Q3 2020 Redfin Corp Earnings Call
[music].
Welcome to the Redskins Corporation third quarter.
Earnings call today's conference is being recorded at this time I'd like to turn the conference over to Chris.
Chief Financial Officer. Please go ahead Sir.
Good afternoon, and welcome to Red and financial results Conference call for the third quarter ended September 30 2020.
Joining me on the call today is Glenn Coleman our CEO.
You can find the press release on our website at investors Dot Redfin Dot com.
Before we start note that some of our statements on today's call are forward looking.
We believe our assumptions and expectations related to these forward looking statements are reasonable, but our actual results may turn out to be materially different.
Please read and consider the risk factors in our FCC filings together with the content of today's call any.
Any forward looking statements are based on our assumptions today and we don't undertake to update these statements in light of new information or future events.
During this call the financial metrics will be presented on a GAAP basis and includes stock based compensation as well as depreciation and amortization expenses.
In the event, we discuss any non-GAAP measures today, we'll post the most comparable GAAP measure and a reconciliation on our website.
All comparisons made in the course of this call are against the same period in the prior year unless otherwise stated.
With that let me turn the call over to Glen.
Thanks, Chris and hi, everyone.
Red since third quarter net income and revenues were better than we projected in our last earnings call net income increased from $6.8 million in the third quarter of 2000 $19 million to $34.2 million in the third quarter of 2020.
Gross profit was $93 million up 74% from the third quarter of 2019.
Third quarter gross margins for real estate services increased year over year by 870 basis points to 43.8%.
Revenue declined 1% from the third quarter 20, $19 million to $237 million, but this was due to a pandemic driven short fall in the number of redfin now homes, we could sell.
I read to now business of buying and selling homes has an outsized impact on revenues because we have to account for the entire home value not just the transaction fees, we get from a brokerage sale.
In our core business of brokering home sales through Red send agents and through other firms agents working as our partners revenues increased 36% compared to the same quarter last year.
After a first ever year over year decline in market share of one basis point in the second quarter, our share increased eight basis points year over year in the third quarter to 1.04%.
The gain would have been larger had we recruited more agents as redfin employees or as rents and partners instead.
In September we gained 14 basis points year over year, our greatest monthly share gain since December 2019.
Keeping pace with demand its Redskins number one challenge you.
Marketing expertise beyond acquiring customers to recruit agents and lenders.
These campaigns can drawn for middle assets or culture or training programs for people new to real estate and Reds N dot coms authoritative status among hundreds of thousands of traditional agents.
We don't know yet how our campaigns will perform but our goal is to increase our capacity and our agility letting us higher faster when demand increases.
Because demand is so far outpaced our supply of agents, we put our development of 2021 mass media ads on hold.
It would be madness <unk> customers, we aren't sure we can serve well if conditions change it within take is eight to 10 weeks to get an AD on the air We may still run mass media ads later in 2021.
In any event will keep paying for direct ads, mostly through Google and Facebook because we can target those ads to markets, where we have enough agents. We project that are direct marketing campaigns will for the first time since 2017 generate full you're contributing profits and 2020.
What's remarkable is that a business of our size and history is just how much of our growth seems likely to happen with or without at.
The largest source of demand growth has been the market, but we're also benefiting from significant increases in our share of lifting search traffic and improvements in our ability to persuade website visitors to give redfin agents a shop <unk>.
Comparing the third quarter of 2020 into the same quarter last year average monthly unique visitors increased 38% and acceleration from the second quarter's 16% year over year growth.
Based on industry data about searches on Google competitors traffic towards arranged by showing time at home sales.
We believe less than half of our traffic growth market driven the rest is the result of redfin dot com ranking higher for more Google searches and a higher likelihood visitors will return to Redmond dot com from month to month.
We believe that traffic gains will keep accelerating driven in part by machine brain [laughter] driven in part by machine learning breakthroughs rolling out their January.
Because of the market more redfin dot com visitors arrive on our site eager to buy or sell a home but side by side experiments indicate that red finished also getting better at persuading visitors to become customers. We're constantly optimizing redfin dot com channels to get more and better brokerage inquiries.
But what has made the most difference is broadening the range of customer questions. We can answer by a licensed agents and a service center.
And broadening the range of products, we can offer those customers, especially in red for now markets. When you have a qualified local expert on hand, who can give a customer all the options for selling went home and buying another war customers are going to contact you.
Even better are pricing now encourages customers to buy more than one service from us the.
The change we rolled out at the beginning of 2020 limiting of 1% listing fee to lifting customers, who also buy their next tome with US has modestly increased or excuse me as modestly lowered listening demand.
But the loss listing transactions have been more than offset by an increase in purchase transactions from lifting customers. So huge red then for their next town.
The result of spend more transactions at higher overall prices.
The increase in demand to spend the main reason that third quarter gross margins for real estate services have improved so much year over year.
Because we can't hire enough agents for routing nearly half our inquiries to partner agents, we generate less revenue from those referrals, but nearly all of that revenue is profit.
Our brokerage is also becoming more lucrative with revenue per sale up 13% in the third quarter of 2020 compared to the same period last year.
More of our brokerage customers want expensive homes and homes are getting more expensive with September prices up 14% year over a year.
That we're meeting customers, who are more serious about their move has also improved brokerage efficiency.
And our August call, we looked at the customers who went on their first home tour in May June and July of 2019, comparing them to the customer's going on our first tour in May June and July of 2020.
We predicted that 20 twenties customers were at least 10% more likely to buy a home based on their <unk> dot com activity the week after their first home chores.
Now 90 days after that first tour, we know this prediction with an underestimate the customers for May June and July of 2020 have been about 20% more likely to make an offer on a home through a red for an agent.
Not all of these offers will pull through year over year gains in leadership productivity, we're only 2% in the third quarter in part because the intense bidding war. So were once common in San Francisco are now a national phenomenon, making it harder to get an offer accepted.
But what really limited productivity gains has been a higher level of hiring to broaden the range of customers. We can serve redfin added 248 lead agents in the third quarter of 2020 compared to losing forty-three in the third quarter of 2019.
Since the typical new agent takes three months to closer first sale hiring lowers average productivity.
We'll keep improving need agent productivity by reducing the number of tourists with customers have no interest in buying a home whatsoever by adjusting the number of customers an agent supports based on her performance by improving our systems for customer follow up by attracting the best agents.
But even with these improvements as the housing boom suicides gross margins from real estate services may decline from the elevated levels for the past two quarters.
Some efficiency gains should carry over from 2022, <unk> 2021, and we also expect the brokerage to keep growing.
But our investment and other potentially massive businesses should also start to pay off.
The new business, most deeply integrated into our brokerage is redfin now.
And the most important redfin now result has come from offering customers a choice between an instant offer and a brokerage sale.
And our last call we reported on a pilot that used one salesforce to present, a redfin now offer and a pitcher redken listing consultation.
This pilot doubled the rate at which redfin now inquiries led to sales opportunities for a listing agents and this result gave us the confidence to expand red to now aggressively starting with the addition of our 15th Redfin now market Sacramento in October.
The Reds fan I buying has only been compelling as part of a complete solution, where the essential component of that solution has always been brokerage service.
Even when the pandemic is made a brokerage sale less appealing most homeowners to ask about an incident offer ended up listing their home.
At some point it may also be true that most people who ended up listing their home may start that process by exploring an incident offer.
Other competitors are only just now beginning to realize that red sense holistic approach to instant offers and brokerage sales is a decisive advantage over standalone I buyers and brokers.
Despite the encouraging results from an integrated Salesforce red for now still had to ramp up from a near standstill in the third quarter.
Other businesses also have growing pains.
The most serious as these are in Renton title business title forward, we lost some employees due to a furlough and then others quit just as demand came roaring back, which forced us to stop taking orders from most of July weve.
We've now set up partnerships to perform the most cumbersome administrative task, which should lower cost improve employee satisfaction and let us adapt more quickly to ups and downs in demand.
We've deployed new software, replacing one vendor belt system with a better one we.
We expect a new executive to lead this business in 2021.
After losing money in 2020 title forward should be a reliable source of profits.
Redfin mortgage Meanwhile, had a major breakthrough it's first quarter of gross profits third quarter gross margins were more than 30% mortgage revenues for the quarter nearly tripled year over year lifted by near doubling in revenue per loan with rates below 3% and competition for mortgage talent fierce redsun has like many lenders limited.
Volume by raising loan prices.
Despite increasing pay for a dozen roles Redbend mortgage has struggled to staff our back office as other lenders will entry level workers with 20 or $30000 signing bonuses like.
Like the brokerage Redsun mortgages transaction growth is gated by our hiring a problem we'll attack in the same way with more recruiters, new digital marketing tactics and an ability to develop people with no industry experience.
The only difference is that redfin mortgage probably has more untapped sources of demand in the brokerage even when the housing boom subsides and rates increase redfin mortgage can grow fast for years, just expanding to the west coast will increase the percentage of our brokerage homebuyers that redsun mortgage conserve from 65% to 94%.
The lesson in how differently, we see the world, depending on who we are and whom we talk to.
And it's one reason why the appointment in August of a black executive Chair or Board Kerri Chandler has also been important to our governance and our culture.
Before turning the call over to Chris, let's assess the housing market.
When I was a kid the scariest movie I ever saw was the thing it.
It was about a monster that killed people in an Arctic research station and then impersonated them.
The only way you could identify the master was by testing a small blood sample with the probe at which point the blood exploded and Kurt Russell blast. Another one of his colleagues with a flame thrower.
This analogy makes no sense, except the images of the exploding blood in the flame thrower or would always come to mind when people ask me about today's housing market.
I've seen is also a good reminder to treat colleagues under pressure with kindness.
Mortgage rates are at 2.8% of record well the number of homes for sale in September was down 23% to a record low 34% of September sales were for above the asking price compared to 23% last September 48% of listing accepted an offer within two weeks of their debut up from 35% last September.
And October is likely to be even more intense September pending sales increased 33% year over year, while home sales increase less 18%.
Millennials, who grew up buying textbooks on Amazon have come of home buying H with a lower proportion of U S home sales coming from the baby Boomers who've been so hesitant to try a new service like Red 10.
People are moving to idyllic places, where they never thought they could both live and work like Bend, Oregon.
They're also moving to the outlying areas in New Jersey.
Come by are still want houses and expensive coast coastal cities, but urban condos long prize for their proximity to an office are now hard to sell we can argue about how many folks plan to leave the most expensive cities, but the larger issue is that almost no one's taking their place inventories up 51% in San Francisco and up 20.
Per cent in New York City. Meanwhile, builders. So at the start of this bull market. We're focused on urban infill now I'll have the confidence to undertake large developments on cheap land far from urban centers.
October build her confidence index is at its highest recorded level.
Nearly one in six listings on the market is newly built up from 170 year ago pre sales, where our buyer commits to a home still being built had become more common.
This won't last forever or even for another week, if our society can't keep it together for the time it takes to count all the ballots.
What's most likely is that the housing market stays strong heading into 2021.
And even when the market cools the capacity. We're building now will be put to good use our bets on the future on based on a boom.
But a competitive advantages more than a decade in the making with that let's hear from Chris.
[laughter]. Thanks, Glenn as we continue to deal with the impacts of COVID-19, or third quarter results exceeded our revenue and profit projections third.
Third quarter revenue was $237 million down 1% from a year ago.
Real estate services revenue, which includes our brokerage and partner businesses increased 36% year over year.
Brokerage revenue or revenue from home sales close by your an agent was up 33% on an 18% increase in brokerage transactions.
Revenue from our partners without 93% on a 48% increase in partner transactions.
The property segment, which consists of homes sold through a redskin now program generate a $19 million in revenue down 76% from one year ago.
Glen mentioned this decline was the result of having halted redskin now purchases in April and May. So we just didn't have much inventories we started the third quarter.
Our other segment, which includes mortgage title and other services contributed revenue of $8.5 million, an increase of 65% year over here.
Total gross profit was $93 million up 74% year over year.
Real estate services gross margin was 43.8% 870 basis points here over here.
This is primarily attributable to a 350 basis point decrease in personnel costs and transaction bonuses a.
300 basis point decrease in home touring unsealed expenses.
60 basis points decrease in listing expenses and a 40 basis point decrease in occupancy in office expenses, each as a percentage of revenue.
[noise] properties gross margin was down to 680 basis points year over year to minus 7.7%.
This is primarily attributable to a 900 basis point increase in personnel costs and transaction bonuses as a percentage of revenue and was partially offset by a 430 basis point decrease in home purchase costs unrelated capitalized improvements as a percentage of revenue.
We bought and sold home is better than we did in 2019, but we just didn't have enough volume to cover our fixed costs and the Reds and now business.
Other segment gross margin was 30.8% increase of 2990 basis points from a year ago. This.
This was primarily attributable to a 1480 basis point decrease in personnel costs and transaction bonuses a.
960 basis point decreasing outside services cost and a 220 basis point decrease in personal technology expenses, each as a percentage of revenues Glen mentioned mortgage continues to scale very well.
Total operating expenses were up 22% year over a year and represented 24% of revenue.
From 19% of revenue one year ago.
Technology and development expenses increased by 19% as compared with the same period in 2019 the.
The increase was primarily attributable to an increase in personnel costs and hosted services expenses.
Marketing expenses increased by 49% from last year, driven entirely by an increase in marketing media cost as we expanded advertising.
General and administrative expenses increased by 13% year over here.
Primarily attributable to an increase in personnel costs due to increased head count.
Keeping a higher target level for our performance space restricted stock in it.
And an increase in hosted services expenses.
Our net income, including stock based compensation and depreciation was $34.2 million compared to a net income of $6.8 million in the third quarter of 2019.
We also recorded a dividend on convertible preferred stock of $1.5 million.
Diluted income per common share was 30 cents compared with diluted income of seven per share one year ago.
Now turning to our financial expectations for the fourth quarter of 2020.
Revenue is expected to be between $226 million and $233 million.
Representing a year over year, a decrease between 3% and zero percent.
We expect our property segment to account for $31 million to $34 million of that revenue.
Representing a decrease between 69% and 66%.
The guidance also includes approximately $8.1 million of a onetime noncash expense associated with the repurchase of the 2023 notes that I mentioned.
In addition, we expect to pay a quarterly dividend of 30640 shares of common stock to our preferred stock holder.
This guidance assumes among other things that no additional business acquisitions investments restructurings or legal settlements are concluded and that there are no further revisions to stock based compensation estimates.
And with that let's open it up for your questions.
Thank you.
Ask the question.
Star one on your telephone keypad, if you are.
Using a speaker phone please make sure.
Well allow your signal to reach.
Again star one to ask a question.
Please limit yourselves to one question.
Pause for just a moment to allow everyone an opportunity to.
The first question will come from Edward Yruma with Keybanc.
Keybanc capital markets. Please go ahead.
Hi, Thanks for taking the question this is Katie on for.
Ed.
Could you provide an update on the seasonality trend you're seeing in the business and you like but just normalizing point 21.
My second question can you click down a little bit more on right. Now do you have any target number of homes, you're aiming for 2021, I do expect that business to start growing again. Thank you.
Thanks, Casey So first of all seasonality seasonality has been strange this year, we had some demand deferred from the spring into the fall. But then we also have had such a strong boom.
That there has been almost no break in the action heading toward Thanksgiving. So it's really hard to say if things will slow down over the next few months, but we expect there were at least be a brief break in the action for the holidays before things brought back to life in January the bigger factor is whether interest rates are going to stay low and yet.
Economy stays strong that's tourettes and now were not publishing 2021 targets that team is trying to staff up very quickly, it's trying to expand into new markets.
We want to be disciplined about our pricing, but we're going to be more aggressive than we have been in the past. So I would expect volume to increase.
Thank you. The next question will come from still have bundled with aside you. Please go ahead.
Hey, good afternoon, guys just.
Just last quarter, you guys noticed some challenges around your sell side business not having enough opportunities just given the low in inventory in the marketplace. So I was just hoping if you could maybe help us parse out.
The market share gains that you had in this quarter on your sell side versus buy side of the business.
We don't segment sell side versus buy side share gains in our reporting.
But our buy side business is growing faster than our sell side business. We've built a listing search site that appeals to homebuyers and increasingly we're going to have to recruit sellers by talking to people about the home they want to buy and then the home that they need to sell in order to pay for that.
We just don't have as natural of a demand channel four home sellers people come to check the price to their home.
Or what it would get by looking at the Red Pen estimate.
But we don't have as an appealing conversion channel, which would be something like on demand source, we've done better because we are now letting people.
Look at what their home would be worth through a conversation with a real estate agent over the phone and we're also giving them an its an offer so broadening the product range.
Oh offers and the sign in the home quickly and the kind of consumer value proposition I buy model just isn't as strong.
Shift towards partner I'm, just curious how you can kind of think about that that mix going forward and then I just had one one more follow up thanks.
I don't like the mix.
We want to hire more red 10 agents and give people.
Service from our own agents, we make more money that way not on a percentage basis for gross margin, but in absolute dollars of gross profit.
Alright against it wants to list the home because the market's moving so fast and they want to take advantage of that and we're able to be there listing agent and he'd couple that with some of the challenges we've had a converting website visitors to listing customers. We now have a product that is very effective ah converting people off the website and <unk>.
<unk>, who are looking to liquidate their home and most of them are going to choose to liquidate it through a brokerage sale. So I think that experiment more than anything else has made us bullish about red 10, now not just as a standalone product, but as part of this complete solution and Covid.
Has it been as relevant of a factor early in the pandemic. Some salaries were really wary of having people walk through the house, there's still some of that but I think they're just greedy to know where they think gosh I can probably sell it in a week people are gonna be walking through the house, but that extra 2030 $50000 of ups.
<unk>, it's gonna be in my pocket and not somebody else's.
[music].
[music].
Good day and welcome to the Red <unk> Corporation third quarter earnings call. Today's conference is being recorded at this time I'd like to turn the conference over to Chris Nielsen Chief Financial Officer. Please go ahead Sir.
Gross profit was $93 million up 74% from the third quarter of 2019.
Third quarter gross margins for real estate services increased year over year by 870 basis points to 43.8%.
Revenue declined 1% from the third quarter of 2000 $19 million to $237 million, but this was due to a pandemic driven shortfall in the number of redfin now homes, we could sell our.
Our redsun now business of buying and selling homes has an outsized impact on revenues because we have to account for the entire home value not just the transaction fees, we get from a brokerage sale.
And our core business of brokering home sales through redfin agents and through other firms agents working as our partners revenues increased 36% compared to the same quarter last year.
After a first ever year over year decline in market share of one basis point in the second quarter, our share increased eight basis points year over year in the third quarter to 1.04%.
The gain would have been larger had we recruited more agents as redfin employees or as rents and partners.
In September we gained 14 basis points year over year, our greatest monthly share gains since December 2019.
Keeping pace with demand is red sense number one challenge.
Year over year growth in customer inquiries for redfin agents, our partner agents increased from 38% in July to 58% in October.
If october's year over year demand growth remains at the same level to start 2021 will have to increase our aging capacity 13%.
In our last call. We said it would take until the end of 2020 to hire enough employees and partner agents to serve all our customers, but it's not likely that we won't be able to match supply with demand until the second quarter of 2021.
Alright, and redfin dot coms authoritative status among hundreds of thousands of traditional agents.
We don't know yet how our campaigns will perform but our goal is to increase our capacity and our agility letting us higher faster when demand increases.
Because demand is so far outpaced our supply of agents, we put our development of 2021 mass media ads on hold.
It would be madness <unk> customers, we aren't sure we can serve well if conditions change. It would then take US eight to 10 weeks to get an AD on the air We may still run mass media ads later in 2021.
In any event will keep paying for direct ads, mostly through Google and Facebook because we can target those ads to markets, where we have enough agents. We project that are direct marketing campaigns will for the first time since 2017 generate full year contributing profits in 2020.
What's remarkable I thought of business of our size and history is just how much of our growth seems likely to happen with or without at.
The largest source of demand growth has been the market, but we're also benefiting from significant increases in our share of listing search traffic and improvements in our ability to persuade website visitors to give redfin agents a shop <unk>.
Comparing the third quarter of 2020 into the same quarter last year average monthly unique visitors increased 38% and acceleration from the second quarter's 16% year over year growth.
Based on industry data that searches on Google competitors traffic towards arranged by showing time at home sales.
We believe less than half of our traffic growth market driven the rest is the result of redfin dot com ranking higher for more Google searches and a higher likelihood visitors will return to redfin dot com from month to month.
We believe that traffic gains will keep accelerating driven in part by machine brain [laughter] driven in part by machine learning breakthroughs rolling out their January.
Because of the market more redfin dot com visitors arrive on our site eager to buy or sell a home.
The side by side experiments indicate that redfin, it's also getting better at persuading visitors to become customers, we're constantly optimizing redfin dot com channels to get more and better brokerage inquiries.
But what has made the most difference is broadening the range of customer questions. We can answer by a licensed agents and a service center.
And broadening the range of products, we can offer those customers, especially in redfin now markets. When you have a qualified local expert on hand, who can give a customer all the options for selling went home and buying another war customers are going to contact you.
Even better are pricing now encourages customers to buy more than one service from us the.
The change we rolled out at the beginning of 2020 limiting of 1% listing fee to lifting customers, who also buy their next home with US has modestly increased or excuse me as modestly lowered listening demand.
But the last listing transactions have been more than offset by an increase in purchase transactions from lifting customer. So huge red then for their next huh.
The result of spend more transactions at higher overall prices.
The increase in demand to spend the main reason that third quarter gross margins for real estate services have improved so much year over year.
Because we can't hire enough agents for routing nearly half our inquiries to partner agents, we generate less revenue from those referrals, but nearly all of that revenue is profit.
Our brokerage is also becoming more lucrative with revenue per sale at 13% in the third quarter of 2020 compared to the same period last year.
More of our brokerage customers want expensive homes and homes are getting more expensive with September prices up 14% year over year.
That we're meeting customers, who are more serious about their move has also improved brokerage efficiency.
And our August call, we looked at the customers who went on their first home tour of May June and July of 2019, comparing them to the customer's going on our first tour in May June and July of 2020.
We predicted that 20 twenties customers were at least 10% more likely to buy a home based on their redfin dot com activity the week after their first home chore.
Now 90 days after that first tour, we know this prediction with an underestimate the customers for May June and July of 2020 have been about 20% more likely to make an offer on a home through a red for an agent.
Not all of these offers will pull through year over year gains in the agent productivity, we're only 2% in the third quarter in part because of the intense bidding war. So were once common in San Francisco are now a national phenomenon, making it harder to get an offer accepted.
But what really limited productivity gains has been a higher level of hiring to broaden the range of customers. We can serve redfin added 248 lead agents in the third quarter of 2020 compared to losing forty-three in the third quarter of 2019.
Since the typical new agent takes three months to closer first sale hiring lowers average productivity.
<unk> over Standalone, I buyers and brokers.
Despite the encouraging results from an integrated Salesforce Red Sun now still had to ramp up from a near standstill in the third quarter.
We largely stopped buying homes in April and didn't make a significant number of offers until June.
We entered the third quarter with only 17 homes to sell 91% less than at the start of the same period last year.
From the point at which a customer asked for an offer on a home. It typically takes five months for us to sell that home.
Since we don't expect the offers we made in June to generate revenue until November redfin now, it's unlikely to grow year over year until the first quarter of 2021.
That's the redfin now employees returning from furlough have been busy buying homes not preparing them for sale Redsun now its gross margins declined from negative 0.9% in the third quarter of 2019 to negative 7.7% in the third quarter of 2020.
Even as the cost of ramping up Reds and now its workforce and homebuyers swapped our overall margin the premium between red to now its offer prices in sale prices increased.
After losing money in 2020 title forward should be a reliable source of profits.
Redfin mortgage Meanwhile, had a major breakthrough it's first quarter of gross profits third quarter gross margins were more than 30% mortgage revenues for the quarter nearly tripled year over year lifted by near doubling in revenue per loan.
With rates below 3% and competition for mortgage talent fierce redsun has like many lenders limited volume by raising loan prices.
Despite increasing pay for a dozen roles redfin mortgage has struggled to staff our back office as other lenders will entry level workers with 20 or $30000 signing bonuses like.
Like the brokerage redfin mortgages transaction growth is gated by our hiring a problem we'll attack in the same way with more recruiters, new digital marketing tactics and an ability to develop people with no industry experience.
The only difference is that redfin mortgage probably has more untapped sources of demand in the brokerage even when the housing boom subsides and rates increase redfin mortgage can grow fast for years, just expanding to the west coast will increase the percentage of our brokerage homebuyers that redsun mortgage conserve from 65% to 94%.
We've developed the ability to handle refinancing and new marketing channels for promoting redsun mortgage directly to millions of breadth and dot com visitors not just brokerage customers will open as demand channels as Red 10 mortgage staff sub.
The faster had been can hire the faster we can accelerate share of revenue growth goal what matters. Most is hiring the best most diverse workforce not filling positions quickly.
For many roles and especially senior roles. Our recruiters must interview at least one candidate from an underrepresented group.
The goal of this leading program has been to broaden our recruiting networks, but main matter more is that our rapidly growing recruiting team itself has become more diverse.
One result, the percentage of Redfin employees, who are people of color increase from 31% in June to 32% in September.
That gain is encouraging but we've been focused on diversity long enough to know that recruiting people of color. It's only half the battle Red Sun has to be a great place for Black Latin next Asian, and indigenous employees to move up.
In August we changed the promotion policies for our largest group of employees real estate agents, eliminating customer survey data as the criterion.
And then an advocate for using this customer service satisfaction data to avoid manager bias and a focus redfin on customers have a profit.
Since some customers expressed dismay sort of black agent the momeni steps out of his car, we just need to be as vigilant against customer bias has manager bias.
What surprised me after we made this change was how many black agents called me about a policy change that I thought was obscure.
It's a lesson and how differently, we see the world depending on who we are and whom we talk to.
And it's one reason why the appointment in August have a block executive to our board Kerry Chandler has also been important to our governance and our culture.
Before turning the call over to Chris, let's assess the housing market.
When I was a kid the scariest movie I ever saw was the saying it.
It was about a monster that killed people and an Arctic research station and then impersonated them.
The only way you could identify the monster was by testing a small blood sample with the probe at which point the blood exploded and Kurt Russell blast. Another one of his colleagues with the flame thrower.
This is Alan she makes no sense, except the images of the exploding blood in the flame thrower are what always come to mind when people ask me about today's housing market.
I'd seen is also a good reminder to treat colleagues under pressure with kindness.
Mortgage rates are at 2.8% a record low the number of homes for sale in September was down 23% to a record low 34% of September sales were above the asking price compared to 23% last September 48% of listings accepted an offer within two weeks of their debut up from 35% last September.
And October is likely to be even more intense September pending sales increased 33% year over year, while home sales increased less 18%.
Millennials, who grew up buying textbooks on Amazon have come home buying age with a lower proportion of U.S. home sales coming from the baby Boomers, who have been so hesitant to try a new service like Red hat.
People are moving to idyllic places, where they never thought they could both live and work like Bend, Oregon.
There are also moving to the outlying areas in New Jersey.
Homebuyer still want houses and expensive coast coastal cities, but urban condos long price for their proximity to an office are now hard to sell weaken.
We can argue about how many folks plan to leave the most expensive cities, but the larger issue is that almost no. One is taking their place inventory is up 51% in San Francisco and up 20% in New York City. Meanwhile, builders, who at the start of this bull market. We're focused on urban infill now have the confidence to undertake large developments on cheap land from.
Far from urban centers.
Tobar builder confidence index is at its highest recorded level.
Nearly one and six systems on the market is newly build up from one and seven a year ago pre sales were a buyer commits to homes still being built had become more common.
This won't last forever.
Or even for another week of our society can't keep it together for the time it takes to count all the balance.
What's most likely is that the housing market stays strong heading into 2021.
Even when the market cools the capacity we are building now will be put to good use.
Our bets on the future on pistone, a boom, but.
Competitive advantages more than a decade into making with that let's hear from Chris.
Thanks, Glenn as we continue to deal with the impacts of COVID-19, our third quarter results exceeded our revenue and profit projections.
Third quarter revenue was $237 million down 1% from a year ago.
Real estate services revenue, which includes our brokerage and partner businesses increased 36% year over year.
Brokerage revenue or revenue from home sales close by our own agents was up 33% on an 18% increase in brokerage transactions.
Revenue from our partners was up 93% on a 48% increase in partner transactions.
The property segment, which consists of homes sold through our Red Sun now program generated $19 million in revenue down 76% from one year ago.
I mentioned this decline was the result of having halted red Sun now purchases in April and May. So we just didn't have much inventories we started the third quarter.
Our other segment, which includes mortgage title and other services contributed revenue of $8.5 million, an increase of 65% year over year.
Total gross profit was $93 million up 74% year over year.
Real estate services gross margin was 43.8% up 870 basis points year over year. This is primarily attributable to a 350 basis point decrease.
Personnel costs and transaction bonuses.
300 basis point decrease in home touring and field expenses.
Technology and development expenses increased by 19% as compared with the same period in 2019.
The increase was primarily attributable to an increase in personnel costs and hosted services expenses.
Marketing expenses increased by 49% from last year, driven entirely by an increase in marketing media cost as we expanded advertising.
Sure.
General and administrative expenses increased by 13% year over year primary.
Primarily attributable to an increase in personnel costs due to increased headcount.
Choosing a higher target level for our performance based restricted stock units and an increase in hosted services expenses.
Our net income, including stock based compensation and depreciation was $34.2 million compared to a net income of $6.8 million in the third quarter of 2019.
We also recorded a dividend on convertible preferred stock of $1.5 million.
Diluted income per common share was 30 cents compared with diluted income of seven cents per share one year ago.
Now turning to our financial expectations for the fourth quarter of 2020.
Revenue is expected to be between $226 million in $233 million represent.
Representing a year over year decrease between 3% and zero percent.
We expect our property segment to account for $31 million to $34 million of that revenue.
Representing a decrease between 69% and 66%.
On October 20, we closed an offering of.
Convertible senior notes due in 2025.
We received proceeds of approximately $648 million from the notes offering after accounting for the initial purchasers' discounts, but not offering costs.
The accretion of the 2025 notes will be reflected in our fourth quarter financial results.
We also repurchased approximately $117 million principal amount of our convertible senior notes due 2023, using approximately $107 million of the proceeds from our 2025 notes issuance and approximately 2.1 million shares of our common stock.
For the fourth quarter net income is expected to be between $2 million and $5 million compared with the $7.8 million net loss in the fourth quarter of 2019.
Yet again this quarter, we expect for real estate services gross margin to increase as compared with the same quarter in 2019.
Our guidance includes approximately $10.5 million of stock based compensation.
$4.2 million of depreciation and amortization and $7.5 million of interest expense associated with our convertible senior notes and other credit obligations.
The guidance also includes approximately $8.1 million of a onetime noncash expense associated with the repurchase of the 2023 notes that I mentioned.
In addition, we expect to pay a quarterly dividend of 30640 shares of common stock to our preferred stockholder.
This guidance assumes among other things that no additional business acquisitions investments restructurings or legal settlements are concluded that there are no further revisions to stock based compensation estimates.
And with that let's open it up for your questions.
Thank you.
That's the question.
Yes.
You bet.
Using a speaker phone please.
Well.
Again.
Ask the question.
So.
Well pause for just a moment.
<unk>.
Yes.
The first question will come from Edward.
Uh huh.
<unk> capital markets. Please go ahead.
Hi, Thanks for taking the question. This is Katie on for Ed.
An update on that seasonality trend, you're seeing in the business and you expect that normalized point 21.
And can you put down a little bit more on right now do you have any target number of homes.
Slide 21, as you expect that business to start growing again. Thank you.
Thanks, Casey So first of all seasonality seasonality has been strange this year, we had some demand.
Third from the spring into the fall, but then we also have had such a strong boom.
That there has been almost no break in the action heading toward Thanksgiving. So it's really hard to say if things will slow down over the next few months, but.
But we expect there were at least be a brief break in the action for the holidays before things roared back to life in January the bigger factor is whether interest rates are going to stay low and the economy stays strong. That's redfin now were not publishing 2021 targets that team is trying to staff up very quickly, it's trying to expand into new markets.
We want to be disciplined about our pricing, but we're going to be more aggressive than we have been in the past. So I would expect volume to increase.
Thank you. The next question will come from Bob.
Uh huh.
Hey, good afternoon guys.
Just last quarter you guys noted some challenges around your sell side business not having enough opportunities just given the low end and inventory in the marketplace.
I was just hoping if you could maybe help us parse out.
The market share gains that you had in this quarter on your sell side versus buy side of the business.
We don't segment sell side versus buy side share gains in our reporting.
But our buy side business is growing faster than our sell side business Weve built a listing search site that appeals to homebuyers and increasingly we're going to have to recruit sellers by talking to people about the home they want to buy and then the home that they need to sell in order to pay for that.
We just don't have as natural of in demand channel for home sellers people come to check the price to their home.
Or what it would get by looking at the Redfin estimate.
But we don't have as an appealing conversion channel, which would be something like on demand source, we've done better because we are now letting people.
Look at what their home would be worth through a conversation with a real estate agent over the phone and we're also giving the minutes and offer so broadening the product range.
And talking to people about their options through a call center has been more effective but we still have more work to do.
Thank you. The next question will come from all around with Wedbush Securities. Please go ahead.
Yeah. Thanks.
Thanks for taking the question, what's first I just want to maybe look at gross margins a little bit more closely typically on the brokerage side. So that's something that's currently coming from some headcount because you also highlighted a few other areas within gross margins. So it's kind of cycle through this hiring catches up maybe demands.
We've done a little bit I don't understand how much of what we're seeing is structural and things that you guys are.
Implemented so structurally make the margins higher versus.
Things that might settle back down when you know when I read is more normalized environment, it's a little bit more normalized <unk>. That's the first one.
I think it's really hard to parse between those two things right now we do think that we've implemented some programs made some improvements that have made fundamental differences on gross margin that should.
Should drive through going forward.
But because things have been so disrupted in some ways with regard to how customers are acting in this year.
But it really is hard to pull that apart right now so we do believe there's some of those and I think the best way for us to see that actually is.
Just as we get into next year and you don't get into what is probably a little bit more of a normal but still very busy environment.
Okay.
Thanks, That's helpful. And then Glenn you know I'm getting a lot of good color on right now in the high bar model on what's happening in a hot market, having to pay higher when all that work.
Got it and then extended market, where how the market is strong and it's always a getting multiple offers and assign the home quickly and the kind of consumer value proposition I buy a model isn't that strong you know hey.
Hey, does that change how you feel about the hybrid model instead of you yeah.
Because of the way that it fits within the that's the model and has synergies with with the the listing a part of the business. Obviously a lot of focus on on I buy it and they just want to get your take on what happens to that model is how to build the extended period of time now the market. Thanks.
It's great question, we don't need to own the house, we don't need to win the offer.
If the market is roaring and people want to test their luck on the market by listing the home were fine. The only thing we wanted to be sure of is that the customer calls us to understand all their options. So we do think that.
Being a standalone I buyer and having all your eggs in one basket forces you to chase the market in a way that isn't necessary for us and that limits our risk during an extreme time of volatility.
And right now I would say that 14% year over year gross oil prices since September is extreme volatility.
Thank you as a quick reminder, you other question at this time that is star one.
The next question will come from Tom Champion with Piper Sandler. Please go ahead.
Hi, Thanks. This is Jim Callaghan on for Tom I think the the first question I have so I guess, we saw all the sort of mix between brokerage and partner.
A shift towards partner I'm, just curious how you can kind of think about that that mix going forward and then I just had one one more follow up thanks.
I don't like the mix.
We want to hire more red 10 agents and give people.
Service from our own agents, we make more money that way not on a percentage basis for gross margin, but in absolute dollars and gross profit.
And we win that customer hopefully for life.
So the reason the mix has shifted its because we can't hire fast enough and it improves gross margins as a percentage but.
I think we'll take more share when we serve those customers ourselves because we have a higher close rate when we meet the customer ourselves we deliver what I believe is a better product for most customers.
What's the follow Oh Oh.
Ultimate that's helpful and then I guess with with threats and now.
I'd be curious if you have it has kind of changed your approach at all when looking at markets to enter into with a with threats and now thanks.
I don't think Cogut has affected the this much I understand the argument for contact with sale, where you don't have people tromping through the house as the owner and instead, you vacate and let Reds and handle it or another I buyer.
What influences US more is just the success of our efforts to upsell it used to be that when we got a red can now offer.
If the customer didn't take it we lost that customer.
But now increasingly customer calls it's about a red now offer decides against it wants to list the home because the markets moving so fast and they want to take advantage of that and we're able to be their listing agent and you couple that with some of the challenges we've had at converting website visitors to listing customers. We now have a product.
That is very effective at converting people off the website into inquiries or looking to liquidate their home and most of them are going to choose to liquidate it through a brokerage sales. So I think that experiment more than anything else has made us bullish about red 10, now not just as a standalone product, but as part of this complete solution and coated.
Hasn't been as relevant of a factor you know early in the pandemic. Some sellers were really wary of having people walk through the house, there's still some of that but I think they're just greedy to now where they think gosh I can probably sell it in a week people are gonna be walking through the house, but that extra 2030 50000 dollar.
There's some upside is going to be in my pocket and not somebody else's.
Thank you for the question I'm showing no further questions at this time this concludes.
The conference you May now disconnect your line enjoy the rest of <unk>.