Back in Q2 of last year, the headline for EXPI was that they just killed it, but… With Q4 and fully year 2020 results, I think we can remove the “but.” Seems to me that EXPI has turned the corner to some extent. Major challenges remain, but in the core brokerage operations, I think it’s reasonable to conclude that EXPI is now the most serious competitor to most of the traditional brokerage models in the industry today.
Absent some kind of major misstep by EXPI, or major changes in the overall economics of housing, I believe that EXPI will be the dominant force in the mid-low segment of the market while Compass will be a real threat in the high segment of the market. The traditional leaders of today — Realogy and HomeServices of America on the high end, and RE/MAX and KW on the mid-low segment — are facing real threats.
Let’s get into it.
The Numbers
As I said in my previous posts, you can get the reported numbers right off of the earnings releases. If you want them from me for some reason, let me know.
The topline results are very impressive:
And more, from the press release:
- Agents and brokers on the eXp Realty platform increased 63% in 2020 to 41,313, compared to 25,423 at the end of 2019, and increased 15% in the fourth quarter of 2020, compared to 35,877 at the end of the third quarter of 2020. eXp Realty currently has more than 48,000 agents and brokers on the platform at the time of this release.
- Residential transaction sides closed increased 113% to 82,055 in the fourth quarter of 2020, compared to 38,611 in the same year-ago quarter. Residential transaction sides closed in 2020 increased 77% to 238,981, compared to 135,322 in 2019.
- Residential transaction volume closed increased 123% to $24.6 billion in the fourth quarter of 2020, compared to $11.0 billion in the same year-ago quarter. Residential transaction volume closed in 2020 increased 89% to $72.2 billion, compared to $38.2 billion in 2019.
- As of Dec. 31, 2020, cash and cash equivalents totaled $100.1 million, which compares to cash and cash equivalents of $40.1 million as of Dec. 31, 2019.
By any measure, that’s a killer Q4 and a killer 2020. Congratulations are due to everybody at EXPI. Now, let’s take a look at some of the Key Metrics, which I compile for my own understanding, to see why we might remove the “But” from previous posts.
Productivity Gains
Below are EXPI’s Key Metrics from the start of 2019.
There are two things I find very interesting here.
First, the growth in transactions and sales volume are far above growth in agent count. The implication is that EXPI is recruiting more and more productive agents and teams. I noted that in Q2 and Q3 that EXPI was actually having greater success with teams, and in the Q4 earnings call, Glenn Sanford called out that they were having success converting independent brokerages into teams within EXPI.
We see the same in annual trends as well: total closed transactions for 2020 went up 76.6% over 2019, while agent count only went up 62.5%. And 2019 was up 81.2% vs 63.3% respectively. So 2020 vs. 2018 shows a 220% increase in transactions, 264% increase in sales volume, versus 165% in agent count. Over the same period, per-agent transactions went from 4.8 in 2018 to 5.3 in 2019 to 5.8 in 2020. Sure, macroeconomic tailwinds probably played a role, but not all, since over the same period, Realogy’s brokerage division saw per-agent transactions go from 6.7 in 2018 to 6.2 in 2019 and up to only 6.3 in 2020.
Bottomline is that EXPI agents are more productive now. Is it because of recruiting better agents? Or because of training existing agents to be more productive? We don’t know, but in a way, it doesn’t matter that much.
Because the second thing that is so interesting is how much EXPI has turned the corner on agent splits, on profitability. EXPI’s gross margins (company dollar margins) have gone from 8.1% in 2018 to 8.9% in 2020. That results in going from a loss of $1,400 per agent in 2018 to a net profit of $800 per agent. That’s a strong performance in profitability, especially since EXPI still hasn’t really launched a suite of compelling ancillary services yet.
I do think it’s a bit early to buy in 100% to Glenn Sanford’s claim that the EXPI model is “now recognized as a totally viable and legitimate model for the entire industry.” No one doubted that EXPI’s model — basically a cheaper version of KW’s proven recruiting-based model — was not legitimate from a revenue and growth standpoint. There were doubts that it could be profitable, but 2020 shows that yes, it can be profitable indeed… albeit at a 1.7% net profit margin. Still, a profit is always better than a loss.
So one can’t fault Sanford for making the claim. It’s a strong claim, and one that I think will come to be more and more true.
Brokerage is Dead; Long Live Integrated Economics
Another takeaway from this call is that frankly, real estate brokerage as an industry is basically dead. EXPI makes that perfectly clear, IMHO.
Check this out from the earnings call discussion. Tom White from DA Davidson, who is moderating the “call”, asks about EXPI’s past goal to get to 10% gross margin for brokerage. Sanford answers:
Yeah. I think it’s — I think we’ve backed off. And we really — I think even starting in early 2020, we really backed off the top line number of 10% gross margin for core brokerage just because as we learned more about how all this mixes together, it would be tough to get there if we didn’t fundamentally change the model, which we don’t have any interest in doing because our model makes sense, it’s attracting a large number of agents. It’s the — really the best model in the industry. And for us to get to 100,000, 200,000, 300,000, 500,000, whatever the number is eventually, we need to make sure that we’re highly competitive for our agents and brokers.
And that’s the other side, which is the mortgage, the title escrow and other services, which would be, where we would expand gross margins. But we do think that on the net margin basis, we’re really focused on what is that — what are all the things that we can do to get that to closer to 4% on a net basis. And so when we sort of look at that, we think that there’s a path there, that’s a lot more viable because we really were talking about the 10%, 6%, 4% model, we think that there’s something less than 10% on the top side, there’s something less than 6% on the expense side and we think that 4% is still a viable sort of net number as we continue to grow. [Emphasis added]
I can’t see any way to interpret these statements other than an admission that the core brokerage model “makes sense” and attracts a large number of agents. But not from a net margin standpoint. No, to get to expanding gross and net margins, we have to look at “the other side, which is the mortgage, the title, escrow and other services.”
In the best year that EXPI has ever had, having turned the profitability corner, having their agents be more productive, with record revenues, EXPI turned in 1.7% net profit margins. Again, kudos for having profits at all, but those kinds of margin numbers are not what dreams are made of.
Instead, the goal for EXPI appears to be to get to 4% net margins by pursuing mortgage, title, escrow and other services that they can sell either to agents or to consumers through the agents.
Frankly, that makes EXPI just the latest publicly reporting real estate company to talk about the importance of integrated economics for profitability. Realogy, RE/MAX, Zillow, Opendoor, Compass… every single company is talking up integrated economics for profitability.
That’s a pretty crowded space. Differentiation in those ancillary services, most of which are pure commodity services, is going to be… interesting.
The Future of Brokerage is Shaping Up
As of this writing, I believe that EXPI is probably the third largest brokerage by transaction sides since I don’t think Howard Hanna added 150K transactions to its 2019 totals. It probably remains #4 by sales volume since Compass has had amazing growth in 2020 as well and they’re in the high dollar markets that EXPI isn’t as strong in. When RealTrends and T360 release the 2021 rankings, based on 2020 numbers, we’ll have a better idea.
Both of them are chasing Realogy and HomeServices, who had held down the #1 and #2 positions forever.
But the growth rates of EXPI and Compass compared to the growth rates of Realogy and HomeServices strongly suggest that it’s just a matter of time before the newcomers overtake the old guard. My current expectation is that EXPI will be #1 in transactions, while Compass may become #1 in sales volume.
Both of them have essentially abandoned trying to make money on the core brokerage business. That business is just the engine to feed the money-making ventures of mortgage, title, escrow and other ancillary businesses. Investors, I think, would look kindly on that kind of market share grab, as long as both of the newcomers can show that they can effectively grow and monetize the “integrated economics” coming off of the loss-leader brokerage business.
At the same time, both of them have no real infrastructure in or track record of success with ancillary businesses. They have to build them then convert the real estate transactions into order flow. I think they’ll both manage to do so, but probably not in the immediate near future.
The question is, will the current leaders who have the integrated economics advantage today (e.g., Realogy, HomeServices, established regional powerhouses, etc.) decide to follow suit on accepting that brokerage is just a leads funnel for integrated economics before EXPI and Compass build up their integrated economics prowess?
Whoever emerges, however, what seems relatively clear now in early 2021 is that the future of brokerage is either as a loss-leader lead generation vehicle for ancillary services, or an institutionalized agent team (like Redfin is, and Opendoor could be).
And the clear front-runner in the first category today is EXPI. Good for them, I say, and let’s see what happens next. After 2020, though, it seems clear that EXPI is no ragamuffin to be taken lightly.
-rsh
