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Every real estate business has its fingers crossed that the market will pick up sooner rather than later.
But for some, the timing of the market turnaround is a matter of greater urgency.
An Intel review of public financial filings for eight major real estate companies shows that four big firms — Compass, Redfin, Opendoor and Offerpad — saw their combined cash reserves slashed in half over a nine-month period, from a $3.6 billion total in March of last year to $1.8 billion in December.
And virtually every company in this review was sitting on substantially less cash to open 2023 than it was at this time last year.
This puts some companies on a much shorter leash than their peers as the markets continue to process uncertainty roiling global energy markets and the U.S. banking sector.
Mike DelPrete
“Really what these companies need, in addition to cash — as a prerequisite for cash — is some sort of semblance of calm or certainty in the market,” real estate analyst Mike DelPrete said in a phone interview with Intel. “Get investors back to the table. Get homeowners back to buying and selling. That’s what they need. And right now, we’re just living in a pretty volatile environment.”
But the big established brokerages and a few other real estate companies have been able to get through the recent rough stretch while holding onto substantial assets — cash and otherwise. And some were even able to turn a small profit during the downturn.
Here’s what Intel learned about the state of the industry’s cash reserves — and how long they could sustain a potential longer-than-expected downturn.
Less room for error
To put each company’s cash reserves in the context of recent losses, Intel estimated a version of its cash runway.
“It doesn’t matter the absolute number: whether it’s $50 million, $100 million or $1 billion of cash in the bank,” DelPrete said. “What really matters is how quickly they’re burning it: how much runway you have.”
The cash runways below are based on how long a company’s cash and cash equivalents would last if a company continued to lose money as quickly as it did during the last three most recent financial reporting periods. Specifically, those reporting periods cover the final nine months of 2022, when home-price growth ground to a halt and home values began to fall.
They are not a prediction of whether a company will run out of cash in reality, nor are they a forecast for when it would. That’s for a variety of reasons.
For one, most of these companies have access to a number of lifelines — such as revolving credit, fundraising or sales of assets, to name a few — that complicate a company’s outlook for how long its cash could last. For another, some of these companies have likely experienced the worst of their losses already. Many businesses are also operating on significantly lower costs today than they were in the closing stretch of last year.
But the notion of a cash runway does add context that helps interpret a company’s cash balances and demonstrates why executives at some companies have been focusing so urgently on a return to profitability.
The overall takeaway: Real estate companies generally had less cash to work with at the end of 2022 and fewer tools with which to sustain a protracted period of unprofitability.
Chart by Daniel Houston
In the chart above, the shorter the line becomes, the less time a company would have until it ran out of cash at its recent burn rate.
And those timelines sure have shortened.
The major iBuyers — Opendoor and Offerpad — reported particularly heavy losses in the back half of last year as they realized losses from selling off homes they purchased near the peak of the market. More on them in a bit.
But Compass has been burning through cash as well, despite making deep cuts to its operating costs. It has been able to keep its runway steady in recent quarters even as it has continued to lose money, in part by utilizing its revolving credit line.
Robert Reffkin | Compass CEO
The brokerage — which for years had been fueling its fast-paced growth using debt and lucrative, since-discontinued incentives for agent recruitment — has found itself racing to cut costs faster than other brokerages. Following these cuts, Compass CEO Robert Reffkin told investors that Compass expects it will be free-cash-flow positive — meaning the company is generating more money than it spends — in 2023.
At the time, he was eyeing the second quarter of this year as the period where Compass could achieve positive free cash flow.
DelPrete said companies with higher burn rates have had to cut their expenses much more steeply during the ongoing downturn.
“They just need to cut, cut, cut those expenses as fast as they can,” DelPrete said. “And we’ve seen Compass do that, cutting their operating expenses by about 40 percent, laying off 30 to 40 percent of their employees. So that is the urgency which they’re under to be able to cut those costs, so they have enough cash in the bank, so they don’t become insolvent.”
Meanwhile, the listing-portal-and-brokerage-hybrid Redfin — which at the start of 2022 sat on a mountain of cash and cash equivalents totaling well over $1 billion — was down to $240 million of highly liquid assets by the end of the year.
When Redfin’s stock plunged below $4 per share earlier this year, Redfin CEO Glenn Kelman described it as a “near-death experience” on a call in February with investors and analysts. Shares in Redfin are now trading for closer to $9, coinciding with a moderate boost in investor confidence since the stock hit its low point. Redfin is in the process of closing its iBuyer business RedfinNow, a process that its rival Zillow completed roughly a year earlier.
Glenn Kelman | Redfin CEO
“We’re running Redfin out of the cash register in 2023,” Kelman said at the time. “So, if the existing-home sales [projections] seem likely to fall below 4.3 million, we’ll reduce our spending.”
Running short on cash isn’t something any business wants to face. But some companies are better equipped to handle it than others.
Take the more traditional brokerage giant Anywhere. The company reported $453 million in net losses in the fourth quarter alone, and its cash and cash equivalents totaled less than half that amount by the end of that same period. But Anywhere has far more non-cash assets — and far less debt — than many other real estate companies, giving the company more options to maintain a healthy cash cushion.
The height of the blue bars below represents each company’s shareholder equity — essentially its net worth. Shareholder equity is the total value of the assets on a company’s balance sheet, minus the amount of debt and other liabilities on its books. The red portion of each bar below is the company’s average quarterly loss down the stretch in 2022.
Chart by Daniel Houston
In the chart above, Compass and Anywhere’s average quarterly losses look pretty similar. But Compass’ rapid debt-fueled rise during its heavy growth phase of years’ past is now weighing on it more heavily than, say, Anywhere’s perch as a more established real estate behemoth with less debt. As a result, Compass’ newly shortened cash leash puts more pressure on the upstart brokerage than Anywhere’s does.
Opendoor and Offerpad are in a similar spot, where recent quarterly losses make up a significant share of the iBuyers’ net worth as companies.
And Redfin — one of the companies on the shortest leash cash-wise in late 2022 — has also been trending quickly toward negative shareholder equity in recent earnings reports.
While shareholder equity can be a sign of how many options are available to a company in the event of a cash crunch, DelPrete points out that going negative in shareholder equity is far from a death knell for a company.
“There’s no Securities and Exchange Commission umpire that blows their whistle, comes in and says, ‘OK, this doesn’t make any sense. You have to go out of business,'” DelPrete told Intel. “It has no practical effect that I’ve seen.”
Here’s the breakdown by company.
Companies with shortened runways
In Intel’s review of company filings, four companies stood out for their large net losses, which made up a significant share of their remaining cash balances and net worth: Compass, Redfin, Opendoor and Offerpad.
This time last year, these four companies combined for $3.6 billion in cash and cash equivalents. Nine months later, their combined cash war chest had been slashed in half, totaling $1.8 billion in highly liquid assets.
At the outset of 2023, none of them were at risk of running out of cash immediately. But all of them were relying on the next few quarters to go better than the last few have, at least in terms of corporate profitability.
Carrie Wheeler | Opendoor CEO
In a call with investors in February, Opendoor CEO Carrie Wheeler said she expected exactly that.
Her company and other iBuyers like Offerpad had already sold off most of the inventory the purchased near the market peak — and sustained huge losses in the months that followed. With a return to roughly normal housing activity levels, Opendoor should be profitable sometime in 2024, she said.
At the outset of 2023, Opendoor was sitting on over $1 billion in cash. But it had been burning through it at a rate of more than $150 million per month in the final nine months of 2022. With many of its worst-priced properties now off the books, Opendoor has more than enough to get through the current period, Wheeler assured investors on the call. But if the market downturn continues into next year, it could put the company in a tougher spot, she said.
“If I look ahead of 2024, if that’s sort of the question in your comments, and [account] for a — maybe longer trough period in the housing cycle, we’ll take a harder look at our cost structure in light of that,” she told one analyst. “We’ll have to.”
For all companies below, the cash category includes highly liquid cash equivalents but excludes less liquid sellable assets, such as an iBuyer’s equity in its properties. The “equity” category includes the value of all assets above a company’s liabilities.
Monthly net income is calculated as an average over the final nine months of 2022, according to each company’s public filings.
Here’s how quickly each of them burned cash in that nine-month period, and where each of their balance sheets landed by the end of December.
Compass
Monthly net income: -$46 million
Cash: $362 million
Shareholder equity: $521 million
Redfin
Monthly net income: -$26 million
Cash: $240 million
Shareholder equity: $64 million
Opendoor
Monthly net income: -$153 million
Cash: $1.1 billion
Shareholder equity: $1.1 billion
Offerpad
Monthly net income: -$21 million
Cash: $97 million
Shareholder equity: $122 million
Profitable or asset-rich companies
Not every company in real estate was in a tough spot with regard to cash heading into 2023.
Traditional brokerages — especially ones whose place in the market was largely established years ago — were generally in better shape at the start of the year than the iBuyers and debt-heavy competitors like Compass.
“They can weather the storm,” DelPrete said of the traditional brokerages. “In many cases they’re profitable, cash-flow positive. And they might not be the sexiest, most exciting business models. They might not be the companies that appear on the front page of Inman every week. But they’re the proven models that work.”
Also working: The highly cost-efficient, agent-fueled growth model of eXp Realty, which escaped the final nine months with a slim profit. As was Zillow’s model, with losses that were dwarfed by the sheer value of its assets — cash and otherwise.
One thing they all have in common: They were either profitable during the final nine months of 2022, or had immense assets and relatively few liabilities on their balance sheet at the end of the last reporting period in December.
Zillow
Monthly net income: -$13 million
Cash: $1.5 billion
Shareholder equity: $4.5 billion
Anywhere
Monthly net income: -$34 million
Cash: $214 million
Shareholder equity: $1.8 billion
eXp World Holdings
Monthly net income: +$0.7 million
Cash: $122 million
Shareholder equity: $249 million
RE/MAX
Monthly net income: +$0.5 million
Cash: $109 million
Shareholder equity: $32 million
