FinanceLooker

Excrept from filing document 2024-09-30

The aggregate market value of the voting shares of Class A common stock 0 001 par value of the registrant held by non affiliates was approximately 367 5 million based on the 24 00 closing price per common share on The Nasdaq Stock Market LLC on March 31 2024 For purposes of this calculation an aggregate of 419 775 shares of Class A common stock held directly by or by affiliates of the directors and executive officers of the registrant have been included in the number of common shares held by affiliates
As of November 5 2024 there were 15 845 601 shares of Class A common stock par value 0 001 per share 1 000 000 shares of Class B 1 common stock par value 0 001 per share and 15 000 000 shares of Class B 2 common stock par value 0 001 per share outstanding
This Annual Report on Form 10 K contains forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws that are subject to risks and uncertainties These statements may include words such as believe expect anticipate intend plan estimate will may and negatives or derivatives of these or similar expressions These forward looking statements include among others statements about our business strategy economic and industry conditions the impact and opportunities for our and our clients businesses from business cycles in the U S real estate industry as well as economic and industry conditions our belief that it is possible to grow real estate based businesses in selected property types or geographic areas despite general national trends our cash and cash equivalents including their sufficiency to pursue a range of capital allocation strategies and fund our operations and enhance our technology infrastructure and risk exposure and our sustainability practices
Forward looking statements reflect our current expectations are based on judgments and assumptions are inherently uncertain and are subject to risks uncertainties and other factors which could cause our actual results performance or achievements to differ materially from expected future results performance or achievements expressed or implied in those forward looking statements Some of the risks uncertainties and other factors that may cause actual results performance or achievements to differ materially from those expressed or implied by forward looking statements include but are not limited to the following
The ability of Tremont to identify and close suitable investments for our new private capital debt vehicle or our Real Estate Lending Venture and SEVN and to monitor service and administer existing investments
Our and our clients risks associated with our and our clients costs of compliance with laws and regulations including securities regulations exchange listing standards and other laws and regulations affecting public companies and
These risks uncertainties and other factors are not exhaustive and should be read in conjunction with other cautionary statements that are included in this Annual Report on Form 10 K and our other filings with the Securities and Exchange Commission or SEC Our filings with the SEC are available on the SEC s website at www sec gov
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 2024 RMR Inc owned 15 846 025 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 9 of the economic interest of RMR LLC A subsidiary of ABP Trust owns 15 000 000 redeemable Class A Units representing approximately 47 1 of the economic interest of RMR LLC
Adam D Portnoy the Chair of our Board one of our Managing Directors and our President and Chief Executive Officer is the sole trustee an officer and the controlling shareholder of our controlling shareholder ABP Trust and owns all of ABP Trust s voting securities and a majority of the economic interest of ABP Trust As of September 30 2024 Adam D Portnoy beneficially owned including through ABP Trust in aggregate i 211 561 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 2024 we had 40 9 billion of assets under management
We provide 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
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 other healthcare related properties As of September 30 2024 DHC owned 368 properties located in 36 states and the District of Columbia
ILPT Nasdaq ILPT owns and leases industrial and logistics properties As of September 30 2024 ILPT owned 411 properties including 226 buildings leasable land parcels and easements in Oahu Hawaii and 185 properties located in 38 other states
OPI Nasdaq OPI owns office properties primarily leased to single tenants and those with high credit quality characteristics As of September 30 2024 OPI owned 145 properties located in 30 states and the District of Columbia
SVC Nasdaq SVC owns a diverse portfolio of hotels and service focused retail net lease properties As of September 30 2024 SVC owned 959 properties 214 hotels and 745 net lease properties located in 46 states the District of Columbia Puerto Rico and Canada
RMR LLC s wholly owned subsidiary Tremont Realty Capital LLC or Tremont an investment adviser registered with the SEC provides advisory services for Seven Hills Realty Trust or SEVN SEVN is a publicly traded mortgage REIT that focuses on originating and investing in first mortgage loans secured by middle market and transitional commercial real estate
RMR LLC also provided management services to TravelCenters of America Inc or TA until it was acquired by BP Products North America Inc or BP on May 15 2023 TA is a real estate operating company that operates and franchises travel centers primarily along the United States or U S interstate highway system many of which are owned by SVC and standalone truck service facilities
RMR LLC provides management services to AlerisLife Inc or AlerisLife an operator of senior living communities many of which are owned by DHC and Sonesta International Hotels Corporation or Sonesta a privately owned franchisor and operator of hotels resorts and cruise ships in the United States Latin America the Caribbean and the Middle East and many of the U S hotels that Sonesta operates are owned by SVC
On December 19 2023 or the Acquisition Date RMR LLC acquired MPC Partnership Holdings LLC or MPC or the Acquisition In connection with the Acquisition RMR LLC started providing management services through MPC and its subsidiaries to multiple private funds and the underlying residential real estate assets of the funds as well as property management services to third party owners The residential real estate we manage through MPC and its subsidiaries are presented as RMR Residential in these consolidated financial statements
In addition RMR LLC provides management services to private capital vehicles including ABP Trust and other private entities that own commercial real estate of which certain of our Managed Equity REITs own minority equity interests The clients of the other private capital vehicles along with AlerisLife Sonesta and clients of RMR Residential are collectively referred to as the Private Capital clients
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
Our revenues are primarily earned from long term agreements with 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 2024 revenues earned from the Managed Equity REITs represented 69 6 of our total management and advisory services revenue excluding termination fee revenue We continued to generate strong operating margins resulting in net cash from operating activities of 61 4 million and net income of 53 1 million and our regular dividend of 0 45 per share per quarter 1 80 per share per year remains well covered by our cash flows
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 focused retail multifamily residential communities 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 2024 are located throughout the United States in 48 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
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 2024 we had 40 9 billion of assets under management including over 2 000 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 issue equity or incur debt to fund our growth and diversify our operations through additional acquisition opportunities or seeding new clients In
recent years we sought to expand the sources of capital underlying our assets under management with our Private Capital clients representing 12 8 billion of our assets under management as of September 30 2024 an increase of 11 1 billion from September 30 2021 During the fiscal year ended September 30 2024 we executed on this growth strategy through the acquisition of MPC which added approximately 5 5 billion in assets under management as of the Acquisition Date
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 2024 we employed over 1 000 real estate professionals in more than 35 offices throughout the United States 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 46 0 billion of financing in approximately 190 capital raising transactions
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 50 9 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
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
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
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
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
Under each property management agreement subject to the overall management and supervision of the Board of Trustees of each Managed Equity REIT 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
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
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
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 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
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 in any year 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 in any year determined on a cumulative basis i e between 200 basis points and 500 basis points per year multiplied by the number of years in the measurement period and below the applicable market 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
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 AlerisLife Sonesta 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 and 3 of the cost of any major capital project or repositionings at DHC s senior living communities and SVC s hotels
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 and construction management services
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
RMR LLC provides services and earns fees pursuant to management agreements with ABP Trust regarding AlerisLife with Sonesta and until May 15 2023 with TA Under these agreements RMR LLC provides services to these clients 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 internal audit and general oversight of the company s daily business activities including legal and tax matters insurance programs and management information systems
Each of these clients pay RMR LLC a fee under its management agreement in an amount equal to 0 6 of i in the case of AlerisLife AlerisLife s revenues from all sources reportable under U S Generally Accepted Accounting Principles or GAAP less any revenues reportable by AlerisLife 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 estimated revenues from all sources reportable under GAAP less any estimated revenues reportable by Sonesta with respect to hotels for which it provides management services plus the estimated 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
The terms of the management agreements with ABP Trust regarding AlerisLife and with Sonesta end on December 31st of each year and automatically extend for successive one year terms unless RMR LLC or ABP Trust or Sonesta as applicable gives notice of non renewal before the expiration of the applicable term Any party may terminate the applicable management agreement at any time on 30 days notice In connection with BP s acquisition of TA on May 15 2023 TA terminated its management agreement with us and paid us a termination fee of 45 282
ABP Trust and Sonesta have each 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 of ABP Trust s and Sonesta s 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
RMR Residential provides management services to properties owned by third parties and to four funds through its property management and investment management agreements The property management agreements may be terminated upon written notice and generally provide for property management fees ranging from 2 5 to 3 5 of gross collected rents construction management fees of 5 0 of construction costs and reimbursement costs incurred to manage the properties The investment management agreements generally provide for fees that are based on the lesser of a percentage of invested capital and a fixed fee ranging from 100 to 200 annually
RMR LLC provides management services to other Private Capital clients for which we receive 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 up to 5 0 of the cost of any construction renovation or repair activities at the managed properties other than ordinary maintenance and repairs
Tremont is party to a management agreement with SEVN Pursuant to this agreement Tremont 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 is compensated pursuant to its management agreement with SEVN at an annual rate of 1 5 of equity as defined in the agreement Tremont may also earn an incentive fee under this management agreement equal to the difference between a the product of i 20 and ii the difference between A 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 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 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 in the aggregate is greater than zero The incentive fee may not be less than zero
The management agreement with SEVN automatically renews for successive one year terms beginning on each January 1 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 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 under the management agreement is not fair to SEVN provided that in the instance of b Tremont 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 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 for a material breach SEVN will be required to pay Tremont 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 during the 24 month period immediately preceding the most recently completed calendar quarter prior to the date of termination plus b 1 6 million In addition SEVN merged with Tremont Mortgage Trust or TRMT in 2021 The initial organizational costs related to TRMT s formation and the costs of its initial public offering and the concurrent private placement that Tremont 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 No termination fee will be payable if the management agreement is terminated by SEVN for a cause event or by Tremont without SEVN s material breach
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 Equity REITs and SEVN or 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 REITs generally distribute 100 0 of their taxable income to avoid paying corporate federal income taxes and as REITs such companies generally 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
Tremont is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940 as amended or the Investment Advisers Act Tremont provides investment advisory and administrative services to SEVN and may in the future provide such services to private funds that invest in commercial real estate debt Employees of Tremont 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 Investment Company Act of 1940 or 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
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 AlerisLife 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 RMR Residential competes with numerous other companies that provide management services to multifamily residential communities in the Sunbelt region of the United States 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
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
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
We remain committed to our Zero Emissions Promise announced in 2022 which is our organization s goal of net zero by 2050 and a 50 reduction by 2029 from a 2019 baseline as it relates to scope 1 and 2 emissions for all properties where we directly manage energy We anticipate emissions reductions will occur through a combination of strategic capital investments in energy efficiency by the Managed Equity REITs stakeholder engagement to promote sustainable behavior the deployment of on site solar and the purchase of energy from renewable sources We believe our efforts toward these goals will add value to our clients properties benefit tenants by lowering their operating costs drive sustainable economic returns and address investor demands that our clients have viable strategies to mitigate climate risk We have made significant progress to date achieving an overall reduction in emissions of 33
We have an active pipeline of commercial real estate development projects and maintain a green and energy efficient equipment purchasing guideline which mandates the use of high energy efficiency equipment and environmentally friendly materials for new developments and major asset refurbishments Our risk mitigation practices such as energy management programs green purchasing and high efficiency equipment guidelines performance benchmarking and policy tracking and climate related emergency preparedness are well established while the data we obtain to assess future climate change exposure continues to evolve
We drive value manage risk and benchmark the performance of our managed properties by effectively capturing and managing data through real time energy monitoring or RTM Our cloud based system connects building automation systems to a central supervisor 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 In 2024 we expanded this program to include fault detection and diagnostics with the aim of accelerating our identification of energy and emissions reduction opportunities We launched this program in 2017 and it is now deployed in 82 managed properties totaling approximately 63 of our managed annual electricity spend as of the end of 2023 We continue to expand our RTM program and remain committed to a goal of monitoring 90 of our managed energy spend through RTM by the end of 2025 resulting in operational savings and reduced equipment wear and tear while maintaining high tenant comfort
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 We have strengthened our alignment with the TCFD by advancing the depth of our alignment with all four pillars of the TCFD framework and we developed a tool to help assess building energy and emissions performance standards across the U S This tool overlays property locations size and use profiles with laws requiring energy water and emissions reporting or energy and emissions performance standards and forecasts future compliance risks We continue to refine our long standing engineering operating and management practices that incorporate environmental resilience and risk mitigation with activities and technology related to management oversight enhanced data gathering assessing risks and opportunities and adopting science based emissions targets
As a result of our sustainability initiatives we and our managed properties have 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 2023 the honors achieved by our clients included 70 BOMA 360 Certified Properties 88 ENERGY STAR Certified Properties 87 LEED Certified Properties and 22 National Wildlife Sanctuary Sites Certified Properties Finally for the sixth year in a row we received the 2024 ENERGY STAR Partner of the Year Award and for the seventh year in a row OPI received the 2024 ENERGY STAR Partner of the Year Award
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 organization is focused on the assets of our clients and we blend long term strategic vision with careful execution of day to day operations to optimize efficiency and foster the sustainable growth of our clients
As of September 30 2024 RMR LLC employed over 1 000 real estate professionals including 31 in our corporate offices and 69 across more than 35 offices throughout the United States The average tenure of our employees was 5 years Our employees are the foundation of our success and in many ways our most critical asset Our strength lies in the collective experience of a diverse and inclusive workplace 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 2024 39 of our employees were women and 44 were members of minority communities underrepresented in commercial real estate
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 In connection with the acquisition of MPC we added approximately 500 employees and integrated these employees into our organization Our compensation is designed to motivate and retain employees and align their interests with those of our clients We believe our compensation and benefits are best in class and are consistent with companies in the alternative asset management industry We periodically review the effectiveness and competitiveness of our compensation program
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
We established an Analyst Accelerator Internship Program which is designed to attract early career talent to our industry from backgrounds underrepresented in real estate The 10 week program is built upon the premise that hands on exposure as an analyst is an ideal way to provide rising juniors or seniors with a solid first step toward a successful and lasting career in real estate We actively recruit talent from college campuses and student communities interested in real estate who are traditionally underrepresented in the sector including women and people of color Relationships with programs like the University of Massachusetts Amherst Real Estate Program involvement with Historically Black Colleges and Universities and engagement with women s career forums all amplify our outreach efforts to develop a robust and diverse talent pipeline
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 Apprenticeship 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
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 BOMA membership Certified Property Manager Certified Public Accountant Certified Apartment Manager Certified Apartment Portfolio Supervisor and National Association of Industrial and Office Properties
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
our management fees from our clients are based in general on cost of assets enterprise values shareholder returns rent income construction projects or certain revenues as applicable and accordingly our future revenues income and cash flows will decline if the business activities assets enterprise values shareholder returns rent income construction projects or certain revenues of our clients decline
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 including through our acquisition of new businesses 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 of Directors may decide to lower our dividends
our and our operating company clients ability to attract retain and motivate sufficient qualified personnel in a challenging labor market and to effectively manage our and our operating company clients labor costs
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
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
Our business and operations may be adversely affected by market and economic volatility experienced by the U S and global economies the commercial real estate industry and or the local economies in the markets in which our clients properties are located Unfavorable economic and industry conditions may be due to among other things uncertainty surrounding interest rates prolonged inflation labor market challenges supply chain disruptions volatility in the public equity and debt markets pandemics geopolitical instability and tensions such as the ongoing wars in Ukraine and the Middle East possible economic recession changes in real estate utilization and other conditions beyond our control These current conditions or similar conditions existing in the future have adversely affected and may continue to adversely affect our and our clients and their tenants and managers results of operations financial condition and ability to pay dividends Unfavorable market conditions have particularly impacted the office sector as sustained low occupancy in office properties reduced values of these properties and limited acquisition and disposition volume continue to negatively affect our clients that own office properties Unfavorable market conditions and the impact on the commercial real estate industry have negatively impacted and may continue to negatively impact our clients market capitalizations revenues construction projects and acquisition and disposition activity which may reduce the fees we earn from them These conditions may also give rise to an increase in defaults under our clients leases and loans negatively impact market capitalizations shareholder returns rent income and construction projects for the Managed Equity REITs and acquisition and disposition activity of financial performance of and returns for our Private Capital clients Sustained high interest rates may increase the cost of our clients capital reduce their ability to make acquisitions and to make dispositions at favorable prices and have increased their debt service costs Sustained high interest rates also may reduce dispositions by the Managed Equity REITs due to their forgoing property sales because of depressed asset valuations and reduced buyer demand or more costly acquisition financing for buyers which could limit our clients ability to reduce leverage and recycle capital Further unfavorable market conditions have negatively impacted the stock price of some of the Managed Equity REITs which in turn has negatively impacted the fees we earn from them In addition some of our clients may be negatively impacted by an economic downturn that reduces business and leisure travel commerce hotel occupancy and demand for office retail and industrial space and may also limit the ability of residents and potential residents to pay for senior living community services
Most of our revenues are derived from our provision of management services to a limited number of companies The loss or decline in business or assets of any of the Managed Equity REITs or clients comprising a significant part of our Private Capital business 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 most of our revenues However our Private Capital clients have comprised an increasing portion of our assets under management and revenues and our current business plans contemplate that trend continuing A decline in the business or assets of our Private Capital clients could reduce our revenue Our operating results and our ability to maintain and grow our revenues depend upon the ability of our Managed Equity REITs to maintain and grow their investments and market capitalizations and to achieve positive shareholder returns in excess of applicable REIT total shareholder return indexes Additionally our operating results and ability to maintain or grow revenue also increasingly depend on the ability of our Private Capital clients to raise or contribute capital to invest in real estate assets Reduced business activities of the Managed Equity REITs or our Private Capital clients may materially reduce our revenues and our profitability
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 and 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 commercial real estate industry generally the Managed Equity REIT s industry specifically or other factors that are outside of our or its control including prolonged inflation sustained high interest rates supply chain challenges and economic downturns or recessions 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 year ended September 30 2019 our incentive business management fees earned from the Managed Equity REITs was 39 9 of our total management and advisory services revenues and we have not subsequently earned any incentive business management fees from the Managed Equity REITs Further the fees we earn under our property management agreements with the Managed Equity REITs and certain of our Private Capital clients are based on a percentage of the rents they 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 or certain Private Capital clients receive less rent or incur less construction costs our property management fee revenues are negatively impacted Also the fees under our management agreements with respect to AlerisLife and Sonesta are based on a percentage of revenues earned by them or generated at the properties they operate AlerisLife and Sonesta experienced high revenue volatility in the past and given the nature of AlerisLife and Sonesta s businesses i e senior living communities and hotels may continue to experience revenue volatility for the reasonably foreseeable future
The fees we earn and expect to earn from RMR Residential include promote fees on new co investments and such fees may be highly variable The number and timing of new co investments may vary depending on market opportunities changes in interest rates demand for multifamily and commercial real estate in general and other factors that may be out of our control
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 performance measures for three consecutive calendar years under our management agreements with the Managed Equity REITs such Managed Equity REIT will have the right to terminate its management agreement by prior written notice to us within 60 days following the end of the third consecutive calendar year and in which case it would be required to pay us the applicable termination fee If any of our management 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 with any of our clients could have a material adverse impact on our business results of operations and financial condition
We may not be able to successfully grow the RMR Residential business or the growth may be more costly or more time consuming and complex than anticipated and cost savings synergies and anticipated future financial performance may not be realized or may take longer to realize than expected In addition the growth of the RMR Residential business and the time and resources necessary to resume the pace of its acquisition activity may divert our management s attention from our other business opportunities Our ability to generate revenue from RMR Residential depends on our execution of acquisition opportunities on behalf of the investment funds it manages in the multifamily real estate sector We do not have significant experience in this commercial real estate sector and there can be no assurance that we will be successful in this business that we will achieve our expected objectives execute acquisition opportunities operate successfully or that we will earn fees from RMR Residential that provide returns on our investment that meet our underwriting expectations In addition because RMR Residential involves certain joint venture arrangements investment funds and limited partnerships we have limited flexibility and discretionary authority with respect to certain assets acquired or management of assets assumed Further in order to grow
the RMR Residential business we may need to raise additional capital from third party investors and our ability to raise additional capital depends on many factors some of which are outside of our control The failure to raise capital in sufficient amounts and on satisfactory terms could result in a decrease in our assets under management and our management fees or could result in our being unable to grow the RMR Residential business Any of the foregoing risks could have a material adverse effect on our ability to successfully grow the RMR Residential business and to achieve the anticipated benefits of the transaction
In 2024 we and Tremont Realty Capital launched our Real Estate Lending Venture which will provide senior secured transitional first mortgage loans for middle market real estate We are seeking outside investment partners for this venture and have guaranteed Tremont Realty Capital s 200 million repurchase facility with UBS AG the
We may be unable to compete with other companies in the middle market mortgage loan business many of which have significantly more experience and resources than we do Our ability to achieve our investment objectives depends on our Real Estate Lending Venture s ability to attract outside investors and to make investments that generate attractive risk adjusted returns In general the availability of favorable investment opportunities will be affected by the level and volatility of interest rates in the market generally the availability of adequate short and long term real estate financing and the competition for investment opportunities
allocating investment and loan opportunities among its clients on a rotating basis if an opportunity is appropriate for more than one client The allocation of loan opportunities pursuant to this policy frequently involves significant and subjective judgments and Tremont Realty Capital s allocation of loan opportunities may
Further we may not be successful in attracting outside investors to invest in our Real Estate Lending Venture If we are successful in attracting third party investors to our Real Estate Lending Venture the joint venture structure may limit our flexibility with jointly owned investments and subject us to certain risks relating to joint venture relationships
There can be no assurance that our Real Estate Lending Venture will obtain sufficient capital from outside investors within a reasonable time and on acceptable terms that Tremont Realty Capital will make suitable investments
Uncertainty surrounding interest rates and sustained high interest rates or interest rate reductions may significantly reduce our revenues or impede our growth In response to significant and prolonged increases in inflation the Federal Reserve raised interest rates eleven times during 2022 and 2023 and then paused rate increases in the fourth quarter of 2023 following the deceleration of inflationary growth The Federal Reserve cut interest rates in September 2024 and it may seek to further reduce interest rates increase interest rates or maintain current interest rates The timing number and amount of any future interest rate changes are uncertain
Increases in interest rates and sustained high 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 interest rates If 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 Several of the Managed Equity REITs have reduced their quarterly dividend to 0 01 per share in recent years 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 the increases in interest rates has led to increased borrowing costs for our clients and may negatively impact their access to capital to fund future growth or refinance debt reduce their earnings and total shareholder returns and cause the Managed REITs and our real estate business Private Capital vehicles tenants operators and borrowers and SEVN s borrowers to default on their rent and debt obligations which may materially reduce the fees we earn under our management agreements with our clients Further during periods of increased borrowing costs real estate transaction volumes often slow along with real estate valuation growth which may impact the results of operation of our clients and the fees we earn from those clients
If we cannot retain and motivate our key and talented personnel and recruit retain and motivate new talented personnel our business operating 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 highly competitive We do not have employment agreements with our key employees 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 the Managed REITs 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 other compensation or incentives for our employees Likewise if competition for employees increases in order to recruit and retain existing and future personnel we may need to increase the level of compensation that we pay
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 our Real Estate Lending Venture 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 In addition regulatory oversight and enforcement may increase and become more rigorous 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 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
There remains a continued focus from regulators investors certain of our clients tenants managers borrowers customers employees and other stakeholders concerning corporate sustainability For example California has enacted a climate focused disclosure law and the SEC has adopted climate change related regulations both of which will require us to focus significant time and resources on behalf of ourselves and our clients to comply with these new requirements if and when such regulations
become effective and we and these clients may incur significant costs in compliance with such rules Some investors may use ESG 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 Pursuant to our zero emissions goal we have pledged to reduce our scope 1 and 2 emissions to net zero by 2050 with a 50 reduction commitment by 2029 from a 2019 baseline We and our clients may face reputational damage in the event that our or their corporate responsibility procedures or standards do not meet the goals we or they have set or the standards set by various constituencies If we and our clients fail to comply with ESG related regulations and to satisfy the expectations of investors and our clients tenants managers borrowers customers employees and other stakeholders or our or our clients announced goals and other 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 In addition we or our clients may incur significant costs in attempting to comply with regulatory requirements ESG policies or third party expectations or demands
We and our clients are subject to risks and could be exposed to additional costs from adverse weather natural disasters and adverse impact from global climate change For example the properties owned or operated by us or our clients 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 Some of our clients and the investment funds and joint ventures we manage own a significant number of properties in the Southeastern United States which has been increasingly impacted by severe weather and rising sea levels in recent years Severe weather events and climatic conditions could also adversely impact us and our clients and cause significant losses if we or our clients or our or their tenants managers or borrowers are unable to operate their businesses due to damage resulting from such events Insurance may not sufficiently cover all losses sustained by us or our clients and our or their tenants managers or borrowers 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 and services 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 have experienced and 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 have created and 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 Although most of our staff works from our offices for the majority of the work week flexible working arrangements have resulted in increased remote working This and other possible changing work practices have adversely impacted and may in the future adversely impact our ability to maintain the security proper function and availability of our information technology and systems since remote working by our employees 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 have sought and may seek to exploit remote working environments In addition our data security data privacy investor reporting and business continuity processes could be impacted by a third party s inability to perform in a remote work environment or by the failure of or attack on their information systems and technology
In July 2023 the SEC adopted rules requiring public companies to disclose material cybersecurity incidents on Form 8 K and periodic disclosure of a registrant s cybersecurity risk management strategy and governance in annual reports The rules became effective beginning with annual reports for fiscal years ending on or after December 15 2023 and beginning with Form 8 Ks on December 18 2023 With the SEC particularly focused on cybersecurity we expect increased scrutiny of our policies and systems designed to manage our cybersecurity risks and our related disclosures We also expect to face increased costs to comply with the new SEC rules including increased costs for cybersecurity training and management Many jurisdictions in which we operate have laws and regulations relating to data privacy cybersecurity and protection of personal information including the California Consumer Privacy Act and the New York SHIELD Act In addition the SEC has indicated that one of its examination priorities for the Office of Compliance Inspections and Examinations is to continue to examine cybersecurity procedures and controls including testing the implementation of these procedures and controls
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 or any failure to provide the appropriate regulatory and other notifications in a timely manner 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
We are incorporating artificial intelligence into some of our business workflows and processes and challenges with properly managing its use could result in reputational harm competitive harm legal liability and increased regulatory costs and adversely affect our results of operations
We have begun using AI and machine learning technologies to enhance certain workflows and processes used in our business and our research into and continued deployment of such capabilities remain ongoing AI is still in its early stages and the introduction and incorporation of AI technologies may result in unintended consequences or other new or expanded risks and liabilities If the content analyses or recommendations that AI applications assist in producing are or are alleged to be deficient inaccurate or biased such as due to limitations in AI algorithms insufficient or biased base data or flawed training methodologies our business financial condition results of operations and reputation may be adversely affected Additionally AI technology is continuously evolving and we may incur costs to adopt and deploy AI technologies that could become obsolete earlier than expected and there can be no assurance that we will realize the desired or anticipated benefits from AI Also our competitors or other third parties may incorporate AI into their products and services more quickly or more successfully than us which could impair our ability to compete effectively and adversely affect our results of operations
The use of AI applications to support business processes carries inherent risks related to data privacy and security such as unintended or inadvertent transmission of proprietary or sensitive information including personal data AI presents emerging ethical issues and we may be unsuccessful in identifying and resolving these issues before they arise If our use of AI becomes controversial we may experience brand or reputational harm competitive harm or legal liability There is uncertainty in the legal and regulatory landscape for AI which is not fully developed and any laws regulations or industry standards adopted in response to the emergence of AI may be burdensome could entail significant costs and may restrict or impede our ability to successfully develop adopt and deploy AI technologies efficiently and effectively
Inflation remains above historic levels and the global economy continues to experience commodity pricing and other inflation including inflation impacting wages and employee benefits It is uncertain whether inflation will decline further remain relatively steady or increase however some market forecasts indicate that inflation rates may remain elevated for a prolonged period These conditions have increased the costs for materials other goods and labor and these rising costs are
impacting us and our clients 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 us and certain of our clients and tenants operators and borrowers of our clients If these inflationary pressures continue we and 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
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 In connection with the acquisition of RMR Residential in 2023 we added approximately 500 employees and fully integrating these employees in our organization compliance systems and culture may take longer than we anticipate 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 with us for cause and without paying a termination fee which could materially adversely affect our business results of operations and financial condition Additionally alleged misconduct by employees providing services to properties managed by the RMR Residential business has and may in the future contribute to the termination of property management agreements with respect to affected properties
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 If and when federal state or local governments impose higher income tax rates or increase the taxable base RMR LLC s quarterly tax distributions would generally increase accordingly 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
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 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 in addition to the risks noted elsewhere in this Annual Report on Form 10 K include but are not limited to the following
the inability of our clients tenants managers and borrowers to weather the ongoing adverse economic conditions including uncertainty surrounding interest rates and sustained high interest rates prolonged inflation economic downturn and possible recession and thereby impair their ability to pay rent and returns and make loan payments
the inability of our clients to access debt and equity capital on attractive terms or at all which could reduce our clients ability to pursue acquisition and development opportunities and refinance existing debt and reduce our clients returns from acquisition and development activities and increase their future interest expense
some of our clients have a substantial amount of debt and are subject to additional risks including the inability to refinance maturing debt and the cost of any such refinanced debt the inability to reduce debt leverage which may remain at or above current levels for an indefinite period
covenants and conditions contained in debt agreements which may restrict such clients operations by increasing interest expense and limiting such clients ability to make investments in their properties sell properties securing the debt and pay distributions to their shareholders potential downgrades to credit ratings and other limitations on their ability to access capital at reasonable costs or at all including the limited availability of debt capital to office and healthcare REITs in general
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 high interest rates and inflation may increase operating costs reduce the value of properties increase cost of capital and make raising capital difficult for our clients whereas 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
changing general economic and financial market conditions 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 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 and office industrial and healthcare properties and market changes which impact these specific types of assets e g a reduction in levels of business travel and occupancy at hotels and senior living communities as a result of adverse economic and market conditions tenant and customer trends new competition for short term accommodations changes in Medicare and Medicaid rates and other regulatory matters an insufficient recovery or a further reduction in the demand for office space as a result of remote hybrid and other flexible working arrangements and declining economic activity oversupply of industrial buildings or technological or market practice changes such as offshoring reducing the demand for industrial properties may adversely impact certain of the clients ability to maintain or grow their businesses
our clients with significant investments in office space have and may continue to experience declines in demand for office space consistent with declines in the office space industry generally as a result of remote hybrid and other flexible working arrangements which have adversely impacted such clients operating results and financial condition
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
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 REIT s Annual Report on Form 10 K for the year ended December 31 2023 as those Risk Factors may have been updated or supplemented in those companies Quarterly Reports on Form 10 Q filed subsequently Copies of these reports are available at the SEC s website www sec gov
Our public float represents about 48 3 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
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
Although S P Dow Jones a provider of widely followed stock indices reversed its prior decision to exclude companies with multiple share classes such as ours in certain of their indices there is no guarantee that our Class A Common Shares will be included in an S P index despite their eligibility The Council on Institutional Investors remains strongly opposed to dual class structures and some investors may continue to avoid investing in companies with dual class shares particularly companies that do not include time limits with respect to such dual class structures In addition several stockholder advisory firms oppose the use of multiple class structures As a result our Class A Common Shares may not be included in certain 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 Many investment funds are precluded from investing in companies that are not included in stock indices and these funds would be unable to purchase our Class A Common Shares 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
RMR Inc currently plans to pay a regular quarterly cash dividend equal to 0 45 per share 1 80 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 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
Our controlling shareholder has voting control over our outstanding capital stock 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 Chair of our Board of Directors and 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 2024 Adam D Portnoy beneficially owned in aggregate directly and indirectly through ABP Trust a combined direct and indirect 50 9 economic interest in RMR LLC and controlled 91 1 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
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 if the management agreements were terminated following our change of control As a result 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
Our subsidiary 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
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 48 6 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 our other shareholders 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 is 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 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 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 Our shareholders or the shareholders of one or more of our clients may challenge such related party transactions Although all past challenges have been unsuccessful if any future 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
Some of our clients have or have had significant interests in other clients of ours including ownership interests and business arrangements and some of our clients may in the future have such interests in other clients For example Sonesta manages most of SVC s hotels and SVC owns approximately 34 of Sonesta s outstanding common stock and AlerisLife manages many of the senior living communities owned by DHC and DHC owns approximately 34 of AlerisLife s outstanding common stock Accordingly a decline in the performance or prospects of AlerisLife would be expected to adversely impact DHC and any similar decline of Sonesta would be expected to adversely impact SVC
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 Allocating investment and loan opportunities appropriately frequently involves significant and subjective judgments In addition the perception of non compliance with such requirements or policies could harm our reputation with private capital investors and our public stockholders 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 For example our Real Estate Lending Venture and SEVN both provide first mortgage loans for middle market real estate and both are managed by our wholly owned subsidiary Tremont Realty Capital 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 believe we and our clients have appropriate policies and procedures in place that are intended to manage and 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 If we fail or appear to fail to deal appropriately with one or more potential or actual conflict of interest our reputation could be damaged and could have a materially adverse effect on our business financial condition or results of operations in a number of ways including an inability to raise additional funds and a reluctance of counterparties to do business with us
In addition to serving as the Chair and a member of our Board of Directors and on our executive team Adam D Portnoy serves as the chair of the board and as a managing trustee of each Managed REIT as a director of Sonesta and its parent and as the sole director of AlerisLife certain of our other officers serve as managing trustees or directors of our clients and all of the executive officers of the Managed REITs one of the executive officers of AlerisLife and one of the executive officers of Sonesta is an officer and employee of ours In addition some of the independent trustees of the Managed REITs also serve as independent trustees of other Managed REITs Mr Portnoy is also the controlling shareholder of AlerisLife and Sonesta 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 The various relationships noted above 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 vote against certain proposals at special meetings of shareholders and they may advocate for similar voting actions for future meetings These actions may affect the outcome of those shareholder votes 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
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 Although we are not currently availing ourselves of these exceptions the fact that we could in the future may cause our Class A Common Shares to trade at a lower price than if we were required to afford these protections
Our charter limits 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
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 or otherwise involved in a proceeding by reason of his her or their service in that capacity and to pay his her or their expenses in advance of final disposition of a proceeding upon our receipt of an undertaking by or on behalf of such person to repay such amount if it is ultimately determined that such person is not entitled to be indemnified by us 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
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 Internal Corporate Claim as such term is defined under the Maryland General Corporation Law 2 any derivative action or proceeding brought on our behalf 3 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 4 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 including any disputes claims or controversies 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 stock or our shareholders against us or any of our directors officers agents or employees including any disputes claims or controversies relating to the meaning interpretation effect validity performance or enforcement of our charter or bylaws or 5 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 Unless we otherwise consent in writing the sole and exclusive forum for claims that arise under the Securities Act is the federal district courts of the United States of America to the fullest extent of the law Any person or entity purchasing or otherwise acquiring or holding any interest in our shares of stock 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 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
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 effect 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 the 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 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
Under RMR Inc s charter 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 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 During the past three years we expanded our Private Capital through the execution of new business ventures our Private Capital assets under management increased from approximately 1 7 billion as of September 30 2021 to approximately 12 8 billion as of September 30 2024 We entered the multifamily residential real estate sector in December 2023 through our acquisition of RMR Residential and in July 2024 we launched our Real Estate Lending Venture
In addition our strategic initiatives include joint ventures or partnerships in which case we may 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 There can be no assurance that our increased focus on private real estate capital or any other business initiative we decide to pursue will be successful in the future or that we will achieve our performance objectives
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
We maintain a cybersecurity risk management program to identify assess and manage material risks from cybersecurity threats including by regularly assessing risks from cybersecurity threats and monitoring our information systems for potential vulnerabilities Our cybersecurity program is designed to align with the National Institute of Standards and Technology Cybersecurity Framework
We take various actions designed to maintain and protect the operation and security of our information technology and systems including the data maintained in those systems We conduct data security education and testing for our employees in addition to penetration testing and unannounced email phishing exercises Additionally we have implemented a third party risk management process for third party service providers and vendors Extensive security questionnaires are issued to third party providers and vendors the responses to which are weighted and reviewed by our security and compliance team High risk vendors are reviewed at least biennially and new vendors that interact with our data are assessed as part of our vendor procurement process In the event of a cybersecurity incident we have a detailed incident response plan in place for contacting authorities and informing key stakeholders In addition we have engaged a qualified third party who conducted an external assessment of our cybersecurity controls
To date we are not aware of risks from cybersecurity threats including as a result of any previous cybersecurity incidents that have materially affected or are reasonably likely to materially affect the Company including its business strategy results of operations or financial condition For additional information on cybersecurity risks and potential related impacts on us see Part I Item 1A Risk Factors 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
Our Board of Directors holds oversight responsibility over our strategy and risk management including material risks related to cybersecurity threats Our Audit Committee takes a leading role in oversight of risk management including risks related to cybersecurity and receives reports from our management regarding cybersecurity risks and countermeasures being undertaken or considered by us including updates on the internal and external cybersecurity landscape and relevant technical developments and more frequent reports as it may direct or as warranted Our cybersecurity program is led by our Chief Information Officer or CIO who has over two decades of relevant experience in information technology and cybersecurity and has primary responsibility for assessing and managing material risks from cybersecurity threats and overseeing our cybersecurity team Our CIO has previously held senior information technology and security roles including as CIO of a global real estate firm and of a real estate investment trust Our Director of Information Security and our cybersecurity team are responsible for among other things information technology failure mitigation and business continuity cybersecurity threat detection and incident response and continuous network monitoring Our cybersecurity team members have a broad array of relevant skills and expertise and have obtained or are working to obtain relevant information security certifications including Certified Information Systems Security Professional Certified Information Systems Auditor and Certified Risk and Information Systems Control certifications Our Director of Information Security assembles our incident response and investigative teams and informs our CIO if an incident occurs Investigative findings are reported to our executive leadership and to the relevant
authorities if warranted Our CIO works closely with our senior management including cross functional leaders in our human resources legal and corporate communications departments to develop and advance our cybersecurity strategy and reports to our Audit Committee on cybersecurity matters
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 see Note
In December 2023 as part of the MPC Acquisition we acquired a 90 0 economic ownership interest in 260 Woodstock Investor LLC a mixed use apartment complex located in Woodstock GA or the Woodstock Property A mortgage loan with an acquisition date fair value of 4 726 and an aggregate principal amount outstanding of 5 429 is secured by the Woodstock Property and bears interest at a fixed rate of 3 71 The mortgage loan requires monthly payments of interest only until September 2025 at which time payments of principal and interest are due monthly until the loan matures in August 2029
In July 2024 we acquired a 240 unit garden style apartment community located in Denver CO or the Denver Property for a purchase price of 70 000 excluding acquisition costs We financed this purchase with cash on hand and proceeds from a 46 500 mortgage loan with a 5 34 fixed interest rate This mortgage loan requires monthly payments of interest only until maturity in July 2029
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
These Class A Common Share withholdings and purchases were made to satisfy tax withholding and payment obligations of certain of our Directors officers and employees 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
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
On December 19 2023 we completed our acquisition or the Acquisition of MPC now doing business as RMR Residential a vertically integrated residential platform This acquisition further advances our strategic focus on continuing to grow our private capital business comprising approximately 5 1 billion in assets under management as of September 30 2024 and a number of new institutional relationships This acquisition also allows us to further diversify our revenue sources to enter the only major commercial real estate or CRE sector in which we did not have a significant presence and brings infrastructure and digital marketing capabilities that may be leveraged across our platform
The continuation and growth of our business depends upon our ability to operate the Managed Equity REITs our private capital clients and SEVN so as to maintain grow and increase the value of their businesses to assist AlerisLife and Sonesta to grow their businesses and operate profitably and to successfully expand our business through the execution of new business ventures and additional investments 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 population migration across 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
Beyond general real estate industry trends we also take into account general economic factors impacting our clients Heading in to 2024 certain CRE investors seemed cautiously optimistic that inflation had peaked that the U S economy was likely headed for a soft landing and that the Federal Open Market Committee of the U S Federal Reserve or the FOMC would be poised to reduce the federal funds rate by 125 to 150 basis points as a result of five or six rate cuts in 2024 With the anticipation of lower interest rates in the future investors chose to delay sale or refinancing decisions and overall CRE investment and transaction volume remained tepid well into the third quarter of calendar 2024 In September 2024 citing progress toward its 2 inflation target the FOMC lowered the targeted federal funds rate by 50 basis points to a range of 4 75 to 5 00 the first reduction since March 2020 This rate cut provided CRE owners relief from the recent high borrowing costs and uncertainty regarding the timing and magnitude of future rate cuts With this additional clarity on the intentions of the FOMC and the direction of future interest rates CRE owners are now better positioned to make sale or refinance decisions and opt between floating or fixed rate financing options
Although certain CRE investors feel that the risk of a prolonged period of elevated interest rates is largely over other challenges remain Special servicing rates for commercial mortgage backed securities or CMBS and CRE collateralized loan obligations continue to increase and lenders have become more willing to foreclose on borrowers unable to support underperforming properties Furthermore certain segments of the CRE industry continue to experience headwinds in trying to improve operating fundamentals whether it be the pandemic shift in work habits and weak demand for office space impacting the office sector or oversupply in certain markets adversely impacting the industrial and residential sectors
Both we and our clients consider industry and general economic factors and attempt to take advantage of opportunities when they arise For example i since March 2020 ILPT and DHC have completed several joint venture transactions with institutional investors and subsequently grown some of those ventures by acquiring additional properties ii SVC transitioned over 200 hotels from other hotel operators to Sonesta which on March 17 2021 completed its acquisition of RLH Corporation establishing it as one of the largest hotel companies in the U S and expanding its franchising capabilities and iii on February 25 2022 ILPT completed its acquisition of 126 new Class A single tenant net leased e commerce focused industrial properties as a result of its acquisition of Monmouth Real Estate Investment Corporation or MNR in an all cash transaction
valued at approximately 4 0 billion More recently on December 19 2023 we completed our previously announced agreement to acquire 100 of the equity interest in MPC for total consideration of 99 021 which added residential capabilities to RMR LLC 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 increased operating costs We also look to reposition their portfolios and businesses when circumstances warrant such changes or when other more desirable opportunities are identified
For a discussion of some of the circumstances that may adversely affect us and our business see elsewhere in this Annual Report on Form 10 K including Warning Concerning Forward Looking Statements Part I Item 1 Business and Part I Item 1A Risk Factors
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 Managed Equity REITs excluding rents or other revenues from hotels travel centers senior living properties and wellness centers which are separately managed by AlerisLife Sonesta 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 properties owned by the Managed Equity REITs based on a percentage of the cost of such construction For further information regarding the fees we earn see Note
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 2024 and 2023 as applicable
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 2024 and 2023 may differ from the basis at the end of the periods presented in the table above As of September 30 2024 the market capitalization was lower than the historical cost of assets under management for each of the Managed Equity REITs the historical cost of assets under management for DHC ILPT OPI and SVC as of September 30 2024 were 7 651 487 5 699 132 5 806 052 and 11 425 389 respectively
We provide business management services to AlerisLife Sonesta and until May 15 2023 TA AlerisLife 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 AlerisLife Sonesta and until May 15 2023 TA are based on a percentage of certain revenues In connection with BP s acquisition of TA on May 15 2023 TA terminated its business management agreement with us and in accordance with its terms paid us the applicable termination fee of 45 282
In addition we also provide management services to certain other Private Capital clients including high quality institutional investors relationships we assumed as part of our MPC acquisition 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 supervision fees based on a percentage of the cost of construction activities RMR Residential also provides us the potential to generate promote fees on any new co investments in the future
Our management fee revenues from services to these clients for the fiscal years ended September 30 2024 and 2023 are set forth in the following table and exclude termination fee revenue earned from TA of 45 282 for the fiscal year ended September 30 2023
Tremont provides advisory services to SEVN a publicly traded mortgage REIT that focuses on originating and investing in first mortgage loans secured by middle market and transitional commercial real estate Tremont is primarily compensated pursuant to its management agreement with SEVN based on a percentage of equity as defined in the applicable agreement
As part of our strategic initiative to expand our private capital business our plan is to amass a small portfolio of loans financed in part through a bank repurchase facility in a Tremont managed vehicle and bring in third parties to invest in the vehicle The vehicle would then continue growing by making additional loans
In July 2024 we originated a floating rate first mortgage loan that is secured by a hotel property in Revere MA for a total commitment of 40 000 which has been fully funded as of September 30 2024 This loan requires the borrower to pay interest at a rate of the Secured Overnight Financing Rate or SOFR plus a premium of 395 basis points per annum and has an initial term of two years with three one year extensions Also in July 2024 we originated a floating rate first mortgage loan that is secured by an industrial property in Wayne PA for a total commitment of 27 000 of which 17 180 has been funded as of September 30 2024 This loan requires the borrower to pay interest at a rate of SOFR plus a premium of 425 basis points per annum and has an initial term of three years with two one year extensions
In September 2024 we entered into a master repurchase agreement with UBS AG or UBS or our UBS Master Repurchase Agreement for a facility with an aggregate maximum capacity of 200 000 or our UBS Master Repurchase Facility pursuant to which we may sell to UBS and later repurchase commercial mortgage loans which are referred to as purchased assets Pursuant to the UBS Master Repurchase Agreement we will pay UBS a non refundable upfront fee that is equal to 0 60 of the applicable tranche amount on each purchase date
In July 2024 we acquired a 240 unit garden style apartment community located in Denver CO or the Denver Property for a purchase price of 70 000 excluding acquisition costs We financed this purchase with cash on hand and proceeds from a 46 500 mortgage loan with a 5 34 fixed interest rate This mortgage loan requires monthly payments of interest only until maturity in July 2029
References to changes in the income and expense categories below relate to the comparison of consolidated results for the fiscal year ended September 30 2024 compared to the fiscal year ended September 30 2023 For a comparison of consolidated results for the fiscal year ended September 30 2023 compared to the fiscal year ended September 30 2022 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 2023
Management services revenue increased 2 499 primarily due to growth in management services revenue of 16 936 related to our acquisition of MPC partially offset by decreases in management fees earned from TA of 9 932 as a result of the termination of its business management agreement with us on May 15 2023 and decreases in construction supervision fees earned primarily from the Managed Equity REITs of 4 242
Reimbursable compensation and benefits include reimbursements at cost that arise primarily from services our employees provide pursuant to our property management agreements at the properties of our clients A significant portion of these compensation and benefits are charged or passed through to and paid by tenants of our clients Reimbursable compensation and benefits increased 24 244 primarily due to the impact of our acquisition of MPC and annual merit increases effective October 1 2023
Reimbursable equity based compensation includes awards of common shares by our clients directly to certain of our officers and employees in connection with the provision of management services to those clients We record an equal offsetting amount as equity based compensation expense for the value of these awards Reimbursable equity based compensation revenue decreased 1 907 primarily as a result of decreases in certain of our clients respective share prices
Compensation and benefits consist of employee salaries and other employment related costs including health insurance expenses and contributions related to our employee retirement plan Compensation and benefits expense increased 34 002 primarily due to the impact of our acquisition of MPC and annual merit and benefit increases which was partially offset by cost containment measures that reduced headcount
Equity based compensation consists of the value of vested shares awarded to certain of our employees under our and our clients equity compensation plans We record an equal offsetting amount as reimbursable equity based compensation revenue for the value of awards under our clients equity compensation plans to certain of our employees Equity based compensation decreased 1 864 primarily as a result of decreases in certain of our clients respective share prices
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 7 724 primarily due to the impact of our acquisition of MPC and increases in third party costs related to our expanded role in construction oversight
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 2024 and 2023 we had cash and cash equivalents of 141 599 and 267 989 respectively of which 23 189 and 26 802 respectively was held by RMR Inc with the remainder being held at RMR LLC and its subsidiaries 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 2024 and 2023 92 326 and 265 800 respectively of our cash and cash equivalents were invested in money market bank accounts
We believe that 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 to fund our operations and cash distributions and enhance our technology infrastructure in the next twelve months Our experienced platform and existing relationships with institutional investors has provided us with significant opportunities to continue expanding our private capital business We intend to diversify and further grow our private capital revenues by sponsoring and managing new real estate related investment funds that may invest in the equity of real estate or provide commercial mortgage loans secured by middle market and transitional real estate in the U S We anticipate that using our capital for possible formation costs and co investment in these funds will diversify our revenues and generate management fees incentive fees and potential promote income
On December 19 2023 we completed our acquisition of MPC for total cash consideration of 84 474 We are also obligated to pay the Earnout if earned which we currently estimate at 11 958 and which will be payable over the next three years based on our current expectations for the deployment of capital remaining in investment funds managed by MPC prior to the end of such fund s investment period In addition to the Earnout we agreed to pay retention payments to certain employees of MPC in an aggregate amount of 4 200 for their continued employment through December 31 2025
Our liquidity is highly dependent upon our receipt of fees from the businesses we manage Historically we have funded our working capital needs with cash generated from our operating activities 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
ended September 30 2024 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 47 623 On October 16 2024 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 28 2024 in the amount of 0 45 per Class A Common Share and Class B 1 Common Share or 7 581 This dividend will be partially funded by a distribution from RMR LLC to holders of its membership units in the amount of 0 32 per unit or 10 191 of which 5 391 will be distributed to us based on our aggregate ownership of 16 846 025 membership units of RMR LLC and 4 800 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 12 381 and we expect to pay this dividend on or about November 14 2024 See Note
For the fiscal year ended September 30 2024 pursuant to the RMR LLC operating agreement RMR LLC made required quarterly tax distributions to its holders of its membership units totaling 27 796 of which 14 799 was distributed to us and 12 997 was distributed to ABP Trust based on each membership unit holder s then respective ownership percentage in RMR LLC The 14 799 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 12 997 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 47 840 decrease in net cash flows from operating activities for the fiscal year ended September 30 2024 compared to the prior fiscal year reflects a decrease in net income due to termination fee revenue from TA in the prior period The 259 334 decrease in net cash flows from investing activities for the fiscal year ended September 30 2024 compared to the prior fiscal year was due to our acquisition of MPC and the Denver Property as well as the origination of loans held for investment in the current fiscal year compared to the proceeds received from the sale of TA s common shares in the prior period The 101 883 increase in net cash flows from financing activities for the fiscal year ended September 30 2024 compared to the prior fiscal
As of September 30 2024 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
We are party to a tax receivable agreement which 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
to our consolidated financial statements included in Part IV Item 15 of this Annual Report on Form 10 K As of September 30 2024 our consolidated balance sheet reflects a liability related to the tax receivable agreement of 20 863 of which we expect to pay 2 421 to ABP Trust during the fourth quarter of fiscal year 2025
We have not invested in derivative instruments borrowed through issuing debt securities or transacted in foreign currencies Our floating rate debt consists of our purchased assets which are governed by our UBS Master Repurchase Facility and directly relate to our underlying loans held for investment We are required to pay interest on our floating rate debt at a rate of SOFR plus a premium and earn interest on our underlying loans held for investment at a rate of SOFR plus a premium that is in excess of the premium paid on our floating rate debt Changes in market interest rates would not impact the fixed spread that we earn between our purchased assets and our loans held for investment As a result we are not subject to significant direct market risk related to interest rate changes changes to the market standard for determining interest rates or commodity price changes however if any of these risks were to negatively impact our clients businesses or market capitalization our revenues would likely decline We are subject to the credit risk of our borrowers in connection with our loans held for investment We seek to mitigate this risk by utilizing a comprehensive underwriting diligence and investment selection process and by ongoing monitoring of our investments Nevertheless unanticipated credit losses could occur that may adversely impact our operating results To the extent we change our approach on the foregoing activities or engage in other activities our market and credit risks could change See Part I Item 1A Risk Factors of this Annual Report on Form 10 K for the risks to us and our clients
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 bank accounts 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
We have relationships and historical and continuing transactions with Adam D Portnoy the Chair of our Board and one of our Managing Directors as well as our clients For further information about these and other such relationships and related person transactions see Note
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 2025 Annual Meeting of Shareholders or the 2025 Proxy Statement to be filed within 120 days after the close of the fiscal year ended September 30 2024 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 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
An understanding of our accounting policies is necessary for a complete analysis of our results financial position liquidity and trends The preparation of our consolidated financial statements requires our management to make certain critical accounting estimates and judgments that impact i the revenue recognized during the reporting periods ii the estimation of
fair values and iii 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 consolidated 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
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
The estimation of fair value involves a significant level of judgment and estimation uncertainty and actual results could be materially different and have a material impact on our financial condition and results of operations We accounted for the Acquisition as a business combination We used estimates and assumptions to assign fair values to assets acquired and liabilities assumed including intangible assets Determining the fair value of intangible assets requires us to use estimates and assumptions including but not limited to expected future cash inflows and outflows useful lives discount rates and income tax rates Fair values were determined based on estimates and assumptions we believe to be reasonable but that are unpredictable and inherently uncertain Unanticipated events and circumstances may occur that could materially affect the accuracy of such estimates assumptions or actual results
The fair value of our Earnout liability was determined using a Monte Carlo simulation model and is inherently uncertain Inputs into the model require estimates and assumptions regarding the timing and deployment of future capital the historical volatility of similar market transaction and discount rates and credit ratings for companies similar to ours The Earnout liability is remeasured on a quarterly basis and changes to our estimates and assumptions are likely to have a significant impact on the fair value estimate of the Earnout liability In addition actual payments required under the Earnout may differ significantly from our estimates and could have a material impact to our results of operations and financial condition
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
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
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
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 2024 that have materially affected or are reasonably likely to materially affect our 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 2024 In making this assessment it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission 2013 framework in
Our assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of MPC acquired on December 19 2023 which is included in our consolidated financial statements since the date of acquisition and represented less than 4 of our total assets as of September 30 2024 after excluding goodwill and intangible assets acquired and less than 5 of our total revenues for the year ended September 30 2024 We will include MPC in our assessment of internal controls for the fiscal year ending September 30 2025
Deloitte Touche LLP the independent registered public accounting firm that audited our 2024 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
We have adopted comprehensive insider trading policies and procedures that apply to all directors officers and employees These policies are designed to prevent trading on the basis of material nonpublic information and to ensure compliance with applicable securities laws The policies include provisions for pre clearance of trades blackout periods and the establishment of Rule 10b5 1 trading plans A copy of our insider trading policy is filed as an exhibit to this Annual Report on Form 10 K
We may award our Class A Common Shares to our officers and employees under the Amended and Restated 2016 Omnibus Equity Plan 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 awards made under the 2016 Plan are determined by the Compensation Committee of our Board of Directors at the time of the award The following table is as of September 30 2024
Equity Purchase Agreement dated as of July 29 2023 by and among The RMR Group LLC MPC Partnership Holdings LLC the Sellers set forth on the signature pages thereto the Seller Owners set forth on the signature pages thereto and James A Rubright solely in his capacity as the Seller Representative Schedules to the Equity Purchase Agreement have been omitted pursuant to Item 601 b 2 of Regulation S K The Registrant agrees to furnish supplementally a copy of all omitted schedules to the SEC upon its request Incorporated by reference to the Registrant s Current Report on Form 8 K File No 001 37616 filed with the SEC on July 31 2023
Form of The RMR Group Inc Share Certificate for Class A Common Stock 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
Registration Rights Agreement dated as of June 5 2015 by and between the Registrant and ABP Trust formerly known as Reit Management Research Trust 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
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 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
Second Amended and Restated Business Management Agreement dated as of March 20 2023 by and between The RMR Group LLC and ABP Trust Incorporated by reference to the Registrant s Quarterly Report on Form 10 Q File No 001 37616 filed with the SEC on May 3 2023
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 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
First Amendment to Amended and Restated Business Management and Shared Services Agreement dated as of May 31 2022 by and between Sonesta International Hotels Corporation and The RMR Group LLC Incorporated by reference to the Registrant s Quarterly Report on Form 10 Q File No 001 37616 filed with the SEC on August 4 2022
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 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
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 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
Second Amendment to Second Amended and Restated Business Management Agreement dated August 1 2021 between Office Properties Income Trust and The RMR Group LLC Incorporated by reference to the Registrant s Annual Report on Form 10 K File No 001 37616 filed with the SEC on November 15 2021
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 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
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 Incorporated by reference to the Registrant s Annual Report on Form 10 K File No 001 37616 filed with the SEC on November 15 2021
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 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
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 Incorporated by reference to the Registrant s Annual Report on Form 10 K File No 001 37616 filed with the SEC on November 15 2021
Business Management Agreement dated as of January 17 2018 by and between Industrial Logistics Properties Trust and The RMR Group LLC 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
Amendment to Business Management Agreement dated December 31 2018 between Industrial Logistics Properties Trust and The RMR Group LLC 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
Second Amendment to Business Management Agreement dated August 1 2021 between Industrial Logistics Properties Trust and The RMR Group LLC Incorporated by reference to the Registrant s Annual Report on Form 10 K File No 001 37616 filed with the SEC on November 15 2021
Amended and Restated Property Management Agreement by and between The RMR Group LLC and ABP Trust formerly known as Reit Management Research Trust 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
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 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
Third Amended and Restated Property Management Agreement dated as of June 22 2021 by and between The RMR Group LLC and Service Properties Trust 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
Third Amended and Restated Property Management Agreement dated as of June 9 2021 by and between The RMR Group LLC and Diversified Healthcare Trust 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
Property Management Agreement dated as of January 17 2018 by and between The RMR Group LLC and Industrial Logistics Properties Trust 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
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 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
Lease dated as of June 1 2015 by and between RMR West LLC and The RMR Group LLC 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
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 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
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 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
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 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
Form of Indemnification Agreement for the Registrant and its directors and executive officers 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
Letter Agreement dated as of November 15 2023 by and among The RMR Group LLC and Jennifer Francis Incorporated by reference to the Registrant s Quarterly Report on Form 10 Q File No 001 37616 filed with the SEC on February 7 2024
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 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
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 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
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 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
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 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
Letter Agreement dated as of February 21 2020 between Industrial Logistics Properties Trust and The RMR Group LLC 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
Letter dated February 25 2022 between Industrial Logistics Properties Trust and The RMR Group LLC regarding Business Management Agreement between Industrial Logistics Properties Trust and The RMR Group LLC Incorporated by reference to the Registrant s Quarterly Report on Form 10 Q File No 001 37616 filed with the SEC on May 4 2022
Letter Agreement dated as of May 1 2023 between The RMR Group LLC and Service Properties Trust Incorporated by reference to the Registrant s Quarterly Report on Form 10 Q File No 001 37616 filed with the SEC on August 9 2023
Letter Agreement dated as of May 25 2023 between The RMR Group LLC and Office Properties Income Trust Incorporated by reference to the Registrant s Quarterly Report on Form 10 Q File No 001 37616 filed with the SEC on August 9 2023
Property Management Agreement dated as of July 8 2023 between The RMR Group LLC and Floral Vale LLC a subsidiary of Seven Hills Realty Trust Incorporated by reference to the Registrant s Quarterly Report on Form 10 Q File No 001 37616 filed with the SEC on August 9 2023
We have audited the accompanying consolidated balance sheets of The RMR Group Inc the Company as of September 30 2024 and 2023 the related consolidated statements of income shareholders equity and cash flows for each of the three years in the period ended September 30 2024 and the related notes collectively referred to as the financial statements In our opinion the financial statements present fairly in all material respects the financial position of the Company as of September 30 2024 and 2023 and the results of its operations and its cash flows for each of the three years in the period ended September 30 2024 in conformity with accounting principles generally accepted in the United States of America
We have also audited in accordance with the standards of the Public Company Accounting Oversight Board United States PCAOB the Company s internal control over financial reporting as of September 30 2024 based on criteria established in
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated November 12 2024 expressed an unqualified opinion on the Company s internal control over financial reporting
These financial statements are the responsibility of the Company s management Our responsibility is to express an opinion on the Company s financial statements based on our audits We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U S federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB
We conducted our audits in accordance with the standards of the PCAOB Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement whether due to error or fraud Our audits included performing procedures to assess the risks of material misstatement of the financial statements whether due to error or fraud and performing procedures that respond to those risks Such procedures included examining on a test basis evidence regarding the amounts and disclosures in the financial statements Our audits also included evaluating the accounting principles used and significant estimates made by management as well as evaluating the overall presentation of the financial statements We believe that our audits provide a reasonable basis for our opinion
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that 1 relate to accounts or disclosures that are material to the financial statements and 2 involved our especially challenging subjective or complex judgments The communication of critical audit matters does not alter in any way our opinion on the financial statements taken as a whole and we are not by communicating the critical audit matters below providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate
As discussed in Notes 1 and 2 to the financial statements the Company generates its revenue by providing management services to four publicly traded equity real estate investment trusts two real estate operating companies and private capital vehicles as well as providing advisory services to a publicly traded mortgage real estate investment trust all of which are related parties These entities are considered to be related parties for the reasons discussed in Note 8 to the financial statements In addition the Company has also entered into a number of other arrangements with its related persons and related parties collectively related parties as further discussed in Note 8
Given the number of related parties and related party transactions we determined the evaluation of the identification and disclosure of related parties and related party transactions to be a critical audit matter Auditor judgment and effort was involved in assessing the sufficiency of the procedures the Company performed to identify and disclose related parties and related party transactions
Reading public filings made by the Company in addition to external news sources for information related to transactions between the Company and related parties to compare to the Company s detail of related party transactions
As discussed in Note 4 to the financial statements the Company completed the acquisition of MPC Partnership Holdings LLC or MPC on December 19 2023 with a purchase price of 99 million The Company accounted for the acquisition under the acquisition method of accounting for business combinations Accordingly the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values including intangible assets of property management and investment management agreements of 13 5 million trade name of 5 2 million and investor relationships of 1 8 million The method for determining relative fair value requires management to make estimates and assumptions related to the long term growth rate and the selection of the discount rate
Given the fair value determination of the intangible assets for MPC requires management to make significant estimates and assumptions related to the long term growth rate and the selection of the discount rate performing audit procedures to evaluate the reasonableness of these estimates and assumptions required a high degree of auditor judgment and an increased extent of effort
issued by the Committee of Sponsoring Organizations of the Treadway Commission COSO In our opinion the Company maintained in all material respects effective internal control over financial reporting as of September 30 2024 based on criteria established in
We have also audited in accordance with the standards of the Public Company Accounting Oversight Board United States PCAOB the consolidated financial statements as of and for the year ended September 30 2024 of the Company and our report dated November 12 2024 expressed an unqualified opinion on those financial statements
As described in Management Report on Assessment of Internal Control Over Financial Reporting management excluded from its assessment the internal control over financial reporting at MPC Partnership Holdings LLC which was acquired on December 19 2023 and whose financial statements constitute less than 4 of total assets after excluding goodwill and intangible assets acquired and less than 5 of total revenues of the consolidated financial statement amounts as of and for the year ended September 30 2024 Accordingly our audit did not include the internal control over financial reporting at MPC Partnership Holdings LLC
The Company s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management Report on Assessment of Internal Control Over Financial Reporting Our responsibility is to express an opinion on the Company s internal control over financial reporting based on our audit We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U S federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB
We conducted our audit in accordance with the standards of the PCAOB Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects Our audit included obtaining an understanding of internal control over financial reporting assessing the risk that a material weakness exists testing and evaluating the design and operating effectiveness of internal control based on the assessed risk and performing such other procedures as we considered necessary in the circumstances We believe that our audit provides a reasonable basis for our opinion
A company s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles A company s internal control over financial reporting includes those policies and procedures that 1 pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company 2 provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company and 3 provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition use or disposition of the company s assets that could have a material effect on the financial statements
Because of its inherent limitations internal control over financial reporting may not prevent or detect misstatements Also projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate
The RMR Group Inc or RMR Inc is a holding company and substantially all of its business is conducted by its majority owned subsidiary The RMR Group LLC or RMR LLC RMR Inc is a Maryland corporation and RMR LLC is a Maryland limited liability company RMR Inc serves as the sole managing member of RMR LLC and in that capacity operates and controls the business and affairs of RMR LLC In these consolidated financial statements unless otherwise indicated we us and our refer to RMR Inc and its direct and indirect subsidiaries including RMR LLC
As of September 30 2024 RMR Inc owned 15 846 025 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 represented 52 9 of the economic interest of RMR LLC as of September 30 2024 We refer to economic interest as the right of a holder of a Class A Unit or Class B Unit to share in distributions made by RMR LLC and upon liquidation dissolution or winding up of RMR LLC to share in the assets of RMR LLC after payments to creditors A wholly owned subsidiary of ABP Trust a Maryland statutory trust owns 15 000 000 redeemable Class A Units representing 47 1 of the economic interest of RMR LLC as of September 30 2024 which is presented as a noncontrolling interest in the RMR Group LLC within the consolidated financial statements Adam D Portnoy the Chair of our Board one of our Managing Directors and our President and Chief Executive Officer is the sole trustee of ABP Trust and owns all of ABP Trust s voting securities
RMR LLC provides management services to four publicly traded equity real estate investment trusts or REITs Diversified Healthcare Trust or DHC which owns medical office and life science properties senior living communities and other healthcare related properties Industrial Logistics Properties Trust or ILPT which owns and leases industrial and logistics properties Office Properties Income Trust or OPI which owns and leases office properties primarily to single tenants and those with high credit quality characteristics and Service Properties Trust or SVC which owns a diverse portfolio of hotels and service focused retail net lease properties DHC ILPT OPI and SVC are collectively referred to as the Managed Equity REITs
RMR LLC s wholly owned subsidiary Tremont Realty Capital LLC or Tremont an investment adviser registered with the Securities and Exchange Commission or SEC provides advisory services for Seven Hills Realty Trust or SEVN SEVN is a publicly traded mortgage REIT that focuses on originating and investing in first mortgage loans secured by middle market and transitional commercial real estate Tremont may also act as a transaction broker for non investment advisory clients for negotiated fees which we refer to as the Tremont business
RMR LLC also provided management services to TravelCenters of America Inc or TA until it was acquired by BP Products North America Inc or BP on May 15 2023 TA a publicly traded operating company until the time BP acquired it 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 The Managed Equity REITs SEVN and TA until May 15 2023 are collectively referred to as the Perpetual Capital clients
RMR LLC provides management services to AlerisLife Inc or AlerisLife an operator of senior living communities many of which are owned by DHC and Sonesta International Hotels Corporation or Sonesta a privately owned franchisor and operator of hotels resorts and cruise ships in the United States Latin America the Caribbean and the Middle East and many of the U S hotels that Sonesta operates are owned by SVC
On December 19 2023 or the Acquisition Date RMR LLC acquired MPC Partnership Holdings LLC or MPC or the Acquisition In connection with the Acquisition RMR LLC started providing management services through MPC and its subsidiaries to multiple private funds and the underlying residential real estate assets of the funds as well as property management services to third party owners The residential real estate we manage through MPC and its subsidiaries are presented as RMR Residential in these consolidated financial statements For additional information regarding the Acquisition see Note
In addition RMR LLC provides management services to other private capital vehicles including ABP Trust and other private entities that own commercial real estate of which certain of our Managed Equity REITs own minority equity interests These other private clients along with AlerisLife Sonesta and clients of RMR Residential are collectively referred to as the Private Capital clients
Preparation of these financial statements in conformity with U S Generally Accepted Accounting Principles or GAAP requires our management to make certain estimates and assumptions that may affect the amounts reported in these consolidated financial statements and related notes The actual results could differ from these estimates
Revenues from services we provide are recognized as earned over time as the services provided represent performance obligations that are satisfied over time Interest income related to our CRE mortgage loans is generally accrued based on the coupon rates applied to the outstanding principal balance of such loans Fees premiums and discounts if any will be amortized or accreted into interest income over the remaining lives of the loans using the effective interest method as adjusted for any prepayments Revenues from our rental of residential property is recognized on a straight line basis over the underlying lease term
We are party to a business management and a property management agreement with each Managed Equity REIT The following is a summary of the fees we earn pursuant to our business management agreements with the Managed Equity REITs For a summary of the fees we earn pursuant to our property management agreements with the Managed Equity REITs see
the sum of a 0 5 of the historical cost of transferred real estate assets if any as defined in the applicable business management agreement plus b 0 7 of the average invested capital exclusive of the transferred real estate assets as defined in the applicable business management agreement up to 250 000 plus c 0 5 of the average invested capital exceeding 250 000 and
We also may earn annual incentive business management fees from the Managed Equity REITs under the business management agreements The incentive business management fees which are payable in cash are contingent performance based fees recognized only when earned at the end of each respective measurement period Incentive business management fees are excluded from the transaction price until it becomes probable that there will not be a significant reversal of cumulative revenue recognized
The incentive business management fees are calculated for each Managed Equity REIT as 12 0 of the product of a the equity market capitalization of the Managed Equity REIT as defined in the applicable business management agreement on the last trading day of the year immediately prior to the relevant measurement period and b the amount expressed as a percentage by which the Managed Equity REIT s total return per share as defined in the applicable business management agreement exceeded the applicable benchmark total return per share as defined in the applicable business management agreement of a specified REIT index identified in the applicable business management agreement for the measurement period as adjusted for net share issuances during the period and subject to caps on the values of the incentive fees The measurement
Our management agreements with the Managed Equity REITs automatically extend on December 31st of each year and have terms thereafter that end on the 20th anniversary of the date of each extension Each of the Managed Equity REITs has the right to terminate each management agreement i at any time upon 60 days written notice for convenience ii immediately upon written notice for cause as defined in the agreements iii upon written notice given within 60 days after the end of an applicable calendar year for a performance reason as defined in the agreements and iv by written notice during the 12 months following a change of control of RMR LLC as defined in the agreements We have the right to terminate the management agreements for good reason as defined therein
Under our management agreements with the Managed Equity REITs if a Managed Equity REIT terminates our management agreements for convenience or if we terminate one or both of our management agreements with a Managed Equity REIT for good reason the Managed Equity REIT is obligated to pay us a termination fee in an amount equal to the sum of the present values of the Managed Equity REIT s monthly future fees as defined therein for the terminated management agreement s for the remaining term assuming it had not been terminated If a Managed Equity REIT terminates one or both of our management agreements for a performance reason as defined therein the Managed Equity REIT has agreed to pay to us the termination fee calculated as described above but assuming a remaining term of 10 years No termination fee is payable by a Managed Equity REIT if it terminates one or both of our management agreements for cause or as a result of a change of control of us as defined in the applicable management agreement
We earn management fees by providing continuous services pursuant to the management agreements with ABP Trust regarding AlerisLife with Sonesta and until May 15 2023 with TA equal to 0 6 of i in the case of AlerisLife AlerisLife s revenues from all sources reportable under GAAP less any revenues reportable by AlerisLife with respect to properties for which it provides management services plus the gross revenues at those properties determined in accordance with GAAP payable in cash monthly in arrears ii in the case of Sonesta Sonesta s estimated revenues from all sources reportable under GAAP less any estimated revenues reportable by Sonesta with respect to hotels for which it provides management services plus the estimated gross revenues at those hotels determined in accordance with GAAP payable in cash monthly in advance and iii in the case of TA the sum of TA s gross fuel margin as defined in the applicable agreement plus TA s total nonfuel revenues payable in cash monthly in advance
We also earn management fees from certain other Private Capital clients based on a percentage of average invested capital as defined in the applicable management agreements These management fees are payable in cash monthly in arrears
For the fiscal years ended September 30 2024 2023 and 2022 we earned aggregate base business management fees from TA and the Private Capital clients of 27 575 36 815 and 39 653 respectively Additionally in connection with BP s acquisition of TA on May 15 2023 TA terminated its business management agreement with us and paid us the applicable termination fee of 45 282 which was recognized in the fiscal year end September 30 2023
We earn property management fees by providing continuous services pursuant to property management agreements with the Managed Equity REITs SEVN RMR Residential and certain Private Capital clients We generally earn fees under these agreements between 2 5 to 3 5 of gross collected rents Also under the terms of the property management agreements we receive additional fees for construction supervision services up to 5 0 of the cost of such construction In addition we earn fees under our RMR Residential property management agreements for providing certain marketing information technology and other management services as defined in the applicable management agreements and the related costs are included in general and administrative expenses in our consolidated financial statements These management fees are payable in cash monthly in arrears
For the fiscal years ended September 30 2024 2023 and 2022 we earned aggregate property management fees of 76 444 63 153 and 59 667 respectively including construction supervision fees of 15 641 18 443 and 16 743 respectively
Tremont is primarily compensated pursuant to its management agreement with SEVN at an annual rate of 1 5 of equity as defined in the applicable agreement Tremont may also earn an incentive fee under its management agreement with SEVN equal to the difference between a the product of i 20 and ii the difference between A core earnings as defined in the applicable agreements for the most recent 12 month period or such lesser number of completed calendar quarters if applicable including the calendar quarter or part thereof for which the calculation of the incentive fee is being made and B the product of 1 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 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 in the aggregate is greater than zero The incentive fee may not be less than zero For the fiscal years ended September 30 2024 2023 and 2022 Tremont earned incentive fees of 1 213 660 and 0 respectively
Reimbursable compensation and benefits include reimbursements at cost that arise primarily from services our employees provide pursuant to our property management agreements at the properties of our clients A significant portion of these compensation and benefits are charged or passed through to and paid by tenants of our clients We recognize the revenue for reimbursements when we incur the related reimbursable compensation and benefits expense on behalf of our clients
Reimbursable equity based compensation includes awards of common shares by our clients directly to certain of our officers and employees in connection with the provision of management services to those clients The revenue in respect of each award is based on the fair value as of the award date for those shares that have vested with subsequent changes in the fair value of the unvested awards being recognized in our consolidated statements of income over the requisite service periods We record an equal offsetting amount as equity based compensation expense for the value of these awards
Other reimbursable expenses include reimbursements that arise from services we provide pursuant to our property management agreements which include third party costs related to matters such as maintenance and repairs development costs security and cleaning services a significant portion of which are charged or passed through to and paid by tenants of our clients
As of September 30 2024 Tremont owned 1 708 058 or approximately 11 5 of SEVN s outstanding common shares We account for our investment in SEVN using the equity method of accounting because we are deemed to exert significant influence but not control over SEVN s most significant activities We elected the fair value option to account for our equity method investment in SEVN and determine fair value using the closing price of SEVN s common shares as of the end of the period which is a Level 1 fair value input The aggregate market value of our investment in SEVN as of September 30 2024 and 2023 based on quoted market prices was 23 520 and 18 651 respectively The unrealized gain loss in our consolidated statements of income related to our investment in SEVN was 7 260 5 295 and 1 564 for the fiscal years ended September 30 2024 2023 and 2022 respectively During the fiscal years ended September 30 2024 2023 and 2022 we received distributions from SEVN of 2 391 2 221 and 841 respectively
In July 2024 we funded a 213 capital call to CARROLL Multifamily Venture VII LP or Fund VII a co investment vehicle managed by RMR Residential We account for our investment in Fund VII using the equity method of accounting because we are deemed to exert significant influence but not control over Fund VII s most significant activities This investment is recorded in equity method investments in our consolidated balance sheets
Until BP acquired TA on May 15 2023 we owned 621 853 or approximately 4 1 of TA s outstanding common shares that had a cost of 13 701 We previously accounted for our investment in TA using the equity method of accounting because we were deemed to exert significant influence but not control over TA s most significant activities Under the fair value option we determined fair value using the closing price of TA s common shares as of the end of the period which was a Level 1 fair value input and recorded changes in fair value in earnings in our consolidated statements of income We recorded net gains in our consolidated statements of income related to our investment in TA of 19 942 and 2 574 for the fiscal years ended September 30 2023 and 2022 respectively
We regularly evaluate our relationships and investments to determine if they constitute variable interests A variable interest is an investment or interest that will absorb portions of an entity s expected losses or receive portions of an entity s expected returns If we determine we have a variable interest in an entity we evaluate whether such interest is in a variable interest entity or VIE Under the VIE model we would be required to consolidate a VIE we manage if we are determined to be the primary beneficiary of the entity We continuously assess whether we must consolidate any of the entities we manage Consideration of factors included but was not limited to our representation on the entity s governing body the size of our investment in each entity compared to the size of the entity and the size of other investors interests the ability and rights to participate in significant policy making decisions and to replace the manager of those entities Based on this assessment we concluded that we are not required to consolidate any of our clients
We consider highly liquid investments with original maturities of three months or less on the date of purchase to be cash equivalents the majority of which is held at major commercial banks Certain cash account balances exceed Federal Deposit Insurance Corporation insurance limits of 250 000 per account and as a result there is a concentration of credit risk related to amounts in excess of the insurance limits We regularly monitor the financial stability of these financial institutions and believe that we are not exposed to any significant credit risk in cash and cash equivalents
As of September 30 2024 553 in cash and cash equivalents consists of amounts escrowed for performance incentives future real estate taxes insurance and capital expenditures as required by certain of our debt agreements These funds are held by our mortgage lenders and are segregated from our cash accounts
Generally our loans are classified as held for investment based upon our intent and ability to hold them until maturity Loans that are held for investment are carried at cost net of allowance for credit losses unamortized loan origination fees accreted exit fees unamortized premiums and unaccreted discounts as applicable that are required to be recognized in the carrying value of the loans in accordance with GAAP unless the loans are determined to be collateral dependent Loans that we have a plan to sell or liquidate are held at the lower of cost or fair value less cost to sell
Loan origination and exit fees are fees charged to our borrowers and unamortized or unaccreted balances are reflected as a reduction in loans held for investment net in our consolidated balance sheets These fees are recorded as a component of loan investment interest income in our consolidated statements of income over the life of the related loans held for investment
The measurement of current expected credit losses or CECL is based upon historical experience current conditions and reasonable and supportable forecasts incorporating forward looking information that affect the collectability of the reported
prescribes a forward looking expected loss model that generally will result in the earlier recognition of credit losses and is applicable to financial assets measured at amortized cost and off balance sheet credit exposures such as unfunded loan commitments
The allowance for credit losses required under ASU No 2016 13 is a valuation account that is deducted from the related loans amortized cost basis in our consolidated balance sheets Our loans typically include commitments to fund incremental proceeds to borrowers over the life of the loan these future funding commitments are also subject to the CECL model The allowance for credit losses related to unfunded loan commitments is included in accounts payable and accrued expenses in our consolidated balance sheets
Given the lack of historical loss data related to our loan portfolio we estimate our expected losses using an analytical model that considers the likelihood of default and loss given default for each individual loan This analytical model incorporates data from a third party database with historical loan loss information for commercial mortgage backed securities or CMBS and commercial real estate or CRE loans since 1998 We estimate the allowance for credit losses for our loan portfolio including unfunded loan commitments at the individual loan level Significant inputs to the model include certain loan specific data such as loan to value or LTV property type geographic location occupancy vintage year remaining loan term net operating income expected timing and amounts of future loan fundings and macroeconomic forecast assumptions including the performance of CRE assets unemployment rates interest rates and other factors We utilize the model to estimate credit losses over a reasonable and supportable economic forecast period followed by a straight line reversion period to average historical losses Average historical losses are established using a population of third party historical loss data that approximates our portfolio as of the measurement date We evaluate the estimated allowance for each of our loans individually and we consider our internal loan risk rating as the primary credit quality indicator underlying our assessment
As of September 30 2024 based on our loan portfolio the then current economic environment and expectations for future conditions we recorded an allowance for credit losses of 343 with respect to our then outstanding loans held for investment and increasing accounts payable and accrued expenses by 259 with respect to our then unfunded loan commitments
We evaluate the credit quality of each of our loans at least quarterly by assessing a variety of risk factors in relation to each loan and assigning a risk rating to each loan based on those factors Factors considered in these evaluations include but are not limited to property type geographic and local market dynamics physical condition leasing and tenant profile projected cash flow risk of loss current LTV debt yield collateral performance structure exit plan and sponsorship Loans are rated 1 less risk through 5 greater risk as defined below
1 lower risk Criteria reflects a sponsor having a strong financial condition and low credit risk and our evaluation of management s experience collateral performance exceeding performance metrics included in the business plan or credit underwriting and the property demonstrating stabilized occupancy and or market rates resulting in strong current cash flow and net operating income and or having a very low LTV
2 average risk Criteria reflects a sponsor having a stable financial condition and our evaluation of management s experience collateral performance meeting or exceeding substantially all performance metrics included in the business plan or credit underwriting and the property demonstrating improved occupancy at market rents resulting in sufficient current cash flow and or having a low LTV
3 acceptable risk Criteria reflects a sponsor having a history of repaying loans at maturity and meeting its credit obligations and our evaluation of management s experience collateral performance expected to meet performance metrics included in the business plan or credit underwriting and the property having a moderate LTV New loans and loans with a limited history will typically be assigned this rating and will be adjusted to other levels from time to time as appropriate
4 higher risk Criteria reflects a sponsor having a history of unresolved missed or late payments maturity extensions and difficulty timely fulfilling its credit obligations and our evaluation of management s experience collateral performance failing to meet the business plan or credit underwriting the existence of a risk of default possibly leading to a loss and or potential weaknesses that deserve management s attention and or the property having a high LTV
5 loss likely Criteria reflects a very high risk of realizing a principal loss or having incurred a principal loss a sponsor having a history of default payments trouble fulfilling its credit obligations deeds in lieu of foreclosures and or bankruptcies collateral performance is significantly worse than performance metrics included in the business plan loan covenants or
Costs incurred in connection with financings are capitalized and recorded as a reduction to the related liability in our consolidated balance sheets Deferred financing costs are amortized over the term of the financing agreement and are recorded as a component of loan investment interest expense in our consolidated statements of income
Property and equipment are stated at cost Depreciation of building and furniture and equipment is computed using the straight line method over estimated useful lives ranging from three to 30 years Depreciation for leasehold improvements is computed using the straight line method over the term of the lesser of their useful lives or related lease agreements Capitalized software costs information technology labor and other personnel costs are depreciated using the straight line method over useful lives ranging between three and five years We do not depreciate the allocated cost of land We may engage independent real estate appraisal firms to provide market information and evaluations which are relevant to our purchase price allocations and determinations of useful lives however we are ultimately responsible for the purchase price allocations and determinations of useful lives
We allocate the purchase prices of our properties to land buildings and improvements based on determinations of the relative fair values of these assets assuming the properties are vacant We determine the fair value of each property using methods similar to those used by independent appraisers which may involve estimated cash flows that are based on a number of factors including capitalization rates and discount rates among others We allocate a portion of the purchase price of our properties to above market and below market leases based on the present value using an interest rate which reflects the risks associated with acquired in place leases at the time each property was acquired by us of the difference if any between i the contractual amounts to be paid pursuant to the acquired in place leases and ii our estimates of fair market lease rates for the corresponding leases measured over a period equal to the terms of the respective leases We allocate a portion of the purchase price to acquired in place leases and tenant relationships based upon market estimates to lease up the property based on the leases in place at the time of purchase We allocate this aggregate value between acquired in place lease values and tenant relationships based on our evaluation of the specific characteristics of each tenant s lease However we have not separated the value of tenant relationships from the value of acquired in place leases because such value and related amortization expense is immaterial to the accompanying consolidated financial statements In making these allocations we consider factors such as estimated carrying costs during the expected lease up periods including real estate taxes insurance and other operating income and expenses and costs such as leasing commissions legal and other related expenses to execute similar leases in current market conditions at the time a property was acquired by us If the value of tenant relationships becomes material in the future we may separately allocate those amounts and amortize the allocated amounts over the estimated life of the relationships For
We regularly evaluate whether events or changes in circumstances have occurred that could indicate an impairment in the value of long lived assets Impairment indicators may include declining tenant occupancy lack of progress releasing vacant space low long term prospects for improvement in property performance cash flow or liquidity our decision to dispose of an asset before the end of its estimated useful life and legislative market or industry changes that could permanently reduce the value of a property If there is an indication that the carrying value of an asset is not recoverable we estimate the projected undiscounted cash flows to determine if an impairment loss should be recognized The future net undiscounted cash flows are subjective and are based in part on assumptions regarding hold periods market rents and terminal capitalization rates We determine the amount of any impairment loss by comparing the historical carrying value to estimated fair value We estimate fair value through an evaluation of recent financial performance and projected discounted cash flows using standard industry valuation techniques In addition to consideration of impairment upon the events or changes in circumstances described above we regularly evaluate the remaining useful lives of our long lived assets If we change our estimate of the remaining useful lives we allocate the carrying value of the affected assets over their revised remaining useful lives
Goodwill represents the costs of business acquisitions in excess of the fair value of identifiable net assets acquired We evaluate the recoverability of goodwill annually or more frequently if events or changes in circumstances indicate that goodwill might be impaired If our review indicates that the carrying amount of goodwill exceeds its fair value we would reduce the carrying amount of goodwill to fair value During the fiscal year ended September 30 2024 we recognized a 69 902 change in the carrying value of goodwill presented in our consolidated balance sheets as a result of the MPC acquisition
Intangible assets represent the fair value at acquisition of acquired leases trade names investor relationships management agreements and other intangible assets Amortization expense related to intangible assets for the fiscal years ended September 30 2024 2023 and 2022 was 3 048 31 37 respectively Aggregate future amortization to be recognized over the remaining useful lives of these intangible assets is estimated to be 4 675 in 2025 3 607 in 2026 3 076 in 2027 3 075 in 2028 and 691 in 2029 and thereafter
On June 5 2015 in connection with the formation of RMR Inc each of DHC OPI then Government Properties Income Trust or GOV and Select Income REIT or SIR and SVC contributed cash and shares with a combined value of 167 764 The consideration received from such Managed Equity REITs for our Class A Common Shares represented a discount to the fair value of RMR Inc s Class A Common Shares in the amount of 193 806 which we recorded in other assets The other assets are being amortized against revenue recognized related to the management agreements using the straight line method through the period ended December 31 2035 For the fiscal years ended September 30 2024 2023 and 2022 we reduced revenue by 9 416 each year related to the amortization of these other assets As of September 30 2024 and 2023 the remaining amount of these other assets to be amortized was 106 063 and 115 479 respectively
As of September 30 2024 we had one property classified as held for sale in our consolidated balance sheets that is under agreement to sell for a sales price of 9 800 excluding closing costs The following is a summary of assets held for sale and liabilities held for sale in our consolidated balance sheets
The awards made under our share award plan to our Directors officers and employees to date have been shares of Class A common stock of RMR Inc or Class A Common Shares Shares issued to Directors vest immediately Shares issued to our officers and employees vest in five equal consecutive annual installments with the first installment vesting on the date of award We recognize share forfeitures as they occur Compensation expense related to share awards is determined based on the market value of our shares on the date of award with the aggregate value of the awarded shares amortized to expense over the related vesting period Expense recognized for shares awarded to Directors are included in general and administrative expenses and for shares awarded to employees are included in equity based compensation expenses in our consolidated statements of income
Transaction and acquisition related costs include costs related to acquisitions and other strategic transactions Such costs include legal accounting valuation other professional or consulting fees Transaction and acquisition related costs are expensed as incurred
We report our results in a single reportable segment which reflects how our chief operating decision maker allocates resources and evaluates our financial results Because we have a single reportable segment all required financial segment information can be found directly in our consolidated financial statements
they are regularly provided to the chief operating decision maker or CODM and included in each reported measure of segment profit or loss ii provide all annual disclosures about a reportable segment s profit or loss and assets currently required by Accounting Standards Codification or ASC 280 Segment Reporting or ASC 280 in interim periods and iii disclose the CODM s title and position as well as an explanation of how the CODM uses the reported measures and other disclosures Public entities with a single reportable segment must apply all the disclosure requirements of ASU No 2023 07 as well as all the existing segment disclosures under ASC 280 The amendments in ASU No 2023 07 are incremental to the requirements in ASC 280 and do not change how a public entity identifies its operating segments aggregates those operating segments or applies the quantitative thresholds to determine its reportable segments ASU No 2023 07 should be applied retrospectively to all prior periods presented in the financial statements and is effective for fiscal years beginning after December 15 2023 and interim periods within fiscal years beginning after December 15 2024 Early adoption is permitted We are currently evaluating the impact ASU No 2023 07 will have on our consolidated financial statements and disclosures
which requires public entities to enhance its annual income tax disclosures by requiring i consistent categories and greater disaggregation of information in the rate reconciliation and ii income taxes paid disaggregated by jurisdiction ASU No 2023 09 should be applied prospectively but entities have the option to apply it retrospectively to all prior periods presented in the financial statements ASU No 2023 09 is effective for annual periods beginning after December 15 2024 with early adoption permitted We are currently evaluating the impact ASU No 2023 09 will have on our consolidated financial statements and disclosures
We are the sole managing member of RMR LLC We are a corporation subject to U S federal and state income tax with respect to our allocable share of any taxable income of RMR LLC and its tax consolidated subsidiaries RMR LLC is treated as a partnership for U S federal and most applicable state and local income tax purposes As a partnership RMR LLC is generally not subject to U S federal and most state income taxes Any taxable income or loss generated by RMR LLC is passed through to and included in the taxable income or loss of its members including RMR Inc and ABP Trust based on each member s respective ownership percentage During the fiscal years ended September 30 2024 2023 and 2022 all of our income before taxes was derived solely from domestic operations
provides a model for how a company should recognize measure and present in its financial statements uncertain tax positions that have been taken or are expected to be taken with respect to all open years and in all significant jurisdictions Pursuant to this topic we recognize a tax benefit only if it is more likely than not that a particular tax position will be sustained upon examination or audit To the extent the more likely than not standard has been satisfied the benefit associated with a tax position is measured as the largest amount that is greater than 50 0 likely to be realized upon settlement
We continue to be subject to federal state and local income tax audit examinations for open periods which can lead to adjustments to our provision for income taxes the resolution of which may be highly uncertain We received a proposed adjustment from a state jurisdiction with respect to the tax years ended September 30 2019 and 2020 As a result we have accrued an uncertain tax position reserve for the fiscal year ended September 30 2024 related to the adjustment for the fiscal years ending September 30 2019 and thereafter Our policy is to include interest expense related to unrecognized tax benefits within the provision for income taxes in our consolidated statements of income
As of September 30 2024 our gross unrecognized tax benefit from uncertain tax positions exclusive of interest expense was 1 449 of which 107 is based on positions related to the fiscal year ended September 30 2024 As of September 30 2024 we recognized 252 for interest expense related to unrecognized tax benefits and had 1 701 of gross unrecognized tax benefits As of September 30 2023 and 2022 we had no uncertain tax positions We do not reasonably expect any significant changes relating to our unrecognized tax benefits within the next twelve months
On the Acquisition Date RMR LLC acquired all of the issued and outstanding equity interests of MPC excluding certain assets including co investment interests of legacy investment funds managed by MPC and the rights to future distributions and income allocations in respect of such interests and liabilities including liabilities related to such excluded assets for 80 000 in cash subject to customary adjustments for cash debt transaction expenses and working capital at closing which are expected to be finalized during this fiscal year plus up to an additional 20 000 subject to the deployment of remaining capital commitments in investment funds managed by MPC prior to the end of such funds investment period or the Earnout In addition to the Earnout we agreed to pay retention payments to certain employees of MPC in an aggregate amount of 4 200 for their continued employment through December 31 2025 or the Retention Payments The Retention Payments are recognized as transaction and acquisition related costs and are forfeitable upon termination of employment prior to the end of the service period
The Earnout represents contingent consideration of the Acquisition The fair value of the Earnout was determined using a Monte Carlo simulation model based on significant unobservable inputs Level 3 including management s estimates of the deployment of capital remaining in investment funds managed by MPC adjusted for historical volatility of similar transactions and a discount rate based on credit ratings of companies similar to RMR LLC For additional information see Note
Goodwill of 69 902 has been recognized based on the amount that the purchase price exceeds the fair value of the net identifiable assets acquired less the amounts attributable to noncontrolling interests in consolidated entity Goodwill is expected to be deductible for income tax purposes and is primarily attributable to the workforce of the acquired business and synergies that can be achieved subsequent to the Acquisition
As of September 30 2024 we finalized the purchase price allocation for the Acquisition from the preliminary amounts reported as of December 31 2024 The adjustments made during the fiscal year ended September 30 2024 to the fair value of acquired assets and liabilities did not have a significant impact on our consolidated balance sheets or our consolidated statements of income
We acquired a 90 0 economic ownership interest in 260 Woodstock Investor LLC a mixed use apartment complex located in Woodstock GA or the Woodstock Property The allocation of the fair value of the Woodstock Property and related acquired leases as of the Acquisition Date is as follows
We determined the fair value of the Woodstock Property and related acquired leases using Level 3 inputs and standard industry valuation methods including discounted cash flow analyses and sales comparisons Building and improvements had a remaining useful life of 25 years and the weighted average amortization period for acquired leases was 2 9 years as of the Acquisition Date
A mortgage note payable with an acquisition date fair value of 4 726 and an aggregate principal amount outstanding of 5 429 is secured by the Woodstock Property bears interest at a fixed rate of 3 71 per annum and matures in August 2029 Interest only payments are due on a monthly basis until September 2025 at which time payments of principal and interest are due monthly until the loan matures in August 2029 We determined the fair value of the mortgage note payable by discounting the expected cash flows at a rate comparable with interest rates for similar debt as of the Acquisition Date Level 3 inputs Principal payments due during the next five fiscal years are 8 in 2025 98 in 2026 102 in 2027 105 in 2028 and 5 116 in 2029 and thereafter
As of September 30 2024 we have entered into an agreement to sell the Woodstock Property for a sales price of 9 800 excluding closing costs This pending sale is subject to conditions accordingly we cannot be sure that we will complete this sale or that this sale will not be delayed or the terms will not change The Woodstock Property is presented in assets held for sale and the mortgage note payable is presented in liabilities held for sale in our consolidated balance sheets As such accumulated depreciation and accumulated amortization excludes 221 and 331 respectively related to the Woodstock Property Property and equipment net also excludes 15 in furniture and equipment related to the Woodstock Property that was purchased after the Acquisition Date The Acquisition Date fair value of the noncontrolling interest in the Woodstock Property 10 ownership we did not acquire of 444 is reflected in noncontrolling interest in consolidated entity in our consolidated balance sheets
As of the Acquisition Date MPC managed 66 properties including 14 in which MPC did not have an economic ownership interest in or the Third Party Managed Properties through its property management agreements and managed four funds through its investment management agreements The property management agreements may be terminated upon written notice and generally provide for property management fees ranging from 2 5 to 3 5 of gross collected rents construction management fees of 5 0 of construction costs and reimbursement of costs incurred to manage the properties The investment management agreements generally provide for fees that are based on the lesser of a percentage of invested capital and a fixed fee ranging from 100 to 200 annually As of the Acquisition Date the weighted average remaining useful life of these agreements was 5 6 years
MPC has relationships with institutional investors that have invested in and may continue to invest in the funds managed by MPC As of the Acquisition Date the weighted average remaining useful life of these relationships was 5 0 years
As of the Acquisition Date and pursuant to the Equity Purchase Agreement dated as of July 29 2023 by and among RMR LLC MPC and the sellers and seller owners set forth therein we managed four funds that invest in residential real estate Three of the four funds have no unfunded capital commitments remaining As of the Acquisition Date Fund VII had 208 026 in unfunded capital commitments remaining from total capital commitments of 342 825 In the future we will be eligible to participate in distributions and profits interests on investments from capital commitments we provide to Fund VII or Investment Interest however we had no Investment Interest in Fund VII as of the Acquisition Date and as of the Acquisition Date we had no obligations nor rights to any distributions or profits interests from investments of capital contributed on or prior to the Acquisition Date
As of September 30 2024 we have funded capital of 213 to Fund VII and we have not contributed any capital to any of the other funds we manage The results of these funds are not reflected in our consolidated financial statements and we have accounted for the contribution to Fund VII as an equity method investment
Unaudited pro forma financial information for the fiscal years ended September 30 2024 and 2023 is presented below Pro forma financial information presented does not include adjustments related to the Earnout or to reflect any potential synergies that may be achievable in connection with the Acquisition The unaudited pro forma financial information is presented for informational purposes only and is not necessarily indicative of future operations or results had the Acquisition been completed as of October 1 2022
adjustments to eliminate the revenues and expenses attributable to certain assets and liabilities of MPC excluded from the Acquisition including co investment interests of investment funds owned by MPC and the rights to future distributions and income allocations of those co investment interests and the liabilities related to such assets
In July 2024 we acquired a 240 unit garden style apartment community located in Denver CO or the Denver Property for a purchase price of 70 000 excluding 509 in capitalized acquisition costs This transaction was accounted for as an asset acquisition Our allocation of the purchase price of this acquisition is based on the relative fair value of the acquired assets and is presented in the following table
As part of our strategic initiative to expand our private capital business our plan is to amass a small portfolio of loans financed in part through a bank repurchase facility in a Tremont managed vehicle and bring in third parties to invest in the vehicle The vehicle would then continue growing by making additional loans
Generally these loans are classified as held for investment based upon our intent and ability to hold them until maturity Loans that are held for investment are carried at cost net of unamortized loan origination fees accreted exit fees unamortized premiums and unaccreted discounts as applicable that are required to be recognized in the carrying value of the loans in accordance with GAAP unless the loans are determined to be collateral dependent
In July 2024 we originated a floating rate first mortgage loan that is secured by a hotel property in Revere MA for a total commitment of 40 000 which has been fully funded as of September 30 2024 This loan requires the borrower to pay interest at a rate of the Secured Overnight Financing Rate or SOFR plus a premium of 395 basis points per annum and has an initial term of two years with three one year extensions
In July 2024 we originated a floating rate first mortgage loan that is secured by an industrial property in Wayne PA for a total commitment of 27 000 of which 17 180 has been funded as of September 30 2024 This loan requires the borrower to pay interest at the rate of SOFR plus a premium of 425 basis points per annum and has an initial term of three years with two one year extensions
We deferred origination fees totaling 700 of which 651 remains unamortized as of September 30 2024 We have also accrued 35 in exit fee receivables which we include in loans held for investment in our consolidated balance sheets
We evaluate the credit quality of each of our loans at least quarterly by assessing a variety of risk factors in relation to each loan and assigning a risk rating to each loan based on those factors The higher the number the greater the risk level As of September 30 2024 our two loans had an internal risk rating of 3
We estimate credit losses over a reasonable and supportable forecast period of 12 months followed by a straight line reversion period of 12 months back to average historical losses For the fiscal year ended September 30 2024 we recorded an allowance for credit losses of 343 related to our then outstanding loans held for investment and increased accounts payable and accrued expenses by 259 related to then unfunded loan commitments
We have elected to exclude accrued interest receivable from amortized cost and not to measure an allowance for credit losses on accrued interest receivable Accrued interest receivables are generally written off when payments are 120 days past due Such amounts if any are reversed against interest income and no further interest will be recorded until it is collected As of September 30 2024 we recognized 454 in prepaid and other current assets on our consolidated balance sheets related to accrued interest receivable on our loans and no amounts were written off for the fiscal year ended September 30 2024
In September 2024 we through our Tremont managed vehicle entered into a master repurchase agreement with UBS AG or UBS or our UBS Master Repurchase Agreement for a facility with an aggregate maximum capacity of 200 000 or our UBS Master Repurchase Facility pursuant to which we may sell to UBS and later repurchase commercial mortgage loans which are referred to as purchased assets Pursuant to the UBS Master Repurchase Agreement we will pay UBS a non refundable upfront fee that is equal to 0 60 of the applicable tranche amount on each purchase date
Loans financed through our UBS Master Repurchase Facility are treated as collateralized financing transactions unless they meet sales treatment under GAAP Pursuant to GAAP treatment of collateralized financing transactions loans financed through our UBS Master Repurchase Facility remain on our consolidated balance sheets as assets and cash received from UBS is recorded on our consolidated balance sheets as liabilities Interest paid in accordance with our UBS Master Repurchase Facility is recorded as loan investment interest expense on our consolidated income statements
Under our UBS Master Repurchase Facility the initial purchase price paid by UBS for each purchased asset is up to 80 of the lesser of the market value of the purchased asset and the unpaid principal balance of such purchased asset subject to UBS s approval Upon the repurchase of a purchased asset we are required to pay UBS the outstanding purchase price of the
purchased asset accrued interest and all accrued and unpaid expenses of UBS relating to such purchased assets The pricing rate or interest rate relating to a purchased asset is equal to one month SOFR plus a premium within a fixed range determined by the debt yield and property type of the purchased asset s real estate collateral
In connection with our UBS Master Repurchase Agreement we entered into a guaranty or the UBS Guaranty which requires us to guarantee 25 of the aggregate repurchase price and 100 of losses in the event of certain bad acts as well as any costs and expenses of UBS related to our UBS Master Repurchase Agreement The UBS Guaranty also contains financial covenants which require us to maintain a minimum tangible net worth a minimum liquidity and to satisfy a total indebtedness to stockholders equity ratio Upon our Tremont managed vehicle meeting certain requirements including maintaining a minimum tangible net worth of 100 000 we will be released from our obligations under the UBS Guaranty and our Tremont managed vehicle shall be deemed the sole guarantor
Our UBS Master Repurchase Facility also contains margin maintenance provisions that provide UBS with the right in certain circumstances related to a credit event as defined in the UBS Master Repurchase Agreement to redetermine the value of purchased assets Where a decline in the value of such purchased assets has resulted in a margin deficit UBS may require us to eliminate any margin deficit through a combination of purchased asset repurchases and cash transfers to UBS subject to UBS s approval
In September 2024 we sold a purchased asset to UBS for 28 770 with an interest rate equal to SOFR plus a premium of 290 basis points secured by a hotel property in Revere MA The initial term of the purchased asset is two years with no stated extension option and monthly payments of interest only are due until maturity in July 2026 The carrying value of the underlying loan held for investment that is serving as collateral for this purchased asset is 39 373
In September 2024 we sold a purchased asset to UBS for 12 885 with an interest rate equal to SOFR plus a premium of 285 basis points secured by an industrial property in Wayne PA The initial term of the purchased asset is three years with no stated extension option and monthly payments of interest only are due until maturity in July 2027 The carrying value of the underlying loan held for investment that is serving as collateral for this purchased asset is 16 848
In July 2024 we acquired the Denver Property for a purchase price of 70 000 excluding acquisition costs We financed this purchase with cash on hand and proceeds from a 46 500 mortgage loan with a 5 34 fixed interest rate This mortgage loan requires monthly payments of interest only until maturity in July 2029 Deferred financing fees incurred in connection with this mortgage financing are amortized over the term of the mortgage agreement and are recorded as a component of interest expense in our consolidated statements of income Unamortized deferred financing fees totaled 1 351 as of September 30 2024
We determine the estimated fair value of financial assets and liabilities using the three tier fair value hierarchy established by GAAP which prioritizes observable inputs in active markets when measuring fair value The three levels of inputs that may be used to measure fair value in order of priority are as follows
As of September 30 2024 and 2023 the fair values of our financial instruments which include cash and cash equivalents amounts due from related parties accounts payable and accrued expenses and reimbursable accounts payable and accrued expenses were not materially different from their carrying values due to the short term nature of these financial instruments
We estimate the fair value of our fixed rate mortgage note payable loans held for investment and outstanding principal balances under our UBS Master Repurchase Facility using significant observable inputs Level 3 including discounted cash flow analyses and prevailing market interest rates
establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities or Level 1 the lowest priority to unobservable inputs or Level 3 and significant other observable inputs or Level 2 A financial asset s or financial liability s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement
The following table presents additional information about the valuation techniques and significant unobservable inputs for financial assets and liabilities that are measured at fair value and categorized within Level 3 as of September 30 2024
Adam D Portnoy Chair of our Board one of our Managing Directors and our President and Chief Executive Officer is the sole trustee an officer and the controlling shareholder of our controlling shareholder ABP Trust RMR Inc s executive officers serve as trustees or directors of certain companies to which we provide management services For more information regarding these relationships please see our proxy statement for our 2024 annual meeting of shareholders
The Managed Equity REITs and SEVN have no employees RMR LLC provides or arranges for all the personnel overhead and services required for the operation of the Managed Equity REITs pursuant to management agreements with them The officers of the Managed Equity REITs are officers or employees of RMR LLC All the officers overhead and required office space of SEVN are provided or arranged by Tremont All of SEVN s officers are officers or employees of Tremont or RMR LLC One of the executive officers of AlerisLife and one of the executive officers of Sonesta are officers or employees of RMR LLC Our executive officers are also managing trustees of certain of the Perpetual Capital clients
On May 15 2023 BP acquired TA and TA terminated its management agreement with us In connection with the termination of TA s management agreement we received the applicable termination fee of 45 282 during the fiscal year ended September 30 2023
On March 30 2023 AlerisLife merged with and into a subsidiary of ABP Trust and ceased to be a public company As a result the amounts due with respect to AlerisLife are characterized as Private Capital for the period presented
On December 23 2021 DHC sold a 35 equity interest in its existing joint venture with an institutional investor Following this sale DHC owned a 20 equity interest in this joint venture As a result the revenues earned with respect to this joint venture are characterized as Private Capital for periods on and after December 23 2021 and as Perpetual Capital for periods prior to December 23 2021 On June 29 2022 DHC sold an additional 10 equity interest in this joint venture Following this additional sale DHC owns a 10 equity interest in this joint venture
As of September 30 2024 RMR LLC leased from ABP Trust and certain Managed Equity REITs office space for use as our headquarters and local offices During the fiscal years ended September 30 2024 2023 and 2022 we incurred rental expense under related party leases aggregating 5 552 5 329 and 5 859 respectively Our related party leases have various termination dates and many have renewal options Some of our related party leases are terminable on 30 days notice and many allow us to terminate early if our management agreements for the buildings in which we lease space are terminated For additional information regarding these leases see Note
Pursuant to our tax receivable agreement with ABP Trust RMR Inc pays to ABP Trust 85 0 of the amount of cash savings if any in U S federal state and local income tax or franchise tax that RMR Inc realizes as a result of a the increases in tax basis attributable to RMR Inc s dealings with ABP Trust and b tax benefits related to imputed interest deemed to be paid by RMR Inc as a result of the tax receivable agreement Accordingly we made payments of 2 366 2 355 and 2 209 to ABP Trust during the fiscal years ended September 30 2024 2023 and 2022 respectively As of September 30 2024 our consolidated balance sheet reflects a liability related to the tax receivable agreement of 20 863 including 2 421 classified as a current liability in accounts payable and accrued expenses that we expect to pay to ABP Trust during the fourth quarter of fiscal year 2025
Pursuant to the RMR LLC operating agreement for the fiscal years ended September 30 2024 2023 and 2022 RMR LLC made required quarterly tax distributions to holders of its membership units totaling 27 796 65 486 and 30 281 respectively of which 14 799 34 541 and 15 940 respectively was distributed to us and 12 997 30 945 and 14 341 respectively was distributed to ABP Trust based on each membership unit holder s respective ownership percentage at the time of distribution The amounts distributed to us were eliminated in our consolidated financial statements and the amounts distributed to ABP Trust were recorded as a reduction of its noncontrolling interest We use funds from these distributions to pay certain of our U S federal and state income tax liabilities and to pay part of our obligations under the tax receivable agreement
RMR Inc is party to a registration rights agreement with ABP Trust pursuant to which RMR Inc has granted ABP Trust demand and piggyback registration rights subject to certain limitations covering the Class A Common Shares ABP Trust owns including the shares received on conversion of Class B 1 Common Shares or redemption of the paired Class B 2 Common Shares and Class A Units of RMR LLC
Adam D Portnoy and ABP Trust are parties to a registration rights and lock up agreement with each of DHC OPI and SVC with respect to each such Managed Equity REITs common shares Pursuant to that agreement ABP Trust and Adam D Portnoy agreed not to transfer the Managed Equity REITs common shares they acquired in connection with RMR LLC s reorganization in June 2015 for a period of ten years subject to certain exceptions and each of those Managed Equity REITs has granted ABP Trust and Adam D Portnoy demand and piggyback registration rights subject to certain limitations
We enter into retirement agreements with certain of our former executive officers Pursuant to these agreements we make various cash payments and accelerate the vesting of unvested shares of RMR Inc previously awarded to these retiring officers We also enter into separation arrangements from time to time with executive and non executive officers and employees of ours All costs associated with separation arrangements for which there remain no substantive performance obligations are recorded in our consolidated statements of income as separation costs
For the fiscal year ended September 30 2024 2023 and 2022 we recognized separation costs of 6 297 2 002 and 1 315 respectively including equity based separation costs of 632 482 and 163 respectively and cash separation costs of 5 665 1 520 and 1 152 respectively
ABP Trust owns 1 000 000 Class B 1 Common Shares that entitle the holder to ten votes for each share on all matters submitted to a vote of shareholders Each Class B 1 Common Share may at the option of its holder be converted into a Class A Common Share on a one for one basis
ABP Trust owns 15 000 000 Class B 2 Common Shares which are paired with the 15 000 000 RMR LLC Class A Units and have no independent economic interest in RMR Inc The Class A Units may at the option of the holder be redeemed for Class A Common Shares on a one to one basis and upon such redemption our Class B 2 Common Shares that are paired with the Class A Units are automatically canceled RMR Inc has the option to settle the redemption in cash Each Class B 2 Common Share entitles the holder to ten votes per share and accordingly the issuance of additional Class B 2 Common Shares would have a significant dilutive effect on the voting power of the then current holders of our Class A Common Shares
Except as otherwise required in the charter or by applicable law all holders of Class A Common Shares Class B 1 Common Shares and Class B 2 Common Shares shall vote together as a single class on all matters on which shareholders are generally entitled to vote The holders of a class of common shares shall each be entitled to vote separately as a single class with respect to and only with respect to amendments to the charter that alter or change the powers or rights of the shares of such class of common shares so as to affect them materially and adversely provided however if such amendments affect all holders of common shares materially and adversely in the same manner the separate voting requirement shall not be applicable and all holders of common shares shall vote together as a single class
We award our Class A Common Shares to our officers and employees under the Amended and Restated 2016 Omnibus Equity Plan 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 During the fiscal years ended September 30 2024 2023 and 2022 we awarded to our Managing Directors in their capacities as our officers and employees and to certain of our other officers and employees an aggregate of 181 727 121 200 and 125 700 respectively of our Class A Common Shares We also awarded to each of our Managing Directors and Independent Directors 4 219 of our Class A Common Shares during the fiscal year ended September 30 2024 and 3 000 of our Class A Common Shares during each of the fiscal years ended September 30 2023 and 2022 as part of his or her annual compensation for serving as a Director
The Class A Common Shares awarded to our Independent Directors and Managing Directors in their capacities as Directors vest immediately and are included in general and administrative expense in our consolidated statements of income The Class A Common Shares awarded to our Managing Directors in their capacities as our officers and employees and to our other officers and employees vest in five equal consecutive annual installments beginning on the date of the award and are included in equity based compensation expense in our consolidated statements of income During the fiscal years ended September 30 2024 2023 and 2022 we recorded general and administrative expenses of 600 464 and 547 respectively and equity based compensation expenses of 2 705 2 662 and 3 064 respectively related to awards we made under the 2016 Plan
In connection with the vesting and issuance of awards of our Class A Common Shares to our Directors officers and employees we provide for the ability to repurchase our Class A Common Shares to satisfy tax withholding and payment obligations for those eligible to do so The repurchase price is based on the closing price of our Class A Common Shares on The Nasdaq Stock Market LLC or Nasdaq The aggregate value of Class A Common Shares repurchased during the fiscal years ended September 30 2024 2023 and 2022 was 1 136 734 and 547 respectively which is recorded as a decrease to additional paid in capital included in shareholders equity in our consolidated balance sheets
In connection with the issuances and repurchases of our Class A Common Shares and as required by the RMR LLC operating agreement RMR LLC concurrently issues or acquires an identical number of Class A Units from RMR Inc
The 233 346 unvested shares as of September 30 2024 are scheduled to vest as follows 80 932 shares in 2025 69 291 shares in 2026 51 892 shares in 2027 and 31 231 shares in 2028 As of September 30 2024 the estimated future compensation expense for the unvested shares was 5 905 based on the award date fair value of these shares The weighted average period over which this compensation expense will be recorded is approximately 26 months
On October 16 2024 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 28 2024 in the amount of 0 45 per Class A Common Share and Class B 1 Common Share or 7 581 This dividend will be partially funded by a distribution from RMR LLC to holders of its membership units in the amount of 0 32 per unit or 10 191 of which 5 391 will be distributed to us based on our aggregate ownership of 16 846 025 membership units of RMR LLC and 4 800 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 to pay this dividend on or about November 14 2024
We calculate basic earnings per share using the two class method Unvested Class A Common Shares awarded to our employees are deemed participating securities for purposes of calculating basic earnings per common share because they have dividend rights Under the two class method we allocate earnings proportionately to vested Class A Common Shares and Class B 1 Common Shares outstanding and unvested Class A Common Shares outstanding for the period Accordingly earnings attributable to unvested Class A Common Shares are excluded from basic earnings per share under the two class method Our Class B 2 Common Shares which are paired with ABP Trust s Class A Units have no independent economic interest in RMR Inc and thus are not included as common shares outstanding for purposes of calculating basic earnings per common share
Diluted earnings per share is calculated using the treasury stock method for unvested Class A Common Shares and the if converted method for Class B 2 Common Shares The 15 000 000 Class A Units that we do not own may be redeemed for our Class A Common Shares on a one for one basis or upon such redemption we may elect to pay cash instead of issuing Class A Common Shares Upon redemption of a Class A Unit the Class B 2 Common Share paired with such unit is canceled for no additional consideration In computing the dilutive effect if any the assumed redemption would have on earnings per share we considered net income available to holders of our Class A Common Shares would increase due to elimination of the noncontrolling interest offset by any tax effect which may be dilutive For the fiscal years ended September 30 2024 and 2023 such redemption is not reflected in diluted earnings per share as the assumed redemption would be anti dilutive For the fiscal year ended September 30 2022 the assumed redemption is dilutive to earnings per share
We have established a defined contribution savings plan for eligible employees under the provisions of U S Internal Revenue Code Section 401 k whereby we contribute 100 0 of the first 3 0 and 50 0 of the next 2 0 of an employee s cash compensation contributed to the plan up to stated maximums All employees are eligible to participate in the plan and are entitled upon termination or retirement to receive their vested portion of the plan assets Employees contributions and our related matching contributions are fully vested when made Our plan contributions and expenses for the fiscal years ended September 30 2024 2023 and 2022 were 3 390 2 992 and 2 726 respectively
We enter into operating leases as the lessee for office space and vehicles and determine if an arrangement is a lease at inception of the arrangement Operating lease liabilities and right of use assets are recognized on our consolidated balance sheet for leases with an initial term greater than 12 months based on the present value of the future minimum lease payments over the lease term using our estimated incremental borrowing rate Operating lease expense associated with minimum lease payments is recognized on a straight line basis over the lease term When additional payments are based on usage or vary based on other factors they are expensed when incurred as variable lease expense Certain leases include lease and non lease components which we account for as a single lease component Minimum lease payments for leases with an initial term of 12 months or less are not recorded on our consolidated balance sheet As of September 30 2024 we had 60 leases that expire at various dates through 2031 with a weighted average remaining lease term of 5 0 years and a weighted average discount rate of 3 9
As of September 30 2024 21 283 of total lease payments and 1 841 of imputed interest are for our principal executive offices which are leased from an affiliate of ABP Trust pursuant to a lease agreement that expires in 2030
Pursuant to the requirements of Section 13 and 15 d of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized
Pursuant to the requirements of the Securities Exchange Act of 1934 this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated

Company Name	RMR GROUP INC. Vist SEC web-site
Category	SERVICES-MANAGEMENT CONSULTING SERVICES
Trading Symbol	RMR