UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2021.
OR
☐
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
Commission file number: 001-36101
RE/MAX Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware
80-0937145
(State or other jurisdiction ofincorporation or organization)
(I.R.S. EmployerIdentification Number)
5075 South Syracuse StreetDenver, Colorado
80237
(Address of principal executive offices)
(Zip Code)
(303) 770-5531
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Class A Common Stock, $0.0001 par value per share
RMAX
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Emerging growth company
Non-accelerated filer
Smaller reporting company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
On April 30, 2021, there were 18,890,602 outstanding shares of the registrant’s Class A common stock (including unvested restricted stock), $0.0001 par value per share, and 1 outstanding share of Class B common stock, $0.0001 par value per share.
Table of Contents
TABLE OF CONTENTS
Page No.
PART I. – FINANCIAL INFORMATION
Item 1.
Financial Statements
3
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Income
4
Condensed Consolidated Statements of Comprehensive Income
5
Condensed Consolidated Statements of Stockholders’ Equity
6
Condensed Consolidated Statements of Cash Flows
7
Notes to Unaudited Condensed Consolidated Financial Statements
8
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
20
Item 3.
Quantitative and Qualitative Disclosures About Market Risks
28
Item 4.
Controls and Procedures
29
PART II. – OTHER INFORMATION
Legal Proceedings
Item 1A.
Risk Factors
30
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
31
SIGNATURES
32
2
Item 1. Financial Statements
RE/MAX HOLDINGS, INC.
(In thousands, except share and per share amounts)
(Unaudited)
March 31,
December 31,
2021
2020
Assets
Current assets:
Cash and cash equivalents
$
102,632
101,355
Restricted cash
21,500
19,872
Accounts and notes receivable, current portion, less allowances of $11,705 and $11,724, respectively
29,544
29,985
Income taxes receivable
2,158
1,222
Other current assets
14,715
13,938
Total current assets
170,549
166,372
Property and equipment, net of accumulated depreciation of $15,292 and $14,731, respectively
9,184
7,872
Operating lease right of use assets
37,816
38,878
Franchise agreements, net
68,337
72,196
Other intangible assets, net
28,284
29,969
Goodwill
176,008
175,835
Deferred tax assets, net
49,162
48,855
Income taxes receivable, net of current portion
1,980
Other assets, net of current portion
17,068
15,435
Total assets
558,388
557,392
Liabilities and stockholders' equity
Current liabilities:
Accounts payable
5,782
2,108
Accrued liabilities
67,208
68,571
Income taxes payable
9,884
9,579
Deferred revenue
24,689
25,282
Current portion of debt
2,356
2,428
Current portion of payable pursuant to tax receivable agreements
3,590
Operating lease liabilities
5,826
5,687
Total current liabilities
119,335
117,245
Debt, net of current portion
220,676
221,137
Payable pursuant to tax receivable agreements, net of current portion
29,974
Deferred tax liabilities, net
496
490
Deferred revenue, net of current portion
19,601
19,864
Operating lease liabilities, net of current portion
48,794
50,279
Other liabilities, net of current portion
5,411
5,722
Total liabilities
444,287
444,711
Commitments and contingencies
Stockholders' equity:
Class A common stock, par value $.0001 per share, 180,000,000 shares authorized; 18,719,248 and 18,390,691 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively
Class B common stock, par value $.0001 per share, 1,000 shares authorized; 1 share issued and outstanding as of March 31, 2021 and December 31, 2020, respectively
—
Additional paid-in capital
498,810
491,422
Retained earnings
21,433
25,139
Accumulated other comprehensive income, net of tax
653
612
Total stockholders' equity attributable to RE/MAX Holdings, Inc.
520,898
517,175
Non-controlling interest
(406,797)
(404,494)
Total stockholders' equity
114,101
112,681
Total liabilities and stockholders' equity
See accompanying notes to unaudited condensed consolidated financial statements.
Three Months Ended March 31,
Revenue:
Continuing franchise fees
25,374
24,143
Annual dues
8,672
8,921
Broker fees
11,953
9,444
Marketing Funds fees
18,145
17,522
Franchise sales and other revenue
8,151
10,242
Total revenue
72,295
70,272
Operating expenses:
Selling, operating and administrative expenses
43,676
34,677
Marketing Funds expenses
Depreciation and amortization
6,937
6,310
Total operating expenses
68,758
58,509
Operating income
3,537
11,763
Other expenses, net:
Interest expense
(2,098)
(2,682)
Interest income
163
269
Foreign currency transaction gains (losses)
(20)
(270)
Total other expenses, net
(1,955)
(2,683)
Income before provision for income taxes
1,582
9,080
Provision for income taxes
58
(3,790)
Net income
1,640
5,290
Less: net income attributable to non-controlling interest
548
2,659
Net income attributable to RE/MAX Holdings, Inc.
1,092
2,631
Net income attributable to RE/MAX Holdings, Inc. per share of Class A common stock
Basic
0.06
0.15
Diluted
Weighted average shares of Class A common stock outstanding
18,496,532
17,974,264
18,866,727
18,033,631
Cash dividends declared per share of Class A common stock
0.23
0.22
(In thousands)
Change in cumulative translation adjustment
79
(230)
Other comprehensive income (loss), net of tax
Comprehensive income
1,719
5,060
Less: comprehensive income attributable to non-controlling interest
586
2,465
Comprehensive income attributable to RE/MAX Holdings, Inc., net of tax
1,133
2,595
(In thousands, except share amounts)
Accumulated other
Class A
Class B
Additional
comprehensive
Non-
Total
common stock
paid-in
Retained
income (loss),
controlling
stockholders'
Shares
Amount
capital
earnings
net of tax
interest
equity
Balances, January 1, 2021
18,390,691
1
Distributions to non-controlling unitholders
(2,889)
Equity-based compensation expense and dividend equivalents
459,330
12,679
(472)
12,207
Dividends to Class A common stockholders
(4,326)
Change in accumulated other comprehensive income
41
38
Payroll taxes related to net settled restricted stock units
(130,773)
(5,291)
Balances, March 31, 2021
18,719,248
Balances, January 1, 2020
17,838,233
466,945
30,525
414
(399,510)
98,376
(2,777)
368,375
5,962
(289)
5,673
(3,986)
(36)
(194)
(82,645)
(2,268)
Balances, March 31, 2020
18,123,963
470,639
28,881
378
(399,822)
100,078
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Bad debt expense
287
3,435
Equity-based compensation expense
12,054
2,186
Deferred income tax expense
(320)
2,241
Fair value adjustments to contingent consideration
(280)
(505)
Non-cash lease expense (benefit)
(284)
Other, net
87
(504)
Changes in operating assets and liabilities
711
(4,804)
Net cash provided by operating activities
20,832
13,649
Cash flows from investing activities:
Purchases of property, equipment and capitalization of software
(4,381)
(1,965)
Net cash used in investing activities
Cash flows from financing activities:
Payments on debt
(660)
Distributions paid to non-controlling unitholders
Dividends and dividend equivalents paid to Class A common stockholders
(4,798)
(4,275)
Payments related to tax withholding for share-based compensation
Net cash used in financing activities
(13,638)
(9,980)
Effect of exchange rate changes on cash
92
(205)
Net increase in cash, cash equivalents and restricted cash
2,905
1,499
Cash, cash equivalents and restricted cash, beginning of period
121,227
103,601
Cash, cash equivalents and restricted cash, end of period
124,132
105,100
Supplemental disclosures of cash flow information:
Cash paid for interest
1,970
2,556
Net cash paid for income taxes
926
1,079
1. Business and Organization
RE/MAX Holdings, Inc. (“Holdings”) and its consolidated subsidiaries, including RMCO, LLC (“RMCO”), are referred to hereinafter as the “Company.”
The Company is a franchisor in the real estate industry, franchising real estate brokerages globally under the RE/MAX brand (“RE/MAX”) and mortgage brokerages within the United States (“U.S.”) under the Motto Mortgage brand (“Motto”). RE/MAX, founded in 1973, has nearly 140,000 agents operating in over 8,000 offices and a presence in more than 110 countries and territories. Motto, founded in 2016, is the first nationally franchised mortgage brokerage in the U.S. RE/MAX and Motto are 100% franchised—the Company does not own any of the brokerages that operate under these brands.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying Condensed Consolidated Balance Sheet at December 31, 2020, which was derived from the audited consolidated financial statements at that date, and the unaudited interim condensed consolidated financial statements and notes thereto have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The accompanying condensed consolidated financial statements are presented on a consolidated basis and include the accounts of Holdings and its consolidated subsidiaries. All significant intercompany accounts and transactions have been eliminated. In the opinion of management, the accompanying condensed consolidated financial statements reflect all normal and recurring adjustments necessary to present fairly the Company’s financial position as of March 31, 2021 and the results of its operations and comprehensive income, cash flows and changes in its stockholders’ equity for the three months ended March 31, 2021 and 2020. Interim results may not be indicative of full-year performance.
These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements within the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (“2020 Annual Report on Form 10-K”). Please refer to that document for a fuller discussion of all significant accounting policies.
Use of Estimates
The preparation of the accompanying condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Segment Reporting
The Company operates under the following four operating segments: Real Estate, Mortgage, Marketing Funds and booj. Due to quantitative insignificance, the booj operating segment does not meet the criteria of a reportable segment and is included in “Other”.
Revenue Recognition
The Company generates most of its revenue from contracts with customers. The Company’s major streams of revenue are:
Annual Dues
The activity in the Company’s deferred revenue for annual dues consists of the following (in thousands):
Balance atbeginning of period
New billings
Revenue recognized (a)
Balance at endof period
Three Months Ended March 31, 2021
14,539
10,277
(8,672)
16,144
(a)
Revenue recognized related to the beginning balance was $6.3 million for the three months ended March 31, 2021.
Franchise Sales
The activity in the Company’s franchise sales deferred revenue accounts consists of the following (in thousands):
25,069
2,005
(2,349)
24,725
Revenue recognized related to the beginning balance was $2.3 million for the three months ended March 31, 2021.
Commissions Related to Franchise Sales
Commissions paid on franchise sales are recognized as an asset and amortized over the contract life of the franchise agreement. The activity in the Company’s capitalized contract costs for commissions (which are included in “other current assets” and “other assets, net of current portion” on the Condensed Consolidated Balance Sheets) consist of the following (in thousands):
Expenserecognized
Additions to contractcost for new activity
3,690
(421)
320
3,589
9
Disaggregated Revenue
In the following table, segment revenue is disaggregated by Company-Owned or Independent Regions, where applicable, and by geographical area (in thousands):
U.S. Company-Owned Regions
32,546
30,578
U.S. Independent Regions
3,288
2,996
Canada Company-Owned Regions
3,554
3,081
Canada Independent Regions
2,205
2,039
Global
2,641
2,548
Fee revenue (a)
44,234
41,242
Franchise sales and other revenue (b)
6,920
8,663
Total Real Estate
51,154
49,905
U.S.
16,182
15,651
Canada
1,737
1,655
226
216
Total Marketing Funds
Mortgage (c)
2,323
1,458
Other (c)
673
1,387
Transaction Price Allocated to the Remaining Performance Obligations
The following table includes estimated revenue by year, excluding certain other immaterial items, expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period (in thousands):
Remainder of 2021
2022
2023
2024
2025
2026
Thereafter
15,373
771
Franchise sales
5,244
5,898
4,533
3,300
2,023
1,049
2,678
20,617
6,669
40,869
10
Cash, Cash Equivalents and Restricted Cash
All cash held by the Marketing Funds is contractually restricted. The following table reconciles the amounts presented for cash, both unrestricted and restricted, in the Condensed Consolidated Balance Sheets to the amounts presented in the Condensed Consolidated Statements of Cash Flows (in thousands):
March 31, 2021
December 31, 2020
Total cash, cash equivalents and restricted cash
Services Provided to the Marketing Funds by Real Estate
Real Estate charges the Marketing Funds for various services it performs. These services primarily comprise (a) building and maintaining agent marketing technology, including customer relationship management tools, the www.remax.com website, agent, office and team websites, and mobile apps, (b) dedicated employees focused on marketing campaigns, and (c) various administrative services including customer support of technology, accounting and legal. Because these costs are ultimately paid by the Marketing Funds, they do not impact the net income of Holdings as the Marketing Funds have no reported net income.
Costs charged from Real Estate to the Marketing Funds are as follows (in thousands):
Technology - operating
3,600
2,971
Technology - capital
180
644
Marketing staff and administrative services
1,118
1,228
4,898
4,843
Leases
The Company leases corporate offices, a distribution center, billboards and certain equipment. As all franchisees are independently owned and operated, there are no leases recognized for any offices used by the Company’s franchisees. All the Company’s material leases are classified as operating leases.
The Company acts as the lessor for sublease agreements on its corporate headquarters, consisting solely of operating leases.
The Company has made an accounting policy election not to recognize right-of-use assets and lease liabilities that arise from any of its short-term leases. All leases with a term of 12 months or less at commencement, for which the Company is not reasonably certain to exercise available renewal options that would extend the lease term past 12 months, will be recognized on a straight-line basis over the lease term.
Recently Adopted Accounting Pronouncements
None.
New Accounting Pronouncements Not Yet Adopted
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848), which contains temporary optional expedients and exceptions to the guidance in U.S. GAAP on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (“LIBOR”) to alternative reference rates, such as the Secured Overnight Financing Rate (“SOFR”). The new guidance is effective upon issuance and may be adopted on any date on or after March 12, 2020. The relief is temporary and only available until December 31, 2022, when the reference rate replacement activity is expected to have completed. The Company believes the amendments of ASU 2020-04 will not have a significant impact on the Company’s consolidated financial statements
11
and related disclosures as the Company does not currently engage in interest rate hedging of its LIBOR based debt, nor does it believe it has any material contracts tied to LIBOR other than its Senior Secured Credit Agreement, as discussed in Note 8, Debt. An amendment to the Senior Secured Credit agreement will likely be required, but the Company does not expect any material adverse consequences from this transition.
3. Non-controlling Interest
Holdings is the sole managing member of RMCO and operates and controls all the business affairs of RMCO. The ownership of the common units in RMCO is summarized as follows:
Ownership %
Non-controlling interest ownership of common units in RMCO
12,559,600
40.2
%
40.6
Holdings outstanding Class A common stock (equal to Holdings common units in RMCO)
59.8
59.4
Total common units in RMCO
31,278,848
100.0
30,950,291
The weighted average ownership percentages for the applicable reporting periods are used to calculate the “Net income attributable to RE/MAX Holdings, Inc.” A reconciliation of “Income before provision for income taxes” to “Net income attributable to RE/MAX Holdings, Inc.” and “Net Income attributable to non-controlling interest” in the accompanying Condensed Consolidated Statements of Income for the periods indicated is detailed as follows (in thousands, except percentages):
RE/MAXHoldings,Inc.
Non-controllinginterest
Weighted average ownership percentage of RMCO(a)
59.6
40.4
100
58.9
41.1
Income before provision for income taxes(a)
942
640
5,552
3,528
Provision for income taxes(b)(c)
150
(92)
(2,921)
(869)
Distributions and Other Payments to Non-controlling Unitholders
Under the terms of RMCO’s limited liability company operating agreement, RMCO makes cash distributions to non-controlling unitholders on a pro-rata basis. The distributions paid or payable to non-controlling unitholders are summarized as follows (in thousands):
Tax and other distributions
14
Dividend distributions
2,889
2,763
Total distributions to non-controlling unitholders
2,777
12
4. Earnings Per Share and Dividends
Earnings Per Share
The following is a reconciliation of the numerator and denominator used in the basic and diluted EPS calculations (in thousands, except shares and per share information):
Numerator
Denominator for basic net income per share of Class A common stock
Denominator for diluted net income per share of Class A common stock
Add dilutive effect of the following:
Restricted stock
370,195
59,367
Weighted average shares of Class A common stock outstanding, diluted
Earnings per share of Class A common stock
Net income attributable to RE/MAX Holdings, Inc. per share of Class A common stock, basic
Net income attributable to RE/MAX Holdings, Inc. per share of Class A common stock, diluted
Outstanding Class B common stock does not share in the earnings of Holdings and is therefore not a participating security. Accordingly, basic and diluted net income per share of Class B common stock has not been presented.
Dividends
Dividends declared and paid during each quarter ended per share on all outstanding shares of Class A common stock were as follows (in thousands, except per share information):
Quarter end declared
Date paid
Per share
Amount paid to Class Astockholders
Amount paid to Non-controllingunitholders
March 31
March 17, 2021
4,326
March 18, 2020
3,986
On May 5, 2021, the Company’s Board of Directors declared a quarterly dividend of $0.23 per share on all outstanding shares of Class A common stock, which is payable on June 2, 2021 to stockholders of record at the close of business on May 19, 2021.
5. Acquisitions
Gadberry & wemlo
On September 10, 2020, the Company acquired The Gadberry Group, LLC (“Gadberry”) for $4.6 million in cash, net of cash acquired, and $5.5 million in Class A common stock, plus approximately $9.9 million of equity-based compensation, which will be accounted for as compensation expense in the future over two to three years (see Note 11, Equity-Based Compensation for additional information). In addition, the Company recorded a contingent consideration liability in connection with the purchase of Gadberry, which had an acquisition date fair value of $0.9 million, measured at the present value of the probability weighted consideration expected to be transferred. Gadberry is a location intelligence data company whose products have been instrumental in the success of the Company’s consumer website, www.remax.com. Founded in 2000, Gadberry specializes in building products that help clients solve geospatial challenges through location data. Gadberry plans to expand its non-RE/MAX clients while maintaining and enhancing its contributions to the RE/MAX technology offering.
On August 25, 2020, the Company acquired Wemlo, Inc. (“wemlo”) for $6.1 million in cash, net of cash acquired, and $3.3 million in Class A common stock, plus approximately $6.7 million of equity-based compensation, which will be accounted for as compensation expense in the future over three years (see Note 11, Equity-Based Compensation for additional
13
information). Wemlo is a fintech company that has developed its cloud service for mortgage brokers, combining third-party loan processing services with an all-in-one digital platform.
The total purchase price for both of the aforementioned acquisitions was allocated to the assets and liabilities acquired based on their preliminary estimated fair values. The Company recorded $14.4 million in goodwill, virtually all of which is deductible for tax purposes, and $6.3 million in other intangibles as a result of these acquisitions.
6. Intangible Assets and Goodwill
The following table provides the components of the Company’s intangible assets (in thousands, except weighted average amortization period in years):
Weighted
Average
As of March 31, 2021
As of December 31, 2020
Amortization
Initial
Accumulated
Net
Period
Cost
Balance
Franchise agreements
12.6
180,867
(112,530)
(108,671)
Other intangible assets:
Software (a)
4.5
45,876
(21,519)
24,357
44,389
(18,926)
25,463
Trademarks
8.3
2,325
(1,341)
984
(1,274)
1,051
Non-compete agreements
5.1
3,920
(3,110)
810
(2,814)
1,106
Training materials
5.0
2,400
(1,240)
1,160
(1,120)
1,280
Other
5.3
1,670
(697)
973
(601)
1,069
Total other intangible assets
4.7
56,191
(27,907)
54,704
(24,735)
Amortization expense was $6.4 million and $5.9 million for the three months ended March 31, 2021 and 2020, respectively.
The estimated future amortization expense related to intangible assets includes the estimated amortization expense associated with the Company’s intangible assets assumed with the Company’s acquisitions (in thousands):
As of March 31, 2021:
19,238
23,444
17,512
14,513
10,467
11,447
96,621
The following table presents changes to goodwill by reportable segment (in thousands):
Real Estate
Mortgage
Balance, January 1, 2021
157,202
18,633
Purchase price adjustments
133
Effect of changes in foreign currency exchange rates
40
Balance, March 31, 2021
157,375
7. Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
Marketing Funds (a)
50,675
48,452
Accrued payroll and related employee costs
7,101
10,692
Accrued taxes
2,019
2,491
Accrued professional fees
2,545
1,806
4,868
5,130
8. Debt
Debt, net of current portion, consists of the following (in thousands):
Senior Secured Credit Facility
224,425
225,013
Other long-term financing
78
Less unamortized debt issuance costs
(809)
(882)
Less unamortized debt discount costs
(590)
(644)
Less current portion
(2,356)
(2,428)
Maturities of debt are as follows (in thousands):
1,768
2,350
220,313
224,431
The Senior Secured Credit Facility consists of a $235.0 million term loan facility which matures on December 15, 2023 and a $10.0 million revolving loan facility which must be repaid on December 15, 2021. As of March 31, 2021, the Company had no revolving loans outstanding under its Senior Secured Credit Facility and the interest rate on the term loan facility was 3.5%.
15
9. Fair Value Measurements
Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering assumptions, the Company follows a three-tier fair value hierarchy, which is described in detail in the 2020 Annual Report on Form 10-K.
A summary of the Company’s liabilities measured at fair value on a recurring basis is as follows (in thousands):
Fair Value
Level 1
Level 2
Level 3
Liabilities
Motto contingent consideration
4,700
4,750
Gadberry contingent consideration
1,360
1,590
Contingent consideration (a)
6,060
6,340
The Company is required to pay additional purchase consideration totaling 8% of gross receipts collected by Motto each year (the “Revenue Share Year”) through September 30, 2026, with no limitation as to the maximum payout. The annual payment is required to be made within 120 days of the end of each Revenue Share Year. The fair value of the contingent purchase consideration represents the forecasted discounted cash payments that the Company expects to pay. Increases or decreases in the fair value of the contingent purchase consideration can result from changes in discount rates as well as the timing and amount of forecasted revenues. The forecasted revenue growth assumption that is most sensitive is the assumed franchise sales count for which the forecast assumes between 70 and 80 franchises sold annually. This assumption is based on historical sales and an assumption of growth over time. A 10% reduction in the number of franchise sales would decrease the liability by $0.2 million. A 1% change to the discount rate applied to the forecast changes the liability by approximately $0.1 million. As of March 31, 2021, contingent consideration also includes an amount recognized in connection with the acquisition of Gadberry (see Note 6, Acquisitions, for more information on this acquisition).The Company measures these liabilities each reporting period and recognizes changes in fair value, if any, in “Selling, operating and administrative expenses” in the accompanying Condensed Consolidated Statements of Income.
The table below presents a reconciliation of the contingent consideration (in thousands):
Balance at January 1, 2021
Fair value adjustments
Cash payments
Balance at March 31, 2021
The following table summarizes the carrying value and estimated fair value of the Senior Secured Credit Facility (in thousands):
CarryingAmount
Fair ValueLevel 2
223,026
223,303
223,487
223,887
10. Income Taxes
The “Provision for income taxes” in the accompanying Condensed Consolidated Statements of Income is based on an estimate of the Company’s annualized effective income tax rate.
16
11. Equity-Based Compensation
Employee equity-based compensation expense under the RE/MAX Holdings, Inc. 2013 Omnibus Incentive Plan (the “Incentive Plan”), net of the amount capitalized in internally developed software, is as follows (in thousands):
Expense from time-based awards (a)(b)
9,821
2,137
Expense from performance-based awards (a)(c)
796
81
Expense from bonus to be settled in shares (d)
1,437
Equity-based compensation capitalized
(32)
Time-based Restricted Stock
The following table summarizes equity-based compensation activity related to time-based restricted stock units and restricted stock awards:
Weighted averagegrant date fairvalue per share
1,018,008
36.74
Granted
240,101
41.72
Shares vested (including tax withholding) (a)
(410,418)
38.42
Forfeited
(13,347)
37.88
834,344
37.33
As of March 31, 2021, there was $24.9 million of total unrecognized expense. This compensation expense is expected to be recognized over the weighted-average remaining vesting period of 1.9 years.
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Performance-based Restricted Stock
As discussed in more detail in the Company’s Annual Report on Form 10-K, the Company has historically issued performance-based restricted stock awards (PSUs) that contained revenue performance targets and relative total shareholder return (rTSR) targets, both measured over a 3-year performance period. In 2021, the Company changed the structure of its PSUs by issuing awards with only a revenue target and eliminated the rTSR component. Additionally, the revenue target will be measured over three distinct 1-year performance periods, with the target determined near the beginning of each performance period. As a result, the target for 2021 has been determined but will be determined subsequently for 2022 and 2023. These awards cliff-vest at the end of a 3-year period, although the amount of shares that may be earned is fixed after each 1-year performance period ends and performance against target for that period is measured. As with prior revenue performance awards, the Company’s expense will be adjusted based on the estimated achievement of revenue versus each target. Because the performance targets for the 1-year periods in 2022 and 2023 have not yet been determined, they do not yet have a grant date under GAAP and are therefore excluded from the table below.
The following table summarizes equity-based compensation activity related to performance-based restricted stock units:
281,735
32.34
Granted (a)
55,229
(2,573)
28.29
334,391
33.92
As of March 31, 2021, there was $5.8 million of total unrecognized expense. This compensation expense is expected to be recognized over the weighted-average remaining vesting period of 1.9 years.
12. Commitments and Contingencies
A number of putative class action complaints are pending against the National Association of Realtors (“NAR”), Realogy Holdings Corp., HomeServices of America, Inc., RE/MAX, LLC and Keller Williams Realty, Inc. The first was filed on March 6, 2019, by plaintiff Christopher Moehrl in the United States District Court for the Northern District of Illinois. The second was filed in the same court on April 15, 2019, by plaintiff Sawbill Strategic, Inc. These two actions have now been consolidated (the “Moehrl Action”). Similar actions have been filed in federal courts: a) by Joshua Sitzer and other plaintiffs in the Western District of Missouri (the “Sitzer Action”); b) by Mark Rubenstein and Jeffery Nolan in the District of Connecticut (the “Rubenstein Action”); c) by plaintiffs Gary Bauman, Mary Jane Bauman, and Jennifer Nosalek in the District of Massachusetts (the “Bauman Action”); d) by plaintiff Judah Leeder in the Northern District of Illinois (the “Leeder Action”) and e) by plaintiff Alfio Conti in the Northern District of California (the “Conti Action”). The complaints make substantially similar allegations and seek substantially similar relief. For convenience, all of these lawsuits are collectively referred to as the “Moehrl-related suits.” In the Moehrl Action, the plaintiffs allege that a NAR rule requires brokers to make a blanket, non-negotiable offer of buyer broker compensation when listing a property, resulting in inflated costs to sellers in violation of federal antitrust law. They further allege that certain defendants use their agreements with franchisees to require adherence to the NAR rule in violation of federal antitrust law. Amended complaints added allegations regarding buyer steering and non-disclosure of buyer-broker compensation to the buyer. While similar to the Moehrl Action, various other lawsuits: allege violations of the Missouri Merchandising Practices Act (the Sitzer Action); include a multiple listing service (MLS) defendant (the Bauman Action); allege state antitrust violations (the Sitzer Action, Bauman Action, and Conti Action); allege harm to home buyers rather than sellers (the Rubenstein Action, Leeder Action, and Conti Action); allege unjust enrichment (the Leeder Action and Conti Action) or unfair competition (the Conti Action); and/or allege violations of the Racketeer Influenced and Corrupt Organizations Act (RICO) rather than antitrust law (the Rubenstein Action). Among other requested relief, plaintiffs seek damages against the defendants and injunctive relief. The Company intends to vigorously defend against all claims. The Company may become involved in additional litigation or other legal proceedings concerning the same or similar claims. We are unable to predict whether resolution of these matters would have a material effect on our financial position or results of operations.
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13. Segment Information
The Company operates under the following four operating segments: Real Estate, Mortgage, Marketing Funds and booj. Due to quantitative insignificance, the booj operating segment does not meet the criteria of a reportable segment and is included in “Other”. Mortgage does not meet the quantitative significance test; however, management has chosen to report results for the segment as it believes it will be a key driver of future success for Holdings. Management evaluates the operating results of its segments based upon revenue and adjusted earnings before interest, the provision for income taxes, depreciation and amortization and other non-cash and non-recurring cash charges or other items (“Adjusted EBITDA”). The Company’s presentation of Adjusted EBITDA may not be comparable to similar measures used by other companies. Except for the adjustments identified below in arriving at Adjusted EBITDA, the accounting policies of the reportable segments are the same as those described in the Company’s 2020 Annual Report on Form 10-K.
The following table presents revenue from external customers by segment (in thousands):
23,609
22,877
1,765
1,266
558
192
Total Mortgage
The following table presents a reconciliation of Adjusted EBITDA by segment to income before provision for income taxes (in thousands):
Adjusted EBITDA: Real Estate
24,420
20,731
Adjusted EBITDA: Mortgage
(1,150)
(578)
Adjusted EBITDA: Other
(110)
(614)
Adjusted EBITDA: Consolidated
23,160
19,539
Gain (loss) on sale or disposition of assets, net
(12,054)
(2,186)
Acquisition-related expense (a)
(943)
(566)
Gain on reduction in tax receivable agreement liability
500
Fair value adjustments to contingent consideration (b)
280
505
(6,937)
(6,310)
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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements (“financial statements”) and accompanying notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and accompanying notes included in our most recent Annual Report on Form 10-K for the year ended December 31, 2020 (“2020 Annual Report on Form 10-K”).
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements are often identified by the use of words such as “believe,” “intend,” “expect,” “estimate,” “plan,” “outlook,” “project,” “anticipate,” “may,” “will,” “would” and other similar words and expressions that predict or indicate future events or trends that are not statements of historical matters. Forward-looking statements include statements related to: agent count; franchise sales; the impact of the global coronavirus (“COVID-19”) pandemic on our results of operations, financial condition, liquidity and business, including agent count, revenues, expenses, operations, goodwill, income taxes and allowance for doubtful accounts; support that we offered to our franchisees, its effectiveness, and the implication of this support (or future support) to our revenue; our business model, revenue streams, cost structure, balance sheet, and financial flexibility; management of expenses and capital expenditures in response to the impacts of the COVID-19 pandemic, including the amounts and timing of anticipated reductions; revenue; operating expenses; financial outlook; our plans regarding dividends; non-GAAP financial measures; housing and mortgage market condition and trends; economic and demographic trends; competition; the anticipated benefits our technology initiatives; our anticipated sources and uses of liquidity including for potential acquisitions; future litigation expenses relating to the Moehrl-related suits; our strategic and operating plans and business models including our plans to re-invest in our business; and the expected impact of acquisitions and when we expect acquisitions to become accretive to earnings.
Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily accurately indicate the times at which such performance or results may be achieved. Forward-looking statements are based on information available at the time those statements are made and/or management’s good faith belief as of that time with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materiality from those expressed in or suggested by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in the section titled “Risk Factors,” set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q and in Part I, Item 1A of our 2020 Annual Report on Form 10-K. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this report. Except as required by law, we do not intend, and we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
The results of operations discussed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are those of RE/MAX Holdings, Inc. (“Holdings”) and its consolidated subsidiaries, including RMCO, LLC and its consolidated subsidiaries (“RMCO”), collectively, the “Company,” “we,” “our” or “us.”
Business Overview
We are one of the world’s leading franchisors in the real estate industry. We franchise real estate brokerages globally under the RE/MAX brand (“RE/MAX”) and mortgage brokerages in the U.S. under the Motto Mortgage brand (“Motto”). We also sell ancillary products and services, primarily technology, to our franchise networks and, in certain instances, we sell those offerings outside our franchise networks. We organize our business based on the services we provide in Real Estate, Mortgage and our collective franchise marketing operations, known as the Marketing Funds. RE/MAX and Motto are 100% franchised—we do not own any of the brokerages that operate under these brands. We focus on enabling our networks’ success by providing powerful technology, quality education and training, and valuable marketing to build the strength of the RE/MAX and Motto brands. We support our franchisees in growing their brokerages, although, they fund the cost of developing their brokerages. As a result, we maintain a low fixed-cost structure which, combined with our recurring fee-based models, enables us to capitalize on the economic benefits of the franchising model, yielding high margins and significant cash flow.
Financial and Operational Highlights – Three Months Ended March 31, 2021
(Compared to the three months ended March 31, 2020, unless otherwise noted)
A robust housing market and record Motto Mortgage growth helped drive our performance during the three months ended March 31, 2021. During this period, RE/MAX agent count growth experienced its largest year-over-year increase in over a decade, adding more than 8,000 new agents, led by healthy agent growth in Canada and double-digit agent growth globally. Motto continued its record pace of franchise sales, selling the most franchises in its history for the trailing twelve-month period ended March 31, 2021. Motto now has 150 open offices in nearly 40 states.
We continue to increase and enhance our value proposition for both of our franchise networks. For example, at the recent RE/MAX agent conference, the Company introduced an opportunity for virtually all U.S. RE/MAX affiliates to access health benefits through a marketing relationship with a third party. The Company also introduced new tools, technology, and educational resources for the exclusive benefit of the RE/MAX network.
Within our mortgage business, we continue to ramp up our wemlo acquisition, offering affordable, dependable loan processing services to more of our Motto franchises each week. The housing market is experiencing above-average activity, so competition for talent within the industry is intense. Our ability to hire as many quality loan processors as quickly as we would like is our primary challenge alongside onboarding Motto franchisees.
Selected Operating and Financial Highlights
The following tables summarize several key performance indicators and our results of operations.
As of March 31,
#
Total agent count growth
6.4
Agent Count:
62,261
62,668
(407)
(0.6)
22,510
21,523
987
4.6
Subtotal
84,771
84,191
580
0.7
Outside U.S. and Canada
55,443
47,625
7,818
16.4
140,214
131,816
8,398
Motto open offices (2)
118
27.1
RE/MAX franchise sales (1)
166
188
(22)
(11.7)
Motto franchise sales (2)
12.5
21
Total selling, operating and administrative expenses
Adjusted EBITDA (1)
Adjusted EBITDA margin (1)
32.0
27.8
Results of Operations
Comparison of the Three Months Ended March 31, 2021 and 2020
Revenue
A summary of the components of our revenue is as follows (in thousands except percentages):
Three Months Ended
Change
Favorable/(Unfavorable)
1,231
(249)
(2.8)
2,509
26.6
623
3.6
(2,091)
(20.4)
2.9
Consolidated revenue increased primarily due to an increase in Broker fees, incremental revenue from acquisitions, and growth of Motto, partially offset by lower event-based revenue and continued attrition of booj’s legacy customer base.
Continuing Franchise Fees
Revenue from Continuing franchise fees increased primarily due to fewer agent recruiting initiatives, which included a waiver of Continuing franchise fees, in the current year as compared to prior year and Motto expansion, partially offset by declines in agent count in Company-Owned Regions. Beginning April 1, 2021, there will be an average price increase of 3.8% in continuing franchise fees in the majority of our U.S. Company-Owned regions.
Broker Fees
Revenue from Broker fees increased primarily due to higher total transactions per agent and rising home prices.
Revenue from the Marketing Funds fees increased primarily due to fewer agent recruiting initiatives, which included a waiver of Marketing Funds fees, in the current year as compared to prior year, offset by declines in agent count in Company-Owned Regions.
Franchise Sales and Other Revenue
Franchise sales and other revenue decreased primarily due to lower event-based revenue due to our annual agent conference having limited in-person attendance due to COVID-19 restrictions and continued attrition of booj’s legacy customer base, partially offset by incremental revenue from acquisitions. The attrition of the booj legacy customer base negatively impacted the three months ended March 31, 2021 by $0.3 million and is expected to negatively impact the full year 2021 by approximately $2.0 million to $2.5 million, as compared to the same period in the prior year.
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Operating Expenses
A summary of the components of our operating expenses is as follows (in thousands, except percentages):
(8,999)
(26.0)
(623)
(3.6)
(627)
(9.9)
(10,249)
(17.5)
Percent of revenue
95.1
83.3
Selling, operating and administrative expenses consists of personnel costs, professional fee expenses, lease costs and other expenses. Other expenses within Selling, operating and administrative expenses include certain marketing and production costs that are not paid by the Marketing Funds, including travel and entertainment costs, and costs associated with our annual conventions in the U.S. and other events and technology services.
Selling, operating and administrative expenses:
Personnel
28,333
16,260
(12,073)
(74.2)
Professional fees
4,254
3,128
(1,126)
(36.0)
Lease costs
2,083
2,238
155
6.9
9,006
13,051
4,045
31.0
60.4
49.3
Total Selling, operating and administrative expenses increased as follows:
Marketing Funds Expenses
We recognize an equal and offsetting amount of expenses to revenue such that there is no impact to our overall profitability.
Depreciation and Amortization
Depreciation and amortization expense increased primarily due to placing internally developed software into service and new amortization related to our acquisitions.
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Other Expenses, Net
A summary of the components of our Other expenses, net is as follows (in thousands, except percentages):
584
21.8
(106)
(39.4)
250
92.6
728
2.7
3.8
Other expenses, net decreased primarily due to a decrease in interest expense as a result of decreasing interest rates on
our Senior Secured Credit Facility (as defined in Note 8, Debt), partially offset by lower interest earnings on our cash balances from lower interest rates.
Provision for Income Taxes
Our effective income tax rate decreased to (3.7)% from 41.7% for the three months ended March 31, 2021 and 2020, respectively, primarily driven by nonrecurring taxes arising from (a) the conversion of First from a C Corporation to a flow-through entity in 2020 and (b) various adjustments in 2021 that have a disproportionate impact on the tax rate due to having a low pre-tax net income. Our effective income tax rate depends on many factors, including a rate benefit attributable to the fact that the portion of RMCO’s earnings attributable to the non-controlling interests are not subject to corporate-level taxes because RMCO is classified as a partnership for U.S. federal income tax purposes and therefore is treated as a “flow-through entity,” as well as annual changes in state and foreign income tax rates. See Note 3, Non-controlling Interest to the accompanying unaudited condensed consolidated financial statements for further details on the allocation of income taxes between Holdings and the non-controlling interest and see Note 10, Income Taxes for additional information.
Adjusted EBITDA
See “—Non-GAAP Financial Measures” for our definition of Adjusted EBITDA and for further discussion of our presentation of Adjusted EBITDA as well as a reconciliation of Adjusted EBITDA to net income, which is the most comparable GAAP measure for operating performance.
Adjusted EBITDA was $23.2 million for the three months ended March 31, 2021, an increase of $3.6 million from the comparable prior year period. Adjusted EBITDA increased primarily due to increased Broker fees revenue and lower bad debt expense from improved collections, partially offset by higher bonus expense due to the elimination of the corporate bonus in the prior year and higher legal fees.
Non-GAAP Financial Measures
The Securities and Exchange Commission (“SEC”) has adopted rules to regulate the use in filings with the SEC and in public disclosures of financial measures that are not in accordance with U.S. GAAP, such as Adjusted EBITDA and the ratios related thereto. These measures are derived on the basis of methodologies other than in accordance with U.S. GAAP.
We define Adjusted EBITDA as EBITDA (consolidated net income before depreciation and amortization, interest expense, interest income and the provision for income taxes, each of which is presented in our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q), adjusted for the impact of the following items that are either non-cash or that we do not consider representative of our ongoing operating performance: gain or loss on sale or disposition of assets, impairment charges, equity-based compensation expense, acquisition-related expense, gain or losses from changes in the tax receivable agreement liability, expense or income related to changes in the estimated fair value measurement of contingent consideration and other non-recurring items.
As Adjusted EBITDA omits certain non-cash items and other non-recurring cash charges or other items, we believe that it is less susceptible to variances that affect our operating performance resulting from depreciation, amortization and other non-cash and non-recurring cash charges or other items. We present Adjusted EBITDA, and the related Adjusted EBITDA
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margin, because we believe they are useful as supplemental measures in evaluating the performance of our operating businesses and provides greater transparency into our results of operations. Our management uses Adjusted EBITDA and Adjusted EBITDA margin as factors in evaluating the performance of our business.
Adjusted EBITDA and Adjusted EBITDA margin have limitations as analytical tools, and you should not consider these measures either in isolation or as a substitute for analyzing our results as reported under U.S. GAAP. Some of these limitations are:
A reconciliation of Adjusted EBITDA to net income is set forth in the following table (in thousands):
2,098
2,682
(163)
(269)
(58)
3,790
EBITDA
10,454
17,803
(Gain) loss on sale or disposition of assets
(11)
Acquisition-related expense (1)
943
566
(500)
Fair value adjustments to contingent consideration (2)
Liquidity and Capital Resources
Overview of Factors Affecting Our Liquidity
Our liquidity position is affected by the growth of our agent base and conditions in the real estate market. In this regard, our short-term liquidity position from time to time has been, and will continue to be, affected by a number of factors including agents in the RE/MAX network, particularly in Company-Owned Regions. Our cash flows are primarily related to the timing of:
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We have satisfied these needs primarily through our existing cash balances, cash generated by our operations and funds available under our Senior Secured Credit Facility. We may also utilize our Senior Secured Credit Facility, and we may pursue other sources of capital that may include other forms of external financing, such as additional financing in the public capital markets, in order to increase our cash position and preserve financial flexibility as needs arise.
Financing Resources
RMCO and RE/MAX, LLC, a wholly owned subsidiary of RMCO, have a credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and various lenders party thereto (the “Senior Secured Credit Facility”). The Senior Secured Credit Facility provided to RE/MAX, LLC consists of $235.0 million in term loans and a $10.0 million revolving facility. Borrowings under the term loans and revolving loans accrue interest, at London Interbank Offered Rate (“LIBOR”), provided LIBOR shall be no less than 0.75% plus an applicable margin of 2.75%. LIBOR was originally set to cease being provided as a reference rate at the end of 2021, with alternate rates in the U.S. being developed such as the Secured Overnight Financing Rate (“SOFR”). Such cessation would likely require amendments to our Senior Secured Credit Facility. However, in late 2020, the timeline for the cessation of term-based LIBOR (upon which our outstanding borrowings are based) was extended until June 2023. The Company continues to evaluate when it might modify its Senior Secured Credit Facility to allow for a new reference rate. As of March 31, 2021, we had $223.0 million of term loans outstanding, net of an unamortized discount and issuance costs, and no revolving loans outstanding under our Senior Secured Credit Facility. As of March 31, 2021, the interest rate on the term loan facility was 3.5%. See our 2020 Annual Report on Form 10-K for more information.
Sources and Uses of Cash
As of March 31, 2021 and December 31, 2020, we had $102.6 million and $101.4 million, respectively, of cash and cash equivalents, of which approximately $5.2 million and $4.2 million, respectively, were denominated in foreign currencies.
The following table summarizes our cash flows from operating, investing, and financing activities (in thousands):
Cash provided by (used in):
Operating activities
Investing activities
Financing activities
Net change in cash, cash equivalents and restricted cash
Operating Activities
Cash provided by operating activities increased primarily as a result of:
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Investing Activities
During the three months ended March 31, 2021 the change in cash (used in) provided by investing activities was primarily the result of work completed on our corporate headquarters refresh and higher capitalizable investments in technology as compared to the prior year.
Financing Activities
During the three months ended March 31, 2021 cash used in financing activities increased primarily due to an increase in payments related to tax withholding for vested share-based compensation, and an increase in dividends per Class A share and non-controlling unit to $0.23 per share/unit during the first quarter of 2021 as compared to $0.22 per share/unit for the first quarter of 2020.
Capital Allocation Priorities
Liquidity
Our objective is to maintain a strong liquidity position. We have existing cash balances, cash flows from operating activities, access to our revolving facility and incremental facilities under our Senior Secured Credit Facility available to support the needs of our business. Should additional liquidity needs arise, our filed shelf registration would permit access to public capital markets if such financing would be available.
Acquisitions
As part of our growth strategy, we may pursue reacquisitions of Independent Regions in the U.S. and Canada as well as additional acquisitions or investments in complementary businesses, services and technologies that would provide access to new markets, revenue streams, or otherwise complement our existing operations. We may fund any such growth with various sources of capital including existing cash balances and cash flow from operations, as well as proceeds from debt financings including under existing credit facilities or new arrangements raised in the public capital markets.
Capital Expenditures
The total aggregate amount for purchases of property and equipment and capitalization of developed software was $4.4 million and $2.0 million during the three months ended March 31, 2021 and 2020, respectively. These amounts primarily relate to spend on our corporate headquarters refresh and investments in technology. In order to expand our technology, we plan to continue to re-invest in our business in order to improve operational efficiencies and enhance the tools and services provided to the affiliates in our networks. Total capital expenditures for 2021 are expected to be between $12 million and $15 million as we continue with the corporate headquarters refresh and higher capitalizable investments. See Financial and Operational Highlights above for additional information.
Our Board of Directors declared and we paid quarterly cash dividends of $0.23 per share on all outstanding shares of Class A common stock during the first quarter of 2021. On May 5, 2021, our Board of Directors declared a quarterly cash dividend of $0.23 per share on all outstanding shares of Class A common stock, which is payable on June 2, 2021 to stockholders of record at the close of business on May 19, 2021. The declaration of additional future dividends, and, if declared, the amount of any such future dividend, will be subject to our actual future earnings and capital requirements and will be at the discretion of our Board of Directors.
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Distributions and Other Payments to Non-controlling Unitholders by RMCO
Distributions and other payments pursuant to the RMCO, LLC Agreement and TRAs were comprised of the following (in thousands):
Distributions and other payments pursuant to the RMCO, LLC Agreement:
Pro rata distributions to RIHI as a result of distributions to RE/MAX Holdings in order to satisfy its estimated tax liabilities
Total distributions to RIHI
Payments pursuant to the TRAs
Total distributions to RIHI and TRA payments
Commitments and Contingencies
See Note 12, Commitments and Contingencies to the accompanying unaudited condensed consolidated financial statements for additional information.
Off Balance Sheet Arrangements
We have no material off balance sheet arrangements as of March 31, 2021.
Critical Accounting Judgments and Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts and disclosures in the financial statements and accompanying notes. Actual results could differ from those estimates. Our Critical Accounting Judgments and Estimates disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Judgments and Estimates” in our 2020 Annual Report on Form 10-K for which there were no material changes, included:
New Accounting Pronouncements
There have been no new accounting pronouncements not yet effective that we believe have a significant impact, or potential significant impact, to our consolidated financial statements. See Note 2, Summary of Significant Accounting Policies to the accompanying unaudited condensed consolidated financial statements for additional information.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
We have operations both within the U.S. and globally and we are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate, foreign exchange and credit risks, as well as risks relating to changes in the general economic conditions in the countries where we conduct business. We do not currently use derivative instruments to mitigate the impact of our market risk exposures nor do we use derivatives for trading or speculative purposes.
Credit Risk
We are exposed to credit risk related to receivables from franchisees. We perform quarterly reviews of credit exposure above an established threshold for each franchisee and are in regular communication with those franchisees about their balance. For significant delinquencies, we will terminate the franchise. While the onset of COVID-19 in early 2020 created concerns around possible increases in delinquencies, the strong rebound of the housing market coupled with significant temporary financial support initiatives we offered resulted in collection rates roughly equivalent to prior years. Bad debt expense is less than 1% of revenue for the three months ended March 31, 2021.
Interest Rate Risk
We are subject to interest rate risk in connection with borrowings under our Senior Secured Credit Facility which bear interest at variable rates. At March 31, 2021, $224.4 million in term loans were outstanding under our Senior Secured Credit Facility. We currently do not engage in any interest rate hedging activity, but given our variable rate borrowings, we monitor interest rates and if appropriate, may engage in hedging activity prospectively. The interest rate on our Senior Secured Credit Facility is currently based on LIBOR, subject to a floor of 0.75%, plus an applicable margin of 2.75%. As of March 31, 2021, the interest rate was 3.5%. If LIBOR rises such that our rate is above the floor, then each hypothetical 0.25% increase would result in additional annual interest expense of $0.6 million. To mitigate a portion of this risk, we invest our cash balances in short-term investments that earn interest at variable rates.
Currency Risk
We have a network of global franchisees in over 110 countries and territories. Fluctuations in exchange rates of the U.S. dollar against foreign currencies can result, and have resulted, in fluctuations in (a) revenue and operating income due to a portion of our revenue being denominated in foreign currencies and (b) foreign exchange transaction gains and losses due primarily to cash and accounts receivable balances denominated in foreign currencies, with the Canadian dollar representing the most significant exposure. We currently do not engage in any foreign exchange hedging activity of our revenues but may do so in the future; however, we actively convert cash balances into U.S. dollars to mitigate currency risk on cash positions. During the three months ended March 31, 2021, a hypothetical 5% strengthening/weakening in the value of the U.S. dollar compared to the Canadian dollar would have resulted in a decrease/increase to operating income of approximately $0.3 million.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Our management, under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that as of March 31, 2021 our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 1. Legal Proceedings
From time to time we are involved in litigation, claims and other proceedings relating to the conduct of our business, and the disclosures set forth in Note 12, Commitments and Contingencies relating to certain legal matters is incorporated
herein by reference. Such litigation and other proceedings may include, but are not limited to, actions relating to intellectual property, commercial arrangements, franchising arrangements, brokerage disputes, vicarious liability based upon conduct of individuals or entities outside of our control including franchisees and independent agents, and employment law claims. Litigation and other disputes are inherently unpredictable and subject to substantial uncertainties and unfavorable resolutions could occur. Often these cases raise complex factual and legal issues, which are subject to risks and uncertainties and which could require significant time and resources from management. Although we do not believe any currently pending litigation will have a material adverse effect on our business, financial condition or operations, there are inherent uncertainties in litigation and other claims and regulatory proceedings and such pending matters could result in unexpected expenses and liabilities and might materially adversely affect our business, financial condition or operations, including our reputation.
Item 1A. Risk Factors
For a discussion of our potential risks and uncertainties, please see “Risk Factors” in our 2020 Annual Report on Form 10-K. There have been no material changes to the risk factors as disclosed in our 2020 Annual Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
Exhibit No.
Exhibit Description
Form
FileNumber
Date ofFirst Filing
ExhibitNumber
FiledHerewith
3.1
Amended and Restated Certificate of Incorporation
10-Q
001-36101
11/14/2013
3.2
Bylaws of RE/MAX Holdings, Inc.
8-K
2/22/2018
4.1
Form of RE/MAX Holdings, Inc.’s Class A common stock certificate.
S-1
333-190699
9/27/2013
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
X
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
32.1
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
XBRL Instance Document – The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File – The cover page XBRL tags are embedded within the Inline XBRL document.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
(Registrant)
Date:
May 6, 2021
By:
/s/ Adam M. Contos
Adam M. Contos
Director and Chief Executive Officer
(Principal Executive Officer)
/s/ Karri R. Callahan
Karri R. Callahan
Chief Financial Officer
(Principal Financial Officer)
/s/ Brett A. Ritchie
Brett A. Ritchie
Chief Accounting Officer
(Principal Accounting Officer)