La Rosa Holdings Corp (NASDAQ: LRHC) continues to get bigger. Last week, it announced an expansion to its six-state presence by acquiring a controlling interest in two franchised offices in Florida that delivered roughly $20.6 million in combined 2022 revenues. The company also posted net income, meaning that in addition to La Rosa's rollup strategy contributing to impressive topline growth, its bottom line could also see a meaningful benefit. That combination is more than a recipe for growth; it exposes a valuation disconnect between LRHC assets, potentials, and its stock worth seizing.
In other words, weakness in LRHC stock may present an opportunity. At current levels, it's certainly not representative of the company’s positioning and capability for growth. In fact, since its public debut earlier this month, post-IPO turbulence has taken shares from its $5.00 offering price to $2.24 on Monday, a level significantly lower than what the underwriters considered fair value. But even at $5.00, LRHC presents an excellent deal. That's evidenced by the multiples given to other companies in the sector, including Remax (NYSE: RMAX), eXp World Holdings (NASDAQ: EXPI), and Fathom Holdings (NASDAQ: FTHM), whose P/E and/or revenue multiples support a premium share price. In fact, investors have bid the market caps of Fathom Holdings, eXp World Holdings, and The Real Brokerage Inc. (NASDAQ; REAX) appreciably higher, with those scoring 42%, 81%, and 34%, respectively, on a comparative quarterly basis.
While LRHC may be lagging behind that pack in valuation today, the company can close the gap quickly. That bullish presumption is supported by several key factors. First, topline growth is expected to continue its steepening trajectory. Second, despite the jump in interest rates, its significant presence in Florida, California, New York, and Puerto Rico is capitalizing on still red-hot markets. And thirdly, LRHC has only about 11.9 million shares outstanding. What’s even more attractive from an investor's perspective is that the company has only about 805k shares in the float.
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Value Drivers Support a Higher Valuation
The above factors are a recipe for success. Once investors understand just how valuable LRHC’s differences are in a market that has seen little operational change over the past five decades, this company could be given the value deserved, which, on a revenues basis, is decidedly higher. Better yet, that day could come sooner than later. Keep in mind that LRHC is starting from scratch. They have 35 (and counting) affiliate and franchised offices, an agent headcount of over 2450, and completed over 8,300 transactions last year that generated company revenues of $26.2 million last year. The more excellent news regarding revenues is that by taking a controlling interest in two Florida offices, topline growth is expected to double, with a good part of that falling to the bottom line. That's a pattern likely to repeat, facilitating a consistent pace in revenue generation and growth for LRHC. Notably, several reasons helping drive the agent count continually higher.
Foremost is that LRHC agents earn 100% of the commissions on each sale. Unlike traditional real estate offices that earn a percentage of a percentage, LRHC has created a unique business model that provides revenues through franchising, member dues, and a 10% commission from commercial transactions. Residential pays no commissions. Instead, franchised agents pay a one-time upfront fee and monthly dues, currently $75. After that, franchise and affiliate agents earn 100% of commissions, less the dues noted, and a transaction fee of up to $495. Additional revenues to the company are generated through a one-stop-shop approach to real estate transactions, including providing ancillary services like mortgage insurance, title services, and coaching.
However, the most significant contribution results from La Rosa being an agent-centric company, a distinction that’s shifted LRHC’s growth into the next gear. . LRHC agents have access to the best technology tools in the market, providing them with over $7,000 worth of free marketing, consistent training, coaching, and, most importantly, help in closing deals quickly and efficiently. That package led to LRHC completing $2.9 billion in total transaction volume last year, which could be eclipsed this year. If LRHC compensated its agents similarly to traditional brokerages, that might be an overly ambitious target. But since LRHC breaks from the rules by rewarding its agents 100% commission, less the fees noted, it's a goal well within its crosshairs.
A Growing Agent and Office Count
Noting the company has several other acquisitions in its pipeline, breaching that $2.9 billion number may happen faster than expected. LRHC is accelerating growth by developing an infrastructure that can support five times its current agent count. While that foundation will be critical in supporting company expansion, LRHC’s agent-centric business model will be the primary factor attracting new talent – and for good reason. Not only does it pay 100% commission, but it also provides a turnkey solution to real estate brokers and sales agents seeking financial independence. Those benefits, combined with the support from LRHC, create a win-win proposition that incentivizes brokers and agents while enabling LRHC to maintain a high margin, high cash flow business model that benefits from multiple and recurring revenue streams.
Of course, money is an excellent motivator, which is why LRHC's model provides its agents the lion's share of it. It's an innovative model that is actually quite simple to understand. As an example, assume a home sold for $350,000. On average, a traditional brokerage model would earn a 3% commission of $10,500. From that $10,500, the brokerage house may make about 30%, or $3,150. The remaining 70% would then pass to the agent, generating $7,350 as a net commission. La Rosa considers that model the old way to incentivize agents. Its new way can be described in a single sentence: La Rosa agents get the entire $10,500, less the once-monthly association dues and a transaction fee of at most $595, no matter the sale size.
That's a nearly 32% pay increase from simply using the marketing power, technology, and trust the La Rosa Holdings brand provides its agents. Considering Team La Rosa generated $2.9 billion in transactions last year, a massive amount of dollars stayed in agents' pockets - and in the current $113 trillion real estate sector, that pay raise could be off the charts. Of course, La Rosa will get a fraction of that business, but keeping in mind that LRHC can point agents to the billions in transaction volume last year, they will likely earn more of the opportunity in 2023 and onward. That potential should become even greater once the sticker shock of higher interest rates subsides.
A Normalized Interest Rate Environment
Fortunately, that’s already starting to happen. While interest rates are at 7% and higher in some cases, that's not out of the "artificial normal" created by the years of easy Fed money. Yes, there is an effect on buying power and relocation. However, from a historical perspective, current rates align with decades of precedent. In fact, between April 1971 and September 2023, 30-year fixed-rate mortgages averaged 7.74%. That's led sector analysts to believe that markets could start normalizing early next year, despite the Fed hinting that additional rate hikes may be warranted to tame inflation.
In other words, the sense of urgency to buy sooner rather than later could return in early 2024. Sellers will likely oblige, especially after watching their home values soar over the past five years. Since many of these homeowners downsize, those arguing that sellers are holding tight because they can't afford the trade may be losing some credibility. But even in tight markets, the LRHC model is an extremely attractive one to embrace - and the sooner agents get on board, the better.
While conditions have been grim for some time now, there will be a residential and commercial real estate market rebound. Thus, positioning ahead of that inevitability makes professional and financial sense. Remember, until that market resumes normalcy, agents earning 100% of commissions is the ultimate offer. It's a great deal now and will be then, and both periods can bode well for LRHC as it scales its operations. The company is maximizing its opportunities on both sides of the scale by offering a platform that simplifies the buying and selling process. By supporting sellers and enabling agents to leverage LRHC's strength in limited inventory markets where competitive bidding and multiple offers can create considerable emotional stress, LRHC is doing the right things at the right time to capitalize on its strengths and fuel continued growth.
The La Rosa Holdings Value Proposition Exposed
Therefore, the sum of LRHC's parts, including its assets and capital structure, exposes a value proposition that may be too attractive to ignore. Trading at $2.24, investors should keep a close watch on La Rosa Holdings; better still, take action. The company has revenues expected to double, a low-overhead business model, an agent force in the thousands, and a platform designed to enable more transactions from a sales team incentivized by earning the highest commission rate available: 100%.
Know this, too: Post-IPO, the company has the capital to expand its business reach, acquire performing assets, and capitalize on opportunities to drive higher revenues supported by a platform allowing it to fall faster to its bottom line. Remember, in challenging markets, investors should find companies up to the task of clearing hurdles and creating shareholder value. La Rosa Holdings checks those boxes, and with two deals made last week and more expected, doubling expected revenues may be just the precursor of what’s to come. Based on guidance, that's more likely to happen than not.
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