Market Turbulence: Re/Max Faces Share Decline After Landmark Realtor Conspiracy Ruling Raises Litigation Risks, Morgan Stanley Cautions

Investing / Wednesday, 08 November 2023 08:09

"Re/Max Faces Share Decline Amid Litigation Risks Following Landmark Realtor Conspiracy Ruling

In the aftermath of a groundbreaking ruling against realtors and brokerages, Re/Max witnessed a significant dip in its shares, prompted by Morgan Stanley's cautionary note on potential litigation risks. The National Association of Realtors and prominent residential brokerages recently faced a landmark judgment, being held liable for $1.78 billion in damages for conspiring to maintain high commissions.

Although Re/Max had settled the case before trial for $55 million, Morgan Stanley expressed concerns about increased litigation risks and costly settlements in the wake of this ruling. The bank downgraded Re/Max to underweight from equal weight, slashing its price target to $9 per share from $19.50—an implication of a 16% downside.

Analyst Ronald Kamdem highlighted the rising risk of additional litigation and the potential inadequacy of Re/Max's $90 million cash on the balance sheet in a more adverse scenario. As a result, shares of Re/Max plunged by 10% on Tuesday.

Kamdem predicts that the ruling's impact on Re/Max's multiple will persist throughout 2024 due to potential appeals and ongoing litigation. The aftermath is expected to affect commissions, with potential downward pressure on the typical 5% to 6% sellers pay on the sale of a house, split between listing and buyer's agents. This, in turn, could lead to challenges in Re/Max's variable broker fees and potential broker attrition, impacting recurring franchise fees, annual dues, and other revenues.

With Re/Max shares already down more than 40% year-to-date, the real estate giant faces a tumultuous period ahead, navigating the complexities of legal repercussions and potential shifts in industry dynamics."

—Reporting contributed by CNBC’s Michael Bloom.

"As Re/Max grapples with a significant share decline in the aftermath of a landmark realtor conspiracy ruling, the road ahead appears turbulent. Morgan Stanley's cautionary stance on potential litigation risks, coupled with the National Association of Realtors' and residential brokerages' $1.78 billion liability for commission-related conspiracy, has cast a shadow over Re/Max's financial outlook.

The bank's downgrade and the substantial cut in the price target reflect concerns over the adequacy of Re/Max's cash reserves in the face of potential litigation challenges. Analyst Ronald Kamdem's predictions of a prolonged impact on Re/Max's multiple, potential downward pressure on commissions, and challenges to variable broker fees further underscore the complex landscape the real estate giant now navigates.

With shares already down more than 40% year-to-date, Re/Max faces a crucial period marked by legal uncertainties and potential shifts in industry dynamics. As the real estate market watches these developments unfold, the repercussions of the landmark ruling continue to reverberate throughout the brokerage firm's financial landscape."