Analyzing the Five Publicly Held Real Estate Company Earnings Reports
The five largest publicly held real estate services companies all reported earnings for the third quarter of 2019 and their year-to-date results through September 30, 2019. There were no big surprises. The one interesting thing is that virtually all of them rely on creative non-GAAP (Generally Accepted Accounting Principles) to provide clarity to their results.
A high-level look reveals the following:
Zillow had substantial growth rates in its revenues and its losses due to its home buying program. When one takes out the incremental revenues from the home buying program, Zillow’s core businesses, including mortgage, saw a growth rate of about 8.3% comparing September 30, 2019, to September 30, 2018. That’s not bad, but it’s not a high growth number.
RE/MAX grew its agent count worldwide by 3.5%, comparing the third quarter of 2019 to the third quarter of 2018. All of this growth was overseas as the count for the U.S. and Canada declined during the same period by 1.9%. The revenues were mostly flat on a year-over-year basis, but cost reductions resulted in an increase in earnings for the period.
Redfin reported a 70% increase in its total revenues, but this included revenues from its home-buying business. Looking at its core brokerage and services business, revenues grew 19.3%, which is also in line with its growth in closed transactions, which grew 19.7% from September 30, 2018, to September 30, 2019.
Realogy reported declines in virtually every category of performance, both in closed transactions, revenues, and earnings. They did report an increase of 3% in agent count at its NRT unit, which is an important indicator of the durability of their recruiting strategies. Realogy still had significant positive cash flow during the period, as well. The firm also announced the sale of its Cartus unit while retaining all of its affinity group business.
eXp World Holdings reported strength across the company with increases in agent and transaction counts, both increasing 66% for both measurements comparing September 30, 2018 results against September 30, 2019. Revenue increased somewhat faster, at 79%. After reflecting non-cash expenses, the firm reported a free cash flow of $15 million for the third quarter of 2019 versus $6.3 million in free cash flow in the same period a year ago.
What does any of this tell us?
Zillow and Redfin are relying heavily on their home buying business to generate above-average growth results. Whether they can scale these up and find a path to profitability and leverage this business with their mortgage and other related settlement services remains to be seen.
eXp is still growing its core business faster than any of its competitors. The big questions here are: Can they continue to grow at the current rates of growth, and for how long? And, will they generate enough free cash flow to stay competitive in the race to build the global tech platform in which their main competitors are now engaged?
Realogy appears to be turning a corner at NRT, and, with the sale of Cartus, seems to be focused on lead generation activities. Will this lead to regaining growth in their core brokerage franchised operations?
RE/MAX has launched a significant effort to build a global tech platform and believes that this development will enable it to regain growth in its most important markets in the U.S. and Canada—whether this works or not is yet to be seen.
In an environment of flat housing sales, shrinking inventory, and rising prices along with near-record low mortgage rates will each of them be able to maintain their current growth rates given their current plans? Each faces challenges particular to their business models, but the downward pressure on commission levels, gross margins, and profit margins affect each of them in some direct way.