RE/MAX reported Q3 earnings on Halloween, and I can’t help but think there was a lot more trick than treat in its Q3 results. Yes, RE/MAX remains fundamentally healthy and it has some advantages over its main competitors, especially the other publicly reporting franchise company, Realogy, but there were a lot more walking dead in these numbers and these comments than there were candy bars.

In Q1, I wrote that RE/MAX was poised on the brink of greatness but refusing to make a leap. In Q2, I wrote that something’s gotta give because its business model is in conflict with the strategic vision it is laying out. Well, for Q3, I think RE/MAX is telling everyone not to look backwards, but forwards. It’s not about what has happened in the past three months (indeed, the past few quarters), but what will come in the days ahead.

Let’s get into it.

The Numbers

We begin with the actual numbers from RE/MAX. If you’d like access to the entire spreadsheet, please let me know, as I try to figure out how to let y’all just click through to the Google Sheet.

I don’t care how Adam Contos, Nick Bailey, and Karri Callahan want to spin these numbers; this was not a good quarter for RE/MAX. To be fair, most of their spin revolved around how wonderful October was ever since Nick Bailey came on board as the new Chief Customer Officer. (Far more on this below.) But still, those are some distressing numbers for Q3.

Every single category of revenue was down YOY, resulting in a 2.5% decline to $53.5 million vs. $54.9 million. That’s not great.

On a Q/Q basis, it was more or less flat, but Broker Fees was down 1.2% from Q2. The relevance here is that Broker Fees is the one revenue category for RE/MAX that isn’t dependent on agent count, but on production. From the 10Q:

Revenue from broker fees represents fees received from the Company’s RE/MAX franchised regions or franchise offices that are based on a percentage of RE/MAX agents’ gross commission income on home sale transactions. Revenue from broker fees is recognized as a sales-based royalty and recognized in the month when a home sale transaction occurs.

So in the busy Q3 selling seasons, which goes from July to September, RE/MAX agents had lower sales volume… or the loss of RE/MAX agents led to fewer closed transactions.

Either way, on the whole, RE/MAX agents did fewer transactions or did less expensive ones, leading to a decline in GCI which directly leads to a decline in Broker Fees.

If it were not for the fact that cost-cutting measures brought Expenses down by roughly $3 million, the profit picture would have been a bit grim as well. So I guess we have to credit Karri Callahan and Adam Contos for holding the line on costs, knowing that the revenue situation wasn’t great? That’s the same story from Q2: lower revenues, but cost-cutting measures ended up in increases in profit.

The problem is, no company anywhere has ever cut its way to growth, and RE/MAX is not growing, except overseas. Its U.S. agent count dropped by 1,734 YOY while Canada only brought on 111 new agents YOY. That makes the fourth sequential quarter since Q4/2018 that RE/MAX has lost agents on a YOY basis.

No, RE/MAX is not in trouble — it brought in $23.4 million in operating income at a fat 44% margin, and it didn’t lose money. It made a nice and healthy $9.1 million in Net Income, an increase of over 12% YOY. It generated $54.8 million in free cash flow, and has little debt. RE/MAX still has significant advantages over their competition, most notably Realogy, whose Q3 earnings on Thursday ought to be super interesting.

However, Q3 was not a good quarter. Q2 wasn’t great either. So the trend is not great, at all.

Don’t Look Back; Just Look Ahead

One of my biggest takeaways from this earnings call is how much of the positive spin was put on October. For example, Karri Callahan mentions seeing some “positive traction” on agent count in October, contrasting with last October when RE/MAX lost hundreds of agents. Or there’s Ward Morrison from Motto Mortgage, talking about how October was one of the strongest months for Motto franchise sales. And Nick Bailey, the new Chief Customer Officer, talks about growth initiatives launched in October that has led to some of the best gains they had seen in a month.

I think we are all supposed to sort of gloss over the horror film that was Q3 and look forward to Q4 where we will see all manner of improvement. It’s almost as if RE/MAX would desperately want to put the terrible three months behind them and look ahead into the future.

But it’s really hard to look forward with much hope when so little is said about the past.

The biggest holy $&#* moment came when John Campbell of Stephens (one of my favorite real estate analysts who I did a Notorious Interview with) asked about booj, agent growth, and adoption rates. John flat out says that booj, which was THE big strategic focus in Q1 and in Q2, doesn’t appear to have played much of a role in driving agent growth in Q3. Then he asks how RE/MAX defines success around booj in the future, what the KPIs (Key Performance Indicators) might be.

The answers from both Adam Contos and Nick Bailey are concerning.

First off, neither answered the first question about booj’s impact on agent growth at all. That’s kind of a big deal. When booj was the thing you staked growth on since the beginning of the year, and the company lost agents, don’t you kind of have to deal with that? No answer.

Second, Adam Contos starts talking about adoption rates:

Adam Contos — Chief Executive Officer

John, it’s Adam. I mean first of all obviously the best gauge of success initially with a launch is adoption rate. So we’re — the booj platform is centered around the CRM and we look at a couple of things.

One is how many people have signed up for it how many people log into it and how many people are actually utilizing and putting their contacts in there? And what’s that volume of contact placement that we’re seeing as well as the frequency of log and things of that nature.

But ultimately the cool part about this is having been through these different technology launches in our space before that we’ve done a few years ago. This one we find to be incredibly powerful. We’re very excited about it because the sentiment that we’re seeing and the pickup rate the adoption the conversation and the sentiment going on about this.

Okay… so… what is the adoption rate? How many people have signed up for it? How many people log into it? How many people are actually utilizing and putting their contacts in there? What is the volume of contact placement you’re seeing? What is the frequency of login and things of that nature?

Adam goes on to say that they have “a lot of raving fans now.” Then he doesn’t actually say how many such raving fans there are, or any of the KPIs he just mentioned. Instead he talks about having trained hundreds of trainer, brokers and agents. Then again, he says, “we’re seeing a very good adoption rate.”

What is the rate??? If it’s 5%, that’s a disaster. If it’s 15%, that’s not great, but that’s about the norm for the industry. What is “very good adoption rate” in RE/MAX’s mind? Because from where I sit, if adoption rate is below 30%, RE/MAX has a major problem on its hands.

Furthermore, I can’t help but think that if booj had 40,000 agents logging in regularly, uploading their client lists, and actually using the system, that would have led the entire earnings call. After all, if we’re to ignore the terrible numbers posted in Q3, and only look ahead, it really would help to learn that the flagship strategic initiative is being embraced widely by the agent population, these “raving fans” that Adam speaks of.

And third… well… that deserves its own section.

Booj Does What, Exactly?

The thinking at RE/MAX is, if we can make agents more productive with booj, our franchisees will be able to recruit more and lose fewer agents:

So really this is an efficiency play for the agents and brokers in order for them to really leverage our business to spend more time with their customers and more effective time with our customers through the communication through transparency through clarity and really it has a great deal of impact on our relationship with them and the retention that provides us in our network. So obviously retention leads to a lever in agent growth because we’re losing less we’re keeping more. And thus we can gain more effectively. So overall this whole thing has been a great success for us.

The problem with this theory, of course, is the past.

Brokerage Fees went down in Q3 both YOY and Q/Q. That’s not efficiency, that’s not productivity. In fact, that’s the opposite of productivity since it means that RE/MAX agents did less Sales Volume.

And if efficiency leads to retention which leads to a lever in agent growth, I have to point out that RE/MAX lost over 1,700 agents in the U.S. in Q3. If the idea is that the loss would have been worse without booj, I wonder if that’s good news or bad.

Then it takes an interesting turn:

Nick Bailey — Chief Customer Officer

Agreed. Customer experience, that’s a focus of it. You hear all the time end-to-end platforms are integrated. We’re focusing on the customer experience because quite honestly when you look at surveys in the industry and buyers and sellers, after they buy or sell a house — some of you on the call may have personally dealt with this — and you say “Would you like to go through it again?” And a lot of consumers say no.

And this is where we can take technology and leverage it for the consumers which helps empower the agent: the better that the agent sits, the more productivity the more agents that the offices have.

I have listened to this section three times, and I’m still not sure what Nick means here.

First, the part about consumer experience sounds like something you might hear from the Zillow Offers team, or from Flyhomes. It’s great justification for a whole new approach to transactions, but what that has to do with RE/MAX and booj is a little bit of a mystery.

Nick goes on to talk about just getting agents to adopt booj is step one, and step two is getting them involved with their contacts. But he then immediately pivots to talking about 89 million leads and how the pace of leads is overwhelming agents.

I am now thoroughly confused as to what exactly booj is supposed to do. It’s an efficiency tool that drives productivity, but its focus is the consumer experience because buyers and sellers don’t want to go through the horror show that is the modern real estate transaction, yet booj doesn’t change the transaction at all, it just empowers agents, and that productivity means more agents, because the pace of 89 million leads is overwhelming agents. What?

What does online leads have to do with an agent’s sphere of influence/database marketing? What does that have to do with consumer experience with the transaction? What does any of that have to do with growth?

And far more fundamentally, how exactly does more productivity lead to more agents in each office?

In the Q2 post on RE/MAX, I wrote that RE/MAX has a strategic problem on its hands:

The rollout of booj means that RE/MAX’s core strategy is to make their great agents better, and their good agents great.

The problem is that RE/MAX’s business model is, in the words of RE/MAX itself from the Investor Presentation, “Multiple, primarily recurring, fee-based revenue streams.” In other words, RE/MAX’s revenues depend primarily on flat fees from agents to brokerages who then pay RE/MAX.

Since real estate is a zero-sum game, where each transaction an agent does takes away from another agent, making RE/MAX agents more productive means all of those transactions have to come from somewhere, from someone else.

I suppose the thinking is that RE/MAX agents can take those from Realogy agents and KW agents and so on, but the reality is that each and every agent at RE/MAX is his or her small independent business. They all compete against one another, even in (especially in) the same office.

It’s one thing for Realogy, whose business model is all about agent splits from GCI, to talk about productivity. It’s a whole other thing for RE/MAX with its agent count dependent model to talk about productivity.

There is a way to make productivity tools work as a driver of growth, which is ultimately where RE/MAX makes its money, but nothing I heard in Q3 makes me believe that RE/MAX management has a clear and precise idea of how to do that.

It’s all kinds of confusing, and concerning.

Is There a Leadership Change in the Works?

Finally, perhaps I am the only person in the world to think that there was something rather odd about this earnings call. Perhaps not. But I thought Nick Bailey’s presence on the earnings call was a bit odd. Serene Smith, the COO, is not on that call. But a guy who’s been there for a hot minute, who really made no contributions to Q3 results, is?

Then there is the issue of Adam constantly deferring to Nick to make further comments or clarifications or explanations, which then led to the analysts directing question to Adam and to Nick both.

I have only read the coverage from John Campbell and he calls out the Nick Bailey hire like this:

5. Nick Bailey Hire a Positive

RMAX landed a savvy industry vet when it hired (re-hired) Nick Bailey into the newly created Chief Customer Officer position. Bailey has extensive experience (23 years) in the space with roles ranging from hands on work (broker), to operator (franchisor) and finally to leader (most recently CEO at Realogy’s Century 21 & SVP at Zillow/Trulia’s past Market Leader business prior to that). At a high level, this new role centers on “growth” and Bailey’s initial focus is improving the relationship the franchisee network has with RMAX corporate/HQ, which should eventually support coordinated efforts around market share gains, agent recruitment, professional development and industry relations. Net-net, we believe that the Bailey hire was a smart one for RMAX as he is both smart and battle-tested (something that should come in handy amidst an industry that is likely set for rapid change in the quarters/years ahead).

Yes, the Bailey hire was a smart one for RE/MAX. I know Nick pretty well, and he’s a smart, experienced, charismatic guy who has walked the walk. He has enormous credibility with brokers and agents having been one himself.

And then we have this from Adam introducing Nick:

On the leadership front in an effort to connect even more deeply with our network we hired an industry leader Nick Bailey to the newly created Chief Customer Officer role. Nick’s one job is to help lead the RE/MAX network in all aspects of growth – market share, agent count, brand presence, and more. To a large degree this entails helping brokers agents and teams maximize RE/MAX tools, training, technology, and culture to make their careers more rewarding and their lives easier. One of the brightest minds of real estate, Nick brings with him 23 years of industry experience including a prior 12-year stretch at RE/MAX.

During this 2-decade-plus career Nick has been a broker, a franchisor, a real estate tech executive, and eventually the head of a major worldwide real estate brand. His strong industry roots, impressive credentials, and successful track record have garnered the respect of his peers; and his arrival has been universally applauded by our network. Nick is responsible for creating clear actionable goals and targets for everyone within the network. And as of October 1 he has already achieved that objective. This alignment will help ensure RE/MAX is the #1 brand in all aspects of the industry.

That sounds suspiciously like an outgoing CEO introducing his successor to me. Richard Smith of Realogy was nowhere near as effusive in his praise when he introduce Ryan Schneider as the next CEO during Realogy’s Q3/2017 earnings call.

All of this makes me wonder if there is a leadership transition behind the scenes at RE/MAX. It’s pure speculation, of course. Adam is plenty engaging and plenty inspiring, especially in person, and he truly is a great leader, but he hasn’t ever walked in a real estate agent’s shoes or operated a brokerage. Nick has.

Maybe it’s nothing. Maybe it’s just a way to bring the guy now responsible for growth into the mix with Wall Street analysts. But I can’t help that my mind runs to possibilities.

Conclusion

There’s just no way to sugarcoat this: RE/MAX had a bad Q3. The profit beat is nice, but most of it came from cost-cutting measures. The cash flows are nice and strong, and RE/MAX doesn’t have much debt ($223 million). It is raising more money with a shelf registration.

But it is shrinking, and its main strategic bet from last year till today has yet to pay off, or even show strong enough results for RE/MAX to brag about. (If it did, RE/MAX surely would have bragged its head off.)

RE/MAX still has a major strategic contradiction it has yet to address: agent productivity versus its headcount-based business model in a zero-sum game that is real estate.

And maybe, just maybe, there’s a new CEO being groomed to take over.

But then again, the theme of Q3 is “Don’t Look Back, Look Forward” so I guess we will see.

-rsh