18. Segment Information

The Company has two reportable segments: Real Estate Franchise Services and Brokerages. Management evaluates the operating results of its reportable segments based upon revenue and adjusted earnings before interest expense, interest income, the provision for income taxes, depreciation and amortization (“Adjusted EBITDA”). The Company’s presentation of Adjusted EBITDA may not be comparable to similar measures used by other companies. The accounting policies of the reportable segments are the same as those described in Note 2, Summary of Significant Accounting Policies.

Additionally, as a result of changes in management’s process to assess performance and allocate resources, the Company implemented a new segment structure beginning in the second quarter of 2014. The changes in the Company’s segment structure relate to certain corporate-wide professional services expenses, which were previously reflected in the Brokerage and Other reportable segment and, beginning in the second quarter of 2014, are being reflected in the Real Estate Franchise Services reportable segment. All prior segment information has been recast to reflect the Company’s new segment structure and current presentation.

Adjusted EBITDA for the reportable segments excludes depreciation, amortization, interest expense, interest income and the provision for income taxes and is then adjusted for certain other non-cash items and other non-recurring cash charges or other items. Adjusted EBITDA for the reportable segments is also a key factor that is used by the Company’s internal decision makers to (i) determine how to allocate resources to segments and (ii) evaluate the effectiveness of management for purposes of annual and other incentive compensation plans. The additional items that are adjusted to determine Adjusted EBITDA for the reportable segments include loss or gain on sale or disposition of assets and sublease, loss on early extinguishment of debt, equity-based compensation incurred in connection with grants of RMCO common units prior to the IPO and fully vested restricted stock units granted in conjunction with the IPO, non-cash straight-line rent expense, salaries paid to David Liniger, the Company’s Chief Executive Officer, Chairman and Co-Founder, and Gail Liniger, the Company’s Vice Chair and Co-Founder, that the Company discontinued upon completing the IPO, professional fees and certain expenses incurred in connection with the IPO and subsequent secondary offerings, acquisition related expenses and severance related expenses.

The Company’s Real Estate Franchise Services reportable segment comprises the operations of the Company’s owned and independent global franchising operations under the RE/MAX brand name, intersegment revenue from the Company’s owned brokerages and the Company’s corporate-wide professional services expenses. All of the Company’s brokerage offices in its Real Estate Franchise Services reportable segment are franchised. The Company’s Brokerages reportable segment includes the Company’s brokerage services business, intersegment expenses and reflects the elimination of all intersegment revenue and expenses and other consolidation entries.

The following tables present the results of the Company’s reportable segments for the years ended December 31, 2015, 2014 and 2013, respectively:


	Revenue (a)
	Year Ended December 31,
	2015		2014		2013
	(in thousands)
Real Estate Franchise Services:
Continuing franchise fees	$	74,921	$	74,199	$	65,728
Annual dues		31,759		30,729		29,527
Broker fees		32,656		29,014		25,078
Franchise sales and other franchise revenue		25,561		23,459		23,577
Brokerage revenue		—		—		—
		164,897		157,401		143,910
Brokerages:
Continuing franchise fees		(1,171)		(1,493)		(1,263)
Annual dues		(1)		(3)		(3)
Broker fees		(322)		(329)		(267)
Franchise sales and other franchise revenue		(93)		(19)		(3)
Brokerage revenue		13,558		15,427		16,488
		11,971		13,583		14,952
Total segment reporting revenues	$	176,868	$	170,984	$	158,862

(a)

Transactions between the Real Estate Franchise Services and the Brokerages reportable segments are eliminated in consolidation. Revenues for the Real Estate Franchise Services reportable segment include intercompany amounts paid from the Company’s brokerage services business of $1,587,000, $1,844,000 and $1,536,000 for the years ended December 31, 2015, 2014 and 2013, respectively. Such amounts are eliminated through the Brokerages reportable segment.


	Adjusted EBITDA
	Year Ended December 31,
	2015		2014		2013
	(in thousands)
Real Estate Franchise Services	$	89,280	$	83,227	$	75,490
Brokerages		2,121		578		1,549
Total segment reporting adjusted EBITDA	$	91,401	$	83,805	$	77,039

A reconciliation of the Company’s Adjusted EBITDA for its reportable segments to the Company’s consolidated balances is as follows:


	Year Ended December 31,
	2015		2014		2013
	(in thousands)
Real Estate Franchise Services:
Net income	$	47,044	$	43,664	$	26,792
Depreciation and amortization		14,827		15,032		14,791
Interest expense		10,371		9,266		14,641
Interest income		(178)		(313)		(321)
Provision for income taxes		11,181		9,894		2,882
EBITDA		83,245		77,543		58,785
(Gain) loss on sale or disposition of assets and sublease		(342)		(469)		1,110
Loss on early extinguishment of debt		94		178		1,798
Non-cash straight-line rent expense		954		1,045		1,298
Equity-based compensation expense incurred prior to or in conjunction with the IPO		—		—		2,748
Chairman executive compensation		—		—		2,261
Public offering related expenses		1,097		—		6,995
Severance related expenses (a)		1,482		4,617		—
Acquisition related expenses (b)		2,750		313		495
Adjusted EBITDA	$	89,280	$	83,227	$	75,490

Brokerages:
Net income	$	4,306	$	315	$	1,460
Depreciation and amortization		297		284		375
Interest expense		42		29		6
Interest income		—		—		—
Provision (benefit) for income taxes		849		54		(38)
EBITDA		5,494		682		1,803
(Gain) loss on sale or disposition of assets and sublease		(3,308)		129		(139)
Non-cash straight-line rent expense		(65)		(233)		(115)
Adjusted EBITDA	$	2,121	$	578	$	1,549

Consolidated:
Net income	$	51,350	$	43,979	$	28,252
Depreciation and amortization		15,124		15,316		15,166
Interest expense		10,413		9,295		14,647
Interest income		(178)		(313)		(321)
Provision for income taxes		12,030		9,948		2,844
EBITDA		88,739		78,225		60,588
(Gain) loss on sale or disposition of assets and sublease		(3,650)		(340)		971
Loss on early extinguishment of debt		94		178		1,798
Non-cash straight-line rent expense		889		812		1,183
Equity-based compensation expense incurred prior to or in conjunction with the IPO		—		—		2,748
Chairman executive compensation		—		—		2,261
Public offering related expenses		1,097		—		6,995
Severance related expenses (a)		1,482		4,617		—
Acquisition related expenses (b)		2,750		313		495
Adjusted EBITDA	$	91,401	$	83,805	$	77,039

(a)

Severance related expenses include severance and other related expenses incurred in connection with the Restructuring Plan in 2014, the retirement of the Company’s former Chief Executive Officer on December 31, 2014 and subsequent organizational changes implemented during 2015, including the retirement of the Company’s former President on August 19, 2015. See Note 13, Leadership Changes and Restructuring Activities, for further details.

(b)

Acquisition related expenses include costs incurred in connection with the Company’s acquisitions of certain assets of HBN and Tails in October 2013, including legal, accounting and advisory fees as well as consulting fees for integration services. Acquisition related expenses also include a charge of $2,729,000 resulting from a judgment granted to the Defendants by the Court in the litigation concerning the net assets of HBN during the year ended December 31, 2015, as discussed in Note 14, Commitments and Contingencies.

Segment long-lived and total assets are as follows:


	As of December 31,
	2015		2014
	(in thousands)
Long-lived assets:
Real Estate Franchise Services	$	250,567	$	222,888
Brokerages (a)		—		4,673
Total long-lived assets	$	250,567	$	227,561

Total assets:
Real Estate Franchise Services	$	384,959	$	349,481
Brokerages (a)		354		8,846
Total assets	$	385,313	$	358,327

(a)

The Company sold certain operating assets related to 18 owned brokerage offices in 2015 attributable to the Brokerages reportable segment and therefore, the related assets are not reflected in total long-lived assets nor total assets as of December 31, 2015 in the accompanying Consolidated Balance Sheets. Additionally, the sale of the operating assets of RE/MAX Northwest met the criteria to be classified as held for sale and thus are reflected in “Assets held for sale” in the accompanying Consolidated Balance Sheets as of December 31, 2015. See Note 5, Acquisitions and Dispositions, for further disclosures regarding these divestitures.

Information concerning the Company’s principal geographic areas is as follows:


	As of and for the Year Ended December 31,
	2015		2014		2013
	(in thousands)
Revenue (a):
U.S.	$	146,850	$	138,458	$	124,686
Canada		21,978		23,975		25,168
Outside U.S. and Canada		8,040		8,551		9,008
Total	$	176,868	$	170,984	$	158,862

Total long-lived assets (b):
U.S.	$	141,392	$	156,926
Canada		3,142		3,732
Outside U.S. and Canada		—		—
Total	$	144,534	$	160,658

Total assets:
U.S.	$	374,568	$	349,965
Canada		10,745		7,469
Outside U.S. and Canada		—		893
Total	$	385,313	$	358,327

(a)

Revenue recognized for fees assessed by the Company-owned brokerages for services provided to their affiliated real estate agents is entirely attributable to the Company’s U.S. operations. Revenue recognized for franchise services provided to the agents and franchisees in the Company’s network relates to operations in the U.S., Canada and outside of the U.S. and Canada.

(b)

Excludes deferred tax assets, net

Subsequent Events

The dispositions of RE/MAX Equity Group and RE/MAX 100 in 2015 and RE/MAX Northwest in January 2016 resulted in the cessation of operations for the Company’s Brokerages reportable segment. Thus, during the first quarter of 2016, the Company began to operate in one reportable segment, Real Estate Franchise Services.