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The bleeding hasn’t stopped — but it has, perhaps, begun to clot.
An Intel review of earnings reports filed by publicly traded real estate brokerages and tech companies reveals that the biggest companies in this hobbled industry were able to substantially slash their losses in the second quarter of the year, largely affirming a partial recovery of investor confidence in the sector that had been building over the previous three months.
Getting to this more stable point wasn’t easy for the industry. But it was necessary and — in the eyes of many investors — overdue, Stephens analyst John Campbell told Intel.
John Campbell | Stephens
“You’ve seen, I think, the bulk of the dramatic cost-savings — the mass reductions, the emails to employees, the sobbing at night because the next day you’re going to lay off 5 percent of your staff,” said Campbell, a managing director at Stephens. “I think that, for the large part, is done. I think people have got to the point where they’re braced for the current environment.”
Still, Intel found, the industry has a long way to go in order to return to financial health. And while the most cash-strapped companies gained breathing room in recent months, several remain in an uncomfortable spot with regard to profitability and money in the bank.
Below are some of Intel’s high-level takeaways from this most recent round of financial filings, with commentary from Campbell on the winners and losers — as well as what steps companies may have to take to prepare for the months ahead.
A muddled picture
In late February, investors glimpsed real estate’s books for the closing months of 2022. They hated what they saw.
The stock prices of major real estate companies plummeted approximately 20 percent during the Q4 earnings season as companies reported staggering losses to close the year: $158 million by new-age brokerage giant Compass, $453 million by traditional brokerage powerhouse Anywhere, $399 million by former iBuyer darling Opendoor.
These alarming numbers came as the housing transaction downturn continued to deepen, and falling home prices over the back half of 2022 further cut into real estate commissions.
By the time May rolled around and Q1 results became public, things were still really bad for the industry. But compared to Q4, they were “dramatically better,” Campbell said.
“It was not necessarily better from an operational standpoint, it was just not quite as bad, and it was better relative to what was expected,” Campbell told Intel. “And when you think about Wall Street and you think about how these stocks work, some of it’s execution, but a lot of it is, are you doing better than what people expect? And so I think [those May reports were] kind of a turning point.”
Chart by Daniel Houston
As seen in the chart above, investors have recovered nearly all of the confidence they had lost in real estate companies during the month of February, which coincided with that dreadful Q4 earnings round.
And while the recent Q2 earnings season affirmed much of the reasoning behind recent stock-price gains, it’s worth noting that real estate stocks slipped a bit since these reports were released. This type of movement is consistent with financial numbers that were mostly in-line with expectations, but still slightly disappointing to investors, Campbell said.
“Revenues held up much better than I think people expected,” Campbell told Intel. “Profits were still kind of lagging, to some extent. The reason these stocks didn’t fall out is, despite having really good moves, year to date, you look at it over a two, three year stack, these stocks are still down pretty dramatically.”
The race to profitability
Through much of last year, even as it was already clear that real estate had entered a downturn, some real estate CEOs publicly said they were concerned about cutting costs too fast — and losing market share in the process.
This attitude rankled investors, who felt the sector was not adequately preparing for the possibility of a more protracted downturn, Campbell said.
And since then, nearly every real estate company has had to adjust with a series of steep cuts. Today, their actions are finally in line with what investors have wanted for a while: a shift in focus toward generating positive cash flow — and fast.
“It really boils down to this giant shift from market-share growth to profitability,” Campbell said. “And you don’t do that just because everybody says, ‘All right, we’re just fine with share; we’ve got enough.’ It is a fight for survival.”
And real estate companies have made substantial progress in that fight, Intel’s review suggests.
Chart by Daniel Houston
Most real estate companies narrowed their losses substantially from the first three months of the year to the second quarter. Some, such as Anywhere and Opendoor, actually posted slim profits, reversing their trajectory from previous quarters.
And in the case of Zillow, which technically recorded a loss in the second quarter of the year, the bottom-line number is a bit deceptive, Campbell argued. That number is dragged down by items such as stock-based compensation, which doesn’t affect the company’s cash flow in a meaningful way, he said.
“There’s an economic value to [stock-based compensation], and there’s a debate whether you should include that or not” in measures of profit and loss, Campbell said. But Zillow, he added, is “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.”
One of Zillow’s main competitors, the listing portal and brokerage operation Redfin, has had a much dicier downturn.
Not only has Redfin been losing money in quarter after quarter, but it’s been attempting to run its business “out of the cash register” in the process, CEO Glenn Kelman told investors in February.
The company had seen its runway — the amount of time its cash reserves would last if the company’s average monthly loss continued indefinitely — shrink in the months since. When times are good, Campbell said, cash reserves are relatively easy to supplement. In a market like this, it’s much harder.
“You’ve got a tank of oxygen, and that’s your cash balance, because you are burning through it regularly,” Campbell said. “When that lifeline drops, then you’ve got whatever’s left in that tank to survive.”
As of May’s Q1 earnings release, Intel estimated Redfin’s cash was on pace to last until early October, if the company were to continue to lose money at the same rate as it did during the previous nine months.
But thanks to Redfin’s efforts to slash its losses from $61 million in Q1 to $27 million in Q2, the company extended its cash runway out to February of 2024, according to Intel’s same definition. In other words, the company bought itself four months of breathing room.
It’s not the only one.
Chart by Daniel Houston
Of the cash-strapped companies in the chart above, all extended their cash runways substantially in the second quarter of the year, primarily by narrowing losses or even posting slim profits.
Opendoor’s cash outlook improved perhaps more than any major real estate company as the iBuyer reported a $23 million profit in the second quarter of the year — and distanced itself further from the $928 million loss in the third quarter of 2022.
Like its competitor Offerpad, the iBuyer has benefited from offloading a toxic class of assets from its books: Homes purchased near the home-price peak in mid-2022 that went on to sell for less.
Compass, meanwhile, posted by far its smallest quarterly loss in the past two years: $47 million in Q2, compared to $150 million in the previous period. The new-age brokerage giant also has access to large revolving credit lines, which it has used to help navigate the down market.
Still, most real estate companies know they have work to do before they’re in a healthy place, Campbell said.
“At some point you’ve got to be self-generative,” Campbell told Intel. “You’ve got to be able to get your costs to the point where you can actually generate cash. That’s the period we’re in right now. People are progressively moving toward that right now.”
