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The Real Brokerage: The Fastest Growing Company We've EVER Covered On The Podcast (Ticker: REAX)
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- [00:01]
Ryan Henderson
Welcome to Chit Chat Stocks. Before we get to this episode, we want to talk about our friends at Interactive Brokers. Interactive Brokers is the professionals gateway to the world's markets. Interactive Brokers offers Commission starting at $0 on U S listed stocks and ETFs with low commissions on other products and there are no added spreads, ticket charges or account minimums. Clients in over 200 countries and territories trade stocks, options, futures, currencies, bonds, funds and more on 160 global markets from a single unified platform. Clients earn interest rates of up to 3.83% on instantly available cash and pay margin rates up to 53% lower than the industry. You can also earn extra income on your lendable shares and IBKR's powerful award winning trading platform helps every level investors succeed from beginner to advanced on mobile, web and desktop. When placing your money with a broker, go with a broker you can trust. Make sure your broker is secure and can endure through good and bad times. We use IBKR here at Chit Chat Stocks because it is a phenomenal platform for international investing and you can use them too by heading on over to IBKR.com Interactive Brokers is a member of SIPC.
- [01:17]
Brett Schaefer
Welcome to Chit Chat Stocks. On this show, hosts Ryan Henderson and Brett Schaefer analyze businesses and riff on the world of investing. As a quick reminder, Chit Chat Stocks is a CCM Media Group podcast. Anything discussed on Chitchat Stocks by Ryan, Brett or any other podcast guest is not formal advice or recommendation. Now. Please enjoy this episode.
- [01:44]
Ryan Henderson
Welcome to Chitchat Stocks. I am one of your hosts, Ryan Henderson and I am joined as always by Brett Schaefer. Today we have one of our monthly research reports. We are talking about the real brokerage. This is I believe the fastest growing company in the real estate market. They have 100x revenue over the last 5 years. If I'm not mistaken, Brett, that is correct.
- [02:08]
Brett Schaefer
$10 million, well might have been 6. $10 million in revenue in 2018. Essentially nothing when we talk about their unit economics to over $1 billion over the last 12 months. Honestly closer to one and a half billion dollars. So well over 100x in revenue. We're going to discuss that and more on today's episode. I should say I was trying to figure out where I even found this company and I looked on Valley Investors Club. There was nothing. I looked on, you know our old sponsor Yellow Brick Investing. There was nothing. And we before this episode did a little digging and it was an audience question on an old investing power hour so that's a shout out to our community here for bringing up some very interesting stocks. And we're going to talk about one of the, you know, this fast growing business, whether I'm going to buy some shares, what the model looks like, and then, you know, if it's a promising stock and I'm excited to do it.
- [03:03]
Ryan Henderson
Yeah, a little teaser here. This looks like a truly disruptive business and one that has gained legitimate traction. Sometimes you see fast growth and you kind of wonder what's really under the hood. It seems like this is being powered by true business model growth. And we're going to talk about all that and more. But before we do, I want to ask if you enjoy these episodes, if you like our research, if you like the Chit Chat Stocks podcast, please review our show on Apple or Spotify. Five stars would be greatly appreciated. That's really the number one way to help this show grow. And then as a follow up, we drop these research reports on our Chit Chat Stocks substack for free. So if you want any of the charts numbers that are in this research report, you can get all of those over on our sub stack. So go ahead and check that out as well. But let's get into things, Brett, before we talk about the real brokerage and their potentially disruptive model, let's go through, I guess we can call it the traditional model, legacy model. How do real estate commissions work today?
- [04:16]
Brett Schaefer
Right, yeah. So the best way to begin our analysis of the real brokerage. We're going to be saying the word real a lot today. Real estate, real brokerage, real estate commissions. But the best way to do that is to look at how the residential real estate industry operates. Typically, a licensed real estate agent will join a branded brokerage, such as one that's big in my state, Windermere. I don't know if they're in any other states, but it's just a large brand in the state I reside. Agents make money by taking a commission that most people are well aware of of every real estate deal they close. Commissions are usually 6% of the final value of the transaction split evenly between the buyer and seller agents. And for a home that sells, say for a million dollars, 30,000 will go to the buyer's agent and 30,000 will go to the seller's agent. That's not bad if you ask me. Seems like, and we'll talk about this later, fees have a chance to come down with the rise of the digital brokers and the lawsuit that came in, which we're not going to discuss in detail, but basically enabled fees to be more variable depending on supply and demand. However, when we look at these fees, agents don't keep it all. They have to share part of these commissions with say, Windermere, the brokerage that they represent. Exact details of these commission splits are kept under wraps and I'm sure not everyone has the same. But from what I read for example on this Windermere one, I'm assuming it's similar across other brokerages. The split typically starts at 5050 and work up to a better 8020 split if the agent is successful along with other fees paid in the process. I'm sure startup fees, blah blah blah, stuff like that. This means that agents are giving upwards of $15,000 of the $30,000 commission they get with a million dollar home to the brokerage they work with. Now you might be asking why do the agents work with a brokerage brand such as Windermere and sacrifice so much profit? Well, for one, they are required by law to use a broker. They have to use one in order to operate. Two, a company such as Windermere will tout its brand status along with the mentorship from its community and other agents. The agents need Windermere because sellers only want a trusted brand. You know, you see that sign that's recognizable in front of a property and then Windermere needs its agents in order to close deals. It's a symbiotic relationship where both stakeholders succeed. Or that is really as the story went historically. Now, as you may be guessing as I'm leading into here today, we are discussing perhaps the next chapter in the story which where real estate, Internet portals, smartphones and digitization have changed the home buying process which has enabled potential disruption and pricing pressure across the brokerage industry. That disruption is now being led by the real brokerage among some others that we'll talk about later. Its revenue was a measly $8.4 million in 2018 and over the last 12 months it has grown to $1.4 billion, a 127% compound annual growth rate. I think this makes it at least over a five year plus period the fastest growing company we've ever covered on chit chat stocks. And let's get into it. Ryan, anything before we move on to the next section and discuss this business, how it works and its financials.
- [07:40]
Ryan Henderson
Now it's worth mentioning, and you're going to talk about this in a second, that revenue is not the most important figure for this business. However, the growth as you trickle down the income Statement is similar. So if you're using gross profit as sort of the indicator, you've seen similar growth as well. So you might imagine $1.4 billion huge market cap potentially or large company, especially at this growth rate. I'll go ahead and just spoil it here. Not too large of a market cap. This is not, I would say the cat is not quite out of the bag on this one. So there is still some work to be done on the valuation. But let's talk about the business model first. How does the real brokerage business model work and why is it disrupting the traditional model?
- [08:30]
Brett Schaefer
Okay, let's compare it to some other businesses out there. You have some companies like Charles Schwab or Robinhood that have used the Internet digitization software to drive down costs on stock trading stock trades. Honestly, costs went to close to zero. It's a lot different than the real estate market. You had online banks out there such as SoFi Ally Financial that have lower overhead costs without physical bank branches that enable them to offer higher interest rates to customers. Now the real brokerage is aiming to do the same for real estate agents. They're aiming to use software and the Internet and all these digital tools to give them more of the profits back to them while still maintaining a solid business model. And this company is what's known as a cloud brokerage. Instead of going into an office and working with a legacy player such as Windermere, agents that work with the real brokerage simply use its software to manage their business and process transactions for clients. Now there are a few reasons why an agent would want to switch to the real brokerage over a traditional office big based brokerage, at least from what I was reading. I mean, you know real estate agents, there's a ton of discussions online. I mean there's an endless amount of what called forums, chats, all that stuff that you can go read yourself. So first you have the software and ease of use. Real brokerage gives you the independence when operating as a real estate agent. You can build your own brand and even private label real brokerage software. Instead of getting overshadowed by the traditional brokerage brand. Real even send you your own physical advertising set for properties. And the software is modern, can be operated from on the go from a smartphone and is getting better by the quarter as real invests more on the technology development which we'll get into the ancillary services and the whole supply chain in I think the next section. Then the main point of differentiation is the commission split offer to agents who use the real brokerage instead of 5050 or 70 30, all agents start at an 8515 split, which is highly disruptive. From there they can earn even more bonuses through customer referrals where if you bring in a new agent, you get some of the real's commission income from that new agent. Now, once an agent hits $12,000 in commission income, the agent earns a hundred percent of the commission and they have zero split to the real brokerage excluding a transaction fee that I assume is there just to make sure that gross margins don't go negative on a transaction from whatever fees the real programage has to use when processing a transaction. Plus, agents are enticed with a stock purchase plan for real brokerage stock and stock awards that both align stakeholders together. Shareholders, management and the agents would both like the real brokerage stock to go up, which I think is a good thing as a prospective shareholder. Now, what do the agents give up by switching to the real brokerage? In general, I believe maybe the community of the legacy brokerage, its relationships with existing clients. You know, hey, you were someone who bought a home in the past with this legacy brand. You trust them. It was a good process. Hey, we'll go back to them in the future and we'll go back to an agent who works with them. You know, they're trusted entities, at least the well run ones, such as someone like Windermere, who has a long standing brand and good market share in their regions. But I think in the Internet age, the upside of switching to the real brokerage or a cloud based brokerage greatly outweighs the the downside. This is especially true for an established real estate agent. From the blogs and forums I was reading in this for this research, Real brokerage may not be useful for an agent that just got its license because, well, you know, you're starting at square one. You need that help and that community and you know, the mentorship which the real brokerage does provide. But it's a lot different than working in a physical office and getting a mentor that's within your local community. But for an established agent or an established team of agents, it can allow them to take home tens of thousands of more in income a year, maybe even hundreds of thousands if you're a full team in commission income with I think minimal downsides and the numbers speak for themselves. We talked about that revenue growth. There's a reason that revenue has gone to $1.4 billion from close to zero a few years ago. Gross profit has gone from virtually zero to $128 million. So look at that gross margin, it's just below 10%. And that's because, look, they, when they talk about accounting, that's the full commission. And when they're giving up 85% or more of that to the real estate agents, well, the gross margin is going to be low, but that doesn't mean that it's a bad business. Operating income has remained slightly negative but has moved in the right direction. I think we'll talk more on that later. And for context for the listeners, as of this recording, I made these notes on June 12th. So just as a reference when this episode comes out. The market cap today is $858 million. So price to gross profit not too aggressive, especially given the growth rate. And we're going to try to talk through for the rest of this episode. Well, is the real brokerage going to continue growing its gross profit and aggressive rate? Will it get to better operating income? Will it get to positive operating income and see an earnings inflection here? And why or why not would that happen? Because if you believe this growth is going to continue in both revenue, gross profit and then an earnings inflection from slightly negative to positive, well, the stock probably works over the next few years.
- [14:05]
Ryan Henderson
Yeah. And just to rehash some of that. So if you're an agent who is able to generate a lot of their own clients and you know what you're doing, maybe you have already built up sort of a book of business over the years. Those are the ones where moving to real brokerage, for example, is potentially a lot more appealing because you don't need as much support. But there's a obvious lift in your take home earnings as the broker. So that I imagine is kind of their target or core agent that they go after. And you mentioned market cap of $858,128,000,000 in gross profit over the last 12 months, just to put a number on it, comes out to just under seven times market cap to gross profit multiple.
- [14:53]
Brett Schaefer
Yep. And it could come down to three, two or even one in a few years if this growth rate continues. Which is why I think the biggest question is, well, are we going to see this? Is is the growth going to get to do or are they going to hit a wall in market share? Is the business model sustainable? And that's what we're going to discuss in these future sections.
- [15:12]
Ryan Henderson
Yeah, I think the core of that model is really quite disruptive. None of these businesses, because there are some that are similar to this, none of them are going to be winner take All I imagine the digital brokers or the cloud brokers are going to be probably fragmented in you're not going to have regionalization like you do with the traditional models, but there will be certain appeals to certain types of agents all throughout the Internet. So it's probably going to have fragmented market share for some time. And just to go back to that model of the commission split, it's a, it's similar a bit to financial advisor houses.
- [15:57]
Brett Schaefer
Right.
- [15:57]
Ryan Henderson
So maybe some of the people that are listening to this are in the advisory space. You'll know what I'm talking about here where let's say you are an independent advisor or you are a financial advisor under say the Wells Fargo branch, for example, your commissions that you get from your clients, A, you're going to pay for some services to Wells Fargo, but you're also going to pay sort of the first chunk. It's not exactly the same split, but you'll pay, call it up to a certain amount. Let's say it's $1,500 each month in that first part of commission revenue that you get is going to go to sort of the parent advisory house, or in this case it would be sort of the brokerage house and then you gain it from there. So it's basically giving some margin of safety to the real brokerage and covering some of their fixed costs for each agent that they onboard. Let's talk about some of the other services though, because it's not just a pure were the lower priced offering thesis here. There's some ancillary services. Why don't you go through them and I guess talk about what you think has the most promise.
- [17:09]
Brett Schaefer
Yeah, these ancillary services I should say are in the very early stages. So it's more of the potential of what they can build as a comprehensive offering. I would look first at for context, like there's a lot of real estate disruptor names out there. They all say the same thing. The real estate industry is antiquated and broken and real brokerage says the same. And a lot of people believe there's ways to improve on the model where again, if you look at the home buying process and all the fees across this versus the stock buying process, it's just wildly different and there's just so much bloat within the industry. But instead of trying to fully disrupt the traditional model like a Redfin or even with the ibuyers such as Open Door, Rest in Peace, Real brokerage wants to use the Internet and digital tools to make existing agents and the existing Model more productive and then have lower overhead costs on its end to hopefully drive costs down while making everyone more profitable. I don't want to say scaled economy shared. It's an overused term, but I will say it's more of a non, what is it called? Non zero sum. Yeah, non zero sum game where they're trying to basically make it cheaper hopefully over the long run for the home buyers and home sellers, cheaper for the agents, meaning they can keep more of the profit and then cheaper for the real brokerage by keeping more of the product themselves and just not have everything wasted in overhead costs. And this combination will allow real brokers to succeed if the commission's fees come down on real estate transactions and the traditional brokers will struggle in a lower fee environment. I will say at this point moment there's been a big shift given the lawsuit within the brokerage industry on the fixed pricing of the 3%, 3% for the home buyer agent and the home selling agent. We may see some developments there, although who knows, it could stick even with the free market here. And again, real brokerage has succeeded rapidly with their brokerage business. But to further its ambitions, they're now going to try to work on adding ancillary services in categories that the real estate agents either operate in or. Or with services that they need to work with in every transaction. I'll go through the first one here, then maybe Ryan can chime in. In late 2022 they acquired Lemon Brew Lending which is a home loan platform, Relay, sorry, later renamed to One Real Mortgage. Now instead of just operating as the software backbone for real estate agents, home buyers can finance their home purchases with the real brokerage. Well, with One Real Mortgage. The attach rates for One Real Mortgage for the real brokerage agents is low today. But I expect this to grow over time. I think there are rules in the industry where you can't force customers to use them. It's kind of a collusion tactic that is anti competitive. So they're not allowed to do that. But I would assume given the relationship here, it's not. It wouldn't be shocking if more and more people use this over time. I think it's in a low single digit percentage of transactions. Now the segment is small today at just $4.4 million in revenue and they were essentially starting at scratch. They kind of just require the technology. But importantly, this segment has 50% gross margins compared to just 10% or so for the agent brokerage business. So on $100 million in revenue potentially in the future, that could equal $50 million in gross profit which you need a lot more in revenue from the brokerage business to attain.
- [20:41]
Ryan Henderson
So I assume they aren't doing the financing of this themselves, they are using a bank partner.
- [20:48]
Brett Schaefer
Well, yeah, in general it's essentially like look, you're, you have your loan officer, I'm assuming, I don't know the exact terms in the industry they underwrite the loan and then sell it to a bank.
- [20:59]
Ryan Henderson
Okay, makes sense. Yeah. Making sure they're not taking.
- [21:02]
Brett Schaefer
Not a bank. They don't hold on. I mean that's, that's way too much capital for a company this size.
- [21:08]
Ryan Henderson
Sure, the, yeah, I mean that makes sense. Zillow does similar sort of thing with their mortgages segment where you can encourage the buyer to go through you guys to get a mortgage, but it's not guaranteed. There's probably some sort of natural like upsell opportunities there where between the agent and the, the buyer. But it wouldn't surprise me if the attach rate here wasn't enormous. And it's not the end of the world. Like even if they get say a 10 attach rate that's still going to generate a good amount of gross profit for, for the real brokerage. So yeah, this, it can be. Even with a low attach rate it can be meaningful to the real brokerage's income statement potentially.
- [22:02]
Brett Schaefer
Yes sir. All right, now let's move into the other one which anyone that's bought a home probably knows about and that is title insurance and escrow. So they basically. Real brokerage has performed the same strategy for title insurance when they acquired expatitle in 2022. And this business shockingly has now been renamed to one real title and offers title insurance and escrow services. Again this is trying to vertically integrate the process but you can't force people to use this. Not a novel concept, I'm sure, but a smart one that I think can help bring high margin revenue for the real brokerage. Title commissions come with 80% gross margins that are even higher than the mortgage commissions and it generates about the same in revenue at $5 million over the last 12 months. Apparently there have been complaints about the quality of service with one real title. I saw this in my research on just looking at some online forums. But what's nice is that and the company kind of acknowledged this on the latest conference call. They talked about a quote, strategic re pivot of the segment which I translate to real words to mean we're gonna fix the issues. So TBD on that one. Both of these segments I think have a lot of Potential, But I wouldn't bank on them becoming. It's not gonna become 100% of the transactions bought at, I think what they don't give exact numbers, but I think it was either 2% or 4% attach rates. There's room for that to grow. And if they are growing their overall brokerage business and that market share of, you know, title and mortgage stays the same, well, those segments will grow in line with the real brokerage.
- [23:45]
Ryan Henderson
Yeah. I'm curious, what if they're able to improve expatitle here or one real title as they call it now? A lot of these things, they kind of make sense on paper that it's like a logical fit for the agent to be pushing the next thing. But I sometimes worry about whether or not there really is that attraction from the buyer side of things. Like for example, I think a lot of. A lot of home buyers just go with their bank for market.
- [24:15]
Brett Schaefer
Yeah, it's an easy connection. Exactly.
- [24:18]
Ryan Henderson
All right, let's keep talking though. We've got a couple more segments that could, I would call maybe high upside opportunities, call options, if you want to call them that. What is the real Wallet?
- [24:30]
Brett Schaefer
You know, this one is probably the one I'm most excited about because it's something that say, as you mentioned, a lot of customers might not stick with and we're already seeing high, high adoption of it. So the real Wallet, it was only launched in late 2024 and it serves as a digital wallet for real estate agents finances. They promise you to get your money faster, easily. Show commissions, payouts and revenue sharing, manage your finances all from a mobile application. And it already has a debit card that you can use with Apple Pay and Google Pay. I would think of it as the real wallet, as your PayPal wallet, your wise account wallet, or really any other digital wallet, slash hybrid bank account, but tailored specifically for real estate agents that use the real brokerage. I mean, getting that liquidity and all that stuff within these transactions that can be, I think fairly complicated is important. And I'm pretty optimistic on growth here. They already have 3,200 agents in the United States using the product compared to 27,000 total agents on the real brokerage. And that's only in less than a year, which I think is highly promising. And eventually the company wants to perform more financial needs for agents such as giving them lines of credit. I think they already do that in Canada, but don't have the approval in the United States. If there's wide adoption of the real Wallet, the real brokerage can widen Its competitive advantage by keeping their agents locked into the platform, hopefully reducing churn and then start generating tons of interest income on the float held in these accounts, which I think is from an investor perspective, that's where the earnings potential is for the real wallet.
- [26:06]
Ryan Henderson
Yeah, I'm kind of curious what differentiates them from for a real estate broker or a real estate agent, like what makes them special relative to just your standard banking app?
- [26:20]
Brett Schaefer
Think about real brokerage or whatever they call it. I think they call it reason or the r1 app. They got a lot of names and I'm not a real estate agent so I didn't get to use it. Essentially think of it as their operating system. So when you can merge that together and you don't have to say, all right, I'm going to go to the outside bank, work with that, get all this together. The whole thing can be managed through the OneReal app. So it makes sense to adopt that. It's similar to having, as we're all aware of, or at least many of the listeners would be aware of, Ryan is as well. When you have a credit card that is with a different bank than your primary bank provider, you get a little frustrated. Oh, I gotta have two apps, different billing. It's all confusing. This kind of consolidates everything for the agents and hopefully makes it much easier for them. This episode of Chit Chat Stocks is brought to you by Blue Chippers Club. The club was started by two friends of ours with the goal of building a tight knit community of stock focused investors. You can break down your portfolios, pitch stocks, receive feedback, talk to other people about their stock ideas, get insights for your own portfolio and participate in weekly calls with other investors. We love this idea. We wanted role models when we first started to get into investing and we think that joining Blue Chippers Club can really help you level up as an investor. Bounce ideas off other people, talk with us, talk with many other investors that have joined the network. If you're interested in joining, head on over tobluechippers club.com and hit apply. The link will be in the description.
- [27:51]
Ryan Henderson
Yeah, I guess in the long run every company becomes a bank at some point. That's the goal for the real brokerage. All right, last one, I believe, last sort of call option. If we're designating it as that. This one caught me off guard. Leo. AI thoughts?
- [28:08]
Brett Schaefer
Yeah, yeah, this one is, I think part of it is to get part of the AI hype cycle. But there is, given all the busy work within the industry, a lot of potential to automate some process. So LEO AI is a support agent they just launched that is AI for all the agents working with the real brokerage. It can be trained on your agent qualifications, history and potentially even your voice to provide basic chats and even calls with buyers and sellers. Also helps generate content for social media, essentially just helping you be more productive in theory, as we'd hope. But who knows about the execution on all this stuff? The company may be hyping up these capabilities today. They talk about a lot on conference calls. You know, they want to take advantage of the AI narrative. They even had prepared remarks from the CEO on the conference call read by Leo AI instead of him. So it was trained on his voice. And then the opening remarks on the conference call were read by the AI. And then afterwards he disclosed as kind of a joke. I thought that was a good natured joke. But again, we'll see if it actually gets in use from all of these agents. Whatever the actual AI that gets used from this. I think there is a ton of potential to make this valuable for agents to save them on busywork while they work with clients in the field. I mean there's just a lot of busy work, it seems like paperwork, filing, sending stuff, getting signatures to deal with in residential real estate and improving that and making the agents more productive will again not generate direct revenue, but will hopefully be a churn reducer for the platform and getting people to switch over the long term. I guess they say they want to have LEO AI be used by buyers and sellers. That's a bit of a moonshot. We'll see. I'd say don't factor that into any models, but hey, they've been successful so far, so who knows, we'll see what happens there. And just putting everything together, mortgage title, real wallet, LEO AI. If the real brokerage executes in scaling all these ancillary services that circle around its brokerage business, I think it has a chance to be a truly strong operating system for real estate agents. You have the moonshots as a part of it. But even the easy stuff that's just kind of making their lives easier as agents. You get wider moat, you get less churn and you get more revenue opportunities and hopefully that leads to better financial performance.
- [30:41]
Ryan Henderson
Yeah, call me skeptical on the LEO AI.
- [30:44]
Brett Schaefer
Honestly, you don't think that like there's all these perspective chats that they have to make with people. I mean there's just tons of communication. You know, you could say, look, hey, what's your information? It gives you all the information. There's There's a lot of busy work that can be automated with.
- [31:01]
Ryan Henderson
That's literally their entire jobs though, like that it. The busy work is what they are paid for. That's. So I would be, I would be skeptical that a lot of agents are willing to risk just using an AI agent to, for like their communication, for getting introductory info. I mean if they're just using it for like cold reach outs, maybe.
- [31:25]
Brett Schaefer
But say like, yeah, say a home buyer, home seller reaches out and then the chatbot can basically give basic information. All right, this is my expertise, this is my history, this is blah, blah, blah, all the information you'd want. And then you say if you want to call me, we can have a chat or we can meet in person. And it can even probably as the agent bull people say schedule a meeting with people. Now the voice stuff I think maybe goes a bit too far because I don't know if someone would want to become your AI, your real estate agent by just talking with your AI on the phone. But with the chatbot stuff, I mean 100%, I think that can help make them more productive, which is really again, I think part of the reason for the real brokerage existing.
- [32:13]
Ryan Henderson
Maybe in theory, yeah. But real estate agents, it's like one of the most competitive things in the world. Right, Right.
- [32:22]
Brett Schaefer
And you want to make.
- [32:23]
Ryan Henderson
I could go to any agent. No, no, I'm saying I could go to any agent. If I'm buying or selling, do I. Am I really going to go to the one where I figure out that I'm talking to an AI? Probably not.
- [32:34]
Brett Schaefer
Well, I think you got to think about it from the agent's perspective. The more deals they close, the more money they make. And if these tools can make them more productive, there's only so many hours in the day. That's the real brokerage's opportunity. That is their customer. The customer is not the home buyer, seller. They want to make the real, the real brokerage's agents more productive. And why not work on these AI tools that can help with it.
- [33:05]
Ryan Henderson
Maybe. I mean, yeah, I guess it could be worth it. I feel like they probably could have just bought this functionality instead of like hiring the developers to do this themselves.
- [33:16]
Brett Schaefer
Definitely are. I mean they only have. I should look it up, but they have like 200 employees, so they're, they're definitely using like a different service to build this. They're not building it from scratch.
- [33:30]
Ryan Henderson
Okay, yeah, then I'm all right with that. Yeah, I just worry about for a company of this size, scattered bets like or scattered focus. They've got five different underlying segments here. How much between title, mortgage? If some of this is being done by the agents, that's fine, but you got to maintain it. I mean, you can see with the complaints about the title service like it requires work from the company to maintain these services. So I worry that you're a company that does $128 million in essentially net revenue. Is it worth having all these sort of moonshots I worry about?
- [34:15]
Brett Schaefer
Most of these are not moonshots. Most of these are not moonshots. I don't think these are like scattered segments. If they went into commercial real estate now, that would be a whole completely different ball game. These are all things that real estate agents want as opposed to maybe some of the AI stuff they don't want, but they want to be more productive. This all relates to the same transaction. You have to get title insurance, you have to get the loan, blah blah, blah, blah blah. This all connects kind of as a hub and spoke model maybe, or maybe just a process that they want to vertically integrate and do together. I don't know if it's scattered, but I agree with you. They are a small company and they will need to invest and make sure these are quality services. And seeing those complaints is definitely a slight yellow flag, but we'll see. There's always growing pains for a small company.
- [35:03]
Ryan Henderson
Let's talk about the growth thus far. We've mentioned the revenue growth, the gross profit growth, but the agent growth is maybe the most impressive thing here. How much confidence do you have that they will continue to grow? Share?
- [35:17]
Brett Schaefer
Well, I think they may be on the cusp of a continued growth inflection in the real estate industry. Management estimates they're at about 2% market share. That does not include title, mortgage and the real wallet. So 2% of just overall transactions I think remitly came to mind here. When looking at the real brokerage, they are a low cost disruptor, taking market share, but with plenty of room to keep stealing share from the legacy players. I think it reminds me heavily of them. The real brokerage has 27,000 agents or just below 27,000 probably has surpassed that mark. Now there are an estimated 2 million real estate agents licensed in the United States and really if only half are like serious workers, some of them aren't practicing. That provides an immense opportunity for the real brokerage to take share. My question is why can't they eventually get to a hundred thousand agents using its platform if 27,000 thought that they were the best option? For them. Wouldn't there be more? I think that's highly doable. And given the growth from essentially. What was the number here? I guess I kind of clipped it badly. From the FINCHAT chart there.
- [36:23]
Ryan Henderson
1,050. It was at basically 1200 agents in I think, September of 2020.
- [36:33]
Brett Schaefer
Yeah. Now 27,000. That's another highly impressive statistic. Now the real brokerage generates approximately $4,700. So $4,700 in gross profit per agent signed to its brokerage. I believe that figure can maybe grow to $10,000 over the long term with the monetization opportunities at Title Mortgage and Real Wallet. If it doesn't get there, it won't, but I think it can grow over time. And Ryan's showing this chart here. I'd say cut, shout out to that custom metric generator on Finchet, use our link, get 15% off any paid plan was really, really valuable for this episode because say, in the past I would have to calculate this stat myself. Now I can use just revenue and then total agents, KPI that they have there and create this wonderful chart.
- [37:23]
Ryan Henderson
Do you want to.
- [37:24]
Brett Schaefer
Just, just a couple of seconds.
- [37:26]
Ryan Henderson
Do you want to mention what the inputs were here?
- [37:28]
Brett Schaefer
Yeah, it's just revenue. So it's just a ratio. You just take total revenue of the trailing twelve month period and then you divide it by ending agents in the quarter. So it's not exactly, you know, perfect because you have ending agents versus dynamic agents. But whatever, it's, it's, it's a trackable metric. And it's gone from.
- [37:45]
Ryan Henderson
You said revenue there, gross profit.
- [37:47]
Brett Schaefer
Oh, yes. Thank you, thank you, thank you. Gross profit, which I guess you kind of think as their net revenue. As we've been saying, gross profit divided by total real estate agents on the platform. And it's gone from a quite a low number in 2021. And it's climbed and climbed and climbed, I think steadily to about 4,700 and change over the last 12 months. I mean, just think about that. If they get a hundred thousand agents on the platform and they can grow to $10,000 in annual gross profit per agent, that's a billion dollars in annual gross profit compared to today. I'm really not concerned about real's ability to grow. There's a ton of room if they execute you from 2% to 4% market share. You're not even a large player in the space and you've doubled your market opportunity.
- [38:40]
Ryan Henderson
Yeah. And they've got a compelling proposition to agents. It's not like they've just Brute forced their way to growth. There's a natural attraction to this business model and it's money if you're a real estate agent. So let's talk about some of the competitors though. Obviously this, this model seems attractive, but it's not the only one. So who would you consider to be the competitors to the real brokerage?
- [39:07]
Brett Schaefer
First we have the legacy players. Those are traditional ones that we talked about. I think these are easy targets for where real brokerage can take market share and I'd expect them and other cloud providers to grow and take share from them because with the rise of the Internet you don't have again, let's compare it to stocks. You don't call up your broker anymore unless you are Warren Buffett. And in reality for him it's even a little bit different. You call Goldman Sachs. I think there's going to be a consistent switch to the software model where you don't need these wild sprawling offices of all these legacy players and it's just going to be a slow burn over time. Second, we have players like Compass, which is a big VC company people may have heard of. They are a digital focused broker that got a ton of venture capital funding much more than the real brokerage. They focus a little more on I think the luxury market and they try to be a high end brokerage but when I look at them, they only had 33,000 agents on their platform. And again the real brokerage has 27,000 with much less VC funding. And I'm not an expert on Compass. That's maybe another company I'd want to study to really understand how the real brokerage sits within the industry. But their results with all of that VC funding plus the capital markets, I'm assuming I don't have the full numbers in front of me. Seems like the real brokerage is executing with less. And I'm going to include a Reddit thread here of people basically comparing all of these cloud based brokerages encompass and it looks like the real brokerage has a good niche within this play, within the space. And then what's maybe most promising is that they have a direct competitor in Exp World Holdings. The ticker is expi. Luckily they're public and that's another cloud based brokerage but it is older than the real brokerage does about $4.6 billion in annual revenue. But the real brokerage is catching up quickly. In 2020, expi did $1.7 $1.8 billion in revenue. The real brokerage did 16 million and that's caught up to 1.4 billion today for the real brokerage and expi's revenue at $4.6 billion and stagnating. I'm gonna include a good chart there from Finchat comparing both within the newsletter. And the last thing I should say is that the state of the real estate industry is frozen. The transactions have fallen in the tank with high interest rates and high home prices. Supplies building up and stuck. Eventually I believe people are going to sell these homes. I don't know when. It could be next year, it could be this year where the trend changes. And the real brokerage is really facing a macro headwind right now. Pre pandemic. And I have a chart of this in the newsletter. Existing home sales were around 5.5 million a year. Today they are comping at seasonally adjusted $4 million or sorry, sorry. 4 million total home sold per year existing home sales. So from 5.5 million down to 4 million, that is a lot of real estate agent commissions that have disappeared. I think they probably come back one day and this headwind turns into a tailwind for companies like the real brokerage. So lots of. I think the growth can continue. To sum that up.
- [42:35]
Ryan Henderson
Yeah, they've been a very clear share taker in the industry. Both, I mean a lot of the services, a lot of the cloud brokerages have been sharetakers in general from the legacy model. But even among the cloud brokerages, they've been a share taker. As I just shared with that chart, EXP World holdings versus real brokerage. Yeah, they've just kind of climbed numbers.
- [43:04]
Brett Schaefer
Tell the story.
- [43:05]
Ryan Henderson
Yeah, I think today they're probably 25 almost no, maybe even a third of revenue of EXP's revenue as opposed to being like 1/100th maybe five years ago.
- [43:18]
Brett Schaefer
Yep.
- [43:20]
Ryan Henderson
Let's shift gears a little bit actually. I will say there's a house in my neighborhood listed by Compass, so Wow.
- [43:29]
Brett Schaefer
You must live in a fancy neighborhood. No, I don't.
- [43:31]
Ryan Henderson
So I don't know. I don't know if it's pure luxury.
- [43:34]
Brett Schaefer
No, it's not. It's not. But they, they do talk about that. I guess I should research more. But they, yeah, they talk about getting utilized by the high end market but I'm sure they're utilized by everyone.
- [43:45]
Ryan Henderson
So there have been, I guess murmurs online of this being a multi level marketing scheme. Can you maybe describe why some people think that it is a multi level marketing scheme? And then I guess the rebuttal to that. All right folks, if you are a regular listener to chitchat stocks, then you know that we use FinChat IO daily. FinChat is the complete financial data platform for stock focused investors. They have robust financial data on more than 100,000 stocks globally, including company specific segment and KPI data. So you want to see Amazon's revenue from advertising. Finchat's got it. How about Netflix's subscribers by region? Yep, they've got that too. And they just added Morningstar research reports for all subscribers. So if you are subscribed you can now get all the latest Morningstar high quality research reports on more than 1500 stocks globally. If you're interested, head on over to FinChat IO Chitchat. All new users automatically get two weeks of FinChat Pro for free. But if you want to extend to any paid plans, our link will get you 15% off. That is FinChat IO Chitchat. The link will be in the show notes Right.
- [44:59]
Brett Schaefer
So they A lot of people kind of compare it to an MLM scheme such as Herbalife. You know you have some pyramid esque characteristics. Not to say that as a swear word, but to the marketing strategy. You know you're paying hefty referral fees for existing agents and that does make up the bulk of their marketing expense. When they recruit new agents to the real brokerage. I don't believe this makes them a scammy mlm, even if there are characteristics to this. Because I should say an MLM such as Herbalife still operates and is completely legal. A scammy MLM simply focuses solely on recruiting as many new customers to keep expanding the pyramid down and down and down. Well, from what I've found, and I think with the real brokerage, they are truly committed first on building its products for agents. Like we talked about extensively above, it wants them to use the real brokerage as a real estate agent first, not primarily as a recruiter. You're not going to switch your job to just be oh, I'm going to solely recruit more agents to work below them and earn fees. I would say was PayPal and MLM for paying high referral fees if you convinced a customer to join is any financial services company and MLM for doing that, which is a very common tactic within that industry. No, and I don't think the real brokerages either.
- [46:17]
Ryan Henderson
Ryan Something Dad Yeah, there's a fine line between a proper LL MLM which helps companies grow and a pyramid scheme. Maybe I shouldn't say a fine line. A wide line, pretty wide line.
- [46:35]
Brett Schaefer
But I think the distinction is focusing on the product first and not primarily having people focus on recruiting.
- [46:43]
Ryan Henderson
Yes. It's that under the sort of. That assumption, basically every, every single affiliate network would be an mlm.
- [46:52]
Brett Schaefer
Right.
- [46:52]
Ryan Henderson
Which is just kind of, you know, it's turning your customers into sort of brand ambassadors. I don't think there's anything wrong with that. And that seems to be what the real brokerage has done.
- [47:02]
Brett Schaefer
Right. And it's perfect within the industry because real estate agents, it's a community focused thing. A lot of people talk. It's all localized. Yeah. The bulk of the real brokerages, $57 million in annual marketing expense, which is 50% of their gross profit right now. It's their highest expense that is spent on agent referrals and stock bonuses. But I don't think that makes them a shady mlm. I think that makes them again, using a referral program that has worked really well and aligning your agents to stick with you, get those stock options or RSUs or whatever they use and get people aligned with a rising stock price. Now, some real estate agents did say they got some MLM vibes from the EXP cloud brokerage because of the intense focus on recruiting new agents instead of just doing your job. Maybe this is why the company is losing market share to the real brokerage, but something to track over time. Hopefully if you're a real brokerage investor, you keep seeing these market share gains from the real brokerage versus expi and this will kind of shift into talking about management. We'll keep it short here. The real brokerage was founded by Tamir Poleg. He is the CEO today and he owns roughly 3.5% of the outstanding business, according to Finchat. I like that shareholder alignment. Founder led owns a good amount of stock and I don't. The segment's always weird because you kind of just go, well, do you like or dislike the management team? Do you think they're trustworthy? I tend to like Poleg from what he was talking about. Yes, he pulled that weird little joke on the conference call, but I don't think there's anything wrong with that. He's trying to hype up his new product. He gets what is needed to drive a competitive advantage in this space, which is aligning the success with each other, meaning real estate agents and the brokerage, driving down cost for them, giving them shareholder alignment and using that marketing advantage to build scale and attract agents in an efficient manner. There is aggressive spending on marketing, but given how fast they are growing, I think the unit economics are work. It worth it. And he's a jockey. I'm willing to bet on. So far, I think it's an early stage company, I should say. You know, we're going to need to track his actions, decisions, temperament to increase my conviction that he is a founder that deserves to be bet on. There's going to be whatever it is, a rough patch at one point. Seeing how he navigates that will be important. But yeah, so far seem it doesn't seem to be scammy. Seems like one of the few small cap management managers that has a rational head on, on their shoulders.
- [49:52]
Ryan Henderson
All right, let's talk valuation. We it's unprofitable at the moment on a gap basis they do generate positive cash flow, which is a good sign. And it, you know, there's some sustainability here. It's not like you're modeling out the burn rate and concerned that they're going to go bankrupt tomorrow.
- [50:10]
Brett Schaefer
Yep, clean balance sheet too. Although we're not going to get into the details on the episode.
- [50:15]
Ryan Henderson
What do you think they can earn in the future and how does that compare to the price today?
- [50:21]
Brett Schaefer
Okay, context first. Again, they are a low margin business. Gross margin was 9% over the last 12 months and the company pays out a lot of stock based compensation counteracts this with with a lot of this SBC paid to agents and management with share repurchases. And I think a short history says that they are pretty astute in timing these buybacks with lower stock prices. But again they're not someone that's just paying a ton of like part of their model is paying a lot of their expenses as stock to their agents, which is not necessarily a bad thing. And then their cash flow is going to be mismatched with their earnings which we're going to look at earnings more than cash flow, but it gives them that cash to buy back stock. And I don't really think of it as a terrible model. It's just a little bit different than usual and I don't think it's scamming whatsoever. Now when we look at the margins scaling up, mortgage and title can edge gross margins higher. Remember 50% margin on mortgage, 80% on title. And then when we're talking about finding some sort of bottom line gross margin, we need to consider that there are durable and like marketing costs that are going to come with agent referrals and agent revenue share and agent stock bonuses. There should be some operating leverage here, but it's going to be a sizable portion of that gross profit going forward and probably forever. Now of course there's always overhead costs and then research and development. I'm not concerned at all about revenue growth. Revenue was up 76% year over year last quarter in a still tough operating environment. Some listeners might call this aggressive, But I think 50% annual revenue growth for the next five years is doable for the real brokerage. Huge market share gains, huge history of market share gains. There's a potential to keep gaining market share at just 2% of the industry. And you could have the macro headwinds turning into tailwinds. I'm trying to be accurate, not stupidly conservative. And this actually seems like a good ballpark. Whether it's 40%, 35%, 60%, I don't know. But I think that that is a good estimate when you have so much market share to take. Headwinds that can turn into tailwinds from the total transactions within existing home sales and the potential of title, mortgage and the real wallet. Now, 50% revenue growth for the next five years brings revenue to $10.7 billion. And the big question is, what would be a bottom line operating margin or net income margin, say, five years from now? I ran a few different estimates. 3%, which seems very, very doable, is a 3% margin, is $321 million in earnings. On over $10 billion in revenue. 5% would be $535 million in earnings. And if you even got to what I would say is an unlikely 7% bottom line margin, that is $750 million in earnings. And assuming share count stays neutral because of buybacks and the aggressive cash flow they're going to have, we have a market cap of $858 million in five years at today's stock price of $4.16. So with a 3% margin, that's less than three times 2030 earnings. Don't think we even need to run the numbers on the other ones. It can get extremely cheap quickly. If we see durable high revenue growth as they have been doing, and operating leverage, I think the stock looks cheap today, very dirt cheap. And assuming the company would trade at just. Again, these numbers are putting just numbers out there. As an example, if we get to that 3% margin figure, which I know it's hard to talk about on the episode, but they would have a 2.7 times 2030 earnings multiple on today's stock price. If they traded at 27 times earnings, just moving that decimal one place over in 2030 because they're still growing quickly, they're winning market share. It's an attractive model. You would have a 10x for shareholders before considering considering Any capital returns and maybe a 5x if the multiple stays at what would that be? Under 15 and a half. And of course things might not go as planned. It's probably not going to follow this path. But I think the stock looks to trade even though it's unprofitable today. I think it has a margin of safety even if revenue growth decelerates quite quickly.
- [55:04]
Ryan Henderson
Yeah, I think this has the makings of a legitimate multi bagger. My personal best investments have probably come from those companies that have true momentum. They're growth oriented and product focused and they haven't turned the corner to profitability yet. And so you get skepticism from Wall street or maybe they're too small for a lot of people to care that people aren't able to model out earnings. And sometimes it's. I think the difficulty with a business like this is the drivers aren't always clear. Like how do you get to that 40 revenue growth figure? It's you.
- [55:47]
Brett Schaefer
It could be a little different. I don't know exactly what it's going to be.
- [55:51]
Ryan Henderson
It's not always clear what's going to drive the growth from here, but well, market share gains.
- [55:57]
Brett Schaefer
Well I, I'd say what's going to.
- [55:59]
Ryan Henderson
Drive the market share gains aside from them just having momentum, good product and a great referral network? It's not like it's hard to pinpoint. You can't just say, I'm trying to think of a simpler business here. Philip Morris, they're going to sell the same amount of cigarettes in a year, have this much in price increases and you can really easily get to the right figure based on just general assumptions. It's, it's a lot more guesswork and but I think my question would be why wouldn't they keep growing? Why wouldn't they continue to take share? What's stopping real estate agents from moving to this model and joining the real brokerage? I think right now it feels like they have a lot of momentum for a good reason.
- [56:42]
Brett Schaefer
Yeah, they have a lot of momentum now. Some people may argue, oh you look at expi, they grew quickly and then stagnated. Now someone else can come into the industry and be even more disruptive. But I think that's maybe not looking at the big picture and that expi seem to be a bit more promotional MLM focused and not operating and creating value for these real estate agents. And what I like seeing with the real brokerage is I know we discussed and debated the potential of some of those products. They are focused primarily on building projects, products for their agents and keeping them from churning to other platforms. Could another company come in and even have lower commissions? Perhaps. But that feels very uneconomical. And the more scale the real brokerage has, the more they can drive down costs for their customers. So I like the potential here. Is it a wide moat business today? No. But could they have a Wider moat in five years? Yes. And even wider in 10 years? I think, yes. Like any investment, it's not guaranteed to work out. But maybe we can talk about it. Leading into the final question, I think maybe people know what way I'm leaning on this stock. But Ryan, anything else before we close out here?
- [57:59]
Ryan Henderson
No. I guess the last thing I'd add.
- [58:00]
Brett Schaefer
Is.
- [58:02]
Ryan Henderson
There are definitely some elements to the referral network that might seem scammy. Like they pay a lot.
- [58:13]
Brett Schaefer
They pay. They pay good money to people that.
- [58:15]
Ryan Henderson
Refer and they have the stock bonuses to their network, which sometimes it feels weird to be giving stock to your customers type of thing to contractors.
- [58:23]
Brett Schaefer
Yeah.
- [58:24]
Ryan Henderson
They're also essentially salesmen for you as well. So in a way, I mean, if they're growing the platform and they're referring new customers to the real brokerage, I think that actually makes for a really powerful incentive, even though it can feel a bit scammy. And I think they're doing a decent job managing that with the buyback as well. If you look at pure dilution, I don't think it's been too bad. Let's, let's wrap this up here. I personally was very impressed by this company and I'm glad you did this report. Are you going to buy shares of the real brokerage?
- [58:59]
Brett Schaefer
I think I should buy shares. I'm not going to buy until after this episode comes out. Just to be. I mean, we're not a big enough show that can move a stock. But just to be fair for listeners, never want to front run anything. So after the show comes out, within a couple of days, I probably will end up buying. I think I should buy it. I think the real brokerage has a chance to be a 10 bagger and be a huge winner in the residential real estate space. And I think it is trading at a reasonable valuation with a good founder at the helm. Is it guaranteed to work? No. Don't make this 100% of your portfolio. Never make any stock 100% of your portfolio. Except for maybe Constellation Software, Berkshire Hathaway. To do so though, I think I need to trim an existing position. I'm kind of running up on too many stocks in my portfolio. Maybe that's Another decision to make. That's something we could talk about on another podcast. But I like the stock. I think given how. What's my entry level position? It's about 5%. Is what, like a entry level? Not entry level, but like a normal position I have in my portfolio. So I could see myself making it a 5% position. It's not going to be something like Nelnet at the extreme, which is about 20% of my portfolio or something else like a. What's the other one? A coupon that's about 10%. I'll need to build up that trust over time. But I don't think. I don't want to make this a starter position because I like the business and I don't want to give up upside. But making it too small of a position in the portfolio just because it's quote unquote a small cap.
- [60:43]
Ryan Henderson
Yeah, I think obviously there is some.
- [60:45]
Brett Schaefer
It's not Harbor Diversified. It's not a. I don't think it's as risky as some of those micro caps.
- [60:50]
Ryan Henderson
There's more risk to this than obviously some of the more established operations because at the end of the day it's somewhat of a new concept. I guess it's probably five years old. But yes, I, I think you're probably going about it the right way and I was really impressed by this. I think the management team's done a fine, fantastic job even if it doesn't, even if it looks like there's some hair on it from an investor's perspective with the stock issuance to the unprofitable agents. Yeah, yeah. But really they, I mean if you were seeing this many agents onboarding, wouldn't you be investing heavily into it as well? If you were management, it seems like a no brainer for them to be doing that. So yeah, I really like this and it feels like, yeah, making some. A multi bagger potentially. I think that's going to do it though. Thank you everyone for tuning in. Thank you to Finchat for all the charts and remember we publish these reports on our sub stack as well, totally free that has all the charts included. So gross profit per agent and some of those other lovely charts that Brett had in here, they'll all be up there. Thank you again for tuning in. We want to remind all the listeners that Brett and I are not financial advisors. Anything we say or discuss here on Chit Chat stocks is not formal or recommendation. Brett or myself may buy, sell or hold any of the securities discussed in this podcast. Thank you again for tuning in. We'll see you next time.
- [62:32]
Brett Schaefer
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