RE/MAX Holdings, Inc. Class A

Good morning, and welcome to the REMAX Holdings Third Quarter 2022 Earnings Conference Call and Webcast. My name is Chris, and I will be facilitating the audio portion of today's call. At this time, I'd 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 REMAX Holdings Third 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. Your next holding 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 third 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, 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, Steve Joyce. Steve?

Thank you, Andy, and thanks to everyone for joining our call today. Looking at slide three, During the third quarter, we performed well in the face of increasingly difficult market conditions. Our results once again reflect the strength and resilience of our differentiated business model. Some of our notable quarterly highlights include Remax Holdings' total revenue was $88.9 million, down only 2% compared to last year as our Integra acquisition and growing mortgage business helped offset the impact from the softening housing market. We generated adjusted EBITDA of 31.5 million, and our adjusted EBITDA margin was a robust 35.4%. Adjusted EPS was 56 cents. We accelerated our stock buyback program and repurchased over half a million shares during the quarter. Total REMAX agent growth grew by over 3,000 agents to 144,000 agents in total, a new record. And the motto mortgage presence continued to grow with an increase in the open office count during the quarter. Our loan processing business increased as well. We are pleased with our third quarter results, particularly given current market conditions. During times like these, our 100% franchised model, unique in our space, is a key competitive advantage and serves us well. Recurring revenue from dues and fees based on agent count and open model offices accounted for almost 65% of our revenue, excluding the marketing funds during the third quarter. Combined with an asset-like business, we have a relatively low-cost structure that allows for robust adjusted EBITDA margins and strong conversion to adjusted pre-cash flows. Since our IPO nine years ago, we have consistently converted between approximately 55% and 75% of our adjusted EBITDA to adjusted pre-cash flow. This enables us to generously return capital to shareholders while also strategically reinvesting in our business. Since going public, we have paid out more than $125 million in dividends to our Class A stockholders. And we are now almost one quarter of the way through our $100 million stock buyback plan, which we commenced in January of this year. We also aggressively pursued buying back our RE-MAX independent regions, which we think has been an excellent allocation of capital and driver value. In particular, our Integra acquisition continues to perform well and deliver an increasingly handsome return. Our expanding mortgage business has helped further diversify our revenue streams and provided additional and exciting avenues of growth. We continue to execute at full speed on the strategic growth initiatives we announced at the beginning of the quarter. Frankly, it feels good to be playing offense while so many others in our space are taking a more defensive stance. We believe we are in a very desirable position as we approach the next phase of the housing cycle. We have a lot of options, and we intend to be strategic and opportunistic. One final note, the board and I have met recently, and we agree that I should remain a CEO on an interim basis through the second quarter of next year when we expect to start a formal search for a permanent replacement.

With that, I'll turn it over to Nick.

Thank you, Steve, and good morning, everyone. Moving to slide four, as is typical for this time of year, September home sales declined 9.7% from August, according to the most recent REMAX National Housing Report. Across the 53 metro areas surveyed in the report, inventory climbed to two-month supply for the first time in about two years. During that period, quick sales kept the housing covered relatively bare. But now, with the supply of two months, there are a lot more options for homebuyers. The trend also suggests some progress toward more balance in the market. For a long time, six months of inventory was the standard for a balanced market that favored buyers and sellers evenly. Now, with the evolution of technology and various changes in home buying patterns, the new standard is becoming four months, and we're halfway there. Additional good news for home buyers, September's median sales price of $400,000 was 6.1% lower than the year high of $426,000 in June and 1.2% below August. though it was 6.7% above September of 2021. The Fed's move to cool inflation are clearly having an effect on the housing market. The historic pace and magnitude of the interest rate increases have created a reset and softening of the housing landscape as intended. We believe, however, that demand is still high based on generational factors. So in terms of annual sales, even a slower market will still stay in the historic range of results. After all, it's important to view things in context. At nearly 6.9 million sales of new and existing homes, 2021 was an uncommonly strong year. Without that context, the year-over-year comparisons can make the current housing climate seem more dire than it really is. And the fact is, 2022 is shaping up to be a pretty good year for home sales. Now, admittedly, I'm an optimist, so when I talk to people about the housing market, I implore them to take a deep breath and keep things into perspective. Interest rates go up and down and recessions come and go, but no matter what, people are going to buy and sell homes. And based on our five decades of experience, it will happen millions of times every single year. People get married, they have kids, they get divorced, they move for jobs. So that's not really the question. The key question, as you see on slide five, is which agents and brokerages are going to be the ones helping those consumers with their home sales and purchases. That's where our main competitive advantage comes in. The productivity of REMAX agents, because no matter what other business models may be doing and no matter what's happening in the economy, REMAX agents have a long track record of being ahead of the competition. As you can see in every kind of housing market over the past 12 years, REMAX agents in the U.S. have consistently outsold competing agents at large brokerages by a wide margin. From 2010 to 21, U.S. housing experienced markets at both ends of the spectrum. And the number of U.S. home sales has gone up and down, as has the average transaction size per agent. But REMAX agents have continued to outproduce the competition two to one at participating large brokerages, according to the RealTrends data. We also believe experience in navigating through changing markets will influence who will succeed in the next leg of the housing cycle. REMAX agents had nearly twice as much experience as the typical realtor in 2021, an advantage that has widened in recent years. The median years of experience for US REMAX agents was 15 last year compared to just eight years for NAR members. That means most of our agents have gone through market changes that many in the industry have not. That's one reason we're more confident and aggressive than many other brands right now. I don't believe there's enough downline profit share split or whatever to enable unproductive agents to stay in our industry long term when markets are changing as they are today. Looking at slide six, overall agent count increased over 3,000 agents year over year and reached a new high of more than 144,000 agents underscored by continued growth in Canada and globally. In the U.S., we continue to see slightly depressed results driven primarily by the uncertain housing market. We expect to see a notable industry-wide contraction in the number of real estate agents across the U.S. And in truth, that's not a bad thing from our perspective. And while our model makes us more insulated than most, we are not immune. Our U.S. agent count will likely be under a bit of pressure for the foreseeable future. Increasing our U.S. agent count remains a top REMAX priority, and that's why we are so focused on the growth initiatives announced last quarter. These initiatives are all underway, and we are happy with our progress thus far. They should make a difference in our agent count, even if the impact isn't as clear as it would be in the absence of market headwinds. We expect the new programs for teams and conversions, mergers and acquisitions to be even more impactful in our 2023 results. Part of this is due to the time it takes for people to make a move. These are big decisions for highly productive teams and brokerages, and it often takes months for someone to take the plunge and make a change. That's why it's so critical and advantageous to put these initiatives in place when we did. Having our systems already up and going gives us great runway into the new year. Some teams and brokers have already come on board and we're looking forward to many more joining us during the last part of 22 and into 2023. Lastly, regarding our July announcement to launch Max Tech powered by KV Core, we couldn't be more pleased with the response from our network. We launched the first phase of the rollout in Canada in September and the initial work is progressing nicely. Even more telling, We've spent a good part of the past couple months on the road at our annual regional fall retreats across the U.S. and Canada, engaging with brokers and agents alike. The enthusiasm for this next step in our tech evolution has been off the charts, and it's not lost on our membership and surely not on many of our competitors. We are actively increasing our value proposition while others are cutting services. When the U.S. rollout begins in early 2023, that difference in approach should even be more apparent.

With that, I'll turn it over to Ward. Thanks, Nick.

Looking at slide seven, Motto continued to grow during the quarter, opening more offices and selling additional franchises. Likewise, Winglow's business expanded, posting its best quarter yet as measured by the number of loans processed. In an industry that has been hit particularly hard by rising interest rates, we are grateful to be in this position and talking to you today about our growth. That demonstrated ability to grow in virtually any kind of market is one of the many reasons we are bullish on our mortgage business and the broker channel in general. In fact, our mortgage brands continue to garner more attention and earn more accolades for their quality and for Motto, the unique opportunity offered to entrepreneurs. For example, Franchise Business Review, which has ranked Motto Mortgage as a top 200 franchise for four years running, also named Motto as a top recession-proof franchise based on an assessment of Motto's potential to outclass the competition during trying economic times. Another publication, Black Enterprise, recently named Motto a top 25 franchise for black entrepreneurs based on an analysis it completed using franchise business review data. This top 25 list highlights franchisors with the highest owner satisfaction survey scores among participating black franchise owners. Also, Wemo was just named a Service Partner of the Year by the National Association of Mortgage Brokers at its 2022 Recognition Awards. Wemo was the only processing company recognized in the compliance processing category for quality service and support of the mortgage broker channel. We believe the growth and success of our mortgage business is due to the unique and compelling value proposition each of our brands offer and the fact that ancillary services like Mortgage provide real estate entrepreneurs with opportunities for revenue and earnings diversification, something that is going to be increasingly important in the face of shifting housing market conditions. About 70% of model sales have been to real estate professionals who are within close proximity to the real estate transactions, namely purchase originations. And that proximity is the key to success for many of our franchisees. Looking ahead, our future is very bright as we expect our mortgage business to continue to expand. However, in the near term, growth is being muted by the challenged housing market, and this will likely remain the case until rates settle out. Also, we are in the process of enhancing and increasing our sales force. We are not yet at full capacity, and this, too, may impact our pace of sales as we finish out 2022 and start 2023. Consequently, our stated desire to sell 120 franchises next year no longer looks feasible. However, we expect to provide an update regarding our 2023 franchise sales expectations on our fourth quarter call next February.

With that, I'd like to turn the call over to Carrie.

Thank you, Ward. Good morning, everyone. Moving to slide eight, third quarter revenue declined approximately 2% to $88.9 million. Excluding the marketing funds, revenue was just over $66 million, also a decrease of approximately 2% when compared to the same period last year. This decrease was driven by negative 4.9% organic growth and adverse foreign currency movements of half a percent. partially offset by 3.2% acquisitive growth. All acquisitive growth came from last year's Integra acquisition, which we closed on July 21st and continues to perform well. Organic growth decreased primarily due to lower broker fee revenue and an increase in recruiting incentives, partially offset by model growth and increased events-related revenue. Rising interest rates have adversely impacted housing affordability and weakened housing demand, resulting in fewer transactions and, by extension, lower broker fee revenue. Excluding broker fee and marketing fund revenue, our organic growth rate looks flat. Looking at slide 9, our Q3 SONA expenses decreased 2.7% to $49.7 million. Third quarter 2022 selling, operating, and administrative expenses decreased primarily due to acquisition-related expenses lower personnel costs excluding restructuring charges, and reduced headcount, partially offset by restructuring charges, increased travel and events expenses, and higher legal expenses. Between our restructuring charge in the third quarter and the acquisition of Integra in last year's Q3, there's a lot to unpack when comparing the two quarters, but we are happy to answer any questions you might have. Looking ahead, we expect our Q4 SONA expenses will decrease sequentially from the third quarter and be between $39 and $42 million. Moving to slide 10, before I get to our outlook, there are a couple of items I want to briefly mention. We accelerated our buyback activity during the third quarter, repurchasing just over 500,000 shares. Since the inception of our program in January, we have repurchased approximately 1 million shares in total, returning almost 24 million to shareholders in the process. We continue to believe that repurchasing our stock at its current valuation is an outstanding allocation of capital and creates value for our shareholders. Second, I want to call out the impact that today's increasing interest rate environment is expected to have on our earnings. Specifically, we believe rising interest rates will decrease our adjusted EPS by approximately 10 cents year over year during Q4. That estimate includes the 75 basis point raised by the Fed that was announced earlier this week. In the current interest rate environment, we expect about a $0.03 adjusted EPS degradation for each million dollars of additional interest expense. Now, on to our guidance. The company's fourth quarter and full year 2022 outlook assumes no further currency movements, acquisitions, or divestitures. For the fourth quarter of 2022, we expect agent count to increase 1% to 2% over fourth quarter 2021, revenue in a range of $80 million to $85 million, including revenue from the marketing funds in a range of $21.5 million to $23.5 million, and adjusted EBITDA in a range of $23 million to $27 million. For the full year 2022, the company is reducing its guidance to reflect current housing market conditions and other related macroeconomic trends and now expects agent count to increase 1% to 2% over full year 2021, down from 1 to 2.5%, revenue in a range of $352 million to $357 million, including revenue from the marketing funds in a range of $90 million to $92 million, down from $354 million to $364 million, and adjusted EBITDA in a range of $118 million to $122 million, down from $123 million to $128 million. Now, I'll turn the call over to Steve for closing comments.

Thanks, Kerry. Looking at slide 11, we believe change brings opportunity, and the current economic climate is certainly defined by change. We have faced similar circumstances over the past five decades and performed well, and we believe we are positioned to do so again. With a scale global business, unmatched brands, strong financials, and a proven track record of success, we think we are in an enviable position. Our strategic growth initiatives have us on our toes while others are on their heels. We look forward to finishing the year on a high note. With that, let's open it up for questions.

At this time, I'd like to remind everyone, if you would like to ask a question, please press star then one on your telephone keypad. Our first question is from Anthony Pallone. Oh, my apologies. Our first question is from Stephen Sheldon with William Blair. Your line is open.

Hey, thanks. Good morning. First, just as we think about modeling adjusted EBITDA for 2023, I mean, I know we're still a little bit of ways out, but just can you walk through some of the moving pieces with any visibility you have, especially as we think about the drag from tech initiative, the profit trajectory of motto, and then just curious if your investment priorities changed at all here, where some of the cost savings from the discontinuation of Booge to maybe flow through a little bit more next year? Or does it still seem like most of that will be reinvested, I guess, in other priorities?

Carrie, why don't you start, then I'll chip in.

Sounds good. Good morning, Steven. Yeah, so great question. Obviously, we'll have a lot more to say about 2023 when we get to the call in February. Obviously, some uncertainty as we think about just the macro and what that means for the top line. As we think about the cost structure, as we said back on the call last quarter, we are expecting the announcements that we announced early in the third quarter to have about an $8 million annualized run rate benefit to EBITDA on a go-forward basis. Thinking about that as it relates to spread, it's kind of ratable on a quarterly basis. But, you know, nothing has changed at all. We are very, you know, we're thinking very opportunistically and aggressively given our franchise model and where we sit. And so are looking to continue to invest in that, reinvest those dollars back into the business. So that reinvestment will come both in terms of additional personnel, primarily supporting the mortgage business. And then also in terms of, you know, some revenue relief, as we announced some of the mergers conversions and acquisition initiatives, as well as the teams initiative. So we'll ramp that investment. It'll be a little bit less of an investment in the first half of 2022 or 2023. I'm sorry. And then, you know, that'll scale in the back half. And as we think about the, you specifically mentioned the motto side, you know, we still think it's a prime time to be investing in the mortgage business. It's contributing still to our organic growth. And so we're kind of looking at that break even pushing out maybe a little bit into early 2024 now.

And I think the wild card for us that we're carefully watching as everybody else is, is we believe the investments we're making will will actually help us both on the agent acquisition side through teams and through acquisitions and then on the motto side. And the only question that we've got to come to a conclusion on as we budget and we plan for the year is how much of that is going to be offset by the conditions in the market.

Got it. That's all very helpful.

Maybe just as a follow-up, on the The effort to attract larger teams, I think you got from pilot markets, but maybe you rolled out in August. I guess what early traction or conversations, pipeline building have you seen there? And how long do you think it could take for those efforts to be rolled out more broadly and to have a more material impact and hope maybe stabilize the agent growth in the U.S. market?

Nick, why don't you take that?

Sure. For both teams and conversions, they are early initiatives for us, but we're We're very pleased with both, and we have success in both thus far. Teams just launched August 1st, so though it's too early to give specifics, we know that building a pipeline does take a little bit of time for both, but we can report thus far success in both categories, and we'll have more information as we round out end of year.

Great. Thank you.

The next question is from Anthony Pallone with J.P. Morgan. Your line is open.

Great. Thank you. Good morning. My first question is, can you talk to any concessions you might be making right now for agents or franchisees as the markets deteriorated and maybe contrast that with perhaps what you've done in the prior housing downturn? Just trying to understand as we look to 2023, if there's any headwinds we should expect there as you accommodate sort of a tougher market.

Yeah. I'll sneak to answer this more fully. Where we are putting either investment dollars or fee breaks is in the acquisition of additional agents, not to save at this point. So, but Nick, why don't you talk a little bit about the activity we've got going on and where we think this might go in past performance?

Sure. We don't have any current incentives on a individual per agent basis. So as Steve mentioned, it's just investment in the initiatives that we have. So unlike quarters in the past where we have had initiatives or incentives, we don't have any right now and we don't anticipate any of those in the coming quarters.

Okay. And then just the follow-up I have is with regards to capital priorities. Can you talk about just how you're thinking about you know, buyback versus the dividend versus debt pay down?

Yeah. So clearly our primary capital allocation is always going to be to return to shareholders. So we've been relatively aggressive this year on share repurchase. We have held the dividend to the point we, you know, if you look at our actual distribution of free cash flow, it's, 50 million out of 54. And so I think you can expect us to continue to evaluate the market to the extent we still see a significant dislocation between intrinsic value and price. We will continue to invest in the stock, and we will continue to hold the dividend and look for opportunity to increase it over time. And so then the other, though, is that with the dislocation in the environment, We actually think it's an opportunity potentially for opportunistic investment in the mortgage business and potentially other acquisition targets depending on circumstance. So you can expect us to continue to evaluate the opportunities we see available and hopefully we believe the environment could provide opportunity for us to look at some interesting other investment opportunities.

Okay. Thank you.

The next question is from Tommy McJoynt with KPW. Your line is open.

Hey, good morning, guys. Thanks for taking my questions. I actually can't recall such a wide range of estimates from the industry on U.S. existing home sales looking forward. I mean, from, you know, MBA and And Freddie and NAR have it around $5 million, and Fannie has it below $4 million. You guys have a very wide representative national footprint. What's your house view on the industry existing home sales for next year?

Well, I'm completely confused. So, Nick, why don't you answer that?

Thank you. You're exactly right. It is pretty wide. And I think the challenge is everyone's doing a year-over-year comparison to a year that was a complete anomaly. And so we have to reflect back, I would say, more over, say, a 10-year period of time where we've averaged around 5 million sales, give or take. Where I am very optimistic about, especially the five to eight years ahead in this market, is we still have a shortage of around 4 to 4.5 million homes in the U.S., and we've got millennials at the ages of 25 to 42 at the prime of their purchasing. We've got Zs as big as the millennial population right behind them that are stepping into home buying. I truly believe that in the years ahead, we've got tremendous demand and we still have a shortage of inventory. And it's somewhat similar in Canada, especially with their three-year immigration plan to bring double the number of folks into the country to help with labor that they have in the past few years. And so I think when we step back and look at it, it's probably just a little bit more of our 50-year history and seven recessions and experience on this to say we've seen some changes and it's not just a one-year comparison. And so generationally, we are pretty optimistic on what's to head. Of course, we're going to have to bump through rates and economy and let things settle out. There will be some pressure on overall agent count in the national estate news and realtors, which our business model obviously shows strength in times like this. We're not totally immune to it, but it does show our strength in something that we'll leverage moving forward.

Got it. Thanks, Nick. And then also you touched on Canada there. Can you remind us the various revenue and earnings contribution from Canada specifically? And then your expectations for it seems like Canada's slowdown is a bit more sharp than what we're seeing in the U.S.

Carrie and Nick, why don't you chip in on that?

Sure. So Canada continues to be a very bright spot for us. Our Integra acquisition last year continues to outperform expectations. From a top line perspective, you know, kind of looking high teens in terms of revenue contributions, in terms of the Canadian operations, one thing that I think is important to realize, we've continued to see growth in terms of agent count growth in Canada. Those Canadian agents are still contributing about 80 cents on the dollar to our top line now, since we have the vast majority of agents within our company-owned region umbrella. And so Canada continues to be a very bright spot for us and are continuing to leverage a lot of growth initiatives and opportunity despite the strong market share that we have there.

And the only thing I'd add to Kerry's comments there is when you look at total agent count, you have about 140,000 agents across Canada. We account for over 25,000 of those. So we're 17% to 18% of the total agent count with number one market share by a strong margin. And so that gives us a lot of strength to help continue to drive the growth across that country. Whereas you compare in the U.S., you know, 1.5 million realtors compared to our total numbers, we represent about 4%. So we think that that plays into the candidate growth as well.

That makes sense. Thank you.

The next question is from John Campbell with Stevens. Your line is open.

Hey, guys. Good morning. Good morning. Hey, so we've obviously seen and heard from a lot of folks in the channel just about the negative impact of lower end or, I guess, less productive agents on the total agent count, but basically a big step up in attrition from that lower end cohort. Clearly, you guys have some of the industry's most productive agents, so I'm thinking that's probably less of an issue for you guys, but I'm curious about any color you might provide there.

Yeah, so I think we have... for the most part in tremendously productive ages so kind of about a two to one average margin and so you know there there's clearly going to be there's too many agents out there now there's clearly going to be a drop off for the less productive agents because they're they're not going to be able to make a living doing it or even incremental revenue uh to offset their costs so we we expect to see a lot of that drop off we may see a little of it but we actually expect that to to be offset in some part by all the other activities we're doing. And we actually also see it as somewhat of an opportunity as agents that are concerned about the brand they're with or their affiliations and whether or not they could do better with a stronger brand. We see that somewhat as an opportunity. Nick, you want to add to that?

Yeah, I think something that's important, we talk about conversions, for example, when we look at the pipeline, this is a time when we're seeing people look for more competitive advantages and value. And I think the reality is in the last couple of years, we've seen a lot of agents and a lot of new brokerages come to the industry, but they were somewhat artificially upheld by the strength of the market. And so now it's really putting pressure on what's the true value. And so we're seeing the competitive landscape is cut, cut, cut everything, where historically where we've been through these things before the great recession, not a comparison to right now, but a comparison into how quickly the dynamics in the market changed and how we can respond and agents have been through it. Our average agent is around 15 years experience where the industry averages around eight. And so when you have double the experience, you've seen some of the other sides of this. And so this is where This is where we really think that the brand and the REMAX agent shines because they know how to control their costs and what to do to capture more buyers and sellers at a time when this is a brand new market for some people that have only been licensed two years.

Okay, that makes sense. And this kind of dovetails into the next question, and it seems to run maybe a little bit contrary to what you said earlier, Nick. You mentioned that U.S. agents, you're expecting that to remain under pressure for the foreseeable future. Just want to dig back in on that comment. You guys have clearly ramped up the recruiting incentives. You made obviously a strategic focus to grow agents. Can you explain a little bit about why you don't think you'll be able to battle through the kind of ongoing in-market headwinds?

Why we will be able to?

Why you won't. It sounds like the comment you made earlier about expecting pressure on the U.S. agent count over the foreseeable future. I just want to make sure I heard that correctly.

Yeah, yeah. So to clarify that, When I look at just there's going to be overall pressure on total number of agents in the business. And so even though we talk about how our years of experience, we rely on that, and that'll be something that will help not only our brand brokerage and business model and our agents and brokerages go through a changing market, but we're not totally immune to it. I mean, we have agents that have joined brokerages or joined teams. that have also been licensed just a couple of years. And so there will be some pressure on some of our agents, and we realize that. But when we look at, for example, what we're doing with teams and strategic initiatives, this is a time when you maybe have individual agents that now start struggling on their own, and they may want to join a team. And so you can see teams start to expand and pull people in within their teams. And on the conversion side, The industry consultants that do the valuations for most brokerages throughout the US and Canada, their words, not mine. This is the biggest, largest number of valuation requests that they've seen in their 40 year history. And so that is part of the reason that we looked at the conversions and mergers acquisitions opportunity. And our pipeline is extremely full on it because there are a lot of folks and it's in high demand. And so while there will be some pressure on some of our agents in some markets, we're hoping to make up for that with the opportunity and demand on acquiring companies and recruiting 10, 20, 50, 100 at a time versus one at a time.

Okay, that makes sense. Thanks for the clarification.

The next question is from Ryan McKeveney with Zalman & Associates. Your line is open.

Hey, good morning, and nice job on the quarter. Ward, so on motto, I wanted to ask, so it sounds like the new franchise sales targets might adjust, but if we just look at the trend in open mottos, obviously it looks pretty compelling. I think it was 200 last quarter, 211 this quarter, 217 as of October, so a nice ramp there. I guess I'm curious, is the macro environment driving any acceleration in that timeline from kind of sale to open motto offices? Or is that more just the natural progression of how these should kind of transition to open offices? Anything there would be helpful.

Yeah, I think the biggest thing recently, we have invested in some recruiting liaison in our particular sector. So we're trying to support our owners in finding their first qualified individual that helps them get open. And so we've already seen some increase in the speed of that. So we see the positive effect of that and may invest more in that particular area as we get past the first few that we've been able to speed up this particular process. So we think there's opportunity there. Also, the states, they come and go on the speed of their ability to get somebody licensed. And we've seen that with the change in the industry, they're a little bit less busy, so they're able to look at some of our applicants quicker. So we view that as a potential upside as well. So recruiting efforts and the licensing are improving, and we hope that continues to make open offices happen a little bit quicker. That's great. Thank you.

I think, strangely enough, the conditions we think we're under now and next year actually are – probably favorable to us in terms of growing that business.

That's great. And Kerry, one follow-up or clarification. Just wanted to square a couple comments. So you mentioned for 4Q SONA, I think 39 to 42 million. And then on the comment about the kind of run rate EBITDA benefit of 8 million or seemingly 2 million a quarter, is that effectively saying, you know, kind of take the SONA from 4Q and assume that drops down by 2 million a quarter? going forward, or is there kind of a different flow through to the EBITDA benefit if the cost saves? Any help you can provide there?

Sure. So I think a couple things to keep in mind. We're really looking at reinvesting that $2 million back into the business, right? So that's just going to ramp over the course of the year. So it's not necessarily going to come down. We're just reinvesting it back into the initiative. The other thing to keep in mind just with regards to seasonality is keep in mind that our first quarter SO&A is just unseasonably high because of our annual agent conference. This year is the 50th anniversary. We're very excited and have a lot of things to celebrate. So wouldn't be surprised if that SONA is even a little bit higher than it's been in the past, offset by additional revenue because of additional participation. So kind of Q1, if you're looking at Q1, I think you're probably more of a consistent performance in 23 as 22, just because of some of that seasonality. And obviously, we'll have more to say in February as we get into a full 2023 outlook.

Got it. Very helpful. Okay, thank you.

The next question is from Ronald Camden with Morgan Stanley. Your line is open.

Hey, a couple quick ones. One, just going back to the question on competition in the industry, just hoping you can sort of contextualize what the competition for agents is today versus three, four, five years ago, whether it's some of the recruiting fees or anything, just trying to get a sense of how do we put that into context today? Thanks.

Yeah, I think, and I'll ask Nick to give a more full answer. I think partly what we're seeing is a lot of the incentives that were going out to bring agents in and had some success Our sense is that that may be lessening somewhat, and so our timing may be good in terms of our strategies to bring more agents in. Obviously, company by company, people are faring better or worse as their model dictates. Our model obviously allows us to be very stable in terms of our cash flow and our resources to invest. So we believe that, again, like Mano, the timing is probably good for us to push on these two initiatives that Nick is overseeing and that we'll see over time whether or not the relative weakness of the market drives that opportunity to be greater than we were even hoping. Nick, do you want to add to that?

Yeah, I would say that I think the competitive landscape from a few years ago, we saw a really high number of models and companies come in that were transaction or very low-cost discount type of models. And when we see the market contract somewhat, there's only so much that the brokerage can give away, if you will. And so where we see agents and brokerages start to turn is relying more on productivity. Agents over the last couple of years, many of them, even several new to the business, were somewhat order takers. The business was just flying off the shelves in certain ways. And so now it becomes more about how do I find a client? How do I get another closing versus how do I save $25 a month? And that's where our productivity shines through.

Great. And just going back to the sort of the guidance reduction thing, I think we're really interested to see sort of what assumptions really change on the macro side. I mean, clearly you guys have a view of maybe internally of what home sales or home prices are going to do. Just sort of curious how those sort of pieces changed and moved that led to maybe some of the guidance reductions.

Thanks. Kerry?

Sure. So when we look at the guidance reductions, primarily the impact was coming from the top line and is primarily macro driven. So when we look at the adjustments that we made, the biggest contributor was broker fee, a little bit of headwind coming from our continuing franchise fees. And the other thing that's having an impact is just the strengthening dollar because of the increased contributions from Canada. And so that's really the drivers that impacted the reduction that then kind of fell through to the bottom line.

Great. And then the last one, if I may, I'm just looking at the operating cash flows of $61 million year-to-date, which just wondering if that's a good – obviously things are slowing down a little bit, but is there anything sort of timing or anything related to that, or is that sort of a good run rate number that we should be thinking about? Thanks.

Yeah, there's nothing that's unusual this quarter really of consequence from a cash flow perspective. You know, we look at it a lot in terms of the strength of our business model, kind of the hallmark nature of the franchise model and our ability to consistently convert our adjusted EBITDA into adjusted free cash flow. And that's kind of been in the you know, 60 to 70% range, interest expense is having a little bit of an impact on us. And so do expect that to maybe come down a little bit over in the future, just as interest rates rise. But the strength of the business model really shines in an environment like this. And there's nothing else that's too unusual as it relates to cash flow performance in the quarter.

Thank you.

The next question is from Jason Stewart with Jones Trading. Your line is open.

Hey, guys. It's Matthew on for Jason. Could you talk a little bit about the restructuring and impairment charge, if you haven't already, and what we should expect there going forward?

Okay.

Sure. So the restructuring charge was directly tied to the announcements that we made in early July and the shift in our technology strategy that resulted in a reduction in force. So that's a one-time event, approximately $7 million, primarily severance related. And then we had some asset write-offs as well. And so that's a one-time event. Don't expect that to recur in the future. And then that impairment that you see on the face of the income statement, that has to do with some things that we're doing with our corporate headquarters in terms of just trying to optimize our space. So, again, that's a one-time event. We don't expect to see that happen again going forward.

Thanks. And then how much do transactions and lower transaction volumes affect the broker fees?

All right. Sure.

So obviously, you know, broker fee, we look at it in terms of a number of different contributions. Obviously, the number of transactions, home price, and then agent count are all factors. So, you know, it is a variable part of our business and the part that is most tied to the end market. So when the end market is under pressure, you know, that's the line item that's going to be most impacted. And I think just to keep in mind, our business model is fundamentally different. It is only 1% of the commission. So obviously we're more insulated than many others, but we're not immune to what's happening in the macro from that perspective.

Gotcha.

Thank you, guys.

Our final question today is from Justin Ages with Barenberg Capital Markets. Your line is open.

Hi, thanks for taking the question. I was hoping we could discuss the organic revenue comment. I believe you said it was flat without the decrease in broker fees. Can you just give us a little more detail on the aspects of it that are contributing it to be flat? I would have thought, you know, the decline in U.S. agents would have had an outsized impact, but is that being offset by kind of Canada international and mortgage growth? Sure.

Sure, you're exactly right, Justin. So, you know, I think when we look at the business right now, we, you know, despite the environment, we are, we're optimistic because we do have some differentiation and some diversification with the mortgage business. That was about a point of organic growth. Canada continued to grow, global continued to grow, as you noted, and that really did offset some of the U.S. Asian count. And then some of the investments that we're making in particular in the pilot states as it relates to teams, which we think are very prudent and opportunistic investments as we think about positioning ourselves for growth in the future.

All right. That's very helpful. Thank you. And then next, on capital allocation, I know you mentioned preference right now for buying back shares, given how attractive they are from a valuation standpoint. But is there more kind of focus on looking at buying some more of the independent regions, given that their valuation might be a little depressed, given the current housing market conditions?

Yeah, so we're looking at that all the time. We think that's an excellent allocation of our capital as well. So that is sort of opportunistic, obviously. And at any point in time, we're in dialogue with the remaining independents as to whether or not there's possibility for transactions. So don't be surprised if you see us do more of that within the next year or so.

All right, perfect. Thanks so much for taking the questions.

We have no further questions at this time. I'll turn it over to the presenters for any closing remarks.

Thank you, Operator, and thanks to everyone for joining our call today. That concludes the call. Have a great weekend.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.