RE/MAX Holdings, Inc. Class A

Remax Holdings First Quarter 2022 Earnings Conference Call and Webcast. My name is Chris, and I'll be facilitating the audio portion of today's call. At this time, I'd like to turn the call over to Andy Scholz, Senior Vice President of Investor Relations. Mr. Scholz?

Thank you, Operator. Good morning, everyone, and welcome to Remax Holdings First Quarter 2022 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 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 first quarter 2022 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 Steve Joyce, our Chief Executive Officer, Terry Callahan, our Chief Financial Officer, and the presidents and CEOs of our brands, Ward Morrison and Nick Bailey. With that, I'd like to turn the call over to REMAX Holdings CEO, Steve Joyce. Steve? Thank you, Andy, and thanks to everyone for joining our call today. Looking at slide three, we had a nice start to the year. Our solid Q1 performance was driven by strong ongoing contributions from our acquisition of REMAX and Tegra's North America regions, as well as continued healthy organic growth. Some of our notable quarterly metrics include overall REMAX holdings revenue was $91 million, up 26% driven by our July acquisition of Integra, which comprised 15% of the growth, as well as organic revenue growth. Excluding the marketing funds, we had over 10% organic growth, aided by increased attendance at our annual RE-MAX convention. We generated adjusted EBITDA of $27.9 million, up 20.5%, and our adjusted EBITDA margin was a robust 30.7%. Adjusted EPS increased 11% to 51%. Overall, REMAX agent count grew by more than 2,000 agents to over 142,000 agents in total, a new record. And model franchise sales accelerated with the number of open model offices growing by over 27%. Before Ward and Nick provide additional details on their respective business lines, I'd like to spend a moment discussing our strategic operational plans. On our last call, I mentioned one of my two focus areas as CEO is to work with the board and management team to implement a limited number of initiatives designed to increase our near and long-term growth. During the past quarter, we have made good progress evaluating the opportunities we believe will yield the best results, and we are confident about our ability to shape our growth trajectory. Although we're not yet ready to divulge specific details, you can expect to hear more from us soon about these initiatives, their related investments, as well as the anticipated results. The ideas under consideration are closely aligned with our current strategy. We believe in the path we're on. We have two terrific industry-leading franchise brands, each with their own compelling growth opportunity. We think we can make a measurable difference through smart strategic moves, essentially accelerating our growth through institutional focus, accountability, and the proper allocation of resources. Our focus remains on increasing Rematch USAge account and continue to fuel the growth of our expanding mortgage business. Our mortgage business has significant upside. As we've said previously, we think it's a $100 million annual revenue opportunity with marginate cashflow potential that rivals our Remax business. We believe Motto and Wemo are each capable of generating 50 million or more in annual revenue. With respect to Motto, we've sold over 300 franchises to date and have nearly 200 open Motto offices. We believe we can eventually grow that number to more than 1,000 franchises. Motto's unique value proposition is fantastic and we would like to get to 1,000 open offices much sooner than our current growth trajectory forecasts. We think we are up to the challenge. With that, I'll turn it over to Ward. Thanks, Steve. Looking at slide four, our mortgage business is off to a great start this year, as both Motto and Wemo experienced accelerated growth in this first quarter. We sold 17 Motto franchises in Q1, and March was our best non-December month ever for franchise sales. On a trailing 12-month basis, Q1 sales reaccelerated to over 70 franchises sold. For the full year 2022, we still anticipate selling between 60 and 80 franchises and are trending towards the top half of that range. Encouragingly, franchise sales remain solid into April, and we continue to see strong demand across many customer types. We think our franchise sales success is driven by a combination of reasons, including positive word of mouth, increasing market presence, and fine-tuning our sales and marketing incentives, as well as our sales structure, to name just a few. Combine that with our counter-cyclical aspect of our business model, the increasing importance of ancillary business, and our unique position in the purchase market, and we are piquing the interest of many real estate professionals. In short, the secret is getting out. Motto is an incredible opportunity for many real estate entrepreneurs. A big part of Motto's appeal is that many of its franchisees and loan originators, or LOs, work closely with productive real estate agents who have an ongoing purchase transaction pipeline. As a result, Motto has a higher percentage of purchase volume than the industry average, which is increasingly important during a rising interest rate environment. For example, during Q1, the purchase versus refi split across the motto network was almost 80-20. That's up from approximately 65-35 in fiscal 2021, and in contrast to the roughly 40-60 split the mortgage industry did as a whole last year. Given our heavy focus on the purchase market, we believe motto is a very attractive opportunity, especially for productive LOs focused on successfully navigating a shifting market with reduced refi activity. We are actively evaluating how we can accelerate model franchise sales growth. Given the current momentum, we believe that additional investment in sales and marketing resources is likely a prudent allocation of capital. Each sales professional on our team currently covers a large territory, and we think additional sales resources will increase our ability to capitalize on incremental opportunities. Our mortgage business is also focused on the continued development and growth of WeMo, the first third-party mortgage processing solution with an all-in-one digital platform, created specifically for the broker channel. We acquired WeMo in the second half of 2020 to solve one of our motto franchisees' primary pain points, finding steady, dependable, and economic loan processing services. The WeLo loan processing platform is complemented by a highly qualified team of loan processors who focus on the details and streamline the loan processing experience, thereby helping mortgage loan originators close loans faster and freeing up more time for them to bring in new business. During the first quarter, we saw an increasing number of loans processed by WeLo, particularly for the modern network. Last month, we held our annual Motto Mortgage Innovation and Loan Excellence Summit, or the Motto Mile, as we call it, at which Motto franchisees got to learn, network, and celebrate their achievements. Our Wienlo colleagues attended Motto Mile and educated our franchisees about Wienlo's one-of-a-kind offering. The interactions and overall Wienlo presence were well received by our franchisees, and we think the connections made at our convention will only add to Wienlo's momentum. Last quarter, WEMO also announced the addition of a new product offerings to our platform. WEMO is consistently adding processing services for new product and lender options to provide the flexibility needed to deliver the highest level of customer support for mortgage brokers and loan originators. With that, I'd like to turn the call over to Nick. Thanks, Ward. Good morning, everyone. Moving to slide five, the busy spring housing market got up to another strong start, according to the most recently next national housing report. Many of the themes which have defined the housing market for the past several months remained front and center in March. High demand, strong sales figures, rising prices, and tight inventory. March home sales jumped 32.2% over February, while posting a report record median sales price of $360,000. As buyers continue to far outnumber sellers, month supply of inventory reached a record low of one month across the report's 51 metro areas. More than half of the surveyed markets reported a supply of less than one month. Overall, the housing market remains very active right now, especially on the demand-heavy buy side. Buyers are rushing to beat anticipated mortgage rate hikes, as well as buyers ready to roll as soon as the right listing appears. Those factors which drive a solid start to the season. Stays on market remains the biggest concern for hopeful buyers. But with sellers watching homes get snapped up in record time, the idea of cashing in on their equity gain continues to have great appeal. As we move deeper into the spring selling season, we expect to see more houses come on the market. Buyers should have even more choice and purchasing power as additional sellers choose to join the action. One other important dynamic is that in many parts of the country, rental rates are increasing faster than mortgage rates, which could push even more people toward buying a home. The higher mortgage rates should also partly cool the historically high price gains we've seen. That, along with an expected increase in new for sale homes coming to the market, should help move the housing market toward more equilibrium, a positive for all. Moving to slide six, the recently published 2022 Real Trends 500 survey revealed that REMAX agents at participating large U.S. brokerages on average outsold competing agents by more than two to one last year. The widely respected report showed REMAX agents averaged 16.5 transaction size, more than doubling the average of other agents from the more than 1,700 participating large brokerages. REMAX agents have held this 2-to-1 advantage for 12 years in a row. The RealTrends 500 ranks participating large brokerages by total residential transaction sides, with 500 sides needed to qualify for participation. Among the qualifying brokerages, 28% were REMAX brokerages, more than any other real estate brand. We are thrilled by the performance of the REMAX brokerages on this prestigious RealTrends 500 list. And for entrepreneurs, productivity is the metric that matters the most, and REMAX delivers year after year. In addition to leading the field in per-agent transaction size, RENAX agents also averaged $5.9 million in sales volume, 61% higher than the $3.7 million average of all other agents in the survey. What's more, when the qualifying brokerages are re-ranked by average transaction size per agent, 86 of the top 100 are affiliated with RENAX. REMAX offices attract productive, driven agents and those aspiring to be. Time and time again, REMAX agents continue to perform well regardless of movements in the market. Looking at slide seven, overall agent count increased more than 2,000 agents year over year and reached a new high of more than 142,000 agents, highlighted by nearly 10% growth in Canada. In the U.S., we're seeing traditional seasonal undulation so far this year. Our agent count dropped in January, a month of high turnover throughout the industry, before stabilizing over the next two months. We've had a positive net gain in agent count across all major geographies so far in April, and we expect that trend to continue. Increasing our U.S. agent count remains our top company priority, and we think we have several compelling opportunities to spur that growth, as Steve noted earlier. In particular, we see opportunities to attract and retain larger agent teams as well as to convert independent brokerages to the REMAX brand, which has the direct benefit of adding agents in larger numbers. We'll have more to say about teams at a later date. Regarding conversions, as you would expect, many independent offices have interest in joining the worldwide leader, in part because REMAX has such a compelling and attractive collection of competitive advantages. We have global scale, agent productivity, brand name awareness, marketing power, and a host of other business building elements that most local or regional operations simply can't match. Our data shows that agents who join REBAC and stick with the brand tend to increase their sales over time. And that's an important message for us to send out into the independent broker community. It addresses a chief concern about agent productivity that holds many of these potential mergers or conversions back. We've empowered and equipped our franchise sales team to generate more activity on this front. As we get deeper into the year, we hope to see more independent brokers working through their perceptions of bringing their agents into our network. Frankly, we believe it's a win-win proposition for all parties involved. We're already well underway with a targeted effort to prove out the concept, and the initial results are encouraging. We look forward to expanding the effort and sharing more successes in the future. With that, I will turn it over to Kerry.

Thank you, Nick. Good morning, everyone. Moving to slide eight, first quarter revenue grew 26% to $91 million. Excluding the marketing funds, revenue was just over $68 million, also an increase of 26%. The increase was comprised of slightly over 15% acquisitive growth and 10.5% organic growth. FX impacts this quarter were negligible. All acquisitive growth came from last July's acquisition of Remax Integra's North American operations, which continues to perform well. About half of our double-digit organic growth was due to increased attendance at our annual agent convention, which we call R4. Last year's convention results were muted due to COVID. Nevertheless, excluding R4, we generated mid-single-digit organic revenue growth, X the marketing funds, for the fourth quarter in a row. Outside of our eight conventions, many drivers contributed to our top-line performance during Q1, including rising home prices, more targeted use of agent recruiting incentives, pricing, and motto expansion, to name the most notable ones. If you exclude the Booge legacy runoff, our organic growth improved by another 50 basis points. Looking at slide nine, our Q1 SONA expenses increased 9.5% to $47.8 million. First quarter 2022 selling, operating, and administrative expenses increased primarily due to higher travel and events expenses, largely from our annual agent convention, higher personnel costs from headcount increases, an increase in acquisition-related expenses, and the reinstatement of the 401k match to pre-pandemic levels, partially offset by lower equity-based compensation expense. Recall that during last year's first quarter, we incurred $5.5 million of stock-based compensation expense due to the one-time acceleration of certain equity awards. Before I get to our outlook, there are two items I want to briefly mention. First, a quick update on our share repurchase program, which we announced in January. For compliance reasons, we did not begin purchasing shares until the back half of the quarter. we continue to believe that buying back our stock at its current valuation is an excellent allocation of capital. Second, regarding rising interest rates and its impact on our earnings, it's important to note that every 25 basis point increase in interest rates reduces our full year adjusted EPS by approximately 3 cents per share. Moving to slide 10, the company's second quarter and full year 2022 outlook assumes no further currency movements acquisitions, or divestitures. For the second quarter of 2022, we expect agent count to increase 2% to 3% over second quarter 2021, revenue in a range of $91 million to $94 million, including revenue from the marketing funds in a range of $22 million to $24 million, and adjusted EBITDA in a range of $32.5 million to $35 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. Now, I'll turn up the call back over to Steve for closing comments.