Realogy expected its transaction volume to increase between 6 percent and 9 percent in the first quarter of 2016 — and the company hit that target, reporting a 7 percent transaction volume increase for Q1 this morning.
However, the sale sides and sales price increases were both on the low end of Realogy’s projections.
“Based on the company’s closed and open sales activity in January and February, Realogy expects first quarter home sale transaction sides to be up 3 percent to 5 percent year-over-year and average home sale price to increase 3 percent to 4 percent on a company-wide basis,” stated the company in its Q4 2015 earnings press release in February.
Closed sale sides and average sale price did both increase by 3 percent.
Overall revenue for the company in Q1 was $1.13 billion, up 7 percent year-over-year. Total expenses were 1.20 billion, also about a 7 percent year-over-year increase.
The company reported a net loss of $42 million in Q1.
Inventory constraints, high competition
One of the factors behind Realogy’s struggle to hit the higher projection marks for sale sides and sales price increases is due to issues with low inventory, which is affecting all companies as they move into the spring buying season.
Despite better job opportunities, strong demographic trends and mortgage rates, low inventory in certain price ranges is holding back overall activity, says Realogy’s Executive Vice President Tony Hull. According to Hull, the demographics that are impacted the most by low inventory are first-time and move-up buyers, who buy lower-to-mid range priced homes.
Realogy is finding this to be especially true in California — one of their three key markets. In California, more specifically San Francisco and Los Angeles is experiencing tough inventory constraints and prices are holding. Because of that, Hull says move-up sellers are more reluctant to list, and buyers are relying on mortgages rather than conducting cash purchases.
“It’s improving a little bit; there’s been three months of sequential increases in inventory. We anticipate that will increase somewhat in the second quarter as people decide they can get what they want for a home, and they’re going to put their home on the market so they can move up,” said chairman, CEO and president Richard A. Smith.
“But, we’re still off the normal 6 to 7 months of inventory — we’re at 4.5 to 4.6 right now. But, we’re encouraged, we’re starting to see slight improvements.”
Those improvements can be seen in Realogy’s other key markets of New York and Florida. According to Hull, Florida started its recovery earlier than the rest of the other markets, and the New York tri-state area continues to strengthen due to high inventory for first-time and move-up buyers.
In addition to low inventory woes, Realogy noted the competitiveness of the market contributed to the closed sale sides reaching the lower-end of their projections.
“For NRT listings, 47 percent of home sales in the lower priced starter home market segment had multiple offers, and 38 percent of home sales in the intermediate move-up segment had multiple offers. Only 11 percent of high-end listings drew multiple purchase offers,” said Hull in the call.
Despite the factors of low inventory and multiple competitive offers, Smith says he’s optimistic about the upcoming years.
“Demand is strong. I’d rather see inadequate supply and strong demand, versus the opposite. This will work itself out, and fix itself over time and its slowly doing that,” said Smith.
Expansion of Zap
Although the primary focus of the call was low inventory, Realogy did touch on the expansion of its Zap platform, a tool that allows Realogy-brand-affliated brokers and agents to better “reach, engage and follow-up” with prospective clients.
“We now have over 41,000 affiliated agents on the Zap platform, which is approximately 30 percent of RFG’s total affiliated U.S. agent count,” said Smith. “Our ERA real estate brand reached a significant milestone by being the first of our franchisees to connect its entire network on the ZAP platform thus linking its consumer-facing ERA.com website and thousands of ERA-affiliated broker and agent sites with Zap’s online customer relationship management system.”
“Zap is a long-term investment designed to substantially enhance the value proposition of our franchise offerings delivering productivity tools, which will help our franchisees increase transaction volume and thus the profitability of their companies.”
Smith says franchise sales teams are using Zap quite effectively to attract and win new franchises, brokers are beginning to see more success in recruiting and retaining agents, and most important, Realogy is beginning to see evidence that the agent is more productive in better managing relationships with clients and prospective clients.
Looking ahead to Q2
For Q2, Realogy expects home sale sides to increase 3 to 5 percent, average home sale prices to stay flat up to 2 percent, and transaction volume to increase 3 to 7 percent year-over-year.
For its FY 2016 Adjusted (Covenant) EBITDA Margin Guidance, Realogy expects its transaction volume to increase 6 to 8 percent, and its corresponding adjusted (Covenant) EBITDA Margin to increase by 14.8 to 15.2 percent.
Each of these predictions is based on the company’s open and closed sales activity in April and the first several days of May.
Hull says the company is on track to generate significant free cash flow for full year 2016.
“We continue to make significant progress toward our strategic financial objectives — optimizing our cost structure, executing our share repurchase program and delevering the balance sheet, which is the strongest it has been since we went public,” said Hull in a press release.
