The REcap - March 2020

It’s been a rough month. The Covid-19 pandemic weighed down stocks across the board. But real estate stocks were hit even worse. Agents can’t go on showings. Portals are discounting their marketing services.

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Key takeaways:

• No one has any idea how Covid-19 will impact real estate. Everyone agrees it will be bad. Some brokerages are planning for revenue declines exceeding 50%.
• Mortgage rates reached 10-year lows. But low rates can’t overcome concerns around the broader economy. Mortgage lenders are providing forbearance amidst the crisis.
• Real estate stocks were hampered more than the broader market. The S&P was down 16.4%. Residential brokerages declined ~33%. Real estate portals fell ~32%.
• iBuyers stopped buying. This cuts off a meaningful source of revenue for Redfin and Zillow. And it reflects the complete uncertainty around home values in this market.
• Multiple companies took steps to preserve cash. Realogy accessed its credit line. Redfin raised an additional $110M. Zillow is cutting expenses by 25% along with marketing spend.

Market context

There is a lot of uncertainty from Covid-19. No survey, indicator, or chart will provide much context on such an unknown. But furloughs, layoffs, shelter-in-place policies are certainly bad for real estate.

March S&P 500 Performance: The S&P was devastated in March, falling ~16.4% due to concerns over the economy and Covid-19.  Why it matters: Interest rates reached their lowest point in 50 years. This means it's more attractive for buyers to get a mortgage. Low interest rates equals lower interest fees. And it’s a good time for homeowners to refinance their mortgage. But in the current environment, this doesn’t help much. Homebuyers are more concerned if they’ll have a job. And they've already had access to low interest rates. So, rates are better for buyers, but on a relative basis, it doesn't matter too much.

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March 30-year Mortgage Survey Results: 30-year interest rates ended at 3.3%. It was a rocky month due to uncertainty. That said, low interest rates are not new. Why it matters: Interest rates are incredibly low. It’s more attractive for buyers to get a mortgage (low interest rates = lower interest fees). And it’s a good time for homeowners to refinance their mortgage (convert current interest rates to lower interest rates). But in the current environment, this doesn’t help much. Home buyers are more concerned if they’ll have a job in the next few months than if they’ll save a bit of money when buying a home. And interest rates were already low, so this wasn’t a huge change for buyers.

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January Case Shiller Index Results: In January, home prices were up 3.8% year-over-year and 0.5% month-over-month. This continues a steady trend of improvement we’ve been seeing for quite a while. But this data is months old and we have no idea what Covid-19 will do to home prices.  Why it matters: it doesn’t. We’ll have to wait to see how the pandemic and economic concerns impact new homes. This data isn't helpful at this point.

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February one-unit housing starts: Private single family Housing starts increased month-over-month to just over 75,000. In isolation this is positive. Why it matters: it doesn’t. We’ll have to wait to see how the pandemic and economic concerns impact new home construction over the next two months.

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Brokerages

It was a bad month for brokerages. Covid-19 put a halt to most real estate showings. In New York, agents aren’t even allowed to cold call. Fears around transaction volumes dragged down stocks. Estimates from experts are pretty negative. Robert Reffkin, the CEO of privately held Compass is projecting a revenue decline of 50% in the next 6 months. No one knows what is really going to happen, but everyone agrees it won’t be good.

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Realogy

Stock price: $3.01 | Down 67.5%

Enterprise value: $4.18B | Down $713M

Metrics to watch: Normally we look at revenue and net income. Given the macro environment, these aren’t that helpful.

What happened? Realogy’s stock price was in free fall from concerns over Covid-19. Shelter-in-place is doubly painful for Realogy. It's bad for all of real estate. But Realogy is also exposed to high-density metros that announced these measures first.

• There wasn’t any meaningful Realogy-specific news that drove the downfall. Earnings were already reported in February. Reology has a lot of debt, so often the stock (equity) will react strongly relative to companies with less debt. This is why the decline in enterprise value is more muted.
• The majority of the fall occurred from the 13th through 18th. This coincided with shelter-in-place rulings as well as iBuyers slowing/stopping their buying. As a reminder, Relogy generates much of its income from large metros. And these cities were first to put these policies in place.
• Realogy hit a 52-week low in March. Again, it’s hard to attribute this directly to any single factor rather than the broader market.
• On March 25, Realogy announced measures to preserve cash. It accessed its credit line and made salary cuts. This was viewed as a slight positive by the market.

Redfin

Stock price: $15.42 | Down 43.0%

Enterprise value: $1.35B | Down $1.08B

Metrics to watch: Usually look at revenue, revenue growth rate, and gross margins. But with a tough macro environment, these aren’t that helpful right now.

What happened? Redfin had a very rough month but coming off of gains of 15.1% and 11.2% in January and February makes it more palatable.  

• There wasn’t a fundamental announcement that changed the tone of the month. Most of the decline happened before meaningful press releases. In fact, a March 11th report from the Redfin CEO was somewhat promising.
• The tone from Redfin became worse on March 18th. A new report on the market turned negative. Redfin announced that it would stop buying homes as part of Redfin Now. But by then, most damage had already happened.
• Redfin raised an additional $110M from Durable Capital Partners at the end of the month. The market responded negatively, likely because the raise was at a discount.

eXp Realty

Stock price: $8.46 | Down 11.5%

Enterprise value: $519M | Down $69M

Metric to watchs: eXp ended the year with 25,400 agents, an increase of 9,900 from 2018. Agent count is one of the primary ways eXp grows revenue. But with the tough month, this isn’t that helpful.

What happened? eXp had a rough month but fared better than other companies. It posted a positive earnings report. Its model is defensible in a shelter-in-place world.

• Most declines occurred mid-month. eXp had already fallen 13.4% year-to-date, so the stock had taken some punishment already.
• eXp reported a strong Q4 on March 12th. It beat revenue estimates by ~$12.5M. For 2019, it increased revenue almost $500M while reducing net losses from $22.4M to $9.5M. eXp has shown the ability to continually grow its average home sale price. The average 2019 home sold for $282.4K versus $265.7K in 2018.
• Strong metrics and  healthy agent growth reflect positively on eXp’s model. In fact, eXp’s Q4 was its first profitable quarter since listing on the NASDAQ.
• eXp’s cloud model may help insulate it during the pandemic. It is a virtual offering with low-priced positioning for agents. And doesn’t buy homes directly through its iBuyer program. This means that even in a severe downturn, the damage may not be that bad.

Re/Max

Stock price: $21.92 | Down 24.8%

Enterprise value: $197M | Down $130M

Metric to watch: Net income and revenue per agent are usually what we look at for Re/Max. But this month, things are so challenging there’s little they can mention there.

What happened? Re/Max had already declined almost 24% last month. The additional 25% this past month was particularly devastating. 

• Mid- and late-March were when most declines occurred. This period marked the start of shelter-in-place rules and restrictions on showings. Re/Max did not have any company-specific news driving the downturn.
• On March 19th, Re/Max withdrew its first quarter and full-year 2020 guidance. It also announced new services for franchisees to get through the pandemic. These included commission deferral programs and discounted tools and training. The stock was already at its lowest on March 18th, so this announcement was not that meaningful.
• Re/Max’s franchise model means it generates most money from fees rather than commissions. As a result, it’s interesting that the stock has been hit as hard as it has been. That said, it did fare better than some other brokerages.

Vector Group (Douglas Elliman owner)

Stock price: $9.42 | Down 18.9%

Enterprise value: $2.68B | Down $173M

Metric to watch: Normally we look at revenue growth and net income. But these aren’t that telling in this environment.

What happened? Vector Group had a challenging month, but not as bad as some others. There weren’t any meaningful real estate-related announcements from them.

• Vector Group already released earnings late February. There weren’t any meaningful new Douglas Elliman-specific events.
• On March 5, Vector declared a $0.20 quarterly dividend which was a 50% decline from the prior dividend of $0.40.
• Vector Group fell pretty consistently throughout the month. It’s hard to pinpoint any activity specific to its real estate arm. Douglas Elliman is particularly exposed in markets like New York. These markets are dense and implemented shelter-in-place early.
• *For reference, Douglas Elliman is ~40% of Vector Group’s revenues.

Portals

Concerns around real estate agent advertising has been a drag on real estate portals. Zillow is offering discounts to agents. So is Realtor.com. Zillow’s reliance on iBuying is also a concern. There is very limited visibility on home prices and liquidity in the near future.

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Zillow Group

Stock price: $33.97 | Down 39.0%

Enterprise value: $7.5B | Down $4.3B

Metric to watch: Revenue and revenue growth are normally worth looking at. But this month is not a normal month, so there aren’t any key metrics to focus on.

What happened? Zillow had a rough month, with over $4B of enterprise value erased. But it was coming off gains of almost 21% in February. 

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• Most declines occurred from the start of the month through mid-March. There wasn’t a specific company event driving decliens. But Zillow’s reliance on agent business and iBuying both are concerns. Shelter-in-place policies and a challenging real estate environment are clearly negatives.
• In response to the market conditions, Zillow offered a 50% discount to Premier Agent advertisers in Mid-March. Zillow estimated this would be a $40-50M negative revenue impact.
• The market responded positively to Zillow’s pausing of its iBuying. The uncertainty of iBuying was likely priced into the stock at this point.
• In late March, Zillow CEO Rich Barton announced a hiring freeze and significant expense reduction plan. Again, most damage to the stock was already done and this was mostly viewed positively by the markets.

News Corp (Realtor.com owner)

Stock price: $8.97 | Down 25.7%

Enterprise value: $7.9B | Down $1.9

Metric to watch: Normally we look at revenue and profitability. But it’s harder to pay attention to any core metric this month.

What happened? News Corp had a rough month. It is coming off declines of 11.3% and 3.7%, so while it fared better in March than Zillow, it’s worse year-to-date.

• New Corp experienced steady declines throughout the month. Things were worst mid-month when shelter-in-place mandates were announced.
• On March 20th, Realtor.com announced 60% discounts for lead packages in April. The stock traded down significantly on 3/20, but it’s hard to pinpoint if it’s directly a result of this news.
• *For reference, Realtor.com and its direct parent, Move, account for roughly 40% of News Corp’s revenues.