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 June 30, 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 July 31, 2021, there were 18,891,019 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
22
Item 3.
Quantitative and Qualitative Disclosures About Market Risks
33
Item 4.
Controls and Procedures
34
PART II. – OTHER INFORMATION
Legal Proceedings
35
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
SIGNATURES
38
2
Item 1. Financial Statements
RE/MAX HOLDINGS, INC.
(In thousands, except share and per share amounts)
(Unaudited)
June 30,
December 31,
2021
2020
Assets
Current assets:
Cash and cash equivalents
$
107,252
101,355
Restricted cash
14,425
19,872
Accounts and notes receivable, current portion, less allowances of $11,235 and $11,724, respectively
31,093
29,985
Income taxes receivable
2,417
1,222
Other current assets
13,343
13,938
Total current assets
168,530
166,372
Property and equipment, net of accumulated depreciation of $15,835 and $14,731, respectively
10,484
7,872
Operating lease right of use assets
36,758
38,878
Franchise agreements, net
64,495
72,196
Other intangible assets, net
26,415
29,969
Goodwill
176,061
175,835
Deferred tax assets, net
48,459
48,855
Income taxes receivable, net of current portion
1,980
Other assets, net of current portion
17,119
15,435
Total assets
550,301
557,392
Liabilities and stockholders' equity
Current liabilities:
Accounts payable
4,737
2,108
Accrued liabilities
63,740
68,571
Income taxes payable
1,643
9,579
Deferred revenue
24,936
25,282
Current portion of debt
2,350
2,428
Current portion of payable pursuant to tax receivable agreements
3,590
Operating lease liabilities
5,904
5,687
Total current liabilities
106,900
117,245
Debt, net of current portion
220,217
221,137
Payable pursuant to tax receivable agreements, net of current portion
29,974
Deferred tax liabilities, net
504
490
Deferred revenue, net of current portion
19,032
19,864
Operating lease liabilities, net of current portion
47,307
50,279
Other liabilities, net of current portion
5,648
5,722
Total liabilities
429,582
444,711
Commitments and contingencies
Stockholders' equity:
Class A common stock, par value $.0001 per share, 180,000,000 shares authorized; 18,719,665 and 18,390,691 shares issued and outstanding as of June 30, 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 June 30, 2021 and December 31, 2020, respectively
—
Additional paid-in capital
503,430
491,422
Retained earnings
22,289
25,139
Accumulated other comprehensive income, net of tax
763
612
Total stockholders' equity attributable to RE/MAX Holdings, Inc.
526,484
517,175
Non-controlling interest
(405,765)
(404,494)
Total stockholders' equity
120,719
112,681
Total liabilities and stockholders' equity
See accompanying notes to unaudited condensed consolidated financial statements.
Three Months Ended June 30,
Six Months Ended June 30,
Revenue:
Continuing franchise fees
26,955
16,738
52,329
40,881
Annual dues
8,869
8,745
17,541
17,666
Broker fees
17,453
10,426
29,406
19,870
Marketing Funds fees
18,042
11,765
36,187
29,287
Franchise sales and other revenue
5,927
4,533
14,078
14,775
Total revenue
77,246
52,207
149,541
122,479
Operating expenses:
Selling, operating and administrative expenses
38,816
25,348
82,492
60,025
Marketing Funds expenses
Depreciation and amortization
6,978
6,412
13,915
12,722
Total operating expenses
63,836
43,525
132,594
102,034
Operating income
13,410
8,682
16,947
20,445
Other expenses, net:
Interest expense
(2,124)
(2,187)
(4,222)
(4,869)
Interest income
19
182
303
Foreign currency transaction gains (losses)
(363)
101
(383)
(169)
Total other expenses, net
(2,468)
(2,052)
(4,423)
(4,735)
Income before provision for income taxes
10,942
6,630
12,524
15,710
Provision for income taxes
(696)
(706)
(638)
(4,496)
Net income
10,246
5,924
11,886
11,214
Less: net income attributable to non-controlling interest
5,045
2,435
5,593
5,094
Net income attributable to RE/MAX Holdings, Inc.
5,201
3,489
6,293
6,120
Net income attributable to RE/MAX Holdings, Inc. per share of Class A common stock
Basic
0.28
0.19
0.34
Diluted
0.27
0.33
Weighted average shares of Class A common stock outstanding
18,719,477
18,123,963
18,608,005
18,049,114
18,941,343
18,146,886
18,904,036
18,090,259
Cash dividends declared per share of Class A common stock
0.23
0.22
0.46
0.44
(In thousands)
Change in cumulative translation adjustment
207
117
286
(113)
Other comprehensive income (loss), net of tax
Comprehensive income
10,453
6,041
12,172
11,101
Less: comprehensive income attributable to non-controlling interest
5,142
2,490
5,728
4,955
Comprehensive income attributable to RE/MAX Holdings, Inc., net of tax
5,311
3,551
6,444
6,146
(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
1,092
548
1,640
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
79
Payroll taxes related to net settled restricted stock units
(130,773)
(5,291)
Balances, March 31, 2021
18,719,248
498,810
21,433
653
(406,797)
114,101
(4,110)
640
4,615
(4,345)
110
97
(223)
(7)
Other
12
Balances, June 30, 2021
18,719,665
Balances, January 1, 2020
17,838,233
466,945
30,525
414
(399,510)
98,376
2,631
2,659
5,290
(2,777)
368,375
5,962
(289)
5,673
(3,986)
(36)
(194)
(230)
(82,645)
(2,268)
Balances, March 31, 2020
470,639
28,881
378
(399,822)
100,078
(2,789)
2,812
(3,987)
62
55
Balances, June 30, 2020
473,451
28,385
440
(400,121)
102,157
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Bad debt expense
261
3,860
Equity-based compensation expense
18,307
4,933
Deferred income tax expense
335
1,099
Fair value adjustments to contingent consideration
10
(355)
Non-cash lease expense (benefit)
(635)
Other, net
177
229
Changes in operating assets and liabilities
(13,917)
(17,379)
Net cash provided by operating activities
30,339
16,323
Cash flows from investing activities:
Purchases of property, equipment and capitalization of software
(7,551)
(3,102)
Net cash used in investing activities
Cash flows from financing activities:
Payments on debt
(1,253)
(1,322)
Distributions paid to non-controlling unitholders
(6,999)
(5,566)
Dividends and dividend equivalents paid to Class A common stockholders
(9,143)
(8,262)
Payments related to tax withholding for share-based compensation
(5,298)
Net cash used in financing activities
(22,693)
(17,418)
Effect of exchange rate changes on cash
355
(107)
Net increase (decrease) in cash, cash equivalents and restricted cash
450
(4,304)
Cash, cash equivalents and restricted cash, beginning of period
121,227
103,601
Cash, cash equivalents and restricted cash, end of period
121,677
99,297
Supplemental disclosures of cash flow information:
Cash paid for interest
3,955
4,608
Net cash paid for income taxes
9,792
1,682
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 June 30, 2021 and the results of its operations and comprehensive income, cash flows and changes in its stockholders’ equity for the three and six months ended June 30, 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
Six Months Ended June 30, 2021
14,539
18,808
(17,541)
15,806
(a)
Revenue recognized related to the beginning balance was $10.6 million for the six months ended June 30, 2021, respectively.
Franchise Sales
The activity in the Company’s franchise sales deferred revenue accounts consists of the following (in thousands):
25,069
4,127
(4,541)
24,655
Revenue recognized related to the beginning balance was $4.2 million for the six months ended June 30, 2021, respectively.
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
(714)
638
3,614
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
37,613
25,511
70,159
56,089
U.S. Independent Regions
3,730
3,167
7,018
6,163
Canada Company-Owned Regions
4,800
2,459
8,354
5,540
Canada Independent Regions
2,364
2,033
4,569
4,072
Global
2,854
1,796
5,495
4,344
Fee revenue (a)
51,361
34,966
95,595
76,208
Franchise sales and other revenue (b)
4,930
3,405
11,850
12,068
Total Real Estate
56,291
38,371
107,445
88,276
U.S.
16,359
10,596
32,541
26,247
Canada
1,424
1,015
3,161
2,670
259
154
485
370
Total Marketing Funds (c)
Mortgage (d)
2,410
1,070
4,733
2,528
Other (d)
503
1,001
1,176
2,388
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
12,305
3,501
Franchise sales
3,576
6,223
4,868
3,640
2,365
1,208
2,775
15,881
9,724
40,461
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):
June 30, 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
3,233
3,722
6,833
6,693
Technology - capital
224
116
404
760
Marketing staff and administrative services
1,189
983
2,307
2,211
4,646
4,821
9,544
9,664
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, are 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 and related disclosures as the Company does not currently engage in interest rate hedging of its LIBOR based debt, nor
11
does it believe it has any material contracts tied to LIBOR other than its Senior Secured Credit Facility, as discussed in Note 8, Debt. In addition, see Note 14, Subsequent Event, for information related to the amended and restated Senior Secured Credit Facility which has provisions for transition to an alternative rate. 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
31,279,265
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)
59.1
40.9
Income before provision for income taxes(a)
6,531
4,411
3,895
2,735
(Provision) / benefit for income taxes(b)(c)
(1,330)
634
(406)
(300)
59.7
40.3
59.0
41.0
7,473
5,051
9,447
6,263
(1,180)
542
(3,327)
(1,169)
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
1,221
40
Dividend distributions
5,778
5,526
Total distributions to non-controlling unitholders
6,999
5,566
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
221,866
22,923
296,031
41,145
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
2,889
March 18, 2020
3,986
2,763
June 30
June 2, 2021
4,345
June 2, 2020
3,987
8,671
7,973
On August 3, 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 August 31, 2021 to stockholders of record at the close of business on August 17, 2021.
13
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 is accounted for as compensation expense over the service period of 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, the vast majority of which was expensed in the first quarter of 2021 related to two employees who departed (see Note 11, Equity-Based Compensation for additional 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 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 June 30, 2021
As of December 31, 2020
Amortization
Initial
Accumulated
Net
Period
Cost
Balance
Franchise agreements
12.6
180,867
(116,372)
(108,671)
Other intangible assets:
Software (a)
4.4
47,301
(24,327)
22,974
44,389
(18,926)
25,463
Trademarks
8.4
(1,406)
944
2,325
(1,274)
1,051
Non-compete agreements
5.1
3,920
(3,339)
581
(2,814)
1,106
Training materials
5.0
2,400
(1,360)
1,040
(1,120)
1,280
5.3
1,670
(794)
876
(601)
1,069
Total other intangible assets
4.6
57,641
(31,226)
54,704
(24,735)
Amortization expense was $6.5 million and $6.0 million for the three months ended June 30, 2021 and 2020, respectively. Amortization expense was $12.9 million and $11.8 million for the six months ended June 30, 2021 and 2020, respectively.
14
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):
13,005
23,642
17,995
14,615
10,167
11,486
90,910
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
93
Balance, June 30, 2021
157,428
7. Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
Marketing Funds (a)
44,575
48,452
Accrued payroll and related employee costs
10,922
10,692
Accrued taxes
1,152
2,491
Accrued professional fees
2,939
1,806
4,152
5,130
8. Debt
Debt, net of current portion, consists of the following (in thousands):
Senior Secured Credit Facility
223,838
225,013
Other long-term financing
78
Less unamortized debt issuance costs
(735)
(882)
Less unamortized debt discount costs
(536)
(644)
Less current portion
(2,350)
(2,428)
Maturities of debt are as follows (in thousands):
1,175
220,313
15
As of June 30, 2021, the Senior Secured Credit Facility consisted of a $235.0 million term loan facility and a $10.0 million revolving loan facility. As of June 30, 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%. See Note 14, Subsequent Event, for information related to the amended and restated Senior Secured Credit Facility.
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
5,000
4,750
Gadberry contingent consideration
1,350
1,590
Contingent consideration (a)
6,350
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 June 30, 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
Balance at June 30, 2021
The following table summarizes the carrying value and estimated fair value of the Senior Secured Credit Facility (in thousands):
CarryingAmount
Fair ValueLevel 2
222,567
223,278
223,487
223,887
16
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.
Uncertain Tax Positions
The company has recognized uncertain tax position liabilities and related tax expense for certain foreign tax matters, along with a receivable for amounts of such foreign taxes expected to be creditable in the U.S. While the Company believes the liabilities recognized for uncertain tax positions are adequate to cover reasonable expected tax risks, there can be no assurance that an issue raised by a tax authority will be resolved at a cost that does not exceed the liability recognized. Interest and penalties are accrued on the uncertain tax positions and included in the “Provision for income taxes” in the accompanying Consolidated Statements of Income.
Uncertain tax position liabilities represent the aggregate tax effect of differences between the tax return positions and the amounts otherwise recognized in the consolidated financial statements and are recognized in “Income taxes payable” in the Condensed Consolidated Balance Sheets.
During the quarter ending June 30, 2021, an uncertain position was settled with a taxing authority for foreign tax matters described above.
Based upon the above settlement of this uncertain tax position, the Company adjusted its liability to reflect the amounts ultimately paid during the three months ended June 30, 2021. This resulted in a reduction to income tax expense of $1.4 million (including interest and penalties) in the Condensed Consolidated Statements of Income for the three months ended June 30, 2021.
A reconciliation of the beginning and ending amount, excluding interest and penalties is as follows:
As of June 30,
Balance, January 1
5,300
4,810
Increases related to prior period tax positions
96
230
Decrease related to prior year tax positions
(815)
Settlements
(3,776)
Foreign currency transaction gains/losses
380
Balance, June 30
1,185
5,040
The Company’s remaining uncertain tax positions have a reasonable possibility of being settled within the next 12 months.
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)
3,744
2,358
13,565
4,495
Expense from performance-based awards (a)(c)
871
389
1,667
470
Expense from bonus to be settled in shares (d)
1,638
3,075
Equity-based compensation capitalized
(32)
6,253
2,747
17
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
243,879
41.62
Shares vested (including tax withholding) (a)
(410,418)
38.42
Forfeited
(14,457)
38.06
837,012
37.32
As of June 30, 2021, there was $21.2 million of total unrecognized expense. This compensation expense is expected to be recognized over the weighted-average remaining vesting period of 1.7 years.
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 is being 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)
55,323
41.71
(2,573)
28.29
334,485
33.92
As of June 30, 2021, there was $5.2 million of total unrecognized expense. This compensation expense is expected to be recognized over the weighted-average remaining vesting period of 1.8 years.
18
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”); and d) by plaintiff Judah Leeder in the Northern District of Illinois (the “Leeder 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 and Bauman Action); allege harm to home buyers rather than sellers (the Rubenstein Action and Leeder Action); allege unjust enrichment (the Leeder 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. In July 2021, the court granted RE/MAX, LLC’s motion to dismiss the Rubenstein Action and ordered the case dismissed with prejudice. The Company intends to vigorously defend against all remaining 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.
On April 9, 2021, a putative class action claim was filed in the Federal Court of Canada against the Toronto Regional Real Estate Board (“TRREB”), The Canadian Real Estate Association (“CREA”), RE/MAX Ontario-Atlantic Canada Inc. (“RE/MAX OA”), which was acquired by the Company in July 2021 (see Note 14, Subsequent Event, for information), Century 21 Canada Limited Partnership, Brookfield Asset Management Inc., Royal Lepage Real Estate Services Ltd., Homelife Realty Services Inc., Right At Home Realty Inc., Forest Hill Real Estate Inc., Harvey Kalles Real Estate Ltd., Sotheby's International Realty Canada, Chestnut Park Real Estate Limited, Sutton Group Realty Services Ltd. and IPRO Realty Ltd. by the putative representative plaintiff, Mark Sunderland (the “Plaintiff”). The Plaintiff alleges that the Defendants and their co-conspirators conspired, agreed or arranged with each other to fix, maintain, increase, control, raise, or stabilize the rate of real estate buyers’ brokerages’ and salespersons’ commissions in respect of the purchase and sale of properties listed on TRREB’s multiple listing service system (the “Toronto MLS”); that the Defendants and their co-conspirators acted in furtherance of their conspiracy, agreement or arrangement to fix, maintain, increase, control, raise, or stabilize the rate of real estate buyers’ brokerages’ and salespersons’ commissions in respect of the purchase and sale of properties listed on the Toronto MLS; and violation of Part VI of the Competition Act, R.S.C. 1985, c. C-34 (“Competition Act”). Among other requested relief, Plaintiff seeks damages against the defendants and injunctive relief. RE/MAX OA denies the allegations in the claim and intends to vigorously defend the action.
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):
25,039
15,795
48,648
38,672
1,916
943
3,681
2,209
494
127
1,052
319
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
31,302
19,318
55,722
40,049
Adjusted EBITDA: Mortgage
(733)
(741)
(1,883)
(1,319)
Adjusted EBITDA: Other
(72)
332
(182)
(282)
Adjusted EBITDA: Consolidated
30,497
18,909
53,657
38,448
Gain (loss) on sale or disposition of assets, net
(1)
(6,253)
(2,747)
(18,307)
(4,933)
Acquisition-related expense (a)
(3,928)
(328)
(4,871)
(894)
Gain on reduction in tax receivable agreement liability
(500)
Fair value adjustments to contingent consideration (b)
(290)
(150)
(10)
(6,978)
(6,412)
(13,915)
(12,722)
14. Subsequent Event
RE/MAX INTEGRA North America Region Acquisition
On July 21, 2021, the Company acquired the operating companies of the North America regions of RE/MAX INTEGRA (“INTEGRA NA”), whose territories cover five Canadian provinces (New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, and Prince Edward Island) and nine U.S. states (Connecticut, Indiana, Maine, Massachusetts, Minnesota, New Hampshire, Rhode Island, Vermont and Wisconsin) for cash consideration of approximately $235 million. The Company acquired these companies in order to convert these formerly Independent Regions into Company-Owned Regions, advance its ability to scale, deliver value to its affiliates and recapture the value differential of nearly 19,000 agents (approximately 12,000 in Canada and 7,000 in the U.S.).
The initial accounting for the business combination is incomplete at the time of this filing. As a result, the Company is unable to provide the amounts recognized for the major classes of assets acquired and the pro forma revenues for the
20
combined entity. This information will be included in the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021.
Senior Secured Credit Facility Refinancing
On July 21, 2021, RE/MAX, LLC amended and restated its Senior Secured Credit Facility to fund the acquisition of INTEGRA NA and refinance its existing facility. The revised facility provides for a seven-year, $460 million term loan facility and a five-year $50 million revolving loan facility. No amounts were drawn on the revolving loan facility as of the date of this report. The term loan bears interest at LIBOR (subject to a floor of 0.50%) plus 2.50%, but also contains transition provisions to move to an alternative reference rate when LIBOR is eliminated in June 2023.
21
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.
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.
On July 21, 2021, we acquired the operating companies of the North America regions of RE/MAX INTEGRA (“INTEGRA NA”), whose territories cover five Canadian provinces (New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, and Prince Edward Island) and nine U.S. states (Connecticut, Indiana, Maine, Massachusetts, Minnesota, New Hampshire, Rhode Island, Vermont and Wisconsin) for cash consideration of approximately $235 million. We acquired these companies in order to convert these formerly Independent Regions into Company-Owned Regions, advance our ability to scale, deliver value to our affiliates and recapture the value differential of nearly 19,000 agents (approximately 12,000 in Canada and 7,000 in the U.S.).
For a detailed discussion of the impacts of COVID-19 on our results in 2020, please see our Quarterly Report on Form 10-Q for the three and six months ended June 30, 2020.
Financial and Operational Highlights – Three Months Ended June 30, 2021
(Compared to the three months ended June 30, 2020, unless otherwise noted)
Strong financial results in the second quarter, including all-time high quarterly revenue and Adjusted EBITDA, were driven by a historically strong housing market and improved performance from our core operations. The Company added more than 8,000 net new agents compared to the second quarter of 2020, including agent growth in the U.S. and significant growth in Canada alongside strong growth globally. Open Motto offices increased nearly 30% year-over-year, and we continued to sell Motto franchises at a similar pace to 2020.
Second quarter revenue growth included contributions from many facets of our business, including: higher broker fees stemming from increases in total transactions per agent and rising home prices, acquisitions, fewer agent recruiting incentives, agent count growth, increased pricing and Motto expansion, among other factors.
Year-over-year comparisons were impacted by actions taken by us in the second quarter of 2020 because of the global pandemic. For example, revenue in the second quarter of 2020 was reduced by temporary COVID-19 financial support initiatives that we extended to our networks. Similarly, selling, operating and administrative expenses in the second quarter of 2020 were reduced by temporary COVID-19 costs savings measures we employed.
Selected Operating and Financial Highlights
The following tables summarize several key performance indicators and our results of operations.
#
Total agent count growth
6.3
3.8
Agent Count:
62,428
61,677
751
1.2
23,066
21,295
1,771
8.3
Subtotal
85,494
82,972
2,522
3.0
Outside U.S. and Canada
54,707
48,933
5,774
11.8
140,201
131,905
8,296
Motto open offices (2)
164
37
29.1
23
RE/MAX franchise sales (1)
395
359
36
10.0
Motto franchise sales (2)
24
26
(2)
(7.7)
Total selling, operating and administrative expenses
Adjusted EBITDA (1)
Adjusted EBITDA margin (1)
39.5
36.2
35.9
31.4
Results of Operations
Comparison of the Three Months Ended June 30, 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)
10,217
61.0
124
1.4
7,027
67.4
6,277
53.4
1,394
30.8
48.0
Consolidated revenue increased primarily due to temporary COVID-19 financial support initiatives introduced in the prior year and an increase in Broker fees; also contributing were fewer agent recruiting initiatives in the current year as compared to the prior year, incremental revenue from acquisitions, and growth of Motto, partially offset by continued attrition of booj’s legacy customer base.
Continuing Franchise Fees
Revenue from Continuing franchise fees increased primarily due to temporary COVID-19 financial support initiatives introduced in the prior year, which included a waiver or discount of Continuing franchise fees; fewer agent recruiting initiatives in the current year as compared to prior year; RE/MAX monthly fee increases and Motto expansion. Beginning April 1, 2021, there was an average price increase of 3.8% in RE/MAX 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 as compared to the prior year, which was impacted by the economic slowdown in the second quarter of 2020 caused by COVID-19.
Revenue from the Marketing Funds fees increased primarily due to temporary COVID-19 financial support initiatives introduced in the prior year, which included a waiver or discount of Marketing Funds fees and fewer agent recruiting initiatives in the current year as compared to the prior year.
Franchise Sales and Other Revenue
Franchise sales and other revenue increased primarily due to incremental revenue from our 2020 acquisitions, partially offset by the attrition of the booj legacy customer base which negatively impacted the three months ended June 30, 2021 by $0.5 million and is expected to negatively impact the full year 2021 by approximately $2.0 million to $2.5 million, as compared to the prior year.
Operating Expenses
A summary of the components of our operating expenses is as follows (in thousands, except percentages):
(13,468)
(53.1)
(6,277)
(53.4)
(566)
(8.8)
(20,311)
(46.7)
Percent of revenue
82.6
83.4
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
22,683
14,546
(8,137)
(55.9)
Professional fees
6,617
2,712
(3,905)
(144.0)
Lease costs
2,038
327
13.8
7,478
5,725
(1,753)
(30.6)
50.2
48.6
Total Selling, operating and administrative expenses increased as follows:
25
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 new amortization related to our acquisitions and placing internally developed software into service.
Other Expenses, Net
A summary of the components of our Other expenses, net is as follows (in thousands, except percentages):
63
2.9
(15)
(44.1)
(464)
(459.4)
(416)
20.3
3.2
3.9
Provision for Income Taxes
Our effective income tax rate decreased to 6.4% from 10.6% for the three months ended June 30, 2021 and 2020, respectively, primarily driven by nonrecurring taxes arising from decreases in 2021 related to the settlement of uncertain tax positions (see Note 10, Income Taxes for additional information). 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 $30.5 million for the three months ended June 30, 2021, an increase of $11.6 million from the comparable prior year period. Adjusted EBITDA increased primarily due to temporary COVID-19 financial support initiatives introduced in the prior year and higher Broker fees revenue partially offset by higher personnel costs due to the elimination of the corporate bonus and the suspension of the 401(k) match in the prior year and headcount increases largely from acquisitions.
Comparison of the Six Months Ended June 30, 2021 and 2020
Six Months Ended
11,448
28.0
(125)
(0.7)
9,536
6,900
23.6
(697)
(4.7)
27,062
22.1
Consolidated revenue increased primarily due to temporary COVID-19 financial support initiatives introduced in the prior year and an increase in Broker fees, also contributing were incremental revenue from acquisitions, fewer agent recruiting initiatives in the current year as compared to the prior year and growth of Motto, partially offset by lower event-based revenue and continued attrition of booj’s legacy customer base.
Revenue from Continuing franchise fees increased primarily due to temporary COVID-19 financial support initiatives introduced in the prior year, which included a waiver or discount of Continuing franchise fees, fewer agent recruiting initiatives in the current year as compared to prior year, RE/MAX monthly fee increases and Motto expansion. Beginning April 1, 2021, there was an average price increase of 3.8% in RE/MAX continuing franchise fees in most of our U.S. Company-Owned regions.
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 our 2020 acquisitions. The attrition of the booj legacy customer base negatively impacted the six months ended June 30, 2021 by $1.2 million.
27
(22,467)
(37.4)
(6,900)
(23.6)
(1,193)
(9.4)
(30,560)
(30.0)
88.7
83.3
51,016
30,806
(20,210)
(65.6)
10,871
5,840
(5,031)
(86.1)
4,121
4,603
482
10.5
16,484
18,776
2,292
12.2
55.2
49.0
28
647
13.3
(121)
(39.9)
(214)
126.6
312
6.6
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.
Our effective income tax rate decreased to 5.1% from 28.6% for the six months ended June 30, 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) decreases in 2021 related to the settlement of uncertain tax positions (see Note 10, Income Taxes for additional information). 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 was $53.7 million for the six months ended June 30, 2021, an increase of $15.2 million from the comparable prior year period. Adjusted EBITDA increased primarily due to temporary COVID-19 financial support initiatives introduced in the prior year, higher Broker fees revenue and lower bad debt expense from improved collections, partially offset by higher personnel costs due to the elimination of the corporate bonus in the prior year and headcount increases largely from acquisitions.
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
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non-cash and non-recurring cash charges or other items. We present Adjusted EBITDA, and the related Adjusted EBITDA 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):
2,124
2,187
4,222
4,869
(19)
(34)
(303)
696
706
4,496
EBITDA
20,025
15,195
30,479
32,998
(Gain) loss on sale or disposition of assets
(11)
(22)
Acquisition-related expense (1)
3,928
328
4,871
894
500
Fair value adjustments to contingent consideration (2)
290
150
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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 several factors including agents in the RE/MAX network, particularly in Company-Owned Regions. Our cash flows are primarily related to the timing of:
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”). As of June 30, 2021, the Senior Secured Credit Facility provided to RE/MAX, LLC consisted 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”). The Company recently incorporated transition provisions in its new credit facility (see below). In late 2020, the timeline for the cessation of term-based LIBOR (upon which our outstanding borrowings are based) was extended until June 2023. As of June 30, 2021, we had $222.6 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 June 30, 2021, the interest rate on the term loan facility was 3.5%. See our 2020 Annual Report on Form 10-K for more information.
On July 21, 2021, we amended and restated our Senior Secured Credit Facility to fund the acquisition of INTEGRA NA and refinance our existing facility. The revised facility provides for a seven-year $460 million term loan facility and a five-year $50 million revolving loan facility. The term loan bears interest at LIBOR (subject to a floor of 0.50%) plus 2.50%, but also contains transition provisions to move to an alternative reference rate when LIBOR is eliminated in June 2023. No amounts were drawn on the revolving loan facility as of the date of this report.
Sources and Uses of Cash
As of June 30, 2021 and December 31, 2020, we had $107.3 million and $101.4 million, respectively, of cash and cash equivalents, of which approximately $2.4 million and $4.2 million, respectively, were denominated in foreign currencies.
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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:
Investing Activities
During the six months ended June 30, 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 six months ended June 30, 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 two quarters of 2021 as compared to $0.22 per share/unit for the first two quarters 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 acquisitions 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 $7.6 million and $3.1 million during the six months ended June 30, 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 $13
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million and $16 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 two quarters of 2021. On August 3, 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 August 31, 2021 to stockholders of record at the close of business on August 17, 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.
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 June 30, 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. Bad debt expense is less than 1% of revenue for the six months ended June 30, 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 June 30, 2021, $223.8 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 June 30, 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 and six months ended June 30, 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 and $0.6 million, respectively.
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 June 30, 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 June 30, 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
The Company is supplementing the risk factors previously disclosed in Part I, Item 1A, “Risk Factors” of its Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (the “2020 Annual Report on Form 10-K”), filed with the Securities and Exchange Commission on February 25, 2021, to update the following risk factor under the heading “Risks Related to Our Industry”.
The real estate market may be negatively impacted by industry changes as the result of certain class action lawsuits.
As disclosed in Note 12, Commitments and Contingencies, we are a defendant in class action complaints referred to as the “Moehrl-related suits” which allege violations of federal antitrust law. The Moehrl-related suits seek changes in real estate industry practices and have prompted discussion of regulatory changes to rules established by local or state real estate boards or multiple listing services. In addition, the Department of Justice (“DOJ”) has withdrawn from a previously announced settlement of a lawsuit against the National Association of Realtors (“NAR”) in which NAR had agreed to adopt certain rule changes. The DOJ said it withdrew from the settlement “to permit a broader investigation of NAR’s rules and conduct to proceed.” The continuation of the DOJ investigation and enforcement actions and the Moehrl-related litigation (including the terms and conditions of any ultimate settlement or outcome of such matters) and/or other regulatory changes may lead to changes to our or our brokers’ business models, which may affect agent and broker compensation. These or other related adverse developments could reduce the fees we receive from our franchisees, which, in turn, could adversely affect our financial condition and results of operations.
For a discussion of our potential risks and uncertainties, please see “Risk Factors” in our 2020 Annual Report on Form 10-K. Other than the risk factor amended above, 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
2.1
Stock Purchase Agreement, dated June 3, 2021, by and among A La Carte U.S., LLC, A La Carte Investments Canada, Inc., RE/MAX, LLC, Brodero Holdings, Inc., and Fire-Ball Holdings Corporation, Ltd.
8-K
001-36101
6/3/2021
3.1
Amended and Restated Certificate of Incorporation
10-Q
11/14/2013
Bylaws of RE/MAX Holdings, Inc.
2/22/2018
4.1
Form of RE/MAX Holdings, Inc.’s Class A common stock certificate.
S-1
333-190699
9/27/2013
10.1
Second Amended and Restated Credit Agreement, dated as of July 21, 2021, by and among RMCO, LLC, RE/MAX, LLC, the several lenders from time to time parties thereto, and JPMorgan Chase Bank, N.A., as administrative agent. (Exhibits and schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Registrant hereby undertakes to furnish supplemental copies of any omitted exhibits and schedules upon request by the SEC.)
7/21/2021
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
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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:
August 4, 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)