10-Q 1 rmr_063017x10qdocument.htm 10-Q Document

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, 2017
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.  (Check one):
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 8, 2017, there were 15,094,510 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, 2017
 
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,
 
 
2017
 
2016
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
137,711

 
$
65,833

Due from related parties
 
27,027

 
24,862

Prepaid and other current assets
 
8,307

 
4,690

Total current assets
 
173,045

 
95,385

 
 
 
 
 
Furniture and equipment
 
4,572

 
5,024

Leasehold improvements
 
1,094

 
1,077

Capitalized software costs
 
3,786

 
4,250

Total property and equipment
 
9,452

 
10,351

Accumulated depreciation
 
(6,123
)
 
(6,549
)
 
 
3,329

 
3,802

Due from related parties, net of current portion
 
7,278

 
7,754

Equity method investment
 
208

 

Goodwill
 
1,859

 
2,295

Intangible assets, net of amortization
 
608

 
1,085

Deferred tax asset
 
43,332

 
45,819

Other assets, net of amortization
 
174,329

 
181,391

Total assets
 
$
403,988

 
$
337,531

 
 
 
 
 
Liabilities and Equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable, accrued expenses and deposits
 
$
41,209

 
$
20,579

Total current liabilities
 
41,209

 
20,579

Long term portion of deferred rent payable, net of current portion
 
975

 
778

Amounts due pursuant to tax receivable agreement, net of current portion
 
62,029

 
62,029

Employer compensation liability, net of current portion
 
7,278

 
7,754

Total liabilities
 
111,491

 
91,140

 
 
 
 
 
Commitments and contingencies
 


 


 
 
 
 
 
Equity:
 
 
 
 
Class A common stock, $0.001 par value; 31,600,000 shares authorized; 15,094,510 and
 
 
 
 
15,082,432 shares issued and outstanding, respectively
 
15

 
15

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

 
1

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

 
15

Additional paid in capital
 
95,267

 
94,266

Retained earnings
 
81,793

 
44,543

Cumulative other comprehensive income
 
83

 
83

Cumulative common distributions
 
(29,274
)
 
(17,209
)
Total shareholders’ equity
 
147,900

 
121,714

Noncontrolling interest
 
144,597

 
124,677

Total equity
 
292,497

 
246,391

Total liabilities and equity
 
$
403,988

 
$
337,531


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,
 
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
 
Management services
 
$
44,644

 
$
41,867

 
$
183,036

 
$
182,940

Reimbursable payroll and related costs
 
9,839

 
9,744

 
29,023

 
25,993

Advisory services
 
1,019

 
600

 
3,033

 
1,741

Total revenues
 
55,502

 
52,211

 
215,092

 
210,674

 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
Compensation and benefits
 
24,769

 
22,719

 
72,550

 
65,584

Separation costs
 

 
1,195

 

 
1,358

General and administrative
 
8,539

 
6,110

 
21,526

 
19,110

Depreciation and amortization
 
467

 
349

 
1,550

 
1,333

Total expenses
 
33,775

 
30,373

 
95,626

 
87,385

Operating income
 
21,727

 
21,838

 
119,466

 
123,289

Interest and other income
 
402

 
68

 
1,059

 
144

Income before income tax expense and equity in earnings (loss) of investee
 
22,129

 
21,906

 
120,525

 
123,433

Income tax expense
 
(4,528
)
 
(4,504
)
 
(24,811
)
 
(19,904
)
Equity in earnings (loss) of investee
 
4

 

 
(161
)
 

Net income
 
17,605

 
17,402

 
95,553

 
103,529

Net income attributable to noncontrolling interest
 
(10,748
)
 
(10,704
)
 
(58,303
)
 
(73,663
)
Net income attributable to RMR Inc.
 
$
6,857

 
$
6,698

 
$
37,250

 
$
29,866

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

 
(6
)
 

 
13

Other comprehensive income (loss)
 
1

 
(6
)
 

 
13

Comprehensive income
 
17,606

 
17,396

 
95,553

 
103,542

Comprehensive income attributable to noncontrolling interest
 
(10,748
)
 
(10,701
)
 
(58,303
)
 
(73,669
)
Comprehensive income attributable to RMR Inc.
 
$
6,858

 
$
6,695

 
$
37,250

 
$
29,873

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding - basic
 
16,037

 
16,008

 
16,029

 
16,003

Weighted average common shares outstanding - diluted
 
16,058

 
16,008

 
16,044

 
16,003

 
 
 
 
 
 
 
 
 
Net income attributable to RMR Inc. per common share - basic
 
$
0.43

 
$
0.42

 
$
2.32

 
$
1.87

Net income attributable to RMR Inc. per common share - diluted
 
$
0.43

 
$
0.42

 
$
2.31

 
$
1.87


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, 2016
 
$
15

 
$
1

 
$
15

 
$
94,266

 
$
44,543

 
$
83

 
$
(17,209
)
 
$
121,714

 
$
124,677

 
$
246,391

Share grants, net
 

 

 

 
1,001

 

 

 

 
1,001

 

 
1,001

Net income
 

 

 

 

 
37,250

 

 

 
37,250

 
58,303

 
95,553

Tax distributions to Member
 

 

 

 

 

 

 

 

 
(27,133
)
 
(27,133
)
Common share distributions
 

 

 

 

 

 

 
(12,065
)
 
(12,065
)
 
(11,250
)
 
(23,315
)
Balance at June 30, 2017
 
$
15

 
$
1

 
$
15

 
$
95,267

 
$
81,793

 
$
83

 
$
(29,274
)
 
$
147,900

 
$
144,597

 
$
292,497


See accompanying notes.


3


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

 
 
Nine Months Ended June 30,
 
 
2017
 
2016
Cash Flows from Operating Activities
 
 
 
 
Net income
 
$
95,553

 
$
103,529

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
 
Depreciation and amortization
 
1,550

 
1,333

Straight line office rent
 
197

 
257

Amortization expense related to other asset
 
7,062

 
7,062

Deferred income taxes
 
2,487

 
1,231

Operating expenses paid in RMR Inc. common shares
 
1,021

 
175

Contingent consideration liability
 
(456
)
 

Equity in loss of investee
 
161

 

Distribution from equity method investment
 
70

 

Changes in assets and liabilities:
 


 


Due from related parties
 
(5,779
)
 
(4,757
)
Prepaid and other current assets
 
(3,617
)
 
(2,054
)
Accounts payable, accrued expenses and deposits
 
24,682

 
17,198

Incentive fee allocable to ABP Trust
 

 
(26,611
)
Net cash from operating activities
 
122,931

 
97,363

Cash Flows from Investing Activities
 


 


Purchase of property and equipment
 
(604
)
 
(955
)
Net cash used in investing activities
 
(604
)
 
(955
)
Cash Flows from Financing Activities
 


 


Distributions to noncontrolling interest
 
(38,383
)
 
(36,574
)
Distributions to common shareholders
 
(12,065
)
 
(13,207
)
Net cash used in financing activities
 
(50,448
)
 
(49,781
)
Effect of exchange rate fluctuations on cash and cash equivalents
 
(1
)
 
13

Increase in cash and cash equivalents
 
71,878

 
46,640

Cash and cash equivalents at beginning of year
 
65,833

 
34,497

Cash and cash equivalents at end of year
 
$
137,711

 
$
81,137

Supplemental cash flow information
 
 
 
 
Income taxes paid
 
$
23,336

 
$
19,287


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, 2017, RMR Inc. owns 15,094,510 class A membership units of RMR LLC, or Class A Units, and 1,000,000 class B membership units of RMR LLC, or Class B Units. The aggregate RMR LLC membership units RMR Inc. owns represent 51.8% of the economic interest of RMR LLC as of June 30, 2017. We refer to economic interest as the right of a holder of a Class A Unit or Class B Unit to share in distributions made by RMR LLC and, upon liquidation, dissolution or winding up of RMR LLC, to share in the assets of RMR LLC after payments to creditors. ABP Trust, a Maryland statutory trust, beneficially owned by Barry M. Portnoy and Adam D. Portnoy, our Managing Directors, owns 15,000,000 redeemable Class A Units, representing 48.2% of the economic interest of RMR LLC as of June 30, 2017, which is presented as a noncontrolling interest within the condensed consolidated financial statements.

RMR LLC was founded in 1986 to manage public investments in real estate and, as of June 30, 2017, managed a diverse portfolio of publicly owned real estate and real estate related businesses. RMR LLC manages: Government Properties Income Trust, or GOV, a publicly traded real estate investment trust, or REIT, that primarily owns properties that are majority leased to the U.S. government and state governments; Hospitality Properties Trust, or HPT, a publicly traded REIT that primarily owns hotel and travel center 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 healthcare, senior living and medical office buildings. Hereinafter, GOV, HPT, SIR and SNH are collectively referred to as the Managed REITs. RMR LLC also provides management services to other publicly traded and private businesses, including: Five Star 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 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. During the nine months ended June 30, 2016, RMR LLC provided certain transition services to Equity Commonwealth, or EQC, a publicly traded REIT that primarily owns office properties.

RMR Advisors LLC, a Maryland limited liability company, or RMR Advisors, 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.

On August 5, 2016, we acquired certain assets of Tremont Realty Capital LLC, or the Tremont business, which principally originates and manages real estate debt and debt like financings and serves as adviser to a private fund created for an institutional investor and other separately managed accounts. As part of this transaction, Tremont Realty Advisors LLC, or Tremont Advisors, a wholly owned subsidiary of RMR LLC founded in 2016 and an investment advisor registered with the Securities and Exchange Commission, or SEC, was assigned the investment management contracts of the Tremont business. Tremont Advisors 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.

On November 28, 2016, we were assigned the Tremont business's 0.5% general partnership interest in a private fund created for an institutional investor managed by the Tremont business. We account for this investment under the equity method of accounting and record our share of the investment's earnings or losses each period.

RMR International LLC, a Maryland limited liability company, or RMR Intl, was founded in 2012. RMR Intl is a wholly owned subsidiary of RMR LLC whose sole business is holding the equity interests of RMR Australia Asset Management Pty

5

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

Ltd, or RMR Australia, a company founded in 2012 to manage certain investments of a company then managed by RMR LLC in Australia. RMR Australia continues to hold an Australian financial services license granted by the Australian Securities & Investments Commission but has ceased operations subsequent to the termination of services being provided to EQC as of October 31, 2015.

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

The accompanying condensed consolidated financial statements of RMR Inc. are unaudited. Certain information and disclosures required by U.S. generally accepted accounting principles, or GAAP, for complete financial statements have been condensed or omitted. We believe the disclosures made are adequate to make the information presented not misleading. However, the accompanying condensed consolidated financial statements should be read in conjunction with the financial statements and notes contained in our Annual Report on Form 10-K for the fiscal year ended September 30, 2016, or our Annual Report. In the opinion of our management, all adjustments, which include only normal recurring adjustments considered necessary for a fair presentation, have been included. All intercompany transactions and balances with or among our consolidated subsidiaries have been eliminated. Our operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. 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. In July 2015, the FASB approved a one year deferral of the effective date for this ASU to interim and annual reporting periods beginning after December 15, 2017. We are continuing to evaluate this guidance; however, we do not expect its adoption to have a material impact on our condensed consolidated financial statements as our revenue recognition is expected to be unchanged under this new guidance, including variable consideration attributable to incentive fees.

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. We are currently assessing the potential impact the adoption of ASU No. 2016-02 will have on our condensed consolidated financial statements.

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


6

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

Note 3. Revenue Recognition
Revenues from services that we provide are recognized as earned in accordance with contractual agreements. In the periods presented, management and advisory services revenue consists principally of business management fees, property management fees and advisory fees earned from our Client Companies and EQC.
Business Management and Incentive Fees—Managed REITs
We earn annual base business management fees from the Managed 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 REIT’s monthly average historical costs of assets under management and average market capitalization during the month. For purposes of these fees, a Managed REIT’s assets under management do not include shares it owns of another Client Company.
We also may earn annual incentive business management fees from the Managed 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 REIT as 12.0% of the product of (a) the equity market capitalization of the Managed REIT, as defined in the applicable business management agreement, and (b) the amount, expressed as a percentage, by which the Managed REIT’s total return per share, as defined in the applicable business management agreement, exceeded the benchmark total return per share, as defined in the applicable business management agreement, of a specified REIT index identified in the applicable business management agreement for the measurement period, subject to caps on the values of the incentive fees. The measurement period for the annual incentive fee in respect of calendar year 2016 was the three year period that ended on December 31, 2016 and in respect of calendar year 2015 was the two year period that ended on December 31, 2015. The measurement period for the annual incentive fee in respect of the current calendar year and calendar years thereafter is the three year period ending on December 31 of the applicable calendar year.
We earned aggregate base business management fees from the Managed REITs of $28,643 and $26,623 for the three months ended June 30, 2017 and 2016, respectively, and $84,816 and $76,628 for the nine months ended June 30, 2017 and 2016, respectively. We earned aggregate incentive business management fees from the Managed REITs of $52,407 and $62,263 for the nine months ended June 30, 2017 and 2016, respectively, all of which was earned during the three months ended December 31, 2016 and 2015, respectively. Incentive business management fees recognized as earned in the nine months ended June 30, 2017 and 2016 were earned in respect of the 2016 and 2015 calendar years, respectively.

7

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

Business Management Fees—Managed Operators, ABP Trust and AIC
We earn business management fees from the Managed Operators and ABP Trust pursuant to business management agreements equal to 0.6% of: (i) in the case of Five Star, Five Star’s revenues from all sources reportable under GAAP, less any revenues reportable by Five Star with respect to properties for which it provides management services, plus the gross revenues at those properties determined in accordance with GAAP, (ii) in the case of Sonesta, Sonesta’s revenues from all sources reportable under GAAP, less any revenues reportable by Sonesta with respect to hotels for which it provides management services, plus the gross revenues at those hotels determined in accordance with GAAP, (iii) in the case of TA, the sum of TA’s gross fuel margin, as defined in the applicable agreement, plus TA’s total 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 Trust and AIC of $6,650 and $6,804 for the three months ended June 30, 2017 and 2016, respectively, and $19,372 and $19,121 for the nine months ended June 30, 2017 and 2016, 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 $9,238 and $8,440 for the three months ended June 30, 2017 and 2016, respectively, and $26,089 and $24,870 for the nine months ended June 30, 2017 and 2016, respectively.
Reimbursable Payroll and Related Costs
Pursuant to certain of our management agreements, the companies to which we provide management services pay or reimburse us for expenses incurred on their behalf. In accordance with Accounting Standards Codification, or ASC, 605, Revenue Recognition, we present certain payroll and related cost reimbursements we receive as revenue. A significant portion of these reimbursable payroll and related costs arises from services we provide pursuant to our property management agreements that are charged or passed through to and are paid by tenants of our Client Companies. We realized reimbursable payroll and related costs of $9,839 and $9,744 for the three months ended June 30, 2017 and 2016, respectively, and $29,023 and $25,993 for the nine months ended June 30, 2017 and 2016, respectively.
Our reimbursable payroll and related costs include grants of common shares from Client Companies directly to certain of our officers and employees in connection with the provision of management services to those companies. The revenue in respect of each grant is based on the fair value as of the grant date for those shares that have vested, with subsequent changes in the fair value of the unvested grants being recognized in the condensed consolidated statements of comprehensive income over the requisite service period. We record an equal offsetting amount as compensation and benefits expense for all of our reimbursable payroll and related cost revenues. We realized equity based compensation expense and related reimbursements of $892 and $2,128 for the three months ended June 30, 2017 and 2016, respectively, and $3,386 and $4,971 for the nine months ended June 30, 2017 and 2016, respectively.
We report all other expenses we incur on behalf of our Client Companies on a net basis, as the management agreements provide that reimbursable expenses are to be billed directly to the client. This net basis accounting method is supported by some or all of the following factors, which we have determined define us as an agent rather than a principal with respect to these matters:
reimbursement to us is generally completed prior to payment of the related expenses;
the property owner is contractually obligated to fund such operating costs of the property from existing cash flow or direct funding from its building operating account and we bear little or no credit risk;
our clients are the primary obligor in relationships with the affected suppliers and service providers; and
we earn no margin on the reimbursement aspect of the arrangement, obtaining reimbursement only for actual costs incurred.

8

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

 
Advisory Agreements and Other Services to Advisory Clients
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 fees of $613 and $600 for the three months ended June 30, 2017 and 2016, respectively, and $1,826 and $1,741 for the nine months ended June 30, 2017 and 2016, respectively.
Tremont Advisors is compensated pursuant to its agreement with a private fund created for an institutional investor at an annual rate of 1.35% of the weighted average outstanding balance of all strategic investments, as defined in the agreement, of the private fund. Strategic investments include any direct or indirect participating or non-participating debt investment in certain real estate. Tremont Advisors is also party to loan servicing agreements with its other separately managed account clients. Under such agreements, Tremont Advisors is compensated at an annual rate of 0.50% of the outstanding principal balance of the outstanding loans. In certain circumstances, Tremont Advisors is also entitled to performance fees based on exceeding certain performance targets. Performance fees are realized when a separately managed account client’s cumulative returns are in excess of the contractual preferred return. Tremont Advisors did not earn any performance fees for the three and nine months ended June 30, 2017. The Tremont business also acts as transaction originators for non-investment advisory clients for negotiated fees. For the three and nine months ended June 30, 2017, the Tremont business earned between 0.50% and 1.0% of the aggregate principal amounts of any loans so originated. For the three months ended June 30, 2017, the Tremont business earned management services revenue of $113 and advisory services revenue of $406, and for the nine months ended June 30, 2017, we earned management services revenue of $352 and advisory services revenue of $1,207.
EQC Termination and Cooperation Agreement
We provided certain transition services for EQC in Australia and earned zero and $58 for the three and nine months ended June 30, 2016, respectively, for these services.

Note 4. 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. RMR Intl, RMR Advisors and Tremont Advisors are wholly owned disregarded subsidiaries of RMR LLC for 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 wholly owned subsidiaries.
For the three months ended June 30, 2017 and 2016, we recognized income tax expense of $4,528 and $4,504, respectively, which includes $3,978 and $2,837, respectively, of U.S. federal income tax and $550 and $1,667, respectively, of state income taxes. For the nine months ended June 30, 2017 and 2016, we recognized income tax expense of $24,811 and $19,904, respectively, which includes $21,797 and $16,182, respectively, of U.S. federal income tax and $3,014 and $3,722, respectively, of state income taxes.
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,
 
 
2017
 
2016
 
2017
 
2016
Income taxes computed at the federal statutory rate
 
35.0
 %
 
35.0
 %
 
35.0
 %
 
35.0
 %
State taxes, net of federal benefit
 
2.5
 %
 
2.7
 %
 
2.5
 %
 
2.0
 %
Net income attributable to noncontrolling interest
 
(17.0
)%
 
(17.1
)%
 
(16.9
)%
 
(20.9
)%
Total
 
20.5
 %
 
20.6
 %
 
20.6
 %
 
16.1
 %
 

9

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

ASC 740, Income Taxes, provides a model for how a company should recognize, measure and present in its financial statements uncertain tax positions that have been taken or are expected to be taken with respect to all open years and in all significant jurisdictions. We recognize a tax benefit only if it is “more likely than not” that a particular tax position will be sustained upon examination or audit. To the extent the “more likely than not” standard has been satisfied, the benefit associated with a tax position is measured as the largest amount that is greater than 50% likely of being realized upon settlement. As of June 30, 2017 and September 30, 2016, we have no uncertain tax positions.
Note 5. Fair Value of Financial Instruments
As of June 30, 2017 and September 30, 2016, the fair values of our financial instruments, which include cash and cash equivalents, amounts due from our Client Companies and accounts payable, accrued expenses and deposits, were not materially different from their carrying values, due to the short term nature of these financial instruments.
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 to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1), and the lowest priority to unobservable inputs (Level 3). A financial asset’s or financial liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
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, 2017 and September 30, 2016:
 
 
June 30,
 
September 30,
 
 
2017
 
2016
Money market funds included in cash and cash equivalents
 
$
134,398

 
$
57,741

Current portion of due from related parties related to share based payment awards
 
1,363

 
4,977

Long term portion of due from related parties related to share based payment awards
 
7,278

 
7,754

Current portion of employer compensation liability related to share based payment awards included in accounts payable, accrued expenses and deposits
 
1,363

 
4,977

Long term portion of employer compensation liability related to share based payment awards
 
7,278

 
7,754


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 a potential obligation to pay up to an additional $1,270 over a two year period following the acquisition date based on a portion of the payments that we receive from a specified part of the historical Tremont business. 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, 2017 and September 30, 2016 was $715 and $1,257, respectively.

Note 6. Related Person Transactions
As of June 30, 2017, our Managing Directors own in aggregate, directly and indirectly through ABP Trust, (i) 146,213 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

10

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

RMR Inc., or Class B-2 Common Shares; and (iv) 15,000,000 Class A Units. Our Managing Directors are also officers of RMR Inc. and of RMR LLC.

Our Managing Directors are also managing trustees of each of the Managed REITs. As of June 30, 2017, GOV, HPT, SIR and SNH owned 1,214,225; 2,503,777; 1,586,836 and 2,637,408 Class A Common Shares, respectively, and our Managing Directors beneficially owned, in aggregate, 2.5% of GOV’s common shares, 1.4% of HPT’s outstanding common shares, 1.9% of SIR’s outstanding common shares and 1.3% of SNH’s outstanding common shares.

Barry M. Portnoy is a managing director of Five Star and of TA. As of June 30, 2017, our Managing Directors beneficially owned, in aggregate, less than one percent of TA's outstanding common shares and 36.7% of Five Star’s outstanding common shares. Our Managing Directors are also the owners and directors of Sonesta and are directors of AIC.

All of the executive officers of the Managed REITs and many of the executive officers of the Managed Operators are also officers and employees of RMR LLC.
Additional information about our related person transactions appears in Note 7 below.
Revenues from Related Parties
For the three and nine months ended June 30, 2017 and 2016, we recognized revenues from related parties as set forth in the following table:
 
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
$
 
%
 
$
 
%
 
$
 
%
 
$
 
%
Managed REITs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GOV
 
$
9,139

 
16.4
%
 
$
8,310

 
15.9
%
 
$
26,302


12.3
%
 
$
23,351

 
11.1
%
HPT
 
10,636

 
19.2
%
 
9,840

 
18.8
%
 
84,156


39.1
%
 
90,621

 
43.0
%
SIR
 
11,089

 
20.0
%
 
10,824

 
20.7
%
 
33,108


15.4
%
 
30,722

 
14.6
%
SNH
 
15,653

 
28.2
%
 
14,855

 
28.5
%
 
45,433


21.1
%
 
42,190

 
20.0
%
 
 
46,517

 
83.8
%
 
43,829

 
83.9
%
 
188,999


87.9
%
 
186,884

 
88.7
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Managed Operators:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Five Star
 
2,439

 
4.4
%
 
2,387

 
4.6
%
 
7,206


3.4
%
 
7,109

 
3.4
%
Sonesta
 
671

 
1.2
%
 
594

 
1.1
%
 
1,745


0.8
%
 
1,503

 
0.7
%
TA
 
3,659

 
6.6
%
 
4,013

 
7.7
%
 
10,822


5.0
%
 
10,959

 
5.2
%
 
 
6,769

 
12.2
%
 
6,994

 
13.4
%
 
19,773


9.2
%
 
19,571

 
9.3
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
AIC
 
60

 
0.1
%
 
60

 
0.1
%
 
180


0.1
%
 
180

 
0.1
%
RIF
 
613

 
1.1
%
 
600

 
1.1
%
 
1,826


0.8
%
 
1,741

 
0.8
%
ABP Trust
 
1,024

 
1.9
%
 
728

 
1.5
%
 
2,755


1.3
%
 
2,240

 
1.1
%
 
 
1,697

 
3.1
%
 
1,388

 
2.7
%
 
4,761


2.2
%
 
4,161

 
2.0
%
Total revenues from related parties
 
54,983

 
99.1
%
 
52,211

 
100.0
%
 
213,533

 
99.3
%
 
210,616

 
100.0
%
Other unrelated parties
 
519

 
0.9
%
 

 
%
 
1,559

 
0.7
%
 
58

 
%
 
 
$
55,502

 
100.0
%
 
$
52,211

 
100.0
%
 
$
215,092

 
100.0
%
 
$
210,674

 
100.0
%

In March 2017, RMR LLC entered into a management agreement with a subsidiary of SNH related to a medical office building located in Boston in connection with a joint venture arrangement for that building. Under that agreement, the SNH subsidiary pays RMR LLC certain business management fees, which fees are credited against the business management fees SNH pays to RMR LLC. We include these fees within the amount of business management fees we report as earned by RMR LLC from SNH.

11

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

On December 31, 2016, RMR LLC earned a $52,407 incentive business management fee from HPT pursuant to our business management agreement with HPT. HPT paid this incentive fee in January 2017.
On December 31, 2015, RMR LLC earned a $62,263 incentive business management fee from HPT pursuant to our business management agreement with HPT. This $62,263 incentive fee was paid in January 2016. Under the RMR LLC operating agreement, ABP Trust was entitled to receive a pro rata share of any incentive business management fee earned by RMR LLC for the 2015 calendar year based on the number of days in 2015 to June 5, 2015; the portion of the $62,263 incentive fee allocated solely to ABP Trust pursuant to this provision was $26,611.

Amounts Due From Related Parties
The following table represents amounts due from related parties as of the dates listed:
 
 
June 30,
 
September 30,
 
 
2017
 
2016
Managed REITs:
 
 
 
 
GOV
 
$
5,832

 
$
6,165

HPT
 
11,973

 
7,800

SIR
 
6,244

 
7,190

SNH
 
8,801

 
9,733

 
 
32,850

 
30,888

 
 
 
 
 
Managed Operators:
 
 
 
 
Five Star
 
359

 
291

Sonesta
 
24

 
5

TA
 
436

 
711

 
 
819

 
1,007

 
 
 
 
 
Other Client Companies:
 
 
 
 
AIC
 
20

 
21

RIF
 
34

 
17

ABP Trust
 
582

 
683

 
 
636

 
721

 
 
$
34,305

 
$
32,616


Leases
As of June 30, 2017, we leased from ABP Trust and certain Managed REITs office space for use as our headquarters and regional offices. We incurred rental expense under related party leases aggregating $1,056 and $1,077 for the three months ended June 30, 2017 and 2016, respectively, and $3,165 and $3,190 for the nine months ending June 30, 2017 and 2016, 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. During the nine months ended June 30, 2017, we made no payments to ABP Trust pursuant to this agreement. As of June 30, 2017, our condensed consolidated balance sheet reflects a liability related to the tax receivable agreement of $64,929, including $2,900 classified as a current liability that we expect to pay to ABP Trust during the fourth quarter of fiscal year 2017.
Under the RMR LLC operating agreement, RMR LLC is required to make certain pro rata distributions to each member of RMR LLC quarterly on the basis of the assumed tax liabilities of its members. For the nine months ended June 30, 2017,

12

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

pursuant to the RMR LLC operating agreement, RMR LLC made required quarterly tax distributions to holders of its membership units totaling $56,230, of which $29,097 was distributed to us and $27,133 was distributed to ABP Trust, based on each membership unit holder’s respective ownership percentage. The $29,097 distributed to us was eliminated in our condensed consolidated financial statements, and the $27,133 distributed to ABP Trust was recorded as a reduction of its noncontrolling interest. We used funds from these distributions for payment of certain U.S. federal and state income tax liabilities. We also expect to use funds from these distributions to pay part of our obligations under the tax receivable agreement. 
Other
In June 2017, we became aware that we had been a victim of a criminal fraud that law enforcement authorities refer to as business email compromise fraud. This fraud involved a person pretending to be the representative of the seller in a property acquisition transaction for one of our Managed REITs. The imposter provided fraudulent wire instructions to one of our senior employees. As a result, funds were sent by wire transfer to an account that was believed to be, but in fact was not, the seller’s account, which resulted in our incurring a loss of $590, as well as additional expenses of $95 in connection with this matter for the quarter ended June 30, 2017. We recorded these amounts in general and administrative expense in our condensed consolidated statements of comprehensive income. We are working with law enforcement authorities and the banks involved in the wire transfer to pursue recovery of the $590, but at this time we do not know whether we will be able to recover any of these funds, and we have been advised that it may take several months before we are better able to evaluate our recovery prospects. The Managed REIT did not incur any loss in connection with this matter.

Note 7. Shareholders’ Equity
Issuances
On March 29, 2017, under our equity compensation plan, we granted 2,500 of our Class A Common Shares valued at $48.20 per share, the closing price of our Class A Common Shares on the Nasdaq Stock Market LLC on that day, to each of our Managing Directors and Independent Directors as part of their annual compensation. These Class A Common Shares awarded to our Independent Directors vested immediately and are included in general and administrative expense in our condensed consolidated statements of comprehensive income. In connection with the grant of Class A Common Shares to our Managing Directors and Independent Directors, RMR LLC concurrently issued 12,500 Class A Units to RMR Inc., consistent with the terms of the RMR LLC operating agreement.
On March 29, 2017, we withheld 375 of the Class A Common Shares awarded to one of our Independent Directors to fund that Independent Director's resulting minimum required tax withholding obligation. The aggregate value of the withheld shares was $18, which is reflected as a decrease to shareholders' equity in our condensed consolidated balance sheet. In connection with the acquisition of 375 Class A Common Shares, and as required by the RMR LLC operating agreement, RMR LLC concurrently acquired 375 Class A Units from RMR Inc.
On June 30, 2017, we withheld 47 of the Class A Common Shares awarded to one of our former employees in satisfaction of tax withholding and payment obligations in connection with the vesting of awards of restricted common shares. The aggregate value of the withheld shares was $2, which is reflected as a decrease to shareholders' equity in our condensed consolidated balance sheet. In connection with the acquisition of 47 Class A Common Shares, and as required by the RMR LLC operating agreement, RMR LLC concurrently acquired 47 Class A Units from RMR Inc.
Distributions
On November 17, 2016, 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 $4,021. This dividend was paid to our shareholders of record as of the close of business on October 21, 2016. 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 $7,771, of which $4,021 was distributed to us based on our then aggregate ownership of 16,082,432 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 21, 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 $4,020. This dividend was paid to our shareholders of record as of the close of business on January 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 $7,770, of which $4,020 was distributed to us based

13

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

on our then aggregate ownership of 16,082,432 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 18, 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 $4,024. This dividend was paid to our shareholders of record as of the close of business on April 21, 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 $7,774, of which $4,024 was distributed to us based on our then aggregate ownership of 16,094,557 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 12, 2017, 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 24, 2017, in the amount of $0.25 per Class A Common Share and Class B-1 Common Share, or $4,024. 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 $7,774, of which $4,024 will be distributed to us based on our then aggregate ownership of 16,094,510 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 17, 2017.

Note 8. 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 stock 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, Class B-1 Common Shares 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.

14

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

The calculation of basic and diluted earnings per share is as follows:
 
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Basic EPS
 
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
 
Net income attributable to RMR Inc.
 
$
6,857

 
$
6,698

 
$
37,250

 
$
29,866

Income attributable to unvested participating securities
 
(25
)
 

 
(135
)
 

Net income attributable to RMR Inc. used in calculating basic EPS
 
$
6,832

 
$
6,698

 
$
37,115

 
$
29,866

Denominator:
 
 
 
 
 
 
 
 
Weighted average common shares outstanding - basic
 
16,037

 
16,008

 
16,029

 
16,003

Net income attributable to RMR Inc. per common share - basic
 
$
0.43

 
$
0.42

 
$
2.32

 
$
1.87

 
 
 
 
 
 
 
 
 
Diluted EPS
 
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
 
Net income attributable to RMR Inc.
 
$
6,857

 
$
6,698

 
$
37,250

 
$
29,866

Income attributable to unvested participating securities
 
(25
)
 

 
(135
)
 

Net income attributable to RMR Inc. used in calculating diluted EPS
 
$
6,832

 
$
6,698

 
$
37,115

 
$
29,866

Denominator:
 
 
 
 
 
 
 
 
Weighted average common shares outstanding - basic
 
16,037

 
16,008

 
16,029

 
16,003

Dilutive effect of incremental unvested shares
 
21

 

 
15

 

Weighted average common shares outstanding - diluted
 
16,058

 
16,008

 
16,044

 
16,003

 
 
 
 
 
 
 
 
 
Net income attributable to RMR Inc. per common share - diluted
 
$
0.43

 
$
0.42

 
$
2.31

 
$
1.87


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 cancelled for no additional consideration. If all outstanding Class A Units that we do not own were redeemed for our Class A Common Shares in the periods presented, our Class A Common Shares outstanding as of June 30, 2017, would have been 30,094,510. 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.
 

15

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

Note 9. Net Income Attributable to RMR Inc.
Net income attributable to RMR Inc. for the three and nine months ended June 30, 2017 and 2016, is calculated as follows:
 
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Income before income tax expense and equity in earnings (loss) of investee
 
$
22,129

 
$
21,906

 
$
120,525

 
$
123,433

Add: RMR Inc. franchise tax expense and interest income
 
147

 
220

 
456

 
443

Less: equity in earnings (loss) of investee

4




(161
)


Less: incentive fee allocable to ABP Trust(1)
 

 

 

 
(26,611
)
Net income before noncontrolling interest
 
22,280

 
22,126

 
120,820

 
97,265

Less: noncontrolling interest
 
(10,748
)
 
(10,704
)
 
(58,303
)
 
(47,052
)
Net income attributable to RMR Inc. before income tax expense
 
11,532

 
11,422

 
62,517

 
50,213

Less: income tax expense attributable to RMR Inc.
 
(4,528
)
 
(4,504
)
 
(24,811
)
 
(19,904
)
Less: RMR Inc. franchise tax expense and interest income
 
(147
)
 
(220
)
 
(456
)
 
(443
)
Net income attributable to RMR Inc.
 
$
6,857

 
$
6,698

 
$
37,250

 
$
29,866


(1)
Under the RMR LLC operating agreement, ABP Trust was entitled to receive a pro rata share of any incentive business management fee earned for the 2015 calendar year, based on the number of days in 2015 to June 5, 2015. Accordingly, $26,611 of the incentive business management fee earned on December 31, 2015 was allocated to ABP Trust. 

16

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


Note 10. 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, Tremont Advisors and RMR Intl.
 
 
Three Months Ended June 30, 2017
 
 
 
 
All Other
 
 
 
 
RMR LLC(1)
 
Operations
 
Total
Revenues:
 
 
 
 
 
 
Management services
 
$
44,644

 
$

 
$
44,644

Reimbursable payroll and related costs
 
9,839

 

 
9,839

Advisory services
 

 
1,019

 
1,019

Total revenues
 
54,483

 
1,019

 
55,502

Expenses:
 
 
 
 
 
 
Compensation and benefits
 
24,088

 
681

 
24,769

General and administrative
 
8,057

 
482

 
8,539

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 before income tax expense and equity in earnings of investee
 
22,394

 
(265
)
 
22,129

Income tax expense
 

 
(4,528
)
 
(4,528
)
Equity in earnings of investee
 

 
4

 
4

Net income (loss)
 
$
22,394

 
$
(4,789
)
 
$
17,605

(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
 
$
183,036

 
$

 
$
183,036

Reimbursable payroll and related costs
 
29,023

 

 
29,023

Advisory services
 

 
3,033

 
3,033

Total revenues
 
212,059

 
3,033

 
215,092

Expenses:
 
 
 
 
 
 
Compensation and benefits
 
70,842

 
1,708

 
72,550

General and administrative
 
20,539

 
987

 
21,526

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 loss of investee
 
120,263

 
262

 
120,525

Income tax expense
 

 
(24,811
)
 
(24,811
)
Equity in loss of investee
 

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

 
$
(24,710
)
 
$
95,553

(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. 

17

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

 
 
Three Months Ended June 30, 2016
 
 
 
 
All Other
 
 
 
 
RMR LLC(1)
 
Operations
 
Total
Revenues
 
 
 
 
 
 
Management services
 
$
41,867

 
$

 
$
41,867

Reimbursable payroll and related costs
 
9,744

 

 
9,744

Advisory services
 

 
600

 
600

Total revenues
 
51,611

 
600

 
52,211

Expenses
 
 
 
 
 
 
Compensation and benefits
 
22,445

 
274

 
22,719

Separation costs
 
1,195

 

 
1,195

General and administrative
 
5,778

 
332

 
6,110

Depreciation and amortization
 
349

 

 
349

Total expenses
 
29,767

 
606

 
30,373

Operating income (loss)
 
21,844

 
(6
)
 
21,838

Interest and other income
 
62

 
6

 
68

Income before income tax expense
 
21,906

 

 
21,906

Income tax expense
 

 
(4,504
)
 
(4,504
)
Net income (loss)
 
$
21,906

 
$
(4,504
)
 
$
17,402

(1) Intersegment revenues of $192 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, 2016
 
 
 
 
All Other
 
 
 
 
RMR LLC(1)
 
Operations
 
Total
Revenues
 
 
 
 
 
 
Management services
 
$
182,882

 
$
58

 
$
182,940

Reimbursable payroll and related costs
 
25,993

 

 
25,993

Advisory services
 

 
1,741

 
1,741

Total revenues
 
208,875

 
1,799

 
210,674

Expenses
 
 
 
 
 
 
Compensation and benefits
 
64,712

 
872

 
65,584

Separation costs
 
1,358

 

 
1,358

General and administrative
 
18,234

 
876

 
19,110

Depreciation and amortization
 
1,333

 

 
1,333

Total expenses
 
85,637

 
1,748

 
87,385

Operating income
 
123,238

 
51

 
123,289

Interest and other income
 
137

 
7

 
144

Income before income tax expense
 
123,375

 
58

 
123,433

Income tax expense
 
(1
)
 
(19,903
)
 
(19,904
)
Net income (loss)
 
$
123,374

 
$
(19,845
)
 
$
103,529

(1) Intersegment revenues of $737 recognized by RMR LLC for services provided to the All Other Operations segment have been eliminated in the condensed consolidated financial statements. 

Note 11. Separation Costs.

We recognized separation costs of $1,195 and $1,358 for the three and nine months ended June 30, 2016, respectively, in connection with employment termination costs.


18


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, 2017, the over 1,400 properties which RMR LLC manages are located in 48 states, Washington, DC, Puerto Rico and Canada and are principally owned by the Managed REITs.
Substantially all of our revenues are derived from providing business and property management services to our Client Companies. We also earn revenue from advisory and other services to RIF, a registered investment company, to a private fund created for an institutional investor and to other separately managed accounts.
Managed REITs
The recurring business management fees we earn from the Managed REITs are principally based upon the lower of (i) the historical cost of each REIT’s properties and (ii) each REIT’s total market capitalization. The property management fees we earn from the Managed REITs are principally based upon the gross rents collected at certain managed properties owned by the REITs, excluding rents or other revenues from hotels, travel centers, senior living properties and wellness centers which are separately managed by one of our Managed Operators or a third party. The following table presents for each Managed REIT: a summary of its primary strategy and the lesser of the historical cost of its assets under management and its total market capitalization as of June 30, 2017 and 2016, as applicable:
 
 
 
 
Historical Cost of Assets Under Management or
 
 
 
 
Total Market Capitalization
 
 
 
 
As of June 30,
REIT
 
Primary Strategy
 
2017
 
2016
GOV
 
Office buildings majority leased to government tenants
 
$
2,235,767

 
$
2,062,981

HPT
 
Hotels and travel centers
 
8,666,849

 
8,195,406

SIR
 
Lands and properties primarily leased to single tenants
 
4,611,115

 
4,688,539

SNH
 
Healthcare, senior living and medical office buildings
 
8,272,965

 
8,143,399

 
 
 
 
$
23,786,696

 
$
23,090,325

Base business management fees payable to us by the Managed REITs are calculated monthly. A Managed 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 REIT’s historical cost of assets under management does not include the cost of shares it owns of another Client Company. A Managed REIT's average total market capitalization includes the average value of the Managed REIT's outstanding common equity value during the period, plus the daily weighted average of each of the aggregate liquidation preference of preferred shares and the principal amount of consolidated indebtedness during the period. The table above presents for each Managed REIT, the lesser of the historical cost of its assets under management and its total market capitalization as of the end of each period. The basis on which our base business management fees are calculated for the three and nine months ended June 30, 2017 and 2016 in some instances may differ from the basis at the end of the periods presented in the table above. As of June 30, 2017, the market capitalization was lower than the historical cost of assets under management for HPT and SIR; the historical costs of assets under management for HPT and SIR as of June 30, 2017, were $9,673,567 and $4,838,694, respectively. For GOV and SNH, the historical cost of assets under management was lower than average market capitalization as of June 30, 2017.

19


The revenues we earned from the Managed REITs for the three and nine months ended June 30, 2017 and 2016 are set forth in the following tables:
 
 
Three Months Ended June 30, 2017 (1)
 
Three Months Ended June 30, 2016 (1)
 
 
 
 
Incentive
 
 
 
 
 
 
 
Incentive
 
 
 
 
 
 
Base Business
 
Business
 
Property
 
 
 
Base Business
 
Business
 
Property
 
 
 
 
Management
 
Management
 
Management
 
 
 
Management
 
Management
 
Management
 
 
REIT
 
Revenues
 
Revenues
 
Revenues
 
Total
 
Revenues
 
Revenues
 
Revenues
 
Total
GOV
 
$
2,837

 
$

 
$
2,584

 
$
5,421

 
$
2,617

 
$

 
$
2,293

 
$
4,910

HPT
 
10,315

 

 
10

 
10,325

 
9,078

 

 
11

 
9,089

SIR
 
5,674

 

 
3,302

 
8,976

 
5,539

 

 
3,219

 
8,758

SNH
 
9,817

 

 
2,966

 
12,783

 
9,389

 

 
2,717

 
12,106

 
 
$
28,643

 
$

 
$
8,862

 
$
37,505

 
$
26,623

 
$

 
$
8,240

 
$
34,863

 
 
Nine Months Ended June 30, 2017 (1)
 
Nine Months Ended June 30, 2016 (1)
 
 


Incentive




 
 
 
Incentive
 
 
 
 
 
 
Base Business

Business

Property


 
Base Business
 
Business
 
Property
 
 
 
 
Management

Management

Management


 
Management
 
Management
 
Management
 
 
REIT
 
Revenues

Revenues

Revenues

Total
 
Revenues
 
Revenues
 
Revenues
 
Total
GOV
 
$
8,317


$


$
7,403


$
15,720

 
$
7,745

 
$

 
$
6,551

 
$
14,296

HPT
 
30,341


52,407


40


82,788

 
26,773

 
62,263

 
33

 
89,069

SIR
 
16,970




9,691


26,661

 
15,778

 

 
9,501

 
25,279

SNH
 
29,188




8,029


37,217

 
26,332

 

 
8,110

 
34,442

 
 
$
84,816


$
52,407


$
25,163


$
162,386

 
$
76,628

 
$
62,263

 
$
24,195

 
$
163,086

(1) Includes base and incentive business management revenues and property management revenues, including construction supervision fees, if any, earned during the applicable period, and excludes reimbursable payroll and related costs. Incentive business management fees from the Managed REITs are contingent performance based fees which are only recognized when earned at the end of each respective measurement period. While we record incentive business management fee revenue only when earned, we estimate that we would have earned aggregate incentive business management fees from the Managed REITs of $61,055 as of June 30, 2017 if that date had been the end of a measurement period. This estimated amount of incentive business management fees which would have been earned if the measurement period ended on June 30, 2017 is not included in the fees listed in the tables above or in our condensed consolidated financial statements as it may not reflect the incentive business management fees which will be earned as of the end of the measurement period, if any.

20


Managed Operators, AIC and ABP Trust
We also provide business management services to the Managed Operators. Five Star operates senior living and healthcare facilities throughout the United States, many of which are owned by and leased from, or managed for, SNH. 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 HPT. TA operates travel centers along the U.S. interstate highway system, many of which are owned by and leased from HPT, as well as convenience stores, gas stations and restaurants. In addition, we provide management services to certain other businesses, including ABP Trust and AIC. Generally, our fees earned from business management services to companies other than the Managed REITs are based on a percentage of certain revenues from the managed businesses. We also earn fees based upon rents collected for managing rental properties owned by ABP Trust and for managing TA’s headquarters building. Effective July 31, 2017, our property management agreement with TA was not renewed. Property management fees related to this agreement were $9 and $8 for the three months ended June 30, 2017 and 2016, respectively, and $27 and $23 for the nine months ended June 30, 2017 and 2016, respectively. Our revenues from services to the Managed Operators, AIC and ABP Trust were as follows(1):
 
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
Company
 
2017
 
2016
 
2017

2016
Five Star
 
$
2,354

 
$
2,315

 
$
6,972


$
6,913

Sonesta
 
625

 
594

 
1,668


1,503

TA
 
3,577

 
3,807

 
10,459


10,426

AIC
 
60

 
60

 
180


180

ABP Trust
 
410

 
228

 
1,019


774

 
 
$
7,026

 
$
7,004

 
$
20,298


$
19,796


(1) Includes business management fees and property management fees, including construction supervision fees, if any, earned during the applicable period and excludes reimbursable payroll and related costs.

RMR Advisors and Tremont Advisors
RMR Advisors, a SEC registered investment adviser, provides advisory services to RIF, a registered closed end investment company, and earns fees based upon the fair market value of the gross assets owned by RIF, including assets acquired with the use of debt or other leverage. The value of RIF’s assets, as defined by the investment advisory agreement, managed by RMR Advisors was $273,956 and $272,311 at June 30, 2017 and 2016, respectively. The advisory fees earned by RMR Advisors included in our revenue were $613 and $600 for the three months ended June 30, 2017 and 2016, respectively, and $1,826 and $1,741 for the nine months ended June 30, 2017 and 2016, respectively.
On August 5, 2016, we acquired the Tremont business, which principally originates and manages real estate debt and debt like financings and serves as an adviser to a private fund created for an institutional investor and other separately managed accounts. As part of this transaction, our wholly owned subsidiary, Tremont Advisors, an investment advisor registered with the SEC, was assigned the investment management contracts of the Tremont business. We earned management services revenue of $113 and $352 for the three and nine months ended June 30, 2017, respectively, and advisory services revenue of $406 and $1,207 for the three and nine months ended June 30, 2017, respectively, from these services.
EQC
EQC is a publicly traded REIT that primarily owns office properties. RMR LLC provided certain transition services for EQC in Australia and earned fees for these services totaling zero and $58 for the three and nine months ended June 30, 2016.
Business Environment and Outlook
The continuation and growth of our business depends upon our ability to operate the Managed REITs so as to maintain and increase the value of their businesses and to assist our Managed Operators to grow their businesses. 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 or net in migration or out migration in different geographic regions can slow, accelerate, overwhelm or otherwise impact general cyclical trends. Because of such

21


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, the expectation that U.S. interest rates will increase may cause a general decrease 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.
At present we believe that the current low interest rates available for real estate purchase financing may be causing real estate valuations to exceed replacement cost for some properties in some markets, and property acquisitions should be undertaken on a selective basis. We also believe that because of the diversity of properties which our Client Companies own and operate there should be opportunities for growth in selected property types and locations and that we and our Client Companies should maintain financial flexibility using only reasonable amounts of debt so we and they will be able to take advantage of growth opportunities which come to our and their attention.
Please see “Risk Factors” in Item 1A of our Annual Report for a discussion of some of the circumstances that may adversely affect our performance and the performance of our Client Companies.
RESULTS OF OPERATIONS (dollars in thousands) 
When considering the financial data for the three and nine months ended June 30, 2017 compared to the same periods in 2016, readers should note that (i) RMR Inc. did not become a publicly owned company until December 14, 2015 when the Managed REITs distributed approximately half of our Class A Common Shares to their shareholders, and (ii) incentive business management fees earned in 2015 were apportioned based upon the pro rata number of days in 2015 after RMR Inc. began operating on June 5, 2015.
Three Months Ended June 30, 2017, Compared to the Three Months Ended June 30, 2016