RE/MAX(RMAX) - 2023 Q4 - Annual Report

Part I Business RE/MAX Holdings, Inc. is a leading global franchisor of real estate and mortgage brokerages, operating a 100% franchised model focused on providing technology, education, and marketing support to its networks * The company operates as a franchisor of real estate brokerages (RE/MAX) and mortgage brokerages (Motto), with a 100% franchised model, meaning it does not own any operating brokerages[19] * In Q3 2023, the company streamlined operations, including a reduction in force, to achieve long-term cost savings[23] * RE/MAX, LLC agreed to a $55.0 million settlement to resolve multiple industry class-action lawsuits, which was recorded in Q3 2023[24] * The Board of Directors suspended the quarterly dividend in Q4 2023 to preserve capital due to the litigation settlement and challenging market conditions[25] Our Brands The company's portfolio includes RE/MAX, a global real estate network with over 140,000 agents, Motto, a U.S. mortgage brokerage franchise, and wemlo, a fintech platform for mortgage loan processing * RE/MAX is a global real estate brand with over 140,000 agents in over 110 countries and territories, noted for high agent productivity, market share, and brand awareness[27][29][31] * Motto Mortgage is a national mortgage brokerage franchise in the U.S. that has grown to over 225 offices across more than 40 states[35] * wemlo is a fintech platform offering third-party mortgage loan processing services, designed to streamline the mortgage process for brokers[37] Industry Overview and Trends The U.S. and Canadian residential real estate markets, valued at approximately $1.9 trillion and $0.3 trillion respectively in 2023, are cyclical and have been impacted by rising interest rates * The U.S. and Canadian residential real estate markets were approximately $1.9 trillion and $0.3 trillion, respectively, based on 2023 sales volume[40] * Rising interest rates in the U.S. caused a slowdown in existing home sales in 2023, however, NAR forecasts a 13.0% increase in existing home sales for 2024[41] * The Canadian housing market also slowed in 2023 due to rising rates, but CREA projects a 10.4% increase in home sales activity for 2024[44] * Despite technological changes, the use of real estate agents remains high, with 89% of U.S. home buyers and sellers using an agent in 2023[45] Our Franchise Models and Offerings The company operates a 100% franchised business model, with RE/MAX offering high commission splits and extensive support, and Motto providing a "mortgage brokerage in a box" solution * The RE/MAX model recommends a 95%/5% agent/broker commission split, which is favorable to high-producing agents[59] * RE/MAX provides agents with the kvCORE technology platform, which includes CRM, lead cultivation, and digital marketing tools[63] * The Motto franchise model offers a "mortgage brokerage in a box" with a seven-year franchise agreement, providing compliance, education, technology, and access to multiple wholesale lenders[73][74] Financial Model The company's financial model is characterized by a low fixed-cost structure and recurring revenue streams, contributing to high margins * The majority of revenue is recurring, with continuing franchise fees and annual dues accounting for 66.7% of revenue excluding Marketing Funds in 2023[80] 2023 Average Annual Revenue Per Agent (Excluding Marketing Funds) | Region | Average Revenue per Agent | | :--- | :--- | | Company-Owned Regions (U.S. & Canada) | $2,550 | | Independent Regions (U.S. & Canada) | $410 | | Global Regions (Outside U.S. & Canada) | $200 | Motto Franchisee Monthly Fee Structure | Tier | Time Period | Fixed Fee Per Month | | :--- | :--- | :--- | | Tier 1 | Months 1 – 6 | $0 | | Tier 2 | Months 7 – 9 | $2,650 | | Tier 3 | Months 10 – 12 | $3,650 | | Tier 4 | Months 13 - remaining term | $4,650 | Value Creation and Growth Strategy The company's growth strategy focuses on organic growth, strategic acquisitions, and returning capital to shareholders, despite a recent dividend suspension * The growth strategy is three-pronged: organic growth (agent count, Motto expansion), acquisitions (regional rights), and returning capital to shareholders[97] * While global agent count grew, U.S. Company-Owned region agent count has declined annually since 2017 (excluding acquisitions)[96] * Acquiring Independent Regions is a key strategy to capture 100% of franchise fees and increase revenue per agent[107] * The quarterly dividend was suspended in Q4 2023, and the company has a $100 million stock repurchase program authorized in January 2022, with $62.5 million remaining at the end of 2023[109][110] Competition The residential real estate brokerage business is highly competitive, with RE/MAX facing traditional, non-traditional, discount, and iBuyer models, while Motto Mortgage competes with various mortgage origination models * RE/MAX faces intense competition from a fragmented market including traditional national brands (Anywhere, Keller Williams), technology-focused brokerages (Compass, eXp Realty), discounters (Redfin), and iBuyers (Opendoor)[111][112][114] * Motto competes with various mortgage origination models, including independent mortgage brokerages, mortgage bankers, and joint ventures, although it is the first national mortgage brokerage franchise brand in the U.S[119] Corporate Structure and Ownership RE/MAX Holdings, Inc. is a holding company managing RMCO, LLC, with significant ownership and voting power held by RIHI, Inc., and obligations under Tax Receivable Agreements * Holdings is a holding company managing RMCO, LLC, and as of Dec 31, 2023, Holdings owned 59.3% of RMCO, and RIHI, Inc. (controlled by the Linigers) owned 40.7%[122] * RIHI holds 40.7% of the company's voting power through its ownership of Class B common stock[124] * The company has Tax Receivable Agreements (TRAs) to pay 85% of tax benefits from asset basis step-ups to TRA holders, and in 2023, a valuation allowance on deferred tax assets led to a $25.3 million gain from reducing the TRA liability[128][129] Human Capital Management As of December 31, 2023, the company had 544 full-time employees, an 8% decrease from 2022, following a 7% workforce reduction in Q3 2023 Employee Headcount and Function | | 2023 | 2022 | % change | | :--- | :--- | :--- | :--- | | Full-time employees | 544 | 594 | (8%) | | Employee function | | | | | Technology | 28% | 30% | (2%) | | Sales and franchise development | 28% | 28% | 0% | | Marketing, education and events | 17% | 16% | 1% | | Shared services | 27% | 26% | 1% | * The company reduced its workforce by approximately 7% in Q3 2023 and by 17% in Q3 2022[130] * Globally, as of December 31, 2023, approximately 48% of RE/MAX franchises have at least one female owner and 53% of RE/MAX agents are women[135] Risk Factors The company faces significant risks across its business, industry, legal structure, and regulatory environment, including potential impacts from class-action lawsuits, market downturns, and substantial shareholder influence * The company's financial results are directly affected by the operational success of its independent franchisees and their ability to attract and retain agents, which is outside of the company's direct control[147] * Industry class-action lawsuits (Moehrl-related antitrust litigations) and potential regulatory changes pose a substantial risk, potentially impacting commission structures and adversely affecting financial results[177][178] * The business is tied to the cyclical residential real estate market, which has been and will likely continue to be negatively impacted by downturns, such as those caused by rising interest rates[184] * RIHI, controlled by the company's co-founders, holds 40.7% of the voting power, allowing it to significantly influence stockholder matters, which may create conflicts of interest with Class A stockholders[192] * Cyberattacks and security breaches pose a significant risk, as the company relies on information technology and collects personally identifiable information, with growing complexity from global privacy legislation like GDPR and CCPA[216][217] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the SEC * There are no unresolved staff comments[222] Cybersecurity The company's cybersecurity program is managed by a dedicated Information Security Officer and overseen by the Board, with no material incidents reported to date * The cybersecurity program is managed by an Information Security Officer (ISO) with oversight from the Board's Audit Committee[223][225] * The company has not experienced any cybersecurity incident that has materially affected its business, operations, or financial condition to date[226] Properties The company's corporate headquarters is located in leased office space in Denver, Colorado, covering approximately 231,000 square feet with a lease expiring in April 2028 * The corporate headquarters is in a leased office in Denver, Colorado, consisting of approximately 231,000 square feet with a lease expiring in April 2028[228] Legal Proceedings The company is involved in various legal proceedings, most notably industry-wide class-action antitrust lawsuits, with details incorporated by reference from Note 14 of the financial statements * The company is involved in ongoing litigation, with disclosures regarding certain legal matters, particularly the industry class-action lawsuits, incorporated by reference from Note 14[229] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's Class A common stock trades on the NYSE under "RMAX", and while a $100 million stock repurchase program remains, the quarterly dividend was suspended in Q4 2023 * The company's Class A common stock is traded on the New York Stock Exchange under the symbol "RMAX"[232] * In the fourth quarter of 2023, the Board of Directors suspended the quarterly dividend, citing the recent litigation settlement and challenging market conditions[233] * As of December 31, 2023, $62.5 million remained available under the $100 million stock repurchase program authorized in January 2022, with no repurchases made in Q4 2023[237] Management's Discussion and Analysis of Financial Condition and Results of Operations The company experienced a challenging 2023 with decreased revenue and a net loss due to difficult market conditions, a significant litigation settlement, and high leverage impacting liquidity 2023 Financial Highlights vs. 2022 | Metric | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Total Revenue | $325.7M | $353.4M | -7.8% | | Net Income (Loss) Attributable to Holdings | ($69.0)M | $6.1M | N/A | | Adjusted EBITDA | $96.3M | $121.6M | -20.8% | | Adjusted EBITDA Margin | 29.6% | 34.4% | -4.8 p.p. | * Financial performance in 2023 was negatively impacted by high interest rates, limited housing supply, a $55.0 million litigation settlement, and a workforce reorganization[243][246] * The company's Total Leverage Ratio (TLR) was 7.80:1 as of Dec 31, 2023, which is above the 4.50:1 threshold required to access its revolving line of credit and the 3.50:1 threshold for unlimited restricted payments (dividends, buybacks)[299][501] Results of Operations (2023 vs. 2022) For the year ended December 31, 2023, total revenue decreased by 7.8% to $325.7 million, driven by lower broker fees and continuing franchise fees, while operating expenses increased due to settlement and impairment charges Revenue Breakdown (2023 vs. 2022) | Revenue Stream | 2023 ($M) | 2022 ($M) | % Change | | :--- | :--- | :--- | :--- | | Continuing franchise fees | 127.4 | 133.4 | (4.5)% | | Annual dues | 33.9 | 35.7 | (5.0)% | | Broker fees | 51.0 | 62.9 | (19.0)% | | Marketing Funds fees | 83.9 | 90.3 | (7.2)% | | Franchise sales and other | 29.5 | 31.1 | (5.0)% | | Total revenue | 325.7 | 353.4 | (7.8)% | * Selling, operating and administrative expenses decreased 1.4% to $171.5 million, primarily due to lower personnel and professional fee costs, partially offset by higher convention expenses and bad debt[268][270] * Settlement and impairment charges totaled $73.8 million in 2023, including a $55.2 million legal settlement and an $18.6 million goodwill impairment for the Mortgage segment[268][274][292] * A gain of $25.3 million was recorded on the reduction of the Tax Receivable Agreement liability, resulting from a valuation allowance placed on deferred tax assets[279] Liquidity and Capital Resources The company's liquidity is primarily managed through cash from operations and its Senior Secured Credit Facility, though access to its revolving credit facility is currently restricted due to a high leverage ratio Cash Flow Summary (in thousands) | | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | | :--- | :--- | :--- | | Cash provided by operating activities | $ 28,264 | $ 71,142 | | Cash used in investing activities | (5,643) | (11,500) | | Cash used in financing activities | (35,817) | (78,363) | * As of December 31, 2023, the company had $444.6 million of term loans outstanding, net of costs, under its Senior Secured Credit Facility[303] * The company's Total Leverage Ratio (TLR) of 7.80:1 as of year-end 2023 prevents it from drawing on its revolving line of credit and limits restricted payments like dividends and buybacks[299][302] * Total capital expenditures for 2024 are projected to be between $7.0 million and $9.0 million[312] Critical Accounting Judgments and Estimates Management identifies critical accounting estimates including goodwill impairment, purchase accounting for acquisitions, and the valuation of deferred tax assets and the Tax Receivable Agreement liability * The fair value of the Mortgage reporting unit was assessed during the 2023 annual impairment test, leading to a full impairment of its $18.6 million goodwill due to declines in projected cash flows[331] * Purchase accounting for acquisitions requires significant management judgment in allocating the purchase price to identifiable assets and liabilities, primarily using discounted cash flow analysis[332] * The calculation of deferred tax assets and the related TRA liability is complex, relying on valuations of intangible assets and subject to complex IRS rules[334][335] Qualitative and Quantitative Disclosures About Market Risk The company is exposed to credit risk from franchisee receivables, interest rate risk on its variable-rate debt, and currency risk from global operations, particularly the Canadian dollar * Credit risk increased, with bad debt expense rising to 2.0% of revenue in 2023, compared to 0.7% in 2022[339] * The company is subject to interest rate risk on its $448.5 million of variable-rate term loans, where a 0.25% rate increase would result in an additional $1.1 million in annual interest expense[340][341] * The company has significant currency risk, primarily from the Canadian dollar, where a hypothetical 5% strengthening/weakening of the U.S. dollar would impact operating income by approximately $1.5 million[342][343] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2023, including balance sheets, income statements, and cash flow statements, along with detailed notes on accounting policies, debt, and legal contingencies * The financial statements for the year ended December 31, 2023, were audited by Ernst & Young LLP, which issued an unqualified opinion[349] * A critical audit matter identified was the impairment of goodwill in the Mortgage reporting unit, due to the subjective nature of assumptions like franchise sales forecasts and discount rates used in the fair value assessment[354][355] Consolidated Balance Sheet Highlights (As of Dec 31, 2023) | Account | Amount (in thousands) | | :--- | :--- | | Total Assets | $ 577,150 | | Total Liabilities | $ 653,211 | | Total Stockholders' Equity (Deficit) | $ (76,061) | Consolidated Statement of Income (Loss) Highlights (Year Ended Dec 31, 2023) | Account | Amount (in thousands) | | :--- | :--- | | Total Revenue | $ 325,671 | | Operating Income (Loss) | $ (10,637) | | Net Income (Loss) | $ (98,486) | | Net Income (Loss) Attributable to RE/MAX Holdings, Inc. | $ (69,022) | Note 14. Commitments and Contingencies This note details significant legal proceedings, primarily the Moehrl-related antitrust class-action lawsuits, for which RE/MAX, LLC reached a $55.0 million settlement that received preliminary court approval * RE/MAX, LLC is a defendant in multiple class-action antitrust lawsuits (Moehrl-related) concerning NAR rules on buyer broker compensation[533] * A settlement was reached for $55.0 million to resolve nationwide claims, with the amount recorded as a charge in Q3 2023, and the settlement is subject to final court approval, with a hearing scheduled for May 9, 2024[535][537] * The company is also a defendant in Canadian antitrust lawsuits (Sunderland and McFall Actions) and a U.S. lawsuit alleging harm to homebuyers (Batton Action)[540][541] Controls and Procedures Management concluded that the company's disclosure controls and procedures and internal control over financial reporting were effective as of December 31, 2023, with no material changes identified in Q4 2023 * Management concluded that disclosure controls and procedures were effective as of December 31, 2023[568] * Management concluded that internal control over financial reporting was effective as of December 31, 2023, based on the COSO framework[571] * No material changes in internal control over financial reporting occurred during the fourth fiscal quarter of 2023[572] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance practices will be provided in the company's definitive proxy statement for the 2024 annual meeting of stockholders and is incorporated by reference * The required information for this item is incorporated by reference from the company's upcoming 2024 Proxy Statement[578] Executive Compensation Information regarding executive compensation will be included in the company's definitive proxy statement for the 2024 annual meeting of stockholders and is incorporated by reference * The required information for this item is incorporated by reference from the company's upcoming 2024 Proxy Statement[579] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section provides information on equity compensation plans as of December 31, 2023, with other required security ownership details incorporated by reference from the 2024 proxy statement Equity Compensation Plan Information as of December 31, 2023 | Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights | Remaining Available for Future Issuance Under Equity Compensation Plans | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 1,292,802 | $22.58 | 2,554,960 | | Equity compensation plans not approved by security holders | 868,012 | — | — | | Total | 2,160,814 | $22.58 | 2,554,960 | * The remaining information required for this item is incorporated by reference from the company's upcoming 2024 Proxy Statement[581] Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence will be included in the company's definitive proxy statement for the 2024 annual meeting of stockholders and is incorporated by reference * The required information for this item is incorporated by reference from the company's upcoming 2024 Proxy Statement[582] Principal Accounting Fees and Services Information regarding principal accounting fees and services will be included in the company's definitive proxy statement for the 2024 annual meeting of stockholders and is incorporated by reference * The required information for this item is incorporated by reference from the company's upcoming 2024 Proxy Statement[583] Part IV Exhibits and Financial Statement Schedules This section lists the financial statements filed as part of the report under Item 8, noting that separate financial statement schedules have been omitted as inapplicable or included elsewhere, and incorporates the Index to Exhibits by reference * This item lists the financial statements filed in Part II, Item 8 and states that financial statement schedules are omitted, with the exhibits listed in the Index to Exhibits[584] Form 10-K Summary The company reports that there is no Form 10-K summary provided * None[585]