Anywhere Real Estate Inc (HOUS) 2023 Q1 法說會逐字稿

Good afternoon, and welcome to the Anywhere Real Estate First 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's Senior Vice President, Alicia Swift. Please go ahead, Alicia.

Thank you, Breanna. Good afternoon, and welcome to the first quarter 2023 earnings conference call for Anywhere Real Estate. On the call with me today are Anywhere's CEO and President, Ryan Schneider; and Chief Financial Officer, Charlotte Simonelli.

As shown on Slide 3 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 the 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. For those who listen to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, May 3 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.

Thank you, Alicia. Good afternoon, everyone. Even in the face of a challenging housing market, Anywhere continues to charge ahead and make meaningful progress, setting up our company for even greater success in the future. In the first quarter of 2023, we stayed focused on positioning our existing businesses for future growth, especially franchise and luxury for specific successes in Owned Brokerage agent recruiting and retention and franchise sales across our great brands.

We significantly lower our cost base, including permanently changing how we operate as we work to execute $200 million in cost savings for the year and we continue to invest in re-imagining the agent and consumer experience to create a simpler, more integrated real estate transaction but also lets us capture greater economics.

I will share more on each of these later in the call, but I want to start by thanking our great employees, agents and franchisees for helping our customers navigate a tough environment, as Anywhere stays laser focus driving our strategic priorities, including an intense innovation agenda. In that spirit, our company got a lot of energy from being named one of Fortune's Most Innovative Companies for the first time ever.

Now turning to the housing market. There's no hiding from the fact we are in the midst of a very challenging year. Most forecast predict home sales in the low $4 million range, which would be one of the worst years we've seen in a long time and we still believe the year-over-year volume comparisons will improve throughout the year. And I'm starting to hear from some agents and franchisees about greater optimism for the market improving going forward. And we have a few of those positive indicators in our portfolio.

In Q1, our business performed right around our expectations. We delivered $50 million of cost savings in a tough quarter when volume is down about 30%, both of which we signaled in advance to you. The volume decline was almost all unit driven, with a 29% decline in home sale units. While home sales were down substantially across all markets, there was significant geographic variation in price changes. A few markets in particular, California and New York City had prices down 5% to 10% versus prior year while about 2/3 of the states, including large ones like Texas and Florida saw prices hold steady or even increase versus last year. Revenue was over $1 billion and operating EBITDA was minus $52 million. However, our operating EBITDA was meaningfully impacted by new legal accruals in the quarter.

As a reminder, in addition to the 2 other class action jury trials later this year, a second large industry antitrust transaction with certified in March. Now legal accruals aside, we were pleased that March operating EBITDA was solidly positive. We expect that trend to continue. We are also glad to see open volume metrics continuing to outperform closed volume metrics in Q1, which indicates positive future volume levels and our numbers for April so far are continuing the trend of open volume metrics running better than closed volume metrics.

We are most excited about our strategic progress to set us up for greater success especially in stronger future housing markets. So first, we are working hard to position Anywhere to achieve share growth, especially as the market rebounds with a particular focus on our franchise business and our luxury leadership. Our Anywhere Advisors agent base again grew year-over-year and we continue to have record agent retention levels. Our Anywhere Brands business is delivering robust franchise sales both domestically and internationally and we continue to see agents and brokers attracted to our compelling value proposition that includes innovative technology, data and marketing products and high-quality lead generation programs.

Second, we are moving our business to a permanently lower cost base. As you can see from our cost results in 2022 and Q1 of 2023, we are re-architecting and reducing our real estate footprint and automating our operations. This includes our most recent actions as we bring together our Title and Brokerage physical footprints and operations to better serve agents, lower costs and improve the transaction experience. And third, we continue to invest and make progress, since our goal to simplify and integrate the agent and consumer transaction experience. We believe this will have multiple benefits including capturing additional economics in the transaction and further reducing the stress and friction for consumers, agents and franchisees.

A few examples include the following from the quarter. Our RealVitalize product provides a turnkey solution to help sellers prepare their home for sale. This adds to our value proposition by simplifying the agent and consumers transaction experience and enables us to capture additional economics. So for example, in Q1 we captured Title on over 80% of the RealVitalize transactions in seller controlled markets. We scaled up our Leads Engine product which simplifies and speeds up the process of matching consumers with agents. Leads Engine is part of our ongoing successful effort to shorten the time to connect interested consumers with agents and more broadly meet consumers where they are even earlier in their home buying and selling journey.

One Click Title, which as the name suggests simplifies and integrates the Title ordering process to a single click across our Title and Brokerage operations launched last year in Coldwell Banker Reality and in Q1 nearly 30% of our CBR agents who closed transactions use the feature. So in addition to better integrating the transaction, One Click Title is also an example of change in how we work by automating a complex part of the transaction.

And finally Upward Title, our new multi-franchise title joint venture program went live in its first market Florida and is on track to launching our next planned markets of California and Pennsylvania later this year. This program allows our franchisees to benefit from our scale and title, and extends the reach of our integrated Title offering to our franchise network.

So in the midst of a clearly tough housing market, I'm excited by our strategic progress, our team's continued to track record of delivery and how we are seizing this moment to further position Anywhere to capture the opportunities ahead of us, especially in stronger housing markets.

Now I will turn it over to Charlotte to discuss our results in more detail.

Good afternoon, everyone. Given the market dynamics, we had solid financial and operational performance in the first quarter and continue to focus on what we can control, our cost savings and executing against our strategic goals. We believe our execution, strategic focus and industry leadership will enable us to drive differentiated performance and emerge stronger when the housing market improves.

Now I will highlight our first quarter financial results. Q1 revenue was $1.1 billion, down 31% versus prior year, and in line with our transaction volume decline. Q1 operating EBITDA was negative $52 million, down versus prior year due to lower transaction volume and higher agent commission costs, offset in part by cost savings across the enterprise.

Our results were also impacted by the significant legal accruals, Ryan referred to earlier. We are prudently managing our cash. Cash on hand at the end of Q1 was $122 million, and Q1 free cash flow was negative $120 million. This result is better than what we normally see in the first quarter, our seasonally slowest. Our revolver borrowing at the end of the quarter was $380 million, only $30 million higher than year-end 2022 and driven by our prudent cash management and better working capital. Also almost all of our revolver borrowings relate to the note redemption, we did in November last year, which leaves us with limited maturities until 2026.

Now let me go into more detail on our business segment performance. Our Anywhere Brands business, which includes Leads and Relocation generated $97 million in operating EBITDA. Operating EBITDA decreased $41 million year-over-year primarily due to lower revenue related to transaction volume declines, partially offset by decreases in operating and marketing costs.

Our Q1 Anywhere Advisors' operating EBITDA was negative $75 million, down $35 million versus prior year due to lower volume and higher agent commission costs, offset in part by lower operating and marketing expenses. Commission splits in Q1 were up 84 basis points year-over-year, which was better than we expected in the quarter. Splits were worse than the prior year due to the impact of amortization of prior recruiting and retention payments over a much lower volume and due to the mix of agents we've recruited over the past year.

It was also impacted by timing on our corporate new development business. Anywhere Integrated Services was negative $17 million in operating EBITDA in Q1. Operating EBITDA declined $14 million year-over-year due to lower purchase and refinance volumes, and $6 million lower earnings due to the sale of our Title Underwriter business. This was partially offset by lower operating expenses due to cost savings initiatives and $6 million in improved GRA JV performance.

Moving on to costs. We have a relentless focus on changing how we operate our company to drive greater efficiency. We continue to execute on our $200 million cost savings program realizing $50 million of this in the first quarter and expect the balance to be recognized fairly evenly across the remainder of the year. The majority of the savings will come from headcount and real estate footprint efficiencies representing about 70% of our 2023 savings.

We have reduced our headcount by 11% since June of 2022. 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 services like Title and Mortgage. These efforts are focused on how we deliver services to agents and customers by advancing our technology and product solutions which drive efficiencies.

A couple of examples. In the first quarter these efforts resulted in a reduction in our Coldwell Banker Realty offices of about 10%. We have historically operated Title and Brokerage separately, but now are focused on the opportunity to integrate administrative operations. This will change how we deliver services to brokerage, expanding our value proposition. This simplifies the transaction for agents and consumers, shortening timelines and improving the end user experience. This will also drive efficiencies and streamline operations by leveraging work that had previously been done in both Title and Brokerage and now eliminating those redundancies. We are also targeting higher ROI spending. For example, we are moving away from advertising in March Madness to Amazon Prime Video for Thursday Night Football. The same dollar investment doubles our reach and offers re-targeting opportunities and branded and show integration. We consider approximately 2/3 of our full year savings to be permanent, and are not expected to return when volumes increase.

These savings will be offset in part by inflation, and by intensifying litigation costs driven by the cases Ryan mentioned previously. Now onto our new estimates for 2023. First, we expect our Q2 closed volumes to be down about 25% versus prior year. Second, based on the Q1 split trends we now expect full year 2023 split pressure of about 100 basis points, which is better than our previous estimates.

Estimates that remain the same as our last call. For full year 2023 we continue to expect transaction volume declines to about 15% to 20% year-over-year, which is consistent with our past estimate and in line with industry forecasts. We also still expect the 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 help counterbalance this tough year in housing. 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.

Thank you, Charlotte. So as I reflect on the first quarter, I'm proud of our team navigated the tough housing environment and deliver. I'm also excited about the strategic progress we've made in the quarter to set our business up for greater growth when the market rebounds to permanently streamline our cost base as we operate differently and to re-imagine the agent and customer transaction experience.

Looking ahead, we continue to believe the housing market will improve through the course of the year and I remain quite optimistic about the housing market over the medium term and our ability to lead in it. To achieve even greater success in the future we continue to seize this moment to position Anywhere to capture the benefits of that better housing environment as together with our agents and franchisees, we move real estate towards next.

Now I will turn the call back over to the operator for any questions.

(Operator Instructions) Your first question comes from Tommy McJoynt with KBW.

So I want to start off asking about the commission split numbers. So assuming that the full year transaction volumes are down 15% to 20%. I think you guided to for the full year and understanding that the productivity mix among agents can vary. What's a reasonable range for where that commission split could end up this year relative to what it was last year?

Yes. So I think the guidance that I just indicated in the prepared remarks was to be around 100 basis points worse than prior year. The first quarter being down 84. And again, the drivers of what's causing this split pressure is the amortization of prior recruiting and retention payments as well as the mix of some of the agents that we've recruited over the past year. So those are the big drivers down 84 basis points in Q1 and our call for the full year at this point is to be down about 100 -- sorry, worse than 100.

Right. Got it. Okay. And then my second question, have you seen any early indications of a slowdown in available jumbo mortgage credit that's impacting the luxury housing market following the pullback by some of the banks that historically were pretty prominent in that market?

No, we have not -- our mortgage business is meaningfully sized and kind of has a pretty broad distribution out there. Obviously, we are not a bank. So we do operate differently than some of the banks in our joint venture. But we haven't seen any pressure on housing results because of mortgage pullbacks. We've seen a massive amount of pressure on housing results because of mortgage rates with frankly the supply issue and the fact that so many people have a low rate and are kind of locked into their homes and we are getting so little inventory on the market is even bigger than the affordability that comes with 6% to 7% mortgage rates.

But on the list of things that are kind of affecting housing transactions both the number, the pricing et cetera, the pullback in mortgage credit and in the jumbo market in particular is not anywhere near the top of the list. It's not something that comes up, and look, the luxury segment has a disproportionate majority of cash transactions relative to rest of the market. So, good question, given everything that's going on, but it is not a driver. We believe will be either our results or of the results out there in the industry. And again, it's a tough year for housing right now because of those rate environment, but we think the longer-term outlook for housing with demographics and the fact that it's not a loose credit environment and we don't have the balance sheet issues of 15 years ago, does have us more optimistic over the medium term but pretty strong no on your question in terms of what we are seeing and what's affecting our results.

Your next question comes from Matthew Bouley with Barclays.

So I guess on the G&A spend, I guess, presumably that includes some of these meaningful legal accruals that you're speaking to. And I know you didn't add those back to adjusted EBITDA. I don't know, if you want to quantify those or you're kind of holding that back, but maybe said another way, is there a way to kind of think about sort of normalized level of G&A spend ongoing, maybe a way to put it?

Well, look, this is 3 quarters in a row that we've had -- meaningful legal accruals that affect our EBITDA and to your point we just put it in the operating EBITDA and we don't try to adjust that out, but we talk about them and we make it clear that is meaningful. So you should obviously be assuming on a run rate basis that are absent those things, our G&A would have been lower and our EBITDA would have been higher. We are not going to get in the business of giving the numbers out, partly because you wouldn't want us to be sharing them with the plaintiffs, but we are pretty transparent about what's going on there and that it's a meaningful impact. And you're right, that is where the lion's share of that stuff shows up.

Yes, I think, Matt, I mean you've probably looked at our corporate G&A over a longer period of time and you know kind of where our cost savings come from and the majority of which are coming out of Brokerage and Title. So I think you can probably estimate for yourself what do you think the run rate of corporate G&A would be.

Yes, I mean, the other thing probably to keep it in mind when you look at the other legal accruals kind of get the results, Matt, obviously they go straight into the operating EBITDA number that we quoted, but legal accruals aside, March was a positive EBITDA month for us. It was solidly positive. So we like that. We like the trend there and then underlying that is the fact every month so far this year we've seen the open transactions, volume metrics outperform the closed ones which kind of shows future months better than previous and that's partly why March was a better month than January and February.

So those accruals really been a headwind to some of these numbers that we've been sharing with you on an overall basis, but we have tried to be clear that there's stronger underlying business performance there and with the March EBITDA solidly positive is just one example of that.

Yes. Got it. Before I get to my second question, any color on maybe how many more quarters of legal accrual we could look for?

Yes, so obviously, these cases continue to evolve. I mean what were accrued for at this point is our best guess as of today, but we do have to reevaluate sort of month by month and the class was certified and so we took a position that we thought was prudent, but we are going to have to keep watching it month by month.

Okay, got it. Thank you for all that helpful detail. And then so secondly, just kind of question on how this overall housing market is evolving. I think one thing you see, as you look in the data is that you're seeing this sort of larger share shift towards new build and I'm thinking more of the single-family side. So not really asking about the new development business that you guys do in Corcoran for example. So as you think about how that maybe plays out from Anywhere's perspective to what extent do your agents participate in new construction, new single-family construction? And how would that play into either commission splits or even commission rate? Thank you.

Yes, so we play with -- our agents play a new single-family home construction, I would say episodically when the markets are hot, builders don't need to use agents to sell their homes when markets are tougher like we are getting right now, a bit bluntly we have more agents who are helping people, I would say sell homes. That said, it's never going to be that in our mix because if the normal world is whatever 5 plus million resale in a good year, I guess about a 1 million or so new construction. Maybe, I don't know, it's a plus or minus that, even a big move in the new construction number it doesn't kind of move the overall that much, kind of thing. And so our world is pretty much going to be swamped by what happens either up or down with the resale market.

So we'll take any of the business we can get there, but it's neither going to make up for the resale market, nor is it going to be a problem if the new sales stuff kind of goes away in terms of our agents involvement, but the bigger thing is just -- it is a challenging market right now and part of the reason the new sale market is doing well is they are bringing new supply into the market. And as I said in the earlier comment the lack of supply is by far the biggest issue out there in the world and it's true across price points and geographies, and obviously you know what's happening on the rate environment has really hurt that ability and you know, you can look at all the forecasts, but whether it's 4.2, 4.3, 4.5, 4.0 whatever those forecasts those are like some of the lowest numbers will have seen in 15 to 30 or 40 years in terms of number of units sold.

So we've really got to stay focused on the cost side like we are doing. We absolutely are excited that we can invest in a time when a lot of people are having to pullback even more and the fact that we could drive -- still drive meaningful EBITDA this year and even have some modestly positive free cash flow, you know is feeling pretty good given the market that we are in and then you've obviously seen how we can perform in stronger markets and so anything we can do to create some space with the competition because I think the competitive environment has gotten better. And I have a personal belief there may be some fight to quality is still going on here.

So we are -- that's what we are seeing out in the market and how we are trying to navigate our way through it.

Yes, the only thing I'd add to that as Ryan brought up are modestly positive free cash flow in the year. I just want to be explicit that we have no further information about any possibility or timing of any of the outcomes in our litigation. So that's not factored into the estimates that we've shared with you.

(Operator Instructions) Your next question comes from John Campbell with Stephens, Inc.

This is AJ Hayes stepping in for John Campbell. Congrats on the quarter. So we saw in the 10-K that a third of Title transactions last year is been from your company's owned brokerages. And you also called out that about 30% of Title attach rates for those broker transactions. Can you provide some insight on how that looked in prior years? And how -- you've seen an improvement in attach rates over the years and in longer term where do you think you can take those attach rates?

Well, I think we've had that stuff out there. I don't think our attach rates are frankly really improved over the years. I mean, and they've kind of stayed in kind of that range there.

To your other point, we do, do a meaningful amount of third-party business and we love that, right. We love doing Title business for any transactions that we can, not just our own agents and so that's why AJ, and I appreciate you stepping in. I do spend as much time as I do talking about re-imagining the agent and the consumer transaction experience because I have a very strong fundamental belief AJ, if you'll let me just share with you here which is everybody just trying to change the way we've done things to get a different Title attachment the way it's been done for ever and our industry is unlikely to work and the fact that our results on that core metric haven't changed that much as evidenced, but the way to actually get different results is that actually change how the transaction happens and make it easier for people or create products that make it easier to let you capture and the RealVitalize one I use as an example of that.

We give a product, I've actually use this product as a home seller where it makes it -- it takes all the work of prepping your home for sale and enhance it to professionals, where both the agent and the homeowner doesn't have to do any of the coordination because a professional does that, right and then we recoup the cost of that stuff at the closing, but built into that product is using our Title in any market where the home seller controls the Title and so we get 80 plus percent capture rates there.

And so I don't talk about simplifying the transaction just for the fun of it or because of the obvious thing that we all want simpler things in life. Having products and experiences that are better for the agent and the consumer in this very complex big dollar thing is not only good on its own rights and can help with our value proposition, but my view AJ is that's the only way to really get your Title and Mortgage capture rates to a different zip code wherever possible to actually embedded in the product that people want because it makes the service better or easier and RealVitalize is an example of that.

And so we actually -- that's partly why we want to give those kind of data points that we are finding ways to do that in pilot programs at smaller scale that we want to roll more broadly and that's the kind of way we can get to different capture rates just doing what we do or what our industry does is not likely to move the needle. But innovation and change in the experience that could do it. And so we've got that real example we gave you this quarter and that's the kind of innovation agenda we need to be driving.

Yes. I really appreciate the color there Ryan and definitely impressive attach rates with RealVitalize. One follow-up, if I may with Cartus it's obviously buried in the brand segment, but it seems like you've rebuilt to a great spot after the pandemic driven fallout. It would be very helpful if you could provide either the exact contributions or maybe just talk broadly to where it is today versus pre-pandemic for both revenue and margin as well.

Yes. So what I would say is we had a really good quarter and relocation it was -- it drove a decent year-over-year improvements in the -- it was definitely noticeable. From a revenue perspective over the past year, the volume was kind of driven by a couple of different things. It was driven by a little bit of a rebound of pent-up demand but it was also driven by new business with existing clients and then share gains that we had with new clients.

So I think the business, to your point is very healthy. We have really focused on it. When the real estate business was booming, we continue to invest and ensure that we were driving the right technology agenda. And so I'm really happy with the way that performance is playing out. I will say there is -- for what's to come balance of the year, there are challenges that are driven by, if you think about the sectors that used relocation, some of those sectors are suffering and so they may have different plans for relocation in the near term as they have their own agendas to worry about, but over the long haul the market share gains that we've built both with existing and new customers I think are going to benefit us for sure, and we are very happy with the year-over-year contribution from that business.

Operator, do we have any other questions in the queue?

There are no further questions at this time.

All right. Well, we thank all of our shareholders and other interested parties for joining us today. And with that, I think we are going to wrap up the call.

This concludes today's conference call. You may now disconnect.