Realogy Corp. officials on Monday detailed continued plans to cut costs through office consolidations and other actions in response to the reeling real estate market.
After consolidating about 67 company-owned brokerage offices in 2007, Realogy has plans to consolidate or reduce in size an additional 70 company-owned office locations during the first two quarters of this year, said Richard A. Smith, company president and CEO, during an earnings conference call Monday.
On March 19, the company announced a $797 million net loss in the period dating from the company’s April 10, 2007, acquisition by private equity firm Apollo Management LP through Dec. 31, 2007. A company projection of its finances, which counted the impacts of the Apollo buyout as if the deal closed on Jan. 1, 2007, estimated a full-year net loss of $605 million for Realogy in 2007.
Realogy said a fourth-quarter review resulted in a noncash impairment charge of $667 million that reduced the company’s intangible assets by $550 million and reduced goodwill by $117 million. "The impairment is the result of the continued downturn in the residential real estate market in 2007 as well as reduced short-term financial projections," the company reported.
The company’s revenue for the Jan. 1-April 9 period in 2007 was $1.49 billion and was $4.47 billion for the April 10-Dec. 31 period in 2007, for an annual total of $5.97 billion. That compares with $6.49 billion in revenue in 2006 and $7.14 billion in revenue in 2005.
The company had also announced projected earnings before interest, taxes, depreciation and amortization of $816 million for the full year in 2007, based on the company’s accounting of the acquisition as if it had occurred on Jan. 1.
Among the company’s divestitures in 2007 was a group of brokerage offices in northwest Florida that were picked up by a Coldwell Banker franchise operation.
Realogy, in addition to its company-owned offices, also operates several national and international real estate franchise networks. Company-owned and franchise brands include Coldwell Banker, Century 21, ERA and Sotheby’s International Realty with plans to launch a Better Homes & Gardens franchise network in July.
As of Dec. 31, 2007, Realogy had about 940 company-owned brokerage offices across the country, and there were about 14,800 offices in the franchise network.
Company-owned business in real-estate-owned properties (REOs), which are foreclosure properties that were bought back by banks at auction, has been booming, Smith stated during the earnings call.
The company expects to handle about 36,000 REO sales this year, up about 70 percent compared to 2007. While foreclosures put pressure on average home prices, that is expected to be more than offset by this rise in REO business, the company reported.
Realogy officials said they also expect to continue to reduce costs through a change in the share of the real estate commission split paid out to agents by company brokers.
The company reported a decrease of $361 million in commission expenses paid to real estate agents in 2007 "as a result of the reduction in revenue and an improvement in the commission split rate as a result of certain management initiatives."
Smith said that the commission split improved by about 65 basis points in favor of brokers from 2006 to 2007, and should improve by "at least another 50 basis points" specific to NRT brokers this year.
He also said there is some concern about the "ever-widening spreads" in the interest rate of jumbo loans versus conforming loans, though federal approval of a program to boost conforming loan limits should benefit the market.
He said so far the tougher lending standards in response to the subprime mortgage meltdown and credit crunch have not had a major impact on the company’s cancellation rate.
Company officials said that the company’s debt levels are manageable and parent company Apollo has the ability to inject capital into Realogy if necessary to ensure that the company is satisfying its debt covenants.
Transaction volume is expected to drop about 25 percent to 28 percent in first-quarter 2008 compared to first-quarter 2007 for franchise and company-owned operations, with the average home price falling about 4 percent to 6 percent on the franchise side and the average home price in company-owned operations remaining flat in first-quarter 2008 compared to first-quarter 2007.
The company’s EBITDA is expected to be around zero in the first quarter, compared with a positive $88 million in first-quarter 2007.
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