Real estate franchisor and brokerage Realogy Corp. said it turned a $58 million profit in the third quarter, thanks in part to a debt restructuring that allowed the company to claim a $75 million gain and stay in compliance with agreements governing nearly $3 billion in loans.
Realogy said commission revenue was down 13 percent from a year ago, to $878 million — the main factor driving a decline in net revenue of the same magnitude, to $1.17 billion.
But Realogy cut expenses even more drastically — by 20 percent, to $1.11 billion. Realogy reported a decrease of $89 million in commission expenses paid to real estate agents at company-owned offices as a result of a reduction in revenue and receiving a larger share of the commission-split rate.
Realogy also reduced operating costs by 22 percent from a year ago, to $309 million, and slashed marketing expenditures for the quarter by 24 percent, to $38 million.
At the end of September, Realogy had approximately 14,500 franchised and company-owned offices and 268,000 sales associates operating under its brands — 1,500 fewer offices and 32,000 fewer agents than a year ago.
In the past year, Realogy’s company-owned brokerages have closed about 90 offices and shed 6,000 sales associates, leaving 47,000 agents working out of 770 offices, the company said in a regulatory filing.
Realogy Franchise Group (RFG) franchises the Century 21, Coldwell Banker, ERA, Sotheby’s International Realty, Coldwell Banker Commercial, and Better Homes and Gardens Real Estate brand names.
Franchises operating under RFG closed 281,973 transaction sides during the third quarter, essentially unchanged from a year ago. But the average home-sale price fell 10 percent, to $194,881, reducing Realogy’s royalties per transaction side to $260, down 9 percent from a year ago.
Realogy’s company-owned brokerages, operated by NRT Inc. under the Coldwell Banker, ERA, Corcoran Group and Sotheby’s International Realty brand names, closed 81,025 transaction sides during the quarter, a 1 percent improvement from the same period a year ago.
But the average sale price in transactions handled by company-owned brokerages fell 14 percent, to $407,398, netting Realogy $10,816 in gross commission income per side, down 13 percent from a year ago. …CONTINUED
Broker commission rates were up 1 basis point to 2.49 percent per side at company-owned brokerages and 2.53 percent at the RFG franchises.
The company-owned brokerages accounted for most of Realogy’s revenue ($896 million). RFG companies — for which Realogy provides only franchise services — generated $151 million in revenue. That’s less than the combined total for Realogy’s relocation services ($92 million) and title and settlement services ($91 million) divisions.
A $650 million second-lien debt offering allowed Realogy to reduce its senior secured net debt by $490 million during the third quarter. Another $150 million in proceeds from the offering was used to reduce unsecured debt by $221 million, or 7 percent.
The resulting $75 million debt extinguishment was reported as a gain, helping push Realogy into the black for the quarter.
In the long run, Realogy will pay higher interest rates on the new second-lien term loans — 13.5 percent — than the senior secured debt they replace.
Realogy’s senior secured debt is tied to short-term interest rates — such as the three-month London Interbank Offer Rate (LIBOR) — which are currently below historical norms but could rise if the current downturn gives way to economic growth or even inflation.
Realogy has been paying around 4.2 percent interest on $3 billion in senior secured debt this year, but moved to reduce its senior secured debt in September in order to remain in compliance with agreements with creditors (see story).
The agreement had previously capped Realogy’s senior secured leverage ratio at 5.35-to-1. But that ratio stepped down to 5-to-1 on Sept. 30, and will be reduced again to 4.75-to-1 on March 31, 2011. On June 30, the debt ratio stood at 5.1-to-1. But issuing new second-lien debt allowed Realogy to pay off part of its senior secured debt, and reduce its leverage ratio to 4.94-to-1 as of Sept. 30.
Realogy was acquired by an affiliate of private equity firm Apollo Management LP in April 2007, in a leveraged deal that left the company deep in debt.
All told, Realogy reported $6.93 billion in short- and long-term debt at the end of September, down 7 percent from $7.46 billion at the end of 2008.
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