Over the past several years, the real estate brokerage business has been disrupted by new platforms like Redfin and Compass. But eXp World Holdings (EXPI 5.08%) stands out as best in class.
The company is much like traditional brokers such as RE/MAX and Realogy, but with one big difference -- it has no physical presence. With no rent to pay and low corporate overhead, eXp passes most of its savings on to agents in the form of commission splits that are more generous than anyone else's.
The business model allows eXp to attract high-producing agents and agent teams to the platform, while still generating ample free cash flow. eXp has grown its agent count from 467 at the end of 2014 to over 80,000 this month.
Even though shares have fallen sharply since their peak in 2021 after a stellar year for real estate in 2020, the stock deserves a spot on your radar. Here's why.
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Agents are flocking to eXp
The concept originated with current CEO and former Keller Williams agent Glenn Sanford. After the real estate bubble burst in the financial crisis of 2007 to 2009, real estate brokers were trying to cut costs to survive. Sanford thought that leaning on technology would be the way to go. Real estate agents must be licensed with a broker. Since most high-producing real estate agents and teams typically have their own offices or rarely use their broker's office, eXp Realty decided to eliminate those offices completely.
Thus, eXp Realty was launched with the idea of passing the cost savings on to agents and disrupting the traditional real estate brokerage business.
Agents obviously love the idea of having more money in their pockets. Here's how it works.
Commission splits: The traditional model typically splits commissions 60/40. The broker keeps 40% of the commission earned on each transaction to pay for offices, support, and owner profits. On the other hand, eXp Realty splits are 80/20. eXp Realty keeps only 20% of the commissions for running the platform and shareholder profits.
It gets better. After the first $16,000 in commissions that eXp in a year, the agent "caps" and takes 100% of the commissions for the rest of the year. The cycle starts again each year.
Equity incentives: Agents can also earn stock by achieving certain milestones.
- $200 in stock for their first closing
- $400 in stock for "capping"
- $400 in stock for referring a new agent
- Agents can enroll to receive up to 5% of their commissions in stock at a 10% discount
- Top agents can earn up to $16,000 in stock based upon achievement of certain production and cultural goals within their first anniversary year
Revenue sharing: Agents can earn overrides based on gross commissions of agents they refer to eXp. The revenue sharing program goes seven layers deep, meaning agents can earn additional revenue sharing when agents they refer also refer other agents to eXp. On top of that, referring agents would have to think twice about jumping ship from eXp before giving up passive income from revenue sharing.
eXp's incentive program harkens back to Charlie Munger's famous quote, "Show me the incentives and I'll show you the results."
Here are the results: eXp ended 2014 with 467 agents. At the end of 2021, it had 71,137 agents -- a compound growth rate of over 105%. They drove up revenue by almost 110% in 2021 and 73% in the just-announced first quarter of 2022. And the company has been profitable since the fourth quarter of 2019.
Cash from generous commission splits makes up the bulk of a typical agent's compensation and first attracts them to the platform. Stock and revenue sharing keep them entrenched with the company for the long haul.
Calling the inspector
You may wonder what's left over for shareholders. Great question. In 2021, eXp World Holdings generated over $233 million of free cash flow, more than double its 2020 free cash flow of just over $113 million.
Your next concern may be rising mortgage rates that may cause the real estate market to slow down.
Remember, eXp makes its cash flow from the first $16,000 in commission splits from each agent. So as the number of agents bolting to the eXp platform grows, so does cash flow. In other words, even if the real estate market pulls back, eXp should still be fine.
Finally, you may be concerned that stock incentives make up a large portion of operating cash flow. Although the agent stock incentives are non-cash, eXp buys back shares to keep the company's share count in check. And even if you did treat that compensation the same as salary, the company would still have positive free cash flow.
The stock's fall may seem like it would make potential agents think twice about stock incentives, but the incentives are based on a dollar amount. So, agents earning an incentive at the lower stock price are getting more shares.
Does it have curb appeal?
Though eXp can weather a slowdown in the real estate market, that doesn't mean its stock won't go down. At recent prices, it's dropped more than 80% from its high in February 2021 when the real estate market was littered with prospective new home buyers.
The stock has a market cap of $2.2 billion, a valuation of roughly 8.5 times free cash flow and less than 26 times earnings over the past 12 months. A small price to pay for a company growing this fast.
Even if you're wary of a potential real estate bubble, eXp World Holdings deserves a spot on your radar.
