3 of the 5 of these public brokerages could fail
I've commonly written articles about local and national brokerages and their value propositions to agents. To be clear, this is an opinion piece. I've done research, but you need to do your own as well. I recommend listening to earnings calls to hear directly from the companies' CEOs like I did.
Funny enough, my last post about brokerage comparisons included a local brokerage that operated as a team where its agents would net approximately 1/5 of what they make if they were selling real estate on their own. Due to this compensation model, the company has a high turnover ratio that is a great detriment to those agents. My personal opinion is that it would be better for these agents, long-term, to own their own business instead of operating practically as a low-paid (for the majority) and non-guaranteed pay, W-2 employee -- but to each their own.
Still, that article garnered a lot of attention and made people think.
I'm back again to share another opinion that I hope makes you think differently. You just get the data and make your own conclusion. I'll share mine. As always, thank you for reading and being open to THINKING BIG, QUESTIONING EVERYTHING alongside 28,000 other subscribers.
My overall conclusion is that 3 of the 5 companies that are referenced in this article likely won't be in business in the next 20 years (or will be acquired or have a merger) or at a minimum are not going to be a good long-term investment.
Did you know that 80% of companies that existed before 1980 are no longer around - and another 17% probably won't be here in five years? This is according to The Harvard Business Review's 2016 article: The Scary Truth About Corporate Survival.
Before we hop in, it's important to note that the average agent with the average production at these companies barely makes more than $50,000 (minus brokerage fees, self employment taxes, and other business expenses) that likely puts their average agent below the poverty level of income after all of those fees and taxes. There's no information on the percentage of part-time versus full-time agents. Not surprisingly, the companies these agents work for barely make any profit, either - even after record breaking years and a 10-year bull run.
Two other super funny things to notice about public brokerages:
All these brokerages in their earnings calls noted that their #1 value proposition in technology. Is it really possible that everyone has the same "value proposition"? The reality is that technology has never made a mediocre agent into a top agent. In the last 8 years I have never seen that happen. Yes, technology can make someone more efficient, by replacing two open browsers with only one, yet it does not replace the agent's ability to make relationships and actually use the technology in the first place. Many of these brokerages report that only about 30% of their agents adopt their beloved and innovative technology. Also, the brokerages do note that their primary objective of this "technology" is to have the ability to charge the agents more money and to create a "stickiness" factor to keeping the agents at the company by making it more difficult for them to leave after using their system and uploading their database. So this "technology" is really more of a money maker and a retention tool for the brokerage than it is in getting the agent to sell more properties. Although, the technology does have pretty features that help with recruiting (which are most commonly just a built-in Canva template on their company website).
Secondly, the #1 thing that agents ask for is leads, though no public brokerage has figured out how to profitably offer these leads outside of a referral network. eXp for example, is starting to put agents who need leads into a strong accountability program, with coaches, through a partnership with Realty.com — but it looks more like a team than a real estate brokerage.
So here we go on the analysis! I'll start from the largest public company to the smallest company. Yes, I listened to all of their earning calls, so my notes are directly from their earnings calls. Below, I include a chart with the summary. The numbers are likely accurate as I've pulled them from the annual reports and recent Q1s (Quarterly Report) as of May 8th, 2023, but I cannot guarantee any numbers. You must research yourself and verify.
HOUS - Anywhere Real Estate (Coldwell Banker, Corcoran, Better Homes & Gardens, Century 21, Sothebys, ERA)
The stock price is down 78% from its peak and the company has ongoing litigation through DNC calls that their agents made and through an antitrust case. These litigation expenses are substantial and ongoing ($52M in legal accruals). The company has very high debt at $4.62 billion with an operating cash flow of negative $150,000,000 and a net profit of negative $453,000,000. Their value proposition to agents is "technology." According to its leaders, the main priority is to get cost savings, as their revenue is down 31% year over year. They've already reduced their headcount by 11%. The company is trying to integrate mortgage and title into their technology and make their agents use it and capture more "agent economics" i.e. charge agents more fees. Overall they are expecting to have a 15-20% decline in production in 2023.
My personal thought: due to the level of debt and losses, this company likely won't be here in 20 years or it will get split up and sold off in pieces or merged with another company. Yes, companies with high negative cash flow can survive by borrowing more, but this company has been doing that for a while and borrowing costs are going up. Having the same value proposition as the other companies (“technology”), with that much debt, and slowing growth, does not indicate a bright outlook.
COMP - Compass
The stock price is down 87.05% since its IPO when it touted to the agents it recruited the ability to purchase the stock at "pre-IPO" prices. Reports of agents who put almost all of their life savings into the venture still plague the company as the stock dropped from more than $20/share to nearly $2/share (it’s recently bounced back to $3+ bucks). The company did increase its agent count by 13% to 29,000 agents in 2022, but its transactions fell 25% to 211,000 sides. The company lost $601,500,000 in net income and their revenue was also down 31%. Compass says its primary objective is to become cash flow positive. Their cash flow is currently negative $362,000,000. They claim that their value proposition is "technology" and that is the sole reason why agents come and stay at Compass. The leadership says that they've reduced their support headcount significantly as they are way over-leveraged. They say that they used to pay agents to sign on both cash bonuses and stock, but then many of those agents left after their lockup period. Since they stopped paying agents to come to the company, the company has slowed its growth significantly. They say they only focus on the top 50% of agents in each market and that the number of agents are contracting in the industry, impacting their business. Compass is also integrating title services into their platform. Although they expect transactions to be down in 2023, they are not giving any guidance for 2023.
NOTE - according to their earnings call, a BIG issue for Compass is that their agents splits will change based on the agents prior year production (for example, it may go from a 90/10 split to a 75/25 split), which is why Compass is betting that agents will stay and they'll make even more money next year. Compass is also known for high transaction fees on top of their splits.
My personal thought: My bet is that many of these newly recruited agents to the company will just leave to other cheaper competitors rather than pay the 75/25 splits plus fees. We shall see. I don't see Compass having a long-term path to success and profitability, even with their technology (which every company is apparently claiming). I wouldn't put money into their stock personally as an investor. They have $763,000,000 in debt and are losing $601,500,000 in net income. Would you put your money into a company like that?
EXPI - eXp
The stock price is down 83.41% since its peak during the COVID craze. The company grew 12% to 86,000 agents in 2022, but its gross profit is down 12% and its net income is down 84% quarter-over-quarter. Agent headcount and sales are starting to slow. 47% of their attrition is from agents with 0-2 sales (half their attrition). They note that mortgage rates are up 1.65% and the entire company has a positive net income of $15,424,000 in 2022. The company notes that agents are flowing to brokerages where they can keep more of their commission. Their model, as they say, is attractive because agents can attract other agents without putting capital into the business (but most brokerages offer these recruiting incentives now). The one major benefit of eXp versus its competitors is that it has no debt that threatens its existence. This is good as most other brokerages are loaded up with debt. Though, instead of debt, eXp is financing its agent growth through giving up revenue share and stock options, for which it must keep using its profits to buy back shares to avoid dilution. This creative financial engineering is good for growth, but not so good for profitability and share price. To note, there is no competitive moat around this compensation model. Another competitor can copy or improve their compensation model, such as REAL and Fathom, who are also on a race to the bottom (or are they... read on to REAL's where they've increased almost every expense for their agents), and "reset" the revenue share tree for recruiting. eXp notes that it had lots of cost cutting last year and will continue to do so. They expect to increase their agent headcount by 10% in 2023 but say it could be lower due to agents hopping around looking for solutions in a slowing market. Their original goal was 500,000 agents but they've since scratched that goal.
My thoughts: eXp has the RIGHT approach on trying to improve its value proposition to agents (but not on profit), where it says that its goal is to help agents do more business and everything in their value prop will be around that. The financial engineering that they've created where they have to divvy out shares to agents to retain them only to buy back shares with profit due to its own dilution, will make it challenging for the company to advance its profitability long-term. To me, the company is starting to mature its market share which is why I would not put money into this stock, even if they are profitable, they're only making about $170/agent per year, with not much opportunity to grow it eXponentially (get it ;p). I would rather invest my money elsewhere.
FTHM - Fathom
Fathom's stock is down 91.71% from its peak. The company lost $27,600,000 in profit and has cash flow of negative $26,777,000. Its average agent produces 4.31 sales per year. It has a debt of $18,000,000. Fathom claims its competitive advantage is also technology (this is again funny to me because this technology can be purchased outside these brokerages for less than $100/mo for practically the same exact product). The company also claims that it has the industry's best compensation model. The company did have a good 2022 with revenue growth of 25%, 28% growth in agent headcount, and 14% growth in transaction count. They do have an annual fee of $600 and fees after the $8,250 cap (there are other brokerages with less fees — there always will be a cheaper option). They are excited because it costs them $1,000 to acquire an agent and all the agent has to do is sell ONE home for the company to break even. They're also in the process of creating a company to sell leads to agents (versus referring to them).
My thoughts: Though this company is growing, it's never generated a profit, even during 2020 and 2021. And now it is loading up with debt to operate. I do not see how this company will have a path to profitability without adding more fees, or trying to convince agents to use its services versus the agent's self selected service providers. They are just like every other company claiming its value proposition is technology and now they're starting to go down the debt cycle.
REAL - REAL
REAL is smaller and therefore has a faster growth rate of agent count (113% headcount) with 10,000 agents, and 37,500 transactions in 2022. They stated their new big thing is that they are building a consumer facing portal to generate leads for agents. They've started a title and mortgage company and want to keep expanding those businesses too. They say that they intend to retain agents through its equity plan and a compelling suite of products (but did not describe this suite in its call). According to their latest report, they have 2.8 units per PRODUCING agent. Their focus is on social media influencers to attract other agents. The company lost $6,000,000 in 2022, and is break even on cash flow. The good thing is that they have no debt. The company wants to make more money, specifically $5,000,000 more profit in 2023. They are doing this by charging more fees to their existing agents and new agents it is recruiting, including: a new $30 BEOP fee, 1.2% fee on all payments, a $249 joining fee, increasing the annual brokerage fee from $250 to $750, increasing the post capping transaction fee from $60 to $285, and the Elite Agent transaction fee from $29 to $129. These fees are very significant to the agent if you do all the math. I believe the company will lose agents due to its higher fees which now puts it more expensive than some other models. They claim they have to raise fees due to "inflation" and being "capped" on what the company can charge its agents. It cites that it has 1 broker per 1,386 agents. The CEO, Tamir Poleg, said, "Our assumptions for the year is that transaction volume will drop 15% to 20% and home prices will drop 7% to 12%"
My personal thought: This company will continue to grow, but more slowly, due to its increase in fees. Also, those low producers will likely turnover in a shifting market. The good thing about this company is that it has no debt, but it is now losing $6,759,000 a year in net income which is significant for a smaller company. I personally would not put money into a small company that is losing money like this and is changing its value proposition at the same time.
To summarize:
Overall, the larger real estate companies like HOUS and COMP have tons of debt and do not generate positive profit or cash flow. I think they'll get broken up or acquired or merge with other companies over the next 20 years. EXPI has potential but has to keep using its profit to buy back its shares to keep its recruiting model going, and it is also becoming a mature company. There's also no moat around its recruiting model (i.e. anyone can copy it or improve it). FTHM is losing money and is going into debt, it probably won’t be in business in 20 years with its current trajectory unless it has a significant turn-around. REAL has no debt which is great, but isn't making any cash and is losing money. All these companies claim their technology is the best and that's why agents join them, but any agent knows that technology does not increase sales, only the speed of tasks.
You can see all their earnings links below, and feel free to watch their earnings calls yourself!
REAX: https://investors.onereal.com/static-files/16183826-1705-482d-898a-c2c40d419d5b
Thank you for reading! - JB / jon@movewithmomentum.com
