RMR 8-K/A
Rmr Group Inc. (RMR)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Amendment No. 1)
CURRENT REPORT
Pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934
Date of Report
(Date of earliest event reported)
The
(Exact Name of Registrant as Specified in Its Charter)
(State or Other Jurisdiction of Incorporation)
| 8742 | ||
| (Commission File Number) | (Primary Standard Industrial | (IRS Employer |
| Classification Code Number) | Identification Number) |
(Address of principal executive offices, including zip code)
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(Registrant’s telephone number, including area code)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
Securities registered pursuant to Section 12(b) of the Act:
| Title Of Each Class | Trading Symbol | Name
Of Each Exchange On Which Registered | ||
| The (Nasdaq Capital Market) |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
EXPLANATORY NOTE
On December 19, 2023, The RMR Group Inc. (the “Company”) filed a Current Report on Form 8-K (the “Original 8-K”) with the Securities and Exchange Commission reporting that The RMR Group LLC, a Maryland limited liability company and a majority-owned operating subsidiary of the Company, completed its acquisition of MPC Partnership Holdings LLC, a Georgia limited liability company (“MPC”) pursuant to the terms of the equity purchase agreement, dated July 29, 2023 (the “Agreement”), by and among MPC, the sellers set forth on the signature pages thereto (collectively, the “Sellers”), the seller owners set forth on the signature pages thereto (collectively, the “Seller Owners”), and, solely in his capacity as the Seller Representative, James A. Rubright. This Amendment No. 1 amends the Original 8-K, in accordance with Item 9.01(a)(3) and Item 9.01(b)(2) of Form 8-K, to include the financial statements required by Item 9.01(a) of Form 8-K and the pro forma financial information required by Item 9.01(b) of Form 8-K. This Amendment No. 1 should be read in conjunction with the Original 8-K. Except as set forth herein, no modifications have been made to information contained in the Original 8-K.
Item 9.01. Financial Statements and Exhibits
(a) Financial statements of businesses or funds acquired.
Audited consolidated financial statements of MPC as of September 30, 2023 and for the period from January 1, 2023 through September 30, 2023, with independent auditor’s report (filed herewith as Exhibit 99.3 and incorporated by reference herein).
(b) Pro forma financial information.
Unaudited pro forma condensed consolidated financial information of the Company for the fiscal year ended September 30, 2023 and for the three months ended December 31, 2023, after giving effect to the acquisition of MPC, is filed herewith as Exhibit 99.4 and incorporated by reference herein.
(d) Exhibits.
| † | Included in Original 8-K. |
| * | The Agreement contains representations and warranties by each of the parties to the Agreement, which were made only for purposes of that agreement and as of specified dates. The representations, warranties, covenants, and agreements in the Agreement were made solely for the benefit of the parties to the Agreement, are subject to limitations agreed upon by the contracting parties, including being qualified by confidential disclosures made for the purposes of allocating contractual risk between the parties to the Agreement instead of establishing these matters as facts, and are subject to standards of materiality applicable to the contracting parties that may differ from those applicable to investors. Investors should not rely on the representations, warranties, covenants, and agreements or any descriptions thereof as characterizations of the actual state of facts or condition of the Company or its respective subsidiaries and affiliates, including MPC. Moreover, information concerning the subject matter of the representations, warranties, covenants, and agreements may change after the date of the Agreement, which subsequent information may or may not be fully reflected in the Company’s public disclosures. |
| ** | The press release and investor presentation were furnished as Exhibits 99.1 and 99.2, respectively, to the Original 8-K pursuant to Item 7.01 of Form 8-K. The information furnished in Exhibit 99.1 and 99.2 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities under that section, and shall not be deemed to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing. |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| THE RMR GROUP INC. | ||
| Dated: March 6, 2024 | By: | /s/ Matthew P. Jordan |
| Matthew P. Jordan | ||
| Executive Vice President, Chief Financial Officer and Treasurer | ||
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated February 5, 2024, with respect to the consolidated financial statements of MPC Partnership Holdings LLC and subsidiaries included in the Current Report on Form 8-K/A of The RMR Group Inc. filed on March 6, 2024. We consent to the incorporation by reference of said report in the Registration Statements of RMR Group Inc. on Form S-8 (File No. 333-263413) and on Form S-3 (File No. 333-262124).
/s/ Grant Thornton LLP
Charlotte, North Carolina
March 6, 2024
Exhibit 99.3
Consolidated Financial Statements and Report of Independent Certified Public Accountants
MPC Partnership Holdings LLC
As of and for the period from January 1, 2023 to September 30, 2023
MPC Partnership Holdings LLC
Table of contents
| Report of Independent Certified Public Accountants | 1-2 |
| Consolidated financial statements: | |
| Consolidated balance sheet | 3 |
| Consolidated statement of operations | 4 |
| Consolidated statement of changes in members’ equity | 5 |
| Consolidated statement of cash flows | 6 |
| Notes to consolidated financial statements | 7-17 |
| GRANT THORNTON LLP | REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS | |
| 1415 Vantage Park Dr., Suite 500 | ||
| Charlotte, NC 28203 | ||
| D +1 704 632 3500 | ||
| F +1 704 334 7701 | ||
| To the Members of | ||
| MPC Partnership Holdings LLC | ||
| Opinion | ||
| We have audited the consolidated financial statements of MPC Partnership Holdings LLC (a Delaware limited liability company) and subsidiaries (collectively the “Company”), which comprise the consolidated balance sheet as of September 30, 2023, and the related consolidated statements of operations, changes in members’ equity, and cash flows for the period from January 1, 2023 through September 30, 2023, and the related notes to the financial statements. | ||
| In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2023, and the results of its operations and its cash flows for the period from January 1, 2023 through September 30, 2023 in accordance with accounting principles generally accepted in the United States of America. | ||
| Basis for opinion | ||
| We conducted our audit of the consolidated financial statements in accordance with auditing standards generally accepted in the United States of America (US GAAS). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of the Company and to meet our other ethical responsibilities in accordance with the relevant ethical requirements relating to our audit. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. | ||
| Responsibilities of management for the financial statements | ||
| Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. | ||
| In preparing the consolidated financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for one year after the date the financial statements are available to be issued. |
| GT.COM | Grant Thornton LLP is the U.S. member firm of Grant Thornton International Ltd (GTIL). GTIL and each of its member firms are separate legal entities and are not a worldwide partnership. |
| Auditor’s responsibilities for the audit of the financial statements | ||
| Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with US GAAS will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgment made by a reasonable user based on the consolidated financial statements. | ||
| In performing an audit in accordance with US GAAS, we: |
| · | Exercise professional judgment and maintain professional skepticism throughout the audit. | ||
| · | Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. | ||
| · | Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, no such opinion is expressed. | ||
| · | Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the consolidated financial statements. | ||
| · | Conclude whether, in our judgment, there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for a reasonable period of time. | ||
| We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control-related matters that we identified during the audit. |
| /s/ Grant Thornton LLP | ||
| Charlotte, North Carolina | ||
| February 5, 2024 |
| MPC Partnership Holdings LLC | 3 |
Consolidated balance sheet
| As of September 30, 2023 |
| Assets | ||||
| Current assets: | ||||
| Cash | $ | 13,007,007 | ||
| Restricted cash | 39,324 | |||
| Short term liquid investments | 1,017,181 | |||
| Prepaid expenses and other assets | 551,380 | |||
| Accounts receivable | 3,500,397 | |||
| Total current assets | 18,115,289 | |||
| Fixed assets (net of accumulated depreciation) | 3,569,385 | |||
| Operating lease right-of-use asset | 1,979,686 | |||
| Rental property and improvements (net of accumulated depreciation) | 4,685,190 | |||
| Assets held for sale | 900,000 | |||
| Capitalized development costs | 263,126 | |||
| Equity method investments accounted for under the fair value option | 40,079,984 | |||
| Total assets | $ | 69,592,660 | ||
| Liabilities and equity | ||||
| Current liabilities: | ||||
| Accounts payable | $ | 6,507,592 | ||
| Other liabilities | 4,445,645 | |||
| Current lease liability | 362,811 | |||
| Current debt | 327,336 | |||
| Total current liabilities | 11,643,384 | |||
| Long term lease liability | 1,802,794 | |||
| Long term debt | 5,947,262 | |||
| Total liabilities | 19,393,440 | |||
| Equity: | ||||
| Members' equity | 37,282,085 | |||
| Noncontrolling interests | 12,917,135 | |||
| Total equity | 50,199,220 | |||
| Total liabilities and equity | $ | 69,592,660 |
The accompanying notes are an integral part of these consolidated financial statements.
| MPC Partnership Holdings LLC | 4 |
Consolidated statement of operations
| For the period from January 1, 2023 to September 30, 2023 |
| Fee income | ||||
| Property management fees | $ | 10,514,269 | ||
| Marketing fees | 3,493,875 | |||
| Information technology fees | 1,414,321 | |||
| Construction supervision fees | 2,229,354 | |||
| Other fee income | 3,338,672 | |||
| Total fee income | 20,990,491 | |||
| Operating expenses | ||||
| Salaries and benefits | 18,391,405 | |||
| General and administrative | 23,505,988 | |||
| Depreciation and amortization | 491,221 | |||
| Pursuit costs, net of reimbursements | 35,234 | |||
| Other operating expenses | 102,617 | |||
| Total operating expenses | 42,526,465 | |||
| Operating loss | (21,535,974 | ) | ||
| Investment income (loss) | ||||
| Realized investment income and promote income from equity method investments accounted for under the fair value option | 23,723,835 | |||
| Net change in unrealized fair value of equity method investments accounted for under the fair value option | (46,799,894 | ) | ||
| Rental property income (net of expenses) | 190,970 | |||
| Net investment loss | (22,885,089 | ) | ||
| Other income (loss) | ||||
| Self-funded medical insurance | (657,162 | ) | ||
| Income from short term liquid investments | 164,642 | |||
| Impairment on assets held for sale | (1,074,272 | ) | ||
| Net loss | $ | (45,987,855 | ) | |
| Net loss attributable to noncontrolling interests | (3,472,324 | ) | ||
| Net loss attributable to members | $ | (42,515,531 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
| MPC Partnership Holdings LLC | 5 |
Consolidated statement of changes in members’ equity
| Noncontrolling | ||||||||||||
| Members' Equity | Interests | Total Equity | ||||||||||
| Balance at December 31, 2022 | $ | 83,566,597 | $ | 21,022,516 | $ | 104,589,113 | ||||||
| Distributions | (3,768,981 | ) | (4,633,057 | ) | (8,402,038 | ) | ||||||
| Allocation of net loss | (42,515,531 | ) | (3,472,324 | ) | (45,987,855 | ) | ||||||
| Balance at September 30, 2023 | $ | 37,282,085 | $ | 12,917,135 | $ | 50,199,220 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| MPC Partnership Holdings LLC | 6 |
Consolidated statement of cash flows
For the period from January 1, 2023 to September 30, 2023
| Cash flows from operating activities: | ||||
| Net loss | $ | (45,987,855 | ) | |
| Adjustments to reconcile net loss to net cash and restricted cash used in operating activities: | ||||
| Depreciation and amortization | 491,221 | |||
| Realized investment income and promote income from equity method investments accounted for under the fair value option | (23,723,835 | ) | ||
| Net change in unrealized fair value of equity method investments accounted for under the fair value option | 46,799,894 | |||
| Impairment on assets held for sale | 1,074,272 | |||
| Income from short term liquid investments | (164,642 | ) | ||
| Net change in right-of-use asset and lease liability | 119,037 | |||
| Changes in operating assets and liabilities: | ||||
| Accounts receivable | 966,741 | |||
| Prepaid expenses and other assets | 874,101 | |||
| Accounts payable | 4,801,003 | |||
| Other liabilities | 1,782,822 | |||
| Net cash used in operating activities | (12,967,241 | ) | ||
| Cash flows from investing activities: | ||||
| Contributions to equity method investments accounted for under the fair value option | (104,318 | ) | ||
| Distributions from equity method investments accounted for under the fair value option | 25,690,789 | |||
| Sale of short term liquid investments | 5,795,391 | |||
| Purchases of fixed assets, rental property improvements, and capitalized development costs | (445,903 | ) | ||
| Net cash provided by investing activities | 30,935,959 | |||
| Cash flows from financing activities: | ||||
| Payments of debt principal | (245,502 | ) | ||
| Repayments on line of credit | (2,600,000 | ) | ||
| Draws on line of credit | 2,600,000 | |||
| Member distributions | (3,768,981 | ) | ||
| Noncontrolling interest distributions | (4,633,057 | ) | ||
| Net cash used in financing activities | (8,647,540 | ) | ||
| Net increase in cash and restricted cash | 9,321,178 | |||
| Cash and restricted cash, beginning | 3,725,153 | |||
| Cash and restricted cash, ending | $ | 13,046,331 | ||
| Supplemental disclosures of cash flow information: | ||||
| Cash paid for interest | $ | 219,969 | ||
| Reconciliation of cash and restricted cash | ||||
| Cash | $ | 13,007,007 | ||
| Restricted Cash | 39,324 | |||
| Total | $ | 13,046,331 | ||
The accompanying notes are an integral part of these consolidated financial statements.
| MPC Partnership Holdings LLC | 7 |
Notes to financial statements
| 1 | Organization and Summary of Significant Accounting Policies |
Organization
MPC Partnership Holdings LLC (collectively, with its subsidiaries, the “Company”) was organized on February 7, 2013, under the laws of Georgia for the purpose of indirectly investing in multifamily properties as well as providing property management, asset management and other services to owners of multifamily properties, primarily in the Southeastern United States. On February 21, 2013, the Company began operations.
The initial members included P. Carroll Capital Partners, LLC (Capital Partners) and Darren DeVore (DeVore), with ownership percentages of 75% and 25%, respectively. On February 21, 2013, the operating agreement was amended to admit Hanna Capital, LLC (Hanna Capital) as a member through a membership interest purchase agreement (Membership Purchase). Under the Membership Purchase, DeVore transferred 2.5% of his ownership to Hanna Capital in exchange for $250,000 and Capital Partners transferred 7.5% of its ownership in exchange for $750,000. The transfer of interests resulted in ownership of 67.5%, 22.5% and 10% for Capital Partners, DeVore and Hanna Capital, respectively.
On July 17, 2013, the operating agreement was amended and restated and another membership interest purchase agreement (Membership Purchase II) was approved. Under the Membership Purchase II, Hanna Capital and DeVore invested $2,175,000 and $300,000, respectively. As a result of the Membership Purchase II transaction, Hanna Capital and DeVore's interests were increased to 24.5% and 24.5%, respectively, with Capital Partners owning 51%. On March 24, 2015, DeVore transferred his 24.5% membership interest in the Company to James Rubright (Rubright) in exchange for consideration paid by Rubright per the Assignment of Membership Interest and Amendment to the Amended and Restated Operating Agreement of the Company (Assignment). DeVore transferred all voting and economic rights to Rubright, excluding the economic interest in certain subsidiary investments held by the Company, which were retained by DeVore. DeVore's interests in the Company were decreased to 0% with the exception of remaining economic interest in certain subsidiary investments. As a result of the Assignment, Rubright's interest increased to 24.5%, and Hanna Capital and Capital Partners ownership remained the same at 24.5% and 51%, respectively. All of Devore’s economic interests had been distributed as of September 30, 2023. Capital Partners, Hanna Capital, and Rubright are collectively referred to as the Members. Cash distributions are made to the Members based on special allocations of certain items to specific Members, then allocated in proportion to their respective ownership percentages.
The ownership interests by Members are as follows as of September 30, 2023:
| Percentage | ||||
| Members | Interest | |||
| James Rubright | 24.50 | % | ||
| Hanna Capital, LLC | 24.50 | % | ||
| P. Carroll Capital Partners, LLC | 51.00 | % | ||
| 100.00 | % | |||
| MPC Partnership Holdings LLC | 8 |
Notes to financial statements
Period of reporting
The Company’s financial statements presented herein are for the period from January 1, 2023 through September 30, 2023. The period from January 1, 2023 through September 30, 2023 is referred to as “the period ended September 30, 2023”.
Basis of consolidation
In accordance with Accounting Standards Codification (ASC) 810, Consolidation, the consolidated financial statements include the financial statements of MPC Partnership Holdings LLC, its wholly owned and majority-owned subsidiaries in which it has a controlling financial interest, and variable interest entities (VIEs) for which the Company is the primary beneficiary. Such guidance applies to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. In the normal course of business, the Company enters into a variety of transactions with VIEs. The Company determines the primary beneficiary based on an evaluation of which party has both: (i) the power to direct the activities that most significantly impact the economic performance of the VIE; and, (ii) has the obligation to absorb losses, or the right to receive benefits, that could potentially be significant to the VIE. If the determination is made that the Company is the primary beneficiary of a VIE, then that entity is included in the consolidated financial statements. If an entity is not a variable interest entity, the Company evaluates whether consolidation would be appropriate based on voting rights.
The Company consolidates Carroll Multifamily Real Estate Fund III, LP (“Fund III”) and Carroll Multifamily Real Estate Fund IV, LP (“Fund IV”) (collectively, the “Consolidated Funds”) as it is the primary beneficiary and controls each of those entities. The Company also consolidates other entities in which it has a controlling financial interest, including MPC Property Investments, LLC, MPC Property Holdings III, LLC, MPC Property Holdings IV, LLC, MPC Property Holdings V, LLC, Carroll Multifamily Holdings VI, LLC, MPC Property Holdings SE Portfolio, LLC, CE Fund III, LLC, CE Fund IV, LLC, CE Fund V, LLC, Carroll MF VI, LLC, Carroll MF VII, LLC, Carroll SE Portfolio Investors, LLC, Emerald Isle Investors, LLC, 260 Woodstock Investor, LLC, SFVP Carroll Sidecar Investor, LLC, IT Support Solutions Group, LLC, Carroll Management Group, LLC, Carroll Arium, LLC, Tower Place Asset Management, LLC, Carroll Acquisitions, LLC, and Carroll Investments, LLC. Noncontrolling interests are attributable to limited partners, which include executives and members of the Company, of the Consolidated Funds and 260 Woodstock Investor, LLC.
The Company does not consolidate or have a controlling financial interest in Carroll Multifamily Real Estate Fund V, LP, Carroll Fund V Bedrock Sidecar Investor, LP, Carroll Multifamily Venture VI, LP, and Carroll Multifamily Venture VII, LP (herein, “Fund V”, “Fund V Sidecar”, “Fund VI” and “Fund VII”, respectively; collectively, the “Nonconsolidated Funds”) or certain joint ventures of the Consolidated Funds because the Company does not have the power to direct the activities that most significantly impact the economic performance of those entities. Accordingly, these investments are accounted for under the equity method using the fair value option. All intercompany balances and transactions have been eliminated in consolidation.
| MPC Partnership Holdings LLC | 9 |
Notes to financial statements
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions relating to the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include the valuation of equity method investments accounted for under the fair value option and the valuation of held for sale assets. Actual results could differ from those estimates.
Cash
The Company considers all demand accounts and money market accounts to be cash. The Company maintains cash on deposit with banks that, at times, exceeds federally insured limits. The Company periodically assesses the financial condition of the institutions and believes the risk of loss to be remote.
Restricted Cash
Restricted cash consists of security deposits, amounts held in trust for payment of health insurance premiums and claims, as well as amounts held in escrow for insurance and property taxes.
Fixed Assets
Fixed assets are stated at cost less accumulated depreciation. Upon retirement or other disposal, the asset cost and related accumulated depreciation are removed from the accounts and the net amount, less any proceeds, is recognized as a gain or loss in the consolidated statement of operations.
Depreciation is provided on fixed assets using the straight-line method of depreciation. The Company’s fixed assets consist of the following:
| Net Book Value of Fixed Assets | ||||||
| Category | Useful Life | As of September 30, 2023 | ||||
| Office Furniture and Equipment | 4 years | $ | 121,598 | |||
| Watercraft | 10 years | 335,025 | ||||
| Fractional Aircraft Interests | 10 years | 2,665,409 | ||||
| Automobiles | 8 years | 447,353 | ||||
| Total | $ | 3,569,385 | ||||
Accumulated depreciation on the Companies fixed assets totaled $1,072,636 as of September 30, 2023.
Rental Property and Improvements
Fund III, one of the Consolidated Funds, wholly owned a multifamily property located in Woodstock, GA known as Arium Woodstock, which was acquired on May 12, 2015. Arium Woodstock is recorded at cost, net of accumulated depreciation. Expenditures for maintenance and repairs are charged to expense as incurred while major renewals and betterments are capitalized. The building and improvements for Arium Woodstock are depreciated utilizing the straight-line method with a useful life of 27.5 years. The Company recapitalized Arium Woodstock during the year ended December 31, 2019; 260 Woodstock Investor, LLC, a consolidated entity, acquired the property from Fund III at a purchase price of $7,000,000. Accumulated depreciation for Woodstock as of September 30, 2023 totaled $1,825,221. 260 Woodstock Investor, LLC also refinanced the property in connection with the acquisition, as is further described in Note 3.
| MPC Partnership Holdings LLC | 10 |
Notes to financial statements
Capitalized Development Costs
Capitalized development costs are comprised of land, due diligence, pursuit costs, and other costs incurred by the Company in order to develop property. In the event that a development project is determined to be no longer viable or is abandoned, pursuit and other development costs related to that project are expensed immediately in the period in which the decision is made. During the period ended September 30, 2023, the Company deemed one of its development projects to be held for sale. The Company recorded an impairment on the held for sale project of $1,074,272 for the period ended September 30, 2023.
Impairment of and Loss on Long-lived Assets
Long-lived assets such as fixed assets, intangible assets subject to amortization, and rental property and improvements are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. There were no impairment charges during the period ended September 30, 2023 other than that for capitalized development costs held for sale.
Equity Method Investments Accounted for Under the Fair Value Option
The Company accounts for its interests in the Unconsolidated Funds and certain joint ventures of the Consolidated Funds under the equity method of accounting using the fair value option, as further described in Note 2. These investments are owned 50% or less by the Company, or the Company does not have control but is able to exercise substantial influence.
Revenue and Cost Recognition
Realized Investment Income and Promote Income from Equity Method Investments Accounted for Under the Fair Value Option
Proceeds in excess of the Company’s basis from the sale or refinancing of interests in equity method investments accounted for under the fair value option are recognized as realized investment income. The operating agreements of many of the Company’s joint venture investments specify that the Company is to receive a higher proportion of proceeds than its pro-rata equity share as promote income, as defined in those relevant agreements. Realized promote income from the sale of interests in the joint ventures is recognized when specified target returns are achieved by the joint ventures, and sales proceeds are allocable to the Company in excess of the Company’s pro-rata equity share. Income is not recognized when collectability is not reasonably assured.
Net Change in Fair Value of Equity Method Investments Accounted for Under the Fair Value Option
The fair value of equity method investments accounted for under the fair value option is based upon management’s prepared valuations as described in Note 2, and includes the fair value of expected promote income attributable to the Company and its consolidated entities. The net change in unrealized fair value reflects fluctuations in fair value due to appreciation in value, depreciation in value, and realized gains and losses of the investments.
| MPC Partnership Holdings LLC | 11 |
Notes to financial statements
Rental Property Income (Net of Expenses)
The Company has recorded rental property income from Arium Woodstock and has presented the income net of rental property expenses in the consolidated statement of operations. Gross rental property income, rental property interest expense, rental property operating expenses, and depreciation expense consist of the following:
| For the period ended September 30, 2023 | ||||
| Gross rental property income | $ | 568,260 | ||
| Rental property interest expense | (152,740 | ) | ||
| Rental property operating expenses | (224,550 | ) | ||
| Rental property income (net of expenses) | $ | 190,970 | ||
| Rental property depreciation expense | $ | 190,648 | ||
Depreciation expense associated with the rental property has been recorded as depreciation and amortization in the consolidated statement of operations.
Fee Revenue Recognition
The Company accounts for revenue in accordance with ASC 606, Revenue from Contracts With Customers. Revenue is recognized when control of promised services transfers to customers in an amount that reflects consideration to which the Company expects to be entitled in exchange for those services. The Company’s fee income is derived from investment-related services provided to multifamily properties it manages. Services provided to properties are primarily related to property management, marketing services, information technology services, and construction supervision. The following is a description of the categories of the Company’s service fee revenues:
Property Management Fees- The Company provides property management services for multifamily properties. Revenues are recognized monthly, as earned, and are calculated monthly using terms specified in the respective management agreements. Calculations of these fees are typically based on a percentage of gross revenue of the respective property. If the amount of revenue cannot be reasonably estimated on a monthly basis, the Company recognizes revenue when it can be reasonably estimated.
Marketing Fees- The Company provides certain marketing services to the properties it manages for which it earns marketing fee income. These services include online reputation management, moderation of online ratings and reviews, monthly review solicitation campaigns, email and listing management, digital advertising campaign management, market research data, website and collateral creative design, and lead management services.
Information Technology Fees- The Company provides information technology services to the properties it manages and receives fees for these services. These fees are charged to the properties on a monthly basis and are based on either the size of the property being managed or on usage of the services being provided.
Construction Supervision Fees- The Company provides construction management services to properties it manages that are undergoing renovations or other construction and receives fees for these services. These fees are charged to properties undergoing renovations or other construction on a monthly or quarterly basis and are based on a percentage of construction costs incurred.
| MPC Partnership Holdings LLC | 12 |
Notes to financial statements
Other Fee Income- The Company receives fee income for accounting services provided to properties, fund management, and other fees. The Company also receives reimbursements for payroll and related costs from the properties it manages.
Income Taxes
The Company has elected to be treated as a partnership for federal income tax purposes. Accordingly, income and loss is allocated to the members for inclusion in their tax returns. The Company follows applicable authoritative guidance on accounting for uncertainty in income taxes which, among other things, prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As of September 30, 2023, the Company’s open tax years include 2023, 2022 and 2021, and 2020. No income tax expense is recorded by the Company.
Fair Value of Financial Instruments
The carrying amounts of the Company’s cash and restricted cash, accounts receivable, accounts payable and Note Payable (as discussed in Note 3) approximate fair value due to the short-term nature or market-based rates of these financial instruments.
Short Term Liquid Investments
The Company has liquid investments in debt and mutual funds classified as trading securities. These investments are reported at fair value with unrealized gains and losses included in earnings.
The Company’s investments include various types of investment securities and various companies within various markets. Investment securities are exposed to several risks, such as interest rate, market and credit risks. Due to the level of risk associated with certain investment securities, it is possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts reported in the consolidated financial statements.
2 Equity Method Investments Accounted for Under the Fair Value Option
The Company holds equity interests in various partnerships that are accounted for under the equity method using the fair value option. Fair value of real estate investments is based on management’s estimates, independent external appraisals, broker opinions of value, or contracted sales price. Although the valuation process is designed to estimate fair market value, the valuation process involves subjective judgment. Uncertainties in the process, along with uncertainties in the current economic environment, may cause the recorded value of such investments to differ significantly from that which would have been obtained if the investments were actually offered for sale in the marketplace.
The values of investments in joint ventures and the underlying real estate assets have been prepared giving consideration to the income, cost and sales comparison approaches of estimating property values. The income approach for a multifamily property utilizes the discounted cash flow method and estimates future cash flows by projecting net operating income plus recurring capital expenditures through an estimated disposition as well as selecting an appropriate discount rate. The cost approach estimates the replacement cost of the building less physical depreciation plus the land value. Generally, this approach provides a check on the value derived using the income approach. The sales comparison approach compares recent transactions to the appraised property. Adjustments are made for dissimilarities which typically provide a range of value.
| MPC Partnership Holdings LLC | 13 |
Notes to financial statements
The primary approach utilized for the valuations was the income approach. ASC 820, Fair Value, establishes a fair value measurement framework, provides a single definition of fair value, and requires expanded disclosures summarizing fair value measurements. ASC 820 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing an asset or liability.
The standard establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable input be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is measured in three levels based on the reliability of inputs:
| Level I | Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. |
| Level II | Valuations based on quoted prices for similar instruments in active markets or quoted prices for similar or identical instruments in markets that are not active. Fair values are primarily obtained from third party pricing services for identical or comparable assets or liabilities. |
| Level III | Valuations derived from other valuation methodologies, including pricing models, discounted cash flow models and similar techniques, and not based on market, exchange, dealer, or broker-traded transactions. Level III valuations incorporate certain assumptions and projections that are not observable in the market and significant professional judgment in determining the fair value assigned to such assets or liabilities. |
For the Company’s valuations of interests in equity method investments accounted for under the fair value option, all fair values are based on Level III inputs.
The following table presents a summary of changes in the Company’s Level III assets measured at fair value on a recurring basis. The net change in fair value of investments in the table below is reflected in the Company’s consolidated statement of operations:
| Equity Method Investments Accounted for Under the | For the period ended | |||
| Fair Value Option | September 30, 2023 | |||
| Balance at beginning of period | $ | 88,742,514 | ||
| Contributions to investments | 104,318 | |||
| Distributions from investments | (25,690,789 | ) | ||
| Realized investment income and promote income | 23,723,835 | |||
| Net change in fair value of investments | (46,799,894 | ) | ||
| Balance at end of period | $ | 40,079,984 | ||
The implied capitalization rates used in the valuations as of September 30, 2023 are as follows:
| Total Investment | Implied Capitalization Rate | |||||
| Fair Value | Range (Weighted Average) | |||||
| As of September 30, 2023 | $ | 40,079,984 | 2.81% - 4.88% (4.06%) | |||
| MPC Partnership Holdings LLC | 14 |
Notes to financial statements
The company utilized 6.25% - 7.00% discount rates to discount future cash flows in its valuations as of September 30, 2023. Ownership percentages, fair values, and the property acquisition dates for equity method investments accounted for under the fair value option as of September 30, 2023 are as follows:
| Equity Method Investments Accounted for Under the Fair Value Option as of September 30, 2023 | ||||||||||
| Initial | Ownership | |||||||||
| Property Name | Investment Date | Interest | Fair Value | |||||||
| ARIUM JENSEN BEACH | 10/9/2015 | 5.0 | % | $ | 327,520 | * | ||||
| ARIUM VININGS STATION | 10/12/2016 | 5.0 | % | 479,088 | * | |||||
| PENINSULA AT BUCKHEAD | 7/13/2017 | 5.0 | % | 1,215,795 | ||||||
| CARROLL MULTIFAMILY REAL ESTATE FUND V, LP | 10/5/2017 | 12.5 | % | 9,120,555 | ||||||
| CARROLL FUND V BEDROCK SIDECAR INVESTOR, LP | 12/19/2017 | 12.5 | % | 3,861,234 | ||||||
| CARROLL MULTIFAMILY VENTURE VI, LP | 1/27/2020 | 8.6 | % | 21,453,710 | ||||||
| CARROLL MULTIFAMILY VENTURE VII, LP | 12/15/2021 | 4.8 | % | 3,622,082 | ||||||
| Total Fair Value of Equity Method Investments Accounted for Under the Fair Value Option | $ | 40,079,984 | ||||||||
*Underlying investments have been sold as of September 30, 2023. Value is comprised of residual assets to be distributed.
3 Mortgage Note Payable, Line of Credit, and Note Payable
A summary of the Company’s outstanding debt is as follows:
| Schedule of Debt Balances | ||||||||||
| Principal Balance as of | ||||||||||
| Debt | Maturity Date | Interest Rate | September 30, 2023 | |||||||
| Mortgage Note Payable | 8/1/2029 | 3.71% | $ | 5,429,000 | ||||||
| Note Payable | 4/12/2026 | LIBOR + 2.00% | 845,598 | |||||||
| $ | 6,274,598 | |||||||||
Mortgage Note Payable- On July 31, 2019, Arium Woodstock was refinanced with the Company borrowing an amount of $5,429,000. The mortgage note was secured with the property located at 260 Chambers St., Woodstock, GA at an interest rate of 3.71%. Payments of interest only are due on the loan until September 1, 2025, at which point payments of principal and interest become due until maturity. A prepayment premium based on yield maintenance will be due in the event of prepayment of the mortgage. The fair value of the Mortgage Note Payable was $4,726,000 as of September 30, 2023.
Line of Credit- On September 8, 2015, the Company executed a revolving line of credit promissory note with a maximum principal amount of $1,100,000 (Northern Trust LOC), which was increased to $ 2,600,000 in 2016. The line was renewed on December 23, 2021, with a new maturity date of December 23, 2023 and a variable interest rate of the prime rate less 0.63%. The prime rate was 8.5% as of September 30, 2023. The Northern Trust LOC is secured by Company property, certain property of M. Patrick Carroll, and is guaranteed by M. Patrick Carroll. The Northern Trust LOC has certain tangible net worth and debt service coverage ratio requirements. The Company was in compliance with these covenants and had no outstanding principal balance as of September 30, 2023.
Note Payable- On October 12, 2018, the Company executed a note payable (Tower Place Note Payable) totaling $2,455,000, with a maturity on April 12, 2026. The interest rate is variable and based on the LIBOR rate plus 2.00% per annum. LIBOR was 5.04% as of September 30, 2023. Principal payments of $27,278 plus interest are due monthly. The loan is guaranteed by the Company and is secured by the Company’s fractional aircraft interests.
| MPC Partnership Holdings LLC | 15 |
Notes to financial statements
Total interest expense for the period ended September 30, 2023 was $219,409. Of this amount, $ 152,740 is applicable to the mortgage note payable for the period ended September 30, 2023 and is included as an offset to rental property income in the consolidated statement of operations. The remainder of interest expense incurred has been included in the consolidated statement of operations as general and administrative expense. Future principal payments due on the Company’s outstanding debt are as follows:
| Future principal payments due for the twelve | ||||
| months ended September 30: | ||||
| 2024 | $ | 327,336 | ||
| 2025 | 335,011 | |||
| 2026 | 288,928 | |||
| 2027 | 25,215 | |||
| 2028 | 102,709 | |||
| Thereafter | 5,195,399 | |||
| Total | $ | 6,274,598 | ||
4 Acquisition of MPC Partnership Holdings LLC
On July 29, 2023, The RMR Group LLC entered into an equity purchase agreement with the owners of the Company to acquire MPC Partnership Holdings LLC. The base purchase price was $ 80,000,000, subject to adjustments, with a potential for up to an additional $20,000,000 if certain metrics are met subsequent to the acquisition. The purchase agreement excluded the sale of the majority of real estate interests of the Company and certain of its subsidiaries, with the exception of Arium Woodstock and the associated Mortgage Note Payable, and the majority of fixed assets, including the watercraft, fractional aircraft interests, automobiles, and capitalized development costs held for sale, and any liabilities related to those assets, including the Tower Place Note Payable (collectively, the “Excluded Assets and Liabilities”). The sale closed on December 19, 2023. The Excluded Assets and Liabilities were transferred on the closing date to MPC Partnership Legacy Investments, LLC. The Company expensed $4,850,000 of legal fees for the period ended September 30, 2023 related to the transaction, which are included as a component of general and administrative expense in the consolidated statement of operations. These expenses were not contingent upon the transaction closing. Consent fees, success fees, investment banking fees, and other fees were also incurred associated with the transaction. However, these costs were contingent upon the successful close of the purchase. Accordingly, these other fees are not reflected in the financial statements herein, as they were not paid or deemed to have been incurred prior to the close.
5 Lease Obligations
The Company leases its office facilities and some office equipment and has various non-cancelable operating leases. The Company does not have any financing leases. During the year ended December 31, 2022, the Company extended its lease for its principal office in Atlanta, Georgia through January 2028. Lease expenses total $402,882 for the period ended September 30, 2023 and are included as a component of general and administrative expense in the consolidated statement of operations. The Company utilized a discount rate of 2.75% to calculate its lease obligations.
| MPC Partnership Holdings LLC | 16 |
Notes to financial statements
The future minimum lease payments under non-cancelable operating lease agreements as of September 30, 2023 are as follows:
| Future mimimum lease payments due for the twelve months ended September 30: | ||||
| 2024 | $ | 251,736 | ||
| 2025 | 546,522 | |||
| 2026 | 563,117 | |||
| 2027 | 596,740 | |||
| 2028 | 207,490 | |||
| Thereafter | - | |||
| Total | $ | 2,165,605 | ||
6 Related Party Transactions
A majority of the Company’s fee revenue is derived entities the Company invests in. Fee revenue and receivables from related parties as of and for the period ended September 30, 2023 are as follows:
| For the period ended September 30, 2023 | ||||
| Property management fees | $ | 8,845,538 | ||
| Marketing fees | 2,655,417 | |||
| Information technology fees | 873,373 | |||
| Construction supervision fees | 2,040,997 | |||
| Other fee income | 1,946,891 | |||
| Total fees from related parties | $ | 16,362,216 | ||
| Receivables from related parties | $ | 3,302,427 | ||
M. Patrick Carroll, the chief executive officer of the Company and owner of Capital Partners, is entitled to a loan guarantee fee of $50,000 per year as compensation for his personal guarantee of the Company’s Tower Place Note Payable and Northern Trust Line of Credit in accordance with the Company’s operating agreement. The loan guarantee fee is reflected in other operating expenses in the accompanying consolidated statement of operations for the period ended September 30, 2023.
During the period ended September 30, 2023, the Company paid legal fees of $1,958,614 pertaining to legal proceedings concerning executives of the Company. This amount has been recorded in general and administrative expenses.
The Company recorded expenses pertaining to home office expenses for M. Patrick Carroll of $229,303 during the period ended September 30, 2023. These expenses are recorded in general and administrative expenses and salaries and benefits in the consolidated statement of operations.
| MPC Partnership Holdings LLC | 17 |
Notes to financial statements
7 Contingencies and Risks
The Company and its subsidiaries provide performance guarantees for mortgages on behalf of certain real estate joint ventures. The nature of the guarantees relate to the performance of the debt service of the individual mortgages and the ultimate settlement of the outstanding principal and interest. Should an investment default on its mortgage payable, the Company may have to settle the full outstanding principal and interest. The individual mortgages are secured by the real property of each investment, which would limit the amount of exposure to the Company should it have to perform under any of the guarantees. The Company does not have a liability recorded related to the guarantees, as the risk of loss is deemed remote. Under the terms of the guarantees, the Company is required to maintain liquidity of $5,000,000 and a net worth of at least $50,000,000. The Company is in compliance with these covenants as of September 30, 2023.
8 Employee Benefit Plan
The Company has a defined contribution 401(k) plan which covers all full-time employees who are age 21 or older except employees covered by a collective bargaining agreement, employees who are non-resident aliens or leased employees. The plan requires the employer to make matching contributions to the plan equal to 100% of participant contributions up to 3%, then 50% of participant contributions up to 5%. For the period ended September 30, 2023, match contributions of $280,509 were made to the plan and included in salaries and benefits expense in the consolidated statement of operations.
9 Medical Self-insurance
In September 2014, the Company implemented a self-insurance program for its employee medical benefit plan in which the Company collects plan premiums and processes claims. The Company also maintains stop-loss insurance coverage for claims in excess of a certain threshold. For the period ended September 30, 2023, the following activity occurred:
| For the period ended September 30, 2023 | ||||
| Premiums collected | $ | 2,952,013 | ||
| Medical claims and costs | (3,609,175 | ) | ||
| Premiums less than medical claims and costs | $ | (657,162 | ) | |
Premiums less than medical claims and costs are included as self-funded medical insurance (net of expenses) in the consolidated statement of operations for the period ended September 30, 2023.
10 Subsequent Events
The Company has evaluated subsequent events through February 5, 2024, the date at which the consolidated financial statements were available to be issued. On October 1, 2023, Rubright transferred his ownership interest to Woodhaven Multifamily, LLC. On December 18, 2023, Fund III made a final liquidating distribution and was dissolved. As discussed in Note 4, the Company was acquired by The RMR Group LLC on December 19, 2023. Immediately prior to the sale, the Northern Trust Line of Credit and Tower Place Note Payable were cancelled and repaid in full, respectively. At closing, the Excluded Assets and Liabilities were transferred to MPC Partnership Legacy Investments, LLC. All subsequent events requiring recognition or disclosure have been incorporated into these financial statements.
Exhibit 99.4
The RMR Group Inc.
Introduction to Unaudited Pro Forma Condensed Consolidated Financial Information
(dollars in thousands)
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. Unless otherwise indicated, the “Company”, “we”, “us” and “our” refer to RMR Inc. and its direct and indirect subsidiaries, including RMR LLC.
As disclosed in our Current Report on Form 8-K filed with the Securities and Exchange Commission, or SEC, on July 31, 2023, RMR LLC entered into an equity purchase agreement, or the Purchase Agreement, with MPC Partnership Holdings LLC, a Georgia limited liability company, or MPC, the sellers set forth on the signature pages thereto, collectively, the Sellers, the seller owners set forth on the signature pages thereto, collectively, the Seller Owners, and, solely in his capacity as the Seller Representative, James A. Rubright. As disclosed in our Current Report on Form 8-K filed with the SEC on December 19, 2023, or the Acquisition Date, RMR LLC completed its acquisition of the issued and outstanding equity interests of MPC for $80,000 in cash, subject to customary adjustments for cash, debt, transaction expenses and working capital at closing, or the Acquisition. Pursuant to the Purchase Agreement, the Sellers are eligible to earn up to an additional $20,000 of contingent consideration subject to the deployment of capital remaining in an investment fund managed by MPC prior to the end of such fund’s investment period, or the Earnout. In addition, the Sellers retained certain excluded assets (including promotes and co-investment interests in respect of legacy investment funds managed by MPC) and assumed certain excluded liabilities (including liabilities related to such excluded assets), or the Excluded Assets and Liabilities, in accordance with the Purchase Agreement.
The unaudited pro forma condensed consolidated statements of income and the accompanying notes for the fiscal year ended September 30, 2023 and for the three months ended December 31, 2023 present the results of our operations as if RMR LLC's acquisition of MPC were completed on October 1, 2022. No balance sheet has been presented within the unaudited pro forma condensed consolidated financial information because the effects of the Acquisition on our financial position were reflected in our condensed consolidated balance sheets in our Quarterly Report on Form 10-Q for the three months ended December 31, 2023 filed on February 7, 2024 with the SEC, or our Quarterly Report.
The fiscal year of RMR Inc. ends on September 30 while the fiscal year of MPC ends on December 31. The unaudited pro forma condensed consolidated statements of income for the fiscal year ended September 30, 2023 combines the consolidated statement of income of RMR Inc. for the same period with the unaudited consolidated statement of operations of MPC for the three months ended December 31, 2022 and the consolidated statement of operations for the nine months ended September 30, 2023. The unaudited pro forma condensed consolidated statements of income for the three months ended December 31, 2023 combines the unaudited condensed consolidated statement of income of RMR Inc. for the same period with the unaudited condensed consolidated statement of operations of MPC for the period from October 1, 2023 to the Acquisition Date.
The unaudited pro forma condensed consolidated financial information have been derived from and should be read in conjunction with (i) our unaudited condensed consolidated financial statements for the three months ended December 31, 2023 and the notes thereto included in our Quarterly Report, (ii) our audited consolidated financial statements for the fiscal year ended September 30, 2023 and the notes thereto included in our Annual Report on Form 10-K filed on November 15, 2023 with the SEC, or our Annual Report, and (iii) the audited consolidated financial statements of MPC included in Exhibit 99.3 to this Current Report on Form 8-K.
The unaudited pro forma condensed consolidated financial information is provided for informational purposes only and is not necessarily indicative of the operating results or financial position that would have occurred if the Acquisition had been completed as of the dates set forth above. In the opinion of management, all adjustments necessary to reflect the effects of the Acquisition have been included and are based upon available information and assumptions that management believes are reasonable. Adjustments have been made to the unaudited pro forma condensed consolidated financial information to reflect factually supportable items that are directly attributable to these transactions and are expected to have a continuing impact on the consolidated financial results. While the unaudited pro forma condensed consolidated statements of operations do not reflect any synergies or dis-synergies we may realize as a result of the Acquisition, management's estimates of certain cost savings to be realized following the completion of the Acquisition are illustrated in Note 4 to the unaudited pro forma financial condensed consolidated financial information.
The unaudited pro forma condensed consolidated financial information is not necessarily indicative of our financial position or our results of operations for any future period. Differences could result from numerous factors, including factors that are beyond our control. Consequently, actual future results are likely to be different from amounts presented in the unaudited pro forma condensed consolidated financial information and such differences could be significant.
F-1
The RMR Group Inc.
Unaudited Pro Forma Condensed Consolidated Statements of Income
For the Fiscal Year Ended September 30, 2023
(amounts in thousands, except per share data)
| Historical | ||||||||||||||||||
| RMR Inc. | MPC | Transaction Accounting Adjustments | Pro Forma Consolidated | |||||||||||||||
| Revenues: | ||||||||||||||||||
| Management services | $ | 185,702 | $ | 29,057 | $ | — | $ | 214,759 | ||||||||||
| Termination and incentive fees | 45,942 | — | — | 45,942 | ||||||||||||||
| Advisory services | 4,520 | — | — | 4,520 | ||||||||||||||
| Total management and advisory services revenues | 236,164 | 29,057 | — | 265,221 | ||||||||||||||
| Reimbursable compensation and benefits | 59,925 | — | 38,590 | (A) | 98,515 | |||||||||||||
| Reimbursable equity based compensation | 9,826 | — | — | 9,826 | ||||||||||||||
| Other reimbursable expenses | 656,401 | — | — | 656,401 | ||||||||||||||
| Total reimbursable costs | 726,152 | — | 38,590 | 764,742 | ||||||||||||||
| Total revenues | 962,316 | 29,057 | 38,590 | 1,029,963 | ||||||||||||||
| Expenses: | ||||||||||||||||||
| Compensation and benefits | 136,355 | 25,970 | 33,972 | (A)(B) | 196,297 | |||||||||||||
| Equity based compensation | 12,488 | — | — | 12,488 | ||||||||||||||
| Separation costs | 2,002 | — | — | 2,002 | ||||||||||||||
| Total compensation and benefits expense | 150,845 | 25,970 | 33,972 | 210,787 | ||||||||||||||
| General and administrative | 36,019 | 30,126 | (2,018 | ) | (B)(C) | 64,127 | ||||||||||||
| Other reimbursable expenses | 656,401 | — | — | 656,401 | ||||||||||||||
| Transaction and acquisition related costs | 4,221 | — | — | 4,221 | ||||||||||||||
| Depreciation and amortization | 1,102 | 652 | 2,712 | (B)(C) | 4,466 | |||||||||||||
| Total expenses | 848,588 | 56,748 | 34,666 | 940,002 | ||||||||||||||
| Operating income | 113,728 | (27,691 | ) | 3,924 | 89,961 | |||||||||||||
| Interest income | 10,574 | 173 | — | 10,747 | ||||||||||||||
| Realized investment and promote income | — | 63,173 | (63,173 | ) | (B) | — | ||||||||||||
| Gain (loss) on equity method investments | 25,237 | (97,392 | ) | 97,392 | (B) | 25,237 | ||||||||||||
| Impairment on assets held for sale | — | (1,074 | ) | 1,074 | (B) | — | ||||||||||||
| Income (loss) before income tax expense | 149,539 | (62,811 | ) | 39,217 | 125,945 | |||||||||||||
| Income tax expense | (21,768 | ) | — | 3,445 | (D) | (18,323 | ) | |||||||||||
| Net income | 127,771 | (62,811 | ) | 42,662 | 107,622 | |||||||||||||
| Net (income) loss attributable to noncontrolling interest in The RMR Group LLC | (70,624 | ) | — | 11,199 | (E) | (59,425 | ) | |||||||||||
| Net (income) loss attributable to noncontrolling interest in consolidated entities | — | 8,600 | (8,562 | ) | (F) | 38 | ||||||||||||
| Net income (loss) attributable to controlling interest | $ | 57,147 | $ | (54,211 | ) | $ | 45,299 | $ | 48,235 | |||||||||
| Weighted average common shares outstanding - basic | 16,426 | 16,426 | ||||||||||||||||
| Weighted average common shares outstanding - diluted | 16,426 | 16,426 | ||||||||||||||||
| Net income attributable to The RMR Group Inc. per common share - basic | $ | 3.44 | (G) | $ | 2.90 | |||||||||||||
| Net income attributable to The RMR Group Inc. per common share - diluted | $ | 3.44 | (G) | $ | 2.90 | |||||||||||||
Substantially all revenues are earned from related parties. See accompanying notes.
F-2
The RMR Group Inc.
Unaudited Pro Forma Condensed Consolidated Statements of Income
For the Three Months Ended December 31, 2023
(amounts in thousands, except per share data)
| Historical | ||||||||||||||||||
| RMR Inc. | MPC | Transaction Accounting Adjustments | Pro Forma Consolidated | |||||||||||||||
| Revenues: | ||||||||||||||||||
| Management services | $ | 45,094 | $ | 5,155 | $ | — | $ | 50,249 | ||||||||||
| Incentive fees | 299 | — | — | 299 | ||||||||||||||
| Advisory services | 1,125 | — | — | 1,125 | ||||||||||||||
| Total management and advisory services revenues | 46,518 | 5,155 | — | 51,673 | ||||||||||||||
| Reimbursable compensation and benefits | 16,828 | — | 6,463 | (A) | 23,291 | |||||||||||||
| Reimbursable equity based compensation | 2,327 | — | — | 2,327 | ||||||||||||||
| Other reimbursable expenses | 195,998 | — | — | 195,998 | ||||||||||||||
| Total reimbursable costs | 215,153 | — | 6,463 | 221,616 | ||||||||||||||
| Total revenues | 261,671 | 5,155 | 6,463 | 273,289 | ||||||||||||||
| Expenses: | ||||||||||||||||||
| Compensation and benefits | 34,772 | 5,248 | 6,410 | (A)(B) | 46,430 | |||||||||||||
| Equity based compensation | 2,829 | — | — | 2,829 | ||||||||||||||
| Separation costs | 3,544 | — | — | 3,544 | ||||||||||||||
| Total compensation and benefits expense | 41,145 | 5,248 | 6,410 | 52,803 | ||||||||||||||
| General and administrative | 9,511 | 4,873 | (416 | ) | (B)(C) | 13,968 | ||||||||||||
| Other reimbursable expenses | 195,998 | — | — | 195,998 | ||||||||||||||
| Transaction and acquisition related costs | 3,987 | 5,328 | — | 9,315 | ||||||||||||||
| Depreciation and amortization | 423 | 151 | 572 | (B)(C) | 1,146 | |||||||||||||
| Total expenses | 251,064 | 15,600 | 6,566 | 273,230 | ||||||||||||||
| Operating income | 10,607 | (10,445 | ) | (103 | ) | 59 | ||||||||||||
| Interest income | 3,508 | 44 | — | 3,552 | ||||||||||||||
| Realized investment loss (income) | — | (6 | ) | 6 | (B) | |||||||||||||
| Gain (loss) on equity method investments | 4,049 | (1,074 | ) | 1,074 | (B) | 4,049 | ||||||||||||
| Income (loss) before income tax expense | 18,164 | (11,481 | ) | 977 | 7,660 | |||||||||||||
| Income tax expense | (2,638 | ) | — | 1,522 | (D) | (1,116 | ) | |||||||||||
| Net income | 15,526 | (11,481 | ) | 2,499 | 6,544 | |||||||||||||
| Net (income) loss attributable to noncontrolling interest in The RMR Group LLC | (8,531 | ) | — | 4,985 | (E) | (3,546 | ) | |||||||||||
| Net loss attributable to noncontrolling interest in consolidated entities | 2 | 2 | 7 | (F) | 11 | |||||||||||||
| Net income (loss) attributable to controlling interest | $ | 6,997 | $ | (11,479 | ) | $ | 7,491 | $ | 3,009 | |||||||||
| Weighted average common shares outstanding - basic | 16,508 | 16,508 | ||||||||||||||||
| Weighted average common shares outstanding - diluted | 31,512 | 31,512 | ||||||||||||||||
| Net income attributable to The RMR Group Inc. per common share - basic | $ | 0.42 | (G) | $ | 0.18 | |||||||||||||
| Net income attributable to The RMR Group Inc. per common share - diluted | $ | 0.41 | (G) | $ | 0.18 | |||||||||||||
Substantially all revenues are earned from related parties. See accompanying notes.
F-3
The RMR Group Inc.
Notes to Unaudited Pro Forma Condensed Consolidated Financial Information
(dollars in thousands, except per share data)
Note 1. Basis of Presentation
The unaudited pro forma condensed consolidated financial information is based on the historical financial statements and accounting records of RMR Inc. and MPC and reflects the impact of the Acquisition on our condensed consolidated statements of income as if the Acquisition occurred on October 1, 2022. No balance sheet has been presented within the unaudited pro forma condensed consolidated financial information because the effects of the Acquisition on our financial position were reflected in our condensed consolidated balance sheets in our Quarterly Report.
The fiscal year of RMR Inc. ends on September 30 while the fiscal year of MPC ends on December 31. The unaudited pro forma condensed consolidated statements of income for the fiscal year ended September 30, 2023 combines the consolidated statement of income of RMR Inc. for the same period with the unaudited consolidated statement of operations of MPC for the three months ended December 31, 2022 and the consolidated statement of operations for the nine months ended September 30, 2023. The unaudited pro forma condensed consolidated statements of income for the three months ended December 31, 2023 combines the unaudited condensed consolidated statement of income of RMR Inc. for the same period with the unaudited condensed consolidated statement of operations of MPC for the period from October 1, 2023 to the Acquisition Date.
The Acquisition was accounted for as a business combination under the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 805, Business Combinations. The purchase price allocation is preliminary and is based on estimates of the fair values of the assets acquired and liabilities assumed as of the Acquisition Date, as further described in Note 2. Amounts allocated to assets acquired and liabilities assumed could change significantly from those used in the unaudited pro forma condensed consolidated financial information..
Note 2. Preliminary Purchase Price Allocation
The following table summarizes the estimated consideration transferred as of the Acquisition Date and excludes transaction costs:
| Cash consideration paid by RMR LLC | $ | 84,474 | ||
| Earnout, at fair value | 14,547 | |||
| Total consideration | $ | 99,021 |
The purchase price has been allocated to the assets acquired and liabilities assumed based on estimates of fair values as of the Acquisition Date. We expect to finalize the purchase price allocation as soon as practicable, but no later than one year from the Acquisition Date.
F-4
The RMR Group Inc.
Notes to Unaudited Pro Forma Condensed Consolidated Financial Information
(dollars in thousands, except per share data)
The following table summarizes the fair value amounts recognized for the assets acquired and liabilities assumed and resulting goodwill as of the Acquisition Date:
| Assets acquired: | ||||
| Cash and cash equivalents | $ | 5,703 | ||
| Real estate | 8,460 | |||
| Due from related parties | 6,788 | |||
| Prepaid and other current assets | 1,373 | |||
| Intangible assets: | ||||
| Property management and investment management agreements | 13,694 | |||
| Trade name | 5,047 | |||
| Investor relationships | 1,874 | |||
| Acquired leases | 703 | |||
| Total intangible assets | 21,318 | |||
| Total assets acquired | 43,642 | |||
| Liabilities assumed: | ||||
| Mortgage note payable | 4,726 | |||
| Other liabilities | 9,213 | |||
| Total liabilities | 13,939 | |||
| Net identifiable assets acquired | 29,703 | |||
| Noncontrolling interests in consolidated entity | (444 | ) | ||
| Goodwill | 69,762 | |||
| Total consideration | $ | 99,021 | ||
Note 3. Transaction Accounting Adjustments
Certain reclassifications have been made to MPC’s historical financial statements to conform to RMR Inc.’s presentation. In the unaudited pro forma condensed consolidated financial information, MPC's total fee income has been recorded to management services revenue; general and administrative, pursuit costs, net of reimbursements, other operating expenses, self-funded medical insurance and rental property income, net of expenses has been recorded to general and administrative expenses.
(A) We determined we control the services provided by our employees to our clients pursuant to our property management agreements and therefore account for the cost of these services and the related reimbursement revenue on a gross basis. Because MPC has historically accounted for these costs and related reimbursements on a net basis, this adjustment reflects the additional compensation and benefits costs and related reimbursements during the period to conform MPC's accounting policy to ours.
(B) Revenues and expenses related to the Excluded Assets and Liabilities were removed, including:
| · | compensation and benefits expenses related to profit sharing of promote income of $4,618 for the fiscal year ended September 30, 2023 and $53 for the three months ended December 31, 2023; |
| · | general and administrative expenses related to certain assets leased or owned by MPC and excluded from the Acquisition of $2,143 for the fiscal year ended September 30, 2023 and $443 for the three months ended December 31, 2023; |
| · | depreciation and amortization related to certain assets owned by MPC and excluded from the Acquisition of $652 for the fiscal year ended September 30, 2023 and $151 for the three months ended December 31, 2023; |
| · | realized investment and promote income (loss) and unrealized losses on legacy investment funds managed by MPC for the fiscal year ended September 30, 2023 and the three months ended December 31, 2023; and |
| · | impairment on excluded assets classified as held for sale during the fiscal year ended September 30, 2023. |
F-5
The RMR Group Inc.
Notes to Unaudited Pro Forma Condensed Consolidated Financial Information
(dollars in thousands, except per share data)
(C) The following table summarizes information related to certain assets acquired and liabilities assumed with fair value adjustments and the useful lives used to determine the related depreciation and amortization expense using the straight line method for each period presented in the pro forma condensed consolidated financial information:
| Identified Asset | Fair Value | Useful
Life (in years) | Adjustment Line Item | |||||||
| Building and improvements | $ | 7,060 | 25.0 | Depreciation and amortization | ||||||
| Property management and investment management contracts | $ | 13,694 | 5.6 | Depreciation and amortization | ||||||
| Investor relationships | $ | 1,874 | 5.0 | Depreciation and amortization | ||||||
| Acquired leases | $ | 703 | 2.9 | Depreciation and amortization | ||||||
| Trade name | $ | 5,047 | Indefinite | n/a | ||||||
| Discount on mortgage note payable | $ | 703 | 5.7 | General and administrative | ||||||
(D) RMR Inc. is a corporation subject to U.S. federal and state income tax. RMR LLC and MPC are treated as partnerships for U.S. federal and most state and local income tax purposes and are generally not subject to U.S. federal and most state income taxes. Any taxable income or loss generated by RMR LLC and, following the Acquisition, by MPC 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. As a result, the pro forma income tax expense is reflected at an effective tax rate of 14.6% for the fiscal year ended September 30, 2023 and 14.5% for the three months ended December 31, 2023.
(E) As of both September 30, 2023 and December 31, 2023, RMR Inc. owned 52.7% of the economic interest of RMR LLC, and a wholly owned subsidiary of ABP Trust, a Maryland statutory trust, owned 47.3% of the economic interest of RMR LLC, which is presented as noncontrolling interest in The RMR Group LLC in the pro forma condensed consolidated financial information. The adjustment represents the pro forma impact of the Acquisition on the noncontrolling interest in The RMR Group LLC.
(F) The noncontrolling interests in the Excluded Assets and Liabilities have been removed from the pro forma financial information. The remaining noncontrolling interest in consolidated entities represents the 10% noncontrolling interest in a real estate property we acquired, the results of which are not material to the pro forma condensed consolidated financial information and are included in general and administrative expenses.
(G) We calculate basic earnings per share, or EPS, using the two-class method. Unvested Class A common stock of RMR Inc., or our 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 stock of RMR Inc., or our 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 stock of RMR Inc., or Class B-2 Common Shares, which are paired with ABP Trust’s Class A membership units of RMR LLC, or 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 EPS 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.
F-6
The RMR Group Inc.
Notes to Unaudited Pro Forma Condensed Consolidated Financial Information
(dollars in thousands, except per share data)
The calculation of basic and diluted pro forma EPS for the fiscal year ended September 30, 2023 and for the three months ended December 31, 2023 is as follows (amounts in thousands, except per share amounts):
| Fiscal
Year Ended September 30, 2023 | Three Months Ended December 31, 2023 | |||||||
| Numerators: | ||||||||
| Net income attributable to The RMR Group Inc. | $ | 48,235 | $ | 3,009 | ||||
| Less: income attributable to unvested participating securities | (550 | ) | (81 | ) | ||||
| Net income attributable to The RMR Group Inc. used in calculating pro forma basic EPS | 47,685 | 2,928 | ||||||
| Effect of dilutive securities: | ||||||||
| Add back: income attributable to unvested participating securities | — | 81 | ||||||
| Add back: net income attributable to noncontrolling interest in The RMR Group LLC | — | 3,546 | ||||||
| Add back: income tax expense | — | 1,116 | ||||||
| Less: income tax expense assuming redemption of noncontrolling interest’s Class A Units for Class A Common Shares | — | (2,110 | ) | |||||
| Net income used in calculating pro forma diluted EPS | $ | 47,685 | $ | 5,561 | ||||
| Denominators: | ||||||||
| Common shares outstanding | 16,712 | 16,711 | ||||||
| Less: unvested participating securities and incremental impact of weighted average | (286 | ) | (203 | ) | ||||
| Weighted average common shares outstanding - basic | 16,426 | 16,508 | ||||||
| Effect of dilutive securities: | ||||||||
| Add: assumed redemption of noncontrolling interest’s Class A Units for Class A Common Shares | — | 15,000 | ||||||
| Add: incremental unvested shares | — | 4 | ||||||
| Weighted average common shares outstanding - diluted | 16,426 | 31,512 | ||||||
| Net income attributable to The RMR Group Inc. per common share - basic | $ | 2.90 | $ | 0.18 | ||||
| Net income attributable to The RMR Group Inc. per common share - diluted | $ | 2.90 | $ | 0.18 | ||||
Note 4. Management's Adjustments
Management expects that certain cost savings will be realized as compared to the historical adjusted combined costs of RMR Inc. and MPC operating independently. Management’s adjustments are based on actual historical costs incurred by MPC and result from the elimination of certain compensation and benefits, legal expenses and other professional fees related to former executives of MPC that are not expected to be incurred after completion of the Acquisition. Such cost savings are expected to be realized immediately after the completion of the Acquisition and are not indicative of all synergies or dis-synergies that may be realized.
Material limitations of these adjustments include, but are not limited to, not fully realizing the currently anticipated cost saving, taking longer than currently expected to realize anticipated cost savings or other adverse effects that are not currently foreseen. Further, there may be additional expenses incurred in achieving these cost savings above what has been estimated below. Future results may vary significantly from the unaudited condensed consolidated pro forma financial information presented because of various factors, including those discussed in the section captioned “Risk Factors” in our Annual Report.
F-7
The RMR Group Inc.
Notes to Unaudited Pro Forma Condensed Consolidated Financial Information
(dollars in thousands, except per share data)
Had the Acquisition been completed as of October 1, 2022, and after giving effect to management's adjustments described above, management estimates that for the fiscal year ending September 30, 2023 and the three months ended December 31, 2023, additional costs savings would have been realized as follows:
| Pro Forma | Management Adjustments | As Adjusted | ||||||||||
| For the Fiscal Year Ended September 30, 2023 | ||||||||||||
| Compensation and benefits expense | $ | 196,297 | $ | (1,601 | ) | $ | 194,696 | |||||
| General and administrative expense | $ | 64,127 | $ | (18,144 | ) | $ | 45,983 | |||||
| Income before income tax expense | $ | 125,945 | $ | 19,745 | $ | 145,690 | ||||||
| Net income attributable to RMR Inc. | $ | 48,235 | $ | 7,483 | $ | 55,718 | ||||||
| Net income per common share - basic and diluted | $ | 2.90 | $ | 0.45 | $ | 3.35 | ||||||
| For the Three Months Ended December 31, 2023 | ||||||||||||
| Compensation and benefits expense | $ | 46,430 | $ | (243 | ) | $ | 46,187 | |||||
| General and administrative expense | $ | 13,968 | $ | (2,419 | ) | $ | 11,549 | |||||
| Income before income tax expense | $ | 7,660 | $ | 2,662 | $ | 10,322 | ||||||
| Net income attributable to RMR Inc. | $ | 3,009 | $ | 1,012 | $ | 4,021 | ||||||
| Net income per common share - basic and diluted | $ | 0.18 | $ | 0.06 | $ | 0.24 | ||||||
F-8