Anywhere Real Estate Inc. (NYSE:HOUS) Q2 2023 Earnings Call Transcript

Anywhere Real Estate Inc. (NYSE:HOUS) Q2 2023 Earnings Call Transcript July 25, 2023

Anywhere Real Estate Inc. misses on earnings expectations. Reported EPS is $0.24 EPS, expectations were $0.33.

Operator: Good morning. Welcome to the Anywhere Real Estate Second 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. At this time, I would like to turn the conference over to Anywhere Senior Vice President, Alicia Swift. Please go ahead, Alicia.

Alicia Swift: Thank you, Rihanna. Good morning and welcome to the second 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. As shown on Slide 3 of the presentation, the company will be making statements about its future results and other forward-looking statements during this call. These statements are based on the current expectations and the current economic environment. 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.

And the incurrence of liabilities that are in excess of amounts accrued or payments made in connection with pending litigation. Actual results may differ materially from those expressed or implied in the forward-looking statements. Important assumptions and 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. Note that nothing we say today should be construed as an offer or solicitation to purchase, sell, or tender any securities. For those who listen to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, July 25, 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.

Ryan Schneider: Thank you, Alicia. Good morning, everyone. In the midst of a challenging housing market, we delivered results in line with our expectations and continue to invest to set Anywhere Real Estate out for an even stronger future. During the second quarter, we delivered $1.7 billion of revenue and generated $126 million of operating EBITDA. Our closed transaction volume was in line with our estimates, and we are on track to deliver $200 million of cost savings this year. And our agent commission results came in better than expected with some of the best year-over-year results we’ve seen in a long time. We remained focused on improving our capital structure, especially our priority to leverage our balance sheet. And today we announced a debt exchange transaction with one of our bondholders, and our intention to conduct a broader exchange offering on similar terms.

And importantly, we continue to invest to drive our strategic agenda, which includes growing our high-margin franchise business, expanding our luxury leadership position, simplifying and integrating the consumer transaction experience, and further transforming our cost base as we position Anywhere Real Estate to both benefit from a stronger housing market and to lead into the future. Now starting with the housing market, we remain in a tough part of the cycle. With six months of the year behind us, it looks like our industry is heading towards $4.2 million to $4.3 million annual unit transactions, which would be by far the lowest level in over a decade. And if you look past the Great Recession, we’ve not seen unit transactions this low since the mid-90s.

But we planned for a challenging 2023, took aggressive actions in both cost reductions and investing for the future, and we are seeing our volume metrics come in consistent with our expectations that we shared with you. Q2 transaction volume was down 23% year-over-year. The decline was almost all unit driven, and we saw unit volume declines be pretty consistent across our markets. Our home prices were basically flat year-over-year, as we’ve all seen incredibly tight inventory creating supply challenges, even in this higher mortgage rate environment. However, we see significant geographic variation in price trends in our results. Across about two thirds of the country, including large states like Texas and Florida, we saw price increases on average by about 3% versus last year.

But a few of the bigger markets, in particular California and New York, we saw prices down in the mid-single digits, consistent with our first quarter trends. And in Q2, the more positive, detailed trends in our portfolio have persisted. Open volume compared to prior year continues to look better than closed volume compared to prior year, each month in the quarter. And volume comparisons to 2022 improved each month in the quarter, both as the market has a little more positivity and as the 2022 comparisons get easier. And all of this is consistent with our quarterly and full year guidance. Now, the challenging housing market affects the entire industry, and we like the fact that it establishes a level playing field, because Anywhere Real Estate is best positioned to prosper because of some of our unique advantages, including our high octane industry leading franchise business with six nationally recognized brands, our opportunities from having end-to-end national assets and brokerage, title, mortgage and insurance.

Our powerful lead generation is a time when quality lead generation is more important than ever at our high impact technology and data scale. And we’re harnessing these advantages even in a tough market to charge ahead on our strategic priorities and position anywhere for long term success. Some examples of that include, first, we are laser focused on changing how we operate to deliver efficiencies that help simplify, automate and streamline our operations. We continue to make considerable progress in our cost transformation and expect to take $200 million of costs out of our business in 2023. And Charlotte will share more on this shortly. Second, we are integrating our national brokerage and title support operations to make the real estate transactions simpler for the agent and consumer to make it easier for us to capture title and mortgage economics and to be more cost effective as we streamline those businesses.

Third, we love and put significant effort into growing our powerful franchise business. Beyond the recent record years of franchise sales success, Anywhere Brands is further strengthening its value proposition by providing new and innovative offerings to franchisees. As one example, Anywhere is now using our technology and data scale to help our franchisees achieve better results via our recently launched Affiliate Insights product. This new product helps individual franchisees run their business better by drawing on Anywhere’s extensive internal and external data to provide them actionable insights on growth, on their cost base, on agent migration opportunities and on other critical topics. And I love the demand I’m hearing from our franchisees.

Finally, Anywhere is an innovative technology provider and we’re the industry analytics leader leveraging our unique data scale. We are finding exciting opportunities using generative AI and large language models and we’re committed to being on the forefront of this new world in our industry. Now, if you look backwards, we like the analytic and the machine learning insights we’ve been using to enhance our business. And so for example, the agent recruiting machine learning model you’ve heard me talk about with you before. But today I’m going forward, we are seeing large language models have real power for real estate’s future. For example, augmenting real estate marketing, including designing and executing marketing campaigns. And I’m personally very intrigued by photo and image-based AI innovations like virtual renovations, as well as this the whole opportunity to simplify the transaction.

And we are starting multiple proofs of concept to explore these and other opportunities. Now, these new technologies are also already helping us run our company differently. E.g., our software engineers are using these technologies to code more efficiently. E.g., we have a few early pilots where large language models are providing support to our employees. And we’re really excited about these new analytic opportunities even in these early days. We still have people looking at the output of our generative AI experiments given the importance of ensuring accuracy. And we have a lot of work to do to both train and tune these models on our specific data and on real estate industry data more broadly. But we’re really excited about it. We know these new technologies will change how every company operates.

And we’re committed to being at the forefront of that journey. So I’m going to come back later with a few closing thoughts. But for now, I’m going to turn it over to Charlotte to discuss our results in more detail.

Charlotte Simonelli: Good morning, everyone. We are pleased with our second quarter results given the market dynamics which continue to improve sequentially, as expected. We remain focused on what we can control, reimagining how we operate, driving cost efficiencies, prudently managing cash, and being opportunistic on our capital structure. We believe these actions will enable us to drive differentiated performance and set us up well for when the housing market improves. Now I will highlight our second quarter financial results. Q2 revenue was $1.7 down 22% versus prior year and in line with our transaction volume decline. Q2 operating EBITDA was $126 million down versus prior year due to lower transaction volume and slightly higher agent commission costs, which were offset in part by cost savings across the enterprise.

Q2 free cash flow was $105 million as we prudently managed our cash, which we used in a consistent way with our capital allocation priorities to invest in the business and partially repay some of our revolver borrowings, which stand at $310 million today. Free cash flow in the quarter benefited from improved working capital and the relocation securitization facility. Consistent with our capital allocation priorities to reduce our debt, we are pleased with the opportunistic financing transaction we announced this morning with one of our bond holders agreeing to exchange approximately $275 million of their 2029 and 2030 senior notes for approximately $220 million in new 7% second lien 2030 secured notes and our intention to conduct an exchange offer for a portion of the remaining 2029 and 2030 notes on similar terms.

As Ryan mentioned, we view these transactions as an opportunistic way to deleverage with minimal incremental annual cash interest expense while retaining our flexibility going forward. Now let me go into more detail on our business segment performance. Our Anywhere Brands business, which includes leads and relocation, generated $164 million in operating EBITDA. Operating EBITDA decreased $40 million year-over-year primarily due to lower revenue related to transaction volume declines partially offset by decreases in operating and marketing costs. Our Q2 Anywhere Advisors operating EBITDA was negative $10 million down $21 million versus prior year due to lower volume and slightly higher agent commission costs also offset in part by lower operating and marketing expenses.

Commission splits in Q2 were up 32 basis points year-over-year, which was better than we expected in the quarter. We have been taking advantage of an improved competitive backdrop and our proactively managing splits. Also, there are even parts of our business, especially in luxury, where our splits were even lower than prior year in the quarter. Anywhere integrated services was $10 million in operating EBITDA in Q2. Operating EBITDA declined $11 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 $3 million of improved GRA JV performance. As Ryan said, we continue to change how we operate and that is driving efficiency and lower costs.

Before I talk about the cost savings, let me provide some additional detail on our overall cost structure. In 2022, operating, marketing, and G&A expense line items totaled about $2 billion. Of this total, headcount related expenses were about $1.1 billion and office related expenses were about $220 million. As these are the majority of our expenses, this is where most of our savings come from and represent about 70% of our 2023 cost savings program. For example, we have reduced our headcount by 15% since June 2022. And on the real estate footprint, we are focusing our efforts to reimagine and transform our real estate brokerage offices to be more efficient, flexible, and integrated with transaction support services entitled in mortgage. We expect to reduce our brokerage and title footprint by about 10% this year with most of the actions already completed.

Please refer to slides 18, 19, and 20 for further details. Year-to-date, we have realized approximately $100 million of our $200 million cost savings program. The savings will be realized pretty evenly throughout the year and we consider approximately two-thirds of our full year savings will be permanent and not expected to return when volumes increase. These savings, however will be offset in part by inflation and by litigation costs. Between 2022 and 2023 we expect to realize a combined $350 million of cost savings, which is a huge accomplishment. Our focus here reinforces our commitment to reimagine how we work while delivering a better experience to our agents and customers. And we’ve nearly achieved our 2026 cost savings target that we laid out in our investor day last year.

Now, onto our updated estimates for 2023. First, we expect Q3 closed volumes to be down about 10% versus prior year. This is the third quarter of sequential improvement in year-over-year transaction volume driven in part by easier comparisons to the prior year. Second, based on the year-to-date split trends, we now expect full year split pressure of about 50 to 75 basis points. We really like our actions in this area, the improving volume trends, and the better competitive environment we’re experiencing. Estimates that remain the same as our last call. For full year 2023, we continue to expect transaction volumes to decline about 15% to 20% year-over-year and likely towards the better part of that range. We also still expect transaction volumes will improve sequentially throughout the year.

We expect our operating free cash flow to be modestly positive as favorable working capital, 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 items. Finally, we are on track to realize $200 million of P&L cost savings in 2023. Let me now turn the call back to Ryan for some closing remarks.

Ryan Schneider: Thank you, Charlotte. So as I reflect on the second quarter, I’m proud of how our team navigated this tough housing environment to deliver results. And I’m excited about the future progress we made in the quarter to set up our business for greater growth when the market rebounds, to permanently streamline our cost base as we operate differently, to reimagine the agent and consumer experience, and to enhance our analytic leadership as we experiment with generative AI and large language models. Now looking ahead, I remain optimistic about the housing market over the medium term and our ability to lead into the future. Together with our employees, affiliated agents, and franchisees, we’re seizing this moment to position Anywhere Real Estate to move real estate to what’s next. With that, we will take your questions.

Q&A Session

Operator: [Operator Instructions] Your first question comes from Matthew Bouley with Barclays. Your line is open.

Unidentified Analyst: Good morning. You have Elizabeth [laying] it on from Matt’s team today. Just kind of starting off, I was wondering if you could offer a few comments just around the commission split trends. And you mentioned that luxury splits had kind of moved down. Would you mind talking a little bit about what you’re seeing, just the details around agent splits, maybe higher end splits versus the overall market. And in the longer term, how you’re kind of thinking about balancing commission splits with the expansion of agent tools?

Charlotte Simonelli: Absolutely. So we really benefited in the quarter from a few things. But basically, because the competitive environment has improved, what we’re seeing is that, while we still have prior years and quarters recruiting and retention, it is not, we’re not having to add nearly as much to that. So as the volume continues to improve as we come into the season, it has a lesser impact on the split because the competitive environment is better. And we, we’re, we’re just basically rolling off the majority of prior years recruiting and retention. On the luxury side, like I mentioned, some of our luxury side is actually down versus prior year. And all the split plans are actually quite different brand by brand. Some of our split plans actually did reset all at the same time in January for some brands.

And we’re bit that’s part of where we’re seeing the benefit year-over-year actually being down. So we like the trends, we like the competitive environment. And as it relates to the overall agent value proposition, absolutely. So there’s lots of other ways to provide value to agents that is not in the commission split. I think Ryan’s referring to some of that in his prepared remarks. And that definitely helps balance overall. So good call out there. That’s something we’re absolutely focused on for the future.

Unidentified Analyst: Okay. And then just to follow up, do you have a view on where agents are, kind of see the top concerns for home buyers in today’s market? I don’t know if you have like kind of a pulse on what they’ve been saying and such. But, is it mostly an inventory issue? I mean, obviously, inventory is a major issue. But is that where they’re seeing kind of the largest pressure on volumes for, home buyer decision making or are rates kind of making that decision for buyers?

Ryan Schneider: So it’s a great question, Elizabeth. Thank you for asking it. Yes, we clearly have a pulse on the agents with the kind of couple of hundred thousand here in the U.S. that we, support and interact with a bunch of them regularly, as you would want us to. Look, the biggest thing I hear from agents is just, they need more houses to sell, right? And for buyers, it’s just tough out there when supply is just so limited. And obviously, a lot of that comes out of the, the mortgage world and in a world where, 60 plus percent of people have mortgage rates below 4%. It’s just such a barrier to supply with mortgage rates now at 6.7 or whatever they are. And so there’s a lot of people who want to buy houses even at higher mortgage rates and with the affordability challenges at grace relative to the houses out there for supply.

And so that’s why in my script, I referred to, high quality lead generation, anything we can do to help our agents, actually get a transaction in this tight, very low transaction year is critical. But the biggest thing I think buyers are frustrated with is just the lack of choices out there. And it’s the thing that’s kind of dominating the challenges in the housing market right now is just that lack of supply with high mortgage rates being a big piece of why that supply is so low.

Unidentified Analyst: Thank you. That’s really helpful.

Ryan Schneider: Thank you, Elizabeth.

Operator: Your next question comes from Tommy McJoynt with KBW. Your line is open.

Tommy McJoynt: Hey, good morning, guys. Thanks for taking my questions. The first one is just to the extent that the housing market does sort of remain stuck in this $4.5 million existing home sale market and fast-forwarding too, I guess all of your expense savings having been fully action. Can you help us think about the earnings power of this model, perhaps just to put some guideposts around maybe what the EBITDA power is in this type of market backdrop?

Ryan Schneider: Yes, sure. Good question, Tommy. So, look, look obviously the easiest way for anyone to grow in our industry from an earnings standpoint is when the market’s stronger, but if you look at the actions that we’re taking today, we should show you that, we’re committed to driving EBITDA growth, no matter what the market is and our EBITDA both kind of absolute and relative results on a competitive basis are going to look pretty darn good. And a lot of it starts with the cost stuff that you referenced and Charlotte referenced, right? The more we transform our company to be simpler, more automated, more digital, you think about the $150 million last year, the $200 million this year. And today’s not the day to talk about it, but there may be more in the future, right in that kind of world.

So that’s a big bucket. But even in this market there’s some of the opportunities we’ve also been working on that would add more to our revenue and to our bottom line. If you think about the transaction integration opportunities that can kind of bring more mortgage title economics into the ecosystem, even at today’s transaction levels, that creates EBITDA upside for us. And we like the early green shoots on that. And we’re still investing in that in this tough market. And then some of the consumer specific things that, we’ve talked about over the last kind of year or so whether it’s in the lead area or some of the other consumer insights, again, those can add to our economics and we’re still investing in those things right now. And then even in this market, that the thing I talked about trying to grow that, high margin franchise business, grow in luxury, like gains in those areas will add to our ability to do EBITDA growth even in a low market.

And we have the octane to invest pretty well even in a down market, like we’re in the middle of, as you can tell from our remarks and how we’re using our free cash flow. But we also, as this quarter shows generate meaningful EBITDA, generate meaningful free cash flow that enables those things. And so we like, we don’t like a tough housing market, but relative to the rest of our industry, I think we’re actually much better positioned to do well in a tough housing market.

Charlotte Simonelli: The down housing markets don’t last forever. And if you look over the last 30 years or 40 years, they tend to last, what, two, three-ish years. And so the savings that we’re doing, most of which are permanent, are going to benefit us into the future. And so that’s kind of how we’re focused on that as well.

Tommy McJoynt: Got it. Thanks. And then the second question, I do want to ask about the pending industry litigation because it’s an area where we’re frankly getting a lot of questions. I understand you can’t opine on the actual outcome of, what’s really uncertain class action litigation. But can you just help us think about the impacts on a commission-based business model like yours if we were to see a widespread decoupling of the buyer’s agent commissions, which I think is at the heart of what this litigation is about?

Ryan Schneider: Well, this litigation is about, as I understand, it’s about the mandatory nature of the participation of the participation rule. I think speculating on what could come out of it is kind of speculating on the trials themselves, which I’m not really going to do. But we have a strong belief in our ability to defend this pretty vigorously. We’re very focused on it. We’ve got a trial coming up in October that we’re very focused on. And we dispute the allegations against this and believe we’ve got substantial offenses and we’re going to vigorously defend them. But, litigation stuff, including class actions have a lot of uncertainty. These antitrust cases have a lot of co-defendants and joint and sever liability. So you should always be looking at our queue. We think we do a pretty good, darn good job of updating people on the latest developments. And we’ll probably just leave it there, Tommy.

Tommy McJoynt: Okay, thanks.

Operator: Your next question comes from Soham Bhonsle with BTIG. Your line is open.

Soham Bhonsle: Hey, good morning, guys. Thanks for taking my questions. Charlotte, the first one on the debt exchange program. Should we think of this as sort of being a wash, I just want to go forward based on being a wash on the interest expense and then principles sort of coming down over time, and is this more, opportunistic here, or do you continue to see, sort of being in the market than doing these deals?

Charlotte Simonelli: Yes, like as I mentioned in my prepared remarks, we do see this as opportunistic. I did try to highlight that this is a very nominal incremental interest expense going forward. We do see this as a great way to deleverage and that’s really the reason that, we’ve done this transaction, so that’s, that’s kind of been a similar philosophy of mine over the past few years, trying to deleverage, and so that’s really the primary reason why we’ve done it.

Soham Bhonsle: Okay, and then, I guess, Ryan, on transaction volume, so I think you guys are guiding down 10 and that sort of implies a little bit of improvement from 2Q, right and sort of the things that we’re seeing on the mortgage side, those sort of suggest that things slowed down, maybe in the back half of June, so I guess, what’s giving the confidence to sort of hit that 10%, right and is that just in line with industry volumes, like how are you thinking about that, hitting that guide?

Ryan Schneider: Yes, I mean, so, look we’re doing that guide, having the benefit of having our, July data through effectively, let’s call it, last Friday, I guess 21st or so, but we’ve also seen the mortgage stuff move around kind of within the quarter, different ways, so we’re not going to let what happened with mortgage in the last two weeks of June dominate kind of all the other data that we’re getting, but basically the trends that we’re seeing are kind of continuing, like I said, in our portfolio the opens continue to look better than the closed, and that’s been true every, it was true in April, it was true in May, it was true in June, we’re seeing it true in July the comparisons to the year before keep getting better, some of that’s the market, some of it’s the easier comparison, that was true in April, May, June, the July numbers so far are kind of consistent with the number that we just gave you.

And so we have so much data, we have it geographically in every state, we have it nationally, we have the opens, we have we have the new listings coming in, we even have, appointment data, we have all kinds of data that kind of gives us a sense of kind of what’s coming and so we kind of landed around that 10% decline versus last year and then again, the 15 to 20 for the full year, we’re seeing it at the better end of that range, we kind of stuck with that range the whole year, that’s pretty consistent with, forecasters like Fannie Mae and Goldman Sachs who are at that 4.2 million units to 4.3 million units kind of thing, so we haven’t seen big swings bluntly, but when we look at kind of all the data we have, including our kind of most of July data, we think that’s the expectation you should have from us and then on that full year basis, we’re trending toward the better part of it, and again some of that is us and some of it’s just good, but that’s kind of the ecosystem that we’re pulling that guidance out of.

Soham Bhonsle: Got it. And Ryan, if I could just squeeze one more in on the competitive environment, obviously the splits sound is a good sign here, but can you maybe just talk broadly about what you’re seeing on the agent recruitment side between full service models like yourselves versus maybe independence or other sort of models out there? Just curious on that.

Ryan Schneider: Yes, look, I mean, I think if you look at the industry data, you’re saying that there are fewer, two industry data trends right now in the agent front. So one is there are fewer agents moving now than have been moving any time in the past five or six years. And a piece of that’s clearly the better competitive environment. The other thing happening on the agent front right now is, frankly, agents leaving the industry typically lower non-producing agents, especially when you get, fees and stuff, licensing fees and stuff like that do. And we saw this in Q2 and COVID too by the way in 2020. And so both of those trends are happening. And I think the first one is partly because of the kind of better competitive environment Charlotte referred to.

And doesn’t mean it’s easy out there. It doesn’t mean everybody’s still not focused on recruiting. We’re very focused on it. But it’s a little, different than it was for sure, like three years ago or four years ago. And it’s even, again, I think better than it was, a year or so ago. And some of that shows up in the results that Charlotte talked about. And then some of the, there’s certain competitors who, pull much more from the mass market. And there’s others who pull much more from the higher end. And because we play full spectrum, we compete pretty aggressively with all of them. But when we look like head to head against, some of the other big companies in our industry, we like our numbers. We’re a net winner often in those comparisons. And we even in a tough market, we got some, we have both some experience and some assets and some financial stuff that a lot of companies don’t have.

And so, like Charlotte said we’re a lot of what we’re doing, including on the agent side, is trying to set us up for even greater success in a stronger market.

Soham Bhonsle: Great. Thanks a lot for the color.

Ryan Schneider: Thank you.

Operator: Your next question comes from Anthony Paolone with JP Morgan. Your line is open.

Anthony Paolone: Thanks. Good morning. I guess first one is just following up on the competitive landscape, just on the share side. I guess if I’m looking at the NAR data in the quarter, just using median price is down about ‘22. And I guess you guys are down about ‘23. Like just, is that, do you feel like you lost share? Are you guys looking at it differently? Can you just comment on the share side?

Ryan Schneider: We feel like we’re right on. I mean, we were down ‘23, NAR was down [2022]. I don’t even know if there’s any rounding in that. But, look I said in the prepared remarks, Tony, California and New York were the two big drags, especially from a price side in our portfolio kind of down mid-single digits. And I think those numbers are true by the way, for everybody. But remember those are our two biggest markets. So if you want to map us to NAR, you’ve probably got to reweight us a little bit. And I think we’re kind of like right around them, maybe a little bit better. I don’t know. But, when they’re down in ‘22 and we’re down in ‘23, and we’re so, heavy in kind of the two worst geographies, it kind of feels like we’re, basically kind of, holding share. I don’t know maybe if we reweight it, we’re a little better. But that’s not a thing that has been keeping me up at night when I watch the number share.

Anthony Paolone: Okay. Good. Thanks for that. And then, second one, on the lawsuits in G&A, can you give a sense as to whether or not you continued to accrue in the quarter?

Ryan Schneider: Yes, we didn’t do any accruals this quarter. You got to remember, the accruals cover several litigation matters, there’s the class actions. We also have, a couple of other things out there. But we didn’t do any accruals, of the type you’re talking about in the quarter. And having done, three quarters in a row where accruals were a headwind to our strong operating performance, it’s nice to have a quarter where we’re not doing that. We don’t break those legal accruals out. But, we do aggregate those accruals with other items, including our non-cash long-term incentive comp, other non-cash charges, other extraordinary non or unusual recurring charges. And we show that big group aggregation in table 8(a), the press release.

But, this was a quarter where we didn’t have a development that required an accrual. But, Tony, the litigation is complex. It evolves every quarter. And we’ll keep providing you the quarterly updates in the discussion of our litigation in our 10-Qs. So you should always check those out. But this was a quarter without the kind of accrual we’ve been talking about in some previous quarters.

Anthony Paolone: Okay. So, but it just makes sure I understood that. But there were other accruals in the quarter, is that what you said?

Ryan Schneider: No, no, nothing, basically, no, nothing, no, no, no.

Charlotte Simonelli: And if you look at G&A on the quarter, it’s down versus the prior year. And we do have cost savings. But to Ryan’s point, there’s other, there’s always other moving pieces.

Unidentified Analyst: Okay. I understand. And then just last one on the exchange offer. I guess if you get, a lot of those bonds exchanged, is the, is there a taxable gain? Do you anticipate having to pay taxed on that this year? Or do you get some cover for that given just the general weakness in the business this year? Just how does that work?

Charlotte Simonelli: Yes. We did announce that we planned to do an offer. We haven’t gone there yet. So there’s really I’m limited by what I can say based on securities law. But if you look at the structure of those types of things, if they were to happen, there can be tax implications that something that we’re, we’re obviously evaluating and getting full ahead of. And if that was to be the case, but there’s really not much I can say about that at this moment in time.

Anthony Paolone: Okay. Thank you.

Operator: Your next question comes from Ryan McKeveny with Zelman & Associates. Your line is open.

Ryan McKeveny: Hey, good morning. And thanks for taking the questions. I guess one to start, I guess in terms of your total transaction sides, I’m curious if you have or can share a rough breakdown between how that splits between buyer side and listing sides and given your size and scale, maybe my baseline assumption is maybe it’s about 50:50, but I’m curious if there’s a skew there. And then specifically on the listing side, I guess just any thoughts or anything you can add around what you’re seeing in terms of new listings coming to market, what do you think it takes to get back to a more normal pace of homeowners actually listing their homes and whether it’s by market or by price point. Just curious if there’s any kind of green shoots or encouraging signs you might be seeing to suggest that more listings, will be coming to the market?

Ryan Schneider: Yes. So, Ryan, look, given our size and scale, 50:50 is totally the right assumption, on buyer versus sell side listings and listings, clearly way down versus a year ago, and it’s a supply issue as we’ve talked about, we’re seeing the biggest pressure on listings as you would probably expect in the mass market in the first-time home buyer, if you look at the July data that I referred to in an earlier question, we’re actually seeing luxury listings in July improve more than the rest of the market. So that’s kind of the one price point thing that, we’re seeing some green shoots on that we’re interested in, especially with our luxury leadership position, in terms of what it’s going to take, I’ve got a pretty strong view on this, and I think it’s, mortgage rates in the 5 to 5.5%, I referred earlier to the, the percentage of people who, the 60-plus percent of people have mortgages below four, 82% or 85% of people have mortgages below 5%, and what I really look at here Ryan is the home builders and I spoke to one of the home builder CEOs. We communicated, it was a month ago, they’re moving a ton of product, and part of that is obviously because there’s very little inventory in the resell market, but they’re also moving the product because they’re buying down mortgage rates, into that 5 or 5.5% rate.

In fact, this CEO told me that, they’ll buy a mortgage down to 4.99 for any house being delivered in the next 60 days and then their other buy downs take it to 5% to 5.5%, and so there’s some real clear evidence to me there that, at those mortgage rates, consumers are absolutely ready to buy, want to buy, it’s not an affordability issue, but if those guys could move product without buying down, they would, but they’re not, they’re buying it down, so it tells me that, 7% mortgages are both tough in terms of bringing supply to the market, and 7% mortgages are tough for consumers on affordability, and so to really unlock both the supply side and even some more on the demand side, mortgage rates in that 5 to 5.5% is kind of what I’m really focused on.

Now, again, we’re going to do all right, even in a tough market, as you can see this quarter, with our earnings, with our free cash flow, our ability to invest, but, imagine our octane both on the, with the cost changes and some of the other innovations we’re doing in a much, much, more normal market, what that could look like. We get real excited about it, but I think that homebuilder actions gives, gives us all a path to what really is moving homes and what consumers are willing to do and I’m obviously rooting for the home builders.

Ryan McKeveny: Yes, that’s really helpful, Ryan. Second question, so you’ve mentioned a few times, California is one of your biggest markets. I guess one of the headlines we’ve all been seeing more recently is homeowners insurance companies pulling out of the state and as well as some other parts of the country. I guess any impact you’re seeing on, on home sale activity in, in some of those markets and if it’s not tangible at this point, I guess, is it a focal point of agents or buyers and sellers in those markets? And just kind of curious how you’re thinking about, this topic of homeowners insurance and some of these bigger entities pulling out of different markets?

Ryan Schneider: Yes, it’s a great question and there’s really kind of a tale of two cities. Florida is not, even though, Florida gets headlines on this issue, it’s not something I’m hearing about from agents or franchisees. And it really just doesn’t come up a lot. That doesn’t mean we’re not watching it. It just doesn’t come up a lot. It does come up a little more in California. And remember California kind of has both the higher price point thing and the luxury thing kind of in greater share than probably anywhere else in the U.S., other than maybe New York City. And we do see a few more like properties there that are just hard to sell because they’re not insurable, basically, for the reason that you talk about. Now, these tend to be pretty anecdotal, I’ve talked to our, Southeast International Realty Leader about one in the last quarter, for example, but it is something we’re watching.

I mean, I think at the end of the day the idea that any state in the U.S. isn’t going to have home insurance available is unlikely from just kind of a government to kind of market forces thing. But it’s, I put it in a, it’s one of yet another kind of headwind in the California world, along with the taxes and other things. Whereas, Florida with its tax advantages, weather advantages, et cetera, it just doesn’t really show up as a headwind. So it’s on the radar but there’s probably some bigger issues on the radar when you look at like the California versus Florida comparison. But again, more anecdotal, but enough anecdotal that I do notice.

Ryan McKeveny: Got it. Okay. Thank you very much.

Ryan Schneider: Thank you, Ryan.

Operator: Your next question comes from John Campbell with Stephens Inc. Your line is open.

John Campbell: Hey, guys. Good morning.

Ryan Schneider: Good morning, John.

John Campbell: Hey, good morning. On the brokerage business, obviously, I mean, it’s still a pretty tough operating environment. I think revenue is down $400 million or so year-over-year. But you only saw a $21 million drop in EBITDA for the brokerage segment. I know that’s obviously a very high variable cost business you had, a little bit less splits, growth, pressure. But clearly, there’s a lot of self-help there. Charlotte, it sounds like you spoke to this pretty extensively on the call saves. And I think that is very helpful as far as the disclosures of kind of the breakout of savings by segment. But my question here is, if you could maybe talk to, the degree of the remaining call saves throughout 2026 and kind of how much of that is going to be directed or geared towards the brokerage segment and then just maybe more nearer term, do you feel like you’ve got the business cost-wise in a good spot where if you saw maybe even modest brokerage growth, you could get back to margin expansion there?

Charlotte Simonelli: So I’ll take the last part first. Yes, and it kind of goes to the answer I gave earlier. Yes, I do believe that because we are at a pretty historically low housing market, these are sizable cost savings of which most are permanent and they will definitely benefit us when we get to more normalized housing markets, north of $5 million absolutely. It’s far, like, so thanks for the feedback on the slides. We’ve been taking feedback on this, we tried to give additional detail here to highlight that the majority of our costs really are people-related and then sort of occupancy and other things and because of that, yes, a lot of the cost savings this year are going to come out of brokerage. Now, we’re not giving updated 2026 numbers this quarter.

You’ll likely hear more about that from me later this year, but just basis where the costs are, we’re constantly mining across the business and the majority of the costs sitting in on brokerage, title, etc. Clearly, there’s going to have to be, sort of more to come. So we like the magnitude of our savings. We do believe we will be a big beneficiary of this to our margins when the housing market gets more normalized. But that doesn’t mean that we’re done and we’re constantly looking at ways to make our business more efficient. And also at the same time a lot of the stuff that we’re working on now delivers an even better experience for our agents and our customers. So more to follow on that. But happy that folks are able to see sort of the benefits of the actions because of the magnitude of what we’ve done you can see that on the different operating and G&A and marketing line items in the P&L.

John Campbell: Okay, that’s very helpful. And then, back on the legal expenses, Ryan, you pointed this out, but you can definitely see the add-backs in the, I guess, one of the late tables in the press release. I think the senior secured leverage ratio table, you can see it there. You guys are obviously not adding that back to operating EBITDA. I mean, if you look over, the last 12 months, I mean there’s been a pretty substantial step up relative to maybe a year and a half, two years ago. I think clearly, you’re spending a lot there. But if you look at it from last quarter, it looks like it might have stepped down on a 12 and 12 month basis. So I don’t know how much detail you can provide there, but was that lower legal spend? I know you talked to their crews, but just kind of on an ongoing basis. Is that a step down and spend?

Charlotte Simonelli: It’s not so much that it was a step down and spend other than there were no incremental reserves that we did. Now, there’s always stuff year-over-year. And I’m sure we had something in the prior year that we’re lapping, but nothing material. So it’s really the absence of incremental new spend. And then there’s other —

Ryan Schneider: John, remember, Yes, that line item has non-cash long-term incentives comp. It’s got other non-cash charges. It’s got other extraordinary non or unusual recurring charges. And so, yes, the number in that table went down a little bit from last quarter. It’s just a few things rolling off from the year before. But it’s not a change in the core thing that we were talking about. And as Charlotte said litigation costs unfortunately is one of the cost headwinds we do actually have still given the upcoming trials.

John Campbell: Okay. And then just one more on the legal side. I mean, Ryan, I know you guys can’t talk much there. So definitely don’t want you to step out of bounds. But, I mean, I saw the update from the Bright MLS, which is the nation’s second largest MLS. But I think they’re named as a co-conspirator in the moral case. But it sounds like that they are going to basically kind of diverge from the NAR rule, the participation rule. So I was curious, again, don’t want you to try to step out of bounds here, but is there official messages coming from you guys, corporate-wise, as far as a stance or a message on the participation rule or maybe even more specifically what Bright MLS is proposing to do?

Ryan Schneider: We’re not going to talk about what Bright’s doing. But look John we’re on public record that we don’t think NAR’s mandatory participation rule is necessary. Period, like we’re literally on public record about that. So and we’ve been on public record for a while about that. So what — what, what everybody should know is that we have that strong view and we haven’t been shy about sharing it. And so we’ve still got these trials and we’re going to, defend them, vigorously and everything. But, we have a view on that specific thing and it’s a public view. So I don’t mind commenting on it, on it here. And we don’t think the rule is necessary for Mark to stop right well. We think agents for both buyers and sellers create real value for the consumer.

And there’s there’s geographies in the U.S. that don’t have that rule and they operate really well for consumers, for agents, for homeowners. And so we just don’t think NAR’s mandatory rule is necessary. And again, we’re on public record.

John Campbell: Thanks for the color. We can agree with you. Thank you.

Operator: There are no further questions at this time. With that, we thank you for joining us today. This concludes the conference call and you may now disconnect.