This report is available exclusively to subscribers of Inman Intel, a data and research arm of Inman offering deep insights and market intelligence on the business of residential real estate and proptech. Subscribe today.
The housing market is fully immersed in a sharp downturn, and real estate companies have had to dip into their cash reserves to offset losses in revenue.
By the end of 2022, the biggest publicly traded real estate companies were sitting on less cash than they held six months earlier, according to an Intel review of their balance sheets. And in some cases — such as the upstart brokerage giant Compass and the iBuyer leader Opendoor — the cash burn was particularly steep.
This is an area that real estate analyst Mike DelPrete watches closely. But how far is it from becoming a problem for the industry?
DelPrete shared his thoughts on the topic this week in a phone interview with Intel. He described an industry that is, if not yet cash-strapped, then at least having to keep a closer eye on its balances. It’s not a question they can afford to get wrong, he believes.
Intel: Let’s touch on a sore subject right now for the industry: cash. Most of the big real estate companies have reported losing money in recent months, and they’re all sitting on less cash today than they were in the first half of 2022. What’s your read on this?
DelPrete: The market turned in 2022. Everything changed, and the other thing that changed is, it’s like every investor or venture capitalist kind of got the memo at the same time, which is: These companies that we’re investing in can’t continue to lose money indefinitely. They need to be profitable. So suddenly, investors and stakeholders were demanding that companies have profitable business models, because they were no longer going to be able to raise money to sustain their unprofitable business models. So that really put the pressure on them.
And so the rubber really hits the road in a company’s cash balance. You can have all these manufactured financial metrics: EBITDA and GAAP or non-GAAP, adjusted this, adjusted that. But at the end of the day, it’s how much cash is in your bank account that matters. And that’s no different for a public company, a private company, or me and you as individuals. When you run out of cash in the bank, you’re in trouble.
Where are real estate companies sitting right now with regard to cash? Do they still have healthy levels of cash, you think?
It all depends on the company and the type of company — which sounds obvious, but that’s really what it’s all about. So established, proven business models that have been around for decades — think traditional brokerages — with positive cash flow, they’re well positioned. These are all businesses that have proven business models, and they generate cash.
The companies at risk are the newer companies, the disruptors. They’re earlier in their growth stage.
If you think about, perhaps, launching into orbit, these are the companies that are still burning, trying to get into orbit. All of these traditional companies that have been around for decades with more proven business models, they’re in orbit. They don’t need a lot of rocket fuel. Once you’re in orbit, you’re kind of in orbit. And you continue to go around the Earth and operate in the same way that you have.
These other businesses that are trying to reach orbit, they’re burning massive amounts of capital. And the two best examples of that would be Opendoor and Compass. They’ve raised crazy amounts of money, and they’ve burned crazy amounts of money because they’re trying to get to scale. They’re trying to get to orbit. They’re trying to get to that place where they have a self-sustaining business model. So those are the businesses that are in trouble now, because you can imagine if you’re trying to get to orbit and something goes wrong, you don’t have a lot of options. Are you going to power down? If you power down, you don’t make it to orbit. So there’s not a lot of options for those businesses, and that’s the cash crunch that some of those companies are under.
Now with that being said, it all comes down to how much cash they have — how much fuel they have. Some have a lot; some have less.
What are some signs that a company might be in actual trouble? And how close are Compass and Opendoor to to that point?
It goes back to what I said before, which is, how much cash does a company have in the bank, and how much are they burning? And then I’m gonna say there’s a third thing, which is “everything else.”
How much cash do you have in the bank? That’s actual cash, that’s not a net loss or anything. If you look at these companies’ quarterly filings, and you just search for cash and cash equivalents, that’s the best way to find that number. When I last checked, Opendoor had $1 billion dollars of cash and cash equivalents, and Compass had close to $300 million. And then you look at how much cash they’re actually burning.
And then there’s the third thing, which is kind of “everything else.” And that gets into debt and debt markets, and liquidity, and loan covenants, and accounts receivable, and accounts payable. That’s an area outside of my expertise. But a lot of these companies have debt, and there’s certain terms of conditions around that debt, and if they miss certain milestones, that could cause some problems.
What options do companies have when their reserves of cash — and other highly liquid assets — starts running short?
They either need to cut their expenses to make their existing cash last longer, or they need to get more cash.
It’s simple. The problem is, getting more cash right now in these financial markets is a lot more difficult than it was before. Venture capitalists are less likely to invest. Company stock prices are down so much, so raising money from the public markets is incredibly difficult, and highly diluted to existing shareholders. So the options for raising money and raising debt — they’re not gone, but they’re much more limited than they were before.
There’s also the option, for a public company, of going private: private equity coming in and taking a company out [of the public markets]. And I’m not saying that’s a likely outcome for Compass or Opendoor. But it’s one of the more likely outcomes. A private company could come in, take over a company like Compass, continue to strip out costs, continue to invest in the business, and ideally build it into something where five years from now it’s worth more than what they paid for it. Because right now valuations are so, so, so low. And there might not be options. If a company does not have any other options, they’re going to be forced to accept an option that is not very favorable for them.