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RMAX > SEC Filings for RMAX > Form 10-Q on 15-May-2014All Recent SEC Filings

Show all filings for RE/MAX HOLDINGS, INC.

Form 10-Q for RE/MAX HOLDINGS, INC.


15-May-2014

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the financial condition and results of our operations should be read together with the condensed consolidated financial statements and the related notes of RE/MAX Holdings, Inc. included in Item 1 of Part I of this Quarterly Report on Form 10-Q and with the audited consolidated financial statements and the related notes of RE/MAX Holdings, Inc. included in our most recent Annual Report on Form 10-K for the year ended December 31, 2013.

This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are often identified by the use of words such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "plan," "project," "will," "would" or the negative or plural of these words or similar expressions or variations. For example, forward-looking statements include statements we make relating to:

- our expectations regarding consumer trends in residential real estate transactions;

- our expectations regarding overall economic and demographic trends, including the continued recovery of the U.S. residential real estate market;

- our expectations regarding our performance during future downturns in the housing sector;

- our growth strategy of increasing our agent count;

- our ability to expand our network of franchises at higher than average rates in both new and existing but underpenetrated markets;

- our expectations regarding agent count and productivity;

- our growth strategy of increasing our number of closed transaction sides and transaction sides per agent;

- our expectations of the effects of the reacquisitions of the regional franchise rights in the Southwest and Central Atlantic regions of the U.S. on our results of operations;

- the continued strength of our brand both in the U.S. and Canada and in the rest of the world;

- the pursuit of future reacquisitions of Independent Regions;

- our future financial performance;

- the effects of laws applying to our business;

- our ability to retain our senior management and other key employees;

- our intention to pursue additional intellectual property protections;

- our future compliance with U.S. or state franchise regulations; and

- other plans and objectives for future operations, growth, initiatives or strategies.

Such forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in the section titled "Risk Factors," set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q and in our most recent Annual Report on Form 10-K for the year ended December 31, 2013. You should not rely upon forward-looking statements as predictions of future events. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

The historical results of operations discussed in this Management's Discussion and Analysis of Financial Condition and Results of Operations are those of RMCO, LLC ("RMCO") and its consolidated subsidiaries prior to October 7, 2013 and RE/MAX Holdings, Inc. ("RE/MAX Holdings") and its consolidated subsidiaries, including RMCO, commencing on October 7, 2013 (collectively, the "Company," "we," "our" or "us"), the effective date of our initial public offering (the "IPO"). Subsequent to the IPO, RE/MAX Holdings began to operate and control all of the business affairs of RMCO. As a result, RE/MAX Holdings began to consolidate RMCO on October 7, 2013, and because RE/MAX Holdings and RMCO are entities under common control, such consolidation has been reflected for all periods presented.


Business Overview

We are one of the world's leading franchisors of real estate brokerage services. Our business strategy is to recruit and retain agents and sell franchises. Our franchisees operate under the RE/MAX brand name which has held the number one market share in the U.S. and Canada since 1999 as measured by total residential transaction sides completed by our agents.

Our financial results are driven by the number of agents in our global network. The majority of our revenue is derived from fixed, contractual fees and dues paid to us based on the number of agents in our franchise network.

Our current growth strategies include the following initiatives:

Increase our total agent count.

Continue to drive franchise sales growth and agent recruitment and retention.

Reacquire select RE/MAX regional franchises in the U.S. and Canada.

Increase franchise and agent fees.

As a franchisor (less than 1% of the brokerages in the U.S. RE/MAX system are owned by us), we maintain a low fixed-cost structure which enables us to generate high margins and helps us drive significant operating leverage through incremental revenue growth as reflected in our financial results.

We operate in two reportable segments, (1) Real Estate Franchise Services and
(2) Brokerage and Other. The Real Estate Franchise Services reportable segment comprises the operations of our owned and independent global franchising operations. The Brokerage and Other reportable segment contains the operations of our 21 owned brokerage offices in the U.S. which represent less than 1% of RE/MAX brokerages in the U.S., the results of operations of a mortgage brokerage company in which we own a non-controlling interest, the elimination of intersegment revenue and other consolidation entities, as well as corporate and professional services expenses. Our reportable segments represent our operating segments for which separate financial information is available and which is utilized on a regular basis by our management to assess performance and to allocate resources.

As a result of changes in management's process to assess performance and allocate resources, we implemented a new segment structure beginning in the second quarter of 2014. The changes in our segment structure relate to certain corporate-wide professional services expenses, which were previously reflected in the Brokerage and Other reportable segment and, beginning in the second quarter of 2014, are being reflected in the Real Estate Franchise Services reportable segment.

How We Assess the Performance of Our Business

In assessing the performance of our business, we consider a variety of financial and operating measures that affect our operating results, including agent count, franchise sales, revenue and Adjusted EBITDA.

Agent Count. Agent count reflects the number of licensed agents who have active, independent contractual relationships with RE/MAX offices at a particular time. The majority of our revenue is derived from recurring fixed fee streams we receive from our franchisees and agents that are closely correlated to our aggregate agent count.


The following table shows our agent count at the end of the periods indicated:

                                                                                   As of
                                     March 31,       December 31,       September 30,      June 30,       March 31,       December 31,
                                       2014              2013               2013             2013           2013              2012
Agent Count:
U.S.
Company-owned regions (1)                33,911             33,416              27,343        26,846          26,189             25,819
Independent regions                      21,375             21,075              26,879        26,482          26,030             25,984
U.S. Total                               55,286             54,491              54,222        53,328          52,219             51,803
Canada
Company-owned regions                     6,117              6,084               6,089         6,106           6,073              6,070
Independent regions                      12,852             12,838              12,934        12,939          12,804             12,796
Canada Total                             18,969             18,922              19,023        19,045          18,877             18,866
Outside U.S. and Canada
Company-owned regions                       323                338                 319           316             334                336
Independent regions                      19,807             19,477              19,167        19,120          18,542             18,003
Outside U.S. and Canada Total            20,130             19,815              19,486        19,436          18,876             18,339
Total                                    94,385             93,228              92,731        91,809          89,972             89,008
Net change in agent count compared
to the prior period                       1,157                497                 922         1,837             964

(1) As of March 31, 2014 and December 31, 2013, U.S. Company-owned Regions includes agents in the Southwest and Central Atlantic regions which converted from Independent Regions to Company-owned Regions in connection with the acquisitions of the business assets of HBN and Tails on October 7, 2013. As of the acquisition date, the Southwest and Central Atlantic regions had a total of 5,918 agents.

Revenue. The percentage of revenue from recurring, fixed contractual fees and dues paid by our agents, franchisees and regional franchise owners was 60.2% and 58.0% for the three months ended March 31, 2014 and 2013, respectively. A smaller percentage of our revenue is based on transaction activity derived from a percentage of agent commissions and was 13.3% and 12.0% for the three months ended March 31, 2014 and 2013, respectively.

Adjusted EBITDA. We present Adjusted EBITDA because we believe Adjusted EBITDA is useful as a supplemental measure in evaluating the performance of our business and provides greater transparency into our results of operations. Our management uses Adjusted EBITDA as a factor in evaluating the performance of our business. Our presentation of Adjusted EBITDA may not be comparable to similarly-titled measures used by other companies. See below under "-Non-GAAP Financial Measures" for further discussion of our presentation of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income.

We define Adjusted EBITDA as EBITDA (consolidated net income before depreciation and amortization, interest expense, net and the provision for income taxes, each of which is presented in our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q), adjusted for the impact of the following items that we do not consider representative of our ongoing operating performance: loss (gain) on sale or disposition of assets and sublease, loss on early extinguishment of debt, equity-based compensation, non-cash straight-line rent expense, salaries paid to David and Gail Liniger, our Chairman and Vice Chair, respectively, that we discontinued subsequent to the completion of the IPO, expenses incurred in connection with the IPO and acquisition integration costs. See "-Non-GAAP Financial Measures." Because Adjusted EBITDA omits certain non-cash items and other infrequent cash charges, we feel that it is less susceptible to variances in actual performance resulting from depreciation, amortization and other non-cash charges and other infrequent cash charges and is more reflective of other factors that affect our operating performance.


The following table shows our Adjusted EBITDA and Adjusted EBITDA margins on a consolidated basis and for our reportable segments for the periods presented:

                                            Three months ended March 31,
                                             2014                    2013
                                         (in thousands, except margin data)
       Consolidated:
       Adjusted EBITDA                 $          16,251        $       15,433
       Adjusted EBITDA margins                      38.8 %                39.5 %

       Real Estate Franchise Services:
       Adjusted EBITDA                 $          18,675        $       16,246
       Adjusted EBITDA margins                      47.8 %                45.6 %

       Brokerage and Other:
       Adjusted EBITDA                 $          (2,424 )      $         (813 )
       Adjusted EBITDA margins                     -87.2 %               -23.7 %

We generally experience lower Adjusted EBITDA margins in the first and fourth quarters of the fiscal year primarily due to lower home sale transactions in the residential housing market in the U.S. and Canada, which result in lower broker fees in these quarters. In addition, generally, our margins in the first quarter are lower because of higher selling, operating and administrative expenses incurred in connection with our annual convention and associated with year-end compliance activities.

Our Adjusted EBITDA margins result from the high margin Real Estate Franchise Services segment, and are offset slightly by the owned real estate brokerage operations, which have much lower margins due primarily to higher fixed costs resulting from rent expense and increased corporate-wide professional services expenses reflected in our Brokerage and Other segment, which in turn adversely impacts our consolidated margins.

Factors Affecting Our Consolidated Operating Results

Various factors affected our results for the periods presented in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" including the following:

Initial Public Offering. On October 7, 2013, we issued and sold 11,500,000 shares of our Class A common stock at a public offering price of $22.00 per share in our IPO and became a member and the sole manager of RMCO. We are a holding company and own approximately 39.56% of the common units in RMCO. RIHI, Inc. ("RIHI") owns the remaining 60.44% of the common units in RMCO. Our only business is to act as the sole manager of RMCO and, in that capacity, we operate and control all of the business and affairs of RMCO. As a result, on October 7, 2013, we began to consolidate the financial results of RMCO and its subsidiaries. Due to RIHI's approximate 60.44% equity interest in RMCO, our post-IPO results reflect a significant non-controlling interest and our pre-tax income represents approximately 39.56% of RMCO's net income. Our only source of cash flow from operations is in the form of distributions from RMCO and management fees paid by RMCO pursuant to a management services agreement between us and RMCO. Following the IPO, we became subject to U.S. federal and state income taxation on our allocable portion of the income of RMCO.

Acquisitions. Effective October 7, 2013, we used approximately $27.3 million of the proceeds from the IPO to reacquire regional franchise rights in the Southwest and Central Atlantic regions of the U.S. through the acquisitions of the business assets of HBN, Inc. ("HBN") and Tails, Inc. ("Tails") and contributed those assets to RMCO in exchange for an ownership interest in RMCO. As a result, the comparability of our operating results for the three months ended March 31, 2014 and 2013 is affected by these acquisitions.

Changes in Agent Count. The majority of our revenue is derived from fees and dues based on the number of agents in the RE/MAX network. Due to the low fixed cost structure of our franchise model, the addition of new agents generally requires little incremental investment in capital or infrastructure. Accordingly, the number of agents in our network (particularly in our owned U.S. and Canadian regions) is the most important factor affecting our results of operations and the addition of new agents can favorably impact our revenue and Adjusted EBITDA. Historically, the number of agents in the residential real estate industry has been highly correlated with overall home sale transaction activity. Our agent count decreased during the downturn in the U.S. housing sector, but has experienced growth for each quarter beginning in the first quarter of 2012. However, we do not use our overall home sale transaction activity on a per agent or aggregate basis in order to evaluate our results of operations. We believe that the number of agents in our network is the primary statistic that drives our revenue.


Changes in Aggregate Fee Revenue Per Agent. A significant portion of our revenue is tied to various fees that are ultimately tied to the number of agents, including annual dues, continuing franchise fees and certain transaction or service-based fees. Our average annual revenue per agent for our Company-owned Regions in the U.S. and Canada is nearly three times greater than for our Independent Regions. Our average revenue per agent in regions outside the U.S. and Canada is substantially lower than the average revenue per agent in the U.S. and Canada. We have expanded our owned regional franchising operations through acquisitions of Independent Regions in the U.S. and Canada, and intend to pursue reacquisition of other regions in the future. In addition, other changes in our aggregate revenue per agent are derived from changes in our fee arrangements with our franchisees and agents over time. Our revenue per agent also increases in other ways including when transaction sides and transaction sizes increase since a portion of our revenue comes from fees tied to the number and size of real estate transactions closed by our agents. Due to the low fixed cost structure of our franchise model, modest increases in revenue per agent, such as the January 1, 2014 increases to the amount of annual dues billed to our U.S. and Canadian agents and the continuing franchise fees charged in our U.S. Company-owned Regions, impacts the comparability of our operating results.

Results of Operations

For comparability purposes, the following tables set forth our results of
operations for the periods presented as dollars for those periods. The
period-to-period comparison of financial results is not necessarily indicative
of financial results to be achieved in future periods.



                                    Three months ended March 31,                  Change
                                      2014                 2013             ($)            (%)
                                                (in thousands, except percentages)
Revenue:
Continuing franchise fees        $       17,704       $       15,105     $    2,599           17.2 %
Annual dues                               7,506                7,553            (47 )         -0.6 %
Broker fees                               5,558                4,673            885           18.9 %
Franchise sales and other
franchise revenue                         7,909                8,153           (244 )         -3.0 %
Brokerage revenue                         3,203                3,591           (388 )        -10.8 %
Total revenue                            41,880               39,075          2,805            7.2 %
Operating expenses:
Selling, operating and
administrative expenses                  25,287               25,991           (704 )         -2.7 %
Depreciation and amortization             3,938                3,725            213            5.7 %
Gain on sale or disposition of
assets, net                                  (1 )                 (1 )            -            0.0 %
Total operating expenses                 29,224               29,715           (491 )         -1.7 %
Operating income                         12,656                9,360          3,296           35.2 %
Other expenses, net:
Interest expense                         (2,466 )             (3,514 )        1,048          -29.8 %
Interest income                              81                   74              7            9.5 %
Foreign currency transaction
losses                                     (529 )                (71 )         (458 )        645.1 %
Loss on early extinguishment of
debt                                          -                 (134 )          134         -100.0 %
Equity in (losses) earnings of
investees                                   (59 )                146           (205 )       -140.4 %
Total other expenses, net                (2,973 )             (3,499 )          526          -15.0 %
Income before provision for
income taxes                              9,683                5,861          3,822           65.2 %
Provision for income taxes               (1,885 )               (454 )       (1,431 )        315.2 %
Net income                       $        7,798       $        5,407     $    2,391           44.2 %

Adjusted EBITDA(1)               $       16,251       $       15,433     $      818            5.3 %

(1) See "-Non-GAAP Financial Measures" for further discussion of Adjusted EBITDA and a reconciliation of the differences between Adjusted EBITDA and net income.


Comparison of the Three Months Ended March 31, 2014 and 2013

Total Revenue

A summary of the components of our revenue for the three months ended March 31,
2014 and 2013 is as follows:



                                    Three months ended March 31,                  Change
                                      2014                 2013             ($)            (%)
                                                (in thousands, except percentages)
Revenue:
Continuing franchise fees        $       17,704       $       15,105     $    2,599           17.2 %
Annual dues                               7,506                7,553            (47 )         -0.6 %
Broker fees                               5,558                4,673            885           18.9 %
Franchise sales and other
franchise revenue                         7,909                8,153           (244 )         -3.0 %
Brokerage revenue                         3,203                3,591           (388 )        -10.8 %
Total revenue                    $       41,880       $       39,075     $    2,805            7.2 %

Continuing Franchise Fees

Continuing franchise fees increased $2.6 million from the three months ended March 31, 2014 compared to the three months ended March 31, 2013 as a result of the following:

- an increase of $1.5 million due to the acquisitions and subsequent growth of HBN and Tails, which resulted in agents within Independent Regions being converted to agents within Company-owned Regions, and gave us the right to earn 100% of the fixed continuing franchise fees per agent;

- an increase of $0.9 million and $0.2 million in our Company-owned Regions and Independent Regions in the U.S., respectively, due to an increase in agent count; and

- an increase of $0.3 million due to the January 1, 2014 increase in continuing franchise fees of $3 per month per agent in our U.S. Company-owned Regions.

The aforementioned increases were offset by the weakening of the Canadian dollar compared to the U.S. dollar, which negatively impacted revenue by approximately $0.3 million.

Annual Dues

Revenue from annual dues increased $0.2 million due to an overall increase in total agent count of 4,413 from March 31, 2013 to March 31, 2014, of which 3,159 agents were located in the U.S. and Canada. The aforementioned increase was offset by the effect of an approximately comparable amount of revenue reflected in reported revenue for the three months ended March 31, 2013 related to a targeted program that was subsequently reversed during the three months ended June 30, 2013. The weakening of the Canadian dollar against the U.S. dollar also adversely impacted annual dues revenue during the three months ended March 31, 2014 by approximately $0.1 million. As a result of the revenue recognition pattern associated with annual dues, the impact of the increase in annual dues membership fees of $10 per agent annually for our U.S. and Canadian agents did not significantly impact the three months ended March 31, 2014.

Broker Fees

Revenue from broker fees increased $0.9 million due to additional broker fees of $0.4 million that resulted from the acquisitions and subsequent growth of HBN and Tails, which converted agents from Independent Regions to Company-owned Regions resulting in a higher portion of broker fees for these agents being retained by us. Excluding acquisition activity, revenue from broker fees earned from Company-owned Regions in the U.S. and Canada increased $0.5 million during the three months ended March 31, 2014 compared to the three months ended March 31, 2013 due primarily to an increase in agent count. The aforementioned increases in revenue from broker fees were offset by the weakening of the Canadian dollar against the U.S. dollar, which adversely impacted broker fees revenue during the three months ended March 31, 2014 by approximately $0.1 million.


Franchise Sales and Other Franchise Revenue

Franchise sales and other franchise revenue decreased $0.2 million primarily due to a $0.7 million decrease in revenue recognized due to lower attendance at our 2014 annual convention held in March. The 2013 annual convention celebrated our fortieth anniversary and attendance was unusually high. This decrease was offset by an increase in franchise sales and renewals of $0.6 million driven by an overall increase in the total number of office franchise sales and an increase in franchise sales revenue related to global regional franchise sales during the three months ended March 31, 2014 compared to the three months ended March 31, 2013.

Brokerage Revenue

Brokerage revenue, which principally represents fees assessed by our owned brokerages for services provided to their affiliated real estate agents, decreased $0.4 million in part as a result of lower agent count and also due to reduced home sales volume in our owned brokerage offices.

Operating Expenses

A summary of the components of our operating expenses for the three months ended
March 31, 2014 and 2013 is as follows:



                                    Three months ended March 31,                  Change
                                      2014                 2013             ($)            (%)
                                                (in thousands, except percentages)
Operating expenses:
Selling, operating and
administrative expenses          $       25,287       $       25,991     $     (704 )         -2.7 %
Depreciation and amortization             3,938                3,725            213            5.7 %
Gain on sale or disposition of
assets, net                                  (1 )                 (1 )            -            0.0 %
Total operating expenses         $       29,224       $       29,715     $     (491 )         -1.7 %
Percent of revenue                         69.8 %               76.0 %

. . .
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