One of the riddles of the Internet is its failure to disintermediate the realtor industry. After all, real estate transaction fees in the US are high -- far higher than in Europe, for example. And the market for buying and selling residential property is largely an information market, which should, at least in theory, be perfect for the Internet.
One of the earliest online players in the space is Homestore.com, a stock that has been a long-term disappointment. Now the company has announced a large acquisition, and changed its name. Here's an excerpt from Avondale Partners analyst Frank Gristina's note to clients evaluating the changes:
Yesterday [Feb 22nd], HOMS announced it is buying Moving.com, and that the whole company would be changing its name to Move.com to better reflect the broad consumer services Realtor.com, Rentnet, Homebuilder, and Welcome Wagon are intended offer consumers. A subsequent strategy call revealed some qualitative details about the decision, how it will change the websites, and how the sites will be branded. Unfortunately, we will have to wait until the 4Q call to receive details on the financial impact near term. We believe uncertainty over the impact may drive share lower near term. Key Details and Summary Perspectives
Summary of Changes
• HOMS is buying Moving.com and consolidating it as well as the Homestore, HomeBuilder, and Rentnet brands under "Move.com". The site will launch in 2Q06 as a full service search and moving solution to consumers. The site will contain diverse real estate content and a search engine for consumers, and advertising capabilities for corporations. With the exception of the acquired move-related lead engine and the launch of a vertical "search engine", there is nothing initially created in the way of new consumer services with this transition. However, a centralized site may make launching new products easier as well as allowing branding dollars to go a bit further.
• Management did confirm some branding initiatives would be required early on but deferred details to the 4Q call. Management also said HomeBuilder and Rentnet would be transitioning away from paid inclusion models and that sponsorship revenue will have to be replaced. Increased branding expenses and discontinued revenue suggests consensus EBITDA estimates may need to come down - at least in 2006.
• Moving.com is expected to add $7m-$8m in sales.
• Realtor.com, which is humming along, will incorporate Welcome Wagon and begin to offer consumer generated content. Top Marketer, a lead generator for real estate professionals, is now available to the 60k users of Top Producer.
• HOMS capped litigation exposure to Peter Tafeen at $11.9m. This conclusion, coupled with expense from previous litigation, will result in a $7.7m charge in 4Q05. With this one time expense, management said the company should break even for the year on a GAAP basis. Management did confirm that excluding the legal costs HOMS would come in line with previous 4Q guidance.
We believe HOMS is one of the best ways to play the migration of real estate ad dollars to the Internet. Homestore sites account for about 25% of all online real estate traffic in a given month and about 50% of time spent on sites. Selling an expanded suite of services to agents is becoming easier as agents give in to the Internet – evidenced by accelerating sales and expanding margins.
HOMS has a significant head-start with home-buying and -selling consumers as they are already aware of the flagship website "Realtor.com" and the fact that HOMS has long ago secured MLS relationships which push nearly all agent-listed homes to the consumer portal.
HOMS has a significant head-start with active real estate agents as the company is the preferred listing enhancement tool for the NAR, the largest agent trade group in the U.S. We believe this shortens the sales cycle to sign up agents that need to migrate services to the Internet but have a natural distrust for unqualified models.
HOMS has been consistent in improving operating margins since the new management team came on board in early 2002. We believe margins will continue to improve, with short cycles of reinvestment, potentially driving EBITDA ahead of expectations.
We are not as concerned by slower transactions or rising inventory levels for homes as this may actually increase the need for agents to advertise their listings and prospect for home buyers.
However, 2006 could be a heavy investment year as HOMS launches several new products and seeks to gain mind share ahead of increased competition.