What is Keller Williams’ valuation?
This is a tricky question to answer because KW is one of the only big real estate companies with no publicly available valuation. Plus, the company does not release earnings reports.
But let’s not give up so easy.
Let’s start with some comps
We know the value of publicly-traded real estate companies. After the market closed on Wednesday, Zillow was valued at $9.4 billion. Redfin came in at $1.99 billion and RE/MAX at $1.17 billion. Realogy is up to $1.11 billion after its stock more than doubled in the last 100 days. And eXp has a $780 million valuation. The variation is tricky to dissect, some are profitable, while others eke out a small profit or earn nothing. The business models are all different — the classic apples to oranges comparison problem.
Like KW, Compass is privately held, but this past summer the New York-based company did disclose a staggering $6.4 billion valuation. That is the amount investors valued the company at the time of its last funding six months ago. However, that was before WeWork’s epic meltdown. Since they share investors — SoftBank’s Vision Fund — Compass’s valuation probably took a hit, as it is a sister company to upside down WeWork — associations can rub off.
But until its’ next funding round or an IPO, we really do not know what Compass is worth.
Back to Keller Williams. The company has not raised money. It has never stated what it’s worth and it’s not publicly traded.
“Being privately held, we choose to focus attention on our holistic growth and technology KPIs, as part of ongoing results reporting,” Keller Williams spokesman Darryl Frost explained.
Code for “we aren’t telling you anything.” It is difficult to do a valuation based on multiples of income and profit, when we have no clue what they are. To be fair, private means private, and Gary Keller is under no obligation whatsoever to report his company’s financial information.
Nevertheless, that mystery gave me some resolve to get as close as I could to a reasonable estimate of how much KW is worth. I cannot remember a time when company valuations suddenly became such a hot topic for our readers, triggered by mega valuations like that of Compass and depressed market caps for companies like Realogy. And begging the question, where does KW fit in?
Factors contributing to KW’s valuation include the fact that the brand has the most agents. According to KW, in the 3rd quarter the company had 162,289 agents in the U.S. (158,679) and Canada (3,610), who closed 323,187 transactions which amounts to about $100 billion in sales volume. Its agent growth rate has slowed lately but it is still growing.
It has no debt like Realogy, but no star-studded technology like Zillow and Redfin that might give it a sky-high tech valuation. KW execs promise it is coming.
Realogy would seem to be a fair comparison
But not really because the New Jersey franchisor wrestles with $3.5 billion in debt and its $6 billion in revenue and $600 million in net income has been in decline lately.
And unlike Realogy, KW is not a broker with big overhead like NRT who must contend with a low margin, expensive brokerage model.
But even though KW doesn’t have any investors or owe anybody any money, theoretically that could change, if it decides to invest more on technology or it begins to buy homes directly like other iBuyers. It launched an iBuyer program with OfferPad. The tech investment must already be hitting its P&L.
If you valued the company on agent growth, all of their reported core metrics (agents and productivity) are rising anywhere from 3.5 percent to over 8 percent annually, according to the company. That’s better than Realogy, probably less than Compass and more than RE/MAX. It is hard to compare Redfin and Zillow in this particular analysis.
With its shift in business model to Instant Offers and referral fees, Zillow’s top line revenue has skyrocketed, but it is still unprofitable. Redfin is on a steady growth curve, giving investors confidence for its smooth expansion and rapid tech deployment. It only earned $6.8 million in the third quarter on revenue of $238 million, but revenue is up 70 percent for the same period last year.
So what is the scoop on KW’s financial metrics?
I was able to find sources who say Keller William’s net income will be as much as $100 to $150 million this year. This was on an estimated $300 to 350 million in gross income which includes estimates for training, conferences and other sources of income.
Where it gets muddy is Keller Williams’ business model. While it is a franchisor, the company only owns six of its 31 franchise regions. So it is not getting a very big slice of every KW transaction. Keller has bought back some of the franchises but that is expensive because they have grown in value.
RE/MAX suffers from the same problem.
Neither RE/MAX nor KW brought on investors or took on enormous debt when they were founded because they sold franchises to grow into national brands. That strategy worked at first but then came back to haunt them.
Another source told me that four years ago Gary Keller allegedly had the company valued because he was transferring stock into his trust. At the time, he supposedly received a $900 million valuation.
I asked several sources to estimate the value of the company today based on what we know.
KW value could be as high as $1.5 billion to $2 billion
One observer who knows real estate valuations said, “I don’t think that the logic is incorrect. If you believe the $100 million to $150 million in net income, profit after taxes, a $1.5 billion to $2 billion valuation would be a 10 to 20 times price-to earnings multiple, based on the range end points.”
He added, “That net income profile is pretty compelling (42% net income margin on the high end 150 million/350 million), so I really wonder if they’re that profitable, but there’s no way to know.”
“It would be interesting to compare that multiple to public comp multiples to triangulate,” he said further.
To triangulate, RE/MAX in the third quarter reported earnings of $28.2 million, with a margin of 39.4% on $72 million in revenue. However, its top and bottom line declined for the quarter year over year and it is not getting the multiples from Wall Street on its $1.1 billion valuation that is applied here to KW.
Realogy’s multiples are much worse despite impressive top line revenue, rich net income and high margins. The company has been hammered for all sorts of reasons. Simply using the KW math, the Realogy valuation should be closer to $5 billion, where it was about five years ago.
Because it is private, KW can control its story and does not face the scrutiny of public markets like RE/MAX and Realogy.
If Keller Williams gets its tech right, its valuation could come in more like Redfin but still a fraction of Zillow’s valuation. In the coming months, we should know how durable and game changing its technology offer is. As RE/MAX invests more in technology, you might argue it too is undervalued. Same for Realogy, if NRT CEO Ryan Gorman can straighten out the mess there and Realogy CEO Ryan Schneider can find new ways to work down the debt like he did with the sale of Cartus Relocation. The recent stock rally shows signs of renewed investor confidence.
With a smaller base of agents, eXp is growing faster than any other real estate company and offers a virtual solution to reduce overhead. It too has room to grow its current valuation, as it has many of the necessary elements of what a thriving brokerage looks like in the future. But it is a new kid on the block that needs a longer runway to prove itself.
Even if the low-end of the estimate is right for KW, Gary Keller is probably a billionaire. He owns 73 percent of KW along with the value of its mortgage company and all of his personal real estate holdings. That probably makes him the richest person in the real estate services business.
His ability to grow an enterprise of such size and scale from scratch has paid off for him and his long-time agents who participate in the largess. A classic American success story.
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