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Cash to burn: How brokerages are spending capital in a record year

From VC investing to expansion into new markets, the nation’s biggest brokerages are doubling down

Douglas Elliman’s Howard Lorber, Compass’ Robert Reffkin
Douglas Elliman’s Howard Lorber, Compass’ Robert Reffkin

Big U.S. real estate brokerages, awash in cash amid a housing rebound that shows few signs of slackening, are repaying debt and rewarding investors as they push to expand market share.

Douglas Elliman’s parent, Vector Group, plans to plow money into its venture capital investment arm. EXp Holdings announced a cash dividend for the first time. Realogy, meanwhile, aims to keep paying down debt. And Compass, after opening 15 new markets and announcing a mortgage business, is facing mounting pressure to show profits.

All four, among the nation’s biggest brokerages by volume of closed sales, are in an unusual situation: With so much cash on hand, they’re under pressure to stay ahead of rivals without overcommitting to markets that can turn fickle in a hurry. The decisions they’re making now represent a big bet on the future of the housing market.

“These firms are in a position to know better than anyone,” said David Trainer, CEO of investment research firm New Constructs. “We can look at them as an early indicator of whether the real estate market will be beginning to cool off or continuing to stay hot.” 

Rising demand is outpacing supply, pushing the median price for an existing home up 17.8 percent to $359,900 in July from the same month a year ago, when the median topped $300,000 for the first time. Although the pace of sales dropped in the past year, economists have largely blamed low inventory, not prices, citing historically low mortgage rates and massive fiscal stimulus. 

Red hot

Elliman brought in $392 million in revenue last quarter, the least among the nation’s biggest brokerages by volume. Still, the firm is implementing a bold strategy to deploy excess capital. Its parent, Vector, has been de-leveraging for the past six months. With $490 million of cash and cash equivalents on hand — $155 million of which is at Elliman — the company plans on making a series of big wagers on its real estate business.

“I’m pretty bullish on where we are at today and where the near future, at least for the next couple of years, will be,” Howard Lorber, executive chairman of Elliman and CEO of Vector, said on an August earnings call. 

Vector is looking to deploy capital in “a couple of places,” including proptech venture capital investment arm New Valley Ventures, chief financial officer Bryant Kirkland said on the call. New Valley’s investment criteria is linked to prospects for Elliman’s luxury real estate market, not housing market cycles, according to Dan Sachar, the division’s managing director. 

Sachar categorized initial bets into two main categories: “table stakes” investments — investments that Elliman agents must have access to — and innovative new startups. New Valley’s inaugural investment in digital transaction management platform Rechat is an example of the first, while wagers on property services startups, Humming Homes and MoveEasy, represent the latter. 

New Valley Ventures reported investing in six companies in the last quarter. They range from Purlin, an AI platform that helps home buyers narrow their search based on customized criteria, to EVPassport, an electronic vehicle-charging platform. 

“We have to do all the things that our competitors are doing, and we are doing them,” said Sachar. “And then we have to go further.” 

Tech investing won’t displace M&A activity. Scott Durkin, Elliman’s chief executive, said that the brokerage is poised to expand in new and existing markets, though he wouldn’t say whether any plans are in motion. He said the firm is bringing back its in-person events and is looking at ancillary services such as mortgage services. In June, Vector took a 50 percent stake in nascent mortgage company Biscayne Mortgage, filings show.  

Warning signs

At eXp World Holdings, a virtual brokerage, revenue rose to almost $1 billion, a quarterly record, up from $353 million in the second quarter of 2020. EXp announced its first cash dividend this month. The brokerage’s cash on hand totals $107.4 million, compared with $63.3 million last year. 

Glenn Sanford, eXp’s CEO, said on an earnings call that his goal is to make the quarterly dividend “relatively permanent.” The firm bought back almost $55 million of its shares in the past quarter, aiming to benefit agents, who are all shareholders. 

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“That’s to keep the company as concentrated as possible in the hands of our agents and brokers,” he said in an interview.  “We believe in investing in ourselves and our agents.” 

Sanford expressed skepticism about starting new initiatives as the market booms. The company explored launching a technology incubator program, but it didn’t move forward, he said. “The best time to launch new products is at the bottom of the market.” 

That doesn’t mean eXp is standing still. The company announced a joint venture with mortgage company Kind Lending in July, and it’s investing in its iBuying business, which uses algorithms to make cash offers for homes. EXp is ramping up a new media venture with the publisher of SUCCESS, a magazine devoted to personal and professional coaching. The brokerage also expanded into Israel, Spain, Colombia and Panama this year, bringing the total number of nations where eXp operates to 17.

‘We need the growth’

Realogy reaped in $2.3 billion of revenue last quarter, almost double the amount compared to the same period a year earlier. It also cut its senior secured debt level to the lowest since going public in 2012. Realogy has $859 million in cash.

“We’re going to keep investing in the business,” Ryan Schneider, Realogy’s CEO, said during an interview at a Barclays conference in August. “We absolutely will think about other capital deployment opportunities here, potentially for investors, but you should always be thinking we’re about investing in the business for growth.” 

Schneider emphasized that the residential brokerage’s business is cyclical, suggesting the firm doesn’t expect the market to remain strong and that he wants to expand key areas of Realogy’s business now.

Segments he singled out as ripe for investment include its iBuying program, RealSure, which Realogy runs with Home Partners of America, a title business that HPA and Realogy recently launched and its corporate franchise business and luxury brands, including the Corcoran Group and Sotheby’s International Realty. Sotheby’s was Realogy’s top performing brand last quarter.

“We want to drive the growth,” said Schneider. “We need the growth.” 

The iBuyer, RealSure, expanded into eight markets during the second quarter, and its partner HPA was recently acquired by Blackstone Group for $6 billion, which Schneider told investors was a “vote of confidence.”

Strike now

Compass, the second-largest brokerage after Realogy in terms of closed sale volume, is similarly growth-minded. After going public on April 1, the brokerage is under pressure to prove to investors that it has a path to profitability after its stock price plummeted almost 40 percent to a low of $12.25 in July.  

Compass reported $1.95 billion in revenue last quarter and announced a mortgage joint venture with Guaranteed Rate in July that will start originating loans by the end of the year. Compass has already begun offering title services through its digital platform, which it says will be completed by next summer. 

The company also launched 15 new markets, far more than its typical average of two per quarter. That means Compass is operating in 62 different markets across the nation. Robert Reffkin, the CEO, said that the expansion is opportunistic. 

“We saw an opportunity to accelerate expansion in the first half of the year that was originally planned for the back half of the year,” he said on an earnings call. Even though he said that growth at Compass will probably slow for the rest of the year, he’s confident that the housing market will remain strong.

“Yes, 7.5 million Americans have already moved, but millions more are looking,” Reffkin said on the call. “Remember, when you hear about 10 offers being put on a home, only one is chosen, meaning nine buyers are still in the market.”

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