Redfin Corporation

If you stand by, we're about to begin. Good day and welcome to the Redfin Corporation Q2 2022 earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Meg Nunnally. Please go ahead, ma'am.

Thanks, Cody. Good afternoon and welcome to Redfin's financial results conference call for the second quarter ended June 30th, 2022. I'm Meg Nunnally, Redfin's head of investor relations Joining me on the call today is Glenn Kelman, our CEO, and Chris Nielsen, our CFO. 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 content 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. On this call, we'll present non-GAAP measures when discussing our financial results. We encourage you to review today's earnings release, which is available on our website at investors.redfin.com for more information related to our non-GAAP measures, including the most directly comparable GAAP financial measure and related reconciliation. All comparisons made in the course of this call are against the same period in the prior year unless otherwise stated. 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, I'll turn the call over to Glenn.

Thanks, Meg. And hello, everyone. REDSEN in the second quarter performed below the expectations we set in our last call with revenue of $607 million compared to a projection of $613 million to $650 million. The shortfall was due to the largest rate hike in 35 years, which in June curtailed the second quarter lending revenues of Bay Equity, the lender we acquired in April by $15 million. Our net income was nonetheless in line with expectations after the exclusion of $10 million in restructuring costs for the 6% of our employees we laid off in June. The adjusted EBITDA loss was $29 million. In five years as a public company, Redfin has never before fallen short of our revenue projections. But this is also true, that even as the housing market weakened our results, Redfin has gotten stronger. We expanded our site from 91% of the homes in America to 94% to compete as a national rather than a regional destination. Our year-over-year brokerage share gains once again began to accelerate from four basis points in the first quarter to five basis points in the second quarter. We hired agents too quickly during the pandemic, but now sales execution is improving across the board. Of the Redfin customers who bought a home, a higher percentage stuck with us for that purchase, the first such gain since April 2020. The percentage of Redfin home buyers who got a Redfin mortgage increased to 11% in June and 15% in July. which has nearly doubled a five-year monthly high of 8% that we'd reached prior to acquiring Bay Equity home loans. Title Forward's second quarter attach rate also more than doubled from 12% in 2021 to 32% in 2022. We've learned where low fees let us take share and where we can raise prices to increase profits. In the markets where we came back to advertising the 1% listing fee we charge our move-up customers, New Redfin listings in July grew 10 points faster than the market overall. In the month prior to the campaign's launch, new Redfin listings were growing more slowly than the market. As we invest more in advertising this fee in 2023, we expect listing share to accelerate. But we'll likely stop trying to convince buyers they should save money on their own agent since buyers aren't the ones who pay that agent directly. On July 26th, we eliminated the commission refund we offered home buyers in 22 markets with few objections from customers or agents. If this pilot continues to be successful, we'll eliminate the refund entirely as early as January 2023, improving full year gross margins in our core business by more than 500 basis points. In the nine small markets that already eliminated the refund in 2019, we kept taking share. Our mission to put customers first is stronger than ever, but we need to save customers money at the points of the moving process when money matters the most, when choosing which listing agent to hire, and when shopping for mortgage rates. This pricing decision is one of thousands that Redfin is making to become profitable as this market correction has forced us to simplify our business. Our goal isn't just to survive the downturn, but to come out of it stronger. Profit discipline and sales execution have become more important to Redfin with housing demand weakening. As affordability pressure began to mount in February, more people searched Google for rental homes than real estate, favoring sites like Zillow with well-established rental search. Redfin is still competing effectively for new visitors searching online for homes for sale, but our visitors have become less likely to return, with some suspending their home search until the economy improves. The shift in interest toward rental slowed traffic growth to Redfin.com and Redfin's mobile applications from 11% year-over-year in the first quarter to 9% in the second. Over time, Redfin expects to compete better for renters, not just homebuyers. Since adding rental listings to Redfin.com at the end of March, visits to rental listings on Redfin.com and Redfin mobile applications has grown at a monthly rate of 9%. And the number of inquiries Redfin.com sent to our property management customers has grown even faster. Already, Redfin.com accounts for 4% of the rental inquiries generated by all of our rental search sites. The Redfin.com contribution is just one reason that RentPath, the rentals marketplace we acquired out of bankruptcy in April 2021, recorded its first ever quarter-on-quarter revenue growth since 2017. I just said first ever. I meant to say it's first quarter-on-quarter revenue growth since 2017. Excuse me. Total rental site visits, including rental traffic on Redfin.com, are up 9% year-over-year. While we still need to improve customer attention, second-quarter bookings are up 24% year-over-year. Since July 2021, the productivity of salespeople at generating new bookings has doubled. At the June National Apartment Association Conference, RentPath relaunched as RENT. Anointing Rent.com as our flagship site rather than apartment guide and simplifying the story of how our marketing services and online marketplaces work together. As Rent recruits more property managers to promote their apartment buildings on our network of sites, we'll compete more effectively with the largest real estate portals. Our goal is to surpass realtor.com, now second only to Zillow and real estate traffic. Already among people looking to buy or sell a home in the 20 largest US markets, 30% in the second quarter named Redfin is one of the first three real estate sites to come to mind, compared to 23% for realtor.com. At the beginning of 2021, these numbers were reversed. Becoming one of North America's top two real estate search sites can have a seismic impact on demand, accelerating brokerage share gains. And we can invest more in driving demand as we improve monetization. This is where Redfin has made the most progress over the last three months. First, by eliminating our commission refund in the 22 market pilot. Second, by increasing the rate at which the Redfin customers who buy homes stick with a Redfin agent for the purchase. The buyer pullback from the market downturn left many of our agents idle, swinging real estate services to a second quarter adjusted EBITDA loss. but we reduced costs within the quarter, lowering expenses quickly while holding on to the people needed for long-term growth. This June 14th layoff may be a setback for near-term gains in share and close rate, but not over time. The agents who stayed had a close rate nearly double that of the agents who left. Even if the buyers now returning to the market will take time to close, our agent sales pipelines are now mostly full. Another improving measure of agent performance is loyalty sales. The fraction of our brokerage sales that come from past clients, client referrals, or through agents' personal networks had already increased from 24% in 2019 to 27% in 2020 to 32% in 2021. But in the second quarter of 2022, it rose even higher to 35%. Outside of our layoff, agent attrition has also improved, falling by five points from the second quarter of 2021 to the second quarter of 2022. This is why we expect loyalty sales to keep outpacing sales from our site, especially as we offer more incentives for top performing agents. Redfin employs many of the agents we recommend on our site because we believe those agents deliver better service. But employing agents also gives us the standing to ask those agents to sell Redfin's suite of lending, title, and renovation services. It's why we could double the rate at which Redfin homebuyers get a Redfin mortgage though we've only owned Bay Equity since April 1st. Our success in Atlanta and Salt Lake City, where 34% of homebuyers got a Bay Equity mortgage in July, tells us that Redfin's overall attach rate of 15% is just the beginning. Over time, we also expect significant margin expansion on our loans. When we announced the acquisition, we told investors that Bay Equity and Redfin earned a similar amount of gross profit for homebuyer in 2021. as a tribute to Bay Equity's underwriting efficiency. Since then, a massive contraction in mortgage lending has led many lenders to issue mortgages at a loss, forcing Bay Equity to cut its gross profit per loan in half. Bay Equity already reduced staffing on July 28. When rates stabilize and Bay Equity can raise prices on new loans and also refinance many of our 2022 loans, will have the potential to generate more profit from a customer than any other broker. This acquisition can change the fundamental physics of our business. Redfin has been a new source of sales for BayEquity, but also a recruiting partner for building BayEquity's traditional business of meeting home buyers through agents and other brokerages. In market after market from Washington, D.C. to Seattle to Chicago, BayEquity has recruited loan officers who once got plenty of loans from RunFed agents while working with competitors. but then saw that loan volume dwindle after our acquisition. Joining Bay Equity, a loan officer gets a steady source of referrals from Redfin agents, but also brings over other customers and agent partners outside of the Redfin network. Beyond mortgage, the business most affected by market forces is Redfin Now, which gives homeowners an immediate cash offer. Our property segment earned $6.8 million in second quarter gross profit, up from $5 million in the second quarter of last year. But because of a sharp decline in U.S. home buying demand, we now expect to sell the homes we agreed to buy in April and May for a loss after accounting for holding costs, selling costs, and repairs. That won't be enough to sink our battleship. Our forecast assumes home prices keep declining moderately through the rest of 2022. but we still expect our properties division to earn a significant gross profit for the full year. We aren't worried about the homes we agreed to buy in June or July because we haven't bought as many or paid as much for these homes. In April and May, Redfin Now's offer amounts were based on the assumption that home prices would hold steady over the four months that it typically takes us to clear out the original owner, to get the home on the market, and to get the next owner under contract. In June and July, Redfin now assumed home prices would decline about 6% over that time. We're now selling homes much more quickly than we are buying them. In July, we put more than four homes under contract to sell for every one we put under contract to buy. Our inventory should peak early next week at $436 million in homes owned and then decline quickly. We expect that virtually all of the homes we bid on in spring will be under contract to the ultimate buyer by October and off our books by year end. We have long believed that homeowners' interest in immediate liquidity is here to stay, but that we wouldn't know iBuying's true margins until we weathered a downturn that lasted longer than the false starts of late 2018 and mid-2020. We also believe that iBuying is only worthwhile as part of a brokerage that can serve homeowners even when market conditions make iBuying nearly cost prohibitive. That latter belief has already been vindicated. For every RedfinNow inquiry that led to an accepted offer in June, Two more led to the homeowner hiring a Redfin agent to list the home instead. Driving brokered share is the rationale not just for Redfin now, but for every one of Redfin's businesses. We invested in rentals because becoming one of the Internet's top real estate destinations is crucial to our share growth. We built a title business and bought a lender because employing agents lets us sell a suite of services better than any other broker. Every extra dollar that these businesses earn from a customer can be reinvested in driving more brokerage demand or can be returned to investors. After all, we're too small and too mission-driven to be a holding company for housing-related business. We tell ourselves that if business doesn't drive brokerage share, it's out of there. But though each of these businesses shares the same market share goal, we presented the profits of each separately to clarify the scope of our investment in each. Our plan to generate our first annual net income in 2024 entails generating adjusted EBITDA in 2023. Only one of our major businesses, rentals, can lose a significant amount of money next year. Our brokerage generated profits in 2021, and Bay Equity have been profitable for almost its entire 16-year history prior to this summer's rate hike, so both can return to profits when the market settles down. We expect the remainder of our businesses will be near break-even in 2023. Before turning the call over to Chris, let's discuss the housing market, which got significantly worse in June, but then improved in July. The breaking point for many buyers came on Friday, June 10th, when mortgage rates spiked 30 basis points and climbed another 43 basis points to 6.28% the following Monday and Tuesday, to the biggest one-week jump since 1987. From June 2022 to June 2021, Pending home sales, I said that wrong, excuse me, from June 2021 to June 2022, pending home sales dropped 20%. Just from May 2022 to June 2022, the drop was a whopping 9% when economists expected it to be 1%. Existing home sales may dip below an annualized rate of 5 million units, a Mendoza line for housing that we haven't breached for a full year since 2014. The percentage of homes that had a price drop in June doubled from 9% in 2021 to 18% in 2022, a trend that we expect to accelerate when the dust settles on July numbers. In pandemic markets like Denver, more than half of all listings had a price reduction. In Boise, that number was 62%. From March to mid-July, year-over-year price growth slowed from 16% to 9%, but the value of most homes probably fell further. The reported numbers reflect sale prices only for homes that sold when we know the market has become more selective. Beautiful homes on quarter lots still sell readily. But the homes with funky layouts now don't sell at all. In lieu of publicly reported price drops, builders are funding lower mortgage rates, paying closing costs, doubling agent commissions, buying washers and dryers, and upgrading kitchen finishes. One reason prices are falling fast is the fraction of inventory now being sold by iBuyers, builders, and other institutions, which has increased from 27% in 2017 to nearly 35% in 2022. Redfin knows from our experience as a broker that people who have lived their whole lives in a home just aren't going to market down after a few weeks. But iBuyers price the listing below every current comparable and price it even lower if it doesn't get an offer in the opening weekend. Builders also respond to market downturns quickly. This makes market correction sharper, but maybe also shorter too. The good news is that buyers are already responding to drops in prices and mortgage rates. The market-wide data on sales closed in July and August reflect how far demand fell in June. But now demand has modestly improved in the second, third, and fourth weeks of July. It may improve further as mortgage rates dropped this week to around 5% from a peak north of 6% in June. If the housing market and the overall economy can stabilize, many, many Americans still want to move. And we're here to help them with low fees and the best service in the brokerage industry. Take it away, Chris.