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RE/MAX redoes books after outside audit

The franchisor preliminarily lost $25 million in Q3 2021

RE/MAX has preliminarily announced a $25.1 million loss for the third quarter as the venerable and distinctive real estate company juggles expansion and redoing prior financial disclosures.  

Denver-based RE/MAX generates revenue through franchise, broker and marketing fees plus collecting affiliated agent’s dues. The company sells shares on the New York Stock Exchange but last Tuesday NYSE notified the real estate company that it is not compliant with listing requirements.

NYSE did, however, give RE/MAX six months to file a quarter three report. A RE/MAX spokesperson said that the company “continues to work expeditiously to complete the work necessary to file” an earnings report and it expects to do so “well within the six-month timeframe.”

A NYSE spokesperson declined to comment.

In public filings, the brokerage has said it must reassess the financial impact of “six independent regions” the company acquired between 2007 and 2017. A KPMG audit concluded that the “effectiveness of the Company’s internal control of financial reporting as of December 31, 2020 included in the 2020 Annual Report should not be relied upon.”

A RE/MAX spokesperson pointed out that company executives were aware of and fixing accounting problems prior to any outside audit.

One facet of RE/MAX’s business model, an independent region is when RE/MAX sells franchising rights to someone who can use the RE/MAX branding in a designated geographic area. The independent region owner then builds up their RE/MAX-branded brokerage – often with the aim of RE/MAX eventually acquiring their business.

RE/MAX has not indicated the six independent regions in question. The company estimated it understated net income by $500,000 in each of the past three years because of accounting errors regarding the six regions. However, RE/MAX has also perhaps overstated its goodwill by $10.5 million, and intangible assets by $2.4 million in 2020.

Such projected errors are arguably significant for a company with a total third quarter revenue was $90.7 million, according to a press release Monday night – though a RE/MAX spokesperson pointed out that the company has deemed them “immaterial.” The release provided initial Q3 financial measurements as the company works to complete an earnings report.

The company was slightly profitable in prior quarters and had reported $3.6 million in quarter three 2020 net income. However, the company doubled operating expenses year over year – largely through contracts and personnel costs added from subsequent independent region acquisitions.

These independent region acquisitions (not to be confused with the ones that turned up in the KPMG audit) closed this July. RE/MAX forked over $235 million in cash to acquire brokerage shops throughout the U.S. and Canada branded “RE/MAX Integra” but – despite the name – not previously RE/MAX-owned. RE/MAX Integra’s U.S. presence includes New England as well as Indiana, Minnesota, and Wisconsin.

In order to make good on the acquisition, the brokerage entered a credit agreement with JPMorgan Chase and other lenders for a seven-year, $460 million term loan facility.

These multiple financial machinations were somewhat discussed on an earnings call Tuesday morning, assembled following RE/MAX’s preliminary financial statements. The call highlighted another feature of RE/MAX’s business – the corporate headquarters’ ability to sever ties with underperforming franchisees.

Company president Nick Bailey said on the call that part of his job is “making sure franchisees perform at required levels” and doling out “terminations for underperformance.”

Franchisees in “California, Indiana, and New Jersey” each had “significant underperformers terminated in quarter three,” Bailey said.

Another increased operating expense the company cited was stock-based equity compensation and bonuses. A RE/MAX spokesperson said that executives did not receive bonuses stemming from the Integra acquisition.

In April, RE/MAX provided a lengthy SEC disclosure regarding the company’s executive compensation. In the fiscal year 2020, CEO Adam Contos made $2.4 million, the sum of an annual salary, bonus and stock awards. Chief Financial Officer Karri Callahan earned $1.2 million. Nick Bailey, then the Chief Customer Officer, also netted $1.2 million. Bailey was named company president in June.

UPDATE – Nov. 24, 2021: This piece was updated to clarify KPMG’s role in analyzing RE/MAX’s accounting, and also to note that RE/MAX has deemed its overstatements of goodwill and intangible assets to be “immaterial.” Also, Karri Callahan’s name was misspelled in the original story.