EDGAR 10-K Filing

Company CIK: 1644378
Filing Year: 2021
Filename: 1644378_10-K_2021_0001644378-21-000041.json

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ITEM 1. BUSINESS
Item 1. Business
Our Company
The RMR Group Inc., or RMR Inc., is a holding company incorporated as a Maryland corporation and substantially all of its business is conducted by its majority owned subsidiary, The RMR Group LLC, or RMR LLC. 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 this Annual Report on Form 10-K, unless otherwise indicated, “we”, “us” and “our” refers to RMR Inc. and its direct and indirect subsidiaries, including RMR LLC.
As of September 30, 2021, RMR Inc. owned 15,485,236 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 approximately 52.4% of the economic interest of RMR LLC. ABP Trust owns 15,000,000 redeemable Class A Units, representing approximately 47.6% of the economic interest of RMR LLC.
Adam D. Portnoy, one of our Managing Directors, is the sole trustee of our controlling shareholder, ABP Trust, and owns all of ABP Trust’s voting securities. As of September 30, 2021, Adam D. Portnoy beneficially owned (including through ABP Trust), in aggregate, (i) 170,502 shares of Class A common stock of RMR Inc., or Class A Common Shares; (ii) all the outstanding shares of Class B-1 common stock of RMR Inc., or Class B-1 Common Shares; and (iii) all the outstanding shares of Class B-2 common stock of RMR Inc., or Class B-2 Common Shares.
Since its founding in 1986, RMR LLC has substantially grown assets under management and the number of real estate businesses it manages. As of September 30, 2021, we had $32.7 billion of assets under management.
Our business primarily consists of providing management services to four publicly traded equity real estate investment trusts, or REITs, whose securities are listed on The Nasdaq Stock Market LLC, or Nasdaq: Diversified Healthcare Trust, a Maryland REIT, including its subsidiaries, or DHC; Industrial Logistics Properties Trust, a Maryland REIT, including its subsidiaries, or ILPT; Office Properties Income Trust, a Maryland REIT, including its subsidiaries, or OPI; and Service Properties Trust, a Maryland REIT, including its subsidiaries, or SVC. DHC, ILPT, OPI and SVC are collectively referred to as the Managed Equity REITs. We also provide management services to three real estate operating companies: Five Star Senior Living Inc., a Maryland corporation, or Five Star; Sonesta International Hotels Corporation, a Maryland corporation, or Sonesta; and TravelCenters of America Inc., a Maryland corporation, or TA. Five Star, Sonesta and TA are collectively referred to as the Managed Operating Companies.
As manager of the Managed Equity REITs, we are responsible for implementing investment strategies and managing day to day operations, subject to supervision and oversight by each Managed Equity REIT’s board of trustees. The Managed Equity REITs have no employees, and we provide the personnel and services necessary for each Managed Equity REIT to conduct its business. The Managed Equity REITs invest in diverse income producing properties across multiple real estate asset classes as follows:
•DHC (Nasdaq: DHC) owns medical office and life science properties, senior living communities and wellness centers. As of September 30, 2021, DHC owned 392 properties located in 36 states and the District of Columbia.
•ILPT (Nasdaq: ILPT) owns and leases industrial and logistics properties. As of September 30, 2021, ILPT owned 294 properties, including 226 buildings, leasable land parcels and easements in Oahu, Hawaii and 68 buildings located in 32 other states.
•OPI (Nasdaq: OPI) owns office properties primarily leased to single tenants and those with high quality credit characteristics, including the government. As of September 30, 2021, OPI owned 178 properties located in 33 states and the District of Columbia.
•SVC (Nasdaq: SVC) owns a diverse portfolio of hotels and net lease service and necessity-based retail properties. As of September 30, 2021, SVC owned 1,098 properties (304 hotels and 794 net lease properties) located in 47 states, Puerto Rico, Canada and the District of Columbia.
We also provide management services to the Managed Operating Companies that have diverse businesses as follows:
•Five Star (Nasdaq: FVE) operates senior living communities, many of which are owned by DHC. As of September 30, 2021, Five Star managed or operated 179 senior living communities located in 29 states, including 159 communities that it managed and 20 communities that it owned and operated.
•Sonesta is a privately owned franchisor and operator of hotels, resorts and cruise ships in the United States, Latin America, the Caribbean and the Middle East, and many of the U.S. hotels that Sonesta operates are owned by SVC. As of September 30, 2021, Sonesta’s business included 1,166 properties in eight countries.
•TA (Nasdaq: TA) operates and franchises travel centers primarily along the U.S. interstate highway system, many of which are owned by SVC, and standalone truck service facilities. As of September 30, 2021, TA operated or franchised 279 properties of which TA owned 52 (51 travel centers and one standalone truck service facility) located in 44 states in the United States and the province of Ontario, Canada.
RMR LLC’s wholly owned subsidiary, Tremont Realty Capital LLC (formerly known as Tremont Realty Advisors LLC), or Tremont Realty Capital, an investment adviser registered with the Securities and Exchange Commission, or SEC, provides advisory services for Seven Hills Realty Trust (formerly known as RMR Mortgage Trust, or RMRM), or SEVN. SEVN is 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. Until September 30, 2021, Tremont Realty Capital also provided advisory services to Tremont Mortgage Trust, or TRMT, a publicly traded mortgage REIT. On September 30, 2021, TRMT merged with and into SEVN, or the Merger, with SEVN continuing as the surviving company.
The Managed Equity REITs, SEVN and, until September 30, 2021, TRMT, are collectively referred to as the Managed REITs or the Managed Public Real Estate Capital clients.
In addition, RMR LLC provides management services to private capital vehicles, including ABP Trust and its subsidiaries, or collectively ABP Trust, and other private entities that own commercial real estate, of which certain of our Managed Equity REITs own minority equity interests. In this Annual Report on Form 10-K, we refer to these clients as the Managed Private Real Estate Capital clients.
Our Business Strategy
Our business strategy is to provide an expanded range of management services to our existing clients, as well as to diversify the number of clients to which we provide services and the sources of capital upon which those clients may rely for growth.
We believe that we have several strengths that distinguish our business from other alternative asset managers:
•Revenue Base. Our revenues are primarily from fees earned under long term agreements with strong credit quality companies, many of which are permanent capital vehicles. Our agreements with the Managed Equity REITs are 20 year term evergreen contracts with significant termination fees payable in certain circumstances. For the fiscal year ended September 30, 2021, revenues earned from the Managed Equity REITs represented 78.1% of our total management and advisory services revenue.
•Cash Flow and Dividend. For the fiscal year ended September 30, 2021, we generated net cash from operating activities of $71.8 million and net income of $81.0 million. We have no debt outstanding. Our regular dividend of $0.38 per share per quarter ($1.52 per share per year) has been well covered by our cash flows. In addition, we paid a one-time special dividend of $7.00 per share, or $219.9 million, in September 2021 to return excess capital to our shareholders.
•Diverse Portfolio of Managed Real Estate. We provide management services to a wide range of real estate assets and businesses that include healthcare facilities, senior living and other apartments, hotels, office buildings, industrial buildings, leased lands, net-lease service and necessity-based retail, including travel centers, and various specialized properties such as properties leased to government tenants and properties specially designed for medical and biotech research. The properties and businesses we managed as of September 30, 2021, are located throughout the United States in 47 states and Washington D.C., and in Puerto Rico and Canada. The diversity of our managed portfolio helps provide balance throughout economic cycles, as the impacts to each respective real estate sector can vary.
•Growth. Since the founding of RMR LLC in 1986, we have substantially grown our assets under management and the number and variety of real estate businesses we manage. As of September 30, 2021, we had $32.7 billion of assets under management, including more than 2,100 properties. The synergies among our clients may also
facilitate their and our growth. We assist our clients in realizing investment opportunities by working together to make acquisitions, obtain financing, identifying possible joint venture partners, completing redevelopment activities, facilitating capital recycling from strategic property dispositions and assisting in portfolio repositioning and other business arrangements and strategic restructurings.
In addition, we expect to use cash on hand, future operating cash flows and may use our equity or incur debt to fund our growth and diversify our operations through possible acquisition opportunities or seeding new clients. We have recently sought to expand the sources of capital underlying our assets under management, with our Managed Private Real Estate Capital clients representing $1.3 billion of our assets under management as of September 30, 2021.
•Quality and Depth of Management. Our highly qualified and experienced management team provides a broad base of deep expertise to our clients. Our senior management has worked together through several business cycles in which they acquired, financed, managed and disposed of real estate assets and started real estate businesses. We are a vertically integrated manager and as of September 30, 2021, we employed approximately 600 real estate professionals in more than 30 offices throughout the United States. Additionally, the clients we manage collectively had approximately $10 billion of annual revenues and approximately 37,000 employees at September 30, 2021. We have also assisted our clients to grow by successfully accessing the capital markets; since our founding in 1986, our clients have successfully completed over $41.0 billion of financing in approximately 180 capital raising transactions.
•Alignment of Interests. We believe our structure fosters strong alignment of interests between our principal executive officer and our shareholders because our principal executive officer, Adam D. Portnoy, has a 51.4% economic interest in RMR LLC. Alignment of interests also exists between us and our Managed Equity REITs due to the manner upon which we earn base management fees and incentive management fees under our Management Agreements with the Managed Equity REITs, as described in more detail below.
We can provide no assurance that we will be able to implement our business strategy or achieve our desired growth. Our business and the businesses of our clients are subject to a number of risks and uncertainties. See “Risk Factors” beginning on page 13.
Our Management Agreements with the Managed Equity REITs
RMR LLC is party to a business management agreement and a property management agreement with each Managed Equity REIT. The following is a summary of the terms of our business and property management agreements with the Managed Equity REITs. The summary does not purport to be complete and is subject to, and qualified in its entirety by, reference to the actual agreements, copies of which are filed or incorporated as exhibits to this Annual Report on Form 10-K.
Business Management Agreement Services
Each business management agreement requires RMR LLC to use its reasonable best efforts to present the Managed Equity REIT with a continuing and suitable real estate investment program consistent with the REIT’s real estate investment policies and objectives.
Subject to the overall management, direction and oversight of the Board of Trustees of each Managed Equity REIT, RMR LLC has the responsibility to:
•provide research and economic and statistical data in connection with the Managed Equity REIT’s real estate investments and recommend changes in the Managed Equity REIT’s real estate investment policies when appropriate;
•investigate, evaluate and negotiate contracts for the investment in, or the acquisition or disposition of, real estate and related interests, financing and refinancing opportunities and make recommendations concerning specific real estate investments to the Board of Trustees of the Managed Equity REIT;
•investigate, evaluate, prosecute and negotiate any of the Managed Equity REIT’s claims in connection with its real estate investments or otherwise in connection with the conduct of the Managed Equity REIT’s business;
•administer bookkeeping and accounting functions as required for the Managed Equity REIT’s business and operation, contract for audits and prepare or cause to be prepared reports and filings required by a governmental
authority in connection with the conduct of the Managed Equity REIT’s business, and otherwise advise and assist the Managed Equity REIT with its compliance with applicable legal and regulatory requirements;
•advise and assist in the preparation of all equity and debt offering documents and all registration statements, prospectuses or other documents filed by the Managed Equity REIT with the SEC or any state;
•retain counsel, consultants and other third party professionals on behalf of the Managed Equity REIT;
•provide internal audit services;
•advise and assist with the Managed Equity REIT’s risk management and business oversight function;
•advise and assist the Managed Equity REIT with respect to the Managed Equity REIT’s public relations, preparation of marketing materials, internet website and investor relations services;
•provide communication facilities for the Managed Equity REIT and its officers and trustees and provide meeting space as required;
•provide office space, equipment and experienced and qualified personnel necessary for the performance of the foregoing services; and
•to the extent not covered above, advise and assist the Managed Equity REIT in the review and negotiation of the Managed Equity REIT’s contracts and agreements, coordination and supervision of all third party legal services and oversight for processing of claims by or against the Managed Equity REIT.
Property Management Agreement Services
Under each property management agreement, RMR LLC is required to act as managing agent for each Managed Equity REIT’s properties and devote such time, attention and effort as may be appropriate to operate and manage the Managed Equity REIT’s properties in a diligent, orderly and efficient manner. Subject to the overall management and supervision of the Board of Trustees of each Managed Equity REIT, RMR LLC has the responsibility to:
•seek tenants for the Managed Equity REIT’s properties and negotiate leases;
•collect rents and other income from the Managed Equity REIT’s properties;
•make contracts for, and supervise repairs and/or alterations on, the Managed Equity REIT’s properties;
•for the Managed Equity REIT’s account and at its expense, hire, supervise and discharge employees as required for the efficient operation and maintenance of the Managed Equity REIT’s properties;
•obtain appropriate insurance for the Managed Equity REIT’s properties and notify the Managed Equity REIT’s insurance carriers with respect to casualties or injuries at the properties;
•procure supplies and other necessary materials;
•pay from rental receipts, other income derived from the Managed Equity REIT’s properties or other monies made available by the Managed Equity REIT for such purpose, all costs incurred in the operation of the Managed Equity REIT’s properties that are expenses of the Managed Equity REIT;
•establish reasonable rules and regulations for tenants of the Managed Equity REIT’s properties;
•institute or defend, on the Managed Equity REIT’s behalf and in the Managed Equity REIT’s name, any and all legal actions or proceedings relating to the operation of the Managed Equity REIT’s properties;
•maintain the books and records of the Managed Equity REIT reflecting the management and operation of the Managed Equity REIT’s properties and prepare and deliver statements of expenses for tenants of the REIT’s properties;
•aid, assist and cooperate with the Managed Equity REIT in matters relating to taxes and assessments and insurance loss adjustments;
•provide emergency services as may be required for the efficient management and operation of the Managed Equity REIT’s properties; and
•arrange for day to day operations of the Managed Equity REIT’s properties, including water, fuel, electricity, cleaning and other services.
Term and Termination
The business and property management agreements with each Managed Equity REIT automatically extend on December 31st of each year and have terms thereafter that end on the 20th anniversary of the date of each extension. A Managed Equity REIT has the right to terminate its management agreements with RMR LLC: (1) at any time upon 60 days’ written notice for convenience, (2) immediately upon written notice for cause, as defined in the agreements, (3) 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 (4) by written notice during the 12 months following a manager change of control, as defined in the agreements. RMR LLC has the right to terminate the management agreements for good reason, as defined in the agreements.
If a Managed Equity REIT terminates a management agreement for convenience, or if RMR LLC terminates a management agreement with a Managed Equity REIT for good reason, the Managed Equity REIT is obligated to pay RMR LLC a termination fee equal to the sum of the present values of the monthly future fees, as defined in the agreement, payable for the remaining term of the agreement, assuming it had not been terminated. If a Managed Equity REIT terminates a management agreement for a performance reason, as defined in the agreement, the Managed Equity REIT is obligated to pay RMR LLC the termination fee calculated as described above, but assuming a remaining term of ten years.
The management agreements provide for certain adjustments to the termination fees if a Managed Equity REIT merges with another REIT to which RMR LLC is providing management services or if the Managed Equity REIT spins off a subsidiary to which it contributed properties and to which RMR LLC is providing management services both at the time of the spin off and on the date of the expiration or termination of either of the management agreements.
A Managed Equity REIT is not required to pay any termination fee if it terminates its business or property management agreements for cause, or as a result of a manager change of control, in each case as defined in such agreements.
Business Management Agreement Fees and Expense Reimbursement
Each business management agreement between RMR LLC and a Managed Equity REIT provides for (i) an annual base management fee, payable monthly in arrears, and (ii) an annual incentive business management fee.
The annual base management fee generally is calculated as 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 $250.0 million, plus (c) 0.5% of the average invested capital exceeding $250.0 million; and
•the sum of (a) 0.7% of the average market capitalization, as defined in the applicable business management agreement, up to $250.0 million, plus (b) 0.5% of the average market capitalization exceeding $250.0 million.
The annual incentive business management fee payable by each Managed Equity REIT, if any, is calculated as follows:
•The incentive business management fee is calculated as an amount equal to 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 measurement period, and (b) the amount, expressed as a percentage, by which the Managed Equity REIT’s total return per share realized by its common shareholders (i.e. share price appreciation plus dividends) or the “total return per share,” exceeds the total shareholder return of a specified REIT index, the “benchmark return per share,” for the relevant measurement period, with each of (a) and (b) subject to adjustments for net common shares issued by the Managed Equity REIT during the measurement period.
•Our business management agreements with each Managed Equity REIT were amended effective August 1, 2021 to replace the benchmark index used in the calculation of incentive business management fees. These changes to the index were due to S&P Global ceasing to publish the SNL U.S. REIT indexes. Accordingly, the specified REIT
index utilized to calculate the benchmark return per share for each of our Managed Equity REITs when calculating the incentive business management fees is as follows:
For the Periods
Through July 31, 2021 On and After August 1, 2021
DHC SNL U.S. REIT Healthcare Index MSCI U.S. REIT/Health Care Index
ILPT SNL U.S. Industrial REIT Index MSCI U.S. REIT/Industrial REIT Index
OPI SNL U.S. Office REIT Index MSCI U.S. REIT/Office REIT Index
SVC SNL U.S. REIT Hotel Index MSCI U.S. REIT/Hotel & Resort REIT Index
•No incentive business management fee is payable by the Managed Equity REIT unless its total return per share during the measurement period is positive.
•The measurement period for an annual incentive business management fee is defined as the three year period ending on December 31 of the year for which such fee is being calculated.
•If the Managed Equity REIT’s total return per share exceeds 12% per year in the measurement period, the benchmark return per share is adjusted to be the lesser of the total shareholder return of the specified REIT index for such measurement period and 12% per year, or the “adjusted benchmark return per share.” In instances where the adjusted benchmark return per share applies, the incentive fee will be reduced if the Managed Equity REIT’s total return per share is between 200 basis points and 500 basis points below the specified REIT index by a low return factor, as defined in the applicable business management agreement, and there will be no incentive business management fee paid if, in these instances, the Managed Equity REIT’s total return per share is more than 500 basis points below the specified REIT index.
•The incentive business management fee payable by the Managed Equity REIT is subject to a cap equal to the value of the number of its common shares which would, after issuance, represent (a) 1.5% of the number of its common shares outstanding on December 31 of the year for which such fee is being calculated multiplied by (b) the average closing price of its common shares during the 10 consecutive trading days having the highest average closing prices during the final 30 trading days of the relevant measurement period.
•Incentive fees paid by the Managed Equity REIT for any measurement period may be subject to certain “clawback” if the financial statements of the Managed Equity REIT for that measurement period are restated due to material non-compliance with any financial reporting requirements under the securities laws as a result of the bad faith, fraud, willful misconduct or gross negligence of RMR LLC and the amount of the incentive fee paid by the Managed Equity REIT was greater than the amount it would have paid based on the restated financial statements.
If the business management agreement is terminated, the base business management fee and incentive business management fee due in respect of any partial period prior to the date of termination will be prorated as provided in the agreement.
Under each business management agreement: the Managed Equity REIT pays or reimburses RMR LLC for all of the expenses relating to the Managed Equity REIT’s activities, including the costs and expenses of investigating, acquiring, owning and disposing of its real estate (third party property diligence costs, appraisal, reporting, audit and legal fees), its costs of borrowing money, its costs of securities listing, transfer, registration and compliance with reporting requirements and its costs of third party professional services, including legal and accounting fees, and as otherwise agreed; and RMR LLC bears its general and administrative expenses relating to its performance of its obligations under the agreement, including expenses of its personnel, rent and other office expenses. Also, the allocable cost of internal audit services is reimbursed by each Managed Equity REIT to RMR LLC.
Property Management Agreement Fees and Expense Reimbursement
Each property management agreement between RMR LLC and a Managed Equity REIT provides for the following:
(i) a management fee equal to 3.0% of the gross rents collected from tenants, which is not applicable to any hotels, senior living communities or travel centers which are leased to, or managed by, a Managed Operating Company or another operating business such as a hotel management company or a senior living or healthcare services provider; and
(ii) a construction supervision fee equal to 5.0% of the cost of any construction, renovation or repair activities at the Managed Equity REIT’s properties, other than ordinary maintenance and repairs. In June 2021, we and DHC and SVC amended our respective property management agreements to, among other things, provide for our oversight of any major capital projects and repositionings at DHC’s senior living communities, including DHC’s senior living communities managed by Five Star, and SVC’s hotels, including SVC’s hotels managed by Sonesta, as DHC or SVC, as applicable, may request from time to time. Under the amended agreements, we receive the same fee previously paid to Five Star and Sonesta, respectively, for these services, which is equal to 3.0% of the cost of any such major capital project or repositioning.
Also, under each property management agreement, the Managed Equity REIT pays certain allocable expenses of RMR LLC in the performance of its duties, including wages for onsite property management personnel and allocated costs of centralized property management services.
Other Provisions
Under both the business and property management agreements, each Managed Equity REIT has agreed to indemnify RMR LLC, its members, officers, employees and affiliates against liabilities relating to acts or omissions of RMR LLC with respect to the provision of services by RMR LLC, except to the extent such provision of services was in bad faith or fraudulent, constituted willful misconduct or was grossly negligent. In addition, each management agreement provides that any disputes, as defined in those agreements, arising out of or relating to the agreement or the provision of services pursuant thereto, upon the demand of a party to the dispute, will be subject to mandatory arbitration in accordance with procedures provided in the agreement.
Our Management Agreements with the Managed Operating Companies
RMR LLC provides services and earns fees pursuant to a management agreement with each of the Managed Operating Companies. Under these agreements, RMR LLC provides services to the Managed Operating Companies relating to, or assists them with, among other things, their compliance with various laws and rules applicable to them, capital markets and financing activities, maintenance of their properties, selection of new business sites and evaluation of other business opportunities, accounting and financial reporting, internal audit, investor relations and general oversight of the company’s daily business activities, including legal and tax matters, human resources, insurance programs and management information systems.
Each Managed Operating Company pays RMR LLC a fee under its management agreement in an amount 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; and (iii) in the case of TA, the sum of TA’s gross fuel margin, determined as TA’s fuel sales revenues less its cost of fuel sales, plus TA’s total nonfuel revenues. In addition, the management agreement with each Managed Operating Company provides that the compensation of senior executives of the Managed Operating Company, who are also employees or officers of RMR LLC, is the responsibility of the party to or on behalf of which the individual renders services. In the past, because at least 80.0% of each of these executives’ business time was devoted to services to the Managed Operating Company, 80.0% of these executives’ total cash compensation was paid by the Managed Operating Company and the remainder was paid by RMR LLC.
The terms of the management agreements with each Managed Operating Company end on December 31st of each year, and automatically extend for successive one year terms, unless RMR LLC or the applicable Managed Operating Company gives notice of non-renewal before the expiration of the applicable term. Also, a Managed Operating Company may terminate its management agreement at any time (i) for Five Star and TA, on 60 days’ notice and RMR LLC may terminate such agreements at any time on 120 days’ notice and (ii) for Sonesta, on 30 days’ notice and RMR LLC may terminate its agreement with Sonesta on 30 days’ notice. If Five Star or TA terminates or elects not to renew its agreement, other than for cause as defined in each agreement, the Managed Operating Company is obligated to pay RMR LLC a termination fee equal to 2.875 times the sum of the annual base management fee and the annual internal audit services expense, which amounts are based on averages during the 24 consecutive calendar months prior to the date of notice of nonrenewal or termination.
Each Managed Operating Company has agreed to indemnify RMR LLC, its members, officers, employees and affiliates against liabilities relating to acts or omissions of RMR LLC with respect to the provision of services by RMR LLC, except to the extent such provision of services was in bad faith or was grossly negligent. In addition, each agreement provides that any disputes, as defined in those agreements, arising out of or relating to the agreement or the provision of services pursuant
thereto, upon the demand of a party to the dispute, shall be subject to mandatory arbitration in accordance with procedures provided in the agreement.
Our Management Agreements with the Managed Private Real Estate Capital Clients
RMR LLC provides management services to our Managed Private Real Estate Capital clients for which it receives, depending upon the services provided, a management fee based on a percentage of average invested capital, as defined in the applicable management agreements, a property management fee in an amount equal to 3.0% of rents collected from managed properties and a construction supervision fee in an amount equal to 5.0% of the cost of any construction, renovation or repair activities at the managed properties, other than ordinary maintenance and repairs.
Our Management Agreements with Advisory Clients
Tremont Realty Capital is party to a management agreement with SEVN. Pursuant to this agreement, Tremont Realty Capital provides SEVN with a continuous investment program, makes day to day investment decisions and generally manages the business affairs of SEVN in accordance with SEVN’s investment objectives and policies.
Tremont Realty Capital is compensated pursuant to its management agreements with SEVN at an annual rate of 1.5% of SEVN’s equity, as defined in the agreement. Tremont Realty Capital may also earn an incentive fee under this management agreement beginning the second calendar quarter of 2021 equal to the difference between: (a) the product of (i) 20% and (ii) the difference between (A) SEVN’s core earnings, as defined in the agreement, 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) SEVN’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 Realty Capital 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 core earnings for the 12 most recently completed calendar quarters (or such lesser number of completed calendar quarters from January 5, 2021) in the aggregate is greater than zero. The incentive fee may not be less than zero.
The initial term of the management agreement with SEVN ends on December 31, 2023, and the agreement will automatically renew for successive one year terms beginning January 1, 2024 and each January 1 thereafter, unless it is sooner terminated upon written notice delivered no later than 180 days prior to a renewal date by the affirmative vote of at least two-thirds (2/3) of the independent trustees of SEVN based upon a determination that (a) Tremont Realty Capital’s performance is unsatisfactory and materially detrimental to SEVN or (b) the base management fee and incentive fee, taken as a whole, payable to Tremont Realty Capital under the management agreement is not fair to SEVN (provided that in the instance of (b), Tremont Realty Capital will be afforded the opportunity to renegotiate the base management fee and incentive fee prior to termination). The management agreement may be terminated by Tremont Realty Capital before each annual renewal upon written notice delivered to the board of trustees of SEVN no later than 180 days prior to an annual renewal date.
In the event the management agreement is terminated by SEVN without a cause event or by Tremont Realty Capital for a material breach, SEVN will be required to pay Tremont Realty Capital a termination fee equal to (a) three times the sum of (i) the average annual base management fee and (ii) the average annual incentive fee, in each case paid or payable to Tremont Realty Capital during the 24 month period immediately preceding the most recently completed calendar quarter prior to the date of termination or, if such termination occurs within 24 months of its initial commencement, the base management fee and the incentive fee will be annualized for such two year period based on such fees earned by Tremont Realty Capital during such period, plus (b) $1.6 million. In addition, the initial organizational costs related to TRMT’s formation and the costs of its initial public offering and the concurrent private placement that Tremont Realty Capital had paid pursuant to its management agreement with TRMT will be included in the “Termination Fee” under and as defined in SEVN’s management agreement with Tremont Realty Capital. No termination fee will be payable if the management agreement is terminated by SEVN for a cause event or by Tremont Realty Capital without SEVN’s material breach.
Tremont Realty Capital, and not SEVN, will be responsible for the costs of Tremont Realty Capital’s employees who provide services to SEVN, including the cost of Tremont Realty Capital’s personnel who originate SEVN’s loans, unless any such payment or reimbursement is specifically approved by a majority of the independent trustees of SEVN or is a shared services cost or relates to awards made under any equity compensation plan adopted by SEVN from time to time. SEVN is required to pay or to reimburse Tremont Realty Capital and its affiliates for all other costs and expenses of SEVN’s operations, including but not limited to, the costs of rent, utilities, office furniture, equipment, machinery and other overhead
type expenses, the costs of legal, accounting, auditing, tax planning and tax return preparation, consulting services, diligence costs related to SEVN’s investments, investor relations expenses and other professional services, and other costs and expenses not specifically required under the management agreement to be borne by Tremont Realty Capital. Some of these overhead, professional and other services will be provided by RMR LLC pursuant to a shared services agreement between Tremont Realty Capital and RMR LLC. In addition, SEVN will also pay its pro rata costs of any combined directors and officers liability or other insurance programs arranged by RMR LLC for public companies managed by RMR LLC or its affiliates and SEVN’s pro rata portion of internal audit costs incurred by RMR LLC on behalf of SEVN and other public companies to which RMR LLC or its affiliates provides management services.
Our Organizational Structure
Our organizational structure has not materially changed since September 30, 2019. For a discussion of our organizational structure, see Part I, Item 1 “Business - Our Organizational Structure” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019.
Regulation
We and our clients are subject to supervision and regulation by state, federal and non-U.S. governmental authorities and are subject to various laws and judicial and administrative decisions imposing various requirements and restrictions upon the ways in which we and our clients do business including various requirements for public disclosure of our and their activities.
The Managed REITs have qualified and expect to continue to qualify to be taxed as REITs under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, or the Code. In addition, the Managed Equity REITs generally distribute, and SEVN is expected to generally distribute, 100.0% of their taxable income to avoid paying corporate federal income taxes; and as REITs, such companies must currently distribute, at a minimum, an amount equal to 90.0% of their taxable income. REITs are also subject to a number of organizational and operational requirements in order to elect and maintain REIT status, including share ownership tests and assets and gross income composition tests. If a Managed REIT fails to continue to qualify as a REIT under Sections 856 through 860 of the Code in any taxable year, it will be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate tax rates. Even if a Managed REIT qualifies for taxation as a REIT, it may be subject to state and local income taxes and to federal income tax and excise tax on its undistributed income.
Certain of our clients own or operate healthcare and senior living properties. These companies are subject to numerous federal, state and local laws and regulations that are subject to frequent and material changes (sometimes applied retroactively) resulting from legislation, adoption of rules and regulations and administrative and judicial interpretations of existing laws. Some of the revenues received by these companies are paid by governmental programs which are also subject to periodic and material changes.
Certain of our clients own and operate hotels and some provide dining, food and beverage services, including the sale of alcoholic beverages. The operation of such properties is subject to numerous regulations by various governmental entities.
TA is also required to comply with federal and state regulations regarding the storage and sale of petroleum and natural gas products and franchising of petroleum retailers. In addition, as a result of TA’s involvement in gaming operations, TA and certain of its subsidiaries are subject to gaming regulations in Illinois, Louisiana, Montana, Nevada and Pennsylvania; and because SVC owns TA properties where gaming occurs, SVC is also subject to gaming regulations in some of those jurisdictions.
Tremont Realty Capital is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940, as amended, or the Investment Advisers Act. Tremont Realty Capital provides investment advisory and administrative services to mortgage REITs, including SEVN, and may, in the future, provide such services to private funds that invest in commercial real estate debt. Employees of Tremont Realty Capital may also act as transaction originators for its non-investment advisory clients, which we refer to as the Tremont business. These activities result in certain aspects of our asset management business being supervised by the SEC and requires our compliance with numerous obligations, including record keeping requirements, operational procedures and disclosure obligations. SEVN intends to conduct its business in a manner that does not require its registration under the 1940 Act and, to do so, may rely on any available exemption from registration, or exclusion from the definition of “investment company,” under the 1940 Act. To maintain this exemption from registration, SEVN will be required to ensure the composition of its portfolio complies with certain tests.
The ownership and operation of real estate properties are subject to various federal, state and local laws and regulations concerning the protection of the environment, including air and water quality, hazardous or toxic substances and health and
safety. Certain of our clients own real estate, and we may be responsible for compliance with some of these environmental protection laws.
While we incur significant expense to comply with the various regulations to which we and our clients are subject, we do not believe that existing statutes and regulations have had a material adverse effect on our business. However, it is not possible to forecast the nature of future legislation, regulations, judicial decisions, orders or interpretations, nor their impact upon our future business, financial condition, results of operations or prospects.
Competition
The asset management industry is intensely competitive, and we expect it to remain so. Our continued growth will depend upon our ability to manage or assist our clients in an effective manner and identify and execute on opportunities to expand our services to new clients and new sources of capital.
Our existing clients face significant competition in their respective sectors or industries. The Managed Equity REITs compete on a national and regional basis with many third parties engaged in real estate investment activities including other publicly traded REITs, non-traded REITs, commercial and investment banking firms, private institutional funds, private equity funds and other investors. Five Star competes with numerous other companies that provide senior living services, including home healthcare companies and other real estate based service providers. Sonesta competes with other hotel operators and franchisors. TA competes on a national and local basis with companies operating travel centers, as well as retailers operating in the convenience store and retail gas station industries. SEVN competes on a national and regional basis with a variety of institutional investors, including other REITs, specialty finance companies, public and private funds (including funds or investors that we or our affiliates may sponsor, advise or manage), banks, credit unions, insurance companies and other financial institutions.
We compete with other businesses in the real estate management and asset management businesses. Many of these competitors may have greater financial, technical, marketing and other resources than we or our clients have. Such competitors may also enjoy significant competitive advantages that result from, among other things, a lower cost of capital, greater business scale and enhanced operating efficiencies. Certain competitors may also be subject to different regulatory regimes or rules that may allow them more flexibility or better access to pursue potential investments and raise capital for themselves or their managed companies. In addition, certain competitors may have higher risk tolerance, different risk assessments or lower return thresholds, which could allow them to consider a broader range of investments and to bid more aggressively for investment opportunities. Our ability and the ability of our clients to continue to compete effectively will depend in large part upon the ability to attract, retain and motivate employees.
Corporate Sustainability
Over our more than three decades in business, we and our clients have been guided by Environmental, Social and Governance, or ESG, principles. Given the magnitude of our platform, we believe corporate sustainability must be a strategic focus alongside our focus on economic performance. Our sustainability practices - minimizing our impact on the environment, embracing the communities where we operate and attracting top professionals - are critical elements supporting our long-term success.
Environmental Focus
We recognize our responsibility to minimize the impact of our business on the environment. We seek to preserve natural resources and maximize efficiencies in order to reduce the impact the properties we manage have on the planet. Our environmental sustainability strategies and best practices help to mitigate our managed properties’ environmental footprint, optimize operational efficiency and enhance our competitiveness in the marketplace. Certifications help to benchmark performance and mitigate risk.
We drive value, manage risk and benchmark performance of our managed properties by effectively capturing and managing data through real-time energy monitoring, or RTM. RTM facilitates advanced data analytics and access to detect faults and inefficiencies in equipment operations faster meanwhile enhancing building system control in a cost-effective and scalable way across platforms for our clients. Our first RTM program finished one year ahead of schedule, captured 53 properties totaling approximately 46% of our managed annual electricity spend and generated $2.1 million in annual savings. We continue to expand our RTM program and expect to cost effectively scale to cover up to 90% of our managed energy spend.
Our energy performance programs drive down energy consumption and reduce carbon emissions of our managed properties. Lower energy use and emissions reduce our managed properties' potential exposure to policies that call for a carbon tax or other emissions-based penalties. Our existing business practices align with the Task Force on Climate-related Financial Disclosures, or TCFD, framework across both physical and transition risks and opportunities.
As a result of our sustainability initiatives, we and our managed properties have historically received honors from The Building Owners and Managers Association, or BOMA, The Environmental Protection Agency, or EPA, and the U.S. Green Building Council, or USGBC, amongst others. In 2020, the honors achieved by our Managed Equity REITs, included 53 BOMA 360 Certified Properties, 63 ENERGY STAR Certified Properties and 33 LEED Certified Properties. Finally, for the third year in a row, we received the 2021 ENERGY STAR Partner of the Year Award for outstanding efforts as a Service and Product Provider, and for the fourth year in a row, OPI received the 2021 ENERGY STAR Partner of the Year Sustained Excellence Award for outstanding efforts in energy management.
Human Capital Resources and Governance
We are led by an experienced management team with proven ability to manage and grow a resilient business. Moreover, significant insider ownership and the structure of the contracts with our clients provide a strong alignment of interests with our clients and with public shareholders. Our dedicated asset management and property management teams blend long-term strategic vision with careful execution of day-to-day operations to optimize efficiency and foster the sustainable growth of our Managed Equity REITs. Our property management organization is dedicated solely to the assets of our clients.
Employees and Equal Opportunity
As of September 30, 2021, RMR LLC employed approximately 600 real estate professionals, including 46% in our corporate office and 54% across our more than 30 offices throughout the United States. The average tenure of our employees was 6.3 years. Our employees are the foundation of our success and in many ways our most critical asset. We ensure employees receive competitive salaries and benefits and we aim to attract professionals who will uphold our values of social and environmental stewardship.
We are an equal opportunity employer, with all qualified applicants receiving consideration for employment without regard to race, color, religion, sex, sexual orientation, gender identity, national origin, disability or protected veteran status. Throughout our organization, including our Board, we are committed to racial equality and fostering a culture of diversity and inclusion. We have made diversity and inclusion an important part of our hiring, retention and development programs. As of September 30, 2021, 37% and 27% of our approximately 600 employees were female and non-white, respectively.
Board Diversity
As of September 30, 2021, our Board of Directors composition included 50% of members from under represented communities, including 33% female and 17% African American.
Employee Engagement, Education and Training
Our employee engagement initiatives align with our goal of being an employer of choice with a thriving workforce that encourages career enrichment and positions us for growth. Our programs are carefully designed for hiring, developing and retaining the best talent in the real estate industry. Our recruiting programs, on-boarding and retention programs and our development and on-going training programs currently include the following:
•LiveWell Employee Wellness Program: Our LiveWell program has steadily gained traction since it was launched in 2016 with the goal of providing resources and incentives to enhance employees’ physical, emotional and financial wellness. LiveWell includes a range of educational presentations, webinar series and wellness competitions.
•Managing with Impact: Since 2016, we hosted Managing with Impact workshops for managers throughout the company to expand their perspectives and increase their confidence as a new manager. Within their first year, managers complete the workshop and learn how to effectively delegate, solve problems and give meaningful performance feedback.
•Tuition Reimbursement Program: We offer tuition assistance up to $20,000 annually for work-related education from accredited colleges and universities in order to deepen employees’ skillsets and support personal enrichment.
•Leadership Development Program: This two-year rotational program prepares newly hired MBA graduates for future leadership roles by providing an expansive view into all our clients.
We also prioritize on-going education and training for all employees across our organization as follows:
•Engineering Development Program: Given the increasing challenges within the real estate industry of attracting qualified engineers throughout the country, we made it a strategic focus to develop the next generation of qualified building engineers. Our Engineering Development Program standardizes the recruitment and development of engineering candidates to prepare them for open positions and to plan for future engineering needs. We recruit from various trade schools and job fairs to identify candidates for the two-year program with a curriculum that includes specific onboarding plans for training in electrical, HVAC, or plumbing trades and covers a range of essential engineering staff development topics.
•Industry Associations & Credentials: In order to further their professional development, many of our employees seek out credentials and association memberships, with any membership costs reimbursed by us. Examples of credentials and association memberships include: Building Owners and Managers Association Membership and Event Participation, Certified Property Manager, Certified Public Accountant and National Association of Industrial and Office Properties.
The success of our employee programs earned us the Real Estate Management Excellence Award for Employee and Leadership Development from the Institute of Real Estate Management in 2019.
Internet Website
Our internet website address is www.rmrgroup.com. We make available, free of charge, through the “Investors & Media” section of our website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, as soon as reasonably practicable after these forms are filed with, or furnished to, the SEC. Any material we file with or furnish to the SEC is also maintained on the SEC website (sec.gov).
The information on or accessible through our website is not incorporated by reference into this Annual Report on Form 10-K or other documents we file with, or furnish to, the SEC. We intend to use our website as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. Such disclosures will be included on our website in the “Investors & Media” section. Accordingly, investors should monitor such portions of our website, in addition to following our press releases, SEC filings and public conference calls and webcasts.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors
Summary of Risk Factors
Our business is subject to a number of risks and uncertainties. The following is a summary of the principal risk factors described in this section:
•the duration and severity of the impact of COVID-19 and the resulting disruption on us and our clients;
•changing market conditions, practices and trends may adversely impact our clients and the fees we receive from them;
•substantially all of our revenues are derived from services to a limited number of clients;
•our management fees from our clients are based, in general, on cost of assets, market capitalization, shareholder returns, rent receipts, capital projects or certain revenues, as applicable, and, accordingly our future revenues, income and cash flows will decline if the business activities, assets, market capitalizations, shareholder returns, rent receipts, capital projects or certain revenues of our clients decline;
•our revenues may be highly variable;
•potential terminations of our management agreements with our clients;
•our ability to expand our business depends upon the growth and performance of our clients and our ability to obtain or create new clients for our business and is often dependent upon circumstances beyond our control;
•our ability to continue to pay a regular quarterly dividend is dependent on many factors, including current and expected earnings and alternative uses for available cash and our board may decide to lower our dividends;
•our and our Managed Operating Companies’ ability to attract, retain and motivate sufficient qualified personnel in a challenging labor market and to effectively manage our and their labor costs;
•our ability to retain the services of our controlling shareholder and other key and talented personnel;
•our and our clients’ risks associated with our and their costs of compliance with laws and regulations, including securities regulations, exchange listing standards and other laws and regulations affecting public companies;
•third party expectations relating to ESG factors may impose additional costs and expose us and our clients to new risks;
•risks related to the security of our information technology;
•risks related to supply chain constraints, commodity pricing and other inflation, including inflation impacting wages and employee benefits;
•risks related to acquisitions, dispositions and other activities by or among our clients;
•allegations, even if untrue, of any conflicts of interest arising from our management activities; and
•risks related to our Class A Common Shares, including our dual class capital structure.
Prospective investors should carefully consider the risks described in this section, together with all of the other information in this Annual Report on Form 10-K. These risks may not be the only risks we face but are risks we believe may be material at this time. Additional risks and uncertainties that we do not yet know of, or that we currently think are immaterial, may also impair our business operations or financial results. If any of the events or circumstances described in this section occur, our business, financial condition or results of operations and the trading price of our securities could decline. Investors and prospective investors should consider these risks, the information contained under the heading “Warning Concerning Forward-Looking Statements” and the risks described elsewhere in this Annual Report on Form 10-K before deciding whether to invest in our securities. We may update these risk factors in our future periodic reports.
Risks Related to Our Business
The duration of the COVID-19 pandemic and the extent of its continued and ultimate impact on the economy and public health is unknown, but it may have a long term negative affect on us and our clients.
The strain of coronavirus that causes the viral disease known as COVID-19 has been declared a pandemic by the World Health Organization, and the U.S. Health and Human Services Secretary declared a public health emergency in the United States in response to the outbreak. The COVID-19 pandemic has had a substantial adverse impact on the global economy, including the U.S. economy, during various stages of the pandemic. Government requirements to stay in place and temporarily close businesses had a substantial negative impact on the economy. Government spending during the pandemic, and subsequent easing of the government restrictions, has since helped avert extended negative economic impact to the economy and is believed to have helped foster a return to economic growth. However, the progression of the pandemic has been unpredictable with periods of high rates of infection, followed by periods of reduced infection rates later followed again by periods of high infection rates. Recently, the Delta variant of COVID-19 spread in the United States during the 2021 summer months and has begun to wane. This spike is attributed with causing a reduction in the level of economic growth that had been expected. Any future variants of COVID-19 could have similar or worse impacts on the economy and public health.
The COVID-19 pandemic has had particularly negative impacts on certain industries in the commercial real estate market, including hotels, senior living communities, rehabilitation services and certain retail businesses, such as movie theaters and fitness centers. Certain of our clients operate in those industries and they and their businesses and operating results have been substantially negatively impacted. These clients experienced decreases in their market capitalizations during the pandemic, which decreased our management fee revenues. Although their market capitalizations have generally improved or stabilized from their low points during the pandemic, they are below the levels experienced prior to the pandemic, and they may remain so for an indefinite period and they could decline.
Although we have experienced increases in the fees we earn from our clients since the low points during the pandemic, there can be no assurance that the COVID-19 pandemic will not continue to negatively impact our clients and reduce the fees that we earn from our clients in future periods.
Potential consequences of the unprecedented measures taken in response to the spread of the virus that causes COVID-19 and the potential reintroduction of such measures in light of the spread of the Delta variant and other COVID-19 related variants and market disruptions and volatility affecting us include, but are not limited to:
•sudden and/or severe declines in the market price of our and our clients’ common shares;
•the inability of our clients to comply with certain financial covenants or pay interest and principal on their outstanding debt that could result in their defaulting under their debt agreements;
•the inability of our clients to access debt and equity capital on attractive terms, or at all;
•downgrades of our clients’ credit ratings by nationally recognized credit rating agencies;
•the inability of our clients to reduce leverage through the sale of identified properties in accordance with targets;
•the inability of borrowers under SEVN's loans to timely pay interest and principal under their respective loans;
•continued or new state, local and federal industry-initiated tenant relief efforts that may adversely affect some clients’ ability to collect rent and/or enforce remedies for the failure to pay rent;
•the inability of our clients to maintain or increase their current distribution rate, or make any distributions to their shareholders;
•uncertain economic and financial market conditions that could significantly reduce the value of the real estate, loans and other investments of our clients and reduce the amounts earned on those investments;
•increased risk of our clients’ and their tenants’ and managers’ default or bankruptcy;
•increased risk of our clients’ and their tenants’ and managers’ inability to weather an extended cessation of normal economic activity and thereby impairing their ability to continue functioning as going concerns and our clients’ tenants’ and managers’ ability to pay rent and returns to our clients;
•reduction in our property management fees if our clients reduce or delay capital expenditures in order to conserve capital or because of a reintroduction of construction moratoriums issued by governments;
•our and our clients’ and their tenants’ and managers’ inability to operate our, our clients’ and our and their tenants’ businesses if the health, well-being or morale of our and their management personnel and other employees is adversely affected by the ongoing COVID-19 pandemic or otherwise, particularly if a significant number of individuals are impacted; and
•reduced economic demand resulting from any mass employee layoffs or furloughs in response to future governmental action that may be taken to slow the spread of COVID-19 and its variants, and reductions in spending and other business operations and initiatives in response to the COVID-19 pandemic and other economic conditions, which could impact our and our clients’ and their tenants’ and managers’ continued viability.
There remains uncertainty as to the ultimate duration and severity of the COVID-19 pandemic, including risks that may arise from the Delta variant and other COVID-19 related variants, 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, the ability of vaccinations to prevent infection and the spread of COVID-19, 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. A continued, long-duration and severe COVID-19 pandemic would likely materially and adversely affect us and our clients.
Market, consumer and workplace practices may change indefinitely in response to the COVID-19 pandemic and those changes could be detrimental to us and our clients’ businesses.
Market, consumer and workplace practices have changed during the pendency of the COVID-19 pandemic in response to temporary closures of businesses, governmental stay in place orders and the proliferation of remote working. For example, the increased adoption of and familiarity with remote work practices could result in decreased demand for business travel, hotel stays, conference facilities, office space, diesel fuel and gasoline. In addition, consumer practices and demands may change from what they were prior to the onset of the COVID-19 pandemic, including avoiding activities where people congregate, such as hotels, restaurants and fitness centers. Further, despite the continued distribution of the COVID-19 vaccines, as a result of the ongoing effects of the COVID-19 pandemic, there is a possibility of continued or increased occupancy declines at senior living communities, due to the surge of the Delta variant or other COVID-19 related variants, current residents leaving senior living communities, restrictions on new residents moving into and/or touring senior living communities and the possibility that older adults will forego or delay moving into senior living communities because of perceived safety issues associated with the COVID-19 pandemic. To the extent these changes occur on a long term basis, our clients’ businesses, operating results, financial condition and prospects may be materially adversely impacted, which may result in our realizing decreased fees from our clients and declines in our operating results and financial condition.
Substantially all of our revenues are derived from our provision of management services to a limited number of companies. The loss or failure, or decline in business or assets, of any of the Managed Equity REITs could substantially reduce our revenues.
The fees we earn from providing management services to, and the reimbursable fees we receive from, the Managed Equity REITs comprise substantially all our revenues. Our operating results and our ability to maintain and grow our revenues depend upon the ability of our Managed Equity REITs to raise capital to invest in real estate assets, to maintain and grow their investments and market capitalizations and to achieve positive shareholder returns in excess of applicable REIT total shareholder return indexes. Reduced business activities, market capitalizations or shareholder returns, including such reductions caused by, or in response to, the COVID-19 pandemic and its aftermath, sales of assets or the failure of any of the Managed Equity REITs or the termination of their management agreements with us would materially reduce our revenues and our profitability.
Our revenues may be highly variable.
RMR LLC’s business management agreement with each Managed Equity REIT provides for a base business management fee that is based on the lower of the average historical costs of the Managed Equity REIT’s assets under management or its average market capitalization, as calculated in accordance with the applicable business management agreement, and an incentive business management fee that is based on the Managed Equity REIT’s relative outperformance of a specified REIT total shareholder return index. The management fees we earn under these agreements are highly variable.
The base business management fee payable by a Managed Equity REIT may increase or decrease materially as the Managed Equity REIT acquires or disposes of real estate assets or its market capitalization increases or decreases. In addition, we generally only earn an incentive business management fee under our business management agreement with a Managed Equity REIT if it outperforms an identified REIT total shareholder return index during the measurement period and certain other conditions are satisfied, as measured at the end of the applicable measurement period. The shareholder returns realized by a Managed Equity REIT, its market capitalization and its ability to raise capital or make investments may be impacted by trends in the Managed Equity REIT’s portfolio, the U.S. real estate industry generally, the Managed Equity REIT’s industry specifically or other factors that are outside of our or its control, including the continued effects of the COVID-19 pandemic. Whether we earn an incentive fee, and the amount of any incentive fee we may earn, may have a significant impact on the amount of revenues we earn. For example, in the fiscal years ended September 30, 2021, 2020 and 2019, incentive business management fees earned from the Managed Equity REITs were 0%, 0% and 39.9%, respectively, of our total management and advisory services revenues. Further, the fees we earn under our property management agreements with the Managed Equity REITs are based on a percentage of the rents our Managed Equity REITs receive and a percentage of the costs of construction, in each case, at properties we manage for them. To the extent the Managed Equity REITs receive reduced rent or incur lower construction costs, our property management fee revenues would be negatively impacted. Also, the fees under our management agreements with the Managed Operating Companies are based on a percentage of revenues (in the case of TA, gross fuel margin and nonfuel revenues) earned by them or generated at the properties they manage. Our Managed Operating Companies have experienced high revenue volatility in the past, and given the nature of the Managed Operating Companies’ businesses (i.e., travel centers, senior living communities and hotels), may continue to experience revenue volatility for the reasonably foreseeable future.
Our management agreements with our clients are subject to termination.
Our management agreements with our clients may be terminated by a client or by us in certain circumstances. For example, if we do not satisfy the applicable measures for calendar year 2021 under our management agreements with DHC or SVC, DHC or SVC, as applicable, will have the right to terminate its management agreement by prior written notice to us within 60 days following December 31, 2021, and in which case, it would be required to pay us the applicable termination fee. If any of our management or advisory agreements with a client is terminated, we may be unable to replace the lost revenue. Even if we receive a termination fee upon the termination of a management agreement with a client, we may be unable to invest the after tax proceeds from the termination fee we receive in opportunities that earn returns equal to or greater than the revenues lost as a result of the terminated management agreement. The termination of our management agreement or advisory agreement with any of our clients could have a material adverse impact on our business, results of operations and financial condition.
We are significantly dependent on conditions in the commercial real estate industry.
Our business and operations are significantly dependent on conditions in the commercial real estate industry, which in turn is impacted by general economic conditions in the United States. Significant portions of the commercial real estate markets in the United States were significantly negatively impacted during the recession that occurred during the early stages of the COVID-19 pandemic, and certain aspects of that market continue to be challenged by the pandemic and the changes to market and workplace practices in response to the pandemic, such as remote work for many office based workers, reduced hotel occupancy and declines in senior living communities’ operations. Adverse conditions in the commercial real estate industry and declining real estate values would harm our business and financial condition by limiting our and our clients’ access to debt and equity capital and our and their ability to grow our and their businesses. Adverse conditions may also give rise to an increase in tenant defaults under our clients’ leases, defaults of SEVN’s loans, and decreased market capitalizations, shareholder returns, rent receipts and capital projects for the Managed Equity REITs.
Changes in market interest rates may significantly reduce our revenues or impede our growth.
Changes in market interest rates may be sudden and may significantly reduce our revenues or impede our growth. Interest rates have remained at relatively low levels on a historical basis, and the U.S. Federal Reserve had previously indicated that it did not expect to raise interest rates in response to the COVID-19 pandemic and current market conditions until at least the end of 2023. However, the Federal Reserve has recently indicated that, in light of the economic recovery and higher than anticipated inflation, it may raise interest rates sooner than expected. The timing, number and amount of any future interest rate increases are uncertain.
Increases in market interest rates may materially and negatively affect us. One of the factors that investors typically consider important in deciding whether to buy or sell the common shares of our Managed REITs is the distribution rate with respect to such shares relative to prevailing market interest rates. If market interest rates go up, investors may expect a higher distribution rate before investing in a Managed REIT or they may sell the Managed REITs’ common shares and seek alternate investments with a higher distribution rate. Sales of common shares of the Managed Equity REITs may cause a decline in the
market prices of such shares, which reduces the market capitalizations and total shareholder returns of the Managed Equity REITs, which, in turn, may materially reduce the fees we earn under our business management agreements with them. Moreover, an increase in interest rates could raise borrowing costs for our clients, negatively impact their access to capital to fund future growth, reduce their earnings and total shareholder returns and cause SEVN’s borrowers to default, which may materially reduce the fees we earn under our business management agreements with our clients.
Low market interest rates, particularly if they remain over a sustained period, may result in increased use of debt capital to fund property acquisitions, lower capitalization rates for property purchases and increased competition for property purchases, which may reduce the amount of property acquisitions by our clients and, in turn, impede our ability to grow and realize increased management fees from our clients.
If we cannot retain and motivate our key and talented personnel and recruit, retain and motivate new talented personnel, our business, results and financial condition could be adversely affected.
Our people are the foundation of our success and in many ways our most critical asset. Our continued success depends to a great extent on our ability to retain and motivate our key and talented personnel and strategically recruit, retain and motivate new talented personnel. However, we may not be successful in these efforts as the market for qualified employees in the asset management industry is extremely competitive. Historically, we have not had employment agreements with our key employees and we have no present intention to enter into any. Our ability to recruit, retain and motivate our personnel is dependent on our ability to offer attractive compensation, opportunities for professional growth and a desirable work environment. In addition, our clients have historically granted equity awards to our officers and certain other employees of ours. If our clients reduce the amount of, or stop making, similar grants in the future, or if the value of any equity awards they may grant are lower than anticipated, we may need to increase the amount of compensation we pay to offset the reduction in compensation our officers and other applicable employees would otherwise receive. In order to recruit and retain existing and future personnel, we may need to increase the level of compensation that we pay to them, which may cause a higher amount of our revenue to be paid out in the form of compensation, which may have an adverse impact on our profits.
We depend on our controlling shareholder and other key and talented personnel.
We depend on the efforts, skills, reputations and business contacts of our controlling shareholder, Adam D. Portnoy, and other key and talented personnel. The extent and nature of the experience of our executive officers and of the relationships they have with real estate professionals and financial institutions, although not a guarantee of positive results, are critical to the success of our business. The loss of the services of any of them or the loss of investor confidence in such personnel could have a material adverse effect on our revenues, operating income and cash flows and could impair our ability to maintain or grow assets under management in our clients or otherwise maintain or grow our business.
We are subject to substantial regulation and numerous contractual obligations and internal policies, and failure to comply with these provisions could have a material adverse effect on our business, financial condition and results of operations.
We are subject to substantial regulation and numerous contractual obligations and internal policies. We are subject to regulation by the SEC, Nasdaq, and other federal, state and local or international governmental bodies and agencies or self-regulatory organizations. Our subsidiary, Tremont Realty Capital, is registered with the SEC as an investment adviser under the Investment Advisers Act. The Investment Advisers Act requires registered investment advisers to comply with numerous obligations, including compliance, record keeping, operating and marketing requirements, disclosure obligations and limitations on certain activities. Investment advisers also may owe fiduciary duties to certain of their clients.
We are also responsible for managing or assisting with the regulatory aspects of certain of our clients, including the Managed REITs’ compliance with applicable REIT rules and SEVN’s maintenance of its exemption from registration under the 1940 Act. The level of regulation and supervision to which we and our clients are subject varies from jurisdiction to jurisdiction and is based on the type of business activity involved. For example, we and SEVN may also be subject to state licensing requirements to conduct lending activities. The regulations to which we and our clients are subject are extensive, complex and require substantial management time and attention. Regulatory oversight and enforcement may become more rigorous for regulated industries as a result of the impact of the COVID-19 pandemic, especially in the wake of the array of state and federal government financial assistance programs. Laws and regulations passed in connection with the ongoing COVID-19 pandemic may result in a more complex regulatory, tax and political environment, which could subject us to increased compliance costs and administrative burdens. COVID-19 related laws and regulations can be subject to rapid change depending on public health developments, which can lead to confusion and make compliance with laws uncertain. Further, in connection with the Biden administration, uncertainty has arisen regarding prospective changes in laws and regulations affecting the financial industry, including the possibility of significant revision to U.S. financial and tax laws, rules and regulations that could have an adverse impact on us and our clients. These regulatory and fiduciary obligations may result in increased costs or otherwise adversely
impact our business. Our or our clients’ failure to comply with any of the regulations, contractual obligations or policies applicable to it may subject us to litigation, extensive investigations, enforcement actions, as well as substantial fines, penalties and reputational risk, and our business and operations could be materially adversely affected.
Our lack of compliance with applicable law could result in, among other things, our inability to enforce contracts, our default under contracts (including our management agreements or advisory agreements with our clients) and our ineligibility to contract with, and receive revenue from, governmental authorities and agencies, our clients or other third parties.
We have numerous contractual obligations with which we must comply on a continuous basis to operate our business, the default of which could have a material adverse effect on our business and financial condition. We have established internal policies designed to ensure that we manage our business in accordance with applicable law and regulation and in accordance with our contractual obligations. These internal policies may not be effective in all regards; and, if we fail to comply with our internal policies, we could be subjected to additional risk and liability.
Third party expectations relating to ESG factors may impose additional costs and expose us and our clients to new risks.
There is an increasing focus from certain investors and certain of our clients’ tenants, managers, borrowers, customers, employees, and other stakeholders concerning corporate responsibility, specifically related to ESG factors. Some investors may use these factors to guide their investment strategies and, in some cases, may choose not to invest in us or our clients, or otherwise do business with us or our clients, if they believe our or their policies relating to corporate responsibility are inadequate. Third party providers of corporate responsibility ratings and reports on companies have increased in number, resulting in varied and in some cases inconsistent standards. In addition, the criteria by which companies' corporate responsibility practices are assessed are evolving, which could result in greater expectations of us and our clients and cause us and our clients to undertake costly initiatives to satisfy such new criteria. Alternatively, if we or our clients elect not to or are unable to satisfy such new criteria or do not meet the criteria of a specific third party provider, some investors may conclude that our or their policies with respect to corporate responsibility are inadequate. We and our clients may face reputational damage in the event that our or their corporate responsibility procedures or standards do not meet the standards set by various constituencies. If we and our clients fail to satisfy the expectations of investors and our clients’ tenants, managers, borrowers, customers, employees and other stakeholders or our or our clients’ initiatives are not executed as planned, our and our clients’ reputation and financial results could be adversely affected, the management fees we may earn from our clients may decline, and our revenues, results of operations and ability to grow our business may be negatively impacted.
We and our clients are subject to risks from adverse weather, natural disasters and climate events.
We and our clients are subject to risks and could be exposed to additional costs from adverse weather, natural disasters and climate events. For example, the properties owned by our Managed Equity REITs could be severely damaged or destroyed by physical climate risks that could materialize as either singular extreme weather events (for example floods, storms and wildfires) or through long-term impacts of climatic conditions (such as precipitation frequency, weather instability and rise of sea levels). Such events could also adversely impact our other clients and cause significant losses if such clients or their tenants, managers or borrowers are unable to operate their businesses due to damage resulting from such events. If we or our clients fail to adequately prepare for such events, our and our clients’ revenues, results of operations and financial condition may be impacted.
We rely on information technology and systems in our operations, and any material failure, inadequacy, interruption or security breach of that technology or those systems could materially harm our business.
We rely on information technology and systems, including the Internet and cloud-based infrastructures, commercially available software and our internally developed applications, to process, transmit, store and safeguard information and to manage or support a variety of our business processes, including financial transactions and maintenance of records, which may include personal identifying information of employees, tenants, borrowers and guarantors and lease data. If we experience material failures, inadequacies or interruptions or security breaches of our information technology, we could incur material costs and losses. Further, third party vendors could experience similar events with respect to their information technology and systems that impact the products and services they provide to us or our clients. We rely on commercially available systems, software, tools and monitoring, as well as our internally developed applications and internal procedures and personnel, to provide security for processing, transmitting, storing and safeguarding confidential tenant, customer, borrower, guarantor and vendor information, such as personally identifiable information related to our employees and others and information regarding our and our clients’ financial accounts. We take various actions, and we incur significant costs, to maintain and protect the operation and security of our information technology and systems, including the data maintained in those systems. However, it is possible that these measures will not prevent the systems’ improper functioning or a compromise in security, such as in the event of a cyberattack or the improper disclosure of personally identifiable information. Security breaches, computer viruses,
attacks by hackers, online fraud schemes and similar breaches can create significant system disruptions, shutdowns, fraudulent transfer of assets or unauthorized disclosure of confidential information. The risk of a security breach or disruption, particularly through cyberattack or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased.
The cybersecurity risks to us, our clients and third party vendors are heightened by, among other things, the evolving nature of the threats faced, advances in computer capabilities, new discoveries in the field of cryptography and new and increasingly sophisticated methods used to perpetrate illegal or fraudulent activities against us, including cyberattacks, email or wire fraud and other attacks exploiting security vulnerabilities in our or other third parties’ information technology networks and systems or operations. The COVID-19 pandemic may adversely impact our ability to maintain the security, proper function and availability of our information technology and systems since a continued period of remote working by our employees or individuals with whom we work outside of our organization could strain our technology resources and introduce operational risk, including heightened cybersecurity risk. Remote working environments may be less secure and more susceptible to hacking attacks, including phishing and social engineering attempts that seek to exploit the COVID-19 pandemic. Although most of our office-based employees and those of our clients have returned to the office, the ongoing transition to in person work arrangements, or any return to remote work in light of the resurgence of the COVID-19 pandemic may result in the continuation of many of the risks of offsite work arrangements. In addition, our data security, data privacy, investor reporting and business continuity processes could be impacted by a third party’s inability to perform due to the COVID-19 pandemic or by the failure of, or attack on, their information systems and technology. Any failure to maintain the security, proper function and availability of our information technology and systems, or certain third party vendors’ failure to similarly protect their information technology and systems that are relevant to our or our clients’ operations, or to safeguard our or our clients’ business processes, assets and information could result in financial losses, interrupt our operations, damage our reputation, cause us to be in default of material contracts and subject us to liability claims or regulatory penalties, any of which could materially and adversely affect us.
Supply chain constraints and commodity pricing and other inflation, including inflation impacting wages and employee benefits, may negatively impact our clients and our business, results of operations and ability to grow.
The global economy has been experiencing supply chain constraints and commodity pricing and other inflation, including inflation impacting wages and employee benefits. These conditions have increased the costs for materials, other goods and labor. For example, various construction supplies and materials have experienced significant price increases as have other commodities, such as food and fuel. These pricing increases as well as increases in labor costs have increased the operating costs for certain of our clients. If these inflationary pressures continue, our clients may reduce or delay construction projects that we oversee and may realize decreased earnings, negative impacts on their ability to increase or maintain dividends that they pay to their shareholders and reduced market capitalizations. In that case, the management fees we earn may decline and our revenues, results of operations and ability to grow our business may be negatively impacted.
Employee misconduct could harm us by subjecting us to significant legal liability, reputational harm and loss of business.
As an asset manager, our business, and our ability to retain and attract new clients, is dependent upon our maintaining a positive reputation in the marketplace. There is a risk that our employees could engage in misconduct that adversely affects our reputation and, hence, our business. We are subject to a number of obligations and standards arising from our business and our authority over the companies and assets we manage. The violation of these obligations and standards by any of our employees may adversely affect our clients and us. Our business often requires that we deal with confidential matters of great significance to our clients. If our employees improperly use or disclose confidential information, we and the concerned client could suffer serious harm to our and its reputation, financial position and current and future business relationships and face potentially significant litigation. It is not always possible to detect or deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in all cases. If any of our employees were to engage in or be accused of misconduct, our business and our reputation could be adversely affected. Misconduct by an employee might rise to the level of a default that would permit a client to terminate its management agreements or advisory agreements with us for cause and without paying a termination fee, which could materially adversely affect our business, results of operations and financial condition.
RMR LLC’s required quarterly tax distributions may limit our ability to implement our business or pursue growth opportunities.
Under the RMR LLC operating agreement, RMR LLC is required to make certain pro rata distributions to each member of RMR LLC, including RMR Inc., quarterly on the basis of the assumed tax liabilities of the members. From time to time, RMR LLC’s cash flows from operations may be insufficient to enable it to make required minimum tax distributions to its members. RMR LLC may have to borrow funds or sell assets to fund its distribution requirements, and thereby materially
adversely affect our liquidity and financial condition. Further, by making cash distributions rather than investing that cash in our businesses, we might risk slowing the pace of our growth, or not having a sufficient amount of cash to fund our operations, new investments or unanticipated capital expenditures, should the need arise. In such event, we may not be able to implement our business and growth strategy to the extent intended.
Risks Related to the Businesses of Our Clients
Risks associated with our clients’ businesses could adversely affect their respective abilities to grow, generate revenue, increase their market capitalizations and pay management fees.
We have presented in this Annual Report on Form 10-K historical fees that we have earned from our clients. The historical fees earned from our clients, including those presented in this Annual Report on Form 10-K, should not be considered as indicative of the future results of our clients or of our future results. The risks associated with each client’s business could adversely affect its ability to carry out its business plans and objectives, and, as a result, could adversely impact its ability to pay us management or advisory fees or cause the amounts of those fees to decline. For more information see “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Overview.” Risks to our clients include, but are not limited to, the following:
•the duration and severity of the negative economic impact of COVID-19 and the resulting market disruption on certain industries in which our clients operate, especially on hospitality, travel, service retail, senior housing and rehabilitation services;
•the inability of our clients’ tenants, managers and borrowers to weather an extended cessation of normal economic activity caused by the COVID-19 pandemic and thereby impair their ability to pay rent and returns and make loan payments;
•the Managed Equity REITs face competition for tenants at substantially all of their properties and competing properties may be more attractive to tenants;
•our clients face significant competition for investment opportunities from other investors, some of which have greater financial resources, including publicly traded REITs, non-traded REITs, insurance companies, banking firms, private institutional funds, private equity funds and other investors;
•a sustained period of low interest rates may increase the amount of debt capital available, which may result in declining capitalization rates for property acquisitions and impede the growth of our clients’ businesses whereas rising interest rates may increase operating costs, reduce the value of properties, increase cost of capital and make raising capital difficult for our clients;
•changing general economic and financial market conditions, including any reversal of the economic recovery or future economic slowdown caused by the COVID-19 pandemic, could significantly reduce the value of the real estate, loans and other investments of our clients and reduce the amounts earned on those investments;
•the real estate and real estate related investments of our clients may be less liquid than other investments and the ability of our clients to adjust their portfolios in response to changes in economic or other conditions may be limited;
•our Managed Operating Companies’ ability to attract, retain and motivate sufficient qualified personnel in a challenging labor market and to effectively manage their labor costs;
•changes in investor preferences or market conditions, including any future adverse conditions caused by the COVID-19 pandemic, could limit our clients’ ability to raise capital to competitively maintain their properties and operations or make new investments;
•shareholder activism, complaints about management strategies and structures, corporate governance and other matters may divert management attention and be disruptive to the operation of our clients;
•third party expectations relating to ESG factors could impose additional costs and expose our clients to new risks;
•changes in tax laws, regulation or accounting rules may make certain types of investments in or by our clients less valuable;
•our clients are exposed to environmental, building and other laws, natural disasters, adverse impacts from global climate change and other factors beyond their control as a result of their investment in real estate;
•our clients have significant investments in certain types of assets, such as hotels, senior living communities, healthcare properties and travel centers, and market changes which impact these specific types of assets (e.g., continued depressed levels of business travel and occupancy at hotels and senior living communities as a result of, and market reaction to, the COVID-19 pandemic, tenant and customer trends, new competition for short term accommodations, changes in Medicare and Medicaid rates, and other regulatory matters, fuel price volatility, fuel efficiency improvements and alternative energy sourcing) may adversely impact certain of the clients’ ability to maintain or grow their business;
•the failure of a Managed REIT to continue to qualify as a REIT would subject it to U.S. federal income tax and reduce cash available for distributions to its shareholders, adversely impacting its ability to raise capital and operate its business;
•the failure of our clients to comply with applicable laws and regulations could result in legal liability, regulatory fines and the loss of, or an inability to obtain, licenses required to operate their businesses; and
•complying with REIT requirements may cause a Managed REIT to forgo otherwise attractive opportunities or liquidate otherwise attractive investments.
Many of our clients are SEC registrants and file reports with the SEC as required by the Exchange Act. A discussion of the businesses and the risks associated with the businesses of our clients that are SEC registrants is contained in the reports filed by our clients, including in the section captioned “Risk Factors” in each Managed Equity REIT’s, Five Star’s and TA’s Annual Reports on Form 10-K for the year ended December 31, 2020, as those Risk Factors may have been updated or supplemented in those companies’ Quarterly Reports on Form 10-Q filed subsequently, and in SEVN’s registration statement on Form S-4 (File No. 333-256951) filed by SEVN with the SEC, and declared effective on July 26, 2021 and the joint proxy statement/prospectus contained therein, and SEVN’s subsequent filings with the SEC. Copies of these reports are available at the SEC’s website, www.sec.gov.
Risks Related to Our Securities
A trading market that provides adequate liquidity may not be sustained for our Class A Common Shares and the market price of our Class A Common Shares may fluctuate widely.
Our public float represents about 48.6% of the economic interest in RMR LLC. As a result, a significant amount of the economic interest in RMR LLC is not represented in our public float, which may adversely impact trading in our Class A Common Shares. There can be no assurance that an active trading market for our Class A Common Shares will be sustained in the future.
The market price of our Class A Common Shares may fluctuate widely, depending upon many factors, some of which are beyond our control, including, but not limited to, the following:
•the duration and severity of the negative economic impact of COVID-19 and the resulting market disruption on us and our clients;
•declines in the market prices of our clients’ common shares;
•a relatively thin trading market for our Class A Common Shares could cause trades of small blocks of shares to have a significant impact on the price of our Class A Common Shares;
•our quarterly or annual earnings, or those of other comparable companies;
•actual or anticipated fluctuations in our operating results;
•changes in accounting standards, policies, guidance, interpretations or principles;
•announcements by us, our clients or our competitors of significant investments, acquisitions or dispositions;
•the inclusion, exclusion, or deletion of our Class A Common Shares from any trading indices;
•the failure of securities analysts to cover our Class A Common Shares;
•changes in earnings estimates by securities analysts or in our ability to meet those estimates;
•the operating and stock price performance of other comparable companies;
•overall market fluctuations; and
•general economic conditions.
Stock markets in general often experience volatility that is unrelated to the operating performance of a particular company. These broad market fluctuations may adversely affect the trading price of our Class A Common Shares. Our shareholders may not be able to resell their Class A Common Shares following periods of volatility because of the market’s adverse reaction to volatility.
Some investors may be precluded from investing in our Class A Common Shares as a result of our dual class capital structure, which may adversely affect the trading price of our Class A Common Shares.
S&P Dow Jones, a provider of widely followed stock indices, does not include companies with multiple share classes, such as ours, in certain of their indices. In addition, several stockholder advisory firms oppose the use of multiple class structures. As a result, our Class A Common Shares will likely not be eligible for these stock indices and may cause stockholder advisory firms to publish negative commentary about our corporate governance practices or otherwise seek to cause us to change our capital structure. FTSE Russell, another provider of widely followed stock indices, adopted rules requiring new constituents of its indices to have at least five percent of their voting rights in the hands of public stockholders. Many investment funds are precluded from investing in companies that are not included in such indices, and these funds would be unable to purchase our Class A Common Shares. We cannot assure you that other stock indices will not take a similar approach to S&P Dow Jones or FTSE Russell in the future. Exclusion from indices could make our Class A Common Shares less attractive to investors and, as a result, the market price of our Class A Common Shares could be adversely affected. Additionally, any actions or publications by stockholder advisory firms critical of our corporate governance practices or capital structure could also adversely affect the value of our Class A Common Shares.
Our dividend policy is subject to change.
RMR Inc. currently plans to pay a regular quarterly cash dividend equal to $0.38 per share ($1.52 per share per year) to holders of its Class A Common Shares. However, the amount of distributions RMR LLC may make in the future is not certain, and there is no assurance that future distributions will be made. On September 16, 2021, RMR Inc. paid a one-time special dividend of $7.00 per share in order to return excess capital to our shareholders. The declaration and payment of any dividends to our shareholders will be at the discretion of our Board of Directors which considers many factors when setting dividend rates including RMR Inc.’s current and expected earnings and the availability of cash to fund dividends as compared to alternative uses of such cash. Our Board of Directors may change the distribution policy or discontinue the payment of dividends at any time. Accordingly, any future dividends may be increased or decreased and there is no assurance as to the rate at which any future dividends will be paid, and they could decline in amount or be suspended or discontinued. Any change in our dividend policy could have a material adverse effect on the market price of our Class A Common Shares.
Risks Related to Our Relationships with Our Controlling Shareholder and Our Clients
Our controlling shareholder controls our voting power, and our other shareholders will have less influence over our business than shareholders of most other publicly traded companies.
Substantially all of the voting power in RMR Inc. and a majority of the economic interest in RMR LLC is held by ABP Trust, an entity controlled by its sole trustee, Adam D. Portnoy. Mr. Portnoy is one of our Managing Directors and is our President and Chief Executive Officer. RMR Inc. is the managing member of RMR LLC. As of September 30, 2021, Adam D. Portnoy beneficially owned, in aggregate, directly and indirectly through ABP Trust, (i) 170,502 shares of our Class A Common Shares; (ii) all of our outstanding Class B-1 Common Shares; (iii) all of our outstanding Class B-2 Common Shares; and (iv) approximately 49.2% of our outstanding Class A Units of RMR LLC. Our Class B-1 Common Shares and Class B-2 Common Shares entitle holders to ten votes per share. As a result of this ownership, as of September 30, 2021, Adam D. Portnoy beneficially owned in aggregate, directly and indirectly through ABP Trust, a combined direct and indirect 51.4% economic interest in RMR LLC and controlled 91.3% of the aggregate voting power of our outstanding capital stock. As a result of this voting control, Adam D. Portnoy is effectively able to determine the outcome of all matters requiring shareholder approval, including, but not limited to, election of our directors. Adam D. Portnoy is able to cause or prevent a change of control of RMR Inc., and this voting control could preclude any unsolicited acquisition of RMR Inc. The voting control of
Adam D. Portnoy could deprive our shareholders of an opportunity to receive a premium for their Class A Common Shares as part of a sale of us and may affect the market price of our Class A Common Shares.
Our management agreements with the Managed Equity REITs may discourage our change of control.
Each Managed Equity REIT may terminate its management agreements with us if we experience a change of control, as defined in those agreements, without payment of any termination fee. We may be unable to duplicate the long term management arrangements we have with each of the Managed Equity REITs. For these reasons, the management agreements may discourage a change of control of us, including a change of control which might result in payment of a premium for our Class A Common Shares.
The registration of Tremont Realty Capital under the Investment Advisers Act may discourage our change of control.
One of our subsidiaries, Tremont Realty Capital, is registered as an investment adviser under the Investment Advisers Act. Any change in control of Tremont Realty Capital, as defined in and interpreted pursuant to the Investment Advisers Act, would trigger a shareholder approval right by SEVN shareholders or other advisory clients of Tremont Realty Capital as applicable, under that Act. The need for such approval may discourage a change of control of us, including a change of control which might result in payment of a premium for our Class A Common Shares.
The ability of ABP Trust to sell its ownership stake in us and speculation about any such sale may adversely affect the market price of our Class A Common Shares.
ABP Trust controls 100.0% of our Class B-1 Common Shares (which are exchangeable for Class A Common Shares) and Class B-2 Common Shares, some of our currently outstanding Class A Common Shares and approximately 49.2% of our Class A Units of RMR LLC (which ABP Trust may cause RMR LLC to redeem for, at our election, Class A Common Shares on a one for one basis or cash). Thus, a significant portion of our ownership is not trading in the public markets. ABP Trust may sell any or all of its Class A Common Shares at any time without approval by other shareholders of RMR Inc. Speculation by the press, stock analysts, our shareholders or others regarding the intention of ABP Trust to dispose of Class A Common Shares could adversely affect the market price of our Class A Common Shares. Moreover, the market price of our Class A Common Shares may be adversely impacted by the fact that a significant amount of our outstanding shares are not included in the public float of our Class A Common Shares and by our dual-stock structure. Accordingly, our Class A Common Shares may be worth less than they would be if the Class A Common Shares that ABP Trust controls or has a right to acquire were trading in the public markets.
We and our clients are party to transactions with related parties that may increase the risk of allegations of conflicts of interest.
We and our clients are party to transactions with related parties, including with entities controlled by Adam D. Portnoy and entities that we manage. For example, because of the relationships among us, Adam D. Portnoy, and our clients, the agreements we are party to with them, including our management agreements, are among related parties. Other examples include: SVC is TA’s principal landlord, and TA is SVC’s largest tenant, operating travel center locations owned by SVC pursuant to long term leases; Five Star manages most of the senior living communities owned by DHC pursuant to long term management agreements, DHC owns approximately 34% of Five Star’s outstanding common stock and most of the senior living communities Five Star operates are owned by DHC; Sonesta manages the majority of SVC’s hotels pursuant to management agreements, SVC owns approximately 34% of Sonesta’s outstanding common stock and most of the hotels Sonesta operates are owned by SVC. On September 30, 2021, TRMT merged with and into RMRM with RMRM continuing as the surviving entity under the name “Seven Hills Realty Trust.” SEVN will continue to be managed by our subsidiary, Tremont Realty Capital. Our and our clients’ agreements with related parties or in respect of transactions among related parties may not be on terms as favorable to us as they would have been if they had been negotiated among unrelated parties. Moreover, we are subject to the risk that our shareholders or the shareholders of one or more of our clients may challenge any such related party transactions. If challenges to related party transactions were to be successful, we or our clients might not realize the benefits expected from the transactions being challenged. Moreover, any such challenge could result in substantial costs and a diversion of our management’s attention, could have a material adverse effect on our or our clients’ reputation, business and growth and could adversely affect our or our clients’ ability to realize the benefits expected from the transactions, whether or not the allegations have merit or are substantiated.
Increased relations among certain of our clients may cause a decline in revenue, business or assets of a client to adversely impact other clients.
Some of our clients have overlapping ownership interests and material business relationships with other of our clients which could cause a decline in revenue, business or assets of a client to be exacerbated by adverse impact on other clients. For example: Five Star manages most of the senior living communities owned by DHC and DHC owns approximately 34% of Five Star’s outstanding common stock; Sonesta manages most of SVC’s hotels and the majority of the hotels operated by Sonesta are owned by SVC and SVC owns approximately 34% of Sonesta’s outstanding common stock; and TA leases all of SVC’s travel center properties and SVC owns approximately 8.1% of TA’s outstanding common stock. Accordingly, a decline in revenue, business or assets of Five Star would be expected to adversely impact DHC, and a decline in revenue, business or assets of Sonesta or TA would be expected to adversely impact SVC.
Our management responsibilities to each of our clients and any future companies we may manage may give rise to actual, potential or perceived conflicts of interest.
Some of our clients have overlapping investment objectives, and if, and as we expand our management services to include additional private real estate capital clients, additional overlapping investment objectives may result. Additionally, some of our clients have material business relationships with, and in some instances have engaged in material transactions with, other of our clients that could give rise to conflicting interests. Our controlling shareholder’s investment in some of our clients also could give rise to conflicting interests. Our clients rely on information and management services we provide to them. While we and our clients have policies and procedures in place that are intended to mitigate the risks of conflicts of interest, our allocation of investment opportunities and cost reimbursements, advice, recommendations and commitments of our management team across our clients might be perceived to favor one client at the expense of another.
In addition to serving on our Board of Directors and executive team, Adam D. Portnoy serves as the chair of the board of trustees of each of the Managed REITs, as a managing trustee or managing director of each Managed REIT, TA and Five Star and as the chair of the board of directors of TA and Five Star and as a director of Sonesta (and its parent); certain of our other officers serve as managing trustees, managing directors or directors of our clients; and all of the executive officers of the Managed REITs and many of the executive officers of the Managed Operating Companies are our officers and employees. In addition, several of the independent trustees and independent directors of our public clients also serve as independent trustees or independent directors of other public clients. These multiple responsibilities and varying interests could create competition for the time and efforts of Adam D. Portnoy and RMR LLC and its subsidiaries and their officers and employees, and actual, potential or perceived conflicts of interest may arise.
Shareholder litigation, dissident shareholder director nominations and dissident shareholder proposals have often been instituted against companies alleging conflicts of interest in business dealings with affiliated and related persons and entities. Our relationships with Adam D. Portnoy and our clients, the position of our Managing Directors and executive officers as directors, trustees or executive officers of our clients, the position of independent trustees and independent directors of our public clients as independent trustees or independent directors of other public clients and the relationships among our clients may precipitate such activities. In addition, certain proxy advisory firms which have significant influence over the voting by shareholders of public companies, have, in the past, recommended that shareholders vote against, or withhold votes for, the election of board members at annual meetings of shareholders of our clients, and they may advocate for similar voting actions for future meetings. These actions may affect the outcome of those elections and impact the governance of those clients, which may increase the risk of shareholder activism and litigation at those clients. These activities could result in substantial costs and diversion of our management’s attention and could have a material adverse effect on our and our clients’ reputations and businesses.
Risks Related to Our Organization and Structure
We are a “controlled company” within the meaning of the Nasdaq listing rules and, as a result, qualify for, and may rely on, exemptions from certain corporate governance requirements. Our shareholders will not have the same protections afforded to shareholders of companies that are subject to such requirements.
Adam D. Portnoy, as sole trustee of ABP Trust, holds more than 50.0% of the voting power of our shares eligible to vote. As a result, we are a “controlled company” under the Nasdaq listing rules. Under these rules, a company of which more than 50.0% of the voting power in the election of directors is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain listed company governance requirements, including the requirements that the board of directors be comprised of a majority of independent directors and that we have a compensation committee and a nominating and corporate governance committee composed entirely of independent directors. Our compensation committee and our nominating and governance committee are comprised entirely of independent directors. The exemptions for a “controlled
company” do not modify the independence requirements for our audit committee, and we intend to continue to comply with the applicable requirements of the SEC and Nasdaq with respect to our audit committee. Further, the exemptions for “controlled companies” will not impact our compliance with Nasdaq’s new listing rule relating to board diversity; our current board satisfies the diversity standards under the new Nasdaq listing rule in advance of its effective time. Nonetheless, the fact that we may avail ourselves in the future of some or all of the exceptions afforded a “controlled company” may cause our Class A Common Shares to trade at a lower price than if these protections were provided.
Our rights and the rights of our shareholders to take action against our directors and officers are limited.
Our governing documents limit the liability of our directors and officers to us and our shareholders for money damages to the maximum extent permitted under Maryland law. Under current Maryland law, our directors and officers will not have any liability to us and our shareholders for money damages other than liability resulting from:
•actual receipt of an improper benefit or profit in money, property or services; or
•active and deliberate dishonesty by the director or officer that was established by a final judgment as being material to the cause of action adjudicated.
Additionally, our governing documents require us to indemnify, to the maximum extent permitted by Maryland law, any of our present or former directors or executive officers who is made or threatened to be made a party to a proceeding by reason of his, her or their service in that capacity. We also entered into separate agreements with our directors and executive officers providing for indemnification and advancement of expenses in addition to any rights such person may have under our governing documents.
As a result of these limitations on liability and indemnification obligations, we and our shareholders may have more limited rights against our present and former directors and officers than might exist with other companies, which could limit shareholder recourse in the event of actions which some shareholders may believe are not in our best interest.
Our bylaws designate the Circuit Court for Baltimore City, Maryland or, if that court does not have jurisdiction, the United States District Court for the District of Maryland, Baltimore Division, as the sole and exclusive forum for certain actions and proceedings that may be initiated by our shareholders, which could limit our shareholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, manager, agents or employees.
Our bylaws currently provide that, unless the dispute has been referred to binding arbitration, the Circuit Court for Baltimore City, Maryland or, if that court does not have jurisdiction, the United States District Court for the District of Maryland, Baltimore Division, will be the sole and exclusive forum for: (1) any derivative action or proceeding brought on our behalf; (2) any action asserting a claim for breach of a fiduciary duty owed by any director, officer, agent or employee of ours to us or our shareholders; (3) any action asserting a claim against us or any director, officer, agent or employee of ours arising pursuant to Maryland law or our charter or bylaws brought by or on behalf of a shareholder either on such shareholder’s own behalf, on our behalf or on behalf of any series or class of our shareholders or shareholders against us or any of our directors, officers, agents or employees, including any claims relating to the meaning, interpretation, effect, validity, performance or enforcement of our charter or bylaws; or (4) any action asserting a claim against us or any director, officer, agent or employee of ours that is governed by the internal affairs doctrine of the State of Maryland. The exclusive forum provision of our bylaws does not apply to any dispute that has been referred to binding arbitration in accordance with our bylaws. The exclusive forum provision of our bylaws does not establish exclusive jurisdiction in the Circuit Court for Baltimore City, Maryland for claims that arise under the Securities Act, the Exchange Act or other federal securities laws if there is exclusive or concurrent jurisdiction in the federal courts. Any person or entity purchasing or otherwise acquiring or holding any interest in our shares of beneficial interest shall be deemed to have notice of and to have consented to these provisions of our bylaws, as they may be amended from time to time. The arbitration and exclusive forum provisions of our bylaws may limit a shareholder’s ability to bring a claim in a judicial forum that the shareholder believes is favorable for disputes with us or our directors, officers, employees or agents, which may discourage lawsuits against us and our directors, officers, employees or agents.
Shareholder litigation against us or our directors, officers, employees or other agents may be referred to mandatory arbitration proceedings, which follow different procedures than in-court litigation and may be more restrictive to shareholders asserting claims than in-court litigation.
Our shareholders agree, by virtue of becoming shareholders, that they are bound by our governing documents, including the arbitration provisions of our bylaws, as they may be amended from time to time. Our bylaws provide that certain actions by one or more of our shareholders against us or any of our directors, officers, employees or other agents will be referred to mandatory, binding and final arbitration proceedings if we, or any other party to such dispute, including any of our
directors, officers, employees or other agents, unilaterally so demands. As a result, we and our shareholders would not be able to pursue litigation in state or federal court against us or our directors, officers, employees or other agents, including, for example, claims alleging violations of federal securities laws or breach of fiduciary duties or similar director or officer duties under Maryland Law, if we or any of our directors, officers, employees, agents or other parties against whom the claim is made unilaterally demands the matter be resolved by arbitration. Instead, our shareholders would be required to pursue such claims through binding and final arbitration.
Our bylaws provide that such arbitration proceedings would be conducted in accordance with the procedures of the Commercial Arbitration Rules of the American Arbitration Association, as modified in our bylaws. These procedures may provide materially more limited rights to our shareholders than litigation in a federal or state court. For example, arbitration in accordance with these procedures does not include the opportunity for a jury trial, document discovery is limited, arbitration hearings generally are not open to the public, there are no witness depositions in advance of arbitration hearings and arbitrators may have different qualifications or experiences than judges. In addition, although our bylaws’ arbitration provisions contemplate that arbitration may be brought in a representative capacity or on behalf of a class of our shareholders, the rules governing such representation or class arbitration may be different from, and less favorable to shareholders than, the rules governing representative or class action litigation in courts. Our bylaws also generally provide that each party to such an arbitration is required to bear its own costs in the arbitration, including attorneys’ fees, and that the arbitrators may not render an award that includes shifting of such costs or, in a derivative or class proceeding, award any portion of our award to any shareholder or such shareholder’s attorneys. The arbitration provisions of our bylaws may discourage our shareholders from bringing, and attorneys from agreeing to represent our shareholders wishing to bring, litigation against us or our directors, officers, employees, manager or other agents. A number of our contracts with Adam D. Portnoy, ABP Trust and our clients have similar arbitration provisions to those in our bylaws.
We believe that the arbitration provisions in our bylaws are enforceable under both state and federal law, including with respect to federal securities laws claims. We are a Maryland corporation and Maryland courts have upheld the enforceability of arbitration bylaws. In addition, the United States Supreme Court has repeatedly upheld agreements to arbitrate other federal statutory claims, including those that implicate important federal policies. However, some academics, legal practitioners and others are of the view that charter or bylaw provisions mandating arbitration are not enforceable with respect to federal securities laws claims. It is possible that the arbitration provisions of our bylaws may ultimately be determined to be unenforceable.
By agreeing to the arbitration provisions of our bylaws, shareholders will not be deemed to have waived compliance by us with federal securities laws and the rules and regulations thereunder.
RMR Inc. is required to pay ABP Trust for certain tax benefits it claims as a result of the tax basis step up we received as part of the RMR LLC reorganization on June 5, 2015 and will receive upon future redemptions by ABP Trust for Class A Common Shares or for cash. In certain circumstances, payments under the Tax Receivable Agreement may be accelerated and/or significantly exceed the actual tax benefits RMR Inc. realizes.
ABP Trust may redeem Class A Units it owns for Class A Common Shares or cash. See “Business-Our Organizational Structure-The RMR LLC Operating Agreement-Redemption rights of holders of Class A Units” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019. Both ABP Trust’s initial purchase of Class A Units and any future redemptions that ABP Trust may affect may result in increases in our tax basis of our assets that otherwise would not have been available. Such increases in tax basis are likely to increase (for tax purposes) depreciation and amortization deductions and therefore reduce the amount of income tax we otherwise would be required to pay in the future. These increases in tax basis may also decrease gain (or increase loss) on future dispositions of certain capital assets to the extent the increased tax basis is allocated to those assets. The Internal Revenue Service, or IRS, may challenge all or part of these tax basis increases, and a court might sustain such a challenge.
We have entered into a tax receivable agreement, dated June 5, 2015, by and among RMR Inc., RMR LLC and ABP Trust, or the Tax Receivable Agreement, that provides for the payment by RMR Inc. to ABP Trust of 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. actually realizes as a result of (a) the increases in tax basis attributable to its 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. See “Business-Our Organizational Structure-Tax Receivable Agreement” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019 for further information regarding the Tax Receivable Agreement. While the actual increase in tax basis, as well as the amount and timing of any payments under the Tax Receivable Agreement, will vary depending upon a number of factors, including the timing of redemptions, the price of our Class A Common Shares at the time of the redemption, the extent to which such redemptions are taxable, and the amount and timing of our income, we expect that, as a result of the size of the increases in the tax basis of the tangible and intangible assets of RMR LLC attributable to RMR Inc.’s interests in RMR LLC, during the expected term of the Tax Receivable
Agreement, the payments that RMR Inc. makes to ABP Trust may be substantial. ABP Trust generally will not reimburse RMR Inc. for any payments that may have been made under the Tax Receivable Agreement. As a result, in certain circumstances RMR Inc. could make payments to ABP Trust under the Tax Receivable Agreement in excess of cash tax savings. Our ability to achieve benefits from any tax basis increase, and the payments to be made under the Tax Receivable Agreement, will depend upon a number of factors, including the timing and amount of our future income.
In addition, the Tax Receivable Agreement provides that, upon certain changes of control and certain breaches of the agreement that we fail to cure in accordance with the terms of the agreement, our obligations with respect to Class A Units will be accelerated. In those circumstances, our obligations under the Tax Receivable Agreement would be based on certain assumptions, including that we would have sufficient taxable income to fully utilize the deductions arising from the increased tax deductions and tax basis and other benefits described in the Tax Receivable Agreement, and that any Class A Units that have not been redeemed will be deemed redeemed for the market value of the Class A Common Shares at the time of the change of control or breach, as applicable. Consequently, it is possible, in these circumstances, that the actual cash tax savings realized by RMR Inc. may be significantly less than the corresponding Tax Receivable Agreement payments.
Our governing documents permit our directors and officers, our clients and ABP Trust to retain corporate opportunities for their own benefit.
Under RMR Inc.’s governing documents and RMR LLC’s operating agreement, no director or officer of ours who is also serving as an officer, employee or agent of a client or ABP Trust or any of its affiliates is required to present, communicate or offer any business opportunity to us, and such person shall have the right to hold any business opportunity for themselves or transfer it to any other person to the maximum extent permitted by Maryland law. If any of these persons fails to present an opportunity to us or takes the opportunity for themselves, to the maximum extent permitted under Maryland law they will not be liable to us. We have renounced all potential interest or expectation in certain business opportunities which may fit our growth objectives in the future or otherwise have value to us. These opportunities may be directed to the clients or other persons or entities to which RMR LLC may have a relationship. Additionally, under our governing documents, our directors, officers, employees and agents are permitted to engage in other business activities that are similar to, or even competitive with, our own. If such persons engage in competitive business activities, we may have no remedy under our governing documents in these circumstances.
Our governing documents do not limit our ability to enter into new lines of businesses and doing so may result in additional risks and uncertainties in our businesses.
Our governing documents do not limit our business to the management of commercial real estate assets or businesses related thereto. Accordingly, we may pursue other business initiatives. To the extent we enter into a new line of business, we will face numerous risks and uncertainties, including risks associated with: (i) the required investment of capital and other resources; (ii) the possibility that we have insufficient expertise to engage in such activities competently or profitably; (iii) combining or integrating operational and management systems and controls; and (iv) the broadening of our geographic footprint, including the risks associated with conducting operations in non-U.S. jurisdictions. Entry into certain lines of business may subject us to new laws and regulations with which we are not familiar, or from which we are currently exempt, and may lead to increased litigation and regulatory risk. Our strategic initiatives may include joint ventures or partnerships, in which case we will be subject to additional risks and uncertainties because we may be dependent upon, and subject to liability, losses or reputational damage relating to systems, controls and personnel that are not under our control.
Our only material asset is our interest in RMR LLC, and we are accordingly dependent upon distributions from RMR LLC to pay our taxes and expenses.
RMR Inc. is organized as a holding company of RMR LLC and its only material asset is its limited liability company membership units of RMR LLC. RMR Inc. has no independent means of generating revenue. Pursuant to RMR Inc.’s agreements with RMR LLC, RMR Inc., as the managing member of RMR LLC, intends to cause RMR LLC to make distributions in an amount that is at least sufficient to cover applicable taxes payable by its members, other expenses and some or all of the dividends, if any, declared by us.
Deterioration in the financial condition, earnings or cash flow of RMR LLC for any reason could limit or impair its ability to pay such distributions to us. Additionally, to the extent that RMR Inc. requires funds and RMR LLC is restricted from making such distributions under applicable law or regulation or under the terms of financing or other arrangements, or is otherwise unable to provide such funds, our liquidity and financial condition could be materially adversely affected.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
None.

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ITEM 2. PROPERTIES
Item 2. Properties
Our principal executive offices are located at Two Newton Place, 255 Washington Street, Newton, MA 02458-1634. These offices are leased from an affiliate of ABP Trust through 2030. A copy of the lease is incorporated by reference as an exhibit to this Annual Report on Form 10-K.
We also lease other ancillary and local office space from ABP Trust, from certain Managed Equity REITs and from third parties. We consider these leased premises suitable and adequate for our business. For more information about our leased facilities, please see Note 10, Leases, to our consolidated financial statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings
From time to time, we may become involved in litigation matters incidental to the ordinary course of our business. Although we are unable to predict with certainty the eventual outcome of any litigation, we are currently not a party to any litigation which we expect to have a material adverse effect on our business.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our Class A Common Shares are traded on Nasdaq (symbol: RMR). There is no publicly traded market for our Class B-1 Common Shares or our Class B-2 Common Shares, all of which are held by ABP Trust.
Issuer purchases of equity securities.
The following table provides information about our purchases of our equity securities during the fiscal year ended September 30, 2021:
Maximum
Total Number of Approximate Dollar
Shares Purchased Value of Shares that
Number of Average as Part of Publicly May Yet Be Purchased
Shares Price Paid Announced Plans Under the Plans or
Calendar Month Purchased (1)
per Share or Programs Programs
March 2021 450 $ 42.85 N/A N/A
June 2021 5,258 $ 38.64 N/A N/A
September 2021 18,417 $ 33.20 N/A N/A
Total 24,125 $ 34.57 N/A N/A
(1)These Class A Common Share withholdings and purchases were made to satisfy tax withholding and payment obligations in connection with the vesting of awards of our Class A Common Shares. We withheld and purchased these shares at their fair market values based upon the trading prices of our Class A Common Shares at the close of trading on Nasdaq on the purchase dates.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. Reserved

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
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,
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:
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
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.
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:
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
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:
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 - - -
Five Star 7,123 - 7,123 8,787 - 8,787
Sonesta 4,497 - 4,497 1,505 - 1,505
TA 13,727 - 13,727 13,084 - 13,084
$ 30,105 $ 3,308 $ 33,413 $ 25,906 $ 2,109 $ 28,015
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.
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.
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:
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 - 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 - 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%
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.
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:
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
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.
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.
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.
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.
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.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Quantitative and Qualitative disclosures about market risk are set forth above in “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operation-Market Risk and Credit Risk.”

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data
The information required by this item is included in Item 15 of this Annual Report on Form 10-K.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, our management carried out an evaluation, under the supervision and with the participation of our President and Chief Executive Officer and our Executive Vice President, Chief Financial Officer and Treasurer, of the effectiveness of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 under the Exchange Act. Based upon that evaluation, our President and Chief Executive Officer and our Executive Vice President, Chief Financial Officer and Treasurer concluded that our disclosure controls and procedures are effective.
There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management Report on Assessment of Internal Control Over Financial Reporting
We are responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system is designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Our management assessed the effectiveness of our internal control over financial reporting as of September 30, 2021. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) in Internal Control-Integrated Framework. Based on this assessment, we believe that, as of September 30, 2021, our internal control over financial reporting is effective.
Deloitte & Touche LLP, the independent registered public accounting firm that audited our 2021 Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K, has issued an attestation report on our internal control over financial reporting. Its report appears elsewhere herein.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
None.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this Item 10 of Form 10-K will be included in the 2022 Proxy Statement and is incorporated herein by reference.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
The information required by this Item 11 of Form 10-K will be included in the 2022 Proxy Statement and is incorporated herein by reference.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Equity Compensation Plan Information. We may grant our Class A Common Shares to our officers and employees under the 2016 Omnibus Equity Plan adopted in 2016, or the 2016 Plan. In addition, each of our Directors receives Class A Common Shares under the 2016 Plan as part of his or her annual compensation for serving as a Director. The terms of grants made under the 2016 Plan are determined by the Compensation Committee of our Board of Directors, at the time of the grant. The following table is as of September 30, 2021.
Number of securities
Number of securities remaining available for
to be issued upon Weighted-average future issuance under equity
exercise of exercise price of compensation plans (excluding
outstanding options, outstanding options, securities
Plan category warrants and rights
warrants and rights reflected in column (a))
(a) (b) (c)
Equity compensation plans approved by security holders - 2016 Plan None. None. 114,764 (1)
Equity compensation plans not approved by security holders None. None. None.
Total None. None. 114,764 (1)
(1) Consists of shares available for issuance pursuant to the terms of the 2016 Plan. Share awards that are repurchased or forfeited will be added to the shares available for issuance under the 2016 Plan.
Other information required by this Item 12 of Form 10-K will be included in the 2022 Proxy Statement and is incorporated herein by reference.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Person Transactions, and Director Independence
The information required by this Item 13 of Form 10-K will be included in the 2022 Proxy Statement and is incorporated herein by reference.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accountant Fees and Services
The information required by this Item 14 of Form 10-K will be included in the 2022 Proxy Statement and is incorporated herein by reference.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits and Financial Statement Schedules
(a) Index to Financial Statements and Financial Statement Schedules
The following consolidated financial statements of The RMR Group Inc. are included on the pages indicated:
Reports of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of September 30, 2021 and 2020
Consolidated Statements of Income for the fiscal years ended September 30, 2021, 2020 and 2019
Consolidated Statements of Shareholders’ Equity for the fiscal years ended September 30, 2021, 2020 and 2019
Consolidated Statements of Cash Flows for the fiscal years ended September 30, 2021, 2020 and 2019
Notes to Consolidated Financial Statements
All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions, or are inapplicable, and therefore have been omitted.
(b) Exhibits
Exhibit
Number Description
3.1
Articles of Amendment and Restatement of the Registrant (1)
3.2
Articles of Amendment, filed July 30, 2015 (1)
3.3
Articles of Amendment, filed September 11, 2015 (1)
3.4
Articles of Amendment, filed March 9, 2016 (2)
3.5
Fourth Amended and Restated Bylaws of the Registrant adopted September 13, 2017 (3)
4.1
Form of The RMR Group Inc. Share Certificate for Class A Common Stock (4)
4.2
Registration Rights Agreement, dated as of June 5, 2015, by and between the Registrant and ABP Trust (formerly known as Reit Management & Research Trust) (1)
4.3
Description of Capital Stock (5)
10.1
The RMR Group LLC Amended and Restated Operating Agreement, dated as of October 14, 2015, as updated December 22, 2017, by and among The RMR Group LLC and its Members (6)
10.2
Amended and Restated Business Management Agreement, dated as of January 1, 2020, by and between ABP Trust and The RMR Group LLC (17)
10.3
Amended and Restated Business Management and Shared Services Agreement, dated as of June 5, 2015, by and between Sonesta International Hotels Corporation and The RMR Group LLC (1)
10.4
Second Amended and Restated Business Management Agreement, dated as of June 5, 2015, by and between Office Properties Income Trust (formerly known as Government Properties Income Trust) and The RMR Group LLC (1)
10.5
Amendment to Second Amended and Restated Business Management Agreement, dated December 31, 2018, between Office Properties Income Trust (formerly known as Government Properties Income Trust) and The RMR Group LLC (12)
10.6
Second Amendment to Second Amended and Restated Business Management Agreement, dated August 1, 2021, between Office Properties Income Trust and The RMR Group LLC (Filed herewith.)
10.7
Second Amended and Restated Business Management Agreement, dated as of June 5, 2015, by and between Service Properties Trust (formerly known as Hospitality Properties Trust) and The RMR Group LLC (1)
10.8
First Amendment to Second Amended and Restated Business Management Agreement, dated as of August 1, 2021, by and between Service Properties Trust and The RMR Group LLC (Filed herewith.)
10.9
Second Amended and Restated Business Management Agreement, dated as of June 5, 2015, by and between Diversified Healthcare Trust (formerly known as Senior Housing Properties Trust) and The RMR Group LLC (1)
10.10
First Amendment to Second Amended and Restated Business Management Agreement, dated as of August 1, 2021, by and between Diversified Healthcare Trust and The RMR Group LLC (Filed herewith.)
10.11
Business Management Agreement, dated as of January 17, 2018, by and between Industrial Logistics Properties Trust and The RMR Group LLC (7)
10.12
Amendment to Business Management Agreement, dated December 31, 2018, between Industrial Logistics Properties Trust and The RMR Group LLC (12)
10.13
Second Amendment to Business Management Agreement, dated August 1, 2021, between Industrial Logistics Properties Trust and The RMR Group LLC (Filed herewith.)
10.14
Amended and Restated Property Management Agreement, by and between The RMR Group LLC and ABP Trust (formerly known as Reit Management & Research Trust) (1)
10.15
Second Amended and Restated Property Management Agreement, dated as of June 5, 2015, by and between The RMR Group LLC and Office Properties Income Trust (formerly known as Government Properties Income Trust) (1)
10.16
Third Amended and Restated Property Management Agreement, dated as of June 22, 2021, by and between The RMR Group LLC and Service Properties Trust (19)
10.17
Third Amended and Restated Property Management Agreement, dated as of June 9, 2021, by and between The RMR Group LLC and Diversified Healthcare Trust (19)
10.18
Property Management Agreement, dated as of January 17, 2018, by and between The RMR Group LLC and Industrial Logistics Properties Trust (7)
10.19
Tax Receivable Agreement, dated as of June 5, 2015, by and among the Registrant, The RMR Group LLC and ABP Trust (formerly known as Reit Management & Research Trust) (1)
10.20
Lease, dated as of June 1, 2015, by and between RMR West LLC and The RMR Group LLC (1)
10.21
Amendment No. 1 to the Lease, dated as of June 1, 2015, by and between RMR West LLC and The RMR Group LLC, effective as of January 1, 2016 (8)
10.22
Amendment No. 2 to the Lease, dated as of June 1, 2015, by and between ABP Trust and The RMR Group LLC, effective as of July 19, 2018 (8)
10.23
Amendment No. 3 to the Lease, dated as of June 1, 2015, by and between ABP Trust and The RMR Group LLC, effective as of June 13, 2019 (13)
10.24
Letter Agreement, dated as of October 9, 2020, by and among The RMR Group LLC and David M. Blackman (+) (18)
10.25
Form of Indemnification Agreement for the Registrant and its directors and executive officers (1)
10.26
The RMR Group Inc. 2016 Omnibus Equity Plan (+) (2)
10.27
Form of The RMR Group Inc. Share Award Agreement (+) (18)
10.28
Summary of Director Compensation (9)
21.1
Subsidiaries of the Registrant (Filed herewith.)
23.1
Consent of Deloitte & Touche LLP (Filed herewith.)
23.2
Consent of Ernst & Young LLP (Filed herewith.)
31.1
Rule 13a-14(a) Certification (Filed herewith.)
31.2
Rule 13a-14(a) Certification (Filed herewith.)
32.1
Section 1350 Certification (Furnished herewith.)
99.1
Letter, dated March 24, 2017, between The RMR Group LLC and Diversified Healthcare Trust (formerly known as Senior Housing Properties Trust), regarding Second Amended and Restated Business Management Agreement (10)
99.2
Letter, dated October 2, 2017, between The RMR Group LLC and Office Properties Income Trust (formerly known as Government Properties Income Trust), regarding Second Amended and Restated Property Management Agreement (11)
99.3
Letter, dated January 17, 2018, between Office Properties Income Trust (as successor to Select Income REIT) and The RMR Group LLC, regarding Business Management Agreement and Property Management Agreement, between Industrial Logistics Properties Trust and The RMR Group LLC (7)
99.4
Letter, dated January 29, 2019, between The RMR Group LLC and Industrial Logistics Properties Trust, regarding Property Management Agreement, between Industrial Logistics Properties Trust and The RMR Group LLC (14)
99.5
Amended and Restated Business Management and Shared Services Agreement, dated as of March 16, 2015, between Five Star Senior Living Inc. (formerly known as Five Star Quality Care, Inc.) and The RMR Group LLC (15)
99.6
Amended and Restated Business Management and Shared Services Agreement, dated as of March 12, 2015, by and between TravelCenters of America Inc. (formerly known as TravelCenters of America LLC) and The RMR Group LLC (16)
99.7
Letter Agreement, dated as of February 21, 2020, between Industrial Logistics Properties Trust and The RMR Group LLC (17)
101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH XBRL Taxonomy Extension Schema Document. (Filed herewith.)
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document. (Filed herewith.)
101.DEF XBRL Taxonomy Extension Definition Linkbase Document. (Filed herewith.)
101.LAB XBRL Taxonomy Extension Label Linkbase Document. (Filed herewith.)
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document. (Filed herewith.)
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
(1) Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (File No. 333-207423) filed with the SEC on October 14, 2015.
(2) Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 001-37616) filed with the SEC on March 11, 2016.
(3) Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 001-37616) filed with the SEC on September 15, 2017.
(4) Incorporated by reference to the Registrant’s Amendment No. 1 to Registration Statement on Form S-1 (File No. 333-207423) filed with the SEC on November 2, 2015.
(5) Incorporated by reference to the Registrant’s Annual Report on Form 10-K (File No. 001-37616) filed with the SEC on November 22, 2019.
(6) Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-37616) filed with the SEC on February 8, 2018.
(7) Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 001-37616) filed with the SEC on January 18, 2018.
(8) Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-37616) filed with the SEC on August 8, 2018.
(9) Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 001-37616) filed with the SEC on March 12, 2020.
(10) Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-37616) filed with the SEC on May 10, 2017.
(11) Incorporated by reference to the Registrant’s Annual Report on Form 10-K (File No. 001-37616) filed with the SEC on December 12, 2017.
(12) Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-37616) filed with the SEC on February 7, 2019.
(13) Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 001-37616) filed with the SEC on June 14, 2019.
(14) Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-37616) filed with the SEC on May 10, 2019.
(15) Incorporated by reference to Five Star Senior Living Inc.’s Annual Report on Form 10-K (File No. 001-16817) filed with the SEC on March 16, 2015.
(16) Incorporated by reference to TravelCenters of America Inc.’s Annual Report on Form 10-K (File No. 001- 33274) filed with the SEC on March 13, 2015.
(17) Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-37616) filed with the SEC on May 11, 2020.
(18) Incorporated by reference to the Registrant’s Annual Report on Form 10-K (File No. 001-37616) filed with the SEC on November 20, 2020.
(19) Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-37616) filed with the SEC on August 5, 2021.
(+) Contract with management or compensatory plan or arrangement.