RE/MAX’s rating downgraded by Moody’s amid soft US housing market

Investing.com -- Moody’s Ratings has downgraded the corporate family rating (CFR) of RE/MAX Holdings, Inc., a franchisor of real estate and mortgage brokerage services, from B1 to B2. The downgrade, announced on March 20, 2025, is due to the soft US housing market and a decline in the company’s revenue. The outlook for RE/MAX is now stable, a change from the previous negative outlook.

The downgrade was also influenced by the expectations of high borrowing costs throughout 2025, which will keep RE/MAX’s financial leverage above 5x. The company’s US agent counts are expected to continue declining, likely leading to further contraction of revenue in 2025. There is also uncertainty around RE/MAX’s financial strategies, including its financial leverage targets, share repurchase activity, and the potential reintroduction of the quarterly cash dividend that was halted in 2023.

Despite the downgrade, Moody’s expects RE/MAX to generate good free cash flow, around $50 million in 2025, due to cost reduction efforts over the last two years and the suspension of the company’s quarterly cash dividend in Q4 2023.

The rating action also reflects concerns about the company’s tolerance for risky financial strategies that sustain a highly levered capital structure, a key governance consideration.

The B2 CFR reflects the expectation that RE/MAX’s financial leverage will remain in the low-5x range through 2025. The company faces intense industry competition to attract and retain agents, as evidenced by its declining US agent count since 2018. Financial leverage is expected to remain relatively flat as debt repayments offset revenue declines in 2025.

Despite the challenges, RE/MAX is supported by its 100% franchised business model, a history of continued Canada and other non-US agent count growth, and a highly profitable franchise business model. The strong RE/MAX brand recognition and leading market position contribute to predictable revenues, robust profit margins, and good free cash flow generation.

As of December 31, 2024, $55 million of RE/MAX’s restricted cash has been funded into an escrow account for an industry litigation settlement agreement. The suspension of the dividend is seen as a key source of funding for the settlement charge.

The company’s B2 senior secured credit facility rating, consisting of a $460 million term loan due in July 2028 and a $50 million revolver expiring in July 2026, is the same as the B2 CFR. The facility represents the majority of the debt capital structure.

RE/MAX’s liquidity profile is good, supported by an expected $50 million of free cash flow generation over the next 12 months and nearly $97 million of unrestricted cash on hand as of December 31, 2024. The company’s $50 million undrawn revolver expires in July 2026.

The stable outlook reflects the expectation that US residential home sales volumes will remain relatively flat year over year, leading to a decline in RE/MAX’s revenue in the low-single digits and financial leverage remaining around 5x in 2025.

Future upgrades or downgrades of the ratings could be influenced by RE/MAX’s revenue and earnings growth, debt to EBITDA ratios, free cash flow to debt ratios, and financial policies including its strategies towards balancing potential reintroduction of the cash dividend and share repurchases.

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