Realogy is the parent company behind Century 21, Coldwell Banker, Sotheby's International Realty, and other top brands. It operates brokerages both as a company and as franchises, as does Re/Max. Realogy's Q2 revenue was down 27% from the previous year, and closed transaction volume was down more than 24%.
Re/Max's $52.2 million revenue total was down 26.9% compared to the second quarter of 2019. This was partly due to the fact that it reduced franchise and marketing fees during the pandemic. Lower home sales also resulted in lower brokerage fees.
eXp, the newest brokerage in this bunch, had its most profitable quarter ever, and its quarterly revenue was up 33% year over year. The all-remote brokerage uses a virtual campus where agents and brokers meet as virtual avatars and even held its earnings call inside this virtual universe. This platform, VirBELA, is also a revenue stream for eXp World Holdings, as many companies are now more interested than ever in adopting new ways to meet in virtual space.
Agent growth and transaction volumes
For all three of these companies, the number of agents and brokers is always a key metric to track. At eXp, the number of agents and brokers increased by 54% to 31,091. Re/Max saw its total agent count rise by 3.8% to 131,905 agents. At Realogy, brokerage agents grew 2% year over year.
Transaction sides are also a measure of how much activity the company is seeing. These companies tend to count each side of the transaction (buy or sell) separately. At eXp, residential transaction sides were up 22% to 43,653 year over year. Realogy saw its closed transactions fall by 24% but already saw increasing sales in July.
The current activity in the real estate market should help brokerages, in general, see strong numbers during the third quarter. Realogy reported in June that open transaction volume was up 21% from June 2019.
Tightening the belt
In the second quarter, Realogy, like many brokerages, was focused on cost cutting and reported that it delivered cost reductions in the quarter. Some of these will be temporary cuts while others may be more permanent. Realogy ended the quarter with $686 million in cash and also executed $550 million in second-lien notes, which won't mature until 2025, in order to give itself some liquidity and a long runway before large debts are due.
"We were agile and efficient throughout the second quarter and successfully managed costs, which helped generate substantial operating EBITDA and positive free cash flow in the quarter," said Realogy Executive Vice President, CFO, and treasurer Charlotte Simonelli in a press release. "We took proactive steps to strengthen our balance sheet."
Re/Max similarly pared back operating and administrative expenses, including eliminating the company bonus, suspending the company 401K match, and reducing its travel and events spend. Because Re/Max is 100% franchised, it tends to be more asset-light than Realogy.
Mortgage as a shining star
As we saw with this quarter's reports from Zillow (NASDAQ: Z) (NASDAQ: ZG) and Redfin (NASDAQ: RDFN), mortgage is increasingly important for real estate's bottom line. Realogy reported that it's expanding its mortgage business and coverage area. Re/Max increased its total open Motto Mortgages franchises nearly 30% to 127 offices. While eXp hasn't ramped up its business fully yet, it expects mortgage to be a more meaningful contributor going forward.
It's a regional thing
We all know real estate is local and this has swung into focus even more sharply during COVID-19 when the uneven pattern of the outbreaks had some areas in heavy lockdown at different times. Most heavily impacted during Q2 was New York City. Realogy reported Q2 sales in the Big Apple were down over 50%.
Reports from Q2 seem to point at the urban exodus trend that has already manifested itself in the rental market, and all three of these companies addressed a move to the suburbs as one of the trends they're following. Each company is wrestling with a need for more inventory in order to keep pace with the need for buyers.
Should you invest in real estate brokerage stocks?
Although each of these companies has invested heavily in technology, including apps and websites, they're all still in the traditional brokerage business, which means they're heavily tied to the swings of the real estate market. When prices are high and sales are climbing, it's generally good news for these brands. Much has been made of real estate disruption, but the bulk of sales still happen in the traditional manner, and discount brokerages and iBuying still represent a small part of the overall picture. The shift toward compressing commissions is happening but slower than some had predicted.
Of these three stocks, eXp has seen its stock rise the highest in the past year, rising over 100% in the last three months alone. Realogy stock, on the other hand, has been in a mostly downward slide for the past five years, now trading for a fraction of its previous volume. Re/Max has had a steadier track, although its stock has not risen back up to highs hit before the March stock slump. Your decision to invest in these stocks may rest in how well you think each is positioning itself for the future of real estate.