Yesou probably haven’t heard of real estate eXp World Holdings (NASDAQ: EXPI), but its recent growth suggests it may soon become a household name. eXp is making waves in the industry by attracting top real estate agents with generous incentives and a fully digital workplace. The company’s focus on agent satisfaction gives eXp the keys to achieving high revenue and volume growth while expanding globally.
Get agents in the door
eXp understands a crucial real estate idea: having the best agents work to bring you customer satisfaction and loyalty and immense revenue growth. Its unique ability to attract these top agents helped the company grow sales by 183% in the second quarter.
To get the best agents, eXp must offer the best incentives. eXp charges agents a very low start-up fee, as well as a generous 80/20 split on the first $ 80,000 of gross commission income, or GCI. Where most brokerages – like Keller Williams – sometimes take 30% of all an agent’s GCI, eXp takes less, and only for the first $ 80,000. Once the agent reaches $ 80,000 in GCI, he gets 100% of everything he earns; many traditional brokerage firms do not have a GCI cap.
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This gives eXp agents an average commission split, factoring in commissions after the $ 80,000 cap, or over 90%. Compared to a Compass (NYSE: COMP) agent, whose effective distribution of commissions is 80%, or a Analogy (NYSE: RLGY) agent whose distribution is around 75%, eXp agents receive significantly more.
The benefits don’t end there. The company offers agents up to $ 1,000 in inventory to meet certain milestones. Agents can also receive 5% of their commission in inventory at a 10% discount – a program in which around 25% of agents participate. Agents who benefit the most from eXp can receive thousands of dollars in additional inventory. The company also announced a small dividend of $ 0.04 per quarter to shareholders – agents included – other cementing agents for eXp.
These incredible financial incentives convince agents from other real estate companies to step aside and join the eXp team. In fact, the number of eXp agents increased 87% in the second quarter, topping 58,000.
eXp has yet another advantage: a fully digital workplace. Its virtual office, Virbela, allows agents around the world to work entirely online. While this feature has proven particularly useful during the pandemic, eXp has been doing it since 2018. The lack of capital costs like offices allows the company to spend even more on agent incentives.
Building on the foundation
EXp’s successful international expansion puts the “world” in eXp World Holdings. With agents in 17 countries on six continents, eXp used its strong national growth as a base to start expanding its offerings around the world. eXp only employs around 3,000 of its more than 58,000 agents in total outside of the United States and Canada, so the company has enough room to continue expanding its international business.
The incentives received by international agents compared to the industry standard are much greater than those received by domestic agents. The company offers a 75/25 agent commission on GCI internationally, while most international brokerages offer a 50/50 split.
In addition, eXp has chosen international regions which could experience considerable economic growth in the future. India, for example, is expected to increase its GDP at purchasing power parity – removing price level differences between countries – by 400% over the next 30 years. If eXp can fit into the economic base of these developing countries, the company could grow with them.
The cost of all those agent goodies
Two factors decrease the value of this business. First, all of these incredible incentives for agents lead to paltry 8% gross margins. eXp spent nearly $ 920 million on commissions and other agent-related costs in the last quarter, up from $ 1 billion in revenue. This means that he spent 92% of his income on commissions. For the quarter, its operating margin promises to be even thinner, at 1.6%. Compare that to Compass, which only spent 81.5% of its income on commissions. The company hopes that strong future growth will compensate for the low margins.
Second, eXp agents receive a generous share-based compensation – and the shares they receive were largely created out of thin air. Diluted shares outstanding rose 8% year over year, watering down current shareholders.
To reverse this problem, management aggressively repurchased stocks, including nearly $ 55 million in the second quarter alone. If not, the dilution would probably have been much higher. But eXp easily covered that expense with the $ 85.1 million in free cash flow it posted in the same quarter. The company is profitable, with a net profit of $ 37 million, and it plans to continue using its $ 100 million treasury and growing free cash flow – which has more than doubled year over year. in the second quarter – to fund more buyouts.
Disrupting an industry doesn’t come cheap, but management’s willingness to rise to the challenge seems to be paying off. Turnover has grown 140% per year over the past five years. This quarter, the dollar amount of homes sold by eXp increased 210% year over year, while net income increased 350%.
eXp is growing in popularity, although traditional brokers like Compass and emerging digital players like Zillow and Red tuna start bidding wars on the best agents. So far, eXp is winning these wars, providing agent incentives that no competitor can currently match. Keep an eye on the percentage of revenue it gives to agents, compared to its competitors. If this advantage persists, it could help eXp build a mansion for a company while pushing its competitors into the dumps.
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Jamie Louko owns shares of Redfin, Zillow Group (C shares) and eXp World Holdings. The Motley Fool owns and recommends Redfin, Zillow Group (A-shares), Zillow Group (C-shares) and eXp World Holdings. The Motley Fool recommends the following options: Short-term August 2021 sale at $ 65 on Redfin. The Motley Fool has a disclosure policy.
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