RE/MAX HOLDINGS INC RMAX
July 22, 2019 - 1:20pm EST by
allen688
2019 2020
Price: 29.12 EPS 2.10 2.15
Shares Out. (in M): 30 P/E 13.6 13.3
Market Cap (in $M): 885 P/FCF 12.2 11.9
Net Debt (in $M): 163 EBIT 81 82
TEV ($): 1,047 TEV/EBIT 12.9 12.8

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Description

Description:

As most are familiar, RE/MAX operates as a real estate brokerage brand. Their business model is unique in the industry and they are 100% franchised through both the RE/MAX brand as well as the recently launched Motto mortgage brokerage brand. They do not own the brokerages operated under these brands and thus have a highly cash generative business with limited capital expenditure requirements.

 

Unique business model:

 

Most real estate brokerage brands tend to have a 1/3-2/3 commission split with the brokers where 1/3 of the commission goes to the brand owner. However, RE/MAX allows its agents to keep about 95% of the commission and requires them to pay monthly and annual fees in return. This model is especially attractive to very productive agents since the economics become much more attractive once they cover the required fees. It is also very attractive for RE/MAX with a more stable income stream that is less cyclically tied to the real estate market.

 

Transactions Per Agent 

(Large Brokerages Only) (1) 

RE/MAX . . . . . . . . . . . . . . . . . . . . . . . . . . 

17.0 

Realty Executives . . . . . . . . . . . . . . . . . . . 

11.1 

Berkshire Hathaway . . . . . . . . . . . . . . . . . 

9.4 

ERA Real Estate . . . . . . . . . . . . . . . . . . . . 

8.8 

Coldwell Banker . . . . . . . . . . . . . . . . . . . . 

8.2 

Century 21 . . . . . . . . . . . . . . . . . . . . . . . . 

7.8 

Better Homes and Gardens . . . . . . . . . . . 

6.8 

Sotheby's International Realty . . . . . . . . . 

6.6 

Keller Williams Realty . . . . . . . . . . . . . . . . 

6.6 

Compass . . . . . . . . . . . . . . . . . . . . . . . . . 

5.2 

HomeSmart . . . . . . . . . . . . . . . . . . . . . . . 

3.9 

eXp Realty . . . . . . . . . . . . . . . . . . . . . . . . 

3.8 

 

RMAX’s revenue comes from annual dues per agent of roughly $400/agent, fixed monthly franchise fees per agent (average $1500/year), broker fees (5% of commissions), fixed monthly fee per Motto office and franchise sales.

 

 

RE/MAX initially established Independent Regions where another party was responsible for selling the franchises within their regions. While RE/MAX still received annual dues, monthly and broker fees from all of the offices, the split was much lower than in company-owned regions. As the company has grown and cash has been generated, they have actively buying in the Independent Regions. These deals have been very accretive for RMAX and allows the regional owners and exit strategy for their businesses.





~$300 / Agent

Average

~$100 / Agent

Average

~$350 / Agent(1)

 

~$1,500 / Agent

Average

 

~$750 / Agent

Average

~$400 / Agent(1)

 

~$150 / Agent

Average

~$50 / Agent

Average

~$50 / Agent

Continuing Broker Annual Dues Continuing Broker Annual Dues Continuing Broker Annual Dues

Franchise Fees Fee Franchise Fees Fee Franchise Fees Fee




Flow through Independent Regions 

Implied Gross 70%-85% Upside through

Independent Region

Acquisitions

 
 

 

Due to the structure of the business model, the company’s success and growth is largely dependent on agent count. While RE/MAX has been able to consistently grow agent count with its attractive economic split for agents, competition has been fierce of late which has led to a slight decline in the US/Canada this year. Agent count is roughly 2/3 US/Canada, but revenue is 95% US/Canada due to a different structure globally. Strong International growth of over 15% will still allow them to grow total agents by several % this year.

 



 

 

RE/MAX Agent Count





RE/MAX Agents by Geography 

As of Year-end 2018    

           




RE/MAX Revenue by Geography (a) 

Percent of 2018 Revenue  




Challenges:

Just as we are seeing disruption in other industries, the real estate brokerage business is feeling it as well. Compass is a Softbank backed upstart that has been extremely aggressive in the market. It was initially launched with different business model that paid brokers salaries rather than commissions. This has been tried before and usually fails since the most productive, hardest worker agents prefer to be paid for their production. Compass has shifted to a traditional business model and attempts to use technology solutions as a differentiator. Their aggressive recruiting tactics by offering higher splits and stock options has led to a lawsuit from Realogy. The company has raised over $1 billion in VC funds leading to a valuation of $4.4 billion despite losing money. Similar to the WeWorks and Door Dashes of the world, it is hard to see how sustainable this is. And for Compass in particular, they are not really doing anything unique at the same time valuations have come down for brokerages in general. Regardless, the disruption has a greater impact on Realogy and others that operate at the higher end of the market. Fierce competition from other competitors like Berkshire Hathaway are also pressuring the market.

 

Capital Structure:

The Class B shares owned by the founders are included in the diluted share count.

Insider Buying:

RE/MAX was founded in 1973 by David Liniger and his wife, Gail. Following the IPO in 2013, they controlled the company with economic ownership of 41% through Class B stock with voting power of double that amount. On October 7, 2018, they amended the agreement to lower their voting power to a 1 for 1 structure eliminating their effective control of the company though they clearly still retain significant influence with their substantial holdings. Both are current Board members.

In early June of 2019, they began purchasing Class A shares in the open market by accumulating just under 354,000 more shares at an average price of $31.41 Mr. Liniger released the following statement after his initial purchases:

"I consider the RE/MAX stock at current levels to be undervalued. RE/MAX has made key acquisitions, produced outstanding margins and generated strong cash flow. No doubt the industry is changing, as it always has in my 50 years of experience, but the constant that I see through all of this time is consumer preference for quality brokers and agents. Consumers want the speed and convenience that technology has brought to real estate, but they also want the confidence and certainty delivered through personal, professional service. I believe that RE/MAX is uniquely positioned to continue to be the leader in the industry, which is what gives me great confidence that the company is well positioned for the future. That is why I have been buying shares in the open market and may continue to purchase additional shares."

 

While the purchases so far only represent an increase of 3% in his economic interest, it is the first time he has done so.

 Thesis:

Over the last decade, we have seen a greater appreciation for franchised businesses and their stable, cash generative qualities. Companies like Dominos, YUM Brands, Marriott and Choice Hotels have seen their FCF Yield fall below 4% given the stability and capex free growth. RE/MAX had been a beneficiary of this trend until the past year with the yield doubling to over 8%. While the real estate brokerage industry is facing change, it is much less of a threat being seen in other industries. Buyers and Sellers are still relying on traditional agents for about 90% of transactions with similar future intentions. Even if see pressure on commissions rates, RMAX is insulated due to its recurring revenue model that is does not heavily depend on broker commissions. RMAX is still increasing their global agent count and seeing notable increase in new Motto franchises. We have also seen increasing consolidation in the space and RE/MAX could be an attractive target or a potential take private with the founder given its recent stock market performance. Barring M&A, any relief in the unsustainable and unprofitable recruiting of agents in the market place would allow for multiple expansion for RMAX without the need to approach historical levels.





I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

 - M&A

- Improved housing market with the recent drop in mortgage rates

- Any shift in sentiment given negative consensus and all-time low valuation

- Normalization in competition for new agents

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