Re/Max sets IPO price at bullish $22 per share

Real estate heavyweight Re/Max Holdings Inc. set its initial public offering at $22 per share — above a previously announced expected range of $19 to $21 — indicating that the franchisor expects investors will demonstrate their optimism for the U.S. housing recovery when shares begin trading tomorrow on the New York Stock Exchange.

After expenses, Re/Max, which will trade under the ticker “RMAX,” expects to raise at least a net of $195.8 million, which it will use to buy out a large shareholder and reacquire two franchise regions in the U.S.

The 40-year-old company founded by David and Gail Liniger in Denver in 1973 now boasts 90,000 agents in 6,300 offices in more than 90 countries affiliated with the brand.

In addition to selling 10 million shares of its class A common stock, Re/Max is granting underwriters the option to purchase an additional 1.5 million shares.

Source: Re/Max S-1 registration statement *Assuming underwriters don’t exercise their option

If the underwriters exercise their full option, the Linigers, who owned 85 percent of Re/Max pre-IPO, will retain a 61 percent stake in the company.

The firm will use a majority of the proceeds from the IPO  — $120.3 million — to buy out Weston Presidio, a private equity firm that purchased a 15 percent stake in Re/Max in 2010 for $40 million.

Another chunk of the IPO cash, $27.3 million, will go to the reacquisition of two of the firm’s master franchise regions in the U.S.: the Southwest Region, which includes Arizona, New Mexico and Nevada, for $20.2 million; and the Central Atlantic Region, which includes Maryland, Virginia, West Virginia and Washington, D.C., for $7.1 million.

After paying $45.5 million to reacquire its franchise rights in Texas in January, the firm now owns 10 of the 32 franchise regions in the U.S. and Canada. It will own 12 regions after the purchase of the above to regions closes soon after the IPO and, increasing the percentage of U.S. and Canadian Re/Max agents in regions it controls to 54 percent from the current 46 percent.

Re/Max wants to reacquire rights to more of its franchise regions because it averages more annual revenue per agent in regions it owns — $2,288, versus $803 in regions where it’s sold licensing rights.

Re/Max is the latest real estate company to take advantage of the real estate turnaround by going public. Real estate’s IPO train started chugging with Zillow in the summer of 2011, continued with Trulia and Realogy in 2012, and now Re/Max joins them. Some view the IPO as a way for the Linigers, in their late 60s, to make an exit from the company.

Francis Gaskins, who monitors IPOs as partner at IPOdesktop.com, says that some investors will look at Re/Max as an affordable real estate investment option to Realogy, whose share price closed today at $43.69, more than twice the price of Re/Max’s shares in its initial public offering.

Some analysts say Re/Max’s IPO will serve as a barometer for how Wall Street investors feel about the housing market recovery.

“I do think Re/Max is worth watching, if only to see which way the market jumps — it could be an important tell for everything associated with residential real estate,” Mad Money host Jim Cramer said last week.

Now that Re/Max will be a publicly traded company, with responsibilities to shareholders, some Re/Max franchise owners wonder (see comments) if Re/Max will overload some markets with franchised brokerages near each other.

Re/Max claims to be the No. 1 name in real estate, but its registration statement reveals that its network of websites — remax.com, global.remax.com, theremaxcollection.com and remaxcommercial.com — received a total of 52 million hits in 2012, according to citing Experian Marketing Services data.

As a comparison, Experian data shows that Zillow’s website had 62 million hits from desktop computers just in August.

Disclosures filed by Re/Max in association with its IPO show the company has turned profitable as the housing market has recovered, but that it still has some debt to contend with.

The franchisor has been carrying a considerable debt load during the downturn, taking out a loan in 2007 that it refinanced in 2010, according to the latest version of the company’s S-1 registration statement.

The company has been paying an adjustable interest rate on the refinanced loans, which has hovered just above 6.2 percent in the last three years. The rate is tied to LIBOR, the federal funds rate, or the Eurodollar rate. Re/Max must make quarterly principal payments of $650,000 through April 16, 2016, when a final payment of $217 million will be due.

In April 2010, Re/Max took out a $215 million term loan that also provided the company with a $10 million revolving loan fund. Two years later, the company borrowed another $45 million to finance the repurchase of franchise rights in Texas.

Re/Max posted a $2.7 million net loss in 2010 on $140.2 million in revenue. The company’s operating expenses totaled only $101.8 million that year, producing $38.4 million in operating income. But other expenses, including $22.3 million in interest expenses and an $18.2 million loss on the early extinguishment of the 2007 loan, drove a loss for the year.

After refinancing its debt in 2010, Re/Max was profitable in 2011 and 2012. Last year, the company turned a profit of $33.3 million on $143.7 million in revenue.

Re/Max says that it will continue to pursue the reacquisition of its master franchise regions in North America, which it started doing in 2011 when it paid $15.9 million to acquire the assets of Re/Max of Colorado Inc., including franchise rights in the states of Colorado, Utah, Wyoming, North Dakota and South Dakota.

Because Dave and Gail Liniger were the only stockholders of Re/Max of Colorado, the company accounted for the transfer of net assets as a combination of entities under common control.

Last year Re/Max sold “substantially all” of the assets of its regional franchising operations in Eastern Australia and New Zealand for $219,000, recognizing $1.7 million in losses on the sale.