UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934 |
For the fiscal year ended: December 31, 20172019
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934 |
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934
For the transition period from to
Commission File Number 001-36101
RE/MAX Holdings, Inc.
(Exact name of registrant as specified in its charter)
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Delaware | | | 80-0937145 |
Delaware
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(State or other jurisdiction of incorporation or organization) | | | (I.R.S. Employer Identification Number) |
5075 South Syracuse Street Denver, Colorado | | | 80237 |
(Address of principal executive offices) | | | (Zip code) |
(303) 770-5531
(Registrants’ telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading Symbol | Name of each exchange on which registered |
Class A Common Stock, par value $0.0001 per share | RMAX | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
None
Indicate by check mark if the registrant is well-known seasoned issuers, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐☒ No ☒☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, ora smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large Accelerated Filer ☒ |
| Accelerated Filer ☐ |
| Non-Accelerated Filer ☐ |
| Smaller Reporting Company ☐ |
Large Accelerated Filer ☒
| | Accelerated Filer ☐
| | Non-Accelerated Filer ☐
| | Smaller Reporting Company ☐
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| | | | | | Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
AsAs of June 30, 2017,2019, the last business day of the registrant’s most recently completed second quarter, the aggregate value of the registrant’s common stock held by non-affiliates was approximately $988.5$534.2 million, based on the number of shares held by non-affiliates as of June 30, 20172019 and the closing price of the registrant’s common stock on the New York Stock Exchange on June 30, 2017.2019. Shares of common stock held by each executive officer and director have been excluded since those persons may under certain circumstances be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
The number of outstanding shares of the registrant’s Class A common stock, par value $0.0001 per share, and Class B common stock, par value $0.0001, as of February 28, 2018January 31, 2020 was 17,696,99117,909,545 and 1, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for the 20172019 Annual Meeting of Stockholders are incorporated into Part III of this Annual Report on Form 10-K where indicated. Such proxy statement will be filed with the Securities and Exchange Commission within 120 days of the registrant’s fiscal year ended December 31, 2017.2019.
RE/MAX HOLDINGS, INC.
20172019 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements that are subject to risks and uncertainties. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements are often identified by the use of words such as “believe,” “intend,” “expect,” “estimate,” “plan,” “outlook,” “project,” “anticipate,” “may,” “will,” “would” and other similar words and expressions that predict or indicate future events or trends that are not statements of historical matters. Forward-looking statements include statements related to:
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● | | our expectations regarding consumer trends in residential real estate transactions; |
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● | | our expectations regarding overall economic and demographic trends, including the health of the United States (“U.S.”) and Canadian residential real estate markets, and how they affect our performance; |
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● | | our growth strategystrategies of increasinggrowing our agent count; |
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| | our ability to expand our network of franchises in both newRE/MAX and existing but underpenetrated markets;
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| | our expectations regarding the growth of Motto Mortgage our mortgage brokerage franchise;
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| | our growth strategy ofbrands, including (a) increasing ourRE/MAX agent count, increasing the number of closed transaction sides and transaction sides per agent;
RE/MAX agent, and (b) increasing the number of open Motto Mortgage offices; |
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● | the anticipated benefits of our technology initiatives; |
| ● | the continued strength of our brandbrands both in the U.S. and Canada and in the rest of the world; |
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● | | the pursuit of future reacquisitionsacquisitions of Independent Regions; |
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● | | our intention to pay dividends; |
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● | | our future financial performance; |
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| | performance including our ability to forecast selling, operating and administrative expenses; appropriately forecast; |
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● | | the effects of laws applying to our business; business and our future compliance with laws; |
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● | | our ability to retain our senior management and other key employees; |
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● | | our intention to pursue additional intellectual property protections;
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| | our future compliance with U.S. or state franchise regulations;
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| | other plans and objectives for future operations, growth, initiatives, acquisitions or strategies, including investments in our information technology infrastructure; technology; |
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● | | the anticipated benefits of our advertising strategy;
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| | our intention to repatriate cash generated by our Canadian operations to the U.S. on a regular basis in order to minimize the impact of currency gains and losses;
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| | our ability to effectively implement and account for changes in U.S. tax laws, including the Tax Cuts and Jobs Act. laws; |
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● | | the implicationsanticipated outcome of the Special Committee investigationMoehrl/Sitzer litigation, including any risks or uncertainties with regard to any favorable or unfavorable judgements and its impact of the findings and recommendations on us andimplications to our operations; industry. |
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| | our remedial efforts and other measures in response to the outcome, findings and recommendations of the Special Committee investigation; and
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| | our Board of Directors and management structure, including the roles of Adam Contos and the senior management team, the roles of David Liniger and of Richard Covey and the independent members of the Board of Directors.
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These and other forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expected. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors and it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations, or cautionary statements, are disclosed in “Item 1A.—Risk Factors” and in “Item 7.—Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K.
We caution you that the important factors referenced above may not contain all of the factors that are important to you. In addition, we cannot assure you that we will realize the results or developments we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our operations in the way we expect. The forward-looking statements included in this Annual Report on Form 10-K are made only as of the date of this report. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as required by law.
PART I
ITEM 1. BUSINESS
Overview
We are one of the world’s leading franchisors in the real estate industry with two brands and three reportable segments, franchising real estate brokerages globally under the RE/MAX brand (“RE/MAX”) and mortgage brokerages within the U.S. under the Motto Mortgage brand (“Motto”). Our business is and reporting our collective franchise marketing operations as the Marketing Funds. RE/MAX and Motto are 100% franchised—we do not own any of the brokerages that operate under ourthese brands. We focus on enabling our franchisees’, RE/MAX agents’ and Motto loan originators’ success by providing powerful technology, quality education and training, powerful technology, tools and support and valuable marketing to build the strength of the RE/MAX and Motto brands. BecauseAlthough we partner with our franchisees to assist them in growing their brokerages, they fund the cost of developing their brokerages,brokerages. As a result, we maintain a low fixed-cost structure which, combined with our stable, recurring fee-based models, enables us to capitalize on the economic benefits of the franchising model, yielding high margins and significant cash flow.
Our History. RE/MAX was founded in 1973 with an innovative, entrepreneurial culture affording our agentsfranchisees and franchiseestheir agents the flexibility to operate their businesses with great independence. In the early years of our expansion in the U.S. and Canada, we accelerated the brand’s growth by selling regional franchise rights to independent owners for certain geographic regions, a practice we still employ in countries outside of the U.S. and Canada. RE/MAX has held the number one market share in the U.S. and Canada combined since 1999, as measured by total residential transaction sides completed by our agents. SharesOn June 25, 2013, RE/MAX Holdings, Inc. (“Holdings”) was formed as a Delaware corporation. On October 7, 2013, we completed an initial public offering of our Class A common stock, began tradingwhich trades on the New York Stock Exchange under the symbol “RMAX” on October 2, 2013.. In October 2016, we launched Motto, the first national mortgage brokerage franchise offering in the United States.
Our Brands.Brands
RE/MAX. The RE/MAX strategy is to sell franchises to real estate brokers and help those franchisees recruit and retain the best agents. The RE/MAX brand is built on the strength of our global franchise network, which is designed to attract and retain the best-performing and most experienced agents by maximizing their opportunity to retain a larger portion of their commissions. As a result of our unique agent-centric approach, we have established a 45-yearnearly 50-year track record of helping millions of homebuyers and sellers achieve their goals, creating several competitive advantages in the process:
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● | | Leading agent productivity. We believe that ourRE/MAX agents are, on average, substantially more productive than the industry average. In fact, RE/MAX agents at large brokerages on average outsell competing agents more than two-to-one based on two surveysa survey of the largest participating U.S. brokerages (the 2017per the 2019 REAL Trends U.S. 500 Survey. |
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U.S. Transactions Per Agent
(Large Brokerages Only) (1) |
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(1) Transaction sides per agent are calculated by RE/MAX based on 2019 REAL Trends 500 anddata, citing 2018 transaction sides for the RISMedia 2017 Power Broker Report).1,757 largest participating U.S. | | |
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● | Technology, Tools and Training. We have introduced the powerful booj Platform, a fully integrated technology platform custom-built for RE/MAX's unique entrepreneurial culture, in our U.S. Company-owned Regions with additional rollouts to U.S. Independent Regions and Canada scheduled in 2020. We are enhancing the platform over time and will provide additional premium offerings and bolt-ons such as our recent acquisition of First. We also provide agents and brokers the tools to help maximize their productivity through approved supplier arrangements and top-quality education and training. |
| ● | Leading market share. Nobody in the world sells more real estate than RE/MAX, as measured by residential transaction sides. |
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● | | Leading brand awareness. The RE/MAX brand has the highest level of unaided brand awareness in real estate in the U.S. and Canada according to a consumer study conducted by MMR Strategy Group, and our iconic red, white and blue RE/MAX hot air balloon is one of the most recognized real estate logos in the world. |
| ● | Leading global presence. We have a growing global presence and our agent count outside the U.S. and Canada continues to increase. Today, the RE/MAX brand has over 130,000 agents operating in over 8,000 offices, and a presence in more than 110 countries and territories—a global footprint bigger than any other real estate brokerage brand in the world. |
The majority of ourRE/MAX revenue—65%66% in 2017—2019—is derived from fixed, contractual fees and dues paid to us based on the number of agents in our franchise network, so agent count, primarily in the U.S. and Canada, is a key measure of our business performance. Today, the RE/MAX brand has over 115,000 agents operating in over 7,000 offices, and a presence in more than 100 countries and territories—a global footprint bigger than any other real estate brokerage brand in the world.
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130,889 Agents | 8,629 Offices | 118 Countries and Territories |
119,041 Agents
| 7,841 Offices
| 114 Countries and Territories
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As of December 31, 2017.2019
Motto Mortgage. The Motto conceptMortgage franchise model offers U.S. real estate brokers, real estate professionals and other investors access to the mortgage brokerage business, which is highly complementary to our RE/MAX real estate business and a modelis designed to help Motto franchise owners comply with all relevantcomplex mortgage regulations. Motto offersfranchisees offer potential homebuyers an opportunity to find both real estate agents and independent Motto loan originators at offices in one location.near each other. Further, Motto loan originators provide home-buyershomebuyers with financing choices by providing access to a variety of quality loan options from multiple leading wholesale lenders. In addition, Motto provides powerful technology to its franchisees that simplifies the mortgage process. Motto franchisees are mortgage brokers and not mortgage bankers; as a result, Motto franchisees do not fund any loans.bankers. Likewise, we franchise the Motto system and are not lenders or brokers.
Motto’s feerevenue model consists of fixed, contractual fees paid monthly by the broker on a per-office basis by the broker for being a part of the Motto network and for use of the Motto brand and technology, and from sales of individual franchises. We believe it will generally take 14are in the early stages of offering supplemental franchising models to 17 months afterexisting Motto “bricks and mortar” franchises which are offices with a unique physical address with rights granted by a full franchise agreement. The new “virtual” offices and “branchises” are not required to have the sale ofsame physical footprint. A virtual office is a right granted by Motto franchise forto a franchisee to rampoperate in an additional state. The rights for up to payingtwo virtual offices are granted to a Motto franchisee at the time of purchase; the virtual office concept allows that franchisee to take advantage of business opportunities in an additional, sometimes adjoining, state. There are no incremental franchise fees or monthly royalty fees directly associated with a virtual office. A branchise is a scaled down Motto franchise. Branchises are designed for an existing Motto franchise owner who desires to expand to an additional location where the franchisee is uncertain whether anticipated loan origination volume will support full set offranchise fees. Motto franchisees pay a reduced franchise fee and monthly fees. Consequently, although 31 of the 68royalty rate for a branchise. Motto Mortgage has grown to over 100 offices across more than 30 states and we expect Motto to continue to grow as we expect to sell more Motto franchises sold from inception to December 31, 2017 were operational asin 2020 than we did in 2019.
Number of Open Motto in 2017. We remain focused on enabling the success of these initial franchises, which in turn we believe will serve as concept validators.Offices*
*only includes full physical Motto franchisees should profit by attractingoffices; excludes virtual offices and retaining professional, highly productive loan originators who provide superior client service and value. We will not be compensated based on the volume of loans completed by a franchise; the franchisee retains all upside in the volume of loans completed by a given Motto loan originator or franchise.branchises
Industry Overview and Trends
We are a franchisor of businesses in two facets of the real estate industry—real estate brokerages and mortgage brokerages. With approximately 95% of our revenue, and nearly three-quartersapproximately 65% of our RE/MAX agent count coming from our franchising operations in the U.S. and Canada, and 100% of our Motto operations being in the U.S., we are significantly affected by the real estate marketmarkets in the U.S. and Canada.
The U.S. and Canadian Real Estate Industry AreIndustries are Large Markets. The U.S. residential real estate industry is anmarkets in the U.S. and Canada are approximately $1.83$1.9 trillion marketand $0.2 trillion, respectively, based on 20172019 sales volume, according to U.S. Census Bureau data and existing home sales information from the National Association of Realtors (“NAR”). Residential real estate represents the largest single asset class in the U.S. with a value of approximately $24.2 trillion, according to the Federal Reserve. Canadian home sales totaled approximately CA$262 billion in 2017, according to and the Canadian Real Estate Association (“CREA”).
How Brokerages Make Money. Residential real estate brokerages typically realize revenue by charging a commission based on a percentage of the price of the home sold and/or by charging their agents, who are independent contractors, fees for services rendered. The real estate brokerage industry generally benefits in periods of rising home prices and transaction activity (with the number of licensed real estate agents generally increasing during such periods), and is typically adversely impacted in periods of falling prices and home sale transactions (with the number of licensed real estate agents generally decreasing during such periods).
Residential mortgage brokerages typically realize revenue by charging fees for their service, which is based on a percentage of the mortgage loan amount. The mortgage brokerage industry generally benefits from periods of increasing home sales activity, as this generally results in increased purchase-money mortgage originations (loans that arise during the initial sale of a house), and periods when homeowners refinance to take advantage of lower interest rates. The mortgage brokerage industry is usually adversely impacted in periods of decreasing home sales activity, as this results in less purchase-money mortgage originations, and periods of less favorable interest rates making homeowners less likely to refinance.
The Residential Real Estate Industry is Cyclical in Nature. The residential real estate industry is cyclical in nature but has shown strong long-term growth. As illustrated below, the number of existing home sales transactions in the U.S. and Canada has generally increased during periods of economic growth:
U.S. Existing Home Sales
In Canada,U.S. Housing Trends. The U.S. housing market had mixed results during 2019 as the downturn from 2005 through 2011 was mild by comparison to thatexisting home sales declines of 2018 continued in the U.S. forfirst half of 2019. Sales recovered in the second half of 2019 with full year existing home sales ending at the same period. Canadian home sales were up 5.5% in 2015 and 6.3% in 2016, but declined 4.0% in 2017 and are forecasted to decline 5.3% inlevel as 2018, according to CREA.
We believe we remain well-positioned to benefit fromNAR. Persistent price appreciation and low housing inventory, especially at the growing U.S. economy and housing sector and the relatively healthy Canadian economy and housing sector.
U.S. Housing Trends. According to the 2017 Nation’s Housing Report (the “Report”) compiled by the Joint Center for Housing Studies, the U.S. housing market is finally returning to normal almost a decade after the onsetlower end of the Great Recession. The U.S. housing industry has strengthened, butmarket, continued to challenge homebuyers seeking affordable inventory despite historically moderate interest rates. NAR’s January 2020 forecast called for existing home sales to increase an average of 3.4% in 2020.
As we entered 2020, the recovery has been uneven across all markets and pressures remain, particularlygrowth in the areas ofhome sales transactions continued despite ongoing constraints related to shrinking inventory and affordability. Although moderate interest rates, low unemployment and wage appreciation remain positive for U.S. housing trends, continued constriction to inventory levels could stall the current momentum.
Canadian Existing Home Sales
Canadian Housing prices have,Trends. Most individual markets surveyed across Canada experienced moderate price increases year-over-year from 2018 to 2019. We expect the market to grow in many markets, reached or surpassed previous peaks. Homebuilding, while steadily improving over2020 with the last several years, has lagged relativeoverall rate of price increases to historical levels contributing to an overall deficitbe greater than in supply. According2019. CREA projects the average residential sale price for Canada will increase 6.2% in 2020, which indicates that the desire for home ownership remains strong, particularly among Canadian millennials. And according to the 2020 RE/MAX Housing Market Outlook Report, housing completions51% of Canadians are considering buying a property in the ten-year period ended 2016 totaled 9.0 million units, more than 4.0 million units less thannext five years, up from 36% in the next-worst 10-year period dating back to the late 1970s. Household formation growth has increasedprior year.
Favorable Long-Term Demand. We believe long-term demand for housing contributingin the U.S. and Canada is driven by many factors including the economic health of the domestic economy, demographic trends, affordability, interest rates and local factors such as demand relative to home sales price gains outstripping wage growthsupply. We also believe the residential real estate market in the U.S. and pressuring overall affordability. Other notable U.S. housing trends include: Canada will benefit from fundamental demographic shifts over the long term, including:
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● | An increase in demand from rising household formations, including as a result of immigration, population growth and wealth accumulation and wage growth of minorities. According to The State of the Nation’s Housing Report 2019 compiled by the Joint Center for Housing Studies of Harvard University (the “JCHS Report”), U.S. household formations are projected to reach 12.0 million between 2018 and 2028. Likewise, the U.S. Census Bureau projects that the U.S. will continue to experience long-term population growth and predicts net immigration of 36 million individuals from 2014 to 2060. And in Canada, Statistics Canada reports that Canada has the highest annual population growth rate of G7 nations and expects the nation’s population to grow to more than 40 million individuals by 2068 even in its low-growth scenario. |
| ● | An increase in demand from generational shifts. We believe there is pent-up buying demand among adults in the millennial generation, currently the nation’s largest living generation. The millennial generation is moving into their prime home-buying years as they form households and are supported by strong employment, relatively low interest rates, and rising consumer confidence. Similarly, we also believe there is pent-up selling demand from generational shifts, such as many retirement age homeowners, from the “baby boom” generation, who are likely to take advantage of improved housing market conditions in order to sell their existing residences and retire in new areas of the country or purchase smaller homes. |
| ● | Pent-up demand from supply shortages. Supplies of single-family homes for sale remain relatively scarce, particularly at the lower-cost end of the spectrum. The conversion of single-family homes to rental properties, the ongoing decline in residential mobility rates and the low level of single-family construction are likely contributors to the low level of supply, according to the JCHS Report. Additionally, while affordability pressures have eased, the JCHS Report notes this issue remains widespread, a long-term trend which has not been solved. Canada is faced with similar challenges with Statistics Canada noting more than 5% or more than 700 thousand households are in housing that is not suitable for their needs and nearly 20% of households do not report being satisfied with their housing. Should these supply constraints be remedied, we believe the real estate industry would see a substantial benefit. |
Notable Broker and Agent Trends. Notable trends impacting residential real estate brokers and agents include:
| ● | Almost 90% of all U.S. homebuyers and sellers use an agent – About 89% of sellers and 87% of purchasers were represented by a real estate agent in 2017,2019, according to NAR data. These figures have climbed over the last decade and a half—a period of time during which technology has materially changed the typical home-buying or -sellingselling transaction: |
Percentage of Home Buyers and Sellers Using an Agent
Source: NAR Profile of Home Buyers and Sellers
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● | | The number of agents entering the industry is increasing – At the end of 2017, NAR membership was trending to surpass its all-time record of 1.37 million members established in 2006. Typically, during periods of expansion in the housing cycle, the numbers of agents entering the industry increase as the barriers to entry are relatively low. Many of the recent entrants are new to the profession. In fact, NAR reported in 2017 that 20% of its members had been licensed less than one year, a quadrupling of the percentage from just four years ago. At RE/MAX, our model is not for everyone. We focus our brokers on the importance of attracting and retaining highly productive agents and those who aspire to learn and produce more. Consequently, our agent growth rate in the U.S. can lag that of NAR. For example, our U.S. agent count grew 4.9% in 2015, 3.0% in 2016, and 2.3% in 2017 whereas NAR’s membership grew 6.2% in 2015, 5.7% in 2016 and 6.1% in 2017.
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| | Competition for agents and listings remains fierce – Competition for agents, especially highly productive agents, and listings has always been fierce and today is no different. Franchisors and brokers are continually refining and fine-tuning their economic models in order to craft what they believe to be the most compelling value proposition in order to attract and retain the most productive agents and to capture consumer listings. The year 2017 was even more2019 remained heated in this regard as the industry witnessed athe continuation of significant increase in capital |
| | invested in relatively newernew entrants to our industry, resulting in many well-financed competitors offering a wide variety of business models. See Competition for additional discussion. |
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● | | The importance of technology continues to increase – We believe industry market participants will continue to focus on technology investments as evidenced by increased amounts of capital flowing into the industry. We believe mobile platforms, artificial intelligence and predictive analytics are increasingly becoming a point of focus as the industry looks to use technological advancementstechnology to simplify and streamline the oftentimes complicated process of buyinglead cultivation and selling a home.completing transactions. In response, many established brokers are starting to favorfavoring proprietary technology as opposed to purchasing it from third parties. On February 26, 2018, RE/MAX, LLC acquired certain assets |
| ● | Alternate business models increase amid record venture capital investment – While the majority of booj, ahome buyers and sellers still use agents, the number of alternate business models continues to expand. Furthermore, investments into real estate technology, company, in orderespecially as it relates to deliver core technology solutions designed for and with RE/MAX affiliates. We expectalternate models, continues to continue to invest meaningfully in technology as we seek to enhance our overall value proposition to our brokers, agents and consumers. |
Canadian Housing Trends. The year 2017 saw the single-family detached home and condo markets diverge on distinctly different paths in Canada’s two highest-priced real estate markets, Greater Vancouver and the Greater Toronto Area. The trend is expected to continue into 2018 as a mix of relative affordability for condo units and price appreciation for detached homes in recent years, combined with government policy changes in both markets, has helped push an influx of buyers toward condo ownership. According to a survey conducted by Leger on behalf of RE/MAX, the appetite for home ownership remains strong with roughly half of Canadians (48 percent) considering the purchase of a home in the next five years. In order to find a balance between the home features they’re looking for and affordability, many buyers are continuing to look at real estate markets outside of the country’s largest urban centers. The Royal Bank of Canada projects the average residential sale price for Canada will increase 2.2 percent in 2018, which is indicative of how the desire for home ownership remains strong, particularly among Canadian millennials.
Much of the activity in regional markets across Ontario was fueled by price appreciation in Toronto during the first four months of the year prior to the introduction of the provincial government’s Fair Housing Plan. The 16-point plan introduced a 15 percent non-resident speculation tax, which slowed demand from overseas buyers in the upper-end of the market. The policy changes as a whole curtailed activity significantly for single-family detached homes throughout the Greater Toronto Area in the short-term. New mortgage qualification rules that come into effect on January 1, 2018 also impacted housing market activity toward the end of 2017. It is expected that the new mortgage stress test will slow activity across Canada during the first part of 2018. In November 2017, the Bank of Canada predicted that the new regulations could disqualify up to 10 percent of prospective home buyers who have down payments of 20 percent or more.
Favorable Long-Term Demand. We believe long-term demand for housing in the U.S. is driven by many factors including the economic health of the domestic economy, demographic trends, affordability, interest rates and local factors such as demand relative to supply. We also believe the residential real estate market in the U.S. will benefit from fundamental demographic shifts over the long term, including:
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| | An increase in demand from rising household formations, including as a result of immigration, population growth and wealth accumulation and wage growth of minorities.increase. According to an October 2019 Real Estate Funding Report by T360, investment in residential real estate technology through the Report, U.S. household formation averaged only 0.5 millionthird quarter of 2019 totaled $2.14 billion, or 121% of full-year 2018 levels. Nearly $1.5 billion, or 69% of total residential funding in 2019 through September, went to 0.7 million annually in 2007-2012, well below historic levels, but has since recoveredfour iBuyer companies. iBuyers are companies that make an online, all-cash offer to a potential home seller and if the offer is accepted, the iBuyer takes ownership of the property and is projectedresponsible for reselling the home. As the iBuyer model is a quicker alternative to reach 13.6 million between 2015 and 2025, approximately in line with the increase in the 1990s.Likewise, the U.S. Census Bureau projects that the U.S. will continue to experience long-term population growth and predicts net immigration of 30 million individuals from 2014 to 2050.
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| | An increase in demand from generational shifts. We believe there is pent-up selling demand from generational shifts, such as many retirement age homeowners, from the “baby boom” generation,a traditional real estate transaction, those sellers who are likely to take advantage of improved housing market conditions in orderneed or want to sell their existing residences and retire in new areas ofhome quickly find it particularly attractive. Some brokerages have begun to partner with iBuyers or offer their own iBuyer program. Most iBuyer activity tends to be below the country or purchase smaller homes. Similarly, we also believe there is pent-up buying demand among adults in the millennial generation, currently the nation’s largest living generation. The millennial generation is moving into their prime home-buying yearsmedian price range. In addition to iBuyers who operate as they form households and are supported by strong employment, relatively low interest rates, and rising consumer confidencediscussed above, other alternate business models exist including those companies who seek to purchase a home.
an existing homeowner’s “move-up” or “dream” home for cash and then subsequently sell the currently occupied property. |
The Long-Term Value Proposition for Real Estate Brokerage Services. We believe the traditional agent-assisted business model, especially those supported by professional and highly productive agents, compares favorably to alternative channels of the residential brokerage industry, such as discount brokers, “for sale by owner” listings, iBuyers, and lower-fee brokerages catering to consumers who use technology for some of the services traditionally provided by brokers, because full-service brokerages are best suited to address many of the key characteristics of real estate transactions, including:
| (i) | | the complexity and large monetary value involved in home sale transactions, |
| (ii) | | the infrequency of home sale transactions, |
| (iii) | | the high price variability in the home market, |
| (iv) | | the intimate local knowledge necessary to advise clients on neighborhood characteristics, |
| (v) | | the unique nature of each particular home, and |
| (vi) | | the consumer’s need for a high degree of personalized advice and support in light of these factors. |
For these reasons, we believe that consumers will continue to usefavor the agent-assistedfull-service agent model for residential real estate transactions. In fact, a 2019 survey we commissioned from Camp & King of over 5,000 consumers across the U.S. and Canada noted that more than three quarters of home buyers and sellers still see the value of a full-service agent. In addition, although listings are available for viewing on a wide variety of real estate websites, we believe an agent’s local market expertise provides the ability to better understand the inventory of for-sale homes and the interests of potential buyers. This knowledge allows the agent to customize the pool of potential homes they show to a buyer, as well as help sellers to present their home professionally to best attract potential buyers.
The Long-Term Value Proposition for Mortgage Brokerage Services. Likewise, we believe mortgage brokers provide choice and a valuable “concierge” service for consumers. Mortgage brokers are familiar with the latest loan programs and choices available through various wholesale lenders. A professional mortgage broker can introduce consumers to loan programs from several lenders, providing choice and information consumers may be unlikely to locate on their own. TheIn 2019, the percentage of mortgage originations handled by mortgage brokerages was in 2017, substantiallystill below average historical levels, which we believe indicates theshows potential for growth in the mortgage brokerage production channel. In 2019, we began to
realize that potential as the percentage of mortgage originations handled by mortgage brokerages began to rise. We believe there is room for additional growth as the percentage of mortgage originations handled by mortgage brokerages in 2019 has still not reached maximum levels seen in the past.
Total Mortgage Originations
Source: Inside Mortgage Finance Publications, Inc. Copyright © 20172020 Used with permission.
Moreover, according to Federal Home Loan Mortgage Corporation (known as “Freddie Mac”), purchase-money originations are expected to increase gradually in the next few years. Such increases in mortgage originations would provide a growth opportunity for the Motto franchise.
Purchase-money mortgage originations correlate to the overall number of home sales and home prices. Home purchases are driven primarily by the buyer’s personal and professional circumstances, whereas refinances depend mainly upon interest rates, because they primarily occur when homeowners seerates.
According to Federal Home Loan Mortgage Corporation (known as “Freddie Mac”), purchase-money originations are expected to increase gradually in the next few years. As compared to competitors, Motto has a significantly higher ratio of purchase-money mortgage originations to refinances at an approximately 80/20 split. We believe that the expected increase in purchase-money originations will provide a growth opportunity to take advantagefor a Motto franchise.
Purchase Mortgage Originations
Our Franchise Model and Offering
Introduction to Franchising. Franchising is a distributed model for licensing the use of the franchisor’s systembrand and brand.technology, tools, and training. In return, the franchisee retains ownership and sole responsibility for the local business and its risks, and therefore thea substantial portion of the profits it generates and its risks.generates. The successful franchisor provides its franchisees,franchisees: i) a unique product or service offering; ii) a distinctive brand name, and as the system gains market share, the favorable consumer recognition that brand comes to symbolize; and iii) training, productivitytechnology, tools and technologytraining to help franchisees operate their business effectively, efficiently and successfully; and iv) group purchasing power of the franchise system to obtain favorable prices for supplies, advertising, and other tools and services necessary in the operation of the business.successfully. Because franchising involves principally the development and licensing of intellectual property, and the costs of retail space and employees are borne by the individual unit owner, it ishas a low fixed-cost structure typified by high gross margins, allowing the franchisor to focus on innovation, franchisee training and support, and marketing to grow brand reputation.
How Brokerages Make Money. Residential real estate brokerages typically realize revenue by charging a commission based on a percentage of the price of the home sold and/or by charging their agents, who are independent contractors, fees for services rendered. The REMAXreal estate brokerage industry generally benefits in periods of rising home prices and transaction activity (with the number of licensed real estate agents generally increasing during such periods) and is typically adversely impacted in periods of falling prices and home sale transactions (with the number of licensed real estate agents generally decreasing during such periods).
Residential mortgage brokerages typically realize revenue by charging fees for their service, which is based on a percentage of the mortgage loan amount. The mortgage brokerage industry generally benefits from periods of increasing home sales activity and rising home prices, as this generally results in increased purchase-money mortgage originations (loans that arise during the initial sale of a house), and periods when homeowners refinance to take advantage of lower interest rates. The mortgage brokerage industry is usually adversely impacted in periods of decreasing home sales activity, as this results in less purchase-money mortgage originations, and periods of less favorable interest rates making homeowners less likely to refinance.
The RE/MAX “Agent-Centric” Franchise Offering. We believe that our “agent-centric” approach is a compelling offering in the real estate brokerage industry, and it enables us to attract and retain highly effectiveproductive agents and motivated franchisees to our network and drive growth in our business and profitability. Our franchise model providesmaximizes our agent’s productivity by providing the following combination of benefits to our franchisees and agents:
| ·
● | | High Agent Commission Fee Split and Low Franchise Fees. The RE/MAX high commission split concept is a cornerstone of our model and, although not unique, differentiates us in the industry. That differentiation is most evident when our brand advantages and services are factored in as part of the concept. We recommend to our franchisees an agent-favorable commission split of 95%/5%, in exchange for the agent paying fixed fees to share the overhead and other costs of the brokerage. This model allows high-producing agents to earn a higher |
| | commission compared to traditional brokerages where the broker typically takes 30% to 40% of the agent’s commission.commission, and it provides brokers with the resources to offer key services and support to their agents. |
| ·
● | | Affiliation with the Best Brand in Residential Real Estate. With number one market share in the U.S. and Canada combined as measured by total residential transaction sides completed by ourRE/MAX agents, and leading unaided brand awareness in the U.S. and Canada, according to a consumer study by MMR Strategy Group, we reinforce brand awareness through marketing and advertising campaigns that are supported by our franchisees’ and agents’ local marketing. |
| ·
● | | Entrepreneurial, High-Performance Culture. Our brand and the economics of our model generally attract driven, professional, highly productive agents,entrepreneurially-minded franchisees, and we allow them autonomy to run their businesses independently, including generally, the freedom to set commission rates and oversee local advertising. advertising aligned with RE/MAX standards. |
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● | | SophisticatedPowerful Technology including High Traffic Websites Supporting Lead Referral Systems. Remax.com wasand Marketing Tools. We believe we offer industry-leading technology highlighted by our proprietary booj Platform, First mobile app, and the most visitedrecently enhanced consumer facing app and remax.com. The highly-customized booj Platform integrates a suite of digital products that empower high-producing agents, brokers and teams to proactively establish, manage and grow client relationships. With Customer Relationship Management (“CRM”) at the core of this ecosystem, the booj Platform utilizes deal management and lead cultivation tools to streamline the work of agents from lead generation to post-close nurturing and beyond, while integrating key partnerships that are widely adopted across the industry. The First mobile app leverages data science, machine learning and human interaction to help real estate franchisor website during 2017, according to Hitwise data. When a prospective buyer inquires about a property displayed on our websites, aprofessionals better leverage the value of their personal network. Photofy + RE/MAX agent receives this lead through our lead referral system, LeadStreet®, without a referral fee. LeadStreet® sends approximately one million free leads togives our agents a year. We believe that no other national real estate brand provides their agents comparable accessan exclusive social marketing tool to free leads.
complement the variety of marketing tools we offer our agents. |
| ·
● | | RE/MAX University® Training Programs. RE/MAX University® offers on-demand access to industry information and advanced training in areas such as distressed properties, luxury properties, senior clients, buyer agency and many other specialty areas of real estate. |
| ·
● | | RE/MAX Approved Supplier Program. UsingMarketing and Promotion.We believe the collective buying powerwidespread recognition of our franchise network, a network of preferred suppliers provide group discount prices, marketing materials that have been pre-vetted to comply with RE/MAX brand standards and higher quality materials that may not be cost-effective to procure on an individual office basis. These vendors provide us additional revenue in return for marketing access to our network of franchisees and agents. |
We attribute our success to our ability, by providing this unique, agent-centric suite of benefits, to recruit and retain highly productive agents and motivated franchisees. Our goal is to continue a self-reinforcing cycle that we call “Premier Market Presence,” whereby recruiting agents and franchisees helps achieve a network effect to further enhance our brand and market share, expand our franchise network and support offerings, and ultimately grow our revenue, as illustrated below:
RE/MAX Four-Tier Franchise Structure. We are a 100% franchised business, with all of the RE/MAX branded brokerage office locations being operated by franchisees. We franchise directly in the U.S. and Canada, in what we call “Company-owned Regions.” Brokerage offices, in turn, enter into independent contractor relationships with real estate sales associates who represent real estate buyers and sellers. In the early years of our expansion in the U.S. and Canada, we sold regional franchise rights to independent owners for certain geographic regions (“Independent Regions”), pursuant to which those Independent Regions have the exclusive right to sell franchises in those regions. In recent years, we have pursued a strategy to reacquire those regional franchise rights from Independent Regions in the U.S. and Canada.
The following depicts our franchise structure and the location of our Company-owned versus Independent Regions:
| | | | |
Tier
| | Description
| | Services
|
| | | | |
Franchisor
RE/MAX, LLC
| | Owns the right to the RE/MAX brand and sells franchisesour iconic red, white and franchising rights.
| | Brand Equity
Market Share
Advertising
Marketing Strategies
Corporate Communications
|
| | | | |
| Independent Regional Franchise Owner
| | Owns rights to sell brokerage franchises in a specified region.
Typically, 20-year agreement with up to three renewal options.
blue RE/MAX LLC franchises directly in Company-owned Regions, inhot air balloon logo and property signs is a key aspect of our value proposition to agents and franchisees. Representing the restmajority of our Marketing Funds activities, a variety of advertising, marketing and promotion programs build our brand and generate leads for our agents, including leading websites such as remax.com, advertising campaigns using television, digital marketing, social media, print, billboards and signs, and appearances of the U.S. and Canada. | | Local Services
Regional Advertising
Franchise Sales
In Company-owned Regions,well-known RE/MAXLLC performs these services.
|
| | | | |
Franchisee
(Broker-Owner)
| | Operates a RE/MAX-branded brokerage office, lists properties and recruits agents.
Typically, 5-year agreement.
| | Office Infrastructure
Sales Tools / Management
Broker of Record
|
| | | | |
Agent
(Sales Associate)
| | Branded independent contractors who operate out of local franchise brokerage offices.
| | Represents real estate buyer or seller
Typically sets own commission rate
hot air balloon. |
| | | |
| | | Company-owned Regions
|
| | | Independent Regions
|
In general, the franchisees (or broker-owners) do not receive an exclusive territory except under certain limited circumstances. Prior to opening an office, a franchisee or principal owner is required to attend a four- to five-day training program at our global headquarters. Prospective franchisees, renewing franchisees, and transferees of a franchise are subject to a criminal background check and must meet certain standards, including those related to relevant experience, education, licensing, background, financial capacity, skills, integrity and other qualities of character.
RE/MAX Marketing and Promotion.We believe the widespread recognition of the RE/MAX brand and our iconic red, white and blue RE/MAX hot air balloon logo and property signs is a key aspect of our value proposition to agents and franchisees. A variety of advertising, marketing and promotion programs build our brand and generate leads for our agents, including leading websites such as remax.com, advertising campaigns using television, digital marketing, social media, print, billboards and signs, and appearances of the well-known RE/MAX hot-air balloon. In 2017, RE/MAX branding was updated with a fresh, modern design. This “brand refresh” resulted in updates to the iconic RE/MAX Balloon logo, the RE/MAX logotype, and RE/MAX property sign designs. In the company’s 45 year history, this is the first time the RE/MAX logotype has been modernized and the third time the RE/MAX Balloon logo has been updated.
Event-based marketing programs, sponsorships, sporting activities and other similar functions also promote our brand. These include our support, since 1992 for Children's Miracle Network Hospitals in the U.S. and Children's Miracle Network in Canada, to help sick and injured children. Through the Miracle Home program, participating RE/MAX agents donate to Children's Miracle Network Hospitals once a home sale transaction is complete.
Our agentsfranchisees and franchiseestheir agents fund nearly all of the advertising, marketing and promotion supporting the RE/MAX brand, which, in the U.S. and Canada, occurs primarily on threetwo levels:
| ·
● | Marketing Fund Regional, Pan-Regional and Local Marketing Campaigns. Funds are collected from franchisees by our Marketing Funds entities in Company-owned Regions to support both regional and pan-regional marketing campaigns to build brand awareness and to support the Company’s agent and broker technology. The use of the fund balances is restricted by the terms of our franchise agreements. Independent Regions may contribute to national or pan-regional creative and/or media campaigns to achieve economies of scale in the purchase of advertising but are generally responsible for any regional advertising in their respective areas. |
| ● | Agent Sponsored Local Campaigns. Our franchisees and agents engage in extensive promotional efforts within their local markets to attract customers and drive agent and brand awareness locally. These programs are subject to our brand guidelines and quality standards for use of the RE/MAX brand, but we allow our franchisees and agents substantial flexibility to create advertising, marketing and promotion programs that are tailored to local market conditions.
|
RE/MAX “Growth Engine.” The RE/MAX Growth Engine is a virtuous circle whereby all of the key stakeholders in our franchise network—RE/MAX, our franchisees, agents and consumers—benefit from mutual investment and participation in the RE/MAX network or, as we say in RE/MAX, “Everybody wins.” By building our leading brand around an agent-centric model, we believe we are able to attract and retain highly productive agents and motivated franchisees. As a result, our agents and franchisees help to further enhance our brand and market share, expand our franchise network, and ultimately grow our revenue, as illustrated below:
The RE/MAX Growth Engine leads to the following unique benefits for our franchisees and agents and RE/MAX:
| | |
RE/MAX Franchisee and Agent Benefits | | RE/MAX Benefits |
• Affiliation with the best brand in the real estate industry • Entrepreneurial culture • High agent commission split, low franchise fees and highly productive agents • Access to our technology and tools • Comprehensive, award-winning training programs | | • Network effect drives brand awareness • Franchise fee structure provides recurring revenue streams • Franchise model—highly profitable with low capital requirements—leads to strong cash flow generation and high margins |
RE/MAX Four-Tier Franchise Structure. RE/MAX is a 100% franchised business, with all of the RE/MAX branded brokerage office locations being operated by franchisees. We franchise directly in the U.S. and Canada, in what we call “Company-owned Regions.” Brokerage offices, in turn, enter into independent contractor relationships with real estate sales agents who represent real estate buyers and sellers. In the early years of our expansion in the U.S. and Canada, we sold regional franchise rights to independent owners for certain geographic regions (“Independent Regions”), pursuant to which those Independent Regions have the exclusive right to sell franchises in those regions. We have pursued a strategy to acquire those regional franchise rights from Independent Regions in the U.S. and Canada.
The following depicts our franchise structure and the location of our Company-owned versus Independent Regions:
| | ·
| | |
Tier | | Description | | Services |
| | | | |
Franchisor (RE/MAX, LLC) | | Owns the right to the RE/MAX brand and sells franchises and franchising rights. | | |
| | | | |
| Independent Regional Advertising Funds. Regional advertising funds primarily support advertising campaignsFranchise Owner 
| | Owns rights to build and maintain brand awareness at the regional level. The regional advertising fundssell brokerage franchises in a specified region. Typically, 20-year agreement with up to three renewal options. RE/MAX, LLC franchises directly in Company-owned Regions, are funded by our agents through fees that our brokers collectin the rest of the U.S. and pay to the regional advertising funds. These regional advertising funds inCanada. | | In Company-owned Regions are corporations owned by our controlling stockholder,in the U.S. and the useCanada, RE/MAX,LLC performs these services. |
| | | | |
Franchisee (Broker-Owner) | | Operates a RE/MAX-branded brokerage office, lists properties and recruits agents. Typically, 5-year agreement. | | Broker of the fund balances is restricted by the termsRecord |
| | | | |
Agent | | Branded independent contractors who operate out of ourlocal franchise agreements. Therefore, the regional advertising fund entities are excluded from our consolidated financial statements. Franchisee contributions to the regional advertising funds in brokerage offices. | | Represents real estate buyer or seller Typically sets own commission rate |
| | | |
| | | Company-owned Regions were $67.4 million for their fiscal year ended January 31, 2018. The RE/MAX brand is promoted in |
| | | Independent Regions by other regional advertising funds. |
15 | ·
| | Pan-Regional Campaigns. The regional advertising funds in Company-owned Regions, together with some or all of the advertising funds in Independent Regions, may contribute to national or pan-regional creative development and media purchases, to promote a consistent brand message and achieve economies of scale in the purchase of advertising.
|
In general, the franchisees (or broker-owners) do not receive an exclusive territory in the U.S. except under certain limited circumstances. Prior to opening an office, a franchisee or principal owner is required to attend a four- to five-day training program at our global headquarters.
The Motto Mortgage Brokerage ModelFranchise Offering. Through our Motto business, we are a mortgage brokerage franchisor, not a lender or mortgage broker.brokerage. Our franchisees are brokers, not lenders, and so neither we nor our franchisees fund or service any loans. As a franchisor, we help our Motto franchisees establish independent mortgage brokerage companies, with a model designed to comply with all relevant regulations. The technology, training, marketing, tools and other services that we provide to Motto franchisees have been designed to enable real estate brokers—both RE/MAX franchisees and other real estate brokers—to overcome the barriers to enter the mortgage business. Pairingcomplex regulations, essentially providing a Motto franchise with"mortgage brokerage in a box". This model not only creates an ancillary business opportunity for current real estate brokerage lets homebuyers enjoy an enhanced, coordinated, convenientfirms, but also offers opportunities for mortgage professionals seeking to open their own businesses and simplified experience with a professional real estate agentother independent investors interested in financial services. The Motto Mortgage model offers value to find a home and with a Motto loan originator to secure financing from among several quality financing options. Because Motto’s emphasis is on proximity to real estate brokerages and marketing to home-buying customers, we believe our franchisees are well-positioned to benefit from gradually increasing home sales and by extension, a gradually increasing purchase-money mortgage origination market. We believe this convenience should be a differentiator for real estate agents, which we believe will result in enhanced customer satisfaction and customer loyalty, which is essential for a successful, professional, real estate agent. There are not presently any other national mortgage brokerage franchisors in the United States.offering:
| ● | Setup Guidance. We guide owners through every step of the setup process. |
| ● | Compliance, Training, and Support. We provide robust compliance support, including examination assistance and a system built with transparency in mind. To help each franchise owner, we provide support structures that allow them to spend their time getting more business. |
| ● | Access to multiple lenders. Motto Mortgage franchisees work with a pre-vetted group of wholesale lenders to streamline the shopping process and to provide customers with competitive choices. |
| ● | Technology. We’ve seamlessly integrated industry leading systems into one, time-saving technological ecosystemincluding best in class mortgage origination, CRM and marketing platforms. |
| ● | Franchising Expertise. As a member of a family of companies with over 45 years of franchising experience, we provide best practices to franchisees. |
Our Motto Mortgage brokerage franchise business,franchisor, Motto Franchising, LLC, offers seven-year agreements with franchisees. Motto sells franchises directly throughout the U.S. as there are no regional franchise rights in the Motto system. Loan Originators atOur customers are both RE/MAX and non-RE/MAX real estate brokers, real estate professionals and other investors seeking access to the mortgage brokerage business. We are also in the early stages of offering supplemental franchising models in which Motto franchisesoffers brokers with an existing Motto franchise the ability to expand their physical and virtual presence for a reduced contractual fee (aka “branchise”). The aim of these new models is to give franchisees the flexibility to expand their business to places where it would not have been feasible to support a full additional franchise while keeping offices compliant with state branch regulations. These alternative models are typically employeesnot included in our count of open Motto offices. There are not presently any other national mortgage brokerage franchisors in the franchisee and not independent contractors.U.S.
Financial Model
As a franchisor, we maintain a low fixed-costfixed-cost structure. In addition, our stable, fee-based model derives a majority of our revenue from recurring fees paid by our agents,RE/MAX and Motto franchisees, RE/MAX Independent Region franchise
owners and regional franchise owners.RE/MAX agents. This combination helps us drive significant operating leverage through incremental revenue growth, yielding healthy margins and significant cash flow.
| (1) | (1)
| | Revenue (less Marketing Funds fees) and Adjusted EBITDA is aare non-GAAP measuremeasures of financial performance that differsdiffer from U.S. Generally Accepted Accounting Principles. Revenue (less Marketing Fund fees) is calculated directly from our consolidated financial statements as Total revenue less Marketing Funds Fees. See “Item 7.—Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion of Adjusted EBITDA and a reconciliation of the differences between Adjusted EBITDA and net income. |
| (2) | (2)
| | Excludes adjustments attributable to the non-controlling interest. See "Corporate Structure and Ownership” below. |
| (3)
| | Prior period amounts reflect an immaterial correction recorded for the years ended December 31, 2016 and 2015. See Note 18, Immaterial Corrections to Prior Period Financial Statements for additional information.
|
Revenue Streams.
Holdings. The chart below illustrates our revenue streams:
Holdings Revenue Streams as Percentage of 20172019 Total RevenueRevenue*
*Excluding Marketing Funds
The amount of the various RE/MAX fee types received by RE/MAX will vary significantly depending on whether coming from Company-owned regions,Regions, Independent Regions, or global regions,Global Regions, with the greatest amounts in Company-owned regions.Regions. See discussion of revenue per agent below.
Continuing Franchise Fees. Continuing franchise fees are fixed contractual fees paid monthly by regional franchise owners in Independent Regions or franchisees in Company-owned Regions tobased on the number of RE/MAX agentsin the respective franchised region or office or paid by Motto franchisees based on theirthe number of agents. Likewise, Motto continuing franchise fees are fixed contractual fees paid monthly by Motto franchisees.offices open.
Annual Dues. Annual dues are thea fixed membership fees thatfee paid annually by RE/MAX agents pay directly to us to be a part of the RE/MAX network and to use the RE/MAX brand. Annual dues are currently a flat fee per agent paid annually. Motto franchisees do not pay annual dues.agent.
Broker Fees. Broker fees are assessed to the RE/MAX broker against real estate commissions paid by customers when ana RE/MAX agent sells a home. Generally, the amount paid by broker-owners to the master or regional franchisor, which we refer to as the “broker fee,” is 1% of the total commission on the transaction, although the percentage can vary based on the specific terms of the broker fee agreement.agreement and in certain locations (mainly Canada and Texas) is capped at a certain level of commissions, and in Independent Regions in Canada is not charged. The amount of commission collected by brokers is based primarily on the sales volume of RE/MAX agents, home sale prices in such sales and real estate commissions earned by agents on these transactions. Broker fees, therefore, vary based upon the overall health of the real estate industry and the volume of existing home sales. Additionally, agents in Company-owned Regions existing prior to 2004, the year we began assessing broker fees, are generally “grandfathered” and continue to be exempt from paying a broker fee. As of December 31, 20172019, grandfathered agents represented approximately 20%17% of total agents in U.S. Company-owned regions. Consistent with the trend that we have already noted, weRegions. We expect that over time, exempt agents will be replaced by new agents who will pay broker fees, which will have a positive impact on our broker fee revenue independent of changes in agent count, sales volume and home sale prices. Motto franchisees do not pay any fees based on the number or dollar value of loans brokered.
Franchise Sales and Other Franchise Revenue. Franchise sales and other franchise revenue primarily consists of:
| ·
● | | Franchise Sales:Sales. Revenue from sales and renewals of individual franchises in RE/MAX Company-owned Regions, Independent Regions, and Motto, as well as RE/MAX regional and country master franchises for Independent Regions in global markets outside of North America (“Global Regions”). We receive only a portion of the revenue from the sales and renewals of individual franchises from Independent and Global Regions. The franchise sale initial fees and commissions related to franchise sales are recognized over the contractual term of the franchise agreement. |
| ·
● | | Other Franchise Revenue:Revenue. Revenue from (a) preferred marketing arrangements (flat fee) and approved supplier programs with third parties (percentagesuch revenue being either a flat fee or a percentage of revenue from products and services sold to RE/MAX agents), as well as(b) event-based revenue from training and other programs,conventions, including our RE/MAX annual convention, in(c) revenue from booj’s legacy business of supplying websites and other technology to independent real estate brokerages and (d) technology subscription revenue such as for the U.S. First app. |
Revenue per Agent in Owned versus Independent RE/MAX Regions. We receive a higher amount of revenue per agent in our Company-owned Regions than in our Independent Regions in the U.S. and Canada, and more in Independent Regions in the U.S. and Canada than in Global Regions. While both Company-owned Regions and Independent Regions in the U.S. and Canada charge relatively similar fees to RE/MAX brokerages and agents, weWe receive the entire amount of the continuing franchise fee, broker fee and initial franchise and renewal fee in Company-owned Regions, whereas we receive only a portion of these fees in Independent Regions. We generally receive 15%, 20% or 30% of the amount of such fees in Independent Regions, which is a fixed rate in each particular Independent Region established by the terms of the applicable regional franchise agreement. We base our continuing franchise fees, agent dues and broker fees outside the U.S. and Canada on the same structure as our Independent Regions, except that the aggregate level of such fees is substantially lower in these markets. In 2017,2019, the average annual revenue per agent was as follows:
| (1) | (1)
| | Annual dues are currently a flat fee of US$410/CA$410 per agent annually for our U.S. and Canadian agents. The average per agent for the year ended December 31, 20172019 in both Independent Regions and Company-owned Regions reflects the impact of foreign currency movements related to revenue received from Canadian agents. The ratio of Canadian agents to U.S. agents in Independent Regions has increased as a result of U.S. Independent Region acquisitions. |
Motto. Our Motto revenue is derived from continuing franchise fees and franchise sales.
| ● | Continuing Franchise Fees. Motto continuing franchise fees are fixed contractual fees paid monthly by Motto franchisees. The monthly fees paid by the brokers are initially discounted and take approximately 12 to 14 months after the sale of a Motto franchise for a franchisee to ramp up to paying a full set of monthly fees. Motto franchisees do not pay any fees based on the number or dollar value of loans brokered. |
| ● | Franchise Sales. Revenue from sales and renewals of individual franchises. The franchise sale initial fees and commissions related to franchise sales are recognized over the contractual term of the franchise agreement. |
16
Value Creation and Growth Strategy
OurAs a franchisor, we generate favorable margins generateand healthy amounts of cash flow, which facilitates our value creation and growth strategy. As a leading franchisor in the residential real estate industry in the U.S., Canada and Canada,globally, we create shareholder value by:
| a) | | growing organically by building on our network of over 7,0008,000 RE/MAX franchisees and 115,000130,000 agents and our network of over 100 open Motto mortgage brokerage franchises; |
| b) | | catalyzing growth by reacquiring regional RE/MAX franchise rights and acquiring other businesses complementary businesses;to our RE/MAX and Motto franchises; and |
| c) | | returning capital to shareholders. |
Organic Growth. Our organic growth is expected We believe we have multiple opportunities to come from:grow organically, including principally through: a) RE/MAX agent count growth;growth in the U.S. and Canada; b) RE/MAX and Motto franchise sales,sales; c) organic growth from global regions; d) pricing; and e) increases in our ability to monetize the value of our RE/MAX and Motto networks; d) the extent to which we increase the fees paid by RE/MAX or Motto franchisees or RE/MAX agents; and e) continued improvement in the housing market, resulting in more home sale transactionsagent productivity or higher home prices. Other potential organic growth opportunities include monetizing our technology offerings and developing our approved supplier relationships to drive additional revenue.
Organic Growth from
RE/MAX Agent Count and Franchise Sales. Growth. With respect to RE/MAX agent count growth, we experienced agent losses during the downturn, but we returned to a period of net global agent growth in 2012 and our total year-over-year growth in agent count continued infrom 2013 through 2017.2019.
RE/MAX Agent Count
Number of Agents at Quarter-End (1)
| (1) | (1)
| | Agents that converted from an Independent Region to a Company-owned Region are moved from the Independent Region agent count to the Company-owned Region agent count during the quarter of the acquisition. |
As shown in the following table, during the second half of 2018 our agent count growth in U.S. decelerated as U.S. existing home sales decelerated, a correlation we have seen previously. This deceleration poses challenges to organic growth from agent count which we have responded to with recruiting initiatives, including temporary fee waivers among other things, that improved the trend in the fourth quarter of 2019.
RE/MAX intendsAgent Count Year-Over-Year Growth Rate by Geography
Contemporaneous with an abrupt decline in existing U.S. home sales in late 2018, we experienced a decline in our U.S. agent count from the fourth quarter of 2018 through the third quarter of 2019. To reinvigorate U.S. agent growth, we introduced several recruitment programs including some that incentivized recruitment through temporary waivers of fees for new agents. We have several initiatives designed to improve the value proposition offered to both franchisees and agents, which we believe will help recruiting and retention. Two key initiatives in 2020 are:
| ● | Technology. We have introduced the powerful booj Platform, which is a custom-built, integrated platform with products that interact and evolve with one another. With Customer Relationship Management (“CRM”) at the core of this ecosystem, the booj Platform is a holistic real estate technology solution that allows agents to be more strategic in their interactions with current transactions and new potential business, ultimately improving our agents’ productivity. Currently, the platform is rolled out to U.S. Company-owned Regions and beginning in 2020, we plan to offer the platform to Canada and participating U.S. Independent Regions, with the ultimate plan to offer the booj Platform throughout our global network. As we continue to roll out the booj Platform, successful adoption and training of our brokers and agents are key priorities in 2020. In addition, we will continue to focus on enhancing and investing in the booj technology and evaluating complementary technology through partnerships or smaller acquisitions. Providing the best online and offline experience for RE/MAX and Motto affiliates and consumers is one of our primary strategic technology goals and we expect to continue to invest meaningfully in technology as we seek to enhance our overall value proposition, as with the recent acquisition of First. |
| ● | Agent Count Growth and Retention. We have increased our focus on the recruiting and retention of our agents by partnering with our franchise owners. In late 2019, we launched an incentive-based growth campaign that focused on maintaining and recruiting new agents. This campaign reinvigorated recruiting efforts within the network and was well received as the overall participation of franchise owners in the campaign exceeded our expectations. Heading into 2020, we will continue to expand our recruiting initiatives and will incorporate other direct contact opportunities (such as the RE/MAX annual convention, speaking tours, and other company events) with various contact points throughout 2020. |
RE/MAX and Motto Franchise Sales. We intend to continue adding franchises in new and existing markets, and as a result, increase our global market share and brand awareness. Each incremental agentfranchise leverages our existing infrastructure, allowing us to drive additional revenue at little incremental cost. We are committed to reinvesting in the business to enhance our value proposition and through a range of new and existing programs and tools.
RE/MAX Office Franchise Sales
Number of Motto sold 68 franchises from inception to December 31, 2017. We believe theFranchises Sold*
*only includes full physical Motto Mortgage franchise concept extends our core competencies of franchisingoffices; excludes virtual offices and real estate industry knowledge to the mortgage brokerage business. We believe the new Motto business, with its recurring fee model, complements the RE/MAX franchise model and adds a new channel for long-term growth. Success of the Motto brokerage model, we believe, will build brand awareness which, in turn, will lead to increased franchise sales and therefore, increased franchise fees.branchises
Organic Growth from Global Regions. We have a growing global presence with our agent count outside the U.S. and Canada growing almost 16% in 2019 and 33% over the past two years. Over the last two decades, the size of the RE/MAX network outside of the U.S. and Canada has grown to overrepresent approximately a quarterthird of total RE/MAX agent count. We believe offering the booj Platform internationally is another growth opportunity we plan to take advantage of. However, we earn substantially more of our revenue in the U.S. than in other countries as a result of the higher average revenue per agent earned in Company-owned Regions than in Independent Regions, and in the U.S. and Canada as compared to the rest of the world:
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RE/MAX Agents by Geography As of Year-end 2019 | | RE/MAX Revenue by Geography (a) Percent of 2019 Revenue |
RE/MAX Agents by Geography
As of Year-end 2017
| | Revenue by Geography
Percent of 2017 Revenue
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| (a) | Excludes revenues from the Marketing Funds, Motto and booj. |
Revenue from Global Regions has remained a relatively consistent percentage of our total revenue because, as our agent count in these regions has increased (primarily driven by increasing agent counts in Europe, South America and Southeast Asia), recurring revenue from fees and dues has taken the place of less predictable revenue from master franchise sales.
Our revenue from countries outside of the U.S. is also affected by the strength of the U.S. dollar against other currencies, primarily the Canadian dollar and to a lesser degree, the Euro.
Pricing. Given the low fixed infrastructure cost of our RE/MAX franchise model, modest increases in aggregate fees per agent should positively affect our profitability. We may occasionally increase our aggregate fees per agent over time in our Company-owned
Regions as we enhance the value we offer to our network. We are judicious with respect to the timing and amount of increases in aggregate fees per agent and our strategic focus remains on growing agent count through franchise sales, recruiting programs and retention initiatives. BelowFollowing are the annualized average price increases for the previous threefive years, reflected in the year in which the increase was effective.
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| | 2015 | | 2016 | | 2017 | |
| | | | | | | | | |
| | | 2015 | | 2016 | | 2017 | | 2018 | 2019 |
Continuing Franchise Fees | | - | | 3.9% | | - | | | | | | | | |
Company-owned Regions - U.S. | | - | | 1.9% | | 1.9% | | - | | 3.9% | | - | | - |
Company-owned Regions - Canada | | | | | | | | - | | 1.9% | | 1.9% | | - |
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Annual Dues | | | | | | | | | | | | | | |
Company-owned Regions - U.S. | | - | | - | | 2.5% | | - | | - | | 2.5% | | - |
Company-owned Regions - Canada | | - | | - | | 2.5% | | - | | - | | 2.5% | | - |
We recently announced an average price increase of 1.9% in continuing franchise fees in our Company-owned regions in the U.S. beginning on July 1, 2018.
Growth Catalysts through Acquisitions. We intend to continue to pursue reacquisitionsacquisitions of the regional RE/MAX franchise rights in a number of Independent Regions in the U.S. and Canada, as well as other acquisitions in related areas that build on or support our core competencies in franchising and real estate.estate and are complementary to our RE/MAX and Motto businesses.
Independent Region Acquisitions. The reacquisitionacquisition of a regionalan Independent Region franchise substantially increases our revenue per agent and provides an opportunity for us to drive enhanced profitability, as we receive a higher amount of revenue per agent in our Company-owned Regions than in our Independent Regions. While both Company-owned Regions and Independent Regions charge relatively similar fees to their brokerages and agents, we only receive a percentage of the continuing franchise fee, broker fee and initial franchise and renewal fee in Independent Regions. By reacquiringacquiring regional franchise rights, we can capture 100% of these fees and substantially increase the average revenue per agent for agents in the reacquiredacquired region, which, as a result of our low fixed-cost structure, further increases our overall margins. In addition, we believe we can establish operational efficiencies and improvements in financial performance of a reacquiredan acquired region by leveraging our existing infrastructure and experience.
Flow through Independent Regions
The reacquisition of regional franchise rights over the past five years has changed the agent count attributable to Company-owned Regions versus Independent Regions.
Recent History of Reacquiring
Independent Regional Rights
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2012 | | Texas
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2013 | | Central Atlantic
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2013 | | Southwest
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2016 | | New York
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2016 | | Alaska
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2016 | | New Jersey
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2016 | | Georgia
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2016 | | Kentucky/Tennessee
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2016 | | Southern Ohio
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2017 | | Northern Illinois
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RE/MAX Agents
(U.S./Canada)
As of Year-end 2012
| | RE/MAX Agents
(U.S./Canada)
As of Year-end 2017
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Other Acquisitions. We may pursue other acquisitions, either of other brands, or of other businesses that we believe can help enhance the value proposition that we provide to the franchisees and their agents in our existing businesses.
Return of Capital to Shareholders. We are committed to returning capital to shareholders as part of our value creation strategy. We have paid quarterly dividends since the completion of our first full fiscal quarter as a publicly traded company, or April of 2014, the first quarter after our October 7, 2013 initial public offering, when we began paying quarterly dividends of $0.0625 per share, and we2014. We have periodicallyannually increased our quarterly dividends since then, as we have deemed appropriate. On February 21, 2018,19, 2020, our Board of Directors announced a quarterly dividend of $0.20$0.22 per share.
Quarterly Dividends
Our disciplined approach to allocating capital allows us to return capital to shareholders while drivinginvesting to drive future organic growth and catalyzing growth through acquisitions and, as a result, generate shareholder value.acquisitions.
Competition
RE/MAX.The residential real estate brokerage franchise business is fragmented and highly competitive. We primarily compete against othermany different types of competitors - traditional real estate franchisors seekingbrokerages; non-traditional real estate brokerages, including some that offer deeply discounted commissions to grow their franchise system.consumers, and other newer entrants, including iBuyers. We compete in different ways for franchisees, for agents, and for consumers.
The majority of brokerages are independent, with the best-known being regional players. At the individual office level, oftentimes our most formidable competition is that of a local, independent brokerage. Brokerages affiliated with franchises tend to be larger, on average, than independents and are part of a national network. Our largest national competitors in the U.S. and Canada include the brands operated by Realogy Holdings Corp. (including Century 21, Coldwell Banker, ERA, Sotheby’s and Better Homes and Gardens), Berkshire Hathaway Home Services, Keller Williams Realty, Inc. and Royal LePage. In most markets, weOur franchisees also compete to attract and retain agents against real estate franchisors which offer 100% commissions and low fees to agents. These competitors include HomeSmart and Realty ONE Group.
We also compete against regional chains, independent, non-franchisenon-traditional real estate brokerages in the U.S. and virtual and hybrid brokers, some of whichCanada such as Redfin that offer deeply discounted commissions. commissions to consumers. Even among competitors with traditional models, there are variations such as the “hybrid” classification of Compass (a national bricks-and-mortar brokerage focusing on technology and funded by venture capital), and the virtual brokerage (no brokerage offices) platform of eXp Realty.
Our efforts to target consumers and connect them with a RE/MAX agent via our websites also face competition from major real estate portals. Similarly,portals, such as Zillow and Realtor.com.
We also compete for home sales against newer entrants, often referred to as home marketplaces or direct buyers—iBuyers, which along with real estate portals, virtual brokerages and hybrid brokerages—compete with RE/MAX agents for home sales by acting as wholesalers, offeringoffer to buy homes directly from homeowners at below-market rates in exchange for speed and convenience, and then resell them shortly thereafter at market prices. Our largest national competitors in the U.S. in this category include Opendoor, Offerpad, Redfin and Zillow. Some traditional brokerages have begun to adapt to iBuyers by either partnering their agents with an iBuyer directly or by launching their own iBuyer program. Agents most often interact with iBuyers by evaluating iBuyer offers for home sellers (comparing to what the seller might receive by selling their home on the MLS), referring home sellers to an iBuyer for a referral fee or listing homes that are owned by iBuyers.
Likewise, the support services we provide to RE/MAX franchisees and agents also face competition from various providers of training, back office management, marketing, social integration and lead generation services. We believe that competition in the real estate brokerage franchise business is based principally upon the reputational strength of the brand, the quality of the services offered to franchisees, and the amount of franchise-related fees to be paid by franchisees.
The ability of our franchisees to compete with other real estate brokerages, both franchised and unaffiliated, is an important aspect of our growth strategy. A franchisee’s ability to compete may be affected by a variety of factors, including the number and quality of the franchisee’s independent agents and the locationpresence and market span of the franchisee’s offices and the number of competing offices in the area.offices. A franchisee’s success may also be affected by general, regional and local housing conditions, as well as overall economic conditions.
Motto. Motto does not originate loans, and therefore does not compete in the mortgage origination business. The mortgage origination business in which Motto franchisees participate is highly competitive. While there are no national mortgage brokerage franchisors in the United States at the present time other than Motto, Franchising, the mortgage origination business is characterized by a variety of business models. While real estate brokerage owners are our core market for the purchase of Motto franchises, such owners may form independent, non-franchised mortgage brokerages. They may enter
into joint ventures with lenders for mortgage originations, and they may elect not to enter the mortgage origination business themselves, but instead earn revenue from providing marketing and other services to mortgage lenders.
Motto Franchising does not originate loans,Intellectual Property
We regard our RE/MAX trademark, balloon logo and therefore does not competeyard sign design trademarks as having significant value and as being an important factor in the mortgage origination business. The mortgage origination business in which Motto franchisees participate is highly competitive. There are several different marketing channels for mortgage origination services, with some originators, like Motto franchisees, marketing significantly to real estate agents and their customers. Other originators are independent mortgage bankers or
correspondent lenders, underwriting and funding mortgage loans and then selling the loans to third parties. Retail lenders, both traditional and online-only companies, and both banks and non-bank lenders, typically market their loan products directly to consumers.
Intellectual Property
our brand. We protect the RE/MAX and Motto brands through a combination of trademarks and copyrights. We have registered “RE/MAX” as a trademark in the U.S., Canada, and over 150 other countries and territories, and have registered various versions of the RE/MAX balloon logo and real estate yard sign design in numerous countries and territories as well. We also have filed other trademark applications in the U.S. and certain other jurisdictions, and will pursue additional trademark registrations and other intellectual property protection to the extent we believe it would be beneficial and cost effective. We also are the registered holder of a variety of domain names that include “remax,” “motto,” and similar variations.
Corporate Structure and Ownership
RE/MAX Holdings Inc. (“RE/MAX Holdings”) is a holding company incorporated in Delaware and its only business is to act as the sole manager of RMCO,, LLC, (“RMCO”). In that capacity, RE/MAX Holdings operates and controls all of the business and affairs of RMCO. RMCO is a holding company that is the direct or indirect parent of all of our operating businesses, including RE/MAX, LLC and Motto Franchising, LLC. As of December 31, 2017, RE/MAX2019, Holdings owns 58.49%58.7% of the common units in RMCO,, while RIHI, Inc. (“RIHI”) owns the remaining 41.51%41.3% of common units in RMCO. RIHI, Inc. is majority owned and controlled by David Liniger, our Chairman and Co-Founder, and by Gail Liniger, our Vice Chair and Co-Founder.
The diagram below depicts our organizational structure:structure:
The holders of RE/MAX Holdings Class A common stock collectively own 100% of the economic interests in RE/MAX Holdings,, while RIHI owns 100% of the outstanding shares of RE/MAX Holdings Class B common stock. The shares of Class B common stock have no economic rights but entitle the holder, without regard to the number of shares of Class B common stock held, to a number of votes on matters presented to stockholders of RE/MAX Holdings that is equal to two times the aggregate number of common units of RMCO held by such holder. As a result of RIHI’s ownership of shares of RE/MAX Holdings Class B common stock, andstock.
On October 7, 2018, pursuant to the terms of the Company’s Certificate of Incorporation, RIHI lost its ownership of 12,559,600 common units in RMCO, it holdsprevious effective control of a majority of the voting power of RE/MAX Holdings outstanding common stock.
RIHI’s voting rights will be reduced RIHI owns all of Holdings’ Class B common stock which, prior to October 7, 2018, entitled RIHI to a number of votes on matters presented to Holdings stockholders equal to two times the aggregate number of RMCO common units held—andthat RIHI would therefore be expected to lose its controlling vote of RE/MAX Holdings, Inc.—after any of the following occur: (i)held. Effective October 7, 2018; (ii)2018, the deathvoting power of Class B common stock was reduced to equal the Company’s Chairman and Co-Founder, David Liniger; or (iii)RIHI’s ownershipnumber of RMCO common units falls below 5,320,380held, and therefore RIHI lost the controlling vote of Holdings. As a result of this change in the voting rights of the Class B common units.
Due to RIHI’s control ofstock, RIHI no longer controls a majority of the voting power of RE/MAX Holdings’ common stock, RE/MAXand Holdings no longer constitutes a “controlled company”
under the corporate governance standards of the New York Stock Exchange (“NYSE”(the “NYSE”) and therefore are not required to comply with certain corporate governance requirements. Nonetheless, we do not currently take advantage of any. RIHI remains a significant stockholder of the exemptions for controlled companies under NYSE listing standards. Due to RIHI’sCompany, and through its ownership interest in RMCO, RE/MAX Holdings’ results reflect a significant non-controlling interest and our pre-tax income excludes RIHI’s proportionate share of RMCO’s net income. RE/MAX Holding’s only sourcethe Class B common stock, holds approximately 41.3% of cash flow from operations is in the formvoting power of distributions from RMCO and management fees paid by RMCO pursuant to a management services agreement between RE/MAX Holdings and RMCO.the Company’s stock. Mr. Liniger also owns Class A common stock with an additional 1.2% of the voting power of the Company’s stock.
RE/MAX Holdings ownership of RMCO and Tax Receivable Agreements
RE/MAX Holdings has twice acquired significant portions of the ownership in RMCO; first in October 2013 at the time of IPO when RE/MAX Holdings acquired its initial 11.5 million common units of RMCO and, second, in November and December 2015 when it acquired 5.2 million additional common units. RE/MAX Holdings soldissued Class A common stock, which it exchanged for these common units of RMCO. RIHI then sold the Class A common stock to the market.
When RE/MAX Holdings has acquired common units in RMCO, it received a step-up in tax basis on the underlying assets held by RMCO. The step-up is principally equivalent to the difference between (1) the fair value of the underlying assets on the date of acquisition of the common units and (2) their tax basis in RMCO, multiplied by the percentage of units acquired. The majority of the step-up in basis relates to intangiblesintangible assets, primarily franchise agreements and goodwill, and the step-up is often substantial. These assets are amortizable under IRS rules and result in deductions on our tax return for many years and, consequently, RE/MAX Holdings receives a future tax benefit. These future benefits are reflected within deferred tax assets of approximately $59.2 million on our consolidated balance sheets as of December 31, 2017.
sheets.
If RE/MAX Holdings acquires additional common units of RMCO from RIHI, the percentage of RE/MAX Holdings’ ownership of RMCO will increase, and additional deferred tax assets will be created as additional tax basis step-ups occur.
In connection with the initial sale of RMCO common units in October 2013, RE/MAX Holdings entered into a tax receivable agreementTax Receivable Agreements (“TRA”TRAs”) which requiresrequire that RE/MAX Holdings make annual payments to RIHI and Oberndorf Investments LLC (a successor to the other previous owner of RMCO)TRA holders equivalent to 85% of any tax benefits realized on each year’s tax return from the additional tax deductions arising from the step-up in tax basis. We believe 85% is common for tax receivable agreements. AThe TRA liability washolders as of December 31, 2019 are RIHI and Parallaxes Rain Co-Investment, LLC (“Parallaxes”). TRA liabilities were established for the future cash obligations expected to be paid under the TRATRAs and isare not discounted. As of December 31, 2017,2019, this liability was $53.2$37.2 million. Similar to the deferred tax assets, thesethe TRA liabilities would increase if RE/MAX Holdings acquires additional common units of RMCO from RIHI.
Both these deferred tax assets and TRA liability were substantially reduced by the Tax Cuts and Jobs Act enacted in December 2017. The reduction in the corporate tax rate from 35% to 21% resulted in comparable reductions in both the deferred tax asset amounts and the TRA liabilities. See Note 11, Income Taxes for further information on the impact of the Tax Cuts and Jobs Act.
Employees
As of December 31, 2017,2019, we had approximately 350500 employees. Our franchisees are independent businesses. Their employees and independent contractor sales associatesagents are therefore not included in our employee count. None of our employees are represented by a union. We believe our relations with our employees are good.
Seasonality
The residential housing market is seasonal, with transactional activity in the U.S. and Canada peaking in the second and third quarter of each year. Our results of operations are somewhat affected by these seasonal trends. Our Adjusted EBITDA margins are often lower in the first and fourth quarters due primarily to the impact of lower broker fees and other revenue as a result of lower overall sales volume, as well as higher selling, operating and administrative expenses in the first quarter for expenses incurred in connection with the RE/MAX annual convention.
Government Regulation
Franchise Regulation. The sale of franchises is regulated by various state laws, as well as by the Federal Trade Commission (“FTC”). The FTC requires that franchisors make extensive disclosures to prospective franchisees but does not require registration. A number of states require registration or disclosure by franchisors in connection with franchise offers and sales. Several states also have “franchise relationship laws” or “business opportunity laws” that limit the ability of the franchisor to terminate franchise agreements or to withhold consent to the renewal or transfer of these agreements. The states with relationship or other statutes governing the termination of franchises include Arkansas,
California, Connecticut, Delaware, Hawaii, Illinois, Indiana, Iowa, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Jersey, Virginia, Washington and Wisconsin. Some franchise relationship statutes require a mandated notice period for termination; some require a notice and cure period; and some require that the franchisor demonstrate good cause for termination. Although we believe that our franchise agreements comply with these statutory requirements, failure to comply with these laws could result in our company incurring civil liability. In addition, while historically our franchising operations have not been materially adversely affected by such regulation, we cannot predict the effect of any future federal or state legislation or regulation.
Real Estate and Mortgage Regulation. The Real Estate Settlement Procedures Act (“RESPA”) and state real estate brokerage laws and mortgage regulations restrict payments which real estate brokers, mortgage brokers, and other service providers in the real estate industry may receive or pay in connection with the sales of residences and referral of settlement services, such as real estate brokerage, mortgages, homeownershomeowners’ insurance and title insurance. Such laws affect the terms that we may offer in our franchise agreements with Motto franchisees and may to some extent restrict preferred vendor programs, both for Motto and RE/MAX. Federal, state and local laws, regulations and ordinances related to the
origination of mortgages, may affect other aspects of the Motto business, including the extent to which we can obtain data on Motto franchisees’ compliance with their franchise agreements. These laws and regulations include (i) the Federal Truth in Lending Act of 1969 (“TILA”), and Regulation Z (“Reg Z”) thereunder; (ii) the Federal Equal Credit Opportunity Act ("ECOA'') and Regulation B thereunder; (iii) the Federal Fair Credit Reporting Act and Regulation V thereunder; (iv) RESPA, and Regulation X thereunder; (v) the Fair Housing Act; (vi) the Home Mortgage Disclosure Act; (vii) the Gramm-Leach-Bliley Act and its implementing regulations; (viii) the Consumer Financial Protection Act and its implementing regulations; (ix) the Fair and Accurate Credit Transactions Act-FACT ACT and its implementing regulations; and (x) the Do Not Call/Do Not Fax Act and other state and federal laws pertaining to the solicitation of consumers.
Available Information
RE/MAX Holdings, Inc. is a Delaware corporation and its principal executive offices are located at 5075 South Syracuse Street, Denver, Colorado 80237, telephone (303) 770-5531. The Company’s Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports are available free of charge through the “Investor Relations” portion of the Company’s website, www.remax.com, as soon as reasonably practical after they are filed with the Securities and Exchange Commission (“SEC”). The content of the Company’s website is not incorporated into this report. The SEC maintains a website, www.sec.gov, which contains reports, proxy and information statements, and other information filed electronically with the SEC by the Company.
ITEM 1A. RISK FACTORS
RE/MAX Holdings, Inc. and its consolidated subsidiaries (collectively, the “Company,” “we,” “our” or “us”) could be adversely impacted by various risks and uncertainties. An investment in our Class A common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as all of the other information contained in this Annual Report on Form 10-K, including our audited consolidated financial statements and the related notes thereto before making an investment decision. If any of these risks actually occur, our business, financial condition, operating results, cash flow and prospects may be materially and adversely affected. As a result, the trading price of our Class A common stock could decline and you could lose some or all of your investment.
We have grouped our risks according to:
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● | | Risks Related to Our Business and Industry; |
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● | | Risks Related to Our Organizational Structure; and |
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● | | Risks Related to Ownership of Our Class A Common Stock. |
Risks Related to Our Business and Industry
Our results are tied to the residential real estate market and we may be negatively impacted by downturns in this market and general global economic conditions.
The residential real estate market tends to be cyclical and typically is affected by changes in general economic conditions which are beyond our control. These conditions include fluctuations in short-term and long-term interest rates, inflation, fluctuations in debt and equity capital markets, wage and job growth, levels of unemployment, home affordability, down payment requirements, inventory levels, consumer confidence, demographic changes, local or regional economic conditions and the general condition of the U.S., Canadian and the global economy.economies. The residential real estate market also depends upon the strength of financial institutions, which are sensitive to changes in the general macroeconomic and regulatory environment. Lack of available credit or lack of confidence in the financial sector could impact the residential real estate market, which in turn could materially and adversely affect our business, financial condition and results of operations.
For example, the U.S.market. The residential real estate market has steadily improved in recent years after a significantcould also be negatively impacted by acts of nature, such as fires, hurricanes, earthquakes, and prolonged downturn, which began in the second half of 2005 and continued through 2011. Based on our experience, we believe gradually improving market conditions in the U.S. will enablesuch events may lead us to continue to recruit and retain more agents, increasing our revenue and profitability.
We cannot predict whether the market will continue to improve. Ifwaive fees in certain impacted areas. Climate change may negatively affect the residential real estate marketmarket. Changes in local, state and federal laws or regulations that affect residential real estate transactions or encourage ownership, including but not limited to changes in tax law in late 2017 that limit the economydeductibility of certain mortgage interest expenses and increase the standard deduction (thereby potentially decreasing the tax benefits of homeownership) and potential future tax law changes, such as a whole does not continue to improve, we may experience adverse effects on our business, financial conditionfurther limiting or eliminating the deductibility of certain mortgage interest expense, the application of the alternative minimum tax, and liquidity, including our ability to access capital and grow our business.deductibility of real property taxes, could impact the residential real estate market.
Any of the followingabove factors, and other factors discussed in this Annual Report on Form 10-K could cause a decline in the housing or mortgage markets and have a material adverse effect on our business by causing periods of lower growth or a decline in the number of home sales and/or home pricesprices. This could lead to a decrease of the number of agents or franchises in our networks and reduce the fees we receive from our franchisees and agents, which, in turn, could adversely affect our revenuefinancial condition and profitability:
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| | an increase in the unemployment rate;
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| | a decrease in the affordability of homes due to changes in interest rates, home prices, and rates of wage and job growth;
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| | slow economic growth or recessionary conditions;
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| | low consumer confidence in the economy and/or the residential real estate market;
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| | instability of financial institutions;
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| | legislative, tax or regulatory changes that would adversely impact the residential real estate or mortgage markets, including but not limited to potential reform relating to Fannie Mae, Freddie Mac and other government sponsored entities (“GSEs”) that provide liquidity to the U.S. housing and mortgage markets;
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| | increasing mortgage rates and down payment requirements and/or constraints on the availability of mortgage financing, including but not limited to the potential impact of various provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) or other legislation and regulations that may be promulgated thereunder relating to mortgage financing, including restrictions imposed on mortgage originators as well as retention levels required to be maintained by sponsors to securitize certain mortgages;
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| | excessive or insufficient home inventory levels on a regional level;
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| | high levels of foreclosure activity, including but not limited to the release of homes already held for sale by financial institutions;
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| | adverse changes in local or regional economic conditions;
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| | the inability or unwillingness of homeowners to enter into home sale transactions due to negative equity in their existing homes;
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| | demographic changes, such as a decrease in household formations; lower turnover in the housing market due to homeowners staying in the same home longer than in the past; slowing rate of immigration or population growth; decrease in home ownership rates, declining demand for real estate and changing social attitudes toward home ownership;
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| | changes in local, state and federal laws or regulations that affect residential real estate transactions or encourage ownership, including but not limited to changes in tax law in late 2017 that limit the deductibility of certain mortgage interest expenses and increase the standard deduction (thereby potentially decreasing the tax benefits of homeownership) and potential future tax law changes, such as further limiting or eliminating the deductibility of certain mortgage interest expense, the application of the alternative minimum tax, and real property taxes and employee relocation expense; and/or
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| | acts of nature, such as hurricanes, earthquakes and other natural disasters that disrupt local or regional real estate markets and which may, in some circumstances, lead us to waive certain fees in impacted areas.
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The failure of the U.S. residential real estate market growth to be sustained, or a prolonged decline in the number of home sales and/or home sale prices could adversely affect our revenue and profitability.
The U.S. residential real estate market has gradually improved since 2011. However, not all U.S. markets have participated to the same extent in the improvement. A lack of a continued or widespread growth or a prolonged decline in existing home sales, a decline in home sale prices or a decline in commission rates charged by our franchisees/brokers could adversely affect our results of operations by impacting the number of agents in our network and reducing the recurring fees we receive from our franchisees and our agents.operations.
A lack of financing for homebuyers in the U.S. residential real estate market at favorable rates and on favorable terms could have a material adverse effect on our financial performance and results of operations.
Our business is significantly impacted by the availability of financing at favorable rates or on favorable terms for homebuyers, which may be affected by government regulations and policies.
The Dodd-Frank Act, which was passed to more closely regulate the financial services industry, created the Consumer Financial Protection Bureau (“CFPB”), an independent federal bureau, which was designed to enforce consumer protection laws, including various laws regulating mortgage finance. The Dodd-Frank Act also established new standards and practices for mortgage lending, including a requirement to determine a prospective borrower’s ability to repay a loan, removing perceived incentives to originate higher cost mortgages, requiring additional disclosures to potential borrowers and restricting the fees that mortgage originators may collect. Rules implementing many of these changes protect creditors from certain liabilities for loans that meet the requirements for “qualified mortgages.” (“QM loans”). The rules placed several restrictions on qualified mortgages, including caps on certain closing costs as well as limits on debt to income (“DTI”) ratios for qualified mortgages.
Certain potential reformsregulatory changes such as the U.S. federal government’s conservatorshiptermination by the CFPB of a regulatory exemption known as the “QM patch” for loans backed by Fannie Mae andor Freddie Mac, proposalsthe requirement to reformimplement a new uniform residential loan application (“URLA”) which may increase Equal Credit Opportunity Act (“ECOA”) and other operational risks, and more activist supervision and regulation of housing finance at the U.S. housing market, attempts to increase loan modifications for homeowners with negative equity, monetary policy of the U.S. government, increases in interest rates and the Dodd-Frank Actstate level may adversely impact the housing industry, including homebuyers’ ability to finance and purchase homes.
The monetary policy of the U.S. government, and particularly the Federal Reserve Board, which regulates the supply of money and credit in the U.S., significantly affects the availability of financing at favorable rates and on favorable terms, which in turn affects the domestic real estate market. Policies of the Federal Reserve Board can affect interest rates available to potential homebuyers. Further, we are affected by any rising interest rate environment. Changes in the Federal Reserve Board’s policies the interest rate environment and mortgage market are beyond our control, are difficult to predict, and could restrict the availability of financing on reasonable terms at favorable interest
rates for homebuyers, which could have a material adverse effect on our business, results of operations and financial condition. Since December 2015, the Federal Open Market Committee of the Federal Reserve Board has raised the target range for federal funds five times, including three times in 2017, after leaving the federal funds interest rate near zero since late 2008. The pace of future increases in the federal funds rate is uncertain, although the Federal Open Market Committee has indicated it expects additional increases to occur. Historically, changes in the federal funds rate have led to changes in interest rates for other loans but the extent of the impact on the future availability and price of mortgage financing cannot be predicted with certainty.
In addition, a reduction in government support for home financing, including the possible winding down or privatization of GSEs could further reduce the availability of financing for homebuyers in the U.S. residential real estate market. In connection with the U.S. federal government’s conservatorship of Fannie Mae and Freddie Mac, it provided billions of dollars of funding to these entities during the real estate downturn, in the form of preferred stock investments to backstop shortfalls in their capital requirements. No consensus has emerged in Congress concerning potential reforms relating to Fannie Mae and Freddie Mac and a potential transition to alternative structures for the secondary market, so we cannot predict either the short or long term effectsterm-effects of such regulation and its impact on homebuyers’ ability to finance and purchase homes.
Furthermore, many lenders significantlyhave tightened their underwriting standards since the real estate downturn, and many subprime and other alternative mortgage products are no longer as common in the marketplace. IfWhile some loosening of credit standards and a resurgence of alternative mortgage products, including non-qualified mortgages has occurred, if these mortgage loans continue to be somewhat more difficult to obtain, including in the jumbo mortgage markets, the ability and willingness of prospective buyers to finance home purchases or to sell their existing homes could be adversely affected, which would adversely affect our operating results.
The Dodd-Frank Act, which was passed to more closely regulate the financial services industry, created the Consumer Financial Protection Bureau (“CFPB”), an independent federal bureau, which enforces consumer protection laws, including various laws regulating mortgage finance. The Dodd-Frank Act also established new standards and practices for mortgage lending, including a requirement to determine a prospective borrower’s ability to repay a loan, removing incentives to originate higher cost mortgages, prohibiting prepayment penalties for non-qualified mortgages, prohibiting mandatory arbitration clauses, requiring additional disclosures to potential borrowers and restricting the fees that mortgage originators may collect. Rules implementing many of these changes protect creditors from certain liabilities for loans that meet the requirements for “qualified mortgages.” The rules place several restrictions on qualified mortgages,
including caps on certain closing costs. These and other rules promulgated by the CFPB could have a significant impact on the availability of home mortgages and how mortgage brokers and lenders transact business. In addition, the Dodd-Frank Act contained provisions that require GSEs, including Fannie Mae and Freddie Mac, to retain an interest in the credit risk arising from the assets they securitize. This may serve to reduce GSEs’ demand for mortgage loans, which could have a material adverse effect on the mortgage industry, which may reduce the availability of mortgages to certain borrowers.
While we are continuing to evaluate all aspects of legislation, regulations and policies affecting the domestic real estate market, we cannot predict whether or not such legislation, regulation and policies may increase down payment requirements, increase mortgage costs, or result in increased costs and potential litigation for housing market participants, any of which could have a material adverse effect on our financial condition and results of operations.
We may fail to execute our strategies to grow our business, which could have a material adverse effect on our financial performance and results of operations.
We intend to pursue a number of different strategies to grow our revenue and earnings and to deploy the cash generated by our business. We constantly strive to increase the value proposition for our agents and brokers. If we do not reinvest in our business in ways that support our agents and brokers and make the RE/MAX network attractive to agents and brokers, we may become less competitive. Additionally, we are exploring opportunities to acquire other businesses, including select RE/MAX independent regional franchises, or other businesses in the U.S. and Canada that are complementary to our core business.business, particularly those offering differentiated technology. If we fail to develop, execute, or focus on our business strategy, fail to make good business decisions, fail to enforce a disciplined management process to ensure that our investment of resources aligns with our strategic plan and our core management and franchising competencies or fail to properly focus resources or management attention on strategic areas, any of these could negatively impact the overall value of the Company. If we are unable
We may fail to executecontinue our business strategy, for thesebooj Platform rollout as expected or any other reasons, our prospects, financial condition and results of operationsits effectiveness in attracting & retaining agents may be harmedmore limited than anticipated.
During the first quarter of 2018, we acquired booj, a real estate technology company, primarily to develop and deliver core technology solutions designed for RE/MAX affiliates. We anticipate that this new technology will improve the RE/MAX value proposition and ultimately assist in attracting and retaining agents and franchisees. The technology platform developed by booj has been delivered to our stock priceU.S. Company-owned Regions in 2019. If the booj Platform is (a) delivered to additional regions later than expected, or (b) does not create a distinct competitive edge for franchisees and agents, or (c) has a poorer than expected adoption rate by our franchisees and agents, the introduction of such platforms may decline.
not be effective in attracting and retaining agents and franchisees.
We may be unable to reacquireacquire regional franchise rights in independent RE/MAX regions in the U.S. and Canada or successfully integrate the independent RE/MAX regions that we have acquired.
We are pursuingcontinue to pursue a key growth strategy of reacquiring select RE/MAX independent regional franchises in the U.S. and Canada.Canada to support our growth. The reacquisitionacquisition of a regional franchise enables us to focus on a consistent delivery of the RE/MAX value proposition, increases our revenue and provides an opportunity for us to drive enhancedenhance profitability. This growth strategy depends on our ability to find regional franchisees willing to sell the franchise rights in their regions on favorable terms, as well as our ability to finance, complete and completeintegrate these transactions. The number of remaining
independent regions in the United States and Canada is limited and therefore we may have difficulty finding suitable regional franchise acquisition opportunities at an acceptable price. Further, in the event we acquire a regional franchise, we may not be able to achieve the expected returns on our acquisition after we integrate the reacquiredacquired region into our business.
Integrating acquired regions involves complex operational and personnel-related challenges and we may encounter unforeseen difficulties and higher than expected integration costs or we may not be able to deliver expected cost and growth synergies.
Future acquisitions may present other challenges and difficulties, including:
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● | | the possible departure of a significant number of key employees; |
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● | | regulatory constraints and costs of executing our growth strategy may vary by geography; |
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● | | the possible defection of franchisees and agents to other brands or independent real estate companies; |
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● | | the disruption of our respective ongoing business;
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| | limits on growth due to exclusive territories granted to current franchisees by former region owners; |
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● | | problems we may discover post-closing with the operations, including the internal controls and procedures of
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the regions we reacquire;
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| | the failure to maintain important business relationships and contracts of the selling region; |
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● | | impairment of acquired assets;
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| | legal or regulatory challenges or litigation post-acquisition, which could result in significant costs; |
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● | | unanticipated expenses related to integration; and
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| | potential unknown liabilities associated with acquired businesses. |
A prolonged diversion of management’s attention and any delays or difficulties encountered in connection with the integration of any acquired region or region that we may acquire in the future could prevent us from realizing anticipated cost savings and revenue growth from our acquisitions.
We may not be able to manage growth successfully.
In order to successfully expand our business, we must effectively recruit, develop and motivate new franchisees, and we must maintain the beneficial aspects of our corporate culture. We may not be able to hire new employees with the expertise necessary to manage our growth quickly enough to meet our needs. If we fail to effectively manage our hiring needs and successfully develop our franchisees, our franchisee and employee morale, productivity and retention could suffer, and our brand and results of operations could be harmed. Effectively managing our potential growth could require significant capital expenditures and place increasing demands on our management. We may not be successful in managing or expanding our operations or in maintaining adequate financial and operating systems and controls. If we do not successfully manage these processes, our brand and results of operations could be adversely affected.
The failure to attract and retain highly qualified franchisees could compromise our ability to expand the RE/MAX network.
and Motto networks.
Our most important asset is the people in our network, and the success of our franchisees depends largely on the efforts and abilities of franchisees to attract and retain high quality agents.agents and loan originators. If our franchisees fail to attract and retain agents and loan originators, they may fail to generate the revenue necessary to pay the contractual fees owed to us.
Additionally, although we believe our relationship with our franchisees and their agents and loan originators is open and strong, the nature of such relationships can give rise to conflict. For example, franchisees or agentsagents/loan originators may become dissatisfied with the amount of contractual fees and dues owed under franchise or other applicable arrangements, particularly in the event that we decide to increase fees and dues further.dues. They may disagree with certain network-wide policies and procedures, including policies such as those dictating brand standards or affecting their marketing efforts. They may also be disappointed with anyour marketing campaigns designed to develop our brand. There are a variety of reasons why our franchisor-franchisee relationship can give rise to conflict.campaigns. If we experience any conflicts with our franchisees on a large scale, our franchisees may decide not to renew their franchise agreements upon expiration or may file lawsuits against us or they may seek to disaffiliate with us, which could also result in litigation. These events may, in turn, materially and adversely affect our business and operating results.
Our financial results are affected by the ability of our franchisees to attract and retain agents.
agents and loan originators.
Our financial results are heavily dependent upon the number of RE/MAX agents and Motto offices in our global network.networks. The majority of our revenue is derived from recurring dues paid by our franchisee’s agents and contractual fees paid by our franchisees or regional franchise owners based on the number of agents or offices within the franchisee’s or regional franchise owner’s network.their respective networks. Competition for real estate agents and loan originators is fierce. Our competitors may attempt to recruit the agents and loan originators of our franchisees. If our franchisees are not able to attract and retain agents and loan originators (which is not within our direct control), our agent count and revenue may decline. In addition, our competitors may attempt to recruit the agents of our franchisees.
Competition in the residential real estate franchising business is intense, and we may be unable to grow our business organically, including increasing our agent count, expanding our network of franchises and their agents, and increasing franchise and agent fees, which could adversely affect our brand, our financial performance, and results of operations.
We generally face strong competition in the residential real estate services business from other franchisors and brokerages (i.e. national, regional, independent, boutique, discount and web-based brokerages), as well as web-based companies focused on real estate. There has recently been substantial capital investment in real estate technology, including companies aiming to use innovative technology to disrupt the real estate industry. As a real estate brokerage franchisor, one of our primary assets is our brand name.market. Upon the expiration of a franchise agreement, a franchisee may choose to renew their franchise with us, operate as an independent broker or to franchise with one of our competitors. Competing franchisors may offer franchises monthly ongoingfranchisees fees that are lower than those we charge, or that are more attractive in particular market environments.markets. Further, some of our largest competitors in this industry in the U.S. and Canada include the brands operated by Realogy Holdings, Corp., (which include Coldwell Banker, Century 21, ERA, Sotheby’s and Better Homes and Gardens, among others), Berkshire Hathaway Home Services, Keller Williams Realty, Inc. and Royal LePage. Some of these companies may have greater financial resources and larger budgets than we do to invest in technology to build their brands and enhance their value proposition to agents, brokers and consumers. To remain competitive in the sale of franchises and to retain our existing franchisees at the time of the renewal of their franchise agreements, we may have to reduce the cost of renewals and/or the recurring monthly fees we charge our franchisees. Further, in certain areas, regional and local franchisors provide additional competitive pressure.
We may have to offer incentives to encourage franchisees to recruit new agents. In addition, even with these measures, franchisees may choose not to renew their franchise, or may not recruit new agents.
As a result of this competition, we may face many challenges in achieving organic growth by adding franchises and attracting agents in new and existing markets to expand our network, in the U.S., Canada and globally, as well as other challenges such as:
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● | | selection and availability of suitable markets; |
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● | | finding qualified franchisees in these markets who are interested in opening franchises on terms that are favorable to us; |
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● | | increasing our local brand awareness in new markets; |
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● | | attracting and training of qualified local agents; and |
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● | | general economic and business conditions. |
The real estate market may be negatively impacted by industry changes as the result of certain class action lawsuits.
In March and April of 2019, three putative class action complaints were filed against National Association of Realtors (“NAR”), Realogy Holdings Corp., HomeServices of America, Inc, RE/MAX Holdings, and Keller Williams Realty, Inc. The first was filed on March 6, 2019, by plaintiff Christopher Moehrl in the Northern District of Illinois. The second was filed on April 15, 2019, by plaintiff Sawbill Strategies, Inc., also in the Northern District of Illinois. These two actions have now been consolidated. A third action was filed by plaintiffs Joshua Sitzer and four other individual plaintiffs in the Western District of Missouri. The complaints (collectively “Moehrl/Sitzer suits”) make substantially similar allegations and seek substantially similar relief. The plaintiffs allege that a NAR rule requires brokers to make a blanket, non-negotiable offer of buyer broker compensation when listing a property, resulting in inflated costs to sellers in violation of federal antitrust law. They further allege that certain defendants use their agreements with franchisees to require adherence to the NAR rule in violation of federal antitrust law. Amended complaints add allegations regarding buyer steering and non-disclosure of buyer-broker compensation to the buyer. These lawsuits have also prompted discussion of regulatory changes by various governments or rules established by local or state real estate boards or multiple listing services. The resolution of these complaints and/or such regulatory changes may require changes to our or our brokers business model, including changes in broker compensation. This could reduce the fees we receive from our franchisees, which, in turn, could adversely affect our financial condition and results of operations.
A significant adoption by consumers of online alternatives to full-service agents or loan originators could have a material adverse effect on our business, prospects and results of operations.
A significant increase in consumer use of technology that eliminates or minimizes the role of the real estate agent or mortgage loan originator could have a materially adverse effect on our business, prospects and results of operations. These options include cloud-based competitors such as direct-buyer companies (also called iBuyers) that purchase directly from the seller at below-market rates in exchange for speed and onlineconvenience, and then resell them shortly thereafter at market prices, and discounters who reduce the role of the agent in order to offer sellers a low commission or a flat fee while giving rebates to buyers. How consumers want to buy or sell houses and finance their purchase will determine if these models reduce or replace the long-standing preference for full-service agents.
agents and loan originators.
Our financial results are affected directly by the operating results of franchisees and their agents and loan originators, over whom we do not have direct control.
Our real estate franchises generate revenue in the form of monthly ongoing fees, including monthly management fees and broker fees (which are tied to agent gross commissions) charged by our franchisees to our agents. Our agents pay us annual dues to have access to our network and utilize our services. Accordingly, our financial results depend upon the operational and financial success of our franchisees and, for RE/MAX, their agents whom we do notand for Motto Mortgage, their loan originators. We have limited control over these parties, particularly in Independent Regions where we exercise less control over franchisees than in Company-owned Regions. Our franchisees operate in an intensely competitive marketmarkets and we have little visibility into the results of operations of our franchises.their operations. If industry trends or economic conditions are not sustained or do not continue to improve, our franchisees’ financial results
may worsen, and our revenue may decline. We terminate franchisees for non-payment, non-reporting and other non-compliance with their franchise agreements and we may also have to terminate franchisees more frequently in the future due to non-reporting and non-payment. Further, if franchisees fail to renew their franchise agreements, or if we decide to restructure franchise agreements in order to induce franchisees to renew these agreements, then our revenue from ongoing monthly fees may decrease, and profitability from new franchisees may be lower than in the past due to reduced ongoing monthly fees and other non-standard incentives we may need to provide.future.
Our franchisees and their agents or loan originators could take actions that could harm our business.
Our regional franchisees are independent businesses and the agents and loan originators who work within these brokerages are independent contractors or employees of the brokerages and, as such, are not our employees, and we do not exercise control over their day-to-day operations. Broker franchiseesFranchisees may not operate real estate and mortgage brokerage businesses in a manner consistent with industry standards, or may not attract and retain qualified independent contractor agents.agents and loan originators. If broker franchisees and agents and loan originators were to provide diminished quality of service to customers, engage in fraud, defalcation, misconduct, or negligence or otherwise violate the law or realtor codes of ethics, our image and reputation may suffer materially and we may become subject to liability claims based upon such actions of our franchisees and agents.actions. Any such incidenceincidents could adversely affect our results of operations.
Brand value can be severely damaged even by isolated incidents, particularly if the incidents receive considerable negative publicity or result in litigation. Some of these incidents may relate to the way we manage our relationship with our franchisees, our growth strategies or the ordinary course of our business or our franchisees’ business. Other incidents may arise from events that are or may be beyond our control and may damage our brand, such as actions taken (or not taken) by one or more franchisees or their agents and loan originators relating to health, safety, welfare or other matters; litigation and claims; failure to maintain high ethical and social standards for all of our operations and activities; failure to comply with local laws and regulations; and illegal activity targeted at us or others. Our brand value could diminish significantly if any such incidents or other matters erode consumer confidence in us, which may result in a decrease in our total agent and loan office count and, ultimately, lower continuing franchise fees and annual dues,revenues, which in turn would materially and adversely affect our business and results of operations.
An organized franchisee association could pose risks to our ability to set the terms of our franchise agreements and our pricing. A group of broker/owners from around the country have founded and committed to the continued success and funding of the RMX Association (RMXA), an independent association of RE/MAX franchisees, whose goal is to work in partnership with RE/MAX, LLC and each other to improve, enhance and grow the brand into the future and protect assets and grow profitability as franchisees.
The failure of Independent Region owners to successfully develop or expand within their respective regions could adversely impact our revenue.
revenue and earnings.We have sold regional master franchises in the U.S. and Canada and have sold and continue to sell regional master franchises in our global locations outside of Canada. While we are pursuing a strategy to reacquireacquire select regional
franchise rights in a number of regions in the U.S. and Canada, we still rely on independent regional master franchises in Independent Regions, and in all regions located outside the U.S. and Canada. We derive only a limited portion of our revenue directly from master franchises. However, we depend on Independent Regions, which have the exclusive right to grant franchises within a particular region, to successfully develop or expand within their respective regions and to monitor franchisees’ use of our brand. The failure of any of these Independent Region owners to do these things, or the termination of an agreement with a regional master franchisee could delay the development of a particular franchised area, interrupt the operation of our brand in a particular market or markets while we seek alternative methods to develop our franchises in the area, and weaken our brand image. Such an event could result in lower revenue for us, which would adversely impact our business and results of operations.
We are subject to a variety of additional risks associated with our franchisees.
Our franchise system subjects us to a number of risks, any one of which may impact our ability to collect recurring, contractual fees and dues from our franchisees, may harm the goodwill associated with our brand, and/or may materially and adversely impact our business and results of operations.
Bankruptcy of U.S. Franchisees. A franchisee bankruptcy could have a substantial negative impact on our ability to collect fees and dues owed under such franchisee’s franchise arrangements. In a franchisee bankruptcy, the bankruptcy trustee may reject its franchise arrangements pursuant to Section 365 under the U.S. bankruptcy code, in which case there would be no further payments for fees and dues from such franchisee, and there can be no assurance as to the
proceeds, if any, that may ultimately be recovered in a bankruptcy proceeding of such franchisee in connection with a damage claim resulting from such rejection.
Franchisee Insurance. The franchise arrangements require each franchisee to maintain certain insurance types and levels. Certain extraordinary hazards, however, may not be covered, and insurance may not be available (or may be available only at prohibitively expensive rates) with respect to many other risks. Moreover, any loss incurred could exceed policy limits or the franchisee could lack the required insurance at the time the claim arises, in breach of the insurance requirement, and policy payments made to franchisees may not be made on a timely basis. Any such loss or delay in payment could have a material and adverse effect on a franchisee’s ability to satisfy its obligations under its franchise arrangement, including its ability to make payments for contractual fees and dues or to indemnify us.
Franchise Arrangement Termination. Each franchise arrangement is subject to termination by us as the franchisor in the event of a default, generally after expiration of applicable cure periods, although under certain circumstances a franchise arrangement may be terminated by us upon notice without an opportunity to cure. The default provisions under the franchise arrangements are drafted broadly and include, among other things, any failure to meet operating standards and actions that may threaten the licensed intellectual property.
Franchise Nonrenewal. Each franchise agreement has an expiration date. Upon the expiration of the franchise arrangement, we or the franchisee may or may not elect to renew the franchise arrangement. If the franchisee arrangement is renewed, such renewal is generally contingent on the franchisee’s execution of the then-current form of franchise arrangement (which may include terms the franchisee deems to be more onerous than the prior franchise agreement), the satisfaction of certain conditions and the payment of a renewal fee. If a franchisee is unable or unwilling to satisfy any of the foregoing conditions, the expiring franchise arrangement will terminate upon expiration of the term of the franchise arrangement.
We may fail to protect the privacy and personally identifiable information of our franchisees, agents and consumers.
We rely on the collection and use of personally identifiable information from franchisees, agents and consumers to conduct our business. We disclose our information collection and dissemination practices in a published privacy statement on our websites, which we may modify from time to time. We may be subject to legal claims, government action and damage to our reputation if we act or are perceived to be acting inconsistently with the terms of our privacy statement, consumer expectations, or the law. In the event we, or the vendors with which we contract to provide services on behalf of our customers, were to suffer a breach of personally identifiable information, our customers could terminate their business with us. Further, we may be subject to claims to the extent individual employees or independent contractors breach or fail to adhere to company policies and practices and personally identifiable information is jeopardized as a result.
The real estate business of our franchisees is highly regulated and any failure to comply with such regulations or any changes in such regulations could adversely affect our business.
The businesses of our franchisees are highly regulated and must comply with theare subject to requirements governing the licensing and conduct of real estate brokerage and brokerage-related businesses in the jurisdictions in which we and they do business. These laws and regulations contain general standards for and prohibitions on the conduct of real estate brokers and agents, including those relating to licensing of brokers and agents, fiduciary and agency duties, administration of trust funds, collection of commissions, advertising and consumer disclosures. Under state law, the franchisees and our real estate brokers have certain duties to supervise and are responsible for the conduct of their brokerage business.
Our franchisees (other than in commercial brokerage transactions) must comply with RESPA. RESPA and comparable state statutes, among other things, restrict payments which real estate brokers, agents and other settlement service providers may receive for the referral of business to other settlement service providers in connection with the closing of real estate transactions. Such laws may to some extent restrict preferred vendor arrangements involving our franchisees. RESPA and similar state laws also require timely disclosure of certain relationships or financial interests that a broker has with providers of real estate settlement services. Pursuant to the Dodd-Frank Act, administration of RESPA has been moved from the Department of Housing and Urban Development (“HUD”) to the Consumer Financial Protection Bureau
(“CFPB”). The CFPB’s interpretation or application of RESPA may differ from HUD’s, particularly with respect to a range of informal interpretations that HUD staff provided over many years; that possibility presents an increased regulatory risk.
There is a risk that we and our franchisees could be adversely affected by current laws, regulations or interpretations or that more restrictive laws, regulations or interpretations will be adopted in the future that could make compliance more difficult or expensive. There is also a risk that a change in current laws could adversely affect our business or our franchisees’ businesses.
Regulatory authorities also have relatively broad discretion to grant, renew and revoke licenses and approvals and to implement regulations. Accordingly, such regulatory authorities could prevent or temporarily suspend our franchisees from carrying on some or all of our activities or otherwise penalize them if their financial condition or our practices were found not to comply with the then current regulatory or licensing requirements or any interpretation of such requirements by the regulatory authority. In addition, new regulations could increase the barriers to entry for brokers and agents which may impact our ability to sell franchisees and our franchisees’ ability to recruit agents. Our or our franchisees’ failure to comply with regulatory requirements or interpretations could limit our ability to renew current franchisees or sign new franchisees or otherwise have a material adverse effect on our operations.
We, or our franchisees, are also subject to various other rules and regulations such as:
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● | | the Gramm-Leach-Bliley Act, which governs the disclosure and safeguarding of consumer financial information; |
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● | | the European Union’s General Data Protection Regulation (“GDPR”), the California Consumer Privacy Act, and various state and federal privacyother laws protecting consumer data; |
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● | | restrictions on transactions with persons on the Specially Designated Nationals and Blocked Persons list promulgated by the Office of Foreign Assets Control of the Department of the Treasury; |
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● | | federal and state “Do Not Call,” “Do Not Fax,” and “Do Not E-Mail” laws; |
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● | | laws and regulations, including the Foreign Corrupt Practices Act, that impose sanctions on improper payments; |
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● | | laws and regulations in jurisdictions outside the U.S. in which we do business; |
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● | | state and federal employment laws and regulations, including any changes that would require reclassification of independent contractors to employee status, and wage and hour regulations; |
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● | | increases in state, local or federal taxes that could diminish profitability or liquidity; and
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● | | consumer fraud statutes. |
Our or our franchisees’ failure to comply with any of the foregoing laws and regulations may subject us toresult in fines, penalties, injunctions and/or potential criminal violations. Any changes to these laws or regulations or any new laws or regulations may make it more difficult for us to operate our business and may have a material adverse effect on our operations.
Our franchising activities are subject to a variety of state and federal laws and regulations regarding franchises, and any failure to comply with such existing or future laws and regulations could adversely affect our business.
The sale of franchises is regulated by various state laws as well as by the Federal Trade Commission (“FTC”). The FTC requires that franchisors make extensive disclosure to prospective franchisees but does not require registration. A number of states require registration and/or disclosure in connection with franchise offers and sales. In addition, several states have “franchise relationship laws” or “business opportunity laws” that limit the ability of franchisors to terminate franchise agreements or to withhold consent to the renewal or transfer of these agreements. We believe that our franchising procedures, as well as any applicable state-specific procedures, comply in all material respects with both the FTC guidelines and all applicable state laws regulating franchising in those states in which we offer new franchise
arrangements. However, noncompliance could reduce anticipated revenue, which in turn may materially and adversely affect our business and operating results.
Most of our RE/MAX franchisees self-report their agent counts and agent commissions andwhich drives the fees due to us, and we have limited tools to validate or verify these reports and a few of our domestic and global master franchise agreements do not contain audit rights.reports. This could impact our ability to collect revenue owed to us by our Independent Regions, franchisees, and agents, and could affect our ability to forecast our performance accurately.
Under our franchise agreements, franchise owners,franchisees, including regional owners, reportindependent regions, self-report (a) the number of agents monthly managementand (b) gross commissions and other statistics from home sale transactions. This data is used to determine our billings for continuing franchise fees, annual dues and broker service fees received by the brokers from the agents and the monthly ongoing fees (continuing franchise fees and broker fees) payable to us by the brokers. Some of our regional agreements do not provide us with audit rights. For those agreements that do not, wefees. We may have limited methods of validating the monthly ongoing fees due to us from these regionsdata and must rely on reports submitted by such regional franchisees and our internal protocols for verifying agent counts.the reasonableness of the data. If franchisees were to underreport or erroneously report amounts payable,such data, even if unintentionally, we may not receive all of the annual agent dues or monthly ongoing feesrevenues due to us. In addition, to the extent that we were underpaid, we may not have a definitive method for determining such underpayment. If a material number of our franchisees were to underreport or erroneously report their agent counts, agent commissions or fees due to us, it could have a material adverse effect on our financial performance and results of operations. Further, agent count is a key performance indicator (KPI), and incomplete information, or information that is not reported in a timely manner could impair our ability to evaluate and forecast key business drivers and financial performance.
Attrition of legacy booj customers could have an adverse effect on our financial results.
The booj business we acquired in February 2018 continues to service legacy customers, unrelated to RE/MAX. Several legacy customers have discontinued their relationship with booj, causing revenue to decrease. There is a risk that the remaining legacy customers leave at a faster pace than anticipated resulting in an accelerating decline in revenue.
We are subject to certain risks related to litigation filed by or against us, and adverse results may harm our business and financial condition.
We cannot predict with certainty the costs of defense, the costs of prosecution, insurance coverage or the ultimate outcome of litigation and other proceedings filed by or against us, including remedies or damage awards, and adverse results in such litigation and other proceedings may harm our business and financial condition.
Such litigation and other proceedings may include, but are not limited to, securities litigation including class actions and shareholder derivative litigation, complaints from or litigation by franchisees, usually related to alleged breaches of contract or wrongful termination under the franchise arrangements, actions relating to intellectual property, commercial arrangements and franchising arrangements.
In addition, litigation against a franchisee or its affiliated sales agents by third parties, whether in the ordinary course of business or otherwise, may also include claims against us for liability by virtue of the franchise relationship. Franchisees may fail to obtain insurance naming the Company as an additional insured on such claims. We could face similar claims for direct liability related to our former operation of Company-owned brokerages, the last of which we sold in 2015 and early 2016. In addition to increasing franchisees’ costs and limiting the funds available to pay us contractual fees and dues and reducing the execution of new franchise arrangements, claims against us (including vicarious liability claims) divert our management resources and could cause adverse publicity, which may materially and adversely affect us and our brand, regardless of whether such allegations are valid or whether we are liable.
Our global operations may be subject to additional risks related to litigation, including difficulties in enforcement of contractual obligations governed by foreign law due to differing interpretations of rights and obligations, compliance with multiple and potentially conflicting laws, new and potentially untested laws and judicial systems and reduced protection of intellectual property. A substantial unsatisfied judgment against us or one of our subsidiaries could result in bankruptcy, which would materially and adversely affect our business and operating results. See “Risk Factors—We may experience legal proceedings related to the matters underlying the Special Committee investigation and such legal proceedings may result in adverse findings, the imposition of fines or other penalties, increased costs and expenses and the diversion of management’s time and resources.”
Our global operations, including those in Canada, are subject to risks not generally experienced by our U.S. operations.
Although our global operations provide a relatively small portion of our revenue, they are subject to risks not generally experienced by our U.S. operations. The risks involved in our global operations and relationships could result in losses against which we are not insured and therefore affect our profitability. These risks include:
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● | | fluctuations in foreign currency exchange rates, primarily related to changes in the Canadian dollar to U.S. dollar exchange rates, as well as theand Euro to U.S. dollar exchange rate and foreign exchange restrictions; rates; |
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● | | exposure to local economic conditions and local laws and regulations, including those relating to the agents of our franchisees; |
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● | | economic and/or credit conditions abroad; |
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● | | potential adverse changes in the political stability of foreign countries or in their diplomatic relations with the U.S.; |
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● | | restrictions on the withdrawal of foreign investment and earnings; |
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● | | government policies against businesses owned by foreigners; |
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● | | investment restrictions or requirements;
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| | diminished ability to legally enforce our contractual rights in foreign countries; |
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● | | difficulties in registering, protecting or preserving trade names and trademarks in foreign countries;
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| | restrictions on the ability to obtain or retain licenses required for operation;
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| | increased franchise regulations in foreign jurisdictions;
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| | withholding and other taxes on remittances and other payments by subsidiaries; and |
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● | | changes in tax laws regarding taxation of foreign tax laws. profits. |
Our global operations outside Canada generally generate substantially lower average revenue per agent than our U.S. and Canadian operations.
Our business is dependent on key personnel including key members of our senior management team and loss of key individuals, or the inability to retain additional qualified personnel could adversely affect our operations, our brand and our financial performance.
Our senior management team has recently undergone significant changes in personnel, including the completion of transitioning the CEO role from David Liniger, who has been serving as Co-CEO and principal executive officer, to Adam Contos, who will now serve as our sole CEO and as principal executive officer. We also recently enhanced the role of our Lead Independent Director in order to provide additional involvement by our board of directors (the “Board of Directors”) to support the senior management team during this period of transition and to enhance our governance at the Board of Directors level in part in response to the findings of the Special Committee (as defined below).
Our future success will likely continue to depend heavily on the efforts and abilities of key personnel including our CEO, Adam Contos and other members of our senior management, other key employees and the services of our Lead Independent Director, Richard Covey. The loss of services from any of these key personnel could make it more difficult to successfully operate our business and achieve our business goals. In addition, we do not maintain key employee life insurance policies on Mr. Contos or our other key employees. As a result, we may not be able to cover the financial loss we may incur in losing the services of any of these individuals.
In the event of the loss of the services of any of such key personnel, we may be unable to implement or execute upon our corporate succession plan due to factors including the timing of the loss relative to the development of key successor employees or the loss of those successors themselves.
Our ability to retain such key personnel and other key individuals is generally subject to numerous factors, including the compensation and benefits we pay, our ability to provide pathways for professional development and overall morale. As such, we could suffer significant attrition among these key individuals unexpectedly. Competition for qualified personnel in the real estate franchising industry is intense, and we cannot assure you that we will be successful in attracting and retaining qualified employees.
We only have one primary facility, which serves as our corporate headquarters. If we encounter difficulties associated with this facility, we could face management issues that could have a material adverse effect on our business operations.
We only have one primary facility, in Denver, Colorado, which serves as our corporate headquarters where most of our employees are located. A significant portion of our computer equipment and senior management, including critical resources dedicated to financial and administrative functions, is also located at our corporate headquarters. Our management and employees would need to find an alternative location if we were to encounter difficulties at our corporate headquarters, including by fire or other natural disaster, which would cause disruption and expense to our business and operations.
We recognize the need for, and continue to develop business continuity and document retention plans that would allow us to be operational despite casualties or unforeseen events impacting our corporate headquarters. If we encounter difficulties or disasters at our corporate headquarters and our business continuity and document retention plans are not adequate, our operations and information may not be available in a timely manner, or at all, and this would have a material adverse effect on our business.
Our business depends on a strong brand,brands, and any failure to maintain, protect and enhance our brand would hurt our ability to grow our business, particularly in new markets where we have limited brand recognition.
We have developedRE/MAX is a strong brand that we believe has contributed significantly to the success of our business.business, and the Motto brand is gaining recognition. Maintaining, protecting and enhancing the “RE/MAX” brandand Motto brands is critical to growing our business, particularly in new markets where we have limited brand recognition.business. If we do not successfully build and maintain a strong brand,brands, our business could be materially harmed. Maintaining and enhancing the quality of our brand may require us to make substantial investments in areas such as marketing, community relations, outreach and employee training. We actively engage in television, print and online advertisements, targeted promotional mailings and email communications, and engage on a regular basis in public relations and sponsorship activities. These investments may be substantial and may fail to encompass the optimal range of traditional, online and social advertising media to achieve maximum exposure and benefit to the brand.
Inasmuch as our business is in part dependent on a strong brand, our business may be subject to risks related to events and circumstances that have a negative impact on our brand. If we are exposed to adverse publicity or events that do damage to our brand and/or image, our business may suffer material adverse effects from the deterioration in our brand and image.
We may be unable to obtain approval of independent regional owners to fund network wide advertising and promotional initiatives.
Regional RE/MAX master franchisees, as independent business operators, may from time to time disagree with us and our strategies regarding the business and how best to promote the RE/MAX brand on a national or network-wide basis. Both Company-owned and Independent Regions in the U.S. concentrate advertising expenditures with our respective regional advertising funds. Our focus on regional and local advertising in the U.S. may fail to leverage franchisee contributions to achieve maximum group purchasing power in our media buys, having an adverse impact on our business and results of operation in future periods. To the extent that the advertising funds in Independent Regions choose not to
contribute to national or pan-regional creative development and media purchases, this may reduce economies of scale in the purchase of advertising, or may result in different marketing messages being associated with the RE/MAX brand in different areas of the country. If Independent Regions and their advertising funds choose not to invest in common technology platforms, this likewise may reduce economies of scale and may result in fragmented web presences for the RE/MAX brand in various areas of the country and less web traffic to remax.com, resulting in fewer leads to RE/MAX agents, potentially affecting our results of operations.
Loss of market leadership could weaken our brand awareness and brand reputation among consumers, agents, and brokers.
We derive significant benefit from our market share leadership and our ability to make claims regarding the same, including through use of our slogan that “Nobody in the world sells more real estate than RE/MAX” as measured by residential transaction sides. Loss of market leadership, and as a result an inability to tout the same, may hinder public and industry perception of RE/MAX as a leader in the real estate industrymarket and hurt agent recruitment and franchise sales as a result.
Inasmuch as our business is in part dependent on strong brands, our business may be subject to risks related to events and circumstances that have a negative impact on our brands. If we are exposed to adverse publicity or events that do damage to our brands and/or image, our business may suffer material adverse effects from the deterioration in our brand and image.
Infringement, misappropriation or dilution of our intellectual property could harm our business.
We regard our RE/MAX trademark, balloon logo and yard sign design trademarks and our Motto trademarks as having significant value and as being an important factor in the marketing of our brand.brands. We believe that this and other intellectual property are valuable assets that are critical to our success. Not all of the trademarks or service marks that we currently use have been registered in all of the countries in which we do business, and they may never be registered in all of those countries. There can be no assurance that we will be able to adequately maintain, enforce and protect our trademarks or other intellectual property rights.
We are commonly involved in numerous proceedings, generally on a small scale, to enforce our intellectual property and protect our brand.brands. Unauthorized uses or other infringement of our trademarks or service marks, including uses that are currently unknown to us, could diminish the value of our brand and may adversely affect our business. Effective intellectual property protection may not be available in every market. Failure to adequately protect our intellectual property rights could damage our brand and impair our ability to compete effectively. Even where we have effectively secured statutory protection for our trademarks and other intellectual property, our competitors may misappropriate our intellectual property, and in the course of litigation, such competitors occasionally attempt to challenge the breadth of our ability to prevent others from using similar marks or designs. If such challenges were to be successful, less ability to prevent others from using similar marks or designs may ultimately result in a reduced distinctiveness of our brand in the minds of consumers. Defending or enforcing our trademark rights, branding practices and other intellectual property could result in the expenditure of significant resources and divert the attention of management, which in turn may materially and adversely affect our business and operating results. Even though competitors occasionally attempt to challenge our ability to prevent infringers from using our marks, we are not aware of any challenges to our right to use, and to authorize our franchisees to use, any of our brand names or trademarks.
In addition, franchisee noncompliance with the terms and conditions of our franchise agreements and our brand standards may reduce the overall goodwill of our brand, whether through diminished consumer perception of our brand, dilution of our intellectual property, the failure to meet the FTC guidelines or applicable state laws, or through the participation in improper or objectionable business practices. Moreover, unauthorized third parties may use our intellectual property to trade on the goodwill of our brand, resulting in consumer confusion or dilution. Any reduction of our brand’s goodwill, consumer confusion, or dilution is likely to impact sales, and could materially and adversely impact our business and operating results.
Our business is heavily reliant on technology infrastructureand product development for certain key aspects of our internal operations.
The systems may not perform as desired or we may experience cost overages, delays, or other factors that may distract our management from our business, which could have an adverse impact on our results of operations. Further, we may not be able to obtain future new technologies and systems, or to replace or introduce new technologies and systems as quickly as our competitors or in a cost-effective manner. Also, we may not achieve the benefits anticipated or required
from any new technology or system, including those related to our recent acquisitiontechnology acquisitions.
We rely on traffic to our websites, including our flagship websites, remax.com and mottomortgage.com, directed from search engines. If our websites fail to rank prominently in unpaid search results, traffic to our websites could decline and our business could be adversely affected.
Our success depends in part on our ability to attract home buyers and sellers to our websites, including our flagship websites, remax.com and mottomortgage.com through unpaid Internet search results on search engines. The number of booj,users we attract from search engines is due in large part to how and where our websites rank in unpaid search results. These rankings can be affected by a number of factors, such as changes in ranking algorithms, many of which are not under our direct control, and they may change frequently. In addition, our website faces increasing competition for audience from real estate technology company,portal websites, such as Zillow, Trulia and Realtor.com. Our websites have experienced fluctuations in search result rankings in the past, and we may not be ableanticipate fluctuations in the future. Any reduction in the number of users directed to devote financial resourcesour websites could adversely impact our business and results of operations.
Cyberattacks, security breaches and improper access to, newdisclosure or deletion of our data, personally identifiable information we collect, or business records could harm our business, damage our reputation and cause losses.
Our information technologies and systems and those of our third-party hosted services are vulnerable to breach, damage or interruption from various causes, including: (i) natural disasters, war and acts of terrorism, (ii) power losses, computer systems failure, Internet and telecommunications or data network failures, operator error, losses and corruption of data, and similar events, and (iii) employee error, malfeasance or otherwise. Of particular risk and focus in recent years is the potential penetration of internal or outsourced systems by individuals seeking to disrupt operations or misappropriate information (aka, cyberattacks). Cyberattacks, including the use of phishing and malware, continue to grow in sophistication making it impossible for us to mitigate all of these risks. Any extended interruption of our systems or exposure of sensitive data to third parties could cause significant damage to our business or our brand, for which our business interruption insurance may be insufficient to compensate us for losses that may occur.
In addition, we rely on the collection and use of personally identifiable information from franchisees, agents and consumers to conduct our business and in certain instances such data may include social security numbers, payment card numbers, or customer financial information. Global privacy legislation (including the recently enacted GDPR regulations in the future.European Union), enforcement and policy activity are rapidly expanding and creating a complex compliance environment. Changes in these laws may limit our data access, use, and disclosure, and may require increased expenditures by us or may dictate that we not offer certain types of services. For example, California recently enacted the California Consumer Privacy Act, which became effective on January 1, 2020 and requires covered businesses to, among other things, provide disclosures to California consumers regarding the collection, use and disclosure of such consumers’ personal information and afford such consumers new rights with respect to their personal information, including the right to opt out of certain sales of personal information. We believe that further increased regulation in additional jurisdictions is likely in the area of data privacy.Should we misuse or improperly store the personally identifiable information that we collect, or should we be the victim of a cyberattack that results in improper access to such personally identifiable information, we may be subject to legal claims and regulatory scrutiny. Any legal claims, government action or damage to our reputation due to actions, or the perception that we are taking actions, inconsistent with the terms of our privacy statement, consumer expectations, or privacy-related or data protection laws and regulations, could expose us to liability and adversely impact our business and results of operations.
Any disruption to our websites or lead generation tools could harm our business.
We are vulnerable to certain additional risks and uncertainties associated with websites, which include our lead referral system, remax.com, global.remax.com, theremaxcollection.com, remaxcommercial.com and mottomortgage.com. These risks include changes in required technology interfaces, website downtime and other technical failures, security breaches and consumer privacy concerns. We may experience service disruptions, outages and other performance problems due to a variety of factors, including reliance on our third-party hosted services, infrastructure changes, human or software errors, capacity constraints due to an overwhelming number of users accessing our platform simultaneously, and denial of service, fraud or attacks. Our failure to address these risks and uncertainties successfully could reduce our Internet presence, generate fewer leads for our agents and damage our brand. Many of the risks relating to our website operations are beyond our control.
We only have two primary facilities, one of which serves as our corporate headquarters. If we encounter difficulties associated with these facilities, we could face management issues that could have a material adverse effect on our business operations.
We have two primary facilities both located in Denver, Colorado, where most of our employees are located. A significant portion of our owned computer equipment, IT team focused on agent technology, and our management is located in these facilities. Our management and employees would need to find an alternative location if we were to encounter difficulties at our corporate headquarters, including by fire or other natural disaster, which would cause disruption and expense to our business and operations.
We rely on third parties for certain important functions and/orand technology. Any failures by those vendors and service providers could disrupt our business operations.
We have outsourced certain key functions to external parties, including some that are critical to financial reporting, our franchise and membership tracking/billing, the Motto loan origination system, and a number of critical consumer- and franchise/agent-facing websites. We may enter into other key outsourcing relationships in the future. If one or more of these external parties were not able to perform their functions for a period of time, perform them at an acceptable service level, or handle increased volumes, our business operations could be constrained, disrupted, or otherwise negatively affected. Our use of vendors also exposes us to the risk of losing intellectual property or confidential information and to other harm. Our ability to monitor the activities or performance of vendors may be constrained, which makes it difficult for us to assess and manage the risks associated with these relationships.
We rely on traffic to our websites, including our flagship website, remax.com, directed from search engines like Google and Bing. If our websites fail to rank prominently in unpaid search results, traffic to our websites could decline and our business could be adversely affected.
Our success depends in part on our ability to attract home buyers and sellers to our websites, including our flagship websites, remax.com and mottomortgage.com through unpaid Internet search results on search engines like Google and Bing. The number of users we attract from search engines is due in large part to how and where our websites rank in unpaid search results. These rankings can be affected by a number of factors, such as changes in ranking algorithms, many of which are not under our direct control, and they may change frequently. In addition, our website faces increasing competition for audience from real estate portal websites, such as Zillow, Trulia and Realtor.com. As a result, links to our websites may not be prominent enough to drive traffic to our websites, and we may not be in a position to influence the results. In some instances, search engine companies may change these rankings in order to promote their own competing services or the services of one or more of our competitors. Our websites have experienced fluctuations in search result rankings in the past, and we anticipate fluctuations in the future. Any reduction in the number of users directed to our websites could adversely impact our business and results of operations.
Any disruption or reduction in our information technology capabilities or websites or other threats to our cybersecurity or the physical security of our business records could harm our business.
Our information technologies and systems and those of our third-party hosted services are vulnerable to breach, damage or interruption from various causes, including: (i) natural disasters, war and acts of terrorism, (ii) power losses, computer systems failure, Internet and telecommunications or data network failures, operator error, losses and corruption of data, and similar events and (iii) computer viruses, penetration by individuals seeking to disrupt operations or misappropriate information and other physical or electronic breaches of security. Our physical filing systems are vulnerable to security breaches or damage from a variety of possible causes. We may not be able to prevent a disruption to or a material adverse effect on our business or operations in the event of a disaster, theft of data or other business interruption. Any extended interruption in our technologies or systems, significant breach or damage of electronic or physical files could significantly curtail our ability to conduct our business and generate revenue or could expose us to liability for improper handling of personally identifiable information. Additionally, our business interruption insurance may be insufficient to compensate us for losses that may occur.
We are vulnerable to certain additional risks and uncertainties associated with websites, which include our lead referral system LeadStreet®, remax.com, global.remax.com, theremaxcollection.com, remaxcommercial.com and mottomortgage.com. These risks include changes in required technology interfaces, website downtime and other technical failures, security breaches and consumer privacy concerns. We may experience service disruptions, outages and other performance problems due to a variety of factors, including reliance on our third-party hosted services, infrastructure changes, human or software errors, capacity constraints due to an overwhelming number of users accessing our platform simultaneously, and denial of service, fraud or attacks. Our failure to address these risks and uncertainties
successfully could reduce our Internet presence, generate fewer leads for our agents and damage our brand. Many of the risks relating to our website operations are beyond our control.
We are relatively new to the mortgage brokerage industry, which, along with the intense competition within the industry, may hinder our efforts to establish and grow our new mortgage brokerage franchising business, Motto Mortgage, which could have implications to the goodwill on our Consolidated Balance Sheet.
We are pursuing a growth strategy to offer and sell residential mortgage brokerage franchises in the U.S under the “Motto Mortgage” brand and trademarks. Our investments in the new Motto business included the cost of our acquisition of certain assets of Full House Mortgage Connection, Inc. (“Full House”) and initial funding for the business. We lack extensivecontinue to develop operating experience in the mortgage brokerage industry. Our strategy hinges on our ability to recruit franchisees and help them recruit loan originators, to develop and maintain strong competencies within the mortgage brokerage market, on favorable conditions in the related regulatory environment and on our success in developing a strong, respected brand. We may fail to understand, interpret, implement and/or train franchisees adequately concerning compliance requirements related to the mortgage brokerage industry or the relationship between us and our franchisees, any of which failures could subject us or our franchisees to adverse actions from regulators. Motto Franchising, LLC, may also have regulatory obligations arising from its relationship with Motto franchisees; we may fail to comply with those obligations, and that failure could also subject us to adverse actions from regulators. As a start-up, theThe Motto Mortgage brand’s initial lack of brand recognition may hamper franchise sales efforts. We may experience impairment of acquired assets and/or potential unknown liabilities associated with the acquisition of the business of Full House. This venture could divert resources, including the time and attention of management and other key employees, from our RE/MAX business, and a prolonged diversion could negatively impact operating results. In addition, residential mortgage brokerage is a highly competitive industry and Motto will suffer if we are unable to attract franchisees, which will adversely affect Motto’s growth, operations and profitability. Motto has $11.8 million of goodwill recognized in connection with its acquisition. Poor performance for any of the reasons outlined above could trigger an impairment of this goodwill.
The terms of RE/MAX, LLC’s senior secured credit facility restrict the current and future operations of RMCO, RE/MAX, LLC and their subsidiaries.
RE/MAX, LLC’s senior secured credit facility includes a number of customary restrictive covenants. These covenants could impair the financing and operational flexibility of RMCO, RE/MAX, LLC and their subsidiaries and make it difficult for them to react to market conditions and satisfy their ongoing capital needs and unanticipated cash requirements. Specifically, such covenants may restrict their ability to, among other things:
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| | make certain investments, acquisitions and joint ventures;
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| | enter into certain types of transactions with affiliates;
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| | pay dividends or make distributions or other payments to us;
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| | use assets as security in certain transactions;
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| | repurchase their equity interests;
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| | sell certain assets or merge with or into other companies;
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| | guarantee the debts of others;
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| | enter into new lines of business; and
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| | make certain payments on subordinated debt.
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In addition, so long as any revolving loans are outstanding under the senior secured credit facility, RE/MAX, LLC is required to maintain specified financial ratios. As of December 31, 2017, there were no outstanding revolving loans.
The ability to comply with the covenants and other terms of the senior secured credit facility will depend on the future operating performance of RE/MAX, LLC and its subsidiaries. If RE/MAX, LLC fails to comply with such covenants and terms, it would be required to obtain waivers from the lenders or agree with the lenders to an amendment of the facility’s terms to maintain compliance under the facility, such as the waivers received in connection with the delayed filing of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2017. If RE/MAX, LLC is unable to obtain any necessary waivers or amendments and the debt under our senior secured credit facility is accelerated or the lenders obtain other remedies, it would likely have a material adverse effect on our financial condition and future operating performance.
We have significant debt service obligations and may incur additional indebtedness in the future.
We have significant debt service obligations, including principal, interest and commitment fee payments due quarterly pursuant to RE/MAX, LLC’s senior secured credit facility.Senior Secured Credit Facility. Our currently existing indebtedness, or any additional indebtedness we may incur, could require us to divert funds identified for other purposes for debt service and impair our liquidity position. If we cannot generate sufficient cash flow from operations to service our debt, we may need to refinance our debt, dispose of assets or issue additional equity to obtain necessary funds. We do not know whether we would be able to take such actions on a timely basis, on terms satisfactory to us, or at all. Future indebtedness may impose additional restrictions on us, which could limit our ability to respond to market conditions, to make capital investments or to take advantage of business opportunities. Our level of indebtedness has important consequences to you and your investment in our Class A common stock.
The discontinuation of London Interbank Offered Rate ("LIBOR") may adversely affect our borrowing costs.
For example, our level of indebtedness may: | ·
| | require us to use a substantial portion of our cash flow from operations to pay interest and principal on our debt, which would reduce the funds available to us for working capital, capital expenditures and other general corporate purposes;
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| | limit our ability to pay future dividends;
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| | limit our ability to obtain additional financing for working capital, capital expenditures, expansion plans and other investments, which may limit our ability to implement our business strategy;
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| | heighten our vulnerability to downturns in our business, the housing industry or in the general economy and limit our flexibility in planning for, or reacting to, changes in our business and the housing industry; or
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| | prevent us from taking advantage of business opportunities as they arise or successfully carrying out our plans to expand our franchise base and product offerings.
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We cannot assure you that our business will generate sufficient cash flow from operations or that future financing will be available to us in amounts sufficient to enable us to make paymentsThe variable interest rate on our indebtednessSenior Secured Credit Facility can be based on LIBOR at our option, and we have chosen the LIBOR option on a regular basis. In 2017, the Chief Executive of the U.K. Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced that the FCA will no longer persuade or compel banks to fundsubmit rates for the calculation of LIBOR after 2021. The discontinuation of LIBOR as a reference rate may cause interest rates under our operations.
As a result of these covenants,current or future debt agreements to perform differently than in the past. The replacement with an alternative reference rate may cause unanticipated consequences and our future borrowing costs may be adversely affected. At this time, we are limited in the manner in which we conduct our business and we may be unable to engage in favorable business activities or finance future operations or capital needs. Our ability to make payments to fund working capital, capital expenditures, debt service,predict what effect the discontinuance of LIBOR and strategic acquisitionsthe establishment of alternative reference rates will dependhave on our ability to generate cash in the future, which is subject to general economic, financial, competitive, regulatoryborrowing costs and other factors that are beyond our control.results of operations.
Variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.
As of December 31, 2017, $229.0 million in term loans were outstanding under our senior secured credit facility, net of an unamortized discount and issuance costs, which was at variable rates of interest, thereby exposing us to interest rate risk. We currently do not engage in any interest rate hedging activity. As such, if interest rates increase, our debt service obligations on our outstanding indebtedness would increase even if the amount borrowed remained the same, and our net income would decrease.
Our operating results are subject to quarterly fluctuations due to home sales, and results for any quarter may not necessarily be indicative of the results that may be achieved for the full fiscal year.
Historically, we have realized, and expect to continue to realize, lower Adjusted EBITDA margins in the first and fourth quarters due primarily to the impact of lower broker fees and other revenue primarily as a result of lower overall home sale transactions, and higher selling, operating and administrative expenses in the first quarter for expenses incurred in connection with our RE/MAX annual convention. Accordingly, our results of operations may fluctuate on a quarterly basis, which would cause period to period comparisons of our operating results to not be necessarily meaningful and cannot be relied upon as indicators of future annual performance.
The Special Committee investigation has causedExpectations of the Company relating to environmental, social and governance factors may impose additional costs
and expose us to incur significant expensesnew risks.
There is an increasing focus from certain investors, employees and other adverse effects following the completion of the Special Committee investigation as we implement remedial measures in response to the findings of the Special Committee and address other consequences of the investigation.
In October 2017, our Board of Directors appointed a special committee of independent directors (the “Special Committee”) to investigate actions of certain members of our senior management. The Special Committee completed its investigation in February 2018 and identified previously undisclosed transactions involving a loan of personal funds from the Company’s then CEO and principal executive officer, David Liniger, to the Company’s then COO, Adam Contos, as well as certain other personal transactions, including cash and non-cash gifts from David and Gail Liniger to Mr. Contos and others. Although the loan, gifts, and other transactions between the Linigers and Mr. Contos did not involve use of anystakeholders concerning corporate funds, the Special Committee concluded that these transactions created an actual or apparent conflict of interest. The Special Committee also concluded that Mr. Liniger and Mr. Contos violated the Company’s Code of Ethics by engaging in certain transactions and by failing to report those transactions to the Company. The Special Committee also identified instances of noncompliance with other Company policiesresponsibility, specifically related to workplace conductenvironmental, social and governance factors. Some investors may use these factors to guide their investment strategies and, in some cases, may choose not to invest in us if they believe our policies relating to corporate responsibility are inadequate. Third-party providers of corporate responsibility ratings and reports on companies have increased to meet growing investor demand for measurement of corporate responsibility performance. The criteria by which companies’ corporate responsibility practices are assessed may change, which could result in greater expectations of us and cause us to undertake costly initiatives to satisfy such new criteria. If we elect not to or are unable to satisfy such new criteria, investors may conclude that were limited to actions of Mr. Liniger and did not extend to other members of the Company’s leadership team.
As a result of the Special Committee investigation, the Company’s management team is implementing, under the oversight of the Board of Directors, remedial measures to address various findings of the Special Committee as well as to address deficiencies in our internal controls. These efforts include among other matters (i) enhanced corporate policies and practices including with respect to gifts, loans, conflicts of interest and workplace conduct, (ii) enhanced procedures and practices concerning reporting including with respect to compliance matters, (iii) enhanced training on a range of matters including the responsibilities of officers and leaders related to workplace conduct and various compliance issues, (iv) a range of other actions designed to reinforce changes to the corporate culture in key areas including compliance and workplace practices, and (v) various remedial measures in connection with the deficiencies in our internal controls over financial reporting including an identified material weakness. The remedial measures referred to aboveresponsibility are in process and are not complete as of the date of this Annual Report on Form 10-K and it is expected that these remedial measures and improvements to governance and corporate policies and practices will continue in future periods over a sustained period of time. See “Item 9A—Controls and Procedures.”
During the fourth quarter of 2017, we incurred $2.6 million in expenses related to the Special Committee investigation, and we will continue to incur significant expenses in the first quarter of 2018 and future periods related to the Special Committee investigation and the ongoing implementation of the remedial measures adopted as a result of the findings of the Special Committee.
Some of the anticipated increase in costs will result from enhanced procedures and corrective measures that we need to take with respect to public company compliance work including with respect to our internal controls and disclosures controls and procedures in order to report our financial results and file our SEC filings in a timely manner. In addition, our Board of Directors, senior management and other employees have spent, and will continue to spend, significant time and resources in connection with the Special Committee investigation and the response to the findings of the Special Committee including the adoption and implementation of remedial measures. The time and attention required for these matters may divert management and our Board of Directors from other actions that would be devoted toward our
operations and the implementation of our business strategy and thereby could have a material adverse effect on our business, financial condition, results of operations and cash flows.
As a consumer-facing company, maintaining, protecting and enhancing the “RE/MAX” brand is critical to growing our business. The findings by the Special Committee could adversely affect our reputation, our brand and our ability to obtain new business or retain existing business, attract and retain employees, access the capital markets and secure financing, any of which could have a material adverse effect on our business, financial condition, results of operations and cash flows and the market price of our common stock.
inadequate. We may experience legal proceedings related to the matters underlying the Special Committee investigation and such legal proceedings may resultface reputational damage in adverse findings, the imposition of fines or other penalties, increased costs and expenses and the diversion of management’s time and resources.
We may experience legal proceedings including investigations, securities class action claims and/or derivative litigation related to matters reviewed by the Special Committee. The Company has advised the staff of the SEC regarding the internal investigation being undertaken by the Special Committee. The SEC is performing its own investigative review of certain matters related to the Special Committee investigation. The Company has been, and intends to continue, cooperating fully with the SEC with respect to its review of these matters.
Any legal proceedings related to the Special Committee investigation including any shareholder derivative litigation or governmental inquiries or investigations may divert management’s time and attention and may result in the incurrence of significant expense, including legal fees. Such legal proceedings could also have a material adverse effect on our business, financial condition, results of operations and cash flows including as a result of such expenses or arising from any consequences of such legal proceedings including damages, monetary fines, sanctions, penalties, adverse publicity and damage to reputation.
We have identified control deficiencies in our internal control over financial reporting that constitute a material weakness in our internal control over financial reporting. If we are unable to remediate these control deficiencies including this material weakness, we may not be able to accurately or timely report our financial condition or results of operations, which could cause investors to lose confidence in our reported financial information and thereby adversely affect the market price of our common stock.
As disclosed in Item 9A of this Annual Report on Form 10-K, the Company did not have an effective risk assessment process to identify and assess the financial reporting risks related to benefits provided by principal stockholders. As a consequence, the Company did not have effective controls and training of personnel over the identification and communication of related party transactions to financial reporting personnel, management, and the Board, as appropriate, to identify and evaluate recognition, measurement and disclosure of such transactions.
In particular, the Company’s controls failed to timely identify, record and disclose certain transactions between the Company’s non-Executive Chairman and Co-Founder and other Company personnel. A material weakness is defined as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
As a result of this material weakness, our management concluded that our internal control over financial reporting was not effective as of December 31, 2017 and our disclosure controls and procedures were not effective as of December 31, 2017. These control deficiencies have been in existence for a substantial period of time, but we are actively engaged in developing and implementing remedial measures designed to address these control deficiencies including the identified material weakness, but we have not remedied these matters as of the date of this Annual Report on Form 10-K and can provide no assurance that we will be successful in remediating these deficiencies or the material weakness in a timely manner, or at all, or that we will not identify additional deficiencies and material weaknesses in the future. If our remedial measures are insufficient to address these deficiencies or the material weakness, or if additional material weaknesses or deficiencies in our internal control over financial reporting are discovered or occur in the future, we may not be able to accurately or timely report our financial condition or results of operations, which could cause investors to
lose confidence in our reported financial information and thereby adversely affect the perception of our business and the market price of our common stock. See “Item 9A—Controls and Procedures.”
We have recently experienced changes in our senior management team, our management structure and our governance, any of which changes may be disruptive to, or cause uncertainty in, our business, which may have an adverse effect on our financial performance and results of operations.
We have recently experienced significant changes in our senior management team and in our management structure. On February 14, 2018, we announced that we had completed the transition of CEO responsibilities from our Co-Founder David Liniger, who had previously been serving as our Co-CEO and principal executive officer, to Adam Contos, who was previously Co-CEO with Mr. Liniger. Effective February 14, 2018, Mr. Contos became our sole CEO and our principal executive officer. Mr. Liniger continues to serve on our Board of Directors as non-executive Chairman. In addition, the Board of Directors broadened the scope of authority and responsibilities of our Lead Independent Director position, in part to assist with the Company’s further response to the findings of the Special Committee and to provide enhanced Board oversight and involvement during the transition in management roles. Richard Covey has been appointed to serve as the Lead Independent Director.
These changes in our senior management team and our governance structure and the short time period over which they occurred may be disruptive to, or cause uncertainty in, our business. In addition, our future success will depend in part on Mr. Contos’ successful transition to his role as the sole CEO and principal executive officer. One of the findings of the Special Committee was that Mr. Contos had violated our Code of Ethics in connection with the failure to disclose the loan and certain other transactions involving Mr. Liniger.
David Liniger transitioned to the role of non-executive Chairman of our Board of Directors on February 14, 2018. Findings of the Special Committee included that Mr. Liniger had violated our Code of Ethics in connection with the failure to disclose the loan and certain other transactions involving Mr. Contos. The Special Committee also identified instances of noncompliance with other Company policies related to workplace conduct, which were limited to Mr. Liniger’s actions and did not extend to other members of senior management. For more information regarding the Special Committee investigation, see “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Special Investigation.”
The Board of Directors appointed Richard Covey to serve as Lead Independent Director with enhanced authority and responsibilities in order to provide additional oversight and assistance to the senior management team from the Board of Directors during this period of transition in the management and governance structure of the Company.
There can be no assurance that we will manage to navigate successfully the transition in our management and governance structure that we have begun to implement during the time period of the conclusion of the Special Committee investigation. In addition, the transition structure that we are implementing may not prove to be successful in certain respects and we may experience other developments that lead us to implement further changes in governance and management structure.
Our financial condition and results of operations may suffer if we experience adverse developments our outcomes in connection with our efforts to manage the transition in our management team and governance structure. In the event that our management teamcorporate responsibility procedures or standards do not meet the standards set by various constituencies. Furthermore, if our competitors’ corporate responsibility performance is unableperceived to effectively managebe greater than ours, potential or current investors may elect to invest with our business, for example, during this time period,competitors instead. In addition, in the event that we may experience a declinecommunicate certain initiatives and goals regarding environmental, social and governance matters, we could fail, or be perceived to fail, in our businessachievement of such initiatives or goals, or we could be criticized for the scope of such initiatives or goals. If we fail to satisfy the expectations of investors, employees and other stakeholders or our initiatives are not executed as planned, our reputation and financial results of operation. In addition, uncertainty regarding the effectiveness of these managementcould be materially and governance transitions may harm our business in other ways and may adversely affect the trading price of our common stock.affected.
Risks Related to Our Organizational Structure
RIHI has substantial controlinfluence over us including over decisions that require the approval of stockholders, and its interest in our business may conflict with yours.
RIHI, isa company controlled by David Liniger, our current Chairman and Co-Founder, and Gail Liniger, our Vice Chair and Co-Founder, respectively, holds a majority of the combined voting power of our capital stock through its ownership of 100%owns all of our outstanding Class B common stock. Although RIHI no longer controls a majority of the voting power of RE/MAX Holdings’ common stock, RIHI remains a significant stockholder of the Company and through its ownership of the Class B common stock has no economic rights, sharesholds approximately 41.3% of the voting power of the Company’s stock. Mr. Liniger also owns Class BA common stock entitlewith an additional 1.2% of the holder, without regard tovoting power of the number of shares of Class B common stock held, to a number of votes on matters presented to stockholders of RE/MAX Holdings that is equal to two times the aggregate number of common units of RMCO held by such holder, and unless certain events occur, may continue to do so until October 7, 2018.
Accordingly,Company’s stock. Therefore, RIHI acting alone, has the ability to approve or disapprove substantiallysignificantly influence all matters submitted to a vote of our stockholders. These rights may enable RIHI to consummate transactions that may not be in the best interests of holders of our Class A common stock or, conversely, prevent the consummation of transactions that may be in the best interests of holders of our Class A common stock.
In addition, although RIHI has voting control of us, RIHI’s entire economic interest in us is in the form of its direct interest in RMCO through the ownership of RMCO common units, the payments it may receive from us under its tax receivable agreement and the proceeds it may receive upon any redemption of its RMCO common units, including issuance of shares of our Class A common stock, upon any such redemption and any subsequent sale of such Class A common stock. As a result, RIHI’s interests may conflict with the interests of our Class A common stockholders. For example, RIHI may have a different tax position from us which could influence its decisions regarding certain transactions, especially in light of the existence of the tax receivable agreements that we entered into in connection with our IPO, andincluding whether and when we should terminate the tax receivable agreements and accelerate our obligations thereunder. In addition, RIHI could have an interest in the structuring of future transactions mayto take into consideration theits tax or other considerations, of RIHI, even in situations where no similar considerations are relevant to us.
In addition, Mr. Liniger served as our Co-CEO until February 2018. As described above, in connection with its investigation, the Special Committee concluded that Mr. Liniger violated the Company’s Code of Ethics and other Company policies. Although Mr. Liniger is no longer involved in the day-to-day management of the Company, his control of RIHI and therefore his position as a controlling shareholder of the Company, as well as his position as Chairman of the Board of Directors, may allow him to exert significant influence over the decisions of management and our business, which may result in conflicts with other members of the Board of Directors.
We have incurred and will continue to incur increased costs as a result of operating as a public company, and our management is required to devote substantial time to compliance initiatives.
As a public company, we incur significant legal, accounting, insurance and other expenses, and our management and other personnel devote a substantial amount of time to compliance initiatives resulting from operating as a public company. We anticipate that these costs and compliance initiatives will increase as a result of the ongoing implementation of the remedial measures adopted as a result of the findings of the Special Committee, as described above, as well as in connection with our efforts to remediate the material weakness in our internal control over financial reporting and in our disclosure controls and procedures. In addition, we anticipate further costs and compliance initiatives in connection with the Company having ceased to be an “emerging growth company,” as defined in the JOBS Act, as of December 31, 2016. Because we no longer qualified as an “emerging growth company,” our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 was the first one in which we were required to include an attestation report as to the effectiveness of our internal control over financial reporting that is issued by our independent registered public accounting firm. In addition, we had previously taken advantage of the JOBS Act’s reduced disclosure requirements applicable to “emerging growth companies” regarding executive compensation and exemptions from the requirements of holding advisory “say-on-pay” votes on executive compensation. As of December 31, 2016, we were no longer eligible for such reduced disclosure requirements and exemptions.
We depend on distributions from RMCO to pay taxes and expenses, including payments under the tax receivable agreements, but RMCO’s ability to make such distributions may be subject to various limitations and restrictions.
We have no material assets other than our ownership of common units of RMCO and have no independent means of generating revenue. RMCO is treated as a partnership for U.S. federal income tax purposes and, as such, is not subject to U.S. federal income tax. Instead, taxable income is allocated to RMCO’s partners, including us. As a result, we incur income taxes on our allocable share of any net taxable income of RMCO and are responsible for complying with U.S. and foreign tax laws. Under the terms of RMCO’s fourth amended and restated limited liability company operating agreement, which became effective upon the completion of our IPO (the “New RMCO, LLC agreement”), RMCO is obligated to make tax distributions to its members, including us. In addition to tax expenses, we also incur expenses related to our operations and must satisfy obligations under the terms of the tax receivable agreements, which we expect will be significant over the fifteen-year term. As RMCO’s managing member, we cause RMCO to make distributions in an amount sufficient to allow us to pay our taxes and operating expenses, including any payments due under the tax receivable agreements. However, RMCO’s ability to make such distributions may be subject to various limitations and restrictions including, but not limited to, restrictions on distributions that would either violate any contract or agreement to which RMCO is then a party, including debt agreements, or any applicable law, or that would have the effect of rendering RMCO insolvent. If RMCO does not have sufficient funds to pay tax or other liabilities to fund our operations, we may have to borrow funds, which could adversely affect our liquidity and financial condition and subject us to various restrictions imposed by any such lenders. To the extent we are unable to make payments under the tax receivable agreements for any reason, such payments will be deferred and will accrue interest until paid. If RMCO does not have sufficient funds to make distributions, our ability to declare and pay cash dividends may also be restricted or impaired. See “Risk Factors—Risks Related to Ownership of Our Class A Common Stock.”
Our tax receivable agreements require us to make cash payments based upon future tax benefits to which we may become entitled, and theentitled. The amounts that we may be required to pay could be significant.significant, may be accelerated in certain circumstances and could significantly exceed the actual tax benefits that we ultimately realize.
In connection with our IPO, we entered into tax receivable agreements with our historical owners. After one of these historical owners assigned its interest in its tax receivable agreement, these tax receivable agreements are now held by RIHI and Oberndorf InvestmentsParallaxes Rain Co-Investment, LLC (“Oberndorf”Parallaxes” and together, the “TRA Parties”). The amount of the cash payments that we may be required to make under the tax receivable agreements could be significant and will depend, in part, upon facts and circumstances that are beyond our control.
The amount of our obligations pursuant to the tax receivable agreement with RIHI will depend, in part, upon the occurrence of future events, including any redemptions by RIHI of its ownership interest in RMCO. In general, future redemptions by RIHI will increase our tax receivable agreement obligations to RIHI.Payments under the tax receivable agreements are anticipated to be made, on an annual basis. Any payments made by us to the TRA Parties under the tax receivable agreements will generally reduce the amount of overall cash flow that might have otherwise been available to us. To the extent we are unable to make timely payments under the tax receivable agreements for any reason, the unpaid amounts will be deferred and will accrue interest until paid by us. Furthermore, our future obligation to make payments under the tax receivable agreements could make us a less attractive target for an acquisition, particularly in the case of an acquirer that cannot use some or all of the tax benefits that may be deemed realized under the tax receivable agreements. The payments under the tax receivable agreement with RIHI are not conditioned upon RIHI maintaining a continued ownership interest in either RMCO or us, and payments under the tax receivable agreement with Oberndorf are not conditioned upon Oberndorf holding any ownership interest in either RMCO or us.
The amounts that we may be required to pay to the TRA Parties under the tax receivable agreements may be accelerated in certain circumstances and may also significantly exceed the actual tax benefits that we ultimately realize.
The tax receivable agreements provide that if certain mergers, asset sales, other forms of business combination, or other changes of control were to occur, or that if, at any time, we elect an early termination of the tax receivable agreements, then our obligations, or our successor’s obligations, to make payments under the tax receivable agreements would be
based on certain assumptions, including an assumption that we would have sufficient taxable income to fully utilize all potential future tax benefits that are subject to the tax receivable agreements.
As a result, (i) we could be required to make cash payments to the TRA Parties that are greater than the specified percentage of the actual benefits we ultimately realize in respect of the tax benefits that are subject to the tax receivable agreements, and (ii) if we elect to terminate the tax receivable agreements early, we would be required to make an immediate cash payment equal to the present value of the anticipated future tax benefits that are the subject of the tax receivable agreements, which payment may be made significantly in advance of the actual realization, if any, of such future tax benefits. In these situations, our obligations under the tax receivable agreements could have a substantial negative impact on our liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combination, or other changes of control. There can be no assurance that we will be able to finance our obligations under the tax receivable agreements.
We will also not be reimbursed for any cash payments previously made to the TRA Parties (or their predecessors) pursuant to the tax receivable agreements if any tax benefits initially claimed by us are subsequently challenged by a taxing authority and are ultimately disallowed. Instead, any excess cash payments made by us to either of the TRA Parties will be netted against any future cash payments that we might otherwise be required to make under the terms of the tax receivable agreements. However, we might not determine that we have effectively made an excess cash payment to either of the TRA Parties for a number of years following the initial time of such payment. As a result, it is possible that we could make cash payments under the tax receivable agreements that are substantially greater than our actual cash tax savings.
If we were deemed to be an investment company under the Investment Company Act of 1940, as amended (the “1940 Act”) as a result of our ownership of RMCO, applicable restrictions could make it impractical for us to continue our business as contemplated and could have an adverse effect on our business.
Under Sections 3(a)(1)(A) and (C) of the 1940 Act, a company generally will be deemed to be an “investment company” for purposes of the 1940 Act if (i) it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities or (ii) it engages, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and it owns or proposes to acquire investment securities having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. We do not believe that we are an “investment company,” as such term is defined in either of those sections of the 1940 Act.
As the sole managing member of RMCO, we control and operate RMCO. On that basis, we believe that our interest in RMCO is not an “investment security” as that term is used in the 1940 Act. However, if we were to cease participation in the management of RMCO, our interest in RMCO could be deemed an “investment security” for purposes of the 1940 Act.
We and RMCO intend to conduct our operations so that we will not be deemed an investment company. However, if we were to be deemed an investment company, restrictions imposed by the 1940 Act, including limitations on our capital structure and our ability to transact with affiliates, could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our business.
Risks Related to Ownership of Our Class A Common Stock
RIHI directly (through ownership of our Class B common stock) and indirectly (through ownership of RMCO common units) owns interests in us, and RIHI has the right to redeem and cause us to redeem, as applicable, such interests pursuant to the terms of the New RMCO, LLC agreement. We may elect to issue shares of Class A common stock upon such redemption, and the issuance and sale of such shares may have a negative impact on the market price of our Class A common stock.
As of December 31, 2017, we had 149,743,409 shares of Class A common stock authorized but unissued, and an additional 12,559,600 shares of Class A common stock unauthorized and unissued but reserved for issuance upon redemption of RMCO common units that are held by RIHI. In connection with our IPO, RMCO entered into the New RMCO, LLC agreement, and subject to certain restrictions set forth therein, RIHI is entitled to potentially redeem the RMCO common units it holds for an aggregate of up to 12,559,600 shares of our Class A common stock, subject to
customary adjustments. We also have entered into a registration rights agreement pursuant to which the shares of Class A common stock issued upon such redemption are eligible for resale, subject to certain limitations set forth therein.
We cannot predict the size of future issuances of our Class A common stock or the effect, if any, that future issuances and sales of shares of our Class A common stock may have on the market price of our Class A common stock. Sales or distributions of substantial amounts of our Class A common stock, including shares issued in connection with an acquisition, or the perception that such sales or distributions could occur, may cause the market price of our Class A common stock to decline.
The dual class structure of our common stock has the effect of concentrating voting control with RIHI and David Liniger, our Chairman and Co-Founder, as well as his spouse Gail Liniger, our Vice Chair and Co-Founder.
The Class B common stock has no economic rights but entitles the holder, without regard to the number of shares of Class B common stock held, to a number of votes on matters presented to stockholders of RE/MAX Holdings that is equal to two times the aggregate number of common units of RMCO held by such holder. Our Class A common stock has one vote per share.
Based on the voting rights associated with our Class B common stock, and the number of common units of RMCO that RIHI currently owns, RIHI holds nearly 60% of the voting power of our outstanding capital stock. As a result, RIHI controls a majority of the combined voting power of our common stock and therefore is able to control all matters submitted to our stockholders for approval. This concentrated control will limit or preclude your ability to influence corporate matters for the foreseeable future.
RIHI is a Delaware corporation that is majority owned and controlled by David Liniger, our Chairman and Co-Founder, and Gail Liniger, our Vice Chair and Co-Founder. Mr. Liniger served as our Co-CEO until February 2018. As described above, in connection with its investigation, the Special Committee concluded that Mr. Liniger violated the Company’s Code of Ethics and other Company policies. Although Mr. Liniger is no longer involved in the day-to-day management of the Company, his control of RIHI and therefore his position as a controlling shareholder of the Company gives him significant influence over the decisions of management. Any differences in the interests of Mr. Liniger and the interests of owners of our Class A common stock may have a negative impact on the market price of our Class A common stock and may harm our business, financial condition and results of operations.
You may be diluted by future issuances of additional Class A common stock in connection with our incentive plans, acquisitions or otherwise; future sales of such shares in the public market, or the expectations that such sales may occur, could lower our stock price.
Our certificate of incorporation authorizes us to issue shares of Class A common stock and options, rights, warrants and appreciation rights relating to Class A common stock for the consideration and on the terms and conditions established by our Board of Directors in its sole discretion. This could include issuances as compensation pursuant to our 2013 Omnibus Incentive Plan, in connection with acquisitions (either by issuing shares to raise funds for such an acquisition, or by issuing shares to the seller of the acquired business) or to raise capital for other purposes. Any Class A common stock that we issue, including under our 2013 Omnibus Incentive Plan or other equity incentive plans that we may adopt in the future, would dilute the percentage ownership held by the investors who own Class A common stock.
Our Class A common stock price may be volatile or may decline regardless of our operating performance and you may not be able to resell your shares at or above the price you paid for them.
Many factors, which are outside our control, may cause the market price of our Class A common stock to fluctuate significantly, including those described elsewhere in this “Risk Factors” section, as well as the following:
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| | our operating and financial performance and prospects;
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| | our quarterly or annual earnings or those of other companies in our industry compared to market expectations;
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| | conditions that impact demand for our services, including the condition of the U.S. residential housing market
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unrelated to our performance;
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| | future announcements concerning our business or our competitors’ businesses;
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| | the public’s reaction to our press releases, other public announcements and filings with the SEC;
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| | the size of our public float;
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| | coverage by or changes in financial estimates by securities analysts or failure to meet their expectations;
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| | market and industry perception of our success, or lack thereof, in pursuing our growth strategy;
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| | strategic actions by us or our competitors, such as acquisitions or restructurings;
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| | changes in government and environmental regulation;
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| | housing and mortgage finance markets;
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| | changes in accounting standards, policies, guidance, interpretations or principles;
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| | changes in senior management or key personnel;
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| | issuances, exchanges or sales, or expected issuances, exchanges or sales of our capital stock;
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| | adverse resolution of new or pending litigation against us;
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| | changes in general market, economic and political conditions in the U.S. and global economies or financial markets, including those resulting from natural disasters, terrorist attacks, acts of war and responses to such events; and
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| | material weakness in our internal control over financial reporting.
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Volatility in the market price of our common stock may prevent investors from being able to sell their common stock at or above the price they paid for the stock. In addition, price volatility may be greater if the public float and trading volume of our common stock is low. As a result, you may suffer a loss on your investment.
We cannot assure you that we will have the available cash to make dividend payments.
We intend to continue to pay cash dividends quarterly. Whether we will do so, however, and the timing and amount of those dividends, will be subject to approval and declaration by our Board of Directors and will depend upon on a variety of factors, including our financial results, cash requirements and financial condition, our ability to pay dividends under our senior secured credit facility and any other applicable contracts, and other factors deemed relevant by our Board of Directors. Any dividends declared and paid will not be cumulative.
Because we are a holding company with no material assets other than our ownership of common units of RMCO, we have no independent means of generating revenue or cash flow, and our ability to pay dividends is dependent upon the financial results and cash flows of RMCO and its subsidiaries and distributions we receive from RMCO. We expect to cause RMCO to make distributions to fund our expected dividend payments, subject to applicable law and any restrictions contained in RMCO’s or its subsidiaries’ current or future debt agreements.
Anti-takeover provisions in our charter documents and Delaware law might discourage or delay acquisition attempts for us that you might consider favorable.
Our certificate of incorporation and bylaws contain provisions that may make the acquisition of our company more difficult without the approval of our Board of Directors. These provisions:
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● | | establish a classified Board of Directors so that not all members of our Board of Directors are elected at one time; |
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● | | authorize the issuance of undesignated preferred stock, the terms of which may be established and the shares of which may be issued without stockholder approval, and which may include super voting, special approval, |
dividend or other rights or preferences superior to the rights of the holders of common stock; |
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● | | provide that our Board of Directors is expressly authorized to make, alter or repeal our bylaws; |
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● | | delegate the sole power to a majority of our Board of Directors to fix the number of directors; |
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● | | provide the power of our Board of Directors to fill any vacancy on our Board of Directors, whether such vacancy occurs as a result of an increase in the number of directors or otherwise; |
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● | | eliminate the ability of stockholders to call special meetings of stockholders; and |
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● | | establish advance notice requirements for nominations for elections to our Board of Directors or for proposing matters that can be acted upon by stockholders at stockholder meetings. |
Our certificate of incorporation also contains a provision that provides us with protections similar to Section 203 of the Delaware General Corporation Law, and prevents us from engaging in a business combination with a person who acquires at least 15% of our common stock for a period of three years from the date such person acquired such common stock unless board or stockholder approval is obtained prior to the acquisition, except that David and Gail Liniger are deemed to have been approved by our Board of Directors, and thereby not subject to these restrictions. These anti-takeover provisions and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change in control of our Company, even if doing so would benefit our stockholders. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and to cause us to take other corporate actions you desire
.desire.
ITEM 1B. UNRESOLVED STAFF COMMENTS
COMMENTS
None.
ITEM 2. PROPERTIES
Our corporate headquarters is located in leased offices in Denver, Colorado. The lease consists of approximately 231,000 square feet and expires in April 2028. As discussedWe also lease an office building in Note 5, AcquisitionsDenver, Colorado for our booj operations. The lease consists of approximately 20,000 square feet and Dispositions we sold certain operating assets and liabilities related to 21 Company-owned real estate brokerage offices during 2015 and the first quarter of 2016. In connection with these sales, we assigned the related operating leases to the respective purchasers.expires in February 2034.
ITEM 3. LEGAL PROCEEDINGS
FromAs disclosed in Note 15 Commitments and Contingencies, from time to time we are involved in litigation, claims and other proceedings relating to the conduct of our business.business, and the disclosures set forth in Note 15 relating to certain legal matters is incorporated herein by reference. Such litigation and other proceedings may include, but are not limited to, actions relating to intellectual property, commercial arrangements, franchising arrangements, brokerage disputes, vicarious liability based upon conduct of individuals or entities outside of our control including franchisees and independent agents, and employment law claims. Litigation and other disputes are inherently unpredictable and subject to substantial uncertainties and unfavorable resolutions could occur. Often these cases raise complex factual and legal issues, which are subject to risks and uncertainties and which could require significant time and resources from management. LitigationAlthough we do not believe any currently pending litigation will have a material adverse effect on our business, financial condition or operations, there are inherent uncertainties in litigation and other claims and regulatory proceedings against usand such pending matters could result in unexpected expenses and liabilities and could alsomight materially adversely affect our business, financial condition or operations, andincluding our reputation.
ITEM 4. MINE SAFETY DISCLOSURES
None.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY,EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Shares of ourOur Class A common stock began tradingtrades on the New York Stock Exchange (“NYSE”) under the symbol “RMAX” on October 2, 2013. Prior to that date, there was no public trading market for shares of our Class A common stock.. As of March 1, 2018,February 20, 2020, we had 2265 stockholders of record of our Class A common stock. This number does not include stockholders whose stock is held in nominee or street name by brokers. All shares of Class B common stock are owned by RIHI, Inc. (“RIHI”), and there is no public market for these shares.
The following table shows the highest and lowest prices paid per share for our Class A common stock as well as dividends declared per share during the calendar quarter indicated below for
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For the years ended December 31, 20172019 and 2016.
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| | Class A Common Stock | | Dividends |
| | Market Price | | Declared |
| | Highest | | Lowest | | per Share |
2017 | | | | | | | | | |
First quarter | | $ | 60.90 | | $ | 53.10 | | $ | 0.18 |
Second quarter | | $ | 60.25 | | $ | 53.15 | | $ | 0.18 |
Third quarter | | $ | 64.60 | | $ | 56.50 | | $ | 0.18 |
Fourth quarter | | $ | 67.20 | | $ | 46.30 | | $ | 0.18 |
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2016 | | | | | | | | | |
First quarter | | $ | 36.54 | | $ | 30.54 | | $ | 0.15 |
Second quarter | | $ | 42.25 | | $ | 34.53 | | $ | 0.15 |
Third quarter | | $ | 44.33 | | $ | 39.47 | | $ | 0.15 |
Fourth quarter | | $ | 56.40 | | $ | 41.67 | | $ | 0.15 |
4
During 2017, our Board of Directors declared quarterly cash dividends of $0.18 per share of Class A common stock, which were paid on March 22, 2017, May 31, 2017, August 30, 2017 and November 29, 2017. During 2016, our Board of Directors declared quarterly cash dividends of $0.15 per share of Class A common stock, which were paid on March 23, 2016, June 2, 2016, August 31, 2016 and December 1, 2016. On February 21, 2018 our Board of Directorswe declared a quarterly cash dividend of$0.21 and $0.20 per share on all outstanding shares of Class A common stock, which is payable on March 21, 2018 to stockholders of record at the close of business on March 7, 2018.dividend for each quarter during those calendar years, respectively. We intend to continue to pay a cash dividend on shares of Class A common stock on a quarterly basis. However the timing and amount of those dividends will be subject to approval and declaration by our Board of Directors and will depend on a variety of factors, including the financial results and cash flows of RMCO, LLC and its consolidated subsidiaries (“RMCO”), distributions we receive from RMCO, our financial results, cash requirements and financial condition, our ability to pay dividends under our senior secured credit facility and any other applicable contracts, and other factors deemed relevant by our Board of Directors. All dividends declared and paid will not be cumulative. See Note 5, Earnings Per Share and Dividends to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further information.
Performance Graph
The following graph and table depict the total return to stockholders from October 2,December 31, 2013 (the date our Class A common stock began trading on the NYSE) through December 31, 2017,2019, relative to the performance of the S&P 500 Index Russell 2000 (Total Return) Index and a peer group of real estate and franchise related companies.S&P Homebuilders Select Industry Index. The graph and table assumeassumes that $100 was invested at the closing price of $27.00 on October 2, 2013 (rather than the IPO price of $22.00 per share)December 31, 2014 and that all dividends were reinvested.
The performance graph and table areis not intended to be indicative of future performance. The performance graph and table shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any of the Company’s filings under the Securities Act of 1933, as amended, or the Exchange Act.
Other franchise and real estate related companies include the following: Realogy Holding Corp., Dunkin’ Brands Group Inc., Domino’s Pizza Inc., Yum! Brands Inc., Choice Hotels International Inc., Marriott International Inc., CBRE Group Inc. and Jones Lang LaSalle Inc. For purposes of the chart and table, the companies in this peer group are weighted according to their market capitalization.
4
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth our selected historical consolidated financial results and other data as of the dates and for the periods indicated. The selected consolidated statements of income data for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, and the consolidated balance sheets data as of December 31, 20172019 and 20162018 have been derived from our audited consolidated financial statements (“financial statements”) included elsewhere in this Annual Report on Form 10-K.
The selected consolidated statements of income data for the years ended December 31, 20142016 and 20132015 and the selected consolidated balance sheets data as of December 31, 2015, 20142017, 2016 and 20132015 have been derived from our audited consolidated financial statements not included in this Annual Report on Form 10-K.
After the completionAs of our initial public offering on October 7, 2013,December 31, 2014, RE/MAX Holdings, Inc. (“RE/MAX Holdings”) owned 39.56%39.9% of the common membership units in RMCO, LLC and its consolidated subsidiaries (“RMCO”), and as of December 31, 2017, RE/MAX2019, Holdings owns 58.49%58.7% of the common membership units in RMCO. RE/MAX Holdings’ economic interest in RMCO increased primarily due to the issuance of shares of Class A common stock as a result of RIHI’s redemption of 5.2 million common units in RMCO during the fourth quarter of 2015. RE/MAX Holdings’ only business is to act as the sole manager of RMCO and in that capacity, RE/MAX Holdings operates and controls all of the business and affairs of RMCO. Our selected historical financial data does not reflect what our financial position, results of operations and cash flows would have been had we been a separate, stand-alone public company during those periods.
Our selected historical financial data may not be indicative of our future financial condition, future results of operations or future cash flows.
You should read the information set forth below in conjunction with our historical consolidated financial statements and the notes to those statements and “Item 7.—Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K.
| | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 | | 2016 | | 2015 (1) |
| | (in thousands, except per share amounts and agent data) |
Total revenue: | | | | | | | | | | | | | | | |
Continuing franchise fees | | $ | 99,928 | | $ | 101,104 | | $ | 93,694 | | $ | 81,197 | | $ | 73,750 |
Annual dues | | | 35,409 | | | 35,894 | | | 33,767 | | | 32,653 | | | 31,758 |
Broker fees | | | 45,990 | | | 46,871 | | | 43,801 | | | 37,209 | | | 32,334 |
Marketing Funds fees | | | 72,299 | | | — | | | — | | | — | | | — |
Franchise sales and other revenue | | | 28,667 | | | 28,757 | | | 22,452 | | | 24,471 | | | 25,468 |
Brokerage revenue | | | — | | | — | | | — | | | 112 | | | 13,558 |
Total revenue | | | 282,293 | | | 212,626 | | | 193,714 | | | 175,642 | | | 176,868 |
Operating expenses: | | | | | | | | | | | | | | | |
Selling, operating and administrative expenses | | | 118,890 | | | 120,179 | | | 106,946 | | | 88,037 | | | 91,561 |
Marketing Funds expenses | | | 72,299 | | | — | | | — | | | — | | | — |
Depreciation and amortization | | | 22,323 | | | 20,678 | | | 20,512 | | | 16,094 | | | 15,124 |
Loss (gain) on sale or disposition of assets, net | | | 342 | | | 63 | | | 660 | | | 178 | | | (3,397) |
Gain on reduction in tax receivable agreement liability | | | — | | | (6,145) | | | (32,736) | | | — | | | — |
Total operating expenses | | | 213,854 | | | 134,775 | | | 95,382 | | | 104,309 | | | 103,288 |
Operating income | | | 68,439 | | | 77,851 | | | 98,332 | | | 71,333 | | | 73,580 |
Other expenses, net: | | | | | | | | | | | | | | | |
Interest expense | | | (12,229) | | | (12,051) | | | (9,996) | | | (8,596) | | | (10,413) |
Interest income | | | 1,446 | | | 676 | | | 352 | | | 160 | | | 178 |
Foreign currency transaction (losses) gains | | | 109 | | | (312) | | | 174 | | | (86) | | | (1,661) |
Loss on early extinguishment of debt | | | — | | | — | | | — | | | (796) | | | (94) |
Equity in earnings of investees | | | — | | | — | | | — | | | — | | | 1,215 |
Total other expenses, net | | | (10,674) | | | (11,687) | | | (9,470) | | | (9,318) | | | (10,775) |
Income before provision for income taxes | | | 57,765 | | | 66,164 | | | 88,862 | | | 62,015 | | | 62,805 |
Provision for income taxes | | | (10,909) | | | (16,342) | | | (57,542) | | | (15,167) | | | (12,030) |
Net income | | | 46,856 | | | 49,822 | | | 31,320 | | | 46,848 | | | 50,775 |
Less: net income attributable to non-controlling interests | | | 21,816 | | | 22,939 | | | 21,221 | | | 24,627 | | | 34,363 |
Net income attributable to RE/MAX Holdings, Inc. | | $ | 25,040 | | $ | 26,883 | | $ | 10,099 | | $ | 22,221 | | $ | 16,412 |
Earnings Per Share Data: | | | | | | | | | | | | | | | |
Basic | | $ | 1.41 | | $ | 1.52 | | $ | 0.57 | | $ | 1.26 | | $ | 1.30 |
Diluted | | $ | 1.40 | | $ | 1.51 | | $ | 0.57 | | $ | 1.26 | | $ | 1.28 |
Other Data: | | | | | | | | | | | | | | | |
Agent count at period end (unaudited) | | | 130,889 | | | 124,280 | | | 119,041 | | | 111,915 | | | 104,826 |
Cash dividends declared per share of Class A common stock | | $ | 0.84 | | $ | 0.80 | | $ | 0.72 | | $ | 0.60 | | $ | 2.00 |
| (1) | Effective January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), the new revenue recognition standard, retrospectively. Financial results for 2015 have not been recast and are therefore not comparable. |
Table of Contents
| | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| | (in thousands, except per share amounts and agent data) |
Total revenue: | | | | | | | | | | | | | | | |
Continuing franchise fees | | $ | 93,694 | | $ | 81,197 | | $ | 73,750 | | $ | 72,706 | | $ | 64,465 |
Annual dues | | | 33,767 | | | 32,653 | | | 31,758 | | | 30,726 | | | 29,524 |
Broker fees | | | 43,801 | | | 37,209 | | | 32,334 | | | 28,685 | | | 24,811 |
Franchise sales and other franchise revenue | | | 24,667 | | | 25,131 | | | 25,468 | | | 23,440 | | | 23,574 |
Brokerage revenue | | | — | | | 112 | | | 13,558 | | | 15,427 | | | 16,488 |
Total revenue | | | 195,929 | | | 176,302 | | | 176,868 | | | 170,984 | | | 158,862 |
Operating expenses: | | | | | | | | | | | | | | | |
Selling, operating and administrative expenses (2) | | | 107,268 | | | 88,213 | | | 91,561 | | | 92,400 | | | 96,243 |
Depreciation and amortization | | | 20,512 | | | 16,094 | | | 15,124 | | | 15,316 | | | 15,166 |
Loss (gain) on sale or disposition of assets, net | | | 660 | | | 178 | | | (3,397) | | | (14) | | | 373 |
Gain on reduction in tax receivable agreement liability | | | (32,736) | | | — | | | — | | | — | | | — |
Total operating expenses | | | 95,704 | | | 104,485 | | | 103,288 | | | 107,702 | | | 111,782 |
Operating income | | | 100,225 | | | 71,817 | | | 73,580 | | | 63,282 | | | 47,080 |
Other expenses, net: | | | | | | | | | | | | | | | |
Interest expense | | | (9,996) | | | (8,596) | | | (10,413) | | | (9,295) | | | (14,647) |
Interest income | | | 352 | | | 160 | | | 178 | | | 313 | | | 321 |
Foreign currency transaction gains (losses) | | | 174 | | | (86) | | | (1,661) | | | (1,348) | | | (764) |
Loss on early extinguishment of debt | | | — | | | (796) | | | (94) | | | (178) | | | (1,798) |
Equity in earnings of investees | | | — | | | — | | | 1,215 | | | 600 | | | 904 |
Total other expenses, net | | | (9,470) | | | (9,318) | | | (10,775) | | | (9,908) | | | (15,984) |
Income before provision for income taxes | | | 90,755 | | | 62,499 | | | 62,805 | | | 53,374 | | | 31,096 |
Provision for income taxes | | | (55,576) | | | (15,273) | | | (12,030) | | | (9,948) | | | (2,844) |
Net income (2) | | | 35,179 | | | 47,226 | | | 50,775 | | | 43,426 | | | 28,252 |
Less: net income attributable to non-controlling interests | | | 22,364 | | | 24,830 | | | 34,363 | | | 30,209 | | | 26,746 |
Net income attributable to RE/MAX Holdings, Inc. (2) | | $ | 12,815 | | $ | 22,396 | | $ | 16,412 | | $ | 13,217 | | $ | 1,506 |
Earnings Per Share Data: | | | | | | | | | | | | | | | |
Basic (1) | | $ | 0.72 | | $ | 1.27 | | $ | 1.30 | | $ | 1.14 | | $ | 0.13 |
Diluted (1) | | $ | 0.72 | | $ | 1.27 | | $ | 1.28 | | $ | 1.08 | | $ | 0.12 |
Other Data: | | | | | | | | | | | | | | | |
Agent count at period end (unaudited) | | | 119,041 | | | 111,915 | | | 104,826 | | | 98,010 | | | 93,228 |
Cash dividends declared per share of Class A common stock | | $ | 0.72 | | $ | 0.60 | | $ | 2.00 | | $ | 0.25 | | $ | — |
| | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2019 | | 2018 | | 2017 | | 2016 | | 2015 (1) |
| | (in thousands) |
Cash and cash equivalents | | $ | 83,001 | | $ | 59,974 | | $ | 50,807 | | $ | 57,609 | | $ | 110,212 |
Restricted cash (2) | | | 20,600 | | | — | | | — | | | — | | | — |
Franchise agreements, net | | | 87,670 | | | 103,157 | | | 119,349 | | | 109,140 | | | 61,939 |
Goodwill | | | 159,038 | | | 150,684 | | | 135,213 | | | 126,633 | | | 71,871 |
Total assets | | | 542,352 | | | 428,373 | | | 413,934 | | | 444,683 | | | 383,786 |
Payable pursuant to tax receivable agreements, including current portion | | | 37,223 | | | 40,787 | | | 53,175 | | | 98,809 | | | 100,035 |
Debt, including current portion | | | 225,681 | | | 227,787 | | | 228,986 | | | 230,820 | | | 200,357 |
Total stockholders' equity | | | 98,376 | | | 75,014 | | | 45,408 | | | 40,615 | | | 39,414 |
| (1) | (1)
Effective January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), the new revenue recognition standard, retrospectively. Financial results for 2015 have not been recast and therefore are not comparable. |
| (2) | | We consummated our initial public offering on October 7, 2013. Since that date, we have consolidated the results of RMCO due to our role as RMCO’s managing member. Therefore, all income for the periods prior to October 7, 2013Restricted cash is entirely attributable to the non-controlling interestsMarketing Funds, which existed priorwere acquired January 1, 2019. See Note 6, Acquisitions to the initial public offering. As a result, in the computation of earnings per share in accordance with U.S. generally accepted accounting principles, only the net income attributable to our controlling interests from the period subsequent to the initial public offering is considered. Additionally, the computation of weighted average basic and diluted shares of Class A common stock outstandingaccompanying consolidated financial statements for the year ended December 31, 2013 only considers the outstanding shares from the date our Class A common stock started trading on the New York Stock Exchange, October 2, 2013, through December 31, 2013.
more information. |
| (2)
| | Prior period amounts reflect an immaterial correction that resulted in increases in “Selling, operating, and administrative expenses” of $584,000, $575,000 and $553,000, decreases in “Net Income” of $584,000, $575,000 and $553,000 and decreases in “Net Income attributable to RE/MAX Holdings, Inc.” of $341,000, $243,000 and $219,000 in the Consolidated Statements of Income for the years ended December 31, 2016, 2015 and 2014, respectively. See Note 18, Immaterial Corrections to Prior Period Financial Statements for additional information.
|
| | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| | (in thousands) |
| | | | | | | | | | | | | | | |
Cash | | $ | 50,807 | | $ | 57,609 | | $ | 110,212 | | $ | 107,199 | | $ | 88,375 |
Franchise agreements, net | | | 119,349 | | | 109,140 | | | 61,939 | | | 75,505 | | | 89,071 |
Goodwill | | | 135,213 | | | 126,633 | | | 71,871 | | | 72,463 | | | 72,781 |
Total assets | | | 406,562 | | | 437,153 | | | 383,786 | | | 356,431 | | | 350,470 |
Payable pursuant to tax receivable agreements, including current portion | | | 53,175 | | | 98,809 | | | 100,035 | | | 67,418 | | | 68,840 |
Debt, including current portion | | | 228,986 | | | 230,820 | | | 200,357 | | | 209,777 | | | 226,051 |
Total stockholders' equity/members' deficit | | | 69,395 | | | 60,709 | | | 39,414 | | | 39,283 | | | 15,539 |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our consolidated financial statements (“financial statements”) and accompanying notes thereto included elsewhere in this Annual Report on Form 10-K. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. See “Special Note Regarding Forward-Looking“Forward-Looking Statements” and “Item 1A.—Risk Factors” for a discussion of the uncertainties, risks and assumptions associated with these statements. Actual results may differ materially from those contained in any forward-looking statements.
The historical results of operations discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are those of RE/MAX Holdings, Inc. (“RE/MAX Holdings”) and its consolidated subsidiaries (collectively, the “Company,” “we,” “our” or “us”), including RMCO, LLC. (“RMCO”).
Business Overview
We are one of the world’s leading franchisors in the real estate industry, franchising real estate brokerages globally under the RE/MAX brand (“RE/MAX”) and mortgage brokerages within the U.S. under the Motto Mortgage brand (“Motto”). RE/MAX, founded in 1973, has over 115,000 agents operating in over 7,000 offices and a presence in more than 100 countries and territories. Nobody in the world sells more real estate than RE/MAX, as measured by residential transaction sides. The RE/MAX brand has the highest level of unaided brand awareness in real estate in the U.S. and Canada according to a consumer study conducted by MMR Strategy Group, and our iconic red, white and blue RE/MAX hot air balloon is one of the most recognized real estate logos in the world. Motto, founded in 2016, is the first national mortgage brokerage franchise offering in the U.S.
Special Committee Investigation
In October 2017, our Board of Directors appointed a special committee of independent directors (the “Special Committee”) to investigate actions of certain members of the Company’s senior management including (i) a previously undisclosed loan from David L. Liniger, the Company’s controlling stockholder, Chairman and former Chief Executive Officer to Adam M. Contos, the Company’s Chief Executive Officer, (ii) certain other transactions, including cash and non-cash gifts from David and Gail Liniger to Mr. Contos and others over a period of time, and (iii) wrongdoing in employment practices and workplace conduct (the “Special Committee Investigation”). The Special Committee Investigation was performed with the assistance of independent outside advisors and was completed in February 2018.
Although the loan, gifts, and other transactions between the Linigers and Mr. Contos did not involve use of any corporate funds, the Special Committee concluded that these transactions created an actual or apparent conflict of interest. The Special Committee also concluded that Mr. Liniger and Mr. Contos violated the Company’s Supplemental Code of Ethics for CEO and Senior Financial Officers (the “Code of Ethics”) by engaging in these transactions and by failing to report them to the Company. The Special Committee concluded that credible evidence did not substantiate that Mr. Liniger and Mr. Contos intentionally failed to disclose the loan or gifts.
The Special Committee also identified other instances of noncompliance by Mr. Liniger with the Code of Ethics and other Company policies related to workplace conduct, which were limited to Mr. Liniger’s actions and did not extend to other members of the Company’s leadership team.
As a result of the Special Committee investigation, the Company’s management team is implementing, under the oversight of the independent members of the Board of Directors, remedial measures to address various findings of the Special Committee as well as to address deficiencies in our internal controls. These efforts include among other matters (i) enhanced corporate policies and practices including with respect to gifts, loans, conflicts of interest and workplace conduct, (ii) enhanced procedures and practices concerning reporting including with respect to compliance matters, (iii) enhanced training on a range of matters including the responsibilities of officers and leaders related to workplace conduct and various compliance issues, (iv) a range of other actions designed to reinforce changes to the corporate culture in key areas including compliance and workplace practices, and (v) various remedial measures in connection with
the deficiencies in our internal controls over financial reporting including an identified material weakness. The remedial measures referred to above are in process and not complete as of the date of this Annual Report on Form 10-K and it is expected that these remedial measures and improvements to governance and corporate policies and practices will continue in future periods over a sustained period of time. See “Item 9A—Controls and Procedures—Remediation.”
During the fourth quarter of 2017, the Company incurred $2.6 million in expenses related to the Special Committee investigation, and will continue to incur significant expenses in the first quarter of 2018 and future periods related to the Special Committee investigation and the ongoing implementation of the remedial measures adopted as a result of the findings of the Special Committee as well as the control deficiencies including the identified material weakness.
Financial and Operational Highlights – Year Ended December 31, 20172019
(Compared to the year ended December 31, 20162018 unless otherwise noted)
| ·
● | Deployed the booj Platform to the majority of agents in U.S. Company-owned Regions |
| ● | Acquired First, a data science and machine learning company. |
| ● | Total agent count grewincreased by 6.4%5.3% to 119,041 agents130,889 agents. |
| ·
● | | U.S. and Canada combined agent count increased 2.3%0.3% to 84,274 agents 84,688 agents. |
| ·
● | | Acquired the master franchise rightsTotal open Motto Mortgage offices increased to Northern Illinois
111 offices. |
| ·
● | | Revenue of $195.9$282.3 million, up 11.1%32.8% from the prior year year. Excluding the acquisition of the Marketing Funds, revenue decreased $2.6 million from the prior year. |
| ·
● | | Net income attributable to RE/MAX Holdings, Inc. of $12.8 million, which includes an $8.2 million net expense impact from the Tax Cuts and Jobs Act $25.0 million. |
| ·
● | | Adjusted EBITDA of $103.9$103.5 million and Adjusted EBITDA margin of 53.0% 36.7%. Adjusted EBITDA margin decreased from the prior year because of the acquisition of the Marketing Funds, which increased revenue, but had no impact to Adjusted EBITDA. |
During 2017,As of December 31, 2019, we grew our total agent count 5.3% as compared to 2018, surpassing 130,000 agents for the first time in our history, led by strong growth in our international markets. During 2019, our stable business organicallymodel delivered resilient revenue and margin performance despite the soft housing market that prevailed during the first part of the year. Agent count in the combined U.S. and Canada markets were virtually flat at 0.3% growth from the prior year, with improvement in the fourth quarter. Rejuvenating agent count growth in the U.S. has been and will continue to be a top priority. Some of the more impactful forces on our U.S. agent count growth in the fourth quarter of 2019 included: our enterprise-wide focus on growth, our ongoing technology transformation, improving housing market conditions and perhaps most notably, the introduction of several recruiting initiatives including some that incentivized recruitment through temporary waivers of fees for new agents. Motto continued to expand with 111 open franchises as of December 31, 2019, which is an increase of 42.3% since December 31, 2018. Revenue, excluding the Marketing Funds, declined 1.2% during 2019 as compared to the prior year period, driven by weak housing market conditions in the U.S. and parts of Canada during the first part of the year, decreased average agent count in the U.S. and Canada owned regions and attrition of some of booj’s legacy customers, offset by the expansion of Motto and healthy international agent growth. Adjusted EBITDA decreased $0.8 million primarily due to higher bad debt expense, higher property tax expense, additional training expenses for the launch of the booj technology platform and lower organic revenue, partially offset by lower professional fees and severance costs.
We continued to invest in our value proposition and began introducing the powerful, fully integrated booj Platform that has been custom-built for RE/MAX’s unique entrepreneurial culture in the third quarter of 2019 in our U.S. Company-owned Regions, with additional functionality added in the fourth quarter. We deployed an increaseenhanced consumer facing app and www.remax.com experience in broker feeJanuary 2020 and plan to continue to innovate and release ongoing updates to the
Platform in the future. Later in 2020, we plan to offer the booj Platform to participating U.S. Independent Regions and to Canada. Ultimately, we plan to offer the booj Platform throughout our global network. We will continue to invest in future growth opportunities, including those that diversify our revenue as a result of rising average home priceslike the exciting First mobile app, which we expect to be accretive in 2021 but to adversely impact Adjusted EBITDA in 2020 by $1.5 million to $2.5 million.
Financial and changing agent mix,Operational Highlights – Year Ended December 31, 2018
(Compared to year ended December 31, 2017 unless otherwise noted)
| ● | Total agent count increased by 4.4% to 124,280 agents. |
| ● | U.S. and Canada combined agent count increased 0.2% to 84,449 agents. |
| ● | Total open Motto Mortgage franchises more than doubled to 78 offices. |
| ● | Revenue increased 9.8% to $212.6 million. |
| ● | Net income attributable to RE/MAX Holdings, Inc. of $26.9 million. |
| ● | Adjusted EBITDA of $104.3 million and Adjusted EBITDA margin of 49.1%. |
During 2018, we grew organic revenue 4.5% primarily due to agent count increases, Motto expansion, and July 1, 2016 fee increases inrising average home prices, event-based revenue from our Company-owned Regions. We grew our network agent count 6.4% and our U.S. and Canadian agent count by 2.3%, and we sold 1,059 RE/MAX franchises worldwide and 324 franchisesannual convention in the U.S. and Canada combined. Organica July 1, 2017 annual dues fee increase in the U.S. and Canada. Our 2018 revenue growth was negativelyalso impacted by the impact of waiving ofhaving waived approximately $2.0 million of continuing franchise fees and brokerbrokers fees duringin the prior year for associates impactedhurricane-impacted associates. We grew our network agent count 4.4% and our U.S. and Canadian combined agent count by Hurricanes Harvey0.2%, and Irma. we sold 1,120 RE/MAX franchises worldwide, including 285 franchises in the U.S. and Canada combined.
Expenses increased primarily due to increased investments in technology, costs to support booj’s legacy operations assisting its external customers, severance and other payroll related expenses, and operating costs to support Motto’s growth. These increases were partially offset by a $3.7 million loss recognized in the prior year related to subleasing a portion of our corporate office building; a net chargebuilding and costs of $2.6 million incurred in connection with a litigation settlement and additional corresponding professional fees relatedsettlement. Interest expense also increased $2.1 million due to our 2013 acquisition of the net assets of Tails, Inc. (“Tails”); $2.6 million of professional fees incurred related to the Special Committee Investigation and costs for Motto, the 2016 Acquired Regions, certain employee benefits and the refresh of the RE/MAX brand.rising interest rates.
We also focused on pursuing potential growth catalysts by successfully acquiring the Independent Region of Northern Illinois (the “2017 Acquired Region”)booj, a real estate technology company, for a purchase price of $35.7$26.3 million. The acquisition converted nearly 2,300With booj, we expect to deliver core technology solutions designed for and with RE/MAX affiliates in 2019. We believe this new technology will make our highly productive agents even more efficient and over 100 offices into the Company-owned Regions.
In 2017,successful and help RE/MAX branding was updated with a fresh, modern design. This “brand refresh” resulted in updates to the iconic RE/MAX Balloon logo, the RE/MAX logotype,franchisees recruit and RE/MAX property sign designs. In the company’s 45 year history, this is the first time the RE/MAX logotype has been modernized and the third time the RE/MAX Balloon logo has been updated.retain agents.
On December 22, 2017, the Tax Cuts and Jobs Act was enacted. The Tax Cuts and Jobs Act includes significant changes to the U.S. corporate tax system, including a federal corporate rate reduction from 35% to 21%. The reduction in the corporate tax rate from 35% to 21% resulted in substantial reductions to the Company’s deferred tax assets and the TRA liability and resulted in a net expense impact on net income of $8.2 million.
Financial and Operational Highlights – Year Ended December 31, 2016
(Compared to year ended December 31, 2015 unless otherwise noted)
| ·
| | Total agent count grew by 6.8% to 111,915 agents
|
| ·
| | U.S. and Canada combined agent count increased 3.5% to 82,402 agents
|
| ·
| | Acquired the master franchise rights to six Independent Regions in the U.S.
|
| ·
| | Launched Motto franchise on October 25, 2016
|
| ·
| | Revenue of $176.3 million, down 0.3% from the prior-year; revenue would have increased 6.9% after adjusting for the sale of our owned brokerage offices
|
| ·
| | Operating income decreased $1.8 million and 2.4%
|
| ·
| | Net income attributable to RE/MAX Holdings, Inc. increased $6.0 million and 36.5%.
|
| ·
| | Adjusted EBITDA of $94.2 million and Adjusted EBITDA margin of 53.4%
|
| ·
| | Refinanced our credit agreement entered into on July 31, 2013 (“2013 Senior Secured Credit Facility”) on December 15, 2016
|
During 2016, we grew our business organically through agent increases and franchise sales, supplemented by strategic acquisitions and the launch of a second brand, Motto Mortgage. We also strategically disposed of our three remaining owned brokerages early in the year. RE/MAX is now a 100% franchised business. We grew our network agent count 6.8% and our U.S. and Canadian agent count by 3.5%, and we sold 903 RE/MAX franchises worldwide and 335 franchises in the U.S. and Canada combined.
In addition, we focused on growth catalysts by acquiring Independent Regions and businesses within our core competencies of franchising and real estate. We successfully acquired six Independent Regions, (New York, Alaska, New Jersey, Georgia, Kentucky/Tennessee and Southern Ohio, collectively, the “2016 Acquired Regions”) for an aggregate purchase price of $105.4 million. The 2016 Acquired Regions converted more than 8,000 agents and almost 500 offices into the Company-owned Regions. We also acquired the concept behind Motto along with certain assets from a third-party mortgage brokerage franchisor, Full House Mortgage Connection, Inc. (“Full House”) for $8.0 million plus certain future contingent royalty payments.
Concurrent with our acquisitions, we reinvested in our business to enhance the value proposition to our network. We continued our Momentum broker and agent development program, launched the new www.remax.com website and introduced our Office and Agent Portal. Our new website features a fresh, dynamic design, an improved search and mobile experience and personalized features for consumers coupled with increased calls-to-action to improve lead generation for our agents. The new Office and Agent Portal streamlines operations for our franchisees and simplifies reporting from our franchisees to us. In recognition of the increase in value we offer to our network on July 1, 2016 we modestly increased the monthly continuing franchise fees paid by franchisees to us to be a part of the RE/MAX network. We believe that our 2016 growth catalysts will contribute to our future organic growth in Company-owned Regions and strengthen our brand in the future.
In December 2016, we refinanced our 2013 Senior Secured Credit Facility, referred to herein as the “2016 Senior Secured Credit Facility,” in order to take advantage of favorable market conditions and to provide us with enhanced flexibility to pursue the future execution of our growth strategy. Proceeds from our 2016 Senior Secured Credit Facility were used to repay existing indebtedness and fund the multi-territory region covering Georgia, Kentucky/Tennessee and Southern Ohio.
Selected Operating and Financial Highlights
For comparability purposes, the following table sets forth our agent count, Motto open offices, franchise sales and results of operations for the periods presented in our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The period-to-period comparison of agent count, Motto open offices, franchise sales and financial results is not necessarily indicative of future performance.
| | | | | | | | | | |
| | December 31, | |
| | 2019 | | 2018 | | 2017 | |
Total agent count growth | | | 5.3 | % | | 4.4 | % | | 6.4 | % |
| | | | | | | | | | |
Agent Count: | | | | | | | | | | |
U.S. | | | 63,121 | | | 63,122 | | | 63,162 | |
Canada | | | 21,567 | | | 21,327 | | | 21,112 | |
U.S. and Canada Total | | | 84,688 | | | 84,449 | | | 84,274 | |
Outside U.S. and Canada | | | 46,201 | | | 39,831 | | | 34,767 | |
Network-wide agent count | | | 130,889 | | | 124,280 | | | 119,041 | |
| | | | | | | | | | |
Motto open offices (2) | | | 111 | | | 78 | | | 31 | |
| | | | | | | | | | |
| | Year Ended December 31, | |
| | 2019 | | 2018 | | 2017 | |
RE/MAX franchise sales (1) | | | 1,030 | | | 1,120 | | | 1,059 | |
Motto franchise sales (2) | | | 52 | | | 49 | | | 60 | |
| | | | | | | | | | |
| | Year Ended December 31, | | |
| | 2017 | | | 2016 | | | 2015 | | |
| (in thousands, except percentages, agent data and franchise sales) |
Total agent count growth | | 6.4 | % | | 6.8 | % | | 7.0 | % | |
| | | | | | | | | | |
Agent Count: | | | | | | | | | | |
U.S. | | 63,162 | | | 61,730 | | | 59,918 | | |
Canada | | 21,112 | | | 20,672 | | | 19,668 | | |
U.S. and Canada Total | | 84,274 | | | 82,402 | | | 79,586 | | |
Outside U.S. and Canada | | 34,767 | | | 29,513 | | | 25,240 | | |
Total | | 119,041 | | | 111,915 | | | 104,826 | | |
| | | | | | | | | | |
Franchise sales | | 1,059 | | | 903 | | | 929 | | |
| | | | | | | | | | |
Total revenue | $ | 195,929 | | $ | 176,302 | | $ | 176,868 | | |
Total selling, operating and administrative expenses(1) (3) | $ | 107,268 | | $ | 88,213 | | $ | 91,561 | | |
Total operating income(1) | $ | 100,225 | | $ | 71,817 | | $ | 73,580 | | |
Net income attributable to RE/MAX Holdings, Inc.(1) (3) | $ | 12,815 | | $ | 22,396 | | $ | 16,412 | | |
Adjusted EBITDA(2) | $ | 103,858 | | $ | 94,173 | | $ | 89,908 | | |
Adjusted EBITDA margin(2) | | 53.0 | % | | 53.4 | % | | 50.8 | % | |
| (1) | (1)
| | The results for the year ended December 31, 2017 were impacted by the Tax Cuts and Jobs Act enacted in December 2017. The reductionIncludes franchise sales in the corporate tax rate from 35% to 21% resulted in comparable reductions in both the deferred tax asset amountsU.S., Canada and the TRA liabilities. See Note 11, Income Taxes for further information on the impact of the Tax Cutsglobal regions.
|
| (2) | Excludes virtual offices and Jobs Act.branchises. |
| | | | | | | | | | |
| | Year Ended December 31, | |
| | 2019 | | 2018 | | 2017 | |
| | | | | | | | | | |
Total revenue | | $ | 282,293 | | $ | 212,626 | | $ | 193,714 | |
Total selling, operating and administrative expenses | | $ | 118,890 | | $ | 120,179 | | $ | 106,946 | |
Operating income | | $ | 68,439 | | $ | 77,851 | | $ | 98,332 | |
Net income attributable to RE/MAX Holdings, Inc. | | $ | 25,040 | | $ | 26,883 | | $ | 10,099 | |
Adjusted EBITDA (1) | | $ | 103,515 | | $ | 104,316 | | $ | 102,145 | |
Adjusted EBITDA margin (1) | | | 36.7 | % | | 49.1 | % | | 52.7 | % |
| (1) | (2)
| | See “—Non-GAAP Financial Measures” for further discussion of Adjusted EBITDA and Adjusted EBITDA margin and a reconciliation of the differences between Adjusted EBITDA and net income, which is the most comparable U.S. generally accepted accounting principles (“U.S. GAAP”) measure for operating performance. Adjusted EBITDA margin represents Adjusted EBITDA as a percentage of total revenue. Adjusted EBITDA margins decreased considerably from the prior year because of the acquisition of the Marketing Funds, which increased revenue significantly, but had no impact to Adjusted EBITDA. |
| (3)
| | Prior period amounts reflect an immaterial correction recorded for the years ended December 31, 2016 and 2015. See Note 18, Immaterial Corrections to Prior Period Financial Statements for additional information.
|
Results of Operations
Year Ended December 31, 20172019 vs. Year Ended December 31, 20162018
Revenue
A summary of the components of our revenue is as follows (in thousands except percentages):
| | | | | | | | | | | | |
| | Year Ended | | Change | |
| | December 31, | | Favorable/(Unfavorable) | |
| | 2019 | | 2018 | | $ | | % | |
Revenue: | | | | | | | | | | | | |
Continuing franchise fees | | $ | 99,928 | | $ | 101,104 | | $ | (1,176) | | (1.2) | % |
Annual dues | | | 35,409 | | | 35,894 | | | (485) | | (1.4) | % |
Broker fees | | | 45,990 | | | 46,871 | | | (881) | | (1.9) | % |
Marketing Funds fees | | | 72,299 | | | — | | | 72,299 | | n/m | |
Franchise sales and other revenue | | | 28,667 | | | 28,757 | | | (90) | | (0.3) | % |
Total revenue | | $ | 282,293 | | $ | 212,626 | | $ | 69,667 | | 32.8 | % |
n/m – not meaningful
Consolidated revenue increased due to acquisitions of the Marketing Funds and having a full year of booj revenue due to acquisition timing, which added $73.4 million, or 34.6%, partially offset by a decrease in organic revenue of $3.1 million, or 1.5% and foreign currency movements of $0.6 million, or 0.3%.
Continuing Franchise Fees
Revenue from continuing franchise fees decreased primarily due to agent count decreases in the U.S. and Company-owned Regions in Canada during most of the year, partially offset by Motto expansion. While U.S. agent count was flat year-over-year, it was down a large portion of 2019 with most of the increases coming in the fourth quarter, driven notably by the introduction of recruiting initiatives, some of which waived continuing franchise fees for a limited period of time. We estimate that we will forgo $2.0 million to $3.0 million in revenue through the third quarter of 2020 from these waivers.
Annual Dues
Revenue from annual dues declined due to agent count declines in the U.S. and Company-owned Regions in Canada.
Broker Fees
Revenue from broker fees decreased primarily due to agent count declines in the U.S. and Company-owned Regions in Canada and lower total transactions per agent, partially offset by rising home prices.
Marketing Funds fees
Revenue from the Marketing Funds fees increased due to the acquisition of the Marketing Funds on January 1, 2019.
Franchise Sales and Other Revenue
Franchise sales and other revenue was relatively flat as lower revenue from preferred marketing arrangements, event-based revenue from our RE/MAX annual convention in the U.S. and continued attrition of booj’s legacy customer base was mostly offset by booj revenue in the current year for periods we did not own booj in the prior year. We expect the continued booj legacy customer attrition to lower other revenue by approximately $3.0 million in 2020.
Operating Expenses
A summary of the components of our operating expenses is as follows (in thousands, except percentages):
| | | | | | | | | | | | |
| | Year Ended | | Change | |
| | December 31, | | Favorable/(Unfavorable) | |
| | 2019 | | 2018 | | $ | | % | |
Operating expenses: | | | | | | | | | | | | |
Selling, operating and administrative expenses | | $ | 118,890 | | $ | 120,179 | | $ | 1,289 | | 1.1 | % |
Marketing Funds expenses | | | 72,299 | | | — | | | (72,299) | | n/m | |
Depreciation and amortization | | | 22,323 | | | 20,678 | | | (1,645) | | (8.0) | % |
Loss (gain) on sale or disposition of assets, net | | | 342 | | | 63 | | | (279) | | (442.9) | |
Gain on reduction in tax receivable agreement liability | | | — | | | (6,145) | | | (6,145) | | 100.0 | % |
Total operating expenses | | $ | 213,854 | | $ | 134,775 | | $ | (79,079) | | (58.7) | % |
Percent of revenue | | | 75.8 | % | | 63.4 | % | | | | | |
n/m – not meaningful
Selling, Operating and Administrative Expenses
Selling, operating and administrative expenses consisted of personnel costs, professional fee expenses, lease costs and other expenses. Other expenses within selling, operating and administrative expenses include certain marketing and production costs that are not paid by the Marketing Funds, including travel and entertainment costs, and costs associated with our conventions in the U.S. and other events.
A summary of the components of our selling, operating and administrative expenses is as follows (in thousands, except percentages):
| | | | | | | | | | | | |
| | Year Ended | | Change | |
| | December 31, | | Favorable/(Unfavorable) | |
| | 2019 | | 2018 | | $ | | % | |
Selling, operating and administrative expenses: | | | | | | | | | | | | |
Personnel | | $ | 63,022 | | $ | 62,935 | | $ | (87) | | (0.1) | % |
Professional fees | | | 11,159 | | | 15,631 | | | 4,472 | | 28.6 | % |
Lease costs | | | 8,805 | | | 9,104 | | | 299 | | 3.3 | % |
Other | | | 35,904 | | | 32,509 | | | (3,395) | | (10.4) | % |
Total selling, operating and administrative expenses | | $ | 118,890 | | $ | 120,179 | | $ | 1,289 | | 1.1 | % |
Percent of revenue | | | 42.1 | % | | 56.5 | % | | | | | |
Total selling, operating and administrative expenses decreased as follows:
| ● | Personnel costs remained relatively flat due to an increase in equity-based compensation expense of $1.8 million (See Note 13 Equity-Based Compensation) and other personnel costs, mostly offset by lower severance. |
| ● | Professional fees decreased primarily due to costs incurred in 2018 related to an investigation by a special committee of our Board of Directors (the “Special Committee”) of $2.5 million and a decrease of $1.0 million for technology costs (which includes the impact of charging certain costs to the Marketing Funds in 2019. See Note 2 Summary of Significant Accounting Policies), partially offset by a slight increase in legal fees in the current year, driven by the Moehrl/Sitzer suits (See Note 15 Commitments and Contingencies). We expect legal fees will increase approximately $1.5 million in 2020. |
| ● | Other selling, operating and administrative expenses increased primarily due to a favorable fair value adjustment to our contingent consideration liability in 2018 that did not recur in 2019 (See Note 11 Fair Value Measurements), increases in bad debt expense, increases in property tax expense (driven by an increase in the |
| | assessed value of our corporate headquarters) and additional training expenses for the launch of the booj Platform. |
Marketing Funds Expenses
Marketing Funds expenses increased due to the acquisition of the Marketing Funds on January 1, 2019. We recognize an equal and offsetting amount of expenses to revenue such that there is no impact to our overall profitability.
Depreciation and Amortization
Depreciation and amortization expense increased primarily due to amortization expense related to the deployment of various technology initiatives.
Gain on Reduction in TRA Liability
The gain on reduction in TRA liability during the year ended December 31, 2018 resulted from changes in tax law arising from the Tax Cuts and Jobs Act, enacted in December 2017 and further clarified in 2018. These tax law changes resulted in reductions to the value of deferred tax assets the Company holds and related reduction in the value of the TRA liabilities. The gain of $6.1 million in 2018 is a result of changes in the taxation of foreign derived income, which the Company recognized after performing a detailed review during 2018 of these complex provisions. See Note 12, Income Taxes for additional information.
Other Expenses, Net
A summary of the components of our operating expenses is as follows (in thousands, except percentages):
| | | | | | | | | | | | |
| | Year Ended | | Change | |
| | December 31, | | Favorable/(Unfavorable) | |
| | 2019 | | 2018 | | $ | | % | |
Other expenses, net: | | | | | | | | | | | | |
Interest expense | | $ | (12,229) | | $ | (12,051) | | $ | (178) | | (1.5) | % |
Interest income | | | 1,446 | | | 676 | | | 770 | | 113.9 | % |
Foreign currency transaction gains (losses) | | | 109 | | | (312) | | | 421 | | 134.9 | % |
Total other expenses, net | | $ | (10,674) | | $ | (11,687) | | $ | 1,013 | | 8.7 | % |
Percent of revenue | | | 3.8 | % | | 5.5 | % | | | | | |
Other expenses, net decreased due to an increase in interest income due to rising interest rates and having larger cash balances to invest in 2019 compared to 2018, and foreign currency gains that were primarily a result of fluctuations of the Canadian dollar against the U.S. dollar, partially offset by an increase in interest expense due to an increase in interest rates on our Senior Secured Credit Facility.
Provision for Income Taxes
Our effective income tax rate decreased to 18.9% from 24.7% for the years ended December 31, 2019 and 2018, respectively, primarily due to a valuation allowance recognized in 2018. Our effective income tax rate depends on many factors, including a rate benefit attributable to the fact that the portion of RMCO’s earnings attributable to the non-controlling interests are not subject to corporate-level taxes because RMCO is classified as a partnership for U.S. federal income tax purposes and therefore is treated as a “flow-through entity,” as well as annual changes in state and foreign income tax rates. See Note 4, Non-controlling Interest for further details on the allocation of income taxes between Holdings and the non-controlling interest.
Adjusted EBITDA
See “—Non-GAAP Financial Measures” for our definition of Adjusted EBITDA and for further discussion of our presentation of Adjusted EBITDA as well as a reconciliation of Adjusted EBITDA to net income, which is the most comparable GAAP measure for operating performance.
Adjusted EBITDA was $103.5 million for the year ended December 31, 2019, a decrease of $0.8 million from the comparable prior year period. Adjusted EBITDA decreased primarily due to increases in bad debt expense, organic revenue declines, property tax expense and technology training expenses, offset by lower event and advertising expenses, severance, legal and other professional fees as compared to the prior year period.
Year Ended December 31, 2018 vs. Year Ended December 31, 2017
Revenue
A summary of the components of our revenue for the years ended December 31, 20172018 and 20162017 is as follows:follows (in thousands, except percentages):
| | | | | | | | | | | | |
| | Year Ended | | Change | |
| | December 31, | | Favorable/(Unfavorable) | |
| | 2018 | | 2017 | | $ | | % | |
Revenue: | | | | | | | | | | | | |
Continuing franchise fees | | $ | 101,104 | | $ | 93,694 | | $ | 7,410 | | 7.9 | % |
Annual dues | | | 35,894 | | | 33,767 | | | 2,127 | | 6.3 | % |
Broker fees | | | 46,871 | | | 43,801 | | | 3,070 | | 7.0 | % |
Franchise sales and other revenue | | | 28,757 | | | 22,452 | | | 6,305 | | 28.1 | % |
Total revenue | | $ | 212,626 | | $ | 193,714 | | $ | 18,912 | | 9.8 | % |
| | | | | | | | | | | | |
| | Year Ended | | Change | |
| | December 31, | | Favorable/(Unfavorable) | |
| | 2017 | | 2016 | | $ | | % | |
| | (in thousands, except percentages) | |
Revenue: | | | | | | | | | | | | |
Continuing franchise fees | | $ | 93,694 | | $ | 81,197 | | $ | 12,497 | | 15.4 | % |
Annual dues | | | 33,767 | | | 32,653 | | | 1,114 | | 3.4 | % |
Broker fees | | | 43,801 | | | 37,209 | | | 6,592 | | 17.7 | % |
Franchise sales and other franchise revenue | | | 24,667 | | | 25,131 | | | (464) | | (1.8) | % |
Brokerage revenue | | | — | | | 112 | | | (112) | | n/a | |
Total revenue | | $ | 195,929 | | $ | 176,302 | | $ | 19,627 | | 11.1 | % |
Consolidated revenue increased primarily due to the acquisitions of the 2017 and 2016 Acquired Regions, which added $13.5$18.9 million, or 7.6%. Organic growth increased revenue $5.8 million or 3.3%9.8%, primarily due to an increase in broker fee revenue due to rising average home prices and changing agent mix, agent count increases, Motto expansion and July 1, 2016 fee increases in our Company-owned Regions. Organic growth was offset by a decrease in revenue recognized from preferred marketing arrangements and the impact of waiving approximately $2.0 million of continuing franchise fees and broker fees during the year for hurricane-impacted associates. Foreign currency movements increased revenue $0.5 million, or 0.3%.to:
| ● | organic growth of $8.8 million, or 4.5%, primarily as a result of agent count increases, Motto expansion, rising average home prices, event-based revenue from our annual convention in the U.S. and contributions from the July 1, 2017 annual dues fee increase, and the impact of having waived approximately $2.0 million of continuing franchise fees and broker fees for hurricane-impacted associates during 2017; |
| ● | acquisitions of Northern Illinois and booj added $10.0 million, or 5.2%; and |
| ● | foreign currency movements increased revenue $0.2 million, or 0.1%. |
Continuing Franchise Fees
Revenue from continuing franchise fees increased primarily as a result of contributions from the 2017 and 2016 Acquired Regions,acquisition of RE/MAX of Northern Illinois, which added $8.6$3.1 million, or 10.6%. Organic growth increased continuing franchise fees by $3.7 million or 4.5%, primarily related toMotto expansion and agent count growth which contributed $2.2 million, July 1, 2016 fee increases in Company-owned Regions which contributed $1.2 million and Motto expansion. Organic growth was negatively impacted bygrowth. Additionally, the waiving ofCompany waived approximately $1.4 million of continuing franchise fees during the year for hurricane-impacted associates.associates during 2017.
Annual Dues
Revenue from annual dues increased primarily due to increasedan increase in agent count in the U.S. and Canada.Canada and the July 1, 2017 fee increase. Revenue from annual dues is not affected by our acquisitions of Independent Regions because agents in the U.S. and Canadian Independent Regions already pay annual dues to us in the same amounts as agents in Company-owned regions.Regions.
Broker Fees
Revenue from broker fees increased primarily due to contributions from the acquisitionsacquisition of the 2017 and 2016 Acquired Regions,RE/MAX of Northern Illinois, which contributed $4.2added $1.1 million, to the increase, as well organic growth of $2.3 million driven primarily by rising average home prices, and a reduction in the number of home sale transactions completed by agents that do not pay broker fees. Organic growth was negatively impacted by the waiving ofhaving waived approximately $0.6 million of broker fees during the year for hurricane-impacted associates.associates during 2017, partially offset by declines in total transactions per agent.
Franchise Sales and Other Franchise Revenue
Franchise sales and other franchise revenue decreasedincreased primarily due to a decreaserevenue contributed from booj of $5.6 million and event-based revenue from our annual convention in revenue recognized from preferred marketing arrangements. These decreases were partially offset by increases in master franchise sales and contributions from Motto and the 2017 and 2016 Acquired Regions. U.S.
Operating Expenses
A summary of the components of our operating expenses for the years ended December 31, 20172018 and 20162017 is as follows:follows (in thousands, except percentages):
| | | | | | | | | | | | |
| | Year Ended | | Change | |
| | December 31, | | Favorable/(Unfavorable) | |
| | 2018 | | 2017 | | $ | | % | |
Operating expenses: | | | | | | | | | | | | |
Selling, operating and administrative expenses | | $ | 120,179 | | $ | 106,946 | | $ | (13,233) | | (12.4) | % |
Depreciation and amortization | | | 20,678 | | | 20,512 | | | (166) | | (0.8) | % |
Loss on sale or disposition of assets, net | | | 63 | | | 660 | | | 597 | | 90.5 | % |
Gain on reduction in tax receivable agreement liability | | | (6,145) | | | (32,736) | | | (26,591) | | (81.2) | % |
Total operating expenses | | $ | 134,775 | | $ | 95,382 | | $ | (39,393) | | (41.3) | % |
Percent of revenue | | | 63.4 | % | | 49.2 | % | | | | | |
| | | | | | | | | | | | |
| | Year Ended | | Change | |
| | December 31, | | Favorable/(Unfavorable) | |
| | 2017 | | 2016 | | $ | | % | |
| | (in thousands, except percentages) | |
Operating expenses: | | | | | | | | | | | | |
Selling, operating and administrative expenses | | $ | 107,268 | | $ | 88,213 | | $ | (19,055) | | (21.6) | % |
Depreciation and amortization | | | 20,512 | | | 16,094 | | | (4,418) | | (27.5) | % |
Loss on sale or disposition of assets, net | | | 660 | | | 178 | | | (482) | | n/a | |
Gain on reduction in tax receivable agreement liability | | | (32,736) | | | — | | | 32,736 | | n/a | |
Total operating expenses | | $ | 95,704 | | $ | 104,485 | | $ | 8,781 | | 8.4 | % |
Percent of revenue | | | 48.8 | % | | 59.3 | % | | | | | |
Selling, Operating and Administrative Expenses
Selling, operating and administrative expenses primarily consisted of personnel costs, professional fee expenses, rent and related facility operations expense (including losses on subleases) and other expenses. Other expenses include certain marketing and production costs that are not paid by our related party advertising funds, including travel and entertainment costs, and costs associated with our annual conventions in the U.S. and other events.
A summary of the components of our selling, operating and administrative expenses for the years ended December 31, 20172018 and 20162017 is as follows:follows (in thousands, except percentages):
| | | | | | | | | | |
| | Year Ended | | Change | | |
| | December 31, | | Favorable/(Unfavorable) | | |
| | 2017 | | 2016 | | $ | | % | | |
| | (in thousands, except percentages) | | |
| | | | | | | | | | | | | |
| | | Year Ended | | Change | |
| | | December 31, | | Favorable/(Unfavorable) | |
| | | 2018 | | 2017 | | $ | | % | |
Selling, operating and administrative expenses: | | | | | | | | | | | | | | | | | | | | | |
Personnel | | $ | 45,063 | | $ | 42,817 | | $ | (2,246) | | (5.2) | % | | $ | 62,935 | | $ | 45,063 | | $ | (17,872) | | (39.7) | % |
Professional fees | | | 16,927 | | | 13,348 | | (3,579) | | (26.8) | % | | | 15,631 | | | 16,927 | | | 1,296 | | 7.7 | % |
Rent and related facility operations | | | 12,860 | | | 8,673 | | (4,187) | | (48.3) | % | | | 9,104 | | | 12,860 | | | 3,756 | | 29.2 | % |
Other | | | 32,418 | | | 23,375 | | | (9,043) | | (38.7) | % | | | 32,509 | | | 32,096 | | | (413) | | (1.3) | % |
Total selling, operating and administrative expenses | | $ | 107,268 | | $ | 88,213 | | $ | (19,055) | | (21.6) | % | | $ | 120,179 | | $ | 106,946 | | $ | (13,233) | | (12.4) | % |
Percent of revenue | | | 54.7 | % | | 50.0 | % | | | | | | | | 56.5 | % | | 55.2 | % | | | | | |
Total selling, operating and administrative expenses increased as follows:
| ·
● | | Personnel costs increased primarily due to personnel investments$5.7 million in costs, including incremental stock-based compensation expense, to support Motto and the 2017 and 2016 Acquired Regions as well as an increaseour increased investments in certain employee benefits, partially offset bytechnology, $5.1 million in costs to support booj’s legacy operations assisting its external customers, severance and other payroll |
related expenses, recognizedand operating costs to support Motto. |
| ● | Professional fees decreased primarily due to a decrease in acquisition-related costs compared to the prior year and not recognized incosts incurred during the current year. |
| ·
| | Professional fees increased primarily due to $2.6 million in costs related to the Special Committee Investigation, costs incurredthird quarter of 2017 in connection with litigation related to our 2013 acquisition of the net assets of Tails (See Note 15, Commitments and Contingencies) and other legal fees. These increases werefees, partially offset due to expenses incurredby investments in the prior year in connection with the 2016 Senior Secured Credit Facility.
technology. |
| ·
● | | Rent and related facility operations increaseddecreased primarily due to a $3.7 million loss recognized during the third quarter of 2017 related to subleasing a portion of our corporate office building. See Note 14, Commitments and Contingencies for additional information. |
| ·
● | | Other selling, operating and administrative expenses increased slightly primarily due to increased costs to support booj’s legacy operations assisting its external customers, increased costs for RE/MAX of Northern Illinois and Motto, increases in expenses related to higher attendance at our annual convention in the U.S., and increases in bad debt expense. These increases were largely offset by charges in 2017 that did not recur, including a net charge of $2.6 million incurred in connection with anet litigation settlement related to our 2013 acquisition of the net assets of Tails (See Note 15, Commitments and expenses incurred related to the 2017 and 2016 Acquired Regions, Motto, certain broker eventsContingencies) and the refresh of the RE/MAX brand. Additionally, during the year ended December 31, 2018, we adjusted the estimated fair value of the contingent consideration liability related to the acquisition of Full House (See Note 11, Fair Value Measurements). |
Depreciation and Amortization
Depreciation and amortization expense increased primarily due to an increase in amortization expense related to the franchise agreementsintangibles acquired in connection with the 2017acquisitions of RE/MAX of Northern Illinois and 2016 Acquired Regions, partiallybooj. See Note 6, Acquisitions for additional information. These increases were largely offset by a reduction in amortization expense related to certain acquired franchise agreements reaching the end of their contractual term in the Texas, California and Hawaii regions. becoming fully amortized.
Loss on Sale or Disposition of Assets, Net
The change in loss on sale or disposition of assets, net was primarily due to the $0.5 million loss recognized during the year ended December 31, 2017 for a final settlement of certain provisions of the asset sale agreement related to the December 31, 2015 disposition of Sacagawea, LLC d/b/aa/ RE/MAX Equity Group (“RE/MAX Equity Group”). See Note 5, Acquisitions and Dispositions for additional information.
Gain on Reduction in TRA Liability
The gain on reduction in TRA liability resulted from changes in tax law arising from the Tax Cuts and Jobs Act, enacted in December 2017 and further clarified in 2018. These tax law changes resulted in reductions to the value of deferred tax assets the Company holds and related reduction in the value of the TRA liabilities. The gain of $6.1 million in 2018 is a result of changes in the taxation of foreign derived income, which the Company recognized after performing a detailed review during 2018 of these complex provisions. The gain on reduction in TRA liability of $32.7 million as of December 31,in 2017 is a result of the Tax Cuts and Jobs Act enactedreduction in December 2017, which reduced the corporate tax rate from 35% to 21%. This reduction caused a decrease in the Company’s deferred tax assets and a related decrease in the TRA liability. See Note 11, 12, Income Taxesfor additional information.
Other Expenses, Net
A summary of the components of our other expenses, net for the years ended December 31, 20172018 and 20162017 is as follows:follows (in thousands, except percentages):
| | | | | | | | | | | | |
| | Year Ended | | Change | |
| | December 31, | | Favorable/(Unfavorable) | |
| | 2018 | | 2017 | | $ | | % | |
Other expenses, net: | | | | | | | | | | | | |
Interest expense | | $ | (12,051) | | $ | (9,996) | | $ | (2,055) | | (20.6) | % |
Interest income | | | 676 | | | 352 | | | 324 | | 92.0 | % |
Foreign currency transaction (loss) gain | | | (312) | | | 174 | | | (486) | | n/m | |
Total other expenses, net | | $ | (11,687) | | $ | (9,470) | | $ | (2,217) | | (23.4) | % |
Percent of revenue | | | 5.5 | % | | 4.9 | % | | | | | |
| | | | | | | | | | | | |
| | Year Ended | | Change | |
| | December 31, | | Favorable/(Unfavorable) | |
| | 2017 | | 2016 | | $ | | % | |
| | (in thousands, except percentages) | |
Other expenses, net: | | | | | | | | | | | | |
Interest expense | | $ | (9,996) | | $ | (8,596) | | $ | (1,400) | | (16.3) | % |
Interest income | | | 352 | | | 160 | | | 192 | | n/a | |
Foreign currency transaction gain (loss) | | | 174 | | | (86) | | | 260 | | n/a | |
Loss on early extinguishment of debt | | | — | | | (796) | | | 796 | | n/a | |
Total other expenses, net | | $ | (9,470) | | $ | (9,318) | | $ | (152) | | (1.6) | % |
Percent of revenue | | | 4.8 | % | | 5.3 | % | | | | | |
n/m – not meaningful
Other expenses, net increased mainlyprimarily due to higheran increase in interest expense as a result of an increase in the principal balance of term debt outstanding underincreasing interest rates on our 2016 Senior Secured Credit Facility which replaced our 2013 Senior Secured Credit
Facility on December 15, 2016. The replacementfluctuations of the 2013 Senior Secured Credit Facility resulted in a loss on early extinguishment of debt.Canadian dollar against the U.S. dollar.
Provision for Income Taxes
Our effective income tax rate increaseddecreased to 61.2%24.7% from 24.4%64.8% for the years ended December 31, 20172018 and 2016,2017, respectively, primarily due to the Tax Cuts and Jobs Act enacted in December 2017 which resulted in a substantial decrease in our deferred tax asset due to the reduction in our corporate tax rate. See Note 11, 12, Income Taxes for further information on the impact of the Tax Cuts and Jobs Act. As shown in Note 11, Income Taxes, our effective income tax rate would have been 25.2% excluding the impacts of the Tax Cuts and Jobs Act. Our effective income tax rate depends on many factors, including a rate benefit attributable to the fact that the portion of RMCO’sRMCO, LLC’s earnings attributable to the non-controlling interests are not subject to corporate-level taxes because RMCO, LLC (“RMCO”) is classified as a partnership for U.S. federal income tax purposes and therefore is treated as a “flow-through entity.” See Note 3, 4, Non-controlling Interest for further details on the allocation of income taxes between RE/MAX Holdings and the non-controlling interest.
Net Income Attributable to Non-controlling Interest
Net income attributable to non-controlling interest, which represents the portion of earnings attributable to the economic interest in RMCO held by RIHI, Inc. (“RIHI”), decreased $2.5 million primarily due to a decrease in RMCO’s net income during the year ended December 31, 2017 compared to December 31, 2016.
Adjusted EBITDA
See “—Non-GAAP Financial Measures” for our definition of Adjusted EBITDA and for further discussion of our presentation of Adjusted EBITDA as well as a reconciliation of Adjusted EBITDA to net income, which is the most comparable GAAP measure for operating performance.
Adjusted EBITDA was $103.9$104.3 million for the year ended December 31, 2017,2018, an increase of $9.7$2.2 million from the comparable prior year period. Adjusted EBITDA increased primarily increased due to $11.0 million in contributions from the 2017 and 2016 Acquired Regions, increases in broker fee revenue due toacquisition of RE/MAX of Northern Illinois, agent count growth, rising average home prices and changing agent mix, agent count growth, certain payroll related expenses recognized in the prior yearimpact of having waived continuing franchise fees and not recognized in the current year, July 1, 2016 fee increases in our Company-owned Regions and an increase in master franchise sales.
These increases are partially offset by higher operating expenses related to Motto, the refresh of the RE/MAX brand, litigation and a reduction in revenue recognized for preferred marketing arrangements. In addition, fee waivers grantedbroker fees for hurricane-impacted associates reduced Adjusted EBITDA by approximately $2.0 million.
Year Ended December 31, 2016 vs. Year Ended December 31, 2015
Total Revenue
A summary of the components of our revenue for the years ended December 31, 2016 and 2015 is as follows:
| | | | | | | | | | | | |
| | Year Ended | | Change | |
| | December 31, | | Favorable/(Unfavorable) | |
| | 2016 | | 2015 | | $ | | % | |
| | (in thousands, except percentages) | |
Revenue: | | | | | | | | | | | | |
Continuing franchise fees | | $ | 81,197 | | $ | 73,750 | | $ | 7,447 | | 10.1 | % |
Annual dues | | | 32,653 | | | 31,758 | | | 895 | | 2.8 | % |
Broker fees | | | 37,209 | | | 32,334 | | | 4,875 | | 15.1 | % |
Franchise sales and other franchise revenue | | | 25,131 | | | 25,468 | | | (337) | | (1.3) | % |
Brokerage revenue | | | 112 | | | 13,558 | | | (13,446) | | (99.2) | % |
Total revenue | | $ | 176,302 | | $ | 176,868 | | $ | (566) | | (0.3) | % |
Consolidated revenue decreased primarily due to the sale of our owned brokerages and would have increased $11.3 million or 6.9%, after adjusting for these sales. Organic growth increased revenue 5.3%, and the acquisitions of the 2016 Acquired Regions added $2.7 million, or 1.5%.during 2017. The sale of our owned brokerages negatively impacted revenue by $11.9 million or 6.7%, and the strengthening of the U.S. dollar also reduced revenue by $0.8 million or 0.4%.
Continuing Franchise Fees
Revenue from continuing franchise fees increased primarily due to agent count growth in the U.S. and Canada and increases in our aggregate fee revenue per agent, which added $4.5 million. Revenue from continuing franchise fees also increased $1.5 million due to contributions from the 2016 Acquired Regions and $1.1 million as a result of a July 1, 2016 rate increase in our Company-owned Regions in the U.S. These increases were partially offset by the strengthening of the U.S. dollar comparedincreased investments in technology and personnel, severance expense and operating costs to the Canadian dollar.
Annual Dues
Revenue from annual dues increased due to the overall increase in total agent count, partially offset by the strengthening of the U.S. dollar compared to the Canadian dollar.
Broker Fees
Revenue from broker fees increased $3.8 million due to organic growth primarily from increased agent count in the U.S. and Canada. The 2016 Acquired Regions increased broker fees by $0.9 million. The aforementioned increases were partially offset by the strengthening of the U.S. dollar compared to the Canadian dollar.
Franchise Sales and Other Franchise Revenue
Franchise sales and other franchise revenue decreased primarily due to a reduction in franchise sales outside the U.S. and Canada offset by increases from the 2016 Acquired Regions.
Brokerage Revenue
Brokerage revenue decreased due to the dispositions of owned brokerages.
support booj’s legacy operations assisting its external customers.
Operating Expenses
A summary of the components of our operating expenses for the years ended December 31, 2016 and 2015 is as follows:
| | | | | | | | | | | | |
| | Year Ended | | Change | |
| | December 31, | | Favorable/(Unfavorable) | |
| | 2016 | | 2015 | | $ | | % | |
| | (in thousands, except percentages) | |
Operating expenses: | | | | | | | | | | | | |
Selling, operating and administrative expenses | | $ | 88,213 | | $ | 91,561 | | $ | 3,348 | | 3.7 | % |
Depreciation and amortization | | | 16,094 | | | 15,124 | | | (970) | | (6.4) | % |
Loss (gain) on sale or disposition of assets, net | | | 178 | | | (3,397) | | | (3,575) | | n/a | |
Total operating expenses | | $ | 104,485 | | $ | 103,288 | | $ | (1,197) | | (1.2) | % |
Percent of revenue | | | 59.3 | % | | 58.4 | % | | | | | |
Selling, Operating and Administrative Expenses
A summary of the components of our selling, operating and administrative expenses for the years ended December 31, 2016 and 2015 is as follows:
| | | | | | | | | | | | |
| | Year Ended | | Change | |
| | December 31, | | Favorable/(Unfavorable) | |
| | 2016 | | 2015 | | $ | | % | |
| | (in thousands, except percentages) | |
Selling, operating and administrative expenses: | | | | | | | | | | | | |
Personnel | | $ | 42,817 | | $ | 44,184 | | $ | 1,367 | | 3.1 | % |
Professional fees | | | 13,348 | | | 9,406 | | | (3,942) | | (41.9) | % |
Rent and related facility operations | | | 8,673 | | | 11,963 | | | 3,290 | | 27.5 | % |
Other | | | 23,375 | | | 26,008 | | | 2,633 | | 10.1 | % |
Total selling, operating and administrative expenses | | $ | 88,213 | | $ | 91,561 | | $ | 3,348 | | 3.7 | % |
Percent of revenue | | | 50.0 | % | | 51.8 | % | | | | | |
Selling, operating and administrative expenses decreased as follows:
| ·
| | Personnel costs decreased $4.9 million due to a reduction in overall headcount as a result of the dispositions of our owned brokerages, partially offset by personnel investments to support Motto and the 2016 Acquired Regions and increases in general personnel costs and benefit related expenses.
|
| ·
| | Professional fees increased primarily due to $2.1 million in costs incurred in connection with the 2016 Senior Secured Credit Facility and $1.8 million in costs incurred related to the acquisition of the 2016 Acquired Regions and the launch of Motto.
|
| ·
| | Rent and related facility operations expense decreased primarily due to the sale of our owned brokerages.
|
| ·
| | Other selling, operating and administrative expenses decreased primarily due to the sale of our owned brokerages and expenses associated with a $2.7 million litigation judgment in 2015 related to our acquisition of the net assets of HBN, Inc., partially offset by an increase in bad debt expense in 2016 related to a preferred marketing arrangement.
|
Depreciation and Amortization
Depreciation and amortization expense increased primarily due to the increase in amortization expense related to the franchise agreements acquired with the acquisition of the 2016 Acquired Regions.
Loss (gain) on Sale or Disposition of Assets, Net
The decrease in the loss (gain) on sale or disposition of assets, net is due to the gains recognized for the dispositions of eighteen brokerages during 2015, offset by the loss recognized for the sale of the remaining three owned brokerages during the first quarter of 2016.
Other Expenses, Net
A summary of the components of our other expenses, net for the years ended December 31, 2016 and 2015 is as follows:
| | | | | | | | | | | | |
| | Year Ended | | Change | |
| | December 31, | | Favorable/(Unfavorable) | |
| | 2016 | | 2015 | | $ | | % | |
| | (in thousands, except percentages) | |
Other expenses, net: | | | | | | | | | | | | |
Interest expense | | $ | (8,596) | | $ | (10,413) | | $ | 1,817 | | 17.4 | % |
Interest income | | | 160 | | | 178 | | | (18) | | 10.1 | % |
Foreign currency transaction losses | | | (86) | | | (1,661) | | | 1,575 | | 94.8 | % |
Loss on early extinguishment of debt | | | (796) | | | (94) | | | (702) | | n/a | |
Equity in earnings of investees | | | — | | | 1,215 | | | (1,215) | | n/a | |
Total other expenses, net | | $ | (9,318) | | $ | (10,775) | | $ | 1,457 | | 13.5 | % |
Percent of revenue | | | 5.3 | % | | 6.1 | % | | | | | |
Other expenses, net decreased primarily due to a reduction in principal balance on the 2013 Senior Secured Credit Facility as a result of the $12.7 million excess cash flow prepayment made on March 31, 2016. Foreign currency transaction losses decreased primarily due to the reduction in cash held in foreign currencies subsequent to the repatriation of cash generated from our Canadian operations that began in February 2015. Loss on early extinguishment of debt increased primarily due to the refinancing of our 2016 Senior Secured Credit Facility. Equity in earnings of investees decreased due to no longer recognizing equity in earnings of investees in 2016 due to the disposition of one of our owned brokerages on December 31, 2015.
Provision for Income Taxes
The provision for income taxes increased primarily due to the redemption of 5.2 million common units in exchange for shares of Class A common stock in the fourth quarter of 2015, which resulted in RE/MAX Holdings’ weighted average economic interest in RMCO increasing to 58.40% from 42.33% and due to the increase in RMCO’s income before the provision for income taxes. As a result of these factors, our effective income tax rate increased to 24.4% from 19.2% for the years ended December 31, 2016 and 2015, respectively. Our effective income tax rate depends on many factors, including a rate benefit attributable to the fact that the portion of RMCO’s earnings attributable to the non-controlling interest is not subject to corporate-level taxes because RMCO is classified as a partnership for U.S. federal income tax purposes and therefore is treated as “flow-through entity.” See Note 3, Non-controlling Interest for further details on the allocation of income taxes between RE/MAX Holdings and the non-controlling interest.
Net Income Attributable to Non-controlling Interest
Net income attributable to non-controlling interest, which represents the portion of earnings attributable to the economic interest in RMCO held by RIHI, decreased $9.5 million primarily due to the redemption of 5.2 million of common units in exchange for shares of Class A common stock by RIHI in the fourth quarter of 2015, which resulted in a decrease of the non-controlling unitholders weighted average economic interest in RMCO to 41.60% for the year ended December 31, 2016 from 57.67% for the year ended December 31, 2015. RMCO’s net income increased $0.1 million during the year ended December 31, 2016 over the prior period which also contributed to this decrease.
Adjusted EBITDA
See “—Non-GAAP Financial Measures” for our definition of Adjusted EBITDA and for further discussion of our presentation of Adjusted EBITDA as well as a reconciliation of Adjusted EBITDA to net income, which is the most comparable GAAP measure for operating performance.
Adjusted EBITDA was $94.2 million for the year ended December 31, 2016, an increase of $4.3 million from the comparable prior year period. Adjusted EBITDA primarily increased due to agent count growth, contributions from the 2016 Acquired Regions and the positive impact from foreign currency transaction gains and losses driven primarily by the repatriation of cash generated from certain of our Canadian operations that we began in February 2015. These increases were offset by a decrease in Adjusted EBITDA from the sale of our owned brokerages, an increase in bad debt expense related to a preferred marketing arrangement and costs incurred in connection with the launch of Motto.
Non-GAAP Financial Measures
The Securities and Exchange Commission (“SEC”) has adopted rules to regulate the use in filings with the SEC and in public disclosures of financial measures that are not in accordance with U.S. GAAP, such as Adjusted EBITDA and the ratios related thereto. These measures are derived on the basis of methodologies other than in accordance with U.S. GAAP.
We define Adjusted EBITDA as EBITDA (consolidated net income before depreciation and amortization, interest expense, interest income and the provision for income taxes, each of which is presented in our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K), adjusted for the impact of the following items that are either non-cash or that we do not consider representative of our ongoing operating performance: lossgain or gainloss on sale or disposition of assets and sublease, loss on early extinguishment of debt, equity-based compensation expense, professional fees and certain expenses incurred in connection with the issuance of Class A common stock as a result of RIHI’s redemption of common units in RMCO, acquisition related expensesexpense, gain on reduction in tax receivable agreement liability, Special Committee investigation and remediation expense, expense or income related to changes in the estimated fair value measurement of contingent consideration and other non-recurring items including the impact of the Tax Cuts and Jobs Act and the Special Committee Investigation. During the first quarter of 2017, we revised our definition of Adjusted EBITDA to better reflect the performance of our business and comply with SEC guidance. We now adjust for equity-based compensation expense and no longer adjust for straight-line rent expense and severance related expenses. Adjusted EBITDA was revised in prior periods to reflect this change for consistency in presentation.items.
BecauseAs Adjusted EBITDA omits certain non-cash items and other non-recurring cash charges or other items, we believe that it is less susceptible to variances that affect our operating performance resulting from depreciation, amortization and other non-cash and non-recurring cash charges or other items. We present Adjusted EBITDA, and the related Adjusted EBITDA margin, because we believe they are useful as supplemental measures in evaluating the performance of our operating businesses and provides greater transparency into our results of operations. Our management uses Adjusted EBITDA and Adjusted EBITDA margin as factors in evaluating the performance of our business.
Adjusted EBITDA and Adjusted EBITDA margin have limitations as analytical tools, and you should not consider these measures either in isolation or as a substitute for analyzing our results as reported under U.S. GAAP. Some of these limitations are:
| ·
● | | these measures do not reflect changes in, or cash requirements for, our working capital needs; |
| ·
● | | these measures do not reflect our interest expense, or the cash requirements necessary to service interest or principal payments on our debt; |
| ·
● | | these measures do not reflect our income tax expense or the cash requirements to pay our taxes; |
| ·
● | | these measures do not reflect the cash requirements to pay dividends to stockholders of our Class A common stock and tax and other cash distributions to our non-controlling unitholders; |
| ·
● | | these measures do not reflect the cash requirements to pay RIHI and Oberndorf Investments LLC (“Oberndorf” and together, the “TRA Parties”) pursuant to the TRAs; Tax Receivable Agreements (“TRAs”); |
| ·
● | | although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often require replacement in the future, and these measures do not reflect any cash requirements for such replacements; |
| ·
● | | although equity-based compensation is a non-cash charge, the issuance of equity-based awards may have a dilutive impact on earnings per share; and |
| ·
● | | other companies may calculate these measures differently, so similarly named measures may not be comparable. |
A reconciliation of Adjusted EBITDA to net income for our consolidated results for the periods presented is set forth in the following table:table (in thousands):
| | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
Net income | | $ | 46,856 | | $ | 49,822 | | $ | 31,320 |
Depreciation and amortization | | | 22,323 | | | 20,678 | | | 20,512 |
Interest expense | | | 12,229 | | | 12,051 | | | 9,996 |
Interest income | | | (1,446) | | | (676) | | | (352) |
Provision for income taxes | | | 10,909 | | | 16,342 | | | 57,542 |
EBITDA | | | 90,871 | | | 98,217 | | | 119,018 |
(Gain) loss on sale or disposition of assets and sublease, net | | | 342 | | | (139) | | | 4,260 |
Equity-based compensation expense | | | 10,934 | | | 9,176 | | | 2,900 |
Acquisition-related expense (1) | | | 1,127 | | | 1,634 | | | 5,889 |
Gain on reduction in tax receivable agreement liability (2) | | | — | | | (6,145) | | | (32,736) |
Special Committee investigation and remediation expense (3) | | | — | | | 2,862 | | | 2,634 |
Fair value adjustments to contingent consideration (4) | | | 241 | | | (1,289) | | | 180 |
Adjusted EBITDA | | $ | 103,515 | | $ | 104,316 | | $ | 102,145 |
| | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | | | | | (in thousands) | | | |
Net income | | $ | 35,179 | | $ | 47,226 | | $ | 50,775 |
Depreciation and amortization | | | 20,512 | | | 16,094 | | | 15,124 |
Interest expense | | | 9,996 | | | 8,596 | | | 10,413 |
Interest income | | | (352) | | | (160) | | | (178) |
Provision for income taxes | | | 55,576 | | | 15,273 | | | 12,030 |
EBITDA | | | 120,911 | | | 87,029 | | | 88,164 |
Loss (gain) on sale or disposition of assets and sublease, net (1) | | | 4,260 | | | (171) | | | (3,650) |
Loss on early extinguishment of debt | | | — | | | 2,893 | | | 94 |
Equity-based compensation expense | | | 2,900 | | | 2,330 | | | 1,453 |
Public offering related expenses | | | — | | | 193 | | | 1,097 |
Acquisition related expenses (2) | | | 5,889 | | | 1,899 | | | 2,750 |
Gain on reduction in TRA liability(3) | | | (32,736) | | | — | | | — |
Special Committee Investigation costs(4) | | �� | 2,634 | | | — | | | — |
Adjusted EBITDA (5) | | $ | 103,858 | | $ | 94,173 | | $ | 89,908 |
| (1) | (1)
| | Represents loss (gain) on the sale or disposition of assets as well as the losses (gains) on the sublease of a portion of our corporate headquarters office building.
|
| (2)
| | Acquisition related expenses includeAcquisition-related expense includes legal, accounting, advisory and consulting fees incurred in connection with ourthe acquisition and integration of certain assets of Tails in October 2013, the six independent regions that were acquired during 2016 (New York, Alaska, New Jersey, Georgia, Kentucky/Tennessee and Southern Ohio), Motto and the independent region acquired during 2017 (Northern Illinois). Costs include legal, accounting and advisory fees, consulting fees for integration services, and litigation settlement and fees specific to Tails.
companies. |
| (2) | (3)
| | Gain on reduction in tax receivable agreement liability is a result of the Tax Cuts and Jobs Act enacted in December 2017.2017 and further clarified in 2018. See Note 11, 12, Income Taxes for additional information. |
| (3) | (4)
| | Special Committee Investigation costs relateinvestigation and remediation expense relates to costs incurred in relation to athe previously disclosed investigation by the special committee of independent directors appointed by the Board of Directors to investigate actions of certain members of our senior management.management and the implementation of the remediation plan. |
| (4) | Fair value adjustments to contingent consideration include amounts recognized for changes in the estimated fair value of the contingent consideration liability. See Note 1, Business and Organization11, Fair Value Measurements to the accompanying consolidated financial statements for additional information.information |
| (5)
| | Below is a reconciliation of Adjusted EBITDA as previously reported to Adjusted EBITDA as currently reported (in thousands):
|
| | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 |
Adjusted EBITDA as previously reported | | $ | 94,647 | | $ | 91,401 |
Equity-based compensation expense | | | 2,330 | | | 1,453 |
Straight-line rent expense (a) | | | (748) | | | (889) |
Severance-related expenses (b) | | | (1,472) | | | (1,482) |
Immaterial correction (c) | | | (584) | | | (575) |
Adjusted EBITDA as currently reported | | $ | 94,173 | | $ | 89,908 |
| (a)
| | Represents the charge to record rent expense on a straight-line basis over the term of the lease arrangement taking into consideration escalation in monthly cash payments.
|
| (b)
| | Includes severance and other related expenses due to organizational changes in our executive leadership.
|
| (c)
| | Prior period amounts reflect an immaterial correction recorded for the years ended December 31, 2016 and 2015. See Note 18, Immaterial Corrections to Prior Period Financial Statements for additional information.
|
Liquidity and Capital Resources
Overview of Factors ImpactingAffecting Our Liquidity
Our liquidity position has been positivelyis affected by the growth of our agent base and improving conditions in the real estate market. In this regard, our short-term liquidity position from time to time has been, and will continue to be, affected by the number of factors including agents in the RE/MAX network.network, particularly in Company-owned Regions. Our cash flows are primarily related to the timing of:
(i)cash receipt of revenues;
(ii)payment of selling, operating and administrative expenses;
(iii)cash consideration for acquisitions and acquisition-related expenses;
(iv)principal payments and related interest payments on our 2016 Senior Secured Credit Facility and 2013 Senior Secured Credit Facility;
(v)dividend payments to stockholders of our Class A common stock;
(vi)distributions and other payments to non-controlling unitholderspursuant to the terms of RMCO’s fourth amended and restated limited liability company operating agreement (“the New RMCO, LLC Agreement”);
(vii)corporate tax payments paid by the Company; and
(viii)payments to the TRA Parties pursuant to the TRAs.
| (i) | cash receipt of revenues; |
| (ii) | payment of selling, operating and administrative expenses; |
| (iii) | investments in technology and Motto; |
| (iv) | cash consideration for acquisitions and acquisition-related expenses; |
| (v) | principal payments and related interest payments on our Senior Secured Credit Facility; |
| (vi) | dividend payments to stockholders of our Class A common stock; |
| (vii) | distributions and other payments to non-controlling unitholderspursuant to the terms of RMCO’s limited liability company operating agreement (“the RMCO, LLC Agreement”); |
| (viii) | corporate tax payments paid by the Company; and |
| (ix) | payments to the TRA parties pursuant to the TRAs. |
We have satisfied these needs primarily through our existing cash balances, cash generated by our operations and funds available under our 2016 Senior Secured Credit Facility and 2013 Senior Secured Credit Facility.
Financing Resources
On December 15, 2016,RMCO and RE/MAX, LLC, a wholly owned subsidiary of RMCO, entered intohave a credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and various lenders party thereto (the “2016 Senior Secured Credit Facility”), which amended and restated a prior credit agreement (the “2013 Senior“Senior Secured Credit Facility”). The 2016 Senior Secured Credit Facility provides to RE/MAX, LLC $235.0 million in term loans and a $10.0 million revolving facility. The proceeds provided by these term loans were used to refinance and repay existing indebtedness under the
2013The Senior Secured Credit Facility of $188.4restricts the aggregate acquisition consideration for permitted acquisitions, in a situation in which RE/MAX, LLC would not be in pro forma compliance with a 3.5:1.0 total leverage ratio (based on how such term is defined therein), to $100.0 million and to help fund the acquisition of RE/MAX of Georgia, Inc., RE/MAX of Kentucky/Tennessee, Inc., and RE/MAX of Southern Ohio, Inc., collectively (“RE/MAX Regional Services”). See Note 5, Acquisitions and Dispositions for further information on the acquisition of RE/MAX Regional Services. See Note 9, Debt for further detail.
in any fiscal year. The maturity date on all of the term loans under the 2016 Senior Secured Credit Facility is December 15, 2023. Term loans are repaid in quarterly installments of $0.6 million withalso provides for incremental facilities, subject to lender participation, as long as the balance due at maturity. The quarterly installments will be reduced pro-rata by the amount of any excess cash flow principal payments made annually in accordance with the 2016 Senior Secured Credit Facility. Term loans may be optionally repaid by RE/MAX, LLC at any time. All amounts outstanding, if any, under the revolving line of credit must be repaid on December 15, 2021. total leverage ratio (calculated as net debt to EBITDA as defined therein) remains below 4.00:1.00.
The 2016 Senior Secured Credit Facility requires RE/MAX, LLC to repay term loans and reduce revolving commitments with (i) 100.0% of proceeds of any incurrence of additional debt not permitted by the 2016 Senior Secured Credit Facility, (ii) 100.0% of proceeds of asset sales and 100.0% of amounts recovered under insurance policies, subject to certain exceptions and a reinvestment right and (iii) 50.0% of excess cash flow at the end of the applicable fiscal year if RE/MAX, LLC’s total leverage ratio as defined in the 2016 Senior Secured Credit Facility is in excess of 3.25:1.00, with such percentage decreasing to zero as RE/MAX, LLC’s leverage ratio decreases below 2.75:1.00. The 2013 Senior Secured Credit Facility required RE/MAX, LLC to repay term loans with 50% of excess cash flow at the end of the applicable year if its total leverage ratio as defined therein was in excess of 2.50:1.00, with such percentage decreasing as RE/MAX, LLC’s leverage ratio decreased.decreases.
The 2016 Senior Secured Credit Facility is guaranteed by RMCO and RE/MAX of Western Canada (1998), LLC, a wholly owned subsidiary of RE/MAX, LLC, and is secured by a lien on substantially all of the assets of RMCO, RE/MAX, LLC and each guarantor.
Borrowings under the term loans and revolving loans accrue interest, at our option on (a) London Interbank Offered Rate (“LIBOR”), provided that LIBOR shall be no less than 0.75% plus an applicable margin of 2.75% and, provided further, that LIBOR shall be adjusted for reserve requirements for eurocurrency liabilities, if any (the “Eurodollar Rate”) or (b) the greatest of (i) JPMorgan Chase Bank N.A.’s prime rate, (ii) the NYFRB Rate (as defined in the 2016 Senior Secured Credit Facility) plus 0.50% and (iii) the one-month Eurodollar Rate plus 1%, (such greatest rate, the “ABR”) plus, in each case, the applicable margin. The applicable margin for ABR loans is 1.75%. During 2017 interest accrued at LIBOR plus 2.75%.
RE/MAX, LLC had entered into the 2013 Senior Secured Credit Facility, which was paid off when RE/MAX, LLC amended and restated the 2013 Senior Secured Credit Facility by entering into the 2016 Senior Secured Credit Facility, in July 2013 with JPMorgan Chase Bank, N.A., as administrative agent, and various lenders party thereto. Under the 2013 Senior Secured Credit Facility, RE/MAX, LLC had borrowed $230.0 million in term loans and had a revolving line of credit available of up to $10.0 million.
The 2016 Senior Secured Credit Facility, like the 2013 Senior Secured Credit Facility provides for customary restrictions on, among other things, additional indebtedness, liens, dispositions of property, dividends, transactions with affiliates and fundamental changes such as mergers, consolidations and liquidations. With certain exceptions, any default under any of our other agreements evidencing indebtedness in the amount of $15.0 million or more constitutes an event of default under the 2016 Senior Secured Credit Facility. Certain of the restrictions under the 2016 Senior Secured Credit Facility are less restrictive, as compared with the comparable terms in the 2013 Senior Secured Credit Facility.
The 2016 Senior Secured Credit Facility restricts the aggregate acquisition consideration for permitted acquisitions, in a situation in which RE/MAX, LLC would not be in pro forma compliance with a 3.5:1.0 total leverage ratio (based on how such term is defined therein), to $100.0 million in any fiscal year. The 2016 Senior Secured Credit Facility also provides for incremental facilities as long as the total leverage ratio as defined therein remains below 4.00:1.00.
On March 11, 2015, the 2013 Senior Secured Credit Facility was amended, providing for an increase to the maximum applicable margin for both LIBOR and ABR loans by 0.25%, and a modification of certain liquidity covenants in order to increase the amounts RE/MAX, LLC could distribute to RMCO to enable RMCO to increase the dividends declared
and paid to its unitholders. On November 22, 2016, the 2013 Senior Secured Credit Facility was further amended, providing for an increase in the revolving commitment by $20.0 million to a total of $30.0 million effective upon the acquisition of RE/MAX Regional Services, and also waived certain limitations on acquisitions in order to enable us to consummate such acquisition.
As of December 31, 2017,2019, we had $229.0$225.3 million of term loans outstanding, net of an unamortized discount and issuance costs, $0.4 million of long-term financing assumed with the acquisition of booj and no revolving loans outstanding under our 2016 Senior Secured Credit Facility. As of December 31, 2019, the interest rate on the term loan facility was 4.55%. If any loan or other amounts are outstanding under the revolving line of credit, the 2016 Senior Secured Credit Facility requires compliance with a leverage ratio and an interest coverage ratio. A commitment fee of 0.5% per annum accrues on the amount of unutilized revolving line of credit. We received certain limited waivers and extensions related
As needs arise, we may seek additional financing in the public capital markets. On October 15, 2019 we filed a registration statement on Form S-3 (“shelf registration”) allowing for the sale of up to our obligation to deliver timely financial information.$400 million in additional financing. The SEC declared the shelf registration effective on December 30, 2019.
Sources and Uses of Cash
As of December 31, 20172019, and 2016,2018, we had $50.8$83.0 million and $57.6$60.0 million, respectively, in cash and cash equivalents, of which approximately $0.8 million and $11.6$1.1 million were denominated in foreign currencies, respectively.
The following table summarizes our cash flows from operating, investing and financing activities:
| | | | | | | |
| | Year Ended December 31, | |
| | 2017 | | 2016 | | 2015 | |
| | (in thousands) | |
| | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
Cash provided by (used in): | | | | | | | | | | | | | | | |
Operating activities | | $ | 63,288 | | $ | 64,379 | | $ | 77,358 | | $ | 78,975 | | $ | 76,064 | | $ | 63,288 |
Investing activities | | | (37,918) | | (117,332) | | 1,664 | | | (876) | | | (33,675) | | | (37,918) |
Financing activities | | | (33,235) | | 228 | | (75,186) | | | (34,542) | | | (33,152) | | | (33,235) |
Effect of exchange rate changes on cash | | | 1,063 | | | 122 | | | (823) | | | 70 | | | (70) | | | 1,063 |
Net change in cash and cash equivalents | | $ | (6,802) | | $ | (52,603) | | $ | 3,013 | |
Net change in cash, cash equivalents and restricted cash | | | $ | 43,627 | | $ | 9,167 | | $ | (6,802) |
Operating Activities
During the year ended December 31, 2017,2019, Adjusted EBITDA was relatively flat, but cash provided by operating activities slightly decreased as a resultincreased because of:
| ·
● | a decrease in TRA payments between years of $2.7 million driven by the impacts of the Tax Cut & Jobs Act; |
| an increase●
| a net payment in February 2018 of $12.0$2.6 million in cash paid pursuant to satisfy the terms of the TRAs in the current period; offset by |
| ·
| | the February 2016 payment of $3.3 million to satisfy liabilities from a litigation settlement that occurred in 2018 that did not recur in the current year period; and
2019; partially offset by |
| ·
● | | an increase in Adjusted EBITDAlower receipts of $9.7initial franchise sales as compared to revenue recognized, with a net impact of $2.1 million and other selling,
|
| ● | timing differences on various operating assets and administrative activities.liabilities. |
During the year ended December 31, 2016,2018, cash provided by operating activities decreased primarily as a resultincreased because of:
| ·
● | | the February 2016 paymentan increase of Adjusted EBITDA of $2.2 million, which includes $3.3 million to satisfy liabilities from a litigation judgment that did not occurof severance costs accrued but unpaid in the current year period versus the prior year period;
|
| ·
● | | the $1.3a decrease of $7.1 million payment pursuant to the TRAs that did not occurin timing of TRA payments in the current year versus the prior year period;year; and
|
| ·
● | | an increase of $6.1 million in cash paid for income taxes as a result of changes in our ownership structuretiming differences on various operating assets and timing of our U.S. federal tax payments.
liabilities. |
The increase in cash provided by operating activities was partially offset by the February 2018 net payment of $2.6 million to satisfy the terms of a litigation settlement in which no comparable transactions occurred in the prior year period.
Investing Activities
During the year ended December 31, 2017,2019, cash used in investing activities decreasedwas primarily as athe result of the 2016 acquisitionsacquisition of MottoFirst and the 2016 Acquired Regions in 2016 as well as a reduction in the investments in our information technology, infrastructure, partiallyespecially the booj Platform, mostly offset by restricted cash acquired in connection with the acquisition of RE/MAX of Northern Illinois in 2017.
the Marketing Funds. See Note 6, Acquisitions to the accompanying consolidated financial statements for more information.
During the year ended December 31, 2016,2018, cash used in investing activities increased primarily as a resultbecause of the $112.9 millionacquisition of booj, investments in training materials and cash used for the acquisitionstechnology investments.
Financing Activities
During the year ended December 31, 2017,2019, cash used in financing activities increased as a result of:primarily due to:
| ·
● | | net cash proceeds of $44.0 million received in 2016 in connection with the 2016 Senior Secured Credit facility;
|
| ·
| | a decrease of $12.7 million due to the excess cash flow prepayment made on the 2013 Senior Secured Credit Facility in March 2016 for which a similar payment was not made in 2017 pursuant to the revised terms of the 2016 Senior Secured Credit Facility, partially offset by
|
| ·
| | an increase of $1.5 millionin distributions paid to non-controlling unitholders, and |
| ● | an increase in cash paid to Class A common stockholders and non-controlling unitholders due to our Board of Directors declaring a quarterly dividend of $0.18$0.21 per share on all outstanding shares of Class A common stock in 2017all four quarters of 2019 compared to a quarterly dividend of $0.15$0.20 per share on all outstanding shares of Class A common stock in 2016.all four quarters of 2018. |
During the year ended December 31, 2016,2018, cash provided byused in financing activities increased as a result of:decreased primarily due to:
| ·
● | | net cash proceeds of $44.0 million receiveda decrease in connection with the 2016 Senior Secured Credit facility;
distributions paid to non-controlling unitholders, offset by |
| ·
● | | a net decrease of $38.3 millionan increase in cash paid to Class A common stockholders and non-controlling unitholders due to our Board of Directors declaring a special dividend in March 2015 of $1.50$0.20 per share on all outstanding shares of Class A common stock which did not occur during the year ended December 31, 2016 offset by an increase in the quarterly dividends declared in 2016all four quarters of 2018 compared to $0.15a dividend of $0.18 per share ofon all outstanding shares of Class A common stock from $0.125 per share outstanding in 2015; partially offset by
all four quarters of 2017, as well as |
| ·
● | | an increase of $5.4 million in the mandatory excess cash flow prepayments made in March 2016 compared to March 2015 pursuant to the terms of our 2013 Senior Secured Credit Facility; and |
| ·
| | a reduction of $2.1 million in cash received from stock option exercises duringpaid related to financing assumed with the year ended December 31, 2016 compared to December 31, 2015.
acquisition of booj. |
CashCapital Allocation Priorities
Liquidity
Our objective is to maintain a strong liquidity position. We have existing cash balances, cash flows from operating activities, access to our revolving line of credit and incremental facilities under our 2016 Senior Secured Credit Facility available to support the needs of our business. Should additional liquidity needs arise, our recently filed shelf registration, effective December 30, 2019, would permit access to public capital markets.
Acquisition of BusinessesAcquisitions
As part of our growth strategy we may pursue reacquisitions of master franchise rights in Independent Regions in the U.S. and Canada as well as additional acquisitions or investments in complementary businesses, services and technologies that would provide access to new markets, or customers, leverage our leadership position in the industryrevenue streams, or otherwise complement our existing operations. We would fund any such growth with existing cash balances, funds generated from operations, access to capital under our Senior Secured Credit Facility and access to public capital markets via our revolving line of credit and incremental facilities under our 2016 Senior Secured Credit Facility. In 2017, we acquired the Northern Illinois Region for $35.7 million and funded the acquisition with existing cash balances.recently filed shelf registration.
Capital Expenditures
The total aggregate amount paid for purchases of property and equipment and capitalization of software was $2.1$13.2 million, $4.4$7.8 million and $3.5$2.2 million in 2018, 2017 and 2016, and 2015, respectively. Amounts paid for purchases of property, equipment and softwareThese amounts primarily related to investments in our information technology infrastructure and leasehold improvements.training materials. In order to
expand our technological capabilities, we plan to continue to re-invest in our business in order to improve operational efficiencies and enhance the tools and services provided to the franchisees, agents, and agentsloan originators in our network.networks. Total capital expenditures for 20182020 are expected to be between $5.0$17 million and $6.0 million.$19 million as a result of combined investments in technology and including between $7 million and $8 million related to the refresh and efficiency enhancements of our corporate headquarters. See Financial and Operational Highlights above for additional information.
Dividends
Our Board of Directors declared quarterly cash dividends of $0.18$0.21 and $0.15$0.20 per share on all outstanding shares of Class A common stock every quarter in 20172019 and 2016,2018, respectively, as disclosed in Note 4, 5, Earnings Per Share and Dividends. On February 21, 2018,19, 2020, our Board of Directors declaredannounced a quarterly cash dividend of $0.20$0.22 per share on all outstanding shares of Class A common stock, which is payable on March 21, 201818, 2020 to stockholders of record at the close
of business on March 7, 2018.4, 2020. The declaration of additional future dividends, and, if declared, the amount of any such future dividend, will be subject to our actual future earnings and capital requirements and will be at the discretion of our Board of Directors; however, we currently intend to continue to pay a cash dividend on shares of Class A common stock on a quarterly basis.
Distributions and Other Payments to Non-controlling Unitholders by RMCO
Distributions byto Non-Controlling Unitholders Pursuant to the RMCO, LLC Agreement
As authorized by the New RMCO, LLC Agreement, RMCO makes cash distributions to its unitholders, RE/MAXmembers, Holdings and RIHI, also referred to as its members. In accordance with the New RMCO, LLC Agreement, distributionsRIHI. Distributions are required to be made by RMCO to its members on a pro-rata basis in accordance with each members’ ownership percentage in RMCO. These distributions have historically been either in the form of payments to cover its members’ estimated tax liabilities, dividend payments, or payments to ensure pro-rata distributions have occurred.
As a limited liability company (treated as a partnership for income tax purposes), RMCO does not incur significant domestic federal, state or local income taxes, as these taxes are primarily the obligations of its members. RMCO is generally required to distribute cash to its members to cover each member’s estimated tax liabilities, if any, with respect to their allocable share of RMCO earnings. Such distributions are required if any other distributions from RMCO (i.e., in the form of dividend payments) for the relevant period are otherwise insufficient to enable each member to cover its estimated tax liabilities.
RE/MAX Holdings’ only source of cash flow from operations is in the form of distributions from RMCO. RE/MAX Holdings receives distributions from RMCO on a quarterly basis that are equal to the dividend payments RE/MAX Holdings makes to the stockholders of its Class A common stock. As a result, absent any additional distributions, RE/MAX Holdings may have insufficient funds to cover its estimated tax and TRA liabilities. Therefore, as necessary, RMCO makes a separate distribution to RE/MAX Holdings, and because all distributions must be made on a pro-rata basis, RIHI receives a separate payment to ensure such pro-rata distributions have occurred.
Throughout the year until completion of its tax return with respect to such year, RMCO may pay required or pro-rata true-up distributions to its members, if cash is available for such purposes, with respect to actual taxable income for the prior year. See Note 3, 4, Non-controlling Interest for further details on distributions made by RMCO.
Payments Pursuant to the Tax Receivable Agreements
As of December 31, 2017,2019, the Company reflected a total liability of $53.2$37.2 million under the terms of theseits TRAs. The liability pursuant to the TRAs will increase in the future upon future exchanges by RIHI of RMCO common units, with the increase representing 85% of the estimated future tax benefits, if any, resulting from such exchanges. We receive funding from RMCO in order to fund the payment of amounts due under the TRAs.
Payments are made on this liability as tax benefits are realized by Holdings.
Distributions by RMCO to non-controlling unitholders and other payments pursuant to the TRAs in the years ended December 31, 2017RMCO, LLC Agreement and 2016TRAs were comprised of the following (in thousands):
| | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 |
Distributions and other payments pursuant to the RMCO, LLC Agreement: | | | | | | |
Required distributions for taxes and pro rata distributions as a result of distributions to RE/MAX Holdings in order to satisfy its estimated tax liabilities | | $ | 4,880 | | $ | 4,511 |
Dividend distributions | | | 10,550 | | | 10,048 |
Total distributions to RIHI | | | 15,430 | | | 14,559 |
Payments pursuant to the TRAs | | | 3,556 | | | 6,305 |
Total distributions to RIHI and TRA payments | | $ | 18,986 | | $ | 20,864 |
| | | | | |
| Year Ended |
| December 31, |
| 2017 | | | 2016 |
Distributions and other payments pursuant to the New RMCO, LLC Agreement: | | | | | |
Required distributions for taxes and pro rata distributions as a result of distributions to RE/MAX Holdings in order to satisfy its estimated tax liabilities | $ | 8,217 | | $ | 10,391 |
Dividend distributions | | 9,043 | | | 7,536 |
Total distributions to RIHI | | 17,260 | | | 17,927 |
Payments pursuant to the TRAs | | 13,371 | | | 1,344 |
Total distributions to RIHI and TRA payments | $ | 30,631 | | $ | 19,271 |
62
Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 20172019 and the effect such obligations are expected to have on our liquidity and cash flows in future periods:periods (in thousands):
| | | | | | | | | | | | | | | | |
| | Payments due by Period | |
| | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | After 5 years | |
Senior Secured Credit Facility (including current portion) (1) (2) | | $ | 227,363 | | $ | 2,350 | | $ | 4,700 | | $ | 220,313 | | $ | — | |
Other long-term financing (including current portion) (3) | | | 362 | | | 298 | | | 64 | | | — | | | — | |
Interest payments on credit facility (4) | | | 40,688 | | | 10,466 | | | 20,550 | | | 9,672 | | | — | |
Interest payments on other long-term debt (3) | | | 24 | | | 23 | | | 1 | | | — | | | — | |
Lease obligations (5) | | | 74,944 | | | 7,868 | | | 16,433 | | | 17,005 | | | 33,638 | |
Payments pursuant to tax receivable agreements (6) | | | 37,223 | | | 3,583 | | | 7,273 | | | 6,803 | | | 19,564 | |
Vendor contracts (7) | | | 49,904 | | | 38,403 | | | 11,413 | | | 88 | | | — | |
Estimated undiscounted contingent consideration payments (8) | | | 9,052 | | | 402 | | | 1,750 | | | 2,864 | | | 4,036 | |
| | $ | 439,560 | | $ | 63,393 | | $ | 62,184 | | $ | 256,745 | | $ | 57,238 | |
| | | | | | | | | | | | | | | |
| | Payments due by Period |
| | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | After 5 years |
| | (in thousands) |
Long-term debt (including current portion) (1) (2) | | $ | 232,063 | | $ | 2,350 | | $ | 4,700 | | $ | 4,700 | | $ | 220,313 |
Interest payments on debt facilities (3) | | | 60,497 | | | 10,415 | | | 20,540 | | | 20,088 | | | 9,454 |
Lease obligations (4) | | | 88,216 | | | 7,822 | | | 15,862 | | | 16,046 | | | 48,486 |
Payments pursuant to tax receivable agreements (5) | | | 53,175 | | | 6,252 | | | 8,058 | | | 8,227 | | | 30,638 |
| | $ | 433,951 | | $ | 26,839 | | $ | 49,160 | | $ | 49,061 | | $ | 308,891 |
| (1) | (1)
| | We are required to make quarterly principal payments on our 2016 Senior Secured Credit Facility of $0.6 million through December 2023. We have also reflected full payment of long-term debt at maturity of our 2016 Senior Secured Credit Facility in December 2023. The total amount excludes the unamortized discount.
2023 at maturity. |
| (2) | (2)
| | The 2016 Senior Secured Credit Facility only requires mandatorymay require additional prepayments and commitment reductions throughout the term of the loan if the total leverage ratio as of the last day of such fiscal year is greater than 2.75 to 1.0. If the total leverage ratio as of the last day of such fiscal year is not greater than 2.75 to 1.0 no excess cash flow principal prepayment is required. No excess cash flow principal prepayments are included as our total leverage ratio as |
| (3) | Includes financing assumed with the acquisition of December 31, 2017 was not greater than 2.75 to 1.0 and we don’t anticipate our total leverage ratio to be greater than 2.75 to 1.0 in future periods. booj. |
| (4) | (3)
| | The interest payments in the above table are determined assuming that principal payments on debt are made on their applicable maturity dates. The variable interest rate on the 2016 Senior Secured Credit Facility is assumed at the interest rate in effect as of December 31, 20172019 of 4.44%4.55%.
|
| (5) | (4)
| | We are obligated under non-cancelable leases for offices and equipment. Future payments under these leases and commitments, net of payments to be received under sublease agreements of $6.6$4.7 million in the aggregate, are included in the table above. |
| (6) | (5)
| | As described elsewhere in this Annual Report on Form 10-K, we entered into TRAs, that will provide for the payment by us of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax or franchise tax that we realize as a result of tax deductions arising from the increase in tax basis in RMCO’s assets. |
| (7) | Represents outstanding purchase orders with vendors initiated in the ordinary course of business for operating and capital expenditures. |
| (8) | Represents estimated payments to the former owner of Motto as required per the purchase agreement. |
Commitments and Contingencies
Our management does not believe there are any matters involving us that could result, individually or in the aggregate, in a material adverse effect on our financial condition, results of operations and cash flows.
Off Balance Sheet Arrangements
We have no material off balance sheet arrangements as of December 31, 2017. 2019.
Critical Accounting Judgments and Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts and disclosures in the financial statements and accompanying notes. Several of the estimates and assumptions we are required to make relate to matters that are inherently uncertain as they pertain to future events. We base estimates on historical experience and other assumptions believed to be reasonable under the circumstances and evaluate these estimates on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.
Our significant accounting policies are discussed in Note 2, Summary of Significant Accounting Policies. We believe that the accounting policies and estimates discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.
Motto Goodwill and Contingent Consideration
Goodwill is an asset representing the future economic benefits arising from the other assets acquired in a business combination that are not individually identified and separately recognized. We assess goodwill for impairment at least annually or whenever an event occurs, or circumstances change that would indicate impairment may have occurred at the reporting unit level. Reporting units are driven by the level at which segment management reviews operating results. We perform our required impairment testing annually on August 31.
Our impairment assessment begins with a qualitative assessment to determine if it is more likely than not that a reporting unit’s fair value is less than the carrying amount. The initial qualitative assessment includes comparing the overall financial performance of the reporting units against the planned results as well as other factors which might indicate that the reporting unit’s value has declined since the last assessment date. If it is determined in the qualitative assessment that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then the standard two-step quantitative impairment test is performed. The first step of the quantitative impairment test consists of comparing the estimated fair value of each reporting unit with its carrying amount, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying value, then it is not considered impaired and no further analysis is required. If the first step of the quantitative impairment test indicates that the estimated fair value of a reporting unit is less than its carrying value, then impairment potentially exists and the second step of the quantitative impairment test is performed to measure the amount of goodwill impairment. Goodwill impairment is measured as the difference between the implied fair value of a reporting unit’s goodwill and its carrying value. October 1.
During 2017, 20162019, 2018 and 2015,2017, we performed the qualitative impairment assessment by evaluating, among other things, market and general economic conditions, entity-specific events, events affecting aassessments for all reporting unit and our results of operations and key performance measures.
The carrying value of goodwill as of December 31, 2017 was $135.2 million, which represented approximately 33.3% of our consolidated assets.units. Except for the Motto Franchising reporting unit, the fair value of ourthe reporting units significantly exceeded their carrying values at ourthe latest assessment date.
The Motto Franchising segment, which has a carrying value of goodwill as of December 31, 20172019 of $11.8 million, is a startupan early-stage business and its fair value is tied primarily to franchise sales over the next several years.years and the discount rate used in our discounted cash flow analysis. Failure to achieve targeted franchise sales (which are currently estimated at between 50 and 80 per year over the next 10 years) would likely result in an impairment of this goodwill balance.
We didhave not recordrecorded any material goodwill impairments during the years ended December 31, 2017, 20162019, 2018 and 2015.2017.
Franchise Agreements and Other Intangible Assets
We review our franchise agreements and other intangible assets subject to amortization for impairment whenever events or changes in circumstances indicate that the carrying amountContingent consideration consists of an asset may not be recoverable. Recoverabilityearn-out obligation in connection with the acquisition of assetsFull House, in which we are required to be held and usedpay additional purchase consideration totaling 8% of gross receipts generated by the acquired business each year through 2026 with no limitation as to the maximum payout. Contingent consideration is recorded at fair value, which is measured by a comparisonat the present value of the carrying amount of an asset to estimated undiscounted future cash flowsconsideration expected to be generated from such assets. Undiscounted cash flow analyses require us to make estimates and assumptions, including among other things, revenue growth rates and operating margins based on our financial budgets and business plans.
Disruptions to contractual relationships or other issues significantly impacting the future cash flows associated with our franchise agreements and other intangible assets would cause us to evaluate their recoverability. If an event described above occurs and causes us to determine that an asset has been impaired, that could result in an impairment charge.transferred. The net carryingfair value of ourcontingent consideration is re-measured at the end of each reporting period with the change in fair value recognized in selling, operating and administrative expenses in the Consolidated Statements of Income. Similar to the goodwill discussion above, estimates of the fair value of contingent consideration are also impacted by Motto franchise agreementssales over the next several years and other intangible assets as ofdiscount rates. See Note 11, Fair Value Measurement for additional information. Contingent consideration obligations were $5.0 million and $5.1 million at December 31, 2017 was $119.3 million2019 and $8.5 million, respectively. We have not recorded any impairment charges during the years ended December 31, 2017, 2016 and 2015.2018.
Purchase Accounting for Acquisitions
We allocate the purchase price of an acquired business to its identifiable assets and liabilities based on estimated fair values. The excess of the purchase price over the amount allocated to the identifiable assets less liabilities is recorded as goodwill. Purchase price allocations require management to make assumptions and apply judgment to estimate the fair value of acquired assets and liabilities. Management estimates the fair value of assets and liabilities primarily using discounted cash flow analysis.
We engage outside appraisal firms to assist in the fair value determination of identifiable intangible assets, primarily franchise rights. The timing and amount of expected future cash flows used in the valuation requires estimates, among other items, of revenue and agent growth rates, operating expenses and expected operating cash flow margins. The development of these cash flows, and the discount rate applied to the cash flows, is subject to inherent uncertainties. We adjust the preliminary purchase price allocation, as necessary, after the acquisition closing date through the end of the measurement period of one year or less as we finalize valuations for the assets acquired and liabilities assumed. If estimates or assumptions used to complete the initial purchase price allocation and estimate the fair value of acquired assets and liabilities significantly differed from assumptions made in the final valuation, the allocation of purchase price between goodwill and intangibles could significantly differ. Such a difference would impact future earnings through amortization expense of these intangibles. In addition, if forecasts supporting the valuation of the intangible assets or goodwill are not achieved, impairments could arise, as discussed further in “Goodwill” and “Franchise Agreements and Other Intangible Assets” above.
Contingent Consideration64
Table of Contents
Contingent consideration consists of an earn-out obligation in connection with the acquisition of Full House, in which we are required to pay additional purchase consideration totaling eight percent of gross revenues generated by the acquired business each year for the first ten years subsequent to the acquisition with no limitation as to the maximum payout. Contingent consideration is recorded at the acquisition date fair value, which is measured at the present value of the consideration expected to be transferred. The fair value of contingent consideration is re-measured at the end of each reporting period with the change in fair value recognized in selling, operating and administrative expenses in the Consolidated Statements of Income. Estimates of the fair value of contingent consideration are impacted by the timing and amount of franchise sales, discount rates and credit risk. Contingent consideration obligations were $6.6 million at December 31, 2017, with $0.3 million classified as current in our Consolidated Balance Sheets.
Deferred Tax Assets and TRA Liability
As discussed in Item 1. Business, RE/MAX Holdings has twice acquired significant portions of the ownership in RMCO. When RE/MAX Holdings acquired thesethis ownership in the form of common units, it received a significant step-up in tax basis on the underlying assets held by RMCO. The step-up is principally equivalent to the difference between (1) the fair value of the underlying assets on the date of acquisition of the common units and (2) their tax basis in RMCO, multiplied by the percentage of units acquired. The majority of the step-up in basis relates to intangibles assets, primarily franchise agreements and goodwill, and is included within deferred tax assets of approximately $59.2 million on our consolidated balance sheets at December 31, 2017.sheets. The computation of the step-up requires valuations of the intangible assets of RMCO and has the same complexities and estimates as discussed in Purchase Accounting for Acquisitions above. In addition, the step-up is governed by complex IRS rules that limit which intangibles are subject to step-up, and also imposes further limits on the amount of step-up. Given the magnitude of the deferred tax assets and complexity of the calculations, small adjustments to our model used to calculate these deferred tax assets can result in material changes to the amounts recognized. If more
common units of RMCO are redeemed by RIHI, the percentage of RE/MAX Holdings’ ownership of RMCO will increase, and additional deferred tax assets will be created as additional tax basis step-ups occur.
Pursuant to the TRA agreements, RE/MAX Holdings makes annual payments to RIHI and Oberndorf InvestmentsParallaxes Rain Co-Investment, LLC (“Parallaxes”) (a successor to the other previous owner of RMCO)TRAs prior owners) equivalent to 85% of any tax benefits realized on each year’s tax return from the additional tax deductions arising from the step-up in tax basis. A TRA liability of $53.2$37.2 million exists as of December 31, 20172019 for the future cash obligations expected to be paid under the TRAs and is not discounted. The calculation of this liability is a function of the step-up described above and therefore has the same complexities and estimates. Similar to the deferred tax assets, these liabilities would increase if RIHI redeems additional common units of RMCO.
General Litigation Matters
We are subject to litigation claims arising in the ordinary course of business. We accrue for contingencies related to litigation matters if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Because these matters are inherently unpredictable and unfavorable developments or resolutions can occur, assessing litigation matters is highly subjective and requires judgments about future events. We regularly review litigation matters to determine whether our accruals and related disclosures are adequate. The amount of ultimate loss may differ from these estimates. See Note 14, 15, Commitments and Contingencies for more information related to litigation matters.
New Accounting Pronouncements
New Accounting Pronouncements Not Yet Adopted
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), which requires lessees to recognize the assets and liabilities that arise from all leases on the consolidated balances sheets. ASU 2016-02 is required to be adopted by us on January 1, 2019. Early adoption is permitted in any interim or annual reporting period. The standard requires a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. We have not yet determined the effect of the standard on our consolidated financial statements and related disclosures.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), with several subsequent amendments, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. We adopted this standard on January 1, 2018. We will use the modified retrospective transition method, which will result in restating each prior reporting period presented, fiscal years 2016 and 2017, in the year of adoption. Additionally, a cumulative effect adjustment will be recorded to the opening balance sheet as of the first day of fiscal year 2016, the earliest period presented. The adoption of the new guidance will change the timing of recognition of franchise sales and franchise renewal revenue. Currently, we recognize revenue upon completion of a sale or renewal. Under the new guidance, franchise sales and renewal revenue, which are included in “Franchise Sales and Other Franchise Revenue” in the Consolidated Statements of Income, will be recognized over the contractual term of the franchise agreement. The impact to both “Franchise Sales and Other Franchise Revenue” and “Operating Income” in the Consolidated Statements of Income for 2017 from this change will be a decrease of less than $2.0 million. However, the Consolidated Balance Sheet as of December 31, 2017 will be adjusted in the first quarter of 2018 to reflect an increase in “Deferred revenue and deposits” of approximately $26.0 million. The commissions related to franchise sales will be recorded as a contract asset and be recognized over the contractual term of the franchise agreement. Currently, we expense the commissions upon franchise sale completion. The impact from this change to “Selling, operating and administrative expenses” and “Operating Income” in the Consolidated Statements of Income for 2017 is immaterial and the Consolidated Balance Sheet as of December 31, 2017 will be adjusted in the first quarter of 2018 to reflect an increase in “Total assets” of approximately $4.0 million. We do not expect the adoption of the standard to have a material impact on other revenue streams.
Other than the items noted above, there have been no new accounting pronouncements not yet effective that we believe have a significant impact, or potential significant impact, to our consolidated financial statements.
See Note 2, Summary of Significant Accounting Policies for recently issued accounting pronouncements applicable to us and the effect of those standards on our consolidated financial statements and related disclosures.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We have operations both within the U.S. and globally and we are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate, foreign exchange and inflation risks, as well as risks relating to changes in the general economic conditions in the countries where we conduct business. To reduce certain of these risks, we monitor the financial condition of our large franchisees. In addition, our investment strategy has been to invest in financial instruments that are highly liquid and mature within three months from the date of purchase. We do not currently use derivative instruments to mitigate the impact of our market risk exposures nor do we use derivatives for trading or speculative purposes.
Interest Rate Risk
We are subject to interest rate risk in connection with borrowings under our 2016 Senior Secured Credit Facility which bear interest at variable rates. At December 31, 2017, $229.02019, $227.4 million in term loans were outstanding under our 2016 Senior Secured Credit Facility, net of an unamortized discount and issuance costs. As of December 31, 2017, the undrawn borrowing availability under the revolving line of credit under our 2016 Senior Secured Credit Facility was $10.0 million.Facility. We currently do not engage in any interest rate hedging activity, but given our variable rate borrowings,
we monitor interest rates and if appropriate, may engage in hedging activity prospectively. The interest rate on our 2016 Senior Secured Credit Facility entered into in December 2016 is currently based on 3-month LIBOR, subject to a floor of 0.75%, plus an applicable margin of 2.75%. An interest rate floorAs of 1.75% is specified within the definition sections of the credit agreement. Based on the LIBOR rate in effect at December 31, 2017,2019, the interest rate was 4.44%4.55%%. If LIBOR rises, then each hypothetical 1/8%0.25% increase would result in additional annual interest expense of $0.3$0.6 million. To mitigate a portion of this risk, we invest our cash balances in short-term investments that earn interest at variable rates.
Currency Risk
We have a network of global franchisees in over 100110 countries and territories. Fees imposed on independent franchisees and agents in foreign countries are charged in the local currency. Fluctuations in exchange rates of the U.S. dollar against foreign currencies and cash held in foreign currencies can result, and have resulted, in fluctuations in our(a) revenue and operating income due to a portion of our revenue being denominated in foreign currencies and (b) foreign exchange transaction gains and losses due primarily to cash and accounts receivable balances denominated in foreign currencies, with the Canadian dollar representing the most significant exposure. We had foreign currency transaction gains of approximately $0.2 million during the year ended December 31, 2017 and foreign currency losses of approximately $0.1 million and $1.7 million during the years ended December 31, 2016 and 2015, respectively. We currently do not engage in any foreign exchange hedging activity of our revenues but may do so in the future. We repatriatefuture; however, we actively convert cash generated by certain of our Canadian operationsbalances into U.S. dollars to the U.S.mitigate currency risk on a regular basis and expect to continue to do so prospectively.cash positions. During the year ended December 31, 2017,2019, a hypothetical 5% strengthening/weakening in the value of the U.S. dollar compared to the Canadian dollar would have resulted in a decrease/increase to pre-taxoperating income of approximately $1.0 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm | | 7968 |
Consolidated Balance Sheets as of December 31, 20172019 and 20162018 | | 8272 |
Consolidated Statements of Income for the Years Ended December 31, 2017, 20162019, 2018 and 20152017 | | 8373 |
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2017, 20162019, 2018 and 20152017 | | 8474 |
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2017, 20162019, 2018 and 20152017 | | 8575 |
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 20162019, 2018 and 20152017 | | 8676 |
Notes to Consolidated Financial Statements | | 8777 |
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
RE/MAX Holdings, Inc.:
Opinion on the ConsolidatedFinancial Statements
We have audited the accompanying consolidated balance sheets of RE/MAX Holdings, Inc. and subsidiaries (the Company) as of December 31, 20172019 and 2016,2018, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three‑yearthree-year period ended December 31, 2017,2019, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20172019 and 2016,2018, and the results of its operations and its cash flows for each of the years in the three‑yearthree-year period ended December 31, 2017,2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 15, 2018February 21, 2020 expressed an adverseunqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has elected to change its method of accounting for leases as of January 1, 2019 due to the adoption of ASC Topic 842, Leases.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
T he critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgment. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Assessment of the carrying value of goodwill for the Motto reporting unit
As discussed in notes 2 and 8 to the consolidated financial statements, the goodwill balance as of December 31, 2019 was $159.0 million, of which $11.8 million related to the Motto reporting unit. The Motto reporting unit includes Motto Franchising, a mortgage brokerage franchisor. The Company performs goodwill impairment testing on an annual basis and whenever events or changes in circumstances indicate that the carrying value of a reporting unit might exceed its fair value.
We identified the assessment of the carrying value of goodwill for the Motto reporting unit as a critical audit matter. Assessing the estimated fair value of the Motto reporting unit required the application of subjective auditor judgment. Specifically, evaluating certain assumptions, such as franchise sales forecasts and the discount rate, used to determine the fair value of the reporting unit required subjective auditor judgment.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s goodwill impairment assessment process, including controls related to the determination of the fair value of the reporting unit, the related franchise sales forecasts, and the assumptions used to develop the discount rate. We evaluated the Company’s forecasted franchise sales by comparing the growth assumptions to historical franchise sales of the Company. We compared the Company’s historical franchise sales forecasts to historical actual results to assess the Company’s ability to accurately forecast franchise sales. We involved a valuation professional with specialized skill and knowledge, who assisted in:
• Evaluating the Company’s selected discount rate based on historic results, franchise sales forecasts, discount rates used in prior valuations of the reporting unit, and discount rates from publicly available venture capital studies; and
• Assessing the valuation methodology used by the Company to estimate the fair value of the Motto reporting unit.
/s/KPMG LLP
We have served as the Company’s auditor since 2003.
Denver, Colorado
February 21, 2020
March 15, 2018
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
RE/MAX Holdings, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited RE/MAX Holdings, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, because of the effect of the material weakness, described below, on the achievement of the objectives of the control criteria, the Company has not maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 20172019 and 2016,2018, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2017,2019, and the related notes (collectively, the consolidated financial statements), and our report dated March 15, 2018February 21, 2020 expressed an unqualified opinion on those consolidated financial statements.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Management concluded that there was a material weakness because the Company did not have an effective risk assessment process to identify and assess the financial reporting risks related to benefits provided by principal stockholders and, therefore, did not have effective controls and training of personnel over the identification and communication of related party transactions to financial reporting personnel, management, and the Board, as appropriate, to identify and evaluate recognition, measurement and disclosure of such transactions. The material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2017 consolidated financial statements, and this report does not affect our report on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal ControlControls over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/KPMG LLP
Denver, Colorado
March 15, 2018February 21, 2020
RE/MAX HOLDINGS, INC.
Consolidated Balance Sheets
Sheets
(In thousands, except share and per share amounts)
| | | | | | |
| | As of December 31, |
| | 2017 | | 2016 |
Assets | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | 50,807 | | $ | 57,609 |
Accounts and notes receivable, current portion, net | | | 21,304 | | | 19,419 |
Income taxes receivable | | | 870 | | | — |
Other current assets | | | 6,924 | | | 4,186 |
Total current assets | | | 79,905 | | | 81,214 |
Property and equipment, net | | | 2,905 | | | 2,691 |
Franchise agreements, net | | | 119,349 | | | 109,140 |
Other intangible assets, net | | | 8,476 | | | 9,811 |
Goodwill | | | 135,213 | | | 126,633 |
Deferred tax assets, net | | | 59,151 | | | 105,770 |
Other assets, net of current portion | | | 1,563 | | | 1,894 |
Total assets | | $ | 406,562 | | $ | 437,153 |
Liabilities and stockholders' equity | | | | | | |
Current liabilities: | | | | | | |
Accounts payable | | $ | 517 | | $ | 1,000 |
Accrued liabilities | | | 15,390 | | | 13,268 |
Income taxes payable | | | 133 | | | 379 |
Deferred revenue and deposits | | | 18,918 | | | 16,306 |
Current portion of debt | | | 2,350 | | | 2,350 |
Current portion of payable pursuant to tax receivable agreements | | | 6,252 | | | 13,235 |
Total current liabilities | | | 43,560 | | | 46,538 |
Debt, net of current portion | | | 226,636 | | | 228,470 |
Payable pursuant to tax receivable agreements, net of current portion | | | 46,923 | | | 85,574 |
Deferred tax liabilities, net | | | 151 | | | 133 |
Other liabilities, net of current portion | | | 19,897 | | | 15,729 |
Total liabilities | | | 337,167 | | | 376,444 |
Commitments and contingencies (note 14) | | | | | | |
Stockholders' equity: | | | | | | |
Class A common stock, par value $0.0001 per share, 180,000,000 shares authorized; 17,696,991 shares issued and outstanding as of December 31, 2017; 17,652,548 shares issued and outstanding as of December 31, 2016 | | | 2 | | | 2 |
Class B common stock, par value $0.0001 per share, 1,000 shares authorized; 1 share issued and outstanding as of December 31, 2017 and December 31, 2016 | | | — | | | — |
Additional paid-in capital | | | 451,199 | | | 448,713 |
Retained earnings | | | 16,027 | | | 16,005 |
Accumulated other comprehensive income (loss), net of tax | | | 515 | | | (28) |
Total stockholders' equity attributable to RE/MAX Holdings, Inc. | | | 467,743 | | | 464,692 |
Non-controlling interest | | | (398,348) | | | (403,983) |
Total stockholders' equity | | | 69,395 | | | 60,709 |
Total liabilities and stockholders' equity | | $ | 406,562 | | $ | 437,153 |
| | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
Assets | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | 83,001 | | $ | 59,974 |
Restricted cash | | | 20,600 | | | — |
Accounts and notes receivable, current portion, less allowances of $12,538 and $7,980, respectively | | | 28,644 | | | 21,185 |
Income taxes receivable | | | 896 | | | 533 |
Other current assets | | | 9,638 | | | 5,855 |
Total current assets | | | 142,779 | | | 87,547 |
Property and equipment, net of accumulated depreciation of $14,940 and $13,280, respectively | | | 5,444 | | | 4,390 |
Operating lease right of use assets | | | 51,129 | | | — |
Franchise agreements, net | | | 87,670 | | | 103,157 |
Other intangible assets, net | | | 32,315 | | | 22,965 |
Goodwill | | | 159,038 | | | 150,684 |
Deferred tax assets, net | | | 52,595 | | | 53,852 |
Income taxes receivable, net of current portion | | | 1,690 | | | 1,379 |
Other assets, net of current portion | | | 9,692 | | | 4,399 |
Total assets | | $ | 542,352 | | $ | 428,373 |
Liabilities and stockholders' equity | | | | | | |
Current liabilities: | | | | | | |
Accounts payable | | $ | 2,983 | | $ | 1,890 |
Accrued liabilities | | | 60,163 | | | 13,143 |
Income taxes payable | | | 6,854 | | | 208 |
Deferred revenue | | | 25,663 | | | 25,489 |
Current portion of debt | | | 2,648 | | | 2,622 |
Current portion of payable pursuant to tax receivable agreements | | | 3,583 | | | 3,567 |
Operating lease liabilities | | | 5,102 | | | — |
Total current liabilities | | | 106,996 | | | 46,919 |
Debt, net of current portion | | | 223,033 | | | 225,165 |
Payable pursuant to tax receivable agreements, net of current portion | | | 33,640 | | | 37,220 |
Deferred tax liabilities, net | | | 293 | | | 400 |
Income taxes payable, net of current portion | | | — | | | 5,794 |
Deferred revenue, net of current portion | | | 18,763 | | | 20,224 |
Operating lease liabilities, net of current portion | | | 55,959 | | | — |
Other liabilities, net of current portion | | | 5,292 | | | 17,637 |
Total liabilities | | | 443,976 | | | 353,359 |
Commitments and contingencies (note 15) | | | | | | |
Stockholders' equity: | | | | | | |
Class A common stock, par value $.0001 per share, 180,000,000 shares authorized; 17,838,233 shares issued and outstanding as of December 31, 2019; 17,754,416 shares issued and outstanding as of December 31, 2018 | | | 2 | | | 2 |
Class B common stock, par value $.0001 per share, 1,000 shares authorized; 1 share issued and outstanding as of December 31, 2019 and December 31, 2018 | | | — | | | — |
Additional paid-in capital | | | 466,945 | | | 460,101 |
Retained earnings | | | 30,525 | | | 20,559 |
Accumulated other comprehensive income, net of tax | | | 414 | | | 328 |
Total stockholders' equity attributable to RE/MAX Holdings, Inc. | | | 497,886 | | | 480,990 |
Non-controlling interest | | | (399,510) | | | (405,976) |
Total stockholders' equity | | | 98,376 | | | 75,014 |
Total liabilities and stockholders' equity | | $ | 542,352 | | $ | 428,373 |
See accompanying notes to consolidated financial statements
RE/MAX HOLDINGS, INC.
Consolidated Statements of Income
(In thousands, except share and per share amounts)
| | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
Revenue: | | | | | | | | | | |
Continuing franchise fees | | | $ | 99,928 | | $ | 101,104 | | $ | 93,694 |
Annual dues | | | | 35,409 | | | 35,894 | | | 33,767 |
Broker fees | | | | 45,990 | | | 46,871 | | | 43,801 |
Marketing Funds fees | | | | 72,299 | | | — | | | — |
Franchise sales and other revenue | | | | 28,667 | | | 28,757 | | | 22,452 |
Total revenue | | | | 282,293 | | | 212,626 | | | 193,714 |
Operating expenses: | | | | | | | | | | |
Selling, operating and administrative expenses | | | | 118,890 | | | 120,179 | | | 106,946 |
Marketing Funds expenses | | | | 72,299 | | | — | | | — |
Depreciation and amortization | | | | 22,323 | | | 20,678 | | | 20,512 |
Loss on sale or disposition of assets, net | | | | 342 | | | 63 | | | 660 |
Gain on reduction in tax receivable agreement liability (note 4) | | | | — | | | (6,145) | | | (32,736) |
Total operating expenses | | | | 213,854 | | | 134,775 | | | 95,382 |
Operating income | | | | 68,439 | | | 77,851 | | | 98,332 |
Other expenses, net: | | | | | | | | | | |
Interest expense | | | | (12,229) | | | (12,051) | | | (9,996) |
Interest income | | | | 1,446 | | | 676 | | | 352 |
Foreign currency transaction gains (losses) | | | | 109 | | | (312) | | | 174 |
Total other expenses, net | | | | (10,674) | | | (11,687) | | | (9,470) |
Income before provision for income taxes | | | | 57,765 | | | 66,164 | | | 88,862 |
Provision for income taxes | | | | (10,909) | | | (16,342) | | | (57,542) |
Net income | | | $ | 46,856 | | $ | 49,822 | | $ | 31,320 |
Less: net income attributable to non-controlling interest (note 4) | | | | 21,816 | | | 22,939 | | | 21,221 |
Net income attributable to RE/MAX Holdings, Inc. | | | $ | 25,040 | | $ | 26,883 | | $ | 10,099 |
| | | | | | | | | | |
Net income attributable to RE/MAX Holdings, Inc. per share of Class A common stock | | | | | | | | | | |
Basic | | | $ | 1.41 | | $ | 1.52 | | $ | 0.57 |
Diluted | | | $ | 1.40 | | $ | 1.51 | | $ | 0.57 |
Weighted average shares of Class A common stock outstanding | | | | | | | | | | |
Basic | | | | 17,812,065 | | | 17,737,649 | | | 17,688,533 |
Diluted | | | | 17,867,752 | | | 17,767,499 | | | 17,731,800 |
Cash dividends declared per share of Class A common stock | | | $ | 0.84 | | $ | 0.80 | | $ | 0.72 |
| | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Revenue: | | | | | | | | | |
Continuing franchise fees | | $ | 93,694 | | $ | 81,197 | | $ | 73,750 |
Annual dues | | | 33,767 | | | 32,653 | | | 31,758 |
Broker fees | | | 43,801 | | | 37,209 | | | 32,334 |
Franchise sales and other franchise revenue | | | 24,667 | | | 25,131 | | | 25,468 |
Brokerage revenue | | | — | | | 112 | | | 13,558 |
Total revenue | | | 195,929 | | | 176,302 | | | 176,868 |
Operating expenses: | | | | | | | | | |
Selling, operating and administrative expenses | | | 107,268 | | | 88,213 | | | 91,561 |
Depreciation and amortization | | | 20,512 | | | 16,094 | | | 15,124 |
Loss (gain) on sale or disposition of assets, net | | | 660 | | | 178 | | | (3,397) |
Gain on reduction in tax receivable agreement liability (note 11) | | | (32,736) | | | — | | | — |
Total operating expenses | | | 95,704 | | | 104,485 | | | 103,288 |
Operating income | | | 100,225 | | | 71,817 | | | 73,580 |
Other expenses, net: | | | | | | | | | |
Interest expense | | | (9,996) | | | (8,596) | | | (10,413) |
Interest income | | | 352 | | | 160 | | | 178 |
Foreign currency transaction gains (losses) | | | 174 | | | (86) | | | (1,661) |
Loss on early extinguishment of debt | | | — | | | (796) | | | (94) |
Equity in earnings of investees | | | — | | | — | | | 1,215 |
Total other expenses, net | | | (9,470) | | | (9,318) | | | (10,775) |
Income before provision for income taxes | | | 90,755 | | | 62,499 | | | 62,805 |
Provision for income taxes | | | (55,576) | | | (15,273) | | | (12,030) |
Net income | | $ | 35,179 | | $ | 47,226 | | $ | 50,775 |
Less: net income attributable to non-controlling interest (note 3) | | | 22,364 | | | 24,830 | | | 34,363 |
Net income attributable to RE/MAX Holdings, Inc. | | $ | 12,815 | | $ | 22,396 | | $ | 16,412 |
| | | | | | | | | |
Net income attributable to RE/MAX Holdings, Inc. per share of Class A common stock | | | | | | | | | |
Basic | | $ | 0.72 | | $ | 1.27 | | $ | 1.30 |
Diluted | | $ | 0.72 | | $ | 1.27 | | $ | 1.28 |
Weighted average shares of Class A common stock outstanding | | | | | | | | | |
Basic | | | 17,688,533 | | | 17,628,741 | | | 12,671,051 |
Diluted | | | 17,731,800 | | | 17,677,768 | | | 12,829,214 |
Cash dividends declared per share of Class A common stock | | $ | 0.72 | | $ | 0.60 | | $ | 2.00 |
See accompanying notes to consolidated financial statements.
RE/MAX HOLDINGS, INC.
Consolidated Statements of Comprehensive Income
(In thousands)
| | | | | | | | | |
| | | | | |
| | | | | |
| | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
Net income | | $ | 46,856 | | $ | 49,822 | | $ | 31,320 |
Change in cumulative translation adjustment | | | 166 | | | (253) | | | 1,037 |
Other comprehensive income (loss), net of tax | | | 166 | | | (253) | | | 1,037 |
Comprehensive income | | | 47,022 | | | 49,569 | | | 32,357 |
Less: comprehensive income attributable to non-controlling interest | | | 21,896 | | | 22,817 | | | 21,752 |
Comprehensive income attributable to RE/MAX Holdings, Inc., net of tax | | $ | 25,126 | | $ | 26,752 | | $ | 10,605 |
| | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Net income | | $ | 35,179 | | $ | 47,226 | | $ | 50,775 |
Change in cumulative translation adjustment | | | 1,074 | | | 165 | | | (1,289) |
Other comprehensive income (loss), net of tax | | | 1,074 | | | 165 | | | (1,289) |
Comprehensive income | | | 36,253 | | | 47,391 | | | 49,486 |
Less: comprehensive income attributable to non-controlling interest | | | 22,895 | | | 24,918 | | | 34,065 |
Comprehensive income attributable to RE/MAX Holdings, Inc., net of tax | | $ | 13,358 | | $ | 22,473 | | $ | 15,421 |
See accompanying notes to consolidated financial statements.
RE/MAX HOLDINGS, INC.
Consolidated Statements of Stockholders’ Equity
(In thousands, except unit and share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Accumulated other | | | | |
| | Class A | | Class B | | Additional | | | | comprehensive | | Non- | | Total |
| | common stock | | common stock | | paid-in | | Retained | | income (loss), | | controlling | | stockholders' |
| | Shares | | Amount | | Shares | | Amount | | capital | | earnings | | net of tax | | interest | | equity |
Balances, January 1, 2015 | | 11,768,041 | | $ | 1 | | 1 | | $ | — | | $ | 242,435 | | $ | 11,822 | | $ | 886 | | $ | (215,861) | | $ | 39,283 |
Net income | | — | | | — | | — | | | — | | | — | | | 16,412 | | | — | | | 34,363 | | | 50,775 |
Distributions paid to non-controlling unitholders | | — | | | — | | — | | | — | | | — | | | — | | | — | | | (42,827) | | | (42,827) |
Equity-based compensation expense | | — | | | — | | — | | | — | | | 1,453 | | | — | | | — | | | — | | | 1,453 |
Dividends paid to Class A common stockholders | | — | | | — | | — | | | — | | | — | | | (24,003) | | | — | | | — | | | (24,003) |
Change in accumulated other comprehensive (loss) income | | — | | | — | | — | | | — | | | — | | | — | | | (991) | | | (298) | | | (1,289) |
Excess tax benefit realized on exercise of stock options and delivery of vested restricted stock units | | — | | | — | | — | | | — | | | 2,770 | | | — | | | — | | | — | | | 2,770 |
Cancellation of vested restricted stock units to satisfy statutory tax withholding requirements | | (8,873) | | | — | | — | | | — | | | (327) | | | — | | | — | | | — | | | (327) |
Issuance of Class A common stock, equity-based compensation plans | | 650,183 | | | — | | — | | | — | | | 2,248 | | | — | | | — | | | — | | | 2,248 |
Secondary Offering Transactions: | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of Class A common stock, net of underwriters discount and expenses | | 5,175,000 | | | 1 | | — | | | — | | | 186,299 | | | — | | | — | | | (186,300) | | | — |
Equity effect of establishment of payable pursuant to tax receivable agreements | | — | | | — | | — | | | — | | | (33,018) | | | — | | | — | | | — | | | (33,018) |
Equity effect of step-up in tax basis and share of RE/MAX Holdings' inside tax basis | | — | | | — | | — | | | — | | | 43,774 | | | — | | | — | | | — | | | 43,774 |
Other | | — | | | — | | — | | | — | | | 575 | | | — | | | — | | | — | | | 575 |
Balances, December 31, 2015 | | 17,584,351 | | $ | 2 | | 1 | | $ | — | | $ | 446,209 | | $ | 4,231 | | $ | (105) | | $ | (410,923) | | $ | 39,414 |
Net income | | — | | | — | | — | | | — | | | — | | | 22,396 | | | — | | | 24,830 | | | 47,226 |
Distributions to non-controlling unitholders | | — | | | — | | — | | | — | | | — | | | — | | | — | | | (17,927) | | | (17,927) |
Equity-based compensation expense and related dividend equivalents | | — | | | — | | — | | | — | | | 2,330 | | | — | | | — | | | — | | | 2,330 |
Dividends to Class A common stockholders | | — | | | — | | — | | | — | | | — | | | (10,578) | | | — | | | — | | | (10,578) |
Change in accumulated other comprehensive income | | — | | | — | | — | | | — | | | — | | | — | | | 77 | | | 88 | | | 165 |
Payroll taxes related to net settled restricted stock units | | (13,639) | | | — | | — | | | — | | | (516) | | | — | | | — | | | — | | | (516) |
Issuance of Class A common stock, equity-based compensation plans | | 81,836 | | | — | | — | | | — | | | 101 | | | — | | | — | | | — | | | 101 |
Cumulative effect adjustment from change in accounting principle | | — | | | — | | — | | | — | | | 123 | | | (44) | | | — | | | (51) | | | 28 |
Other | | — | | | — | | — | | | — | | | 466 | | | — | | | — | | | — | | | 466 |
Balances, December 31, 2016 | | 17,652,548 | | $ | 2 | | 1 | | $ | — | | $ | 448,713 | | $ | 16,005 | | $ | (28) | | $ | (403,983) | | $ | 60,709 |
Net income | | — | | | — | | — | | | — | | | — | | | 12,815 | | | — | | | 22,364 | | | 35,179 |
Distributions to non-controlling unitholders | | — | | | — | | — | | | — | | | — | | | — | | | — | | | (17,260) | | | (17,260) |
Equity-based compensation expense and related dividend equivalents | | 58,426 | | | — | | — | | | — | | | 2,900 | | | (53) | | | — | | | — | | | 2,847 |
Dividends to Class A common stockholders | | — | | | — | | — | | | — | | | — | | | (12,740) | | | — | | | — | | | (12,740) |
Change in accumulated other comprehensive income | | — | | | — | | — | | | — | | | — | | | — | | | 543 | | | 531 | | | 1,074 |
Payroll taxes related to net settled restricted stock units | | (13,983) | | | — | | — | | | — | | | (816) | | | — | | | — | | | — | | | (816) |
Other | | — | | | — | | — | | | — | | | 402 | | | — | | | — | | | — | | | 402 |
Balances, December 31, 2017 | | 17,696,991 | | $ | 2 | | 1 | | $ | — | | $ | 451,199 | | $ | 16,027 | | $ | 515 | | $ | (398,348) | | $ | 69,395 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Accumulated other | | | | | | |
| | Class A | | Class B | | Additional | | | | comprehensive | | Non- | | Total |
| | common stock | | common stock | | paid-in | | Retained | | income (loss), | | controlling | | stockholders' |
| | Shares | | Amount | | Shares | | Amount | | capital | | earnings | | net of tax | | interest | | equity |
Balances, January 1, 2017 | | 17,652,548 | | $ | 2 | | 1 | | $ | — | | $ | 448,713 | | $ | 10,676 | | $ | (47) | | $ | (418,729) | | $ | 40,615 |
Net income | | — | | | — | | — | | | — | | | — | | | 10,099 | | | — | | | 21,221 | | | 31,320 |
Distributions to non-controlling unitholders | | — | | | — | | — | | | — | | | — | | | — | | | — | | | (17,257) | | | (17,257) |
Equity-based compensation expense and related dividend equivalents | | 58,426 | | | — | | — | | | — | | | 2,900 | | | (53) | | | — | | | — | | | 2,847 |
Dividends to Class A common stockholders | | — | | | — | | — | | | — | | | — | | | (12,740) | | | — | | | — | | | (12,740) |
Change in accumulated other comprehensive income | | — | | | — | | — | | | — | | | — | | | — | | | 506 | | | 531 | | | 1,037 |
Payroll taxes related to net settled restricted stock units | | (13,983) | | | — | | — | | | — | | | (816) | | | — | | | — | | | — | | | (816) |
Other | | — | | | — | | — | | | — | | | 402 | | | — | | | — | | | — | | | 402 |
Balances, December 31, 2017 | | 17,696,991 | | $ | 2 | | 1 | | $ | — | | $ | 451,199 | | $ | 7,982 | | $ | 459 | | $ | (414,234) | | $ | 45,408 |
Net income | | — | | | — | | — | | | — | | | — | | | 26,883 | | | — | | | 22,939 | | | 49,822 |
Distributions to non-controlling unitholders | | — | | | — | | — | | | — | | | — | | | — | | | — | | | (14,559) | | | (14,559) |
Equity-based compensation expense and related dividend equivalents | | 73,462 | | | — | | — | | | — | | | 9,314 | | | (112) | | | — | | | — | | | 9,202 |
Dividends to Class A common stockholders | | — | | | — | | — | | | — | | | — | | | (14,194) | | | — | | | — | | | (14,194) |
Change in accumulated other comprehensive income | | — | | | — | | — | | | — | | | — | | | — | | | (131) | | | (122) | | | (253) |
Payroll taxes related to net settled restricted stock units | | (16,037) | | | — | | — | | | — | | | (895) | | | — | | | — | | | — | | | (895) |
Other | | — | | | — | | — | | | — | | | 483 | | | — | | | — | | | — | | | 483 |
Balances, December 31, 2018 | | 17,754,416 | | $ | 2 | | 1 | | $ | — | | $ | 460,101 | | $ | 20,559 | | $ | 328 | | $ | (405,976) | | $ | 75,014 |
Net income | | — | | | — | | — | | | — | | | — | | | 25,040 | | | — | | | 21,816 | | | 46,856 |
Distributions to non-controlling unitholders | | — | | | — | | — | | | — | | | — | | | — | | | — | | | (15,430) | | | (15,430) |
Equity-based compensation expense and related dividend equivalents | | 106,390 | | | — | | — | | | — | | | 7,375 | | | (104) | | | — | | | — | | | 7,271 |
Dividends to Class A common stockholders | | — | | | — | | — | | | — | | | — | | | (14,970) | | | — | | | — | | | (14,970) |
Change in accumulated other comprehensive income | | — | | | — | | — | | | — | | | — | | | — | | | 86 | | | 80 | | | 166 |
Payroll taxes related to net settled restricted stock units | | (22,573) | | | — | | — | | | — | | | (1,110) | | | — | | | — | | | — | | | (1,110) |
Other | | — | | | — | | — | | | — | | | 579 | | | — | | | — | | | — | | | 579 |
Balances, December 31, 2019 | | 17,838,233 | | $ | 2 | | 1 | | $ | — | | $ | 466,945 | | $ | 30,525 | | $ | 414 | | $ | (399,510) | | $ | 98,376 |
See accompanying notes to consolidated financial statements.
RE/MAX HOLDINGS, INC.
Consolidated Statements of Cash Flows
(In thousands)
| | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Cash flows from operating activities: | | | | | | | | | |
Net income | | $ | 35,179 | | $ | 47,226 | | $ | 50,775 |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | |
Depreciation and amortization | | | 20,512 | | | 16,094 | | | 15,124 |
Bad debt expense | | | 1,109 | | | 1,195 | | | 433 |
Loss (gain) on sale or disposition of assets and sublease, net | | | 4,260 | | | (171) | | | (3,650) |
Loss on early extinguishment of debt | | | — | | | 796 | | | 94 |
Equity in earnings of investees | | | — | | | — | | | (1,215) |
Distributions received from equity investees | | | — | | | — | | | 1,178 |
Equity-based compensation expense | | | 2,900 | | | 2,330 | | | 1,453 |
Deferred income tax expense | | | 46,494 | | | 3,473 | | | 2,531 |
Fair value adjustments to contingent consideration | | | 180 | | | 100 | | | — |
Payments pursuant to tax receivable agreements | | | (13,371) | | | (1,344) | | | — |
Non-cash change in tax receivable agreement liability | | | (32,736) | | | — | | | — |
Other | | | 1,145 | | | 1,029 | | | 1,014 |
Changes in operating assets and liabilities | | | | | | | | | |
Accounts and notes receivable, current portion | | | (2,924) | | | (3,841) | | | (999) |
Advances from/to affiliates | | | (106) | | | 71 | | | (771) |
Other current and noncurrent assets | | | (2,414) | | | 362 | | | 502 |
Other current and noncurrent liabilities | | | 1,583 | | | (2,616) | | | 7,253 |
Income taxes receivable/payable | | | (1,133) | | | (71) | | | 2,770 |
Deferred revenue and deposits, current portion | | | 2,610 | | | (254) | | | 866 |
Net cash provided by operating activities | | | 63,288 | | | 64,379 | | | 77,358 |
Cash flows from investing activities: | | | | | | | | | |
Purchases of property, equipment and software and capitalization of trademark costs | | | (2,198) | | | (4,502) | | | (3,628) |
Acquisitions, net of cash acquired of $0, $131 and $0, respectively | | | (35,720) | | | (112,934) | | | — |
Dispositions | | | — | | | 200 | | | 5,650 |
Other investing activity, net | | | — | | | (96) | | | (358) |
Net cash (used in) provided by investing activities | | | (37,918) | | | (117,332) | | | 1,664 |
Cash flows from financing activities: | | | | | | | | | |
Proceeds from issuance of debt, net | | | — | | | 233,825 | | | — |
Payments on debt | | | (2,366) | | | (203,298) | | | (9,722) |
Capitalized debt amendment costs | | | — | | | (1,379) | | | (555) |
Distributions paid to non-controlling unitholders | | | (17,260) | | | (17,927) | | | (42,827) |
Dividends and dividend equivalents paid to Class A common stockholders | | | (12,793) | | | (10,578) | | | (24,003) |
Proceeds from exercise of stock options | | | — | | | 101 | | | 2,248 |
Payment of payroll taxes related to net settled restricted stock units | | | (816) | | | (516) | | | (327) |
Net cash (used in) provided by financing activities | | | (33,235) | | | 228 | | | (75,186) |
Effect of exchange rate changes on cash | | | 1,063 | | | 122 | | | (823) |
Net (decrease) increase in cash and cash equivalents | | | (6,802) | | | (52,603) | | | 3,013 |
Cash and cash equivalents, beginning of year | | | 57,609 | | | 110,212 | | | 107,199 |
Cash and cash equivalents, end of period | | $ | 50,807 | | $ | 57,609 | | $ | 110,212 |
Supplemental disclosures of cash flow information: | | | | | | | | | |
Cash paid for interest | | $ | 9,972 | | $ | 7,797 | | $ | 9,319 |
Net cash paid for income taxes | | $ | 10,078 | | $ | 11,912 | | $ | 5,841 |
Schedule of non-cash investing and financing activities: | | | | | | | | | |
Establishment of amounts payable under tax receivable agreements | | | — | | | — | | | 33,018 |
Establishment of deferred tax assets | | | — | | | — | | | 43,774 |
Note receivable received as consideration for sale of brokerage operations assets | | $ | — | | $ | 150 | | $ | 851 |
Increase in accounts payable for capitalization of trademark costs and purchases of property, equipment and software | | $ | 295 | | $ | 150 | | $ | 667 |
Contingent consideration issued in a business acquisition | | $ | — | | $ | 6,300 | | $ | — |
| | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
Cash flows from operating activities: | | | | | | | | | |
Net income | | $ | 46,856 | | $ | 49,822 | | $ | 31,320 |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | |
Depreciation and amortization | | | 22,323 | | | 20,678 | | | 20,512 |
Bad debt expense | | | 4,964 | | | 2,257 | | | 1,109 |
Loss (gain) on sale or disposition of assets and sublease, net | | | 342 | | | (139) | | | 4,260 |
Equity-based compensation expense | | | 10,934 | | | 9,176 | | | 2,900 |
Deferred income tax expense | | | 2,310 | | | 9,511 | | | 47,931 |
Fair value adjustments to contingent consideration | | | 241 | | | (1,289) | | | 180 |
Payments pursuant to tax receivable agreements | | | (3,556) | | | (6,305) | | | (13,371) |
Non-cash change in tax receivable agreement liability | | | — | | | (6,145) | | | (32,736) |
Other, net | | | 910 | | | 1,127 | | | 1,146 |
Changes in operating assets and liabilities | | | | | | | | | |
Accounts and notes receivable, current portion | | | (5,614) | | | (3,241) | | | (2,825) |
Advances from/to affiliates | | | — | | | 581 | | | (106) |
Other current and noncurrent assets | | | (6,084) | | | 2,170 | | | (2,724) |
Other current and noncurrent liabilities | | | 6,737 | | | (3,466) | | | 1,592 |
Income taxes receivable/payable | | | 178 | | | 1,099 | | | (605) |
Deferred revenue, current and noncurrent | | | (1,566) | | | 228 | | | 4,705 |
Net cash provided by operating activities | | | 78,975 | | | 76,064 | | | 63,288 |
Cash flows from investing activities: | | | | | | | | | |
Purchases of property, equipment and capitalization of software | | | (13,226) | | | (7,787) | | | (2,198) |
Acquisitions, net of cash acquired of $55, $362 and $0, respectively | | | (14,945) | | | (25,888) | | | (35,720) |
Restricted cash acquired with the Marketing Funds acquisition | | | 28,495 | | | — | | | — |
Other | | | (1,200) | | | — | | | — |
Net cash used in investing activities | | | (876) | | | (33,675) | | | (37,918) |
Cash flows from financing activities: | | | | | | | | | |
Payments on debt | | | (2,622) | | | (3,171) | | | (2,366) |
Distributions paid to non-controlling unitholders | | | (15,430) | | | (14,559) | | | (17,260) |
Dividends and dividend equivalents paid to Class A common stockholders | | | (15,074) | | | (14,306) | | | (12,793) |
Payment of payroll taxes related to net settled restricted stock units | | | (1,110) | | | (895) | | | (816) |
Payment of contingent consideration | | | (306) | | | (221) | | | — |
Net cash used in financing activities | | | (34,542) | | | (33,152) | | | (33,235) |
Effect of exchange rate changes on cash | | | 70 | | | (70) | | | 1,063 |
Net increase (decrease) in cash, cash equivalents and restricted cash | | | 43,627 | | | 9,167 | | | (6,802) |
Cash, cash equivalents and restricted cash, beginning of year | | | 59,974 | | | 50,807 | | | 57,609 |
Cash, cash equivalents and restricted cash, end of period | | $ | 103,601 | | $ | 59,974 | | $ | 50,807 |
Supplemental disclosures of cash flow information: | | | | | | | | | |
Cash paid for interest | | $ | 11,690 | | $ | 11,525 | | $ | 9,972 |
Net cash paid for income taxes | | $ | 8,429 | | $ | 5,769 | | $ | 10,078 |
Schedule of non-cash investing activities: | | | | | | | | | |
Increase (decrease) in accounts payable and accrued liabilities for purchases of property, equipment and capitalization of software | | $ | (94) | | $ | 1,080 | | $ | 295 |
See accompanying notes to consolidated financial statements.
1. Business and Organization
RE/MAX Holdings, Inc. (“RE/MAX Holdings”) was formed as a Delaware corporation on June 25, 2013. On October 7, 2013, RE/MAX Holdings completed an initial public offering (the “IPO”) of its shares of Class A common stock. RE/MAXstock on October 7, 2013. Holdings’ only business is to act as the sole manager of RMCO, LLC (“RMCO”). As of December 31, 2017, RE/MAX2019, Holdings owns 58.49%58.7% of the common membership units in RMCO, while RIHI, Inc. (“RIHI”) owns the remaining 41.51% of common membership units in RMCO. RE/MAX41.3%. Holdings and its consolidated subsidiaries, including RMCO, are referred to hereinafter as the “Company.”
The Company is a franchisor in the real estate industry, franchising real estate brokerages globally under the RE/MAX brand (“RE/MAX”) and mortgage brokerages within the United States (“U.S.”) under the Motto Mortgage brand (“Motto”). RE/MAX, founded in 1973, has over 115,000130,000 agents operating in over 7,0008,000 offices locatedand a presence in more than 100110 countries and territories. Motto, founded in 2016, is the first nationally franchised mortgage brokerage in the U.S. The Company sold certain operating assets and liabilities of its owned brokerage offices during 2015 and the first quarter of 2016 to existing RE/MAX franchisees. (See Note 5, Acquisitions and Dispositions). Since then,During 2018, the Company isacquired all membership interests in booj, LLC, formerly known as Active Website, LLC, (“booj”), a real estate technology company. RE/MAX and Motto are 100% franchised no longer operatesand do not operate any real estate or mortgage brokerage offices and no longer recognizes brokerage revenue (which consisted of fees assessed by the Company’s owned brokerages for services provided to their affiliated real estate agents).offices.
The Company’s revenue is derived as follows:
| ·
| | Continuing franchise fees which consist of fixed contractual fees paid monthly by regional franchise owners and franchisees based on the number of RE/MAX agents in the respective franchised region or office and the number of Motto offices (no significant continuing franchise fees were generated by Motto during the periods presented);
|
| ·
| | Annual dues from RE/MAX agents;
|
| ·
| | Broker fees, which consist of fees paid on real estate commissions when an agent sells a home;
|
| ·
| | Franchise sales and other franchise revenue which consist of fees from initial sales of RE/MAX and Motto franchises, renewals of RE/MAX franchises, master franchise fees, preferred marketing arrangements, approved supplier programs and event-based revenue from training and other programs; and
|
| ·
| | Brokerage revenue prior to the sale of the Company’s brokerage offices in January 2016.
|
RE/MAX Holdings Capital Structure
RE/MAX Holdings has two2 classes of common stock, Class A common stock and Class B common stock, which are described as follows:stock:
Class A common stock
Holders of shares of Class A common stock are entitled to one1 vote for each share held of record on all matters submitted to a vote of stockholders. Additionally, holders of shares of Class A common stock are entitled to receive dividends when and if declared by the Company’s Board of Directors, subject to any statutory or contractual restrictions on the payment of dividends.
Holders of shares of Class A common stock do not have preemptive, subscription, redemption or conversion rights.
Class B common stock
RIHI is the sole holder of Class B common stock and is controlled by David Liniger, the Company’s Chairman and Co-Founder, and Gail Liniger, the Company’s Vice Chair and Co-Founder. The holderOn October 7, 2018, pursuant to the terms of the Company’s Certificate of Incorporation, RIHI lost its previous effective control of a majority of the voting power of Holdings common stock. RIHI owns all Holdings’ Class B common stock which, prior to October 7, 2018, entitled RIHI to a number of votes on matters presented to Holdings stockholders equal to 2 times the number of RMCO common units that RIHI held. Effective October 7, 2018, the voting power of Class B common stock is entitledwas reduced to two votes for each Common Unit in RMCO held by the holder, without regard toequal the number of sharesRMCO common units held, and therefore RIHI lost the controlling vote of Class B common stock held. Accordingly, Common UnitholdersHoldings. As a result of RMCO collectively have a number of votesthis change in RE/MAX Holdings that is equal to two times the aggregate number of Common Units that they hold.
The voting rights of the Class B common stock, will be reduced to one times the aggregate number of RMCO Common
Units held after anyRIHI no longer controls a majority of the following events: (i) October 7, 2018; (ii)voting power of Holdings’ common stock, and Holdings is no longer considered a “controlled company” under the death of David Liniger, the Company’s Chairman and Co-Founder; or (iii) at such time as RIHI’s ownership of RMCO Common Units falls below 30% of the number of RMCO common units held by RIHI immediately after the IPO. Additionally, if any Common Units of RMCO are validly transferred in accordance with the termscorporate governance standards of the New RMCO, LLC Agreement, the voting rightsYork Stock Exchange (the “NYSE”).
Holders of the corresponding shares of Class B common stock transferred will also be reduced to one times the aggregate number of RMCO Common Units held by such transferee, unless the transferee is David Liniger.do not have preemptive, subscription, redemption or conversion rights.
Holders of shares of Class A common stock and Class B common stock vote together as a single class on all matters presented to the Company’s stockholders for their vote or approval, except as otherwise required by applicable law.
Holders of Class B common stock do not have any right to receive dividends or to receive a distribution upon a dissolution or liquidation or the sale of all or substantially all of the Company’s assets. Additionally, holders of shares of Class B common stock do not have preemptive, subscription, redemption or conversion rights.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements (“financial statements”) and notes thereto included in this Annual Report on Form 10-K have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The accompanying consolidated financial statements are presented on a consolidated basis and include the accounts of RE/MAX Holdings and its consolidated subsidiaries. All significant intercompany accounts and transactions have been eliminated. In the opinion of management, the accompanying consolidated financial statements reflect all normal and recurring adjustments necessary to present fairly the
Company’s financial position as of December 31, 20172019 and 2016,2018, the results of its operations and comprehensive income, changes in its stockholders’ equity and its cash flows for the years ended December 31, 2017, 20162019, 2018 and 2015.2017.
On January 1, 2019 the Company acquired all of the regional and pan-regional advertising fund entities previously owned by its founder and Chairman of the Board of Directors, David Liniger, for a nominal amount. During 2017 and 2016,2018, the Company completed the acquisitionsacquisition of variousbooj, and during 2017 the Company completed the acquisition of an independent regions.region. Their results of operations, cash flows and financial positions are included in the consolidated financial statements from their respective dates of acquisition. See Note 5, 6, Acquisitions andDispositionsfor additional information.
Reclassifications
Certain items in the accompanying consolidated financial statements as of and for the years ended December 31, 2016 and 2015 have been reclassified to conform to the current year’s presentation. These reclassifications did not affect the Company’s consolidated results of operations.
Use of Estimates
The preparation of the accompanying consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Significant areas in which management uses assumptions include, among other things, the allowance for doubtful accounts, the estimated lives of intangible assets, amounts accrued for litigation matters, the fair value of assets acquired and liabilities assumed in business combinations, the accounting for income taxes, the fair value of reporting units used in the annual assessment of goodwill, the fair value of the contingent consideration and the amounts due to RIHI and Oberndorf Investments LLC (“Oberndorf”) pursuant to the terms of the tax receivable agreements (the “TRAs”) discussed in more detail in Note 3, Non-controlling Interest. Actual results could differ from those estimates.
Reclassifications
Segment Reporting
The Company operates under the following segments:
| ● | RE/MAX Franchising – comprises the operations of the Company’s owned and independent global franchising operations under the RE/MAX brand name and corporate-wide shared services expenses. |
| ● | Motto Franchising – comprises the operations of the Company’s mortgage broker franchising operations under the Motto Mortgage brand name and does not include any charges related to the corporate-wide shared services expenses. |
| ● | Marketing Funds – comprises the operations of the Company’s marketing campaigns designed to build and maintain brand awareness and the development and operation of agent marketing technology. |
| ● | Other – comprises the legacy operations of booj (see Note 6, Acquisitions for additional information), which, due to quantitative insignificance, do not meet the criteria of a reportable segment. |
See Note 18 Segment Information for additional information about segment reporting.
Principles of Consolidation
As of December 31, 2017, RE/MAX Holdings owns 58.49% of the common membership units in RMCO, and, as its managing member, RE/MAX Holdings controls RMCO’s operations, management and activities. As a result, RE/MAX Holdings consolidates RMCO and records a non-controlling interest in the accompanying Consolidated Balance Sheets and records net income attributable to the non-controlling interest and comprehensive income attributable to the non-controlling interest in the accompanying Consolidated Statements of Income and Consolidated Statements of Comprehensive Income, respectively.
Segment ReportingRevenue Recognition
Since the first quarter of 2016, the Company has operated in one reportable segment, Real Estate Franchise Services. The Company launched Motto in October 2016,generates the substantial majority of its revenue from contracts with customers. The Company’s franchise agreements offer the following benefits to the franchisee: common use and while we operate through bothpromotion of RE/MAX and Motto astrademarks; distinctive sales and promotional materials; access to technology; marketing tools and training; standardized supplies and other materials used in RE/MAX and Motto offices; and recommended procedures for operation of December 31, 2017, due to the immateriality of revenue earned byRE/MAX and Motto we disclose only one reportable segment.
Revenue Recognition
offices. The Company generates revenue fromconcluded that these benefits are highly related and all a part of one performance obligation for each franchise agreement, a license of symbolic intellectual property that is billed through a variety of fees including continuing franchise fees, annual dues, broker fees, marketing funds fees and franchise sales, described below. The Company has other performance obligations associated with contracts with customers in other
revenue for training, marketing and other franchise revenueevents, and through January 2016, brokeragelegacy booj customers. The method used to measure progress is over the passage of time for most streams of revenue. RevenueThe following is recognized when there is persuasive evidencea description of an arrangement,principal activities from which the service has been rendered, the price is fixed or determinable and collection of the fees is reasonably assured.Company generates its revenue.
Continuing Franchise Fees
The Company provides an ongoing trademark license, operational, training and administrative services and systems to franchisees, which include technology and tools designed to help the Company’s franchisees attract new or retain existing agents. In addition, training, technology and other tools are provided to the agents within the network to enable them to enhance the service provided to home buyers and sellers. RE/MAX continuing franchise fees principally consists of fixed fees earned monthly from franchisees on a per agent basis. Motto continuingContinuing franchise fees are fixed contractual fees paid monthly (a) by regional franchise owners in Independent Regions or franchisees in Company-owned Regions based on the number of RE/MAX agents in the respective franchised region or office or (b) by Motto franchisees. Revenue from continuing franchise feesfranchisees based on the number of offices open. Motto offices reach the full monthly billing once the Motto office has been open for 12 to 14 months. This revenue is recognized in income whenthe month for which the fee is billed. This revenue is a usage-based royalty as it is earned and becomes due and payable, as stipulated independent on the related franchise agreements.number of RE/MAX agents or number of Motto offices.
Annual Dues
Annual dues revenue represents amounts assessedare a fixed membership fee paid annually by RE/MAX agents directly to agents for membership affiliation inthe Company to be a part of the RE/MAX network.network and use the RE/MAX brand. Annual dues are a flat fee per agent. The Company defers the annual dues revenue when billed and recognizes the revenue ratably over the 12-month period to which it relates. As of December 31, 2017 and 2016, the Company had deferred annualAnnual dues revenue totaling approximately $15.3 million and $14.2 million, respectively. Loan originators employed by Motto franchisees do not pay annual dues.is a usage-based royalty as it is dependent on the number of RE/MAX agents.
The activity in the Company’s deferred revenue for annual dues deferredis included in “Deferred revenue” and “Deferred revenue, net of current portion” on the Consolidated Balance Sheets, and consists of the following in aggregate (in thousands):
| | | | | | | | | | | | |
| | Balance at
beginning of period | | New billings | | Revenue recognized(a) | | Balance at end
of period |
Year ended December 31, 2019 | | $ | 15,877 | | $ | 35,514 | | $ | (35,409) | | $ | 15,982 |
| | | | | | | | | | | | |
| | Balance at beginning of period | | New billings | | Revenue recognized | | Balance at end of period |
Year ended December 31, 2017 | | $ | 14,227 | | $ | 34,837 | | $ | (33,767) | | $ | 15,297 |
Year ended December 31, 2016 | | $ | 13,106 | | $ | 33,774 | | $ | (32,653) | | $ | 14,227 |
Year ended December 31, 2015 | | $ | 12,912 | | $ | 31,952 | | $ | (31,758) | | $ | 13,106 |
| (a) | Revenue recognized related to the beginning balance was $14.4 million for the year ended December 31, 2019. |
Broker Fees
Broker Fees
Revenue from broker fees represents fees received fromare assessed against real estate commissions paid by customers when a RE/MAX agent sells a home. Generally, the Company’s franchise offices that are primarily based on a percentage of agents’ gross commission income. Revenue from broker feesamount paid is determined upon close1% of the home-saletotal commission on the transaction, and recognized as revenue when the fees become due and payable, as stipulatedalthough in the related franchise agreements. AgentsIndependent Regions in certain regionsCanada it is not charged. Additionally, agents in Company-owned Regions existing prior to 2004, the year the Company began assessing broker fees, are generally “grandfathered” and continue to be exempt from paying a broker fee. As of December 31, 20172019, grandfathered agents represented approximately 20%17% of total agents in U.S. Company-owned agents.Regions. Revenue from broker fees is recognized as a sales-based royalty and recognized in the month when a home sale transaction occurs. Motto franchisees do not pay any fees based on the number or dollar value of loans brokered.
Marketing Funds Fees
TableMarketing Funds fees are fixed contractual fees paid monthly by franchisees based on the number of ContentsRE/MAX agents in the respective franchised region or office or the number of Motto offices. These revenues are obligated to be used for marketing campaigns to build brand awareness and to support agent marketing technology. Amounts received into the Marketing Funds are recognized as revenue in the month for which the fee is billed. This revenue is a usage-based royalty as it is dependent on the number of RE/MAX agents or number of Motto offices.
All assets of the Marketing Funds are contractually restricted for the benefit of franchisees, and the Company recognizes an equal and offsetting liability on the Company’s balance sheet for all amounts received. Additionally, this results in recording an equal and offsetting amount of expenses against all revenues such that there is no impact to overall profitability of the Company from these revenues.
Franchise Sales and Other Franchise Revenue
Franchise sales and other franchise revenue is primarily comprised ofcomprises revenue from the sale or renewal of franchises,franchises. A fee is charged upon a franchise sale or renewal. Those fees are deemed to be a part of the license of symbolic intellectual property and are recognized as well
revenue over the contractual term of the franchise agreement, which is typically 5 years for RE/MAX and 7 years for Motto franchise agreements. The activity in the Company’s franchise sales deferred revenue accounts consists of the following (in thousands):
| | | | | | | | | | | | |
| | Balance at
beginning of period | | New billings | | Revenue recognized(a) | | Balance at end
of period |
Year ended December 31, 2019 | | $ | 27,560 | | $ | 7,750 | | $ | (9,426) | | $ | 25,884 |
| (a) | Revenue recognized related to the beginning balance was $8.4 million for the year ended December 31, 2019. |
Commissions Related to Franchise Sales
Commissions paid on franchise sales are recognized as otheran asset and amortized over the contract life of the franchise agreement. The activity in the Company’s capitalized contract costs for commissions (which are included in “other current assets” and “other assets, net of current portion” on the Consolidated Balance Sheets) consist of the following (in thousands):
| | | | | | | | | | | | |
| | Balance at | | Expense | | Additions to contract | | Balance at end |
| | beginning of period | | recognized | | cost for new activity | | of period |
Year ended December 31, 2019 | | $ | 3,748 | | $ | (1,290) | | $ | 1,120 | | $ | 3,578 |
Other Revenue
Other revenue includingis primarily revenue from preferred marketing arrangements and with approved suppliers, and registrationevent-based revenue from conventions heldtraining and other programs. Revenue from preferred marketing arrangements involves both flat fees paid in advance as well as revenue sharing, both of which are generally recognized over the period of the arrangement and are recorded net as the Company does not control the good or service provided. Event-based revenue is recognized when the event occurs and until then amounts collected are included in “Deferred revenue”. Other revenue also includes revenue from booj’s legacy operations for agentsits external customers as booj continues to provide technology products and broker ownersservices, such as websites, mobile apps, reporting and website tools, to its legacy customers andtechnology subscription revenue such as for the First app.
Disaggregated Revenue
Inthe following table, segment revenue is disaggregated by geographical area (in thousands):
| | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
U.S. | | $ | 164,867 | | $ | 170,496 | | $ | 160,538 |
Canada | | | 23,024 | | | 23,771 | | | 23,189 |
Global | | | 11,745 | | | 10,237 | | | 9,431 |
Total RE/MAX Franchising | | | 199,636 | | | 204,504 | | | 193,158 |
U.S. | | | 64,906 | | | — | | | — |
Canada | | | 6,559 | | | — | | | — |
Global | | | 834 | | | — | | | — |
Total Marketing Funds | | | 72,299 | | | — | | | — |
Motto Franchising (a) | | | 4,542 | | | 2,536 | | | 556 |
Other | | | 5,816 | | | 5,586 | | | — |
Total | | $ | 282,293 | | | 212,626 | | | 193,714 |
| (a) | Revenue from the Motto Franchising segment is derived exclusively within the U.S. |
In the following table, segment revenue is disaggregated by Company-owned or Independent Regions in the RE/MAX network.U.S., Canada and Global (in thousands):
| | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
Company-owned Regions | | $ | 128,972 | | $ | 133,925 | | $ | 125,092 |
Independent Regions | | | 44,686 | | | 46,289 | | | 44,799 |
Global and Other | | | 25,978 | | | 24,290 | | | 23,267 |
Total RE/MAX Franchising | | | 199,636 | | | 204,504 | | | 193,158 |
Marketing Funds | | | 72,299 | | | — | | | — |
Motto Franchising | | | 4,542 | | | 2,536 | | | 556 |
Other | | | 5,816 | | | 5,586 | | | — |
Total | | $ | 282,293 | | $ | 212,626 | | $ | 193,714 |
UponTransaction Price Allocated to the sale of a franchise,Remaining Performance Obligations
The following table includes estimated revenue by year, excluding certain other immaterial items, expected to be recognized in the Company recognizes revenue from franchise sales when it has no significant continuing operationalfuture related to performance obligations substantially allthat are unsatisfied (or partially unsatisfied) at the end of the initialreporting period (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | Thereafter | | Total |
Annual dues | | $ | 15,982 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 15,982 |
Franchise sales | | | 7,141 | | | 5,801 | | | 4,368 | | | 2,881 | | | 1,589 | | | 4,104 | | | 25,884 |
Total | | $ | 23,123 | | $ | 5,801 | | $ | 4,368 | | $ | 2,881 | | $ | 1,589 | | $ | 4,104 | | $ | 41,866 |
Cash, Cash Equivalents and Restricted Cash
All cash held by the Marketing Funds is contractually restricted. The following table reconciles the amounts presented for cash, both unrestricted and restricted, in the Consolidated Balance Sheets to the amounts presented in the Consolidated Statements of Cash Flows (in thousands):
| | | | | | |
| | | | |
| | As of December 31, |
| | 2019 | | 2018 |
Cash and cash equivalents | | $ | 83,001 | | $ | 59,974 |
Restricted cash | | | 20,600 | | | — |
Total cash, cash equivalents and restricted cash | | $ | 103,601 | | $ | 59,974 |
Services Provided to the Marketing Funds by RE/MAX Franchising
RE/MAX Franchising charges the Marketing Funds for various services it performs. These services are primarily comprised of (a) providing agent marketing technology, including customer relationship management tools, the www.remax.com website, agent and office websites, and mobile apps, (b) dedicated employees focused on marketing campaigns, and (c) various administrative services including accounting and legal. Because these costs are ultimately paid by the Marketing Funds, they do not impact the net income of Holdings as the Marketing Funds have been performedno reported net income.
Costs charged from RE/MAX Franchising to the Marketing Funds are as follows (in thousands):
| | | |
| | Year Ended |
| | December 31, 2019 |
Technology development - operating | | $ | 6,244 |
Technology development - capital | | | 5,095 |
Marketing staff and administrative services (a) | | | 3,763 |
Total | | $ | 15,102 |
| (a) | Costs charged to the Marketing Funds for the years ended December 31, 2018 and 2017, while the Marketing Funds were a related party, were $3.8 million and $3.4 million, respectively. |
Prior to January 1, 2019, the Marketing Funds were not owned by the Company (see Note 6 Acquisitions). During that time, the Marketing funds still incurred significant technology costs, however, these services were provided by and other conditions affecting consummation of the sale have been met. In the event the franchisee failspaid directly to perform under the franchise agreement or defaults on the purchase obligations, the Company has the right to reacquire the franchisethird parties and to resell or operate that specific franchise. Franchise sales revenue recognized during the years ended December 31, 2017, 2016 and 2015 was $10.8 million, $8.8 million and $9.7 million, respectively.
Brokerage Revenue
As discussed in Note 5, Acquisitions and Dispositions the Company sold certain operating assets and liabilities of brokerage offices during 2015 and the first quarter of 2016 and, subsequent thereto, no longer operates any real estate brokerage offices and no longer recognizes brokerage revenue. Prior to the sale of the Company’s brokerage offices, brokerage revenue principally represented fees assessedwere not provided by the Company-owned brokerages forCompany. In 2019, RE/MAX Franchising (through the booj technology team) began providing these services provided to their affiliated real estate agents. Because the independent contractors in the Company-owned brokerage offices operated as agents in a real estate transaction, the commissions earned and the related commission expenses paid to the agents were recorded on a net basis. noted above.
Selling, Operating and Administrative Expenses
Selling, operating and administrative expenses primarily consist of personnel costs, including salaries, benefits, payroll taxes and other compensation expenses, professional fees, rent and related facility operations expense,lease costs, as well as expenses for marketing expanding and supportingto customers, to expand the Company’s franchisefranchises and through January 2016, brokerage operations.outsourced technology services.
Cash and Cash Equivalents
Cash and cash equivalents include bank deposits and other highly liquid investments purchased with an original purchase maturity of three months or less.
Fair Value of Financial Instruments
The carrying amounts of financial instruments, net of any allowances, including cash equivalents, accounts and notes receivable, accounts payable and accrued expenses approximate fair value due to their short-term nature.
Accounts and Notes Receivable
Accounts receivable arising from the Company’s franchise operations are recorded at the time the Company bills under the terms of the franchise agreements and other contractual arrangements andmonthly billings do not bear interest. The Company provides limited financing of certain franchise sales through the issuance of notes receivable that either bear interest at a rate of prime plus 2% or at a stated amount, which is fixed at the inception of the note with the associated earningsinterest recorded in “Interest income” in the accompanying Consolidated Statements of Income. Amounts collected on notes receivable are included in “Net cash provided by operating activities” in the accompanying Consolidated Statements of Cash Flows.
In circumstances where the Company has the contractual right to bill its franchisees, but where collectability is not sufficiently assured, the Company records a receivable and deferred revenue, which amounted to $1.2 and $1.0 million as of December 31, 2017 and 2016, respectively.
The Company records allowances against its accounts and notes receivable balances for estimated probable losses. Increases and decreases in the allowance for doubtful accounts are established based upon changes in the credit quality of receivables and are included as a component of “Selling, operating and administrative expenses” in the accompanying Consolidated Statements of Income. The allowance for doubtful accounts and notes receivable are the Company’s best
estimate of the amount of probable credit losses, and is based on historical experience, industry and general economic conditions, and the attributescredit quality of specific accounts.
The activity in the Company’s allowances against accounts and notes receivable consists of the following (in thousands):
| | | | | | | | | | | | |
| | | | | | | | |
| | | | Additions/charges | | | | |
| | Balance at | | to cost and expense for | | | | |
| | beginning of period | | allowances for doubtful accounts | | Deductions/write-offs | | Balance at end of period |
Year ended December 31, 2017 | | $ | 5,535 | | $ | 1,159 | | $ | (491) | | $ | 6,203 |
Year ended December 31, 2016 | | $ | 4,483 | | $ | 1,325 | | $ | (273) | | $ | 5,535 |
Year ended December 31, 2015 | | $ | 4,495 | | $ | 353 | | $ | (365) | | $ | 4,483 |
| | | | | | | | | | | | |
| | Balance at beginning of period | | Additions/charges to cost and expense for allowances for doubtful accounts (a) | | Deductions/write-offs | | Balance at end of period |
Year Ended December 31, 2019 | | $ | 7,980 | | $ | 4,964 | | $ | (406) | | $ | 12,538 |
Year Ended December 31, 2018 | | $ | 7,223 | | $ | 2,257 | | $ | (1,500) | | $ | 7,980 |
Year Ended December 31, 2017 | | $ | 6,458 | | $ | 1,109 | | $ | (344) | | $ | 7,223 |
(a) For the yearsyear ended December 31, 2017, 2016 and 2015, bad debt2019, $1.5 million of expense relatedwas attributable to trade accounts and notes receivable was $1.1 million, $1.2 million and $0.4 million, respectively, and is reflected in “Selling, operating and administrative expenses” in the accompanying Consolidated Statementsacquired Marketing Funds.
Accumulated Other Comprehensive Income (Loss), Foreign Operations and Foreign Currency Translation
Accumulated other comprehensive income (loss) includes all changes in equity during a period that have yet to be recognized in income, except those resulting from transactions with stockholders and is comprised of foreign currency translation adjustments.
As of December 31, 2017,2019, the Company, directly and through its franchisees, conducted operations in over 100110 countries and territories, including the U.S. and Canada.
The functional currency for the Company’s domestic operations is the U.S. dollar, andexcept for its Canadian subsidiary which is the Canadian Dollar.
Assets and liabilities of the Canadian subsidiary are translated at the spot rate in effect at the applicable reporting date, and the consolidated statements of income and cash flows are translated at the average exchange rates in effect during the applicable period. Exchange rate fluctuations on translating consolidated foreign currency financial statements into U.S. dollars that result in unrealized gains or losses are referred to as translation adjustments. Cumulative translation adjustments are recorded as a component of “Accumulated other comprehensive income,” a separate component of stockholders’ equity, and periodic changes are included in comprehensive income. When the Company sells a part or all of its investment in a foreign entity resulting in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided, it releases any related cumulative translation adjustment into net income.
Foreign currency denominated monetary assets and liabilities and transactions occurring in currencies other than the Company’s or the Company’s consolidated foreign subsidiaries’ functional currencies are recorded based on exchange rates at the time such transactions arise. Changes in exchange rates with respect to amounts recorded in the accompanying Consolidated Balance Sheets related to these non-functional currency transactions result in transaction gains and losses that are reflected in the accompanying Consolidated Statements of Income as “Foreign currency transaction gains (losses). gains.”
Property and Equipment
Property and equipment, including leasehold improvements, are initially recorded at cost. Depreciation is provided for on a straight-line method over the estimated useful lives of each asset class and commences when the property is placed in service. Amortization of leasehold improvements is provided for on a straight-line method over the estimated benefit period of the related assets or the lease term, if shorter.
Franchise Agreements and Other Intangible Assets
The Company’s franchise agreements result from franchise rights acquired from Independent Region acquisitions and are initially recorded at fair value. The Company amortizes the franchise agreements over their estimated useful life on a straight-line basis.
The Company also purchases and develops software for internal use. Software development costs and upgrade and enhancement costs incurred during the application development stage as well as upgrades and enhancements that result in additional functionality are capitalized. Costs incurred during the preliminary project and post-implementation-operation stages are expensed as incurred. Software developmentCapitalized software costs are generally amortized over a term of threetwo to five years. Purchased software licenses are amortized over their estimated useful lives.
In addition, the Company owns the principal trademarks, service marks and trade names that it uses in conjunction with operating its business. These intangible assets increase when the Company pays to file trademark applications in the U.S. and certain other jurisdictions globally. The Company’s trademarks are amortized on a straight-line basis over their estimated useful lives.
The Company reviews its franchise agreements and other intangible assets subject to amortization for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is assessed by a comparison of the carrying amount of an asset group to estimated undiscounted future cash flows expected to be generated from such asset. If not recoverable, the excess of the carrying amount of an asset over its estimated discounted cash flows would be charged to operations as an impairment loss. For each of the years ended December 31, 2017, 20162019, 2018 and 2015,2017, there were no0 material impairments indicated for such assets.
Goodwill
Goodwill is an asset representing the future economic benefits arising from the other assets acquired in a business combination that are not individually identified and separately recognized. The Company assesses goodwill for impairment at least annually at the reporting unit level or whenever an event occurs or circumstances change that would indicate impairment may have occurred at the reporting unit level.occurred. Reporting units are driven by the level at which segment management reviews operating results. The Company performs its required impairment testing annually on August 31.October 1.
The Company’s impairment assessment begins with a qualitative assessment to determine if it is more likely than not that a reporting unit’s fair value is less than the carrying amount. The initial qualitative assessment includes comparing the overall financial performance of the reporting units against the planned results as well as other factors which might indicate that the reporting unit’s value has declined since the last assessment date. If it is determined in the qualitative assessment that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then the standard two-step quantitative impairment test is performed. The first step of the quantitative impairment test consists of comparing the estimated fair value of each reporting unit with its carrying amount, including goodwill. The fair value of a reporting unit is determined by forecasting results, such as franchise sales for Motto, and applying and assumed discount rate to determine fair value as of the test date. If the estimated fair value of a reporting unit exceeds its carrying value, then it is not considered impaired and no further analysis is required. If the first step of the quantitative impairment test indicates that the estimated fair value of a reporting unit is less than its carrying value, then impairment potentially exists and the second step of the quantitative impairment test is performed to measure the amount of goodwill impairment. Goodwill impairment exists when the estimated implied fair value of a reporting unit’s goodwill is less than its carrying value.
During 2017, 2016 and 2015, the Company performed the qualitative impairment assessment for all of its reporting units by evaluating, among other things, market and general economic conditions, entity-specific events, events affecting a reporting unit and the Company’s results of operations and key performance measures. Except for Motto, the fair value of our reporting units significantly exceeded their carrying values at our latest assessment date. Motto is a startup business and its fair value is tied primarily to franchise sales over the next several years. Failure to achieve targeted franchise sales would result in an impairment of this goodwill balance.
The Company did not record any goodwill impairments during the years ended December 31, 2017, 20162019, 2018 and 2015.2017.
Income Taxes
The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Management periodically assesses the recoverability of its deferred tax assets based upon expected future earnings, future deductibility of the asset and changes in applicable tax laws and other factors. If management determines that it is not probablelikely that the deferred tax asset will be fully recoverable in the future, a valuation allowance may be established for the difference between the asset balance and the
amount expected to be recoverable in the future. The allowance will result in a charge to the Company’s Consolidated Statements of Income. Further, the Company records its income taxes receivable and payable based upon its estimated income tax liability.
RMCO complies with the requirements of the Internal Revenue Code that are applicable to limited liability companies that have elected to be treated as partnerships, which allow for the complete pass-through of taxable income or losses to RMCO’s unitholders, who are individually responsible for any federal tax consequences. ProvisionThe share of U.S. income allocable to Holdings results in a provision for Income Taxes includesincome taxes for the federal income tax obligation related to RE/MAX Holdings’ allocatedand state taxes on that portion of RMCO’s income. The share of U.S. income allocable to RIHI does not result in a provision for income taxes for federal and state taxes given Holdings does not consolidate RIHI. RMCO is subject to certain stateglobal withholding taxes, which are ultimately allocated to both Holdings and local taxes, and its global subsidiariesRIHI since they are subject to tax in certain jurisdictions.paid by RMCO.
The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
Equity-Based Compensation
The Company recognizes compensation expense associated with equity-based compensation as a component of “Selling, operating and administrative expenses” in the accompanying Consolidated Statements of Income. All equity-based compensation is required to be measured at fair value on the grant date, is expensed over the requisite service, generally over a three-year period, and forfeitures are accounted for as they occur. The Company recognizes compensation expense on awards on a straight-line basis over the requisite service period for the entire award. Refer to Note 12, 13, Equity-Based Compensation for additional discussion regarding details of the Company’s equity-based compensation plans.
Recently Adopted Accounting Pronouncements Not Yet Adopted
In February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220), which adjusts the classification of stranded tax effects resulting from the Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings. ASU 2018-02 isbecame effective for fiscal years, and interim periods within those years, beginning after December 15, 2018.the Company on January 1, 2019. The standard is to be applied either in the period of adoption or retrospectively to each period effectedaffected by the Tax Cuts and Jobs Act. The Company plans to adopt this ASU on January 1, 2019. As of December 31, 2017, the Company completed the majority of its accounting for the tax effects of the Tax Cuts and Jobs Act.Act as of December 31, 2017. The Company believes the amendments of ASU 2018-02 willdid not have a significant impact on the Company’s consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), with several subsequent amendments, which requires lessees to recognize the assets and liabilities that arise from operating and finance leases on the consolidated balance sheets, with a few exceptions. ASU 2016-02 became effective for the Company on January 1, 2019 and replaced the existing lease guidance in U.S. GAAP when it became effective. The Company did not retrospectively recast prior periods presented and instead adjusted assets and liabilities on January 1, 2019. In addition, the Company elected the package of practical expedients permitted under the transition guidance, which allowed the Company to forgo reassessing (a) whether a contract contains a lease, (b) lease classification, and (c) whether capitalized costs associated with a lease are initial direct costs. The practical expedient was applied consistently to all the Company’s leases, including those for which the Company acts as the lessor. In addition, the Company elected the practical expedient relating to the combination of lease and non-lease components as a single lease component. The Company chose not to apply the hindsight practical expedient. The new lease guidance has been applied to all the Company’s leases as of January 1, 2019, which impacted how operating lease assets and liabilities were recorded within the Consolidated Balance Sheet, resulting in the recording of approximately $65.8 million of lease liabilities and approximately $55.6 million of right-of-use (“ROU”) assets on the Consolidated Balance Sheet. Deferred rent and sublease loss balances as of January 1, 2019 of approximately $9.3 million and approximately $2.4 million, respectively, and intangible assets of approximately $1.5 million were subsumed into the ROU asset at transition. Adoption of the new standard did not materially affect the Company’s consolidated net earnings and had no impact on cash flows. See Note 3, Leases, for more information.
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350), which simplifies the subsequent measurement of goodwill by eliminating step two from the goodwill impairment test. The Company early adopted ASU 2017-04 isand it was effective for annual and interim impairment tests beginning January 1, 2020 for the Company and is required to be adopted2019 using a prospective approach. Early adoption is allowed for annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect the adoption of this ASU to have a materialstandard had no impact on its consolidatedthe Company’s financial statements and related disclosures.
Also in January 2017,New Accounting Pronouncements Not Yet Adopted
In August 2018, the FASB issued ASU 2017-01, Business Combinations (Topic 805)2018-15, Intangibles – Goodwill and Other Internal-Use Software (Subtopic 350-40): Clarifying the Definition ofCustomer’s Accounting for Implementation Costs Incurred in a Business, Cloud Computing Arrangement that is a Service Contract, which clarifies when transactions shouldthat implementation costs incurred by customers in cloud computing arrangements are deferred if they would be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is effective for fiscal years, and interim reporting periods within those years, beginning January 1, 2018 for the Company and is required to be adopted using a prospective approach. Early adoption is permitted for transactions not previously reported in issued financial statements. The Company will determine the effect of the standard on its consolidated financial statements and related disclosures based on the facts and circumstances of each individual acquisition or disposal.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which clarifies classification for certain cash receipts and cash payments on the consolidated statements of cash flow. ASU 2016-15 is effective for fiscal years, and interim reporting periods within those years, beginning January 1, 2018 for the Company. The standard requires a retrospective transition method for each period presented. Under the new guidance, the contingent consideration payments related to the purchase of Full House Mortgage Connection, Inc. (“Full House”) will be classified as financing outflows up to the $6.3 million
acquisition date fair value and any cash payments paid in excess of the acquisition date fair value will be classified as operating outflows. (See Note 5, Acquisitions and Dispositions.) The Company expects no material impact on its financial statements and related disclosures upon the adoption of this standard.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize the assets and liabilities that arise from all leases on the consolidated balance sheets. ASU 2016-02 is required to be adoptedcapitalized by the Company on January 1, 2019. Early adoption is permitted in any interim or annual reporting period. The standard requires a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative periodcustomers in the financial statements. The Company hassoftware licensing arrangements under the internal-use software guidance. ASU 2018-15 also clarifies that any capitalized costs should not yet determined the effect of the standard on its consolidated financial statements and related disclosures.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), with several subsequent amendments, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The Company adopted this standard on January 1, 2018. The Company will use the modified retrospective transition method, which will result in restating each prior reporting period presented, fiscal years 2016 and 2017, in the year of adoption. Additionally, a cumulative effect adjustment will be recorded to the opening balance sheet as of the first day of fiscal year 2016, the earliest period presented. The adoption of the new guidance will change the timing of recognition of franchise sales“Depreciation and franchise renewal revenue. Currently, the Company recognizes revenue upon completion of a sale or renewal. Under the new guidance, franchise sales and renewal revenue, which are included in “Franchise Sales and Other Franchise Revenue”amortization” in the Consolidated Statements of Income, will be recognized over the contractual term of the franchise agreement. The impact to both “Franchise Sales and Other Franchise Revenue” and “Operating Income” in the Consolidated Statements of IncomeIncome. ASU 2018-15 is effective for 2017 from this change will be a decrease of less than $2.0 million. However, the Consolidated Balance Sheet as of December 31, 2017 will be adjusted in the first quarter of 2018 to reflect an increase in “Deferred revenue and deposits” of approximately $26.0 million. The commissions related to franchise sales will be recorded as a contract asset and be recognized over the contractual term of the franchise agreement. Currently, the Company expensesbeginning January 1, 2020 and provides for the commissions upon franchise sale completion. The impact fromalternative to adopt the ASU (a) prospectively only for new costs incurred after the adoption date or (b) by adjusting existing costs to comply with this changestandard, including the requirement to “Selling, operatingpresent the amortization of costs outside “Depreciation and administrative expenses” and “Operating Income” in the Consolidated Statements of Income for 2017 is immaterial and the Consolidated Balance Sheet as of December 31, 2017 will be adjusted in the first quarter of 2018 to reflect an increase in “Total assets” of approximately $4.0 million.amortization”. The Company does not expectplans to adopt this ASU prospectively to all new implementation costs incurred after adoption. Given this implementation approach, the adoption of the standard on January 1, 2020 will have no immediate impact.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), which eliminates certain disclosure requirements for fair value measurements and requires new or modified disclosures. ASU 2018-13 is effective for the Company beginning January 1, 2020; early adoption is permitted. Certain changes are applied retrospectively to each period presented and others are to be applied either in the period of adoption or prospectively. The Company believes the amendments of ASU 2018-13 will not have a materialsignificant impact on other revenue streams. the Company’s financial statements and related disclosures.
3. Leases
3.The Company leases corporate offices, a distribution center, billboards and certain equipment. As all franchisees are independently owned and operated, there are no leases recognized for any offices used by the Company’s franchisees. The leases have remaining lease terms ranging from less than a year up to 14, some of which include one or more options to renew, with renewal terms that can extend the lease term from one to 20 years depending on the lease. Of these renewal options, the Company determined that 0ne are reasonably certain to be exercised. All the Company’s material leases are classified as operating leases.
The Company has a lease for its corporate headquarters office building (the “Master Lease”) that expires in 2028. The Company may, at its option, extend the Master Lease for 2 renewal periods of 10 years. Under the terms of the Master Lease, the Company pays an annual base rent, which escalates 3% each year, including the first optional renewal period. The second optional renewal period resets to fair market rental value, and the rent escalates 3% each year until expiration. The Company pays for insurance, property taxes and operating expenses of the leased space. The Master Lease is the Company’s only significant lease.
The Company acts as the lessor for 4 sublease agreements on its corporate headquarters, consisting solely of operating leases, each of which include a renewal option for the lessee to extend the length of the lease. Renewal options for 2 of the sublease agreements are contingent upon renewal of the corporate headquarters lease, which is not reasonably certain to be exercised in 2028. As such, the Company determined these sublease renewal options are not reasonably certain to be exercised. Renewal options for the remaining 2 sublease agreements have already been exercised and will expire before the end of the corporate headquarters lease in 2028.
The Company has made an accounting policy election not to recognize right-of-use assets and lease liabilities that arise from any of its short-term leases. All leases with a term of 12 months or less at commencement, for which the Company is not reasonably certain to exercise available renewal options that would extend the lease term past 12 months, will be recognized on a straight-line basis over the lease term.
The Company used its Senior Secured Credit Facility interest rate to extrapolate a rate for each of its leases to calculate the present value of the lease liability and right-of-use asset. A summary of the Company’s lease cost is as follows (in thousands, except for weighted-averages):
| | | | |
| | Year Ended December 31, 2019 | |
Lease Cost | | | | |
Operating lease cost (a) | | $ | 12,259 | |
Sublease income | | | (1,508) | |
Short-term lease cost (b) | | | 6,495 | |
Total lease cost | | $ | 17,246 | |
Other information | | | | |
Cash paid for amounts included in the measurement of lease liabilities | | | | |
Operating cash outflows from operating leases | | $ | 8,507 | |
Weighted-average remaining lease term in years - operating leases | | | 8.4 | |
Weighted-average discount rate - operating leases | | | 6.3 | % |
| (a) | Includes approximately $3.7 million of taxes, insurance and maintenance. |
| (b) | Includes expenses associated with short-term leases of billboard advertisements and is included in “Marketing Funds expenses” on the Consolidated Statements of Income. |
Maturities under non-cancellable leases as of December 31, 2019 were as follows (in thousands):
| | | | | | | | | |
| | Rent Payments | | Sublease Receipts | | Total Cash Outflows |
Year ending December 31: | | | | | | | | | |
2020 | | $ | 8,756 | | $ | (888) | | $ | 7,868 |
2021 | | | 9,010 | | | (775) | | | 8,235 |
2022 | | | 9,002 | | | (804) | | | 8,198 |
2023 | | | 9,173 | | | (822) | | | 8,351 |
2024 | | | 9,439 | | | (785) | | | 8,654 |
Thereafter | | | 34,235 | | | (597) | | | 33,638 |
Total lease payments | | $ | 79,615 | | $ | (4,671) | | $ | 74,944 |
Less: imputed interest | | | 18,554 | | | | | | |
Present value of lease liabilities | | $ | 61,061 | | | | | | |
As previously disclosed in our 2018 Annual Report on Form 10-K and under the previous lease accounting, maturities under non-cancellable leases as of December 31, 2018 were as follows (in thousands):
| | | | | | | | | |
| | Rent Payments | | Sublease Receipts | | Total Cash Outflows |
Year ending December 31: | | | | | | | | | |
2019 | | $ | 9,402 | | $ | (1,087) | | $ | 8,315 |
2020 | | | 9,601 | | | (873) | | | 8,728 |
2021 | | | 9,341 | | | (775) | | | 8,566 |
2022 | | | 9,011 | | | (804) | | | 8,207 |
2023 | | | 9,169 | | | (827) | | | 8,342 |
Thereafter | | | 43,556 | | | (1,382) | | | 42,174 |
Total lease payments | | $ | 90,080 | | $ | (5,748) | | $ | 84,332 |
4. Non-controlling Interest
RE/MAX
Holdings is the sole managing member of RMCO and operates and controls all of the business affairs of RMCO. The ownership of the common units in RMCO is summarized as follows:
d
| | | | | | | | | |
| | | | | |
| | As of December 31, | |
| | 2019 | | 2018 | |
| | Shares | | Ownership % | | Shares | | Ownership % | |
Non-controlling interest ownership of common units in RMCO | | 12,559,600 | | 41.3 | % | 12,559,600 | | 41.4 | % |
Holdings outstanding Class A common stock (equal to Holdings common units in RMCO) | | 17,838,233 | | 58.7 | % | 17,754,416 | | 58.6 | % |
Total common units in RMCO | | 30,397,833 | | 100.0 | % | 30,314,016 | | 100.0 | % |
| | | | | | | | | | |
| | As of December 31, | |
| | 2017 | | | 2016 | |
| | Shares | | Ownership % | | | Shares | | Ownership % | |
Non-controlling interest ownership of common units in RMCO | | 12,559,600 | | 41.51 | % | | 12,559,600 | | 41.57 | % |
RE/MAX Holdings, Inc. outstanding Class A common stock (equal to RE/MAX Holdings, Inc. common units in RMCO) | | 17,696,991 | | 58.49 | % | | 17,652,548 | | 58.43 | % |
Total common units in RMCO | | 30,256,591 | | 100.00 | % | | 30,212,148 | | 100.00 | % |
The weighted average ownership percentages for the applicable reporting periods are used to calculate the net“Net income attributable to RE/MAX Holdings. In 2015 RE/MAX Holdings’ economic interest in RMCO significantly increased as a result of RIHI’s redemption of 5.2 million common units in RMCO and issuance of 5.2 million shares of Class A common stock.
Holdings, Inc.” A reconciliation of “Income before provision for income taxes” to “Net income attributable to RE/MAX Holdings, Inc.” and “Net Income attributable to non-controlling interest” in the accompanying Consolidated Statements of Income for the periods indicated is detailed as follows (in thousands, except percentages):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | |
| 2019 | | 2018 | | 2017 | |
| RE/MAX
Holdings,
Inc. | | Non-controlling
interest | | Total | | RE/MAX
Holdings,
Inc. | | Non-controlling
interest | | Total | | RE/MAX
Holdings,
Inc. | | Non-controlling
interest | | Total | |
Weighted average ownership percentage of RMCO(a) | | 58.6 | % | | 41.4 | % | | 100.0 | % | | 58.6 | % | | 41.4 | % | | 100.0 | % | | 58.5 | % | | 41.5 | % | | 100.0 | % |
Income before provision for income taxes(a) | $ | 33,850 | | $ | 23,915 | | $ | 57,765 | | $ | 41,238 | | $ | 24,926 | | $ | 66,164 | | $ | 65,493 | | $ | 23,369 | | $ | 88,862 | |
Provision for income taxes(b)(c) | | (8,810) | | | (2,099) | | | (10,909) | | | (14,355) | | | (1,987) | | | (16,342) | | | (55,394) | | | (2,148) | | | (57,542) | |
Net income | $ | 25,040 | | $ | 21,816 | | $ | 46,856 | | $ | 26,883 | | $ | 22,939 | | $ | 49,822 | | $ | 10,099 | | $ | 21,221 | | $ | 31,320 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | |
| 2017 | | | 2016 | | | 2015 | |
| RE/MAX Holdings, Inc. | | Non-controlling interest | | Total | | | RE/MAX Holdings, Inc. | | Non-controlling interest | | Total | | | RE/MAX Holdings, Inc. | | Non-controlling interest | | Total | |
Weighted average ownership percentage of RMCO (a) | | 58.48 | % | | 41.52 | % | | 100.00 | % | | | 58.40 | % | | 41.60 | % | | 100.00 | % | | | 42.33 | % | | 57.67 | % | | 100.00 | % |
Income before provision for income taxes | $ | 66,599 | | $ | 24,156 | | $ | 90,755 | | | $ | 36,446 | | $ | 26,053 | | $ | 62,499 | | | $ | 26,554 | | $ | 36,251 | | $ | 62,805 | |
Provision for income taxes (b)(c) | | (53,784) | | | (1,792) | | | (55,576) | | | | (14,050) | | | (1,223) | | | (15,273) | | | | (10,142) | | | (1,888) | | | (12,030) | |
Net income | $ | 12,815 | | $ | 22,364 | | $ | 35,179 | | | $ | 22,396 | | $ | 24,830 | | $ | 47,226 | | | $ | 16,412 | | $ | 34,363 | | $ | 50,775 | |
| (a) | (a)
| | The weighted average ownership percentage of RMCO differs from the allocation of income before provision for income taxes between RE/MAX Holdings and the non-controlling interest due to (i) certain relatively insignificant expenses and (ii) the significant gain on reduction in TRA liability in 2018 and 2017 being recorded at RE/MAXattributable only to Holdings. See Note 12, Income Taxes for additional information. |
| (b) | (b)
| | The provision for income taxes attributable to RE/MAX Holdings is primarily comprised of U.S. federal and state income taxes on its proportionate share of the pass-through income from RMCO. However, itIt also includes itsHoldings’ share of taxes directly incurred by RMCO and its subsidiaries, related primarily to tax liabilities in certain foreign jurisdictions. In 2018 and 2017, the provision for income taxes attributable to Holdings also includes a significant decrease in the value of deferred tax assets. See Note 12, Income Taxes for additional information. |
| (c) | (c)
| | The provision for income taxes attributable to the non-controlling interest represents its share of taxes related primarily to tax liabilities in certain foreign jurisdictions directly incurred by RMCO or its subsidiaries. Because RMCO is a pass-through entity there is no U.S. federal and state income tax provision recorded on the non-controlling interest. |
Distributions and Other Payments to Non-controlling Unitholders
Under the terms of RMCO’s fourth amended and restated limited liability company operating agreement, (the “New RMCO, LLC Agreement”), RMCO makes cash distributions to non-controlling unitholders on a pro-rata basis. The distributions paid or payable to or on behalf of non-controlling unitholders are summarized as follows (in thousands):
| | | | | | |
| | Year Ended | |
| | December 31, | |
| | 2017 | | 2016 | |
| | | | | | |
| | | Year Ended |
| | | December 31, |
| | | 2019 | | 2018 |
Tax and other distributions | | $ | 8,217 | | $ | 10,391 | | $ | 4,880 | | $ | 4,511 |
Dividend distributions | | | 9,043 | | | 7,536 | | | 10,550 | | | 10,048 |
Total distributions to non-controlling unitholders | | $ | 17,260 | | $ | 17,927 | | $ | 15,430 | | $ | 14,559 |
On February 21, 2018,19, 2020, the Company declared a distribution to non-controlling unitholders of $2.5$2.8 million, which is payable on March 21, 2018.18, 2020.
RE/MAX Holdings ownershipOwnership of RMCO and Tax Receivable Agreements
RE/MAX Holdings has twice acquired significant portions of the ownership in RMCO; first in October 2013 at the time of IPO when RE/MAX Holdings acquired its initial 11.611.5 million common units of RMCO and, second, in November and December 2015 when it acquired 5.2 million additional common units. RE/MAX Holdings soldissued Class A common stock, which it exchanged for these common units of RMCO. RIHI then sold the Class A common stock to the market.
When RE/MAX Holdings has acquired common units in RMCO, it received a step-up in tax basis on the underlying assets held by RMCO. The step-up is principally equivalent to the difference between (1) the fair value of the underlying assets on the date of acquisition of the common units and (2) their tax basis in RMCO, multiplied by the percentage of units acquired. The majority of the step-up in basis relates to intangibles assets, primarily franchise agreements and goodwill, and the step-up is often substantial. These assets are amortizable under IRS rules and result in deductions on the Company’s tax return for many years and consequently, RE/MAX Holdings receives a future tax benefit. These future benefits are reflected within
deferred tax assets of approximately $59.2 million on the Company’s consolidated
balance sheets as of December 31, 2017. sheets.
If RE/MAX Holdings acquires additional common units of RMCO from RIHI, the percentage of RE/MAX Holdings’ ownership of RMCO will increase, and additional deferred tax assets will be created as additional tax basis step-ups occur.
In connection with the initial sale of RMCO common units in October 2013, RE/MAX Holdings entered into TRAsTax Receivable Agreements (“TRAs”) which require that RE/MAX Holdings make annual payments to RIHI and Oberndorf Investments LLC (a successor to the other previous owner of RMCO)TRA holders equivalent to 85% of any tax benefits realized on each year’s tax return from the additional tax deductions arising from the step-up in tax basis. AThe TRA liability washolders as of December 31, 2019 are RIHI and Parallaxes Rain Co-Investment, LLC (“Parallaxes”). TRA liabilities were established for the future cash obligations expected to be paid under the TRAs and isare not discounted. As of December 31, 2017,2019, this liability was $53.2 million.$37.2 million and was recorded within “Current portion of payable pursuant to tax receivable agreements” and “Payable pursuant to tax receivable agreement” in the Consolidated Balance Sheets. Similar to the deferred tax assets, thesethe TRA liabilities would increase if RE/MAX Holdings acquires additional common units of RMCO from RIHI.
Both these deferred tax assets and TRA liability were substantially reduced by the Tax Cuts and Jobs Act enacted in December 2017. The reduction in the corporate tax rate from 35% to 21% resulted in comparable reductions in both the deferred tax asset amounts and the TRA liabilities. The deferred tax assets and TRA liabilities were further reduced in 2018 as a result of the foreign tax provisions contained in the Tax Cuts and Jobs Act. See Note 11, 12, Income Taxes for further information on the impact of the Tax Cuts and Jobs Act.
4.5. Earnings Per Share and Dividends
Earnings Per Share
Basic earnings per share (“EPS”) measures the performance of an entity over the reporting period. Diluted EPS measures the performance of an entity over the reporting period while giving effect to all potentially dilutive common shares that were outstanding during the period. The treasury stock method is used to determine the dilutive potentialeffect of stock options andtime-based restricted stock units. The dilutive effect of performance-based restricted stock units is measured using the guidance for contingently issuable shares.
The following is a reconciliation of the numerator and denominator used in the basic and diluted EPS calculations (in thousands, except shares and per share information):
| | | | | | | | |
| | Year Ended | |
| | December 31, | |
| | 2017 | | 2016 | | 2015 | |
| | | | | | | | | | |
| | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
Numerator | | | | | | | | | | | | | | | | |
Net income attributable to RE/MAX Holdings, Inc. | | $ | 12,815 | | $ | 22,396 | | $ | 16,412 | | $ | 25,040 | | $ | 26,883 | | $ | 10,099 |
Denominator for basic net income per share of Class A common stock | | | | | | | | | | | | | | | | |
Weighted average shares of Class A common stock outstanding | | | 17,688,533 | | | 17,628,741 | | | 12,671,051 | | | 17,812,065 | | | 17,737,649 | | | 17,688,533 |
Denominator for diluted net income per share of Class A common stock | | | | | | | | | | | | | | | | |
Weighted average shares of Class A common stock outstanding | | | 17,688,533 | | 17,628,741 | | 12,671,051 | | | 17,812,065 | | | 17,737,649 | | | 17,688,533 |
Add dilutive effect of the following: | | | | | | | | | | | | | | | | |
Stock options | | | — | | 5,059 | | 130,001 | |
Restricted stock units | | | 43,267 | | | 43,968 | | | 28,162 | | | 55,687 | | | 29,850 | | | 43,267 |
Weighted average shares of Class A common stock outstanding, diluted | | | 17,731,800 | | | 17,677,768 | | | 12,829,214 | | | 17,867,752 | | | 17,767,499 | | | 17,731,800 |
Earnings per share of Class A common stock | | | | | | | | | | | | | | | | |
Net income attributable to RE/MAX Holdings, Inc. per share of Class A common stock, basic | | $ | 0.72 | | $ | 1.27 | | $ | 1.30 | | $ | 1.41 | | $ | 1.52 | | $ | 0.57 |
Net income attributable to RE/MAX Holdings, Inc. per share of Class A common stock, diluted | | $ | 0.72 | | $ | 1.27 | | $ | 1.28 | | $ | 1.40 | | $ | 1.51 | | $ | 0.57 |
There were no anti-dilutive shares for the years ended December 31, 2017, 2016 and 2015. The one share of
Outstanding Class B common stock outstanding does not share in the earnings of RE/MAX Holdings and is therefore not a participating security. Accordingly, basic and diluted net income per share of Class B common stock has not been presented.
Dividends
Dividends declared and paid to holders of the Company’s Class A common stock during the yearseach quarter ended December 31, 2017, 2016 and 2015 were $12.7 million, $10.6 million and $24.0 million, respectively. Dividends declared and paid quarterly per share on all outstanding shares of Class A common stock during the years ended December 31, 2017, 2016 and 2015 were as follows:follows (in thousands, except per share information):
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2017 | | 2016 | | 2015 | |
| | Date paid | | Per share | | Date paid | | Per share | | Date paid | | Per share | |
Dividend declared during quarter ended: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
Quarter end declared | | | Date paid | | Per share | | Date paid | | Per share | | Date paid | | Per share |
March 31 | | March 22, 2017 | | $ | 0.18 | | | March 23, 2016 | | $ | 0.15 | | April 8, 2015 | | $ | 1.625 | | March 20, 2019 | | $ | 0.21 | | March 21, 2018 | | $ | 0.20 | | March 22, 2017 | | $ | 0.18 |
June 30 | | May 31, 2017 | | | 0.18 | | | June 2, 2016 | | 0.15 | | June 4, 2015 | | | 0.125 | | May 29, 2019 | | | 0.21 | | May 30, 2018 | | | 0.20 | | May 31, 2017 | | | 0.18 |
September 30 | | August 30, 2017 | | | 0.18 | | | August 31, 2016 | | 0.15 | | September 3, 2015 | | | 0.125 | | August 29, 2019 | | | 0.21 | | August 29, 2018 | | | 0.20 | | August 30, 2017 | | | 0.18 |
December 31 | | November 29, 2017 | | | 0.18 | | | December 1, 2016 | | | 0.15 | | November 27, 2015 | | | 0.125 | | November 27, 2019 | | | 0.21 | | November 28, 2018 | | | 0.20 | | November 29, 2017 | | | 0.18 |
| | | | $ | 0.72 | | | | | $ | 0.60 | | | | $ | 2.00 | |
| | | | | $ | 0.84 | | | | $ | 0.80 | | | | $ | 0.72 |
On February 21, 2018,19, 2020, the Company’s Board of Directors declared a quarterly dividend of $0.20$0.22 per share on all outstanding shares of Class A common stock, which is payable on March 21, 201818, 2020 to stockholders of record at the close of business on March 7, 2018.4, 2020.
6. Acquisitions
First
5. AcquisitionsOn December 16, 2019, the Company acquired First Leads, Inc. (“First”) for $15 million in cash generated from operations. First is a mobile app that leverages data science, machine learning and Dispositionshuman interaction to help real estate professionals better leverage the value of their personal network and was acquired to complement the Company’s technology offerings and booj Platform.
Marketing Funds
On January 1, 2019, the Company acquired all of the regional and pan-regional advertising fund entities previously owned by its founder and Chairman of the Board of Directors, David Liniger, for a nominal amount. As in the past, the Marketing Funds are contractually obligated to use the funds collected to support both regional and pan-regional marketing campaigns designed to build and maintain brand awareness and to support the Company’s agent marketing technology. The Company does not plan for the use of the funds to change because of this acquisition and consolidation. The acquisitions of the Marketing Funds are part of the Company’s succession plan, and ownership of the Marketing Funds by the franchisor is a common structure. Expenses incurred with the acquisition of the Marketing Funds were not material.
The total assets equal the total liabilities of the Marketing Funds and beginning January 1, 2019, are reflected in the consolidated financial statements of the Company. The Company also began recognizing revenue from the amounts collected, which substantially increased its revenues and expenses.
The following table summarizes the Company’s allocation of the purchase price to the fair value of assets acquired and liabilities assumed (in thousands):
| | | |
Restricted cash | | $ | 28,495 |
Other current assets | | | 8,472 |
Property and equipment | | | 788 |
Other assets, net of current portion | | | 126 |
Total assets acquired | | | 37,881 |
Other current liabilities | | | 37,881 |
Total liabilities assumed | | | 37,881 |
Total acquisition price | | $ | - |
The Marketing Funds constitutes a business and was accounted for using the fair value acquisition method. The total purchase price was allocated to the assets acquired based on their estimated fair values.
Booj, LLC
On February 26, 2018, the Company acquired all membership interests in booj using $26.3 million in cash generated from operations, plus up to approximately $10.0 million in equity-based compensation to be earned over time, based on grant date fair value, which will be accounted for as compensation expense in the future (see Note 13, Equity-Based Compensation for additional information). The Company acquired booj in order to deliver core technology solutions designed for and with RE/MAX affiliates.
The following table summarizes the Company’s allocation of the purchase price to the fair value of assets acquired and liabilities assumed (in thousands):
| | | |
| | | |
Cash | | $ | 362 |
Other current assets | | | 367 |
Property and equipment | | | 625 |
Software | | | 7,400 |
Trademarks | | | 500 |
Non-compete agreement | | | 1,200 |
Customer relationships | | | 800 |
Other intangible assets | | | 1,589 |
Other assets, net of current portion | | | 336 |
Total assets acquired, excluding goodwill | | | 13,179 |
Current portion of debt | | | (606) |
Other current liabilities | | | (557) |
Debt, net of current portion | | | (805) |
Total liabilities assumed | | | (1,968) |
Goodwill | | | 15,039 |
Total purchase price | | $ | 26,250 |
Booj constitutes a business and was accounted for using the fair value acquisition method. The total purchase price was allocated to the assets acquired based on their estimated fair values. The largest intangible assets acquired were valued using an income approach which utilizes Level 3 inputs and are being amortized over a weighted-average useful life using the straight-line method. The excess of the total purchase price over the fair value of the identifiable assets acquired was recorded as goodwill. The goodwill is attributable to expected synergies and projected long-term revenue growth for the RE/MAX network. All of the goodwill recognized is tax deductible.
Independent Region AcquisitionsAcquisition
RE/MAX, LLC hasOn November 15, 2017, the Company acquired certain key assets of several Independent Regions, includingRE/MAX of Northern Illinois, Inc. for $35.7 million using cash generated from operations. The Company acquired the franchise agreements issued by the Company permitting the sale of RE/MAX franchises in the corresponding regionsregion as well as the franchise agreements between those Independent Regionsthe region and the franchisees. RE/MAX, LLCThe Company acquired these assets in order to expand its owned and operated regional franchising operations. Details of these acquisitions are outlined in the tables below.
The Company funded RE/MAX of Georgia, Inc., RE/MAX of Kentucky/Tennessee, Inc., and RE/MAX of Southern Ohio, Inc., collectively (“RE/MAX Regional Services”) by refinancing its 2013 Senior Secured Credit Facility (See Note 9, Debt) and using cash from operations. The Company used cash generated from operations to fund all other Independent Region acquisitions.
| | | | | | | | | | | |
| | | RE/MAX of Northern Illinois, Inc. | | RE/MAX Regional Services | | RE/MAX of New Jersey, Inc. | | RE/MAX of Alaska, Inc. | | RE/MAX of New York, Inc. |
| Acquisition date | | November 15, 2017 | | December 15, 2016 | | December 1, 2016 | | April 1, 2016 | | February 22, 2016 |
| Cash consideration (in thousands) | | 35,720 | | 50,400 | | 45,000 | | 1,500 | | 8,500 |
| Status of accounting for the business combination | | Preliminary(a) | | Final as of December 31, 2017(b) | | Final as of December 31, 2017(b) | | Final as of December 31, 2016 | | Final as of December 31, 2016 |
| | | | | | | | | | | |
Acquisitions occurring during the current reporting period: | | | | | | | | | | |
| Acquisition-related costs (in thousands)(c) | | 333 | | | | | | | | |
| Revenue since acquisition date (in thousands)(d) | | 595 | | | | | | | | |
| Weighted-average useful life of franchise agreements acquired | | 12.4 | | | | | | | | |
| (a)
| | The preliminary estimated fair value of the assets acquired is subject to adjustments based on the Company’s final assessment of the fair values of the franchise agreements, which is the acquired asset with the highest likelihood of changing upon finalization of the valuation process.
|
| (b)
| | As of December 31, 2017, the Company finalized its purchase allocations related to the acquisitions of RE/MAX Regional Services and RE/MAX of New Jersey. Adjustments recorded during the measurement-period are calculated as if they were known at the acquisition date, but are recognized in the reporting period in which they are determined. The Company does not revise or adjust any prior period information. In finalizing the accounting for these acquisitions, adjustments were made during the year ended December 31, 2017 to the consolidated balance sheet to decrease “Goodwill” by $4.2 million with a corresponding increase to “Franchise agreements, net” of $4.2
|
million. The Company recognized a reduction in depreciation and amortization expense of $0.8 million during the year ended December 31, 2017 in connection with these measurement adjustments.
|
| (c)
| | Includes transaction and integration costs such as legal, accounting, advisory and consulting fees for the year ended December 31, 2017 that are included in “Selling, operating and administrative expenses” in the accompanying Consolidated Statements of Income.
|
| (d)
| | Includes the amount of revenue of the acquiree since the acquisition date through the year ended December 31, 2017 that is included in the accompanying Consolidated Statements of Income.
|
The franchise agreements acquired were valued using an income approach which utilizes level 3 inputs and are being amortized over a weighted-average useful life using the straight-line method.
Full House Mortgage Connection, Inc.
Motto Franchising, LLC (“Motto Franchising”), a wholly-owned subsidiary of RE/MAX, LLC, was formed and developed to franchise mortgage brokerages. On September 12, 2016, Motto Franchising acquired certain assets of Full House Mortgage Connection, Inc. (“Full House”), a franchisor of mortgage brokerages that created concepts used to develop Motto, for initial cash consideration of $8.0 million. Motto Franchising, as a franchisor, grants each franchisee a license to use the Motto Mortgage brand, trademark, promotional and operating materials and concepts. The Company used cash generated from operations to initially fund the acquisition. Additional cash consideration may be required based on future revenues generated. The contingent purchase consideration and its subsequent valuation is more fully described in Note 10, Fair Value Measurements.
The following table summarizes the estimated consideration transferred at the acquisition (in thousands):
| | |
Cash consideration | $ | 8,000 |
Contingent purchase consideration (See note 10) | | 6,300 |
Total purchase price | $ | 14,300 |
The following table summarizes the allocation of the purchase price to the fair value of assets acquired for the aforementioned acquisitions (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | RE/MAX of Northern Illinois | | RE/MAX Regional Services | | RE/MAX of New Jersey | | Full House | | RE/MAX of Alaska | | RE/MAX of New York | | Total |
Cash and cash equivalents | | $ | - | | $ | - | | $ | 335 | | $ | - | | $ | - | | $ | 131 | | $ | 466 |
Franchise agreements | | | 23,500 | | | 30,700 | | | 29,700 | | | - | | | 529 | | | 5,000 | | | 89,429 |
Non-compete agreement | | | - | | | - | | | - | | | 2,500 | | | - | | | - | | | 2,500 |
Other assets | | | - | | | - | | | - | | | - | | | - | | | 340 | | | 340 |
Goodwill | | | 12,220 | | | 19,700 | | | 15,300 | | | 11,800 | | | 971 | | | 3,029 | | | 63,020 |
Other liabilities | | | - | | | - | | | (335) | | | - | | | - | | | - | | | (335) |
Total purchase price | | $ | 35,720 | | $ | 50,400 | | $ | 45,000 | | $ | 14,300 | | $ | 1,500 | | $ | 8,500 | | $ | 155,420 |
Each of these constitute a business and were accounted for using the fair value acquisition method. The total purchase price for all acquisitions was allocated to the assets acquired based on their estimated fair values. The excess of the total purchase price over the estimated fair value of the identifiable assets acquired was recorded as goodwill. The goodwill recognized for all acquisitions is attributable to expected synergies and projected long-term revenue growth. All of the goodwill recognized is tax deductible.
Unaudited Pro Forma Financial Information
The following unaudited pro forma financial information reflects the consolidated results of operations of the Company as if the acquisition of the Marketing Funds had occurred January 1, 2018, the acquisition of booj had occurred on January 1, 2017 and the acquisition of RE/MAX of Northern Illinois had occurred on January 1, 2016 and the acquisitions of RE/MAX Regional Services, RE/MAX of New Jersey, RE/MAX of Alaska and RE/MAX of New York had occurred on January 1, 2015.2016. The historical financial information has been adjusted to give effect to events that are (1) directly attributed to the acquisitions, (2) factually supportable and (3) expected to have a continuing impact on the combined results, including additional amortization expense associated with the valuation of the acquired franchise agreements. This unaudited pro forma
information should not be relied upon as necessarily being indicative of the historical results that would have been obtained if the acquisitions had actually occurred on that date, nor of the results that may be obtained in the future.
| | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| (in thousands, except per share amounts) |
Total revenue | $ | 199,769 | | $ | 192,594 | | $ | 189,397 |
Net income attributable to RE/MAX Holdings, Inc. (a) | $ | 13,035 | | $ | 23,533 | | $ | 16,746 |
Basic earnings per common share | $ | 0.74 | | $ | 1.33 | | $ | 1.32 |
Diluted earnings per common share | $ | 0.74 | | $ | 1.33 | | $ | 1.31 |
| (a)
| | Year ended December 31, 2016 includes the net impact of $1.0 million in professional fees and debt extinguishment costs incurred related to the amendment of the Company’s credit facility. See Note 9, Debt for a discussion of the credit facility.
|
Dispositions
| | | | | | |
| | Year Ended December 31, |
| | | 2018 | | | 2017 |
| | (in thousands, except per share amounts) |
Total revenue | | $ | 287,394 | | $ | 205,059 |
Net income attributable to Holdings | | $ | 26,131 | | $ | 7,628 |
Basic earnings per common share | | $ | 1.47 | | $ | 0.43 |
Diluted earnings per common share | | $ | 1.47 | | $ | 0.43 |
Sacagawea, LLC d/b/a RE/MAX Equity Group
On December 31, 2015, the Company sold certain operating assets and liabilities related to 12 owned brokerage offices located in the U.S., of Sacagawea, LLC d/b/a RE/MAX Equity Group (“RE/MAX Equity Group”), a wholly owned subsidiary of the Company. The Company recognized a gain on the sale of the assets of approximately $2.8 million during the fourth quarter of 2015, which is reflected in “Loss (gain) on sale or disposition of assets, net” in the accompanying Consolidated Statements of Income. In connection with this sale, the Company transferred separate office franchise agreements to the purchaser, under which the Company will receive ongoing monthly continuing franchise fees, broker fees and franchise sales revenue. During the third quarter of 2017, the Company recognized a loss of approximately $0.5 million as a revised estimate of the final settlement on certain provisions of the asset sale agreement which is reflected in the “Loss (gain) on sale or disposition of assets, net” in the accompanying Consolidated Statements of Income.
RB2B, LLC d/b/a RE/MAX 100
On April 10, 2015, the Company sold certain operating assets and liabilities related to six owned brokerage offices located in the U.S., of RB2B, LLC d/b/a RE/MAX 100 (“RE/MAX 100”), a wholly owned subsidiary of the Company. The Company recognized a gain on the sale of the assets and the liabilities transferred of $0.6 million during the second quarter of 2015, which is reflected in “Loss (gain) on sale or disposition of assets, net” in the accompanying Consolidated Statements of Income. In connection with this sale, the Company transferred separate office franchise agreements to the purchaser, under which the Company will receive ongoing monthly continuing franchise fees, broker fees and franchise sales revenue.
6.7. Property and Equipment
Property and equipment consist of the following (in thousands):
| | | | | | | | | |
| | | | As of December 31, | |
| | Depreciable Life | | 2017 | | 2016 | |
| | | | | | | | | |
| | | | | As of December 31, |
| | | Depreciable Life | | 2019 | | 2018 |
Leasehold improvements | | Shorter of estimated useful life or life of lease | | $ | 3,227 | | $ | 3,063 | | Shorter of estimated useful life or life of lease | | $ | 3,327 | | $ | 3,278 |
Office furniture, fixtures and equipment | | 1 - 10 years | | | 12,004 | | | 11,824 | | 2 - 10 years | | | 17,057 | | | 14,392 |
| | | | | 15,231 | | | 14,887 | |
Total property and equipment | | | | | | 20,384 | | | 17,670 |
Less accumulated depreciation | | | | | (12,326) | | | (12,196) | | | | | (14,940) | | | (13,280) |
| | | | $ | 2,905 | | $ | 2,691 | |
Total property and equipment, net | | | | | $ | 5,444 | | $ | 4,390 |
Depreciation expense was $0.9$1.7 million, $0.9$1.2 million and $1.0$0.9 million for the years ended December 31, 2019, 2018 and 2017, 2016 and 2015, respectively.
7.8. Intangible Assets and Goodwill
The following table provides the components of the Company’s intangible assets (in thousands, except weighted average amortization period in years):
| | | | | | | | | | | | | | | | | | | | |
| | Weighted | | | | | | | | | | | | | | | | | | |
| | Average | | As of December 31, 2019 | | As of December 31, 2018 |
| | Amortization | | Initial | | Accumulated | | Net | | Initial | | Accumulated | | Net |
| | Period | | Cost | | Amortization | | Balance | | Cost | | Amortization | | Balance |
Franchise agreements | | 12.5 | | $ | 180,867 | | $ | (93,197) | | $ | 87,670 | | $ | 180,867 | | $ | (77,710) | | $ | 103,157 |
Other intangible assets: | | | | | | | | | | | | | | | | | | | | |
Software (a) | | 4.0 | | $ | 36,680 | | $ | (9,653) | | $ | 27,027 | | $ | 20,579 | | $ | (5,802) | | $ | 14,777 |
Trademarks | | 9.3 | | | 1,904 | | | (1,037) | | | 867 | | | 1,857 | | | (839) | | | 1,018 |
Non-compete agreements | | 7.7 | | | 3,700 | | | (1,546) | | | 2,154 | | | 3,700 | | | (896) | | | 2,804 |
Training materials | | 5.0 | | | 2,400 | | | (640) | | | 1,760 | | | 2,350 | | | (157) | | | 2,193 |
Other (b) | | 5.0 | | | 800 | | | (293) | | | 507 | | | 2,389 | | | (216) | | | 2,173 |
Total other intangible assets | | 4.6 | | $ | 45,484 | | $ | (13,169) | | $ | 32,315 | | $ | 30,875 | | $ | (7,910) | | $ | 22,965 |
| | | | | | | | | | | | | | | | | | | | |
| | Weighted | | | | | | | | | | | | | | | | | | |
| | Average | | As of December 31, 2017 | | As of December 31, 2016 |
| | Amortization | | Initial | | Accumulated | | Net | | Initial | | Accumulated | | Net |
| | Period | | Cost | | Amortization | | Balance | | Cost | | Amortization | | Balance |
Franchise agreements | | 12.5 | | $ | 181,567 | | $ | (62,218) | | $ | 119,349 | | $ | 224,167 | | $ | (115,027) | | $ | 109,140 |
Other intangible assets: | | | | | | | | | | | | | | | | | | | | |
Software (a) | | 4.6 | | $ | 13,762 | | $ | (8,111) | | $ | 5,651 | | $ | 13,207 | | $ | (7,154) | | $ | 6,053 |
Trademarks | | 10.2 | | | 1,539 | | | (902) | | | 637 | | | 3,102 | | | (1,782) | | | 1,320 |
Non-compete | | 10.0 | | | 2,500 | | | (312) | | | 2,188 | | | 2,500 | | | (62) | | | 2,438 |
Total other intangible assets | | 6.4 | | $ | 17,801 | | $ | (9,325) | | $ | 8,476 | | $ | 18,809 | | $ | (8,998) | | $ | 9,811 |
| (a) | (a)
| | As of December 31, 20172019, and December 31, 2016,2018, capitalized software development costs of $0.6$10.5 million and $0.4 $4.5 million, respectively, were recorded in “Other intangible assets” in the accompanying Consolidated Balance Sheets. As of these dates, the associated informationrelated to technology infrastructure projects were not yet complete and ready for their intended use and thus were not subject to amortization. |
| (b) | Other consists of customer relationships and a favorable market lease, both obtained in connection with the acquisition of booj. The favorable market lease was subsumed into “Operating lease right of use assets” on the accompanying Consolidated Balance Sheet upon adopting the new lease standard on January 1, 2019. See Note 2, Summary of Significant Accounting Policies for additional information. |
Amortization expense was $19.6$20.6 million, $15.2$19.5 million and $14.1$19.6 million for the years ended December 31, 2019, 2018 and 2017, 2016 and 2015, respectively. Amounts for the year ended December 31, 2017 include the franchise agreement measurement period adjustment of $0.8 million. Refer to Note 5, Acquisitions and Dispositions for additional information.
As of December 31, 2017,2019, the estimated future amortization expense for the next five years related to intangible assets includes the estimated amortization expense associated with definite livesthe Company’s intangible assets assumed with the acquisition of booj and is as follows (in thousands):
| | | |
| | | | |
Year ending December 31: | | | | | | |
2018 | | $ | 17,614 | |
2019 | | | 17,482 | |
2020 | | | 17,288 | | $ | 25,438 |
2021 | | | 16,775 | | | 25,122 |
2022 | | | 14,511 | | | 21,946 |
| | $ | 83,670 | |
2023 | | | | 14,594 |
2024 | | | | 12,146 |
| | | $ | 99,246 |
The following table presents changes to goodwill for the period from January 1, 20162018 to December 31, 20172019 (in thousands):
| | | | | | | | | |
| | RE/MAX
Franchising | | Motto Franchising | | Total |
Balance, January 1, 2018 | | $ | 123,413 | | $ | 11,800 | | $ | 135,213 |
Goodwill recognized related to acquisitions(a) | | | 15,039 | | | — | | | 15,039 |
Adjustments to acquisition accounting during the measurement period | | | 700 | | | — | | | 700 |
Effect of changes in foreign currency exchange rates | | | (268) | | | — | | | (268) |
Balance, December 31, 2018 | | | 138,884 | | | 11,800 | | | 150,684 |
Goodwill recognized related to acquisitions(a) | | | 8,207 | | | — | | | 8,207 |
Effect of changes in foreign currency exchange rates | | | 147 | | | — | | | 147 |
Balance, December 31, 2019 | | $ | 147,238 | | $ | 11,800 | | $ | 159,038 |
| | | |
Balance, January 1, 2016 | | $ | 71,871 |
Goodwill recognized related to acquisitions | | | 54,665 |
Effect of changes in foreign currency exchange rates | | | 97 |
Balance, December 31, 2016 | | | 126,633 |
Goodwill recognized related to current year acquisitions | | | 12,220 |
Adjustments to acquisition accounting during the measurement period | | | (3,865) |
Effect of changes in foreign currency exchange rates | | | 225 |
Balance, December 31, 2017 | | $ | 135,213 |
| (a) | The purpose of the booj and First acquisitions is to deliver technology solutions to RE/MAX franchisees and agents. As such, the Company allocated the goodwill arising from these acquisitions to RE/MAX Franchising. See Note 6, Acquisitions for additional information. |
8.9. Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
| | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
Marketing Funds (a) | | $ | 39,672 | | $ | — |
Accrued payroll and related employee costs | | | 11,900 | | | 6,517 |
Accrued taxes | | | 2,451 | | | 1,480 |
Accrued professional fees | | | 2,047 | | | 2,010 |
Other | | | 4,093 | | | 3,136 |
| | $ | 60,163 | | $ | 13,143 |
| | | | | | |
| | As of December 31, |
| | 2017 | | 2016 |
Accrued payroll and related employee costs | | $ | 3,874 | | $ | 7,035 |
Accrued taxes | | | 1,635 | | | 1,554 |
Accrued professional fees | | | 2,339 | | | 1,382 |
Other(a) | | | 7,542 | | | 3,297 |
| | $ | 15,390 | | $ | 13,268 |
| (a) | (a)
| | Other accruedConsists primarily of liabilities include a $4.5 million payablerecognized to reflect the contractual restriction that all funds collected in connection with the February 13, 2018 settlement resulting fromMarketing Funds must be spent for designated purposes. See Note 2, Summary of Significant Accounting Policies for additional information. As previously noted, the litigation matter concerning the Company’s 2013 acquisition of the net assets of Tails, Inc. (“Tails”), as discussed in Note 14, Commitments and Contingencies.
Marketing Funds were acquired on January 1, 2019. |
9.10. Debt
Debt, net of current portion, consists of the following (in thousands):
| | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
Senior Secured Credit Facility | | $ | 227,363 | | $ | 229,713 |
Other long-term financing(a) | | | 362 | | | 635 |
Less unamortized debt issuance costs | | | (1,182) | | | (1,481) |
Less unamortized debt discount costs | | | (862) | | | (1,080) |
Less current portion(a) | | | (2,648) | | | (2,622) |
| | $ | 223,033 | | $ | 225,165 |
| | | | | | |
| | As of December 31, |
| | 2017 | | 2016 |
2016 Senior Secured Credit Facility | | $ | 232,063 | | $ | 234,412 |
Less unamortized debt issuance costs | | | (1,780) | | | (2,076) |
Less unamortized debt discount costs | | | (1,297) | | | (1,516) |
Less current portion | | | (2,350) | | | (2,350) |
| | $ | 226,636 | | $ | 228,470 |
| (a) | Includes financing assumed with the acquisition of booj. As of December 31, 2019 and 2018, the carrying value of this financing approximates the fair value. |
Maturities of debt are as follows (in thousands):
| | | |
Year Ended December 31, 2019 | | | |
2020 | | $ | 2,648 |
2021 | | | 2,414 |
2022 | | | 2,350 |
2023 | | | 220,313 |
| | $ | 227,725 |
| | |
Year Ending December 31: | | |
2018 | $ | 2,350 |
2019 | | 2,350 |
2020 | | 2,350 |
2021 | | 2,350 |
2022 | | 2,350 |
Thereafter | | 220,313 |
| $ | 232,063 |
Senior Secured Credit Facility
OnIn July 31, 2013, the Company entered into a new credit agreement with several lenders and administered by a bank, referred to herein as the “2013 Senior Secured Credit Facility.” The 2013 Senior Secured Credit Facility consisted of a $230.0 million term loan facility and a $10.0 million revolving loan facility.
On March 11, 2015, the 2013 Senior Secured Credit Facility was amended, providing for an increase to the maximum applicable margin for both London Interbank Offered Rate (“LIBOR”) and Alternate Base Rate (“ABR”) loans by 0.25%, and a modification of certain liquidity covenants in order to increase the amounts the Company may distribute in the form of dividends to its non-controlling unitholders and stockholders of its Class A common stock, referred to herein as the “First Amendment.” In connection with the First Amendment, the Company incurred costs of $1.1 million during the year ended December 31, 2015, of which $0.6 million was recorded as an unamortized debt discount and is being amortized over the remaining term of the 2013 Senior Secured Credit Facility and the remaining $0.5 million was expensed as incurred.
On November 22, 2016, the 2013 Senior Secured Credit Facility was further amended, providing for an increase in the revolving commitment by $20.0 million to a total of $30.0 million effective upon the acquisition of RE/MAX Regional Services, and also waived certain limitations on acquisitions in order to enable us to consummate such acquisition.
On December 15, 2016, the 2013 Senior Secured Credit Facility was amended and restated, referred to herein as the “2016 Senior“Senior Secured Credit Facility.” The 2016 Senior Secured Credit Facility consists of a $235.0 million term loan facility which matures on December 15, 2023 and a $10.0 million revolving loan facility which must be repaid on December 15, 2021. The proceeds provided by the term loan were used to refinance and repay existing indebtedness and fund the acquisition of RE/MAX Regional Services. In connection with the 2016 Senior Secured Credit Facility, the Company incurred costs of $3.5 million during the year ended December 31, 2016, of which $1.4 million was recorded in “Debt, net of current portion” in the accompanying Consolidated Balance Sheets and is being amortized to interest expense over the term of the 2016 Senior Secured Credit Facility and the remaining $2.1 million was expensed as incurred.
Borrowings under the term loans and revolving loans accrue interest, at ourthe Company’s option on (a) LIBOR provided that LIBOR shall be no less than 0.75% plus a maximuman applicable margin of 2.75% and, provided further, that LIBOR shall be adjusted for reserve requirements for eurocurrency liabilities, if any (the “Eurodollar Rate”“LIBOR rate”) or (b) the greatest of (i)
JPMorgan Chase Bank N.A.’s prime rate, (ii) the NYFRB Rate (as defined in the 2016 Senior Secured Credit Facility) plus 0.50% and (iii) the one-month Eurodollar Rate plus 1%, (such greatest rate, the “ABR”) plus, in each case, the applicable margin. The applicable margin for Eurodollar Rate loans is 2.75% and for ABR loans is 1.75%.
The 2013 Senior Secured Credit Facility required RE/MAX, LLC to repay term loans with 50% As of excess cash flow at the end of the applicable year if its total leverage ratio as defined therein was in excess of 2.50:1.00, with such percentage decreasing as RE/MAX, LLC’s leverage ratio decreased. Under the 2013 Senior Secured Credit Facility,December 31, 2019, the Company was required to make principal payments outselected the LIBOR rate resulting in an interest rate on the term loan facility of excess cash flow, as well as from the proceeds of certain asset sales, proceeds from the issuance of indebtedness and from insurance recoveries. The Company made excess cash flow prepayments of $12.7 million and $7.3 million during the years ended December 31, 2016 and 2015, respectively. The Company accounted for the mandatory principal excess cash flow prepayments as early extinguishments of debt and recorded a loss during each of the years ended December 31, 2016 and 2015 of $0.1 million related to unamortized debt discount and issuance costs. 4.55%.
The 2016 Senior Secured Credit Facility requires RE/MAX, LLC to repay term loans and reduce revolving commitments with (i) 100.0% of proceeds of any incurrence of additional debt not permitted by the 2016 Senior Secured Credit Facility, (ii) 100.0% of proceeds of asset sales and 100.0% of amounts recovered under insurance policies, subject to certain exceptions and a reinvestment right and (iii) 50.0% of excess cash flow at the end of the applicable fiscal year if RE/MAX, LLC’s total leverage ratio as defined in the 2016 Senior Secured Credit Facility is in excess of 3.25:1.00, with such percentage decreasing to zero as RE/MAX, LLC’s leverage ratio decreases. No mandatory prepayment and commitment reduction is required if the total leverage ratio as defined by the 2016 Senior Secured Credit Facility as of the last day of such fiscal year is less thandecreases below 2.75 to 1.0. The Company’s total leverage ratio was less than 2.75 to 1.0 as of December 31, 2017,2019, and as a result, the Company does not expect to make an excess cash flow principal prepayment within the next 12-month period. Mandatory principal payments of approximately $0.6 million are due quarterly until the facility matures on December 15, 2023. The Company may make optional prepayments on the term loan facility at any time without penalty; however, no0 such optional prepayments were made during the year ended December 31, 2017.2019.
As of December 31, 2017, the Company had $229.0 million of term loans outstanding, net of an unamortized discount and issuance costs, and no revolving loans outstanding under our 2016 Senior Secured Credit Facility. Whenever amounts are drawn under the revolving line of credit, the 2016 Senior Secured Credit Facility requires compliance with a leverage ratio and an interest coverage ratio. A commitment fee of 0.5% per annum accrues on the amount of unutilized revolving line of credit. As of December 31, 2017, no2019, 0 amounts were drawn on the revolving line of credit.
The 2016 Senior Secured Credit Facility requires compliance with certain operational and financial covenants to the extent the Company has an outstanding balance on its revolving loan facility at the end of each quarter. The Company did not have an outstanding balance on the revolving loan facility as of December 31, 2017 and 2016, as such, no operational or financial covenants were in effect. The Company received certain limited waivers and extensions related to its obligation to deliver timely financial information.
10.11. Fair Value Measurements
Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should beis determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering assumptions, the Company follows a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
| ·
● | | Level 1: Quoted prices for identical instruments in active markets. |
| ·
● | | Level 2: Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations, in which all significant inputs are observable in active markets. The fair value of the Company’s debt reflects a Level 2 measurement and was estimated based on the amount that the Company would pay to enter into the identical liability, since quoted prices for the Company’s debt instruments are not available. in an inactive market. |
| ·
● | | Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions. Level 3 liabilities that are measured at fair value on a recurring basis consist of the Company’s contingent consideration related to the acquisition of Full House. Motto. |
A summary of the Company’s liabilities measured at fair value on a recurring basis as of December 31, 2017 and 2016 is as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| | As of December 31, 2017 | | As of December 31, 2016 | |
| | Fair Value | | Level 1 | | Level 2 | | Level 3 | | Fair Value | | Level 1 | | Level 2 | | Level 3 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | As of December 31, 2019 | | As of December 31, 2018 |
| | | Fair Value | | Level 1 | | | | Level 3 | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Contingent consideration | | $ | 6,580 | | $ | - | | $ | - | | $ | 6,580 | | $ | 6,400 | | $ | - | | $ | - | | $ | 6,400 | | $ | 5,005 | | $ | — | | — | | $ | 5,005 | | $ | 5,070 | | $ | — | | $ | — | | $ | 5,070 |
The Company is required to pay additional purchase consideration totaling eight percent8% of gross revenues generatedreceipts collected by Motto for each year beginning October 1, 2017(the “Revenue Share Year”) through September 30, 2026, with no limitation as to the maximum payout. The annual payment is required to be made within 120 days of the end of each Revenue Share Year. Each Revenue Share Year ends September 30. The fair value of the contingent purchase consideration represents the forecasted discounted cash payments that the Company expects to pay the former owner of Full House with respect to Motto. The Company measures this liability each reporting period and recognizes changes in fair value, if any, in earnings of the Company. Any changes are included in “Selling, operating and administrative expenses” in the accompanying Consolidated Statements of Income.pay. Increases or decreases in the fair value of the contingent purchase consideration can result from changes in discount rates as well as the timing and amount of forecasted cash payments derived from anticipated gross revenues. The forecasted revenue growth assumption that is most sensitive related to assumed franchise sales count for which the forecast assumes between 50 and 80 franchises sold annually. This assumption is based on historical sales and an assumption of growth over time. A 10% reduction in the number of franchise sales would decrease the liability by $0.3 million. A 1% change to the discount rate applied to the forecast changes the liability by approximately $0.2 million. The Company measures this liability each reporting period and recognizes changes in fair value, if any, in “Selling, operating and administrative expenses” in the accompanying Consolidated Statements of Income.
The table below presents a reconciliation of all assets and liabilities of the Company measured at fair value on a recurring basis using significant unobservable inputs for the period from January 1, 2016 to December 31, 2017contingent consideration (in thousands):
| | | |
Balance at January 1, 2018 | | $ | 6,580 |
Fair value adjustments (a) | | | (1,289) |
Cash payments | | | (221) |
Balance at December 31, 2018 | | | 5,070 |
Fair value adjustments (a) | | | 241 |
Cash payments | | | (306) |
Balance at December 31, 2019 | | $ | 5,005 |
| | | |
| | Fair Value of Contingent Consideration Liability |
Balance at January 1, 2016 | | $ | - |
Full House acquisition | | | 6,300 |
Fair value adjustments | | | 100 |
Balance at December 31, 2016 | | | 6,400 |
Fair value adjustments | | | 180 |
Balance at December 31, 2017 | | $ | 6,580 |
| (a) | Fair value adjustments relate to realignment of future franchise sales assumptions to more closely reflect historical sales trends from inception to date. |
The Company assesses categorization of assets and liabilities by level at each measurement date, and transfers between levels are recognized on the actual date of the event or change in circumstances that caused the transfer. There were no0 transfers between Levels 1, 2I, II and 3 IIIduring the year ended December 31, 2017.
The following table summarizes the carrying valuesvalue and estimated fair value of the 2016 Senior Secured Credit Facility as of December 31, 2017 and 2016 (in thousands):
| | | | | | | | | | | | |
| | As of December 31, |
| | 2017 | | 2016 |
| | Carrying Amount | | Fair Value Level 2 | | Carrying Amount | | Fair Value Level 2 |
Senior Secured Credit Facility | | $ | 228,986 | | $ | 232,933 | | $ | 230,820 | | $ | 233,240 |
| | | | | | | | | | | | |
| | December 31, | | December 31, |
| | 2019 | | 2018 |
| | Carrying
Amount | | Fair Value
Level 2 | | Carrying
Amount | | Fair Value
Level 2 |
Senior Secured Credit Facility | | $ | 225,319 | | $ | 227,363 | | $ | 227,152 | | $ | 221,673 |
11.12. Income Taxes
“Income before provision for income taxes” as shown in the accompanying Consolidated Statements of Income is comprised of the following (in thousands):
| | | | | | | | | | |
| | Year Ended December 31, | |
| | 2017 | | 2016 | | 2015 | |
| | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
Domestic | | $ | 78,812 | | $ | 51,194 | | $ | 51,552 | | $ | 44,343 | | $ | 52,798 | | $ | 77,346 |
Foreign | | | 11,943 | | | 11,305 | | | 11,253 | | | 13,422 | | | 13,366 | | | 11,516 |
Total | | $ | 90,755 | | $ | 62,499 | | $ | 62,805 | | $ | 57,765 | | $ | 66,164 | | $ | 88,862 |
Components of the “Provision for income taxes” in the accompanying Consolidated Statements of Income consist of the following (in thousands):
| | | | | | | | | | |
| | Year Ended December 31, | |
| | 2017 | | 2016 | | 2015 | |
| | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 |
Current | | | | | | | | | | | | | | | | | | |
Federal | | $ | 3,568 | | $ | 8,002 | | $ | 5,451 | | $ | 2,533 | | $ | 1,393 | | $ | 3,239 |
Foreign | | | 4,345 | | | 2,855 | | | 3,019 | | | 4,929 | | | 4,738 | | | 5,203 |
State and local | | | 1,169 | | | 943 | | | 1,029 | | | 1,137 | | | 700 | | | 1,169 |
Total current expense | | | 9,082 | | | 11,800 | | | 9,499 | | | 8,599 | | | 6,831 | | | 9,611 |
Deferred expense | | | | | | | | | | | | | | | | | | |
Federal | | | 45,934 | | | 3,222 | | | 2,333 | | | 2,084 | | | 8,795 | | | 47,045 |
Foreign | | | (9) | | | 13 | | | 25 | | | (142) | | | 12 | | | 323 |
State and local | | | 569 | | | 238 | | | 173 | | | 368 | | | 704 | | | 563 |
Total deferred expense | | | 46,494 | | | 3,473 | | | 2,531 | | | 2,310 | | | 9,511 | | | 47,931 |
Provision for income taxes | | $ | 55,576 | | $ | 15,273 | | $ | 12,030 | | $ | 10,909 | | $ | 16,342 | | $ | 57,542 |
The provision for income taxes is comprised of a provision for income taxes attributable to RE/MAX Holdings and to entities other than RE/MAX Holdings.
The provision for income taxes attributable to RE/MAX Holdings includes all U.S. federal and state income taxes on RE/MAX Holdings’ proportionate share of RMCO’s net income. The provision for income taxes attributable to entities other than RE/MAX Holdings represents taxes imposed directly on RMCO and its subsidiaries, primarily foreign taxes that are allocated to the non-controlling interest.
A reconciliation of the U.S. statutory income tax rate to the Company’s effective tax rate is as follows:
| | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2019 | | 2018 | | 2017 |
U.S. statutory tax rate | | | 21.0 | % | | 21.0 | % | | 35.0 | % |
Increase due to state and local taxes, net of federal benefit | | | 3.1 | | | 3.1 | | | 2.6 | |
Non-creditable foreign taxes | | | 1.1 | | | 1.2 | | | - | |
Foreign derived intangible income deduction | | | (1.5) | | | (1.3) | | | - | |
Income attributable to non-controlling interests | | | (7.2) | | | (7.3) | | | (12.5) | |
Uncertain Tax Positions | | | 1.0 | | | 0.8 | | | 0.6 | |
Other | | | 1.4 | | | (0.8) | | | (0.8) | |
Subtotal | | | 18.9 | | | 16.7 | | | 24.9 | |
Impact of TRA adjustment on NCI (a) | | | - | | | 0.7 | | | 4.5 | |
Effect of permanent difference - TRA adjustment (b) | | | - | | | (2.2) | | | (13.6) | |
Tax Reform Rate Change (c) | | | - | | | - | | | 49.0 | |
Valuation allowance recognized on basis step-ups | | | - | | | 9.5 | | | - | |
| | | 18.9 | % | | 24.7 | % | | 64.8 | % |
| | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2017 | | | 2016 | | | 2015 | |
U.S. statutory tax rate | | | 35.0 | % | | 35.0 | % | | 35.0 | % |
Increase due to state and local taxes, net of federal benefit | | | 2.6 | | | 2.6 | | | 2.6 | |
Effect of permanent differences | | | (0.1) | | | (0.2) | | | 1.2 | |
Income attributable to non-controlling interests | | | (12.5) | | | (14.1) | | | (19.7) | |
Other | | | 0.2 | | | 1.1 | | | 0.1 | |
Subtotal | | | 25.2 | | | 24.4 | | | 19.2 | |
Impact of reduction in TRA liability on non-controlling interests(a) | | | 4.5 | | | - | | | - | |
Effect of permanent difference – reduction in TRA liability(b) | | | (13.6) | | | - | | | - | |
Tax Cuts and Jobs Act rate change(c) | | | 45.1 | | | - | | | - | |
| | | 61.2 | % | | 24.4 | % | | 19.2 | % |
| (a) | (a)
| | Reflects additional impact of non-controlling interest adjustment being on a larger base of income that includes the gain on reduction in TRA liability. |
| (b) | (b)
| | Reflects the impact of gain on TRA liability reduction, which is not taxable. |
| (c) | (c)
| | Reflects reduction in deferred tax assets and resulting increase in deferred tax expense due to U.S. Federal rate declining from 35% to 21%. |
OnIn December 22, 2017, the Tax CutsCut and Jobs Act (the “TCJA”) was enacted. The Tax Cuts and Jobs Act includesenacted, which included a significant changes toreduction in the U.S. corporate tax system, including a federal corporate rate reduction from 35% to 21%. The Company’s effective tax rate includes a rate benefit attributable to the fact that the Company’s subsidiaries operate as a series of limited liability companies which are not themselves subject to federal income tax. Accordingly, the portion of the Company’s subsidiaries earnings attributable to the non-controlling interest are subject to tax when reported as a component of the non-controlling interests’ taxable income and are excluded from the Provision for Income Taxes. The reduction in the corporate tax rate from 35% to 21% resulted in substantial reductionsalong with several changes to taxation of foreign derived income. In 2017, the Company’s deferred tax assets and the TRA liability. The deferred tax asset was reduced for the impact of the lower rate, resulting inCompany recorded a $42.8 million charge to “Provision for income taxes” in the accompanying Consolidated Statements of Income for the reduction in the value of $40.9 million.its deferred tax assets related to this tax rate change (reflected in the rate reconciliation table above as a 49.0% adjustment in 2017). Correspondingly, the TRA liability was alsoliabilities were reduced forbecause of the rate change, resulting in a benefit to operating income of $32.7 million. The net effect onof these two adjustments was a reduction to 2017 net income was $8.2of $10.1 million.
On December 22,When the aforementioned adjustments were recorded in 2017, the Company was still evaluating several aspects of the TCJA, most notably around foreign derived income.
In 2018, the Company completed its evaluation of the impacts to its foreign derived income, particularly the tax credits received for foreign taxes and deductions allowed under the newly created foreign-derived intangible income deduction. The SEC staff issued Staff Accounting Bulletin 118 and later ASU 2018-05, which provides guidance on accounting for the tax effectsprovided all companies through December of 2018 to finalize provisional estimates of the Tax Cuts and Jobs Act for which the accounting under ASC 740, Income Taxes (“ASC 740”) is incomplete. To the extent that a company's accounting for certain income tax effectsimpacts of the Act is incomplete but it is ableTCJA.
Starting with tax year 2018, the Company has foreign tax credit limitation due to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisionsU.S. federal tax rate being lower than many foreign jurisdictions, particularly Canada. Certain of the tax laws that werebasis step-ups, described in effect immediately before enactment of the Tax Cuts and Jobs Act.
As of December 31, 2017, we have completed the majority of our accounting for the tax effects of the Tax Cuts and Jobs Act. However, our analysis around the new foreign-derived intangible income (“FDII”) deduction is incomplete. As such, we have not estimated or included a provisional adjustment for deferred tax assetsNote 4, Non-controlling interest, are related to intangible assets from the FDII deduction. Also, there is uncertainty aroundCompany’s Western Canada operations. The deductions expected to be taken from these tax basis step-ups are no longer expected to be realized by the depreciable life of qualified property as well as eligibility for accelerated depreciation after September 27, 2017. Therefore we have not estimatedCompany due to now being subject to a provisional amount for deferredforeign tax assetscredit limitation. As a result, the Company recognized a $6.3 million valuation allowance against the related to qualified property depreciation expense. In addition, we also re-measured the applicable deferred tax assets and an increase in “Provision for income taxes” in the accompanying Consolidated Statements of Income (reflected in the rate reconciliation table above as a 9.5% adjustment in 2018). The loss in value of the step-up, along with other less significant changes, also reduced the value of the TRA liabilities, basedresulting in a $6.1 benefit to operating income. The net impact of these items was insignificant to net income. In addition, the Company is now limited on the rates at which theyamount of foreign tax credit that can be claimed in its U.S. return.
The Company will continue to evaluate tax planning opportunities as well as monitor any changes that might be contained in the final regulations related to foreign derived income. Such remaining final regulations are expected to reverse. However, we are still analyzing certain aspects of the Tax Cuts and Jobs Act and are refining our calculations, which could potentially affect the measurement of these balances.in 2020.
Income taxes (payable) receivable, (payable)net were $0.7($4.3) million and $(0.4)$0.3 million at December 31, 20172019 and 2016,2018, respectively.
Deferred income taxes are provided for the effects of temporary differences between the tax basis of an asset or liability and its reported amount in the accompanying Consolidated Balance Sheets.
These temporary differences result in taxable or deductible amounts in future years. Details of the Company’s deferred tax assets and liabilities are summarized as follows (in thousands):
| | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
Long-term deferred tax assets | | | | | | |
Goodwill, other intangibles and other assets | | $ | 42,800 | | $ | 48,427 |
Imputed interest deduction pursuant to tax receivable agreements | | | 2,651 | | | 2,719 |
Operating lease liabilities | | | 1,618 | | | 1,845 |
Compensation and benefits | | | 3,043 | | | 2,131 |
Allowance for doubtful accounts | | | 1,629 | | | 944 |
Motto contingent liability | | | 783 | | | 748 |
Deferred revenue | | | 3,706 | | | 3,939 |
Foreign tax credit carryforward | | | 1,862 | | | 1,259 |
Net operating loss | | | 2,641 | | | — |
Other | | | 950 | | | 1,435 |
Total long-term deferred tax assets | | | 61,683 | | | 63,447 |
Valuation allowance (a) | | | (7,184) | | | (7,051) |
Total long-term deferred tax assets, net of valuation allowance | | | 54,499 | | | 56,396 |
Long-term deferred tax liabilities | | | | | | |
Property and equipment and other long lived assets | | | (1,494) | | | (2,944) |
Other | | | (703) | | | — |
Total long-term deferred tax liabilities | | | (2,197) | | | (2,944) |
Net long-term deferred tax assets | | | 52,302 | | | 53,452 |
Total deferred tax assets and liabilities | | $ | 52,302 | | $ | 53,452 |
| | | | | | |
| | As of December 31, |
| | 2017 | | 2016 |
Long-term deferred tax assets | | | | | | |
Goodwill, other intangibles and other assets | | $ | 52,385 | | $ | 90,686 |
Imputed interest deduction pursuant to tax receivable agreements | | | 3,052 | | | 8,483 |
Rent liabilities | | | 1,878 | | | 2,037 |
Compensation and benefits | | | 526 | | | 1,606 |
Allowance for doubtful accounts | | | 687 | | | 979 |
Motto contingent liability | | | 929 | | | 1,405 |
Deferred Revenue | | | 171 | | | — |
Other | | | 393 | | | 855 |
Total long-term deferred tax assets | | | 60,021 | | | 106,051 |
Long-term deferred tax liabilities | | | | | | |
Property and equipment and other long lived assets | | | (1,021) | | | (414) |
Total long-term deferred tax liabilities | | | (1,021) | | | (414) |
Net long-term deferred tax assets | | | 59,000 | | | 105,637 |
Total deferred tax assets and liabilities | | $ | 59,000 | | $ | 105,637 |
| (a) | Includes a valuation allowance on deferred tax assets for goodwill and intangibles in the Company’s Western Canada operations, as well as foreign tax credit carryforwards. |
As of December 31, 2019, the Company generated $1.1 million in unutilized foreign tax credits. These credits may be carried back one year and carried forward for 10 years until utilized. This amount is included in the valuation allowance as of December 31, 2019.
Net deferred tax assets are also recorded related to differences between the financial reporting basis and the tax basis of RE/MAX Holdings’ proportionate share of the net assets of RMCO. Based on the Company’s historical taxable income and its expected future earnings, management evaluates the uncertainty associated with booking tax benefits and determined thatdetermines whether the deferred tax assets are more likely than not to be realized, including evaluation of deferred tax liabilities and the expectation of future taxable income. If not expected to be realized, a valuation allowance is recognized to offset the deferred tax asset.
The Company does not believe it has any significant uncertain tax positions. Accordingly, the Company did not record any adjustments or recognize interest expense for uncertain tax positions for the years ended December 31, 2017, 2016 and 2015. In the future, if uncertain tax positions arise, interest and penalties will be accrued and included in the “Provision for income taxes” in the accompanying Consolidated Statements of Income.
The Company and its subsidiaries file, or will file, income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. RE/MAX Holdings will file its 20172019 income tax returnreturns by October 15, 2018.2020. RMCO is not subject to domestic federal income taxes as it is a flow-through entity; however, RMCO is still required to file an annual U.S. Return of Partnership Income. With respect to state and local jurisdictions and countries outside of the U.S., the Company and its subsidiaries are typically subject to examination for three to four years after the income tax returns have been filed. As such, income tax returns filed since 20132015 are subject to examination.
Uncertain Tax Positions
12. Equity-Based CompensationIn 2019, the Company corrected immaterial errors to recognize uncertain tax position liabilities, and related tax expense for certain foreign tax matters, along with deferred tax assets for amounts of such foreign taxes expected to be creditable
in the U.S. The Company concluded that the omission of tax expense for these matters from prior period financials was immaterial to each of the affected reporting periods and therefore amendment of previously filed reports was not required. However, the Company corrected those amounts in the prior years included herein. These adjustments resulted in an increase in “Provision for income taxes” of $0.5 million for each of the years ended December 31, 2018, and 2017, respectively. In addition, the Company recognized an uncertain tax position liability of $5.8 million (including interest and penalties), an income tax receivable of $1.4 million, a deferred tax asset of $0.2 million and a resulting reduction in “Total stockholders’ equity” of $4.2 million as of December 31, 2018 in the Consolidated Balance Sheets. The Company recognized a $3.7 million reduction in “Total stockholders’ equity” in the Consolidated Statements of Stockholders’ Equity as of December 31, 2017 in relation to this correction.
While the Company believes the liabilities recognized for uncertain tax positions are adequate to cover reasonably expected tax risks, there can be no assurance that an issue raised by a tax authority will be resolved at a cost that does not exceed the liability recognized. Interest and penalties are accrued on uncertain tax positions and included in the “Provision for income taxes” in the accompanying Consolidated Statements of Income.
Uncertain tax position liabilities represent the aggregate tax effect of differences between the tax return positions and the amounts otherwise recognized in the consolidated financial statements and are recognized in “Income taxes payable” in the Consolidated Balance Sheets. A reconciliation of the beginning and ending amount, excluding interest and penalties is as follows:
| | | | | | |
| | As of December 31, |
| | 2019 | | | 2018 |
Balance, January 1 | | $ | 4,278 | | $ | 3,703 |
Increase related to current period tax positions | | | 532 | | | 575 |
Balance, December 31(a) | | $ | 4,810 | | $ | 4,278 |
| (a) | Excludes accrued interest and penalties of $1.9 million and $1.5 million for the years ended December 31, 2019 and 2018, respectively. These related interest and penalties are recognized in “Income taxes payable” within the Consolidated Balance Sheets. |
The Company’s Boarduncertain tax position has a reasonable possibility of Directors adoptedbeing paid within the next 12 months.
13. Equity-Based Compensation
The RE/MAX Holdings, Inc. 2013 Omnibus Incentive Plan (the “2013 Incentive“Incentive Plan”), under which 3,576,466 shares are currently authorized. (See below for shares available for grant at December 31, 2017.) The 2013 Incentive Plan provides for the grant of incentive stock options to the Company’s employees, and for the grant of shares of the RE/MAX Holdings Class A common stock, non-qualified stock options, stock appreciation rights, includes restricted stock restricted stock units (“RSUs”) which may have time-based or performance-based vesting criteria, dividend equivalent rights, cash-based awards and any combination thereof to employees, directors and consultants of the Company.
criteria. The Company recognizes equity-based compensation expense in “Selling, operating and administrative expenses” in the accompanying Consolidated Statements of Income. The Company recognizes corporate income tax benefits relating to the exercise of options and vesting of restricted stock units in “Provision for income taxes” in the accompanying Consolidated Statements of Income.
Employee stock-based compensation expense under the Company’s 2013 Incentive Plan, wasnet of the amount capitalized in internally developed software, is as follows (in thousands):
| | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
Expense from Time-based awards (a) | $ | 7,554 | | $ | 5,189 | | $ | 2,523 |
Expense from Performance-based awards (a)(b) | | (179) | | | 4,126 | | | 377 |
Expense from bonus to be settled in shares (c) | | 3,788 | | | — | | | — |
Equity-based compensation capitalized (a) | | (229) | | | (139) | | | — |
Equity-based compensation expense | | 10,934 | | | 9,176 | | | 2,900 |
Tax benefit from equity-based compensation | | (1,548) | | | (1,297) | | | (637) |
Deficit / (excess) tax benefit from equity-based compensation | | 55 | | | (145) | | | (324) |
Net compensation cost | $ | 9,441 | | $ | 7,734 | | $ | 1,939 |
| | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Expense from Time-based RSUs | $ | 2,523 | | $ | 2,330 | | $ | 1,453 |
Expense from Performance-based RSUs | | 377 | | | - | | | - |
Equity-based compensation expense | | 2,900 | | | 2,330 | | | 1,453 |
Tax benefit from equity-based compensation | | (637) | | | (511) | | | (231) |
Excess tax benefit from equity-based compensation | | (324) | | | (261) | | | (2,770) |
Net compensation cost | $ | 1,939 | | $ | 1,558 | | $ | (1,548) |
| (a) | Includes expense recognized and costs capitalized in connection with the awards granted to booj employees and former owners at the time of acquisition. |
| (b) | Expense recognized for performance-based awards is re-assessed each quarter based on expectations of achievement against the performance conditions. For the year ended December 31, 2019, the Company reversed expense that had been recognized in 2018 for awards granted for certain booj work deliverables. This reversal was primarily a result of modifying the awards to extend the due date of the performance conditions, primarily through December 31, 2019, as the achievement of the goals at the previous date was no longer probable. Accounting for these modifications resulting in the reversal of the cumulative expense previously recognized and expensing the modified awards over the new vesting period resulting in a net $0.3 million recognized in 2019. Also, for the year ended December 31, 2019, certain conditions were no longer deemed probable of being met for other performance awards tied to the achievement of a revenue target measured over a three-year performance period. The cumulative expense previously recognized was reversed in the current period, resulting in a negative expense of ($0.5) million in 2019. |
| (c) | In 2019, the Company revised its annual bonus plan so that half of the bonus for most employees will be settled in shares. The share amounts to be issued will be determined based on the stock price at the time of vesting in early 2020. These amounts are recognized as “Accrued liabilities” in the accompanying Consolidated Balance Sheets and are not included in “Additional paid-in capital” until shares are issued. |
Time-based Restricted Stock Units
Time-based RSUs granted under the 2013 Incentive Planrestricted stock units (“RSUs”) are valued using the Company’s closing stock price on the date of grant. Grants awarded to the Company’s Board of Directors generally vest over a one yearone-year period. Grants awarded to the Company’s employees, other than booj employees and former owners in connection with the acquisition, generally vest equally in annual installments over a three yearthree-year period. Grants awarded to booj employees and former owners in connection with the acquisition vest in 3 installments over a four-year period. Compensation expense is recognized on a straight linestraight-line basis over the vesting period.
The following table summarizes equity-based compensation activity related to time-based RSUs for the year ended December 31, 2017:RSUs:
| | | | | |
| | RSUs | | Weighted average
grant date fair
value per share |
Balance, January 1, 2019 | | 298,610 | | $ | 51.97 |
Granted (a) | | 257,087 | | $ | 38.43 |
Shares vested (including tax withholding) (b) | | (80,008) | | $ | 43.30 |
Forfeited | | (20,237) | | $ | 45.41 |
Balance, December 31, 2019 | | 455,452 | | $ | 46.15 |
| | | | | |
| | | | | |
| | Time-based restricted stock units | | | Weighted average grant date fair value per share |
Balance, January 1, 2017 | | 127,011 | | $ | 33.00 |
Granted | | 43,450 | | $ | 55.45 |
Shares vested (including tax withholding)(a) | | (58,426) | | $ | 33.03 |
Forfeited | | (6,173) | | $ | 41.94 |
Balance, December 31, 2017 | | 105,862 | | $ | 41.67 |
| | | | | |
| (a) | (a)
The weighted average grant date fair value for the years ended December 31, 2018 and 2017 were $53.04 and $55.45 per RSU granted, respectively. |
| (b) | | Pursuant to the terms of the 2013 Incentive Plan, RSUs withheld by the Company for the payment of the employee's tax withholding related to an RSU vesting are added back to the pool of shares available for future awards. |
The following table summarizes information about our RSU grants during the years ended December 31, 2017, 2016 and 2015:
| | | | | | | | | | |
| | | Year ended December 31, |
| | | 2017 | | | | 2016 | | | 2015 |
Weighted average grant date fair value per RSU granted | | $ | 55.45 | | | $ | 33.24 | | $ | 32.45 |
At December 31, 2017,2019, there was $2.2$12.6 million of total unrecognized time-based RSU expense, all of which is related to unvested awards.expense. This compensation expense is expected to be recognized over the weighted-average remaining vesting period of 1.522.1 years for time-based restricted stock units.RSUs.
Performance-based Restricted Stock Units
Performance-based RSUsrestricted stock units (“PSUs”) granted underto employees, other than booj employees and former owners in connection with the 2013 Incentive Planacquisition, are stock-based awards in which the number of shares ultimately received depends on the Company’s achievement of either a specified revenue as well astarget or the Company’s total shareholder return (“TSR”) relative to the TSR of all companies in the S&P SmallCap 600 Indexa peer company index over a three-year performance period.period or achievement of both. If the minimum threshold conditions are not met, no shares will vest. The number of shares that could be issued range from 0% to 150% of the participant’s target award. Performance-based RSUsPSUs are valued on the date of grant using a Monte Carlo simulation for the TSR element of the award. PSUs that vest upon achievement of a specified revenue target are valued using the Company’s closing stock price on the date of grant. The Company’s expense will be adjusted based on the estimated achievement of revenue versus target. Performance-based RSUsEarned PSUs cliff-vest at the end of the three-year performance period. Compensation expense is recognized on a straight-line basis over the vesting period based on the Company’s probable performance, with cumulative to-date adjustments made when revenue performance expectations change.
PSUs granted to booj employees and former owners in connection with the acquisition are stock-based awards in which the number of shares ultimately received depends on the achievement of certain technology milestones set forth in the related purchase agreement. The number of shares that could be issued range from 0% to 100% of the participant’s target award. The awards were valued using the Company’s closing stock price on the date of grant. The Company’s expense will be adjusted based on the estimated achievement of the milestones. The majority of these PSUs vested July 29, 2019 and December 31, 2019. The remaining PSUs vest on February 15, 2020 to the extent the corresponding milestones are achieved and provided the participant is still an employee of the Company at the time of vesting. Compensation expense is recognized on a straight-line basis over the vesting period based on the Company’s estimated performance, subject to adjustment for changes in expectations of the achievement againstof the revenue target. technology milestones.
The following table summarizes equity-based compensation activity related to performance-based RSUs for year ended December 31, 2017:PSUs:
| | | | | |
| | PSUs | | Weighted average
grant date fair
value per share |
Balance, January 1, 2019 | | 179,615 | | $ | 55.75 |
Granted (a)(b) | | 119,410 | | $ | 38.87 |
Shares vested | | (97,436) | | $ | 36.20 |
Forfeited | | (61,625) | | $ | 56.24 |
Balance, December 31, 2019 | | 139,964 | | $ | 45.31 |
| | | | | |
| | | | | |
| | Performance-based restricted stock units | | | Weighted average grant date fair value per share |
Balance, January 1, 2017 | | — | | $ | — |
Granted (a) | | 33,961 | | $ | 57.88 |
Forfeited | | (2,130) | | $ | 57.88 |
Balance, December 31, 2017 | | 31,831 | | $ | 57.88 |
| (a) | (a)
| | Represents the total participant target award. |
| (b) | The weighted average grant date fair value for the years ended December 31, 2018 and 2017 were $55.38 and $57.88 per PSU granted, respectively. |
At December 31, 20172019, there was $0.9$2.3 million of total unrecognized performance-based RSU expense, all of which is related to unvested awards.PSU expense. This compensation expense is expected to be recognized over the weighted-average remaining vesting period of 2.001.8 years for performance-based RSUs.PSUs.
After giving effect to all outstanding awards (assuming maximum achievement of performance goals for performance-based awards), there were 2,400,8572,122,970 additional shares available for the Company to grant under the 2013 Incentive Plan as of December 31, 2017.2019.
Stock Options14. Leadership Changes and the New Service Model
The 2013 Incentive Plan provides forOn February 9, 2018, the grantCompany announced the retirement of stock options. As of December 31, 2017, there are no stock options outstanding.the Company’s President. The Company received $0.1 million and $2.2 million in cash proceeds related to the exercise of stock options during the years ended December 31, 2016 and 2015, respectively. Upon the exercise of stock options, shares of Class A common stock are issued from authorized common shares. For the year ended December 31, 2017, there were no options exercised. The total intrinsic value of stock options exercised during the years ended December 31, 2016 and 2015 were $0.9 million and $19.2 million, respectively. As there were no stock options exercised during the year ended December 31, 2017, there was no intrinsic value.
13. Leadership Changes
On January 7, 2016, the Company’s former Chief Financial Officer and Chief Operating Officer entered into a separationSeparation Agreement with the President, and transition agreement pursuant to which he separated from the Company effective March 31, 2016. Theterms of this agreement, the Company incurred a total cost of $1.0$1.8 million including $0.3 million of equity-based compensation expense, which was recorded to “Selling, operating and administrative expenses” in the accompanying Condensed Consolidated Statements of Income during the year ended December 31, 2016.2018, which will be paid over a 39-month period.
On May 4, 2015,
In addition, the Company’s former President entered intoCompany announced a retirement agreementnew service model in early 2019 designed to deliver more value to franchisees, as well as support franchisee growth and professional development (the “New Service Model”). In connection with the Company pursuant to which he retired on August 10, 2015 andNew Service Model, the Company agreed to provide retirement benefits over a 24-month period, beginning in September 2015. The Company recorded a liability for payments that will be made with a corresponding charge to “Selling, operating and administrative expenses” in the accompanying Consolidated Statements of Income. The Company incurred a total cost of $0.9approximately $2.1 million including $0.2in expenses related to severance and outplacement services provided to certain former employees of the Company, of which $1.4 million of equity-based compensationin expense was recognized during the year ended December 31, 2015.
On December 31, 2014, the Company’s former Chief Executive Officer retired2018 and the Company agreed to provide severance and other related benefits over a 36-month period. The Company recorded a liability for payments that will be made with a corresponding charge to “Selling, general and administrative expenses”remainder was recognized in the accompanying Consolidated Statements of Income. The Company incurred a total cost of $3.6 million, including $1.0 million of equity-based compensation expense related to this retirement in 2014.
The Company’s severance and other related2019. These expenses incurred for leadership changes and restructuring activities were $1.1 million for each of the years ended December 31, 2016 and 2015, which isare included in “Selling, operating and administrative expenses” in the accompanying Consolidated Statements of Income. No such expenses were recorded for the year ended December 31, 2017.
The following table presents a rollforwardAll of the liability for the aforementioned leadership changes (in thousands):
| | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 |
Balance, January 1 | | $ | 964 | | $ | 1,973 |
Severance and other related expenses | | | — | | | 1,055 |
Accretion | | | 19 | | | 59 |
Cash payments | | | (983) | | | (1,792) |
Non-cash adjustment (a) | | | — | | | (331) |
Balance, December 31 | | $ | — | | $ | 964 |
(a) For the year ended December 31, 2016, the non-cash adjustment represents the non-cash equity-based compensation expense recorded for the accelerated vesting of restricted stock units pursuantabove costs were attributable to the terms of the separation and transition agreement entered into with the Company’s former Chief Financial Officer and Chief Operating Officer on January 7, 2016.RE/MAX Franchising reportable segment.
14.15. Commitments and Contingencies
CommitmentsContingencies
The Company leases offices and equipment under noncancelable leases, subject to certain provisions for renewal options and escalation clauses. Future minimum payments (including those allocated to an affiliate) under these leases and commitments, net of payments under sublease agreements, are as follows (in thousands):
| | | | | | | | | |
| | Rent Payments | | Sublease Receipts | | Total Cash Outflows |
Year ending December 31: | | | | | | | | | |
2018 | | $ | 8,669 | | $ | (847) | | $ | 7,822 |
2019 | | | 8,783 | | | (1,087) | | | 7,696 |
2020 | | | 9,039 | | | (873) | | | 8,166 |
2021 | | | 8,868 | | | (775) | | | 8,093 |
2022 | | | 8,757 | | | (804) | | | 7,953 |
Thereafter | | | 50,695 | | | (2,209) | | | 48,486 |
| | $ | 94,811 | | $ | (6,595) | | $ | 88,216 |
Minimum rent payments under noncancelable operating leases are recognized on a straight-line basis over the terms of the leases. Rent expense, excluding amounts related to gain or loss on sublease, was $7.8 million, $7.5 million and $10.6 million for the years ended December 31, 2017, 2016 and 2015, respectively, net of amounts recorded under sublease agreements of $1.0 million, $1.1 million and $1.2 million for the years ended December 31, 2017, 2016 and 2015, respectively.
In April 2010, the Company entered into an 18-year lease for its corporate headquarters office building (the “Master Lease”). The Company may, at its option, extend the Master Lease for two renewal periods of 10 years. Under the terms of the Master Lease, the Company pays an annual base rent, which escalates 3% each year, including the first optional renewal period. The first year of the second optional renewal period is at a fair market rental value, and the rent escalates 3% each year until expiration. The Company pays for operating expenses in connection with the ownership,
maintenance, operation, upkeep and repair of the leased space. The Company may assign or sublet an interest in the Master Lease only with the approval of the landlord.
Upon entering into the Master Lease, the Company became the primary lessee for all facilities located on the headquarters property. The following subleases resulted in a gain (loss) on sublease during the year ended December 31, 2017:
| | | | | | |
Execution Date
| | End Date
| | 2017 (Loss) Gain on Sublease
(in thousands)
| |
May 2017
| | April 2028
| | $
| (173)
| |
August 2017
| | January 2025
| | | (3,725)
| |
September 2017
| | August 2024
| | | 294
| (a)
|
| | | | $
| (3,604)
| |
| (a)
| | During the year ended December 31, 2013 the Company entered into a sublease agreement with a tenant and recognized a loss related to the subleased office space of $1.2 million. In September 2017 the Company amended this sublease agreement and the existing liability was reduced, resulting in a net gain of $0.3 million during the year ended December 31, 2017.
|
As of December 31, 2017 and 2016, the liability related to the aforementioned sublease agreements was approximately $3.9 million and $0.8 million, respectively, and is included in “Other liabilities, net of current portion” in the accompanying Consolidated Balance Sheets.
Contingencies
In connection with the Purchase of Full House, as described in Note 5, Acquisitions and Dispositions the Company entered into an arrangement to pay additional purchase consideration based on Motto’s future gross revenues, excluding certain fees, for each year beginning October 1, 2017 through September 30, 2026. As of December 31, 2017, the short term portion of this liability was estimated to be $0.3 million and is recorded in “Accrued liabilities” in the accompanying Consolidated Balance Sheets. The long-term portion of this liability was estimated to be $6.3 million and is recorded in “Other liabilities, net of current portion” in the accompanying Consolidated Balance Sheets.
In connection with the sale of the assets and liabilities related to the Company’s previously owned brokerage offices as described in Note 5, Acquisitions andDispositionsbrokerages, the Company entered into three3 Assignment and Assumption of Leases Agreements (the “Assignment Agreements”) pursuant to which the Company assigned its obligations under and rights, title and interest in 21 leases to the respective purchasers. For certain leases, the Company remains secondarily liable for future lease payments through July 2021 under the respective lease agreements and accordingly, as of December 31, 2017,2019, the Company has outstanding lease
guarantees of $3.7$1.1 million. This amount represents the maximum potential amount of future payments under the respective lease guarantees.
In addition, the Company maintains a self-insurance program for health benefits. As of December 31, 20172019, and 2016,2018, the Company recorded a liability of $0.4$0.3 million and $0.3 million, respectively, related to this program.
Litigation
In March and April of 2019, three putative class action complaints were filed against National Association of Realtors (“NAR”), Realogy Holdings Corp., HomeServices of America, Inc, RE/MAX Holdings, and Keller Williams Realty, Inc. The first was filed on March 6, 2019, by plaintiff Christopher Moehrl in the Northern District of Illinois. The second was filed on April 15, 2019, by plaintiff Sawbill Strategies, Inc., also in the Northern District of Illinois. These two actions have now been consolidated. A third action was filed by plaintiffs Joshua Sitzer and four other individual plaintiffs in the Western District of Missouri. The complaints (collectively “Moehrl/Sitzer suits”) make substantially similar allegations and seek substantially similar relief. The plaintiffs allege that a NAR rule requires brokers to make a blanket, non-negotiable offer of buyer broker compensation when listing a property, resulting in inflated costs to sellers in violation of federal antitrust law. They further allege that certain defendants use their agreements with franchisees to require adherence to the NAR rule in violation of federal antitrust law. Amended complaints add allegations regarding buyer steering and non-disclosure of buyer-broker compensation to the buyer. Additionally, plaintiffs in the action filed by Sitzer et al allege violations of the Missouri Merchandising Practices Act. By agreement, RE/MAX, LLC was substituted for RE/MAX Holdings as defendant in the actions. Among other requested relief, plaintiffs seek damages against the defendants and an injunction enjoining defendants from requiring sellers to pay the buyer broker. The Company is subjectintends to litigation claims arising in the ordinary course of business. The Company believes that it has adequately accrued for legal matters as appropriate. The Company records litigation accruals for legal matters which are both probable and estimable and for related legal costs as incurred.vigorously defend against all claims.
On October 7, 2013, RE/MAX Holdings acquired the net assets, excluding cash, of Tails for consideration paid of $20.2 million. Following earlier litigation that was dismissed, several shareholders of Tails filed a complaint entitled Robert B. Fisher, Carla L. Fisher, Bradley G. Rhodes and James D. Schwartz v. Gail Liniger, Dave Liniger, Bruce Benham, RE/MAX Holdings, Inc. and Tails Holdco, Inc. in Denver District Court ("Tails II"). On February 13, 2018, the parties signed a formal Settlement Agreement and Mutual General Release resulting in the Company recording a charge of $2.6 million in “Selling, operating and administrative expenses” in the accompanying Consolidated Statements of Income during the year ended December 31, 2017. OnIn February 27, 2018, the Company received $1.9 million from its insurance carriers as reimbursement of attorneys’ fees and a portion of the settlement. On February 28, 2018, the Companysettlement and paid
$4.5 $4.5 million to satisfy the terms of the Settlement Agreement. As a result of the settlement, the litigation was dismissed with prejudice on March 1, 2018.
The Company believes other such litigation matters involving a reasonably possible chance of loss will not, individually or in the aggregate, result in a material adverse effect on the Company's financial condition, results of operations and cash flows.
15.16. Defined-Contribution Savings Plan
The Company sponsors an employee retirement plan (the “401(k) Plan”) that provides certain eligible employees of the Company an opportunity to accumulate funds for retirement. The Company provides matching contributions on a discretionary basis. During the years ended December 31, 2017, 20162019, 2018 and 2015,2017, the Company recognized expense of $1.5$2.1 million, $1.4$1.8 million and $1.3$1.5 million, respectively, for matching contributions to the 401(k) Plan.
16.17. Related-Party Transactions
The majority stockholders of RIHI, includingspecifically the Company’s current Chairman and Co-Founder and the Company’s Vice Chair and Co-Founder have made and continue to make a golf course they own available to the Company for business purposes. The Company used the golf course and related facilities for business purposes at minimal charge in 2017, 2016during the years ended December 31, 2019, 2018 and 2015.2017. Additionally, the Company recorded expense of $0.5 million, $0.5 million and $0.4 million for the value of the benefits provided to Company personnel and others for the complimentary use of the golf course during the yearseach year ended December 31, 2017, 20162019, 2018 and 2015, respectively,2017, with an offsetting increase in additional paid in capital.
The Company also provided support services to the Marketing Funds prior to their acquisition on January 1, 2019. See Note 18, Immaterial Corrections2 Summary of Significant Accounting Policies and Note 6 Acquisitions for additional information.
18. Segment Information
The Company operates under the following 4 operating segments: RE/MAX Franchising, Motto Franchising, Marketing Funds and booj. Due to Prior Period Financial Statementsquantitative insignificance, the booj operating segment does not meet the criteria of a reportable segment and is included in “Other”. Motto Franchising does not meet the quantitative significance test; however, management has chosen to report results for further discussion regarding the amounts recordedsegment as it believes it will be a key driver of future success for Holdings. Management evaluates the operating results of its segments based upon revenue and adjusted earnings before interest, the provision for income taxes, depreciation and amortization and other non-cash and non-recurring cash charges or other items (“Adjusted EBITDA”). The Company’s presentation of Adjusted EBITDA may not be comparable to similar measures used by other companies. Except for the adjustments identified below in arriving at Adjusted EBITDA, the accounting policies of the reportable segments are the same as those described in Note 2, Summary of Significant Accounting Policies.
The following table presents revenue from external customers by segment (in thousands):
| | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018* | | 2017* |
Continuing franchise fees | | $ | 95,853 | | $ | 98,828 | | $ | 93,232 |
Annual dues | | | 35,409 | | | 35,894 | | | 33,767 |
Broker fees | | | 45,990 | | | 46,871 | | | 43,801 |
Franchise sales and other revenue | | | 22,383 | | | 22,911 | | | 22,357 |
Total RE/MAX Franchising | | | 199,635 | | | 204,504 | | | 193,157 |
Continuing franchise fees | | | 4,075 | | | 2,276 | | | 462 |
Franchise sales and other revenue | | | 468 | | | 260 | | | 95 |
Total Motto Franchising | | | 4,543 | | | 2,536 | | | 557 |
Marketing Funds fees | | | 72,299 | | | — | | | — |
Other | | | 5,816 | | | 5,586 | | | — |
Total revenue | | $ | 282,293 | | $ | 212,626 | | $ | 193,714 |
*Amounts in the years ended December 31, 20162018 and 2015.2017 have been recast to show Motto separately.
The Company provides services, such as accounting, legal, marketing, technology, human resources and public relations services,following table presents a reconciliation of Adjusted EBITDA by segment to certain affiliated entities (primarily the advertising funds), and it allows these companies to share its leased office space. Duringincome before provision for income taxes (in thousands):
| | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018* | | 2017* |
Adjusted EBITDA: RE/MAX Franchising | | $ | 106,810 | | $ | 108,669 | | $ | 105,184 |
Adjusted EBITDA: Motto Franchising | | | (2,709) | | | (3,436) | | | (3,039) |
Adjusted EBITDA: Other | | | (586) | | | (917) | | | — |
Adjusted EBITDA: Consolidated | | | 103,515 | | | 104,316 | | | 102,145 |
Gain (loss) on sale or disposition of assets and sublease, net (a) | | | (342) | | | 139 | | | (4,260) |
Equity-based compensation expense | | | (10,934) | | | (9,176) | | | (2,900) |
Acquisition-related expense (b) | | | (1,127) | | | (1,634) | | | (5,889) |
Gain on reduction in TRA liability (c) | | | — | | | 6,145 | | | 32,736 |
Special Committee investigation and remediation expense (d) | | | — | | | (2,862) | | | (2,634) |
Fair value adjustments to contingent consideration (e) | | | (241) | | | 1,289 | | | (180) |
Interest income | | | 1,446 | | | 676 | | | 352 |
Interest expense | | | (12,229) | | | (12,051) | | | (9,996) |
Depreciation and amortization | | | (22,323) | | | (20,678) | | | (20,512) |
Income before provision for income taxes | | $ | 57,765 | | $ | 66,164 | | $ | 88,862 |
*Amounts in the years ended December 31, 2018 and 2017 2016 and 2015,have been recast to show Motto separately.
| (a) | Represents gain (loss) on the sale or disposition of assets as well as the gains (losses) on the sublease of a portion of our corporate headquarters office building. |
| (b) | Acquisition-related expense includes legal, accounting, advisory and consulting fees incurred in connection with the acquisition and integration of acquired companies. |
| (c) | Gain on reduction in tax receivable agreement liability is a result of the Tax Cuts and Jobs Act enacted in December 2017 and further clarified in 2018. See Note 12, Income Taxes for additional information. |
| (d) | Special Committee investigation and remediation expense relates to costs incurred in relation to the previously disclosed investigation by the special committee of independent directors of actions of certain members of our senior management and the implementation of the remediation plan. |
| (e) | Fair value adjustments to contingent consideration include amounts recognized for changes in the estimated fair value of the contingent consideration liability. See Note 11, Fair Value Measurements for additional information. |
The following table presents total assets of the total amounts allocated for services rendered and rent for office space provided on behalfCompany’s segments (in thousands):
| | | | | | |
| | As of December 31, |
| | 2019 | | 2018* |
RE/MAX Franchising | | $ | 479,370 | | $ | 406,643 |
Marketing Funds | | | 41,090 | | | — |
Motto Franchising | | | 20,161 | | | 21,346 |
Other | | | 1,731 | | | 384 |
Total assets | | $ | 542,352 | | $ | 428,373 |
*Amounts as of affiliated entities were $3.4 million, $2.0 million and $1.7 million, respectively. Amounts are generally paid within 30 days and no material amounts were outstanding to or from these affiliated entities at December 31, 2017 and 2016. 2018 have been recast to show Motto separately.
Related party advertising funds had current outstanding amounts due from the CompanyThe following table presents long-lived assets, net of $0.1 million as of both December 31, 2017 and 2016. Such amounts are included in “Accounts payable” in the accompanying Consolidated Balance Sheets.accumulated depreciation disaggregated by geographical area (in thousands):
| | | | | | |
| | As of December 31, |
| | 2019 | | 2018 |
U.S. | | $ | 5,406 | | $ | 4,342 |
Global | | | 38 | | | 48 |
Total long-lived assets | | $ | 5,444 | | $ | 4,390 |
17.19. Quarterly Financial Information (unaudited)
Summarized quarterly results for the years ended December 31, 2017 and 2016 were as follows:follows (in thousands, except shares and per share amounts):
| | | | | | | | | | | | | |
| | For the Quarter Ended | |
| | March 31, 2017 | | June 30, 2017 | | September 30, 2017 | | December 31, 2017(a) | |
| | | (in thousands, except shares and per share amounts) | |
| | | | | | | | | | | | | | |
| | | For the Quarter Ended | |
| | | March 31, 2019 | | June 30, 2019 | | September 30, 2019 | | December 31, 2019 | |
Total revenue | | $ | 48,229 | | $ | 48,819 | | $ | 49,377 | | $ | 49,504 | | $ | 71,178 | | $ | 71,381 | | $ | 71,541 | | $ | 68,193 | |
Total operating expenses | | | 32,777 | | | 26,022 | | | 36,569 | | | 336 | | | 58,233 | | | 49,311 | | | 48,097 | | | 58,213 | |
Operating income | | | 15,452 | | | 22,797 | | | 12,808 | | | 49,168 | | | 12,945 | | | 22,070 | | | 23,444 | | | 9,980 | |
Total other expenses, net | | | (2,351) | | | (2,398) | | | (2,180) | | | (2,541) | | | (2,780) | | | (2,751) | | | (2,727) | | | (2,416) | |
Income before provision for income taxes | | | 13,101 | | | 20,399 | | | 10,628 | | | 46,627 | | | 10,165 | | | 19,319 | | | 20,717 | | | 7,564 | |
Provision for income taxes | | | (3,030) | | | (4,762) | | | (3,091) | | | (44,693) | | | (1,908) | | | (3,186) | | | (3,453) | | | (2,362) | |
Net income | | | 10,071 | | | 15,637 | | | 7,537 | | | 1,934 | | | 8,257 | | | 16,133 | | | 17,264 | | | 5,202 | |
Less: net income attributable to non-controlling interest | | | 5,159 | | | 8,108 | | | 3,702 | | | 5,395 | | | 3,848 | | | 7,563 | | | 8,091 | | | 2,314 | |
Net income (loss) attributable to RE/MAX Holdings, Inc. | | $ | 4,912 | | $ | 7,529 | | $ | 3,835 | | $ | (3,461) | |
| | | | | | | | | | | | | |
Net income (loss) attributable to RE/MAX Holdings, Inc. per share of Class A common stock | | | | | | | | | | | | | |
Net income attributable to Holdings | | | $ | 4,409 | | $ | 8,570 | | $ | 9,173 | | $ | 2,888 | |
| | | | | | | | | | | | | | |
Net income attributable to Holdings per share of Class A common stock | | | | | | | | | | | | | | |
Basic | | $ | 0.28 | | $ | 0.43 | | $ | 0.22 | | $ | (0.20) | | $ | 0.25 | | $ | 0.48 | | $ | 0.51 | | $ | 0.16 | |
Diluted | | $ | 0.28 | | $ | 0.42 | | $ | 0.22 | | $ | (0.20) | | $ | 0.25 | | $ | 0.48 | | $ | 0.51 | | $ | 0.16 | |
Weighted average shares of Class A common stock outstanding | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | | 17,662,842 | | | 17,696,842 | | | 17,696,991 | | | 17,696,991 | | | 17,775,381 | | | 17,808,321 | | | 17,826,332 | | | 17,837,386 | |
Diluted | | | 17,716,013 | | | 17,723,802 | | | 17,737,786 | | | 17,747,744 | | | 17,817,620 | | | 17,833,958 | | | 17,840,158 | | | 17,978,431 | |
| | | | | | | | | | | | | |
| | For the Quarter Ended | |
| | March 31, 2016 | | June 30, 2016 | | September 30, 2016 | | December 31, 2016 | |
| | | (in thousands, except shares and per share amounts) | |
| | | | | | | | | | | | | | |
| | | For the Quarter Ended | |
| | | March 31, 2018 | | June 30, 2018 | | September 30, 2018 | | December 31, 2018 | |
Total revenue | | $ | 42,917 | | $ | 43,404 | | $ | 45,559 | | $ | 44,422 | | $ | 52,642 | | $ | 54,277 | | $ | 54,866 | | $ | 50,841 | |
Total operating expenses | | | 27,061 | | | 22,955 | | | 24,417 | | | 30,052 | | | 38,925 | | | 33,363 | | | 33,059 | | | 29,428 | |
Operating income | | | 15,856 | | | 20,449 | | | 21,142 | | | 14,370 | | | 13,717 | | | 20,914 | | | 21,807 | | | 21,413 | |
Total other expenses, net | | | (2,202) | | | (2,036) | | | (2,204) | | | (2,876) | | | (2,688) | | | (3,176) | | | (2,846) | | | (2,977) | |
Income before provision for income taxes | | | 13,654 | | | 18,413 | | | 18,938 | | | 11,494 | | | 11,029 | | | 17,738 | | | 18,961 | | | 18,436 | |
Provision for income taxes | | | (3,259) | | | (4,285) | | | (4,632) | | | (3,097) | | | (1,997) | | | (3,283) | | | (3,555) | | | (7,507) | |
Net income | | | 10,395 | | | 14,128 | | | 14,306 | | | 8,397 | | | 9,032 | | | 14,455 | | | 15,406 | | | 10,929 | |
Less: net income attributable to non-controlling interest | | | 5,456 | | | 7,314 | | | 7,520 | | | 4,540 | | | 4,089 | | | 6,848 | | | 7,307 | | | 4,695 | |
Net income attributable to RE/MAX Holdings, Inc. | | $ | 4,939 | | $ | 6,814 | | $ | 6,786 | | $ | 3,857 | |
| | | | | | | | | | | | | |
Net income attributable to RE/MAX Holdings, Inc. per share of Class A common stock | | | | | | | | | | | | | |
Net income attributable to Holdings | | | $ | 4,943 | | $ | 7,607 | | $ | 8,099 | | $ | 6,234 | |
| | | | | | | | | | | | | | |
Net income attributable to Holdings per share of Class A common stock | | | | | | | | | | | | | | |
Basic | | $ | 0.28 | | $ | 0.39 | | $ | 0.38 | | $ | 0.22 | | $ | 0.28 | | $ | 0.43 | | $ | 0.46 | | $ | 0.35 | |
Diluted | | $ | 0.28 | | $ | 0.39 | | $ | 0.38 | | $ | 0.22 | | $ | 0.28 | | $ | 0.43 | | $ | 0.46 | | $ | 0.35 | |
Weighted average shares of Class A common stock outstanding | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | | 17,584,351 | | | 17,636,590 | | | 17,645,696 | | | 17,647,930 | | | 17,709,095 | | | 17,746,042 | | | 17,746,184 | | | 17,748,745 | |
Diluted | | | 17,638,667 | | | 17,668,995 | | | 17,691,641 | | | 17,706,070 | | | 17,762,133 | | | 17,769,641 | | | 17,771,212 | | | 17,771,180 | |
(a) The quarterly results for the quarter ended December 31, 2017 were impacted by the Tax Cuts and Jobs Act enacted in December 2017. The reduction in the corporate tax rate from 35% to 21% resulted in comparable reductions in both the deferred tax asset amounts and the TRA liabilities. See Note 11, Income Taxes for further information on the impact of the Tax Cuts and Jobs Act.
18. Immaterial Corrections to Prior Period Financial Statements
The Company identified certain related party transactions with its controlling stockholder that had not been recognized as expenses in previously issued financial statements, the largest being the complimentary use by Company personnel of a golf facility owned by David and Gail Liniger. The value of these benefits is required to be reflected as an expense in the financial statements with a corresponding increase to additional paid in capital. The Company concluded that the omission of the expense associated with these transactions from prior period financial statements was immaterial to each of the affected reporting periods and therefore amendment of previously filed reports was not required. However, the Company corrected this immaterial error in the prior years included herein. These adjustments resulted in an increase in “Selling, operating, and administrative expenses” with a corresponding decrease in “Net Income” in the Consolidated Statements of Income of $584,000 and $575,000 for the years ending December 31, 2016 and 2015, respectively. In addition, these adjustments resulted in an increase to “Additional paid-in capital” of $1,712,000, a decrease to “Retained earnings” of $803,000 and a decrease to “Non-controlling interest” of $909,000 in the Consolidated Balance Sheets as of December 31, 2016. The adjustment to “Additional paid-in capital” in the Consolidated Balance Sheets includes an adjustment of $553,000 for the year ending December 31, 2014 in addition to the previously noted adjustments for years ending December 31, 2016 and 2015.
19. Subsequent Events
Separation Agreement
On February 9, 2018, the Company announced the retirement of the Company’s President. The President will remain with the Company as a Senior Advisor through June 30, 2018. The Company entered into a Separation Agreement with the President, and pursuant to the terms of this agreement, the Company accrued a total cost of approximately $1.9 million in the first quarter of 2018, which will be paid over a 39-month period.
Booj Acquisition
On February 26, 2018, RE/MAX, LLC acquired certain assets of booj, a real estate technology company, for cash consideration of $26.3 million, plus up to $10.0 million in equity-based compensation to be earned over time. RE/MAX, LLC acquired these assets in order to deliver core technology solutions designed for and with RE/MAX affiliates. The Company used cash generated from operations to fund the acquisition. The assets acquired constitute a business that will be accounted for using the fair value acquisition method. The total purchase price will be allocated to the assets acquired and liabilities assumed based on their estimated fair values. Due to the timing of this acquisition, the Company has not completed a preliminary purchase price allocation.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (Exchange Act), that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Our management, under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Annual Report on Form 10-K. Based on that evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that as of December 31, 20172019 our disclosure controls and procedures were not effective due to a material weakness in our internal control over financial reporting described below.effective.
Notwithstanding the material weakness, management believes the consolidated financial statements included in this Annual Report on Form 10-K present fairly, in all material respects, the Company’s financial condition, results of operations and cash flows at and for the periods presented in accordance with U.S. generally accepted accounting principles.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the company, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements for external purposes in accordance with U.S. generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company, and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Our management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2017,2019, using the criteria in the Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this evaluation, our management determined the following control deficiencies existed as of December 31, 2017.
The Company did not have an effective risk assessment process to identify and assess the financial reporting risks related to benefits provided by principal stockholders. As a consequence, the Company did not have effective controls and training of personnel over the identification and communication of related party transactions to financial reporting personnel, management and the Board, as appropriate, to identify and evaluate recognition, measurement and disclosure of such transactions. These control deficiencies resulted in misstatements in the consolidated financial statements that were corrected in current and prior years as discussed in Note 18, Immaterial Corrections to Prior Period Financial Statements to the consolidated financial statements as of and for the year ended December 31, 2017. These control deficiencies create a reasonable possibility that a material misstatement to the consolidated financial statements will not be prevented or detected on a timely basis, and, therefore, we concluded that the control deficiencies represent a material weakness in our internal control over financial reporting and ourCompany’s internal control over financial reporting was not effective as of December 31, 2017.2019.
KPMG LLP, an independent registered public accounting firm, has issued an adverse report onindependently assessed the operating effectiveness of the Company’sour internal control over financial reporting as of December 31, 20172019 and its report is included on page 80 of this Annual Report on Form 10-K. herein.
Remediation Plans
To remediate the material weakness in internal control over financial reporting, we are making several changes, including the following:
| ·
| | adopting additional policies and procedures for reviewing and approving transactions involving our senior management and controlling stockholder
|
| ·
| | strengthening our process for ensuring the Company has a complete and accurate accounting of all related party transactions involving principal stockholders
|
| ·
| | providing additional training to all officers and directors related to reporting and review of certain transactions
|
| ·
| | adopting enhanced procedures for the review by our Chief Compliance Officer and Board of Directors of related party transactions.
|
Several of these changes have already been implemented and the Company continues to work on the remainder. However, the material weakness will not be considered fully remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect the remediation will be completed in 2018, but there can be no assurance that we will meet this goal and we may also conclude that additional measures are required to remediate the material weakness which may necessitate additional implementation and evaluation time.
Changes in Internal Controls over Financial Reporting
Except as related to the material weakness and remedial measures described above, thereThere have been no changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during our fourth fiscal quarter ended December 31, 20172019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Updated Compensation Information for a Named Executive Officer and Certain Directors
In connection with the Special Committee Investigation described in Part II Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Special Committee Investigation,” we reviewed certain transactions involving David L. Liniger, our Chairman and Co-Founder, and/or Gail Liniger, our Vice Chair and Co-Founder, who together control our controlling shareholder (the “Linigers”) including certain accommodations and perquisites provided by the Linigers to our named executive officers and directors. These transactions include previously undisclosed gifts from the Linigers for the benefit of Adam Contos, our Chief Executive Officer, as well as a previously undisclosed $2.375 million loan on favorable terms from Dave Liniger to Adam Contos. We have also reviewed other transactions and “perquisites and benefits” provided by the Linigers on a complimentary basis including the use of a golf course owned by the Linigers and travel involving hotel and air provided by the Linigers. Use of the Linigers’ golf facility on a complimentary basis was a broad based employee perquisite that was accessed by many Company employees.
We reviewed the compensation disclosure information with respect to our named executive officers and directors provided in our definitive proxy statements filed with the Securities and Exchange Commission (the “SEC”) and we are providing the following information to update compensation information for Adam M. Contos, our Chief Executive Officer, and two of our directors, Daniel J. Predovich and Kathleen J. Cunningham:
| ·
| | Adam M. Contos -- 2016 Compensation. In the Summary Compensation Table on page 22 of our Definitive Proxy Statement filed with the SEC on April 12, 2017 (the “2017 Proxy Statement”), the amount reported under “All Other Compensation” for Mr. Contos for 2016 should have been $224,824, rather than $103,188, resulting in total compensation of $961,463 to Mr. Contos in 2016, rather than $839,827. The additional amounts included under “All Other Compensation” are comprised of (i) $84,000 in relation to gifts for the benefit of Contos provided by David and Gail Liniger, (ii) travel involving hotel and air provided by the Linigers on a complimentary basis for the benefit of Contos (iii) the benefit of below market terms including an annual interest rate of 1% with respect to a loan to Mr. Contos from Mr. Liniger in the principal amount of $2.375 million and (iv) complimentary use of a golf course owned by the Linigers.
|
| ·
| | Daniel J. Predovich – 2014 through 2016 Compensation. The additional amounts included in “All Other Compensation” for Daniel J. Predovich with respect to certain perquisites, including travel involving hotel and air provided by the Linigers on a complimentary basis for the benefit of Predovich and complimentary use of the golf course owned by the Linigers, are being revised as follows:
|
2016 Compensation.In the Director Compensation Table on page 28 of the 2017 Proxy Statement, the amount reported under “All Other Compensation” for Mr. Predovich for 2016 should have been $13,681, rather than $3,313, resulting in total compensation of $136,204 to Mr. Predovich in 2016, rather than $125,836.
2015 Compensation. In the Director Compensation Table on page 19 of our Definitive Proxy Statement filed with the SEC on March 24, 2016, $33,133 should have been reported under “All Other Compensation” for Mr. Predovich for 2015, resulting in total compensation of $148,138 to Mr. Predovich in 2015, rather than $115,005.
2014 Compensation. In the Director Compensation Table on page 18 of our Definitive Proxy Statement filed with the SEC on March 27, 2015 (the “2015 Proxy Statement”), the amount reported under “All Other Compensation” for Mr. Predovich for 2014 should have been $41,665, rather than $568, resulting in total compensation of $112,290 to Mr. Predovich in 2014, rather than $71,193.
| ·
| | Kathleen J. Cunningham -- 2014 Compensation. In the Director Compensation Table on page 18 of the 2015 Proxy Statement, the amount reported under “All Other Compensation” for Ms. Cunningham for 2014 should have been $13,728, rather than $568, resulting in total compensation of $103,728 to Ms. Cunningham in 2014, rather than $90,568. The additional amounts included in “All Other Compensation” are comprised of travel involving hotel and air provided by the Linigers on a complimentary basis for the benefit of Cunningham and complimentary use of the golf course owned by the Linigers.
|
Certain other directors and named executive officers also received travel involving hotel and air provided by the Linigers on a complimentary basis as well as use of the golf course provided by the Linigers on a complimentary basis but the
aggregate dollar value of the “perquisites and other benefits” received by these other directors and named executive officers was less than $10,000 per year.
The Company is still evaluating details of the tax treatment of some of the perquisites and benefits described above that were provided by the Linigers on a complimentary basis.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
We have adopted a Code of Business Conduct and Ethics and a Supplemental Code of Ethics for the Chief Executive Officer and Senior Financial Officers. Both of these codes apply to our chief executive officer, principal financial officer, principal accounting officer and controller, or persons performing similar functions. Both of these codes are available on our website at www.remax.com.
The remaining information required by this Item 10 will be included in our definitive proxy statement for its annual meeting of stockholders (the “Proxy Statement”) and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 will be included in the Proxy Statement and is incorporated herein by reference.
The Company is providing updated information on the compensation and other benefits received by certain named executive officers and directors in prior years in connection with a loan, gifts and certain other benefits that were provided by Dave and Gail Liniger during prior periods. See “Item 9B—Other Information—Updated Compensation and Benefit Information for Certain Named Executive Officers and Directors.”
In addition, on March 14, 2018, the Compensation Committee approved compensation increases for Adam Contos based on his promotion to Chief Executive Officer, including: (i) an increase in base salary to $650,000 per year, (ii) a 2018 cash incentive bonus target of 60% of base salary and (iii) a 2018 RSU equity award target of 100% of base salary. The Company has not yet approved detailed metrics for the 2018 Performance Evaluation and Incentive Plan for cash bonus payments or the performance and vesting terms for 2018 long-term equity incentive compensation awards for officers. The 2018 cash bonus and equity award for Adam Contos will be subject to the final terms and incentive goals approved by the Compensation Committee for such bonus program and such equity awards for 2018.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table provides information as of December 31, 20172019 with respect to shares of our Class A common stock issuable under our equity compensation plan:
| | | | | | | |
| | Equity Compensation Plan Information |
| | | | | | | Number of Securities |
| | | | | | | Remaining Available for |
| | | | | | | Future Issuance Under |
| | Number of Securities to | | Weighted-Average | | Equity Compensation |
| | be Issued Upon Exercise | | Exercise Price of | | Plans (Excluding |
| | of Outstanding Options, | | Outstanding Options, | | Securities Reflected in |
Plan Category | | Warrants and Rights | | Warrants and Rights | | Column (a)) |
Equity compensation plans approved by security holders | | 595,416 | (1) | $ | — | (2) | 2,122,970 |
Equity compensation plans not approved by security holders | | — | | | — | | — |
Total | | 595,416 | (1) | $ | — | (2) | 2,122,970 |
| | | | | | | | |
| | Equity Compensation Plan Information | |
| | | | | | | Number of Securities | |
| | | | | | | Remaining Available for | |
| | | | | | | Future Issuance Under | |
| | Number of Securities to | | Weighted-Average | | Equity Compensation | |
| | be Issued Upon Exercise | | Exercise Price of | | Plans (Excluding | |
| | of Outstanding Options, | | Outstanding Options, | | Securities Reflected in | |
Plan Category | | Warrants and Rights | | Warrants and Rights | | Column (a)) | |
Equity compensation plans approved by security holders | | 137,693 | (1) | $ | — | (2) | 2,400,857 | |
Equity compensation plans not approved by security holders | | — | | | — | | — | |
Total | | 137,693 | (1) | $ | — | (2) | 2,400,857 | |
| (1) | (1)
| | Includes 137,693Represents 595,416 shares issuable upon vesting of unvested restricted stock units.
|
| (2) | (2)
| | The weighted average exercise price does not take into account shares issuable upon vesting or delivery of restricted stock units because these have no exercise price. |
The remaining information required by this Item 12 will be included in the Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by this Item 13 will be included in the Proxy Statement and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item 14 will be included in the Proxy Statement and is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
| (a) | (a)
| | The following documents are filed as part of this Annual Report on Form 10-K: |
| 1. | 1.
| | Consolidated Financial Statements |
The following financial statements are included in Part II, Item 8 of this Annual Report on Form 10-K:
| ·
● | | Consolidated Balance Sheets as of December 31, 20172019 and December 31, 2016 2018 |
| ·
● | | Consolidated Statements of Income for the fiscal years ended December 31, 2017,2019, December 31, 20162018 and December 31, 2015 2017 |
| ·
● | | Consolidated Statements of Comprehensive Income for the fiscal years ended December 31, 2017,2019, December 31, 20162018 and December 31, 2015 2017 |
| ·
● | | Consolidated Statements of Stockholders’ Equity for the fiscal years ended December 31, 2017,2019, December 31, 20162018 and December 31, 2017 |
| ·
● | | Consolidated Statements of Cash Flows for the fiscal years ended December 31, 2017,2019, December 31, 20162018 and December 31, 2015 2017 |
| ·
● | | Notes to Consolidated Financial Statements |
| ·
● | | Report of Independent Registered Public Accounting Firm |
| 2. | 2.
| | Financial Statement Schedules |
Separate financial statement schedules have been omitted because such information is inapplicable or is included in the financial statements or notes described above.
The exhibits listed in the Index to Exhibits, which appears immediately following the signature page and is incorporated herein by reference, are filed or incorporated by reference as part of this Annual Report on Form 10-K.
ITEM 16. FORM 10-K SUMMARY
None.
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Exhibit No. | | Exhibit Description | | Form | | File Number | | Date of First Filing | | Exhibit Number | | Filed Herewith | |
2.1 | | Asset Purchase Agreement, dated November 2, 2017, by and among RE/MAX, LLC; Roaring Fork Capital Partners, Inc.; RE/MAX Northern Illinois Ad Fund, Inc. and certain stockholders of Roaring Fork Capital Partners, Inc.* | | 8-K | | 001-36101 | | 11/7/2017 | | 2.1 | | | |
3.1 | | Amended and Restated Certificate of Incorporation | | 10-Q | | 001-36101 | | 11/14/2013 | | 3.1 | | | |
3.2 | | Bylaws of RE/MAX Holdings, Inc. | | 8-K | | 001-36101 | | 2/22/2018 | | 3.2 | | | |
10.1 | | 2013 Omnibus Incentive Plan and related documents. | | S-8 | | 333-191519 | | 10/1/2013 | | 4.2 | | | |
10.2 | | Lease, dated April 16, 2010, by and between Hub Properties Trust and RE/MAX International, LLC. | | S-1 | | 333-190699 | | 8/19/2013 | | 10.5 | | | |
10.3 | | Employment Agreement, dated as of July 1, 2010, by and between RE/MAX International Holdings, Inc., RE/MAX, LLC and Geoffrey Lewis. | | S-1 | | 333-190699 | | 9/19/2013 | | 10.8 | | | |
10.4 | | Registration Rights Agreement, dated as of October 1, 2013, by and among RE/MAX Holdings, Inc. and RIHI, Inc. | | 10-Q | | 001-36101 | | 11/14/2013 | | 10.8 | | | |
10.5 | | Management Services Agreement, dated as of October 1, 2013, by and among RMCO, LLC, RE/MAX, LLC and RE/MAX Holdings, Inc. | | 10-Q | | 001-36101 | | 11/14/2013 | | 10.9 | | | |
10.6 | | RMCO, LLC Fourth Amended and Restated Limited Liability Company Agreement. | | 10-Q | | 001-36101 | | 11/14/2013 | | 10.10 | | | |
10.7 | | Tax Receivable Agreement, dated as of October 7, 2013, by and between RIHI, Inc. and RE/MAX Holdings, Inc. | | 10-Q | | 001-36101 | | 11/14/2013 | | 10.11 | | | |
10.8 | | Tax Receivable Agreement, dated as of October 7, 2013, by and between Weston Presidio V, L.P. and RE/MAX Holdings, Inc. | | 10-Q | | 001-36101 | | 11/14/2013 | | 10.12 | | | |
10.9 | | Form of Indemnification Agreement by and between RE/MAX Holdings, Inc. and each of its directors and executive officers. | | S-1 | | 333-190699 | | 9/27/2013 | | 10.3 | | | |
| | | | | | | | | | | | | |
|---|
| | | | | | | | | | | | | |
|---|
Exhibit No. | | Exhibit Description | | Form | | File Number | | Date of First Filing | | Exhibit Number | | Filed Herewith | |
|---|
| | | | | | | | | | | | | |
3.1 | | Amended and Restated Certificate of Incorporation | | 10-Q | | 001-36101 | | 11/14/2013 | | 3.1 | | | |
3.2 | | Bylaws of RE/MAX Holdings, Inc. | | 8-K | | 001-36101 | | 2/22/2018 | | 3.2 | | | |
4.1 | | Form of RE/MAX Holdings, Inc.’s Class A common stock certificate. | | S-1 | | 333-190699 | | 9/27/2013 | | 4.1 | | | |
4.2 | | Description of the Registrant’s Securities Registered under Section 12 of the Securities Exchange Act of 1934, as amended. | | | | | | | | | | X | |
10.1 | | 2013 Omnibus Incentive Plan and related documents.† | | S-8 | | 333-191519 | | 10/1/2013 | | 4.2 | | | |
10.2 | | Lease, dated April 16, 2010, by and between Hub Properties Trust and RE/MAX International, LLC. | | S-1 | | 333-190699 | | 8/19/2013 | | 10.5 | | | |
10.3 | | Registration Rights Agreement, dated as of October 1, 2013, by and among RE/MAX Holdings, Inc. and RIHI, Inc. | | 10-Q | | 001-36101 | | 11/14/2013 | | 10.8 | | | |
10.4 | | Management Services Agreement, dated as of October 1, 2013, by and among RMCO, LLC, RE/MAX, LLC and RE/MAX Holdings, Inc. | | 10-Q | | 001-36101 | | 11/14/2013 | | 10.9 | | | |
10.5 | | RMCO, LLC Fourth Amended and Restated Limited Liability Company Agreement.** | | | | | | | | | | X | |
10.6 | | Tax Receivable Agreement, dated as of October 7, 2013, by and between RIHI, Inc. and RE/MAX Holdings, Inc. | | 10-Q | | 001-36101 | | 11/14/2013 | | 10.11 | | | |
10.7 | | Tax Receivable Agreement, dated as of October 7, 2013, by and between Weston Presidio V, L.P. and RE/MAX Holdings, Inc. | | 10-Q | | 001-36101 | | 11/14/2013 | | 10.12 | | | |
| | | | | | | | | | | | | |
|---|
| | | | | | | | | | | | | |
|---|
Exhibit No. | | Exhibit Description | | Form | | File Number | | Date of First Filing | | Exhibit Number | | Filed Herewith | |
|---|
10.8 | | Form of Indemnification Agreement by and between RE/MAX Holdings, Inc. and each of its directors and executive officers.† | | S-1 | | 333-190699 | | 9/27/2013 | | 10.3 | | | |
10.9 | | Form of Time-Based Restricted Stock Unit Award.† | | 10-K | | 333-190699 | | 2/24/2017 | | 10.11 | | | |
10.10 | | Form of Performance-Based Restricted Stock Unit Award.† | | 10-K | | 001-36101 | | 2/22/2019 | | 10.12 | | | |
10.11 | | Form of Restricted Stock Award (Directors and Senior Officers).† | | S-1 | | 333-190699 | | 9/27/2013 | | 10.15 | | | |
10.12 | | Form of Restricted Stock Award (General).† | | S-1 | | 333-190699 | | 9/27/2013 | | 10.16 | | | |
10.13 | | Form of Stock Option Award (Directors and Senior Officers).† | | S-1 | | 333-190699 | | 9/27/2013 | | 10.17 | | | |
10.14 | | Form of Stock Option Award (General).† | | S-1 | | 333-190699 | | 9/27/2013 | | 10.18 | | | |
10.15 | | Joinder, dated May 29, 2015, among RE/MAX Holdings, Inc., Weston Presidio V., L.P. and Oberndorf Investments LLC | | 10-Q | | 001-36101 | | 8/7/2015 | | 10.3 | | | |
10.16 | | Joinder, dated October 4, 2018, among RE/MAX Holdings, Inc., Oberndorf Investments LLC and Parallaxes Capital Opportunities fund I LP | | 10-K | | 001-36101 | | 2/22/2019 | | 10.18 | | | |
10.17 | | Joinder, dated December 19, 2018, among RE/MAX Holdings, Inc., Parallaxes Capital Opportunities Fund I LP and Parallaxes Rain
Co-Investment, LLC | | 10-K | | 001-36101 | | 2/22/2019 | | 10.19 | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Exhibit No. | | Exhibit Description | | Form | | File Number | | Date of First Filing | | Exhibit Number | | Filed Herewith | |
10.10 | | Form of Time-Based Restricted Stock Unit Award. | | 10-K | | 333-190699 | | 2/24/2017 | | 10.11 | | | |
10.11 | | Form of Performance-Based Restricted Stock Unit Award. | | 10-K | | 333-190699 | | 2/24/2017 | | 10.12 | | | |
10.12 | | Form of Restricted Stock Award (Directors and Senior Officers). | | S-1 | | 333-190699 | | 9/27/2013 | | 10.15 | | | |
10.13 | | Form of Restricted Stock Award (General). | | S-1 | | 333-190699 | | 9/27/2013 | | 10.16 | | | |
10.14 | | Form of Stock Option Award (Directors and Senior Officers). | | S-1 | | 333-190699 | | 9/27/2013 | | 10.17 | | | |
10.15 | | Form of Stock Option Award (General). | | S-1 | | 333-190699 | | 9/27/2013 | | 10.18 | | | |
10.16 | | Joinder, dated May 29, 2015, among RE/MAX Holdings, Inc., Weston Presidio V., L.P. and Oberndorf Investments LLC | | 10-Q | | 001-36101 | | 8/7/2015 | | 10.3 | | | |
10.17 | | Amended and Restated Credit Agreement, dated as of December 15, 2016, among RMCO, LLC, RE/MAX, LLC, the several lenders from time to time parties thereto, and JPMorgan Chase Bank, N.A., as administrative agent.* | | 8-K | | 001-36101 | | 12/21/2016 | | 10.1 | | | |
10.18 | | Consent and Waiver, dated November 14, 2017 with respect to the Amended and Restated Credit Agreement, dated as of December 15, 2016 among RE/MAX, LLC; RMCO, LLC; the several banks and other financial institutions or entities from time to time party thereto; and JPMorgan Chase Bank, N.A., as administrative agent. | | 8-K | | 001-36101 | | 11/15/17 | | 10.1 | | | |
10.19 | | Second Consent and Waiver, dated December 19, 2017 with respect to the Amended and Restated Credit Agreement, dated as of December 15, 2016 among RE/MAX, LLC; RMCO, LLC; the several banks and other financial institutions or entities from time to time party thereto; and JPMorgan Chase Bank, N.A., as administrative agent. | | 8-K | | 001-36101 | | 12/26/17 | | 10.1 | | | |
21.1 | | List of Subsidiaries | | | | | | | | | | X | |
| | | | | | | | | | | | | |
|---|
| | | | | | | | | | | | | |
|---|
Exhibit No. | | Exhibit Description | | Form | | File Number | | Date of First Filing | | Exhibit Number | | Filed Herewith | |
|---|
10.18 | | Amended and Restated Credit Agreement, dated as of December 15, 2016, among RMCO, LLC, RE/MAX, LLC, the several lenders from time to time parties thereto, and JPMorgan Chase Bank, N.A., as administrative agent.* | | 8-K | | 001-36101 | | 12/21/2016 | | 10.1 | | | |
10.19 | | Consent and Waiver, dated November 14, 2017 with respect to the Amended and Restated Credit Agreement, dated as of December 15, 2016 among RE/MAX, LLC; RMCO, LLC; the several banks and other financial institutions or entities from time to time party thereto; and JPMorgan Chase Bank, N.A., as administrative agent. | | 8-K | | 001-36101 | | 11/15/17 | | 10.1 | | | |
10.20 | | Second Consent and Waiver, dated December 19, 2017 with respect to the Amended and Restated Credit Agreement, dated as of December 15, 2016 among RE/MAX, LLC; RMCO, LLC; the several banks and other financial institutions or entities from time to time party thereto; and JPMorgan Chase Bank, N.A., as administrative agent. | | 8-K | | 001-36101 | | 12/26/17 | | 10.1 | | | |
10.21 | | Equity Purchase Agreement, dated January 1, 2019, by and between RADF, LLC and David Liniger.* | | 10-K | | 001-36101 | | 2/22/2019 | | 10.23 | | | |
10.22 | | Asset Purchase Agreement, dated January 1, 2019, by and between RE/MAX Texas Ad Fund, Inc. | | 10-K | | 001-36101 | | 2/22/2019 | | 10.24 | | | |
10.23 | | Share Purchase Agreement, dated January 1, 2019, by and between RE/MAX of Western Canada (1998), LLC and David Liniger | | 10-K | | 001-36101 | | 2/22/2019 | | 10.25 | | | |
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Exhibit No. | | Exhibit Description | | Form | | File Number | | Date of First Filing | | Exhibit Number | | Filed Herewith | |
|---|
10.24 | | Share Purchase Agreement, dated January 1, 2019, by and between Motto Franchising, LLC and David Liniger | | 10-K | | 001-36101 | | 2/22/2019 | | 10.26 | | | |
10.25 | | Severance Pay Benefit Plan | | 8-K | | 001-36101 | | 4/11/2019 | | 10.1 | | | |
21.1 | | List of Subsidiaries | | | | | | | | | | X | |
23.1 | | Consent of Independent Registered Public Accounting Firm. | | | | | | | | | | X | |
24.1 | | Power of Attorney (included on signature page) | | | | | | | | | | X | |
31.1 | | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. | | | | | | | | | | X | |
31.2 | | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. | | | | | | | | | | X | |
32.1 | | Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | | | | | | X | |
101 | | The following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 formatted in Inline Extensible Business Reporting Language (iXBRL): (i) the Consolidated Statements of Income, (ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Stockholders’ Equity and (vi) related notes | | | | | | | | | | X | |
† Indicates a management contract or compensatory plan or arrangement.
* Exhibits and schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Registrant hereby undertakes to furnish supplemental copies of any omitted exhibits and schedules upon request by the SEC.
**Exhibit refiled to correct certain section references.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | |
| RE/MAX Holdings, Inc. |
| (Registrant) |
| | |
Date: March 15, 2018February 21, 2020 | By: | /s/ Adam M. Contos |
| | Adam M. Contos |
| | Director and Chief Executive Officer |
| | (Principal Executive Officer) |
| | |
Date: March 15, 2018February 21, 2020 | By: | /s/ Karri R. Callahan |
| | Karri R. Callahan |
| | Chief Financial Officer |
| | (Principal Financial Officer) |
| | | |
Date: March 15, 2018February 21, 2020 | By: | /s/ Brett A. Ritchie |
| | Brett A. Ritchie |
| | Chief Accounting Officer |
| | (Principal Accounting Officer) |
POWER OF ATTORNEY
Know all persons by these presents, that each person whose signature appears below constitutes and appoints Adam M. Contos and Karri R. Callahan, and each of them, as such person’s true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for such person and in such person’s name, place and stead, in any and all capacities, to sign any and all amendments to this annual report on Form 10-K, and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto each said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or their or such person’s substitute or substitutes, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature |
| Title |
| Date |
/s/ Adam M. Contos | | Director and Chief Executive Officer | | March 15, 2018February 21, 2020
|
Adam M. Contos | | (Principal Executive Officer) | | |
|
/s/ Karri R. Callahan | | Chief Financial Officer | | March 15, 2018February 21, 2020
|
Karri R. Callahan | | (Principal Financial Officer) | | |
|
/s/ Brett A. Ritchie | | Chief Accounting Officer | | March 15, 2018February 21, 2020
|
Brett A. Ritchie | | (Principal Accounting Officer) | | |
| | | | |
/s/ David L. Liniger | | Chairman and Co-Founder | | March 15, 2018February 21, 2020
|
David L. Liniger | | | | |
| | | | |
/s/ Gail A. Liniger | | Vice Chair and Co-Founder | | March 15, 2018February 21, 2020
|
Gail A. Liniger | | | | |
|
/s/ Richard O. Covey
| | Director
| | March 15, 2018
|
Richard O. Covey
| | | | |
|
/s/ Kathleen J. Cunningham | | Director | | March 15, 2018February 21, 2020
|
Kathleen J. Cunningham | | | | |
|
/s/ Roger J. Dow | | Director | | March 15, 2018February 21, 2020
|
Roger J. Dow | | | | |
|
/s/ Ronald E. Harrison | | Director | | March 15, 2018February 21, 2020
|
Ronald E. Harrison | | | | |
|
/s/ Daniel J. Predovich | | Director | | March 15, 2018February 21, 2020
|
Daniel J. Predovich | | | | |
|
/s/ Christine M. Riordan | | Director | | March 15, 2018February 21, 2020
|
Christine M. Riordan | | | | |
|
/s/ Joseph A. DeSplinter | | Director | | March 15, 2018February 21, 2020
|
Joseph A. DeSplinter | | | | |
| | | | |
/s/ Teresa S. Van De Bogart | | Director | | March 15, 2018February 21, 2020
|
Teresa S. Van De Bogart | | | | |
