The Appraisal, May 2023 — Q1 Earnings Update, Single-Family Rental Market Map
Welcome to the May edition of The Appraisal, a newsletter on real estate tech. My writing focuses on the 30+ public companies operating at the intersection of real estate and technology. The Real Estate Tech Index is up 15% in 2023 and 1% over the last year.
Most companies have reported first quarter earnings, which provide helpful insight into how several real estate sub-markets are trending this year. 2023 has continued to be a challenging year for many companies in the real estate segment, given persistently high interest rates, a slowdown in transaction volume and general market unease due to recent bank failures. I’ve included earnings summaries for Zillow, Opendoor and WeWork below.
Zillow (ZG, +40% YTD)
Zillow’s Q1 results included total revenue of $469 million (down 13% year-over-year) and Adjusted EBITDA of $104 million; both came in ahead of Street estimates. Outperformance in the quarter was primarily attributable to strength in Rentals and Mortgages, which grew 21% y/y and >100% y/y, respectively. The results were strong overall given challenges in the U.S. housing market, which declined 27% year-over-year in Q1 (total transaction dollars).
Zillow sunset its Offers business (which competed with Opendoor) in late 2021; the company has since gone all-in capturing more value per home transaction via “integrated experience” vision — by connecting home search, touring, Premier Agents, mortgage and more. The company’s Q1 results demonstrated that Zillow’s role as the primary “front door” for home search persists even during weaker housing markets, and perhaps plays an even more important role for its partner agents as a key driver of client referrals.
Opendoor (OPEN, +144% YTD)
Opendoor reported revenue of $3.1B (down 40% Y/Y) and an adjusted EBTIDA loss of $341M, beating consensus on more homes sold than expected (8,274 homes). But Opendoor lost $29k of contribution profit before interest per home sold, resulting in a (7.7%) contribution margin. The losses were largely driven by homes purchased in Q2 ‘22 and prior, with homes purchased after Q2 ‘22 realizing a +8.5% contribution profit margin before interest.
On the acquisition front, Opendoor purchased 1,747 homes in the first quarter, down 81% versus Q1 ‘22. Home prices experienced significant downward pressure in the back half of 2022, making it difficult for the iBuyers to accurately predict future pricing when purchasing homes. A muted home price appreciation environment, along with increasing funding costs, longer holding periods, and limited industry home sales velocity likely will create headwinds to the iBuying business model over the next few quarters, but management is confident that they will be able to capitalize once transaction volumes begin to normalize.
WeWork (WE, -85% YTD)
In my last newsletter, I wrote about WeWork’s business and its management team’s recent attempt at a turnaround, led by CEO Sandeep Mathrani. The post covered the actions taken by Mithrani to drive the company towards profitability, the post-COVID tailwinds for companies in the flex office space, and the potential challenges ahead for WeWork. A lot has changed since that post — including a restructuring of the company’s sizable debt load (eliminating $1.2 billion in debt and extending maturities to 2025) that converted a meaningful portion of that debt to equity, resulting in an expansion of total shares outstanding from 856 million to 2.2 billion.
Shortly after announcing the debt restructure, the company reported Q1 earnings, which were mixed: revenue was in line with expectations at $849M, and Management continued to rationalize SG&A expenses (down $50M from the year prior), however, occupancy came in lighter than expected (73%, down from 75% in Q4 ‘22), location operating expenses ticked higher, and desk sales were the lowest since Q2 ‘21. While the company continues to make progress towards its goal of reaching cash-flow breakeven, the earning report made clear that the milestone is still several quarters away.
Finally (and surprisingly) last week the company announced that Mathrani would step down as CEO effective May 26. . During Mathrani's tenure, the company was able to right-size the cost structure to the tune of ~$2.3B, while also growing revenue — from $593M in Q2 ‘21 to $849M in Q1 ‘23. The next CEO will face a similar task — simultaneously growing revenue while rationalizing costs — but with perhaps less investor patience to do so. WeWork’s stock price as of publishing is $0.20, down 98% from its de-SPAC price in late 2020.
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Highlight of the Month — SFR Technology Market Map
Over on the Thomvest blog, I published a Single-Family Rental (SFR) Technology Market Map. The map highlights dozens of companies building software for SFR landlords large and small. SFRs have been the fastest growing segment of rental occupied households, adding more than 4 million rental homes over the last decade. Today, nearly 34% of rented units are SFRs, representing 16 million properties across the U.S.
Part of that growth can be attributed to the flow of institutional capital into the sub-asset class — while institutional investors own only 3% of SFRs today, they have earmarked nearly $110 billion to purchase or build single-family-rental homes in the coming years, according Zelman & Associates.
In my post, I detail the emergence of technology platforms to remotely manage portfolios of geographically distributed SFR properties. There are several areas within the market map that we are particularly excited about — many of these companies represent the emerging platforms on which new operators in SFR will build. A few examples:
“Full stack” property management platforms — several venture-backed startups have emerged in recent years that consolidate all aspects of property investment into a single platform. Companies like Mynd (a Thomvest portfolio company), Roofstock and Bungalow offer a new approach to property management, leveraging technology to streamline the process of finding, renting, and managing properties for both landlords and tenants.
Next generation property management systems — for smaller-scale investors who self-manage their properties, there are a number of interesting new platforms that simplify property finances, including expense management, bookkeeping and taxes. Baselane (a Thomvest portfolio company) has emerged as an early leader in this segment.
Maintenance marketplaces — as investors expand their portfolios into new markets, its important that they establish consistent workflows around property maintenance and repairs in order to ensure a positive tenant experience. They also need access to competent and reliable service providers across every trade. Fortunately, several platforms have emerged to assist landlords with repair assessment, triage, and dispatching service providers when needed.
Retail investment platforms — several startups have emerged that enable individual investors to access the SFR asset class. These platforms abstract away many of the complexities associated with property ownership and enable investing in across geographies. And collectively, they offer several distinct “flavors” for ownership — from fractional, passive investing opportunities (Arrived, Lofty), to single-asset purchases (Roofstock, Doorvest), to real estate fund investments (Fundrise).
Thanks for reading! As always, please feel free to share feedback or thoughts on the newsletter — you can respond to this email directly or shoot me a note at nima@thomvest.com.
Note: Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.