Redfin - Q2 2022

Transcript

Speaker 0

Good day, and welcome to the Redfin Corporation Q2 2022 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Meg Nunally. Please go ahead, ma'am.

Speaker 1

Thanks, Cody. Good afternoon, and welcome to Redfin's financial results conference call for the Q2 ended June 30, 2022. I'm Meg Nunnally, Fredston's Head of Investor Relations. Joining me on the call today is Glenn Kelman, our CEO and Chris Nielsen, our CFO. Before we start, note that some of our statements on today's call are forward looking.

Ms. We believe our assumptions and expectations related to these forward looking statements are reasonable, but our actual results may turn out to be materially different. Operator. Please read and consider the risk factors in our SEC filings together with the content of today's call. Any forward looking statements are based on our assumptions today and we don't undertake to update these statements in light of new information or future events.

On this call, we will present non GAAP measures when discussing our financial results. We encourage you to review today's earnings release, which is available on our website at investors. Redfin.com for more information related to our non GAAP measures, CFO, including the most directly comparable GAAP financial measures and related reconciliations. All comparisons made in the course of this call are against the same period in the prior year, you unless otherwise stated. Lastly, we will be providing a copy of our prepared remarks on our website by the conclusion of today's call you, and a full transcript and audio replay will also be available soon after the call.

With that, I'll turn the call over to Glenn.

Speaker 2

Mike. Thanks, Meg, and hello, everyone. Redfin in the 2nd quarter performed below the expectations we set in our last the call with revenue of $607,000,000 compared to a projection of $613,000,000 to $650,000,000 The shortfall was due to the largest rate hike in 35 years, which in June curtailed the 2nd quarter lending revenues of Bay Equity, the lender we acquired in April by $15,000,000 Our net income was nonetheless in line with expectations Mr. Earnings, after the exclusion of $10,000,000 in restructuring costs for the 6% of our employees we laid off in June. The adjusted EBITDA loss was $29,000,000 Mr.

President. In 5 years as a public company, Redfin has never before fallen short of our revenue projections. But this is also true the company's website from 91% of the homes in America to 94% to compete as a national rather than a regional destination. Our shareholders. Our year over year brokerage share gains once again began to accelerate from 4 basis points in the Q1 to 5 basis points in the 2nd quarter.

We hired agents too quickly during the pandemic, but now sales execution is improving across the board. Of the Redfin customers who bought a home, a higher the company's stock with us for that purchase, the first such gain since April 2020. The percentage of Redfin homebuyers Regatta Redfin Mortgage increased to 11% in June 15% in July, which is nearly double the 5 year monthly high of 8% that we'd reached prior to acquiring Bay Equity Home Loans. Title Forward's 2nd quarter attach rate also more than doubled from 12% in 2021 to 32% in 20 2022. We've learned where low fees let us take share and where we can raise prices to increase profits.

In the markets where we came back to advertising the 1% listing fee we charge our move up customers, new Redfin listings in July grew 10 points faster than the market overall. Mr. President. In the month prior to the campaign's launch, new Redfin listings are growing more slowly than the market. As we invest more in advertising this fee in 2023, buyers, they should save money on their own agents since buyers aren't the ones who pay that agent directly.

On July 26, We eliminated the commission refund we offered homebuyers in 22 markets with few objections from customers or agents. If this pilot continues to be Mr. Sealy will eliminate the refund entirely as early as January 2023, improving full year gross margins in our core business by more than 500 basis points. Mr. President.

In the 9 small markets that already eliminated the refund in 2019, we kept taking share. Our mission to put customers first is stronger than ever, but we need to save customers money at the points of the moving process when money matters the most, Mr. President, as this market correction has forced us to simplify our business. Our goal isn't just to survive the downturn, but to come out of it stronger. Profit discipline and sales execution have become more important to Redfin with housing demand weakening.

As affordability pressure Redfin is still competing effectively for new visitors searching online for homes for sale, but our visitors have become less likely to return the company's credit profile.com and Redfin's mobile applications from 11% year over year in the Q1 to 9% in the second. Over time, Redfin expects to compete better for renters, not just homebuyers. Since adding rental listings to redfin dot Mr. Tom at the end of March, visits to rental listings on redfin.com and redfin mobile applications has grown at a monthly rate of 9%. And the number of inquiries redfin.com sent to our property management customers has grown even faster.

Already redfin.com accounts for 4% of the rental inquiries the operator generated by all of our rental search sites. The redfin.com contribution is just one reason that RentPath, the rentals marketplace Mr. Silcox, we acquired out of bankruptcy in April 2021, recorded its first ever quarter on quarter revenue growth since 2017.

Speaker 3

I I just said first ever,

Speaker 2

I meant to say its 1st quarter on quarter revenue growth since 2017, excuse me. Total rental site visits, including rental traffic on redfin. The company. While we still need to improve customer retention, 2nd quarter bookings are up 24% year over year. Since July 2021, the productivity of salespeople at generating new bookings has doubled.

At the June National Apartment Association Conference, Rent Pat relaunched as Rent. Anointingrent.com is our flagship site rather than apartment guide and simplifying the a story of how our marketing services and online marketplaces work together. As RENT recruits more property managers pastrealtor.com, now second only to Zillow and real estate traffic. Already among people looking to buy or sell a home in the 20 largest U. S.

Markets, 30% in the 2nd quarter named Redfin is one of the first three real estate sites to come to mind compared to 23% for realtor.com. At Mr. Shneur, at the beginning of 2021, these numbers were reversed. Becoming 1 of North America's top 2 real estate search sites can have a seismic impact on demand, accelerating brokerage share gains. And we can invest more in driving demand as we improve monetization.

Mr. President. This is where Redfin has made the most progress over the last 3 months. First, by eliminating our commission refund in the 'twenty two market pilot. 2nd, by increasing the rate at which the Redfin customers who buy homes stick with the Redfin agent for the purchase.

The buyer pullback from the market downturn left many of our agents idle, swinging real estate services to a 2nd quarter adjusted EBITDA loss. Mr. President. But we reduced costs within the quarter, lowering expenses quickly while holding on to the people needed for long term growth. The company's employees.

The company's employees and employees and employees and employees and employees and employees and employees and employees. The company's employees and employees and employees and employees and employees and employees

Speaker 3

and employees and employees and employees

Speaker 2

and employees and employees. Our agent sales pipelines are now mostly full. Another improving measure of agent performance is loyalty sales. The operator. The fraction of our brokerage sales that come from past clients, client referrals or through agents' personal networks had already increased from 24% in 2019 to 27% in 2020 to 32% in 2021.

But in the Q2 of 2022, it rose even higher to 35%. Outside of our layoff, agent attrition is the company's results, following by 5 points from the Q2 of 2021 to the Q2 of 2022. This is why we expect loyalty sales to our site, especially as we offer more incentives for top performing agents. Redfin employs many of the agents we recommend on our site because we believe those agents deliver better service. But employing agents also gives us the standing investors to ask those agents to sell Redfin's suite of lending, title and renovation services.

It's why we could double the rate at which Redfin homebuyers get a Redfin mortgage, So we've only owned Bay Equity since April 1. Our success in Atlanta and Salt Lake City, where 34% of homebuyers got a Bay Equity Mortgage in July tells us that Redfin's overall attach rate of 15% is just the beginning. Over time, we also expect significant margin expansion on our loans. When we announced the acquisition, we told investors the company's shareholders. The Bay Equity and Redfin earned a similar amount of gross profit per homebuyer in 2021 as a tribute to Bay Equity's underwriting efficiency.

Mr. President. Since then, a massive contraction in mortgage lending has led many lenders to issue mortgages at a loss, forcing Bay Equity to cut its gross profit per loan in half. Bay Equity already reduced staffing on July 28. When rates stabilize and Bay Equity can raise prices on new loans and also refinance many of our 2022 loans, Will have the potential to generate more profit from a customer than any other broker.

This acquisition can change the fundamental physics of our business. Red Penn has been a new source of sales for Bay Equity, but also a recruiting partner for building Bay Equity's traditional business meeting homebuyers through agents and other brokerages. In market after market from Washington, D. C. To Seattle to Chicago, Bay Equity has recruited loan officers who once got plenty of loans from run fit agents while working with competitors, but then saw that loan volume dwindle after our acquisition.

Joining Bay Equity, a loan officer gets a steady source of referrals from Redfin agents, but also brings over other customers the company and agent partners outside of the Redfin network. Beyond mortgage, the business most affected by market forces is RedfinNow, which gives homeowners an immediate cash offer. Our Property segment earned $6,800,000 in 2nd quarter gross profit, up from $5,000,000 in the Q2 of last Mr. Shire. But because of a sharp decline in U.

S. Home buying demand, we now expect to sell the homes we agreed to buy in April May for a loss after accounting for holding costs, the operator's office and the operator's office. That won't be enough to sink our battleship. Our forecast assumes home prices keep declining moderately through the rest of 2022, Mr. President.

We still expect our properties division to earn a significant gross profit for the full year. Mr. President. We aren't worried about the homes we agreed to buy in June or July because we haven't bought as many or paid as much for these homes. In April May, Redfin Now's offer amounts were based on the assumption that home prices would hold steady over the 4 months that it typically takes us to clear out the original owner to get the home on the market and to get the next owner under contract.

In June July, RedfinNow assumed home prices would decline about 6% over that time. Mr. President. We're now selling homes much more quickly than we are buying them. In July, we put more than 4 homes under contract to sell for every one we put under contract to buy.

Our inventory should peak early next week at $436,000,000 in homes owned and then decline quickly. We expect that virtually all of the the next few quarters. The next question comes from the line of David. Please go ahead. Hi, good morning, everyone.

We have long believed that homeowners' interest and immediate liquidity is here to stay, but that we wouldn't know iBuying's true margins questions until we weathered a downturn that lasted longer than the fall starts of late 2018 mid-twenty 20. We also believe that iBuying is only worthwhile as part of a brokerage that can serve homeowners even when market conditions make iBuying nearly cost prohibitive. That latter belief has already been vindicated. For every RedfinNow inquiry that led to an accepted offer in June, 2 more led to the homeowner hiring a Redfin agent to list the home instead. Driving brokerage share is the rationale not just for Redfin We built a title business and bought a lender because employing agents less sell a suite of services better than any other broker.

Every extra dollar that these businesses earn from a customer can be reinvested in driving more brokerage demand or can be returned to investors. Mr. Earnings. After all, we're too small and too mission driven to be a holding company for housing related business. We tell ourselves that if the business doesn't drive brokerage share, Mr.

It's out of there. But though each of these businesses shares the same market share goal, we presented the profits of each separately to clarify the scope of our investment in each. Our plan to generate our 1st annual net income in 2024 entails generating adjusted EBITDA in 2023. Only one of our major businesses rentals can lose a significant amount of money next year. Our brokerage generated profits in 2021 and Bay Equity have been profitable for almost its entire 16 year history prior to this summer's rate hike, so both can return to profits when the market settles down.

Chris. We expect the remainder of our businesses will be near breakeven in 2023. Before turning the call over to Chris, let's discuss the housing market, which got significantly worse in June, but then improved in July. The breaking point for many buyers came on Friday, June Mr. President when mortgage rates spiked 30 basis points and climbed another 43 basis points to 6.2.8 percent the following Monday Tuesday to the biggest 1 week jump Vince 1987.

From June 2022 to June 2021, pending home sales I said that wrong, excuse me. From June 2021 to June 2022, pending home sales dropped 20%. Just from May 2022 to June 2022, the drop was a whopping 9% when economists expected it to be 1%. Existing home sales may dip below an annualized rate of 5,000,000 units, a Mendoza line for housing that we haven't breached for a full year since 2014. The operator.

The percentage of homes that had a price drop in June doubled from 9% in 2021 to 18% in 2022, a trend that we expect to accelerate when the dust settles on July numbers. In pandemic markets like Denver, more than half of all listings had a price reduction. In Boise, that number was 62%. From March to mid July, year over year price growth slowed from 16% to 9%, but the value of most homes probably fell further. The reported numbers reflect sale prices only for homes that sold when we know the market has become more selective.

Beautiful homes on quarter lots the company's financial results, but the homes with funky layouts now don't sell at all. In lieu of publicly reported price drops, builders our financial advisers. Are funding lower mortgage rates, paying closing costs, doubling agent commissions, buying washers and dryers and upgrading kitchen finishes. One reason prices are falling fast is the fraction of inventory now being sold by iBuyers, builders and other institutions, our experience as a broker that people have lived their whole lives in a home just aren't going to market down after a few weeks. But iBuyers price the listing below every current a number of comparable and price it even lower if it doesn't get an offer in the opening weekend.

Builders also respond to market downturns quickly. This makes market correction sharper, but maybe also shorter too. The good news is that buyers are already responding to drops in prices and mortgage rates. The market wide data on sales closed in July August will reflect how far demand fell in June. But now demand has modestly improved in the second, third the 4th weeks of July.

It may improve further as mortgage rates dropped this week to around 5% from a peak north of 6% in June. Mr. President. If the housing market and the overall economy can stabilize, many, many Americans still want to move, and we're here to help them with low fees the best service in the brokerage industry. Take it away, Chris.

Speaker 3

Thanks, Glenn. This is a volatile quarter and we're being responsive to the changing macro environment in taking actions to manage towards profitability, including reducing the number of homes we purchased through our properties segment, laying off employees in our headquarters real estate services and mortgage businesses and limiting backfills for voluntary attrition. 2nd quarter revenue was $607,000,000 up 29% from a year ago and below the low end of our $613,000,000 to the $650,000,000 guidance range. The difference is due to a quicker than anticipated decline in refinancing purchase home volumes for Bay Equity. Real Estate Services revenue, which includes our brokerage and partner businesses, Generated $252,000,000 in revenue, which was flat year over year and in line with guidance.

Brokerage revenue or revenue from home sales Closed Buy Our Own Agents was up 1% driven by home price appreciation, while transaction volume was down 2%. Revenue from our partners was down 23% on a 13% decrease in transactions and a mixed shift to lower value houses. Overall, real estate services revenue per transaction was up 4% year over year. The property segment, which consists primarily of homes sold through RedfinNow, generated $263,000,000 in revenue, up 52% from a year ago and driven by a 45% increase in homes Sol. Our rentals business generated $38,000,000 down 10% from a year ago, but up slightly from the Q1 of 2022.

As Glenn mentioned, this marks the Q1 of sequential revenue growth for this business in many years. Our mortgage Segment generated $53,000,000 in revenue in the Q2. This is below our guidance range as discussed above, but we're thrilled with how Bay Equity loan officers have been serving Redfin customers. Our other segment, which now includes title and other services, contributed revenue of $6,000,000 an increase of 72% year over year, driven by increased attach rates for our title and closing services. Total gross profit was $118,000,000 down year over year.

Dollars 23,600,000 of the increase was attributable to the acquisition of Bay Equity, our mortgage business, Mr. CFO as well as restructuring expenses incurred in the quarter. As a percentage of revenue, total operating expenses represented 32%,

Speaker 2

Mr. CFO, down from 33% 1 year ago.

Speaker 3

Technology and development expenses increased by $10,000,000 or 24 percent year over year. Included in the increase was $700,000 from Bay Equity. Mr. President. The remaining increase was primarily attributable to an $8,700,000 increase in personnel costs due to increased headcount.

Total technology and development expenses represented 8% of revenue, down from 9% 1 year ago. Marketing the company's expenses increased by $1,300,000 as compared to the same period in 2021. Included in the increase was $1,800,000 from Bay Equity. The remaining decrease was primarily attributable to a $1,900,000 decrease in outside services and recruiting offset by a $1,500,000 increase in external costs. Total marketing expenses represented 9% of revenue, down from 12% 1 year ago.

General and administrative expenses increased by 12.2 percent or 20 percent or $12,200,000 or 20% as compared with the same period in 2021. Included in the increase was an $8,400,000 from Bay Equity, a $3,200,000 increase in legal expenses largely due to a settlement offer and a $3,100,000 increase in personnel costs Mr. Silke, due to increased headcount. This is partially offset by a $4,200,000 decrease in acquisition related expenses. Total G and A expenses represented 12% of revenue, down from 13% 1 year ago.

Restructuring expenses included Ian. Total operating expenses were $12,700,000 and there were no such expenses in the same period in 2021. These expenses were to a $2,400,000 in severance and other costs associated with our mortgage restructuring and $10,300,000 in severance costs Mr. Simeon associated with our June 2022 workforce reduction. Turning to segment level profitability, real estate services gross margin was 29.4%, down 5 50 basis points year over year.

This was driven by a 6 70 basis point increase in personnel costs and transaction bonuses. Mr. Earnings. This increase was offset by a 210 basis point decrease in tour and field costs and a 50 basis point decrease in listing expenses. Total net loss for real estate services was $18,800,000 down from a net income of $7,800,000 in the prior period.

The operator. The decrease was attributable to lower revenue and margins as well as a $12,500,000 year over year increase in operating expenses. These expenses were added during a period of rapid growth in our real estate services business and we've already begun to pair back with the restructuring announced in June. Properties gross margin was 2.6%, down 30 basis points year over year. This was driven by an 80 basis point increase in purchase, maintenance and capital improvement costs.

Mr. Stifel. This was then offset by a 50 basis point decrease in personnel costs as the business scaled. Total net loss for properties was $3,200,000 down from a net loss of $1,400,000 in the prior years, With the increase in operating expenses slightly exceeding the increase in gross profits. Rentals gross margin was 79.3%, down 290 basis points year over year.

This is driven by 180 basis point increase in personnel costs you as we sold more marketing services that require personnel to fulfill. Total net loss for rentals was $19,200,000 down from a net loss Mr. Scott of $14,100,000 Declining profitability was primarily attributable to year over year declines in revenue as discussed earlier, while operating the company's financial results. The company's adjusted EBITDA margin was $49,800,000 compared to the $49,300,000 in the prior year. Mortgage gross margin was 12.8% for the 2nd quarter, below our implied guidance of 31% to 36%.

Mr. Earnings. This is driven by lower refinancing and purchase volume from Bay Equity's historic business. Total net loss for mortgage was $6,500,000 Mr. Earnings.

We acquired Bay Equity on April 1 this year and completed the wind down of our legacy mortgage business during the Q2 of 2022. Wind Down activities contributed approximately $4,900,000 to the segment's net loss, dollars 1,600,000 is attributable to Bay Equity. Other segment gross margin was negative 0.1%, an improvement from the negative 6.1% a year ago. Total net loss was $2,100,000 compared to a net loss of $1,100,000 in the prior period. Turning back to consolidated results, total net loss of $78,000,000 was below the low end of our $72,000,000 to $60,000,000 guidance range.

Our guidance didn't include $10,300,000 of restructuring expenses for our June layoff. Diluted loss per share attributable to common stock of $0.73 compared with the diluted loss per share attributable to common stock of $0.29 Per Share 1 year ago. Now turning to our financial expectations for the Q3 of 2022. Consolidated revenue is expected to be between $590,000,000 $627,000,000 representing year over year growth between 9% 16%. We expect our Real Estate Services segment to account for $200,000,000 to $208,000,000 of that revenue the property segment to be between $305,000,000 $330,000,000 Rentals revenue is expected to be between $37,000,000 38,000,000 Mr.

Morgan. Mortgage revenue is expected to be between $45,000,000 $48,000,000 Total net loss is expected to be between $87,000,000 $79,000,000 compared to total net loss of $19,000,000 in the prior year. Adjusted EBITDA loss is expected to be between $47,000,000 $39,000,000 We expect real estate services gross margin to decrease in the 3rd quarter the same period of 2021. In prior earnings calls, we discussed operational changes we were making that were intended to increase real estate service gross margins in the second half of twenty twenty two. However, deteriorating macroeconomic conditions have overshadowed these operational changes you and we now expect gross margin compression.

With respect to properties, we expect gross margins to be negative in the 3rd quarter as we work through selling inventory that we purchased earlier Nir. We expect inventory to peak in August. We want to continue to offer choice to customers, Mark, who will be more conservative on offer prices right now. With respect to mortgage, we expect gross margins to be roughly flat to slightly down quarter over quarter. Mr.

President. On a consolidated basis, this guidance includes approximately $37,000,000 in total company marketing expense, $19,000,000 of stock based compensation, dollars 16,000,000 of depreciation and amortization and $5,000,000 of interest expense. Mr. C. In addition, we expect to pay a quarterly dividend of 30,640 shares of common stock to our preferred stockholder.

Mr. President. This guidance assumes, among other things, that no additional business acquisitions, investments, restructurings or legal settlements are concluded that there are no further revisions to stock based compensation Mr. Simons. And now, let's take your

Speaker 2

questions.

Speaker 0

Thank to

Speaker 2

Mr. Chairman.

Speaker 0

We'll take our first question from Ryan McEwen with Zelman and Associates. Please go ahead.

Speaker 4

Hey, thank you very much. Glenn and Chris, appreciate all the detail and commentary on the levers in the business. And certainly the comment about the potential impact to the real estate gross margins next year for removing the buyer refund is encouraging. But wanted to ask one more on the real estate gross margin and some of the levers. So a comment you guys have in your filings in the 10 ks is that the real estate gross margin is generally higher in some of the top markets and generally lower and smaller markets.

So I guess I'm curious on kind of the levers that you guys can pull. You. How do you think about those smaller markets that maybe are subscale or lower margin and pushing for growth in actual brokerage business Verus potentially leaning more into the partner channel to potentially kind of grow through less some brokerage specific growth and brokerage specific costs and maybe more so leaning into the partner business, which I believe is kind of a higher margin lead gen business. So again, just curious if you can talk about the balance there between kind of brokerage and partner and if there are additional levers that you guys can pull and maybe how that compares between the bigger markets and some of the smaller markets. Thank you.

Speaker 2

Well, we're going to manage the business to maximize gross profit dollars Mr. Customer. So as these smaller markets grow, their prices are also increasing, Mr. President, which will increase both their gross profit contribution and their gross margin. The reason that we often want to serve customers through our employees is because our employee agents have higher close rates, they have higher loyalty rates.

I'm going to generate more gross profit per customer, but we are going to be financially disciplined about it. If we feel like a partner stronger than we expected immediately following our layoff. So there will be a modest shift toward the partner business at least you in the first part of

Speaker 4

the Q3. Got it. Okay. Thanks very much, Glenn. That's helpful.

And then Chris, one just kind of big picture on the cash flows. I guess looking ahead and thinking about the convertible debt, I guess maybe if you can just give us a big picture sense of how you guys are thinking of to ultimately managing the cash flow side of things and obviously the maturities are quite a ways away. But I think to some degree people are just curious you. How you think about managing the cash from now and the coming years to with those maturities on the horizon, just any big picture thoughts there would be helpful.

Speaker 3

Yes, I think that the commentary on our capital matches with Glenn's commentary and our march to profits here that the way we think about continuing to drive the business forward Kare and that sets the stage then for us to feel really good about the capital position that we'll have as those notes start to become Sure. So I do think of these things as naturally matched up that way and not separate topics.

Speaker 0

Thank you. We'll take our next question from Mark Mahaney with Evercore ISI.

Speaker 5

Hi. This is Jan Lee for Mark Mahaney. Thanks for the question. I just wanted to the one thing to clarify, sorry if I misheard that, but Was iBuying the gross margin you're expecting to be negative in Q3 with some mentioned some headwinds. But on a full year basis, you're still expecting it to maintain positive gross margin, did I hear that right?

And if you can just like talk through the leverage in the business to support margins,

Speaker 2

Well, we're assuming that prices will continue to decline and the business will the company. So the levers for the business are making sure that we react quickly to the market, lowering our bids on the homes that we're buying now. Obviously, we also want to convince the customers who ask us about a Redfin Now offer and So mostly we just want to sell the homes quickly, renovate them well. Sometimes we've been backlogged in 2020 2021 and haven't been able to get the properties on the market because we can't just get somebody out there to fix it up. But now, we've got good capacity.

The homes are selling quickly. We're going to reach peak inventory next week. And then we know it's downhill from there just because we already have so many homes under contract. So I think we've got good visibility here. It would take a fairly apocalyptic price drop for us to swing into negative territory for RedfinNow.

We've already factored in significant price declines.

Speaker 5

Got it. That's helpful. And if I may, one more on just marketing spend this quarter. Saw some leverage Cheers. So if you can is that like a kind of a pullback in marketing spend?

If you can talk through kind of the efficiencies of the brand campaign? Yes. Okay.

Speaker 2

It's more seasonal. We probably stepped back a month early from our TV campaign because Just the tone of the campaign didn't match the mood of the American consumer. It was just about a frenzied housing market coming into 2022 you. And that market has become less frenzied. But other than that, we've been advertising fairly aggressively, actually shifting some dollars toward the 1 the site campaign, which is resonating well.

Mostly that we just planned to end the advertising campaign in the summer, we've done that every year.

Speaker 5

Great. Thanks a lot, guys.

Speaker 0

Thank you. Operator. We'll take our next question from Jason Helfstein with Oppenheimer.

Speaker 6

Hi. It's Redwall Rafid on for Jason Helfstein. So two quick questions. If we're thinking about real estate as a top of the funnel driver for the rest of the business, how do you Think about long term gross margins and EBITDA margins for real estate, assuming other segments will limit spending amount on marketing. And the second question is, are you making any further changes to the way you compensate agents?

Thanks.

Speaker 2

So the brokerage has been an engine of profit for the company. It generated significant adjusted EBITDA last year, as you you. And it should remain that way. So we had too many agents in the second quarter. It swung us to an adjusted EBITDA loss for that business, but we view that as an intolerable situation long term.

So we're not going to think about The brokerage is a loss leader for getting a loan or a loss leader for doing the title. We want that business to have its own the company's high gross margins north of 30%. And then we just want to monetize that customer again and again through mortgage and title. We'll deliver more value to the customer. We'll offer them a great rate on the loan.

We don't want to back off at all on brokerage gross margins just because we have these ancillary businesses and that's evidenced by the price increase where we're eliminating the commission And then on the second question, I don't know, Chris, do you want to answer that first? Might be more in your wheelhouse.

Speaker 3

Why don't you go ahead, Glenn.

Speaker 2

Can you just rephrase the question? I want to make sure I understand it.

Speaker 6

Yes. No, totally. So given like the recent layoffs, are you like incrementing any more changes on the way you pay your agents?

Speaker 2

On agent pay. Yes. Not really. We adjusted how much we pay our agents at the beginning of the year because we were lowering loads in anticipation of having better close rates. We've seen that of the customers who buy, they are sticking with us at a higher rate.

So that's been encouraging. We have been waiting for 2 years to get a result from that effort and now we have one. But other than that, we aren't making major changes to agent pay.

Speaker 6

Thank you. That's helpful.

Speaker 2

Thank you.

Speaker 0

Thank you.

Speaker 2

Mr. President. All

Speaker 0

right. With no additional questions in the queue, that does conclude today's question and answer session. It also does conclude today's conference. We thank you all for your participation. You may now disconnect.