RMR GROUP INC

Previous wording

Beyond general real estate industry trends, we also take into account general economic factors impacting our clients. More specifically, in the U.S., the Federal Reserve has increased the federal funds rate multiple times since the beginning of calendar 2022 in an attempt to slow inflation, contributing to macroeconomic uncertainty and market volatility in the U.S. and in the commercial real estate markets. Increased borrowing costs and concerns of a possible or pending economic recession have resulted in an overall decline in commercial real estate transactions. Additionally, concerns about the capital adequacy and liquidity of the banking sector caused by the bank failures in 2023, as well as stricter lending standards, have resulted in decreased lending activity from traditional sources such as banks and life insurance companies and may negatively impact the businesses of our clients and our clients' tenants. Rising or sustained high interest rates also adversely impact our clients with floating rate debt, which they, in some instances, attempt to address with interest rate caps and other strategic actions to reduce leverage. Further, while the Federal Reserve is looking to slow inflation, its efforts may not be successful or fully achieve targeted results and they may take longer to achieve. The impact of rising costs, both for goods and services, insurance and human capital, are impacting us and our clients and we and our clients are continuing to implement mitigation strategies to minimize the impact of increased costs on our and our clients’ earnings, where possible.

Current wording

Additionally, concerns about the capital adequacy and liquidity of the banking sector due to the bank failures in 2023, as well as stricter lending standards, have resulted in decreased lending activity from traditional sources such as banks and life insurance companies and may negatively impact the businesses of our clients and our clients' tenants. Rising or sustained high interest rates also adversely impact our clients with floating rate debt, which they, in some instances, attempt to address with interest rate caps and other strategic actions to reduce leverage. The impact of rising costs, both for goods and services, insurance and human capital, are impacting us and our clients and we and our clients are continuing to implement mitigation strategies to minimize the impact of increased costs on our and our clients’ earnings, where possible.

Previous wording

The basis on which our base business management fees are calculated for the three and six months ended March 31, 2024 and 2023 may differ from the basis at the end of the periods presented in the table above. As of March 31, 2024, the market capitalization was lower than the historical cost of assets under management for each of the Managed Equity REITs; the historical cost of assets under management for DHC, ILPT, OPI and SVC as of March 31, 2024, were $7,719,866, $5,693,869, $5,905,126 and $11,424,841, respectively.

Current wording

The basis on which our base business management fees are calculated for the three and nine months ended June 30, 2024 and 2023 may differ from the basis at the end of the periods presented in the table above. As of June 30, 2024, the market capitalization was lower than the historical cost of assets under management for each of the Managed Equity REITs; the historical cost of assets under management for DHC, ILPT, OPI and SVC as of June 30, 2024, were $7,731,622, $5,696,515, $5,965,791 and $11,472,436, respectively.

Previous wording

The fee revenues we earned from the Managed Equity REITs for the three and six months ended March 31, 2024 and 2023 are set forth in the following tables:

Current wording

The fee revenues we earned from the Managed Equity REITs for the three and nine months ended June 30, 2024 and 2023 are set forth in the following tables:

Previous wording

Our management fee revenues from services to these clients for the three and six months ended March 31, 2024 and 2023, are set forth in the following tables:

Current wording

Our management fee revenues from services to these clients for the three and nine months ended June 30, 2024 and 2023, are set forth in the following tables and exclude termination fee revenue earned from TA of $45,282 for the three and nine months ended June 30, 2023:

Previous wording

Tremont earned advisory services revenue of $1,126 and $1,139 for the three months ended March 31, 2024 and 2023, respectively, and $2,251 and $2,230 for the six months ended March 31, 2024 and 2023, respectively. Tremont also earned incentive fees from SEVN of $60 and $359 for the three and six months ended March 31, 2024, respectively. Tremont did not earn incentive fees from SEVN for the three or six months ended March 31, 2023.

Current wording

Tremont earned advisory services revenue of $1,127 and $1,141 for the three months ended June 30, 2024 and 2023, respectively, and $3,378 and $3,371 for the nine months ended June 30, 2024 and 2023, respectively. Tremont also earned incentive fees from SEVN of $370 and $729 for the three and nine months ended June 30, 2024, respectively. Tremont did not earn incentive fees from SEVN for the three or nine months ended June 30, 2023.

Previous wording

Management services revenue. Management services revenue increased $1,390 primarily due to growth in management services revenue of $5,462 related to our acquisition of MPC in December 2023, partially offset by declines in management fees earned from TA of $3,785 as a result of the termination of its business management agreement with us on May 15, 2023.

Current wording

Management services revenue. Management services revenue increased $1,897 primarily due to growth in management services revenue of $5,688 related to our acquisition of MPC in December 2023, partially offset by declines in management fees earned from TA of $1,956 as a result of the termination of its business management agreement with us on May 15, 2023 and decreases in construction supervision revenues earned from the Managed Equity REITs of $1,398.

Previous wording

Reimbursable compensation and benefits. Reimbursable compensation and benefits include reimbursements, at cost, that arise primarily from services our employees provide pursuant to our property management agreements at the properties of our clients. A significant portion of these compensation and benefits are charged or passed through to and paid by tenants of our clients. Reimbursable compensation and benefits increased $7,746 primarily due to the impact of our acquisition of MPC and annual merit increases that were effective October 1, 2023.

Current wording

Reimbursable compensation and benefits. Reimbursable compensation and benefits include reimbursements, at cost, that arise primarily from services our employees provide pursuant to our property management agreements at the properties of our clients. A significant portion of these compensation and benefits are charged or passed through to and paid by tenants of our clients. Reimbursable compensation and benefits increased $7,551 primarily due to the impact of our acquisition of MPC.

Previous wording

Reimbursable equity based compensation. Reimbursable equity based compensation includes awards of common shares by our clients directly to certain of our officers and employees in connection with the provision of management services to those clients. We record an equal, offsetting amount as equity based compensation expense for the value of these awards. Reimbursable equity based compensation revenue decreased $2,990 primarily as a result of decreases in certain of our clients’ respective share prices.

Current wording

Reimbursable equity based compensation. Reimbursable equity based compensation includes awards of common shares by our clients directly to certain of our officers and employees in connection with the provision of management services to those clients. We record an equal, offsetting amount as equity based compensation expense for the value of these awards. Reimbursable equity based compensation revenue decreased $534 primarily as a result of decreases in certain of our clients’ respective share prices.

Previous wording

Compensation and benefits. Compensation and benefits consist of employee salaries and other employment related costs, including health insurance expenses and contributions related to our employee retirement plan. Compensation and benefits expense increased $9,632 primarily due to the impact of our acquisition of MPC, which was partially offset by cost containment measures that reduced headcount.

Current wording

Compensation and benefits. Compensation and benefits consist of employee salaries and other employment related costs, including health insurance expenses and contributions related to our employee retirement plan. Compensation and benefits expense increased $10,792 primarily due to the impact of our acquisition of MPC, which was partially offset by cost containment measures that reduced headcount.

Previous wording

Equity based compensation. Equity based compensation consists of the value of vested shares awarded to certain of our employees under our and our clients’ equity compensation plans. Equity based compensation decreased $3,069 primarily as a result of decreases in certain of our clients’ respective share prices.

Current wording

Equity based compensation. Equity based compensation consists of the value of vested shares awarded to certain of our employees under our and our clients’ equity compensation plans. Equity based compensation decreased $486 primarily as a result of decreases in certain of our clients’ respective share prices.

Previous wording

General and administrative. General and administrative expenses consist of office related expenses, information technology related expenses, employee training, travel, professional services expenses, director compensation and other administrative expenses. General and administrative costs increased $2,181 primarily due to the impact of our acquisition of MPC and increases in third party costs related to our expanded role in construction oversight at hotel and senior living properties.

Current wording

General and administrative. General and administrative expenses consist of office related expenses, information technology related expenses, employee training, travel, professional services expenses, director compensation and other administrative expenses. General and administrative costs increased $1,829 primarily due to the incremental costs to support RMR Residential that results from our acquisition of MPC.

Previous wording

Transaction and acquisition related costs. Transaction and acquisition related costs in the 2024 fiscal period primarily represent costs associated with integration expenses related to our acquisition of MPC.

Current wording

Transaction and acquisition related costs. Transaction and acquisition related costs primarily represent costs associated with integration expenses related to our acquisition of MPC and the evaluation of various other strategic initiatives.

Previous wording

Depreciation and amortization. Depreciation and amortization increased $951 primarily due to amortization of MPC related intangible assets in the current period.

Current wording

Depreciation and amortization. Depreciation and amortization increased $953 primarily due to amortization of MPC related intangible assets in the current period.

Previous wording

Gain on equity method investments. Gain on equity method investments represents the unrealized and realized gains or losses on our investments in SEVN and TA common shares. For further information, see Note 5, Investments, to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Current wording

Gain on equity method investments. Gain on equity method investments represents the unrealized and realized gains or losses on our investments in SEVN and TA common shares. For further information, see Note 5, Equity Method Investments, to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Previous wording

Income tax expense. The decrease in income tax expense of $4,763 is primarily attributable to lower taxable income for the 2024 fiscal period compared to the same period in the prior fiscal year.

Current wording

Income tax expense. The decrease in income tax expense of $5,557 is primarily attributable to lower taxable income for the 2024 fiscal period compared to the same period in the prior fiscal year.

Previous wording

The following table presents the changes in our operating results for the six months ended March 31, 2024 compared to the six months ended March 31, 2023:

Current wording

The following table presents the changes in our operating results for the nine months ended June 30, 2024 compared to the nine months ended June 30, 2023:

Previous wording

Management services revenue. Management services revenue decreased $2,064 primarily due to declines in management fees earned from TA of $7,976 as a result of the termination of its business management agreement with us on May 15, 2023, partially offset by growth in management services revenue of $6,176 related to our acquisition of MPC in the current period.

Current wording

Management services revenue. Management services revenue decreased $167 primarily due to declines in management fees earned from TA of $9,932 as a result of the termination of its business management agreement with us on May 15, 2023 and decreases in construction supervision revenues earned from the Managed Equity REITs of $2,311, partially offset by growth in management services revenue of $11,864 related to our acquisition of MPC in the current period.

Previous wording

Reimbursable compensation and benefits. Reimbursable compensation and benefits increased $10,251 primarily due to the impact of our acquisition of MPC and annual merit increases that were effective October 1, 2023.

Current wording

Reimbursable compensation and benefits. Reimbursable compensation and benefits increased $17,802 primarily due to the impact of our acquisition of MPC and annual merit increases that were effective October 1, 2023.

Previous wording

Reimbursable equity based compensation. Reimbursable equity based compensation decreased $2,952 primarily as a result of our clients’ annual employee share awards and decreases in certain of our clients’ respective share prices.

Current wording

Reimbursable equity based compensation. Reimbursable equity based compensation decreased $3,486 primarily as a result of decreases in certain of our clients’ respective share prices.

Previous wording

Compensation and benefits. Compensation and benefits expense increased $11,140 primarily due to the impact of our acquisition of MPC and annual merit and benefit increases.

Current wording

Compensation and benefits. Compensation and benefits expense increased $21,932 primarily due to the impact of our acquisition of MPC and annual merit and benefit increases, which was partially offset by cost containment measures that reduced headcount.

Previous wording

Equity based compensation. Equity based compensation decreased $3,090 primarily as a result of decreases in certain of our clients’ respective share prices.

Current wording

Equity based compensation. Equity based compensation decreased $3,576 primarily as a result of decreases in certain of our clients’ respective share prices.

Previous wording

General and administrative. General and administrative costs increased $2,529 primarily due to the impact of our acquisition of MPC, strategic technology investments and increases in third party costs related to our expanded role in construction oversight.

Current wording

General and administrative. General and administrative costs increased $4,358 primarily due to the impact of our acquisition of MPC and increases in third party costs related to our expanded role in construction oversight.

Previous wording

Depreciation and amortization. Depreciation and amortization increased $1,106 primarily due to amortization of MPC acquisition related intangible assets in the current period.

Current wording

Depreciation and amortization. Depreciation and amortization increased $2,059 primarily due to amortization of MPC acquisition related intangible assets in the current period.

Previous wording

Interest income. Interest income increased $2,027 primarily due to higher interest earned during the 2024 fiscal period primarily as a result of higher interest rates and higher average cash balances invested compared to the prior period.

Current wording

Interest income. Interest income increased $1,832 primarily due to higher interest earned during the 2024 fiscal period primarily as a result of higher interest rates and higher average cash balances invested compared to the prior period.

Previous wording

Gain on equity method investments. Gain on equity method investments represents the unrealized and realized gains or losses on our investments in SEVN and TA common shares. For further information, see Note 5, Investments, to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Current wording

Gain on equity method investments. Gain on equity method investments represents the unrealized and realized gains or losses on our investments in SEVN and TA common shares. For further information, see Note 5, Equity Method Investments, to our condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Previous wording

Income tax expense. The decrease in income tax expense of $4,609 is primarily attributable to lower taxable income for the 2024 fiscal period compared to the same period in the prior fiscal year.

Current wording

Income tax expense. The decrease in income tax expense of $10,166 is primarily attributable to lower taxable income for the 2024 fiscal period compared to the same period in the prior fiscal year.

Previous wording

Our current assets have historically been comprised predominantly of cash, cash equivalents and receivables for business management, property management and advisory services fees. As of March 31, 2024 and September 30, 2023, we had cash and cash equivalents of $192,108 and $267,989, respectively, of which $25,918 and $26,802, respectively, was held by RMR Inc., with the remainder being held at RMR LLC. Cash and cash equivalents include all short term, highly liquid investments that are readily convertible to known amounts of cash and have original maturities of three months or less from the date of purchase. As of March 31, 2024 and September 30, 2023, $180,444 and $265,800, respectively, of our cash and cash equivalents were invested in money market bank accounts.

Current wording

Our current assets have historically been comprised predominantly of cash, cash equivalents and receivables for business management, property management and advisory services fees. As of June 30, 2024 and September 30, 2023, we had cash and cash equivalents of $207,976 and $267,989, respectively, of which $25,368 and $26,802, respectively, was held by RMR Inc., with the remainder being held at RMR LLC. Cash and cash equivalents include all short term, highly liquid investments that are readily convertible to known amounts of cash and have original maturities of three months or less from the date of purchase. As of June 30, 2024 and September 30, 2023, $195,320 and $265,800, respectively, of our cash and cash equivalents were invested in money market bank accounts.

Previous wording

On December 19, 2023, we completed our acquisition of MPC for total cash consideration of $84,474. We are also obligated to pay the Earnout, if earned, which we currently estimate at $14,847 and which will be payable over the next three years, based on our current expectations for the deployment of capital remaining in investment funds managed by MPC prior to the end of such fund’s investment period. In addition to the Earnout, we agreed to pay Retention Payments to certain employees of MPC in an aggregate amount of $4,200 for their continued employment through December 31, 2025.

Current wording

On December 19, 2023, we completed our acquisition of MPC for total cash consideration of $84,474. We are also obligated to pay the Earnout, if earned, which we currently estimate at $13,783 and which will be payable over the next three years, based on our current expectations for the deployment of capital remaining in investment funds managed by MPC prior to the end of such fund’s investment period. In addition to the Earnout, we agreed to pay Retention Payments to certain employees of MPC in an aggregate amount of $4,200 for their continued employment through December 31, 2025.

Previous wording

The $7,099 decrease in net cash from operating activities for the six months ended March 31, 2024 compared to the prior period reflects a decrease in net income partially offset by favorable changes in working capital. The $78,766 increase in net cash used in investing activities for the six months ended March 31, 2024 compared to the prior period was due to our acquisition of MPC in the current fiscal period. Net cash used in financing activities for the six months ended March 31, 2024 was relatively unchanged compared to the prior period.

Current wording

The $46,623 decrease in net cash from operating activities for the nine months ended June 30, 2024 compared to the prior period reflects a decrease in net income partially offset by favorable changes in working capital. The $131,647 change in net cash flows from investing activities for the nine months ended June 30, 2024 compared to the prior period was due to our acquisition of MPC in the current fiscal period compared to the proceeds received from the sale of TA’s common shares in the prior period. Net cash used in financing activities for the nine months ended June 30, 2024 decreased $11,922 primarily due to higher tax distributions in the prior period, partially offset by increased distributions paid to shareholders of our Class A Common Shares and Class B-1 Common Shares in the current period.