[VIP] RE/MAX Q1, 2020: Nothing Has Really Changed

RE/MAX came into 2020 on a big upswing. Q4 was a good quarter; it was a very good quarter, in fact. And as we have already seen from Realogy, Redfin and Zillow, Q1 was a record-breaking type of quarter until COVID hit.

So it’s a bit surprising that RE/MAX’s numbers came in so soft. I’m not sure where that’s coming from, since the COVID-related measures that RE/MAX took did not appear to have had that big an impact.

But the bigger takeaway, which is pretty much what I focus on, is that RE/MAX is extremely experienced at navigating all kinds of markets. The theme, if there was one to the call, is that RE/MAX has been there, done that, got the T-shirt, and the playbook remains the same as it ever was. That experience is both a blessing and a curse, and which it is depends almost entirely on one’s perspective of what comes next, post-COVID.

Let’s get into it.

The Numbers

We begin with the actual numbers from RE/MAX.

As mentioned, the Q1 numbers are a bit soft, and I confess I don’t understand it.

• Revenue: up a paltry 0.7% YOY
• Total Operating Expenses: Up 3.9%
• Operating Income: Down 9.1%
• Net Income: Down 40.3%
• Adjusted EBITDA: Down 15%
• Free Cash Flow: Down 41.3%

I mean… what the hell? Just as a point of comparison, Realogy Franchise Group had revenues go down by 6%, but pre-tax income go up by  52%. Is it because Realogy took much more aggressive cost-cutting measures? I don’t know.

I thought perhaps the response to COVID was responsible, but doesn’t look that way. During the call (and the accompanying presentation), the management spoke about cost-cutting measures in Q2, not in Q1. And since the COVID thing really only affected the last couple weeks of March, it doesn’t seem like the declines are attributable to those things. Q2, yes, absolutely attributable to COVID, but not Q1.

Broker fees were up big, and that has to do with agent commission rather than headcount, so that’s nice. But again, puzzling. So Q1 being a record-breaking quarter means that RE/MAX agents made a bundle, which translated up to the brokerage/franchisee, and a piece of that went up to RE/MAX. But what’s going on with the core “recurring revenue” thing that RE/MAX is so proud of?

It’s a mystery, and no one on the earnings call asked about it, so I guess we’ll have to leave it there for now.

Because the real story is something else: nothing has really changed.

Are You Experienced?

Throughout the call, Adam Contos and other senior managers kept stressing how much experience they and RE/MAX institutionally had with navigating recessions and a down market. It starts off early in the prepared remarks:

This isn’t the first downturn our organization has faced. In fact, many of our key leaders, including Ward, Nick and myself, helped guide the company through the Great Recession a decade ago. Our Chairman, David Liniger, has noted that RE/MAX has battled through six recessions since he and Gail founded RE/MAX almost 50 years ago.

Many of the actions we’re taking now are modernized versions of tactics learned while steering through challenging business cycles and market conditions in the past. Most of our affiliates have been successful for years, if not decades, and our newer affiliates benefit from the experience of their peers. Entrepreneurial spirit and the ability to pivot, adapt and overcome challenges have become hallmarks of the RE/MAX network for nearly five decades. RE/MAX and Motto have similar cultures and are professional, productive and collaborative, which gives us a valuable competitive edge during difficult times. [Emphasis added]

I do not doubt that RE/MAX management and many of RE/MAX’s franchisees and agents have tons of experience in surviving a recession. That’s a plus from a tactical standpoint. They know how to cut costs, which costs to cut, how to keep marketing during down markets, etc. So that’s a blessing.

The problem is, we’re not dealing with a recession. We will be dealing with a recession, possibly a depression, later but what we went through and are going through is not and never was a business cycle issue.

What we are actually dealing with — as I have written from the start of COVID — is a wholesale change in the industry brought on by wholesale changes in society, government, consumer psychology, and potentially more (e.g., global monetary system, international politics, and so on). For the most part, COVID accelerated the timeline for existing trends and we may be seeing brand new trends come out as a result of the disease and the response to the disease.

When the problem is new, never-seen-before, then experience can be a negative — a curse instead of a blessing.

So when Contos talks about “modernized versions of tactics learned” in the Great Recession, it makes me very nervous.

I get even more nervous when every RE/MAX leader, throughout the call, doesn’t really quite seem to grasp that everything has changed.

For example, here is one exchange between an analyst and Karri Callahan, CFO:

Dhiraj Kapgate — JPMorgan — Analyst

And just like, you can still have good liquidity. So like, just wondering if this downturn [provides] good opportunities on the acquisition side? Or does it change anything on how you have been approaching these?

Karri Callahan — Chief Financial Officer

Yes. So with regards to capital allocation, our current priorities, they do remain unchanged. We’re still looking at independent regions, as we stated in the scripted remarks. Importantly, we have not scaled back our investments in technology. So we are still looking at allocating capital to reinvest back into both of our networks on the RE/MAX and the Motto side. And then we will continue to look at other strategic partnerships and acquisitions if they make sense and can drive long-term shareholder value in addition to continuing to return capital. So nothing has really changed from that perspective.

“Nothing has really changed.” That is the theme of this report, because that’s the theme that RE/MAX embraced.

And that’s odd, because just a few minutes after the above exchange, Contos says:

I would agree with Ward on [digitization of the transaction]. When you look at the virtual environment that consumers have used in the past, but we have been forced as an industry to use, in the last month. There will be adoption within our industry on additional technology and tools moving forward. Maybe previously agents didn’t stop, learn, take time to implement, and it was somewhat of a forcing function now to increase their knowledge, their learnings and those agents — especially our RE/MAX agents that sell 2:1 to the competition on average — will be able to create more efficiencies in their business.

I realize it’s a bit difficult to understand what Contos is saying here, but I think what he’s saying is that the transaction is getting digitized, agents are being forced to learn and implement technology tools that consumers have adapted to, and the industry as a whole is being dragged kicking and screaming into the 21st century.

Wouldn’t you think that if RE/MAX understands that the transaction is becoming more digital, they would make moves to ensure that they invest in (or acquire) technology that supports the digital transaction? With a strong balance sheet, and real estate tech vendors being so cheap, why not go after more of that? Why not openly discuss a strategic shift towards more digital, more technology, and so on?

Maybe it’s because the takeaway for RE/MAX is that these virtual technologies, these tools, will just create more efficiencies in the businesses of agents. No disruption, just efficiency.

Clash of Visions

As I noted in my Zillow analysis, Rich Barton saw the exact same things that Adam Contos and team saw, and concluded:

This is not going – we are not going to bounce back to the way things were done before.

We are seeing all kinds of systems, processes, business models, players change right now.

And there are going to be a bunch of sad stories there, but there are going to be a bunch of happy progress for our consumers and for the industry as a result.

A lot of the technology that I have already been talking about, this kind of Real Estate 2.0, a modern platform for virtual shopping and digital closing. That’s all – it’s just – it’s really rapidly progressing right now and that’s not going to go back either.

Now, Zillow also has experience in navigating the Great Recession. But they came to an entirely different conclusion than did RE/MAX. Maybe it’s because Zillow navigated the Great Recession as a technology company, while RE/MAX navigated it as a real estate company, but we have a real question as to what the future holds.

Whether you like the direction of RE/MAX or not depends entirely on your vision of the future. Will it be more or less the same as today, but with more Zoom and more 3D home tours? Or will it be something completely different? Real Estate 2.0, a modern platform for virtual shopping and digital closing?

Efficiency is a Strategic Problem for RE/MAX

But let’s say that Contos turns out to be right: all that COVID does is to force agents to adopt and implement technology that has been around for years. The “forcing function” turns into an “eager adoption function,” and that makes agents more efficient.

So nothing really changes.

That’s a problem for RE/MAX.

I’m not going to belabor the point too much; go read the Q4 writeup where I go into great detail on the issue if you’re interested.

Bottomline is that RE/MAX has a business model that is based almost entirely on headcount. Efficiency makes the top agents more productive. That productivity, which leads to the rise of Super Agent Teams, then reduces headcount and creates real pricing pressure for RE/MAX.

If we get widespread adoption of technology because of COVID, that disproportionately benefits the top agents and top teams. Zillow certainly thinks that’s going to happen, so they’ll be investing in technology accordingly. (Which leads to The Big Squeeze for Redfin, as I wrote in that analysis.)

RE/MAX is just staying the course. Nothing has really changed. They’ll freeze hiring, they’ll push off headquarters renovations, and if some acquisition opportunity arises, they’ll take a look at it.

Meanwhile, Zillow is raising another billion dollars or more to make moves.

Let’s wrap up, because there is nothing else of interest to look at.

Conclusion

Where I end up after everything is this: RE/MAX is static. Nothing really changes. You could call that stability and wisdom of experience, as Contos said, or you could view it as sclerotic paralysis, as Rich Barton mentioned in his earnings call about real estate companies operating as if it’s still the 1960’s or 1970’s.

The numbers themselves were remarkably subpar for what was a record-setting quarter for the rest of the real estate industry. That alone should suggest that there may be problems beneath the surface, and that alone should expect some changes at RE/MAX. But nothing really changes.

An unprecedented global crisis brought on by a novel coronavirus (meaning, it’s never been seen before) would make most people stop, examine what’s happening, and think about what this entirely new phenomenon will change. But at RE/MAX, nothing really changes. Some more video conferencing, some more third-party tools like Zoom and Matterport — but really, it’s still about recruiting “the most productive agents in the business” and letting them be more efficient. It’s still about booj and First app and the culture of recruiting over there.

That may very well be the smart thing to do. Wisdom comes from experience, and RE/MAX has plenty of experience in navigating recessions.

For their sake, and for ours as a country, I hope that 2020 and 2021 is nothing more than that: just a plain-jane recession like all of the other recessions we have seen since 1974 when RE/MAX was founded.

-rsh