Earnings Call Transcript - RMAX Q3 2021

Operator, Operator

Good morning, and welcome to the RE/MAX Holdings Preliminary Third Quarter 2021 Earnings Conference Call and Webcast. My name is Julianne, 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, Vice President of Investor Relations. Mr. Schulz?

Andy Schulz, Vice President of Investor Relations

Thank you, operator. Good morning, everyone, and welcome to RE/MAX Holdings Preliminary Third Quarter 2021 Earnings Conference Call. Please visit the Investor Relations section of remaxholdings.com for all earnings related materials and to access the live webcast and replay of the call today. If you are participating through the webcast, please note that you will need to advance the slides as we move through the presentation. Turning to Slide 2. 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, financial measures and outlook, brand expansion, competition, technology, housing and mortgage market conditions, capital allocation, dividends, 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 and that may cause actual results to differ materially from those projected in forward-looking statements. These are discussed in our preliminary third quarter 2021 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. Please note that our third quarter 2021 financial results and other related information discussed on this call are preliminary. Our final results and financial information for the third quarter 2021 may vary materially from the preliminary financial information discussed on this call. Joining me on our call today are Adam Contos, our Chief Executive Officer; Karri Callahan, our Chief Financial Officer; Nick Bailey, President of RE/MAX; and Ward Morrison, President of Motto Franchising. With that, I'd like to turn the call over to RE/MAX Holdings CEO, Adam Contos. Adam?

Adam Contos, CEO

Thank you, Andy, and thanks to everyone for joining our call today. Looking at Slide 3, we again posted record financial results in the third quarter. Our strong performance was driven by better than anticipated results from our recent acquisition of RE/MAX Integra's North American regions, broad based contributions from our core operations, and a healthy housing market in both the US and Canada. We believe the third quarter was a strong affirmation of our strategy. Over the past few years, we've been investing to diversify and expand our revenue and growth opportunities. Our third quarter results illustrate how those efforts are paying off. Motto is perhaps the best example of that expansion and diversification. Motto recently celebrated its fifth birthday and the brand is truly coming of age. Franchise sales remained brisk and the open office count was up more than 30% year-over-year during the third quarter. We expect Motto to start generating a profit beginning next year, which is a notable achievement for our startup franchise. Overall, RE/MAX Holdings revenue for the third quarter was $91 million, an all-time high, with much of the year-over-year increase driven by our recent Integra acquisition, which so far has exceeded our expectations. More on that in a moment. Among our other recent acquisitions, Gadberry Group, now called G73 was another outperformer, posting a quarterly profit. First, in Wimo, our two tech startups are both showing steady progress and we expect to see more meaningful revenue contributions from them in 2022. Excluding the marketing funds, our core business generated almost 7% organic revenue growth in the third quarter with contributions from multiple facets across the company. As our acquisitions lap their respective first year anniversaries and start to fill more of the organic bucket, we're confident we'll see continued organic growth, which we expect to be in the mid single digits. We will continue to drive additional organic revenue growth, leveraging the strength of our business model as much of each incremental dollar of revenue tends to translate into profit. We saw that dynamic play out in Q3 as we generated record adjusted EBITDA of $35 million and record adjusted diluted EPS of $0.71. These strong results enabled us to again increase our profit guidance for 2021. Karri will update our outlook in just a few minutes. As I noted earlier, our Integra acquisition is off to a great start. This is a large, complicated, and important investment. Tremendous progress has been made to date with significant portions of the integration already completed, primarily where we have prioritized transitioning the customer-facing elements of the business. The teams involved are doing a terrific job and are focused on ensuring that our franchisees and agents continue to receive the outstanding support, services, and products they need to help them grow their businesses. For the immediate future, at least the remainder of this year and the first part of 2022, we'll focus largely on facilitating a smooth transition and enhancing the future growth trajectory of this significant investment. Moving to Slide 4. On the heels of the second most active September in the 14-year history of the RE/MAX National Housing Report, October home sales in 51 surveyed metros dropped 6.4% from September, almost double the typical seasonal decline. In many markets, home sales are getting pinched by near record prices and record low inventory. We're seeing the effects of a long, sustained run-up in prices and month-over-month home sales, and the days of immediate sales, multiple offers, and bidding wars on virtually every property are beginning to wane. This cool down is somewhat overdue and the October dip in sales could be a step toward a more balanced housing market. Overall, the market remains relatively robust even as it trends towards more seasonal norms. Sales are still happening quickly but at a slightly slower pace than earlier this year. October's average days on market of 27 was one day more than September and reflected sales that were 11 days faster on average than in October 2020. Inventory remains an issue. The 1.3 months supply of inventory in October was down from September's 1.5 month supply, and having more homes on the market would be welcome news. Homebuilders are trying to fill the gap especially with multifamily home construction, but many of them are being delayed by shortages in labor and materials as well as general supply chain challenges. Homebuyers may see some relief in price appreciation during the coming months even as sales levels stay high. Sellers remain in a very strong position, but with price stabilization and the continuation of competitive interest rates, buyers should find the coming months to be more advantageous than any time earlier this year. In any event, 2021 has been a strong year for sales and should continue to be. The value of a skilled full-time real estate professional will be even more evident as the market rebalances a bit. With that, I'll turn it over to Nick for some greater detail on RE/MAX.

Nick Bailey, President of RE/MAX

Thanks, Adam. Good morning, everyone. Looking at Slide 5, overall agent count increased nearly 5% year-over-year to a new record of almost 141,000 agents. We've added over 6,000 agents worldwide since September 2020, highlighted by exceptional growth in Canada. In fact, our combined US agent count is approaching levels we haven't seen in over a dozen years despite the competitive marketplace and the unusual circumstances of the past year. US agent count held steady year-over-year, highlighting the resiliency and attractiveness of our brand. Because of their productivity, RE/MAX agents tend to be recruited aggressively and consistently, especially by brands with an agent-to-agent recruiting model. Productive agents stay with our network, however, because they value its many benefits and advantages. Our focus continues to be on providing the best services so that our agents can focus on increasing their productivity and helping consumers close more sales. The industry is filled with discount options and complex compensation structures, but we continue to build our market presence by appealing to full-time professionals who would rather work with buyers and sellers than recruit other agents. We believe it's a sound strategy that will spur new growth, productive growth over time. It's happening in Canada right now where our growth is accelerating. We've added over 2,000 agents, a significant 10% gain year-over-year. In Canada, where being a real estate agent is widely viewed as a full-time profession, RE/MAX is the market leader and the best choice for those who want to work among other strong like-minded professionals. Adding the Canadian portion associated with the Integra transaction positions us for even greater things across the country, bringing the RE/MAX Ontario, Atlantic Canada region and our company-owned Western Canada region together as a unified force is enabling us to scale our efforts in technology, marketing, and other services. The alignment will create a more seamless experience for franchisees, agents, and even consumers, and shifting 12,000 Canadian agents from an independent region to a company-owned will open up even more opportunities in the future. When you factor in our long-time market leadership in Quebec, the prospects across all of Canada become even more exciting; it is also one of the many reasons we continue to invest in our Canada operations. To this point, we officially announced earlier this month that Booj was launched in Canada. The introduction of our proprietary technology suite greatly enhances our value proposition and further differentiates us from the competition. Shifting to the global arena, our international agent count increased over 8.5% to more than 55,000 agents. Recall when that was surpassed 50,000 agents outside the US and Canada in the summer of 2020, so increasing more than 10% in a little over a year during a pandemic has been impressive growth. And despite already being in over 110 countries and territories, we continue to move into new geographies due to the strong desire to be affiliated with the RE/MAX brand. During the past 90 days, we've announced the sales of master franchise rights into three additional countries: Pakistan, Guyana, and Uzbekistan. Very exciting news and with these sales come additional opportunities to grow.

Ward Morrison, President of Motto Franchising

Thanks, Nick. Looking at Slide 7. The last 90 days have been a very exciting time for our mortgage segment. On the Motto side, we continue to sell franchises at a near record rate through September 30, and we expect to sell 60 or more franchises this year. Lifetime to date, we have now sold almost 300 franchises, and we expect to eclipse that significant milestone before year-end. Notably, office openings continue to accelerate as expected. We are seeing the echo effect of last year's inflection in franchise sales and are experiencing a similar uptick in office openings, which grew more than 30% year-over-year in Q3. In fact, year-to-date, we have opened more offices than we have sold, a first in our history. We now have over 175 open Motto franchises in almost 40 states and we are aiming to have 200 open offices by year-end. A big area of organizational focus for our Motto Mortgage business this year has been the continued development of Wemlo. We acquired Wemlo last year to solve one of our Motto franchisees’ primary pain points: finding steady, dependable, and economic loan processing services. With the addition of Wemlo, Motto offices now have access to an operationally ingrained third-party loan processing team, which is held to the same high standards of customer service that have come to define the Motto Mortgage brand. The exciting news we announced last month was the introduction of Wemlo's Loan Brokering System or LBS. We believe our LBS is a revolutionary technology, a software suite purpose-built to address the exact needs of the professional loan originator operating in the mortgage broker channel. And importantly, the streamlined Wemlo LBS doesn't require brokers to navigate through irrelevant system tasks designed for other landing channels. We have spent the past five years gathering real-world experiences from hundreds of Motto loan originators so we could understand precisely where traditional origination systems fall short for the broker channel. In developing the Wemlo LBS, we have been focused on how to better leverage a mortgage broker's most valuable resource, time. Our team knows that loan originators often spend precious time navigating through unneeded components in integrated loan systems; that lost time could be better spent developing value-add solutions for our franchisees and providing high-quality service to their consumers. Our Motto affiliates deserve the efficiencies of a purpose-built platform, and the broker channel is more than ready for modern technology that simplifies their unique workflow. The Wemlo LBS will officially launch in the mortgage brokerage industry in January 2022, but Motto offices will be granted first access and begin onboarding this year. Motto affiliates are receiving the LBS platform at no additional fee, as well as initial discounts on the integrated Wemlo loan processing offerings and exclusive LBS product features. With that, I'd like to turn the call over to Karri.

Karri Callahan, CFO

Thank you, Ward. Good morning, everyone. Moving to Slide 8. Total revenue grew 28% to a record $91 million. Excluding the marketing funds, revenue was almost $68 million. Acquisitions increased overall revenue by 18%, primarily due to incremental revenue from the RE/MAX Integra North American regions acquisition. However, we are also seeing year-over-year growth for both Wemlo and Gadberry. FX impacted revenue by a negligible amount. Notably, our organic revenue growth was up almost 7%. Even after setting aside broker fees, this is the second quarter in a row we generated mid-single digit organic growth. Many organic growth drivers contributed to our strong top line performance during Q3, including agent count growth, pricing, Motto, and more targeted use of agent recruiting incentives, to name the most notable ones. If you exclude the book legacy runoff, our organic growth improved by almost another 60 basis points. We believe we'll see continued mid-single digit organic growth for the foreseeable future, which should drive further margin expansion. Looking at Slide 9. Selling, operating, and administrative expenses were $51.1 million in the third quarter of 2021, up significantly over the prior year. The year-over-year comparisons for SO&A are not particularly meaningful due to one-time items in 2020 related to the pandemic and our reduced spend in Q3 of last year. Additionally, our 2021 third quarter SO&A included expenses related to the acquisition of RE/MAX Integra's North American operations. While our staff travel is picking up in response to the importance of in-person events and training that our customers are now eager to participate in, our spending levels remain well behind our prepandemic levels in 2019. In terms of our newer businesses, we continue to see margins from our recent acquisitions trending in the right direction. While Gadberry has already started to generate a monthly profit ahead of our expectations, growth in Wemlo is ramping a bit slower. We have plans in place to boost each offering's revenue in 2022. Motto continues to perform well, bolstered by the accelerated office openings. Along with Wemlo, we expect our mortgage business to generate a profit in 2022 and thereafter. Moving to Slide 10. The company's fourth quarter and full year 2021 outlook assumes no further currency movements, acquisitions, or divestitures. For the fourth quarter of 2021, we expect agent count to increase 2.5% to 3.5% over fourth quarter 2020, revenue in the range of $86 million to $90 million, including revenue from the marketing funds in a range of $22 million to $24 million, and adjusted EBITDA in a range of $27.5 million to $30.5 million. For the full year 2021, we're decreasing our agent count guidance due to slower than expected global growth, tightening our revenue range, and increasing our adjusted EBITDA guidance due to better than expected third quarter results. We expect agent count to increase 2.5% to 3.5% over full year 2020, down from 5% to 6%, revenue in a range of $326.5 million to $330.5 million, including revenue from the marketing funds in a range of $81.5 million to $83.5 million, change from $321 million to $336 million, and adjusted EBITDA in a range of $116 million to $119 million, up from $113 million to $118 million. Now I'll turn it back to Adam.

Adam Contos, CEO

Thanks, Karri. Looking at Slide 11. We had a record third quarter in many respects. Our recent acquisition of RE/MAX Integra's North American regions is off to a terrific start. We're seeing our many investments really begin to pay off. We are a more diversified business with plentiful growth opportunities. We believe we have real momentum right now and we're looking forward to finishing 2021 with strength and setting a strong foundation to build upon through 2022. With that, operator, let's open it up for questions.

Operator, Operator

Your first question comes from Richard Hill from Morgan Stanley.

Richard Hill, Analyst

Thanks for the prepared remarks and the additional color. I did want to talk maybe a little bit more about your revenue per agent. What does that look like? Has that decreased? How do you think about that relative to where home valuations are going and maybe some of the trends that you're seeing in your agent count?

Karri Callahan, CFO

As we think about revenue per agent, I think it really highlights the differences in the RE/MAX model with over 60% of our revenue being recurring in nature. That revenue per agent, especially in our owned regions here in North America, has been pretty consistent, kind of in that $2,600 to $2,700 per agent. Obviously, with broker fee and home price appreciation moving upwards, that's continuing to increase our revenue per agent. But just the difference in our business model and the recurring fee nature really helps protect us in any kind of macro environment. And we've seen that pretty consistent with an upward trajectory and contributions from broker fee as well as the continuing franchise fee increase we did earlier this year.

Richard Hill, Analyst

And then you made a pretty interesting comment. And hopefully, I'm not putting words in your mouth, but that you're keeping the most productive brokers. How do you guys measure that? And I'm not pushing back on it. I'd just like to maybe get a little bit more transparency on how you think through that.

Nick Bailey, President of RE/MAX

That's something that's actually been on our radar. As we look across the system with a footprint as large as ours, we have a number of ways that we look at each and every franchisee to make sure that they're performing at the required levels. And so we have taken, as we do on a regular basis, an analysis of all of our franchisees. And we have to look at those that are underperforming and unfortunately, may not be part of the system. So we have had some terminations for underperformance that has been part of just our regular course of business, but we've had a few of those recently in the third quarter.

Operator, Operator

Your next question comes from Ryan McCagney from Zelman & Associates.

Ryan McCagney, Analyst

So in terms of the acquisitions over the past few years, G73 was one you called out in particular, mentioning the quarterly profit. I was hoping maybe you can remind us on kind of the revenue model there or the economic model there? And then also, when we think about first, sounds like that one is still in investment mode, but the outlook is 2022, maybe that flips. So curious if you can just again hit on the G73 kind of the economic model there, how we should think about that? And then for all the ancillaries, I guess, is this flowing through, I believe, within the franchise sales and there was some better growth there than at least I was modeling. So is that a reflection of some of these new businesses starting to ramp up there on the revenue side? And then I have a second question I'll come back to.

Karri Callahan, CFO

As we look at just the holistic investments that we've made in the business, it's been part of a broad effort over the last couple of years from a diversification perspective. And we're starting to see some momentum across all of the investments. So from a Gadberry perspective, it's more of a subscription-based revenue stream just based on the products that are sold. It is running through franchise sales and other revenue. And so some of that performance was contributing to the overall top line. And I think that's what we're so excited about. We said if we can get the top line going, given the strength of our franchise model, that would translate into profit. And so as we look ahead to 2022 and beyond, a little bit slower ramp in '21 but positioning ourselves well for future adoption across first Wemlo and continued profitable growth on Gadberry in the future.

Adam Contos, CEO

And I'll add a little bit. This is just really kind of the results of what we've been talking about over the past couple of years of our efforts to ensure that we provide a deeper knowledge base and capability in our data and technology for our agents and our franchisees, obviously, with the efforts of helping the consumer so much better. So what you're starting to see with these results is what we've been saying; hey, we're going to see some results from this, and we're seeing that occur now from these different technology acquisitions and the integrations going on in the network. But also our lack of dependence, we're pretty data and technology independent now in the industry and that's a good thing for our network and our system because it allows us to provide effort in the areas that we see the agents desiring better value out of that. So we're pretty proud of the direction it's headed and anticipating continued progress in these.

Ryan McCagney, Analyst

I have a follow-up question for Ward regarding the mortgage side. To clarify your earlier comments about Wemlo and the LBS system, it seems that Motto brokers will have either free or discounted access to it. My question is whether we should consider the LBS system as a potential source of incremental revenue for RE/MAX and its Motto brokers, or do you think that the franchise fees from the brokers will cover this cost? Additionally, it appears that there might be even greater revenue opportunities outside the Motto network, targeting loan brokers or mortgage brokers who might be interested in this product. Could you clarify your comments on the access for Motto brokers and the revenue potential associated with it?

Ward Morrison, President of Motto Franchising

On the Motto side, we previously used the Encompass platform, and we will transition all of our personnel to the Wemlo LBS. As a result, there will be no cost for our Motto owners to use that platform, just as there was no cost for the Encompass platform before. However, being on the Wemlo platform is expected to enhance the processing service since users can simply click a button to process with Wemlo. We anticipate this will significantly improve Wemlo's processing capabilities. Additionally, starting in January, we will introduce the Wemlo LBS to the mortgage broker channel as a Software-as-a-Service. We see potential for incremental growth as we begin to roll out the program and make it available to the industry, which we believe will lead to additional revenue opportunities as we progress.

Operator, Operator

Your next question comes from Anthony Paolone from JPMorgan.

Anthony Paolone, Analyst

My first question is with regards to the reduced agent count growth. Can you talk about what regions perhaps are driving that, and also maybe what's changed or why more specifically the reduced outlook?

Adam Contos, CEO

As we entered 2021 and particularly this quarter, we started to notice the positive effects of our investments and focus on recruiting, with many encouraging developments globally. Canada is performing exceptionally well, and we've identified states in the US that are meeting our expectations for adding hundreds of agents this year. However, as I mentioned in response to an earlier question, a factor that influenced our performance going into Q3 was the situation in three states: California, Indiana, and Ohio, as well as New Jersey. In those areas, we had to terminate some underperforming franchisees in Q3, which slightly disrupted our momentum. While we continue to work towards achieving our goals with gross additions and revenue growth, those unexpected terminations impacted us more than we anticipated. On a global scale, it's important to note that, unlike the positive trends in the US and Canada, the ongoing pandemic, particularly with severe lockdowns in certain countries, has significantly hindered business growth. Recent news from Europe underscores the extent of restrictions there, which are much greater than what we're experiencing in North America. This situation continues to affect our original forecasts.

Anthony Paolone, Analyst

And then you had called out the strength in Canada and the growth that you're achieving there. Can you talk about or put some brackets around where you see your market share now, where you think that can go? Just trying to understand the runway you might have there still?

Adam Contos, CEO

I think that market share has always been a great contributor to our strength all across Canada, which we average approximately 30% plus all across Canada and even in, say, the Quebec region upwards of 40%. So very, very strong market position throughout the country. And I think you couple that with a strong real estate market; it even enhances our ability to grow. And we see that across the US as well. In the cities and the markets where we have the strongest amount of market share, we have the greatest strength of franchise sales. We have the greatest strength in agent count growth. So just Canada as a whole, we believe market share is a major driver in helping us grow organically.

Anthony Paolone, Analyst

And then just last one, if I might, for Karri. Can you maybe just help us with anything we should keep in mind in normalizing SOA and also like noncash comp going forward basis? Because it sounds like or it looked like maybe those were kind of noise in the quarter.

Karri Callahan, CFO

So there's a little bit of noise in the quarter. With regards to some of the equity-based compensation, it was up a little bit due to some one-time charges for Integra. On a prospective basis in Q4 and beyond, looking to get back to kind of $7 million per quarter run rate. A couple of other things, noncash-wise related to amortization expense. So we are expecting some incremental amortization expense coming from the Integra acquisition. Quarterly run rate kind of in the $2 million to $3 million of incremental amortization expense as a result of Integra.

Anthony Paolone, Analyst

And so that will be an adjusted EPS hit or…

Karri Callahan, CFO

Yes, that will affect adjusted EPS.

Operator, Operator

Your next question comes from James Hawley from Stephens.

James Hawley, Analyst

In the earnings release, you mentioned that a revenue driver was the reduction in recruiting initiatives. Could you briefly explain which initiatives you have discontinued and which ones you have retained that are performing well?

Karri Callahan, CFO

So when we look at recruiting initiatives, it's really a holistic view across the value proposition and then other incentives that we might pull from a financial perspective. That's nothing new that we've done. It's been a holistic view really over the last several years. We had placed a little bit heavier focus on some of the financial incentives previously while we were really focusing on enhancing the value proposition. And really as we've transitioned into 2021, really much more of a focus on delivery of the value proposition and less utilization of fee waivers. And so that's what you're seeing in terms of the year-over-year comp from a financial perspective.

James Hawley, Analyst

And then just one more quick here. Could you also share pre-acquisition with Integra, its agent count and how it's been trending across the US and Canada relative to RE/MAX owned?

Karri Callahan, CFO

So as we look at the Integra regions holistically, they have been on the forefront of growth from an agent count perspective. So both the US and Canada have been outsized growers in terms of comparisons against the rest of our operations. That's part of the reason why we were so excited about the opportunity. And as we noted on the scripted remarks, in the third quarter, the asset even performed better than our expectations. And so continuing to see that outsized performance, both in terms of agent count growth as well as that leading to revenue and earnings contributions as well.

Operator, Operator

We have no further questions in queue. I'd like to turn the call back over to Andy Schulz for any closing remarks.

Andy Schulz, Vice President of Investor Relations

Thank you, operator, and thanks to everyone joining us on the call today. Have a great holiday week for those in the US. This concludes the call.

Operator, Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.