A CEO announcement or two here, a dip in transaction volume there — bits of news dropped like dots on a map. Connected, they form a bigger picture: 10 executive-level shifts in nine months, and the makings of a seemingly aggressive regrouping strategy.

  • Realogy, which owns and operates several large real estate brands, is still profitable, but its growth has been slipping.
  • The company has made (and plans to make) several executive hires to keep the bottom lines healthy in 2017, and a succession plan is being made for CEO Richard Smith.

A CEO announcement or two here, a dip in transaction volume there — bits of news dropped like dots on a map. Connected, they form a bigger picture: 10 executive-level shifts in nine months, and the makings of a seemingly aggressive regrouping strategy.

That’s the current situation at Realogy, one of the biggest power-players in the real estate industry. Business unit shake-ups and a new agreement with the company’s reigning chief executive indicate that, while this water bird appears to be serenely floating along, furious movement is happening beneath the surface.

According to very recent SEC filings, the Realogy board of directors is focused on CEO succession planning. As part of that work, a board committee is recruiting to fill a newly created position of president and chief operating officer — presumably a candidate to be CEO Richard Smith’s successor. And in the last nine months, Realogy Franchise Group Alex Perriello has retired and the CEOs of the firm’s two largest brands — Coldwell Banker and Century 21 — have left the company, while ERA has a new CEO.

Is this routine executive succession planning? Is it retrenchment for a company facing new business realities? Is the company arming itself with a new generation of leaders to face challenges such as shrinking margins for its franchisees and new broker and franchise business models?

Or is it threats from disrupters such as Opendoor and — maybe most important — from its fast-growing arch rival Keller Williams? Is it all of the above?

A Goliath in real estate

Realogy Holdings Corporation is a publicly owned company (meaning it sells company shares on the public stock exchange) that operates a number of business units:

  • Better Homes and Gardens Real Estate
  • Century 21
  • Coldwell Banker
  • Coldwell Banker Commercial
  • The Corcoran Group
  • ERA
  • Sotheby’s International Realty
  • ZipRealty
  • NRT LLC
  • Cartus
  • Title Resource Group
  • ZapLabs, Realogy’s technology development subsidiary

Realogy Franchise Group (RFG), the business unit that manages the franchise brands, “provides its franchisees with the value of widely recognized and respected brands, powerful national marketing, training and general sales support systems, services and tools,” states Realogy on its website.

The NRT business unit operates Realogy’s company-owned real estate business segments, which also include some of Realogy’s franchise and agency brands — Coldwell Banker, Sotheby’s, Corcoran Group and ZipRealty among them — in addition to Climb Real Estate, which NRT acquired last August.

Between RFG and NRT, Realogy has captured a significant share of the residential real estate market.

Year Home sale transaction volume Transaction volume YOY growth Transaction “sides”
2015 $456 billion 8 percent 1,438,077
2016 $473 billion 4 percent 1,471,043

Realogy’s franchise (RFG) and company-owned (NRT) business segments achieved a combined home sale transaction volume of approximately $456 billion in 2015, an 8-percent increase compared to 2014.

The National Association of Realtors estimates that 5,250,000 existing homes were sold in 2015; add in the 510,000 newly constructed homes that the U.S. Census Bureau reported sold in 2015 and you’ve got a total of 5,760,000 home sales in 2015. That’s approximately 11,010,000 “sides” in 2015 (two for each existing-home sale plus one for each newly constructed home sale) — so with 1,438,077 “sides” in 2015 from both NRT and RFG, Realogy captured 13.06 percent of the available home sale market.

As a whole, Realogy is not doing shabbily. The company’s annual revenue is in the billions of dollars, and it nets hundreds of millions of dollars in income every year, too. NRT was named the no. 1 brokerage in the country by Real Trends this year for the 20th year running, both in transaction sides and transaction volume.

However, financial statements throughout 2016 and in the beginning of 2017 make it clear that the company’s growth has slowed. Its transaction volume growth, for example, was halved between 2015 and 2016 — shrinking to 4 percent from 8 percent.

Year Annual revenue Revenue YOY growth Annual net income Income YOY growth
2015 $5.7 billion 7 percent $184 million 29 percent
2016 $5.81 billion 2 percent $213 million 16 percent

“NRT’s performance in 2016 was impacted by strong competition for agents and soft demand at the high end of the housing market in the markets it serves,” wrote Realogy’s CEO, Richard Smith, in a proxy letter to shareholders on March 17.

“Our company-owned offices are predominantly located in high-end markets, and felt the impact of this imbalance. Given that NRT accounted for approximately 59 percent of Realogy’s Operating EBITDA [earnings before interest, taxes, deductions and amortization] in 2016 — prior to intercompany royalty and marketing payments to the Realogy Franchise Group (RFG) — these pressures correspondingly affected Realogy’s overall results in 2016,” he added.

Movement in the executive suite

Near the middle of March, a big (but quiet) move was made when Realogy Holdings Corp. entered into a new employment agreement with CEO Smith, who has helmed Realogy since 2007.

The two-year agreement would expire in March 2019 and stipulates that Smith’s duties and responsibilities as CEO “shall include the development of, and transition of responsibilities to, Executive’s successor(s),” according to the agreement.

Then, in the proxy letter filed on March 17, Realogy announced that it would be hiring a president and COO — a newly created position.

“The new Succession Planning Committee formed in October 2016 formalized the Board’s focus on CEO succession planning and to assure an orderly transition at the time our current CEO retires,” stated the section of the proxy letter from Realogy’s lead independent director, Michael J. Williams. “As part of this process, this committee is identifying and assessing candidates for a newly created position of President and Chief Operating Officer.”

“We are creating the new COO role to ensure we have a deep bench of management talent, and we look forward to announcing the executive following the completion of a thorough search,” said Realogy spokesman Mark Panus.

Not long before the new contract with Smith and recruiting letter release, in February RFG announced that Alex Perriello, the RFG CEO since 2004, would be retiring (though keeping a position as chairman emeritus); president and COO John Peyton would step into Perriello’s shoes.

(Peyton had been hired as RFG president/COO, a newly created position for the former Starwood Hotels and Resorts SVP, in October 2016.)

Franchisor brand shifts

Moreover, a couple of C-suite shifts at Realogy’s franchisor brands have added to the list of changes.

Near the end of March, Century 21 Real Estate announced that CEO and President Rick Davidson would be stepping aside after seven years at the helm of the company to return as partner/co-owner of a leading C21 franchise affiliate; current COO Greg Sexton will be managing things while a new CEO is sought.

In July last year, Coldwell Banker CEO Budge Huskey retired, and Charlie Young, who had been CEO at ERA, took Huskey’s spot as the head of Coldwell Banker. ERA COO Susan Yannaccone was Young’s replacement as the new ERA CEO.

Growth hires

Meanwhile, a series of newly created positions and a training initiative highlight RFG’s recent emphasis on reviving growth and directly addressing the competition.

After shaky second-quarter earnings results, in September 2016, NRT created two new executive-level positions — a new chief strategy/operating officer (Ryan Gorman) and a new chief recruiting officer (Peter Sobeck).

In February of this year, Realogy made a couple of personnel announcements — the first was that Bryon Ellington, the former chief learning officer at Keller Williams, would be joining Realogy as the new SVP of learning for the company’s just-introduced integrated learning institute for franchise brands and NRT.

Realogy’s performance “has been mediocre; by their own admission it’s been more than a couple of tough quarters,” said Steve Murray, president at real estate consulting firm Real Trends.

However, he added, he doesn’t think that financial performance and recent executive departures are necessarily related. Perriello, for example, “is 70 years old,” Murray pointed out. “He’s in good health, he’s got all the money a guy could want. It’s just his time.”

What’s growing and what’s stagnant

Although there are more brands under which Realogy sells residential real estate, there are five major franchisors that RFG operates:

  • Better Homes & Gardens Real Estate
  • Century 21
  • Coldwell Banker
  • ERA
  • Sotheby’s International Realty

In the past 13 months, RFG and NRT have made announcements about franchisor and brokerage growth (acquisitions, expansions, affiliations and other positive growth stories). Here’s how they’ve broken down by brand, illustrating where Realogy has focused its growth efforts.

Brand/company Number of growth mentions in past year
Better Homes & Gardens Real Estate 19
Century 21 2
Coldwell Banker 8*
ERA 11
Sotheby’s International Real Estate 23
NRT 14*

* The Coldwell Banker announcements are Coldwell Banker NRT brands, so the 8 Coldwell Banker expansion are also included in NRT’s count.

NRT’s struggles: Top talent lured away and softening high-end markets

In the second quarter of 2016 (Q2), we began to see more significant shifts. NRT struggled in Q2, posting a 3-percent drop in transaction volume and a 2-percent drop in average sales price compared to the second quarter of the previous year.

“Our agents are some of the top talent in the industry, and as such, historically have been targeted by the competition,” said Realogy CEO Smith during the quarterly earnings call. “This trend has recently become more pronounced as new entrants to the industry as well as assorted, established firms use short-term economic incentives to build market share.

“Our experience tells us that economic incentives need to be complemented by a strong level of support to the agent, which we uniquely provide,” he added.

In Q3 2016, Realogy stated that its lower-than-expected revenue was “primarily driven by lower homesale transaction volume at NRT along with lower referral revenue at Cartus.”

In its most recent earnings call, the company went over Q4 2016/annual 2016 financial results, and gross commission income generated by NRT slipped to $4.277 billion in 2016 from $4.288 billion the previous year.

Smith said in a statement that the results were connected to the “operating challenges of strong competition for sales agents and soft demand at the high end of the housing market for NRT.”

To tackle that challenge, Realogy said in the mid-March proxy letter that NRT is “executing on an aggressive campaign” designed to bring productive agents and teams on board at NRT brokerages, as well as enhancing current agent retention and productivity.

NRT used the program to recruit agents who generated about $120 million in revenue during the 12 months before they affiliated with NRT, Smith said in an earnings call in February. NRT is also offering “more favorable commission splits” as part of the campaign.

Realogy and NRT “have commanding market share in just about every market they’re in,” noted Victor Lund, founder of business consulting firm WAV Group. “So if you’re recruiting, you’re going after their agents. It doesn’t matter where they are. They’re good agents, and they walk around with a target on their back.”

Re-invigorating Realogy

The proxy letter sent in mid-March identified a few areas — besides talent development and the “aggressive” market-share initiative already mentioned — where the company would focus its efforts. They included technology and business optimization initiatives, plus continued merger-and-acquisition activity, to boost the bottom line in 2017.

But there’s no question that the real estate behemoth is taking its talent development especially seriously.

Murray notes that after looking back at the performance of Real Trends top brokers and up-and-comers, in general, “there’s not really a great difference between independents and franchises collectively.

“It doesn’t appear to be one business model, one region, one brand that defines the difference in performance,” he added. “It’s something else, and that something else is the quality of the men and women who own brokerage companies and who are running them.”

Industry experts seem to be more or less in accord that Realogy is working on setting new executive John Peyton up for success — a man who, by all accounts, understands branding very well.

That was “probably a good move,” opined Lund.

“They already have operational expertise; they didn’t need someone to come in and fix the operational components of how to run their business. They need somebody to come who had deep brand experience and who could make sure that these brands have vitality in the marketplace. If your brand gets stale and goes to sleep, you’re dead.”

Lund added that when franchise agreements are up for renewal, many brokerages “go shopping.”

“When you have a really strong relationship with your brokerage brands, they’re going to shop for more than just price,” he noted. “So the relationship matters. You can get a lot of money if you change brands.

“Change is the gasoline of innovation,” concluded Lund. “I think that when you have turnover like this, you have opportunities to really reimagine your business.”

Editor’s note: This story has been updated to correct the number of growth-related press releases involving NRT and Coldwell Banker.

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