Homestore’s New Management Trying to Put House in Order
In the dot-com universe of the late 1990s, most companies were built on inflated hope and little else.
But Homestore.com was supposed to be different. Founded in 1996 by Stuart H. Wolff, an electrical engineer by training, the Westlake Village-based firm quickly became the biggest provider of home-sale listings on the Web.
It was a service the public--and real estate agents--seemed to want and need. By 2000, the potential power of Homestore’s franchise loomed so large that the company became the target of a government antitrust probe.
Today, like so many remaining dot-com firms, Homestore is struggling for its life. It has warned shareholders not to rely on its financial statements for 2000 and 2001 because those figures will be restated. The Securities and Exchange Commission is investigating the company, and Nasdaq is threatening to delist its stock.
As with the collapse of Enron Corp., Homestore executives, led by Wolff, are accused of falsifying financial results and enriching themselves at other shareholders’ expense.
But for the new management team attempting to right the firm, the most urgent question may be whether home listings, like so many other aspects of commerce, simply don’t constitute a profitable enterprise on the Internet--or at least, not as Homestore envisioned.
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Some Agents Allege Strong-Arm Tactics
The new management team, headed by three former WebMD Corp. executives, including new Chief Executive Michael Long, acknowledges that it is facing defections by disgruntled real estate brokers--some of whom contend they were strong-armed into buying additional services from Homestore to have their names and phone numbers prominently displayed on the firm’s Web sites.
Some agents also say their Homestore listings aren’t generating the sales they expected.
Nevertheless, home seekers flock to Homestore’s Web sites. As home sales surged nationwide in January, the company’s combined Wen sites attracted about 13.7 million visitors, nearly double the number of hits recorded a year earlier, according to Internet analyst Jupiter Media Metrix.
Long, 49, is refocusing Homestore and expects the business to be “cash-flow positive” this year, meaning the firm’s survival wouldn’t depend on outside financing--a critical issue for a company whose shares last traded Tuesday at 87 cents apiece.
“We’re a smaller company than last year but still a substantial one,” Long said. “We’re contacting customers to see what the issues are and what we can do to take corrective action to make them happier. It will take some time.”
Some investors and Wall Street analysts view the company’s prospects more skeptically.
The California State Teachers’ Retirement System, which has asked to be the lead plaintiff in shareholder suits against Homestore, said it has little hope of recovering the $9 million it lost on Homestore stock and isn’t sure the company can survive.
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Homestore got its start in 1996, when Internet businesses such as Homeseekers.com began putting listings of houses for sale, once the sole domain of brokers and agents, on their Web sites.
Wolff, a Princeton University-educated electrical engineer, saw the potential business opportunity in online real estate and quickly raised $7 million from investors to forge a partnership with the National Assn. of Realtors, the brokerage industry’s principal trade group. NAR had attempted, but failed, to start its own real estate Web site.
Under the terms of Wolff’s deal, his company, RealSelect Inc., took over the operation of NAR’s Realtor.com, and NAR took a 4% ownership stake in RealSelect. RealSelect quickly signed up real estate agencies representing about 90% of the nation’s listings of homes for sale.
By July 1998, Realtor.com was the dominant Internet site for home shoppers, boasting 1.2 million listings supplied by brokers in all 50 states.
In August 1999, RealSelect Inc., now called Homestore.com, sold 7 million shares of stock in an initial public offering at $20 apiece, raising $140 million. The company had amassed more than twice the number of home listings of its closest competitor, HomeAdvisor.com.
Homestore by then also operated HomeBuilder.com, focusing on new-home sales, SpringStreet .com, with millions of apartment listings, and CommercialSource .com, a listing service for the commercial real estate industry.
“Homestore was a very positive force in a trillion-dollar market,” said Shawn Milne, a Wall Street analyst with SoundView Technologies Group. “In 1997, 2% of consumers searched online for home listings. Now, 55% go online first. They cornered a good market.”
Wolff’s vision was for Homestore to derive revenue from two sources: fees paid by listing agents for assorted services, and ads on the sites from housing-related advertisers.
Homestore’s listing-exclusivity agreements with local realty boards were perhaps its strongest selling point for investors and helped drive the stock to a peak of $138 in January 2000. Yet the deals also drew sharp criticism in the industry and scrutiny from regulators concerned that the agreements stifled competition.
The Justice Department’s antitrust unit opened an investigation in April 2000 into Homestore’s business practices, which prevented other sites from using the same listings. More than a year later, however, the government terminated its probe without taking action.
Meanwhile, the financial data Homestore was reporting to shareholders showed a company growing at a dramatic pace. Reported revenue jumped from $11 million in the second quarter of 1999 to $50million in the same period of 2000 and $129 million in the same period of 2001.
Excluding what the company said were one-time charges, Homestore claimed to be profitable: It said “pro forma” earnings totaled $14.5 million in the second quarter of last year, or 13 cents a share.
Nonetheless, Homestore shares began to slide in late summer, and the decline accelerated after the Sept. 11 terrorist attacks.
Then, on Oct. 3, the company stunned investors by announcing that third-quarter results would fall below analysts’ estimates. Homestore blamed a drop in ad revenue, which Wolff said was partly attributed to the terrorist attacks. But analysts now say the company was losing ground well before that.
“Management hoped they could keep building, keep growing through quarters when advertising revenue wasn’t,” said Safa Rashtchy, an analyst at brokerage U.S. Bancorp Piper Jaffray. “They were looking for an excuse, and Sept. 11 gave them an excuse. But they already knew they were in trouble.”
What investors didn’t discover until late last year was that Homestore was relying heavily on barter arrangements with certain advertisers to beef up revenue. These so-called round-trip deals were transactions in which ads were exchanged not for cash but for goods and services, the value of which Homestore apparently overstated, said Jay Leupp, senior equity analyst at brokerage Robertson Stephens.
On Dec. 21, the company disclosed that its board of directors was conducting an internal investigation of its accounting practices. On Jan. 2, Homestore said it had overstated revenue in the first nine months of 2001 by as much as $95million. The company had reported revenue of $351 million in the period.
Less than a week later, Wolff resigned.
On Feb. 13, Homestore said it also would restate its 2000 financial results. And on Feb. 21, the company raised its estimate of the 2001 revenue overstatement to as much as $113 million. Homestore said it expects to conclude its internal financial inquiry by mid-March.
Now, nearly 20 class-action lawsuits accuse Homestore, Wolff and his top executives of faking revenue to prop up the firm’s stock so they could sell as much as $27.9 million worth of their own shares.
Homestore has declined to comment on the lawsuits. Wolff could not be reached for comment.
Long, as yet unable to tell Wall Street what the company’s true financial picture was in 2000 and 2001, is stressing his game plan for the future: Advertising will play a smaller role in generating revenue; agent and broker service subscriptions and sales of software will play a more prominent role, he said. (The latter already accounted for 61% of revenue as of mid-2001, according to the company’s previous statements.)
Meanwhile, Homestore is in the process of exiting businesses that don’t relate to its “core constituents,” primarily agents, brokers and home builders. But holding on to that constituency may be Long’s biggest challenge.
Some agents complain that after providing listings to Homestore, they were pressured into paying for the company’s special services, including the prominent display of their names and phone numbers on the firm’s sites. Several Realtors described the fee they were forced to pay, up to $1,100 a year, as a “shakedown.”
“I subscribed to [Homestore’s services] because I realized it was the only way my name would appear on the listing,” said Diane Scarfuto, an agent at ReMax Real Estate Specialists in Long Beach who canceled her Homestore subscription last month. “If I treated my customers the way they treated us, I wouldn’t be in business.”
Homestore expected a renewal rate of about 70% among subscribers, but a recent survey conducted by U.S. Bancorp Piper Jaffray revealed a projected renewal rate among brokers of 30% to 40%.
Some multiple-listing services, which are paid $1 per exclusive listing by Homestore, also are threatening to end their contracts.
The New Jersey Multiple Listing Service, for example, is “teetering on the brink” of canceling its contract because the service is receiving only half the fees Homestore promised to pay, said Tina Griffin, executive director of the service. “We want to see Homestore succeed, but they can’t on the backs of their members. If we don’t see them taking our interests to heart, we won’t renew.”
Homestore has told some of the listings services that it will continue to pay the $1-per-listing fee as long as it can, but the company may not be able to do so beyond this year. As of Dec. 31, Homestore said it had $48 million in cash on hand.
The company also faces another large potential liability: In 2000, Homestore entered a marketing partnership with AOL Time Warner Inc., in which Homestore pledged to pay AOL $20 million in cash and 3.9 million shares of Homestore stock over the course of four years. Homestore guaranteed its shares would be worth $68.50, but in the event they weren’t, the firm would pay the difference, according to Salomon Smith Barney analyst Lanny Baker.
That agreement could cost Homestore up to $90 million.
Long said Homestore set aside $90 million from the beginning of its relationship with AOL to cover such an eventuality.
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Market Appears to
Have Given Up Hope
Although Homestore still enjoys the support of the National Assn. of Realtors, some agents claim they receive few leads from Homestore-run Realtor.com.
“I subscribed to Realtor.com in the beginning, for a year, then gave it up,” said Joe DiTore of ReMax Real Estate Specialists in Long Beach. “I wasn’t getting any business from it.”
Long said he is aggressively addressing agents’ complaints.
“I’m worried about subscribers who aren’t renewing, so we’re pursuing why and adjusting our product accordingly,” Long said. “We’ve instituted a customer-advocacy program that will find out what our customers’ issues are and to help us take corrective action.”
But the financial cloud over Homestore has analysts and investors questioning whether Long’s rescue plan can succeed. With the stock at 87 cents, the market appears to have given up hope.
Some analysts say Homestore could be acquired by one of its competitors, such as HomeAdvisor or HomeGain. Others say Yahoo Inc. or EBay Inc., which could benefit from Homestore’s technology and market penetration, might be interested in bidding once the company’s financial situation is clearer.
But some also question whether a takeover offer is possible. “If I were looking to buy Homestore, I’d wonder whether I could build it myself,” Salomon’s Baker
said.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
1996
Stuart H. Wolff forms an Internet home-listings partnership with the National Assn. of Realtors and signs up real estate agencies accounting for 90% of the nation’s home listings.
August 1999
Homestore.com goes public, selling 7 million shares at $20 each, in a deal underwritten by brokerage Morgan Stanley.
April 2000
The Justice Department’s antitrust unit opens an investigation into Homestore’s business practices.
October 2000
Homestore agrees to buy a key rival, Move.com, from Cendant Corp., in return for $761 million in stock. The deal gives Cendant a 15% stake in Homestore.
March 2001
Goldman Sachs, one of Wall Street’s most respected brokerages, adds Homestore stock to its “recommended list” with the share price at $27.
April 2001
Homestore says that first-quarter revenue totaled $118 million, up 105% from a year earlier, and that the company earned $4 million excluding a host of “one-time” charges.
July 2001
The Justice Department terminates its probe of Homestore, without taking action.
Oct. 26, 2001
Homestore announces it is slashing 700 jobs, or 20% of its work force, because of a revenue shortfall.
Nov. 2, 2001
Homestore’s shares tumble 54% to $2.28 after the company says 2002 revenue won’t meet analysts’ estimates.
Dec. 6, 2001
Chief Financial Officer Joseph Shew resigns.
Dec. 21, 2001
Trading in Homestore stock is temporarily halted on Nasdaq after Homestore announces that its board is conducting an inquiry into accounting practices.
Jan. 2, 2002
Homestore announces that its revenue during the first three quarters of 2001 was overstated by as much as $95 million.
Jan. 3, 2002
The first of nearly 20 lawsuits are filed, claiming that Homestore’s top executives falsified revenue to prop up the stock so they could sell up to $27.9 million worth of their shares.
Jan. 7, 2002
Founder and Chief Executive Stuart Wolff resigns; new slate of officers is installed.
February 2002
Homestore says it will restate its 2000 results, and boosts estimate of 2001 revenue overstatement to as much as $113 million.
