The REcap - July 2020

Real estate stocks posted a solid month. Tech-driven players continue to thrive amidst the pandemic environment. Redfin, eXp Realty, and Zillow are all in better positions than they started the year. But other companies are flattish year-to-date, which is pretty good considering the environment. The housing market is showing surprising strength. Limited supply and competitive mortgage rates are contributing to continued pricing growth.

Key takeaways:

• Real estate stocks improved in July.  Redfin, eXp Realty, and Zillow are all priced better than they were pre-COVID.
• Home prices have continued to rise as supply remains limited. Sellers are staying on the sidelines. Low interest rates are making buying more attractive. All during an uncertain economic environment.

Market context

Brokerage stocks posted gains in line with the broader market. Portals exceeded the market’s performance. Despite continued uncertainty from COVID-19, the markets continued to rally. Data on home prices show continued increases. Mortgage rates hit record lows and seller reluctancy is limiting inventory.

S&P 500: The S&P continued its rally despite continued uncertainty on COVID-19 and employment. The S&P increased almost 5% in July. Why it matters: Real estate companies are not feeling market pressure. This is especially important for companies like Redfin and Zillow. They have both gone deeper into holding real estate on their books.

30-year Mortgage Survey: 30-year mortgage rates continue to reach historic lows. Rates fell below 3%. Why it matters: It continues to be more attractive for buyers to get a mortgage. Low interest rates mean lower interest fees. Demand for homes are strong as a result. Yet on the other end, over 4 million forbearance plans are in place for struggling homeowners.

Case Shiller Index Results: In May, home prices continued to rise. Prices have increased since the start of shelter-in-place policies in major metros. Why it matters: Home sellers aren’t excited about selling in a pandemic, which limits supply. But mortgage rates are low.  Many  buyers working full-time from home now want to buy sooner rather than later. In an uncertain and scary market, this supply-demand dynamic is increasing prices.

Annualized existing home sales: Annualized existing home sales picked up considerably month-over month.  But they remain  sluggish overall. While prices are high, homes aren’t moving at the same rate they did pre-pandemic. Why it matters: Sellers are waiting. This is one of the only expected outcomes of the pandemic that seems be playing out.

Brokerages

Brokerages posted collective gains of under 6%,  matching the broader market rally. Most improvements year-to-date are driven by tech-enabled brokerages.  eXp Realty and Redfin, are both up from the start of the year from better-than-expected performance.

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Realogy

Stock price: $9.06 | Up 22.3%

Enterprise value: $5.0B | Up $138M

What happened? Realogy posted a strong month with most gains coming in leading up to and after it reported earnings for Q2.

• Realogy announced earnings on July 30th. While revenue declined ~27% year-over-year, investors seem to view the muted losses positively. June declines were only 8% year-over-year.
• As a frame of reference, the stock is still trading below pre-COVID levels of $9.27 at the end of February. The current performance is more of a recovery than a rally.
• As iBuyers return to market, RealSure, Realogy’s iBuying program, also has come back. This was a move the market responded to positively.
• Courts rejected Reology’s attempt to force the $400M Cartus deal. But there wasn’t much market response to the decision, as this seemed to be priced into expectations.

Redfin

Stock price: $41.57 | Down 0.8%

Enterprise value: $4.0B | Down 149M

What happened? Redfin underperformed the broader market.  But this is due to year-to-date performance leaving questions on its lofty valuation. That said, Redfin posted a strong quarter, providing some confidence to analysts.

• Redfin posted a strong quarterly earnings report. Analyst estimates were exceeded on both revenue and earnings. Even amidst the pandemic, revenue increased 8% year-over-year.
• Redfin also announced its first monthly gross profit from Redfin Mortgage, driven from strong mortgage demand.
• A large portion of Redfin’s early declines in the month came from concerns around valuation. Bank of America downgraded the stock on this thesis. Susquehanna joined in on the downgrades later in the month.

eXp Realty

Stock price: $19.87 | Up 16.5%

Enterprise value: $1.3B | Up $189M

What happened? eXp posted a strong July. It added almost $200M to its enterprise value and continued a 3-month rally.

• There wasn’t any specific eXp Realty event driving gains. Housing market strength and eXp’s strong position as a virtual brokerage in a pandemic likely helped.
• Separate from real estate brokerage, VirBELA announced strong growth in its events volume.

Re/Max

Stock price: $32.37 | Up 3.0%

Enterprise value: $391M | Up $17M

What happened? Re/Max posted an okay month, slightly trailing the S&P 500.

• In positive news, Re/Max announced their home sales data. They indicated a 37% gain in June sales over pandemic-impacted May. Lack of inventory continued to be cited as a core challenge.

Vector Group (Douglas Elliman owner)

Stock price: $8.82 | Down 12.3%

Enterprise value: $2.6B | Down $190M

What happened? Vector Group continued a decline from the end of June. Most concerns appeared to be related to Tobacco divisions

• There were not any meaningful real estate-related events for Vector Group in July. That said, Vector Groups exposure to New York and lack of large tech investments may be a cause concern.
• *For reference, Douglas Elliman is ~40% of Vector Group’s revenues.

Portals

Portals outperformed the broader market, posting gains above 12% month-over-month. Zillow has not only matched its pre-COVID stock price but exceed it. New Corp, by contrast, is much closer to a recovery story.

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Zillow Group

Stock price: $68.09 | Up 18.5%

Enterprise value: $14.8B | Up $2.4B

What happened? Zillow posted a very strong July in advance of Q2 earnings. There weren’t any specific drivers. Investors seem to be responding positively to strong real estate industry news. Zillow’s strong position in tech as the industry moves towards technology doesn't hurt.

• Zillow continued to roll out Zillow Offers in more markets. This provided  increased confidence to investors following initial concerns in March.

News Corp (Realtor.com owner)

Stock price: $12.72 | Up 7.3%

Enterprise value: $9.4B | Up $497M

What happened? News Corp increased over 7% month-over-month, reflecting the broader recovery across the market.

• There weren’t specific Realtor.com-specific events in July that drove the increase. Earnings are in early August. The stock was upgraded by JPMorgan to neutral mid-month on valuation.
• *For reference, Realtor.com and its direct parent, Move, account for roughly 40% of News Corp’s revenues.

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