The mystery that is RE/MAX continues. Except that with Q3 results, it’s fair to conclude that whatever RE/MAX is doing just isn’t working. It pains me to write that, because as I’ve long observed, RE/MAX has some of the best people in the business led by one of the really good guys in the industry, Adam Contos. And I still feel that way even after being disinvited to their BOC event.
But consider the horrorshow that was Q2/2020.
- 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%
But that was during the height of the COVID crisis, and RE/MAX pointed out that they gave back a bunch of money to its franchisees and such. And the housing market had frozen in many parts of the country.
Q3 was the polar opposite of Q2, as rising tides lifted all boats… except for S.S. REMAX. From the press release:
- Total agent count increased 5.1% to 134,769 agents
- U.S. and Canada combined agent count decreased 0.3% to 83,802 agents
- Total open Motto Mortgage franchises increased 27.9% to 133 offices
- Total Revenue of $71.1 million; Revenue excluding the Marketing Funds increased 0.5% to $53.8 million
- Net income attributable to RE/MAX Holdings, Inc. of $3.6 million and earnings per diluted share (GAAP EPS) of $0.19
- Adjusted EBITDA2 of $30.3 million, Adjusted EBITDA margin2 of 42.7% and Adjusted earnings per diluted share (Adjusted EPS2) of $0.64
Dig into the details a bit and we find that the 0.5% increase in revenue is more troubling still:
- Continuing franchise fees: $24.3 million, down 3.3%
- Annual dues: $8.6 million, down 2.2%
- Broker fees: $15.5 milion, up 16.3%
- Franchise sales and other revenue: $5.3 million, down 13.9%
Note that in the RE/MAX system, “Broker fees” is the small portion that comes from commission splits. In other words, that’s the only piece that a higher sales volume driven by market conditions would affect. Since one of RE/MAX’s big selling points to investors is a “stable, recurring fee-based model” it strikes me as problematic when the only reason why revenues were up even 0.5% is because of the not-so-stable, commission-based model.
Critical to RE/MAX’s model, agent count increases are almost entirely from outside North America. Which is good, I guess, for the stock but we here care mostly about U.S. and to some extent, Canada. And in North America, RE/MAX was down 244 agents YOY. (Do note that RE/MAX made up some of the losses in October, down only 133 YOY.)
At one point in the earnings call, Nick Bailey, Chief Customer Officer, says they added over 800 agents in the U.S. and Canada combined since June 30. That’s true, but… US and Canada agent count is down 389 from Q1, down 886 from Q4/19 when RE/MAX had really emphasized its new “culture of recruiting” under Bailey’s lead, and frankly, down 265 from Q3/2019 when Nick Bailey was hired.
So Operating Income is down 54% YOY, Net Income down 61%, and even Free Cash Flow (always a strength of RE/MAX’s model) is down 20%.
This in a quarter where just about everybody else was booming. It was so hot and crazy that Redfin couldn’t boom as much as traditional brokers because they couldn’t hire agents fast enough, and eXp improved profit margins because so much business spilled over from great agents to marginal agents. Realogy had a fantastic Q3 all around, which implies that every traditional brokerage had a fantastic Q3 all around, even RE/MAX franchisees as evidenced by the much higher Broker Fees line.
So uh, yeah, I can’t imagine it is controversial to state that Q3 results are troubling for the Big Balloon.
The Highlight: Two Tech Acquisitions
What was kind of weird was that most of the earnings call was about two minor acquisitions that RE/MAX did: wemlo, a mortgage software company, and Gadberry Group, a location data company. I mean, yeah, sure, why not. They spent some $10 million in cash and some number of RE/MAX shares to do that. Good for Wemlo and Gadberry Group, and good for RE/MAX for its Motto Mortgage business and for adding more tech goodies for its agents.
So most of the questions from analysts had to do with that.
It was, frankly, a boring earnings call.
What I’ve learned over the years is that as a general matter, the analysts from Wall Street do not ask tough questions during earnings calls. It’s not good for them to get on any public company’s bad side. When they do, it’s so very subtle, so very… in between the lines. One such question came from Vikram Malhotra of Morgan Stanley:
Vikram Malhotra — Morgan Stanley — Analyst
Okay, great. And then just last one, if I may, where — I’m sure I can do some calculation to get number, but if you have it handy, where is agent penetration today for RE/MAX versus say a few years ago? And specifically, if you can give us some examples of where this penetration is in the regions you acquired over the last few years?
Karri Callahan — Chief Financial Officer
Yeah, so in terms of kind of agent count as a percentage of NAR, we’ve been pretty consistent. But I think the thing that’s really important to realize right, is that RE/MAX isn’t for everyone, right. We like to say that, a RE/MAX agent can work anywhere, but not any agent in the industry is going to work at RE/MAX. And so we’ve been kind of pretty consistent in that 5% of NAR transactions, market share has also been pretty consistent. You mentioned some of the acquisitions. We continue to have some outside penetration, especially up in the Northeast, we have a lot of opportunity to grow market share in New York and we’ve successfully executed on that opportunity. And so I think everything that we’re doing in terms of enhancing the value that we provide, really focusing on enhancing the tools that improved productivity, are really all kind of in the right direction, as we focus on the productive agents.
A RE/MAX agent can work anywhere, but not any agent in the industry is going to work at RE/MAX. A true statement.
No Wall Street analyst is going to press the issue. But I’m an industry analyst, so I will.
Given that a RE/MAX agent can work anywhere, and anywhere is coming hard after the RE/MAX agent, with either lower prices (eXp, HomeSmart, etc.) or more goodies (Compass) or a salary in these uncertain times (Redfin), but not any agent can work at RE/MAX… how does all that fit with the Culture of Recruiting again?
Seems to me that RE/MAX is caught in the horns of a dilemma. It has the best and most productive agents today, outside of Redfin. Those productive agents can go anywhere, they need far less from their broker, and accordingly, can get enough value from low-touch brokerages like eXp. I spoke with many of them; I’m fairly confident in that statement. How do you keep them?
The idea is booj, First, Gadberry Group, and whatever else. If those things worked as well as RE/MAX says they do, I can’t imagine we see US and Canada agent count be below 2018 levels. 1,896 agents in North America left RE/MAX between Q3 of 2018, before all the tech was introduced, and Q3 of 2020.
On the other hand, RE/MAX can’t go on a recruiting spree like eXp can because “not any agent in the industry is going to work at RE/MAX.” Elitism works if you’re elite — see Mercedes Benz and Porsche. But a lot of consumers buy Honda and Toyota because they don’t feel like (and in fact, can’t) afford the elite.
It’s Not Working
In Q2, I wrote:
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.
I then worried that if Q3 comes in better than expected, RE/MAX would take it as a sign that the horrible Q2 was a pandemic anomaly, and that their strategy is working or can work. Well, Q3 came in worse than expected. Not sure how it could have been worse.
So when I hear Adam Contos say, “We believe we’ve recaptured the momentum we had at the start of 2020, before the pandemic upended everything, and that we are well positioned for future growth” I have to think RE/MAX still hasn’t learned the key lesson of COVID: we are in a transformation, not a recession.
The steady as she goes strategy is not working. Maybe Wemlo and Gadberry Group together with additional adoption of First and booj will turn things around. Maybe agents will come flooding back to RE/MAX brokerages because they’re making so much money that they want to pay more.
I wouldn’t bet on any of that happening though.
Q3 should be a wakeup call for RE/MAX. Whatever it’s been trying since last year isn’t working. The proof is in the pudding of the disappointing results in a quarter when everybody was up, up, and up. So I’ll just repeat my thoughts from Q2:
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.
But winter is coming, and with the amped up competition in the industry, the days are getting shorter and shorter. I hope they can figure things out.