Thanks to the research I’ve been doing for the Q2 Report (releasing soon, I swear!), I kind of figured that RE/MAX was going to have a mediocre quarter. And there was a light at the end of the tunnel. I suppose that light still exists but… I’m trying to make sense of the disaster that was Q2 for RE/MAX.
Again, in the new format, I’m skipping all the income statement analysis and all that since you can and have already gotten it yourself. If necessary, I’ll put up my own charts and tables. But I’d like to focus on the key things from Q2.
For RE/MAX, none of the key things are good, I’m afraid.
Let’s see…
- Revenues down 24%;
- Operating Income down 61%, (yet Operating Expenses went up 1.6%);
- Net Income Margin down 46%, so Q2 looks more like a typical Q1 (the slow season);
- Free Cash Flow down 38%; and most critically…
- US Agent Count down 1.6%
Despite valiant efforts by Adam Contos and team, there’s just no good way to spin this. During prepared remarks, Contos talked about “resiliency of our model” and “reinforced confidence in our systems.” Try as I might, I’m not seeing either in the numbers.
I don’t want to or need to belabor the obvious, that RE/MAX had a very bad Q2. The questions from the Wall Street analysts were, I thought, illustrative… as they asked about deurbanization, about Motto mortgage, and agent recruiting/retention. It was a quick call, as if none of them were all that curious… having made up their minds already.
So let’s try to focus on what we can and should learn from RE/MAX, reading the tea leaves.
The Cruel Juxtaposition
Since you’ve hopefully already read the Zillow Q2 analysis, you know that Zillow has reaffirmed its commitment to building out broker and agent technology; in fact, it is Zillow’s highest priority for tech development.
Well, for the past year, ever since the acquisition, booj has been the centerpiece of RE/MAX’s overall strategy. And on every single conference call, RE/MAX executives wax poetic about booj, about how it’s a life-and-career changing technology, and how their brokers and agents are just embracing the hell out of it.
But it is equally obvious that booj is blue-pill real estate technology at its finest. It’s built first and foremost for the legacy industry user in mind, designed to reinforce/automate/make efficient those same old blue-pill real estate practices.
So on the one hand, we have RE/MAX executives talking about how adoption and interest and engagement in booj is up, way up. We have Adam Contos talking up the First app, calling it a “potential career-changing tool” and have heard from the network that it created additional business. And on the other hand, we have 24% declines in revenue, and according to my research, we have RE/MAX’s sales volume being down 22% YOY in Q2.
At the same time, we have eXp, who doesn’t have booj, doesn’t have First app, doesn’t really have any technology other than Virbela. But their revenues are up, profitability is up, cash flows are up. Agent count is up, way up. And not in Sri Lanka, but in the United States… where RE/MAX lost almost 1,000 agents.
Maybe First is life-changing, and it makes agents far more productive. But given the results of Q1 and Q2, is it fair to conclude that RE/MAX’s technology-centric strategy has not produced either additional production, additional revenue, or additional agent headcount?
The Culture of Recruiting?
In the RE/MAX Q4/2019 earnings analysis, we talked about how Nick Bailey, RE/MAX’s new Chief Customer Officer, instituted a new culture of recruiting at RE/MAX. It was a real centerpiece of the conversation, as RE/MAX had a very good Q4.
Well, the 61,677 agents RE/MAX had at the end of Q2 in the United States is the fewest it has had for quite some time now. Just as a point of reference, in Q1 of 2018, RE/MAX boasted 63,612 agents in the U.S. That’s almost 2,000 fewer agents in the U.S. after two and a half years. The culture of recruiting was supposed to change that, right? And it did for one quarter.
Since Q4/2019, when the new culture of recruiting was instituted, RE/MAX is down 1,444 agents in the U.S. Almost 75% of the losses since Jan of 2018 occurred in the last six months.
Which would explain why we get this from Nick Bailey in this earnings call:
However, the one thing to note, though, we are not the home for every real estate license. We are known for having top producing, full time real estate agents. And so, we’re not known just to warehouse non-producing agents. And so, as the level of uncertainty, especially the first part of the second quarter, affected the decisions of where people — where agents hung their real estate licenses. We’re thrilled with the fact that now how we’re executing on all of the recruiting strategies is showing that, as the certainty returns at some level to the real estate industry, we’re seeing that stabilization that we can move forward on from June, July.
Huh. So what are we to make of this? That the 1,444 agents who left RE/MAX since January are non-producing agents? Or that RE/MAX in Q3 and Q4 went out and recruited a bunch of non-producing agents?
Plus, since RE/MAX’s business model is primarily based on per-agent fees, why does RE/MAX care if their agents are producing or non-producing? They make the same amount whether the agent is doing 1,000 transactions or 1 or zero.
Does Steady As She Goes Even Work Now?
The biggest takeaway for me from the Q2 earnings call is that just like in Q1, nothing much has changed for RE/MAX. No matter what else is going on, RE/MAX is doing the same thing it’s been doing since Q2 of last year. It’s booj and First, it’s recruiting, it’s the network, it’s the “we have the best agents” and so on.
And frankly, that’s worked fine for RE/MAX. It hasn’t grown RE/MAX much, but it hasn’t really hurt RE/MAX either. It’s been more of a somnolescent steady profits, steady cash flows, low debt, low growth story. Since the start of 2019, we’re talking +/- 3% YOY change in revenues, for example. Until now. Now we’re looking at -24%.
The issue, as I see it, is that just like COVID accelerated all past trends, it has accelerated the trends for RE/MAX. The slow drip drip of decline has become a fast gush of decline.
What troubles me is that RE/MAX doesn’t seem to even acknowledge that things done changed. Contos made a point to say that this is the seventh recession that RE/MAX had been through. So the strategy remains booj/First, top agents, resiliency of the network, and so on: the exact same things he’s been saying for a year. But this ain’t back in the day with Cazal shades, when honeys had high-top jellies.
Plus, there is this: we’re not in a recession, real estate wise. The market is as hot as it’s ever been, save for the blips in April and May. In fact, the economy itself is not in a recession; it’s in a government-mandated pause. Whatever lessons RE/MAX had learned from past recession do not apply.
What COVID made clear is that we’re in a transformation. As I said in the Zillow post, we’re in a red pill vs. blue pill situation, not a recession.
I think I would have preferred to hear Contos and team tell us that they had a terrible quarter, that they were caught flat-footed, but had regrouped. I would have liked to hear Nick Bailey admit that things had changed, and talk about a new strategy to cope with the changed circumstances.
Instead, we got more of the same. Steady as she goes. But it’s not clear that even works anymore.
The Light That Never Goes Out
Having said all that, let me be kind to RE/MAX. There is a light that never goes out in real estate, and RE/MAX does have that… for now: quality agents. No matter what else happened in Q2, RE/MAX likely held on to most of their top producing, most productive agents. That shows up in the research I’ve been doing.
Specifically, RE/MAX’s new listings taken in June is up 25% YOY — above eXp, Realogy and Redfin. It’s close to KW’s new listings taken at 28%.
Better, more experienced agents tend to be listing agents, and RE/MAX does still have those. Which means that Q3 ought to look better for RE/MAX than it does for some of the competition.
But if Q3 comes in better than expected, I worry that RE/MAX will take it as a sign that Q2 was just an anomaly and will continue to do the steady as she goes thing going forward instead of looking at the root causes of its problems in Q2 and realizing that yes, they need to take the red pill and see how far down the rabbit hole goes.
The Wrap-up
So, wrapping up… Q2 was a horrendous quarter for RE/MAX. There’s just no two ways about it, and no real way to spin it either.
Neither of its two major recent initiatives — technology and a new culture of recruiting — worked to stem the losses. And while I’m certain that the people of RE/MAX, both at corporate and in the franchises, were resilient and innovative and all that, there’s nothing about Q2 results that show that the model is resilient, or that there are “many strengths of RE/MAX the company, brands and networks.”
The unprecedented COVID pandemic might serve as a cover-all excuse, except that eXp exists as the counterexample. And we know about eXp because it’s public; I can say with certainty, from speaking to brokers and agent team leaders, that many of them had the best quarter in their existence in Q2. COVID can’t be an excuse, because the real estate market is hot as it has ever been. No recession going on here, by any stretch of the imagination.
I think RE/MAX needs to acknowledge how bad things were, really do some soul-searching about their fundamental strategies, stop spinning and telling themselves comfortable stories, and get back to greatness. They have all of the core elements, starting with some of the best agents in North America.
We’ll see if they will, or if Q3 will bring us more of the same steady as she goes, as it has for the past couple of years.
-rsh
