It isn’t the same as turning lead into gold but the latest talk about red and black in the real estate industry is still nice fodder for the pundits even if it doesn’t really reflect reality.
Second quarter earnings announcements and SEC filings were released earlier this month for Redfin, Zillow, Realogy and eXp. As usual, each one had an accompanying earnings call and, as usual, the transcripts provided interesting contexts to the 10-Q’s for each company.
Before diving in, why only these companies? Because while Opendoor and Compass provide a little more color to the overall picture, the details for these four are readily available out there on the Internet for anyone who wants to pore over that much mind-numbing detail. These four also provide a window into the motivations of a lot of people who invest in these companies.
Realogy, Redfin, and eXp (along with Compass) all have the same two issues to deal with – agent commission split and company dollar. Realogy management addressed the former in its earnings call by noting only a 21 basis point increase but then immediately followed that by saying that “on a like-for-like basis, splits were up 40 basis points.” Hmmm….
As noted in its earnings calls last year, 2017 and 2018 were not good years for Realogy on the agent split front, so the year-over-year quarterly comparisons this year are going to be skewed in Realogy’s favor by the not-so-good numbers in 2018. 2020 may present a different picture.
Redfin has only employees as “lead agents” (leading to a bogus comparison with other brokers) but it still has a company dollar issue and its Redfin Partner revenue is flat this year compared to last year. Let’s see what the 4th and 1st quarters bring in terms of employee/transaction-related costs.
As noted in Part 2, eXp has a continuing problem with its company dollar percentage. And while all four companies talked about their latest technology solutions in their earnings calls, let’s not forget that technology matters but it is still not a game changer (locked for non Geek Estate Mastermind members).
Zillow finally crossed over to the other side of the street and still doesn’t have the brick-and-mortar expense that Realogy and Compass have. It also has had consumers’ eyeballs and top agents’ attention for years. It’s now converting them into the foundation for its 35% referral revenue in its new Flex pricing model.
Debt and Available Funds
Debt and available funds provide unique clues into these companies as functions of their business volumes and as indicators of their business strategies. A quick scan of the companies in the debt and funds categories as of June 30:
- Opendoor has access to a little more than $1 billion in VC funds and it’s also carrying $3 billion in debt which is likely tied to its cost of buying houses and carrying them in inventory.
- In its 10-Q, Zillow had $1.4 billion in cash, cash equivalents and short term investments (i.e., available funds). It was also carrying $552,000 in housing inventory and a little over $1 billion in short and long term debt. Last but not least, it still has another $500 million in debt that it can draw on to fund its iBuyer business.
- Realogy has $3.5 billion in debt and Moody’s just downgraded it again on August 14. It also had approximately $460 million in available funds. Realogy’s debt is a legacy from being taken private years ago by Apollo and continues to weigh heavily on its balance sheet. It has also spent $896 million beginning in 2016 to repurchase shares at prices much higher than the current stock price. Hindsight is always 20/20 but this one does not look good in retrospect.
- eXp had $89 million in available funds and $64 million in accrued expenses and other forms of financial commitments. Bottom line: there’s nothing here worth a mention. For all intents, eXp is a regional broker. Period.
- Redfin had $333 million in available funds and $287 million in various forms of financial commitments, both short and long term. It also now has a $100 million credit facility in place to fund its iBuyer purchases. Decent size numbers but still much smaller than Zillow and Opendoor.
- Zillow and Redfin both have warehouse credit facilities in place for their respective mortgage loan origination segments, both of which are fractions of the funds in place for their iBuyer businesses.
Zillow, Opendoor and the iBuyer Market
People talk about Knock and Offerpad (slide 15 at the link), but the only two that really matter are Zillow and Opendoor. No one will argue that, right now, Opendoor is the leader in the iBuyer market. RIGHT NOW.
As noted in Redfin’s 10-Q, its iBuyer business had $39.9 million revenue. From a standing start in late 2018, Zillow’s iBuyer segment logged $249 million revenue alone in the second quarter – 6 times that of Redfin. Not coincidentally, Redfin has thrown in with Opendoor (or has Opendoor thrown in with Redfin?) in order to compete with Zillow in this business segment. And as a postscript, KW announced an iBuyer partnership with Offerpad. Twelve months from now, those two arrangements will have changed nothing materially as Zillow marches to the lead in this segment.
Is Opendoor’s Phoenix performance a valid proxy for its overall performance in 2018 (slide 34 at the link)? Did it really clear $11,000 in average price appreciation for all 7,200 home sales nationwide in 2018? Maybe, maybe not. It’s true that Zillow only had 1,200 home sales in the first half of 2019 but it didn’t really start ramping up until 2019, it doesn’t have the staffing problem that Opendoor recently experienced and it does have a cash cow in its lead gen business. Technology does play a role in this market segment but available funds and discipline of execution count for just as much if not more.
More to come in Part 2….