,698

Unrealized losses attributable to changes in fair value of stock

 

 

 

 

 

 

 

 

 

 

 

accounted for under the fair value option

 

 -

 

 

(1,727)

 

 

 -

 

 

(290)

Income before income tax expense and equity in earnings

 

 

 

 

 

 

 

 

 

 

 

of investee

 

21,906

 

 

16,909

 

 

123,433

 

 

61,643

Income tax expense

 

(4,504)

 

 

(651)

 

 

(19,904)

 

 

(654)

Equity in earnings of investee

 

 -

 

 

15

 

 

 -

 

 

115

Net income

 

17,402

 

 

16,273

 

 

103,529

 

 

61,104

Net income attributable to noncontrolling interest

 

(10,704)

 

 

(15,303)

 

 

(73,663)

 

 

(60,134)

Net income attributable to RMR Inc.

$

6,698

 

$

970

 

$

29,866

 

$

970

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

(6)

 

 

88

 

 

13

 

 

(167)

Unrealized loss in investment in available for sale securities

 

 -

 

 

(130)

 

 

 -

 

 

(54)

Equity interest in investee’s unrealized gains (losses)

 

 -

 

 

(4)

 

 

 -

 

 

35

Other comprehensive income (loss)

 

(6)

 

 

(46)

 

 

13

 

 

(186)

Comprehensive income

 

17,396

 

 

16,227

 

 

103,542

 

 

60,918

Comprehensive income attributable to noncontrolling interest

 

(10,701)

 

 

(15,115)

 

 

(73,669)

 

 

(59,806)

Comprehensive income attributable to RMR Inc.

$

6,695

 

$

1,112

 

$

29,873

 

$

1,112

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common stock outstanding - basic and diluted

 

16,008

 

 

16,000

 

 

16,003

 

 

16,000

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

basic and diluted

$

0.42

 

$

0.06

 

$

1.87

 

$

0.06

 

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

Share grants

 

 

 -

 

 

 -

 

 

 -

 

 

175

 

 

 -

 

 

 -

 

 

 -

 

 

175

 

 

-

 

 

175

Net income

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

29,866

 

 

 -

 

 

 -

 

 

29,866

 

 

73,663

 

 

103,529

Incentive fee allocable to ABP Trust

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(26,611)

 

 

(26,611)

Tax distributions to Member

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(24,195)

 

 

(24,195)

Common share distributions

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(13,207)

 

 

(13,207)

 

 

(12,379)

 

 

(25,586)

Other comprehensive income

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

7

 

 

 -

 

 

7

 

 

6

 

 

13

Balance at June 30, 2016

 

$

15

 

$

1

 

$

15

 

$

93,600

 

$

37,169

 

$

80

 

$

(13,207)

 

$

117,673

 

$

123,304

 

$

240,977

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

3


 

The RMR Group Inc.

Condensed Consolidated Statements of Cash Flows

(dollars in thousands)

(unaudited)

 

 

 

 

 

 

 

 

Nine Months Ended June 30,

 

2016

 

2015

Cash Flows from Operating Activities

 

 

 

 

 

Net income

$

103,529

 

$

61,104

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

 

 

 

 

 

Depreciation expense

 

1,333

 

 

1,662

Straight line office rent amortization

 

257

 

 

(10)

Amortization expense related to other asset

 

7,062

 

 

645

Deferred income taxes

 

1,231

 

 

 -

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

 

 

 

 

 

under the fair value option

 

 -

 

 

290

Dividend income

 

 -

 

 

(1,259)

Revenues paid in common shares of Managed REITs

 

 -

 

 

(6,564)

Gain on sale of shares

 

 -

 

 

(15)

Equity in earnings of investee

 

 -

 

 

(115)

Other non-cash expense

 

175

 

 

 -

Changes in assets and liabilities:

 

 

 

 

 

Due from related parties

 

(4,757)

 

 

25,613

Accounts receivable

 

 -

 

 

26,229

Prepaid and other current assets

 

(2,054)

 

 

(119)

Accounts payable, accrued expenses and deposits

 

17,198

 

 

13,817

Incentive fee allocable to ABP Trust

 

(26,611)

 

 

 -

Due to related parties

 

 -

 

 

(27,639)

Net cash from operating activities

 

97,363

 

 

93,639

Cash Flows from Investing Activities

 

 

 

 

 

Purchase of property and equipment

 

(955)

 

 

(1,176)

Proceeds from sale of shares

 

 -

 

 

2,369

Proceeds from disposal of assets

 

 -

 

 

1,335

Dividends received from investment in REITs

 

 -

 

 

1,237

Purchase of investment in RMR LLC

 

 -

 

 

(46,386)

Net cash used in investing activities

 

(955)

 

 

(42,621)

Cash Flows from Financing Activities

 

 

 

 

 

Proceeds from issuance of common shares

 

 -

 

 

57,906

Distributions to noncontrolling interest

 

(36,574)

 

 

 -

Members' distribution

 

 -

 

 

(224,139)

Distribution to common shareholders

 

(13,207)

 

 

 -

Net cash used in financing activities

 

(49,781)

 

 

(166,233)

Effect of exchange rate fluctuations on cash and cash equivalents

 

13

 

 

12

Increase (decrease) in cash and cash equivalents

 

46,640

 

 

(115,203)

Cash and cash equivalents at beginning of year

 

34,497

 

 

141,731

Cash and cash equivalents at end of year

$

81,137

 

$

26,528

Supplemental cash flow information

 

 

 

 

 

Income taxes paid

$

19,287

 

$

217

Supplemental schedule of non-cash activities

 

 

 

 

 

Establishment of deferred taxes, net of amounts payable under tax receivable agreement

$

 -

 

$

14,107

Non-cash equity activity

$

 -

 

$

60,143

Establishment of other asset

$

 -

 

$

193,806

Proceeds from the issuance of common shares received in Managed REIT shares

$

 -

 

$

121,378

Purchase of investment in RMR LLC in Managed REIT shares

$

 -

 

$

(121,378)

 

 

 

 

 

 

See accompanying notes.

 

 

4


 

Table of Contents

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., 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, unless otherwise indicated, “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, Related Person Transactions, 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 had been in existence throughout the periods covered by our condensed consolidated financial statements.

 

RMR Inc. owns 15,007,500 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 represent 51.6% of the economic interest of RMR LLC. 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. ABP Trust owns 15,000,000 redeemable Class A Units, 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 June 30, 2016, 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, the Caribbean 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 Highway System, many of which are owned by HPT, convenience stores with retail gas stations and restaurants. Hereinafter, Five Star, Sonesta and TA are collectively referred to as the Managed Operators. In addition, RMR

 

5


 

Table of Contents

The RMR Group Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands, except per share amounts)

 

LLC also provides 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 nine months ended June 30, 2015, 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.

 

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 our 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 Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2014-09, Revenue from Contracts with Customers. The main provision of ASU No. 2014-09 is to recognize revenue when control of the goods or 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 our condensed consolidated balance sheet as of September 30, 2015.

 

 

6


 

Table of Contents

The RMR Group Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands, except per share amounts)

 

In February 2016, the FASB issued ASU No. 2016-02, Leases, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). ASU No. 2016-02 requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease. A lessee is also required to record a right of use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales type leases, direct financing leases and operating leases. ASU No. 2016-02 is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. We are currently assessing the potential impact the adoption of ASU No. 2016-02 will have on our condensed consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires that entities use a new forward looking “expected loss” model that generally will result in the earlier recognition of allowance for credit losses. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. ASU No. 2016-13 will become effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are currently assessing the potential impact that adoption of ASU No. 2016-13 will have on our condensed consolidated financial statements.

 

 

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. For purposes of these fees, a Managed REIT’s assets under management do not include shares it owns of another Client Company.

As part of the Up‑C Transaction, which is more fully described in Note 6 below and 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

 

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Table of Contents

The RMR Group Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands, except per share amounts)

 

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

Under our amended management agreements with the Managed REITs, if a Managed REIT terminates one or both of our amended management agreements with that Managed REIT for convenience, or if we terminate one or both of our amended management agreements with a Managed REIT for good reason, the Managed REIT has 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 REIT has agreed to pay to us the termination fee calculated as described above, but assuming a remaining term of 10 years. No Managed REIT has agreed to pay any termination fee if it terminates one or both of our amended management agreements with that Managed REIT for cause or as a result of a change of control of us, as defined in the applicable management agreement.

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 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 Managed REIT as 12.0% of the product of (a) the equity market capitalization of the Managed REIT, as defined in the applicable business management agreement, and (b) the amount, expressed as a percentage, by which the Managed 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 year 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.

We earned aggregate base business management fees of $26,623 and $27,070 for the three months ended June 30, 2016 and 2015, respectively, and $76,628 and $76,763 for the nine months ended June 30, 2016 and 2015, respectively, from the Managed REITs. We earned aggregate incentive business management fees from the Managed REITs of $62,263 and zero for the nine months ended June 30, 2016 and 2015, respectively. Incentive business management fees recognized as earned in the nine months ended June 30, 2016 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 was allocated to ABP Trust.  See Note 6 below.

 

 

 

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Table of Contents

The RMR Group Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands, except per share amounts)

 

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 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. 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. These fees are estimated and payable monthly in advance. We earned aggregate business management fees from the Managed Operators, ABP Trust and AIC of $6,804 and $6,181 for the three months ended June 30, 2016 and 2015, respectively, and $19,121 and $18,229 for the nine months ended June 30, 2016 and 2015, 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. We earned aggregate property management fees of $8,440 and $7,731, for the three months ended June 30, 2016 and 2015, respectively, and $24,870 and $21,400 for the nine months ended June 30, 2016 and 2015, 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 FASB Accounting Standards Codification, or 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 provide pursuant to our property management agreements that are charged or passed through to and were paid by tenants of our Client Companies. We realized reimbursable payroll and related costs of $9,744 and $6,427 for the three months ended June 30, 2016 and 2015, respectively, and $25,993 and $20,535 for the nine months ended June 30, 2016 and 2015, respectively.

Our reimbursable payroll and related costs 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 condensed 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. Equity based compensation expense and related reimbursements were $2,128 and $953 for the three months ended June 30, 2016 and 2015, respectively, and $4,971 and $4,435 for the nine months ended June 30, 2016 and 2015, respectively.

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:

 

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Table of Contents

The RMR Group Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands, except per share amounts)

 

·

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.

 

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. We earned advisory fees of $600 and $596 for the three months ended June 30, 2016 and 2015, respectively, and $1,741 and $1,801 for the nine months ended June 30, 2016 and 2015, respectively.

EQC Termination and Cooperation Agreement

Pursuant to a Termination and Cooperation Agreement dated September 30, 2014, or 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 $174 and $6,097 for the three and nine months ended June 30, 2015, respectively, for transition services. Also, we continued to provide certain services for EQC in Australia until October 31, 2015 and earned zero and $58 for the three and nine months ended June 30, 2016, respectively, for these services.

Note 4. Income Taxes

As a result of the Up‑C Transaction, we 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. 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. 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 wholly owned subsidiaries.

For the three and nine months ended June 30, 2016, we recognized income tax expense of $4,504 and $19,904, respectively, which includes $2,837  and $16,182, respectively, of U.S. federal income tax and $1,667 and $3,722, respectively, of state income taxes. For the three and nine months ended June 30, 2015, we recognized income tax expense of $651 and $654, respectively, which includes $574 of U.S. federal income tax for both periods and $77 and $80, respectively, of state income taxes.

As of June 30, 2016, we had a net deferred tax asset of $45,383, which is primarily a result of the Up-C Transaction. For further information about the Up-C Transaction, please refer to Note 6 below and our Annual Report.

 

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Table of Contents

The RMR Group Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(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

 

Nine Months Ended

 

June 30, 2016

 

June 30, 2016

Income taxes computed at the federal statutory rate

35.0

%

 

35.0

%

State taxes, net of federal benefit

4.8

%

 

4.8

%

Net income attributable to non-controlling interest

(19.2)

%

 

(23.7)

%

Income tax rate

20.6

%

 

16.1

%

 

Prior to June 5, 2015, RMR LLC was a single member limited liability company and together with its sole owner was classified as an S corporation for tax purposes and generally not subject to federal and most state income taxes.  Also prior to June 5, 2015, RMR Advisors and RMR Intl were classified as an S corporation and partnership, respectively, for income tax purposes and were also generally not subject to federal and most state income taxes. RMR Intl conducted business in Australia through a foreign entity that was subject to Australian income tax and has certain deferred tax assets.  We have determined that it is more likely than not that RMR Intl will not realize the benefit of its deferred tax assets, and therefore, we maintain a full valuation allowance for its deferred tax assets.

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. 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% likely of being realized upon settlement. As of June 30, 2016 and September 30, 2015, we have no uncertain tax positions.

Note 5. Fair Value of Financial Instruments

As of June 30, 2016 and September 30, 2015, the fair values of our financial instruments, which include cash and cash equivalents, amounts due from related parties and accounts payable, accrued expenses and deposits, 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 inputs in the fair value hierarchy as of June 30, 2016 and September 30, 2015:

 

 

 

 

 

 

 

 

June 30, 

 

September 30, 

 

2016

 

2015

Money market funds included in cash and cash equivalents

$

77,280

 

$

33,241

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

 

4,040

 

 

4,267

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

 

4,846

 

 

6,446

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

 

4,040

 

 

4,267

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

 

4,846

 

 

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 (i) all of the outstanding shares of Class B‑1 common stock of RMR Inc., or Class B-1 Common Shares; (ii) all of the outstanding shares of Class B‑2 common stock of RMR Inc., or Class B-2 Common Shares; and (iii) 15,000,000 Class A Units. For the periods prior to June 5, 2015, our Founders also were the owners of RMR Advisors and RMR Intl. Our Founders are directors of AIC and the shareholders and directors of Sonesta. Our Founders are

 

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Table of Contents

The RMR Group Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands, except per share amounts)

 

directors and officers of RMR Inc. and officers of RMR LLC. Our Founders are also managing trustees of each of the Managed REITs; and, as of June 30, 2016, the Managed REITs collectively owned a majority of the outstanding shares of Class A common stock of RMR Inc., or Class A Common Shares. 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 Parties

For the three and nine months ended June 30, 2016 and 2015, we recognized revenues from related parties (excluding incentive business management fees) as set forth in the following table:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended June 30, 

 

For the Nine Months Ended June 30, 

 

 

 

 

2016

 

2015

 

2016

 

2015

 

 

 

 

$

 

%

 

$

 

%

 

$

 

%

 

$

 

%

 

 

Managed REITs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GOV

 

$

8,310

 

15.9%

 

$

6,820

 

14.3%

 

$

23,351

 

15.7%

 

$

21,774

 

15.0%

 

 

HPT

 

 

9,840

 

18.8%

 

 

10,134

 

21.1%

 

 

28,358

 

19.1%

 

 

31,148

 

21.5%

 

 

SIR

 

 

10,824

 

20.7%

 

 

9,449

 

19.6%

 

 

30,722

 

20.7%

 

 

22,713

 

15.7%

 

 

SNH

 

 

14,855

 

28.5%

 

 

13,512

 

28.0%

 

 

42,190

 

28.5%

 

 

39,511

 

27.3%

 

 

 

 

 

43,829

 

83.9%

 

 

39,915

 

83.0%

 

 

124,621

 

84.0%

 

 

115,146

 

79.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Managed Operators:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Five Star

 

 

2,387

 

4.6%

 

 

2,329

 

4.8%

 

 

7,109

 

4.8%

 

 

6,980

 

4.8%

 

 

Sonesta

 

 

594

 

1.1%

 

 

542

 

1.1%

 

 

1,503

 

1.0%

 

 

1,372

 

0.9%

 

 

TA

 

 

4,013

 

7.7%

 

 

3,682

 

7.6%

 

 

10,959

 

7.4%

 

 

10,798

 

7.5%

 

 

 

 

 

6,994

 

13.4%

 

 

6,553

 

13.5%

 

 

19,571

 

13.2%

 

 

19,150

 

13.2%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AIC

 

 

60

 

0.1%

 

 

64

 

0.1%

 

 

180

 

0.1%

 

 

186

 

0.1%

 

 

RIF

 

 

600

 

1.1%

 

 

596

 

1.2%

 

 

1,741

 

1.2%

 

 

1,801

 

1.2%

 

 

ABP Trust

 

 

728

 

1.5%

 

 

877

 

1.8%

 

 

2,240

 

1.5%

 

 

2,445

 

1.8%

 

 

 

 

 

1,388

 

2.7%

 

 

1,537

 

3.1%

 

 

4,161

 

2.8%

 

 

4,432

 

3.1%

 

 

Other unrelated parties

 

 

 -

 

0.0%

 

 

174

 

0.4%

 

 

58

 

0.0%

 

 

6,097

 

4.2%

 

 

 

 

$

52,211

 

100.0%

 

$

48,179

 

100.0%

 

$

148,411

 

100.0%

 

$

144,825

 

100.0%

 

 

On December 31, 2015, RMR LLC also earned a $62,263 incentive business management fee from HPT pursuant to our business management agreement with HPT. Pursuant to the RMR LLC Operating Agreement, ABP Trust was 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 pro rata portion of the $62,263 incentive fee allocated solely to ABP Trust was $26,611. In January 2016, HPT paid RMR LLC this $62,263 incentive fee and RMR LLC paid ABP Trust $26,611. We earned no other incentive fees during the periods presented.

 

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Table of Contents

The RMR Group Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands, except per share amounts)

 

Investments in Managed REITs, RIF and AIC

For 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. During the three and nine months ended June 30, 2015, we received shares for such services as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

During the Three Months Ended

 

During the Nine Months Ended

 

 

 

 

June 30, 2015

 

June 30, 2015

 

 

 

 

No. of

 

 

 

 

No. of

 

 

 

 

 

REIT

 

Shares

 

Value

 

Shares

 

Value

 

 

GOV

 

7,610

 

$

171

 

30,276

 

$

692

 

 

HPT

 

21,104

 

 

677

 

84,810

 

 

2,605

 

 

SIR

 

15,383

 

 

374

 

39,927

 

 

982

 

 

SNH

 

29,179

 

 

637

 

103,265

 

 

2,285

 

 

 

 

 

 

$

1,859

 

 

 

$

6,564

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends that we received on the shares of the Managed REITs which we owned during the three and nine months ended June 30, 2015 totaled $375 and $1,237, respectively, and are reported as interest and other income in our condensed consolidated statements of comprehensive income.

We also historically owned shares of RIF, for which our quarterly dividend distributions were reinvested in purchasing additional RIF shares.  For the three and nine months ended June 30, 2015, we purchased zero and 1,068 shares for zero and $22, respectively, pursuant to this dividend reinvestment program.   

AIC was formed in 2008 and provides a combined property insurance program for its shareholders, including the companies to which we provide management services. For the three and nine months ended June 30, 2015, RMR LLC or its transferee, ABP Trust, 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, except per share amounts)

 

Amounts due from related parties

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

 

 

 

 

 

 

 

 

 

June 30, 

 

September 30,

 

 

2016

 

2015

Managed REITs:

 

 

 

 

 

 

GOV

 

$

5,108

 

$

3,506

HPT

 

 

6,080

 

 

6,990

SIR

 

 

5,815

 

 

4,741

SNH

 

 

8,058

 

 

6,853

 

 

 

25,061

 

 

22,090

 

 

 

 

 

 

 

Managed Operators:

 

 

 

 

 

 

Five Star

 

 

385

 

 

1,361

Sonesta

 

 

265

 

 

16

TA

 

 

1,103

 

 

821

 

 

 

1,753

 

 

2,198

 

 

 

 

 

 

 

Other Client Companies:

 

 

 

 

 

 

AIC

 

 

20

 

 

22

ABP Trust

 

 

528

 

 

122

 

 

 

548

 

 

144

 

 

$

27,362

 

$

24,432

Leases

As of June 30, 2016, we leased from ABP Trust and certain Managed REITs office space for use as our headquarters and local offices. We incurred rental expense under related party leases aggregating $1,077 and $902 for the three months ended June 30, 2016 and 2015, respectively, and $3,190 and $2,983 for the nine months ending June 30, 2016 and 2015, 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.

The Up-C Transaction

On June 5, 2015, our Founders, ABP Trust and the Managed REITs were parties to 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) RMR LLC issued 1,000,000 Class B Units to RMR Inc.; (c) 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.; (d) RMR Inc. issued 1,000,000 Class B-1 Common Shares and 15,000,000 Class B-2 Common Shares to ABP Trust; (e) RMR Inc. issued 1,541,201 shares of 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; (f) ABP Trust delivered to RMR Inc. 15,000,000 of the 30,000,000 Class A Units it then owned; and (g) RMR Inc. delivered to ABP Trust the shares and cash which had been contributed to RMR Inc. by the Managed REITs. Pursuant to the Up-C 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. 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

 

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The RMR Group Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands, except per share amounts)

 

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; however, 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. Also, for purposes of GAAP, we concluded that the consideration received from the Managed REITs for the Class A Common Shares represented a discount to the fair value of RMR Inc.’s Class A Common Shares; and 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 are 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. We reduced revenue by $2,354 and $645 for the three months ended June 30, 2016 and 2015, respectively, and $7,062 and $645 for the nine months ended June 30, 2016 and 2015, respectively, related to the amortization of these other assets. As of June 30, 2016, the unamortized amount of this asset was $183,745.

Pursuant to the Up-C 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, and we facilitated this distribution by filing a registration statement with the U.S. Securities and Exchange Commission, or the SEC, to register the Class A Common Shares being distributed and by listing those shares on The NASDAQ Stock Market LLC, or NASDAQ.

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 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. During the nine months ended June 30, 2016, we made no payments to ABP Trust pursuant to this agreement. As of June 30, 2016, our condensed consolidated balance sheet reflects a liability related to the Tax Receivable Agreement of $65,834, of which we expect to pay $929 to ABP Trust during the fourth quarter of fiscal 2016. 

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 assumed tax liabilities of its members. For the nine months ended June 30, 2016, pursuant to the RMR LLC Operating Agreement, RMR LLC made required quarterly tax distributions to holders of its membership units totaling $49,995, of which $25,800 was distributed to us and $24,195 was distributed to ABP Trust, based on each membership unit holder’s respective ownership percentage. The $25,800, distributed to us was eliminated in our condensed consolidated financial statements, and the $24,195 distributed to ABP Trust was recorded as a reduction of their noncontrolling interest. We used funds from this distribution for payment of certain U.S. federal and state income tax liabilities. We also expect to use funds from this distribution to pay our obligations under the Tax Receivable Agreement.

 

 

 

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Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands, except per share amounts)

 

Other

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 June 30, 2016 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 June 30, 2016 and September 30, 2015, respectively, no loans were outstanding from our Founders to RMR LLC. 

Additional information about our related person transactions appears in Note 7 below.

Note 7. Shareholders’ Equity

Common Shares

RMR Inc.’s authorized capital stock consists of 31,600,000 Class A Common Shares, 1,000,000 Class B‑1 Common Shares and 15,000,000 Class B‑2 Common Shares.

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 Units held by ABP Trust. The Class A Units 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 are paired with the Class A 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.

Issuances

On March 9, 2016, under our equity compensation plan we granted 2,500 of our Class A Common Shares valued at $23.27 per share, the closing price of our Class A Common Shares on NASDAQ on that day, to each of our then three Independent Directors as part of their annual compensation. These Class A Common Shares awarded to our Independent Directors vested immediately and are included in general and administrative expense in our condensed consolidated financial statements. In connection with the grant of Class A Common Shares to our Independent Directors, RMR LLC concurrently issued 7,500 Class A Units to RMR Inc., consistent with the terms of the RMR LLC Operating Agreement.

Distributions

On December 15, 2015, we paid a dividend on our Class A Common Shares and Class B-1 Common Shares, in the amount of $0.5260 per Class A Common Share and Class B-1 Common Share, or $8,416. This dividend was paid to our shareholders of record as of the close of business on November 25, 2015, which included the Managed REITs and ABP Trust. The amount of this dividend was calculated at a rate of $0.25 per share per quarter pro rata for the period June 5, 2015 to December 14, 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

 

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Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands, except per share amounts)

 

16,007,500 membership units of RMR LLC and $7,890 was distributed to ABP Trust based on its ownership of 15,000,000 membership units of RMR LLC.

On May 19, 2016, we paid a dividend on our Class A Common Shares and Class B-1 Common Shares, in the amount of $0.2993 per Class A Common Share and Class B-1 Common Share, or $4,791. This dividend was paid to our shareholders of record as of the close of business on April 25, 2016. The amount of this dividend was calculated as $0.25 per share for the quarter ended March 31, 2016, plus a pro rata dividend in respect of the period from December 14, 2015 through and including December 31, 2015. This dividend was funded by a distribution from RMR LLC to holders of its membership units in the amount of $0.2993 per unit, or $9,280, of which $4,791 was distributed to us based on our aggregate ownership of 16,007,500 membership units of RMR LLC and $4,489 was distributed to ABP Trust based on its ownership of 15,000,000 membership units of RMR LLC.

On July 12, 2016, we declared a dividend on our Class A Common Shares and Class B-1 Common Shares payable to our shareholders of record as of July 22, 2016, in the amount of $0.25 per Class A Common Share and Class B-1 Common Share, or $4,002. This dividend will be funded by a distribution by RMR LLC to holders of its membership units in the amount of $0.25 per unit, or $7,752, of which $4,002 will be distributed to us based upon our aggregate ownership of 16,007,500 membership units of RMR LLC and $3,750 will be distributed to ABP Trust based on its ownership of 15,000,000 membership units of RMR LLC. We expect to pay this dividend on or about August 18, 2016 with cash on hand.

Note 8.  Per Common Share Amounts

Earnings per common share for the three and nine months ended June 30, 2016 reflects net income attributable to RMR Inc. divided by our weighted average common shares outstanding. Basic and diluted weighted average common shares outstanding represent our 15,007,500 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 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 Class A Units that we do not own may be redeemed for our Class A Common Shares on a one for one basis, or upon such redemption, we may elect to pay cash instead of issuing Class A Common Shares. Upon redemption of a Class A Unit, our Class B‑2 Common Share “paired” with such unit is cancelled for no additional consideration. If all outstanding Class A Units were redeemed for our Class A Common Shares in the periods presented our Class A Common Shares outstanding would have been 30,007,500. 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). Accordingly, in the periods presented, such redemption is not reflected in diluted earnings per share as the assumed redemption would be anti‑dilutive.

 

 

 

 

 

 

 

 

 

 

 

 

 

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Note 9. Net Income Attributable to RMR Inc.

Net income attributable to RMR Inc. for three and nine months ended June 30, 2016, is derived as follows:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

June 30, 2016

 

June 30, 2016

 

 

Net income before income tax expense

$

21,906

 

$

123,433

 

 

Add: RMR Inc. franchise tax expense and interest income

 

220

 

 

443

 

 

Less: incentive fee allocable to ABP Trust

 

 -

 

 

(26,611)

 

 

Net income before non-controlling interest

 

22,126

 

 

97,265

 

 

Less: non-controlling interest

 

(10,704)

 

 

(47,052)

 

 

Net income attributable to RMR Inc. before income tax expense

 

11,422

 

 

50,213

 

 

Less: income tax expense attributable to RMR Inc.

 

(4,504)

 

 

(19,904)