Redfin Corporation

Good day, ladies and gentlemen, and welcome to the Redfin Corporation second quarter 2024 earnings conference call. Our host for today's call is Meg Nunnally, head of investor relations. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. I would like to now turn the call over to your host. Ms. Nunnally, you may begin.

Thank you. Good afternoon, and welcome to Redfin's Financial Results Conference Call for the second quarter ended June 30, 2024. I'm Meg Nunnally, Redfin's Head of Investor Relations. Joining me on the call today is Glenn Kellman, 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 continuing operations the same period in the prior year unless otherwise stated. Lastly, we will 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 be also available soon after the call. With that, I'll turn the call over to Glenn.

Thanks, Meg, and hi, everyone. Red 10 second quarter earnings were at or near the top of the range we discussed in our last call, setting us up to be roughly adjusted EBITDA break-even for the full year. Second quarter adjusted EBITDA was break-even when we had said it would be between a $4 million loss and a $2 million gain. Real estate services revenue was $188 million, compared to guidance of 180 to 188 million. The share of home sales brokered by our own agents and through referrals to our partner agents increased from 0.75% in the second quarter of 2023 to 0.77% in the second quarter of 2024, our first year-over-year share gain in nearly two years. We expect these gains to continue in the third quarter, largely on the strength of RedfinNet. the plan to pay agents entirely on commissions that four California markets tested in January 2024. Entering 2025, we expect next to be redfin wide. For the first time in years, we have a plausible basis for accelerations in brokerage market share, but being the best at monetizing for sale housing demand is only one half of our strategy. The other is broadening our online guidance, excuse me, our online audience to include people looking for a rental home. To focus our resources on growing our rentals marketplace, Red 10 began integrating RENT in January 2024 so that both businesses draw on the same human resources experts, finance system, and cloud software. As a result, RENT's second quarter operating expenses fell 19% year over year with a nearly identical marketing budget. This restructuring of rent cast a series of seismic changes that began just as we tipped into the downturn. In 2022, we ditched our own loan origination system and closed our mortgage business in favor of buying one of our customers' favorite lenders, Bay Equity. In 2023, we closed our iBuying business, Redfin Now, and invested in digital businesses that immediately began contributing significant profits. And now, in 2024, With the integration of rent and the shift to a sales force paid entirely on commissions, Redfin is more efficient, resilient, and ready to scale. Already, profits are better. From the first half of 2023 to the first half of 2024, sales of existing U.S. homes fell 3%, but Redfin revenues increased 6%, and our profits improved by more than 40 million bucks. As our restructuring drives more rentals traffic and better brokerage service, we expect revenue growth to accelerate, with most of that growth falling to the bottom line. When the housing market starts to recover, we'll do even better. Now let's dive into our detailed business review, which starts, as it always does, with a network of websites that are our primary source of customers. We keep finding new applications for artificial intelligence to determine which photo of an apartment to show first and to let homeowners imagine how to redecorate their place. We've also developed a new self-service tool for the owner of a rental property to post your listing on Redfin.com, which will reach the entire U.S. in September. Building a better mousetrap has kept bringing more people to our door. According to Comscore, second quarter visitors to Redfin.com grew 4% year over year, faster than both Realtor.com and Zillow.com. This year, we've competed effectively for traffic, even as our largest online competitors have been able to quintuple our mass media advertising budget. When consumer interest in home buying rises from its current low, we'll hit back with larger ad campaigns of our own. Though Redfin.com has drawn visitors from competitors, our 2024 share gains have mostly come from sales execution. In the four California markets that piloted Redfin Next, first half share increased by six basis points year over year. For the customers that come from Redfin.com, Next agents close more sales, but at roughly the same margin as our salaried agents. Rolling out Next across 2024 is lowering second and now third quarter real estate services margins due to one-time transition pay for Redfin agents losing their salaries. The increasing variability of our agents' income will also dampen the seasonality of our margins. Next agents can earn more than before in busy summer months, and less than before in the winter. Getting similar full year margins with less seasonal volatility should have been easier to run. The capacity that Next has given us to hire more and better agents with less financial risk has been why we could become more disciplined about requiring a lead agent to host the first meeting with a home buyer in the All You Can Meet program we launched broadly this spring. In years past, Redfin asked the contractors we hired for short notice property access to handle up to 40% of our customers' first tours. Our lead agents make the Redfin case far better than these contractors. Meeting every new customer has in turn been a prerequisite for our Sign and Save program, also launched widely this spring, in which the lead agent asked the home buyer for a commitment to that agent in exchange for lowering our commissions. Nearly half our sales now come from customers who signed the Redfin contract weeks or months before bidding on a home. Early data on customer engagement indicates that All You Can Meet and Sign and Save have lifted home buyer close rate for the first time since 2020, but the gain would be larger if we had more agents. We've hired more than 200 top producers over the last six months. Over the next nine months, our lead agent census is likely to keep increasing. but without the capital risk of salaried agents. This month, next will be how we pay agents in markets that accounted for 74% of 2023 revenue, up from 17% in January and 30% in May. Changes mandated by the National Association of Realtors March 15th settlement of a class action lawsuit, which must be complete by August 17th, may help with recruiting by encouraging more agents to consider a brokerage built to compete on price. and the handful of markets where the local multiple listing service has already stopped showing the commission offered to a buyer's agent for a listing, agents are calling one another to find out what the seller is willing to pay. The answer is usually that the amount is negotiable. Few listings are offering a fixed percentage to the buyer's agent. Negotiations have been straightforward, at least for now, first because many sellers who listed their homes before the rules changed already expected to pay a fixed percentage commission. A second reason is that the market began shifting in buyer's favor as the rules changed, leaving many sellers glad to get any offer before the home buying season ends. Our experiments with the Sign and Save program beginning in late 2023 have already prepared us to disclose our fees from the first tour, and we've been an outlier among industry leaders in believing that reforms could meaningfully lower fees. Like nearly every real estate business, we'll make less on each sale if fees go down, But we may be the only large-scale broker eager to offset that with more sales at lower prices. In the event homebuyers become as value-oriented as sellers already are, Redfin will use more aggressive sign-and-safe pricing and more direct sales that are listing to the buyer to gain share. Our ancillary businesses are one reason we can make money from brokerage customers at a lower price. Bay Equity improved just at EBITDA from $2.2 million loss in the second quarter of 2023 to a $1.1 million profit in the second quarter of 2024. Of the brokerage customers who financed their second quarter home purchase, 28% used Bay Equity, the same as in the first quarter, but up from 24% in the second quarter of last year. To drive this number even higher, we're investing more in our systems for introducing brokerage customers to our loan officers. We rarely talk about our title business, Title Forward, which is part of our other segment. That segment also includes the money we earn from display ads in our mortgage marketplace for routing website visitors directly to a lender. But Title Forward's performance has been extraordinary, with second quarter attach rates above 60% and year-over-year revenue growth above 50%. We've said that Title Forward's long-term gross margin goal was 20%, but the second quarter showed it could be greater than 30%. Before turning to the state of the housing market, let's discuss our rental segment, which improved adjusted EBITDA from a $9 million loss in the second quarter of 2023 to a $1 million profit in the second quarter of 2024 on 12% revenue growth. We expect growth to remain muted through the second half of 2024, but then to increase on the strength of significant investments being made now in traffic. We've hired a new president, Damon Joshua, to run rent. Previously, he worked for 12 years at MarketSource, leading a global team responsible for billions in revenue. When we get more traffic, Damon will get more sales. In the meantime, rent will still make money. After losing $31 million in 2022 and $15 million in 2023, rent this year will generate its first full-year adjusted EBITDA profit as a Redfin business unit. We've been glad the rental segment has reduced our dependence on the for-sale market because the for-sale market had, at least until last week, been terrible. Over the four weeks ending July 28th, industry-wide pending sales fell 5.3% year over year, and the decline had been widening even as rates began to ease. Inventory is rising, but 30% below pre-pandemic levels. Affordability is near a 40-year low. Yet as we already noted, the market is significantly shifting in buyer's favor. 22% of active listings have dropped their price, the highest percentage since we began tracking this number in 2012, excuse me, 2012. 36%, excuse me, 36% of listings accepted an offer within two weeks of their debut, down from 41% the year prior. Interest rates declines haven't so far increased competition for listings. From April 30 to July 24, Mortgage interest rates fell from about 7.5% to about 6.9%, with almost no reaction from homebuyers. Industry-wide mortgage purchase applications have been mostly below last year's levels. It has been the first time in years that a major interest rate drop had no impact on homebuying demand. Then, from July 24th to yesterday, rates dropped below 6.35%. And finally, the number of Redfin.com homebuyer inquiries increased last weekend over the prior two weekends. But that gain was still only modest. And among the customers already engaged with our agents, offer writing activity actually declined compared to the prior two weekends. Agents we polled on Monday about the low number of offers cited broadening economic anxieties, the distraction of a presidential election, and homebuyers' growing belief that time is on their side. In a shifting market, sellers often get stuck on the asking price from last month, while buyers imagine they can get an even better deal next month. But if rates keep falling, U.S. home sales should increase. We expect rates will stay low through the winter and into next spring, which should lead to a much stronger housing market in 2025. I believe the housing market is about to get better, and that Redfin is also going to take share. Take it away, Chris.