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The flurry of information that drops during earnings season from every publicly traded real estate company is enough to make almost any real estate professional’s head spin.
That’s why Intel spoke this week by video chat with John Campbell, a managing director at the analytics firm Stephens, to pick his brain on the biggest takeaways from Q2 earnings season for the world of publicly traded real estate brokerages and tech companies.
John Campbell | Photo credit: Stephens
Campbell described a housing industry that was still in a mad dash toward profitability in the second quarter of the year — but also one in which investors were beginning to regain faith in the sector as it demonstrated its willingness to cut costs and adjust to the ongoing downturn in transactions.
In Campbell’s comments below — which have been edited for length and clarity — he lays out the state of the market, the winners of second-quarter earnings season, and what might happen to the companies that fail to achieve positive cashflow in the months to come.
Intel: Real estate companies are still reporting a lot of losses as they try to navigate this down market, but most have been able to narrow those losses considerably. What were some of your higher-level takeaways for real estate as an industry?
Campbell: There has been a very dramatic shift, a pendulum shift, from [market] share gains — overly focused on revenue growth — to profitability. It’s almost like a race for share vs. a race to survive, a race to profitability. It’s just human nature to see a trendline decline, and if it keeps declining for several months to almost a year, it feels like that’s going to go to zero.
Even those naysayers in U.S. housing are finally getting over the hump and saying, ‘All right, maybe we’re stabilized now [and] it’s not going to get much worse, but we can’t see it getting much better.’
So if that’s the case and you’re looking at those companies, they were not at that time — six or seven months ago — were not bracing themselves for the new norm that a lot of investors felt like was about to happen. I think getting to the point where these guys were cutting costs so dramatically and right-sizing their businesses — once you started to see that, I think that’s where these stocks started to work.
So we finally had an alignment. Consensus of Wall Street finally got estimates to the right spot. Companies were finally cutting their costs to the right spot, and investors were kind of all — everybody was [finally] in the same camp.
While real estate stock prices are up from the previous earnings period, it’s also true that they’ve cooled a bit as the latest round of earnings came out. What do you think investors saw in these reports?
First and foremost, make sure you always look at it relative to the broader market. You can’t really look at the Dow and some of these indexes that are weighted toward the big conglomerates that have been there forever. You probably want to look at the Russell. The Russell index covers 2,000 stocks. It’s a broad look at the overall market.
And so yes, these [real estate] stocks are up on the year, but so is the Russell. They’ve certainly outperformed the Russell this year, but you look at these higher-exposed [residential] stocks, that group was down like 56 percent last year. The Russell was down a lot too — it was down 22 percent — so clearly a bear market.
Sometimes, company-specific, a company can be down 50-60 percent. Sometimes that’s fraud. Sometimes that’s going out of business, like Chapter 11 bankruptcy. People really are fearful when stocks are down like that. When you have a group that’s down like that, it is investors punting it, completely putting it to the sideline. A lot of that is fear of U.S. housing.
And so a lot of the move this year, year to date, it’s easy for us to be like, ‘All right, well, are people getting overly excited?’ This is just recovering from a complete wipeout. A lot of them are still cash-generative companies, and they’re going to be here. People are going to need agents to buy and sell houses. A lot of this recovery this year is, U.S. housing isn’t going to zero. It’s moving from this overly draconian mindset from investors to like, ‘We can gravitate a little bit more toward the middle.’ People are not bullish on U.S. housing, to be very, very clear.
From the standpoint of profitability, I feel like everybody’s on the right path, but it just feels like it’s just a quarter or two delayed.
Some companies — notably Redfin, Compass and the major iBuyers — have probably felt a bit more sense of urgency to get back into the black, due to how fast they’ve been burning through their cash or credit lines. How do you think they’re doing, all around?
I will say this: I was never very much a fan of iBuying when it was within the four walls of Zillow and Redfin. Anywhere has dabbled in iBuying; eXp has dabbled in iBuying. I’m just not a big fan of the concept. I’m not one of those guys who think it’s going to be 50 percent of the market. I do think it has a place. It is a very tough business, with razor-thin margins.
From an investor standpoint, if you worried about these businesses not being profitable during the peak bull cycle, and they weren’t profitable at that point, you do ask yourself the question, will they ever be profitable?
So this is just this very trying moment where a lot of these companies are really put to the test. If they can get profitable and cashflow-generative under this current environment, it’s going to make them all exit this cycle with a lot of tailwinds. So those who are able to survive will be better-suited. Those who cannot get to the point of profitability will literally go away.
This is getting to the point where it’s real. There will actually be companies that do not make it through to the other side. And I think we’re in that process right now.
Were there any winners from this latest round of earnings, in your view?
Zillow is doing well. I think Zillow, amidst this very tough market, is doing a really good job.
Another thing with Zillow is they are very limited in the amount of advertising placements they can have. A lot of this is driven by the number of listings in the market. Housing’s in a really tough spot, but listings inventory is awful. I don’t know what’s going to solve this over time. There’s just this complete lack of inventory. And so Zillow can only monetize what’s out there.
They are very close to GAAP profitability. If you look at their rate of profit-beats the last couple quarters, they have been materially above consensus the last four quarters. What they’re showing you is, when they are materially outperforming the national market, they are gaining share, and they’re ahead by a large margin of profits. This is still a very cash-generative business, and the reason they are not GAAP-profitable is because of the rate of stock-based [compensation], which again, does not have a cash component to it. There’s an economic value to that, and there’s a debate whether you should include that or not. But they are highly cash-generative. They’re growing revenues. They’re beating revenues. They’re beating EBITDA profits. They are really standing out in this market right now.
Aside from that, I don’t think you look at any of the brokerages and say they’re really doing exceptionally well. There’s just not a single one of them that I look at right now that seem to be lighting it up right now.
I have long admired eXp. If they wanted to be far more profitable right now, they could. It is literally a decision for them. They have reinvested in their business across multiple different facets.
I look at eXp’s numbers. They have been a little bit behind the consensus on profitability, but to me, this is by nature. If they wanted to just manage to Wall Street, manage quarterly, they could be doing well right now.
Did this latest round of earnings highlight anything that real estate decision-makers should keep an eye on in the months to come?
From here, if I am a brokerage owner, I am being very selective in where I add costs. There’s going to be pump-fakes constantly. We will see rates drop. At some point it will go to the low 6 [percent range], and it’s going to shoot right back up. There’s so much going on in the macro right now.
And from what I’ve seen, this is the most prone I’ve ever seen the market to interest rates. The market is absolutely influenced by this right now.
And so, if I’m a brokerage owner, or if I’m a leader in this industry, I am acting like this is going to be the new normal for a long time. I’m going to adjust my costs around that. Everything is going to be shifted as if this is going to last a long time. That would be my suggestion. And again, if you can get fit in this current environment — if you can survive in the current environment — you will build a business that’s going to last for a long time.
