Anywhere stock downgraded over commission splits

Keefe, Bruyette & Woods label Anywhere drops brokerage from buy to hold

Ryan Schneider (Getty)

Harrison Connery

Mar 2, 2023, 3:15 PM

The market downturn has cost Anywhere some of its commission splits — and now its buy rating from an investment bank.

As home sales dried up in the second half of 2022, top agents began accounting for a greater percentage of sales volume. That’s contributed to the pressure on splits, because top agents keep a greater percentage of their commissions.

“If there’s less deals to go around, it’s the best agents winning those deals,” analyst Thomas McJoynt of Keefe, Bruyette & Woods said in an interview. “Frankly it’s a little tough to think to what extent the housing market would have to come down for you to see some moderation in that split line.”

The persistence of high splits led McJoynt to downgrade Anywhere’s stock from a buy-rating to a hold. That is in line with its neutral rating from JPMorgan.

“We had the sense that commission split pressures would ease in a weaker housing market,” said McJoynt. “Structurally, the strength of the agent at the expense of the [brokerage] has become a bit unsustainable.”

Average commission splits ended last year at 80.2 percent, compared to 78.9 percent the year before, according to an analysis of the company’s relevant earnings reports.

Separately, S&P Global downgraded Anywhere’s credit rating Thursday, citing lower transaction volume, which it says will raise the company’s debt ratio. Anywhere’s rating was lowered to B+ from BB-.

The grade, which measures an entity’s ability to pay back its debt, means Anywhere is “more vulnerable to adverse business, financial and economic conditions but has the capacity to meet financial commitments,” according to S&P.

Anywhere’s fortunes, like its competitors’, changed significantly last year as the market shifted. It was able to post a profit of $32 million over the course of the year before counting restructuring costs and the depreciation of intangible assets. That was despite a rough fourth quarter, in which it lost $93 million before depreciation and restructuring.

With mortgage rates rising and home sales slowing, Anywhere’s annual revenue dropped by over $1 billion.

The company responded with aggressive cost-cutting — including a round of layoffs in August — which eliminated $150 million from its budget. While the company didn’t disclose how many employees it let go, it finished the year with 775 fewer full-time employees, according to its annual report.

Another round of layoffs in January reduced its workforce to 11 percent below its size in June.

Though the company’s long-term savings plan is ahead of schedule, with another $200 million to be slashed from the budget this year, McJoynt’s report said high commission costs require “a material amount of offsetting expense reductions and/or ancillary revenue growth to preserve earnings power.”

“While [Anywhere] has admirably improved efficiencies and invested in title, mortgage, RealSure, etc., we now think there are limits to plugging that hole,” it continued.

Generally, splits have gotten more favorable for brokers in recent years as legacy brokerages have dealt with competition from newcomers like Compass, which for years had deep pockets to lure brokers with better splits and bonuses, and digital-only upstarts like eXp.

During Anywhere’s third quarter earnings call, executives said commission splits could fall as brokerages cut back on their recruitment offers. While that hasn’t happened, executives last week said the recruiting environment has become more favorable.

But with sales down for the foreseeable future, McJoynt sees a rocky road ahead.

“It’s still going to be a very challenging next year or two,” he said.