RE/MAX Holdings, Inc. (NYSE:RMAX) Q3 2023 Earnings Call Transcript

RE/MAX Holdings, Inc. (NYSE:RMAX) Q3 2023 Earnings Call Transcript November 3, 2023

Operator: Good morning, and welcome to the RE/MAX Holdings’ Third Quarter 2023 Earnings Conference Call and Webcast. My name is Krista, and I will be facilitating the audio portion of today’s call. At this time, I would like to turn the call over to Andy Schulz, Senior Vice President of Investor Relations. Mr. Schulz, you may begin.

Andy Schulz: Thank you, operator. Good morning, everyone, and welcome to RE/MAX Holdings’ third quarter 2023 earnings conference call. Please visit the investor relations section of www.remaxholdings.com for all earnings related materials and to access the live webcast and the replay of the call today. If you’re participating through the webcast, please note that you will need to advance the slide as we move through the presentation. Turning to slide two, our prepared remarks and answers to your questions on today’s call may contain forward-looking statements. Forward-looking statements include those related to agent count, franchise sales, and open offices, financial measures and outlook, brand expansion, competition, technology, housing, and mortgage market conditions, capital allocation, credit facility, dividends, share repurchases, litigation settlement, strategic and operational plans, and business models.

Forward-looking statements represent management’s current estimates. RE/MAX Holdings assumes no obligations to update any forward-looking statements in the future. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ materially from those projected in forward-looking statements. These are discussed in our third quarter 2023 financial results press release and other SEC filings. Also, we will refer to certain non-GAAP measures on today’s call. Please see the definitions and reconciliations of non-GAAP measures contained in our most recent quarterly financial results press release, which is also available on our website. Joining me on our call today are Steve Joyce, our Chief Executive Officer; Karri Callahan, our Chief Financial Officer; and the Presidents and CEOs of our brands, Nick Bailey and Ward Morrison.

With that, I’d like to turn the call over to RE/MAX Holdings’ CEO, Steve Joyce. Steve?

Stephen Joyce: Thank you, Andy, and thanks to everyone for joining our call today. Looking at slide three, our financial and operational performance was once again in-line with our expectations highlighting the resilience and stability of our attractive 100% franchise model. Majority of our global scale business is driven by recurring revenue providing fairly dependable revenue streams. Together with low fixed costs, we tend to generate strong margins and healthy cash flows, even when the housing and mortgage market conditions are like they are today. Although we cannot control the macro environment that impacts our business, we made continued progress on our core strategic initiatives, which include aggressively pursuing agent growth opportunities in the U.S., increasing our Canadian and global agent counts, and growing our mortgage business.

Ultimately, we believe we will successfully navigate these challenging times and grow significantly when industry conditions improve, a pattern we’ve seen repeatedly for 50 years. Our brands and networks are unmatched in many ways, and we believe our future is very bright. Even today, we see positive trends worth noting, like the momentum we have at both RE/MAX franchise sales and our conversions, acquisitions, and mergers initiative, as well as continued growth in our mortgage business. Some of our notable quarterly financial highlights include RE/MAX Holdings’ total revenue was $81.2 million. We generated adjusted EBITDA of $26.7 million and adjusted EBITDA margin was 32.9%, and adjusted diluted EPS was $0.40. During the third quarter, we made two difficult but necessary moves in the current environment.

First, as previously announced in mid-August, we streamlined our operations and reduced our overall workforce by 7%. Second, during September, RE/MAX LLC agreed to settle costly litigation and protect the company and RE/MAX network from multiple industry-class action lawsuits. While it came at a significant financial cost, we believe it was absolutely the best decision for all of our stakeholders, affiliates, employees, shareholders, and debt holders alike. Nick, will elaborate further in a few moments. Subsequent to quarter-end, the Board of Directors decided to suspend our quarterly dividend. In light of the recent litigation settlement, which includes a $55 million payment and challenging housing and mortgage market conditions, the company believes this action to preserve its capital is prudent.

Regarding our CEO search, I am pleased to report that we are nearing a conclusion and expect to announce our new leader within the next couple of weeks. With that, I’ll turn it over to, Nick.

Nick Bailey: Thanks, Steve. Moving to slide four, during the third quarter, we remain focused on advancing our growth initiatives designed to increase our U.S. agent count, while current market conditions are somewhat overshadowing the desired outcomes, we continue to experience encouraging results in both our teams and conversions mergers and acquisitions programs. For example, our teams pilot has added 25 new teams of six-or-more agents since it was launched in five states a year ago. In addition, RE/MAX teams in those pilot states have added over 700 new agents during this time. Similarly, our conversions, mergers, and acquisitions, or CMA efforts continue to yield some great results. In fiscal 2022, we completed nearly 30 CMA transactions, which added over 260 agents to RE/MAX.

Through the first nine months of 2023, we’ve completed 36 CMA transactions and added more than 500 agents and the momentum continues to grow. These are productive offices and agents we are adding and in fact, office conversions, expansions and acquisitions completed in the past two months alone had upwards of $630 million in combined sales volume last year and included a notable conversion of unaffiliated brokerage with a 165 agents. It is terrific to see, we’re capitalizing on some bigger opportunities just as we had intended, and we have several more that have not been announced as well as a robust growing pipeline. In addition, we are pleased to announce we just signed a long-term renewal with our largest master franchise or RE/MAX Europe, which includes 49 countries.

This is a significant renewal as it demonstrates the ongoing commitment to growth and expansion from a longstanding proven partner. RE/MAX is also experiencing strong franchise sales year-to-date. For example, our sales in U.S. owned regions are up 35% year-over-year through September 30th. RE/MAX recently secured the top spot for real estate franchises in the Franchise Times Top 400 list. This achievement marks the 15th consecutive year, RE/MAX has been recognized as the top real estate franchise in this comprehensive list. RE/MAX is a top-tier brand, offering real estate entrepreneurs the opportunity to go into business for themselves, but not by themselves. The franchise sales growth throughout the U.S. underscores the value of building a brokerage business by providing a strong brand best-in-class technology and extensive education and experiences to agents and clients.

Speaking of the best technology, we are very proud to announce that we have met and surpassed our internal goals set for the roll out of MAX/Tech powered by kvCORE ahead of schedule. During the third quarter, aggressive company goals regarding office onboarding and monthly active users and other metrics were met or exceeded. A major feature of the system, the new RE/MAX Design Center, recently launched, which enables our affiliates to expand their focus on state-of-the-art marketing efforts relating to all aspects of their business. Our goal for 2024 is to continue to drive the already successful adoption and usage and to continue delivering value throughout the platform including the expansion of additional AI features scheduled for early 2024.

Last just a few additional comments on our recent settlement of multiple industry class-action lawsuits. It’s important to note that the nationwide settlement, which requires court approval, would release RE/MAX LLC, our U.S. independent regions, and U.S. RE/MAX brokers and affiliates from any claims related to these lawsuits. It would also settle on a nationwide basis any similar future claims that could be brought. We continue to deny the allegations made in the complaint and in no way acknowledge any wrongdoing. We also continue to believe in buyer agency cooperative compensation, and the idea that consumers are best served when they are working with real estate professionals. At the same time, we believe that protecting the network from costly mitigation and the risk of further damages makes this settlement the right course of action.

In the settlement, we agreed to certain business practice changes, many of which we already do. However, one change of note is RE/MAX LLC will no longer require our affiliates to join or be members of the National Association of Realtors or follow NAR’s Code of Ethics or the MLS Handbook. You’ll be free to determine whether NAR membership is best for them, their brokerage, and their agents, and we’ll support their choice either way. Apart from payment of the settlement amount, we do not expect the terms of the proposed settlement to have a material impact on results of operations and cash flows. As industry leaders, RE/MAX affiliates understand the value of transparency, clarity, and fully informed buyers and sellers. These are key elements to the foundation of repeat and referral business the basis of top producing agents.

With that, I will turn the call over to, Ward.

Ward Morrison: Thanks, Nick. Turning to slide five. Impressively, our mortgage business continued to grow during the third quarter. Year-over-year, our Motto will open office count increased nearly 15%. Motto just celebrated our seventh anniversary, and we are approaching 250 open offices, a notable milestone, especially for such a relatively young franchise concept. While franchise sales have understandably slowed, they are still occurring reflective of the industry-wide interest in the Motto opportunity. As mentioned last quarter, we just hired an inside sales team with a proven track record of success at another franchisor. Early results are encouraging, especially in this climate. We’ve already had one sale which is this team’s source, and we believe we have many other promising prospects in the pipeline.

The team’s focus remains on real estate brokerages and team leaders as well as entrepreneurial loan originators. Our Motto growth and development team is also focused on helping our franchisees to exceed by supplementing their recruiting efforts. Hiring a good loan originator is often a new franchisee’s toughest initial challenge. We help assist our affiliates recruiting efforts and accelerate their growth in the process. It is a true win-win dynamic. With our recruiting focus, we have helped offices recruit over 10 new [LOs] (ph) in the last couple of months. We continue to experience positive results on the Wemlo front. Wemlo is changing the game for mortgage brokers by combining highly qualified customer centric processing talent with easy to use technology.

Since the company’s acquisition in 2020, Wemlo has helped 100 of brokers across the United States, increase productivity, manage bigger pipelines, and grow their business beyond what they thought they were capable of. Operational success and improvement are key focal point. We see Wemlo improve on many of our most important operating metrics like the time it takes for loans to progress from application to clear to close. Wemlo’s excellence has caught the attention of the industry. Recently, Wemlo was once again named a Service Partner of the Year for processing by the National Association of Mortgage Brokers in its 2023 Recognition Awards program. Wemlo has also been named a 2023 most loved mortgage employer by National Mortgage Professional.

The brand earned a gold ranking in the service providers category based on results from employee satisfaction survey, which focused on key factors, including company culture, benefits, community involvement, diversity inclusion, and more. As a young brand and a growth state, we believe that employee satisfaction and retention is key to providing the best customer experience, and the best way to keep your employees happy and engaged is to invest in their growth. We provide ongoing personalized training for our processors and consistent opportunities for them to share insights in the field, so they can witness firsthand how that feedback directly impacts organizational change and growth. With that, I’d like to turn the call over to, Karri.

Karri Callahan: Thank you, Ward. Good morning, everyone. Moving to slide six, third quarter revenue declined 8.7% to $81.2 million. Excluding the marketing funds, revenue was $60.4 million, a decrease of 8.8% compared to the same period last year. This decrease was driven by negative 8.2% organic growth and adverse foreign currency movements of 0.6%. Organic growth decreased principally due to lower broker fees, driven primarily by a reduction in transactions per agent, given the overall decline in existing home sales. Organic growth also decreased due to a reduction in U.S. agent count, and a decline in other revenue, which was down as a result of the shift in our technology strategy announced last year, partially offset by higher mortgage segment revenue.

Turning to slide seven, Q3 selling, operating, and administrative expenses decreased 13.3% to $43.1 million, primarily due to lower severance and reorganization charges, equity compensation expense, and legal fees. As Steve mentioned, during the third quarter, we announced a reduction in force and reorganization intended to streamline the company’s operations and yield cost savings over the long-term. The reorganization, which was substantially complete by September 30th, reduced the company’s overall workforce by approximately 7%, and total associated cash savings are expected to be approximately $6.5 million on an annual basis. We recorded a pretax cash charge for one-time termination benefits, which consists primarily of severance and related costs of $4.3 million.

We have agreed to settle certain industry class-action lawsuits and pay a total of $55 million into a qualified settlement fund, in addition to the business practice changes that Nick has discussed earlier. We intend to use available cash to satisfy our liabilities, pursuant to the terms of the settlement. We paid 25% of the amount due just before the end of the third quarter. We expect to pay another 25% within 10 business days after preliminary court approval and the remaining 50% within 10 business days of final court approval likely sometime next year. As Steve noted earlier, we believe settling these cases in the manner we did was the best decision for all our stakeholders, despite the financial costs. The settlement, alongside the weakening macro environment, has also impacted a few different provisions in our credit agreement, given the increase to our total leverage ratio.

For purposes of calculating the total leverage ratio under our credit agreement, the $55 million settlement charge is not added back. Consequently, as of September 30th, 2023, our total leverage ratio was seven to one. However, we only anticipate this elevated level to persist for the next four quarters, before moderating significantly. The provisions in our credit agreement that were impacted include restricted payments, excess cash flow principal repayments, and access to our revolver. These are discussed in detail in our Form 10-Q. I’m also happy to answer any related questions you might have, once we get to Q&A. Last, as Steve said earlier, our Board of Directors made the difficult, but prudent decision to suspend our quarterly dividend.

This change in capital allocation was not entered into lightly. We always have and continue to strongly support returning capital to shareholders. However, given current circumstances and out of an abundance of caution, we believe this decision is optimal for shareholders as we determine how best to take advantage of those opportunities that we believe will yield the best long-term return. Moving to slide eight. Regarding our outlook, the company’s fourth quarter and full year 2023 outlook assumes no further currency movements, acquisitions, or divestitures. For the fourth quarter of 2023, we expect agent count to increase 0.25% to 1.25% over fourth quarter 2022, revenue in a range of $74 million to $79 million including revenue from the marketing funds in a range of $20 million to $22 million, and adjusted EBITDA in a range of $20.5 million to $23.5 million.

For the full year 2023, we are slightly increasing our agent count guidance and narrowing our revenue and adjusted EBITDA guidance ranges, and now expect agent count to increase 0.25% to 1.25% over full year 2022, revenue in a range of $323 million to $328 million, including revenue from the marketing funds in a range of $83 million to $85 million, and adjusted EBITDA in a range of $94 million to $97 million. Now, I’ll turn the call over to Steve, for closing comments.

Stephen Joyce: Thanks, Karri. Looking at slide nine, we remain focused on the long-term as we move through a challenging time within the housing industry. We continue to make good progress on our growth initiatives and have taken necessary steps to better position our company for growth, when the industry rebounds. With that operator, let’s open it up for questions.

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Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Soham Bhonsle from BTIG. Please go ahead.

Soham Bhonsle: Hey, good morning, everyone. Thanks for taking the questions.

Stephen Joyce: Morning.

Soham Bhonsle: First one, Nick or Steve, I’m sure you’re having a lot of conversations with your broker customers can you maybe just give us a sense for, what those conversations are looking like today, as they digest this all the headlines, are there any conversations around, changes that they may be thinking about making to their business, right, would just love to get a sense for that first.

Stephen Joyce: So, I think generally, they are very happy with the action we took, and they view that we did a significant set of sacrifices on our part to help impart protect them. And so, I would say it’s overwhelmingly a sense of gratitude for the position the company took to kind of put this behind, them and us. And so, so that’s number one. Number two, our view is and obviously, we’ll have to see as the recent judgment plays out, our view was we did never, we never really saw this change in our business significantly. A number of the practices that people were looking for, we had already adopted. So, there wasn’t really, there wasn’t a lot of changes we expected. And as we’ve said before, where our agreement goes, provided it’s approved, which we have a high degree of confidence it will be, that it’s not going to affect our business from practice or profitability materially.

And so, Nick, why don’t you give a little more color around the calls that you’ve gotten from the brokers and from the agents.

Nick Bailey: Sure. I echo Steve’s position that, many of our franchisees are, at this point pleased with the action, but we also have to remember that it’s not all buttoned up and complete at this point. And so, most of the brokers are really working hard to keep their agents focused on the business, which is there, still people out there buying and selling. And at this point, focusing on helping consumers right now. And as things progress, if there are additional changes that affect the manner in which they adjust and do business, then they’ll make those changes. So, there are certainly a lot of discussions happening, but I know we are encouraging and our brokers are encouraging their agents to not get overly excited and stay focused on the business at hand, which is helping buyers and sellers with the rules that are in front of them at right now.

Soham Bhonsle: Okay. And then I guess, if I think a few years out from now, in a scenario where, there is some compression on the on the buy side, right? And let’s just say, there’s fewer agents or brokers out there, and, I think you’ve historically shown an appetite or a willingness to maybe just help your customers out. And so I’m just curious, how you think sort of that scenario can play out? Is this any different, right, if we have sort of fewer agents and brokers in the long-term?

Stephen Joyce: Nick, why don’t you comment on that?

Nick Bailey: Yes. I think, we’ve seen history repeat itself a little bit that agent count does follow market conditions a bit. And if we rewind, pre-great recession, there were 1.5 million realtors that drop to sub 1 million. And then as the market came back over a 10-year period with over a 130 months of consecutive increases in prices. We also saw agent count increase. And so we’re seeing that now as well, that as there’s pressuring contraction in the overall real estate market, we see contraction in the number of agents that want to be in the business. And so the easier the market, if you will, the more the agents are there. But, I think this is where we come back to the foundation of our business, which is our agents have twice as much experience as the industry.

They’ve been through changes before. They know how to adapt and that’s kind of the nature of a true full-time professional knows how to adjust whether it be the market conditions. And, hey, we’ve had rule changes and changes to our business in the past. But bottom line is, people are still going to buy and sell houses. They still want a trusted adviser. We still believe in buyer agency. And I think one thing that’s interesting to note is we’re about a full generation away from how we got here with buyer agency and MLS’s. And really it was all put together to help consumers, with the biggest financial decision of most people’s lives. And so, we still believe in absolutely consumers being represented by a trusted professional that’s going to continue no matter what.

Soham Bhonsle: And then —

Stephen Joyce: Okay. Just to add to that, I think Nick mentioned this because we have the most productive agents and because our model is very different than anything out there, go around a fixed fee basis with the agents. It’s a very different approach. So, if you’re highly productive, regardless of where the commissions go, you’re going to still like our model, and you’re going to still like being with us because you got, it is the most enabling of the brands out there to sell more houses. And so, the more houses they sell, the more their margin of profitability grows concerning us because we’re a fixed cost. And then on top of that, they’re the ones that are going to survive the most. And so, I think while there’s certainly an opinion out there that could see changes in particularly on the buyer side.

Our view is, and Nick said this, that we have the most qualified agents that are the most experienced that sell the most houses by a factor of two to one. And therefore, they’re going whether why they’re sold off. And another way of looking at it is, this could be a positive piece for us because when people are concerned about where things are going, they fly to quality. And, we think we stand at the top of the industry in terms of most agents of brokers’ views of the brands. So, when there’s uncertainty, it usually helps the people that are more of the blue-chip type, and that’s where we sit.

Soham Bhonsle: Yes. No. That makes sense. And your 95% split helps too. I guess, Karri, just one more on the TLR. So it’s at 7.0 currently — can you just maybe talk about, the potential to have to make sort of, an excess cash flow payment here in the near-term? And then, any potential for raising capital if you don’t have access to the secured facility?

Karri Callahan: Sure. Good morning. So, did mention a couple of implications as a result of the increase in that total leverage ratio, do you expect it to persist for kind of the next four quarters and then expect it to moderate significantly. With respect to, let me touch on three different points as it relates to it, with respect to the excess cash flow payment. We need to calculate that as of the end of the year given the settlement payment, we don’t expect to have an excess cash flow payment at this time. So, we know we have to go through the process. Don’t expect it to be, an issue or a use of cash at this time. There’s one other implication as a result of the increase in the TLR, and that is related to some of our restrictive covenants pursuant to the terms of our credit agreement.