SEC Company Response from RMR GROUP INC. (RMR) (CIK 0001644378) (RMR) — Oct 14, 2015
RMR GROUP INC. (RMR) (CIK 0001644378)
Date: Oct. 14, 2015 · CIK: 0001644378 · Accession: 0001104659-15-070661
AI Filing Summary & Sentiment
Referenced dates: October 6, 2015
Letter
VIA EDGAR AND OVERNIGHT COURIER United States Securities and Exchange Commission Division of Corporation Finance Attention: Tom Kluck, Legal Branch Chief, Office of Real Estate and Commodities Re: The RMR Group Inc. Amendment No. 1 Draft Registration Statement on Form S-1 Submitted September 11, 2015 CIK No. 0001644378
Dear Mr. Kluck:
On behalf of The RMR Group Inc. (the “Company”), we are responding to comments of the staff (the “Staff”) of the United States Securities and Exchange Commission (the “Commission”) in your letter dated October 6, 2015 in connection with the above captioned draft registration statement (the “Draft Registration Statement”). In connection with these responses, on behalf of the Company, we are filing via EDGAR a complete copy of the Registration Statement on Form S-1 (as so amended, the “Registration Statement”). For the convenience of the Staff, we also sent to you a paper copy of this letter and clean and marked copies of the Registration Statement.
Your numbered comments with respect to the Draft Registration Statement are reproduced below in italicized text. The Company’s responses thereto are set forth
United States Securities and Exchange Commission
October 14, 2015
Page 2
immediately following the reproduced comment to which they relate. All references to page numbers in the Company’s responses are to the page numbers in the prospectus included as part of the Registration Statement. Capitalized terms used herein without definition have the meanings given in such prospectus.
In addition, the Company advises the Staff that the Registration Statement contains a new Company logo set forth on the front and back cover pages of the prospectus.
Organizational Structure, page 29
1. In the tables, please disclose the ownership of RMR Trust.
Response: In response to the Staff’s comment, the Company has revised the tables on pages 29 and 30 of the prospectus.
The Up-C Transaction, page 31
2. Please describe in greater detail how the consideration for the contributing assets was determined. If applicable, please discuss in an appropriate section any related conflicts of interest.
Response: In response to the Staff’s comment, the Company has revised the disclosure on page 31 of the prospectus.
3. In disclosing the contributing assets listed on pages 31-32, please revise to clarify more clearly the consideration received in return for such contributing assets.
Response: In response to the Staff’s comment, the Company has revised the disclosure on page 32 of the prospectus.
Reasons for the Up-C Transaction and this Distribution, page 34
4. Please expand upon your disclosure in this section regarding how you plan to use “securities with evident value to expand and to motivate [your] employees.”
Response: In response to the Staff’s comment, the Company has revised the disclosure on page 34 of the prospectus.
Dividend Policy, page 43
5. We note your response to comment 12. We further note on page 48 that management fees earned have decreased approximately 23% in the nine months ended June 30, 2015 as compared to the nine months ended June 30, 2014. As
United States Securities and Exchange Commission
October 14, 2015
Page 3
previously requested, please tell us why you believe that your historical statements of operations and cash flow data and your unaudited pro forma statements of operations provide investors a reasonable basis to evaluate your ability to cover the estimated dividend.
Response: The Company advises the Staff that the approximate 23% decrease in management fees earned in the nine months ended June 30, 2015, as compared to the nine months ended June 30, 2014, is due primarily to the termination of the EQC management agreements on September 30, 2014. The Company notes that each of SIR and SNH completed significant transactions during the nine months ended June 30, 2015 which materially increased their assets under management and market capitalizations and resulted in material increases in management fees earned from these companies. On January 29, 2015, SIR completed the acquisition of Cole Corporate Income Trust (“CCIT”) and paid consideration of approximately $1.245 billion in cash and 28,400,000 SIR common shares to former holders of CCIT common stock. Concurrently with the closing of this acquisition, SIR sold entities that it acquired in the CCIT transaction which own 23 healthcare properties to SNH for approximately $509.0 million in cash, plus the assumption by SNH of approximately $30.0 million of mortgage debt principal. On May 1, 2015, SNH completed the acquisition of 37 senior living communities for an aggregate purchase price of approximately $762.6 million, excluding additional consideration of $1.4 million related to allocated debt issuance costs. The Company advises that these transactions have resulted in material increases in management fees earned from these companies, which offset a significant portion of the decrease in management fees resulting from the termination of the EQC management agreements.
In accordance with Article 11 of Regulation S-X, the Company’s pro forma net income for the nine months ended June 30, 2015 does not adjust the Company’s historical financial statements to give effect to increased fees receivable as a result of any acquisition by a Managed REIT that closed after September 30, 2014 (including the acquisitions by SIR and SNH referenced above) for the full period presented, because those acquisitions are not directly attributable to the Up-C Transaction.
As demonstrated in the below table, the Company’s pro forma net income for the nine months ended June 30, 2015 (shown on pages 46 and 47 of the prospectus), which reflects the termination of the EQC management agreements on September 30, 2014,(1) but does not fully reflect the increase in the assets under management and market capitalizations of SIR and SNH for the full nine-month period, covers the Company’s estimated dividend for that period 1.46 times.
(1) Transition services fees of $6.1 million received from EQC are recognized as management services fees in the nine month period ended June 30, 2015, as compared to management fees of $50.0 million received from EQC during the nine month period ended June 30, 2014.
United States Securities and Exchange Commission
October 14, 2015
Page 4
Nine Months Ended
June 30, 2015
(in thousands)
Pro forma net income attributable to RMR Inc.
$
17,477
Pro forma dividends
$
12,000
Pro forma dividend coverage
1.46
On a pro forma EBITDA basis (the Company has no interest bearing debt), the dividend coverage is even stronger.
In these circumstances, the Company respectfully submits that the disclosure in the registration statement, including its historical statements of operations and cash flow data and unaudited pro forma statements of operations, provides investors a reasonable basis to evaluate the Company’s ability to cover the estimated dividend. Moreover, as part of the Up-C Transaction, the Company’s management agreements with the Managed REITs were amended and extended for 20 year terms, which the Company submits has increased the stability of its management services revenues.
Condensed Consolidated Balance Sheets, page F-29
6. We note from your disclosure on page 38 that RMR LLC has agreed to pay RMR Trust all fees paid to RMR LLC for business management, property management or advisory services in calendar year 2015 prior to the effective time of the Up-C Transaction, including the pro rata portion of any incentive management fee received pursuant to any business management agreement with a Managed REIT. We further note that you recorded a $224 million cash distribution to Member on your consolidated statement of changes in equity and statement of cash flows. Please confirm whether the Member distribution includes amounts due to RMR Trust under the agreement disclosed on page 38.
Response: The Company confirms that the net cash distributions to Member of $224 million reported in our Condensed Consolidated Statement of Changes in Equity includes fees paid to RMR LLC for business management, property management and advisory services provided prior to the effective date of the Up-C transaction, which were due to RMR Trust under the agreement disclosed under “Allocation of management and advisory fees” on page 38 of the prospectus.
The Company advises the Staff that annual incentive management fees in respect of calendar 2015, if any, will be determined based on a two calendar year measurement period ending December 31, 2015. As such, no incentive management fees have been paid to RMR LLC in respect of calendar 2015, nor
United States Securities and Exchange Commission
October 14, 2015
Page 5
were any recognized in the June 30, 2015 Condensed Consolidated Statement of Comprehensive Income due to the contingent, performance based nature of the fees. If incentive management fees are earned in respect of calendar 2015, the RMR LLC Operating Agreement provides for the payment to RMR Trust of a pro rata portion of any incentive management fees earned while RMR Trust was the sole Member of RMR LLC, which is disclosed under “Allocation of management and advisory fees” on page 38 of the prospectus.
7. We note your response to comment 21. As previously requested, please explain to us your basis for recording an asset related to the revised management agreements on the consolidated balance sheet of RMR Inc. given that the cash and shares received from the Managed REITs were delivered to RMR Trust in exchange for a portion of their interest in RMR LLC, the underlying management business. In addition, tell us whether the amendments to the management agreements were a condition to the consummation of the Up-C transaction.
Response: The Company advises that the Up-C Transaction was one transaction comprised of several actions that closed simultaneously and were conditions of each other. The actions that occurred at the closing of the Up-C Transaction on June 5, 2015 included the following:
· The Managed REITs delivered their common shares and cash valued at $167 million to RMR Inc.
· Each Managed REIT entered into amendments to its management agreements with RMR LLC extending those agreements to 20 year terms. (2)
· RMR Inc. delivered the common shares of the Managed REITs and cash valued at $167 million to RMR Trust.
· RMR Trust delivered 15,000,000 Class A membership units of RMR LLC to RMR Inc.
· RMR Inc. delivered 15,000,000 Class B-2 Common Shares of RMR Inc. to RMR Trust.
· RMR Inc. delivered 15,000,000 Class A Common Shares to the Managed REITs.
The Company submits that the amendments to the management agreements between each Managed REIT and RMR LLC represented a significant change from the one year term of the then existing management agreements that provided RMR LLC and its parent, RMR Inc., with more secure cash flows from the Managed REITs. The Company advises that these secure cash flows were a necessary condition for RMR Inc. to extend to the Managed REITs the economic benefits of a 48.4% economic interest in RMR LLC through the Up-C Transaction and also further strengthened and aligned the interests between RMR Inc. and the Managed REIT. The amendments to the management agreements were an express condition to the consummation of the Up-C Transaction, as set forth in Section 6.1(c) of the Transaction Agreement with each Managed REIT. This condition of the Up-C Transaction closing is also referenced in the recitals to the
(2) RMR Trust is not a party to the amendments to the management agreements or to the management agreements.
United States Securities and Exchange Commission
October 14, 2015
Page 6
Transaction Agreements which expressly state that the amendment and restatement of the REIT’s business management and property management agreement with RMR LLC is a condition of and a material inducement to the Up-C Transaction. The Company directs the Staff’s attention to the Transaction Agreements filed as Exhibits 10.2 to 10.5 to the Registration Statement, respectively.
RMR Inc. recorded an asset related to the amendments to the management agreements on its consolidated balance sheet due to the following facts:
· RMR Inc. owns a 51.6% economic interest in RMR LLC and RMR LLC is a majority owned consolidated subsidiary of RMR Inc.
· Each amended management agreement is between a Managed REIT and RMR LLC, and RMR LLC is entitled to rights and subject to obligations under each such agreement. RMR LLC has recorded the asset as RMR LLC will recognize the management services revenues under the amended management agreements (against which the corresponding inducement asset will be amortized).
· As the parent of RMR LLC, RMR Inc.’s financial statements will reflect the benefit of the amended management agreements over their 20 year terms.
8. The comment above notwithstanding, please explain to us in detail why you believe the payment of cash and shares by the Managed REITs in exchange for your shares and entry into a new management agreement includes a revenue component. Please also explain to us in detail why you believe the discount on your shares transferred to the Managed REITs qualifies as a customer incentive as contemplated in ASC 605-50.
Response: The Up-C Transaction included the following deliverables by the Company:
· The commitment by RMR LLC, RMR Inc.’s majority owned consolidated subsidiary, to deliver business management and property management
United States Securities and Exchange Commission
October 14, 2015
Page 7
services to the Managed REITs under amended 20-year management agreements.
· The issuance of Class A Common Shares to the Managed REITs.
The Company respectfully submits that the management agreements are revenue elements, as the management services represent deliverables associated with the Company’s ongoing central operating activity.
The Company considered the scope of the provisions of ASC 605-25 Revenue Recognition — Multiple Element Arrangements, as it relates to the amended management agreements. ASC 605-25-15-2 describes transactions subject to the guidance as:
“All deliverables (that is, products, services, or rights to use assets) within contractually binding arrangements (whether written, oral, or implied, and hereinafter referred to as arrangements) in all industries under which a vendor will perform multiple revenue-generating activities.”
The Company also considered ASC 605-25-25-
Show Raw Text
CORRESP 1 filename1.htm SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP 500 BOYLSTON STREET BOSTON, MASSACHUSETTS 02116-3740 TEL: (617) 573-4800 FAX: (617) 573-4822 www.skadden.com October 14, 2015 FIRM/AFFILIATE OFFICES CHICAGO HOUSTON LOS ANGELES NEW YORK PALO ALTO WASHINGTON, D.C. WILMINGTON DIRECT DIAL (617) 573-4859 BEIJING DIRECT FAX BRUSSELS (617) 305-4859 FRANKFURT EMAIL ADDRESS HONG KONG margaret.cohen@skadden.com LONDON MOSCOW MUNICH PARIS SÃO PAULO SEOUL SHANGHAI SINGAPORE SYDNEY TOKYO TORONTO VIA EDGAR AND OVERNIGHT COURIER United States Securities and Exchange Commission Division of Corporation Finance 100 F Street, N.E. Washington, D.C. 20549 Attention: Tom Kluck, Legal Branch Chief, Office of Real Estate and Commodities Re: The RMR Group Inc. Amendment No. 1 Draft Registration Statement on Form S-1 Submitted September 11, 2015 CIK No. 0001644378 Dear Mr. Kluck: On behalf of The RMR Group Inc. (the “Company”), we are responding to comments of the staff (the “Staff”) of the United States Securities and Exchange Commission (the “Commission”) in your letter dated October 6, 2015 in connection with the above captioned draft registration statement (the “Draft Registration Statement”). In connection with these responses, on behalf of the Company, we are filing via EDGAR a complete copy of the Registration Statement on Form S-1 (as so amended, the “Registration Statement”). For the convenience of the Staff, we also sent to you a paper copy of this letter and clean and marked copies of the Registration Statement. Your numbered comments with respect to the Draft Registration Statement are reproduced below in italicized text. The Company’s responses thereto are set forth United States Securities and Exchange Commission October 14, 2015 Page 2 immediately following the reproduced comment to which they relate. All references to page numbers in the Company’s responses are to the page numbers in the prospectus included as part of the Registration Statement. Capitalized terms used herein without definition have the meanings given in such prospectus. In addition, the Company advises the Staff that the Registration Statement contains a new Company logo set forth on the front and back cover pages of the prospectus. Organizational Structure, page 29 1. In the tables, please disclose the ownership of RMR Trust. Response: In response to the Staff’s comment, the Company has revised the tables on pages 29 and 30 of the prospectus. The Up-C Transaction, page 31 2. Please describe in greater detail how the consideration for the contributing assets was determined. If applicable, please discuss in an appropriate section any related conflicts of interest. Response: In response to the Staff’s comment, the Company has revised the disclosure on page 31 of the prospectus. 3. In disclosing the contributing assets listed on pages 31-32, please revise to clarify more clearly the consideration received in return for such contributing assets. Response: In response to the Staff’s comment, the Company has revised the disclosure on page 32 of the prospectus. Reasons for the Up-C Transaction and this Distribution, page 34 4. Please expand upon your disclosure in this section regarding how you plan to use “securities with evident value to expand and to motivate [your] employees.” Response: In response to the Staff’s comment, the Company has revised the disclosure on page 34 of the prospectus. Dividend Policy, page 43 5. We note your response to comment 12. We further note on page 48 that management fees earned have decreased approximately 23% in the nine months ended June 30, 2015 as compared to the nine months ended June 30, 2014. As United States Securities and Exchange Commission October 14, 2015 Page 3 previously requested, please tell us why you believe that your historical statements of operations and cash flow data and your unaudited pro forma statements of operations provide investors a reasonable basis to evaluate your ability to cover the estimated dividend. Response: The Company advises the Staff that the approximate 23% decrease in management fees earned in the nine months ended June 30, 2015, as compared to the nine months ended June 30, 2014, is due primarily to the termination of the EQC management agreements on September 30, 2014. The Company notes that each of SIR and SNH completed significant transactions during the nine months ended June 30, 2015 which materially increased their assets under management and market capitalizations and resulted in material increases in management fees earned from these companies. On January 29, 2015, SIR completed the acquisition of Cole Corporate Income Trust (“CCIT”) and paid consideration of approximately $1.245 billion in cash and 28,400,000 SIR common shares to former holders of CCIT common stock. Concurrently with the closing of this acquisition, SIR sold entities that it acquired in the CCIT transaction which own 23 healthcare properties to SNH for approximately $509.0 million in cash, plus the assumption by SNH of approximately $30.0 million of mortgage debt principal. On May 1, 2015, SNH completed the acquisition of 37 senior living communities for an aggregate purchase price of approximately $762.6 million, excluding additional consideration of $1.4 million related to allocated debt issuance costs. The Company advises that these transactions have resulted in material increases in management fees earned from these companies, which offset a significant portion of the decrease in management fees resulting from the termination of the EQC management agreements. In accordance with Article 11 of Regulation S-X, the Company’s pro forma net income for the nine months ended June 30, 2015 does not adjust the Company’s historical financial statements to give effect to increased fees receivable as a result of any acquisition by a Managed REIT that closed after September 30, 2014 (including the acquisitions by SIR and SNH referenced above) for the full period presented, because those acquisitions are not directly attributable to the Up-C Transaction. As demonstrated in the below table, the Company’s pro forma net income for the nine months ended June 30, 2015 (shown on pages 46 and 47 of the prospectus), which reflects the termination of the EQC management agreements on September 30, 2014,(1) but does not fully reflect the increase in the assets under management and market capitalizations of SIR and SNH for the full nine-month period, covers the Company’s estimated dividend for that period 1.46 times. (1) Transition services fees of $6.1 million received from EQC are recognized as management services fees in the nine month period ended June 30, 2015, as compared to management fees of $50.0 million received from EQC during the nine month period ended June 30, 2014. United States Securities and Exchange Commission October 14, 2015 Page 4 Nine Months Ended June 30, 2015 (in thousands) Pro forma net income attributable to RMR Inc. $ 17,477 Pro forma dividends $ 12,000 Pro forma dividend coverage 1.46 On a pro forma EBITDA basis (the Company has no interest bearing debt), the dividend coverage is even stronger. In these circumstances, the Company respectfully submits that the disclosure in the registration statement, including its historical statements of operations and cash flow data and unaudited pro forma statements of operations, provides investors a reasonable basis to evaluate the Company’s ability to cover the estimated dividend. Moreover, as part of the Up-C Transaction, the Company’s management agreements with the Managed REITs were amended and extended for 20 year terms, which the Company submits has increased the stability of its management services revenues. Condensed Consolidated Balance Sheets, page F-29 6. We note from your disclosure on page 38 that RMR LLC has agreed to pay RMR Trust all fees paid to RMR LLC for business management, property management or advisory services in calendar year 2015 prior to the effective time of the Up-C Transaction, including the pro rata portion of any incentive management fee received pursuant to any business management agreement with a Managed REIT. We further note that you recorded a $224 million cash distribution to Member on your consolidated statement of changes in equity and statement of cash flows. Please confirm whether the Member distribution includes amounts due to RMR Trust under the agreement disclosed on page 38. Response: The Company confirms that the net cash distributions to Member of $224 million reported in our Condensed Consolidated Statement of Changes in Equity includes fees paid to RMR LLC for business management, property management and advisory services provided prior to the effective date of the Up-C transaction, which were due to RMR Trust under the agreement disclosed under “Allocation of management and advisory fees” on page 38 of the prospectus. The Company advises the Staff that annual incentive management fees in respect of calendar 2015, if any, will be determined based on a two calendar year measurement period ending December 31, 2015. As such, no incentive management fees have been paid to RMR LLC in respect of calendar 2015, nor United States Securities and Exchange Commission October 14, 2015 Page 5 were any recognized in the June 30, 2015 Condensed Consolidated Statement of Comprehensive Income due to the contingent, performance based nature of the fees. If incentive management fees are earned in respect of calendar 2015, the RMR LLC Operating Agreement provides for the payment to RMR Trust of a pro rata portion of any incentive management fees earned while RMR Trust was the sole Member of RMR LLC, which is disclosed under “Allocation of management and advisory fees” on page 38 of the prospectus. 7. We note your response to comment 21. As previously requested, please explain to us your basis for recording an asset related to the revised management agreements on the consolidated balance sheet of RMR Inc. given that the cash and shares received from the Managed REITs were delivered to RMR Trust in exchange for a portion of their interest in RMR LLC, the underlying management business. In addition, tell us whether the amendments to the management agreements were a condition to the consummation of the Up-C transaction. Response: The Company advises that the Up-C Transaction was one transaction comprised of several actions that closed simultaneously and were conditions of each other. The actions that occurred at the closing of the Up-C Transaction on June 5, 2015 included the following: · The Managed REITs delivered their common shares and cash valued at $167 million to RMR Inc. · Each Managed REIT entered into amendments to its management agreements with RMR LLC extending those agreements to 20 year terms. (2) · RMR Inc. delivered the common shares of the Managed REITs and cash valued at $167 million to RMR Trust. · RMR Trust delivered 15,000,000 Class A membership units of RMR LLC to RMR Inc. · RMR Inc. delivered 15,000,000 Class B-2 Common Shares of RMR Inc. to RMR Trust. · RMR Inc. delivered 15,000,000 Class A Common Shares to the Managed REITs. The Company submits that the amendments to the management agreements between each Managed REIT and RMR LLC represented a significant change from the one year term of the then existing management agreements that provided RMR LLC and its parent, RMR Inc., with more secure cash flows from the Managed REITs. The Company advises that these secure cash flows were a necessary condition for RMR Inc. to extend to the Managed REITs the economic benefits of a 48.4% economic interest in RMR LLC through the Up-C Transaction and also further strengthened and aligned the interests between RMR Inc. and the Managed REIT. The amendments to the management agreements were an express condition to the consummation of the Up-C Transaction, as set forth in Section 6.1(c) of the Transaction Agreement with each Managed REIT. This condition of the Up-C Transaction closing is also referenced in the recitals to the (2) RMR Trust is not a party to the amendments to the management agreements or to the management agreements. United States Securities and Exchange Commission October 14, 2015 Page 6 Transaction Agreements which expressly state that the amendment and restatement of the REIT’s business management and property management agreement with RMR LLC is a condition of and a material inducement to the Up-C Transaction. The Company directs the Staff’s attention to the Transaction Agreements filed as Exhibits 10.2 to 10.5 to the Registration Statement, respectively. RMR Inc. recorded an asset related to the amendments to the management agreements on its consolidated balance sheet due to the following facts: · RMR Inc. owns a 51.6% economic interest in RMR LLC and RMR LLC is a majority owned consolidated subsidiary of RMR Inc. · Each amended management agreement is between a Managed REIT and RMR LLC, and RMR LLC is entitled to rights and subject to obligations under each such agreement. RMR LLC has recorded the asset as RMR LLC will recognize the management services revenues under the amended management agreements (against which the corresponding inducement asset will be amortized). · As the parent of RMR LLC, RMR Inc.’s financial statements will reflect the benefit of the amended management agreements over their 20 year terms. 8. The comment above notwithstanding, please explain to us in detail why you believe the payment of cash and shares by the Managed REITs in exchange for your shares and entry into a new management agreement includes a revenue component. Please also explain to us in detail why you believe the discount on your shares transferred to the Managed REITs qualifies as a customer incentive as contemplated in ASC 605-50. Response: The Up-C Transaction included the following deliverables by the Company: · The commitment by RMR LLC, RMR Inc.’s majority owned consolidated subsidiary, to deliver business management and property management United States Securities and Exchange Commission October 14, 2015 Page 7 services to the Managed REITs under amended 20-year management agreements. · The issuance of Class A Common Shares to the Managed REITs. The Company respectfully submits that the management agreements are revenue elements, as the management services represent deliverables associated with the Company’s ongoing central operating activity. The Company considered the scope of the provisions of ASC 605-25 Revenue Recognition — Multiple Element Arrangements, as it relates to the amended management agreements. ASC 605-25-15-2 describes transactions subject to the guidance as: “All deliverables (that is, products, services, or rights to use assets) within contractually binding arrangements (whether written, oral, or implied, and hereinafter referred to as arrangements) in all industries under which a vendor will perform multiple revenue-generating activities.” The Company also considered ASC 605-25-25-