RE/MAX Holdings, Inc. (NYSE:RMAX) Q1 2024 Earnings Call Transcript

RE/MAX Holdings, Inc. (NYSE:RMAX) Q1 2024 Earnings Call Transcript May 3, 2024

RE/MAX Holdings, Inc.  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning and welcome to the RE/MAX Holdings First Quarter 2024 Earnings Conference Call and Webcast. My name is Brianna 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?

Andy Schulz: Thank you, operator. Good morning everyone and welcome to RE/MAX Holdings first quarter 2024 earnings conference call. Please visit the Investor Relations section of www.remaxholdings.com for all earnings-related materials including our standard earnings presentation and to access the live webcast and the replay of the call today. 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 obligation 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 first quarter 2024 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 available on our website. Joining me on our call today are, Erik Carlson, our Chief Executive Officer; and Karri Callahan, our Chief Financial Officer; our brand leaders, Ward Morrison and Amy Lessinger are also here and will join us for Q&A.

With that, I’d like to turn the call over to RE/MAX Holdings CEO, Erik Carlson. Eric?

Erik Carlson: Thank you, Andy, and thanks to everyone for joining us today. In the short time has passed since our last call, several events of note have taken place. On the housing front, the industry appears to be in the early stages of recovery. Industry reports and feedback from our network helps demand remains robust and the supply of for-sale homes continues to rise, providing some relief to frustrated buyers in this most unusual housing market. However, interest rates have moved up, using the number of transactions and adding uncertainty to the Fed will cut interest rates later in the year as some had expected and hoped would be the case. While there are a lot of factors currently affecting the real estate market, one thing remains constant; RE/MAX agents leverage their skills, experience and competitive advantages to serve as many customers as they can.

Key difference between our business model and that of many of our peers, our model incentivizes agents to help buyers and sellers to reach their housing goals, while some other models and center agents to recruit other agents, many of whom are productive. In contrast, our agents’ commitment and drive sustain the RE/MAX culture of productivity. And this was recently confirmed by a widely respected industry survey. The 2024 real trends verified best brokerages rankings revealed that RE/MAX agents’ at large US brokerages on average outsold the competition 2-to-1 in residential transaction sides last year. In a survey of more than 1,300 participating large brokerages, RE/MAX agents averaged 11.8 transaction sites, more than double the average of other agents, plus when the brokerages are ranked by transaction sides for agents, 88 of the top 100 are RE/MAX firms.

This marks the 16th straight year in which the real trend data confirms that RE/MAX leads in average per agent productivity. Known for being skilled, experienced and very good at what they do, our agents have made RE/MAX the world’s most productive real estate network as measured by our residential transaction sites. In addition, RE/MAX agents in the US and Canada have been voted as the most trusted for several years straight and trust as a top consideration among consumers when they’re selecting their real estate agents. Our industry-leading trust and productivity are key competitive advantages. Our iconic brand is the number one name in real estate. We have an unequaled global presence, a distinct value proposition of services and most importantly, the best agents and brokers in the business.

As I said previously, RE/MAX agents are simply the gold standard. Our competitive advantages should serve us well, considering recent industry development taking place amid a lot of noise and misinformation. To recap, on March 15, the National Association of REALTORS announced a proposed nationwide settlement agreement that would release NAR, association owned MLSs and most of its membership from liability in multiple seller initiated commission lawsuits. The proposed settlement includes a payment by NAR, as well as several changes in business practices in our industry. Two proposed business changes that are most relevant to RE/MAX affiliates are expected to go into effect mid July 2024. First, while offers of compensation to buyers’ agents are still permitted by the agreement, they cannot take place in the MLS.

And second, written agreements will be required for MLS participants. Notably, about 20 states already require written buyer agency agreements. Let me stress that we continue to remain steadfast in our support of buyer agency and buyer broker compensation, emphasizing the significant advantages of having buyers and sellers represented by trustworthy seasoned real estate professionals. These skilled agents ensure that consumers receive guidance and advocacy while navigating the complexities of the home buying and selling process. This representation generally drives better outcomes and experiences for the consumers involved. When the NAR news broke, we quickly moved to communicate with RE/MAX affiliates and help them understand the changes. Our RE/MAX brand president, Amy Lessinger immediately held informational sessions for our brokers and our agents.

With 51 years of history, we’ve had a front row seat, many sudden changes in our industry, and the wisdom that comes with experience continues to serve us well. Education and outreach, two other core strengths of RE/MAX were our top priorities following NAR announcements. Now in preparation, we have developed and have now deployed materials and resources to help our affiliates navigate the post-settlement landscape, from education and consultation, to marketing and consumer messaging, RE/MAX will continue to support affiliates in every possible way. We advised our network that there were four primary things that they should be focused on. First RE/MAX affiliates should continue to conduct their business with the security of being released and protected from liability related to these industry lawsuits, pending final court approval of the RE/MAX settlement plated for hearing next week on May 9th.

Second, they should start preparing for the two proposed NAR rule changes expected to take effect in July. This includes updating their marketing materials, buyer presentation and buyer representation agreements. Third, they should continue to speak to their clients in a clear, transparent way about the value they provide and how they’re compensated. Fourth, they should stay updated on ongoing industry developments. The terms of the proposed NAR settlement would change some aspects of the business, but RE/MAX agents are well positioned to navigate these changes, and we will help guide them as they evolve. Given the extensive experience within our network, our affiliates are able to lean on and learn from the RE/MAX community. That’s the power of a network filled with full-time productive professionals.

In our settlement announcement, many have asked us how the proposed NAR changes might impact the industry. Only time will really tell. All commissions are negotiable, as they always have been. Ultimately, the responsibility to set fees to clearly communicate value lies within the individual brokerages, teams and agents. That has always been the case within our network. We’re moving intentionally and methodically given these unusual times. We’re in a period of transition and some uncertainty, and we’ll a better read on how these developments will impact the industry and RE/MAX as the year unfolds. In the meantime we’ll continue to operate our business as efficiently and effectively as possible, maintaining a growth mindset and staying laser focused on delivering the absolute best customer experience.

We’re leaving no stone unturned. We’re challenging each process and function to improve not only the velocity, but our outcomes. These efforts should yield measurable results in the aggregate, and we believe we have additional revenue opportunities and the potential for margin improvement driven by control over operating costs fell. As we said last quarter, this will take time, but we are moving with the requisite sense of urgency. We’ve got a great foundation to build upon. Our team, our affiliates, they’re passionate, passionate about our brands, about each other and about innovating, growing and simply getting better each and every day. We recently held our annual agent convention called R4 in Las Vegas. With thousands of attendees from 60 countries, the event was both inspiring and reassuring.

Personally my first thought [ph] for I spend most of my time listening trying to learn as much as possible from our network and other industry leaders who has a fantastic experience our agents and brokers. We’re not only confident and enthusiastic but excited about the opportunities ahead and can’t wait until next year’s events. Regarding our growth initiatives. We continue to iterate digging into details, getting insight and uncovering additional opportunities. To-date we’ve seen positive results. So not large enough yet to overcome the overall contraction currently being experienced throughout the real estate industry. We launched our expanded teams initiative April 1 and we’re seeing the first brokerages unlock the benefits by adding the required six new team members.

Notwithstanding the macro pressure, our conversions mergers and acquisitions or CM&A program continues to add brokerages and agents to the network. It also continues to evolve as we work through our pipeline of compelling prospects, identifying new targets and developing new approaches. We are laying the groundwork which should serve us well when the market resumes its growth cycle. Now on the mortgage side despite one of the most challenging end market conditions, the mortgage industry has faced in recent history we continue to grow. Tier 2 was focused on what we can control, our recent franchise and loan originator convention a good participation despite the market condition. Attendees were excited. Excited about the future prospects of the mortgage industry.

Motto is going through its first renewal process as the original cohort of franchises are completing their seven year franchise terms and we’re off to an encouraging start. With that thank you and I’ll turn it over to Karri.

Karri Callahan: Thank you, Eric. Good morning, everyone. Effective cost management amidst a challenging housing market summed up our financial performance for the first quarter. Some of the notable quarterly financial highlights included total revenue of $78.3 million, adjusted EBITDA of $19 million with an adjusted EBITDA margin of 24.3% and adjusted diluted EPS of $0.20. Looking closer at revenue. Excluding the Marketing Funds revenue was $58.1 million a decrease of 9.3% compared to the same period last year driven by negative organic growth. Organic growth decreased principally due to a reduction in events related revenue and lower US agent count partially offset by higher mortgage segment revenue. With respect to events, recall that last year we celebrated our 50th anniversary at our annual agent convention which led to exceptional attendance and revenue.

This year’s conference was smaller in comparison. Q4 selling, operating and administrative expenses decreased 6.9% to $45.7 million primarily due to lower expenses from our annual convention and reduced legal expenses partially offset by higher equity-based compensation. From a capital allocation perspective, we continue to be disciplined and patient particularly in light of the fact that rate cuts appear less likely to occur in the second half of this year and our pending settlement that is not yet finalized. Though housing appears to be rebounding, it is a slow process. For all these reasons, we continue to be responsible stewards of capital and think it’s best to focus on replenishing our cash in the near-term. Simultaneously, we believe we still have the financial flexibility to pursue those growth opportunities where we see the greatest potential.

Our second quarter and full year 2024 outlook assumes no further currency movements, acquisitions or divestitures. For the second quarter of 2024, we expect agent count to change negative 1.5% to 0% over second quarter 2023, revenue in a range of $75 million to $80 million, including revenue from the marketing funds in a range of $19 million to $21 million and adjusted EBITDA in a range of $24 million to $27 million. And for the full year 2024, we continue to expect agent count to change negative 0.5% to positive 1.5% over full year 2023, revenue in a range of $300 million to $320 million including revenue from the marketing funds in a range of $78 million to $82 million and adjusted EBITDA in a range of $90 million to $100 million. With that, operator let’s open it up for questions.

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question today comes from Soham Bhonsle with BTIG. Please go ahead.

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Q&A Session

Soham Bhonsle: Hey guys, good morning. Hope you’re all doing well. Maybe first one for Amy or Erik, it doesn’t matter. Do you feel like the NAR settlements are enough to satisfy the DOJ’s concerns as you speak to folks around the industry? Or do you think they may look to include some other additional stipulations before we get final approval.

Erik Carlson: Yeah, Soham this is Eric and then I’ll pass it over to Amy for some additional color. I think it’s a — we don’t know necessarily what the DOJ is making, and so it would be tough for us to speculate. I think that the settlement, although there’s changes, it supports what we’ve been promoters of this, which is transparency around the transaction and representation on both the buy and the sell side. And coming back from ARPU more recently and over the past month and Amy might have some more color here. Definitely agents and brokers are — they are chatting about obviously changes, the potential impact what RE/MAX and the industry is doing to help support them and they’re hearing from customers. There are more questions about what does this mean from a compensation perspective?

What does it mean from values you offer? And from the RE/MAX perspective, we’re comfortable with that because obviously we’ve got full-time agents and they’re highly productive. They’re in the business. They’re good at negotiating. They provide great value. And so although we have to make changes to business practices, the good thing is it’s already happening in about 20 states. So we’ll learn from that. Not to say that those are perfect representations, but they’re helpful to guide kind of what the future path looks like. So as it relates to the DOJ, hard to tell. We’ll leave that to them. I’m sure they’ll make great decisions. But from us — for us we’re trying to right now control what we can control. So Amy maybe you have a bit more color, obviously, you’ve been in the field a bit.

Amy Lessinger: Sure. In talking to our brokers out there, they are highly focused on ensuring they’re educating their agents and we’ve provided a lot of support there. And I’ll echo Erik’s sentiments and the fact that our agents are already experienced, but they’re probably getting a few more questions from buyers and sellers than they have in the past. And I think we welcome the conversation and our agents welcome the conversation. We’ve always believed in transparency in the transaction. And I think that it’s absolutely right and perfect that we’re already prepared. We had already prepared education leading up to this. And so our brokers in the field, I think that’s the point of differentiation as well. They are at the local level supporting their agents on a day-to-day basis and we have provided them with education through our RE/MAX University platform where they can hold classes and bring everyone up to speed on what they need to do to facilitate a conversation about, what it means to be represented in a transaction and how compensation works?

Soham Bhonsle: And Amy, I guess, just curious, are you seeing any pushback from buyers on the commission rate early on? Or are we still sort of status quo?

Amy Lessinger: It’s interesting, so far we are not widely hearing that the reported 90% of buyers last year engaged in being represented. And so in the US in particular buyers are used to being represented and they understand the value of being represented. Their interests are protected. They value local market expertise, the ability for an agent to negotiate on their behalf really streamlines the process. And so really the questions that we’re getting is, what does it mean to be represented? And so we’ve always been able to negotiate on their behalf. And commissions have always been negotiable, but I think it’s really diving a little deeper into what does true rep buyer representation mean.

Soham Bhonsle: Okay. And then, maybe one long-term one, as we sort of think about the next three to five years, I think the consensus seems to be that there’s going to be fewer agents in the industry but those that maybe remain are going to be more professional in nature, which is I guess, positive for the RE/MAX model. But it also means that your competition for some of those best agents is going to probably intensify as well. So can you maybe just talk about what changes or potential refreshes you may have to do for the RE/MAX model as you’re trying to adapt to and there’s enhanced competition for the best agents in the industry?

Erik Carlson: Well, look, as you know, so — I appreciate the question. I think that we compete for the best agents in the industry today. So I think it’s something that it has been in our 51 year history and we’re good at it, not to say that we’re not going to have to evolve, which is what I talked about in my opening comments. I do think it’s a little bit early to understand some of the changes that will occur over the summer and the impact. However, obviously, we focused on what we think we can control and that is look at the power of our network with 140,000 agents worldwide means something. The number of brokers that we have in local communities means something. They have their finger on the pulse. They’re able to serve the needs, the wants, help with questions, communication, education, not only the materials that we provide in our U, RE/MAX University, but at that local level, and that’s the importance of broker relationship living and working in the community with agents and helping them understand the value that not only that brokerage provides but obviously, the RE/MAX brands, tools and community provide.

And so, I think we’re well positioned to compete. But I do agree, that we will have to continue to compete and competition will get more fierce. Will part-time agents leave? I think that is — I think I agree. I totally agree with that consensus. To what level, I don’t know. But I do think that we’re well positioned, because we are full-time and productive and we’ve got the support of a great community. We’re in a better position than that not to say that we don’t have work to do and that we’re going to have to keep our eye on the competition and work hard every day to help brokers and agents be successful in their market.

Karri Callahan: Well, I think I’d add to that too, Soham. So everything we do here for decades has truly been designed to help an agent be more professional, more productive and ultimately lead them to a path and an opportunity to sell more houses. And so we’re not playing catch-up there. But I also echo Eric’s sentiments about the fact that we can continue to evolve and make sure that we stay in the most competitive position possible.

Soham Bhonsle: Yes. All right. Thanks for that.

Operator: Your next question comes from Ryan McKeveny with Zelman & Associates. Please go ahead. Ryan McKeveny, your line is now open