RE/MAX HOLDINGS, INC., 10-Q filed on 5/3/2019
Quarterly Report
v3.19.1
Document and Entity Information - shares
3 Months Ended
Mar. 31, 2019
Apr. 30, 2019
Entity Registrant Name RE/MAX Holdings, Inc.  
Entity Central Index Key 0001581091  
Document Period End Date Mar. 31, 2019  
Current Fiscal Year End Date --12-31  
Document Type 10-Q  
Document Fiscal Year Focus 2019  
Document Fiscal Period Focus Q1  
Amendment Flag false  
Entity Current Reporting Status Yes  
Entity Filer Category Large Accelerated Filer  
Entity Small Business false  
Entity Emerging Growth Company false  
Common Class A    
Entity Common Stock, Shares Outstanding   17,807,948
Common Class B    
Entity Common Stock, Shares Outstanding   1
v3.19.1
Condensed Consolidated Balance Sheets - USD ($)
$ in Thousands
Mar. 31, 2019
Dec. 31, 2018
Current assets:    
Cash and cash equivalents $ 64,771 $ 59,974
Restricted cash 33,227 0
Accounts and notes receivable, current portion, less allowances of $12,431 and $7,980, respectively 29,080 21,185
Income taxes receivable 1,188 533
Other current assets 7,471 5,855
Total current assets 135,737 87,547
Property and equipment, net of accumulated depreciation of $13,642 and $13,280 respectively 5,654 4,390
Operating lease right of use assets 54,429 0
Franchise agreements, net 99,282 103,157
Other intangible assets, net 21,836 22,965
Goodwill 150,749 150,684
Deferred tax assets, net 52,494 53,698
Other assets, net of current portion 5,755 4,399
Total assets 525,936 426,840
Current liabilities:    
Accounts payable 3,027 1,890
Accrued liabilities 55,712 13,143
Income taxes payable 0 208
Deferred revenue 25,228 25,489
Current portion of debt 2,629 2,622
Current portion of payable pursuant to tax receivable agreements 3,567 3,567
Operating lease liabilities 4,680 0
Total current liabilities 94,843 46,919
Debt, net of current portion 224,632 225,165
Payable pursuant to tax receivable agreements, net of current portion 37,220 37,220
Deferred tax liabilities, net 294 400
Deferred revenue, net of current portion 19,716 20,224
Operating lease liabilities, net of current portion 59,849 0
Other liabilities, net of current portion 5,756 17,637
Total liabilities 442,310 347,565
Commitments and contingencies (note 14)
Stockholders' equity:    
Additional paid-in capital 462,601 460,101
Retained earnings 21,765 21,138
Accumulated other comprehensive income, net of tax 364 328
Total stockholders' equity attributable to RE/MAX Holdings, Inc. 484,732 481,569
Non-controlling interest (401,106) (402,294)
Total stockholders' equity 83,626 79,275
Total liabilities and stockholders' equity 525,936 426,840
Common Class A    
Stockholders' equity:    
Common stock 2 2
Total stockholders' equity 2 2
Common Class B    
Stockholders' equity:    
Common stock
Total stockholders' equity $ 0 $ 0
v3.19.1
Condensed Consolidated Balance Sheets (Parenthetical) - USD ($)
$ in Thousands
Mar. 31, 2019
Dec. 31, 2018
Accounts and notes receivable, allowance $ 12,431 $ 7,980
Property and equipment, accumulated depreciation $ 13,642 $ 13,280
Common Class A    
Common stock, par value $ 0.0001 $ 0.0001
Common stock, shares authorized 180,000,000 180,000,000
Common stock, shares issued 17,807,948 17,754,416
Common stock, shares outstanding 17,807,948 17,754,416
Common Class B    
Common stock, par value $ 0.0001 $ 0.0001
Common stock, shares authorized 1,000 1,000
Common stock, shares issued 1 1
Common stock, shares outstanding 1 1
v3.19.1
Condensed Consolidated Statements of Income - USD ($)
3 Months Ended
Mar. 31, 2019
Mar. 31, 2018
Revenue:    
Total revenue $ 71,178,000 $ 52,642,000
Operating expenses:    
Selling, operating and administrative expenses 33,524,000 34,368,000
Marketing Funds expenses 18,772,000 0
Depreciation and amortization 5,558,000 4,575,000
Loss (gain) on sale or disposition of assets, net 379,000 (18,000)
Total operating expenses 58,233,000 38,925,000
Operating income 12,945,000 13,717,000
Other expenses, net:    
Interest expense (3,155,000) (2,724,000)
Interest income 320,000 119,000
Foreign currency transaction gains (losses) 55,000 (83,000)
Total other expenses, net (2,780,000) (2,688,000)
Income before provision for income taxes 10,165,000 11,029,000
Provision for income taxes (1,908,000) (1,862,000)
Net income 8,257,000 9,167,000
Less: net income attributable to non-controlling interest (note 4) 3,848,000 4,184,000
Net income attributable to RE/MAX Holdings, Inc. 4,409,000 4,983,000
Common Class A    
Other expenses, net:    
Net income $ 0 $ 0
Net income attributable to RE/MAX Holdings, Inc. per share of Class A common stock    
Basic $ 0.25 $ 0.28
Diluted $ 0.25 $ 0.28
Weighted average shares of Class A common stock outstanding    
Basic 17,775,381 17,709,095
Diluted 17,817,620 17,762,133
Cash dividends declared per share of Class A common stock $ 0.21 $ 0.20
Continuing franchise fees    
Revenue:    
Total revenue $ 24,956,000 $ 25,240,000
Annual dues    
Revenue:    
Total revenue 8,854,000 8,696,000
Broker fees    
Revenue:    
Total revenue 8,588,000 9,188,000
Marketing Funds fees    
Revenue:    
Total revenue 18,772,000 0
Franchise sales and other revenue    
Revenue:    
Total revenue $ 10,008,000 $ 9,518,000
v3.19.1
Condensed Consolidated Statements of Comprehensive Income - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2019
Mar. 31, 2018
Consolidated Statements of Comprehensive Income    
Net income $ 8,257 $ 9,167
Change in cumulative translation adjustment 69 (82)
Other comprehensive income (loss), net of tax 69 (82)
Comprehensive income 8,326 9,085
Less: comprehensive income attributable to non-controlling interest 3,881 4,145
Comprehensive income attributable to RE/MAX Holdings, Inc., net of tax $ 4,445 $ 4,940
v3.19.1
Condensed Consolidated Statement of Stockholders' Equity - USD ($)
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss), net of tax
Non-controlling interest
Common Class A
Common Class B
Total
Beginning balance, Value at Dec. 31, 2017 $ 451,199,000 $ 8,400,000 $ 459,000 $ (410,934,000) $ 2,000 $ 0 $ 49,126,000
Beginning balance, Shares at Dec. 31, 2017         17,696,991 1  
Net income 0 4,983,000 0 4,184,000 $ 0 $ 0 9,167,000
Distributions to non-controlling unitholders 0 0 0 (4,212,000) 0 0 (4,212,000)
Equity-based compensation expense and related dividend equivalents, value 1,268,000 (48,000) 0 0 $ 0 $ 0 1,220,000
Equity-based compensation expense and related dividend equivalents, shares         46,520 0  
Dividends to Class A common stockholders 0 (3,547,000) 0 0 $ 0 $ 0 (3,547,000)
Change in accumulated other comprehensive (loss) income 0 0 (43,000) (39,000) 0 0 (82,000)
Payroll taxes related to net settled restricted stock units (564,000) 0 0 0 $ 0 $ 0 (564,000)
Payroll taxes related to net settled restricted stock units (in shares)         (10,209) 0  
Ending balance, Value at Mar. 31, 2018 451,903,000 9,788,000 416,000 (411,001,000) $ 2,000 $ 0 51,108,000
Ending balance, Shares at Mar. 31, 2018         17,733,302 1  
Beginning balance, Value at Dec. 31, 2018 460,101,000 21,138,000 328,000 (402,294,000) $ 2,000 $ 0 79,275,000
Beginning balance, Shares at Dec. 31, 2018         17,754,416 1  
Net income 0 4,409,000 0 3,848,000 $ 0 $ 0 8,257,000
Distributions to non-controlling unitholders 0 0 0 (2,693,000) 0 0 (2,693,000)
Equity-based compensation expense and related dividend equivalents, value 3,213,000 (42,000) 0 0 $ 0 $ 0 3,171,000
Equity-based compensation expense and related dividend equivalents, shares         70,797 0  
Dividends to Class A common stockholders 0 (3,740,000) 0 0 $ 0 $ 0 (3,740,000)
Change in accumulated other comprehensive (loss) income 0 0 36,000 33,000 0 0 69,000
Payroll taxes related to net settled restricted stock units (713,000) 0 0 0 $ 0 $ 0 (713,000)
Payroll taxes related to net settled restricted stock units (in shares)         (17,265) 0  
Ending balance, Value at Mar. 31, 2019 $ 462,601,000 $ 21,765,000 $ 364,000 $ (401,106,000) $ 2,000 $ 0 $ 83,626,000
Ending balance, Shares at Mar. 31, 2019         17,807,948 1  
v3.19.1
Condensed Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2019
Mar. 31, 2018
Cash flows from operating activities:    
Net income $ 8,257 $ 9,167
Adjustments to reconcile net income to net cash provided by operating activities:    
Depreciation and amortization 5,558 4,575
Bad debt expense 1,439 464
Loss (gain) on sale or disposition of assets, net 379 (28)
Equity-based compensation expense 4,051 1,268
Deferred income tax expense 1,081 478
Fair value adjustments to contingent consideration (70) 135
Other, net 272 127
Changes in operating assets and liabilities 1,474 (2,614)
Changes in operating assets and liabilities:    
Net cash provided by operating activities 22,441 13,572
Cash flows from investing activities:    
Purchases of property, equipment and software and capitalization of trademark costs (3,940) (691)
Acquisitions, net of cash acquired of $0 and $362, respectively 0 (26,250)
Cash acquired with the Marketing Funds acquisition 28,495 0
Other (1,200) 0
Net cash provided by (used in) investing activities 23,355 (26,941)
Cash flows from financing activities:    
Payments on debt (653) (592)
Distributions paid to non-controlling unitholders (2,693) (2,521)
Dividends and dividend equivalents paid to Class A common stockholders (3,782) (3,595)
Payment of payroll taxes related to net settled restricted stock units (713) (564)
Payment of contingent consideration 0 (50)
Net cash used in financing activities (7,841) (7,322)
Effect of exchange rate changes on cash 69 (13)
Net increase (decrease) in cash, cash equivalents and restricted cash 38,024 (20,704)
Cash, cash equivalents and restricted cash, beginning of year 59,974 50,807
Cash, cash equivalents and restricted cash, end of period 97,998 30,103
Supplemental disclosures of cash flow information:    
Cash paid for interest 2,951 2,585
Net cash paid for income taxes 1,729 1,217
Schedule of non cash investing activities:    
Property, equipment, software and trademarks included in accounts payable and accrued liabilities 512 206
Schedule of non cash financing activities:    
Tax and other distributions payable to non-controlling unitholders $ 0 $ 1,691
v3.19.1
Condensed Consolidated Statements of Cash Flows (Parenthetical) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2019
Mar. 31, 2018
Consolidated Statements of Cash Flows    
Cash acquired $ 0 $ 362
v3.19.1
Business and Organization
3 Months Ended
Mar. 31, 2019
Business and Organization  
Business and Organization

1. Business and Organization

RE/MAX Holdings, Inc. (“RE/MAX Holdings”) and its consolidated subsidiaries, including RMCO, LLC (“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. RE/MAX, founded in 1973, has over 125,000 agents operating in over 8,000 offices and a presence in more than 110 countries and territories. Motto Mortgage (“Motto”), founded in 2016, is the first nationally franchised mortgage brokerage in the U.S.

v3.19.1
Summary of Significant Accounting Policies
3 Months Ended
Mar. 31, 2019
Summary of Significant Accounting Policies  
Summary of Significant Accounting Policies

2. Summary of Significant Accounting Policies

Basis of Presentation

 

The accompanying Condensed Consolidated Balance Sheet at December 31, 2018, which was derived from the audited consolidated financial statements at that date, and the unaudited interim condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The accompanying condensed 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 condensed consolidated financial statements reflect all normal and recurring adjustments necessary to present fairly the Company’s financial position as of March 31, 2019 and the results of its operations and comprehensive income, cash flows and changes in its stockholder’s equity for the three months ended March 31, 2019 and 2018. Interim results may not be indicative of full-year performance. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements within the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (“2018 Annual Report on Form 10-K”). 

Use of Estimates

 

The preparation of condensed 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 condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

Segment Reporting

 

In January 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. All of these entities, except for the Western Canada region, were then merged into a new entity called RE/MAX Marketing Fund (with the Western Canada fund, collectively, the “Marketing Funds”). See Note 6, Acquisitions for more information. As a result of the acquisition of the Marketing Funds, the Company added the Marketing Funds as a reportable segment as of January 1, 2019.

The Company operates under the following reportable 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.

·

Marketing Funds – comprises the operations of the Company’s marketing campaigns designed to build and maintain brand awareness and support certain agent marketing technology.

·

Other – comprises the operations of Motto Franchising and booj, which, due to quantitative insignificance, do not meet the criteria of a reportable segment.

Principles of Consolidation

 

RE/MAX Holdings consolidates RMCO and records a non-controlling interest in the accompanying Condensed 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 Condensed Consolidated Statements of Income and Condensed Consolidated Statements of Comprehensive Income, respectively.

Revenue Recognition

The Company generates most of its revenue from contracts with customers. The Company’s franchise agreements offer the following benefits to the franchisee: common use and promotion of RE/MAX and Motto trademarks; distinctive sales and promotional materials; access to technology; standardized supplies and other materials used in RE/MAX and Motto offices; and recommended procedures for operation of RE/MAX or Motto offices. The Company concluded that these benefits are highly related and all a part of one performance obligation, a license of symbolic intellectual property that is billed through a variety of fees including franchise sales, continuing franchise fees, marketing funds fees, broker fees, and annual dues, described below. The Company has other performance obligations associated with contracts with customers in other revenue for training, marketing and events, and legacy booj customers. The method used to measure progress is over the passage of time for most streams of revenue. The following is a description of principal activities from which the Company generates its revenue.

Continuing Franchise Fees

Revenue from continuing franchise fees consists of fixed contractual fees paid monthly by franchisees based on the number of RE/MAX agents in the respective franchised region or office and the number of Motto offices. This revenue is recognized 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 and number of Motto offices.

Marketing Funds Fees

Revenue from Marketing Funds fees consists of fixed contractual fees paid monthly by franchise owners and franchisees based on the number of RE/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. 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.

Annual Dues

Annual dues revenue consists of fixed contractual fees paid annually based on the number of RE/MAX agents. The Company defers the annual dues revenue when billed and recognizes the revenue ratably over the 12-month period to which it relates. Annual dues revenue 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 is included in “Deferred revenue” and “Deferred revenue, net of current portion” on the Condensed 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

Three months ended March 31, 2019

 

$

15,877

 

$

10,038

 

$

(8,854)

 

$

17,061


(a)Revenue recognized related to the beginning balance was $6.9 million for the three months ended March 31, 2019.

Broker Fees

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. Motto franchisees do not pay any fees based on the number or dollar value of loans brokered.

Franchise Sales

Franchise sales comprises revenue from the sale or renewal of 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 revenue over the contractual term of the franchise agreement, which is typically five years for RE/MAX and seven 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

Three months ended March 31, 2019

 

$

27,560

 

$

1,756

 

$

(2,449)

 

$

26,867


(a)Revenue recognized related to the beginning balance was $2.3 million for the three months ended March 31, 2019.

Commissions Related to Franchise Sales

Commissions paid on franchise sales are recognized as an 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 Condensed Consolidated Balance Sheets) consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at

 

 

 

Additions to contract

 

Balance at end

 

    

beginning of period

    

Expense recognized

    

cost for new activity

    

of period

Three months ended March 31, 2019

 

$

3,748

 

$

(385)

 

$

369

 

$

3,732

Other Revenue

Other revenue is primarily revenue from preferred marketing arrangements and event-based revenue from training 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 is included in “Deferred revenue”. Other revenue also includes revenue from booj’s operations for its external customers as booj continues to provide technology products and services, such as websites, mobile apps, reporting and site tools, to its existing customers at the date of acquisition.

Disaggregated Revenue

In the following table, segment revenue is disaggregated by geographical area for the three months ended March 31, 2019 and 2018 (in thousands):

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

    

2019

    

2018

U.S.

 

$

41,735

 

$

43,352

Canada

 

 

5,349

 

 

5,763

Global

 

 

2,740

 

 

2,479

Total RE/MAX Franchising

 

 

49,824

 

 

51,594

U.S.

 

 

16,672

 

 

 —

Canada

 

 

1,885

 

 

 —

Global

 

 

215

 

 

 —

Total Marketing Funds

 

 

18,772

 

 

 —

Other

 

 

2,582

 

 

1,048

Total

 

$

71,178

 

$

52,642

In the following table, segment revenue is disaggregated by owned or independent regions in the U.S. and Canada for the RE/MAX Franchising segment for the three months ended March 31, 2019 and 2018 (in thousands). The split between owned or independent regions is not applicable to the Marketing Funds or Other segments:

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

2019

    

2018

Company-owned Regions

 

$

30,018

 

$

31,363

Independent Regions

 

 

10,923

 

 

11,149

Global and Other

 

 

8,883

 

 

9,082

Total RE/MAX Franchising

 

 

49,824

 

 

51,594

Marketing Funds

 

 

18,772

 

 

 —

Other

 

 

2,582

 

 

1,048

Total

 

$

71,178

 

$

52,642

Transaction Price Allocated to the Remaining Performance Obligations

The following table includes estimated revenue by year expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Remaining 9
months of
2019

    

2020

    

2021

    

2022

    

2023

    

2024

    

Thereafter

    

Total

Annual dues

 

$

15,731

 

$

1,330

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

17,061

Franchise sales

 

 

5,579

 

 

6,321

 

 

4,943

 

 

3,448

 

 

1,941

 

 

996

 

 

3,639

 

 

26,867

Total

 

$

21,310

 

$

7,651

 

$

4,943

 

$

3,448

 

$

1,941

 

$

996

 

$

3,639

 

$

43,928

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 Condensed Consolidated Balance Sheets to the amounts presented in the Condensed Consolidated Statements of Cash Flows (in thousands):

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

    

2019

 

2018

Cash and cash equivalents

 

$

64,771

 

$

59,974

Restricted cash

 

 

33,227

 

 

 —

Total cash, cash equivalents and restricted cash

 

$

97,998

 

$

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, tax and legal. Because these costs are ultimately paid by the Marketing Funds, they do not impact the net income of RE/MAX Holdings as the Marketing Funds have no reported net income.

Costs charged from RE/MAX Franchising to the Marketing Funds for the three months ended March 31, 2019 are as follows (in thousands):

 

 

 

 

Technology development - operating

 

$

965

Technology development - capital

 

 

935

Marketing staff and administrative services

 

 

1,025

Total

 

$

2,925

 

Costs charged to the Marketing Funds for the three months ended March 31, 2018 are disclosed in Note 15, Related-Party Transactions.

Recently Adopted Accounting Pronouncements

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 became effective for the Company on January 1, 2019. The standard is to be applied either in the period of adoption or retrospectively to each period affected by the Tax Cuts and Jobs Act. The Company completed the majority of its accounting for the tax effects of the Tax Cuts and Jobs Act as of December 31, 2017. The amendments of ASU 2018-02 did 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 Condensed 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 Condensed 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.

New Accounting Pronouncements Not Yet Adopted

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. 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 significant impact on the Company’s consolidated financial statements and related disclosures.

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. ASU 2017-04 is effective for annual and interim impairment tests beginning January 1, 2020 for the Company and is required to be adopted using a prospective approach. Early adoption is allowed for annual goodwill impairment tests performed on testing dates after January 1, 2017.

v3.19.1
Leases
3 Months Ended
Mar. 31, 2019
Leases  
Leases

3. Leases

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 15 years, 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 none are reasonably certain to be exercised.

The Company has 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. The Master Lease is the Company’s only significant lease as of March 31, 2019.

The Company acts as the lessor for four 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 two 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 two sublease agreements have already been exercised and will expire before the end of the corporate headquarters lease in 2028. All the Company’s material leases are classified as operating leases.

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 short-term lease expense was not material as of March 31, 2019.

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):

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2019

 

Lease Cost

 

 

 

 

Operating lease cost (a)

 

$

2,940

 

Sublease income

 

 

(360)

 

Total lease cost

 

$

2,580

 

Other information

 

 

 

 

Cash paid for amounts included in the measurement of lease liabilities

 

 

 

 

Operating cash flows from operating leases

 

$

2,086

 

Weighted-average remaining lease term in years - operating leases

 

 

9.2

 

Weighted-average discount rate - operating leases

 

 

6.3

%


(a)

Includes approximately $0.6 million of variable lease cost.

Maturities under non-cancellable leases as of March 31, 2019 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

Rent Payments

 

Sublease Receipts

 

Total Cash Outflows

Year ending December 31:

 

 

 

 

 

 

 

 

 

Remainder of 2019

    

$

6,417

 

$

(823)

 

$

5,594

2020

 

 

8,752

 

 

(888)

 

 

7,864

2021

 

 

9,006

 

 

(775)

 

 

8,231

2022

 

 

9,000

 

 

(804)

 

 

8,196

2023

 

 

9,173

 

 

(822)

 

 

8,351

Thereafter

 

 

43,713

 

 

(1,382)

 

 

42,331

Total lease payments

 

$

86,061

 

$

(5,494)

 

$

80,567

Less: imputed interest

 

 

21,532

 

 

 

 

 

 

Present value of lease liabilities

 

$

64,529

 

 

 

 

 

 

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

 

v3.19.1
Non-controlling Interest
3 Months Ended
Mar. 31, 2019
Noncontrolling Interest  
Non-controlling Interest

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:

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

 

2019

 

2018

 

 

    

Shares

    

Ownership %

    

Shares

    

Ownership %

 

Non-controlling interest ownership of common units in RMCO

 

12,559,600

 

41.36

%  

12,559,600

 

41.43

%

RE/MAX Holdings, Inc. outstanding Class A common stock (equal to RE/MAX Holdings, Inc. common units in RMCO)

 

17,807,948

 

58.64

%  

17,754,416

 

58.57

%

Total common units in RMCO

 

30,367,548

 

100.00

%  

30,314,016

 

100.00

%

The weighted average ownership percentages for the applicable reporting periods are used to calculate the net income attributable to RE/MAX Holdings. 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 Condensed Consolidated Statements of Income for the periods indicated is detailed as follows (in thousands, except for percentages):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

 

2019

 

2018

 

 

    

RE/MAX
Holdings,
Inc.

    

Non-controlling
interest

    

Total

    

RE/MAX
Holdings,
Inc.

    

Non-controlling
interest

    

Total

 

Weighted average ownership percentage of RMCO(a)

 

 

58.60

%  

 

41.40

%  

 

100.00

%  

 

58.51

%  

 

41.49

%  

 

100.00

%

Income before provision for income taxes(a)

 

$

5,958

 

$

4,207

 

$

10,165

 

$

6,453

 

$

4,576

 

$

11,029

 

Provision for income taxes(b)(c)

 

 

(1,549)

 

 

(359)

 

 

(1,908)

 

 

(1,470)

 

 

(392)

 

 

(1,862)

 

Net income

 

$

4,409

 

$

3,848

 

$

8,257

 

$

4,983

 

$

4,184

 

$

9,167

 


(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 certain relatively insignificant expenses recorded at RE/MAX Holdings.    

(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. It also includes RE/MAX Holdings’ share of taxes directly incurred by RMCO and its subsidiaries, related primarily to tax liabilities in certain foreign jurisdictions. 

(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 “RMCO, LLC Agreement”), RMCO makes cash distributions to non-controlling unitholders on a pro-rata basis. The distributions paid or payable to non-controlling unitholders are summarized as follows (in thousands):

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

 

    

2019

    

2018

Tax and other distributions

 

$

55

 

$

1,700

Dividend distributions

 

 

2,638

 

 

2,512

Total distributions to non-controlling unitholders

 

$

2,693

 

$

4,212

 

v3.19.1
Earnings Per Share and Dividends
3 Months Ended
Mar. 31, 2019
Earnings Per Share and Dividends  
Earnings Per Share and Dividends

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 potential of stock options and restricted stock units.

The following is a reconciliation of the numerator and denominator used in the basic and diluted EPS calculations (in thousands, except share and per share information):

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

2019

 

2018

Numerator

 

 

 

 

 

 

Net income attributable to RE/MAX Holdings, Inc.

 

$

4,409

 

$

4,983

Denominator for basic net income per share of Class A common stock

 

 

 

 

 

 

Weighted average shares of Class A common stock outstanding

 

 

17,775,381

 

 

17,709,095

Denominator for diluted net income per share of Class A common stock

 

 

 

 

 

 

Weighted average shares of Class A common stock outstanding

 

 

17,775,381

 

 

17,709,095

Add dilutive effect of the following:

 

 

 

 

 

 

Restricted stock units

 

 

42,239

 

 

53,038

Weighted average shares of Class A common stock outstanding, diluted

 

 

17,817,620

 

 

17,762,133

Earnings per share of Class A common stock

 

 

 

 

 

 

Net income attributable to RE/MAX Holdings, Inc. per share of Class A common stock, basic

 

$

0.25

 

$

0.28

Net income attributable to RE/MAX Holdings, Inc. per share of Class A common stock, diluted

 

$

0.25

 

$

0.28

Outstanding Class B common stock 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 quarterly per share on all outstanding shares of Class A common stock were as follows (in thousands, except share and per share information):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

2019

 

2018

 

    

Date paid

    

Per share

    

Amount paid
to Class A
stockholders

    

Amount paid
to non-controlling
unitholders

    

Date paid

    

Per share

    

Amount paid
to Class A
stockholders

    

Amount paid
to non-controlling
unitholders

Dividend declared during quarter ended:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31

 

March 20, 2019

 

$

0.21

 

$

3,740

 

$

2,638

 

March 21, 2018

 

$

0.20

 

$

3,547

 

$

2,512

On May 1, 2019, the Company’s Board of Directors declared a quarterly dividend of $0.21 per share on all outstanding shares of Class A common stock, which is payable on May 29, 2019 to stockholders of record at the close of business on May 15, 2019.

v3.19.1
Acquisitions
3 Months Ended
Mar. 31, 2019
Acquisitions  
Acquisitions

6. Acquisitions

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. Fees incurred with the acquisition of the Marketing Funds were not material for the three months ended March 31, 2019 and the year ended December 31, 2018.

 

The total assets equal the total liabilities of the Marketing Funds and beginning January 1, 2019, are reflected in the condensed 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 preliminary 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

 

$

 -

Booj, LLC

On February 26, 2018, RE/MAX, LLC 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, which will be accounted for as compensation expense in the future (see Note 12, Equity-Based Compensation for additional information). RE/MAX, LLC 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):

 

 

 

 

 

    

booj

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

The Company finalized its accounting for the acquisition of booj during the year ended December 31, 2018. 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.

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 booj had occurred on January 1, 2017 and the acquisition of the Marketing Funds had occurred January 1, 2018. 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. 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 such dates, nor of the results that may be obtained in the future.

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 2018

 

 

(in thousands, except per share amounts)

Total revenue

 

$

72,377

Net income attributable to RE/MAX Holdings, Inc.

 

$

3,992

Basic earnings per common share

 

$

0.23

Diluted earnings per common share

 

$

0.22

 

v3.19.1
Intangible Assets and Goodwill
3 Months Ended
Mar. 31, 2019
Intangible Assets and Goodwill  
Intangible Assets and Goodwill

7. 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 March 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

 

$

(81,585)

 

$

99,282

 

$

180,867

 

$

(77,710)

 

$

103,157

Other intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Software (a)

 

4.4

 

$

22,218

 

$

(6,718)

 

$

15,500

 

$

20,579

 

$

(5,802)

 

$

14,777

Trademarks

 

9.3

 

 

1,881

 

 

(889)

 

 

992

 

 

1,857

 

 

(839)

 

 

1,018

Non-compete agreements

 

7.7

 

 

3,700

 

 

(1,058)

 

 

2,642

 

 

3,700

 

 

(896)

 

 

2,804

Training materials

 

3.0

 

 

2,350

 

 

(274)

 

 

2,076

 

 

2,350

 

 

(157)

 

 

2,193

Other (b)

 

5.0

 

 

800

 

 

(174)

 

 

626

 

 

2,389

 

 

(216)

 

 

2,173

Total other intangible assets

 

5.0

 

$

30,949

 

$

(9,113)

 

$

21,836

 

$

30,875

 

$

(7,910)

 

$

22,965


(a)

As of March 31, 2019, and December 31, 2018, capitalized software development costs of $4.6 million and $4.5 million, respectively, were related to technology projects 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 Condensed 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 for the three months ended March 31, 2019 and 2018 was $5.2 million and $4.3 million, respectively.

As of March 31, 2019, the estimated future amortization expense for the next five years related to intangible assets is as follows (in thousands):