Redfin Corporation

for 2021 Earnings Conference Call.

Today's conference is being recorded. At this time, I'd like to turn the conference over to Meg Nunley, Head of Investor Relations. Please go ahead, ma'am.

Thanks, Cody. Good afternoon, and welcome to Redfin's Financial Results Conference Call for the fourth quarter into December 31st, 2021. I'm Meg Nunley, Redfin's Head of Investor Relations. Joining me on the call today is Glenn Kellman, our CEO, and Chris Nielsen, our CFO. You can find the press release on our website at investors.redfin.com. Before we start, note that some of our statements on today's call are forward-looking. We believe our assumptions and expectations related to these forward-looking statements are reasonable, but our actual results may turn out to be materially different. Please read and consider the risk factors in our SEC filings together with the contents of today's call. Any forward-looking statements are based on our assumptions today and we don't undertake to update these statements in light of new information or future events. During this call, the financial metrics will be presented on a GAAP basis and include stock-based compensation as well as depreciation and amortization expenses. In the event we discuss any non-GAAP measures today, we'll post the comparable GAAP measures and a reconciliation on our website. All comparisons made in the course of this call are against the same period in the prior year unless otherwise stated. We'll also be sharing some of Bay Equity's preliminary financial results for 2021. Bay Equity and its auditor have not yet completed their process for auditing the company's 2021 financial statements, so actual results may vary from the estimated preliminary results that we present today. Lastly, we'll be providing a copy of our prepared remarks on our website by the conclusion of today's call, and a full transcript and audio replay will also be available soon after the call. With that, let me turn the call over to Glenn.

Thanks, Meg. And hi, everyone. Redfin's overall fourth quarter revenue of $643 million exceeded our expectations on the strength of our iBuying sales. But the $225 million in revenue from our core business of brokering home sales through our own agents and our partners is at the low end of our range, growing only 14% from an exceptionally strong fourth quarter of 2020. Our market share was 1.15%, up 11 basis points from the fourth quarter of last year, similar in magnitude to the third quarter's 12-point year-over-year gain. Our fourth quarter net income, a loss of $27 million, was better than we projected in our last earnings call. In 2021, we invested in a restored advertising budget and the software developers to support new initiatives like rentals on redfin.com and high-growth businesses like iBuys. Outside of the expenses from running acquired businesses that weren't part of Redfin at this time last year, we expect 2022 operating expense growth to slow significantly, with Redfin's gross profits improving across our brokerage and referral, mortgage title, and iBuying businesses. We don't need to buy other companies or launch new products. Our focus is on executing the strategy we've laid out over the past year, building a complete real estate destination for finding a home to buy or rent. improving customer success rates and customer loyalty to accelerate brokerage share, and scaling our mortgage, title, and iBuying businesses into an integrated nationwide offering. At this time last year, the brokerage was the only business generating significant gross profits, but now our property business turned its first annual gross profit since launching in 2017 with a 1.2% gross margin for all of 2021, even better than we expected as recently as last quarter. The anticipated acquisition of Bay Equity home loans will generate far more lending revenue overall and from our brokerage customers at much higher gross margins than Redfin's original mortgage business. As part of that planned acquisition, we also stopped investing in our own loan origination system, which will save more than $13 million in 2022. And after a year of rebuilding, our title business began growing revenues again in the fourth quarter of 2021. entering 2022 on pace to double sales with meaningful 22 gross profits. The business accounting for most of our losses is RentPath, which we bought out of bankruptcy in April. Its new leader started in August, and already he has hired new execs and reorganized the sales force. We will invest in initiatives to drive RentPath sales, but we'll also take steps over the coming months to run RentPath more efficiently. As each of these businesses performs better, Redfin overall will generate more value for each customer and improve operating margins. We'll also keep broadening the range of customers we reach. One of the main engines of Redfin's 2022 growth in its brokerage, iBuying, and rentals businesses is still our listing search site. Even as mortgage rates have been rising, traffic has been accelerating. The year-over-year gain in visitors to Redfin.com and Redfin's mobile applications was 1% in the fourth quarter after being flat in the third quarter. with traffic growth improving every month from October through January. When comparing the second half of 2021 to the sizzling second half of 2020, any growth would have been welcome, especially as Comscore indicates we're growing faster than any of our major rivals. To sustain these search share gains, we've recently added to our site climate-driven risk factors for homeowners and data about groceries, restaurants, and parks. We expect to add rental listings next month. We're also expanding the parts of the U.S. covered by our listing search site and mobile applications. By the end of 2021, Redfin listing search supported 88% of the U.S. population, up from approximately 79% the year before. At the end of this year, we expect that number to reach 95%. The number of homebuyers on our website and in contact with our agents have been in line with expectations, but it's hard to say how many will actually buy a home. With inventory so low and home affordability changing so fast, early touring activity hasn't led to as many accepted offers as we'd expect. We're sure that reducing the number of homebuyers and agent supports by as much as 28% in some markets will over time increase our homebuyers' likelihood of winning an offer with Redfin. With listings so scarce, homebuyers need more personal service than ever. And there's no evidence that the reduction in Home Buyers Commission refund, which we used to fund this service improvement, has limited demand. But to deliver this higher level of service, we've had to hire more agents than usual. 23% of our lead agents have joined Red Fence since October 1, which is nearly as much as the whopping 25% in 2021. As these agents guide customers through their month-long home search, the gains they expect from better customer service and market share and gross profit will come in the second half of 2022. Now that we've staffed for this level of service, our agent hiring for future home buying seasons will mostly be in line with their growth, especially as the annualized attrition rate for lead agents has declined from a peak of 36% in the second quarter of 2021 to 30% in the fourth quarter. Despite the agent retention challenges often discussed in these calls, Redfin outperformed all of our rivals in agent retention last year. One benefit, excuse me, one business benefiting from the shortage of homes for sale in Redfin now, let me try that one more time. One business benefiting from the shortage of homes for sale is Redfin now, which blew out its revenue forecast because the homes we buy on our own account are selling faster than ever. In the first quarter of 2022, when comparisons to 2021 will be a stiffer challenge, Redfin now is still expected to triple year over year. We've been more successful buying homes at profitable prices because there are fewer iBuyers bidding against us. Based on anecdotes from the Redfin employees making offers, the price range of competitors' bids is narrower. When we lost a bid last summer, we sometimes lost by $50,000. But now when we lose, it's more likely to be by $5,000. We're still more active in coastal markets than other iBuyers, buying older homes in more expensive neighborhoods. We have so far earned higher gross profits from these homes, albeit at a lower margin. Starting in December, we significantly raised our offer prices in anticipation of low inventory for the opening three months of the home buying season, a decision that seems likely to pay off. RedfinNow's contributions to gross profits is a major milestone for a company that had been taking money from the brokerage cash register to fund our ancillary businesses. But the acquisition of Bay Equity home loans will have an even larger impact on our profits. On its own, Bay Equity earned more than $50 million in 2021 net income for more than $350 million in revenue, about 53% of it from purchase mortgages rather than refinancings. Refinancings are likely to dwindle as rates rise, but Redfin can offset that by connecting our agents with Bay Equity loan officers. With 396 loan officers compared to Redfin Mortgage's 28, Bay Equity has the scale to serve Redfin's 2,450 lead agents. And because equity supports loans that Redfin Mortgage previously had not, including Veterans Affairs and Federal Housing Administration loans, and far more competitive pricing for jumbo loans, Bay Equity can serve nearly every brokerage home buyer. What we like best about Bay Equity is its culture of putting the customer first. We evaluated dozens of lenders before deciding to acquire Bay Equity. Many were eager to meet our customers, but most assumed we wanted to give those customers the worst deal possible, not the best. Bay Equity was different. Among the lenders with more than $5 billion in originations, Bay Equity was in the top 25 on Redpen's open book review site for on-time closings and customer satisfaction. What was equally striking to us was Bay Equity's commitment to its own people. Many of the lenders we met had binge hired during the boom. But Bay Equity had grown revenues without adding many employees, instead investing in its culture. Mortgage experts told us to expect at least 20% of Bay Equity's loan officers to leave soon after a deal was announced. But one month after the announcement, Bay Equity's loan officers seemed to value meeting Redfin's brokerage customers and to trust Bay Equity's leaders. Only seven of the 396 have resigned so far. Since Bay Equity has hired seven loan officers in that time, There's been no net change in the number of loan officers. Once the deal closes, Bay Equity loan officers and Redfin agents seem excited to meet. We expect the deal to close in April. The company we acquired the year prior, RentPath, started from the opposite position of Bay Equity, emerging from bankruptcy rather than notching record profits, with customers uncertain about its future. Year-over-year declines in revenues and customers have narrowed. But this business is still at the beginning, not the end of a turnaround. Better sales execution and an increase in the number of rental inquiries for each of our customers will help us drive 2022 sales. From the fourth quarter of 2020 to the fourth quarter of 2021, RentPath's spending on search engine ads fell 63%. But if you set aside traffic from advertising, RentPath's visits over that time increased 13%. Even with such a drastic reduction in advertising, the inquiries RentPath generated for each property that a customer paid to promote on our site increased over that time by 9%. One reason we can recruit more customers is that we're now giving those customers more value. That value will get another boost when we promote RentPath properties on RedSend.com this March. And RentPath customers won't be the only beneficiaries. This will also boost Redfin's authority as a real estate destination. Nearly all the major real estate sites Redfin.com competes against have rental listings. Even as RentPath sales recovers, we also have to reduce spending in many areas, which RentPath couldn't do while in bankruptcy because of an earlier failed acquisition attempt. By the time John started in August, change was long overdue. He had already developed a new management team. In the coming months, We expect that team to align the company's resources behind John's initiatives to grow revenue. Now, before turning the call over to Chris, let's discuss the housing market. Since the start of the year, mortgage interest rates have risen from 3.1% to 3.9%, with more increases likely. From January 2021 to January 2022, the mortgage payment for a median price U.S. home increased by more than 25%. December pending sales were down 7% year-over-year and down 15% in the West, home to six of Redfin's top 10 markets. But Redfin expects to grow significantly in 2022, powered by traffic growth, rental listings on Redfin.com, better customer service, and profits from iBuying and mortgage. We'll get more than our fair share of customers and deliver more value to each one. With inventory so low, customers need a broker who can get them into homes at a moment's notice. and make their offers more competitive with financing that won't fall through. New listings started to slow in January with the average number of new listings per day dropping 13%, mostly due to East Coast snow and ice. This was exactly when even more homebuyers were rushing into the market to beat rising mortgage rates. Of the listings that debuted in the middle of January, 58% went off the market in under two weeks, an all-time high. We thought the market was wild in mid-January last year when that number was 51%. The problem is with individual homeowners, not builders. Despite builders' supply chain problems, more than a third of the single-family homes for sale in December were new, a record. The year prior, it was 25%, also a then record. In the bubble years before the great financial crisis, new construction never accounted for more than 20% of U.S. home sales. And it's not just the sellers who are increasing the institutions. It's also the buyers. Investors accounted for 18% of fourth quarter U.S. home purchases, yet another record. Prior to the housing market's decade-long bull run, investors rarely accounted for more than 10% of home purchases. With inventory scarce and sellers eager for the certainty of cash offers, retail home buyers have been struggling to compete with investors. We expect inventory to ease in the spring. The housing market has become more seasonal almost every year over the past decade, with a lower proportion of the year's listings in the winter and a higher proportion in the summer. Because mortgage reform has made it hard to have two mortgages, the families moving have had to buy one home and sell another in increasingly narrow windows. But another group of homeowners who can afford to front the cash for their next home are increasingly deciding against ever selling the home. Title and mortgage businesses are now poised to deliver strong long-term growth. If hard times come, we believe we'll take share faster than ever. Drawing on a culture strong in will to strive, to seek, to find, and not to yield. Take it away, Chris.

Thanks, Glenn. We closed out 2021 on a solid note. Revenue and net income both came in better than the high end of our guidance. Top of funnel demand remains strong, although customer conversion has been impacted by low inventory, and we're carefully monitoring the macroeconomic outlook heading into 2021.