The Importance of Cash Flow in Real Estate Businesses

What Really Matters: Net Cash Provided by Operating Activities

When evaluating the profitability of a real estate business, it’s easy to get bogged down in various financial metrics. However, before debt repayments, stock buybacks, and acquisitions, what really matters is how much cash the business generates. This metric is often buried in the cash flow statement, specifically in the net cash provided by operating activities.

Using Net Cash Provided by Operating Activities as a Baseline

By using net cash provided by operating activities as a baseline, we can compare the business models and relative profitability of top publicly listed real estate companies. This allows us to cut through the hype, misleading metrics, and adjacent financial maneuvering to focus on the core business: does it make money?

Real Estate Companies with Strong Cash Flow

In 2023, Zillow and eXp Realty stood out as cash-generation machines, followed closely by Anywhere. These companies are generally either consistently profitable or unprofitable.

Historical Profitability Trends

Over the past six years, the most profitable companies have deployed their free cash in different ways. Zillow and Anywhere have each generated around $2 billion in cash since 2018. Zillow used this cash to grow, investing over $1 billion in acquisitions, while Anywhere used it to pay off about $1 billion in debt.

Trends Continue into 2024

In 2024, Zillow and eXp continue to generate large amounts of cash, with a few other noteworthy outliers. The biggest improvement in cash flows has been at the most unprofitable companies (Opendoor, Compass, and Redfin), which have been energetically cutting costs and reducing expenses.

The Bottom Line

It may sound elementary, but a real business needs to have a business model that works — and that’s consistently making more money than it spends. Those businesses that generate free cash flow are able to invest for growth, give returns to shareholders, and use profits to launch new ventures to add value to the real estate ecosystem.

FAQs

Q: Why is net cash provided by operating activities important?
A: Net cash provided by operating activities is important because it measures the actual profitability of the core operating business model, ignoring debt repayments, stock buybacks, and acquisitions.

Q: Which real estate companies have strong cash flow?
A: Zillow, eXp Realty, and Anywhere have strong cash flow, followed closely by Opendoor.

Q: What have these companies done with their free cash?
A: Zillow has used its cash to grow, investing in acquisitions, while Anywhere has used it to pay off debt.

Q: How do unprofitable companies compare?
A: Unprofitable companies, such as Opendoor, Compass, and Redfin, have been cutting costs and reducing expenses to improve their cash flows.

Q: What’s the takeaway?
A: A real business needs to have a business model that works and consistently generates more money than it spends.

Author: www.inman.com

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