Obviously, this analysis is late. RE/MAX reported its Q4 and full year 2020 results on February 25th, almost two weeks ago. I’m just now getting around to it because… well… a sense of obligation perhaps.
Because frankly, after everything I wrote about RE/MAX the last few earnings calls (Q3 here, Q2 here, Q1 here, Q4-2019 here, etc.), I don’t have much to say. Nothing has changed, except the details. Seems to me that there is nothing left to do, except look forward at 2021 or as the just-concluded earnings call revealed, look forward to 2022 and beyond.
Some of the Numbers
In the name of tradition, let’s take a look at some numbers. Instead of posting what you can find all over the place, let me give you this table of YOY changes for each quarter going back to Q4 of 2019:
| Q4/2019 | Q1/2020 | Q2/2020 | Q3/2020 | Q4/2020 | |
| Revenue | (0.2%) | 0.7% | (24.2%) | 0.5% | 7.6% |
| Operating Income | (53.4%) | (9.1%) | (60.7%) | (53.9%) | (32.4%) |
| Net Income | (54.0%) | (40.3%) | (59.3%) | (61.3%) | (55.3%) |
| US Agent Count | – | – | (1.6%) | (0.4%) | (1.3%) |
| US & Canada Agent Count | 0.3% | 0.2% | (1.4%) | (0.3%) | (0.5%) |
| International Agent Count | 16.0% | 14.8% | 14.1% | 15.3% | 15.9% |
It should come as no surprise then that the full year 2020 results were… well…
| REMAX 2020 vs 2019 | |||
| (in thousands, except agent data) | 2020 | 2019 | |
| Revenue: | |||
| Continuing franchise fees | 90,217 | 99,928 | (9.7%) |
| Annual dues | 35,075 | 35,409 | (0.9%) |
| Broker fees | 50,028 | 45,990 | 8.8% |
| Franchise sales and other revenue | 26,279 | 28,667 | (8.3%) |
| Brokerage revenue | – | – | |
| Total revenue | 201,599 | 209,994 | (4.0%) |
| Operating expenses: | |||
| Selling, operating and administrative expenses | 128,998 | 119,232 | 8.2% |
| Depreciation and amortization | 26,691 | 22,323 | 19.6% |
| Impairment Charge | 7,902 | – | |
| Total operating expenses | 163,591 | 141,555 | 15.6% |
| Operating income | 38,008 | 68,439 | (44.5%) |
| Operating Income Margin | 18.9% | 32.6% | (42.2%) |
| Other expenses, net: | |||
| Interest expense | (9,223) | (12,229) | 24.6% |
| Interest income | 340 | 1,446 | (76.5%) |
| Foreign currency transaction (losses) gains | (2) | 109 | (101.8%) |
| Total other expenses, net | (8,885) | (10,674) | 16.8% |
| Income before provision for income taxes | 29,123 | 57,765 | (49.6%) |
| Provision for income taxes | (9,103) | (10,909) | 16.6% |
| Net income | 20,020 | 46,856 | (57.3%) |
| Less: net income attributable to non-controlling interests | 9,056 | 21,816 | (58.5%) |
| Net Income, RE/MAX Holdings | 10,964 | 25,040 | (56.2%) |
| Net Income Margin | 5.4% | 11.9% | (54.4%) |
| Adjusted EBITDA | 92,558 | 103,515 | (10.6%) |
| Adjusted EBITDA margin (b) (no Marketing Fund) | 34.8% | 36.7% | (5.2%) |
| Free cash flow | 64,672 | 73,644 | (12.2%) |
| Agent count at period end | 137,792 | 130,889 | 5.3% |
Find me the good news in that table. Broker fees being up 9% YOY is about it, and since Broker fees is the line item that is directly related to GCI (on the RE/MAX business model, franchisees collect 5% of GCI and pass along 1% to RE/MAX), and 2020 was the hottest market on record… I’m not even sure if that’s good news. I mean, just home prices jumped almost that much in 2020. In October, CoreLogic was reporting a 7.3% increase in national home prices. Radian Home Price Index reported an increase of 8.0% for 2020 as a whole. Is being up 8.8% really that big a win?
Yes, much of the declines in revenue and profitability have to do with RE/MAX taking steps due to COVID to discount fees, forgive fees, etc. That’s to be expected. But boy, it’s a lot of big negative numbers, and it isn’t as if other companies didn’t have to do the same for at least a while due to COVID
The improvement in agent count is deceptive, since it’s up 5.3% almost entirely due to growth outside of the core U.S. and Canada markets. The U.S. agent count is now the lowest it has been since 2018 except for Q2 of 2020 when it hit 61,677. Again, this in a year when real estate was insanely hot, and NAR hit a new record in membership numbers.
RE/MAX management was asked about that during the earnings call. Here’s the exchange:
Anthony Paolone — J.P. and Securities LLC — Analyst
Thanks, good morning. My first question revolves around just U.S. agent count. Can you maybe give a little more color as to just more broadly given the strength in housing, whether you’re seeing just more agents move into the market and just the general opportunity set therein is try to reinvigorate growth, I guess into 2021 on that part?
Nick Bailey — Chief Customer Officer
Sure. Hi, Anthony. This is Nick. Thanks for the question. Yeah, when you look at total realtor count in the U.S., The National Association of Realtors just several months ago announced that they hit an all-time high in membership. So we have seen an increase of licensees coming into the market in general, and that does affect some companies. It affects us slightly. But at the same time, we are not the destination for every single agent, we focus on more the top producing full time associates. So a lot of those new agents are not our primary targets. That being said though, obviously, the pool is large and the investments that we’ve made in recruiting over last year are bearing fruit, and we expect those to show good results for the upcoming year. [Emphasis added]
So since RE/MAX doesn’t bother with the newbies (which doesn’t seem to be true given stories from the field, but whatever, let’s stay with the narrative) let’s talk about these top producing full time associates. Compass in its S-1 revealed that it recruited 1,899 Principal Agents in 2020. Compass also only focuses on top producing full time associates.
Is there an explanation?
Everything I’ve said about RE/MAX over the past year or so remains true. It’s a great brand, with some great people, but man… they’re just treading water, slowly drip-drip-dripping agents away in the U.S., making up for it with international expansion (because in non-MLS markets, the brand matters more), betting on technology to somehow change their fortunes and looking ahead to the future.
Look Forward, Ever Forward!
Adam Contos opened the earnings call with these words:
I’m proud of our team and the terrific work they did in 2020. We remain encouraged by the trends we are seeing in our business, with a buoyant housing backdrop, expected contributions from our recent acquisitions, and an upward progress in our legacy business, we think we are poised for meaningful growth in 2021 and beyond.
And Nick Bailey followed with these hopeful words:
After a very solid third quarter, agent count in the U.S. helped stabilize during Q4. Looking ahead, we remain focused on recruiting and retention and creating more opportunities for our affiliates. We expect the macro housing environment will remain robust in the coming year with strong demand outpacing supply. The battle for listings will stay highly competitive, and agents who are experienced, productive and armed with seller focus tools, such as our First app, should enjoy an edge in that regard.
We believe our efforts will pay dividends in 2021, and we expect to grow our agent count, including the U.S. and Canada this year. We’ve made significant investments over the past few years to enhance and improve our value proposition, and we continue to invest heavily.
For their sake, I hope they have meaningful growth in 2021 and beyond. Because “agent count in the U.S.” stabilized in the sense that RE/MAX only lost one agent from Q3 to Q4… but they’re still down 818 agents for the year. And again, Compass picked up almost 1,900 agents in 2020.
Then again, RE/MAX is focused on recruiting and retention and expects to reverse the years-long trend in U.S. and start adding some top producing full time associates to the brand. They’ll come because of booj and First and the edge that technology provides, despite the relatively high cost of belonging to a RE/MAX brokerage. It could happen.
Ward Morrison of Motto Mortgage continued the theme of a bright, bright future:
And as Adam mentioned earlier, we believe this business could generate $100 million or more in annual revenue over time. We continue to believe we can open at least 1,000 model stores eventually and perhaps many more than that, generating a $50 million plus annual revenue opportunity.
Karri Callahan, CFO, tried to remain forward looking and positive and upbeat, but given the nature of her job, she kind of had to say this:
Also, as we mentioned last quarter, margins will be adversely impacted initially in 2021 due to our first wemlo and Gadberry acquisition, but that impact should lessen as the year unfolds and each acquisition gets closer to breakeven. Despite an estimated net investment in First, wemlo and Gadberry Group, are between $2.5 million and $3.5 million this year and other ongoing investments in our business, we expect to grow absolute dollars of adjusted EBITDA in 2021. We expect our new businesses from the past four years, Motto, First, wemlo and Gadberry Group, individually and collectively slip from a net investment, to positively impacting earnings over the next year. Alongside the expected improvement in our RE/MAX business, we would be disappointed if we didn’t generate at least $10 million more and Adjusted EBITDA in 2022 than we anticipate for 2021. This assumes no additional acquisitions, and of course, that the housing market remains healthy next year as we expect it to be this year. [Emphasis added]
So yeah, all of the acquisitions and new ventures — including Motto Mortgage — have been and are and will be a drag on profits, at least for 2021. But they would be disappointed if they didn’t earn another $10 million in Adjusted EBITDA in 2022.
What about 2021? Look ahead! The future is so very bright.
Since we’re in a hopeful and optimistic mood, I too hope their prognostications are correct. I’d love to see Motto generate $100 million or more in annual revenue. I’d love to see RE/MAX disprove the trend of the past that technology doesn’t drive recruiting or productivity or profitability, because that would be interesting… since it has never happened.
The Wrap-up
I suppose with the year that just passed, there really isn’t much else for RE/MAX to do but to look ahead, whether to 2021 or even to 2022. Because 2020 was objectively terrible. To some extent, they deserve a pass since COVID and the government shutdown were disruptive events. Other companies bounced back, and then some, but RE/MAX is one of the old stalwarts. Maybe they can’t move that fast. So let’s see how they do in 2021.
The past is prologue, says RE/MAX. Don’t look back; look ahead. The future is bright.
-rsh
