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spk08: Good morning. Welcome to the Anywhere Real Estate second quarter 2023 earnings conference call via webcast. Today's call is being recorded and a written transcript will be made available in the investor information section of the company's website tomorrow. A webcast replay will also be made available on the company's website. At this time, I would like to turn the conference over to Anywhere Senior Vice President Alicia Swift. Please go ahead, Alicia.
spk09: Thank you, Brianna. Good morning and welcome to the second quarter 2023 earnings conference call for Anywhere Real Estate. On the call with me today are Anywhere CEO and President Ryan Schneider and Chief Financial Officer Charlotte Simonelli. As shown on slide three of the presentation, the company will be making statements about its future results and other forward-looking statements during this call. These statements are based on the current expectation and the current economic environment. Forward-looking statements, estimates, and projections are inherently subject to significant economic, competitive, litigation, regulatory, and other uncertainties and contingencies, many of which are beyond the control of management, including, among others, industry and macroeconomic developments and the incurrence of liabilities that are in excess of amounts accrued or payments made in connection with pending litigation. Actual results may differ materially from those expressed or implied in the forward-looking statements. Important assumptions and factors that could cause actual results to differ materially from those in the forward-looking statements are specified in our earnings release issued today, as well as our annual and quarterly SEC filings. Note that nothing we say today should be construed as an offer or solicitation to purchase, sell, or tender any securities. For those who listened to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, July 25th. and have not been updated subsequent to the initial earnings call. Now I will turn the call over to our CEO and President, Ryan Schneider.
spk01: Thank you, Alicia. Good morning, everyone. In the midst of a challenging housing market, we delivered results in line with our expectations and continued to invest to set Anywhere Real Estate up for an even stronger future. During the second quarter, we delivered $1.7 billion of revenue and generated $126 million of operating EBITDA. Our closed transaction volume was in line with our estimates, and we are on track to deliver $200 million of cost savings this year. And our agent commission results came in better than expected, with some of the best year-over-year results we've seen in a long time. We remain focused on improving our capital structure, especially our priority to deleverage our balance sheet. And today we announced a debt exchange transaction with one of our bondholders, and our intention to conduct a broader exchange offering on similar terms. And importantly, we continue investing to drive our strategic agenda, which includes growing our high-margin franchise business, expanding our luxury leadership position, simplifying and integrating the consumer transaction experience, and further transforming our cost base as we position Anywhere Real Estate to both benefit from a stronger housing market and to lead into the future. starting with the housing market we remain in a tough part of the cycle with six months of the year behind us it looks like our industry is heading toward 4.2 to 4.3 million annual unit transactions which would be by far the lowest level in over a decade and if you look past the great recession we've not seen unit transactions this low since the mid 90s but we planned for a challenging 2023 took aggressive actions in both cost reductions and investing for the future, and we are seeing our volume metrics come in consistent with our expectations that we shared with you. Q2 transaction volume was down 23% year over year. The decline was almost all unit driven, and we saw unit volume declines be pretty consistent across our markets. Our home prices were basically flat year over year, as we've all seen incredibly tight inventory creating supply challenges, even in this higher mortgage rate environment. However, we see significant geographic variation in price trends in our results. Across about two-thirds of the country, including large states like Texas and Florida, we saw price increases on average by about 3% versus last year. But a few of the bigger markets, in particular California and New York, we saw prices down in the mid single digits, consistent with our first quarter trends. And in Q2, the more positive detailed trends in our portfolio have persisted. Open volume compared to prior year continues to look better than closed volume compared to prior year each month in the quarter. And volume comparisons to 2022 improved each month in the quarter, both as the market has a little more positivity and as the 2022 comparisons get easier. And all of this is consistent with our quarterly and full-year guidance. Now, the challenging housing market affects the entire industry, and we like the fact that it establishes a level playing field, because anywhere real estate's best positioned to prosper because of some of our unique advantages, including our high-octane industry-leading franchise business with six nationally recognized brands, our opportunities from having end-to-end national assets in brokerage, title, mortgage, and insurance, our powerful lead generation at a time when quality lead generation is more important than ever, and our high-impact technology and data scale. And we're harnessing these advantages, even in a tough market, to charge ahead on our strategic priorities and position anywhere for long-term success. Some examples of that include, first, we are laser-focused on changing how we operate to deliver efficiencies that help simplify, automate, and streamline our operations. We continue to make considerable progress in our cost transformation and expect to take $200 million of costs out of our business in 2023, and Charlotte will share more on this shortly. Second, we are integrating our national brokerage and title support operations to make the real estate transaction simpler for the agent and consumer, to make it easier for us to capture title and mortgage economics, and to be more cost effective as we streamline those businesses. Third, we love and put significant effort into growing our powerful franchise business. Beyond the recent record years of franchise sales success, Anywhere Brands is further strengthening its value proposition by providing new and innovative offerings to franchisees. As one example, Anywhere is now using our technology and data scale to help our franchisees achieve better results via our recently launched Affiliate Insights product. This new product helps individual franchisees run their business better by drawing on Anywhere's extensive internal and external data to provide them actionable insights on growth, on their cost base, on agent migration opportunities, and on other critical topics. And I love the demand I'm hearing from our franchisees. Anywhere is an innovative technology provider and we're the industry analytics leader leveraging our unique data scale. We are finding exciting opportunities using generative AI and large language models, and we're committed to being on the forefront of this new world in our industry. Now, if you look backwards, we like the analytic and the machine learning insights we've been using to enhance our business. And so, for example, the agent recruiting machine learning model you've heard me talk about with you before. But today and going forward, we are seeing large language models have real power for real estate's future. For example, augmenting real estate marketing, including designing and executing marketing campaigns. And I'm personally very intrigued by photo and image-based AI innovations like virtual renovations, as well as this, the whole opportunity to simplify the transactions. And we are starting multiple proofs of concept to explore these and other opportunities. Now, these new technologies are also already helping us run our company differently. E.g., our software engineers are using these technologies to code more efficiently. E.g., we have a few early pilots where large language models are providing support to our employees. And we're really excited about these new analytic opportunities, even in these early days. We still have people looking at the output of our generative AI experiments, given the importance of ensuring accuracy. And we have a lot of work to do to both train and tune these models on our specific data and on real estate industry data more broadly. But we're really excited about it. We know these new technologies will change how every company operates, and we're committed to being at the forefront of that journey. So I'm going to come back later with a few closing thoughts, but for now, I'm going to turn it over to Charlotte to discuss our results in more detail.
spk06: Good morning, everyone. We are pleased with our second quarter results given the market dynamics, which continue to improve sequentially as expected. We remain focused on what we can control, reimagining how we operate, driving cost efficiencies, prudently managing cash, and being opportunistic on our capital structure. We believe these actions will enable us to drive differentiated performance and set us up well for when the housing market improves. Now I will highlight our second quarter financial results. Q2 revenue was $1.7 billion, down 22% versus prior year, and in line with our transaction volume decline. Q2 operating EBITDA was $126 million. down versus prior year due to lower transaction volume and slightly higher agent commission costs, which were offset in part by cost savings across the enterprise. Q2 free cash flow was $105 million as we prudently managed our cash, which we used in a consistent way with our capital allocation priorities to invest in the business and partially repay some of our revolver borrowings, which stand at $310 million today. Free cash flow in the quarter benefited from improved working capital and the relocation securitization facility. Consistent with our capital allocation priorities to reduce our debt, we are pleased with the opportunistic financing transaction we announced this morning, with one of our bondholders agreeing to exchange approximately $275 million of their 2029 and 2030 senior notes for approximately $220 million in new 7% second-leaning 2030 secured notes, and our intention to conduct an exchange offer for a portion of the remaining 2029 and 2030 notes on similar terms. As Ryan mentioned, we view these transactions as an opportunistic way to deleverage with minimal incremental annual cash interest expense, retaining our flexibility going forward. Now let me go into more detail on our business segment performance. Our Anywhere Brands business, which includes leads and relocation, generated $164 million in operating EBITDA. Operating EBITDA decreased $40 million year over year, primarily due to lower revenue related to transaction volume declines, partially offset by decreases in operating and marketing costs. Our Q2 Anywhere Advisors operating EBITDA was negative $10 million, down $21 million versus prior year, due to lower volume and slightly higher agent commission costs, also offset in part by lower operating and marketing expenses. Commission splits in Q2 were up 32 basis points year over year, which was better than we expected in the quarter. We have been taking advantage of an improved competitive backdrop and are proactively managing splits. Also, there are even parts of our business, especially in luxury, where our splits were even lower than prior year in the quarter. Anywhere Integrated Services was $10 million in operating EBITDA in Q2. Operating EBITDA declined $11 million year-over-year due to lower purchase and refinance volumes, which was partially offset by lower operating expenses due to cost savings initiatives and $3 million of improved GRAJV performance. As Ryan said, we continue to change how we operate, and that is driving efficiency and lower costs. Before I talk about the cost savings, Let me provide some additional detail on our overall cost structure. In 2022, operating, marketing, and G&A expense line items totaled about $2 billion. Of this total, headcount-related expenses were about $1.1 billion, and office-related expenses were about $220 million. As these are the majority of our expenses, this is where most of our savings come from. and represent about 70% of our 2023 cost savings program. For example, we have reduced our headcount by 15% since June 2022. And on the real estate footprint, we are focusing our efforts to reimagine and transform our real estate brokerage offices to be more efficient, flexible, and integrated with transaction support services in title and mortgage. We expect to reduce our brokerage and title footprint by about 10% this year, with most of the actions already completed. Please refer to slides 18, 19, and 20 for further details. Year to date, we have realized approximately $100 million of our $200 million cost savings program. The savings will be realized pretty evenly throughout the year. and we consider approximately two-thirds of our full-year savings will be permanent and not expected to return when volumes increase. These savings, however, will be offset in part by inflation and by litigation costs. Between 2022 and 2023, we expect to realize a combined $350 million of cost savings, which is a huge accomplishment. Our focus here reinforces our commitment to reimagine how we work while delivering a better experience to our agents and customers. And we've nearly achieved our 2026 cost savings target that we laid out in our investor day last year. Now, onto our updated estimates for 2023. First, we expect Q3 closed volumes to be down about 10% versus prior year. This is the third quarter of sequential improvement in year-over-year transaction volume driven in part by easier comparisons to the prior year. Second, based on the year-to-date split trends, we now expect full-year split pressure of about 50 to 75 basis points. We really like our actions in this area, the improving volume trends, and the better competitive environment we're experiencing. Estimates that remain the same as our last call. For full year 2023, we continue to expect transaction volumes to decline about 15% to 20% year over year, and likely towards the better part of that range. We also still expect transaction volumes will improve sequentially throughout the year. We expect our operating free cash flow to be modestly positive as favorable working capital, robust savings programs, and our cash management discipline will counterbalance this tough year in housing. This excludes the impact of cash expenses from the debt exchange transactions and any other non-recurring items. Finally, we are on track to realize $200 million of P&L cost savings in 2023. Let me now turn the call back to Ryan for some closing remarks.
spk01: Thank you, Charlotte. So, as I reflect on the second quarter, I'm proud of how our team navigated this tough housing environment to deliver results. And I'm excited about the strategic progress we made in the quarter to set up our business for greater growth when the market rebounds, to permanently streamline our cost base as we operate differently, to reimagine the agent and consumer experience, and to enhance our analytic leadership as we experiment with generative AI and large language models. Now, looking ahead, I remain optimistic about the housing market over the medium term and our ability to lead into the future. Together with our employees, affiliated agents, and franchisees, we're seizing this moment to position Anywhere Real Estate to move real estate to what's next. With that, we will take your questions.
spk08: At this time, I would like to remind everyone, in order to ask a question, please press star followed by the number one on your telephone keypad. Your first question comes from Matthew Boulet with Barclays. Your line is open.
spk07: Good morning. You have Elizabeth Langan on from Matt's team today. Just kind of starting off, I was wondering if you could offer a few comments just around the commission split trends. And, you know, you mentioned that luxury splits had kind of moved down. Would you mind talking a little bit about what you're seeing? Just, you know, the details around agent splits, you know, maybe higher end splits versus the overall market and in the longer term? how you're kind of thinking about balancing commission splits with the expansion of agent tools?
spk06: Absolutely. So, we really benefited in the quarter from a few things, but basically, because the competitive environment has improved, what we're seeing is that while we still have prior years and quarters recruiting and retention, It is not, you know, we're not having to add nearly as much to that. So as the volume continues to improve as we come into the season, you know, it has a lesser impact on the split because the competitive environment is better. And we, you know, we're just basically rolling off the majority of prior years recruiting and retention. On the luxury side, like I mentioned, you know, some of our luxury side is actually down versus prior year. And and all the split plans are actually quite different brand by brand Some of our split plans actually did reset all at the same time in January for some brands and And we're bit that's part of where we're seeing the benefit year-over-year actually being down So we like the trends we like the competitive environment and as it relates to the overall agent value proposition You know, absolutely. So there's lots of other ways to provide value to agents that is not in the commission split. I think Ryan's referring to some of that in his prepared remarks. And that definitely helps balance overall. So good call out there. That's something we're absolutely focused on for the future.
spk07: Okay. And then just to follow up, do you have a view on where agents are, you know, kind of see the top concerns for homebuyers in today's market? You know, I don't know if you have like kind of a pulse on what they've been saying and such, but, you know, is it mostly an inventory issue? I mean, obviously inventory is a major issue, but is that where they're seeing kind of the largest pressure on volumes for, you know, home buyer decision-making or are rates kind of making that decision for buyers?
spk01: So, yeah, it's a great question, Elizabeth. Thank you for asking it. Yeah, we clearly have a pulse on the agents with the kind of couple hundred thousand here in the U.S. that we're you know, support and interact with a bunch of them regularly as you would want us to. Look, you know, the biggest thing I hear from agents is just, you know, they need more houses to sell, right? And, you know, for buyers, it's just tough out there when supply is just so limited. And obviously, a lot of that comes out of the, you know, the mortgage world. And in a world where, you know, 60 plus percent of people have mortgage rates below 4%, it's just such a barrier to supply, you know, with mortgage rates now at, you know, you know, 6.7 or whatever they are. And so, you know, there's a lot of people who want to buy houses, even at higher mortgage rates. And with the affordability challenges that creates relative to the number of the houses out there for supply. And so that's why in my script, I referred to, you know, you know, high quality lead generation, anything we can do to help our agents actually get a transaction in this tight, very low transaction year is critical. But the biggest thing I think buyers are frustrated with is just the lack of choices out there. And it's the thing that's kind of dominating the challenges in the housing market right now is just that lack of supply with high mortgage rates being a big piece of why that supply is so low.
spk07: Thank you.
spk08: That's really helpful.
spk01: Thank you, Elizabeth.
spk08: Your next question comes from Tommy McJoynt with KBW. Your line is open.
spk10: Hey, good morning, guys. Thanks for taking my questions. The first one is just to the extent that the housing market does sort of remain stuck in this 4.5 million existing home sale market, and fast-forwarding to, I guess, all of your expense savings having been fully actioned, Can you help us think about the earnings power of this model, perhaps just to put some guideposts around maybe what the EBITDA power is in this type of market backdrop?
spk01: Yeah, sure. Good question, Tommy. So, look, you know, obviously the easiest way for anyone to grow in our industry from an earnings standpoint is when the market's stronger, you know. But, you know, if you look at the actions that we're taking today, we should show you that, you know, we're committed to driving, you know, EBITDA growth, you know, no matter what the market is. And You know, our EBITDA, both kind of absolute and relative results, you know, on a competitive basis are going to look, you know, pretty darn good. You know, and a lot of it starts with the cost stuff that you referenced and Charlotte referenced, right? The more we transform our company to be simpler, more automated, more digital, you know, you think about the $150 million last year, the $200 million this year. And today's not the day to talk about it, but there may be more in the future in that kind of world. So that's a big bucket. But even in this market, there's some of the opportunities we've also been working on that would add more to our revenue and to our bottom line. If you think about the transaction integration opportunities that can kind of bring more mortgage title economics into the ecosystem, even at today's transaction levels, That creates EBITDA upside for us, and we like the early green shoots on that, and we're still investing in that in this tough market. And then some of the consumer-specific things that we've talked about over the last year or so, whether it's in the lead area or some of the other consumer insights, again, those can add to our economics, and we're still investing in those things right now. Um, you know, and then even in this market, you know, that the, the thing I talked about trying to grow that, you know, high margin franchise business grow in luxury, like gains in those areas will add to, you know, you know, our ability to do EBITDA growth, even in a low market. And, you know, again, we have the octane to invest, you know, pretty well, even in a down market, like we're in the middle of, as you can tell from our remarks and how we're, you know, using our free cashflow. But we also, as this quarter shows, generate meaningful EBITDA, generate meaningful free cash flow that enables those things. And so we don't like a tough housing market, but relative to the rest of our industry, I think we're actually much better positioned to do well in a tough housing market.
spk06: Down housing markets don't last forever. If you look over the last 30 or 40 years, they tend to last, what, two, three-ish years. And so the savings that we're doing, most of which are permanent, are going to benefit us into the future. And so that's kind of how we're focused on that as well.
spk10: Got it. Thanks. And then the second question, I do want to ask about the pending industry litigation because it's an area where we're frankly getting a lot of questions. I understand you can't opine on the actual outcome of, you know, what's really uncertain in class action litigation. But can you just help us think about the impact on a commission-based business model like yours if we were to see a widespread decoupling of the buyer's agent commissions, which I think is at the heart of what this litigation is about?
spk01: Well, this litigation is about, as I understand it, it's about the mandatory nature of the participation rule. I think speculating on what could come out of it is kind of speculating on the trials themselves, which I'm not really going to do. Um, but, um, you know, we, um, uh, uh, you know, we have a, you know, you know, we're, we have a strong belief in, in our ability to defend this pretty vigorously. Uh, we're very focused on it. We've got a trial coming up in October, um, you know, that we're very focused on and, you know, we dispute the allegations against it and believe we've got substantial offenses and we're going to vigorously defend them. But, you know, Litigation stuff, including class actions, have a lot of uncertainty. You know, these antitrust cases have a lot of co-defendants and joint and several liability. So, you know, you should always be looking at our, you know, our queue. We think we do a pretty good darn good job of updating people on the latest developments. And we'll probably just leave it there, Tommy. Okay, thanks.
spk08: Your next question comes from Soham Bonsley with BTIG. Your line is open.
spk05: Hey, good morning, guys. Thanks for taking my questions. Charlotte, first one on the debt exchange program. Should we think of this as sort of being a wash? You know, I just want to go forward based on being a wash on the interest expense and then, you know, principles sort of coming down over time and Is this more, you know, opportunistic here or do you continue to see, you know, sort of being in the market and doing these deals?
spk06: Yeah, like as I mentioned in my prepared remarks, we do see this as opportunistic. I did try to highlight that this is a very nominal incremental interest expense going forward. We do see this as a great way to deleverage and that's really the reason that, you know, we've done this transaction. So that's kind of been a similar philosophy of mine over the past few years, trying to deleverage. And so that's really the primary reason why we've done it.
spk05: Okay. And then I guess, Ryan, on transaction volume. So I think you guys are guiding down 10. And that sort of implies a little bit of improvement from 2Q. Right. And sort of the things that we're seeing on the mortgage side, those sort of suggest that things slowed down maybe in the back half of June. So I guess what's giving the confidence to sort of hit that 10 percent? Right. And is that just in line with industry volumes? Like, how are you thinking about that hitting that guide?
spk01: Yeah, I mean, so, you know, look, we're we're doing that guide, having the benefit of having our, you know, July data through effectively, let's call it, you know, last Friday, you know, the I think it's 21st or so. But, you know, we've also seen the mortgage stuff move around kind of within the quarter different ways. So, you know, you know, we're not going to let what happened with mortgage in the last two weeks of June, you know, you know, dominate kind of all the other data that we're getting. But basically, you know, the trends that we're seeing are kind of continuing, like I said, in our portfolio, you know, the opens continue to look better than the closed. And that's been true every it was true in April is true in May was true in June. We're seeing it true in July. You know, the comparisons the year before keep getting better. Some of that's the market. Some of it's the easier comparison. That was true in April, May, June. You know, the July numbers so far are kind of consistent with the number that we just gave you. And so, you know, we have so much data. We have it geographically in every state. We have it nationally. You know, we have the OPENs. You know, we have, you know, we have the new listings coming in. We even have, you know, appointment data. We have all kinds of data that kind of gives us a sense of kind of what's coming. And, you know, and so we kind of landed around that 10% decline versus last year. And then again, the 15 to 20 for the full year, you know, we're seeing it at the better end of that range. You know, we've kind of stuck with that range the whole year. That's pretty consistent with, you know, forecasters like Fannie Mae and Goldman Sachs who are at that, 4.2 to 4.3 million units kind of thing. So we haven't seen big swings bluntly, but when we look at kind of all the data we have, including our kind of most of July data, we think that's the expectation you should have from us. And then on that full year basis, we're trending toward the better part of it. And again, some of that is us and some of it's just But, you know, that's kind of the ecosystem that we're pulling that guidance out of.
spk05: Got it. And Ryan, if I could just squeeze one more in on the competitive environment. Obviously, the splits is a good sign here. But can you maybe just talk broadly about what you're seeing on the agent recruitment side, you know, between, you know, full service models like yourselves versus maybe independents or other sort of models out there? Just curious on that.
spk01: Yeah, look, I mean, I think if you look at the industry data, you're seeing that there are two industry data trends right now on the agent front. So one is there are fewer agents moving now than have been moving any time in the past five or six years. And a piece of that's clearly the better competitive environment. The other thing happening on the agent front right now is frankly, agents leaving the industry, typically, you know, low or non-producing agents, especially, you know, when you get, you know, fees and stuff, licensing fees and stuff like that do. And we saw this in Q2 and COVID too, by the way, in 2020. And so both of those trends are happening. And I think the first one is partly because of the, you know, kind of better competitive environment Charlotte referred to. and doesn't mean it's easy out there. It doesn't mean everybody is still not focused on recruiting. We're very focused on it, but it's a little, you know, different than it was for sure, you know, like three years ago or four years ago. And it's even, again, I think better than it was, you know, a year or so ago. And some of that shows up in the results that Charlotte talked about. And then, you know, and then some of the, you know, there are certain competitors who, you know, pull much more from the mass market. And there's others who pull much more from the higher end. And because we play full spectrum, you know, we compete pretty aggressively with all of them. But, you know, when we look like head to head against, you know, some of the other big companies in our industry, we like our numbers. We're a net winner often in those comparisons. And, you know, we, you know, even in a tough market, we got some We have both some experience and some assets and some financial stuff that a lot of companies don't have. And so, you know, like Charlotte said, a lot of what we're doing, including on the agent side, is trying to set us up for even greater success in a stronger market. Great. Thanks a lot for the call. Thank you.
spk08: Your next question comes from Anthony Pallone with J.P. Morgan. Your line is open.
spk03: Thanks. Good morning. I guess first one is just following up on the competitive landscape. Just on the share side, I guess if I'm looking at the NAR data in the quarter, just using median price, it was down about 22, and I guess you guys are down about 23. Do you feel like you lost share? Are you guys looking at it differently? Can you just comment on the share side?
spk01: We feel like we're right on. I mean, we were down 23. NAR was down 22. I don't even know if there's any rounding in that, but You know, look, you know, I said in the prepared remarks, Tony, you know, California and New York were the two big drags, especially from a price side, you know, in our portfolio, kind of down mid-single digits. And I think those numbers are true, by the way, for everybody. But remember, those are our two biggest markets. So, you know, if you want to map us to NAR, you probably got to really weight us a little bit. And I think we're kind of like right around them, maybe a little bit better. I don't know. But, you know, When they're down 22 and we're down 23 and we're so, you know, heavy in kind of the two worst geographies, it kind of feels like we're, you know, basically kind of, you know, holding share. I don't know. Maybe if we reweight it, we're a little better. But that's not a thing that has been keeping me up at night when I watch the numbers here.
spk03: Okay, good. Thanks for that. And then second one, on the lawsuits in GNA, can you give a sense as to whether or not you continue to accrue in the quarter?
spk01: Yeah, we didn't do any accruals this quarter. You know, you got to remember the accruals cover several litigation matters. You know, there's the class actions. We also have, you know, a couple other things out there. But We didn't do any accruals of the type you're talking about in the quarter. And having done three quarters in a row where accruals were a headwind to our strong operating performance, it's nice to have a quarter where we're not doing that. We don't break those legal accruals out, but we do aggregate those accruals with other items, including our non-cash long-term incentive comp, other non-cash charges, other extraordinary non or unusual recurring charges. And we show that big group aggregation in Table 8A of the press release. But, you know, this was a quarter where we did have a development that required an accrual. But, Tony, you know, the litigation is complex. It evolves every quarter. And, you know, we'll keep providing you the quarterly updates, you know, in the discussion of our litigation, you know, in our 10Qs. So, you should always check those out. But this was a quarter without the kind of accrual we've been talking about in some previous quarters.
spk03: Okay. So, but it just makes sure I understood that. But there were other accruals in the quarter?
spk01: Is that what you said? No. Nothing. Basically, no. Nothing. No. No.
spk06: And if you look at GNA on the quarter, it's down versus the prior year. and we do have cost savings, but to Ryan's point, there's always other moving pieces.
spk03: Okay, I understand. And then just last one on the exchange offer. I guess if you get a lot of those bonds exchanged, is there taxable gain? Do you anticipate having to pay tax on that this year, or do you get some cover for that given just the general weakness in the business this year? Just how does that work?
spk06: Yeah. we did announce that we plan to do an offer. We haven't gone there yet. So there's really, I'm limited by what I can say based on, you know, securities law. But, you know, if you look at the structure of those types of things, if they were to happen, there can be tax implications. That's something that we're obviously evaluating and, you know, getting full ahead of and if that was to be the case. But there's really not much I can say about that at this moment in time.
spk03: Okay. Thank you.
spk08: Your next question comes from Ryan McKeveney with Zellman & Associates. Your line is open.
spk00: Hey, good morning, and thanks for taking the questions. I guess one to start, I guess in terms of your total transaction size, I'm curious if you have or can share a rough breakdown between how that splits between buyer side and listing sides. And given your size and scale, maybe my baseline assumption is maybe it's about 50-50, but I'm curious if there's a skew there. And then specifically on the listing side, I guess just any thoughts or anything you can add around what you're seeing in terms of new listings coming to market, what do you think it takes to get back to you know, a more normal pace of homeowners actually listing their homes. And whether it's by market or by price point, just curious if there's any kind of green shoots or encouraging signs you might be seeing to suggest that more listings, you know, will be coming to the market.
spk01: Yeah. So, Ryan, look, given our size and scale, 50-50 is totally the right assumption, you know, on buy versus sell side listings. You know, and listings, you know, clearly way down versus a year ago, and it's a supply issue, as we've talked about. You know, we're seeing the biggest pressure on listings, as you would probably expect in the mass market and the first-time homebuyer. You know, if you look at the July data that I referred to in an earlier question, you know, we're actually seeing luxury listings in July improve more than the rest of the market. So... So that's kind of the one price point thing that we're seeing some green shoots on that we're interested in, especially with our luxury leadership position. You know, in terms of what it's going to take, I've got a pretty strong view on this. And I think it's, you know, mortgage rates in the five to five and a half percent. You know, I referred earlier to the. you know, the, the percentage of people who, uh, you know, the 60 plus percent of people have mortgages below four, you know, 82 or 85% of people have mortgages below 5%. And what I really look at here, Ryan is the home builders. And I spoke to one of the home builder CEOs. Um, uh, we, we communicated, it was a month ago, you know, they're moving a ton of product. And part of that is obviously because there's very little inventory in the resale market. But they're also moving the product because they're buying down mortgage rates into that 5% or 5.5% rate. In fact, this CEO told me that they'll buy a mortgage down to 4.99 for any house being delivered in the next 60 days, and then their other buy-downs take it to 5% to 5.5%. And so there's some real clear evidence to me there that, you know, at those mortgage rates, consumers are absolutely ready to buy, want to buy. It's not an affordability issue. But, you know, if those guys could move product without buying down, they would. But they're not. They're buying it down. So it tells me that, you know, 7% mortgages are both tough in terms of bringing supply to the market and 7% mortgages are tough for consumers on affordability. And so to really unlock both the supply side and even some more on the demand side, mortgage rates in that 5% to 5.5% is kind of what I'm really focused on. Now, again, we're going to do all right even in a tough market, as you can see this quarter, with our earnings, with our free cash flow, our ability to invest. But imagine our octane both on the with the cost changes and some of the other innovations we're doing in a much, much more normal market, what that could look like, we get real excited about it. But I think that home builder actions gives us all a path to what really is moving homes and what consumers are willing to do. And I'm obviously rooting for the home builders.
spk00: Yeah, that's really helpful, Ryan. Second question. So you've mentioned a few times, you know, California is one of your biggest markets. I guess one of the headlines we've all been seeing more recently is homeowners insurance companies pulling out of the state and as well as some other parts of the country. I guess any impact you're seeing on home sale activity in, you know, in some of those markets and, you know, if it's not tangible at this point, I guess, is it a focal point of agents or buyers and sellers in those markets? And, you know, just kind of curious how you're thinking about you know, this topic of homeowner's insurance and, you know, some of these bigger entities falling out of different markets?
spk01: Yeah, it's a great question. And there's really kind of a tale of two cities. You know, Florida is not, even though, you know, Florida gets headlines on this issue, it's not something I'm hearing about from agents or franchisees. And, you know, it really just doesn't come up a lot. That doesn't mean we're not watching it. It just doesn't come up a lot. It does come up a little more in California. And, you know, remember, California kind of has both the higher price point thing and the luxury thing kind of in greater share than probably anywhere else in the US other than maybe New York City. And, you know, we do see a few more like properties there that are just hard to sell because they're not insurable, basically, for the reason that you talk about. Now, these tend to be pretty anecdotal. I've talked to our Sotheby's International Realty leader about one in the last quarter, for example. But it is something we're watching. I mean, I think at the end of the day, the idea that any state in the U.S. isn't going to have home insurance available is unlikely from just kind of a government to kind of market forces thing. You know, it's it's I put it in a it's one of yet another kind of headwind in the California world, along with the taxes and other things. Whereas, you know, Florida, with its tax advantages, weather advantages, et cetera, it just doesn't really show up as a as a headwind. So, you know, it's on the radar, you know, but there's probably some bigger issues on the radar when you look at like the California versus Florida comparison. But again, more anecdotal, but enough anecdotal that I do notice.
spk00: Got it. Okay. Thank you very much.
spk01: Thank you, Ryan.
spk08: Your next question comes from John Campbell with Stevens, Inc. Your line is open.
spk04: Hey, guys. Good morning. Good morning, John. Hey, good morning. On the brokerage business, obviously, I mean, it's still a pretty tough operating environment. I think revenue is down $400 million or so year over year, but you only saw a $21 million drop in EBITDA for the brokerage segment. I know that's obviously a very high variable cost business. You had a little bit less splits growth pressure, but clearly there's a lot of self-help there. Charlotte, it sounds like you spoke to this pretty extensively on the cost saves, and I think that is very helpful as far as the disclosures of kind of the breakout of savings by segment. But my question here is if you could maybe talk to, you know, the degree of the remaining cost saves throughout 2026 and kind of how much of that is going to be directed or geared towards the brokerage segment and then just maybe more nearer term, do you feel like you've got the business cost-wise in a good spot where if you saw maybe even modest brokerage growth, you could get back to margin expansion there?
spk06: So I'll take the last part first. Yeah, and it kind of goes to the answer I gave earlier. Yes, I do believe that because we are at a pretty historically low housing market, these are sizable cost savings of which most are permanent, and they will definitely benefit us when we get to more normalized housing markets north of 5 million. Absolutely. So thanks for the feedback on the slides. We've been taking feedback on this. we tried to give additional detail here to highlight that the majority of our costs really are people related and then you know sort of occupancy and other things and because of that yes you know a lot of the cost savings this year are going to come out of brokerage now we're not giving updated 2026 numbers this quarter you'll likely hear more about that from me later this year but just basis where the costs are. We're constantly mining across the business, and the majority of the costs sitting in own brokerage, title, et cetera, clearly there's going to have to be sort of more to come. So we like the magnitude of our savings. We do believe we will be a big beneficiary of this to our margins when the housing market gets more normalized. But that doesn't mean that we're done, and we're constantly looking at ways to make our business more efficient. And also at the same time, a lot of the stuff that we're working on now delivers an even better experience for our agents and our customers. So more to follow on that, but happy that folks are able to see sort of the benefits of the actions because of the magnitude of what we've done. You can see that on the different operating and G&A and marketing line items in the P&L.
spk04: Okay, that's very helpful. And then back on the legal expenses, Ryan, you pointed this out, but you can definitely see the add-backs and I guess one of the late tables in the press release, I think the senior secured leverage ratio table, you can see it there. You guys are obviously not adding that back to operating EBITDA. If you look over the last 12 months, there's been a pretty substantial step up relative to maybe a year and a half, two years ago. I think clearly you're spending a lot there. But if you look at it from last quarter, it looks like it might have stepped down on a 12-month basis. So I don't know how much detail you can provide there, but was that lower legal spend? I know you talked to the accruals, but just kind of on an ongoing basis, is that a step down in spend?
spk06: It's not so much that it was a step down in spend other than there were no incremental reserves that we did. Now, there's always stuff year over year, and I'm sure we had something in the prior year that we're lapping. but nothing material. So it's really the absence of incremental new spend.
spk01: John, remember, yeah, that line item has non-cash long-term incentives comp. It's got other non-cash charges. It's got other extraordinary non- or unusual recurring charges. And so, you know, yeah, the number in that table went down a little bit from last quarter. It's just, you know, a few things rolling off from the year before, but, you know, it's not a –
spk04: changing the you know core thing that we were talking about and you know as charlotte said you know litigation costs unfortunately is one of the cost headwinds we do actually have still uh given the given the uh upcoming trials okay and then just one more on the legal side i mean ryan i know you guys can't talk much there so definitely don't want you to step out of bounds but i mean i saw the update from the bright mls which is you know the nation's second largest mls but they're named as a co-conspirator in the in the moral case but um it sounds like that they are going to basically kind of diverge from the nar rule you know the participation rule um so i was curious uh again don't want you to try to step out of bounds here but uh is there official messages coming from you guys corporate wise you know as far as a stance uh or a message on the participation rule or maybe even more specifically what bright mos is proposing to do we're not going to talk about what bright's bright's doing but
spk01: Um, but you know, look, John, we're on public record that we don't think NARS mandatory participation rule is necessary, period. Like we're literally on public record about that. So, um, you know, and we've been on public record for a while about that. So, you know, what, you know, you know, what, what everybody should know is that we have that strong view and we haven't been shy about, about sharing it. Um, and so, um, We've still got these trials, and we're going to defend them vigorously and everything, but we have a view on that specific thing, and it's a public view, so I don't mind commenting on it here. We don't think the rules necessary for markets operate well. We think agents for both buyers and sellers create real value for the consumer, and there's geographies in the U.S. that don't have that rule, and they operate really well. for consumers, for agents, for homeowners. And so we just don't think NAR's mandatory rule is necessary. And again, we're on public record.
spk04: Thanks for the comment. We can agree with you. Thank you.
spk08: There are no further questions at this time. With that, we thank you for joining us today. This concludes the conference call, and you may now disconnect.
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