The REcap - May 2020

Real estate stocks have continued to improve in May, accelerating from last month. Brokerages are still worse off than they started the year. But strength in the housing market has kept losses minimal. Portals have improved their standing since the start of the year. And news from major portals on the housing market continues to be positive. Pricing seems to be holding up, and demand is better than most people expected it to be. 

Key takeaways:

• Real estate stocks continued to improve in May. They have not yet offset year-to-date losses across the board, but portals are better off. Brokerages increased over 20% m/m and portals gained just short of 30%.
• Zillow is trading better than it did to start the year. It’s improved its gross profit per Zillow Offers home. It also revised its revenue expectations upward since initial post-pandemic concerns.
• While home prices have been stable, annualized home sales declined almost 20% in March. This reflects the initial response to COVID-19 rather than current market conditions.
• As was the case last month, demand in real estate continues to be solid. Redfin brought back a large portion of its furloughed employees due to a “rapid rise” in demand.
• Mortgage rates remain at historic lows. But the supply of homes on the market is low and many borrowers are still struggling to pay their bills.

Market context

Real estate stocks outpaced a positive market. Despite continued uncertainty from COVID-19, the markets improved in May.

S&P 500: The S&P continued its recovery amidst mixed signals on unemployment and COVID-19. The S&P increased almost 5% for the month. Why it matters: With large unemployment number, the market continued to improve. And real estate stocks outpaced the broader market significantly.

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‍April 30-year Mortgage Survey: 30-year interest rates continue to reach historic lows, falling even further to 3.18%. Why it matters: Interest rates remain at historic lows. It’s more attractive for buyers to get a mortgage because low interest rates mean lower interest fees. But things are still tough. Loan forbearance accounts for 8.5% of total mortgages.

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Case Shiller Index Results: In March, home prices increased roughly 1% month-over-month and almost 3% year-over-year. This continues the increases we’ve seen in prior months. But April will likely show the impact of COVID-19. Why it matters: New data indicates that prices were not significantly impacted by the pandemic. We’ll know for sure in one or two months as Case Shiller Index results come in for April and May.

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Annualized existing home sales: Annualized existing home sales fell significantly from ~5.3M in March to ~4.3M in April. This is down substantially both month-over-month and year-over-year. Why it matters: March data did reflect a significant dropoff in annualized home sales. Numbers have not been this low since 2011. Data next month will likely show the start of any post-COVID shock rebound.

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Brokerages

Brokerages posted collective gains of over 20% and clawed back over $1.4B in enterprise value.  They are still down from the start of the year. But investors are pleased with the muted impact of COVID-19. And cost control measures that brokerages have put in place during the crisis have helped.

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Realogy

Stock price: $6.07 | Up 39.6%

Enterprise value: $4.7B | Up $351M

What happened? Reology posted a strong month despite mediocre earnings. To be clear: it’s still down considerably from its $10.59 price in January.

• Realogy announced earnings on May 7th. It posted a quarterly loss of $.55 per share versus consensus estimate of $0.48. While this wasn’t great, the stock did not move much. Much of this was likely priced into expectations from COVID-19.
• Realogy announced 8% transaction volume growth year-over-year and 4% year-over-year agent growth.
• The average home sales price in Realogy Brokerage Group increased from ~$512K to ~$534K.
• Realogy suspended its partnership with Amazon on smart home products. This didn’t seem to have a meaningful impact on stock price.

Redfin

Stock price: $29.99 | Up 41.9%

Enterprise value: $2.9B | Up $912M

What happened? Redfin posted a very strong month thanks to its impressive earnings. Redfin is up since the start of the year .

• Redfin reported quarterly earnings early in the month. This started a steady climb in stock price. Revenue and net loss per share were both better than expected. 
• The company launched its Mortgage offering in Arizona, Delaware and New Hampshire.
• Marking continued confidence in the housing market, Redfin brought back 35% of its furloughed staff. For reference, roughly 40% of agents were originally furloughed.

eXp Realty

Stock price: $10.69 | Up 16.5%

Enterprise value: $677M | Up $111M

What happened? eXp continues to recover a large portion of its year-to-date losses after posting a strong quarter.

• eXp posted a second profitable quarter in a row and grew revenue over 70% year-over-year. The company announced that it has over 28,000 agents compared to roughly 18,000 a year ago.
• Both revenue and earnings beat analyst expectations, though most gains for the stock came at the end of the month.
• eXp hired a Realogy SVP to head up international expansion.

Re/Max

Stock price: $27.99 | Up 6.5%

Enterprise value: $312M | Up $30.8M

What happened? Relative to other real estate brokerage companies, Re/Max posted muted gains in line with the broader market.

• Re/Max posted mediocre Q1 earnings failing to meet analyst expectations. Agent count increased 5% to ~132K agents and revenue for the quarter increased .7% to $52.8M.
• Similar to many other real estate stocks, a large portion of gains came towards the end of the month, offsetting some of the post-earnings declines.

Vector Group (Douglas Elliman owner)

Stock price: $11.43 | Up 6.8%

Enterprise value: $2.95B | Up $83M

What happened? Vector Group continued its post-COVID improvement. Q1 earnings were solid; Douglas Elliman showed muted year-over-year revenue growth.

• Vector Group beat expectations on earnings across the whole company. Douglas Elliman reported revenue of $165.6M, a slight increase from $161.9M a year ago.
• Vector Group announced an additional offering of 5M shares mid-month, which weighed down slightly on the stock. But broader gains later in the month helped offset these losses. 
• *For reference, Douglas Elliman is ~40% of Vector Group’s revenues.

Portals

Similar to brokerages, portals saw some recovery month-over-month. Zillow has now surpassed its stock price from the start of the year. 

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Zillow Group

Stock price: $57.96 | Up 33.1%

Enterprise value: $12.5B | Up $3.1B

What happened? Zillow posted a very strong month driven by Q1 earnings and real estate market strength.

• Zillow beat Q1 revenue estimates with increases of 148% year-over-year. Gross profit per home on their offers business increased 10.2%. This provides increased confidence in the model, though losses are still growing year-over-year.
• Zillow originally forecasted it would end the year at $1.35B in cash and investments but revised this to $1.7B.
• Later in the month, Zillow resumed its home-buying business nationally.
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News Corp (Realtor.com owner)

Stock price: $12.25 | Up 23.6%

Enterprise value: $9.1B | Up $561M

What happened? News Corp had a very strong month, driven mostly by its non-real estate divisions.

• New Corp posted modest gains in its real estate segment but beat estimates meaningfully across the whole company.
• Real estate segment EBITDA declined primarily due to continued investment into Opcity.
• The company did announce that there are fewer transactions on Realtor.com. But lead volume and unique users have been improving of late.
• *For reference, Realtor.com and its direct parent, Move, account for roughly 40% of News Corp’s revenues.

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