Equity Method Investments. As of September 30, 2020, Tremont Advisors owned 1,600,100, or approximately 19.3%, of TRMT’s outstanding common shares. We account for our investment in TRMT using the equity method of accounting because we are deemed to exert significant influence, but not control, over TRMT’s most significant activities. Our share of earnings and losses from our investment in TRMT is included in equity in earnings (losses) of investees in our consolidated statements of income. Our share of earnings for the fiscal years ended September 30, 2020 and 2019 were $1,545 and $719, respectively, and our share of losses for the fiscal year ended September 30, 2018 was $545. We received aggregate distributions from TRMT of $736 and $549 during the fiscal years ended September 30, 2020 and 2019, respectively. We did not receive any distributions from TRMT during the fiscal year ended September 30, 2018.

We perform periodic evaluations of potential impairment of our investment in TRMT. We record an impairment charge to reduce the carrying value of our TRMT investment to its fair value when determining, based on the length of time and the extent to which the market value is below our carrying value, that the decline in fair value is other than temporary. We determine fair value using the closing price of TRMT common shares, a Level 1 fair value input, as of the reporting period end date in which an impairment is recorded. During the fiscal years ended September 30, 2019 and 2018, we recorded impairment charges of $6,213 and $4,359, respectively.

Until July 1, 2020, we had a 0.5% general partnership interest in a fund created for an institutional investor that was managed by Tremont Advisors. We accounted for this investment under the equity method of accounting and recorded our share of the investment’s earnings or losses each period. We did not record any earnings or losses from this investment during the fiscal years ended September 30, 2020 and 2019. Our share of losses from this fund for the fiscal year ended September 30, 2018 was $33 and is included in equity in earnings (losses) of investees in our consolidated statements of income. In addition, the private fund made distributions to its partners for which our share for the fiscal year ended September 30, 2018 was $174.

Equity Method Investment Accounted for Under the Fair Value Option. As of September 30, 2020, we owned 621,853, or approximately 4.3%, of TA’s outstanding common shares. We purchased 298,538 of these shares on October 10, 2018 for $8,382, 218,577 of these shares on July 6, 2020, in conjunction with a public offering of TA’s common shares for $3,060 and 104,738 of these shares on September 30, 2020 for $2,259. We account for our investment in TA using the equity method of accounting because we are deemed to exert significant influence, but not control, over TA’s most significant activities. We elected the fair value option to account for our equity method investment in TA and determine fair value using the closing price of TA’s common shares as of the end of the period, which is a Level 1 fair value input. The market value of our investment in TA at September 30, 2020 and 2019, based on quoted market prices, was $12,152 and $3,682, respectively. The unrealized gain (loss) in our consolidated statements of income for the fiscal years ended September 30, 2020 and 2019 related to our investment in TA was $3,151 and $(4,700), respectively.

Variable Interest Entities. We regularly evaluate our relationships and investments to determine if they constitute variable interests. A variable interest is an investment or interest that will absorb portions of an entity’s expected losses or receive portions of an entity’s expected returns. If we determine we have a variable interest in an entity, we evaluate whether such interest is in a variable interest entity, or VIE. Under the VIE model, we would be required to consolidate a VIE we manage if we are determined to be the primary beneficiary of the entity. We assessed whether we must consolidate any of the entities we manage. Consideration of factors included, but was not limited to, our representation on the entity’s governing body, the size of our investment in each entity compared to the size of the entity and the size of other investors’ interests, the ability and rights to participate in significant policy making decisions and to replace the manager of those entities. Based on this assessment, we concluded that we are not required to consolidate any of our Client Companies. The relationships and investments related to entities in which we have a variable interest are summarized in Note 6, Related Person Transactions.

Cash and Cash Equivalents. We consider highly liquid investments with original maturities of three months or less on the date of purchase to be cash equivalents, the majority of which is held at major commercial banks. Certain cash account balances exceed Federal Deposit Insurance Corporation insurance limits of $250,000 per account and, as a result, there is a concentration of credit risk related to amounts in excess of the insurance limits. We regularly monitor the financial stability of these financial institutions and believe that we are not exposed to any significant credit risk in cash and cash equivalents.

Property and Equipment. Property and equipment are stated at cost. Depreciation of furniture and equipment is computed using the straight line method over estimated useful lives ranging from three to ten years. Depreciation for leasehold improvements is computed using the straight line method over the term of the lesser of their useful lives or related lease agreements. Capitalized software costs are depreciated using the straight line method over useful lives ranging between three and five years.

Goodwill. Goodwill represents the costs of business acquisitions in excess of the fair value of identifiable net assets acquired. We evaluate the recoverability of goodwill annually in the fourth quarter of each fiscal year, or more frequently, if events or changes in circumstances indicate that goodwill might be impaired. If our review indicates that the carrying amount of goodwill exceeds its fair value, we would reduce the carrying amount of goodwill to fair value.

Leases. On October 1, 2019, we adopted Accounting Standards Update, or ASU, No. 2016-02, Leases, as amended, or ASU No. 2016-02, along with certain allowable practical expedients using the modified retrospective transition approach. We elected to apply the guidance to each lease that had commenced as of the adoption date. We also elected a package of practical expedients that allowed us not to reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) the recognition requirements for initial direct costs for any expired or existing leases. Additionally, we elected to account for the lease and non-lease components as a single lease component. Upon adoption, we recorded a right of use asset of $38,126, net of the deferred rent payable of $1,620, and a lease liability of $39,746, related to our operating leases. The adoption of ASU No. 2016-02 did not affect our consolidated statements of income and cash flows.

Operating lease liabilities and right of use assets are recorded on our consolidated balance sheet and are recognized based on the present value of the future minimum lease payments over the lease term using our estimated incremental borrowing rate. Operating lease expense associated with minimum lease payments is recognized on a straight-line basis over the lease term. When additional payments are based on usage or vary based on other factors, they are expensed when incurred as variable lease expense. Minimum lease payments for leases with an initial term of twelve months or less are not recorded on our consolidated balance sheet. See Note 11, Leases, for further information regarding the adoption of ASU No. 2016-02.

Equity-Based Compensation. The awards made under our share award plan to our Directors and employees to date have been shares of Class A common stock of RMR Inc., or Class A Common Shares. Shares issued to Directors vest immediately. Shares issued to employees vest in five equal, consecutive, annual installments, with the first installment vesting on the date of grant. We recognize share forfeitures as they occur. Compensation expense related to share grants is determined based on the market value of our shares on the date of grant, with the aggregate value of the granted shares amortized to expense over the related vesting period. Expense recognized for shares granted to Directors are included in general and administrative expenses and for shares granted to employees are included in equity based compensation in our consolidated statements of income.

We adopted ASU No. 2014-09, Revenue from Contracts with Customers, which has been codified as ASC, Section 606, or ASC 606, effective October 1, 2018 using the modified retrospective method for all our existing contracts. The main provision of ASC 606 is to recognize revenue when control of the goods or services transfers to the customer, as opposed to the previous guidance of recognizing revenue when the risk and rewards transfer to the customer. Under ASC 606, control of the services before transfer to the client is the primary factor in determining principal versus agent assessments. We have determined that we control the services provided by third parties for certain of our Client Companies and therefore we account for the cost of these services and the related reimbursement revenue on a gross basis. Prior to adoption, costs of such services were accounted for on a net basis, with the exception of amounts related to reimbursed payroll.

Our management agreements with the Managed Equity REITs automatically extend on December 31st of each year and have terms thereafter that end on the 20th anniversary of the date of each extension. Each of the Managed Equity REITs has the right to terminate each management agreement: (i) at any time upon 60 days’ written notice for convenience, (ii) immediately upon written notice for cause, as defined in the agreements, (iii) upon written notice given within 60 days after the end of an applicable calendar year for a performance reason, as defined in the agreements, and (iv) by written notice during the 12 months following a change of control of RMR LLC, as defined in the agreements. We have the right to terminate the management agreements for good reason, as defined therein.

Under our management agreements with the Managed Equity REITs, if a Managed Equity REIT terminates our management agreements for convenience, or if we terminate one or both of our management agreements with a Managed Equity REIT for good reason, the Managed Equity REIT is obligated to pay us a termination fee in an amount equal to the sum of the present values of the Managed Equity REIT’s monthly future fees, as defined therein, for the terminated management agreement(s) for the remaining term, assuming it had not been terminated. If a Managed Equity REIT terminates one or both of our management agreements for a performance reason, as defined therein, the Managed Equity REIT has agreed to pay to us the termination fee calculated as described above, but assuming a remaining term of 10 years. No termination fee is payable by a Managed Equity REIT if it terminates one or both of our management agreements for cause or as a result of a change of control of us, as defined in the applicable management agreement.

We also may earn annual incentive business management fees from the Managed Equity REITs under the business management agreements. The incentive business management fees, which are payable in cash, are contingent performance based fees recognized only when earned at the end of each respective measurement period. Incentive business management fees are excluded from the transaction price until it becomes probable that there will not be a significant reversal of cumulative revenue recognized.

The incentive business management fees are calculated for each Managed Equity REIT as 12.0% of the product of (a) the equity market capitalization of the Managed Equity REIT, as defined in the applicable business management agreement, on the last trading day of the year immediately prior to the relevant measurement period and (b) the amount, expressed as a percentage, by which the Managed Equity REIT’s total return per share, as defined in the applicable business management agreement, exceeded the applicable benchmark total return per share, as defined in the applicable business management agreement, of a specified REIT index identified in the applicable business management agreement for the measurement period, as adjusted for net share issuances during the period and subject to caps on the values of the incentive fees. The measurement period for the annual incentive business management fees is defined as the three year period ending on December 31 of the year for which such fee is being calculated, except for ILPT, whose annual incentive business management fee is based on a shorter period from its initial public offering on January 12, 2018 through the applicable calendar year end. On December 31, 2018, RMR LLC’s business management agreements with ILPT and OPI were amended to provide that, for periods beginning on and after January 1, 2019, the SNL U.S. Industrial REIT Index and the SNL U.S. Office REIT Index will be used by ILPT and OPI, respectively, rather than the SNL U.S. REIT Equity Index, to calculate the benchmark return per share, as defined, for purposes of determining the incentive business management fee, if any, payable thereunder.

We earn management fees by providing continuous services pursuant to the management agreements from the Managed Operators and until December 31, 2019, ABP Trust, equal to 0.6% of: (i) in the case of Five Star, Five Star’s revenues from all sources reportable under Generally Accepted Accounting Principles, or GAAP, less any revenues reportable by Five Star with respect to properties for which it provides management services, plus the gross revenues at those properties determined in accordance with GAAP; (ii) in the case of Sonesta, Sonesta’s revenues from all sources reportable under GAAP, less any revenues reportable by Sonesta with respect to hotels for which it provides management services, plus the gross revenues at those hotels determined in accordance with GAAP; (iii) in the case of TA, the sum of TA’s gross fuel margin, as defined in the applicable agreement, plus TA’s total nonfuel revenues; and (iv) in the case of ABP Trust, revenues from all sources reportable under GAAP. Effective January 1, 2020, management fees earned from ABP Trust are equal to 0.5% of ABP Trust’s average invested capital, as defined in the management agreement. These fees are estimated and payable monthly in advance.

We earn property management fees by providing continuous services pursuant to property management agreements with certain Client Companies. We generally earn fees under these agreements equal to 3.0% of gross collected rents. Also, under the terms of the property management agreements, we receive additional fees for construction supervision in connection with certain construction activities undertaken at the managed properties equal to 5.0% of the cost of such construction. For the fiscal years ended September 30, 2020, 2019 and 2018, we earned aggregate property management fees of $47,690, $45,550 and $42,482, respectively.

RMR Advisors is compensated pursuant to its agreement with RMRM at an annual rate of 0.85% of RMRM’s average daily managed assets. Average daily managed assets includes the net asset value attributable to RMRM’s outstanding common shares and cash on hand, plus the liquidation preference of RMRM’s outstanding preferred shares and the principal amount of any borrowings, including from banks or evidenced by notes, commercial paper or other similar instruments issued by RMRM. RMR Advisors earned advisory services revenue for the fiscal years ended September 30, 2020, 2019 and 2018 of $2,767, $3,013 and $2,888, respectively.

Tremont Advisors is primarily compensated pursuant to its management agreements with TRMT and Centre Street at an annual rate of 1.5% of TRMT’s and Centre Street’s equity, as defined in the applicable agreements. Tremont Advisors may also earn an incentive fee under these management agreements beginning in the fourth quarter of calendar year 2018 for TRMT, and the first full calendar year of 2021 for Centre Street, equal to the difference between: (a) the product of (i) 20% and (ii) the difference between (A) TRMT’s and Centre Street’s core earnings, as defined in the applicable agreements, for the most recent 12 month period (or such lesser number of completed calendar quarters, if applicable), including the calendar quarter (or part thereof) for which the calculation of the incentive fee is being made, and (B) the product of (1) TRMT’s and Centre Street’s equity in the most recent 12 month period (or such lesser number of completed calendar quarters, if applicable), including the calendar quarter (or part thereof) for which the calculation of the incentive fee is being made, and (2) 7% per year and (b) the sum of any incentive fees paid to Tremont Advisors with respect to the first three calendar quarters of the most recent 12 month period (or such lesser number of completed calendar quarters preceding the applicable period, if applicable). No incentive fee shall be payable with respect to any calendar quarter unless TRMT’s or Centre Street’s core earnings for the 12 most recently completed calendar quarters (or such lesser number of completed calendar quarters from the date of the completion of the initial public offering for TRMT or December 18, 2019 for Centre Street) in the aggregate is greater than zero. The incentive fee may not be less than zero. Tremont Advisors agreed to waive any business management fees otherwise due and payable by TRMT pursuant to the management agreement for the period beginning July 1, 2018 until December 31, 2020. In addition, no incentive fee was or will be paid or payable by TRMT to Tremont Advisors for the 2018, 2019 and 2020 calendar years.

Reimbursable compensation and benefits include reimbursements, at cost, that arise primarily from services we provide pursuant to our property management agreements, a significant portion of which are charged or passed through to and were paid by tenants of our Client Companies. We recognize the revenue for reimbursements when we incur the related reimbursable compensation and benefits and other costs on behalf of our Client Companies. We realized reimbursable compensation and benefits for the fiscal years ended September 30, 2020, 2019 and 2018, of $57,256, $57,490 and $53,152, respectively.

Reimbursable compensation and benefits also 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. The revenue in respect of each grant is based on the fair value as of the grant date for those shares that have vested, with subsequent changes in the fair value of the unvested grants being recognized in our consolidated statements of income over the requisite service periods. 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. We realized equity based compensation expense and related reimbursements for the fiscal years ended September 30, 2020, 2019 and 2018, of $4,912, $6,461 and $7,421, respectively.

As a result of adopting ASC 606, our consolidated statement of income for the fiscal years ended September 30, 2020 and 2019 reflect corresponding increases in revenue and expense of $360,572 and $354,540, respectively, in other client company reimbursable expenses, with no impact on net income. Our consolidated balance sheets as of September 30, 2020 and 2019 also include other client company reimbursable expenses of $56,079 and $65,909, respectively.

Other Assets. On June 5, 2015 in connection with the formation of RMR Inc., each of DHC, OPI (then GOV and SIR) and SVC contributed cash and shares with a combined value of $167,764. The consideration received from such Managed Equity REITs for our Class A Common Shares represented a discount to the fair value of RMR Inc.’s Class A Common Shares in the amount of $193,806, which we recorded in other assets. The other assets are being amortized against revenue recognized related to the management agreements using the straight line method through the period ended December 31, 2035. For the fiscal years ended September 30, 2020, 2019 and 2018, we reduced revenue by $9,416 each year, related to the amortization of these other assets. As of September 30, 2020, the remaining amount of these other assets to be amortized was $143,727.

Transaction and Acquisition Related Costs. Transaction and acquisition related costs include costs related to completed and potential management services contracts, pre-commencement costs, acquisitions and other strategic transactions. Such costs include underwriting expenses, commissions paid to third-party broker dealers, legal, accounting, valuation, other professional or consulting and regulatory filing fees. Transaction and acquisition related costs are expensed as incurred.