Mike Delprete writes that businesses that generate free cash flow are best positioned for growth, shareholder returns and value-added new ventures.
This article is shared here with permission from Mike DelPrete of Inman Intel, the data and research arm of Inman that provides insights and market intelligence on the residential real estate and proptech businesses. Subscribe now.
Profitability can be reported in a variety of ways: net income, EBITDA, adjusted EBITDA, adjusted net income, gross profit, and cash in the bank are just some possible metrics.
why this is important: While each is important, none truly measures the actual profitability of the core operating business model.
- Because before paying down debt, stock buybacks, and acquisitions, what really matters is how much cash the business generates, and the metric hidden in the cash flow statement is Net cash provided by operating activities.
Use of net cash provided by operating activities As a benchmark, the business models and relative profitability of top listed real estate companies can be compared.
- The metric here is the effectiveness of the business model – putting aside the hype, misleading metrics and associated financial manipulations and looking at the core business: can it make money?
2023, Zillow and eXp RealtyFollowing closely behind is Anywhere, both cash-generating machines.
- Zillow is often dismissed as “unprofitable” (on a net profit basis), while eXp’s business model has been questioned for years, but both have produced a lot of cash.
- Opendoor’s financial data is inadvertently obfuscated behind large cash inflows and outflows from buying and selling properties — the analysis does not include cash flow from all iBuying activity.
in historythese companies usually either continue to make profits or lose money.
- Zillow, HomeServices of America, eXp, and most of Anywhere have all been profitable since 2018, with 2021 being a significant high point.
- Opendoor, Compass, and Redfin were generally unprofitable during the same period (Redfin was briefly profitable in 2020 and 2021).
the past six yearsthe most profitable companies deploy their free cash in very different ways.
- Zillow and Anywhere are two very different companies, the only similarity being that they are both in the real estate business and have each generated about $2 billion in cash since 2018.
- Zillow used the cash to grow, investing more than $1 billion in acquisitions, while Anywhere used the cash to pay down about $1 billion in debt (leaving only $2.3 billion!).
The same trend will continue until 2024 Zillow and eXp continue to generate significant amounts of cash, and there are a few other notable anomalies.
- The biggest improvements in cash flow compared to the same period last year were among the most loss-making companies (Opendoor, Compass and Redfin), which have been aggressively cutting costs and reducing expenses.
- Anywhere’s heavy cash burn in the first quarter was seasonal and highlights the volatility of the traditional brokerage business (but eXp still generates cash).
bottom line: It may sound simple, but a real business needs to have a business model that works—and one that consistently makes more money than it spends.
- It is these businesses that generate free cash flow that are able to invest for growth, deliver returns to shareholders, and use the profits to launch new businesses and add value to the real estate ecosystem.
- Even if there is ample cash in the bank, companies whose core business is not profitable will be more constrained in their operations and cannot survive forever; either the business model will change, or the company will cease to exist.
Mike DelPrete is a strategic advisor and global expert in the real estate technology space, including iBuyer offer aggregator Zavvie. Connect with him on LinkedIn.
