Every real estate agent is used to being asked that age-old question, "How's the market?" This year, no one needs to ask, since nearly everyone is aware this is a very active real estate cycle, with median prices hitting record highs and most major metros seeing price gains. All this has been very good news for publicly traded real estate brokerages that have watched revenue rise. But in a market where agents outnumber homes for sale, how long can the good news last? And should you try to cash in?
An impressive first quarter all around
The signs of good news began when Realogy (NYSE: RLGY) reported first-quarter 2021 earnings a couple of weeks ago. The brand, which operates major brands, including Century 21, Coldwell Banker, Corcoran, and Sotheby's International Realty, brought in $1.5 billion in revenue, up 32% year over year. Its EBITDA was up 406% year over year to $162 million.
The company saw transactions up 44% year over year. Realogy enjoys an enviable 15.7% market share, which gives it an advantage when sales are strong. Because many of its brands, such as Sotheby's, cater to the luxury market, it benefitted from the uptick in second-home sales.
Virtual brokerage eXp Holdings (NASDAQ: EXPI) saw revenue increase 115% to $583.8 million in the first quarter of 2021, compared to $271.4 million one year ago. Transactions were up 95% to 73,878. Even more impressive: Net income increased 3,348% to $4.8 million, up from just $100,000 in the same quarter last year.
Part of this is due to eXp's very aggressive recruiting strategy that incentivizes agents to bring on other agents. In fact, the number of agents was up over 77% to over 50,000. For more on eXp's plans to keep adding agents, check out our interview with Glenn Sanford, eXp's CEO and founder.
Agent recruiting was also a factor at RE/MAX (NYSE: RMAX), where agent count hit a new record of over 140,000. Total revenue was up 2.9% to $72.3 million, partly because of increased transactions and rising sales prices. Adjusted EBITDA was $23.2 million, up from $19.6 million last year. At Keller Williams, which is not publicly traded, agents closed 272,688 transactions, up 21.3% from the first quarter of 2020. And over at Vector Group (NYSE: VGR), the parent company for Douglas Elliman, real estate revenues were $275.3 million, up 64.4% compared to the prior year. The closed-sales volume was $10.1 billion, up 71% year over year .
Do these numbers make brokerages investible?
The stock market tends to reward brokerages and real estate companies it considers technology companies. This means that Zillow (NASDAQ: Z) (NASDAQ: ZG), Redfin (RDFN) and other real estate disruptors like Opendoor (NASDAQ: OPEN) receive an outsized share of attention. Part of this is because they're seen as having a larger growth trajectory than traditional brokerages.
The biggest question investors in real estate brokerages have to ask themselves is what happens when the market shifts. Anyone who has studied real estate knows that it goes through cycles. When transactions fall and the market shifts, many agents may seek other employment. This may mean lower revenues for brokerages dependent on sales for growth. While RE/MAX, Realogy, and others are building out other ancillary services, including mortgage and title, they still are dependent on sales as their primary engine of revenue.
However, what goes up and down will likely go up again. Many of these publicly traded brokerages have weathered at least one or two down markets. That means they know how to trim their operating expenses and batten down the hatches in tough times. For investors who understand that brokerage performance is highly market-dependent, these companies can still be solid additions to your portfolio.