Welcome to the Redfin Fireside Chat at the Goldman Sachs Communacopia and Technology Conference. I have the privilege of introducing Chris Nielsen, CFO of Redfin. Prior to joining Redfin in 2013, Chris was the CFO and COO at Zappos. My name is Mike Ng, and I cover Redfin as part of our real estate tech coverage here at Goldman. Today, we'll be discussing the state of the housing market, Redfin's strategy and expansion efforts across their core businesses, as well as Redfin's strategy in rentals and mortgage. We have about 35 minutes today, inclusive of audience Q&A. So if you have a question, anytime during the session, please feel free to raise your hand, and we'll go ahead and get a mic runner over to you. So first, Chris, thank you so much for, for being here and participating in our conference. We really appreciate your time. Oh, thanks for hosting us. We're glad to be here. Great. So to kick things off, I was hoping we could just talk about a, you know, high level, kind of strategic topic first. You know, Redfin's a technology-powered real estate brokerage firm with a track record of market share gains, driven by its leading web property, Redfin.com. As well as, you know, its, its, more customer-centric model. Could you talk a little bit about Redfin's strategy and points of differentiation to continue driving market share gains, over the next several years, particularly as you compete with companies like Zillow for traffic and more traditional real estate brokerages and seller and buyer representation? Yeah, I think that's the right framing here. So we do think of the business as tech-enabled. It really starts with a website and a mobile application where we meet customers. That is the primary means that we start the process working with someone, and then our agents use technology all the way through the transaction to help make it easy for our customers to see homes, but then also to close those transactions. We think of that combination as being the differentiator, in that not only do we have this technology capability to meet people, in what we think is the most cost-effective way, and that is over the internet, but then we can deliver service all the way through the transaction. I think we've mostly talked about that service delivery as being related to our brokerage services, where we help someone either buy or sell a home. But then, over the last couple of years, we've added capabilities to also help that customer originate a mortgage, close their transaction through our title services, and then we've made available rentals inventory as well. That's been, I think, particularly important over the last couple of years with inventory levels for existing homes so tight. Having that alternative for a customer to look at and think about renting a property has been, particularly meaningful. Great. I wanted to talk a little bit about, you know, Redfin's views on the macroeconomic environment. You know, as existing home sales in the U.S. have gone from 6.1 million in 2021 to, let's call it, like, the low 4 millions in 2023, depending on who you ask, maybe 4.2 or 4.3 million. Could you talk about Redfin's outlook on housing in both units and pricing terms? And then, you know, maybe talk about some of the key factors that you're watching to understand the trajectory and potential inflection in the overall housing market. So the year has mostly played out the way we expected in terms of existing home sales. Going all the way back to last fall, we thought we would be around these levels. I think that we've mostly been pleased with the way the year has played out that way. A strength in terms of the year has been pricing for homes. Home prices have held up, I think, remarkably well, given that amount of change in a couple of years. And really, what's underlying that is also a little bit of a challenge for more volume, and that's just that inventory levels have been super tight all year. There are kind of two prevailing factors that are holding back the market right now. One, obviously, is that mortgage interest rates have come up since the early part of 2022, are now above 7% and have been bouncing around daily between, you know, 7%-7.5%. So that's a pressure point for home buyers. And then inventory levels, actually, I think, in our view, has been even more of a constraint on transactional volume, that there are lots of people who have navigated through and come to accept that, it's going to cost more, and they'll have to pay more for a mortgage, but they're active in the market. It's just been pretty hard to find homes. And so, you know, those are the pieces I think that we're most watchful of as we go into next year, that we're, just like everyone else, paying attention to interest rate dynamics, what the forward curve looks like that way, what likely Fed actions are, that will influence that mortgage interest rate piece of this. And then the second one is, what the flow of inventory is beginning to look like. And, you know, it's still reasonably early to start talking about what the full 2024 looks like, but we're certainly not counting on an immediate return to anything like normal for next year. And until we can see an inflection in mortgage interest rates, I think that you'll see us be on the cautious side of what to expect for next year. Great. And, I'd like to talk a little bit about, you know, Redfin's response to what's happening in the broader housing market. There have been some lead agent reductions. There has been some reductions in marketing spend. So maybe you can just go into that in a little bit more detail. Talk a little bit about, Redfin's response to, you know, what's happening in the housing market. And also, you know, where are you investing in, Right as you kind of get those savings? Sure. So going all the way back to April 2022, as we saw mortgage interest rates up, we did make a series of cost reductions. We think that those were the right and appropriate things to do, to have the business lined up with the kinds of volumes that we should expect for the next couple of years. We further took action by shutting down our iBuying business, which was capital intensive, but with the cost of capital up, we didn't feel that that business made as much sense going forward. So all those actions were taken in June and November of last year, and it was to get the business right-sized from a cost standpoint to compete and be successful, given the macro volume that we were expecting. So we're glad that we made all those changes. We think that those were the right things to have done. A place where we've really preserved costs, though, is on the growth, marketing, and growth technology side of things, and, you know, we think that that's paid off well this year. So we wanted to make those cost reductions to be appropriately sized, but also, careful about cutting things we think are important for future growth. And, you know, that has paid off this year, where, from everything we can see, we've been able to outgrow, our competitors in terms of traffic for this year. It puts us in a good position. We've met a lot of customers that we do expect will turn into close transactions over the next couple of years. So, we think that's been the right trade-off so far. Great. This past quarter, Redfin updated its target for getting EBITDA positive from, you know, 2023 to mid-year 2024. And one of the things that the company cited was market share losses. So would you just talk a little bit about, you know, what drove market share losses in this period or at this time? And, you know, what are some of the initiatives that Redfin's pursuing to stem those share losses and reverse them? Sure. So I was just describing that mostly the year has played out the way we expected from a market standpoint. The piece where we feel like we can and should be making more progress is on market share gains. Historically, we have a track record of gaining share, and yet we've faced a little bit of headwinds here, in part related to what I was mentioning earlier. As we laid off agents last year, we know that that disrupted some amount of customer flow, for the people who had already connected with those agents. That's a tough thing to overcome. We also know that RedfinNow was an attractant for some customers, and so without that, that's put extra pressure on share gains going forward. You know, the way we navigate through that, in part, is, over the next couple of months, couple of quarters, we'll begin lapping some of those changes from last year. And so that does set us up a little bit better for share gains moving forward beyond that. But then, just more fundamentally, we do have our agent teams just incredibly focused on helping customers navigate what's probably a slightly more challenging housing market even than we expected. So even though the volumes are the same, with inventory levels so tight, it has just been harder for buyers to get all the way through to a closed transaction. And so it has our agents teams just very focused on showing up with the customer early to forge a relationship, making sure we're staying in touch with the customer all the way through what can be kind of a lengthy process, to get all the way through from their initial inquiry to a closed transaction. And so, it is that basic blocking and tackling that we think, you know, begins to build the basis for more share gains going forward. Yeah. One of the things that Redfin announced was a pilot program in San Francisco and L.A. for 2024 to give those agents a larger pool of commissions or a larger share of commissions for self-sourced deals. I was just wondering if you could talk a little bit about, you know, how that works, how that plays into the broader agent recruitment process. Sure. So, this is a good highlight along the same lines of your prior question, and that's that we can see that there's an opportunity for more share gains in some markets where there are higher-priced homes. But to be able to deliver on that, we're hearing from customers that, in some cases, they would like a more experienced agent, who has more, credibility, more experience helping buy and sell those expensive homes. And to recruit those agents, what we're hearing is, they're really excited about joining the Redfin platform because of the customer introductions we can provide from the website. But in some cases, they want to be able to retain more of the economics from their existing customer base. So they've got a pool of customers they've worked with over the last few years. They believe that there are closings from those, and they're reluctant to give up the economics of that transaction by joining Redfin. And so the change that we're making, the pilot that we're running, is to allow those agents to retain a larger split, a larger portion of the transaction, if they're sourcing the customer. And if, in fact, the customer is sourced from Redfin.com, it'll be more like the economics that we've traditionally had. And so the result of all this should be, we'll be able to attract agents with a little bit more experience, who will then have higher close rates, particularly, with these higher-priced homes. So that, that's the thesis behind this pilot. I think that, you know, we're still in the very earliest stages here, but, we are encouraged by what we've heard in terms of feedback on the idea. Great. And that's a good segue to just talk about agent recruiting more broadly. You know, given the outlook for U.S. existing home sales to have more flattish volume through 2024, could you just talk about your agent hiring plans over the next 12 months? Do you see opportunities for increased hiring to drive market share? And, you know, is there enough in the top-of-funnel in traffic volume to help support this incremental hiring right now? Sure. So there, in fact, there's plenty of demand from consumers. There are markets in the U.S. where I think you'll see us hiring agents, because we can see that that demand is above even the capacity we have in our existing agent base. So in general, you know, we've seen migrations towards the Southeast, to Texas, to Florida. Those might be examples of places where we would be somewhat more aggressive in terms of hiring. And then there are a few other spots where we can see that there are also opportunities. But more generally, in terms of agent hiring for next year, you should think of our agent hiring to be relatively limited, in line with, our, our view on what's going on with the housing market for next year. So I wouldn't expect to see a lot of agent hiring overall, and mostly we'll just continue to match up that hiring with the demand we're seeing in those local markets. We don't view agent hiring to be a limit on the business in any kind of way at this point. And so that's kind of how we're thinking about hiring as we go into the year. Great. As you think about managing that top-of-funnel traffic, and you think about opportunities to drive growth in Redfin.com, do you see more opportunities in increasing the amount of traffic or improving the traffic to conversion of actual leads? Then on a related note, you know, what are all the marketing plans that you're pursuing to support Redfin.com? Sure. So we think of both opportunities as being equal, meaning that there's plenty of opportunity for us to continue to gain website traffic share. We've been really pleased with the team's efforts so far this year on that front, continuing to improve search engine optimization, continuing to improve search rankings. We think of that as an important driver of our website traffic. And then the team has also been very successful in finding new ways to convert that traffic into customers who reach out for service. So both are important investment areas moving forward. In terms of marketing, our most successful channel this year has been paid search advertising on Google and various other websites. And so I think you'll see us continue to be really attentive to that. That's the kind of marketing you can do and tune based on your profitability targets. And so because you can see all this pull-through, it really allows us to dial in our investments in those areas. We've also been active at various points in time with brand marketing, and I think there, you'll see us be more aggressive as we're more confident in the housing market, and less aggressive as we're less sure of the housing market. And the reason for that is just that, our experience here is that heavy brand marketing into a slow housing market is just not a great ROI. And so that's how we've adjusted our plans over the last couple of years, and I think you should expect to see us continue to pay attention that way, and just be really attentive to what works and what doesn't work on that front. So we think of both as important marketing vehicles, but the most important thing from a traffic standpoint for us really is the free traffic that we earn, through continuing to deliver great service. But we also self-generate a lot of our traffic. Once a customer has come to Redfin.com or come to the mobile application, we provide recommendations to them about other properties they might be interested in and up-to-date information about new homes coming to the market. And that always has been, and will continue to be, among our most important traffic channels. Great. I'd like to ask you about the Partner Agent strategy. It's been one that's been becoming more important, it seems like. I think 37% of customer inquiries went to Partner Agents in 2022, 45% in the first half of 2023. So could you talk a little bit about the Partner model? Could you just remind us how the economics between a Partner Agent and Redfin works? And then would you ever consider moving everything over to a Partner Agent model and go, you know, agent light? Sure. So partner agents are agents who work with other brokerages, maybe Coldwell Banker, maybe RE/MAX, and those agents join our program. We do introduce customers then, when we don't have enough of our own brokerage capacity, to those partner agents. And if a customer goes all the way through to a closed transaction, we receive a referral fee that's about 35% of the commission that comes from that. And you can imagine there's very little cost to serve that customer or that transaction through Redfin, so it has a much higher gross margin than our brokerage business. You're correct that we've been intentionally shifting over the last year, plus a little bit more towards the partner business, and I expect that to continue into next year. The reason for that is that we can see that there are, you know, just through some of the ups and downs of the housing market over the last few years, there are more fixed costs, more additional fixed costs associated with our brokerage business than there are the partner business. So it makes us, you know, slightly more inclined to shift things towards partners, and that's what you've been seeing in terms of the results. The constraint on that, though, is that we can also see that our own brokerage agents close just at a much higher rate than partner agents do. More than 40% more likely to close if you're working with a brokerage agent than a partner agent. And the reason for that is all of this infrastructure built around that partner relationship or that brokerage relationship, including the technology upfront on the website with the customer, who can make it easy to go ahead and schedule a tour or to see a property. But then also the support staff to help that agent all the way through to a closed transaction. And so that's the reason that we're, you know, cautious on a lot more movement towards partner agents, is that there would just be some amount more loss of fidelity in the closing of transactions, just given that difference in close rate. Great. I'd like to shift gears a little bit and talk about rentals. So Redfin acquired RentPath in 2021, and it's been investing heavily in rentals, including the Rent rebrand, the Rent marketplace, enhanced listing service, to name a few. And it seems to have been working out really well. Certainly better than I had originally expected a year ago. Could you just talk a little bit about, you know, the long-term vision for rentals and how it ties into the real estate services business? I know you touched on this- Yeah. A bit upfront. Yeah. Yeah, no, it's, it's for sure the right question. So the way to think about it is that we, we do know that customers are often thinking about buying a home. At the same time, they're thinking about renting a property. That's a decision the customer needs to make. We've found having that rentals inventory on Redfin to be a really effective attractant for consumers to be able to see and compare properties in that kind of way. And so we're just super glad in this inventory, this tight inventory environment, to have added that rentals inventory to Redfin. And then in terms of the business, we've been really pleased with the turnaround that the team is largely through at this point. That, a year plus ago at this time, we were shedding revenue year-over-year, and what's turned around is that we're now adding more customers. We're providing more services to more of those customers, which further enhances revenue. So we're now on a path where revenue growth has continued to accelerate. We expect that to continue through the rest of this year into next year. In part, that's due to us having just brought to market a better set of capabilities and explained those better to the apartment owners in terms of the advertising that we can provide to their buildings. I think we're also benefiting, at least to some extent, from what's been going on in that rentals market, and that's that there are new buildings that have been coming online. Those buildings are not fully leased up, and that has the apartment building owners wanting to advertise, to continue to, to fill up their properties. And so in part, the benefit, the business has benefited from that dynamic. But again, even more so just through our own efforts to get the business set up for the right kind of growth moving forward. So really pleased with how that's gone. It's been an important turnaround from this point last year. Right. Yeah, accelerating revenue growth, and it's on track for breaking even EBITDA this year. It'll be an important milestone. You know, the business has a long history prior to our acquisition, and then some downturns before our acquisition of generating Adjusted EBITDA, and it's nice to see we're marching back towards that. That's great. Another, you know, real estate-adjacent product is mortgages, and Redfin acquired Bay Equity in April 2022. So I was wondering if you could talk a little bit about how Bay Equity has helped drive the mortgage business for Redfin. You know, why are customers using Bay Equity now? And obviously, this is a business that's been growing in a very challenging macro environment for mortgages. So, how are you thinking about, you know, the catch-up, as well as the long-term growth and scalability of mortgages? We've been really pleased with this acquisition. Bay Equity, prior to the acquisition, was a freestanding mortgage originator, a long history of revenue growth and profit. What the team brought to Redfin customers and Redfin agents is a full suite of mortgage products and experience delivering those mortgages on time to allow for closings. It's been that combination that has allowed us to take attach rates from the mid-single digits prior to the acquisition to around 20% in the most recent couple of quarters. That happened faster than we expected at the time of acquisition, so there's been a good connection between our agents, our brokerage agents, and those local loan officers, who can then work with individual customers and help find the right mortgage product for them. Our view is that there's more growth still in this business, in that we've seen that attach rates are even higher than that 20% or so level in some of our markets, above 30%. And when we look at what's different about those markets that have seen higher attach rate, it is mostly operational in those places, that there's just a better connection between the loan officers and the agent between the local loan management teams and our local brokerage management teams. And so it does make us believers that there's room to continue to drive attach rate from this point forward. So we'll continue to tune in the markets where attach rates have been lower, to find more opportunities that way. At this point, also, you know, this is an industry where there's essentially overcapacity, the mortgage industry, that as volumes have come down across the U.S., there's still more capacity than there is demand. And so that's putting extra pressure on the gain on sale of mortgages. That's probably the biggest headwind that that business has right now. We do think that that's something that ameliorates over time, but we're just glad to have the volume that we do right now, and pleased with how the team's executing and stuff. Great. And, and just as a follow-up on mortgages and Bay Equity, does most of the top of funnel come through Redfin.com, or is it operating as a standalone business? Right. And the majority of volumes still come separately? It's really split between those two things. So the Bay Equity loan officers have a set of relationships they've had for years with either local real estate agents or local customers. That continues to be a driver of the business and growth. But just as important has been this just completely new set of volume that's come from Redfin. And so the loan officers are back and forth between those two things, and I expect that to be the case for a long time. We really want both channels to be successful, even though we do think there's a lot more potential on the Redfin side of things. Great. And one, I'd call, like, emerging revenue stream that, I think has been getting more attention in the last couple of quarters, has been digital revenue, which, you know, has experienced solid growth. I think it was up over 150% year-over-year last quarter. My understanding is that this is advertising on Redfin.com, and also marketplace connections for, I guess, non-Bay Equity lenders. Could you just talk a little bit about this? Because it seems like it's becoming more important. You know, how important is this as a source of revenue and revenue growth going forward? We do think this is an important source of revenue. We think it's even more so an important source of profits. We've become more aggressive about using pixels on the website, on the mobile application, to provide advertisements to consumers who may be on Redfin.com, who are interested in properties, but may not be active in the home market right now. You know, the thing that's been nice about this is we feel like we've found a good sweet spot in that we've been able to deliver these ads. We'll continue to monitor really carefully the impact that any of that advertising placement has on consumers' response to the for-sale properties that we provide to them. But at this point, we've been, again, really pleased to see so much growth in that area, and also believe that there are more opportunities moving forward. That we just know that, there are places we've not yet begun to monetize, either on the website or through the emails or other forms of communication we have with consumers. And, you know, I happen to be a good example this way, which is I have a variety of saved searches. I get notifications from Redfin every day. I'm not exactly in the housing market, at this point. I do click on things regularly, and it, from a company standpoint, we should feel good about monetizing, even if a customer is not super active in the housing market right now. Right. That makes a lot of sense. Before I open it up to audience questions, I'll sneak one more in, and it's on the Zillow new construction partnership. You know, as you mentioned, like, opportunities to improve monetization, you know, Redfin's expected to generate some revenue growth from new construction builders that want to list on Redfin.com, and I believe they're leveraging Zillow's new construction listings. Could you just talk a little bit about the financial implications and strategic merits of this partnership? Sure. That, that's the right description, and it does fall into the category we were just talking about. What we can see right now is that new construction is an important piece of the inventory that a customer will wanna take a look at, just because there are so few existing homes for sale in many markets. And as we looked at it, Zillow happened to have among the best feeds available for that new construction product. And so we were able to work out an arrangement where we'll be able to earn some extra revenue from providing those placements to the builders. Our consumers will be able to see more of that product, which is great from our standpoint. So we really do, across the board, view this to be a good step forward, and just another example of being thoughtful about what makes, what makes sense to consumers to put, you know, straight in front of them, and how we can monetize some of that. Great. Any questions from the audience? Yeah, just a quick one, We're just gonna get the mic over to you, if that's okay. Yeah. Hi, thanks. Just, compared with your competition, do you think there are areas where you do much better in terms of the pricing points or geographies or Tier one versus, you know, other tier cities? Yeah. The biggest difference in terms of our market share is that we do have greater market share in the places we've been the longest, where we've had the greatest chance to accumulate customers, to build a relationship with those customers. I think that, you know, we talked about it a little bit earlier, a place we would like to do even better going forward is with more expensive homes, and that's part of the reason that we're talking about some of the agent compensation changes that we'll be piloting in San Francisco and Los Angeles. That we think there's greater opportunity there to gain share, because we can see that customers, in some cases, just want a little bit more experienced agent that way. Hey, Chris, thanks for the time. If we think back six months ago and think about kind of home transactions going into the second half, I think expectations have come down a bit in terms of what people are expecting going into the second half. So I was hoping to get your perspective on how do you think about transactions going into 2024, and whether you have to make additional cost actions to reflect that environment. Just talk to us about the cadence of the next six quarters here and how you think about that. Sure. So I think for the full year, things have been about what we would've expected going all the way to back to last fall. But I think many people would've expected mortgage interest rates to be headed down at this point in the year, and if anything, they're flat to headed up. And so I do think that it's logical that that's had some extra pressure on transaction volume over the second half of the year. We're not providing commentary on the full year 2024 at this point, but, you know, I think it's fair to assume that we are being pretty cautious about what the next six months looks like, that there are just not a lot of obvious catalysts for either interest rate changes or more inventory in the market. And so you kind of put those things together, and it does, you know, give you a cautious view as you enter 2024. To your point about, or your question about whether there are additional cost reductions we can make in the business, the answer is certainly yes. I think that the navigation that we've tried to provide here is that while we do want to make sure we've got the right cost structure and are driving to profits, we also want to retain the capabilities to grow the business going forward. And so, you know, a little bit to my prior commentary, where we can see opportunities with low ROI investments, you'll see us pull away from that, but where we believe there's more long-term growth, we'll be careful about cutting those costs. So that's a long-winded way of saying there are certainly those kinds of opportunities, and we'll just have to navigate those decisions piece by piece. Great. Any other questions from the audience? Chris, maybe you can talk a little bit about, you know, capital allocation. You know, how are you thinking about addressing the 2025s? You know, will you will you buy them in early? Will you plan to refinance them? Yeah. Sure. So we've been aggressive from our point of view in repurchasing our own 2025 notes. We've done that over the last several quarters. We think that's been a good allocation of capital up to this point because the yield has been really strong on those. I think what you'll see us do going forward is continue to think about that same kind of program, but also be attentive to and open to what's going on from a capital market standpoint. So you know, we haven't made any announcements, any decisions about exactly how all that comes together, but just like we always have in the business, we'll want to pay attention, not only to our existing capital, but what are the capital opportunities from the open markets. Great. In the last minute, in closing, I was just wondering if you could talk about, you know, what products or initiatives you're particularly excited about over the next few years. Obviously, there's some growth initiatives that are gaining momentum in rentals and mortgage, so. Yeah, I think the things that are most exciting to me, mortgage, I believe, will be a really profitable business over a long period of time. We need to navigate through this tight spot in the mortgage industry, but that's been off to a better start than we expected. I, I'm just really pleased with the progress we've made on digital advertising here. I think that, there's plenty more potential, that we can already see on that front. Great. Well, Chris, it's been such a privilege having you on stage. Really want to thank you for all your time and thoughts. This is great. Yeah, thanks for your questions.