M&A Announcement

Jun 4, 2021

Good morning, and welcome to the Conference Call and Webcast to discuss REMAX Holdings Agreement to acquire REMAX Integra's North American Regions. My name is Casey, and I will be facilitating the audio portion of today's call. At this time, I would like to turn the call over to Andy Schulz, Senior Vice President of Investor Relations. Mr. Schulz, please go ahead, sir. Thank you, Casey, and good morning, everyone. Please visit the Investor Relations page of remax.com for all related materials to today's announcement and to access the live webcast and the replay of the call today. Turning to Slide two. Our prepared remarks and the answers to your questions on today's call may contain forward looking statements. Forward looking statements include statements about the acquisition of the REMAX Integra North American regions, including statements about the closing of the transaction and the benefits of the transaction as well as statements related to agent count, franchise sales, financial measures and outlook, brand expansion, competition, technology, housing and mortgage market conditions, capital allocation, dividends, strategic and operational plans and business models. Forward looking statements represent management's current estimates. REMAX Holdings assumes no obligation to update any forward looking statements in the future. Forward looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ materially from those projected in forward looking statements. These are discussed in our related press release and other SEC filings. Also, we will refer to certain non GAAP measures on today's call. Please see the definitions and reconciliations of non GAAP measures contained in our most recent quarterly financial results press release, which is available on our website. Joining me on our call today are Adam Contos, our Chief Executive Officer Carey Callahan, our Chief Financial Officer and Nick Bailey, President of REMAX LLC. Ward Morrison, President of Motto Franchising, will join us for the Q and A. With that, I'd like to turn the call over to REMAX Holdings' CEO, Adam Contos. Adam? Thank you, Andy, and thanks to everyone for joining our call today. We are thrilled to discuss with you our agreement to acquire REMAX Integra's North American regions for $235,000,000 in cash. The purchase, which we expect to be accretive in year one, is by far the most significant independent region acquisition in the history of our company. REMAX Integra is our largest independent regional operation and includes five Canadian provinces and nine U. S. States, covering many local markets where REMAX thrives in terms of brand presence and market share. Adding these strategic geographically desirable regions will strengthen the inherent financial framework around our regional operations. It also will advance our ability to scale, deliver value to affiliates, bring additional growth opportunities as well as simplify our operational structure. As many of you know, acquiring independent regional franchises has long been a capital allocation priority for us and a key pillar of our growth strategy. We typically receive between 1530% of an independent region's fee revenue. In acquiring an independent region, we can recapture the additional 70% to 85% of revenue previously earned at the regional level. In addition, because we're acquiring a part of our existing network, we believe the integration risk that normally accompanies an M and A transaction is relatively low and that we are able to leverage operational synergies in providing support, services and products. This is why independent region acquisitions are so attractive and accretive to our business. This acquisition is subject to customary closing conditions and is expected to close in the third quarter. Here are the highlights. As I mentioned earlier, Integra's North American operations span nine U. S. States and five Canadian provinces. That includes the three Midwestern states of Minnesota, Wisconsin and Indiana as well as all of the New England states Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island and Vermont. We're also acquiring the Ontario Atlantic Canada region, which includes Ontario as well as New Brunswick, Newfoundland and Labrador, Nova Scotia and Prince Edward Island. After the transaction closes, only five independent regions will remain, four in The U. S. And one in Canada. Once completed, the acquisition will add nearly 19,000 agents, approximately 12,000 in Canada and 7,000 in The U. S. As well as more than 1,100 independently owned and operated REMAX offices to our company owned region umbrella. For context, Integra's North American operations comprised about 65% of the combined U. And Canada Independent Region Agent count as of March 31. Before I turn the call over to Nick, I want to thank the REMAX Integra co founders Frank Posler and Walter Schneider and their amazing families for their dedication and passion in growing the REMAX brand for more than forty years. They will still own and lead REMAX Integra's REMAX Europe region, where they'll continue to have a positive impact on region owners, franchisees, sales associates and consumers. Now I'll turn the call over to Nick. Thank you, Adam. Turning to Slide four from an operational perspective. When I think of all the positives that come with this acquisition, the list is very long and compelling. We'll gain greater speed and consistency as well as enhanced ability to scale and more opportunities for overall growth. All these factors should benefit our customers, brokers, agents and consumers alike. An inherent challenge with independent regions is having more one more step to every process and decision or one more system or vendor to deal with. Bringing these regions in house will simplify the critical path with every major decision and initiative, which significantly will speed things up. And perhaps now more than ever, speed to market is essential. Adding 19,000 agents to our company owned regions gives us the opportunity to scale faster than we've been able to in the past. It means more agents on the same systems, using the same products, combining resources and delivering a more consistent consumer experience. Plus, the timing really could not be better. Historically, REMAX has been a story about scale. And the latest chapter in this book is being written now as we're reaching critical scale with our newly revamped technology stack. We are just beginning to gain transaction with our traction with our tech suite rather, so this is an optimal time to bring our biggest client back under the tent. It means more REMAX agents will have unfettered access to our tools, training and tech developed and curated for our unique culture of highly productive agency teams. In terms of growth and opportunity, the acquisition further supports our main drivers of organic growth, increased agent count, additional franchise sales and tech opportunities among others. Plus, given the similarity of our operations, we'll be able to take advantage of and realize multiple operational synergies. In The U. S, for example, the acquired regions will be absorbed into our existing company owned region organization, which means that most of the necessary support structures and services are already in place. After all, our team supports over 48,000 U. S. Agents now, so the addition of 7,000 more should bring more opportunities than challenges. In fact, having 55,000 U. S. Affiliates in the company owned regions aligned and using the same systems should mean more cohesion, consistency and product adoption across the board. Ultimately, the same should be true in Canada, where affiliates will see many benefits of having even tighter alignment across the country. The Western Canada and Ontario regions already work closely on many things like events and market reports and this move will add even more consistency to the mix. REMAX has been a clear industry leader in Canada for decades, and this acquisition positions us for even better things in the future. I'm anticipating many opportunities to merge the best of Western Canada and the best of Ontario Atlantic Canada to create something even more powerful across the entire country. Christopher Alexander, who's been leading Integra's Canadian region over the past few years, will join our team and partner with Elton Ash, who runs our company owned region in Western Canada, to guide a smooth transition and the ongoing development of integrated services across Canada. Our newly combined Canadian operations will also continue to work with the outstanding independent region team in Quebec. Lastly, our tech expansion into Canada is set to launch later this year. We'll bring our booj platform up north, and that's just going to be the beginning. We see a huge opportunity to improve our digital presence at every level with the goals of driving business to the agents, creating the best consumer experience possible. A better consumer search experience drives greater traffic to our digital assets, which in turn builds business for our affiliates. That's our motto, everybody wins. So for the remainder of 2021, our focus will be on completing a smooth transition and enabling the ongoing success of the franchisees and agents in the acquired regions. Already, our teams are engaged in discussions with our brokers and agents and strategizing with them on how we'll continue to support their growth. We're conducting virtual Ask Us Anything sessions starting today so that brokers in these regions can speak directly with our leadership and feel comfortable with the transition. Our franchisees expect and deserve the absolute highest level of support, and we intend to deliver on that. The transition will commence as soon as the deal closes. We expect the membership in all of these regions to recognize the incredible value of being in a company owned region. With that, Carrie? Thanks, Nick. Looking at Slide five, we are extremely excited with our agreement to acquire REMAX Integra's North American business. We have remained steady and resolute in executing on our capital allocation priorities over the past few years. Our balance sheet discipline and patience have paid off as we have kept our powder dry to be able to act on an opportunity like this should one present itself. Committed financing has been secured on terms consistent with our existing credit facility. Financing this acquisition exclusively with debt made the most financial sense and should give us a more efficient capital structure going forward. After adding the expected EBITDA contributions from the acquired regions, we expect our leverage to increase to a still comfortable level of approximately 3x on a net basis and approximately 4x on a gross basis. The cash generative nature of our legacy business, combined with similar financial characteristics of the acquired assets, plus more than $100,000,000 of cash on hand, provides us with the flexibility to continue to invest and act opportunistically when we come across other attractive opportunities, which fit within our strategic plan. Turning to Slide six. As Adam mentioned, the transaction is subject to customary closing conditions, and we expect it to close next quarter. Consequently, we are not updating our 2021 guidance at this time. Once the transaction closes, in the first year of our ownership, we expect Integra's North American operations to generate revenue in a range of $52,000,000 to $55,000,000 including revenue from its marketing funds in the range of $19,500,000 to twenty one point five million dollars adjusted EBITDA in a range of $19,000,000 to $21,000,000 and adjusted EPS in a range of $0.22 to $0.26 per diluted share. Two items to note with respect to these expectations: first, the aforementioned estimated revenue and adjusted EBITDA contributions are each lower by approximately $1,000,000 because accounting rules preclude us as the acquirer from recording the seller's deferred revenue balance from franchise sales renewals. This will initially result in us recognizing less franchise sales revenue than the seller did previously. But importantly, it has no impact on the overall cash flows of the business. And second, these projections assume no further currency movements, acquisitions or divestitures and would be incremental to our legacy business. With that, I'll turn it back to Adam. Thank you, Carrie. Turning to Slide seven. In summary, we cannot be more pleased to have entered into this agreement to acquire the REMAX Integra North American regions. This significant milestone in our history adds increased scale, speed, growth and opportunity to REMAX at a time when the real estate market continues to show incredible resilience and strength. Is a win for our affiliates, our consumers and our investors. We can't wait to close the transaction and begin realizing the many added benefits we believe it will bring to REMAX and our stakeholders. With that, operator, we would like to open it up for questions. Certainly. Thank you. And your first question here comes from Anthony Paolone from JPMorgan. Please go ahead. Your line is now open. Okay, thanks. Good morning and congratulations. My first question is, as it relates to operations and bringing the regions in house, what do you specifically intend to do differently perhaps in the first few quarters or the first year compared to what the owners currently have been doing? Hi. Thanks for the question. This is Nick. First and foremost, I mentioned we're going to be integrating The U. S. Operations into our existing Central And Northeast regions. And so we will take the opportunity between now and close to put the plan together on all of the leadership communicating with all of the owners. But that's step number one is to integrate them. From there, as far as something that we will do different, actually, the good news is we operate the regions very similar as to the previous independent owners. So we're just going to gain the synergies and the opportunity to align systems, create more consistency for agents and brokers that will transition or trickle down to consumers. So it's really not about doing something different. It's really just it's really more about integrating for scale and smooth operations overall. Okay. And I don't know if you can point to just experience on past independent region acquisitions or just your process in underwriting this acquisition. But how do you think about just the potential for breakage of franchisees or conversely the opportunity to recruit or grow? Like is there any low hanging fruit that perhaps wasn't being captured or at risk to the downside? Yes. So because of the nature of how our franchise agreements are structured, we're not worried at all about breakage because those contracts are part of the acquisition of the assets of the deal and the terms of those agreements remain in place as they would with each one of the franchisees. So no risk there. What any type of move like this because of the synergies, the systems, the excitement, the communication, those are all great opportunities to put the growth pedal pushed a little stronger. And so there's only upside when it comes to being able to pull these in under one umbrella and drive growth from one voice instead of two. Got it. And then just a couple of financial ones maybe for Carey, just to make sure I understand. The revenue and EBITDA that you're showing from this, that's net of the $1,000,000 that comes out. Is that right? That's correct. So the $1,000,000 is something that basically gets lost at the time of acquisition related to that deferred revenue. So it's revenue that we will not be able record on a go forward basis. If there wasn't that nuance, you're correct. The revenue and the adjusted EBITDA numbers would be $1,000,000 higher. Okay. And then these numbers, particularly like the revenue number, does that include or exclude the annual dues that I guess you're already getting? So that this is truly what would be incremental. So the annual dues from those agents is included already in our legacy business. And so this is just the incremental revenue that comes from the changeover from the approximately 19000 agents converting from independent regions to company owned regions. Okay. Got it. And then so does that account for If I look at the number you mentioned, you expect $2,275 per agent in terms of this deal, that includes the annual dues, I assume? Yes, that does. Okay. Got it. And then I guess just last question on that. It seems like then you're bringing in about $13,000,000 of incremental costs on this deal. Just wondering what the big buckets of that are? Like what do have to bring in here? Sure. So I mean, obviously, as Nick mentioned in the scripted remarks, we're very focused on making sure that we provide a consistent experience for our franchisees and agents in terms of support staff. We run a very efficient and lean staff, and we want to make sure from a personnel perspective, we've got the right support not only from the front end franchise perspective, but also as we look to optimize the technology across both The U. S. And Canada with the rollout up in Canada next year from a personnel perspective that we're continuing to allocate the appropriate resources. Okay. So it's mostly it's people, right? It will be this will be personnel in terms of the bucket, really? Yes. Okay. Thank you. Your next question comes from the line of Tom McJoint from KBW. Please go ahead. Your line is now open. Hey, good morning, guys. Thanks for taking my question. So on one of the slides, you mentioned that the Canada Agents and company owned regions are a bit lower due to the eight legacy agent economics and the impact of foreign exchange rates. Can you quantify how much of that is driven by exchange rates and how much is from legacy? And is that kind of legacy aspect kind of running off over time perhaps but over a kind of a longer time period? Sure. Tommy, the vast majority of that is really driven by exchange rates. And so I would say that's the vast majority of it. In terms of just kind of the legacy structure, those are things that we're going to evaluate over time. As Nick mentioned, there's multiple different opportunities for growth here. And so we'll just continue to evaluate what we think the right pricing mix looks like and be able to leverage that going forward based on what we think the right opportunities are for the business. Okay, great. And so it looks like the EBITDA margins on this incremental business are fairly consistent with your overall business. So is it fair to say that kind of the margins are pretty similar between company owned franchises and the independent regions in terms of those revenues? Yes. So I mean, if you look at just the stand alone margin, obviously, it's significantly higher than what we're looking at. So kind of on a pro form a basis, you're looking at about 200 basis points of margin improvement. So I think, again, we think that there's a lot of opportunities here and instantly accretive. And so really excited about the opportunity and what it brings to the future financial operational performance of the company. Okay, great. Thanks, Gary. Your next question comes from the line of Ryan McKeviny from Zelman and Associates. Please go ahead. Your line is now open. Hey, good morning. Thanks very much and congrats on the deal. One follow-up on that last response. So on the EBITDA margin, kind of the 200 basis points or so above kind of the corporate business. Is that a function of like Integra pre existing running at a higher margin? Or is that factoring in incremental synergies that come over once you guys kind of own that business? Yes. So what I was saying there, right, if you basically just look at our legacy business and the guidance that we provided back in May and then added this on to it, right, you've got an incremental upside, right? And so I think as we just look at synergies and the opportunities that this brings, it's kind of a combination of the two. Got it. Okay. Makes sense. And on the revenue buildup in the Marketing Fund revenue, I guess, it looks as though what's coming over kind of the marketing fund as a percent of total revenue looks to be higher with Integra than 2020 corporate results. Anything to that or any comments you could share on kind of why that's the case? No. So I mean, as we look at that, right, all of the different regions have their own cost structure with respect to marketing spend. And some of those regions are just a little bit were just a little bit higher. And so obviously, we're looking at how we optimize all of the marketing spend. One of the biggest competitive advantages that we have is the brand and then the structure to be able to pull those dollars from a marketing fund perspective. And so we think it's actually an advantage as we look at deploying marketing and technology across all of the acquired regions. Okay. And two more very quick ones. Is there any stock comp assumption kind of being added back to the adjusted EBITDA guidance? And then second question, just to confirm on the deferred revenue dynamic. Is that I know it's just kind of accounting noise, but is that just a function of when franchise is sold, it's kind of amortized over a longer period of time and the cash component has already happened. So even though the revenue goes away, that's kind of why the cash impact doesn't matter. And then as you guys, from kind of starting point ground zero, build up your own franchise sales within this, that would ramp back up over time. Is that the right way to think about that? Sure. So let me take your first question first, Ryan. With respect to stock based compensation, there is no impact to stock based compensation as a result of the acquisition. So nothing changes there. And then with respect to your second question on the deferred revenue, yes, you're looking at it the right way. So from a GAAP accounting perspective, the deferred revenue that exists because of the fact that we recognize revenue for franchise sales over a five year period, obviously, the sellers had been recognizing about $1,000,000 of that over time. We will not be able to recognize that prospectively after the deal closes with respect to those legacy franchise sales that exist as of the acquisition date. From a cash flow perspective, that cash had already come in. And then prospectively, as we sell franchise sales, we will build that deferred revenue balance back over time. And so we'll start to capture that in the subsequent five years. It's just what exists today and the future runoff of it is what will never be captured. Okay. Thank you, Kerry. Very helpful. Your next question comes from the line of John Campbell from Stephens. Please go ahead. Your line is now open. Hi, good morning. This is James Holly stepping in for John Campbell. Congrats on the deal. I just had two quick questions here. One, you've outlined about 1,900.0 per agent in revenue lift from the region conversion, but I'm curious about the additional revenue that you could pick up from cross selling on the tech related solutions like First? Sure. So I think one of the things that we're so excited about the opportunity is really looking at how we can drive synergies, not only in The U. S. But in Canada. So looking at First, in particular, that's something that right now has been U. S.-focused. But we're very focused this year, as we said back in May, on taking the booj platform to Canada and then leveraging other things like First and even other things potentially like Motto. So I think that there are opportunities for us as we look at other monetization because of the scale that this acquisition brings to the table. Okay. Great. And then second one here. Are there any notable changes in the day to day operations for an agent when they operate in the company owned region? And if there is a notable change, how have retention levels looked in the months following past buyouts? So for most of the agents, it is going to be in the immediate future business as usual. They've had access to the brand and and many of the services that we provide just as a brand from the headquarters level. However, though, as we move and think about later this year and especially moving into next year, when we talk about the consistency of tech platforms, One of the challenges we've always had with independent regions is they have the ability to choose their own technology and their vendors and some of their services. And so agents have had to deal with some level of disparate systems from region to region. And that's the experience that there's only upside for the agent and us as we look to pull those systems through to every agent and broker that are consistent and run on one platform. So no change that's going to be a negative for the agent, but in the coming months it will just be positive on their ability to tap into similar and less disparate systems overall. Got you. Thank you for taking my question. Appreciate it. Your next question comes from the line of Matthew Gargiassos from Compass Point. Please go ahead. Your line is now open. Hey, good morning and congrats on the announcement. Maybe just a quick one for Kerry. Can you speak a little bit to the decision to finance the deal with the debt offering? And any additional thoughts just on where you're comfortable from a cash or leverage ratio target perspective? Sure. Matt. So we've really been looking at our capital structure and wanting to make sure that we had the financial flexibility should an opportunity like this present itself. Given the overall strength of our business model, the franchising business model, the cash flows, all of the economics that come with that, we've always said that we would be comfortable taking leverage up, call it, on a four times on a gross basis, three times on a net basis, maybe a touch higher than that. This will be this will put us just a little bit below three times. And so we're still very comfortable with that. And we think this provides us a more efficient capital structure and something that we can definitely support given the strength and the cash flows of our business. And so just from a use of capital and from a cost of capital perspective, using debt was definitely the option that we thought was the most efficient and effective. Got it. That's helpful. And then maybe just one on recruitment, maybe for you, Nick. Just how are you thinking maybe just expanding on your points, just how are you thinking about the benefit that this provides to the recruitment strategy on the company owned side? Yes, great question. I think the best piece of it or the upside is it eliminates a middleman of sorts. And so when we put together our recruiting programs, our education, our communication, our contacts, every step or hop that has to go through has the opportunity for delay and impact risk. And so what this does in recruiting is we're going directly to every franchisee as we do in our company operated regions versus working through kind of a middleman and having them deploy either what we're offering or maybe modifying it. And we run into, I'm in one state and I'm getting this and maybe I'm in another state and I'm getting that. And so we just get to pull this consistency through all of our growth initiatives directly to all the franchisees like we do in our company operated regions. And that should prove to be a benefit. That's helpful. Thanks for the color. Your next question comes from the line of Anthony Paolone from JPMorgan. Please go ahead. Your line is now open. Thanks. Just had a couple of follow ups. One is, is there any incremental depreciation or amortization? Because it seems like if I just take your EBITDA minus your tax rate and the interest on the debt, it'd be a little bit more accretion than what you're showing there. Yes. So in terms of amortization, there will be additional amortization because about twothree of the purchase price is going to be allocated to the franchise agreements, very, very high level. So additional amortization will be coming through. So about, call it, 15,000,000 or so in the next twelve month period. So we will have additional amortization expense. Dollars 15,000,000. And that's going to hit EPS or? No, sorry. I'm just sorry. Was just focused on the amortization number. So for purposes of EPS, that's excluded. Okay. So is there anything else, though, then between kind of the EBITDA number you're showing us besides, say, interest expense and taxes? No. Okay. Great. And then last item on Motto. Is Motto in Canada? Or is there an opportunity there? Tony, are you there? We lost you. Yes, I'm here. Can you hear me? Operator? Yes, Tony's line is still live. Hey, we dropped. Can you pass us back in? Hi, are you there? Yes, we're here. Sorry, I don't know what happened. But my last question was just on Motto, whether Motto is in Canada or not? Motto is currently not in Canada, but by combining all of Canada together, like Nick talked about, the ability to roll out something like a Motto becomes much easier because we have one uniform front now. So the opportunity is there and potentially for Amado to move up there. We'd be excited to go up there. It just makes it a lot easier now that we own all of Canada except for Quebec. Okay, great. Thank you. And I'm not showing any further questions at this time. I will now turn the call back over to Mr. Schulz for closing comments. Okay. Thank you, Casey, and thanks to everyone for joining us on the call today. Have a great weekend. Thank you. And this concludes today's conference call. Thank you for your participating. You may now disconnect.