RMR : Administration’s Dialogue and Evaluation of Monetary Situation and Outcomes of Operations (kind 10-Q)

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The following information should be read in conjunction with our condensed
consolidated financial statements and accompanying notes included in Part I,
Item 1 of this Quarterly Report on Form 10-Q and with our 2020 Annual Report.
OVERVIEW (dollars in thousands)
RMR Inc. is a holding company and 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. RMR LLC manages a diverse portfolio
of real estate and real estate related businesses. As of December 31, 2020, RMR
LLC managed over 2,100 properties in 47 states, Washington, D.C., Puerto Rico
and Canada that are principally owned by the Managed Equity REITs.
Business Environment and Outlook
The continuation and growth of our business depends upon our ability to operate
the Managed REITs so as to maintain, grow and increase the value of their
businesses, to assist our Managed Operating Companies to grow their businesses
and operate profitably and to successfully execute on new business ventures and
investments we may pursue. Our business and the businesses of our Client
Companies generally follow the business cycle of the U.S. real estate industry,
but with certain property type and regional geographic variations. Typically, as
the general U.S. economy expands, commercial real estate occupancies increase
and new real estate development occurs; new development frequently leads to
increased real estate supply and reduced occupancies; and then the cycle
repeats. These general trends can be impacted by property type characteristics
or regional factors; for example, demographic factors such as the aging U.S.
population, the growth of e-commerce retail sales or net in migration or out
migration in different geographic regions can slow, accelerate, overwhelm or
otherwise impact general cyclical trends. Because of such multiple factors, we
believe it is often possible to grow real estate based businesses in selected
property types or geographic areas despite general national trends. We also
believe that these regional or special factors can be reinforced or sometimes
overwhelmed by general economic factors; for example, increases or decreases in
U.S. interest rates may cause a general decrease, or increase, in the value of
securities of real estate businesses or in their value relative to other types
of securities and investments, including those real estate businesses that use
large amounts of debt and that attract equity investors by paying dividends such
as REITs. We try to take account of industry and general economic factors as
well as specific property and regional geographic considerations when providing
services to our Client Companies.
The COVID-19 pandemic and the various governmental and market responses intended
to contain and mitigate the spread of the virus and its detrimental public
health impact, as well as the general uncertainty surrounding the dangers and
impact of the pandemic, continue to have a significant impact on the global
economy, including the U.S. economy. In addition, the COVID-19 pandemic and
related public health restrictions have had a particularly severe impact on
certain industries in which our Client Companies operate, including,
hospitality, travel, service retail, senior housing and rehabilitation services.
We continue to closely monitor the impact of the COVID-19 pandemic and the
resulting market disruptions on all aspects of our business and our Client
Companies’ businesses including:
•the impact of volatility in our Managed Equity REITs’ share prices and the
related impacts to our business management fee revenues, as the majority of our
Managed Equity REITs are currently paying business management fees on a total
market capitalization basis;
•tenants of our Client Companies’ ability to withstand the current economic
conditions and continue as going concerns, including possible adverse impacts to
our future property management fee revenues due to declines in our Client
Companies’ tenant rental receipts;
•our Client Companies’ operations, liquidity and capital needs and resources,
including possible reductions in our construction management fees as a result of
the Managed Equity REITs reducing or delaying their capital spending in order to
conserve capital;
•our Client Companies’ ability to comply with financial covenants under their
debt agreements;
•our Client Companies’ ability to access debt and equity capital; and
•possible government relief funding sources and other programs that may be
available to us and our Client Companies.
As a result of the COVID-19 pandemic and resulting market disruptions, some of
our Client Companies’ tenants have requested rent assistance. As of January 29,
2021, our Client Companies have granted temporary rent assistance totaling
$20,124 to 239 tenants. This assistance generally entails a deferral of rent, in
most cases one month of rent, after which the
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deferred rent amounts become payable generally over a 12-month period. Our
revenues have been and will continue to be impacted by these rent deferrals as
we earn our property management fee revenue based on gross rents collected. As
such, our property management fees related to these deferred amounts will be
earned when our Client Companies’ tenants pay these deferred amounts.
While our Client Companies continue to face many challenges related to the
COVID-19 pandemic, we continue to believe that our current financial resources
enable us to withstand the COVID-19 pandemic. As of December 31, 2020, we had
$383,213 in cash and cash equivalents, no debt and for the three months ended
December 31, 2020, we generated cash from operations of $27,660.
Further, we believe that, because of the diversity of properties that our Client
Companies own and operate, there may be opportunities for growth in select
property types and locations as this pandemic ebbs. We, on behalf of our Client
Companies and ourselves, attempt to take advantage of opportunities in the real
estate market when they arise. For example: (i) on January 17, 2018, Select
Income REIT, or SIR, launched an equity REIT, ILPT, that it formed to focus on
the ownership and leasing of industrial and logistics properties throughout the
U.S.; (ii) on December 31, 2018, Government Properties Income Trust and SIR
merged to form OPI, a REIT with a broader investment strategy than its
predecessor companies and ultimately a stronger combined entity positioned for
future growth; (iii) on September 20, 2019, SVC acquired a net leased portfolio
of 767 service oriented retail properties, providing SVC with a greater
diversity in tenant base, property type and geography; and (iv) on March 31,
2020, ILPT completed a $680 million joint venture with an Asian institutional
investor, which was expanded to include a large, top tier global sovereign
wealth fund, as a second outside investor to this joint venture on November 18,
2020. In addition, we balance our pursuit of growth of our and our Client
Companies’ businesses by executing, on behalf of our Client Companies, prudent
capital recycling or business arrangement restructurings in an attempt to help
our Client Companies prudently manage leverage and to reposition their
portfolios and businesses when circumstances warrant such changes or when other
more desirable opportunities are identified.
There are extensive uncertainties surrounding the COVID-19 pandemic, and as a
result, we are unable to determine what the ultimate impact will be on our
Client Companies and our financial position. For further information and risks
related to the COVID-19 pandemic on us and our business, see “COVID-19 Pandemic”
in Item 1 and “Risk Factors” in Item 1A of our 2020 Annual Report.
Managed Equity REITs
The base business management fees we earn from the Managed Equity REITs are
calculated monthly in accordance with the applicable business management
agreement and are based on a percentage of 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 on a percentage of 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 Operating Companies 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 December 31, 2020 and 2019, as
applicable:
Lesser of Historical Cost of Assets
Under Management or
Total Market Capitalization as of
December 31,
REIT Primary Strategy 2020 2019
Medical office and life science properties, senior
DHC living communities and wellness centers $ 4,523,958$ 5,543,586
ILPT Industrial and logistics properties 1,963,013 2,538,189
Office properties primarily leased to single tenants,
OPI including the government 3,340,627 3,935,421

Hotels and net lease service and necessity-based retail
SVC properties 8,158,795 10,130,161
$ 17,986,393$ 22,147,357

A Managed Equity REIT’s historical cost of assets under management includes the
real estate it owns and its consolidated assets invested directly or indirectly
in equity interests in or loans secured by real estate and personal property
owned in connection with such real estate (including acquisition related costs
which may be allocated to intangibles or are unallocated), all before reserves
for depreciation, amortization, impairment charges or bad debts or other similar
non-cash reserves. A Managed Equity REIT’s average market capitalization
includes the average value of the Managed Equity REIT’s outstanding common
equity value during the period, plus the daily weighted average of each of the
aggregate liquidation preference of
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preferred shares and the principal amount of consolidated indebtedness during
the period. The table above presents for each Managed Equity REIT, the lesser of
the historical cost of its assets under management and its market capitalization
as of the end of each period.
The basis on which our base business management fees are calculated for the
three months ended December 31, 2020 and 2019 may differ from the basis at the
end of the periods presented in the table above. As of December 31, 2020, the
market capitalization was lower than the historical costs of assets under
management for DHC, OPI and SVC; the historical costs of assets under management
for DHC, OPI and SVC as of December 31, 2020, were $8,405,068, $5,783,978 and
$12,271,160, respectively. For ILPT, the historical costs of assets under
management were lower than its market capitalization of $2,391,860 as of
December 31, 2020.
The fee revenues we earned from the Managed Equity REITs for the three months
ended December 31, 2020 and 2019 are set forth in the following tables:
Three Months Ended December 31, 2020

Three Months Ended December 31, 2019

Base Business Property Base Business Property
Management Management Management Management
REIT Revenues Revenues Total Revenues Revenues Total
DHC $ 5,165$ 3,757$ 8,922$ 6,632$ 3,323$ 9,955
ILPT 3,099 1,775 4,874 3,392 2,182 5,574
OPI 3,895 5,372 9,267 4,890 5,273 10,163

SVC 9,396 821 10,217 12,477 1,196 13,673
$ 21,555$ 11,725$ 33,280$ 27,391$ 11,974$ 39,365

Managed Operating Companies, ABP Trust, AIC, the Industrial Fund and the Open
End Fund
We provide business management services to the Managed Operating Companies. Five
Star operates senior living communities throughout the United States, many of
which are owned by and managed for DHC. Sonesta manages and franchises hotels,
resorts and cruise ships in the United States, Latin America, the Caribbean and
the Middle East; many of Sonesta’s U.S. hotels are owned by SVC. TA operates,
leases and franchises travel centers along the U.S. interstate highway system,
many of which are owned by SVC, and standalone truck service facilities and
standalone restaurants. Generally, our fees earned from business management
services to the Managed Operating Companies are based on a percentage of certain
revenues.
In addition, we provide or provided management services to ABP Trust, AIC, the
Industrial Fund and the Open End Fund. The fees we earn from ABP Trust and the
Industrial Fund include management fees that are based on a percentage of
average invested capital, as defined in the applicable agreements, property
management fees based on a percentage of rents collected from managed properties
and construction management fees based on a percentage of the cost of
construction activities. Prior to January 1, 2020, the business management fees
we earned from ABP Trust were based on a percentage of revenues. The fees we
earned from AIC were based on a percentage of total premiums paid for insurance
arranged by AIC. AIC’s property insurance program expired on June 30, 2019 and
was not continued. AIC was dissolved on February 13, 2020. Until its dissolution
on July 28, 2020, the fees we earned from the Open End Fund included
administrative service fees based on a percentage of the Open End Fund’s net
asset value, property management fees based on a percentage of rents collected
from managed properties and construction management fees based on a percentage
of the cost of construction activities. In connection with the dissolution of
the Open End Fund, the Transaction Agreement, dated as of July 31, 2018, between
ABP Trust and RMR LLC was terminated and all of the properties that ABP Trust
initially contributed to the Open End Fund were transferred back to ABP Trust,
and those properties are now a part of our management agreements with ABP Trust.
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Our fee revenues from services to the Managed Operating Companies, ABP Trust,
the Industrial Fund and the Open End Fund for the three months ended December
31, 2020 and 2019, are set forth in the following table:
Three Months Ended

December 31,

2020

2019

Managed Private Real Estate Capital:

ABP Trust $ 1,056 $ 223

Industrial Fund 514 –
Open End Fund – 840
1,570 1,063
Managed Operating Companies:
Five Star 1,976 2,252
Sonesta 353 579
TA 3,309 3,295
5,638 6,126
$ 7,208 $ 7,189

Other Agreements
Tremont Advisors manages two publicly traded mortgage REITs: RMRM and TRMT. RMRM
and TRMT focus primarily on originating and investing in first mortgage whole
loans secured by middle market and transitional commercial real estate. Tremont
Advisors is primarily compensated pursuant to its management agreements with
RMRM (beginning January 6, 2021) and TRMT based on a percentage of RMRM’s and
TRMT’s equity, as defined in the applicable agreements.
Tremont Advisors earned aggregate advisory services revenue from TRMT of $37 and
$36 for the three months ended December 31, 2020 and 2019, respectively, in each
case net of the fee waiver referenced above, as applicable.
RMR Advisors, which previously provided advisory services for RMRM until it
merged into Tremont Advisors on January 6, 2021, was compensated pursuant to its
agreement with RMRM based on a percentage of RMRM’s average daily managed
assets, as defined in the agreement. The value of RMRM’s assets, as defined by
the investment advisory agreement, managed by RMR Advisors was $192,902 and
$360,001 as of December 31, 2020 and 2019, respectively. The advisory fees
earned by RMR Advisors included in our revenue were $549 and $811 for the three
months ended December 31, 2020 and 2019, respectively. On January 5, 2021, RMRM
received its requested order from the SEC deregistering RMRM as an investment
company under the Investment Company Act of 1940. Effective as of that time,
RMRM’s investment advisory agreement with RMR Advisors was terminated and RMRM
entered into a new management agreement with Tremont Advisors. On January 6,
2021, RMR Advisors merged with and into Tremont Advisors with Tremont Advisors
as the surviving entity.
The Tremont business acts as a transaction originator for non-investment
advisory clients for negotiated fees. The Tremont business earned fees for such
origination services of $259 and $680 for the three months ended December 31,
2020 and 2019, respectively, which amounts are included in management services
revenue in our condensed consolidated statements of income.
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RESULTS OF OPERATIONS (dollars in thousands)
Three Months Ended December 31, 2020, Compared to the Three Months Ended
December 31, 2019
The following table presents the changes in our operating results for the three
months ended December 31, 2020 compared to the three months ended December 31,
2019:

Three Months Ended December 31,

2020 2019 $ Change % Change

Revenues:

Management services $ 40,747$ 47,275$ (6,528) (13.8)%

Advisory services 586 847 (261) (30.8)%
Total management and advisory services
revenues 41,333 48,122 (6,789) (14.1)%
Reimbursable compensation and benefits 13,225 12,847 378 2.9%
Reimbursable client company equity based
compensation 3,003 948 2,055 n/m
Other client company reimbursable expenses 99,385 97,975 1,410 1.4%
Total reimbursable costs 115,613 111,770 3,843 3.4%
Total revenues 156,946 159,892 (2,946) (1.8)%
Expenses:
Compensation and benefits 29,494 30,197 (703) (2.3)%
Equity based compensation 3,561 1,582 1,979 125.1%
Separation costs 4,159 260 3,899 n/m
Total compensation and benefits expense 37,214 32,039 5,175 16.2%
General and administrative 6,260 7,046 (786) (11.2)%
Other client company reimbursable expenses 99,385 97,975 1,410 1.4%
Transaction and acquisition related costs 117 796 (679) (85.3)
Depreciation and amortization 238 256 (18) (7.0)%
Total expenses 143,214 138,112 5,102 3.7%
Operating income 13,732 21,780 (8,048) (37.0)%
Interest and other income 231 1,875 (1,644) (87.7)%

Equity in earnings of investees 424 255 169 66.3%
Unrealized gain on equity method investment
accounted for under the fair value option 8,122 1,438 6,684 n/m
Income before income tax expense 22,509 25,348 (2,839) (11.2)%
Income tax expense (2,756) (3,724) 968 26.0%
Net income 19,753 21,624 (1,871) (8.7)%
Net income attributable to noncontrolling
interest (10,856) (12,175) 1,319 10.8%
Net income attributable to The RMR Group
Inc. $ 8,897$ 9,449$ (552) (5.8)%

n/m – not meaningful
Management services revenue. For the three months ended December 31, 2020 and
2019, we earned base business and property management services revenue from the
following sources:
Three Months Ended December 31,
2020 2019 Change
Managed Equity REITs $ 33,280$ 39,365$ (6,085)
Managed Private Real Estate Capital 1,829 1,784 45
Managed Operating Companies 5,638 6,126 (488)
Total $ 40,747$ 47,275$ (6,528)

Management services revenue decreased $6,528 primarily due to (i) declines in
the market capitalization of DHC, OPI and SVC resulting in decreases to base
business management fees of $1,467, $995 and $3,081, respectively, and (ii)
declines in
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management fees earned from the Managed Operating Companies of $488, primarily
driven by COVID-19 pandemic related adverse impacts on FVE’s and Sonesta’s
businesses.
Advisory services revenue. Advisory services revenue for the three months ended
December 31, 2020 and 2019 includes the fees RMR Advisors earned for managing
RMRM and the fees Tremont Advisors earns for managing TRMT. Advisory services
revenues decreased by $261 primarily due to decreases in the average net asset
value of RMRM’s portfolio since April 2020.
Reimbursable compensation and benefits. Reimbursable compensation and benefits
include reimbursements, at cost, that arise primarily from services our
employees provide pursuant to our property management agreements at the
properties of our Client Companies. A significant portion of these compensation
and benefits are charged or passed through to and were paid by tenants of our
Client Companies. Reimbursable compensation and benefits increased $378
primarily due to annual increases in employee compensation and benefits for
which we receive reimbursement.
Reimbursable client company equity based compensation. Reimbursable client
company equity based compensation includes grants of common shares from Client
Companies directly to certain of our officers and employees in connection with
the provision of management services to those companies. We record an equal
offsetting amount as equity based compensation expense for the value of the
grants of common shares from our Client Companies to certain of our officers and
employees. Reimbursable client company equity based compensation increased
$2,055 primarily due to the acceleration of unvested shares granted by our
Client Companies to certain of our officers in connection with their retirements
and increases in share based compensation granted to our employees by our Client
Companies as a result of increases in their respective share prices.
Other client company reimbursable expenses. For further information about these
reimbursements, see Note 3, Revenue Recognition, to our condensed consolidated
financial statements included in Part I, Item 1 of this Quarterly Report on Form
10­Q.
Compensation and benefits. Compensation and benefits consist of employee
salaries and other employment related costs, including health insurance expenses
and contributions related to our employee retirement plan. Compensation and
benefits expense decreased $703 primarily due to lower estimated bonus costs in
the 2020 period primarily due to officer retirements and lower mortgage
origination commission costs, partially offset by annual employee merit
increases on October 1, 2020.
Equity based compensation. Equity based compensation consists of the value of
vested shares granted to certain of our employees under our equity compensation
plan and by our Client Companies. Equity based compensation increased $1,979
primarily due to the acceleration of unvested shares of our Client Companies
owned by certain of our officers in connection with their retirements and
increases in share based compensation granted to our employees by our Client
Companies as a result of increases in their respective share prices.
Separation costs. Separation costs consist of employment termination costs. For
further information about these costs, see Note 7, Related Person Transactions,
to our condensed consolidated financial statements included in Part I, Item 1 of
this Quarterly Report on Form 10­Q.
General and administrative. General and administrative expenses consist of
office related expenses, information technology related expenses, employee
training, travel, professional services expenses, director compensation and
other administrative expenses. General and administrative costs decreased $786
primarily due to decreases in travel expenses, temporary staffing and recruiting
fees as a result of the ongoing COVID-19 pandemic.
Depreciation and amortization. Depreciation and amortization expense was
relatively unchanged from the prior period.
Transaction and acquisition related costs. Transaction and acquisition related
costs decreased $679 primarily due to costs incurred in the prior period in
connection with RMRM’s conversion from a registered investment company to a
commercial mortgage REIT.
Interest and other income. Interest and other income decreased $1,644 primarily
due to lower interest earned during the three months ended December 31, 2020, as
compared to the three months ended December 31, 2019, as a result of lower
interest rates during the 2020 period.
Equity in earnings of investees. Equity in earnings of investees represents our
proportionate share of earnings from our equity interest in TRMT.
Unrealized gain on equity method investment accounted for under the fair value
option. Unrealized gain on equity method investment accounted for under the fair
value option represents the gain or loss on our investment in TA common shares.
The
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gain for the three months ended December 31, 2020, as compared to the three
months ended December 31, 2019, is a result of recent increases in TA’s share
price and additional shares of TA purchased subsequent to December 31, 2019. For
further information, see Note 4, Investments, to our condensed consolidated
financial statements included in Part I, Item 1 of this Quarterly Report on Form
10-Q.
Income tax expense. The decrease in income tax expense of $968 is primarily
attributable to lower taxable income for the three months ended December 31,
2020, as compared to the same period in the prior year and a reduction in our
income tax provision recorded during the three months ended December 31, 2020 of
$520 related to final tax regulations released in December 2020. For further
information, see Note 5, Income Taxes, to our condensed consolidated financial
statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
LIQUIDITY AND CAPITAL RESOURCES (dollars in thousands, except per share amounts)
Total assets were $698,393 as of December 31, 2020, an increase of $8,140 from
September 30, 2020. Our current assets have historically been comprised
predominantly of cash, cash equivalents and receivables for business management,
property management and advisory services fees. As of December 31, 2020 and
September 30, 2020, we had cash and cash equivalents of $383,213 and $369,663,
respectively, of which $25,407 and $25,498, respectively, was held by RMR Inc.,
with the remainder being held at RMR LLC. Cash and cash equivalents include all
short term, highly liquid investments that are readily convertible to known
amounts of cash and have original maturities of three months or less from the
date of purchase. As of December 31, 2020 and September 30, 2020, $351,848 and
$341,612, respectively, of our cash and cash equivalents were invested in money
market funds.
Total liabilities were $150,276 as of December 31, 2020, an increase of $925
from September 30, 2020. Our liquidity is highly dependent upon our receipt of
fees from the businesses that we manage. Historically, we have funded our
working capital needs with cash generated from our operating activities and we
currently do not maintain any credit facilities. As noted earlier in this
Quarterly Report on Form 10-Q, the market disruptions resulting from the
COVID-19 pandemic are having adverse impacts on our business management fees,
property management fees and construction management fees generated from our
Client Companies. The market turmoil created by COVID-19 may have lasting
effects on our business and the businesses of our Client Companies; however, we
cannot predict the extent and duration of the pandemic or the severity and
duration of its economic impact on us and our Client Companies.
We expect that our future working capital needs will relate largely to our
operating expenses, primarily consisting of employee compensation and benefits
costs, our obligation to make quarterly tax distributions to the members of RMR
LLC, our plan to make quarterly distributions on our Class A Common Shares and
Class B-1 Common Shares and our plan to pay quarterly distributions to the
members of RMR LLC in connection with the quarterly dividends to RMR Inc.
shareholders. Our management fees are typically payable to us within 30 days of
the end of each month or, in the case of annual incentive business management
fees, within 30 days following each calendar year end. Historically, we have not
experienced losses on collection of our fees and have not recorded any
allowances for bad debts.
During the three months ended December 31, 2020, we paid cash distributions to
the holders of our Class A Common Shares, Class B-1 Common Shares and to the
other owner of RMR LLC membership units in the aggregate amount of $10,730. On
January 14, 2021, we declared a quarterly dividend on our Class A Common Shares
and Class B-1 Common Shares to our shareholders of record as of January 25, 2021
in the amount of $0.38 per Class A Common Share and Class B-1 Common Share, or
$6,230. This dividend will be partially funded by a distribution from RMR LLC to
holders of its membership units in the amount of $0.30 per unit, or $9,419, of
which $4,919 will be distributed to us based on our aggregate ownership of
16,395,641 membership units of RMR LLC and $4,500 will be distributed to ABP
Trust based on its ownership of 15,000,000 membership units of RMR LLC. The
remainder of this dividend will be funded with cash accumulated at RMR Inc. We
expect the total dividend will amount to approximately $10,730 and we expect to
pay this dividend on or about February 18, 2021. See Note 8, Shareholders’
Equity, to our condensed consolidated financial statements included in Part I,
Item 1 of this Quarterly Report on Form 10-Q for more information regarding
these distributions.
For the three months ended December 31, 2020, pursuant to the RMR LLC operating
agreement, RMR LLC made required quarterly tax distributions to its holders of
its membership units totaling $5,855, of which $3,035 was distributed to us and
$2,820 was distributed to ABP Trust, based on each membership unit holder’s then
respective ownership percentage in RMR LLC. The $3,035 distributed to us was
eliminated in our condensed consolidated financial statements included in Part
1, Item 1 of this Quarterly Report on Form 10-Q, and the $2,820 distributed to
ABP Trust was recorded as a reduction of their noncontrolling interest. We
expect to use a portion of these funds distributed to us to pay our tax
liabilities and amounts due under the tax receivable agreement described in Note
7, Related Person Transactions, to our condensed consolidated financial
statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. We
expect to use the remaining funds distributed to us to fund our long-term tax
liabilities and pay dividends.
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Cash Flows
Our changes in cash flows for the three months ended December 31, 2020 compared
to the three months ended December 31, 2019 were as follows: (i) net cash from
operating activities decreased $14,260 from $41,920 in the 2019 period to
$27,660 in the 2020 period; (ii) net cash used in investing activities increased
$412 from $148 in the 2019 period to $560 in the 2020 period; and (iii) net cash
used in financing activities decreased $975 from $14,525 in the 2019 period to
$13,550 in the 2020 period.
The decrease in cash from operating activities for the three months ended
December 31, 2020, compared to the same period in 2019 primarily reflects the
net effect of declines in net income and changes in working capital. The
increase in cash used in investing activities for the three months ended
December 31, 2020 compared to the same period in 2019 was due to an increase in
our purchases of property and equipment in the 2020 period. The decrease in cash
used in financing activities for the three months ended December 31, 2020
compared to the same period in 2019 was primarily due to lower tax distributions
based on current estimates for taxable income in this fiscal year.
Off Balance Sheet Arrangements
We have no off balance sheet arrangements.
Tax Receivable Agreement
We are party to a tax receivable agreement, or Tax Receivable Agreement, which
provides for the payment by RMR Inc. to ABP Trust of 85.0% of the amount of
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 RMR Inc.’s dealings with ABP Trust and (b) tax benefits related
to imputed interest deemed to be paid by it as a result of the Tax Receivable
Agreement. See Note 7, Related Person Transactions, to our condensed
consolidated financial statements included in Part I, Item 1 of this Quarterly
Report on Form 10-Q and “Business-Our Organizational Structure-Tax Receivable
Agreement” in our Annual Report on Form 10-K for the fiscal year ended September
30, 2019. As of December 31, 2020, our condensed consolidated balance sheet
reflects a liability related to the tax receivable agreement of $29,950, of
which we expect to pay $2,161 to ABP Trust during the fourth quarter of fiscal
year 2021.
Market Risk and Credit Risk
We have not invested in derivative instruments, borrowed through issuing debt
securities or transacted a significant part of our businesses in foreign
currencies. As a result, we are not now subject to significant direct market
risk related to interest rate changes, changes to the market standard for
determining interest rates, commodity price changes or credit risks; however, if
any of these risks were to negatively impact our Client Companies’ businesses or
market capitalization, our revenues would likely decline. To the extent we
change our approach on the foregoing activities, or engage in other activities,
our market and credit risks could change. See Part I, Item 1A “Risk Factors” of
our 2020 Annual Report for the risks to us and our Client Companies related to
the COVID-19 pandemic.
Risks Related to Cash and Short Term Investments
Our cash and cash equivalents include short term, highly liquid investments
readily convertible to known amounts of cash that have original maturities of
three months or less from the date of purchase. We invest a substantial amount
of our cash in money market funds. The majority of our cash is maintained in
U.S. bank accounts. Some U.S. bank account balances exceed the Federal Deposit
Insurance Corporation insurance limit. We believe our cash and short term
investments are not subject to any material interest rate risk, equity price
risk, credit risk or other market risk.
Related Person Transactions
We have relationships and historical and continuing transactions with Adam D.
Portnoy, one of our Managing Directors, as well as our Client Companies. Our
other Managing Director and our executive officers have historical and
continuing relationships with our Client Companies and several of our Client
Companies have material historical and ongoing relationships with other Client
Companies. For further information about these and other such relationships and
related person transactions, please see Note 7, Related Person Transactions, to
our condensed consolidated financial statements included in Part I, Item 1 of
this Quarterly Report on Form 10-Q, which is incorporated herein by reference,
the section captioned “Business” in Part I, Item 1 of our 2020 Annual Report,
our other filings with the SEC and our definitive Proxy Statement for our 2021
Annual Meeting of Shareholders. In addition, for more information about these
transactions and relationships and about the risks that may arise as a result of
these and other related person transactions and relationships, please see
elsewhere in our 2020 Annual Report, including “Warning Concerning
Forward-Looking Statements” and Part I, Item 1A “Risk Factors.” We may engage in
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additional transactions with related persons, including businesses to which RMR
LLC or its subsidiaries provide management services.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Quantitative and Qualitative disclosures about market risk are set forth above
in “Item 2-Management’s Discussion and Analysis of Financial Condition and
Results of Operation-Market Risk and Credit Risk.”
Item 4. Controls and Procedures
As of the end of the period covered by this report, our management carried out
an evaluation, under the supervision and with the participation of our President
and Chief Executive Officer and our Executive Vice President, Chief Financial
Officer and Treasurer, of the effectiveness of our disclosure controls and
procedures pursuant to Rules 13a-15 and 15d-15 under the Securities Exchange Act
of 1934, as amended. Based upon that evaluation, our President and Chief
Executive Officer and our Executive Vice President, Chief Financial Officer and
Treasurer concluded that our disclosure controls and procedures are effective.
There have been no changes in our internal control over financial reporting
during the quarter ended December 31, 2020 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
WARNING CONCERNING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 and other
securities laws. Our forward-looking statements reflect our current views,
intents and expectations with respect to, among other things, our operations and
financial performance. Our forward-looking statements can be identified by the
use of words such as “outlook,” “believe,” “expect,” “potential,” “will,” “may,”
“estimate,” “anticipate” and derivatives or negatives of such words or similar
words. Such forward-looking statements are subject to various risks and
uncertainties. Accordingly, there are or will be factors that could cause actual
outcomes or results to differ materially from those stated or implied in these
statements. We believe these factors include, but are not limited to the
following:
•the duration and severity of the negative economic impact of COVID-19 and the
resulting disruptions on us and our Client Companies;
•substantially all of our revenues are derived from services to a limited number
of Client Companies;
•our revenues are highly variable;
•changing market conditions that may adversely impact our Client Companies and
our business with them;
•potential terminations of our management agreements with our Client Companies;
•our ability to expand our business depends upon the growth and performance of
our Client Companies and our ability to obtain or create new clients for our
business and is often dependent upon circumstances beyond our control;
•the ability of our Client Companies to operate their businesses profitably and
to grow and increase their market capitalizations and total shareholder returns;
•litigation risks;
•risks related to acquisitions, dispositions and other activities by or among
our Client Companies;
•allegations, even if untrue, of any conflicts of interest arising from our
management activities;
•our ability to retain the services of our managing directors and other key
personnel; and
•risks associated with and costs of compliance with laws and regulations,
including securities regulations, exchange listing standards and other laws and
regulations affecting public companies.
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For example:
•We have a limited number of Client Companies. We have long term contracts with
our Managed Equity REITs; however, the other contracts under which we earn our
revenues are for shorter terms, and the long term contracts with our Managed
Equity REITs may be terminated in certain circumstances. The termination or loss
of any of our management contracts may have a material adverse impact upon our
revenues, profits, cash flows and business reputation;
•Our base business management fees earned from our Managed Equity REITs are
calculated monthly based upon the lower of each REIT’s cost of its applicable
assets and such REIT’s market capitalization. Our business management fees
earned from our Managed Operating Companies are calculated based upon certain
revenues from each operator’s business. Accordingly, our future revenues, income
and cash flows will decline if the business activities, assets or market
capitalizations of our Client Companies decline;
•The fact that we earned significant incentive business management fees from
certain Managed Equity REITs in previous years may imply that we will earn
incentive business management fees in future years. The incentive business
management fees which we may earn from our Managed Equity REITs are based upon
total returns realized by the REITs’ shareholders compared to the total
shareholders return of certain identified indices. We have only limited control
over the total returns realized by shareholders of our Managed Equity REITs and
effectively no control over indexed total returns. There can be no assurance
that we will earn any incentive business management fees in the future;
•We currently intend to pay a regular quarterly dividend of $0.38 per Class A
Common Share and Class B-1 Common Share. Our dividends are declared and paid at
the discretion of our board of directors. Our board may consider many factors
when deciding whether to declare and pay dividends, including our current and
projected cash flows and alternative uses for any available cash. Our board may
decide to lower or even eliminate our dividends. There can be no assurance that
we will continue to pay any regular dividends or with regard to the amount of
dividends we may pay;
•Our liquidity will be temporarily impacted by rent deferrals our Client
Companies have granted to their tenants because our property management fee
revenues are based on gross rents collected and we will not begin to earn fees
related to these deferred amounts until the tenants begin to pay the deferred
amounts to the Client Companies. However, these tenants may be unable to repay
those amounts when due. Further, these and other tenants of our Client Companies
may be unable to pay other rent amounts and they may default on those payments
or our Client Companies may grant them relief, any of which may reduce or delay
the fees we earn and negatively impact our liquidity;
•We balance our pursuit of growth of our and our Client Companies’ businesses by
executing, on behalf of our Client Companies, prudent capital recycling or
business arrangement restructurings in an attempt to help our Client Companies
prudently manage leverage and to reposition their portfolios and businesses when
circumstances warrant such changes or when other more desirable opportunities
are identified. However, these efforts may not be successful and, even if they
are successful, they may not be sufficient to prevent our Client Companies from
experiencing increases in leverage, to adequately reposition our Client
Companies’ portfolios and businesses, or to enable our Client Companies to
execute successfully on desirable opportunities;
•Our belief that, because of the diversity of properties that our Client
Companies own and operate, there should be opportunities for growth in select
property types and locations as the COVID-19 pandemic ebbs may prove unfounded
or we and our Client Companies may not succeed in executing on those
opportunities;
•Our attempts to take into account industry and economic factors as well as
specific property and regional geographic considerations when providing services
to our Client Companies may not be successful;
•We have undertaken new initiatives and are considering other initiatives to
grow our business and any actions we may take to grow our business may not be
successful or we may elect to abandon pursuing some or all of those initiatives
in order to pursue other initiatives or for other reasons. In addition, any
investments or repositioning of the properties we or our Client Companies may
make or pursue may not increase the value of the applicable properties, offset
the decline in value those properties may otherwise experience, or increase the
market capitalization or total shareholder returns of our Client Companies; and
•The market turmoil created by COVID-19 may have lasting effects on our business
and the businesses of our Client Companies. Our business is dependent on revenue
generated from sectors that have been and may continue to be adversely impacted
by COVID-19 to a greater degree than other sectors. Further, our revenues from
other sectors may
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become increasingly adversely impacted by COVID-19. Accordingly, there can be no
assurances that we will be able to successfully manage through the COVID-19
pandemic, resulting market disruptions and their aftermath, or that we will be
able to take advantage of any resulting opportunities.
There are or will be additional important factors that could cause business
outcomes or financial results to differ materially from those stated or implied
in our forward-looking statements. For example, the market turmoil created by
the COVID-19 pandemic and its aftermath, including the current market
conditions, may further lower the market value of our Managed Equity REITs or
cause their rent receipts or construction activities to decline or cause the
revenues of our Managed Operating Companies to significantly decline and, as a
result, our revenues and cash flows may continue to be adversely impacted.
We have based our forward-looking statements on our current expectations about
future events that we believe may affect our business, financial condition and
results of operations. Because forward-looking statements are inherently subject
to risks and uncertainties, some of which cannot be predicted or quantified, our
forward-looking statements should not be relied on as predictions of future
events. The events and circumstances reflected in our forward-looking statements
may not be achieved or occur and actual results could differ materially from
those projected or implied in our forward-looking statements. The matters
discussed in this warning should not be construed as exhaustive and should be
read in conjunction with the other cautionary statements that are included in
this Quarterly Report on Form 10-Q and in our 2020 Annual Report, including the
“Risk Factors” section of our 2020 Annual Report. We undertake no obligation to
update any forward-looking statement, whether as a result of new information,
future developments or otherwise, except as required by law.
Part II. Other Information
Item 1A. Risk Factors
There have been no material changes to the risk factors from those we previously
provided in our 2020 Annual Report.
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Item 6. Exhibits
Exhibit
Number Description

3.1 Articles of Amendment and Restatement of the Registrant. (1)
3.2 Articles of Amendment, filed July 30, 2015. (1)
3.3 Articles of Amendment, filed September 11, 2015. (1)
3.4 Articles of Amendment, filed March 9, 2016. (2)
3.5 Fourth Amended and Restated Bylaws of the Registrant

adopted September 13, 2017. (3)

4.1 Form of The RMR Group Inc. Share Certificate for

Class A Common Stock. (4)

4.2 Registration Rights Agreement, dated as of June 5,

2015, by and between the Registrant and

ABP Trust (formerly known as Reit Management and

Research Trust). (1)

10.1 Letter Agreement, dated as of October 9, 2020, by

and among The RMR Group LLC and David M.

Blackman. (5)
31.1 Rule 13a-14(a) Certification. (Filed herewith.)
31.2 Rule 13a-14(a) Certification. (Filed herewith.)
32.1 Section 1350 Certification. (Furnished herewith.)
101.INS XBRL Instance Document – the instance document does

not appear in the Interactive Data File

because its XBRL tags are embedded within the Inline XBRL document.
101.SCH XBRL Taxonomy Extension Schema Document. (Filed herewith.)
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document. (Filed herewith.)
101.DEF XBRL Taxonomy Extension Definition Linkbase Document. (Filed herewith.)
101.LAB XBRL Taxonomy Extension Label Linkbase Document. (Filed herewith.)
101.PRE XBRL Taxonomy Extension Presentation Linkbase

Document. (Filed herewith.)

104 Cover Page Interactive Data File. (formatted as Inline

XBRL and contained in Exhibit 101.)

(1) Incorporated by reference to the Registrant’s

Registration Statement on Form S-1 (File No.

333-207423) filed with the U.S. Securities and

Exchange Commission on October 14, 2015.

(2) Incorporated by reference to the Registrant’s Current

Report on Form 8-K (File No.

001-37616) filed with the U.S. Securities and Exchange

Commission on March 11, 2016.

(3) Incorporated by reference to the Registrant’s Current

Report on Form 8-K (File No.

001-37616) filed with the U.S. Securities and Exchange

Commission on September 15, 2017.

(4) Incorporated by reference to the Registrant’s

Amendment No. 1 to Registration Statement on

Form S-1 (File No. 333-207423) filed with the U.S.

Securities and Exchange Commission on

November 2, 2015.
(5) Incorporated by reference to the Registrant’s Annual

Report on Form 10-K (File No.

001-37616) filed with the U.S. Securities and Exchange

Commission on November 20, 2020.

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