All Eyes On Inventory As Q1 Earnings Ramp Up Following A Chilling 2022

Jay McCanless, a senior vice president of equity research at Wedbush Securities, reveals what he’ll be watching as publicly traded real estate companies post Q1 earnings this week and next.

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Earnings season is here again, this time with the first big look into 2023.

That’s because beginning this week, all of the major publicly traded real estate companies will reveal how much money they earned — or lost, as the case may be — between January and March of 2023. This round of earnings will be illuminative. It’ll be a chance to see if and to what extent the hardships of 2022 carried over into the new year. And the first quarter does include the very beginning of spring — meaning the upcoming earnings reports will hint at what kind of seasonality, or recovery, may dominate the present.

Jay McCanless

To get a better understanding of what’s happening, Inman reached out to Jay McCanless, the senior vice president of equity research at Wedbush Securities. McCanless tracks a number of prominent publicly traded real estate firms, and he told Inman that overall, one of the biggest issues going into earnings season this month is inventory, or rather a lack thereof.

“This tight existing home situation isn’t helping anybody,” McCanless said. “We’re at almost half of where a normal six months of supply, where a normal market should be.”

That situation will play out across earnings of numerous companies. Here’s what you need to know:

Anywhere: Wednesday, May 3

With its roster of big-name brands and unmatched size, Anywhere is the godfather of real estate companies. And so, what happens to Anywhere is a good sign of what’s happening more broadly in real estate.

In the fourth quarter of 2022, Anywhere managed to hold on to profitability — not a feat every real estate firm managed to pull off — so heading into this earnings season one big question is whether or not it managed to further extend its winning streak.

The company also indicated in its last earnings report that it expected first-quarter volumes to be down, and for 2023 in general to be challenging. So, this earnings season will offer a chance to see how Anywhere’s forecast matches up to reality.

Anywhere additionally indicated last time that it expects a recovery to begin in late 2023. Now, with the first quarter in the books, will company leaders stick with that timeline? Are there any signs of a spring upswing?

Stray thoughts:

Anywhere is among the companies that has had layoffs this year, and it’ll be interesting to see if it is still looking for other big cost cutting measures — or if those efforts are wrapped up.
One of the big real estate stories of recent years has been how legacy firms such as Anywhere have been competing with upstarts such as Compass and eXp Realty. So Anywhere’s earnings relative to newer competitors will also be worth watching this season.

Catch up:

Offerpad: Wednesday, May 3

McCanless said his firm downgraded both Offerpad and Opendoor last week to a “neutral” rating, meaning investors are neither advised to buy or sell the firms’ shares. The biggest challenges for iBuyers, he explained, include the severe lack of inventory as well as the fact that higher mortgage rates mean many homeowners won’t move — or take advantage of the iBuyers’ offers.

“I don’t think there will be no inventory to buy, but I think it’s going to be harder for [the iBuyers] to find product,” McCanlesss said, “especially with the discounts both companies are putting on.”

McCanlesss said that over the last couple of years Offerpad in particular has expanded roughly along the same pathways as COVID-related migration. But now he’s looking for signs that the iBuyers are heading into smaller markets.

“I think going where the competition isn’t is probably a smart move to start with,” he explained.

Stray thoughts:

Offerpad’s stock has been trading for under $1 per share almost continually since last fall (there was a brief spike in February, but those gains are gone now). The company was warned months ago that it has to get its share price above $1 or face delisting, so investors will likely be watching this earnings season for any sign that Offerpad has an unexpected ace in the hole.
McCanlesss ultimately believes that with the iBuyers this quarter, “there’s going to be less volume.”

Catch up:

Zillow: Wednesday, May 3

Zillow has a lot on its plate as it works on a “super app” and continues its pivot to “Zillow 2.0,” which included iBuying until the company abandoned that venture in 2021. Heading into earnings season, McCanless is also watching for news about the company’s mortgage business.

“If you buy into the funnel concept, mortgages are a very important part of the funnel,” he said. “So if Zillow can start retaining their leads and turning them into purchases, so much the better.”

McCanless is also curious about the progress of Zillow’s Opendoor partnership, which displays the iBuyer’s offers on the portal giant’s website.

“Is that helping them generate some more leads and is it helping get the career agents involved?” McCanless wondered. “I think for Zillow, the Opendoor partnership is the best of both worlds. You get an experienced iBuyer but the risk stays on Opendoor’s balance sheet.”

Stray thoughts:

McCanless said the super app concept appears to be “progressing,” and that ShowingTime — which is now a key part of the app — “is gaining pretty rapid adoption.”
McCanless was less convinced Zillow should be trying to grow: “What’s the impetus to try to gain share right now? It’s not really a market where I’m going to go out and try to buy share.”

Catch up:

RE/MAX: Thursday, May 4

Like Anywhere, RE/MAX — once an upstart but now a legacy — managed to hold onto profitability in the fourth quarter of 2022. And so the big question for the franchisor this time around is if it can maintain that record. If it can — and if other legacy firms do as well — that may lend support to the hypothesis that the established players may be better positioned to weather an age of disruption than some observers might previously have guessed.

RE/MAX also touted in its past earnings report the growth of both its agent count and Motto Mortgage office count, so it’ll be worth watching how those numbers changed in the first quarter of 2023.

Stray thoughts:

RE/MAX is among the companies that has seen some agents “boomerang” back after leaving. But it’ll be interesting to see if that trend has a meaningful impact on the franchisor’s headcount.

Catch up:

Rocket Companies: Thursday, May 4

Rocket was among the companies hardest hit by the rapid increase in mortgage rates last year, and McCanless expects the company’s Q1 2023 to look similar to its Q4 2022.

“I think it’s just going to be pretty much the same thing,” he added. “Everybody is fighting for purchase opportunities.”

McCanless also specifically pointed to Rocket Money — a premium personal finance app the company debuted last year — as a promising opportunity that is on his list of things to watch for this earnings season.

Rocket ultimately posted a $493 million loss in the final three months of 2022, and McCanless said such losses aren’t sustainable forever. However, he also said “in the near term, we’re not concerned about liquidity” — meaning Rocket should have enough resources to weather the current storm.

Stray thoughts:

McCanless is among those who see mortgage rates moderating in the near future. And even if rates don’t get down to the record lows of the pandemic, any improvement should benefit a company like Rocket.

Catch up:

Redfin: Thursday, May 4

A number of analysts have in recent quarters suggested that Redfin faces unique challenges because it’s a brokerage with salaried agents, a mortgage lender and, up until recently, an iBuyer.

McCanless, however, wasn’t especially bearish on the firm. He praised Redfin for recently cutting buyer rebates — cuts which the company itself said didn’t significantly impact buyer behavior.

“The fact that they stopped the buyer rebates, and they have seen very little push back from that, I think that was a really smart move on their part,” McCanless said.

McCanless is also watching what Redfin does in the mortgage space, and pointed out that the company just passed the one-year anniversary of its purchase of lender Bay Equity.

As far as opportunities, McCanless suggested that Redfin — as well as Zillow — might want to look for inroads into the new construction sector, which would allow them to continue making money and lending to consumers even as inventory remains tight.

Stray thoughts:

Asked about Redfin’s salaried agent model, McCanless noted that Redfin has strong name recognition and that the company’s unique model may help on that front.

Catch up:

Opendoor: Thursday, May 4

As was the case for Offerpad, McCanless said Opendoor faces challenges related to inventory and high rates that keep people from accepting lower offers. Unlike Offerpad, Opendoor doesn’t currently face the risk of delisting from the stock market, though its shares were trading in the mid $1.30 range as of Tuesday afternoon — a precipitous drop from a high point of nearly $35 in February 2021. Clearly, then, Opendoor has to convince investors that it has a viable business model.

McCanless was optimistic on that front, saying that iBuyers may need to slow purchases down and the concept may never get as big as some imagined. But he also noted that iBuying isn’t a model on the verge of annihilation.

“I still think iBuying done under the right circumstances is a viable concept,” McCanless said.

McCanless went on to note that Opendoor bought higher-priced inventory in 2021 and 2022. Going into this earnings season, then, one key issue to watch for is how much of last year’s inventory Opendoor has managed to offload, and how much new inventory the company bought since market conditions shifted.

Stray thoughts:

Opendoor lost an average of $28,000 per home it sold in the fourth quarter of last year. A key thing to watch for in this upcoming report is whether that figure moves up or down, and by how much.
Opendoor just had another round of layoffs. The cuts happened after Q1 ended, but company leaders may still discuss such cost cutting measures during their call with investors.

Catch up:

Compass: Tuesday, May 9

Compass has grown into a behemoth in a relatively short time, but the story for the company over the last year has been about cutting costs. Specifically, the brokerage axed its cash and stock-based recruiting incentives, as well as laid off staff.

The big question now is if those cuts were enough. CEO Robert Reffkin has specifically promised that Compass would be free cash flow positive for all of 2023, so the company’s upcoming earnings report will be the first big look into how easily it’ll be able to meet that goal.

During the fourth quarter of 2022, Compass lost of $158 million — a large sum but also an improvement. The key this quarter, then, will be to continue that improvement.

Stray thoughts:

Compass has lately been touting its ability to re-recruit agents who previously left the brokerage. But the upcoming earnings report will offer a look into how this trend is impacting the brokerage’s overall headcount.
Compass also recently floated the possibility of franchising, so this earnings season will be a chance to see if the brokerage has made any progress on that front.

Catch up:

Airbnb: Tuesday, May 9

Unlike most of the companies on this list, Airbnb had a banner 2022 by notching its first-ever full-year profit. The company’s good fortunes were fueled by rising demand for short-term rentals, and shares in Airbnb have been riding higher ever since.

Of course the big question is if Airbnb can continue its winning streak, and how it describes demand in the first quarter of 2023.

Airbnb has also faced some criticism in recent months for things such as rising add-on fees, with some critics claiming the platform is suffering. The company’s previous earnings suggest that criticism isn’t hurting the overall bottom line, but it’ll be worth watching to see if Airbnb makes any moves to appease disgruntled consumers, or if it roles out any policies geared at how hosts handle their listings.

Stray Thoughts:

Regulation is always an issue for Airbnb. Unlike permanent housing, where the rules are mostly already set, short-term rental regulation is constantly evolving and generally becoming more strict. So it’ll be interesting to see if Airbnb has any commentary, strategies or insights into the ever-evolving regulatory landscape.

Catch up:

Airbnb notches first profitable full year as demand surges, rates fall

News Corp

News Corp is a massive conglomerate, but for real estate observers it’s relevant for owning Move Inc., the parent of Realtor.com. The big news earlier this year regarding Realtor.com was that CoStar was considering buying the site to use as part of a blitzkrieg into residential real estate.

CoStar ultimately opted against buying Realtor.com, so the question now is what News Corp might do with the portal.

As is the case with other portals, Realtor.com’s traffic numbers — which NEws Corp typically shares in earnings reports — also offer insights into consumer behavior and sentiment.

Stray thoughts:

The fact that News Corp was willing to sell Move Inc. and Realtor.com is as telling as the fact that CoStar wanted to buy it. Might they be courting another suitor?

Catch up:

CoStar and eXp World Holdings

While the big wave of real estate earnings reports begins today, CoStar and eXp got a jump on the rest of the industry and have already published their Q1 2023 earnings.

In CoStar’s case, the company managed to buck the sluggish market and post a 13 percent year-over-year increase in revenue. Profit was down compared to a year ago, but only slightly. Speaking to investors, CEO Andy Florance also repeatedly referenced a plan to build up Homes.com, suggesting CoStar still plans to compete with Zillow.

In eXp’s case, the company’s earnings report revealed a difficult first quarter, with revenue falling 16 percent year over year to $850.6 million. Despite the challenges, however, the company managed to make $1.5 million in profit, up from a net loss of $7.2 million one quarter earlier.

Company founder Glenn Sanford — who serves as the CEO of parent firm eXp World Holdings — said during a call with investors that he thinks the market will pick up in the third and fourth quarters of this year. But for now, it said the market is looking at a new normal.

“So I believe, Sanford concluded, “that we’re now fully into the new normal in terms of sales volumes and those types of things.”

Email Jim Dalrymple II

Topics: Compass | RE/MAX | Redfin | Zillow