# RMR GROUP INC. (RMR) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from RMR GROUP INC.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1644378/000164437821000041/rmr-20210930.htm
Accession: 0001644378-21-000041
Filing date: 2021-11-15
Report date: 2021-09-30
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/RMR/
All MD&A years: /company/RMR/mda/
Next year: /company/RMR/mda/fy2022/ (FY 2022)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following information should be read in conjunction with our consolidated financial statements and accompanying notes included in Part IV, Item 15 of this Annual Report on Form 10-K.

OVERVIEW (dollars in thousands)

RMR Inc. is a holding company and substantially all of its business is conducted by RMR LLC. RMR Inc. has no employees, and the personnel and various services it requires to operate are provided by RMR LLC. RMR LLC manages a diverse portfolio of real estate and real estate related businesses. As of September 30, 2021, RMR LLC managed approximately 2,100 properties in 47 states, Washington, D.C., Puerto Rico and Canada that are principally owned by the Managed Equity REITs.

Business Environment and Outlook

The continuation and growth of our business depends upon our ability to operate the Managed REITs so as to maintain, grow and increase the value of their businesses, to assist our Managed Operating Companies to grow their businesses and operate profitably and to successfully execute on new business ventures and investments we may pursue. Our business and the businesses of our clients generally follow the business cycle of the U.S. real estate industry, but with certain property type and regional geographic variations. Typically, as the general U.S. economy expands, commercial real estate occupancies increase and new real estate development occurs; new development frequently leads to increased real estate supply and reduced occupancies; and then the cycle repeats. These general trends can be impacted by property type characteristics or regional factors; for example, demographic factors such as the aging U.S. population, the growth of e-commerce retail sales or net in migration or out migration in different geographic regions can slow, accelerate, overwhelm or otherwise impact general cyclical trends. Because of such multiple factors, we believe it is often possible to grow real estate based businesses in selected property types or geographic areas despite general national trends. We also believe that these regional or special factors can be reinforced or sometimes overwhelmed by general economic factors; for example, increases or decreases in U.S. interest rates may cause a general decrease, or increase, in the value of securities of real estate businesses or in their value relative to other types of securities and investments, including those real estate businesses that use large amounts of debt and that attract equity investors by paying dividends such as REITs. We try to take account of industry and general economic factors as well as specific property and regional geographic considerations when providing services to our clients.

The COVID-19 pandemic and the various governmental and market responses intended to contain and mitigate the spread of the virus and its detrimental public health impact have had a significant impact on the global economy, including the U.S. economy. In addition, the COVID-19 pandemic and related public health restrictions have had a particularly severe impact on certain industries in which our clients operate, including, hospitality, travel, service retail, senior housing and rehabilitation services. Many of the restrictions that had been imposed in the United States during the COVID-19 pandemic have since been lifted and commercial activity in the United States has increasingly returned to pre-pandemic practices and operations. There remains uncertainty as to the ultimate duration and severity of the COVID-19 pandemic, including risks that may arise from mutations or related strains of the virus, the ability to successfully administer vaccinations to a sufficient number of persons or attain immunity to the virus by natural or other means to achieve herd immunity, and the impact on the U.S. economy that may result from the inability of other countries to administer vaccinations to their citizens or their citizens’ ability to otherwise achieve immunity to the virus.

While our clients continue to face challenges related to the COVID-19 pandemic, we continue to believe that our current financial resources enable us to withstand the COVID-19 pandemic. As of September 30, 2021, we had $159,835 in cash and cash equivalents, no debt and for the fiscal year ended September 30, 2021, we generated cash from operations of $71,794.

Further, we believe that because of the diversity of properties that our clients own and operate, there may be opportunities for growth in select property types and locations as this pandemic ebbs. We, on behalf of our clients and ourselves, attempt to take advantage of opportunities in the real estate market when they arise. For example, since the beginning of the pandemic: (i) on March 31, 2020, ILPT completed a $680 million joint venture with an Asian institutional investor, which was expanded to include a large, top tier global sovereign wealth fund, as a second outside investor to this joint venture on November 18, 2020; (ii) SVC transitioned over 200 hotels from other hotel operators to Sonesta; (iii) on March 17, 2021, Sonesta completed its acquisition of RLH Corporation, establishing Sonesta as one of the largest hotel companies and expanding its franchising capabilities; (iv) DHC restructured its agreements with respect to 108 senior care facilities; and (v) on September 30, 2021, RMRM and TRMT merged to form SEVN, a larger, more diversified mortgage REIT with an expanded capital base than its predecessor companies. Other examples that have been completed in the past, include: (i) ILPT’s initial public offering on January 17, 2018, which was formed to focus on the ownership and leasing of industrial and logistics properties throughout the U.S. and (ii) the acquisition by SVC on September 20, 2019 of a net leased portfolio of 767 service oriented retail properties,

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providing SVC with a greater diversity in tenant base, property type and geography. In addition, we balance our pursuit of growth of our and our clients’ businesses by executing, on behalf of our clients, prudent capital recycling or business arrangement restructurings in an attempt to help our clients prudently manage leverage and to reposition their portfolios and businesses when circumstances warrant such changes or when other more desirable opportunities are identified.

There are extensive uncertainties surrounding the COVID-19 pandemic, and as a result, we are unable to determine what the ultimate impact will be on our clients and our financial position. For further information and risks related to the COVID-19 pandemic on us and our business, see elsewhere in this Annual Report on Form 10-K, including “Warning Concerning Forward-Looking Statements” and Part I, Item 1A “Risk Factors”.

Managed Equity REITs

The base business management fees we earn from the Managed Equity REITs are calculated monthly in accordance with the applicable business management agreement and are based on a percentage of the lower of (i) the average historical cost of each REIT’s properties and (ii) each REIT’s average market capitalization. The property management fees we earn from the Managed Equity REITs are principally based on a percentage of the gross rents collected at certain managed properties owned by the REITs, excluding rents or other revenues from hotels, travel centers, senior living properties and wellness centers, which are separately managed by our Managed Operating Companies or a third party. Also under the terms of the property management agreements, we receive construction supervision fees in connection with certain construction activities undertaken at the managed properties, including senior living communities owned by DHC and managed by Five Star and hotels owned by SVC and managed by Sonesta, based on a percentage of the cost of such construction. For further information regarding the fees that we earn, see Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

The following table presents for each Managed Equity REIT a summary of its primary strategy and the lesser of the historical cost of its assets under management and its market capitalization as of September 30, 2021 and 2020, as applicable:

[[GREPCENT_TABLE]]
[["","","","","Lesser of Historical Cost of Assets"],["","","","","Under Management or"],["","","","","Total Market Capitalization as of"],["","","","","September 30,"],["REIT","","Primary Strategy","","2021","","2020"],["DHC","","Medical office and life science properties, senior living communities and wellness centers","","$","5,150,401","","","$","4,381,749"],["ILPT","","Industrial and logistics properties","","2,100,020","","","2,613,338"],["OPI","","Office properties primarily leased to single tenants, including the government","","3,837,235","","","3,244,624"],["SVC","","Hotels and net lease service and necessity-based retail properties","","9,050,693","","","7,590,437"],["","","","","$","20,138,349","","","$","17,830,148"]]
[[/GREPCENT_TABLE]]

A Managed Equity REIT’s historical cost of assets under management includes the real estate it owns and its consolidated assets invested directly or indirectly in equity interests in or loans secured by real estate and personal property owned in connection with such real estate (including acquisition related costs which may be allocated to intangibles or are unallocated), all before reserves for depreciation, amortization, impairment charges or bad debts or other similar non-cash reserves. A Managed Equity REIT’s average market capitalization includes the average value of the Managed Equity REIT’s outstanding common equity value during the period, plus the daily weighted average of each of the aggregate liquidation preference of preferred shares and the principal amount of consolidated indebtedness during the period. The table above presents for each Managed Equity REIT, the lesser of the historical cost of its assets under management and its market capitalization as of the end of each period.

The basis on which our base business management fees are calculated for the fiscal years ended September 30, 2021 and 2020 may differ from the basis at the end of the periods presented in the table above. As of September 30, 2021, the market capitalization was lower than the historical cost of assets under management for DHC, OPI and SVC; the historical cost of assets under management for DHC, OPI and SVC as of September 30, 2021, were $8,458,462, $6,082,546 and $12,301,972, respectively. For ILPT, the historical cost of assets under management were lower than its market capitalization of $2,665,941 as of September 30, 2021.

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The fee revenues we earned from the Managed Equity REITs for the fiscal years ended September 30, 2021 and 2020 are set forth in the following tables:

[[GREPCENT_TABLE]]
[["","","Fiscal Year Ended September 30,"],["","","2021","","2020"],["","","Base Business","","","","Property","","","","Base Business","","","","Property"],["","","Management","","","","Management","","","","Management","","","","Management"],["REIT","","Revenues","","","","Revenues","","Total","","Revenues","","","","Revenues","","Total"],["DHC","","$","23,247","","","","","$","13,125","","","$","36,372","","","$","22,692","","","","","$","13,493","","","$","36,185"],["ILPT","","11,110","","","","","6,635","","","17,745","","","13,595","","","","","7,878","","","21,473"],["OPI","","17,025","","","","","20,226","","","37,251","","","17,446","","","","","20,489","","","37,935"],["SVC","","41,771","","","","","4,083","","","45,854","","","40,621","","","","","3,680","","","44,301"],["","","$","93,153","","","","","$","44,069","","","$","137,222","","","$","94,354","","","","","$","45,540","","","$","139,894"]]
[[/GREPCENT_TABLE]]

As of September 30, 2021, we estimate that we would have earned an incentive business management fee from OPI of $5,979 for calendar 2021 if September 30, 2021 had been the end of the next measurement period. However, incentive business management fees from the Managed Equity REITs are contingent performance based fees which are only recognized when earned at the end of the respective measurement period. There can be no assurance that we will in fact earn the estimated amount of, or any, incentive business management fees for calendar 2021, from OPI, or any Managed Equity REIT. Accordingly, this estimated amount of incentive business management fees for calendar 2021 which would have been earned if the measurement period ended on September 30, 2021, is not included in the fees listed in the tables above or in our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

Managed Operating Companies and Managed Private Real Estate Capital

We provide business management services to the Managed Operating Companies. Five Star operates senior living communities throughout the United States, many of which are owned by and managed for DHC. Sonesta manages and franchises hotels, resorts and cruise ships in the United States, Latin America, the Caribbean and the Middle East; many of the U.S. hotels that Sonesta operates are owned by SVC. TA operates, leases and franchises travel centers along the U.S. interstate highway system, many of which are owned by SVC, and standalone truck service facilities. Generally, our fees earned from business management services to the Managed Operating Companies are based on a percentage of certain revenues.

In addition, we also provide management services to the Managed Private Real Estate Capital clients and earn fees based on a percentage of average invested capital, as defined in the applicable agreements, property management fees based on a percentage of rents collected from managed properties and construction management fees based on a percentage of the cost of construction activities.

Our fee revenues from services to the Managed Operating Companies and the Managed Private Real Estate Capital clients for the fiscal years ended September 30, 2021 and 2020, are set forth in the following tables:

[[GREPCENT_TABLE]]
[["","","Fiscal Year Ended September 30,"],["","","2021","","2020"],["","","Base Business","","Property","","","","Base Business","","Property"],["","","Management","","Management","","","","Management","","Management"],["","","Revenues","","Revenues","","Total","","Revenues","","Revenues","","Total"],["ABP Trust","","$","2,335","","","$","1,960","","","$","4,295","","","$","2,530","","","$","2,109","","","$","4,639"],["Other private entities","","2,423","","","1,348","","","3,771","","","\u2014","","","\u2014","","","\u2014"],["Five Star","","7,123","","","\u2014","","","7,123","","","8,787","","","\u2014","","","8,787"],["Sonesta","","4,497","","","\u2014","","","4,497","","","1,505","","","\u2014","","","1,505"],["TA","","13,727","","","\u2014","","","13,727","","","13,084","","","\u2014","","","13,084"],["","","$","30,105","","","$","3,308","","","$","33,413","","","$","25,906","","","$","2,109","","","$","28,015"]]
[[/GREPCENT_TABLE]]

Advisory Business

Tremont Realty Capital provides management services to SEVN, a publicly traded mortgage REIT that focuses on originating and investing in first mortgage whole loans secured by middle market and transitional commercial real estate.

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Tremont Realty Capital also provided management services to TRMT until September 30, 2021, when it merged with and into SEVN. Tremont Realty Capital is primarily compensated pursuant to its management agreements with SEVN (beginning January 6, 2021) and TRMT (until September 30, 2021) based on a percentage of SEVN’s and TRMT’s equity, as defined in the applicable agreements.

RMR Advisors LLC, or RMR Advisors, merged into Tremont Realty Capital on January 6, 2021, and previously provided advisory services for SEVN (then RMRM). Until January 5, 2021, RMR Advisors was compensated pursuant to its agreement with SEVN (then RMRM) at a percentage of SEVN’s average daily managed assets, as defined in the agreement.

For the fiscal years ended September 30, 2021 and 2020, Tremont Realty Capital or RMR Advisors, as applicable, earned management and advisory services revenue from SEVN and TRMT of $3,956 and $2,911, respectively.

For the fiscal year ended September 30, 2021, Tremont Realty Capital also earned incentive fees of $620 from TRMT. Tremont Realty Capital waived any incentive fees otherwise due and payable by TRMT pursuant to the management agreement prior to December 31, 2020, and as a result, Tremont Realty Capital could not earn any incentive fees from TRMT for the fiscal year ended September 31, 2020. No incentive fees were earned from SEVN for the fiscal year ended September 30, 2021.

The Tremont business acts as a transaction broker for non-investment advisory clients for negotiated fees. The Tremont business earned fees for such brokerage services of $467 and $816 for the fiscal years ended September 30, 2021 and 2020, respectively, which amounts are included in management services revenue in our consolidated statements of income.

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RESULTS OF OPERATIONS (dollars in thousands)

The following table presents the changes in our operating results for the fiscal year ended September 30, 2021 compared to the fiscal year ended September 30, 2020:

[[GREPCENT_TABLE]]
[["","","Fiscal Year Ended September 30,"],["","","2021","","2020","","$ Change","","% Change"],["Revenues:"],["Management services","","$","171,102","","","$","168,766","","","$","2,336","","","1.4%"],["Incentive business management fees","","620","","","\u2014","","","620","","","n/m"],["Advisory services","","3,956","","","2,911","","","1,045","","","35.9%"],["Total management and advisory services revenues","","175,678","","","171,677","","","4,001","","","2.3%"],["Reimbursable compensation and benefits","","52,369","","","52,344","","","25","","","n/m"],["Reimbursable equity based compensation","","9,154","","","4,912","","","4,242","","","86.4%"],["Other reimbursable expenses","","370,037","","","360,572","","","9,465","","","2.6%"],["Total reimbursable costs","","431,560","","","417,828","","","13,732","","","3.3%"],["Total revenues","","607,238","","","589,505","","","17,733","","","3.0%"],["Expenses:"],["Compensation and benefits","","119,644","","","121,386","","","(1,742)","","","(1.4)%"],["Equity based compensation","","12,022","","","7,828","","","4,194","","","53.6%"],["Separation costs","","4,525","","","1,881","","","2,644","","","140.6%"],["Total compensation and benefits expense","","136,191","","","131,095","","","5,096","","","3.9%"],["General and administrative","","26,961","","","26,514","","","447","","","1.7%"],["Other reimbursable expenses","","370,037","","","360,572","","","9,465","","","2.6%"],["Transaction and acquisition related costs","","984","","","1,618","","","(634)","","","(39.2)%"],["Depreciation and amortization","","973","","","968","","","5","","","0.5%"],["Total expenses","","535,146","","","520,767","","","14,379","","","2.8%"],["Operating income","","72,092","","","68,738","","","3,354","","","4.9%"],["Interest and other income","","760","","","4,451","","","(3,691)","","","(82.9)%"],["Gain on Tremont Mortgage Trust investment","","2,059","","","\u2014","","","2,059","","","n/m"],["Equity in earnings of investees","","443","","","1,545","","","(1,102)","","","(71.3)%"],["Unrealized gain on equity method investment accounted for under the fair value option","","18,811","","","3,151","","","15,660","","","n/m"],["Income before income tax expense","","94,165","","","77,885","","","16,280","","","20.9%"],["Income tax expense","","(13,152)","","","(11,552)","","","(1,600)","","","(13.9)%"],["Net income","","81,013","","","66,333","","","14,680","","","22.1%"],["Net income attributable to noncontrolling interest","","(45,317)","","","(37,541)","","","(7,776)","","","(20.7)%"],["Net income attributable to The RMR Group Inc.","","$","35,696","","","$","28,792","","","$","6,904","","","24.0%"]]
[[/GREPCENT_TABLE]]

n/m - not meaningful

References to changes in the income and expense categories below relate to the comparison of consolidated results for the fiscal year ended September 30, 2021, compared to the fiscal year ended September 30, 2020. For a comparison of consolidated results for the fiscal year ended September 30, 2020 compared to the fiscal year ended September 30, 2019, see Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020.

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Management services revenue. For the fiscal years ended September 30, 2021 and 2020, we earned base business and property management services revenue from the following sources:

[[GREPCENT_TABLE]]
[["","","Fiscal Year Ended September 30,"],["","","2021","","2020","","Change"],["Managed Equity REITs","","$","137,222","","","$","139,894","","","$","(2,672)"],["Managed Private Real Estate Capital","","8,533","","","5,496","","","3,037"],["Managed Operating Companies","","25,347","","","23,376","","","1,971"],["Total","","$","171,102","","","$","168,766","","","$","2,336"]]
[[/GREPCENT_TABLE]]

Management services revenue increased $2,336 primarily due to (i) an increase in management fees earned from Sonesta of $2,992 primarily resulting from an increase in the number of hotels that it manages and franchises during the current fiscal year, (ii) an increase in the average enterprise value of SVC resulting in an increase to base business management fees of $1,150, and (iii) an increase in construction supervision fees earned from SVC and OPI aggregating $957, partially offset by (i) a decline in property management fees earned from DHC, OPI and SVC aggregating $1,185 primarily resulting from property dispositions, and (ii) a decline in management fees earned from Five Star of $1,664 driven by COVID-19 pandemic related adverse impacts to its business.

During the fiscal year ended September 30, 2021, an aggregate of $680,000 of properties were deconsolidated from ILPT in connection with the closing of its private joint venture on November 18, 2020. As such, beginning on November 18, 2020, the associated management services revenue from those properties were earned from the private joint venture and are included within Managed Private Real Estate Capital in the table above. Prior to November 18, 2020, the associated management services revenues from those properties were earned from ILPT and are included within Managed Equity REITs in the table above. The net impact to total management services revenue from these properties was relatively unchanged for the fiscal year ended September 30, 2021.

Incentive business management fees. Incentive business management fees for the current fiscal year include fees earned by Tremont Realty Capital from TRMT of $620. Tremont Realty Capital could not earn any incentive fees from TRMT in the prior fiscal year due to the fee waiver in effect for the period beginning July 1, 2018 until December 31, 2020. For further information about TRMT’s incentive fees and the fee waiver, see Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

Advisory services revenue. Advisory services revenue increased $1,045 primarily due to an increase of $1,014 in fees earned from TRMT as a result of the fee waiver Tremont Realty Capital previously provided to TRMT expiring on December 31, 2020.

Reimbursable compensation and benefits. Reimbursable compensation and benefits include reimbursements, at cost, that arise primarily from services our employees provide pursuant to our property management agreements at the properties of our clients. A significant portion of these compensation and benefits are charged or passed through to and were paid by tenants of our clients. Reimbursable compensation and benefits was relatively unchanged from the prior fiscal year.

Reimbursable equity based compensation. Reimbursable equity based compensation includes grants of common shares from 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 the grants of common shares from our clients to certain of our officers and employees. Reimbursable equity based compensation increased $4,242 primarily as a result of increases in our clients’ respective share prices.

Other reimbursable expenses. For further information about these reimbursements, see Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

Compensation and benefits. Compensation and benefits consist of employee salaries and other employment related costs, including health insurance expenses and contributions related to our employee retirement plan. Compensation and benefits expense decreased $1,742 primarily due to higher mortgage broker commissions, vacation deferrals, business continuity payments and officer retirements during the prior fiscal year, partially offset by annual employee merit and bonus increases in the current fiscal year.

Equity based compensation. Equity based compensation consists of the value of vested shares granted to certain of our employees under our equity compensation plan and by our clients. Equity based compensation increased $4,194 primarily due to increases in our clients’ respective share prices for the share awards granted to our employees by our clients.

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Separation costs. Separation costs consist of employment termination costs. For further information about these costs, see Note 5, Related Person Transactions, to our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

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 $447 primarily due to increases in technology infrastructure costs, insurance and an increase in the value of annual share grants awarded to our Directors, partially offset by decreases in recruiting fees largely as a result of the pandemic, and professional fees.

Transaction and acquisition related costs. Transaction and acquisition related costs decreased $634 primarily due to costs incurred in the prior fiscal year in connection with SEVN’s conversion from a registered investment company to a commercial mortgage REIT.

Depreciation and amortization. Depreciation and amortization was relatively unchanged from the prior fiscal year.

Interest and other income. Interest and other income decreased $3,691 primarily due to lower interest earned during the current fiscal year primarily as a result of lower interest rates compared to the prior fiscal year.

Gain on Tremont Mortgage Trust investment. The gain on Tremont Mortgage Trust investment in the current fiscal year represents the difference between the cost basis of our investment in TRMT and the fair value of our investment in SEVN on the date of the Merger. For further information see Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

Equity in earnings of investees. Equity in earnings of investees represents our proportionate share of earnings from our equity interest in TRMT until September 30, 2021, when it merged with and into SEVN. For further information, see Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

Unrealized gain on equity method investment accounted for under the fair value option. Unrealized gain on equity method investment accounted for under the fair value option represents the gain on our investment in TA common shares. For further information, see Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

Income tax expense. The increase in income tax expense of $1,600 is primarily attributable to higher taxable income during the current fiscal year compared to the prior fiscal year. For further information see Note 3, Income Taxes, to our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

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LIQUIDITY AND CAPITAL RESOURCES (dollars in thousands, except per share amounts)

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 September 30, 2021 and 2020, we had cash and cash equivalents of $159,835 and $369,663, respectively, of which $23,338 and $25,498, respectively, was held by RMR Inc., with the remainder being held at RMR LLC. Cash and cash equivalents include all short term, highly liquid investments that are readily convertible to known amounts of cash and have original maturities of three months or less from the date of purchase. As of September 30, 2021 and 2020, $131,065 and $341,612, respectively, of our cash and cash equivalents were invested in money market funds. The decrease in cash and cash equivalents at September 30, 2021 is primarily attributable to the payment of a one-time special dividend of $7.00 per Class A Common Share and Class B-1 Common Share, or $219,851 in the aggregate, in September 2021. Our cash and cash equivalents leave us well positioned to pursue a range of capital allocation strategies, with a focus on the growth of our private capital business, in the next twelve months.

Our liquidity is highly dependent upon our receipt of fees from the businesses that we manage. Historically, we have funded our working capital needs with cash generated from our operating activities and we currently do not maintain any credit facilities. We expect that our future working capital needs will relate largely to our operating expenses, primarily consisting of employee compensation and benefits costs, our obligation to make quarterly tax distributions to the members of RMR LLC, our plan to make quarterly distributions on our Class A Common Shares and Class B-1 Common Shares and our plan to pay quarterly distributions to the members of RMR LLC in connection with the quarterly dividends to RMR Inc. shareholders. Our management fees are typically payable to us within 30 days of the end of each month or, in the case of annual incentive business management fees earned from the Managed Equity REITs, within 30 days following each calendar year end. Quarterly incentive fees earned from SEVN, if any, are payable generally within 30 days following the end of the applicable quarter. Historically, we have not experienced losses on collection of our fees and have not recorded any allowances for bad debts.

During the fiscal year ended September 30, 2021, we paid cash distributions to the holders of our Class A Common Shares, Class B-1 Common Shares and to the other owner of RMR LLC membership units in the aggregate amount of $262,783, including the one-time special dividend discussed above. On October 14, 2021, we declared a quarterly dividend on our Class A Common Shares and Class B-1 Common Shares to our shareholders of record as of October 25, 2021 in the amount of $0.38 per Class A Common Share and Class B-1 Common Share, or $6,264. This dividend will be partially funded by a distribution from RMR LLC to holders of its membership units in the amount of $0.30 per unit, or $9,446, of which $4,946 will be distributed to us based on our aggregate ownership of 16,485,011 membership units of RMR LLC and $4,500 will be distributed to ABP Trust based on its ownership of 15,000,000 membership units of RMR LLC. The remainder of this dividend will be funded with cash accumulated at RMR Inc. We expect the total dividend will amount to approximately $10,764 and we expect to pay this dividend on or about November 18, 2021. See Note 6, Shareholders’ Equity, to our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K for more information regarding these distributions.

For the fiscal year ended September 30, 2021, pursuant to the RMR LLC operating agreement, RMR LLC made required quarterly tax distributions to its holders of its membership units totaling $31,469, of which $16,764 was distributed to us and $14,705 was distributed to ABP Trust, based on each membership unit holder’s then respective ownership percentage in RMR LLC. The $16,764 distributed to us was eliminated in our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K, and the $14,705 distributed to ABP Trust was recorded as a reduction of their noncontrolling interest. We used a portion of these funds distributed to us to pay our tax liabilities and amounts due under the Tax Receivable Agreement.

The Tax Receivable Agreement provides for the payment by RMR Inc. to ABP Trust of 85.0% of the amount of savings, if any, in U.S. federal, state and local income tax or franchise tax that RMR Inc. realizes as a result of (a) the increases in tax basis attributable to RMR Inc.’s dealings with ABP Trust and (b) tax benefits related to imputed interest deemed to be paid by it as a result of the Tax Receivable Agreement. See Note 5, Related Person Transactions, to our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K. As of September 30, 2021, our consolidated balance sheet reflects a liability related to the Tax Receivable Agreement of $27,792, of which we expect to pay $2,215 to ABP Trust during the fourth quarter of fiscal year 2022.

Their remains an ongoing possibility of prospective changes in laws and regulations, including the possibility of significant revision to U.S. tax laws that could have an adverse impact on us and our clients. Any increase in tax rates will adversely impact our cash flows by increasing our income tax obligations and our quarterly tax distributions under the RMR LLC operating agreement.

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Cash Flows

Our changes in cash flows for the fiscal year ended September 30, 2021 compared to the prior fiscal year were as follows: (i) net cash from operating activities decreased from $77,497 in the prior fiscal year to $71,794 in the current fiscal year; (ii) net cash used in investing activities decreased from $5,920 in the prior fiscal year to $1,142 in the current fiscal year; and (iii) net cash used in financing activities increased from $60,362 in the prior fiscal year to $280,480 in the current fiscal year.

The decrease in cash from operating activities for the fiscal year ended September 30, 2021 compared to the prior fiscal year, primarily reflects changes in working capital, offset by increases in net income, excluding the impacts of non-cash gains. The decrease in net cash used in investing activities for the fiscal year ended September 30, 2021 compared to the prior fiscal year was primarily due to our purchase of 323,315 TA shares in the prior fiscal year. The increase in net cash used in financing activities for the fiscal year ended September 30, 2021 compared to the prior fiscal year was primarily due to a one-time, special cash dividend of $7.00 per Class A Common Share and Class B-1 Common Share, or $219,851, paid in the current fiscal year.

As of September 30, 2021, we had no off-balance sheet arrangements that have had or that we expect would be reasonably likely to have a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Market Risk and Credit Risk

We have not invested in derivative instruments, borrowed through issuing debt securities or transacted in foreign currencies. As a result, we are not now subject to significant direct market risk related to interest rate changes, changes to the market standard for determining interest rates, commodity price changes or credit risks; however, if any of these risks were to negatively impact our clients’ businesses or market capitalization, our revenues would likely decline. To the extent we change our approach on the foregoing activities, or engage in other activities, our market and credit risks could change. Please see Part I, Item 1A “Risk Factors” of this Annual Report on Form 10-K for the risks to us and our clients related to the COVID-19 pandemic.

Risks Related to Cash and Short Term Investments

Our cash and cash equivalents include short term, highly liquid investments readily convertible to known amounts of cash that have original maturities of three months or less from the date of purchase. We invest a substantial amount of our cash in money market funds. The majority of our cash is maintained in U.S. bank accounts. Some U.S. bank account balances exceed the Federal Deposit Insurance Corporation insurance limit. We believe our cash and short term investments are not subject to any material interest rate risk, equity price risk, credit risk or other market risk.

Related Person Transactions

We have relationships and historical and continuing transactions with Adam D. Portnoy, one of our Managing Directors, as well as our clients. For further information about these and other such relationships and related person transactions, please see Note 2, Summary of Significant Accounting Policies and Note 5, Related Person Transactions, to our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K, which is incorporated herein by reference, the section captioned “Business” above in Part I, Item 1 of this Annual Report on Form 10-K, our other filings with the SEC and our definitive Proxy Statement for our 2022 Annual Meeting of Shareholders, or the 2022 Proxy Statement, to be filed within 120 days after the close of the fiscal year ended September 30, 2021. In addition, for more information about these transactions and relationships and about the risks that may arise as a result of these and other related person transactions and relationships, please see elsewhere in this Annual Report on Form 10-K, including “Warning Concerning Forward Looking Statements” and Part I, Item 1A “Risk Factors.” We may engage in additional transactions with related persons, including businesses to which RMR LLC or its subsidiaries provide management services.

Critical Accounting Policies

An understanding of our accounting policies is necessary for a complete analysis of our results, financial position, liquidity and trends. The preparation of our financial statements requires our management to make certain critical accounting estimates and judgments that impact (i) the revenue recognized during the reporting periods and (ii) our principles of consolidation. These accounting estimates are based on our management’s judgment. We consider them to be critical because of their significance to our financial statements and the possibility that future events may cause differences from current judgments or because the use of different assumptions could result in materially different estimates. We review these estimates on a periodic basis to test their reasonableness. Although actual amounts likely differ from such estimated amounts, we believe such differences are not likely to be material.

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Revenue Recognition. Our principal sources of revenue are:

•business management fees, including base and incentive business management fees; and

•property management fees, including construction supervision fees and reimbursement for certain compensation and benefits related expenses.

We recognize revenue from business management and property management fees as earned in accordance with our management agreements. We consider the incentive business management fees earned from the REITs that we manage to be contingent performance based fees, which we recognize as revenue when earned at the end of each measurement period. We also recognize as revenue certain compensation and benefits reimbursements in our capacity as property manager, at cost, when we incur the related reimbursable compensation and benefits and other costs on behalf of our clients. See the “Revenue Recognition” section of Note 2, Summary of Significant Accounting Policies, to our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K for a detailed discussion of our revenue recognition policies and our contractual arrangements.

Consolidation. Our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K include only the accounts of the entities we control. We continually assess whether our existing contractual rights give us the ability to direct the activities of the entities we manage that most significantly affect the results of that entity. The activities and factors we consider include, but are 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; and

•the ability and rights to participate in significant policy making decisions and to replace our manager of those entities.

Based on our historical assessments, we have not consolidated the entities we manage. We will reassess these conclusions if and when facts and circumstances indicate that there are changes to the elements evidencing control.