Anywhere Real Estate Inc. (NYSE:HOUS) Q4 2023 Earnings Call Transcript

Anywhere Real Estate Inc. (NYSE:HOUS) Q4 2023 Earnings Call Transcript February 15, 2024

Anywhere Real Estate Inc. misses on earnings expectations. Reported EPS is $-0.54 EPS, expectations were $-0.39. HOUS isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning and welcome to the Anywhere Real Estate Year-End 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’s Senior Vice President, Alicia Swift. Please go ahead, Alicia.

Alicia Swift: Thank you, Brianna. Good morning and welcome to the year-end 2023 earnings conference call for Anywhere Real Estate. On the call with me today are Anywhere’s 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, antitrust and other litigation, regulatory and other uncertainties and contingencies, many of which are beyond the control of management, including, among others, industry and macroeconomic developments.

Actual results may differ materially from those expressed or implied in the forward-looking statements. Last, the references made to January in these remarks are actual results for the month January 2024 included one more business day than January 2023. Our discussions on January closed volumes have been disclosed as both unadjusted and adjusted to reflect like for like number of business days. 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. For those who listen to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, February 15, 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 so much, Alicia. Good morning, everyone. I am incredibly excited about 2024. There’s more optimism in the housing market. We have increasing competitive advantages as a company and we continue to demonstrate our ability to deliver results. And I’m really proud of what Anywhere Real Estate accomplished in 2023. It was an incredibly difficult year in the housing market, with the fewest home sale transactions since 1995 combined with unprecedented industry litigation challenges. All the while, the Anywhere team stayed focused on our strategic agenda. We continued our track record of delivering meaningful results even as we navigated the challenging market conditions. We generated $200 million of operating EBITDA and $67 million of free cash flow in 2023.

Our EBITDA would have been meaningfully higher without our litigation reserves, and our free cash flow would have been above $100 million without litigation payments and taxes related to debt transactions. The ability to generate these levels of EBITDA and free cash flow, even in such a challenging year for housing demonstrates our financial octane [ph], which is a clear competitive differentiator. We realized over $200 million of cost savings as we continue to simplify, automate and streamline our operations for the future, and we have another $100 million of cost savings targeted for 2024. We continually focus on permanently lowering our cost base, which gives us significant earnings power, especially in more normal housing markets. And now in 2023, we also improved our capital structure with more than $300 million of debt reduction.

Continuing debt reduction is critical and remains a top capital allocation priority. We utilized our competitively advantaged financials to invest in the business for future success, unlike competitors who have had to pull back given the down 2023 housing market, we delivered products, marketing, data, AI and automation wins, all to enhance our value proposition to help position us for future growth and to streamline our company. For example, integrating and digitizing our brokerage and title operations to better assist agents and consumers from contract to close, creating a more frictionless transaction experience, growing our franchise network, one of our most important strategic priorities through new and expanded offerings like Affiliate Insights, Listings Direct and Upward Title.

Strengthening our luxury leadership position through continued domestic and international expansion of our high end brands, growing our auction partnership with Sotheby’s auction house and demonstrating our preeminent position, selling the most expensive homes in America, including a $295 million listing that we recently brought to the market and continuing an aggressive generative AI agenda across many parts of our company. Our biggest success scaling are generative AI pilots since we last spoke, are happening across brokerage and title operations and in marketing as we are automating operational tasks and increasing our efficiency. Finally, we successfully architected the first nationwide settlement in the seller antitrust class action litigation.

We are passionate about spending our leadership time and dollars, growing our business and supporting our customers rather than on litigation. Others have written that our position is a competitive advantage relative to the competition who face large judgments or lawsuits, and we agree with that and hope to capitalize on it going forward. And we look forward to our final approval hearing on May 9. Now so as I started the call, we are really excited about 2024. We are seeing more optimism and positivity around housing. The market was very weak throughout 2023 with our and the market’s volume down almost 20% year-over-year as there are only 4.1 million home sale transactions here in the United States, but we’ve started to see some green shoots in the macro economy.

Mortgage rates have come down over recent months. Consumer sentiment around housing is improving and recently hit a two-year high this month, and there are possibilities for rate cuts in 2024. Now, beyond the macro improving, we really like the early indicators we’re seeing in our book. Our open volume in December was up 8% year-over-year, with growth in both units and price. This was the first month we saw positive open volume since December of 2021, and our January results continued the strengthening trend. January closed volume was up 9% year-over-year with growth in units and price. However, there was an additional business day in January, but like for like January closed volume was still up 4% year-over-year. Now home prices continue to be resilient as more than 80% of the country saw price gains in our portfolio in the quarter.

That continues to illustrate the lack of supply challenges in the market. One of the biggest factors that made 2023 such a tough year for housing. We see demand greater than supply also showing up in other metrics. For example, a larger percentage of homes in our portfolio are selling in the first two weeks than they’ve done in prior years. Now, beyond potentially turning the corner with some volume momentum, we like our differentiated results in the market. Most striking is the strength of our luxury business, particularly our Sotheby’s International Realty brand, whose closed volume in the quarter was actually up year-over-year when both the market and our overall portfolio’s volumes were down. And our luxury leadership also serves us well moving forward as the listings growth we’re seeing today on $1 million plus homes is meaningfully outpacing the listing’s trajectory both in the market and in the rest of our portfolio.

Now, while we have a lot of optimism heading into 2024, the two biggest issues of 2023 will both bear watching this year. First, with 2023 a historically tough year for housing, even meaningful growth above 2023’s numbers will still be another challenging year for the housing ecosystem. And second, while we’ve settled our litigation, the industry and regulatory dynamics at play in residential real estate are still ongoing. You should know that we’re bringing the same proactive thinking and leadership as the industry evolves that we demonstrated in our litigation strategy. And I continue to believe the medium-term outlook for housing is quite strong, given both future demographics and the potential for lower interest rates. And if you look at our 2023 results delivery relative to the competition, our business improvements throughout the year and how our financial octane translates as the housing market rebounds, it’s hard not to be excited like we are.

I appreciate how the world has recognized Anywhere Real Estate’s great work as we’ve been named one of America’s most innovative companies by Fortune and to the Forbes list of World’s Best Employers for the third year in a row. This is in addition to our track record as a world’s most ethical company for a dozen years and a great place to work for six years. Now everything I’ve spoken about is because of our great employees, agents and franchisees who helped Anywhere lead through 2023. We I’d like to thank them for their commitment and energy in a tough year, and I love the optimism I’m hearing from our people about what’s ahead for the housing market and for Anywhere Real Estate in 2024. With that, let me turn it over to Charlotte.

Charlotte Simonelli: Good morning, everyone. We had many successes in 2023 despite the challenging market. We generated meaningful operating EBITDA. We over delivered on cost savings. We mitigated future risk with our legal settlements, we improved our capital structure with sizable debt reduction, we saw the best commission split trends we’ve seen in years, and we prudently managed our cash. We continue to execute on our controllables and position Anywhere for success going forward. We believe these accomplishments along with our progress on strategic objectives will drive differentiated results relative to our peers and lead us to deliver long-term value to our shareholders. I will now highlight our full year 2023 financial results.

We delivered full year 2023 revenue of $5.6 billion and operating EBITDA of $200 million even despite significantly lower industry transaction volumes. Our operating EBITDA would have been meaningfully higher without approximately $50 million of litigation reserves that we took for both antitrust and non-antitrust litigation. We generated free cash flow of $67 million and our free cash flow without taxes related to debt transactions and litigation payments would have been above $100 million. Our free cash flow was up year-over-year due to improved working capital and lower CapEx offset in part by lower EBITDA. Our improved working capital was primarily driven by lower incentives paid in Q1 2023. Consistent with our capital allocation priorities, we used our free cash flow to make selective investments in the business to drive growth, including attracting agents and franchisees at better margins and expanding products and services with the highest ROI.

And we continue to drastically improve both our cost and capital structures this year. We reduced debt by over $300 million in 2023, which represents over $900 million in debt reduction since 2019. We are always evaluating ways to further improve our capital structure, and I feel confident in our ability to weather the current market with only about $200 million due before 2026 and ample liquidity remaining on our $1.1 billion revolver. We realized $222 million of cost savings, which was about 10% higher than our target last year, and we have identified another $100 million cost savings target for 2024, which continues our multiyear trend of reducing costs in the business. Now let me go into more detail on our business segment performance. Our Anywhere Brands business generated $527 million in 2023 operating EBITDA.

While down versus prior year, driven by historically soft industry volumes we love our powerful franchise business with its recurring royalty stream, high margins and its relative stability over time. Our Anywhere Advisors operating EBITDA was negative $144 million in 2023. However, this business generated $171 million in operating EBITDA before the transfer of intercompany royalties and marketing fees paid to our franchise business. Commission splits were 80.2% in 2023, up 46 basis points year-over-year, with 15 basis points of that increase coming from lower new development business in 2023. We continue to like the moderation we see in splits with only four basis points of year-over-year increase in the fourth quarter. And in the fourth quarter, split would have been down year-over-year, excluding the new development impact.

The improvement in split pressure this year was driven by low volumes, more stable agent mix, better recruiting economics and other proactive actions we have taken and we see those continuing into 2024. Anywhere Integrated Services operating EBITDA was negative $17 million in 2023 due to lower purchase and refinance volumes which was partially offset by cost savings. We saw improved GRA performance, which was $22 million better than prior year. And given the tough market, we were pretty happy that our mortgage JV was able to break even for the year. I will now provide our current outlook for 2024. As mentioned, we expect to deliver about $100 million in additional 2024 cost reductions including carryover of approximately $40 million of actions already taken in 2023.

Some of these savings will come from integrating and digitizing our support services for brokerage and title, further reducing our real estate footprint, product rationalization and automation across the enterprise. These savings will be offset in part by inflationary pressures. We like the free cash flow our business delivers and that we demonstrated in 2023. However, remember, we have over $100 million of payments expected in 2024 between our $73.5 million class action litigation payment and the $38 million legacy California tax matter as possible headwinds. The strength or weakness of the housing market will also be one of the biggest drivers of our free cash flow in the year. Consistent with Ryan’s remarks, we are seeing a bit of volume improvement at the start of the year but most of the overall improvement in industry forecast comes in the back half of the year.

And given that, you should expect the shape of our earnings in 2024 to look similar to the shape of 2023. We expect more normal seasonal volumes throughout the year, and Q1 is still at historically low unit volumes, which will likely drive our EBITDA negative in the quarter. As the market leader, we have proven our ability to navigate tough markets by continuing to prioritize investing for growth while also delivering efficiencies for today and tomorrow. We continue to be focused on reducing debt and all of this will position us for an even stronger future. Let me now turn the call back to Ryan for some closing remarks.

Ryan Schneider: Thank you, Charlotte. I’m incredibly proud of how the Anywhere team led and delivered through the 2023 housing market. We generated meaningful operating EBITDA and free cash flow, reduced our debt, invested in the business for future growth, over delivered on our cost savings and mitigated risk by reaching a nationwide settlement in our antitrust litigation. 2024 is about Anywhere Real Estate executing on what we can control. Delivering on our strategic agenda and utilizing our competitive advantages to drive growth to outperform the market and to deliver value for our agents, our franchisees and our shareholders. With that, we will take your questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Your first question comes from Soham Bhonsle with BTIG. Please go ahead.

Soham Bhonsle: Hey. Good morning everyone. Hope you’re doing well.

Ryan Schneider: Good morning. Thank you.

Soham Bhonsle: So I guess the first – great. I guess the first one for either Ryan or Charlotte. Thinking about the long-term margins for the business for a second, so over the past couple of years, obviously you’ve been on this cost reduction journey, there’s probably some of that comes back as volumes come back, but it seems like you’re trying to change how you operate all together. So I guess my question is, historically, this business has been, call it, a low double-digit margin business. But in a normalized market, where do you think your margins can go?

Charlotte Simonelli: Yes. So I think prior to the housing market that we’re seeing this year, meaning 2023, we have been at double – low-double digit margins. I mean, they’ve been different years. Some have been sort of huge years some have been more normal years. So I think it depends on the year, but yes, we have had lower double digit margins. I think what’s important to know for going forward is that, yes we are trying to change how we work. And so the cost savings that we’re taking out today are less likely to be added back when the housing market improves because these are like structural changes to our business. So I’m optimistic that we will be able to keep more of this cost out of the business as the market come back – comes back.

Now sure, there’s always going to be a bit of investment that we have to make as the market improves both in like people to support the transactions and other marketing-related costs that will correlate to volume. But I’m actually very optimistic that a lot of the work we’re doing today are going to be costs that stay out of the business.

Ryan Schneider: Yes. And look, we’ve been explicit that two-thirds of our cost reduction we think is totally permanent, right? We’ve been explicit in the past on the temp versus permanent split. And then remember, within that total margin we also have the 40-plus percent margin franchise business that we’re loving our growth on and are strategically prioritizing along with the luxury area. And so we’re always hoping we can do even more on that that helps the overall margin. But that franchise business and the financial octane we get from that is, frankly, probably one of the competitive advantages we’ve got.

Charlotte Simonelli: And keep in mind, none of the $100 million of cost savings is temporary. The $100 million for this year is all permanent.

Ryan Schneider: Yes.

Soham Bhonsle: Yes. Got it. Okay. And then Charlotte, being – historically the $15 million to $17 million framework for every 100 basis points in volume, is that still a fair way to think about the business this year? Or is there any other puts and takes we should be thinking about?

Charlotte Simonelli: Yes. I think that number is more on a normal housing market. I think with the volumes that we’re seeing today, it’s definitely a little bit lower than that. And it’s because more of this is impacted in units versus price. So yes, I would say it’s definitely lower than that in the housing market that we were in 2023, and we’ll see what happens to the housing market. But keep in mind off of this low base, like even a 10% improvement in the housing market is still a low housing market.

Soham Bhonsle: Right. And then just last one on the comments around commission splits, obviously encouraging trends there. But Charlotte, did you mean to say in 2024 we should expect similar to what we saw in Q4, which was close to flat? Or what you sort of produced in all of 2023?

Charlotte Simonelli: So there’s three factors that are going to drive the commission splits, and I intentionally didn’t give a number because the single biggest driver is going to be volume. And I think those are going to – volume will evolve over the year. And I think if you can look at the industry forecast, like huge swings expected in the back half, but we haven’t seen those yet. So that’s part of the reason I’m not giving an actual number. So volume is going to be a huge piece of that. I think I called up the new development business for a reason. Over the five years I’ve been here, it’s never been more than a couple of basis impact like year-over-year. This year, it was 15 basis points. So it was a huge impact. So to the extent that we get back to a more normal new development business, which is highly correlated to New York City, then that will be less of a headwind for us in 2024.

The third factor is sort of the amortization of recruiting and retention payments. And so to the extent that we’ve had much improved economics in 2023, the negative impact from that amortization will also be improved in 2024. But I think you can’t really correlate one quarter to a year. And so I think – think of it year-over-year with the three factors that I’ve just given you, it will depend on volume. If new development is sort of a nil impact on an annual basis next year, that will also be a favorable year-over-year comparison, and we should also see a slight favorable year-over-year comparison on the amortization.

Soham Bhonsle: Okay. Understood. Thanks for all the color.

Charlotte Simonelli: Thank you.

Operator: Your next question comes from Matthew Bouley with Barclays. Please go ahead.

Matthew Bouley: Hey. Good morning everyone. Thanks for taking the questions. Just wanted to ask around all the commission rates, news, maybe one way to put the question would be, and obviously congratulations on all the work with the settlement over this past year. But kind of as we think about maybe some of the risks from the DOJ, how does – how does the settlement kind of shield you from that potential risk? And then maybe just kind of thinking a little beyond that, just potential kind of range of outcomes in this industry from a commission perspective, kind of how are you positioning the business, communicating with agents and all that, just in case you have, again a different range of potential outcomes there? Thank you.