Anywhere Real Estate : Q1 2024 Anywhere Real Estate Inc. Earnings Conference Call Transcript

Corrected Transcript

25 -Apr-2024

Anywhere Real Estate, Inc. (HOUS )

Q1 2024 Earnings Call

CORPORATE PARTICIPANTS

Ryan M. Schneider

Director, Chief Executive Officer & President, Anywhere Real Estate, Inc.

Charlotte C. Simonelli

Executive Vice President & Chief Financial Officer, Anywhere Real Estate, Inc.

Alicia Swift

Senior Vice President, Investor Relations and Treasury, Anywhere Real Estate, Inc.

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OTHER PARTICIPANTS

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MANAGEMENT DISCUSSION SECTION

Operator: Good morning and welcome to the Anywhere Real Estate First Quarter 2024 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 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.

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Alicia Swift

Senior Vice President, Investor Relations and Treasury, Anywhere Real Estate, Inc.

Thank you, Gavin. Good morning and welcome to the first quarter 2024 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 current expectations and the current economic environment. Forward-looking statements, estimates and projections are inherently subject to significant economic, competitive, antitrust and other litigation, regulatory and other uncertainties and contingencies, many of which are beyond the control of management, including, among others, industry and macroeconomic developments. Actual results may differ materially from those expressed or implied in the forward-looking statements.

The references made to April month-to-date in these remarks reflects data through April 21, 2024. Our discussion on an open volume basis reflects like-for-like number of business days.

The timing of the reference litigation payments can be impacted by developments in the proceedings.

The reference to core franchise in these remarks is the franchise segment, excluding relocation and leads.

Finally, Charlotte's pro forma 2024 illustration financial range is not a financial forecast or guidance for 2024. It is provided purely to illustrate Anywhere's financial octane if the homesale market for 2024 was $5 million to $5.5 million compared to the $4.1 million existing homesale market in 2023, as reported by the National Association of REALTORS. The illustration includes higher mortgage joint venture earnings, higher variable expenses related to a higher existing homesales environment, including increasing commission splits and royalty rates, but makes no adjustment in performance of our Underwriter joint venture, refinance volume or relocation business.

Free cash flow excludes $100 million of one-time anticipated payments related to the litigation and the Cendant legacy tax matter. These assumptions are inherently subject to a high degree of uncertainty and risk. Additionally, this illustration makes no assumptions regarding the potential financial impact of pending antitrust settlements or regulatory reform related to the communication, negotiation, or payment of buyer broker commissions.

See our forward-looking statements for additional information. 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 in 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, April 25, 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.

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Ryan M. Schneider

Director, Chief Executive Officer & President, Anywhere Real Estate, Inc.

Thank you, Alicia. Good morning, everyone. I'm excited by Anywhere Real Estate's position to drive success and to deliver value for our shareholders. We continue to demonstrate a powerful track record of delivery, strategic foresight, and innovation as we lead the industry through fast moving change. And I'm really excited about how our efforts transforming how we operate, anchored in our meaningful cost reductions, should translate to financial octane in more normal housing markets.

While the first quarter of 2024 was another tough time in the housing market, I'm proud of how our affiliated agents, franchisees and employees helped customers navigate ongoing complexities. Every day, real estate agents guide consumers, whether the first-time homebuyer, the growing family in search of more space or the retiree relocating for a lifestyle reboot during the meaningful life moments that come with these big decisions. The value agents provide helps home buyers and sellers achieve their dreams, and I wanted to start the call by thanking them for their commitment.

Now, in the first quarter of 2024, we delivered $1.1 billion of revenue and negative $17 million of operating EBITDA. Remember, this is the seasonally slow part of the year, and we were in a very difficult housing market with a record low level of unit sales. But as we move into the selling season, I'm very excited because our March operating EBITDA was solidly positive.

We realized approximately $30 million of cost savings in the quarter and are on track to deliver our $100 million permanent cost savings target this year, and we are working hard to exceed that initial target.

Our capital allocation priorities remain focused on paying down debt and investing in the business.

And speaking of investing in the business, unlike our competitors who are still pulling back given the challenging 2024 housing market, we continue to invest in our business to position us for future growth and to streamline our company.

So, for example, growing our franchise network, one of our most important strategic priorities, by enhancing our value proposition for both new and existing franchisees, we are bringing them new profit sources like Upward Title. We are providing them excellent technology with our MoxiWorks offering. We are reducing their costs with products like our Listings Direct technology, and we are using Anywhere's data scale to provide actionable franchisee insights to help them run their businesses better through our Affiliate Insights tool.

Another strategic point is that we love and are strengthening our luxury leadership position. And remember, we sell more million dollar-plus homes than anyone. Our Sotheby's International Realty brand continues to gain share as it consistently outperforms both the market and the rest of our portfolio, including again in Q1. Our Corcoran brand dominates the important New York City market and was ranked as the number one brand in Manhattan for the fourth consecutive year. And we love expanding Corcoran on the franchise side with new cities like Boston and Portland coming online in Q1.

And finally, we continue to demonstrate our pre-eminent position selling the most expensive homes in America. Just to share some fun data, at the highest end of the market, we currently have seven listings of $100 million plus homes with three of them under contract and three other $100 million-plus homes whose sales we closed in Q1.

Now, we're also integrating and digitizing our brokerage and title operations, both agent and customer facing and back office.

We are better assisting agents and consumers from contract to close, creating a more frictionless transaction experience. This integrated service is a win for our agents as we provide them high value transaction coordination services as part of the value proposition, saving them the time and hassle of either managing this work themselves or paying hundreds of dollars per transaction for someone else to handle it so that they can focus on earning new business.

It's a win for consumers as we create a simpler transaction experience and a faster and more seamless closing process. And it's a win for Anywhere as this should help us lower our title and mortgage capture - should help - excuse me, as this should help our title and mortgage capture rates and should contribute to a lower cost base.

This more integrated and high-quality service is now available in about one-third of the US, and will be rolled out nationwide by the end of the year. We are already seeing more than a third of transactions and available markets using the service, and we're seeing usage rates above 50% in some of our earliest launch locations.

We're also combining more of our brokerage and title back offices to drive more and consistently better service and to lower costs. As I've referred to in previous calls, this is actually one of the best examples of where we're able to use generative AI to improve our production processes as we continue our generative AI agenda across many parts of the company.

Now finally, we really like some of the recent innovative and exciting investment opportunities we're finding to leverage our strategic assets.

First, as single-family rental companies are shifting to selling their homes directly to consumers, we are finding that our national reach, our curated, high quality leads network, and the ability to integrate title are creating opportunities for us to be a great partner in selling their homes.

Second, we like our innovation around different ways to sell homes and have been selling more luxury homes through auctions recently with our Concierge Auctions business. And remember, the auction economic model is different as there is a buyer premium that we collect along with the seller commissions. Many of you saw the TV coverage of our recent New York City live auction. We've also recently hosted auctions in Hong Kong and Los Angeles. And next month, Concierge Auctions will be hosting the first ever live real estate auction at the historic Sotheby's London auction house with both Dubai and Hong Kong to follow later in 2024.

And third, while we don't talk about international much, we're seeing some interesting international expansions, especially in our Corcoran and Sotheby's International Realty brands. And remember, for those two brands, internationally, we do normal franchise agreements, not master franchising. In Q1, we opened four new SIR franchise offices in Greater London and recently listed a $218 million penthouse. And we're seeing similar success in Dubai's thriving luxury real estate market where we just sold a $40 million home.

Now, let me turn to housing. The Q1 market was a continuation of 2023, which is one of the toughest housing markets in the last 30 years. Unit transactions in the quarter as an industry were down versus Q1 of 2023 as limited inventory and supply challenges continued to mean demand outpaces supply. That showed up as higher prices in the market overall and we saw that in our book with more than 90% of the country having year-over-year price growth in the quarter. It's hard to overstate how high mortgage rates are hurting housing, especially by keeping supply off the market and creating affordability issues. And the recent inflation news has clearly put more headwind against the timing of future rate cuts.

Now, in our book, Q1 was the first quarter of year-over-year closed volume growth we've seen in about two years, as our closed volume was up 2% versus the prior year with units down 4% and price up 7%.

Our luxury segment continued to outperform with our Sotheby's International Realty brand seeing closed volume up 7% year-over-year with about half of that from unit growth as it again it meaningly outperformed both the market and our portfolio.

And I'm a little more optimistic about the future because our open volume, which represents new contracts and future closings, was up year-over-year and improved each month during the quarter. And so far in April, our open volume is up 6% year-over-year.

We are seeing some improvement in areas like California and New York where we have disproportionate and Owned Brokerage businesses with a meaningful piece of that improvement coming from growth in units.

And we're beginning to see more growth in listings. We saw listings growth in our portfolio up 4% year-over-year in the quarter. This is the first time in a couple of years we saw that listings growth. And we're really excited about how listings growth is increasingly differentiated for us in luxury as our million dollar-plus listings in the quarter were up 16% versus a year ago.

Now, look, we're clearly at a low point in the cycle, but the housing market is going to improve over time, and I still believe the medium-term outlook for housing should be quite strong, fueled by demographic demands and a continued desire for home ownership. And I really like our financial octane in stronger housing markets.

Now, before I turn over to Charlotte, there is substantial uncertainty in the industry in light of litigation and regulation developments since we last talked. We were excited for a level playing field on these topics and think there will be both interesting opportunities and challenges ahead, and we are bringing the same proactive thinking and leadership there that we demonstrated relative to the competition in our litigation strategy.

And I also appreciate how the world continues to recognize Anywhere Real Estate for its leadership. Anywhere was recently named to Fortune's America's Most Innovative Companies list for the second year in a row and once again was named one of the World's Most Ethical Companies for the 13th consecutive year.

With that, let me turn over to Charlotte.

Charlotte C. Simonelli

Executive Vice President & Chief Financial Officer, Anywhere Real Estate, Inc.

Good morning, everyone. 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 continue to believe our execution, cost focus, and industry leadership will enable us to drive differentiated performance and emerge with even stronger financial octane when the housing market improves.

I will now highlight our first quarter financial results.

Q1 revenue was $1.1 billion, essentially flat versus prior year as transaction volume growth was offset by softness in relocation. We are encouraged by the improving volume trends even while still off a low base.

Q1 operating EBITDA was negative $17 million, improved versus prior year due to transaction volume growth, lower expenses across the enterprise and the absence of litigation accruals.

We continue to prudently manage our cash. Cash on hand at the end of Q1 was $111 million and Q1 free cash flow was negative $145 million. This result is in line with what we normally see in the first quarter, our seasonally slowest. We expect our 2024 operating free cash flow, excluding one-time items, to be modestly positive as favorable working capital, robust savings programs, and our cash management discipline will help counterbalance another tough year in housing. And as a reminder, we have over $100 million of one-time payments anticipated this year between our $73.5 million class action litigation payment and the $39 million legacy California tax matter.

Now, let me go into more detail on our business segment performance.

Our Anywhere Brands business, which includes leads and relocation, generated $89 million in operating EBITDA. Operating EBITDA decreased $8 million year-over-year, primarily due to lower client volumes in the relocation business. We love our core franchise business and its margin stability over time. And in Q1, our core franchise margins were approximately 60%.

Our Q1 Anywhere Advisors operating EBITDA was negative $59 million, improved $16 million versus prior year due to higher volume and lower operating and marketing costs. Commission splits in Q1 were 80.04%, down 3 basis points year-over-year, continuing the six-quarter trend of more stable splits. We are benefiting from the improved competitive environment, reduced amortization of prior recruiting and retention payments, and some reclasses for one of our brands. This benefit, however, is offset in part by unfavorable agent mix as we saw top agents take a greater share of transactions, and to a lesser degree, geography, as we saw improvement in a few higher split markets like California.

Anywhere Integrated Services was negative $15 million in operating EBITDA in Q1. Operating EBITDA improved $2 million year-over-year due to lower operating expenses, driven by cost savings initiatives.

Moving on to cost. We delivered approximately $30 million of cost savings in the first quarter and expect to realize at least $100 million in cost savings this year. Some important items on our 2024 cost savings program, which are also illustrated on slide 21 in our earnings presentation, include we expect the cost savings to be recognized fairly evenly across the remainder of the year. We have identified 100% of the target, of which $40 million of the program is carryover savings from 2023 actions.

And we continue to have a relentless focus on changing how we operate to drive greater efficiencies across all areas of our company. We continue to realize cost savings by streamlining processes, reimagining roles and footprint, optimizing resources or using AI to automate certain tasks. All of these actions will help to enhance our customer and agent experience while also improving our cost structure over the long term. And we believe these actions will actually help drive growth in the future.

It can be hard to see the full financial octane of our business transformation efforts, especially on the cost side, in this historically low housing market. We often get the question of how will our cost work translate to the P&L in the future and in better housing markets? Given that, we wanted to share the following.

We've put together a pro forma of what 2024 would look like if we had a more normal housing market.

Slide 22 in our earnings presentation shows our historic cost savings delivery over the past five years, which includes a mix of permanent and temporary cost reductions that total approximately $600 million, of which approximately $350 million has flowed through to our P&L. About 40% of the savings were offset by inflation, new investments, and other factors.

Alongside that, if you look at slide 23 in our earnings presentation, we've illustrated our pro forma 2024 financial octane combining our cost reduction, including our in-year target of $100 million and a better housing market. This illustration implies an EBITDA range of $500 million to $600 million in a 5 million to 5.5 million-unit 2024 housing market. This also factors in higher mortgage delivery as well as higher variable expenses, including commissions and royalties for the higher unit rate environment. And to be clear, we are not assuming any consumer commission changes in this pro forma.