Q3 2023 Anywhere Real Estate Inc Earnings Call
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Speaker 1: Yeah.
Good morning, and welcome to the anywhere real estate third quarter of 2023 earnings conference call via webcast.
Speaker 2: Good morning and welcome to the anywhere real estate third quarter 2023 earnings conference call via webcast
Speaker 2: 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.
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.
Speaker 2: At this time, I'd like to turn the conference over to anywhere senior vice president Alicia Swift. Please go ahead Alicia.
At this time I'd like to turn the conference over to anywhere Senior Vice President Alicia Swift. Please go ahead Alicia.
Thank you Chris Good morning, and welcome to the third quarter 2023 earnings conference call for anywhere Real estate, Inc.
Speaker 3: Thank you, Chris. Good morning and welcome to the third quarter, 2023 earnings conference call for anywhere real estate.
On the call with me today are anywhere CEO , and President Ryan Schneider, and Chief Financial Officer, Charlotte Simonelli.
Speaker 3: On the call with me today are anywhere CEO and President Range Snyder and Chief Financial Officer Charlotte Seminelli.
Speaker 3: As shown on slide three of the presentation, the company will be making statements about its future results and other forward-looking statements during this call.
As shown on slide three of the presentation. The company will be making statements about its future results and other forward looking statements during this call.
Speaker 3: These statements are based on the current expectation and the current economic environment.
These statements are based on the current expectation and the current economic environment.
Speaker 3: For 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 development.
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.
Speaker 3: Actual results may differ materially from those expressed room flight in the forward-looking statements. Important assumptions and other factors that could cause actual results to differ materially from those in the forward-looking statements are specified in our earnings release issue today, as well as in our annual and quarterly SEC filing.
Actual results may differ materially from those expressed or implied in the forward looking statements important assumptions and other 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.
Speaker 4: For those who listen to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, October 24th, 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. Anywhere demonstrated our continued ability to lead through the top housing market, even as it worsened in the third quarter with higher mortgage.
For those who listen to the rebroadcast of this presentation. We remind you that the remarks made herein are as of today October 24th 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.
<unk> demonstrated our continued ability to lead through the tough housing market you mentioned it worsened in the third quarter with higher mortgage rates, we pushed forward on our strategic agenda, expanding our high margin franchise business strengthening our balance sheet, completing additional cost reductions and removing litigation uncertainty all setting us up.
Speaker 4: We push forward on our strategic agenda, expanding our high margin franchise business, strengthening our balance.
Speaker 4: removing litigation uncertainty. All said in a set for powerful momentum as the housing market improved.
Our powerful momentum as the housing market improves during the third quarter, we delivered $1 6 billion of revenue and generated a $107 million of operating EBITDA, which includes a small pop up to our legal reserves, we reduced our debt by nearly $300 million.
Speaker 4: During the third quarter, we delivered $1.6 billion of revenue and generated $107 million of operating EBITDA, which includes a small top-up to our legal reserves.
Speaker 4: We reduce our debt by nearly $300 million.
We realized 60 million of cost savings in the quarter and completed the actions to deliver our $200 million cost target for the year and we settled our seller antitrust class action litigation on a nationwide basis.
Speaker 4: We realized 60 million of cost savings in the quarter and completed the actions to deliver our $200 million cost target for the year. And we settled our seller antitrust class action litigation on a nationwide basis.
Speaker 4: A quarterly transaction volume was down 13% year over year, which looks to be in line with or even a bit better than the overall markets per-
Our quarterly transaction volume was down 13% year over year, which looks to be in line with or even a bit better than the overall market performance.
Volumes were softer than we expected in the back half of the quarter, primarily driven by higher mortgage rates that approached 8%.
Speaker 4: Home prices continue to be resilient with more than 80% of the country seeing price gains in our portfolio as supply limits remain the biggest issue in the market.
Home prices continued to be resilient with more than 80% of the country seen price games in our portfolio as supply limits remains the biggest issue in the market.
Speaker 4: Now looking at our year over year volume results, we see variations across both geography and market
Looking at our year over year volume results, we see variations across both geographies and market segments.
Speaker 4: Geographies like Florida and Colorado outperformed the market. The luxury segment, especially million dollar plus homes, had the best performance in our portfolio, with our Sotheby's international reality brand being close to flat versus last.
If you'd like Florida, and Colorado outperformed the market the luxury segment, especially million dollar plus homes had the best performance in our portfolio with our Sotheby's International Realty brand being close to flat versus last year, we remain very excited by our leading position in luxury as we've talked about many times.
Speaker 4: We remain very excited by our leading position in luxury. As we've talked about many times, it is one of our most important strategic deck.
It is one of our most important strategic vectors now Conversely, there are geographies out there like California, and New York that are underperforming the market and from a segment perspective, the lower end of the market has the biggest challenges for that combination of limited supply and higher mortgage rates.
Speaker 4: Now, conversely, there are geographies out there like California and New York that are underperforming the market. And from a segment perspective, the lower end of the market has the biggest challenges from that combination of limited supply and higher mortgage.
Speaker 4: Here at Anywhere Real Estate, we are clear-eyed about the challenges of the current housing market. And remember, we recognized the downturn early and have been very aggressive moving quickly on critical vectors like cost reduction and debt paydown. We are proactively executing on what we can control, laying the groundwork for substantial success, especially when the market rebound.
You heard anywhere real estate, we are clear eyed about the challenges of the current housing market and remember we recognize the downturn early had been very aggressive moving quickly on critical vectors like cost reduction and debt pay down we are proactively executed on what we can control laying the groundwork for substantial success, especially when the <unk>.
Rebounds. So first we are excited by our progress simplifying and automating and streamlining our operations and we have already completed the actions that will deliver our 200 million dollar cost savings target.
Speaker 4: So first, we are excited by our progress simplifying, automating, and streamlining our operations. And we have already completed the actions that will deliver our $200 million cost savings target. And we are cautiously optimistic that we may overdeliver on this project.
And we are cautiously optimistic that we may over deliver on this number.
We like the opportunities to further drive permanent efficiencies in our business and how those opportunities can enhance our margins and better housing markets.
Speaker 4: We'd like the opportunities to further drive permanent efficiencies in our business and how those opportunities can enhance our margins and better housing.
Speaker 4: Second, we remain laser focused on debt reduction. I am so proud that we were able to reduce our debt by nearly 300 million in the quarter as we completed our bond exchange, repurchased bonds in the open market and repaid a portion of our revolver. This builds on the tremendous work we've done over the past years to reduce our debt by nearly 900 million.
We remain laser focused on debt reduction I am so proud that we were able to reduce our debt by nearly 300 million in the quarter as we completed our bond exchange repurchased bonds in the open market and repaid a portion of our revolver. This builds on the tremendous work we've done over the past years to reduce our debt by nearly <unk>.
$900 million continuing debt reduction is critical and remains a top capital allocation priority.
Third we are differentiating ourselves and.
I'm, taking advantage of the better competitive environment, our margin focus and commitment to profitability remains unchanged. We were excited to see our market share results in the quarter hold steady versus the latest overall in our data and we may actually have been a share gainer, we are recruiting agents at both better margins and with less cash.
Speaker 4: taking advantage of the better competitive environment. Our margin focus and commitment to profitability remains unchanged.
Speaker 4: We were excited to see our market share results in the quarter-hold steady versus the latest over our NAR data, and we may actually have been a share gainer. We are recruiting agents at both better margins and with less cash out the door than we did in 2022. And we are achieving the same better results in our franchise sales and renewal.
Cash out the door than we did in 2022, and we are achieving the same better results in our franchise sales and renewals fourth we are pleased to have reached this nationwide settlement and the seller antitrust class action litigation, while the settlement still needs court approvals. This enables us to move past the distraction uncertainty.
Speaker 4: Fourth, we are pleased to have reached a nationwide settlement in the Seller Antitrust Class Action litigation. While the settlement still needs court approvals, this enables us to move past the distraction, uncertainty, and expense that comes with complex and protracted litigation.
Expense that comes with complex and protracted litigation.
Speaker 4: Now looking forward, we're investing substantially in our future, enabled by our scale, profitability, and free cash flow generations, unlike many of our competitors, and we like our strategic progress. We love...
Now looking forward, we're investing substantially in our future enabled by our scale profitability and free cash flow generations. Unlike many of our competitors and we like our strategic progress.
We love the power of our franchise business even in this tough market, we see its high margin resiliency, it's reliable profit generation and the benefits of its long term contract structure, we continue to enhance our value proposition to attract new franchisees and strengthen our existing franchise portfolio.
Speaker 4: Even in this tough market, we see its high margin resiliency, its reliable profit generation, and the benefits of its long-term contracts.
Speaker 4: We continue to enhance our value proposition to attract new franchisees and strengthen our existing franchise portfolio.
Speaker 4: Anywhere is helping franchise these access new economics through our national scale title business, with the launch of our upward title joint venture.
<unk> is helping franchisees access new economics through our national scale title business with the launch of our upward titled Joint Ventures.
Speaker 4: We already have 19 franchise partners across three states with multiple states to follow. And we're seeing strong demand, especially from some of our bigger franchisees, including luxury.
We already have 19 franchise partners across three states with multiple states to follow and we're seeing strong demand, especially from some of our bigger franchisees, including luxury franchises.
Anywhere is using our technology to deliver more cost effective solutions to franchisees.
Speaker 4: Anywhere is using our technology to deliver more cost-effective to loose students to franchise.
Speaker 4: One example is our new Listings Direct technology, which integrates a franchisee with MLSs, and reduces their need to purchase separate solutions and or higher additional staff for MLS-related back office work. We already have over 100 franchisees using or in the pipeline to use Listings Direct.
One example is our new listings direct technology, which integrates a franchisee with MLS says and reduces their need to purchase separate solutions <unk> hire additional staff for MLS related back office work, we already have over 100 franchisees using or in the pipeline to use listings direct and we continue to.
First in our luxury franchise power for example, corporate has expanded or launched in 10 key markets. This year across the northeast the west and internationally and I am excited to announce today its latest market expansion into Houston.
Now second we're integrating our support services across brokerage and title to digitally assist agents and consumers from contract to close.
This is a win for our agents as we can provide them with high value transaction coordination services as part of our value proposition saving them, the time and hassle of either managing this work themselves are paying hundreds of dollars per transaction for someone else to handle it. So they can focus on earning new business.
It's a win for consumers as we create a simpler transaction experience and a faster more seamless closing process and it's a win for anywhere as this makes it easier for us to capture title mortgage and insurance economics.
And allows us to aggressively simplify standardize and automate our operations. We're in the beginning stages of rolling this out and we like our early results. We're live in four markets with several others to be added by year end and a broader rollout in 2024 agent satisfaction is 97% and our net promoter score here is 84%.
Finally, like I shared with you last quarter I am excited about how we're using our industry, leading data scale and generative AI to build powerful proof of concepts. For example, we have large language model proof of concepts that are improving our wide range of marketing activities around both copywriting and image generation This area.
He has tremendous potential given both our spend and our agent spend on marketing activities and.
And by their nature are title and brokerage operations have significant documentation requirements. We have two pilots underway to test generative AI the ability to create assemble and audit those documents and given our significant spend in these areas. We're optimistic about its potential and we see use cases from generative AI coming from.
Everywhere, we recently launched a safe way for people in our ecosystem to access G. P. T. Four while protecting confidential information and we're pleased with the number of people experimenting with these tools and their early innovation excitement and really the challenge from here is not just building more of these exciting use cases, but most <unk>.
Portly scaling them up to deliver real value.
I'm going to come back later with a few closing thoughts.
But for now let me turn it over to Charlotte to discuss our results in more detail.
Good morning, everyone I am proud of our third quarter results delivery as we continue to generate meaningful operating EBITA execute cost savings improve our capital structure and prudently manage our cash.
We remain focused on what we can control and are well equipped to navigate this tough housing environment to drive differentiated results now and in the future.
Now I will highlight our third quarter financial results.
Q3 revenue was $1 6 billion down 12% versus prior year and in line with our transaction volume decline, which we saw worsen in the latter half of the quarter due to rising mortgage rates.
Q3, operating EBITDA was 107 million down versus prior year due to lower transaction volume slightly higher agent commission cost and timing unemployed incentive accruals.
Set in part by cost savings across the enterprise.
We also had a slight top up to our legal reserves in the quarter.
Q3 free cash flow was $95 million, which was consistent with our free cash flow in Q3 of last year, despite significantly lower market volumes.
This strong free cash flow demonstrates our continued prudent cash management discipline, and we used our free cash flow in line with our capital allocation priorities to invest in the business and pay down debt.
It's Ryan mentioned, we entered into a settlement on our seller anti Trust litigation.
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Again this is the operator, please standby while we resolve this technical issue be placed on music hold for a moment to thank you for your patience.
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Chris erratic.
You may resume.
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Chris can you tell us where the audio gave out.
Okay.
I'm not sure on the exact sentence.
My apologies.
So is it a minute ago five minutes ago.
Approximately one minute ago.
I'll repeat myself, sorry, if theres a duplication, we reduced debt by 281 million in the third quarter through successful bond exchanges open market repurchases and repaying a portion of our revolver balance.
In August we had full participation and successfully exchanged about $800 million of our 2029 and 2013 notes for about 640 million of new 7% second lien 2030 secured notes.
This transaction reduced debt by $160 million, while incurring minimal incremental interest expense and retaining our flexibility and long dated maturities.
During the quarter. We also completed about $70 million in opportunistic open market debt repurchases across our 2029 and 2030 unsecured notes.
The weighted average purchase price was about 71, and a half, allowing us to capture 20 million of discount.
In addition, we used our free cash flow generation to further reduce our revolver borrowings by $50 million and end the quarter at $300 million.
Since I joined the company in 2019, we have drastically improved our capital structure with longer dated maturities lower interest rate.
And more unsecured debt.
We have reduced our net debt by almost $900 million with only about $200 million due before 2026.
We remain focused on reducing debt and are always evaluating ways to achieve this goal.
With our improved debt stack and ample liquidity I feel good about our ability to weather the current market conditions, while also investing to drive future results.
Now, let me go into more detail on our business segment performance.
Are any of our brands business, which includes leads and relocation generated 155 million in operating EBITDA, even in one of the worst housing market, we've seen in about 15 years.
Operating EBITDA declined 47 million year over year, primarily due to lower revenue related to transaction volume declines, partially offset by decreases in operating and marketing costs.
While down versus prior year, we loved our recurring royalty stream and high margins of our franchise business and its relative stability over time.
Our Q3 anywhere advisors operating EBITDA was negative 8 million down 7 million versus prior year due to lower volume and slightly higher agent Commission costs.
Operator: Good morning and welcome to the anywhere real estate third 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.
So offset in part by lower operating and marketing expenses.
Our split rate in Q3 was 82%, which is up 55 basis points year over year and in line with where splits where in Q1 and Q2 of this year.
And there continues to be parts of our business, especially in luxury where our splits are actually lower year over year.
Alicia Swift: At this time, I'd like to turn the conference over to anywhere senior vice president, Alicia Swift. Please go ahead, Alicia. Thank you, Chris.
We continue to like the moderation, we see in split which is driven by lower volumes more stable agent mix.
Alicia Swift: Good morning and welcome to the third quarter 2023 earnings conference call for anywhere real estate ink.
Recruiting economics and other proactive actions we have taken.
Alicia Swift: On the call with me today or anywhere CEO and president, Ryan Schneider, and chief financial officer, Charlotte Simonelli. As shown on slide three of the presentation, the company will be making statements about its future results and other four looking statements during this call. These statements are based on the current expectation and the current economic environment. For 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 macro economic development.
Anywhere integrated services with 2 million in operating EBITDA in Q3 operating.
Operating EBITDA declined 7 million year over year due to lower purchase and refinance volumes, which was partially offset by lower operating expenses due to cost savings initiatives and 4 million of improved G. R. A J D perform it.
We are relentlessly focused on changing how we operate to drive efficiencies in our business and set ourselves up for higher margins when the market returns.
Alicia Swift: Actual results may differ materially from those express room flight and a forward looking statements. Important assumptions and other factors that could cause actual results to differ materially from those in the forward looking statements are specified in our earnings release issue today, as well as in our annual and quarterly SEC filing.
We delivered $60 million of cost savings in the quarter and north of $160 million year to date.
We have already completed the actions that will deliver 200 million of realized cost savings. This year and are cautiously optimistic that we'll deliver above that number.
Alicia Swift: For those who listen to the rebroadcast of this presentation, we remind you that the remarks made herein or as of today, October 24th, and have not been updated subsequent to the initial earnings call.
Looking at our year to date cost structure, our total operating marketing and G&A expenses totaled 136 billion through Q3.
This is down from 157 billion, a year ago or a decline of approximately $215 million year over year are.
Ryan Schneider: Now I will turn the call over to our CEO and president, Ryan Schneider. Thank you, Alicia. Anywhere demonstrated our continued ability to lead through the tough housing market, even as it worsened in the third quarter with higher mortgage rates. We push forward on a strategic agenda, expanding our high margin franchise business, strengthening our balance sheet, completing additional cost reductions and removing litigation uncertainty, all setting us up for powerful momentum as the housing market improves.
A clear indication of the realized savings we have achieved with our steadfast focus to help offset the weaker housing market litigation expenses and inflation.
And as you'll see on slide 21 of our earnings presentation. We provided details on the segment makeup of our operating marketing and G&A expenses for the last 12 months.
Ryan Schneider: During the third quarter, we delivered 1.6 billion of revenue and generated 107 million of operating EBITDA, which includes a small top up to our legal reserves. We reduced our debt by nearly $300 million. We realized 60 million of cost savings in the quarter and completed the actions to deliver our $200 million cost target for the year, and we settled our seller antitrust class action litigation on a nationwide basis. Our quarterly transaction volume was down 13% year-over-year, which looked to be in line with or even a bit better than the overall market's performance.
Our operating expenses are primarily comprised of employees and offices.
We have made a lot of progress in driving efficiency in these areas by simplifying automating and streamlining our operations, but we still believe there are opportunities ahead of us across all of our expenses as we continue to re imagine how we operate.
And I will be back in our year end earnings release to provide more details on our savings expectations for 2024.
Now onto our updated estimates for 2023.
For full year 2023, we still expect transaction volumes to decline about 15% to 20% year over year and with the weaker market and higher mortgage rates in the latter part of Q3. We now think this will end up towards the worst part of that range.
Ryan Schneider: Volumes were softer than we expected in the back half of the quarter, primarily driven by higher mortgage rates that approached 8%. Home prices continued to be resilient with more than 80% of the country seeing price gains in our portfolio as supply limits remain the biggest issue in the market. Looking at our year-over-year volume results, we see variations across both geographies and market segments. Geographies like Florida and Colorado outperformed the market. The luxury segment, especially million dollar plus homes, had the best performance in our portfolio, with our Sotheby's International Realty brand being close to flat versus last year.
Second based on the year to date split trends, we are now narrowing our range and expect expect full year split pressure.
50 to 60 basis points.
We really like our actions in this area and the better recruiting margins this year.
Estimates that remain the same as the last call.
We still expect transaction volumes will improve sequentially year over year 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 counterbalance this tough year in housing.
Ryan Schneider: We remain very excited by our leading physician and luxury, and as we've talked about many times, it is one of our most important strategic vectors. Now, conversely, there are geographies out there, like California and New York, that are underperforming the market, and from a segment perspective, the lower end of the market has the biggest challenges from that combination of limited supply and higher mortgage rates. Here at Anywhere Real Estate, we are clear-eyed about the challenges of the current housing market.
This excludes the impact of cash expenses from the debt exchange transactions and any other nonrecurring items.
Finally, we are on track to realize $200 million of P&L cost savings in 2023, and as I said earlier, we may outperform this number.
While 2023 has been challenging and the outlook for 2024 remains uncertain, we have proven our ability to navigate this tough market regenerate consisting earnings consistent earnings and free cash flow to invest in growth and continue to be focused on reducing deaths, which will position us for an <unk>.
Ryan Schneider: And remember, we recognize the downturn early and have been very aggressive moving quickly on critical vectors like cost reduction and debt paydown. We are proactively executing on what we can control, laying the groundwork for substantial success, especially when the market rebounds. So first, we are excited by our progress, simplifying, automating, and streamlining our operations, and we have already completed the actions that will deliver our $200 million cost savings target. And we are cautiously optimistic that we may over deliver on this number.
Even stronger future.
Let me now turn the call back to Ryan for some closing remarks.
Thank you Charlotte I'm incredibly proud of how the anywhere team has led through the housing environment, even with the headwinds higher mortgage rates. This quarter, we delivered meaningful profitability and free cash flow reduced our debt over delivered on our cost savings agenda, and mitigated risk by reaching a nationwide settlements in our antitrust litigation and I'm excited by the strategic.
Ryan Schneider: We'd like the opportunities to further drive permanent efficiencies in our business and how those opportunities can enhance our margins and better housing markets. Second, we remain laser-focused on debt reduction. I am so proud that we were able to reduce our debt by nearly 300 million in the quarter. As we completed our bond exchange, repurchased bonds in the open market and repaid a portion of our revolver. This builds on the tremendous work we've done over the past years to reduce our debt by nearly $900 million.
Progress you made in the quarter enhancing our financially powerful franchise business integrating our brokerage and title operations with Wynn and benefits for agents consumers in anywhere.
The advantage of the improved competitive environment, including some exciting generative AI use cases, and focusing on how we scale them.
Now looking ahead.
While the housing market outlook for 2024 remains uncertain, our proven results delivery combined with our strategic progress positions anywhere real estate to drive differentiated results going forward, especially as the housing market strengthens with that we will take your questions.
Ryan Schneider: Continuing debt reduction is critical and remains a top capital allocation priority. Third, we are differentiating ourselves and taking advantage of the better competitive environment. Our margin focus and commitment to profitability remains unchanged. We were excited to see our market share results in the quarter hold steady versus the latest over our NAR data, and we may actually have been a share gainer. We are recruiting agents at both better margins and with less cash out the door than we did in 2022.
Ryan Schneider: And we are achieving the same better results in our franchise sales and renewals. Fourth, we are pleased to have reached a nationwide settlement in the Seller Anitrust Class Action litigation. While the settlement still needs quarter approvals, this enables us to move past the distraction uncertainty and expense that comes with complex and protracted litigation. Now looking forward, we're investing substantially in our future, enabled by our scale, profitability and free cash flow generations, unlike many of our competitors, and we like our strategic progress.
Okay.
To ask a question. Please press Star then one on your telephone keypad.
First question is from so him bunzl with <unk>. Your line is open.
Hey, good morning, everyone.
Brian maybe just a big picture one to start.
With all the headlines today investors are really trying to undo.
Stan Digest.
All the headlines could mean for the industry over the next few years.
So we'd love for you to just maybe step back and give us your thoughts on what this could mean for industry structure, whether that's the number of agents in the business or market share for players like yourself versus others. However, you sort of want to frame it.
Well look the biggest the biggest headline and the biggest thing impacting our industry bluntly is just where the housing market's out I mean, we're going to trend into what four one or $4 2 million unit transactions. This year that is either the lowest number in 15 years or 30 years dependent on how you count depart.
Ryan Schneider: We love the power of our franchise business. Even in this tough market, we see its high margin resiliency, its reliable profit generation, and the benefits of its long-term contract structure. We continue to enhance our value proposition to attract new franchisees and strengthen our existing franchise portfolio. Anywhere is helping franchisees access new economics through our national scale title business with the launch of our upward title joint ventures. We already have 19 franchise partners across three states with multiple states to follow, and we're seeing strong demand, especially from some of our bigger franchisees, including luxury, and Franchisees.
Men's and stuff like that in those kind of metrics.
But it's that's.
That's a rough year right and we saw a little worsening of the end of the third quarter as mortgage rates either approach or in.
Some cases hit 8% and so that's a pretty.
That's the thing that's really the most challenging right now.
We like the fact that a lot of the actions, we're still able to do whether they're proactive investments or costs or that things.
If you remodel our company in a normal housing environment.
Ryan Schneider: Anywhere is using our technology to deliver more cost-effective solutions to Franchisees. One example is our new Listings Direct technology, which integrates a Franchisee with MLSs and reduces their need to purchase separate solutions and or higher additional staff for MLS-related back office work. We already have over 100 Franchisees using or in the pipeline to use Listings Direct. And we continue to invest in our luxury Franchise power. For example, Corcoran has expanded to launch in 10 key markets this year across the Northeast, the West, and internationally.
Printing money, we're still printing money today, but were printed a lot of money and those kind of things and then.
I still live in the World, where if you think about the U S housing market over a five to 10 year period. It should be pretty strong. If you just think about the demographics and the supply and demand and you know one of our competitors has been out there, saying $60 million 60 million units over 10 years, which averages about 6 million units that wouldn't be unreasonable given the demographics.
No.
It's really going through this valley and how deep and long it's going to be is the near term issue.
Ryan Schneider: And I'm excited to announce today its latest market expansion in the Houston. Now second, we're integrating our support services across brokerage and title to digitally assist agents and consumers from contract to close. This is a win for our agents, as we can provide them with high-value transaction coordination services as part of our 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 they can focus on earning new business.
Think about kind of like the economics and the power, we've got with our size and scale in our profitability and our ability to keep investing in those sites and there is a competitive differentiator happy here I mean look I talk about the competitive market being different I mean, we're we're recruiting agents with better margins than we did last year, we actually we use less cash out the door.
Or how does the free cash flow stuff John was talking about.
Because the market is different and a lot of players of our industry.
Orange investing either because they're smaller or they don't have the profitability.
Ryan Schneider: It's a win for consumers as we create a simpler transaction experience and a faster, more seamless closing process. And it's a win for anywhere, as this makes it easier for us to capture title, mortgage, and insurance economics and allows us to aggressively simplify, standardize, and automate our operations. We're in the beginning stages of rolling this out and we like our early results. We're live in four markets with several others to be added by year end and a broader rollout in 2024.
And we think over the medium term that's a good thing for.
That's a good thing for us.
And so.
We're excited that we can still deliver profitability and free cash flow and make progress on that and keep getting more efficient as a company and then what we always do is say how will our company be in a normal housing market and we really like the moves we're making if you just model that cost reduction in a normal market or your model.
Ryan Schneider: Agent satisfaction is 97%, and our net promoter score here is 84%. Finally, like I shared with you last quarter, I'm excited by how we're using our industry leading data scale and generative AI to build powerful proof of concepts. For example, we have large language model proof of concepts that are improving a wide range of marketing activities around both copyrighting and image generation. This area has tremendous potential given both our spend and our agent spend on marketing activities.
You, even a little bit of what looks like maybe a little bit of market share gain this quarter in normal market. So that is the macro issue obviously it affects everybody, but in a level playing field, where it affects everybody.
We're making some progress on a relative basis here, that's going to really pay off.
And more normal markets.
Okay great.
Charlotte on costs I'm wondering if you could give us some insight into how youre approaching your plans for next year is there any sort of framework that you can share just given volumes are probably going to be challenged next year as well given where rates are today currently.
Ryan Schneider: And by their nature, our title and brokerage operations have significant documentation requirements. We have two pilots underway to test generative AI's ability to create, assemble, and audit those documents and given our significance spend in these areas we're optimistic about its potential. And we see use cases from generative AI coming from everywhere. We recently launched a safe way for people in our ecosystem to access GPT-4 while protecting confidential information. And we're pleased with the number of people experimenting with these tools and their early innovation excitement. And really, the challenge from here is not just building more of these exciting use cases, but most importantly, scaling them up to deliver real value.
Which will make the cost side and an important lever for next year.
Yes, so like I said on the call I'll be out next quarter with more specificity on the numbers, we are targeting but basically we it's not lost on us where the housing market is today and so.
Yes.
Im very optimistic that we'll be able to have some meaningful number for next year.
Yes.
Two years in a row of this type of a market makes it even more important for us to focus on that and so you can you can definitely expect that we are laser focused on it right now and we'll have something meaningful to share with you next quarter.
Okay Eric.
Charlotte Simonelli: Now, I'm going to come back later with a few closing thoughts, but for now, let me turn over to Charlotte to discuss our results in more detail. Good morning, everyone. I am proud of our third quarter results delivery as we continue to generate meaningful operating EBITDA, execute cost savings, improve our capital structure, and prudently manage our cash.
Eric continued potential on the cost side I mean, I mentioned it in my script, even a couple of the things that I talked about we're doing regenerative AI.
If we can scale them up.
A lot of the benefits is on the cost side.
And so I don't think we're done on that journey I think Charles it's been a great captain of steering our ship there.
It will show up more for you next quarter.
Charlotte Simonelli: We remain focused on what we can control and are well equipped to navigate this tough housing environment to drive differentiated results now and in the future. Now I will highlight our third quarter financial results. Q3 revenue was 1.6 billion, down 12% versus prior year, and in line with our transaction volume decline, which we saw worsened in the latter half of the quarter due to rising mortgage rates. Q3 operating EBITDA was 107 million, down versus prior year due to lower transaction volume, slightly higher agent commission costs, and timing on employee incentive accruals, offset in part by cost savings across the enterprise.
Thanks Ryan.
The next question is from Matthew Bouley with Barclays Capital. Your line is open.
Good morning. This is <unk> on for Matt. Thanks for taking my question.
I'm wondering if you can elaborate on the practice changes you outlined from the settlement and overall, how you think this could affect commission rates or agents. Thank you.
Yes, so look.
Look these are all out of there in the public.
We agreed to about eight practice changes.
Some of them are things that nor in the Doj agreed on three or four years ago that we supported that and we actually in some cases, we're ahead and already implemented them.
Others. There are places, where we had already been on a record that we wanted to we thought that was a good change for the industry and so for us they all lean into kind of the power of transparency.
Charlotte Simonelli: We also had a slight top up to our legal reserves in the quarter. Q3 free cash flow was 95 million, which was consistent with our free cash flow in Q3 of last year, despite significantly lower market volumes. This strong free cash flow demonstrates our continued prudent cash management discipline, and we used our free cash flow in line with our capital allocation priorities to invest in the business and pay down debt. As Ryan mentioned, we entered into a settlement on our seller antitrust litigation.
And our belief that both buyer and seller agents add a lot of value.
I'm not going to speculate too much on kind of what's going to happen with the industry, but there are a lot of places in the U S that have moved away from some of the mandatory rules and move more toward this transparency of disclosure that we agreed to.
And we think those markets operate well in.
We're going to be here supporting our buyer or seller agents through.
Through the future here.
Great. Thank you and I guess for my second question are you starting to see any more attrition amongst real estate agents.
Are you seeing them leads the industry given the difficult macro backdrop and what do you think this means overall for the competitive environment for the top producing agents.
Charlotte Simonelli: The jump in this is the operator looks like we're just having a slight technical issue. Please stand by. Again, this is the operator. Please stand by while we resolve this technical issue. Please play some musical for a moment. Thank you for your patience. Chris, are you ready? You may resume. Where did I drop off? Chris, can you tell us where the audio gave out? I'm not sure on the exact sentence, um, my apologies. You have a sense it is a minute ago, five minutes ago, approximately one minute ago. I'll repeat myself and sorry, there's a duplication.
Yes.
Look great question, a couple of things so you're absolutely we're definitely seeing agents leave the industry its.
It's typically the the.
Low or no productivity agents.
And would you even see our agent count Youll see.
Actually go down a bit in part because.
There is some of that was people, leaving the industry and sometimes we're kind of help ensure them out the door a little bit.
Because they are they are not free to support and if they are not really going to be producers then.
It's probably not good for them or for us.
Look this is not a new phenomenon when COVID-19 hit.
Lot of agents lapped in Q2 of 2020, because Q2 is also at a time with a lot of people had to pay their state real estate fees and things like that and so the trend of the top 20% of agents doing an 80 or 90% of the business is not a new one but it is.
Is continuing and so.
We always look at things on kind of who's producing and our retention on our producing agents is phenomenally good.
To view the better recruiting that I talked about are producing agents that we're not talking about.
Lowered our no producers in those in those when we talk about those kind of numbers, but you are right.
There is definitely some movement out of the industry, but it's it's really not concentrated in people doing a lot of business.
And thats not about that.
But it is cyclical right the market gets hot I think agent Count will go back up as more people enter the industry and we obviously take a lot of new agents and make them early successful and partner with them and we have for that but we are in that that shrinkage time as an industry.
Right now.
Great. Thank you I'll pass it on.
The next question is from Anthony Powell loan with Jpmorgan. Your line is open.
Thanks, Good morning.
I guess first one just on on splits.
Charlotte Simonelli: We reduced it by 281 million in the third quarter through successful bond exchanges, open market purchases, and repaying a portion of our revolver balance. In August, we had full participation and successfully exchanged about 800 million of our 2029 and 2030 notes for about 640 million of new 7% second lean 2030 secured notes. This transaction reduced that by 160 million dollars while incurring minimal and cremental interest expense and retaining our flexibility and long dated maturity.
Of just the moderating growth in the splits as from I guess mix I'm trying to just understand that if we're a california rebounds, and you get back to more normalized.
Distribution of activity around the country like what what the sportswear quake.
Yes, so the geography doesn't normally play a big role it actually did play a little bit of a role in the quarter. It was less than 10 basis points.
So I wouldn't say, it's the most material impact there was another impact that didn't call out from some timing on our new development business as well. So if you kind of back out the <unk>.
Charlotte Simonelli: During the quarter, we also completed about 70 million in opportunistic open market debt repurchases across our 2029 and 2030 unsecured notes. The weighted average purchase price was about 71 and a half allowing us to capture 20 million of discounts. In addition, we used our free cash flow generation to further reduce our revolver borrowings by 50 million and end the quarter at 300 million. Since I joined the company in 2019, we have drastically improved our capital structure with longer dated maturity, lower interest rates, and more unsecured debt.
Non core split movements, it would have been sort of less than half or about half of what I reported of an increase so geography was an impact this quarter. It doesn't nor I don't normally call. It out because it isn't normally it was but I would say, but still relatively minor.
Okay, but.
Our sense is that on a go forward basis, if awad these bigger regions kind of normalized we shouldnt expect like I don't know 100, 200 basis point pick up or something like it's not right now.
Keep in mind like right now, we have counterbalancing things between California, and New York.
Florida remains one of the stronger markets and Florida is also one of the higher split markets too so.
Charlotte Simonelli: We have reduced our net debt by almost 900 million dollars with only about 200 million due before 2026. We remain focused on reducing debts and are always evaluating ways to achieve this goal. With our improved debt stack and ample liquidity, I feel good about our ability to weather the current market conditions while also investing to drive future results.
It's interesting, how California, New York tender kind of counterbalance each other and for the long haul and the most part.
Okay got it and then.
Brian .
You talked about demographics and positive things working forward I mean, what's your sense for what the.
For lack of better term of clearing rate might be for interest rates.
Charlotte Simonelli: Now let me go into more detail on our business segment performance. Our anywhere brand's business, which includes leads and relocation, generated 155 million in operating EBITDAV, even in one of the worst housing markets we've seen in about 15 years. Operating EBITDAV declined 47 million year over year, primarily due to lower revenue related to transaction volume declines, partially offset by decreases in operating and marketing costs.
Or.
What point are these higher interest rates socialized enough that.
You start to see people just act I mean is there.
There are a number in your mind or some level that you think.
Would prompt break a balancing activity.
Yes, there is and you may not like it but I'll just give it to you because.
Tell you the truth.
Look I think it's five 5% to 6% for mortgage rates.
And we're a bit away from that right now.
Charlotte Simonelli: While down versus prior year, we love the recurring royalty stream and high margins of our franchise business and its relative stability over time. Our Q3 anywhere advisors operating EBITDAV was negative 8 million, down 7 million versus prior year, due to lower volume and slightly higher agent commission costs, also offset in part by lower operating and marketing expenses. Our split rate in Q3 was 80.2%, which is up 55 basis points year over year and in line with where splits were in Q1 and Q2 of this year.
But the evidence for me there is the <unk>.
All of the homebuilders, who move moved a lot of product, but they did it by buying homebuilder rates down to five 5% basically I mean, I talked to a homebuilder as CEO .
In the past couple of months.
By down to 409 nine for homes to be delivered in the first 60 days when they buy down to five and a half or other stuff and that's changed recently right in the last month or so now they've been hit because at 8% mortgage rates I think their ability to buy down that far as script I can't really speak for them, but that's what I see from the outside but.
Charlotte Simonelli: And there continue to be parts of our business, especially in luxury, where our splits are actually lower year over year. We continue to like the moderation we see in Swift, which is driven by lower volumes, more stable agent mix, better recruiting economics, and other proactive actions we have taken. Anywhere integrated services was 2 million in operating EBITDA in Q3. Operating EBITDA declined 7 million year over year due to lower purchase and refinance volumes, which was partially offset by lower operating expenses due to cost savings initiatives, and 4 million of improved GRAJV performance.
There'll be a little bit of relief as you know.
Some of the people, who have our mortgages kind of roll off over time.
I think that's going to be pretty slow in a world where.
80% of Americans have a rate below 5%.
But I think if you look at consumer survey data I have seen some good data from John Burns consulting on that and then you look at what homebuilders are doing between five five and 6% people or are willing to give up the mortgage they've got for a better slash different house.
It does move product.
With new homes, and so that's the level that I think kind of unlocks the inventory problem because again.
Charlotte Simonelli: We are relentlessly focused on changing how we operate to drive efficiencies in our business and set ourselves up for higher margins when the market returns. We delivered 60 million of cost savings in the quarter and north of 160 million year to date. We have already completed the actions that will deliver 200 million of realized cost savings this year and are cautiously optimistic that will deliver above that number. Looking at our year-to-date cost structure, our total operating, marketing, and GNA expenses totaled 1.36 billion through Q3.
<unk> are up and 80% of our portfolio.
Even with all the affordability issues of higher mortgage rates.
The demand is still greater than supply we have more homes, we could sell them.
No.
More than 50% of our homes.
Like cobalt banker are selling within 14 days I mean.
So I think it's going to take a mortgage rate in that Zip code.
Lockdowns.
Okay. Thank you and then just.
Maybe last one for me, there's a lot of just chatter and articles about Doj risk in the industry, maybe for non lawyers or non experts on how that works like what can you tell us about that risk or where that might be.
Charlotte Simonelli: This is down from 1.57 billion a year ago or a decline of approximately 215 million year over year. A clear indication of the realized savings we have achieved with our steadfast focus to help offset the weaker housing market, litigation expenses, and inflation.
Just anything to level set there it would be great.
Look I mean, we watch all the risks but.
Charlotte Simonelli: As you'll see on slide 21 of our earnings presentation, we provided details on the segment makeup of our operating, marketing, and GNA expenses for the last 12 months. Our operating expenses are primarily comprised of employees and offices. We have made a lot of progress in driving efficiency in these areas by simplifying, automating, and streamlining our operations. But we still believe there are opportunities ahead of us across all of our expenses as we continue to reimagine how we operate.
Youre going to have to go ask the Doj about that I don't I haven't spoken to the Doj and and.
They've got their thing going with NR, but that's that's for those guys to talk about.
Okay.
Okay. Thanks for the color.
Thank you Tony.
The next question is from John Campbell with Stephens. Your line is open.
Hey, guys. Good morning, Thanks for taking our questions. What's the settlement now on the works Ryan I am hoping maybe Charlotte, hoping you guys could provide the all in legal spend.
Charlotte Simonelli: And I will be back in our year-end earnings release to provide more details on our savings expectations for 2024.
Did these suits, maybe since inception, or maybe just kind of what you spent year to date, just trying to get a sense for what that profit lift might look like from a lower legal spend.
Charlotte Simonelli: Now, onto our updated estimates for 2023. For full year 2023, we still expect transaction volumes to decline about 15 to 20 percent year over year. And with the weaker market and higher mortgage rates than the latter part of Q3, we now think this will end up towards the worst part of that range. Second, based on the year-to-date split trends, we are now narrowing our range and expect full year split pressure of about 50 to 60 basis points.
Yes, we're not going to disclose that but I can tell you there will be a little bit of a tailwind next year I wouldn't there was obviously we started taking these expenses in Q3 of last year. So it's kind of like phase out over two years, so youre not going to see like a onetime huge benefit because part of it hits this year and part of it will hit next year.
Really pleased that we're done with it and we can experience the tailwind from having lower litigation expenses.
Charlotte Simonelli: We really like our actions in this area and the better recruiting margins this year. Estimates that remain the same as the last call. We still expect transaction volumes will improve sequentially year over year 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 counterbalance this tough year in housing. This excludes the impact of cash expenses from the debt exchange transactions and any other non-recurring item. Finally, we are on track to realize 200 million of P&L cost savings in 2023, and as I said earlier, we may outperform this number.
And John one of the factors that went into the settlement decision was just the ongoing expense of this kind of complex and prolonged litigation.
And so.
We will have the tailwind the Charlotte talked about but I think ever getting into the nitty gritty of how much we're spending on a specific matter.
Things like that as a bridge too far.
But we've tried to be transparent about when were taking big reserves.
Which we did like three quarters in a row in all top up this quarter and then.
Without.
Roll off on a last 12 month basis on some of our reporting that you see but.
We're going to.
Lower litigation expenses in the bank and that's that's what we're going to we're going to have.
Charlotte Simonelli: While 2023 has been challenging, and the outlook for 2024 remains uncertain, we have proven our ability to navigate this tough market. We generate consistent earnings and free cash flow to invest in growth and continue to be focused on reducing debt, which will position us for an even stronger future.
Subject to these things all being approved.
Okay. That's helpful. And then just to clarify you guys were not adding that back to your adjusted EBITDA.
No we did not exclude it no I mean look it's funny you say that because there are people, who say hey, you should always added back all this legal stuff to your to your EBITDA, but thats historically not been our approach. So we didn't change it but.
Ryan Schneider: Let me now turn the call back to Ryan for some closing remarks. Thank you, Charlotte. I'm incredibly proud of how the anywhere team has led through the tough housing environment. Even with the headwinds higher mortgage rates this quarter, we deliver meaningful profitability and free cash flow, reduced our debt, overdelivered on our cost savings agenda, and mitigated risk by reaching a nationwide settlement in our anti-trust litigation. And I'm excited by the strategic progress we made in the quarter, enhancing our financially powerful franchise business, integrating our brokerage and title operations with wins and benefits for agents, consumers, and anywhere.
We have tried to be clear.
Ryan Schneider: Taking advantage of the improved competitive environment, encouraging some exciting, generative AI use cases, and focusing on how we scaled them. Now, looking ahead, while the housing market outlook for 2024 remains uncertain, our proven results delivery, combined with our strategic progress, positions anywhere real estate to drive a differentiated result going forward, especially as the housing market strengthens.
The numbers we report.
Would have been bigger.
Operator: With that, we will take your questions.
Bigger obviously, if we had if we had not done some of the legal reserve, even everything else, but it served us well and.
We think <unk> got a good.
But our business is more octane than some of the numbers we printed.
Including this quarter is a good thing.
Absolutely.
Last question on the price side of things that was a lot higher than we expected. This quarter. I think also probably a lot of investors were expecting as well Ron you mentioned that 80% of the markets are experiencing price gains. It does seem like it's fairly broad based I am curious about your take on how home price gains as we approach the new year and if you feel like there is enough momentum or if that can continue on that.
Next year it just feels like there's a lot of moving parts, there where if we get the inventory maybe the price cools off so I know, there's a lot of moving parts, but just your best guess.
Yes look I mean, we tend to we tend to not model a lot of price days right because we'd rather have the gains on the unit side. So we're actually rooting for what you just said, which is let's have the unit world unlock let's get some more transactions there and then we're happy with.
Operator: If you'd like to ask a question, please press star then one on your telephone, keep that.
Soham Bhonsle: Our first question is from Soham Bonsol with BTIG. Your line is open. Hey, good morning, everyone. Ryan, maybe just a big picture one to start. You know, I think with all the headlines today, investors are really trying to understand digest what all the headlines could mean for the industry over the next few years. So we'd love for you to just maybe step back and give us your thoughts on what this could mean for industry structure, whether that's the number of agents in the business or market share for players like yourself versus others. However, you sort of want to frame it.
Whatever happens kind of on the price side so.
We're.
The price numbers I think in the quarter, probably were a little bit higher than we thought they would be.
But when you put.
The even higher mortgage rates and then what that does on the supply side and then the fact that there is still demand out there.
We're not that surprised by it right but.
But there's a few markets where price did drop.
Ryan Schneider: Well, you know, look, the biggest headline and the biggest thing impacting our industry globally is just where the housing markets are. I mean, we're going to trending to what 4.1 or 4.2 million unit transactions this year, that's either the lowest number in, you know, 15 years or 30 years, depending on how you count departments and stuff like that in those kind of metrics. But it's, you know, that's a, that's a rough year, right?
So not some of the bigger markets, but.
When do you see.
Market's up two or 3% in price or others, you know 567%.
It's really I think back to this rate supply demand thing and so.
Work on when we when we model next year and we'll probably talk to you about this on the next call electro had talked about on the cost side.
I think youll see a slight not we're not we don't want to bet on price right.
Ryan Schneider: And, you know, we saw a little worsening at the end of the third quarter is more good rate either approach or in some, you know, some cases hit 8%. And so that's a pretty, you know, that's the thing that's really the most challenging right now. You know, we like the fact that a lot of the actions were still able to do, whether they're proactive investments or caused or death things. You know, if you remodel our company in a normal housing environment, like we're printing money, you know, we're still printing money today, but we're printing a lot of money in those kind of things.
And we also think the market is healthier with as many units as possible no matter what happens to price. So that's what we'll be rooting for it but we're going to use all this trend data to be clear eyed about it.
That's just a little more color and kind of how we how we think about it.
Yes, that's very helpful. I appreciate all that thanks, Matt.
Got it.
The next question is from timing with joint with <unk>. Your line is open.
Ryan Schneider: And then, you know, I still live in the world where if you think about the US housing market over a five to 10 year period, it should be pretty strong. If you just think about the demographics and the supply and demand, and you know, one of our competitors has been out there saying 60 million dot 60 million units over 10 years, you know, which average is about 6 million units, that wouldn't be unreasonable given the demographics.
Hey, good morning, guys. Thanks for taking my questions.
The first one is could you help me frame what the average commission split of maybe say the top 20% versus the bottom 50% of agents is really kind of thinking of how big that differences.
Basically I just want to know is that a small difference where the top agents get maybe 85% on average in the bottom 75% or is the gap a lot wider than that.
Ryan Schneider: So it's really this going through this valley and how, you know, deep and long it's going to be is the near term issue. But, you know, you think about kind of like the economics and the power we've got with our size and scale and our profitability and our ability to keep investing through those sites. And there is a competitive differentiator happy here. I mean, look, I talk about the competitive market being different.
I mean, it's probably more in your first bucket to be honest I mean, it's real I mean, we are we have 50000 agents in our own brokerage right.
And it's all.
The range can be quite wide.
We've got how many years, we contract for and all these other kind of things but.
Ryan Schneider: I mean, we're recruiting agents of better margins than we did last year. We have to use less cash out the door against the free cash load stuff to try was talking about. Because the market is different and, you know, a lot of players are industry, aren't investing, either because they're smaller or they don't have the profitability. And, you know, we think, you know, over the medium term, that's a good thing for that's a good thing for us. And so, you know, we're excited that we can still deliver profitability and free cash flow and make progress on debt and keep getting more efficient as a company.
Assuming that the top agents have a.
Above our average split and assuming that the second and third quartile ones have below that's a pretty good assumption.
<unk>.
Yes.
It's kind of how the ecosystem works and I think most of our competitors would probably have something.
Similar with everybody would be in a different price points obviously.
Okay that makes sense.
And then my second question, given your presumably pretty constant communication with your agents and franchisees with boots on the ground.
Charlotte Simonelli: And then what we always do is say, how will our company be in a normal housing market and we really like the moves we're making. If you just model, you know, that cost reduction in a normal market or you model, you know, even a little bit of what looks like maybe a little bit of market share gain this quarter in normal market. So, that is the macro issue, obviously it affects everybody. But in a level playing field where it affects everybody, we think we're making some progress on a relative basis here that's going to really pay off in more normal market. Okay, great.
Given the ongoing class action litigation seemingly getting a bit more mainstream media attention.
Have you heard anecdotally from those agents that more buyers and even perhaps more sellers are starting to ask more about commissions, perhaps negotiate a bit more or maybe seek out more rebates or anything like that.
Well a couple of things so I was down at Jetblue in Atlanta, we have thousands of agents and franchisees there for the Coldwell banker, Brad Awesome, we really had a good time and obviously.
Charlotte Simonelli: Charlotte, on costs, I'm wondering if you could give us some insight into how you're approaching your plans for next year. Is there any sort of framework that you can share, you know, just given volumes are probably going to be challenged next year as well, given where rates are today currently, which will make the cost that an important lever for next year? Yeah, so like I said on the call, I'll be out next quarter with more specificity on the numbers we're targeting, but you know, basically we it's not locked on us where the housing market is today, and so, you know, I'm very optimistic that we'll be able to have some meaningful number for next year, you know, it's two years in a row of this type of a market makes it even more important for us to focus on this, and so you can you can definitely expect that we are laser focused on it right now, and we'll have something, you know, meaningful to share with you next quarter.
Got tons of face time with agents.
And franchisees I guess I would say.
Couple of things one is.
Right.
These agents are in the Middle of commission negotiations with their sellers all the time right and so that's not a new thing and we.
We were I was.
Maybe with an agent from Florida, C&I, we're talking about.
Some of the negotiating tactics that some of the competitors down there we are using versus <unk>.
<unk> her approach and all those kind of things.
How you think about price and value in these discussions kind of thing and so like.
Negotiating with sellers is not a new thing.
There's a lot of that going on out there so that.
Charlotte Simonelli: Okay, I'll continue potential on the cost side, I mean, I've mentioned my script, even a couple of the, you know, AI things that I talked about, we're doing a gender of AI, you know, if we can sell them up, there's a lot of the benefits is on the cost side, and so I don't think we're done on that journey, I think Charlotte's been a great, you know, captain of steering our ship there, and we'll show up more for you next quarter.
Not a lot of questions about that.
No one is kind of.
Telling me that they are hearing something different from for buyers or something like that and.
And so I think again I think the the class action stuff is more mainstream in the real estate crush than the general press.
But we like the value both the seller and buyer agents provide and we think that.
Matthew Bouley: The next question is from Matthew, who lay with Barclays Capitol, your lines open.
<unk>.
We're lucky to have settled the litigation remember we settled the litigation and covers our franchisee and it covers our agents and so.
Ryan Schneider: Good morning, this is Anika Delacchia on from Mad, thanks for taking my question, and I'm wondering if you're going to elaborate on the practice changes that you outlined from the settlement, and overall how you think this could affect commission rates for agents, thank you. Yeah, so, you know, look, these are all out of there in the public, you know, we agreed to about eight practice changes, you know, some of them, you know, are things that NAR and the DOJ agreed on three or four years ago that we supported then, and we actually in some cases went ahead and already implemented them.
That was actually the starting point of a lot of this conversation, we're just kind of.
Thank you.
Remind me, how uncovered and why kind of thing.
But the discussion about customers negotiation was not any different than the Sotheby's International Realty Conference I went through in <unk>.
<unk>.
April got off that.
So.
Because thats a big part of the ecosystem already today and I think.
Ryan Schneider: In others, there are places where we had already been on the record and we wanted to, we thought that was a good change for the industry, and so, you know, for us, they all lean into kind of the power of transparency, you know, and our belief that both buyer and seller agents add a lot of value, you know, I'm not going to speculate too much on kind of what's going to happen with the industry, but, you know, there are a lot of places in the US that, you know, have moved away from some of the mandatory rules and move more toward this trend.
Some people don't realize that as much as they should out there in the world.
Got it Thanks, and then just my last question is looking at over the next couple of quarters, given the existing cash balance.
Typically in the fourth quarter and the first quarter are slower seasonal quarters and we're obviously.
It's in a low home sale market already.
Talk about the kind of trajectory of your kind of cash balance and how you guys might need to.
Ryan Schneider: The transparency of disclosure that we agreed to, and we think those market operate well and, you know, we're going to be here supporting our buyer and our seller agents, you know, through the future here. Great, thank you.
Kind of tap into your available revolver credit facility to the extent that's needed.
Yes, the cash balance doesn't really change dramatically quarter over quarter, we manage especially when we're borrowing we managed to hold the amount of cash that we need to hold and keep the revolver as low as possible.
Ryan Schneider: And I guess for my second question, are you starting to see any more attrition amongst real estate agents? Are you seeing them leave the industry given the difficult macro backdrop? And what do you think this means overall for the competitive environment for the top producing agents?
Right.
In the fourth quarter, we tend to still generate positive free cash flow, it's really the first quarter, where the seasonality and the timing of our expenses hits us.
We normally borrow in the first quarter and a good housing market. So you can anticipate we will probably be borrowing in this housing market in the first quarter as well, but that's very common.
Ryan Schneider: Thanks. Yeah, look, you're a great question. A couple things. So absolutely, you know, we're definitely seeing agents leave the industry. It's typically the low or no productivity agents. And, you know, when you even see our agent count, you'll see it actually go down a bit in part because, you know, there's some of those people leaving the industry. And sometimes we're kind of help them show them out the door a little bit, you know, because they're not free to support.
Yes.
So.
I'm excited that we were able to pay down $50 million of the revolver in the quarter, Despite and on top of doing open market repurchases and having expenses out the door for some of the debt exchanges I'm very proud of our cash flow delivery. This year. We have we are being ruthlessly focused on it and making very specific choices with how we deploy our cash.
Ryan Schneider: And if they're not really going to be producers, then, you know, it's probably not good for them or for us. And look, this is not a new phenomenon, you know, when COVID hits a lot of agents left in Q2 2020. Q2 is also a time when a lot of people had to pay their state real estate fees and things like that. And so, you know, the trend of the top, you know, 20% of agents doing 80 or 90% of the business is not a new one.
And we have tons of liquidity, so yeah I'm proud of the <unk>.
We took on our debt over the past five years and this.
This is not the thing that keeps me up at night for sure.
Got it thank you.
Our final question today will be from Ryan <unk> with Zelman and Associates. Your line is open.
Ryan Schneider: But it is continuing. And so, you know, we always look at things on kind of who's producing. And our retention on our producing agents is phenomenally good. You know, we're able to do the better recruiting that I talked about, producing agents. They're we're not talking about, you know, low or no producers in those in those when we talk about those kind of numbers. But, you know, you are right that there's definitely some movement out of the industry.
Hey, thanks very much.
When the audio cut out earlier, you had just started mentioning the litigation so maybe you've already touched on what was expected to be said in the Q&A, but I don't know it might be worth.
Reading any of those comments from the prepared remarks.
Came back at the cost talking about the cost, but it was right around that litigation comment that that.
Audio cut out.
Sure.
Ryan Schneider: But it's it's really not concentrated in people doing a lot of business. And that's not about them, you know, but it's cyclical, right? The market gets hot. I think agent count will go back up as more people enter the industry. And, you know, we often take a lot of new agents and make them really successful and partner with them and we're for that. But we are in that that shrinkage time as an industry right now.
Maybe start there sure yes. The exact comments I made was we entered into a settlement on our seller antitrust litigation on a nationwide basis for $83 5 million of which we expect to pay $10 million. This year the remainder in 2024.
That's the comments.
Okay perfect. Thank you for that.
And then second Ryan So I hear you on the pricing trends I guess, maybe just square a couple of comments. So you mentioned the incremental slowing in the back half of the quarter, which makes sense with what rates have done.
Operator: Thank you all. Great.
Operator: Thank you all.
Anthony Paolone: The next question is Anthony Paolone with JP Morgan. Your line is open. Thanks. Good morning. I guess first one just on on splits. How much of just the moderating growth and the splits is from, I guess, mix and trying to just understand that if like California rebounds and you get back to more normalized distribution of activity around the country, like what what the splits look like. Yeah, so the geography doesn't normally play a big role.
Assuming leave that comment is mainly about transaction sides, but I guess I'm just curious with rates continuing to move higher or are you seeing any change in the pricing dynamics at all or.
Is the kind of ASP growth.
Just seemingly kind of remaining remaining in place and it's more of a transaction side issue.
In our in our buckets of units issue so transaction sides.
Anthony Paolone: It actually did play a little bit of a role in the quarter. It was less than 10 basis points. So I wouldn't say it's the most material impact. There was another impact that didn't call out from some timing on our new development business as well. So if you kind of back out the non-course split movements, it would have been, you know, sort of less than half or about half of what I reported of an increase. So geography was an impact. In fact, this quarter, it doesn't, I don't normally call it out because it isn't normally it was, but I would say it was still relatively minor.
And I just think it gets back to the <unk>.
Even at the higher rates there is still more demand than supply for the houses that are out there which is.
Strange obviously, given the affordability issues of 8% mortgage rates, but it is the reality and so even in the back half of the year, we didn't see like when I look at September prices, they didn't behave differently than the quarterly prices what was different in September was more pressure on the unit side.
Charlotte Simonelli: Okay, but you said that like on a go forward basis, if a lot of these bigger regions kind of normalized, you know, we shouldn't expect like I don't know, 100, 200 basis point, pick up or something like it's not like that. Keep in mind, like right now, we have counter balancing things between California and New York. Florida remains one of the stronger markets and Florida is also one of the higher split markets too. So it's interesting how California and New York tend to kind of counterbalance each other and for the long call in the most part.
And that drove a little bit worse results volume wise in the quarter than we thought and a little bit of why we are at.
<unk>.
The worse end of the volume guidance for the year. So.
It really was a unit story.
Not a price story.
And again, we're not going to sit here and.
No.
That our future that prices are going to go in a certain direction.
We're really focused on what is happening on the unit front and what we can do for our agents and franchisees there what we can do on our cost base on a lower unit environment et cetera.
Ryan Schneider: Okay, got it. And then, you know, Ryan, you know, you talked about just demographics and positive things looking forward. I mean, what's your sense for what, you know, the, for lack of a better term, a clearing rate might be for interest rates or, you know, what point are these higher interest rates socialized enough that, you know, you start to see people just, you know, act. I mean, is there a number in your mind or some level that you think would prompt like a balance and activity.
But we didn't see anything in the in the end of the quarter that changes the price unit dynamics that we saw for the full quarter.
Got it okay. Thank you very much.
Okay.
We have no further questions at this time and this will conclude today's conference call. Thank you everyone for participating you may now disconnect.
[music].
Ryan Schneider: Yeah, there is. And you may not like it, but I'll just give it to you because I tell you the truth. Like I think it's driving a half to 6% for mortgage rates. And, you know, we're a bit away from that right now. But, you know, the evidence for me there is, you know, the all the homebuilders who, you know, moved, moved a lot of product and that they did it by buying or home built rates down to, you know, 5.5%.
Yes.
[music].
Ryan Schneider: Basically, I mean, I talked to a homebuilder CEO, you know, in the past kind of couple months and, you know, they'll buy down to 4.99 for homes to be delivered in the first 60 days. And then they buy down to 5.5 and a half for other stuff. And that's changed recently right in the last month or so. Now they've been hit because at 8% mortgage rates, I think their ability to buy down that far is is crimped.
Okay.
Yes.
Ryan Schneider: I can't really speak for them, but that's what I see from the outside. But, you know, there'll be a little bit of relief as, you know, some of the people who have armed mortgages kind of roll off over time. I think that's going to be pretty slow in a world where, you know, 80% of Americans have a rate below 5%. But I think if you look at consumer survey data, I've seen some good data from John Burns consulting on that.
Ryan Schneider: And then you look at what homebuilders are doing between 5.5 and a half and 6%. People are willing to give up the mortgage they've got for a better slash different house. You know, it does move product, you know, with new homes. And so that's the level that I think kind of unlocks the inventory problem. Because again, you know, prices are up in 80% of the portfolio. I mean, even with all the affordability issues of high mortgage rates.
Ryan Schneider: The demand is still greater than supply. We had more homes we could sell them, you know, you know, more than 50% of our homes and like Global Banker are selling within 14 days. I mean, so I think it's going to take a mortgage rate in that zip code to unlock nice.
Ryan Schneider: Okay. Thank you.
Anthony Paolone: And then just maybe the last one for me. There's a lot of just chatter and articles about DOJ risk in the industry, maybe for non lawyers or non experts on on how that works. Like what can you tell us about, you know, that risk or, you know, where that might be. Just anything to level set there would be great. Look, I mean, we watch all the risks, but, you know, you're going to have to go ask the DOJ about that. I've spoken to the DOJ and, you know, they've got their thing going with NAR, but that's for those guys to talk about. Okay. Thanks for the car.
Operator: Thank you, Tony.
John Campbell: The next question is from John Campbell with Stevens. Your line is open. Hey guys, good morning. Thanks for taking our questions. What the settlement now in the works, Ryan, I'm hoping or maybe Charlotte, hoping you guys could provide the all in legal spend. Kind of tied to these suits, maybe since inception or maybe just kind of what you spent year to day, just trying to get a sense for what that profit lift might look like from the lower legal spend.
John Campbell: Yeah, we're not going to disclose that, but I can tell you, you know, there will be a little bit of a tailwind next year. I wouldn't, you know, there was obviously. We started taking these expenses in Q3 of last year. So it's kind of like phased out over two years. So you're not going to see like a one time huge benefit because part of it hits this year and part of it will hit next year.
John Campbell: We're just really pleased that we're done with it. And we can, you know, experience the tailwind from having lower litigation expenses. And John, one of the factors that went into the settlement decision was just the ongoing expense of this kind of complex and prolonged litigation. And so, you know, we'll have the tailwind that Charlotte talked about, but I think ever getting into the needy gritty of how much we're spending on a specific matter and things like that is is a bridge too far.
John Campbell: But, you know, we've tried to be transparent about, you know, when we're taking big reserves, you know, which we, we did like three quarters in a row and I'll top up this quarter. And then, you know, you know, that'll roll off on a, you know, last 12 months basis in some of our reporting that you see. But we're going to, you know, lower litigation expenses into the bank. And that's that's what we're going to have, you know, you know, some of these things all being approved.
John Campbell: Okay, that's helpful. And then just to clarify you guys, we're not adding that back to your gutty, but now we did not exclude it. No, I mean, you know, look, that's funny. You say that because, you know, there are people who say, hey, you should have always added back all this legal stuff to your to your EBITDA. But that's historically not in our approach. So we didn't change it. But, you know, we have tried to be a player that, you know, the number of your report would have been, you know, bigger.
John Campbell: Obviously, if we had, you know, if we had not done some of the legal reserving and everything else, but it served as well. And, you know, we think you've got a good, you know, the fact that our business has more octane than some of the numbers we printed. Including this quarter is a good thing. Absolutely.
John Campbell: Last question on the price side of things. That was a lot higher than we expected to score. I think also probably a lot of investors were expecting as well. You mentioned that 80% of the markets are experiencing price gains. It does seem like it's fairly broad base. I'm curious about your take on how price gains is your approach to the new year, and if you feel like there's enough momentum or if that can continue in the next year, it just feels like there's a lot of moving parts there where if we get inventory, maybe the price cools off, so I know there's a lot of moving parts, but just your best guess.
John Campbell: Yeah, look, I mean, we tend to not model a lot of price gains, right? Because we'd rather have the gains on the unit side. So we're actually rooting for what you just said, which is let's have the unit world unlocked. Let's get some more transactions there, and then we're happy with, you know, whatever happens kind of on the price side. So, you know, we're, you know, the price numbers, I think in the quarter, probably were a little bit higher than we thought they would be.
John Campbell: But when you click the even higher mortgage rates, and then what that does on supply side, and then the fact that there is still demand out there, we're not that surprised by it, right? But there's a few markets where a price did drop, you know, but not some of the bigger markets, but, you know, when you see, you know, markets up two or three percent in price or others, you know, five, six, ten percent, it's really, I think this back to this rate supply demand thing.
John Campbell: And so, you know, we're going to, when we, when we model next year, and then we'll probably talk about this on the next call, like Trevor talked about on the cost side, you know, I think you'll see us like not, we're not, we don't want to bet on price, right? And we also think the market's healthier with as many units as possible, no matter what happens. So, that's what we'll be rooting for.
John Campbell: But, you know, we're going to use all this trend data to be clear-eyed about it, but that's just a little more color and kind of how we, how we think about it. Yeah, that's very helpful. I appreciate all that. Thanks, Rhett.
Thomas McJoynt: The next question is from Tommy Mcjoint with KPW. Your line is open. Hey, good morning guys. Thanks for taking my questions. The first one is, could, could you help me frame what the average commission's would of maybe say the top 20% versus the bottom 50% of agencies? It's really kind of thinking of how big that difference is. It's, basically, I just want to know if it's, is it a small difference where the top agents get maybe 85% on average in the bottom 75% or in the gap a lot wider than that.
Thomas McJoynt: I mean, it's probably more in your first bucket, to be honest. I mean, it's real, I mean, we have, we have 50,000 agents in our own brokerage, right? And, you know, and it's all, the range can be quite wide and kind of how many years we contract for and all these other kind of things. But, you know, assuming that the top agents have a, you know, above our average split and assuming that the second and third quartile ones have below, that's a pretty good assumption. And, you know, It's kind of how the ecosystem works. And I think most of our competitors would probably have something similar with everybody being at different price points obviously.
Charlotte Simonelli: Okay, that makes sense. And then my second question, given your presumably pretty constant communication with your agents and franchisees with foods on the ground. Given the ongoing class action litigation, seemingly getting a bit more mainstream news attention, have you heard anecdotally from those agents that more buyers and even perhaps more sellers are starting to ask more about commissions perhaps negotiate a bit more or maybe seek out more rebates anything like that.
Charlotte Simonelli: Well, a couple things. So I was down at Jen Blue in Atlanta. We had thousands of agents and franchisees there, you know, for the cobalt banker brand awesome week really at a good time. And I was just, you know, I got tons of face time with agents and franchisees. I guess I would say a couple things. One is, like, these agents are in the middle of commission negotiations with their, you know, sellers all the time.
Charlotte Simonelli: Right. And like, so that's not a new thing. And, you know, we were, I was, I was meeting with an agent floor to she and I were talking about just, you know, some of the, the negotiating tactics that some of the competitors down there were using versus, you know, versus her approach and all those kind of things and, you know, how you think about price and value in these discussions kind of thing.
Charlotte Simonelli: And so like, you know, negotiating with sellers is not a new thing. And, you know, there's a lot of that going on out there. So that's not a lot of question about that. No one is kind of, you know, telling me that they're hearing something different from, you know, from buyers or something like that. And so I think, again, I think the class action stuff is more mainstream in the real estate press than the general press.
Charlotte Simonelli: But, you know, we like to value both the seller and buyer agents provide and we think that, you know, we, you know, we're, we're lucky to have settled the litigation and remember, we settled the litigation and it covers our franchise these and it covers our agents. And so, you know, that was actually the starting point of a lot of this conversation, which is kind of, you know, thank you and, you know, remind me how I'm covered and why kind of saying.
Charlotte Simonelli: But the discussion about customers and negotiation was not any difference in the sudden these international reality conference I went to in in in April. Right. So, because that's a big part of the ecosystem already today and I think, you know, some people don't realize that as much as they should out there in the world. Got a thanks and then just my last question is looking at over the next, you know, couple quarters given the existing cash balance.
Charlotte Simonelli: Typically, the fourth quarter and the first quarter are, you know, slower, seasonal quarters and we're obviously, you know, facing a low home film market already. She talked about the kind of trajectory of your kind of cash balance and how you guys might need to kind of tap into your available revolver credit facility to the extent that needed. Yeah, so the cash balance doesn't really change dramatically a quarter over quarter. We manage, you know, especially when we're borrowing we manage to hold the amount of cash that we need to hold and keep the revolvers low as possible.
Charlotte Simonelli: You know, in the fourth quarter, we tend to still generate positive free cash flow. It's really the first quarter where the seasonality and the timing of our expenses hits us. So we normally borrow when the first quarter in a good housing market so you can anticipate will probably be borrowing in this housing market in the first quarter as well, but that's very common. So, you know, I'm excited that we were able to pay down 50 million of the revolver in the quarter despite and on top of doing open market repurchases and having, you know, expenses out the door for some of the debt exchanges.
Charlotte Simonelli: I'm very proud of our cash flow delivery this year we have we are being ruthlessly focused on it and making very specific choices with how we deploy our cash and we have tons of liquidating. So, you know, proud of the steps we took on our debt over the past five years and, you know, this is not the thing that keeps me up at night for sure. Got it.
Ryan McKeveny: Thank you.
Charlotte Simonelli: Our final question today will be from Ryan McCaviny with Xelman and Associates. Your line is open. Thanks very much. Charlotte went when the audio cut out earlier, you had just started mentioning the litigation. So maybe you've already touched on what was expected to be said in the Q&A, but I don't know, it might be worth reading any of those comments from the prepared remarks. You kind of came back at the cost, talking about the cost, but it was right around that litigation comment that the audio cut out. Sure. Maybe start there. Sure.
Ryan Schneider: Yeah, the exact comment I made was we entered into a settlement on our seller antitrust litigation on a nationwide basis for 83.5 million of which we expect to pay 10 million this year, the remainder in 2024. That's the comments. Okay, perfect. Thank you for that. And then second, Ryan. So I hear you on the pricing trends. I guess maybe just square a couple of comments. So you mentioned the incremental slowing, you know, in the back half of the quarter, which makes sense with what rates have done, you know, assuming that comment is mainly about transaction sides.
Ryan Schneider: But I guess I'm just curious, you know, with rates continuing to move higher, are you seeing any change in the pricing dynamics at all? Or, you know, is the kind of ASP growth, you know, just seemingly kind of remaining remaining in place. And it's more of a transaction side issue. Yeah, in our, in our book, it's a units issue with the transaction sides, you know, and I just think it gets back to the, you know, even at the higher rates, there is still more demand than supply for the houses that are out there, which is strange, obviously given the affordability issues of 8% mortgage rates.
Ryan Schneider: But it is the reality. And so even in the back half of the year, we didn't see like, you know, when I look at September prices, they didn't behave differently than the quarterly prices. What was different in September was more pressure on the unit side. You know, and that drove a little bit worse results, you know, volume wise in the quarter than we thought. And a little bit of why we're at the, you know, the worst end of the volume guidance, I think, to the year.
Ryan Schneider: So, you know, you know, it really was a unit story, not a, not a price story. And again, we're not going to sit here and, and then our future, the prices are going to go in a certain direction. We're really focused on what's happening on the unit front and what we can do for our agents and franchisees there, what we can do on our cost-based and a lower unit environment, etc. But we didn't standing in the end of the quarter that changes the price unit dynamics that we saw for the full quarter. Got it. Okay, thank you very much.
Operator: We have no further questions at this time and this will conclude today's conference call. Thank you everyone for participating. You may now disconnect.