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Real Estate

IPO no: Why real estate companies stopped going public

The reason is economic uncertainty, yes, but also whether anyone can truly disrupt real estate

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Last June, Guy Gal was staring ahead at Wall Street. The chief executive officer for real estate brokerage Side announced a fresh $50 million in venture capital money spearheaded by ultra-prolific financier Tiger Global Management. The San Francisco company was now “backed by the top three technology initial public offering underwriters,” Side announced at the time, and the money raise “sets the stage for a future IPO.”

Today, though, Side is radio silent on going public. Gal and other company representatives did not return messages for this article.

Side is no outlier. After a few years of brokerages going public, a list that includes Compass, Offerpad, Opendoor, and Redfin, real estate companies are now keeping matters private.

These include HomeSmart, the Scottsdale, Arizona-based brokerage that disclosed its financials in January, and Keller Williams Realty, which has faced rumors since the beginning of time, or at least the last five years, about going public. Messages left with HomeSmart were not returned. Keller Williams declined to comment.

The reason to stay private is twofold, industry experts said. One is people dislike where the economy is headed.

“I would largely chalk up any shelving of plans to go public to the macro backdrop including stock market volatility, recession fears and slowing housing,” said Thomas McJoynt, an equity research analyst at Keefe, Bruyette & Woods who focuses upon real estate and mortgage companies.

Another, though, is fading enthusiasm from investors and IPO underwriters that a company can upend the notoriously fragmented residential real estate industry.

“For many years, everyone thought brokerage was ripe for major disruption,” said Gilles Duranton, real estate professor at the University of Pennsylvania. “New ventures have tried to disrupt it in all sorts of ways. But no one has really managed to make a big dent.”

Seeing red

The recent brokerage IPO wave started with Redfin in 2017. With a popular listings web site, salaried employees as agents, and eventually iBuying, the Seattle-based company fit to a t the notion of a tech-forward outfit that could shake things up.  

CEO Glenn Kelman deemed his company “the Amazon of real estate,” a one-stop shop for all things housing. “We can’t just reinvent half of it. We got to do the whole thing!” Kelman declared at the time of the company’s initial public offering.

One year after that, eXp Realty, a brokerage known for its virtual platform and multi-level marketing plan, moved from an over-the-counter Canadian stock exchange to Nasdaq.

Then, in the year following COVID-19’s U.S. onset, Compass, a brokerage that billed its tech as providing real estate agents an edge, and Offerpad and Opendoor, iBuyers who are also registered brokerages, went public. These companies debuted on Wall Street amid both the highest home appreciation and most home sales in 15 years.

“The 18-month post-COVID period presented an excellent window for any real estate transaction volume-dependent business to entertain attractive initial valuations,” McJoynt said.

But those valuations have fallen. Compass, for instance, premiered on the New York Stock Exchange trading at $19 a share with an $8 billion valuation. The company’s stock is currently at just over $5 with a little over $2 billion market capitalization.

Redfin stock has seen a lot of fluctuation. The company’s stock began trading at $22 a share in 2017 and zoomed to a $76 share price last February. But today Redfin stock is at just over $9, with a valuation of a little over $1 billion.

The stock price has not correlated with either Redfin’s top-line revenue or bottom-line income. Redfin did lose $91 million in the first quarter of 2022 compared to $36 million in Q1 2021. But the company’s revenue more than doubled to $597 million. The increased revenue but growing losses are both traceable to an internal ramp up of iBuying.

What gives with the stock price, then? The company, which declined to comment, has in general connected its fluctuations to investors’ overall thoughts on real estate, not anything Redfin-specific. In other words, the macro backdrop.

“With raising mortgage rates, Wall Street thinks housing sales will go in the tank, so they are lowering their earnings expectations for all of them,” said Steve Murray, senior advisor at RealTrends.

But there may also be some frustration from investors with Redfin and other real estate outfits, said Jay Ritter, a business professor at the University of Florida who focuses on stock market activity.

“Redfin is still a legitimate, possibly successful company,” Ritter said. “But a lot of that run-up has been ever-increasing expectations about the future.”

There was some hope among investors, Ritter said, that Redfin, or Zillow or Compass, or some company they were placing a bet on, could emerge as a one-stop stop, “Benefiting from some network effects and become dominant.”

But, rightly or wrongly, investors now see no model disrupting a brokerage industry replete with dozens of established entrants.

One possible exception, Duranton noted, is Compass, which in a decade has become the largest brokerage by market share. But Compass did this after “making huge investments,” and creating a brokerage model that “differs minimally” from competitors like Sotheby’s International Realty or Douglas Elliman.

Said Murray, “Investors finally realize that whether or not these proptech firms are fast-growing on their top lines, there is no path to profitability for some or most of them.”

Let’s keep this private

Earlier this month, Rainy Hake Austin excitedly charted the future. Her brokerage, The Agency, which has significantly expanded since Austin took over as president in late 2020, had just announced the acquisition of New York brokerage Triplemint.

“We’re going to build from the coast and into the middle,” Austin said, about The Agency’s nationwide plans.

What about going public?

“That’s one option,” Austin replied. “But that’s not the only option.” The executive then went on to talk about first developing The Agency’s mortgage, title, and other ancillary services.

Side, according to people at the company who spoke on the condition of anonymity, similarly plans now to see how much it can grow before going public.

Less clear is the future of HomeSmart, which on Jan. 7, filed an S-1, the initial registration statement companies file before going public. According to that statement, HomeSmart retained J.P. Morgan and BofA Securities among others to underwrite the shares. HomeSmart declared itself, a “revolutionary real estate enterprise powered by our proprietary end-to-end technology platform,” the S-1 states.

The company has made no subsequent filings except an amended S-1.

Keller Williams, meanwhile, has faced persistent calls to go public, especially after its creation of the holding company, KWx in October 2020.

“We are aware of what HomeSmart has attempted to do, and we had heard Side was planning to do something,” Murray said. “Other than the rumors of Keller Williams planning to do something, either IPO or private sale or SPAC, we are not aware of anyone else considering it.”

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