REAL Trending Episode 56
It’s Earning Season
From REAL Trends, the trusted source for real estate industry news, this is REAL Trending episode 56. We’re breaking down the trends of the week and sharing how we think they impact brokers and agents. I’m Steve Murray, president of REAL Trends.
It’s Earning Season
Today we’re discussing earnings season and how brokerages can grow. I the past 10 days, we’ve had the earnings released by publicly held giants, RE/MAX, Realogy, Redfin and Zillow. Ladies and gentlemen, it wasn’t a pretty picture, which I’m sure most people are already aware of. RE/MAX and Realogy both saw some declines in their top lines and some moderation in their bottom lines. On the other hand, Zillow and Redfin showed skyrocketing growth in their revenues and expanding operating losses in the results both on the three month and six month calendar year basis. However, there’s a big difference between RE/MAX and Realogy compared to Redfin and Zillow.
And why is that? Well, primarily while Zillow and Redfin are both growing at huge rates, 30 40 50 70% or more in the six months of 2019 over the first six months of 2018 a lot of their growth was due to the booking of revenues from the acquisition of homes in their eye buying programs. Now, some growth still took place in their core companies, businesses, both Redfin and Zillow, but primarily the big growth was they added the dollar value of the homes they bought to their revenues, which is an interesting treatment of the acquisition of an asset. I’m sure it’s done in other industries. We’ve just never seen any treatment like that in the residential real estate services industry. While Redfin and Zillow were both talking about these huge increases revenues due to the home buying activities with some growth in their core business, they both had significantly growing losses in their operating results. That is their loss was a whole lot bigger than it was in the first six months.
Now some of this obviously is due to the lag in buying a lot of homes and before you sell them, when you recapture some of that money still it’s a strange thing. Realogy and RE/MAX bottom line showing their age a little bit, not a lot of growth in either company. In fact, Realogy suffered some declines in unit sales and offset by little bit by increases in the average price of the homes they sold. Both Realogy and RE/MAX are also targeting some significant investments in technology while also cutting overhead and administrative expense. RE/MAX actually saw a slight increase in their earnings due to those cost reduction methods. However, RE/MAX which reports agent counts while they showed real solid growth overall in the globe for the second quarter in a row saw a decline in their agent count in the key North American markets, which are their biggest and most important financially to them.
It’s kind of a tale of two cities, two completely different kinds of companies, Redfin and Zillow seen as technology driven real estate organizations, RE/MAX and Realogy as brand driven incumbent organizations. We’ve already commented in prior podcasts about the impact of Wall Street and Silicon Valley on their relative valuations. We won’t address that here. What does this mean? We have a sluggish housing market and we find that even Zillow and Redfin are seeing a decreasing rate of growth from the same period last year in their revenues from their existing businesses. That is their growth rates are slowing measurably in their core businesses. The only thing that enables them to show huge increases in revenues is in fact the iBuyer programs. I’m sure we’ll see something about that later, but what does it mean to people? It means everyone is having trouble growing their business in a flat to declining residential broker and sales business.
Zillow and Redfin are captive to those same demographics as are RE/MAX and Realogy. It’s a tough market right now, whether you’re a franchise or you’re corporately owned and whether you’re an online platform or you’re in the nitty gritty business of helping operate brokerage companies or assisting your franchisees to run their companies. It is very difficult to show growth when unit sales are declining 4% to 5% year over year and we have the kind of competition we have. I’m sure we’ll see more of some of this in the next two quarters all depending of course on what happens to housing. Meanwhile, an update from the REAL Trends 500 and up and comers where we ranked the top 1,750 or so brokerage companies in the US as of the end of calendar year 2018. You know it’s interesting. We went and looked, there were about 1,100 of those 1,700 firms appeared on the REAL Trends, 500 up and comers, not only for 18 but for the period of time, five years before in 2014 results.
Here’s what we found interesting. So we resorted all those firms, the 1,150 or so that were in both the 14 study and the 18 study. Interesting. Out of that 1,150 companies, about 730 of them grew their transactions in that five year period of time. Not unsurprisingly given the toughness of the market and the challenge of competition, 420 actually saw declines in their close transaction sides over that five year period of time. But looking carefully at these 1,150 firms and given our involvement in merger acquisition evaluation work, and this is not precise, so don’t take it to the bank today, but roughly 80% of those 730 firms grew totally organically. That is, they grew by recruiting and developing agents and improving their productivity and focusing on going back through if you will, Jim Collins term is the flywheel.
If we recruit more people, we develop more people. Those people will do more sales. We will have the time and money to invest in recruiting more people and developing their skills. And as Collins says in his monogram, the Flywheel, which by the way we recommend you get it and read it, you’ve got an ever increasing abundance of energy to continue that circle of growth. We know that 8 out of the top 10 all grew organically and by the way, all this data is based on percentage growth, not absolute numeric growth, so it was percentage growth, which we believe is a true indication of the ability of brokerage companies to grow. Well, here’s the good news. The good news is that 70 plus percent of the top of 1,100 brokers in the country grew in a time when unit sales were flat to declining. As we’ve said in past reports, the REAL Trends 500 has gained share on the overall market four of the last five years, more indication that strength and scale are beginning to matter in company’s ability to grow.
Further we believe that with the investments that all of them are making large regional independents, along with companies like Keller Williams and RE/MAX and Realogy and Berkshire Hathaway and HomeSmart and others in incredible technology platforms, that we’re going to start to see the pendulum swing further into the direction of those companies who are dedicated to building a brokerage company who practice the right habits of recruiting and developing people and investing in those people. Technology is one way to do that, that these companies are going to grow in a flat to declining market other than giving up. There is only one answer, and that is to invest in those activities that will help organically grow your business. Does it mean that mergers and acquisitions should not be in your toolkit? Of course not, but it means that first, you should have an internal system for growing your business before solely relying on acquisitions of others.
Look more for industry trends, marketing and technology strategies, as well as listen to past REAL Trending episodes on our website, www.realtrends.com/blog/. This has been Steve Murray until next time.