Last quarter, Realogy’s softer-than-expected revenues were a result of a slower real estate market and agent poaching, particularly at the company’s NRT brand. Net income was $106 million (compared with $110 million in Q3 2015).
Realogy also operates Better Homes and Gardens Real Estate, Century 21 Real Estate, Coldwell Banker, ERA, Sotheby’s International Realty and ZapLabs LLC, in addition to title and settlement services provider Title Resource Group (TRG); it reported $1.66 billion in revenue last quarter, a 1-percentage-point increase over Q2 2015.
This quarter, revenue was $1.64 billion — a 1 percentage point decrease from Q3 2015.
And that lower-than-expected revenue was “primarily driven by lower homesale transaction volume at NRT along with lower referral revenue at Cartus,” said Realogy in a statement, adding that Title Resource Group (TRG) had a higher purchase and refinancing closing unit volume that somewhat accommodate for the loss.
Financial results highlights
The combined home sale transaction volume for Realogy increased by 2 percentage points quarter-over-quarter, representing a 4 percent volume gain for Realogy Franchise Group and a 3 percent decline in volume at NRT.
Realogy reported $1.211 billion in gross commission income for the third quarter, down from $1.251 billion in Q3 of 2015. NRT’s gross commission income per side was $12,681, up 1 percent from $12,524 a year prior.
“As we look at the U.S. housing market, we are seeing a tale of two markets, with a dividing line being drawn between the entry and move-up price segments and the high-end markets,” said Richard A. Smith, Realogy’s chairman, CEO and president, in the company’s third quarter earnings call.
“At the entry and move-up price segments, it continues to be a seller’s market, while the high-end remains a buyer’s market.”
He added that demand in entry and move-up levels is helping; however, national inventory is at a low 4.5-month supply, and total inventory has fallen year-over-year for 16 consecutive months.
“In our view, the mainstream market seems relatively healthy and our franchise operation RFG is performing in a manner consistent with the national housing market trends.”
In Q2, Realogy said it expected to deliver adjusted EBITDA of $845 million, with about a 15-percent margin. However, operating EBITDA (earnings before interest, taxes, deductions and amortizations) was $279 million, compared to $295 million in Q3 2015.
The future of NRT
NRT has been facing two significant operating challenges: strong competition for top producing agents and soft demand at the high end of the housing market, said Smith.
“While our third quarter results reflect continued pressure on NRT as expected, we have moved aggressively to improve the business and enhance NRT’s competitiveness with an infusion of talent and new growth initiatives,” Smith said in a statement.
“We expect these initiatives to put near-term pressure on margins, but anticipate that the resulting increase in revenue will deliver improved financial results over time and position us well to achieve our long-term goals and drive shareholder value.”
After a shaky second quarter, NRT announced the addition of a chief strategy and operation officer and chief recruiting officer. These initiatives are intended to “focus on growth, maximize the efficiency of [NRT’s] operations and to provide enhanced value and service level for its agents and consumers,” Smith said in the call.
Moreover, their impact is expected to be realized over the next year while early operating metrics show “encouraging signs of improvement.”
These metrics include the stabilization of agent retention rates in the first and second quarter and overall net agent attrition.
Moving forward, NRT will have two major areas of focus: growing its independent sales associate base and increasing the productivity and retention of existing sales associates. The company spoke of a “very aggressive recruiting campaign” at NRT that started in September and specifically targets the most desirable, top producing agents in NRT’s key markets.
In addition to pinpointing top producers, Smith also indicated that the company’s in the process of creating a stronger value proposition for agent teams.
Promotion announced to focus on ‘company-generated’ leads
NRT also recently promoted operating executive Monty Smith to the new role of president of company generated business, Realogy announced in the Q3 earnings call.
The position is responsible for all activities that produce company generated leads, which accounted for approximately 10 percent of NRT’s closed business (including leads from relocation, internet lead service centers and NRT’s ZipRealty operations — acquired by Realogy for $166 million in July 2014).
Smith notes that company-generated leads that result in a closed transaction have “higher margin characteristics” than agent-generated business — and that providing sales associates with those leads is a big part of their “agent value proposition.”
Mergers and acquisitions
This past quarter NRT acquired “distinctive and innovative” independent brokerage Climb Real Estate, which ranks in San Francisco’s top 10 based on transaction sides and volume.
Smith reiterated that Climb “will retain its brand, a unique operating culture under the leadership of founder and CEO Chris Lim,” and pointed to the brand’s strong positioning in the millennial market as having big influence over NRT’s operations moving forward.
The conference call also gave an update on RFG’s investment in ZipRealty’s “Zap” tech platform. In the first three quarters of 2016, over 1,200 franchisees are now live on Zap platform, and by year’s end the company expects to have 1,500 of its 2,600 franchisees live on Zap, along with 20,000 active agent users.
“We are encouraged by the early indications of productivity gains for agents actively using the Zap platform,” Smith said.
Outlooks and forecasts
Last quarter, Inman reporter Amy Swinderman wrote that in Q3, the company “expects the disparity in transaction volume between RFG and NRT to continue, predicting a 4-percent to 6-percent increase for RFG and a 1-percent to 3-percent decrease for NRT.
“However, based on how closed and open sales fared in July, the company said it expects to see overall home sale transaction gains of between 1 percent to 4 percent in Q3.” It hit a 2 percent target.
“We will continue to execute on our process improvement efficiencies, office footprint optimization, technology and media spending, centralized procurement and organizational design,” Hull said. “At the same time, we are progressing ahead of schedule on returning capital to shareholders while balancing investments in the growth of the business and opportunistic acquisitions.”
Inman associate editor Caroline Feeney contributed reporting to this story.