Redfin Corporation

Greetings and welcome to the Redfin Corporation fourth quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note that this conference is being recorded. I will now turn the conference over to our host, Meg Nunnally, Head of Investor Relations. Thank you. You may begin.

Good afternoon and welcome to Redfin's financial results conference call for the fourth quarter and full year ended December 31st, 2022. I'm Meg Nunnally, Redfin's head of investor relations. Joining me in 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 will 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 and less 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 hi, everyone. Redfin generated $480 million of fourth quarter revenue, exceeding our projected range of $430 million to $459 million in revenue, mostly on the strength of Redfin Now sales. Our net loss of $62 million includes a $57 million gain from repurchasing at a discount $143 million of debt due in 2025. The adjusted EBITDA loss of $63 million was near the favorable end of our $58 million to $71 million guidance. Earnings mostly exceeded expectations, but comparing the fourth quarters of 21 in 2022, Redfin lost two basis points of market share, in part due to layoffs and the loss of Redfin Now-driven demand. As we compete better for online real estate traffic and improve sales execution, We expect share gains to accelerate in the second half, especially when we're no longer comparing our sales to a period of aggressive spending on agent hiring and home purchases. It will be a major achievement to take share in a year when we're also improving annual profits by nearly $200 million, driven by higher gross margins, lower spending, and the closure of money losing businesses. We couldn't be more excited about the year ahead. Two months into 2023, we're still on course to earn an adjusted EBITDA profit for the full year and on schedule to sell our last Redfin Now home in the second quarter. For the property segment that includes Redfin Now, the gross profit losses in the fourth quarter were at the favorable end of our range. The full year gross profit losses for this segment were $23 million, and the 2023 gross profit losses should be a few million dollars or less. Only 19 homes originally purchased by Redfin now for $12.2 million have neither been sold nor accepted an offer to be sold. The closure of Redfin now is part of a larger shift to higher margin, less cyclical revenues. The percentage of homebuyers served by our partner agents instead of our employees will increase from 37% in 2022 to a projected 42% in 2023. We decided to tilt more demand to partners after accounting for costs that aren't directly tied to a sale, but that still grow with the number of agents we employ, like the cost of human resources support and training for agents. This decision will not only increase 2023 profits, but also limit layoffs and losses in future downturns. Real estate services will drive more digital revenues, as will rent, our online marketplace for promoting rental homes. Once a liability, Rent has accelerated its growth in each of the last four months and expects to earn an adjusted EBITDA profit in the fourth quarter of 2023. Beyond Rent, we launched two other digital businesses in the second quarter of 2022, our own Mortgage Marketplace and ads on Redfin.com, both of which are now growing faster than any other Redfin business. The Mortgage Marketplace offers our visitors a choice of lenders beyond the lender we acquired in April 2022. Bay Equity Home Loans. Bay Equity has a retail sales force to work with home buyers already engaged with an agent, but doesn't have the call center to handle online inquiries at all hours of the day and night. Over the next two years, we expect to launch additional digital businesses with the goal of earning more money from an online visit than any other operator of a major real estate site. Those are the structural changes we're making to improve Red Fence margins, even at a one-time cost to our growth. More of every dollar of revenue should fall to the bottom line, but now we need more dollars too. This is why we'll spend the rest of this call on growth. The primary way we've grown is by reaching more people through our sites and mobile applications. Comparing the fourth quarters of 2021 and 2022, the average monthly visitors to Redfin's website and mobile applications declined by 2%. But over that same period, searches on Google for homes for sale declined 33%. The difference between these two numbers indicates why we likely increased Redfin's share of online real estate traffic. ComScore, which lets us compare ourselves to other sites, reported a 6% fourth quarter decline for Redfin compared to 22% for Realtor.com and 2% for Zillow. According to ComScore, we started keeping pace with Zillow in December, despite a second-half budget for TV ads that was a quarter the size of Zillow's. To improve our long-term competitive position, We know we have to draw visitors away from all our major rivals, not just one, and we believe that we can. For Google searches on a home address and our 10 longest established markets, Redfin is now most likely to appear as the first result. Across the U.S. for these searches, we're now likely to appear first more than Realtor.com, which has nearly double our traffic. And we can still grow by expanding to parts of the U.S. our competitors already cover and by improving the machine learning software we use to recommend listings. Drawing more visitors to Redfin is the first step in our growth, but we also want a higher proportion of those visitors to hire our agents. Because we look like other real estate sites, consumers often assume we're a marketplace for promoting the agents who paid us the highest fee. In fact, the whole reason we employed our own agents has been to deliver faster service at a lower fee from top producers. Almost no one knows that in 2022, Redfin agents had the highest average sales volume of any major brokerage, beating our closest competitor by almost 20%. Our agents' experience is one reason why our service is better. Now the site is telling that story, a process that started yesterday when we launched a redesign Redfin.com to promote our agents to luxury customers. We now route those customers to the Redfin agents with the most luxury experience. The week before we launched an ad campaign that explains why for seven years straight, we've sold homes for more money than traditional agents because of our top producers, but also due to the extra exposure each listing gets on redfin.com. In 2023, we expect to gain share, not just due to more traffic and more customers from that traffic, but also by getting more sales from each customer through mortgage and title sales and over time, Repeat and referral transactions. Our goal is to develop the brokerage into a second engine of Redfin's growth, above and beyond our online presence. We have more room to grow as a brokerage than as a website. Nearly 20 years since online real estate portals first launched, about 95% of home buyers search for listings online. Just based on the sales claimed by Zillow and Redfin, it seems likely that only about 5% of home sales originate with people asking the agents on major real estate sites for service. These sites can always squeeze a bit more revenue from traffic gains or by claiming a higher share of the commission from each referred sale. But if Redfin gives customers a reason to choose our own agents, building a brand for better service and value, that 5% of sales that start online can one day become 50%. Employing our own agents can increase consumer affinity for our service, but can also increase close rates. Our data indicates that the customers who asked us for service in the third quarter were less likely to go through with the purchase, whether with Redfin or with a competing broker. But of the Redfin customers we met in the third quarter of 2022 who ended up buying a home, a projected 35% will have stuck with the Redfin agent for the purchase, compared to 26% in the third quarter of 2021. This tells us that even though the market is down, our sales execution is up. Beyond better service for customers who come to us via Redfin.com, our agents are also generating their own sales. 34% of fourth quarter sales came from repeat and referral customers compared to 32% a year earlier. Even here, a Redfin agent has a massive advantage over traditional agents, having met 100 to 200 customers via Redfin.com each year. with each customer's contact information and online search activity tracked in our database. Whereas many traditional agents are canvassing every Tom, Dick, and Sally for a sale, our agents' customer network typically starts with the hundreds of buyers and sellers whom those agents met over the years through Redfin. More than ever, the agents Redfin employs today are capable of driving loyalty sales. One reason for our improved sales execution is an improvement in the quality of our sales force. which ended 2022 30% smaller than it was nine months earlier. Back in March, 37% of our agents had less than one year of Redfin tenure, and only 29% had more than three years. Today, only 13% have less than a year of tenure, whereas 42% have three or more years under their belts. That sales team now includes not just agents, but also loan officers. After all, one rationale for serving the customer ourselves is more follow-on mortgage and title sales, with all of our services working together to make a customer's move easier and less expensive. As in the third quarter, 17% of our brokerage's fourth quarter home buying customers borrowed money from Bay Equity home loans. The pre-acquisition high was 8%. After our January company kickoff got each region's agents and lenders in the same room for the first time, That number surged to a projected 21% for this February. From the fourth quarters of 2021 to 2022, the percentage of eligible brokerage customers who used our title service, Title Forward, also increased from 12% to 44%. Lending and title margins improved in the fourth quarter, a trend likely to continue through 2023. As the lending industry completes its adjustment to lower volume, price competition may ease. And as the housing market recovers, our brokerage, lending, and title businesses will be well positioned for growth. Our rent business, by contrast, has already benefited from rising apartment vacancies in the second half of 2022, and it's growing revenue now. This is a dazzling turnaround for a business acquired out of bankruptcy in April 2021, whose new CEO didn't start until August of that year. Net bookings, a measure of the annualized revenue rent added through sales to new customers, less the annualized revenue loss from departing customers, nearly doubled quarter to quarter from $5 million in the third quarter to $10 million in the fourth quarter. In every quarter of 2021, net bookings had been negative $4 million to $5 million and were barely positive in the first half of 2022. Rent's fourth quarter revenue grew year over year for the first time since 2017 by 5%. Compared to the third quarter of 2022, fourth quarter revenue grew 6%. We expect rent's revenue gains to accelerate on the strength of new products, a January 2022 price increase, excuse me, a January 2023 price increase, and improve sales productivity, which has more than tripled since the summer of 2021. In support of the price increase, Redfin.com's integration of Rent's listings has generated more demand for Rent's property management customers. In June, Redfin.com added 12% of rental visits above and beyond the visits to Rent's site. In the fourth quarter, this contribution grew to 18%. Rent also launched a $3 million fourth quarter mass media campaign, offsetting some of the money we saved from the departure of Rent employees. We felt careful about investing in a second brand, but the appeal of a self-explanatory four-letter domain was so powerful that we had to give it a shot. We'll carefully evaluate the return on this advertising investment and run the business to generate adjusted EBITDA in the fourth quarter under a variety of market conditions. The success we've had so far is a tribute to the leadership of Rent's CEO, John Ziegler, and his whole team. Now, before turning the call over to Chris, Let's discuss the housing market. On March 15, 2022, we were one of the first to state publicly that the market was cresting and that, quote, it was crazy for demand to be so strong in the midst of war, market volatility, and inflation. By May, the market began its first sustained decline since the great financial crisis. Ten months later, on January 25th of this year, we said that housing in January had been stronger than anyone could have hoped and that the market was, quote, fragile. was, quote, recovering. We cautioned that the recovery could, quote, be cut short by a rate hike. By the end of that week, the National Association of Realtors reported that a seasonally adjusted index of pending home sales had improved 2.5% in December, a result surprising to many after six straight months of declines. But in February, the market got another jolt, first from last week's record low unemployment data, and then from this week's report of persistent inflation and strong retail sales. Mortgage rates had fallen from 7.3% in November to 6% in early February, then climbed above 6.7% yesterday on the news. Unsurprisingly, Redfin's February demand is still better than it was in November, even after accounting for the season, but worse than it was in January. We still believe that our 2023 budgeting assumption of 4.3 million existing U.S. home sales is reasonable. Rate volatility and buyers' jitteriness about rates just make that market unusually hard to predict. We're running red pen out of the cash register in 2023, so if existing home sales seem likely to fall below 4.3 million, we'll reduce our spending. Regardless of what happens to rates in 2023 and beyond, inventory will likely stay low. What's most remarkable about this housing downturn is that the number of homes for sale hasn't meaningfully increased from the calamitous lows of the pandemic. Sure, the number of homes on the market at the end of January 2023 was up 40% since January 2022, but it was still at roughly half the pre-pandemic level it was from 2016 to 2019 during a strong seller's market. Our agents report that would-be sellers with 30-year mortgages at a rate below 3% are choosing to keep their homes instead of selling, either to live in or to rent out. This is why from May 2020 to May 2022, Home prices increased 40%, but have fallen only 3% since. The millennial generation that mostly came of home buying age just after home prices and mortgage rates shot up still faces an affordability crisis with no real relief in sight. Because of low inventory, we continue to believe that sales volume will be more volatile than home prices. Regardless of market conditions, Redfin will generate adjusted EBITDA in 2023. and net income in 2024. Once we recover from restructuring our business to be more profitable, our share gains will resume and accelerate. And if we can make money in a housing downturn, we'll be in a good position to make a lot of money when the market recovers. Now, let's hear from Chris on our financial performance and guidance.