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Fathom’s model is built for a low-inventory environment, execs say

Firm looks to increase agent count and ancillary services attach rate as a path to profitability

Fathom Holdings Inc., the M&A-hungry parent of cloud-based real estate brokerage Fathom Realty, achieved supercharged growth in 2021. But it still has a bit of work to do to turn a profit, not that executives seem to be in a rush.

In its quarterly earnings report on Tuesday, the company revealed a $12.5 million GAAP net loss for 2021, despite having increased revenue 87% to $330.2 million.

In 2020, flat-fee absolutist Fathom lost $1.3 million.

On a call with investors Tuesday evening, CEO Josh Harley said the firm is looking to achieve profitability “in the near future.”

“A lot of companies sacrifice profitability for growth, but I am proud to say, we do not have to operate that way,” Harley said on the call, exclaiming that the growth strategy will attract more investors and real estate agents over the long haul. “We believe that we can generate strong profits over time while continuing to grow our business at high rates.”

The firm, which is attempting to build a real estate search portal similar to that of Zillow, attributed its losses to “investments in future growth, operational and overhead costs related to acquired companies, incremental costs due to transitioning to being a public company, and to increases in non-cash stock compensation expense and non-cash amortization of acquired intangible assets.”

All told, Fathom made six acquisitions in 2021, including Naberly Solutions, a cloud-based tech firm that adds CRM and website functionality; Georgia real estate brokerage Red Barn Real Estate; Idaho-based brokerage Epic Realty and the Woodhouse Group; hyperlocal data and tech platform LiveBy; and E4:9 Holdings, a residential mortgage lender.

During the fourth quarter, Fathom’s general and administrative expenses rose to $9.1 million, representing 9.5% of total revenue for the quarter. This is up from $3.6 million a year ago. Fathom executives said they expect general and administrative expenses to continue to rise going forward due to “acquisitions and costs related to scaling and integrating the Company’s business lines.” However, the firm did note that it expects that, as a percentage of revenue, these expenses will decline over the long-term as revenue increases.

Leaders optimistic about future of brokerage

Despite these challenges, Harley and Fathom’s president and CFO Marco Fregenal expressed optimism about the firm’s rising transaction and agent count. During the fourth quarter Fathom Realty agents completed 10,800 transactions — a 43% year-over-year increase. The brokerage’s agent count also grew 48% year over year to 8,100 agents.

Although the brokerage increased its agent fees in January due to inflation and growing expenses — increasing its annual agent fee 20% to $600 per year and the transaction fee 11% to $500 for the first 12 completed transactions — Harley said they have not seen a rise in attrition or had pushback from agents.

As housing inventory continues to tighten, making it harder to agents to complete transactions and earn commissions, Harley believes that Fathom’s flat fee model will help the brokerage attract even more agents, leading to an increase in the overall number of transactions closed.

“If home prices fall, many of our competitors may see a strain on their profitability because they take a percentage split on every transaction, but that would not be the case for Fathom,” Harley said. “We earn the same transaction fee regardless of if the agent earns a $10,000 commission or an $8,000 commission. We believe that this should allow us to capture market share from real estate with old, traditional commission models.”

Core services to bring profitability

Harley and Fregenal also cited Fathom’s growing mortgage, technology and title insurance sectors as sources of profitability in the future. Fathom’s title firm is currently licensed in 29 states and, while the exact attach was not disclosed, Harley did note that the title firm’s Q4 earnings were equivalent to its earnings for all of 2020.

Frenegal told investors that the overall attach rate for all of Fathom’s ancillary services was 5-6% and that they hope to increase this to 10% in the next 12-18 months. According to Harley, this increase coupled with a rising agent count will lead to an uptick in revenue.

“As our agent base grows, those agents generally bring more transactions with them and as we add more transactions we have more opportunities to capture mortgage, title and insurance revenue,” Harley said on the call.

Looking ahead, Harley said that Fathom hopes to expand to all 50 states and Canada (it currently operates in 36 states and Washington, D.C.). In addition, the firm is aiming to generate between $425 million and $435 million in revenue in 2022.

“We believe Fathom has a clear, visible and long runway with tremendous growth prospects,” Harley said. “No matter what the market holds, we believe our model is positioned to win.”

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