Realogy boosts revenue, trims loss to $99M in 2010

Home-price gains, new franchisees and company-owned brokerages fuel royalties

Real estate franchisor and brokerage company Realogy Corp. said it posted a net loss of $99 million in 2010, despite 4 percent growth in annual revenue, to $4.1 billion.

Realogy’s franchise group — which licenses brand names including Century 21, Coldwell Banker and ERA to independently owned brokerages — boosted domestic franchise sales by 56 percent in 2010, Realogy said in its annual report to investors, adding new franchisees and sales associates with $322 million in gross commission income.

Realogy’s NRT subsidiary acquired nine real estate brokerages with 23 offices and 1,000 sales associates generating $60 million in annual gross commission income.

Realogy said that at year-end, there were 264,000 sales agents in its franchise system, working out of 14,700 offices in the U.S. and 99 other countries and territories worldwide. That figure includes 750 brokerage offices with 44,000 sales agents that are owned and operated by NRT.

Realogy itself employed 10,500 workers at year-end, including 700 outside the U.S.

Realogy’s franchise brands are Century 21 (121,000 sales agents), Coldwell Banker (89,700 agents), ERA (30,100 agents), Sotheby’s International Realty (11,800 agents), Better Homes and Gardens Real Estate (7,000 agents), and Coldwell Banker Commercial (2,100 agents).

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About 90 percent of Realogy’s company-owned brokerages operate under the Coldwell Banker brand. Another 5 percent operate under the The Corcoran Group and Citihabitats brand names, 4 percent operate as Sotheby’s International Realty, and 1 percent under the ERA brand.

Realogy attributed growth in revenue to an increase in the average home-sale price in transactions handled by its franchisees and company-owned brokerages that exceeded the national average.

The average home-sale price in transactions handled by Realogy franchisees rose 4 percent compared to 2009, while company-owned brokerages operated by NRT saw an 11 percent gain in the average home-sale price. That compares to a 1 percent increase in average home price reported by the National Association of Realtors for the year.

Realogy’s company-owned brokerages accounted for about 37 percent of total franchise revenue, the company said — about $206 million in royalties.

Realogy counted about 3,600 U.S.-based franchises, and estimated the company was involved in 23 percent of existing-home sales transactions by dollar volume.

Although Realogy has made headway in trimming losses from $1.9 billion in 2008 and $262 million in 2009, it remains heavily in debt, thanks in part to a 2007 leveraged buyout of the company.

After taking into account a recently completed debt refinancing, Realogy said its total debt was more than $7 billion at the end of 2010.

"We have been, and continue to be, challenged by our heavily leveraged capital structure," the company reported.

Realogy’s debt means that "a substantial portion" of cash flow from operations go to pay  interest and amortization on its debt, meaning that money is not available for other purposes, including operations, capital expenditures, and future business opportunities.

The company identified a number of known risks to future results that could also apply to its competitors in the real estate business, including the possibility that mortgage rates and down-payment requirements will increase.

The Dodd-Frank Wall Street Reform and Consumer Protection Act may tighten mortgage credit by imposing new restrictions on mortgage originators, Realogy noted, and by requiring that companies that securitize mortgages retain at least some of the risk of future defaults.

The course of action the Obama administration and lawmakers take to reform or do away with Fannie Mae, Freddie Mac and other government sponsored entities, which provide liquidity to U.S. housing and mortgage markets, could also have adverse impacts on the residential real estate market, the company said.

Another worry identified by Realogy are continuing high levels of foreclosure activity, including the release of real estate-owned (REO) homes for sale by lenders. The continued uncertainty over the "appropriateness" of mortgage servicers’ foreclosure processes — an allusion to ongoing settlement discussions over so-called "robo-signing" practices — is another risk factor, the company said.

Realogy also identified lower U.S. homeownership rates due to factors including high unemployment and a preference for rentals due in part to worries about further price declines as an area of concern, along with an "inability or unwillingness of homeowners to enter into home-sale transactions due to negative equity in their existing homes."

Existing-home sales volume has declined for at least two years in a row only three times since 1972, Realogy noted. From 1980-82, existing-home sales fell by more than 13 percent per year for three years. From 1989-90, existing-home sales fell by 1 percent in 1989 and 1990.

In the most recent downturn, existing-home sales have fallen in every year since 2006, although the severity of the downturn moderated in 2009 and 2010.

Citing forecasts from the National Association of Realtors and Fannie Mae, Realogy said the first half of 2011 will probably compare unfavorably to the first half of 2010 — in large part due to the stimulus the homebuyer tax credit provided to sales last year.

Realogy executives see "some positive signs" for the residential market in 2011, including month-over-month gains in existing-home sales from July 2010 to January 2011 and stabilization in the median home price.

Other positives include the fact that mortgage rates remain low by historical standards, which, along with previous price declines, means homes are more affordable than they were during the boom.

Industry forecasts project double-digit year-over-year gains in the second half of 2011,  which could offset the anticipated weak first half, Realogy also noted.

Most of the revenue generated by the company-owned brokerage offices is from commissions — the average rate for each side of the transaction was 2.48 percent in 2010.

Company-owned brokerages also promote Realogy’s relocation and title and settlement services, and mortgage loans offered by PHH Home Loans LLC. Realogy owns 49.9 percent of PHH Home Loans, with the remainder owned by PHH Corp.

Realogy’s title insurance underwriting subsidiary, TRGC, is licensed in 25 states and Washington, D.C. The company’s title and settlement services business, Title Resource Group, operates 361 offices, 238 of which were co-located in a company-owned brokerage office.

The "capture rate" of the co-located offices is 39 percent, with more than one in three clients of Realogy’s company-owned brokerages utilizing the company’s title and settlement services. Realogy’s Title Resource Group also provides services to PHH and other lenders.

Realogy’s relocation services are provided through its subsidiary, Cartus Corp., which in January 2010 acquired Memphis, Tenn.-based Primacy Relocation LLC.

Primacy has offices in Canada, Europe and Asia, and the acquisition allowed Cartus to re-enter the U.S. government relocation business and expand its global relocation capabilities. Cartus handled more than 148,000 relocations for about 1,500 clients in more than 160 countries in 2010.

Cartus provides referrals to Realogy’s real estate brokerage business, and receives a portion of the commission earned when a brokerage helps a client buy or sell a home. The company also has a broker network, which closed 57,000 properties in 2010.


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