- Realogy's revenue was $1.2 billion in the first quarter, up 6 percentage points from Q1 2016. Operating expenses were also higher; the company operated at a $28 million net loss in Q1.
- Recruiting and retaining top agents are boosting the company's bottom line, while underwriting standards and inventory remain problems.
Realogy, the company that operates some of the biggest brokerage brands in real estate, is in the midst of CEO succession-planning — but even though that big project can often derail focus, the company reported revenue growth and a significantly smaller net loss in its earnings call for the first quarter of 2017 (Q1 2017) today.
Realogy’s revenue “was $1.20 billion, an increase of 6 percent as compared with the first quarter in 2016, driven by transaction volume increases at the Company-owned brokerage segment (NRT) and Realogy Franchise Group (RFG),” the company reported. And although operating expenses were higher in Q1 2017 ($1.23 billion) than in Q1 2016 ($1.2 billion), tax benefits and equities offset the expenses to a net loss of $28 million in Q1 2017, compared to $42 million in Q1 2016.
Realogy CEO Richard Smith said in an earnings call and a statement that Realogy’s priorities include increasing agent productivity and recruiting.
“We also made good progress on our recruiting initiatives intended to increase the number of productive sales agents at NRT and retain a higher percentage of our top-quartile agents,” noted Smith, after discussing the strength of the housing market in Q1. “While these actions will result in near-term moderate pressure on margins, we anticipate that over the medium term they will be additive to revenue and earnings at NRT as well as other Realogy business units that benefit from NRT’s transaction volume.”
Smith also noted that Realogy plans to “selectively pursue acquisitions” like the April Coldwell Banker acquisition of West Haven Regional and Westville Regional brokerages in New Haven, Connecticut.
RFG and NRT sides and volume
Realogy operates the following business units:
- Better Homes and Gardens Real Estate
- Century 21
- Coldwell Banker
- Coldwell Banker Commercial
- The Corcoran Group
- Sotheby’s International Realty
- NRT LLC
- Title Resource Group
- ZapLabs, Realogy’s technology development subsidiary
Two business units report home sale sides and transactions: Realogy Franchise Group (RFG) is the business unit that manages the franchise brands, and NRT operates Realogy’s company-owned business segments in addition to Climb Real Estate, an acquisition Realogy made last August.
“In the first quarter of 2017, RFG and NRT achieved a combined homesale transaction volume (transaction sides multiplied by average sale price) of approximately $96 billion, an increase of 9 percent compared with the first quarter of 2016, which exceeded the Company’s guidance range based on stronger than expected results in March,” said the company in a release.
RFG reported a transaction sides increase of 3 percentage points and an average price increase of 6 percentage points, while NRT saw sides increase 4 percentage points and prices increase 3 percentage points.
“Transaction volume at the high end was also greater than anticipated,” said Anthony E. Hull, Realogy’s executive vice president, CFO and treasurer — and that definitely helped Realogy’s bottom line.
“The high-end volume in the $2.5-million and above price range grew 10 percent year over year,” he added, “half from sides and half from price.”
Recruiting and retention
On March 17 in a proxy letter to shareholders, Smith wrote the following: “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.”
That soft demand seems to be solving itself, so what is the company doing about the competition for agents?
“The distinct advantage we have is our program is targeting productive agents who will be productive with us much faster than an agent with a competitor. So you can consider that the revenue those agents produced has been incremental to us.”
Realogy spent $605 million on “commission and other agent-related costs” in Q1 2017, compared with $558 million in 2016.
“The agents we’re recruiting are productive agents with much higher side production than you might consider,” said Smith in the earnings call. “Many of our competitors are recruiting entry level with no production.”
Therefore, Smith said, Realogy expects its recruited agent to perform at the same level as they did for the previous broker “or even better through their affiliation with us.”
The company reported an agent retention rate of 94 percent. Asked in a question-and-answer session how he felt about it, Smith said, “higher is good.
“You don’t want it to get too high, however,” he added. “There is a cost to those high retention rates. We manage in the context of the return on that investment and we’re pretty comfortable where we are right now.”
Keeping the focus on agents is not cheap, of course — it’s increased the company’s corporate expenditures.
However, it’s a good investment, Smith believes.
“More support to the agent is a better value proposition,” Smith noted. “Support that may be in the form of better improved marketing, better technology — just better values.
“The most important one on the horizon is our new education platform, which we have every reason to believe will increase productivity on the part of not only entry-level agents but also productive agents.” That’s coming later this year, he added.
Commission rates and Zap
Realogy reported that the average homesale brokerage commission rate slipped 1 basis point year-over-year for both NRT and RFG brokerages.
The average RFG homesale brokerage commission rate was 2.50 percent, down from 2.51 percent in Q1 2016, and NRT’s slipped to 2.45 percent from 2.46 percent. Efforts to keep top-producing agents are having an impact on brokers, but Realogy is hopeful that the Zap platform is going to help boost productivity and alleviate some of that loss for its franchisees.
“The Zap platform represents a significant investment in the success of our affiliated sales agents and is at the forefront of our efforts to help franchisees increase profitability,” said Smith, adding that performance metrics on Zap are on the horizon.
“Zap by design is going to level the playing field and make it possible for small- to medium-sized franchisees see productivity gains,” he added.
Mortgage rates, housing prices and the market in general are looking better-than-expected — including some areas of new construction, Smith noted.
However, there are two elephants in the room: challenging mortgage underwriting criteria and housing inventory.
“The current inventory represents a 3.8 month national average supply, which is well below the 25-year average of 6.1 months,” Smith noted. He named inventory and underwriting criteria the most challenging “headwinds” that the industry is facing at the moment.
“I can sell my house but it’s very difficult for me to move up if I’m a move-up buyer,” he added later in the call. “We see that in a number of markets, so we need credit underwriting standards to abate and more new construction.”