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EX-32.1 - EXHIBIT 32.1 - RMR GROUP INC.rmr_63018xexhibitx321.htm
EX-31.2 - EXHIBIT 31.2 - RMR GROUP INC.rmr_63018xexhibitx312.htm
EX-31.1 - EXHIBIT 31.1 - RMR GROUP INC.rmr_63018xexhibitx311.htm
EX-10.2 - EXHIBIT 10.2 - RMR GROUP INC.rmr_63018xexhibitx102secon.htm
EX-10.1 - EXHIBIT 10.1 - RMR GROUP INC.rmr_63018xexhibitx101first.htm

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, 2018
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, a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:
Large accelerated filer ☐
 
Accelerated filer ☒
 
 
 
Non-accelerated filer ☐
 
Smaller reporting company ☐
(Do not check if a smaller reporting company)
 
 
 
 
 
Emerging growth company ☒
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided in Section 13(a) of the Exchange Act. ☒

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

As of August 7, 2018, there were 15,174,463 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
June 30, 2018
 
INDEX

 
 
Page
 
 
 
 
 
 
 
 
 
 




PART I. Financial Information
Item 1. Financial Statements
The RMR Group Inc.
Condensed Consolidated Balance Sheets
(dollars in thousands, except per share amounts)
(unaudited)
 
 
June 30,
 
September 30,
 
 
2018
 
2017
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
280,518

 
$
108,640

Due from related parties
 
24,262

 
25,161

Prepaid and other current assets
 
10,067

 
7,092

Total current assets
 
314,847

 
140,893

 
 
 
 
 
Total property and equipment, net
 
2,713

 
3,276

Due from related parties, net of current portion
 
6,672

 
7,551

Equity method investments
 
11,420

 
12,162

Goodwill
 
1,859

 
1,859

Intangible assets, net of amortization
 
396

 
462

Deferred tax asset
 
24,788

 
45,541

Other assets, net of amortization
 
164,914

 
171,975

Total assets
 
$
527,609

 
$
383,719

 
 
 
 
 
Liabilities and Equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable and accrued expenses
 
$
51,015

 
$
26,414

Total current liabilities
 
51,015

 
26,414

Long term portion of deferred rent payable, net of current portion
 
1,184

 
1,028

Amounts due pursuant to tax receivable agreement, net of current portion
 
34,354

 
59,063

Employer compensation liability, net of current portion
 
6,672

 
7,551

Total liabilities
 
93,225

 
94,056

 
 
 
 
 
Commitments and contingencies
 


 


 
 
 
 
 
Equity:
 
 
 
 
Class A common stock, $0.001 par value; 31,600,000 shares authorized; 15,174,463 shares issued and outstanding
 
15

 
15

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

 
1

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

 
15

Additional paid in capital
 
98,531

 
95,878

Retained earnings
 
174,693

 
86,836

Cumulative other comprehensive income
 
81

 
84

Cumulative common distributions
 
(45,423
)
 
(33,298
)
Total shareholders’ equity
 
227,913

 
149,531

Noncontrolling interest
 
206,471

 
140,132

Total equity
 
434,384

 
289,663

Total liabilities and equity
 
$
527,609

 
$
383,719


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,
 
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
 
Management services
 
$
47,328

 
$
44,644

 
$
142,457

 
$
130,629

Incentive business management fees
 

 

 
155,881

 
52,407

Reimbursable payroll related and other costs
 
13,711

 
9,839

 
38,076

 
29,023

Advisory services
 
1,045

 
1,019

 
3,492

 
3,033

Total revenues
 
62,084

 
55,502

 
339,906

 
215,092

 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
Compensation and benefits
 
28,606

 
23,731

 
82,876

 
68,746

Equity based compensation
 
2,347

 
1,038

 
6,285

 
3,804

Separation costs
 
1,739

 

 
1,875

 

     Total compensation and benefits expense
 
32,692

 
24,769

 
91,036

 
72,550

General and administrative
 
6,551

 
6,779

 
20,281

 
19,073

Transaction and acquisition related costs
 
775

 
1,760

 
917

 
2,453

Depreciation and amortization
 
244

 
467

 
996

 
1,550

Total expenses
 
40,262

 
33,775

 
113,230

 
95,626

Operating income
 
21,822

 
21,727

 
226,676

 
119,466

Interest and other income
 
1,223

 
402

 
3,083

 
1,059

Tax receivable agreement remeasurement
 

 

 
24,710

 

Income before income tax expense and equity in losses of investees
 
23,045

 
22,129

 
254,469

 
120,525

Income tax expense
 
(3,462
)
 
(4,528
)
 
(55,486
)
 
(24,811
)
Equity in income (losses) of investees
 
(134
)
 
4

 
(568
)
 
(161
)
Net income
 
19,449

 
17,605

 
198,415

 
95,553

Net income attributable to noncontrolling interest
 
(11,068
)
 
(10,748
)
 
(110,558
)
 
(58,303
)
Net income attributable to RMR Inc.
 
$
8,381

 
$
6,857

 
$
87,857

 
$
37,250

 
 
 
 
 
 
 
 
 
Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
$
(3
)
 
$
1

 
(5
)
 

Other comprehensive (loss) income
 
(3
)
 
1

 
(5
)
 

Comprehensive income
 
19,446

 
17,606

 
198,410

 
95,553

Comprehensive income attributable to noncontrolling interest
 
(11,067
)
 
(10,748
)
 
(110,556
)
 
(58,303
)
Comprehensive income attributable to RMR Inc.
 
$
8,379

 
$
6,858

 
$
87,854

 
$
37,250

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding - basic
 
16,087

 
16,037

 
16,072

 
16,029

Weighted average common shares outstanding - diluted
 
16,135

 
16,058

 
16,111

 
16,044

 
 
 
 
 
 
 
 
 
Net income attributable to RMR Inc. per common share - basic
 
$
0.52

 
$
0.43

 
$
5.43

 
$
2.32

Net income attributable to RMR Inc. per common share - diluted
 
$
0.52

 
$
0.43

 
$
5.42

 
$
2.31


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, 2017
 
$
15

 
$
1

 
$
15

 
$
95,878

 
$
86,836

 
$
84

 
$
(33,298
)
 
$
149,531

 
$
140,132

 
$
289,663

Share grants, net
 

 

 

 
2,653

 

 

 

 
2,653

 

 
2,653

Net income
 

 

 

 

 
87,857

 

 

 
87,857

 
110,558

 
198,415

Fees from services provided prior to the Up-C Transaction
 

 

 

 

 

 

 

 

 
(127
)
 
(127
)
Tax distributions to Member
 

 

 

 

 

 

 

 

 
(32,840
)
 
(32,840
)
Common share distributions
 

 

 

 

 

 

 
(12,125
)
 
(12,125
)
 
(11,250
)
 
(23,375
)
Other comprehensive loss
 

 

 

 

 

 
(3
)
 

 
(3
)
 
(2
)
 
(5
)
Balance at June 30, 2018
 
$
15

 
$
1

 
$
15

 
$
98,531

 
$
174,693

 
$
81

 
$
(45,423
)
 
$
227,913

 
$
206,471

 
$
434,384


See accompanying notes.


3


The RMR Group Inc.
Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)

 
 
Nine Months Ended June 30,
 
 
2018
 
2017
Cash Flows from Operating Activities:
 
 
 
 
Net income
 
$
198,415

 
$
95,553

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
 
Depreciation and amortization
 
996

 
1,550

Straight line office rent
 
156

 
197

Amortization expense related to other asset
 
7,062

 
7,062

Deferred income taxes
 
20,753

 
2,487

Operating expenses paid in RMR Inc. common shares
 
2,781

 
1,021

Contingent consideration liability
 
(491
)
 
(456
)
Tax receivable agreement remeasurement
 
(24,710
)
 

Distribution from equity method investments
 
174

 
70

Equity in losses of investees
 
568

 
161

Changes in assets and liabilities:
 
 
 
 
Due from related parties
 
(2,857
)
 
(5,779
)
Prepaid and other current assets
 
(2,975
)
 
(3,617
)
Accounts payable and accrued expenses
 
28,824

 
24,682

Net cash from operating activities
 
228,696

 
122,931

 
 
 
 
 
Cash Flows from Investing Activities:
 
 
 
 
Purchase of property and equipment
 
(470
)
 
(604
)
Net cash used in investing activities
 
(470
)
 
(604
)
 
 
 
 
 
Cash Flows from Financing Activities:
 
 
 
 
Distributions to noncontrolling interest
 
(44,090
)
 
(38,383
)
Distributions to common shareholders
 
(12,125
)
 
(12,065
)
Repurchase of common shares
 
(128
)
 

Net cash used in financing activities
 
(56,343
)
 
(50,448
)
 
 
 
 
 
Effect of exchange rate fluctuations on cash and cash equivalents
 
(5
)
 
(1
)
Increase in cash and cash equivalents
 
171,878

 
71,878

Cash and cash equivalents at beginning of period
 
108,640

 
65,833

Cash and cash equivalents at end of period
 
$
280,518

 
$
137,711

 
 
 
 
 
Supplemental cash flow information:
 
 
 
 
Income taxes paid
 
$
30,174

 
$
23,336


See accompanying notes.

4

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


Note 1. Basis of Presentation

The RMR Group Inc., or RMR Inc., is a holding company and substantially all of its business is conducted by its majority owned subsidiary The RMR Group LLC, or RMR LLC. RMR Inc. is a Maryland corporation and RMR LLC is a Maryland limited liability company. RMR Inc. serves as the sole managing member of RMR LLC and, in that capacity, operates and controls the business and affairs of RMR LLC. In these financial statements, unless otherwise indicated, "we", "us" and "our" refer to RMR Inc. and its direct and indirect subsidiaries, including RMR LLC.

As of June 30, 2018, RMR Inc. owned 15,174,463 class A membership units of RMR LLC, or Class A Units, and 1,000,000 class B membership units of RMR LLC, or Class B Units. The aggregate RMR LLC membership units RMR Inc. owns represented 51.9% of the economic interest of RMR LLC as of June 30, 2018. We refer to economic interest as the right of a holder of a Class A Unit or Class B Unit to share in distributions made by RMR LLC and, upon liquidation, dissolution or winding up of RMR LLC, to share in the assets of RMR LLC after payments to creditors. A wholly owned subsidiary of ABP Trust, a Maryland statutory trust, owns 15,000,000 redeemable Class A Units, representing 48.1% of the economic interest of RMR LLC as of June 30, 2018, which is presented as a noncontrolling interest within the condensed consolidated financial statements. Adam D. Portnoy, one of our Managing Directors, is the sole trustee of of our controlling shareholder, ABP Trust, and owns a majority of ABP Trust's voting securities.

RMR LLC was founded in 1986 to manage public investments in real estate and, as of June 30, 2018, managed a diverse portfolio of publicly owned real estate and real estate related businesses. RMR LLC provides management services to: Government Properties Income Trust, or GOV, a publicly traded real estate investment trust, or REIT, that primarily owns properties located throughout the United States that are majority leased to government tenants and office properties in the metropolitan Washington, D.C. market area that are leased to government and private sector tenants; Hospitality Properties Trust, or HPT, a publicly traded REIT that primarily owns hotel and travel center properties; Industrial Logistics Properties Trust, or ILPT, a publicly traded REIT that primarily owns and leases industrial and logistics properties; Select Income REIT, or SIR, a publicly traded REIT that primarily owns properties that are leased to single tenants; and Senior Housing Properties Trust, or SNH, a publicly traded REIT that primarily owns senior living, medical office and life science properties. GOV, HPT, ILPT, SIR and SNH are collectively referred to as the Managed Equity REITs. RMR LLC also provides management services to other publicly traded and private businesses, including: Five Star Senior Living Inc., or Five Star, a publicly traded operator of senior living communities, many of which are owned by SNH; Sonesta International Hotels Corporation, or Sonesta, a privately owned franchisor and operator of hotels, resorts and cruise ships in the United States, Latin America, the Caribbean and the Middle East, some of whose U.S. hotels are owned by HPT; and TravelCenters of America LLC, or TA, an operator and franchisor 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 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 (ABP Trust and its subsidiaries are collectively referred to as ABP Trust).

RMR Advisors LLC, or RMR Advisors, an investment adviser registered with the Securities and Exchange Commission, or SEC, was founded in 2002. RMR Advisors is a wholly owned subsidiary of RMR LLC and is the adviser 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.

Tremont Realty Advisors LLC, or Tremont Advisors, an investment adviser registered with the SEC, was founded in 2016 in connection with the acquisition of certain assets of Tremont Realty Capital LLC, or the Tremont business. Tremont Advisors is a wholly owned subsidiary of RMR LLC that manages a private fund created for an institutional investor and other separately managed accounts that invest in commercial real estate debt, including secured mortgage debt, mezzanine financings and commercial real estate that may become owned by its clients. Tremont Advisors also manages Tremont Mortgage Trust, or TRMT, a publicly traded mortgage real estate investment trust that completed its initial public offering on September 18, 2017, or the TRMT IPO. TRMT focuses primarily on originating and investing in first mortgage loans secured by middle market and transitional commercial real estate.

In these financial statements, we refer to the Managed Equity REITs, the Managed Operators, RIF, TRMT, AIC, ABP Trust and the clients of the Tremont business as our Client Companies. We refer to the Managed Equity REITs and TRMT collectively as the Managed REITs.

5

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


The accompanying condensed consolidated financial statements of RMR Inc. are unaudited. Certain information and disclosures required by U.S. generally accepted accounting principles, or GAAP, for complete financial statements have been condensed or omitted. We believe the disclosures made are adequate to make the information presented not misleading. However, the accompanying condensed consolidated financial statements should be read in conjunction with the financial statements and notes contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2017, or our Annual Report. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of results for the interim period have been included. All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated. Our operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. Reclassifications have been made to the prior year's condensed consolidated financial statements to conform to the current year's presentation.

Preparation of these financial statements in conformity with GAAP requires our management to make certain estimates and assumptions that may affect the amounts reported in these financial statements and related notes. The actual results could differ from these estimates.

Note 2. Recent Accounting Pronouncements
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. The effective date for this ASU is for interim and annual reporting periods beginning after December 15, 2017. We plan to adopt ASU No. 2014-09 using the modified retrospective approach on October 1, 2018. We do not expect the adoption of this ASU to have a material impact on net income, though we are continuing our evaluation, most notably regarding the updated principal versus agent guidance within ASU 2014-09.

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. ASU No. 2016-02 is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. The effective date for RMR will be the first day of fiscal year 2020 and we are continuing to assess 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. We are continuing to assess this guidance, but we have not historically experienced credit losses from our Client Companies and do not expect the adoption of ASU No. 2016-13 to have a material impact on our condensed consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-7, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which aligns the measurement and classification guidance for share-based payments to nonemployees with the guidance for share-based payments to employees, with certain exceptions. ASU No. 2018-7 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. We are currently assessing the potential impact the adoption of ASU No. 2018-7 will have in our condensed consolidated financial statements.

Note 3. Revenue Recognition

Revenues from services that we provide are recognized as earned in accordance with contractual agreements.


6

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

Business Management Fees—Managed Equity REITs

We earn annual base business management fees from the Managed Equity REITs pursuant to business management agreements equal to the lesser of:

the sum of (a) 0.5% of the historical cost of transferred real estate assets, if any, as defined in the applicable business management agreement, plus (b) 0.7% of the average invested capital (exclusive of the transferred real estate assets), as defined in the applicable business management agreement, up to $250,000, plus (c) 0.5% of the average invested capital exceeding $250,000; and

the sum of (a) 0.7% of the average market capitalization, as defined in the applicable business management agreement, up to $250,000, plus (b) 0.5% of the average market capitalization exceeding $250,000.

The foregoing base business management fees are paid monthly in arrears, based on the lower of the Managed Equity REIT’s monthly average historical costs of assets under management and average market capitalization during the month. For purposes of these fees, a Managed Equity REIT’s assets under management do not include shares it owns of another Client Company.

For the three months ended June 30, 2018 and 2017, we earned aggregate base business management fees from the Managed Equity REITs of $29,555 and $28,643, respectively. For the nine months ended June 30, 2018 and 2017, we earned aggregate base business management fees from the Managed Equity REITs of $89,590 and $84,816, respectively.

Incentive Business Management Fees—Managed Equity REITs

We also may earn annual incentive business management fees from the Managed Equity REITs under the business management agreements. The incentive business management fees are contingent performance based fees which are only recognized when earned at the end of each respective measurement period. The incentive fees are calculated for each Managed Equity REIT as 12.0% of the product of (a) the equity market capitalization of the Managed Equity REIT, as defined in the applicable business management agreement, on the last trading day of the year immediately prior to the relevant measurement period and (b) the amount, expressed as a percentage, by which the Managed Equity REIT’s total return per share, as defined in the applicable business management agreement, exceeded the applicable benchmark total return per share, as defined in the applicable business management agreement, of a specified REIT index identified in the applicable business management agreement for the measurement period, as adjusted for net share issuances during the period and subject to caps on the values of the incentive fees. The measurement periods for the annual incentive business management fees in respect of calendar years 2017 and 2016 were the three calendar year periods that ended on December 31, 2017 and 2016, respectively. The annual incentive business management fees for calendar 2018 will be based on the three calendar year periods ended December 31, 2018, except for ILPT, whose annual incentive business management fee will be based on a shorter period subsequent to its initial public offering (January 12, 2018 through the calendar year ended December 31, 2018).

For the nine months ended June 30, 2018 and 2017, we recognized aggregate incentive business management fees earned from the Managed Equity REITs of $155,881 and $52,407, respectively. Incentive business management fees were recognized as earned in the three months ended December 31, 2017 and 2016 as they relate to the calendar years 2017 and 2016, respectively.

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 nonfuel 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. We earned aggregate business management fees from the Managed Operators, ABP

7

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

Trust and AIC of $7,094 and $6,650 for the three months ended June 30, 2018 and 2017, respectively, and $20,432 and $19,372 for the nine months ended June 30, 2018 and 2017, 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 $10,485 and $9,238 for the three months ended June 30, 2018 and 2017, respectively, and $31,853 and $26,089 for the nine months ended June 30, 2018 and 2017, respectively.

Reimbursable Payroll Related and Other 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. We present certain payroll related and other cost reimbursements we receive as revenue. A significant portion of these reimbursable payroll related and other costs arise from services we provide pursuant to our property management agreements that are charged or passed through to, and paid by, tenants of our Client Companies. We realized reimbursable payroll related and other costs of $13,711 and $9,839 for the three months ended June 30, 2018 and 2017, respectively, and $38,076 and $29,023 for the nine months ended June 30, 2018 and 2017, respectively.

Our reimbursable payroll related and other 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 our condensed consolidated statements of comprehensive income over the requisite service periods. We record an equal offsetting amount as equity based compensation expense for all of our payroll related and other cost revenues. We realized equity based compensation expense and related reimbursements of $2,033 and $892 for the three months ended June 30, 2018 and 2017, respectively, and $4,368 and $3,386 for the nine months ended June 30, 2018 and 2017, respectively.

Advisory Services and Other Agreements

RMR Advisors is compensated pursuant to its agreement with RIF at an annual rate of 0.85% of RIF’s average daily managed assets, 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, including from banks or evidenced by notes, commercial paper or other similar instruments issued by RIF. RMR Advisors earned advisory services revenue of $706 and $613 for the three months ended June 30, 2018 and 2017, respectively, and $2,134 and $1,826 for the nine months ended June 30, 2018 and 2017, respectively.

Tremont Advisors is primarily compensated pursuant to its management agreement with TRMT at an annual rate of 1.5% of TRMT's equity, as defined in the agreement. Tremont Advisors may also earn an incentive fee under this management agreement beginning in the fourth quarter of calendar year 2018 equal to the difference between: (a) the product of (i) 20% and (ii) the difference between (A) TRMT’s core earnings, as defined in the agreement, for the most recent 12 month period (or such lesser number of completed calendar quarters, if applicable), including the calendar quarter (or part thereof) for which the calculation of the incentive fee is being made, and (B) the product of (1) TRMT’s equity in the most recent 12 month period (or such lesser number of completed calendar quarters, if applicable), including the calendar quarter (or part thereof) for which the calculation of the incentive fee is being made, and (2) 7% per year and (b) the sum of any incentive fees paid to Tremont Advisors with respect to the first three calendar quarters of the most recent 12 month period (or such lesser number of completed calendar quarters preceding the applicable period, if applicable). No incentive fee shall be payable with respect to any calendar quarter unless TRMT’s core earnings for the 12 most recently completed calendar quarters (or such lesser number of completed calendar quarters from the date of the completion of the TRMT IPO) in the aggregate is greater than zero. The incentive fee may not be less than zero. In June 2018, Tremont Advisors agreed to waive any business management fees otherwise due and payable by TRMT pursuant to the management agreement for the period beginning July 1, 2018 until June 30, 2020. In addition, no incentive fee will be paid or payable by TRMT to Tremont Advisors for the 2018 or 2019 calendar years.


8

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

Tremont Advisors earned advisory services revenue of $339 and $406 for the three months ended June 30, 2018 and 2017, respectively, and $1,358 and $1,207 for the nine months ended June 30, 2018 and 2017, respectively.

The Tremont business also acts as a transaction originator for non-investment advisory clients for negotiated fees. The Tremont business earned between 0.50% and 1.0% of the aggregate principal amounts of any loans so originated. The Tremont business earned fees for such origination services of $194 and $113 for the three months ended June 30, 2018 and 2017, respectively, and $582 and $352 for the nine months ended June 30, 2018 and 2017, respectively, which amounts are included in management services revenue in our condensed consolidated statements of comprehensive income.

Note 4. Equity Investments

As of June 30, 2018, Tremont Advisors owned 600,100, or approximately 19.1%, of TRMT's common shares, with a carrying value of $11,420 and a market value, based on quoted market prices, of $7,891 ($13.15 per share). We account for our investment in TRMT using the equity method of accounting because we are deemed to exert significant influence over, but not control, TRMT's most significant activities. Our share of net losses from our investment in TRMT included in equity in losses of investees in our condensed consolidated statements of comprehensive income for the three and nine months ended June 30, 2018 was $136 and $535, respectively.

We also have a 0.5% general partnership interest in a private fund created for an institutional investor that is managed by Tremont Advisors. This private fund is winding down and our carrying value is zero at June 30, 2018. We account for this investment under the equity method of accounting and record our share of the investment's earnings or losses each period. Our share of net gains from the private fund for the three months ended June 30, 2018 was $2 and our share of net losses from the private fund for the nine months ended June 30, 2018 was $33, both of which are included in equity in losses of investees in our condensed consolidated statements of comprehensive income. In addition, the private fund made distributions to its partners for which our share for the three and nine months ended June 30, 2018 was $31 and $174, respectively.

Note 5. Income Taxes

We are 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. 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 tax consolidated subsidiaries.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act, or the Tax Act. The Tax Act significantly revised the U.S. corporate income tax system, by among other things, lowering corporate income tax rates. Since we have a September 30 fiscal year end, the lower corporate income tax rate of 21.0% will be phased in, resulting in a federal statutory tax rate of approximately 24.5% for our fiscal year ending September 30, 2018, and the new corporate income tax rate of 21.0% for subsequent fiscal years thereafter. The Tax Act reduction in the corporate income tax rate also caused us to adjust our deferred tax asset to the lower federal base rates, resulting in an increase in income tax expense of $19,817, or $1.23 per share, for the nine months ended June 30, 2018.

For the three months ended June 30, 2018 and 2017, we recognized estimated income tax expense of $3,462 and $4,528, respectively, which includes $2,688 and $3,978, respectively, of U.S. federal income tax and $774 and $550, respectively, of state income taxes. For the nine months ended June 30, 2018 and 2017, we recognized estimated income tax expense of $55,486 and $24,811, respectively, which includes $43,225 and $21,797, respectively, of U.S. federal income tax and $12,261 and $3,014, respectively, of state income taxes. We will monitor future interpretations of the Tax Act as they develop and accordingly, our estimates may change.


9

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 June 30,
 
Nine Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Income taxes computed at the federal statutory rate
 
24.5
 %
 
35.0
 %
 
24.5
 %
 
35.0
 %
State taxes, net of federal benefit
 
2.3
 %
 
2.5
 %
 
2.5
 %
 
2.5
 %
Tax Cuts and Jobs Act transitional impact (1)
 
 %
 
 %
 
7.8
 %
 
 %
Permanent items (2)
 
 %
 
 %
 
(2.3
)%
 
 %
Net income attributable to noncontrolling interest
 
(11.8
)%
 
(17.0
)%
 
(10.7
)%
 
(16.9
)%
Total
 
15.0
 %
 
20.5
 %
 
21.8
 %
 
20.6
 %

(1)
Transitional impact is the $19,817 adjustment to our deferred tax asset due to the reduction in our corporate income tax rate under the Tax Act.

(2)
Permanent items include the $24,710 reduction in our liability related to the tax receivable agreement with ABP Trust discussed in Note 7.

ASC 740, Income Taxes, provides a model for how a company should recognize, measure and present in its financial statements uncertain tax positions that have been taken or are expected to be taken with respect to all open years and in all significant jurisdictions. Pursuant to this topic, we recognize a tax benefit only if it is “more likely than not” that a particular tax position will be sustained upon examination or audit. To the extent the “more likely than not” standard has been satisfied, the benefit associated with a tax position is measured as the largest amount that is greater than 50% likely of being realized upon settlement. As of June 30, 2018 and September 30, 2017, we had no uncertain tax positions.

Note 6. Fair Value of Financial Instruments

As of June 30, 2018 and September 30, 2017, the fair values of our financial instruments, which include cash and cash equivalents, amounts due from related parties and accounts payable and accrued expenses, were not materially different from their carrying values due to the short term nature of these financial instruments.

Recurring Fair Value Measures

On a recurring basis we measure certain financial assets and financial liabilities at fair value based upon quoted market prices. ASC 820, Fair Value Measurements, establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1), and the lowest priority to unobservable inputs (Level 3). A financial asset’s or financial liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.

Level 1 Estimates

The following are our assets and liabilities that all have been measured at fair value using Level 1 inputs in the fair value hierarchy as of June 30, 2018 and September 30, 2017:
 
 
June 30,
 
September 30,
 
 
2018
 
2017
Money market funds included in cash and cash equivalents
 
$
278,433

 
$
104,700

Current portion of due from related parties related to share based payment awards
 
1,281

 
4,910

Long term portion of due from related parties related to share based payment awards
 
6,672

 
7,551

Current portion of employer compensation liability related to share based payment awards included in accounts payable and accrued expenses
 
1,281

 
4,910

Long term portion of employer compensation liability related to share based payment awards
 
6,672

 
7,551



10

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

Level 3 Estimates

Contingent consideration liabilities are re-measured to fair value each reporting period using updated probabilities of payment. Projected contingent payment amounts are discounted back to the current period using a discounted cash flow model. Increases or decreases in probabilities of payment may result in significant changes in the fair value measurements.

In August 2016, we acquired the Tremont business for total cash consideration of $2,466, plus contingent consideration of up to an additional $1,270 payable over a two year period following the acquisition date. The contingent consideration is measured at fair value using an income approach valuation technique, specifically with probability weighted and discounted cash flows. The fair value of the contingent consideration as of June 30, 2018 and September 30, 2017 was $5 and $591, respectively, and is included in accounts payable and accrued expenses on our condensed consolidated balance sheets. We recognized a gain of $491 as part of remeasuring the contingent consideration for the nine months ended June 30, 2018 that are included in interest and other income on our condensed consolidated statements of comprehensive income.

Note 7. Related Person Transactions
Adam D. Portnoy, one of our Managing Directors, is the sole trustee of our controlling shareholder, ABP Trust, and owns a majority of ABP Trust's voting securities. As of June 30, 2018, Adam D. Portnoy beneficially owned, in aggregate, directly and indirectly through ABP Trust, (i) 165,365 shares of Class A common stock of RMR Inc., or Class A Common Shares; (ii) all of the outstanding shares of Class B-1 common stock of RMR Inc., or Class B-1 Common Shares; (iii) all of the outstanding shares of Class B-2 common stock of RMR Inc., or Class B-2 Common Shares; and (iv) 15,000,000 Class A Units of RMR LLC. Adam D. Portnoy and Jennifer B. Clark, our other Managing Director, are also officers of ABP Trust and RMR Inc. and officers and employees of RMR LLC.

Adam D. Portnoy is a Managing Trustee or Managing Director of each of the Managed REITs, Five Star and TA, and he is an owner and Director of Sonesta. Jennifer B. Clark is a Managing Trustee of SNH and a Director of Sonesta. Other officers of ours serve as Managing Trustees or Managing Directors of certain of the Managed REITs and TA. As of June 30, 2018, GOV, HPT, SIR and SNH owned 1,214,225, 2,503,777, 1,586,836 and 2,637,408 of our Class A Common Shares, respectively, and Adam D. Portnoy beneficially owned, in aggregate, directly and indirectly through ABP Trust, 36.4% of Five Star’s outstanding common shares, 1.9% of GOV’s common shares, 1.5% of HPT’s outstanding common shares, less than 1% of ILPT’s outstanding common shares, 2.0% of SIR’s outstanding common shares, 1.3% of SNH’s outstanding common shares, 2.2% of RIF’s outstanding common shares and less than 1% of TA’s outstanding common shares and we owned (through Tremont Advisors) 19.1% of TRMT's outstanding common shares.

All of the executive officers of the Managed REITs and AIC and many of the executive officers of the Managed Operators and RIF are also officers of RMR LLC.

Additional information about our related person transactions appears in Note 8 below and in our 2017 Annual Report.


11

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

Revenues from Related Parties
For the three and nine months ended June 30, 2018 and 2017, we recognized revenues from related parties as set forth in the following table:
 
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
$
 
%
 
$
 
%
 
$
 
%
 
$
 
%
Managed Equity REITs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GOV
 
$
13,508

 
21.8
%
 
$
9,139

 
16.4
%
 
$
40,248

 
11.8
%
 
$
26,302

 
12.3
%
HPT
 
10,803

 
17.5

 
10,636

 
19.2

 
106,926

 
31.5

 
84,156

 
39.1

ILPT
 
3,744

 
6.0

 

 

 
6,735

 
2.0

 

 

SIR
 
8,448

 
13.6

 
11,089

 
20.0

 
53,987

 
15.9

 
33,108

 
15.4

SNH
 
15,364

 
24.7

 
15,653

 
28.2

 
101,806

 
30.0

 
45,433

 
21.1

 
 
51,867

 
83.6

 
46,517

 
83.8

 
309,702

 
91.2

 
188,999

 
87.9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Managed Operators:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Five Star
 
2,383

 
3.8

 
2,439

 
4.4

 
7,462

 
2.2

 
7,206

 
3.4

Sonesta
 
836

 
1.3

 
671

 
1.2

 
2,099

 
0.6

 
1,745

 
0.8

TA
 
4,052

 
6.6

 
3,659

 
6.6

 
11,307

 
3.3

 
10,822

 
5.0

 
 
7,271

 
11.7

 
6,769

 
12.2

 
20,868

 
6.1

 
19,773

 
9.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ABP Trust
 
1,258

 
2.0

 
1,024

 
1.9

 
3,868

 
1.1

 
2,755

 
1.3

AIC
 
60

 
0.1

 
60

 
0.1

 
180

 
0.1

 
180

 
0.1

RIF
 
706

 
1.1

 
613

 
1.1

 
2,134

 
0.6

 
1,826

 
0.8

TRMT
 
639

 
1.0

 

 

 
1,986

 
0.6

 

 

 
 
2,663

 
4.2

 
1,697

 
3.1

 
8,168

 
2.4

 
4,761

 
2.2

Total revenues from related parties
 
61,801

 
99.5

 
54,983

 
99.1

 
338,738

 
99.7

 
213,533

 
99.3

Other unrelated parties
 
283

 
0.5

 
519

 
0.9

 
1,168

 
0.3

 
1,559

 
0.7

 
 
$
62,084

 
100.0
%
 
$
55,502

 
100.0
%
 
$
339,906

 
100.0
%
 
$
215,092

 
100.0
%

On December 31, 2017, RMR LLC earned incentive business management fees from HPT, SIR and SNH of $74,572, $25,569 and $55,740, respectively, pursuant to its business management agreements with HPT, SIR and SNH. HPT, SIR and SNH paid these incentive fees to us in January 2018.

On December 31, 2016, RMR LLC earned a $52,407 incentive business management fee from HPT pursuant to its business management agreement with HPT. HPT paid this incentive fee to us in January 2017. All of these incentive fees are included in the table above. These incentive fees are calculated annually at the end of each calendar year.


12

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 indicated:
 
 
June 30,
 
September 30,
 
 
2018
 
2017
Managed Equity REITs:
 
 
 
 
GOV
 
$
7,707

 
$
6,369

HPT
 
6,557

 
7,968

ILPT
 
1,449

 

SIR
 
5,107

 
7,351

SNH
 
8,111

 
9,550

 
 
28,931

 
31,238

 
 
 
 
 
Managed Operators:
 
 
 
 
Five Star
 
292

 
305

Sonesta
 
41

 
1

TA
 
668

 
444

 
 
1,001

 
750

 
 
 
 
 
Other Client Companies:
 
 
 
 
ABP Trust
 
680

 
551

AIC
 
20

 
22

RIF
 
63

 
36

TRMT
 
239

 
115

 
 
1,002

 
724

 
 
$
30,934

 
$
32,712


Leases

As of June 30, 2018, RMR LLC leased from ABP Trust and certain Managed Equity REITs office space for use as our headquarters and local offices. We incurred rental expense under related party leases aggregating $1,274 and $1,056 for the three months ended June 30, 2018 and 2017, respectively, and $3,558 and $3,165 for the nine months ended June 30, 2018 and 2017, respectively.

Tax Related Payments

Pursuant to our tax receivable agreement with ABP Trust, RMR Inc. pays to ABP Trust 85.0% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that RMR Inc. realizes as a result of (a) the increases in tax basis attributable to our dealings with ABP Trust and (b) tax benefits related to imputed interest deemed to be paid by us as a result of the tax receivable agreement. In connection with the Tax Act and the resulting lower corporate income tax rates applicable to RMR Inc., we remeasured the amounts due pursuant to our tax receivable agreement with ABP Trust and reduced our liability by $24,710, or $1.53 per share, which is presented on our condensed consolidated statements of comprehensive income for the nine months ended June 30, 2018 as tax receivable agreement remeasurement. As of June 30, 2018, our condensed consolidated balance sheet reflects a liability related to the tax receivable agreement of $37,289, including $2,935 classified as a current liability that we expect to pay to ABP Trust during the fourth quarter of fiscal year 2018.

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, 2018 and 2017, pursuant to the RMR LLC operating agreement, RMR LLC made required quarterly tax distributions to holders of its membership units totaling $68,232 and $56,230, respectively, of which $35,392 and $29,097, respectively, was distributed to us and $32,840 and $27,133, respectively, was distributed to ABP Trust, based on each membership unit holder’s respective ownership percentage. The amounts distributed to us were eliminated in our condensed consolidated financial statements, and the amounts distributed to ABP Trust were recorded as a reduction of its noncontrolling interest. We used funds from these

13

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

distributions to pay certain of our U.S. federal and state income tax liabilities and to pay part of our obligations under the tax receivable agreement.

Other
On July 31, 2018, RMR LLC entered into a transaction agreement pursuant to which RMR LLC is committing to contribute up to $100,000 and ABP Trust is contributing $206,000 of owned office properties to a newly formed private open end real estate fund, the RMR Office Property Fund LP, or the Fund. The Fund will be focused on the acquisition, ownership and leasing of a diverse portfolio of commercial office properties throughout the United States. The Fund’s General Partner will be a wholly owned subsidiary of ABP Trust and RMR LLC and ABP Trust will be limited partners of the Fund. RMR LLC will manage the Fund and it will receive annual fund administration fees equal to 1.0% of the Fund's net asset value. In addition, RMR LLC will receive property management fees equal to 3.0% of all rents collected from commercial real estate investments and 5.0% of costs of construction or any improvement at commercial real estate investments held by the Fund.

On March 29, 2018, David J. Hegarty announced his resignation from his position as an Executive Vice President of RMR LLC and as president and chief operating officer of SNH effective April 30, 2018. In connection with his retirement, RMR LLC entered into a retirement agreement with Mr. Hegarty on March 29, 2018. Pursuant to his retirement agreement, Mr. Hegarty will remain an employee of RMR LLC until September 30, 2018 or such earlier date as he may elect. Under Mr. Hegarty’s retirement agreement, RMR LLC paid him $1,250 following his resignation as an Executive Vice President of RMR LLC on April 30, 2018 and it will make another cash payment to him in the amount of $1,250 following his resignation as an employee of RMR LLC, subject to RMR LLC’s receipt of a waiver and release. We will recognize these cash payments, net of amounts previously accrued, over Mr. Hegarty's remaining service period as Executive Vice President of RMR LLC, with the costs presented as separation costs on our condensed consolidated statements of comprehensive income. In addition, all of our unvested Class A Common Shares previously awarded to Mr. Hegarty will fully accelerate upon the date of his retirement from RMR LLC, subject to conditions. For the three and nine months ended June 30, 2018, we recorded $55 and $371 in equity based compensation expense, respectively, related to Mr. Hegarty's retirement agreement.

Effective December 31, 2017, Thomas M. O’Brien resigned from his position as an Executive Vice President and employee of RMR LLC and as president, chief executive officer and a managing director of TA. In connection with Mr. O’Brien’s resignation, RMR LLC and TA entered into a retirement agreement with Mr. O’Brien on November 29, 2017. Under Mr. O'Brien's retirement agreement, all 5,600 of our unvested Class A Common Shares previously awarded to Mr. O’Brien were fully accelerated on December 31, 2017, and we recorded $332, the aggregate value of those shares on such date, as equity based compensation expense for the three months ended December 31, 2017.

Note 8. Shareholders’ Equity

Distributions

On November 16, 2017, we paid a quarterly dividend on our Class A Common Shares and Class B-1 Common Shares, in the amount of $0.25 per Class A Common Share and Class B-1 Common Share, or $4,041. This dividend was paid to our shareholders of record as of the close of business on October 23, 2017. This dividend was funded by a distribution from RMR LLC to holders of its membership units in the amount of $0.25 per unit, or $7,791, of which $4,041 was distributed to us based on our then aggregate ownership of 16,164,066 membership units of RMR LLC and $3,750 was distributed to ABP Trust based on its ownership of 15,000,000 membership units of RMR LLC.

On February 22, 2018, we paid a quarterly dividend on our Class A Common Shares and Class B-1 Common Shares, in the amount of $0.25 per Class A Common Share and Class B-1 Common Share, or $4,040. This dividend was paid to our shareholders of record as of the close of business on January 29, 2018. This dividend was funded by a distribution from RMR LLC to holders of its membership units in the amount of $0.25 per unit, or $7,790, of which $4,040 was distributed to us based on our then aggregate ownership of 16,162,338 membership units of RMR LLC and $3,750 was distributed to ABP Trust based on its ownership of 15,000,000 membership units of RMR LLC.

On May 17, 2018, we paid a quarterly dividend on our Class A Common Shares and Class B-1 Common Shares, in the amount of 0.25 per Class A Common Share and Class B-1 Common Share, or $4,044. This dividend was paid to our shareholders of record as of the close of business on April 30, 2018. This dividend was funded by a distribution from RMR LLC to holders of its membership units in the amount of $0.25 per unit, or $7,794, of which $4,044 was distributed to us based

14

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

on our then aggregate ownership of 16,174,463 membership units of RMR LLC and $3,750 was distributed to ABP Trust based on its ownership of 15,000,000 membership units of RMR LLC.

On July 19, 2018, we declared a quarterly dividend on our Class A Common Shares and Class B-1 Common Shares payable to our shareholders of record as of July 30, 2018, in the amount of $0.25 per Class A Common Share and Class B-1 Common Share, or $4,044. This dividend will be funded by a distribution from RMR LLC to holders of its membership units in the amount of $0.25 per unit, or $7,794, of which $4,044 will be distributed to us based on our expected then aggregate ownership of 16,174,463 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 16, 2018.

Note 9. Per Common Share Amounts
Earnings per common share 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 outstanding Class A Common Shares and our Class B-1 Common Shares during the applicable periods. 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 shares outstanding for purposes of calculating our net income attributable to RMR Inc. per share.

Unvested Class A Common Shares granted to our employees are deemed participating securities for purposes of calculating earnings per common share, as they have dividend rights. We calculate earnings per share using the two-class method. Under the two-class method, we allocate earnings proportionately to vested Class A Common Shares and Class B-1 Common Shares outstanding and unvested Class A Common Shares outstanding for the period. Earnings attributable to unvested Class A Common Shares are excluded from earnings per share under the two-class method as reflected in our condensed consolidated statements of comprehensive income.
The calculation of basic and diluted earnings per share is as follows:
 
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Basic EPS
 
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
 
Net income attributable to RMR Inc.
 
$
8,381

 
$
6,857

 
$
87,857

 
$
37,250

Income attributable to unvested participating securities
 
(45
)
 
(25
)
 
(518
)
 
(135
)
Net income attributable to RMR Inc. used in calculating basic EPS
 
$
8,336

 
$
6,832

 
$
87,339

 
$
37,115

Denominator:
 
 
 
 
 
 
 
 
Weighted average common shares outstanding - basic
 
16,087

 
16,037

 
16,072

 
16,029

Net income attributable to RMR Inc. per common share - basic
 
$
0.52

 
$
0.43

 
$
5.43

 
$
2.32

 
 
 
 
 
 
 
 
 
Diluted EPS
 
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
 
Net income attributable to RMR Inc.
 
$
8,381

 
$
6,857

 
$
87,857

 
$
37,250

Income attributable to unvested participating securities
 
(45
)
 
(25
)
 
(518
)
 
(135
)
Net income attributable to RMR Inc. used in calculating diluted EPS
 
$
8,336

 
$
6,832

 
$
87,339

 
$
37,115

Denominator:
 
 
 
 
 
 
 
 
Weighted average common shares outstanding - basic
 
16,087

 
16,037

 
16,072

 
16,029

Dilutive effect of incremental unvested shares
 
48

 
21

 
39

 
15

Weighted average common shares outstanding - diluted
 
16,135

 
16,058

 
16,111

 
16,044

Net income attributable to RMR Inc. per common share - diluted
 
$
0.52

 
$
0.43

 
$
5.42

 
$
2.31



15

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

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 Shares “paired” with such unit is canceled for no additional consideration. If all outstanding Class A Units that we do not own had been redeemed for our Class A Common Shares in the periods presented, our Class A Common Shares outstanding as of June 30, 2018, would have been 30,174,463. In computing the dilutive effect, if any, that the aforementioned redemption would have on earnings per share, 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 periods presented, such redemption is not reflected in diluted earnings per share as the assumed redemption would be anti-dilutive.

Note 10. Net Income Attributable to RMR Inc.

Net income attributable to RMR Inc. for the three and nine months ended June 30, 2018 and 2017, is calculated as follows:

 
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Income before income tax expense and equity in losses of investees
 
$
23,045

 
$
22,129

 
$
254,469

 
$
120,525

Add: RMR Inc. franchise tax expense and interest income
 
91

 
147

 
375

 
456

Less: tax receivable agreement remeasurement
 

 

 
(24,710
)
 

Less: equity in losses of investees
 
(134
)
 
4

 
(568
)
 
(161
)
Less: fees from services provided prior to the UP-C Transaction
 

 

 
(127
)
 

Net income before noncontrolling interest
 
23,002

 
22,280

 
229,439

 
120,820

Less: noncontrolling interest
 
(11,068
)
 
(10,748
)
 
(110,431
)
 
(58,303
)
Net income attributable to RMR Inc. before income tax expense
 
11,934

 
11,532

 
119,008

 
62,517

Add: tax receivable agreement remeasurement
 

 

 
24,710

 

Less: income tax expense attributable to RMR Inc.
 
(3,462
)
 
(4,528
)
 
(55,486
)
 
(24,811
)
Less: RMR Inc. franchise tax expense and interest income
 
(91
)
 
(147
)
 
(375
)
 
(456
)
Net income attributable to RMR Inc.
 
$
8,381

 
$
6,857

 
$
87,857

 
$
37,250

Note 11. Segment Reporting

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

16

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

 
 
Three Months Ended June 30, 2018
 
 
 
 
All Other
 
 
 
 
RMR LLC (1)
 
Operations
 
Total
Revenues:
 
 
 
 
 
 
Management services
 
$
47,328

 
$

 
$
47,328

Reimbursable payroll related and other costs
 
13,078

 
633

 
13,711

Advisory services
 

 
1,045

 
1,045

Total revenues
 
60,406

 
1,678

 
62,084

Expenses:
 
 
 
 
 
 
Compensation and benefits
 
27,047

 
1,559

 
28,606

Equity based compensation
 
2,333

 
14

 
2,347

Separation costs
 
1,739

 

 
1,739

     Total compensation and benefits expense
 
31,119

 
1,573

 
32,692

General and administrative
 
5,665

 
886

 
6,551

Transaction and acquisition related costs
 
775

 

 
775

Depreciation and amortization
 
222

 
22

 
244

Total expenses
 
37,781

 
2,481

 
40,262

Operating income (loss)
 
22,625

 
(803
)
 
21,822

Interest and other income
 
1,085

 
138

 
1,223

Income (loss) before income tax expense and equity in losses of investees
 
23,710

 
(665
)
 
23,045

Income tax expense
 

 
(3,462
)
 
(3,462
)
Equity in losses of investees
 
(2
)
 
(132
)
 
(134
)
Net income (loss)
 
$
23,708

 
$
(4,259
)
 
$
19,449

 
 
 
 
 
 
 
Total Assets:
 
$
460,596

 
$
67,013

 
$
527,609

(1) Intersegment revenues of $995 recognized by RMR LLC for services provided to the All Other Operations segment have been eliminated in the condensed consolidated financial statements.
 

17

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

 
 
Nine Months Ended June 30, 2018
 
 
 
 
All Other
 
 
 
 
RMR LLC (1)
 
Operations
 
Total
Revenues:
 
 
 
 
 
 
Management services
 
$
142,457

 
$

 
$
142,457

Incentive business management fees
 
155,881

 

 
155,881

Reimbursable payroll related and other costs
 
36,193

 
1,883

 
38,076

Advisory services
 

 
3,492

 
3,492

Total revenues
 
334,531

 
5,375

 
339,906

Expenses:
 
 
 
 
 
 
Compensation and benefits
 
78,415

 
4,461

 
82,876

Equity based compensation
 
6,244

 
41

 
6,285

Separation costs
 
1,875

 

 
1,875

     Total compensation and benefits expense
 
86,534

 
4,502

 
91,036

General and administrative
 
17,343

 
2,938

 
20,281

Transaction and acquisition related costs
 
775

 
142

 
917

Depreciation and amortization
 
931

 
65

 
996

Total expenses
 
105,583

 
7,647

 
113,230

Operating income (loss)
 
228,948

 
(2,272
)
 
226,676

Interest and other income
 
2,810

 
273

 
3,083

Tax receivable agreement remeasurement
 

 
24,710

 
24,710

Income before income tax expense and equity in losses of investees
 
231,758

 
22,711

 
254,469

Income tax expense
 

 
(55,486
)
 
(55,486
)
Equity in losses of investees
 
$
33

 
$
(601
)
 
$
(568
)
Net income (loss)
 
$
231,791

 
$
(33,376
)
 
$
198,415

 
 
 
 
 
 
 
Total Assets:
 
$
460,596

 
$
67,013

 
$
527,609

(1) Intersegment revenues of $2,972 recognized by RMR LLC for services provided to the All Other Operations segment have been eliminated in the condensed consolidated financial statements. 

18

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

 
 
Three Months Ended June 30, 2017
 
 
 
 
All Other
 
 
 
 
RMR LLC (1)
 
Operations
 
Total
Revenues:
 
 
 
 
 
 
Management services
 
$
44,644

 
$

 
$
44,644

Reimbursable payroll related and other costs
 
9,839

 

 
9,839

Advisory services
 

 
1,019

 
1,019

Total revenues
 
54,483

 
1,019

 
55,502

Expenses:
 
 
 
 
 
 
Compensation and benefits
 
23,050

 
681

 
23,731

Equity based compensation
 
1,038

 

 
1,038

     Total compensation and benefits expense
 
24,088

 
681

 
24,769

General and administrative
 
6,297

 
482

 
6,779

Transaction and acquisition related costs
 
1,760

 

 
1,760

Depreciation and amortization
 
321

 
146

 
467

Total expenses
 
32,466

 
1,309

 
33,775

Operating income (loss)
 
22,017

 
(290
)
 
21,727

Interest and other income
 
377

 
25

 
402

Income (loss) before income tax expense and equity in losses of investees
 
22,394

 
(265
)
 
22,129

Income tax expense
 

 
(4,528
)
 
(4,528
)
Equity in losses of investees
 
$

 
$
4

 
$
4

Net income (loss)
 
$
22,394

 
$
(4,789
)
 
$
17,605

 
 
 
 
 
 
 
Total Assets:
 
$
344,738

 
$
59,250

 
$
403,988

(1) Intersegment revenues of $221 recognized by RMR LLC for services provided to the All Other Operations segment have been eliminated in the condensed consolidated financial statements.
 
 
Nine Months Ended June 30, 2017
 
 
 
 
All Other
 
 
 
 
RMR LLC (1)
 
Operations
 
Total
Revenues:
 
 
 
 
 
 
Management services
 
$
130,629

 
$

 
$
130,629

Incentive business management fees
 
52,407

 

 
52,407

Reimbursable payroll related and other costs
 
29,023

 

 
29,023

Advisory services
 

 
3,033

 
3,033

Total revenues
 
212,059

 
3,033

 
215,092

Expenses:
 
 
 
 
 
 
Compensation and benefits
 
67,038

 
1,708

 
68,746

Equity based compensation
 
3,804

 

 
3,804

     Total compensation and benefits expense
 
70,842

 
1,708

 
72,550

General and administrative
 
18,086

 
987

 
19,073

Transaction and acquisition related costs
 
2,453

 

 
2,453

Depreciation and amortization
 
1,072

 
478

 
1,550

Total expenses
 
92,453

 
3,173

 
95,626

Operating income (loss)
 
119,606

 
(140
)
 
119,466

Interest and other income
 
657

 
402

 
1,059

Income before income tax expense and equity in losses of investees
 
120,263

 
262

 
120,525

Income tax expense
 

 
(24,811
)
 
(24,811
)
Equity in losses of investees
 
$

 
$
(161
)
 
$
(161
)
Net income (loss)
 
$
120,263

 
$
(24,710
)
 
$
95,553

 
 
 
 
 
 
 
Total Assets:
 
$
344,738

 
$
59,250

 
$
403,988


19

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

(1) Intersegment revenues of $872 recognized by RMR LLC for services provided to the All Other Operations segment have been eliminated in the condensed consolidated financial statements.

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 (dollars in thousands)
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 June 30, 2018, the over 1,700 properties that RMR LLC manages are located in 48 states, Washington, D.C., Puerto Rico and Canada and they are principally owned by the Managed Equity REITs.
Substantially all of our revenues are derived from providing business and property management services to the Managed Equity REITs and the Managed Operators. We also earn revenue from advisory and other services to RIF, a registered investment company, to TRMT, a mortgage real estate investment trust, to a private fund created for an institutional investor and to other separately managed accounts.
Managed Equity REITs
The base business management fees we earn from the Managed Equity REITs are principally based upon the lower of (i) the average historical cost of each REIT’s properties and (ii) each REIT’s average market capitalization. The property management fees we earn from the Managed Equity 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 which are separately managed by one of our Managed Operators or a third party. The following table presents for each Managed Equity REIT: a summary of its primary strategy and the lesser of the historical cost of its assets under management and its market capitalization as of June 30, 2018 and 2017, as applicable: