RE/MAX Holdings, Inc. Class A

Good morning and welcome to the RE-MAX Holdings Preliminary Fourth Quarter 2021 Earnings Conference Call and Webcast. My name is Savannah and I will be facilitating the audio portion of today's call. At this time, I would like to turn the call over to Andy Schultz, Senior Vice President of Investor Relations. Mr. Schultz.

Thank you, Operator. Good morning, everyone, and welcome to RE-MAX Holdings Fourth Quarter and Full Year 2021 Earnings Conference Call. please visit the investor relations section of www.remaxholdings.com for all earnings-related materials and to access the live webcast and the replay of the call today. If you are participating through the webcast, please note that you will need to advance the slides as we move through the presentation. Turning to slide two, our prepared remarks and the answers to your questions on today's call may contain forward-looking statements. Forward-looking statements include those related to agent count, franchise sales, financial measures and outlook, brand expansion, competition, technology, housing and mortgage market conditions, capital allocation, dividends, share repurchases, strategic and operational plans, and business models. Forward-looking statements represent management's current estimates. REMAX Holdings assumes no obligation to update any forward-looking statements in the future. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ materially from those projected in forward-looking statements. These are discussed in our fourth quarter 2021 financial results press release and other SEC filings. Also, we will refer to certain non-GAAP measures on today's call. Please see the definitions and reconciliations of non-GAAP measures contained in our most recent quarterly financial results press release, which is available on our website. Joining me on our call today are Adam Contos, our chief executive officer, Steve Joyce, director and incoming CEO, Kerry Callahan, our chief financial officer, and the presidents and CEOs of our brands, Nick Bailey and Ward Morrison. With that, I'd like to turn the call over to RE-MAX Holdings CEO, Adam Contos. Adam. Thank you, Andy, and thanks to everyone for joining our call today. Looking at slide three, we exceeded our expectations during the fourth quarter. Our strong performance was driven by better-than-anticipated results from our acquisitions of RE-MAX, INTEGRIS, North American regions, and solid organic growth contributions from our core operations. Over the past few years, we have been strategically investing to expand and diversify our revenue and growth opportunities. Our Q4 results affirm that these investments are beginning to pay off. Here are some of the highlights. Overall, REMAX Holdings revenue for the fourth quarter was $89.2 million, up over 23%, largely driven by our July acquisition of Integra. Excluding the marketing funds, we had 5% organic revenue growth in the fourth quarter. We generated adjusted EBITDA of $31.1 million, up over 30%, and we expanded our adjusted EBITDA margin to 34.8%. Adjusted EPS increased more than 27% to $0.60. Overall, agent count grew more than 4,000 agents to 142,000 agents in total, a new record. And Motto opened a record number of offices in 2021, with growth of more than 30%. Today is my last earnings call as CEO of Remax Holdings. Before I turn the call over to Nick, I just want to say what a pleasure it has been working with our tremendous team There's also been an absolute privilege and honor to serve our two amazing networks. Our REMAX and Motto affiliates are hands down the best entrepreneurs in real estate, and it has been the highlight of my professional career to lead them. Our board member, Steve Joyce, will lead REMAX Holdings until the search for our next CEO is complete. I cannot think of a better person to pass the baton to than Steve. His deep experience and long track record of success in leading publicly traded franchisors makes him an optimal fit to lead our company. I am confident he will seamlessly step into the CEO chair and add to our momentum. I'm proud of all that we have accomplished over the past few years. I know I leave the company in great hands, and I look forward to sharing in its many future successes as a shareholder. With that, I'll turn it over to Nick. Thanks, Adam. Good morning, everyone. Moving to slide four, although January home sales were robust by historic standards, they were down modestly, about 5% relative to last year's frenzied start, according to the latest RENEXT National Housing Report. Importantly, the rate of price appreciation paused as the median sales price across the 51 metros surveyed remained steady relative to December sales price. Homebuyers hope this is the continuation of a welcome trend as it represents the second month in a row of very low to no price appreciations. Perhaps the most notable development from January was that mortgage rates started to tick up. Interest rates impact consumer confidence and influence their behavior. Some markets are seeing an early start to their spring selling season as buyers and sellers rush to beat any additional rate increases. Nevertheless, rates remain historically attractive. And with prices stabilizing recently, that is helping offset affordability concerns for the time being. Some exhausted homebuyers may be discouraged by the prospect of rising rates and choose to sit on the sidelines as a consequence. A combination of slightly cooled demand with the expected increase of new homes coming to the market might just be the ticket to start tipping the overall housing market toward equilibrium. In the interim, we expect 2022 to be another strong year for housing, once again driven by strong demand. There's a ton of pent-up demand from last year, and the prospect of rising rates might boost that demand in the first half of the year. Price appreciation trends might follow a similar pattern, moving higher faster in the first half of the year and then less in the back half. Markets with the highest job growth should continue to see the healthiest price increases in the coming year. Looking at slide five, overall agent count increased over 3% year over year to a new high of 142,000 agents. We've added over 4,000 agents worldwide since December 2020, highlighted by terrific growth in Canada. Our agent count in Canada grew by 2,000 agents during 2021, which is a whopping 10% increase. And encouragingly, the increase was broad-based as we experienced growth in almost every province, highlighted by outsized growth in the Ontario Atlantic region, which contributed notably to the acquired Renex Integra operations in the quarter. We are tracking to hit 25,000 agents in Canada sometime later this year, which would represent a 25% increase from just a few years ago. Note that on average, an agent in our Canadian company-owned regions generates over $2,400 in annual revenue in 2021. That is only about 20% less than we derive annually from a U.S.-based agent in company-owned regions. As a result, we're focused on our combined U.S. and Canadian agent count growth and use it as a key performance indicator. And the fact we're approaching levels we haven't seen in over a dozen years is cause for optimism. In the U.S., we had many states that grew their respective agent counts in 2021. However, due to agent attrition in other states, our agent count in the U.S. finished the year slightly down overall. Increasing our U.S. agent count remains our number one company priority, and we have several good ideas on how to spur that growth. We will look forward to telling you more about that in the future. Now, switching to the global arena, our international agent count increased 5.6% to more than 56,000 agents, which is a new record. That represents growth of more than 10,000 agents during the two-year pandemic, which is a tremendous accomplishment under adverse conditions. As the pandemic eases, we expect to see our growth outside the U.S. and Canada begin to accelerate. I'm excited to be heading to Las Vegas this weekend for our annual International Agent Conference. Our network's interest in attending has been fantastic, and we now expect over 6,500 attendees from more than 34 countries to gather, learn, network, share best practices, and get reacquainted with old friends. Also, while we're in Vegas, we also plan to celebrate because in terms of closed transactions, 2021 was the best year ever in the history of REMAX. RENEXT surpassed more than 2 million total transaction size in 2021, and that is something that no other brand has ever done. With that, I'll turn it over to Ward. Thanks, Nick. Looking at slide six, the fourth quarter was a strong capstone to another year of outstanding growth for Motto. In 2021, the Motto Network generated almost $3.5 billion in loan volume and helped nearly 13,000 families realize their dreams of homeownership. Both metrics far surpass 2020s totals. Motto's number one goal every year is growing franchise sales. We hit an inflection point in our franchise sales two years ago, and I'm happy to say the momentum carried forward through last year. We sold 64 franchises in 2021, just off our record pace set in 2020. And just a few short weeks ago, we sold our 300th franchise since inception, which is a rare achievement for any franchise to hit, let alone within the first five and a half years of its launch. Motto has averaged at least one franchise sales per week since our founding in October 2016. And we continue to see strong demand across many customer types. Most Motto franchise sales to date, a little over 55%, have been the REMAX brokers. Importantly, an increasing number of sales are now to independent real estate brokerages or professionals affiliated with a rival brand, representing over 15% of franchise sales to date. The remaining 30% of sales have been to entrepreneurs, investors, or owners of related businesses like title insurers. The extraordinary growth the model mortgage brand has experienced and the rapid diversification of franchise ownership is a testament to how compelling our value proposition is. Potential franchisees know the importance of ancillary business opportunities and how ancillaries can help them diversify their revenue streams and fortify their balance sheets. With the prospect of rising interest rates, potential franchisees are also aware of the counter-cyclical nature of our business model and Motto's unique position in the purchase market. Simply put, Motto's loan originators are often tied directly to purchase pipelines driven by real estate agents. Additionally, Motto's LOs tend to come on board with a lot of local experience and connections to their respective communities, attributes that are vital to building a successful purchase pipeline. As a result, Motto has a much higher percentage of purchase volume than the industry average. This is a fact not lost on the 70% or so of our Motto franchisees who are either real estate brokers or professionals and are situated close to the real estate transaction. Robust franchise sales are also leading to strong office openings, which ultimately drive contributions to our overall organic revenue growth. We opened nearly 60 new offices in 2021, a record. That represents over 30% annual growth, and we have many more openings in the pipeline. As of year end, we had 187 independently owned and operated offices under the Motto Mortgage brand across 38 states and Washington, D.C. The Motto team does a terrific job of helping our franchisees navigate the licensing process and the steps needed to get their offices open. It's an important part of our overall value proposition. And as the impact of COVID lessens, our office openings are kicking up. We're off to a fast start so far in 2022, and we expect to open our 200th Motto franchise any day now. Another big area of organizational focus for our mortgage business this past year has been the continued development of Wienlo. We acquired Wienlo in the second half of 2020 to solve one of our Motto franchisees' primary pain points. finding steady, dependable, and economic loan processing services. With the addition of Wienlo, motto offices now have access to an operationally ingrained third-party loan processing team, which is held to the same high standards of customer service that have come to define the motto mortgage brand. Last quarter, we introduced Wienlo's Loan Brokering System, or LBS, which has been designed to address the specific needs of the professional loan originator operating in the mortgage brokerage channel. We are continuing to iterate on the platform and incorporate critical feedback from our network. Our model affiliates will receive the LBS platform at no additional fee, as well as obtain initial discounts on the integrated Wingo loan processing offerings. Wingo LBS should officially launch the mortgage brokerage industry sometime later in 2022. With that, I'd like to turn the call over to Carrie.

Thank you, Ward. Good morning, everyone. Moving to slide 7. fourth quarter revenue grew 23.1% to $89.2 million. Excluding the marketing funds, revenue was just over $66 million, an increase of 21.2%. This increase was comprised of just over 15% acquisitive growth, 5% organic growth, and just under 1% growth from FX. All acquisitive growth came from last July's acquisition of REMAX Integra's North American operations. which continues to perform better than we anticipated in every significant metric, agent count, revenue growth, cost energies, and profit. Notably, for the third quarter in a row, we generated mid-single-digit organic revenue growth at the marketing fund. As expected, we are witnessing a trend of organic growth developing, and we believe it will continue throughout 2022. Our 5% organic revenue growth rate this quarter was even more encouraging, given that we lapped a historically strong Q4 housing market, so none of the growth came from broker fees. Many drivers contributed to our top-line performance during Q4, including more targeted use of agent recruiting incentives, pricing, increased events-based revenue, and motto expansion, to name the most notable ones. If you exclude the Booge legacy runoff, our organic growth improved by almost another 1%. Looking at slide eight, we also exceeded the top end of our profit guidance range for the third straight quarter, as our adjusted EBITDA increased almost 31% to $31.1 million. Fourth quarter adjusted EBITDA increased primarily due to strong contributions from the acquisition of Integra. Adjusted EBITDA also increased due to incremental revenue from fewer agent recruiting initiatives and a price increase in REMAX continuing franchise fees, offset by increased travel costs in our real estate segment and by continued investment in WEMO within our mortgage segment. The entire acquisition has been a bright spot in both our Q4 and full year 2021 performance, and we expect that to continue. We continue to see growth from the other acquisitions we've made over the past two years, but WEMO and FIRST have ramped slower than expected. From a profit perspective, our business model has significant leverage. Mid-single-digit organic revenue growth again translated to strong profit performance, which was accompanied by margin expansion. Our adjusted EBITDA margin of 34.8% in Q4 was up 200 basis points compared to 32.8% in the fourth quarter of 2020. Over time, we aim to generate consistent mid-single-digit organic revenue growth, which should translate into a higher rate of adjusted EBITDA growth and typically an even higher rate of earnings growth. That's the beauty of the franchise model. Before I get to our guidance, I wanted to spend a moment on capital allocation. Since our initial public offering, we've consistently stated that returning capital to shareholders was a priority. It was true in 2013, and it remains true today. That's why I am pleased with last month's announcement that our board of directors authorized a common stock repurchase program of up to $100 million, reflecting confidence in the company's performance and the strength of our balance sheet. We believe the investments we've made over the past few years position us well to continue to grow and generate substantial amounts of free cash flow over the long term. We continue to balance returning capital to shareholders with strategic investments in the business to create shareholder value, and we will continue to prioritize our capital allocation accordingly. Moving to slide nine, the company's first quarter and full year 2022 outlook assumes no further currency movements, acquisitions, or divestitures. For the first quarter of 2022, we expect agent count to increase 1.5% to 2.5% over first quarter 2021, revenue in a range of $88 million to $92 million, including revenue from the marketing funds in a range of $22 to $24 million, and adjusted EBITDA in a range of $25 million to $28 million. For the full year 2022, we expect agent count to increase 2% to 4% over full year 2021, Revenue in a range of $366 million to $376 million, including revenue from the marketing funds in a range of $91.5 million to $95.5 million, and adjusted EBITDA in a range of $130 million to $135 million. One last item to note with respect to our 2022 expectations. Due to having a full year of contributions from Integra, we expect our income tax rate used to calculate adjusted net income to increase from 24% to 25%. Now, I'll turn the call over to Steve for closing comments.