UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________
FORM 10-K
þ☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20172019
OR
¨☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File No. 001-35674
REALOGY HOLDINGS CORP.
(Exact name of registrant as specified in its charter)
20-8050955
(I.R.S. Employer Identification Number)
Commission File No. 333-148153
REALOGY GROUP LLC
(Exact name of registrant as specified in its charter)
20-4381990
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| Commission File No. 001-35674 | Commission File No. 333-148153 |
| REALOGY HOLDINGS CORP. | REALOGY GROUP LLC |
| (Exact name of registrant as specified in its charter) | (Exact name of registrant as specified in its charter) |
| 20-8050955 | 20-4381990 |
| (I.R.S. Employer Identification Number) | (I.R.S. Employer Identification Number) |
Delaware
(State or other jurisdiction of incorporation or organization)
175 Park Avenue
Madison, NJ 07940
(Address of principal executive offices) (Zip Code)
(973) 407-2000
(Registrants' telephone number, including area code)
___________________________ |
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| Securities registered pursuant to Section 12(b) of the Act: | | | |
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Realogy Holdings Corp. | Common Stock, par value $0.01 per share | RLGY | New York Stock Exchange |
| Realogy Group LLC | None | None | None |
Securities registered pursuant to Section 12(g) of the Act: None
___________________________
Indicate by check mark if the Registrant isRegistrants are a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Realogy Holdings Corp. Yes þ No ¨Realogy Group LLC Yes ¨ No þ
Indicate by check mark if the Registrant isRegistrants are not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Realogy Holdings Corp. Yes ¨ No þRealogy Group LLC Yes þ No ¨
Indicate by check mark whether the RegistrantRegistrants (1) hashave filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant wasRegistrants were required to file such reports), and (2) hashave been subject to such filing requirements for the past 90 days.
Realogy Holdings Corp. Yes þ No ¨Realogy Group LLC Yes ¨ No þ
Indicate by check mark whether the Registrant hasRegistrants have submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant wasRegistrants were required to submit and post such files).
Realogy Holdings Corp. Yes þ No ¨Realogy Group LLC Yes þ No ¨
Indicate by check mark if disclosure of delinquent filer pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Realogy Holdings Corp. þRealogy Group LLC þ
Indicate by check mark whether the Registrant is aRegistrants are large accelerated filer, anfilers, accelerated filer, afilers, non-accelerated filer,filers, smaller reporting company,companies, or an emerging growth company.companies. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Large accelerated filer | | Accelerated filer | | Non-accelerated filer | | Smaller reporting company | | Emerging growth company |
| | | | | | | | | |
| Large accelerated filer | | Accelerated filer | | Non-accelerated filer
(Do not check if a smaller reporting company)
| | Smaller reporting company | | Emerging growth company |
| | | | |
| Realogy Holdings Corp. | þ | | ¨ | | ¨ | | ¨☐ | | ¨☐ |
| Realogy Group LLC | ¨ | | ¨ | | þ | | ¨☐ | | ¨☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the Registrant isRegistrants are a shell company (as defined in Rule 12b-2 of the Exchange Act).
Realogy Holdings Corp. Yes ¨☐ No þRealogy Group LLC Yes ¨☐ No þ
The aggregate market value of the voting and non-voting common equity of Realogy Holdings Corp. held by non-affiliates as of the close of business on June 30, 20172019 was $4.4 billion.$824 million. There were 130,150,797114,379,296 shares of Common Stock, $0.01 par value, of Realogy Holdings Corp. outstanding as of February 23, 2018.21, 2020.
Realogy Group LLC meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this Form with the reduced disclosure format applicable to Realogy Group LLC.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement prepared for the Annual Meeting of Stockholders to be held May 2, 20186, 2020 are incorporated by reference into Part III of this report.
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| PART I | | |
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| Item 1. | | |
| Item 1A. | | |
| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
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| PART II | | |
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PART I | |
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Item 1.5. | | |
Item 1A. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
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PART II | |
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Item 5. | | |
| Item 6. | | |
| Item 7. | | |
| Item 7A. | | |
| Item 8. | | |
| Item 9. | | |
| Item 9A. | | |
| Item 9B. | | |
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| PART III | | |
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| Item 10. | | |
| Item 11. | | |
| Item 12. | | |
| Item 13. | | |
| Item 14. | | |
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| PART IV | | |
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| Item 15. | | |
| Item 16. | | |
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FORWARD-LOOKING STATEMENTS
Forward-looking statements included in this Annual Report on Form 10-K (this "Annual Report") and our other public filings or other public statements that we make from time to time are based on various facts and derived utilizing numerous important assumptions and are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements include the information concerning our future financial performance, business strategy, projected plans and objectives, as well as projections of macroeconomic and industry trends, which are inherently unreliable due to the multiple factors that impact economic trends, and any such variations may be material. Statements preceded by, followed by or that otherwise include the words "believes," "expects," "anticipates," "intends," "projects," "estimates," "plans," and similar expressions or future or conditional verbs such as "will," "should," "would," "may" and "could" are generally forward-looking in nature and not historical facts. You should understand that the following important factors could affect our future results and cause actual results to differ materially from those expressed in the forward-looking statements:
risks related to•adverse developments or the absence of sustained improvement in general business, economic employment andor political conditions andor the U.S. residential real estate markets, either regionally or nationally, including but not limited to:
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◦ | a lack of improvement or a decline in the number of homesales, stagnant or declining home prices and/or a deterioration in other economic factors that particularly impact the residential real estate market and the business segments in which we operate whether broadly or by geography and price segments; |
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◦ | increasing mortgage rates and/or constraints on the availability of mortgage financing; |
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◦ | insufficient or excessive home inventory levels by market and price point; |
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◦ | deceleration in the building of new housing and/or irregular timing or volume of new development closings; |
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◦ | a decrease in consumer confidence; |
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◦ | ◦a decline or a lack of improvement in the number of homesales; ◦insufficient or excessive home inventory levels by market and price point; ◦stagnant or declining home prices; ◦a reduction in the affordability of housing; ◦increasing mortgage rates and/or constraints on the availability of mortgage financing; ◦a lack of improvement or deceleration in the building of new housing and/or irregular timing or volume of new development closings; ◦the potential negative impact of certain provisions of the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) on (i) home values over time in states with high property, sales and state and local income taxes and (ii) homeownership rates, in particular in light of our market concentration in high-tax states; and/or ◦the impact of recessions, slow economic growth, or a deterioration in other economic factors that particularly impact the residential real estate market and the business segments in which we operate, whether broadly or by geography and price segments; •the impact of recessions, slow economic growth, disruptions in the U.S. government or banking system, disruptions in a major geoeconomic region, or equity or commodity markets and high levels of unemployment in the U.S. and abroad, which may impact all or a portion of the housing markets in which we and our franchisees operate; |
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◦ | the potential negative impact of certain provisions of the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) (i) on home values over time in states with high property, sales and state and local income taxes as the deductibility of such taxes is now capped at $10,000 and (ii) on homeownership rates given a narrowing of potential tax-related advantages to owning compared to renting given higher standard deductions available to all taxpayers; |
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◦ | other legislative, tax or regulatory changes (including changes in regulatory interpretations or enforcement practices) that would adversely impact the residential real estate market, including changes relating to the Real Estate Settlement Procedures Act ("RESPA"), potential reforms of Fannie Mae and Freddie Mac, immigration reform, and further potential tax code reform; |
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◦ | a decrease in housing affordability due to higher mortgage rates and increases in average homesale prices; |
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◦ | high levels of foreclosure activity; |
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◦ | changing attitudes toward home ownership compared to renting, including among potential first-time homebuyers who may delay, or decide not to, purchase a home, as well as existing homeowners who may decide to sell their home and rent their next home; and |
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◦ | the inability or unwillingness of current homeowners to purchase their next home due to various factors, including limited or negative equity in their current home, difficult mortgage underwriting standards, attractive rates on existing mortgages and the lack of available inventory in their market; |
increased competition whether through traditional competitors, in the industry for clients, for the affiliation of independent sales agents and for the affiliation of franchisees on our results of operations and market share, including competition from:
◦real estate brokerages, including those seeking to disrupt historical real estate brokerage models;
◦other industry participants or competitors with alternative business models (such as flat fee, capped fee or desk fee models) including companies employing technologies intendedseeking to disrupt the traditional brokerage model, as well as eliminatingeliminate brokers or agents from, or minimizingminimize the role they play in, the homesale transaction, such as reducing brokerage commissions, and companiestransaction;
◦other industry participants otherwise competing for a portion of gross commission income; and
competition for more productive sales agents◦other residential real estate franchisors;
•the impact of disruption in the residential real estate brokerage industry, and sales agent teams will continue to impact the abilityon our results of our company owned brokerage businessoperations and our affiliated franchisees to attractfinancial condition, as a result of listing aggregator concentration and retain independent sales agents, either individually or as members of a team, and will result in market power;
•continuing pressure on the share of gross
commission income paid by our company owned brokerages and our affiliated franchisees to theiraffiliated independent affiliated sales agents;agents and independent sales agent teams;
•our inability to successfully develop products, technology and programs (including our company-directed affinity programs) that support our strategy to grow the failure to attract and retain managers of our company owned brokerage offices who have primary responsibility for the recruitment and retentionbase of independent sales agents for those offices;at our company owned and franchisee real estate brokerages and the base of our franchisees;
•our geographic and high-end market concentration, particularly with respect to our company owned brokerage operations, including the impact of the 2017 Tax Act;heightened competition for independent sales agents in those geographies and price points;
•our inability to enter into franchise agreements with new franchisees or renew existing franchise agreements, at currentwithout reducing contractual royalty rates withoutor increasing the amount and prevalence of sales incentives, including non-standard incentives, to realize royalty revenue growth from them, or to maintain or enhance our value proposition to franchisees;incentives;
•the lack of revenue growth or declining profitability of our franchisees and company owned brokerage operations including or declines in other revenue streams, such as third-party listing fees;
•the potential impact of lower average broker commission rates;negative industry or business trends (including further declines in our market capitalization) on our valuation of goodwill and intangibles;
changes in corporate relocation practices resulting in fewer employee relocations, reduced relocation benefits
•the extent of the negative impact of the discontinuation of the USAA affinity program on the Company’s revenues and profits derived from affinity program referrals (including the impact from the change in the way home moving expenses are treated for tax purposes under the 2017 Tax Act), increasing competition in corporate relocation or revenue to Realogy Leads, Realogy Brokerage, Realogy Franchise, and Realogy Title Groups);
•the loss of one or more significantour next largest affinity clients;client;
•risks related to the planned sale of Cartus Relocation Services to a subsidiary of SIRVA, Inc., including with respect to expected timing, anticipated benefits and the financial impact to our business;
•an increase in the experienced claims losses of our title underwriter could adversely impact the earnings of our title and settlement services segment;
underwriter;our inability to develop or hire skilled executives and other key employees or challenges associated with change management may impact our ability to continue to execute or evolve our strategy;
our inability to successfully develop or obtain new technologies and systems, to replace or introduce new technologies and systems as quickly as our competitors and in a cost-effective manner or to achieve the benefits anticipated from new technologies or systems;
our inability to leverage real-time data analytics to support our company owned and franchisee real estate brokerages, affiliated independent sales agents and their customers as well as our relocation and title and settlement services segments;
disputes or issues with entities that license us their tradenames for use in our business or events that negatively impact their brands that could impede our franchising of those brands;
actions by our franchisees that could harm our business or reputation, non-performance of our franchisees, controversies with our franchisees or actions against us by their independent sales agents or employees or third parties with which our franchisees have business relationships;
our inability to achieve or maintain cost savings and other benefits from our restructuring activities;
our inability to realize the benefits from acquisitions due to the loss of key personnel or productive agents of the acquired companies, as well as the possibility that expected benefits and synergies of the transactions may not be achieved in a timely manner or at all;
•our failure or alleged failure to comply with laws, regulations and regulatory interpretations and any changes or stricter interpretations of any of the foregoing (whether through private litigation or governmental action), including but not limited to (1) state or federal employment laws or regulations that would require reclassification of independent contractor sales agents to employee status, (2) RESPAprivacy or data security laws and regulations, (3) the Real Estate Settlement Procedures Act ("RESPA") or other federal or state consumer protection or similar laws, and (3) privacy or data security(4) antitrust laws and regulations;
any adverse resolution of litigation, governmental or regulatory proceedings or arbitration awards as well as any adverse impact of decisions to voluntarily modify business arrangements or enter into settlement agreements to avoid the risk of protracted and costly litigation or other proceedings;
•risks and growing costs related to cybersecurity threats to our data and customer, franchisee, employee and independent sales agent data, including but not limited to the failure or significant disruption ofimpact on our operations and financial results that may be caused by any future meaningful changes in industry operations or structure as a result of governmental pressures, the actions of certain competitors, the introduction or growth of certain competitive models, changes to the rules of the multiple listing services ("MLS"), or otherwise;
•risks relating to our obligations with respectability to lost data,return capital to stockholders including, among other risks, the increasing level and sophisticationimpact of cybersecurity attacks aimed at compromisingrestrictions contained in our systems and data (including via systems not directly controlled by us, such as those maintained by our franchisees, affiliated independent sales agents, joint venture partners and third party service providers, including our third-party relocation service providers), anddebt agreements, in particular the reputational or financial risks associated with a loss of data or material data breach orindenture governing the diversion of homesale transaction closing funds;9.375% Senior Notes;
•risks associated with our substantial indebtedness and interest obligations and restrictions contained in our debt agreements, including risks relating to having to dedicate a significant portion of our cash flows from operations to service our debt;
debt and risks relating to our ability to refinance or repay our indebtedness or incur additional indebtedness or return capitalindebtedness; and
•risks and growing costs related to stockholders;
our inability to securitize certain assets of our relocation business, which would require us to find an alternative source of liquidity that may not be available, or if available, may not be on favorable terms;
risks that could materially adversely impact our equity investment in our mortgage origination joint venture, including increases in mortgage rates, the impact of the transition from our former joint ventureboth cybersecurity threats to our new joint venture, or operational or liquidity risks that may be faced bydata and customer, franchisee, employee and independent sales agent data, as well as those related to our compliance with the joint venture, such as, regulatory changes, litigation, investigationsgrowing number of laws, regulations and inquiries, or any termination of the venture;
risks relatingother requirements related to the unfavorable impact on homesale activity due to severe weather events or natural disasters;
any remaining resolutions or outcomes with respect to contingent liabilitiesprotection of our former parent, Cendant Corporation ("Cendant"), under the Separation and Distribution Agreement and the Tax Sharing Agreement (described elsewhere in this Annual Report and incorporated by reference as exhibits to this Annual Report), including any adverse impact on our future cash flows; and
new types of taxes or increases in state, local or federal taxes that could diminish profitability or liquidity.personal information.
Other factors not identified above, including those described under "Item 1A.—Risk Factors" and "Item 7.—Management’s Discussion and Analysis of Financial Condition and Results of Operations" of this Annual Report, may also cause actual results to differ materially from those described in our forward-looking statements. Most of these factors are difficult to anticipate and are generally beyond our control. You should consider these factors in connection with any forward-looking statements that may be made by us and our businesses generally.
All forward-looking statements herein speak only as of the date of this report and are expressly qualified in their entirety by the cautionary statements included in or incorporated by reference into this report. Except for our ongoing obligations to disclose material information under the federal securities laws,as is required by law, we undertake noexpressly disclaim any obligation to publicly release publicly any revisions to any forward-looking statements to reportreflect events or to reportafter the occurrencedate of unanticipated events unless we are required to do so by law.this report. For any forward-looking statement contained in this Annual Report, our public filings or other public statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
TRADEMARKS AND SERVICE MARKS
We own or have rights to use the trademarks, service marks and trade names that we use in conjunction with the operation of our business. Some of the more important trademarks that we own or have rights to use that appear in this Annual Report include the CENTURY 21®, COLDWELL BANKER®, ERA®, CORCORAN®, COLDWELL BANKER COMMERCIAL®, SOTHEBY’S INTERNATIONAL REALTY®, BETTER HOMES AND GARDENS® Real Estate, CLIMB REAL ESTATEand CARTUS®, CARTUS®, ZIPREALTY® and ZAPLABS® marks, which are registered in the United States and/or registered or pending registration in other jurisdictions, as appropriate to the needs of our relevant business. Each trademark, trade name or service mark of any other company appearing in this Annual Report is owned by such company.
MARKET AND INDUSTRY DATA AND FORECASTS
This Annual Report includes data, forecasts and information obtained from independent trade associations, industry publications and surveys, and other information available to us. Some data is also based on our good faith estimates, which are derived from management’s knowledge of the industry and independent sources. As noted in this Annual Report, the National Association of Realtors ("NAR"), the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac") were the primary sources for third-party industry data and forecasts. While data provided by NAR and Fannie Mae are two indicators of the direction of the residential housing market, we believe that homesale statistics will continue to vary between us and NAR and Fannie Mae because:
•they use survey data and estimates in their historical reports and forecasting models, which are subject to sampling error, whereas we use data based on actual reported results;
•there are geographical differences and concentrations in the markets in which we operate versus the national market. For example, many of our company owned brokerage offices are geographically located where average homesale prices are generally higher than the national average and therefore NAR survey data will not correlate with NRT'sRealogy Brokerage Group's results;
•comparability is also impaireddiminished due to NAR’s utilization of seasonally adjusted annualized rates whereas we report actual period-over-period changes and their use of median price for their forecasts compared to our average price;
•NAR historical data is subject to periodic review and revision and these revisions have been material in the past, and could be material in the future; and
•NAR and Fannie Mae generally update their forecasts on a monthly basis and a subsequent forecast may change materially from a forecast that was previously issued.
In addition, we base our estimate of the gross commission income generated in the United States in part on data from Real Trends, a provider of residential brokerage industry analysis, and we also base certain estimates on data from various MLS systems and the U.S. Census Bureau. While we believebelieve that the industry data presented herein is derived from the most widely recognized sources for reporting U.S. residential housing market statistical data, we do not endorse or suggest reliance on this data alone.
Forecasts regarding rates of home ownership, median sales price, volume of homesales, and other metrics included in this Annual Report to describe the housing industry are inherently uncertain or speculative in nature and actual results for any period could materially differ. Industry publications, surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but such information may not be accurate or complete. We have not independently verified any of the data from third-party sources nor have we ascertained the underlying economic assumptions relied upon therein. Statements as to our market position are based on market data currently available to us. While we are not aware of any misstatements regarding industry data provided herein, our estimates involve risks and uncertainties and are subject to change based upon various factors, including those discussed under the headings "Risk Factors" and "Forward-Looking Statements." Similarly, we believe our internal research is reliable, even though such research has not been verified by any independent sources.
PART I
Except as otherwise indicated or unless the context otherwise requires, the terms "we," "us," "our," "our company," "Realogy," "Realogy Holdings" and the "Company" refer to Realogy Holdings Corp., a Delaware corporation, and its consolidated subsidiaries, including Realogy Intermediate Holdings LLC, a Delaware limited liability company ("Realogy Intermediate"), and Realogy Group LLC, a Delaware limited liability company ("Realogy Group"). Neither Realogy Holdings, the indirect parent of Realogy Group, nor Realogy Intermediate, the direct parent company of Realogy Group, conducts any operations other than with respect to its respective direct or indirect ownership of Realogy Group. As a result, the consolidated financial positions, results of operations and cash flows of Realogy Holdings, Realogy Intermediate and Realogy Group are the same.
Realogy Holdings is not a party to the Amended and Restated Credit Agreement dated as of March 5, 2013, as amended, amended and restated, modified or supplemented from time to time (the "Senior Secured Credit Agreement") that governs our senior secured credit facility (the "Senior Secured Credit Facility", which includes our "Revolving Credit Facility" and our "Term Loan B") and the Term Loan A Agreement dated as of October 23, 2015, as amended from time to time (the "Term Loan A Agreement") that governs our senior secured term loan A credit facility (the "Term Loan A Facility") and certain references in this Annual Report to our consolidated indebtedness exclude Realogy Holdings with respect to indebtedness under the Senior Secured Credit Facility and Term Loan A Facility. In addition, while Realogy Holdings is a guarantor of Realogy Group's obligations under its unsecured notes, Realogy Holdings is not subject to the restrictive covenants in the indentures governing such indebtedness.
As used in this Annual Report, the terms "3.375%"5.25% Senior Notes," "4.50% Senior Notes," "5.25%Notes", "4.875% Senior Notes" and "4.875%"9.375% Senior Notes" refer to our 3.375%5.25% Senior Notes due 2016 (paid in full at maturity in 2016),2021, our 4.875% Senior Notes due 2023, and our 9.375% Senior Notes due 2027, respectively, and are referred to collectively as the "Unsecured Notes." The term "4.50% Senior Notes" refers to our 4.50% Senior Notes due 2019 our 5.25% Senior Notes due 2021 and our 4.875% Senior Notes due 2023, respectively, and referred to collectively as "Unsecured Notes." In addition, the terms "First and a Half Lien Notes" and "First Lien Notes" refer to our 9.00% Senior Secured Notes due 2020 and our 7.625% Senior Secured Notes due 2020, respectively, which were all redeemed(paid in 2015.full in February 2019).
Item 1. Business.
Our Company
We are the leading and most integrated provider of residential real estate services in the U.S. We are the world's largest franchisor of residential real estate brokerages with some of the most recognized brands in the real estate industry, the leading U.S. residential real estate brokerage (based upon transaction volume), one of the largest U.S. and a leading global provider of outsourced employee relocation services and a significant provider of title and settlement services.
The core of our integrated business strategy is clear and simple: “We Serve Agents.” This strategy is aimed at growingto grow the base of high-performingproductive independent sales agents at our company owned and franchisee brokerages and providingprovide them with compelling data and technology products and services, including high-quality lead generation programs, to make them more productive and their businesses more profitable.
Our revenue is derived on a fee-for-service basis, and given our breadth of complementary service offerings, we are able to generate fees from multiple aspects of a residential real estate transaction. Our operating platform is supported by our portfolioportfolio of industry leading franchise brokerage brands, including Century 21®, Coldwell Banker®, Coldwell Banker Commercial®, Corcoran®, ERA®, Sotheby's International Realty®and Better Homes and Gardens®Real Estate.
We also own and operate Corcorancompany owned brokerages primarily under the Coldwell Banker®, Citi Habitats CorcoranSM® and ZipRealtySotheby's International Realty® brands.
Our multiple brands and operations allow us to derive revenue from many differentmultiple segments of the residential real estate market, in many different geographies and at varying price points.
Segment Overview
On November 6, 2019, the Company entered into a definitive Purchase and Sale Agreement (the "Purchase Agreement") with a subsidiary of SIRVA, Inc. ("SIRVA"), pursuant to which SIRVA will acquire our global employee relocation business, or "Cartus Relocation Services," held by Cartus Corporation, an indirect subsidiary of the Company (“Cartus”). The transaction is expected to close in the next couple of months, subject to the satisfaction or waiver of the closing conditions therein. The sale does not include our affinity and broker-to-broker businesses, nor does it include our broker network made up of agents and brokers from Realogy’s residential real estate brands and certain independent real estate brokers (which was formerly referred to as the Cartus Broker Network and is referred to herein as the "Realogy Broker Network"). In this report, we refer to this business that will be retained as "Realogy Leads Group."
We report our operations in four segments, each of which receives fees based upon services performed for our customers:
•Realogy Franchise Group (formerly referred to as Real Estate Franchise Services, ("RFG"),or RFG);
•Realogy Brokerage Group (formerly referred to as Company Owned Real Estate Brokerage Services, ("NRT"), Relocation Services ("Cartus®") andor NRT);
•Realogy Title Group (formerly referred to as Title and Settlement Services, ("TRG").or TRG); and
Real Estate•Realogy Leads Group (as noted above previously formed part of Cartus, which we formerly referred to as Relocation Services).
The assets and liabilities of Cartus Relocation Services are classified as held for sale in the Consolidated Balance Sheets and the results are reported in this Annual Report as discontinued operations. "Net (loss) income from discontinued operations" is reflected on the Consolidated Statements of Operations for all periods presented.
Realogy Franchise Services. Group. We are the largest franchisor of residential real estate brokerages in the world through our portfolio of well-known brokerage brands, including Century 21®, Coldwell Banker®, Coldwell Banker Commercial®, ERACorcoran®, ERA®, Sotheby's International Realty® and Better Homes and Gardens®Real Estate.
As of December 31, 2017,2019, our real estate franchise systems and proprietary brands had approximately 289,000302,400 independent sales agents worldwide, (which included approximately 50,300 company owned brokerage independent sales agents), including approximately 192,000189,900 independent sales agents operating in the U.S. (which included approximately 52,200 company owned brokerage independent sales agents). As of December 31, 2017,2019, our real estate franchise systems and proprietary
brands had approximately 14,80018,500 offices (which included approximately 790 company owned brokerage offices) worldwide in 116114 countries and territories, including approximately 6,1005,900 brokerage offices in the U.S. (which included approximately 710 company owned brokerage offices).
The average tenure among our U.S. franchisees is approximately 21.522 years as of December 31, 2017.2019. Our franchisees pay us fees for the right to operate under one of our trademarks and to enjoy the benefits of the systems and business enhancing tools provided by our real estate franchise operations. In addition to highly competitive brands that provide unique offerings to our franchisees, we support our franchisees with dedicated national marketing and servicing programs, technology, including the Zap® technology platform, training, education, learning and development to facilitate our franchisees in growing their business and increasing their revenue and profitability. We believe that one of our strengths is the strong relationships that we have with our franchisees, as evidenced by our 98% retention rate as of December 31, 2017. Our retention rate represents the annual franchisee gross commission income for the year ended December 31, 2016 generated by our franchisees that remain in our franchise systems as of December 31, 2017, measured against the annual gross commission income of all franchisees for the year ended December 31, 2016.
Company Owned Real EstateRealogy Brokerage Services. Group. We own and operate the leading residential real estate brokerage business (based upon transaction volume) in the U.S. primarily under the Coldwell Banker®, Corcoran®, and Sotheby's International Realty®,ZipRealty® and Citi HabitatsSMbrand names. We offer full-service residential brokerage services in more than 50many of the 100 largest metropolitan areas of the U.S. NRT,Realogy Brokerage Group, as the broker for a home buyer or seller, derives revenues primarily from gross commission income received at the closing of real estate transactions. NRTRealogy Brokerage Group also has relationships with developers, primarily in major cities, to provide marketing and brokerage services in new developments.To complement its residential brokerage services, NRT offers home ownership services that include comprehensive single-family residential property management in many of the nation's largest rental markets.In addition, the equity earnings or losses related to our 49.9% ownership of PHH Home Loans LLC ("PHH Home Loans"), our former home mortgage venture with PHH Mortgage Corporation (“PHH”) were included in the financial results of NRT. As discussed below, our mortgage origination joint venture with Guaranteed Rate, which began doing business in August 2017 on a phased-in basis, is included within our
Realogy Title and Settlement Services segment.
Relocation Services. We are a leading global provider of outsourced employee relocation services. We are one of the largest providers of such services in the U.S. and also operate in key international relocation destinations. We offer a broad range of world-class employee relocation services designed to manage all aspects of an employee's move to facilitate a smooth transition in what otherwise may be a complex and difficult process for the employee and employer. Our relocation services business serves corporations, including 54% of the Fortune 50 companies. We also service affinity organizations such as insurance companies and credit unions that provide our services to their members. In 2017, we assisted in approximately 162,000 corporate and affinity relocations in nearly 150 countries for approximately 800 active clients. As of December 31, 2017, our top 25 relocation clients had an average tenure of approximately 20 years with us. Member brokers
of the Cartus Broker Network, including certain franchisees and NRT, receive referrals from the relocation services, affinity services and from each other in exchange for a referral fee.
Title and Settlement Services. Group.We assist with the closing of real estate transactions by providing full-service title and settlement (i.e., closing and escrow) services to customers, real estate companies, including our company ownedaffinity groups, corporations and financial institutions with many of these services provided in connection with the Company's real estate brokerage and relocation services businesses, as well as a targeted channel of large financial institution clients.brokerage. In 2017, TRG2019, Realogy Title Group was involved in the closing of approximately 188,000173,000 transactions of which approximately 57,00049,000 related to NRT.Realogy Brokerage Group. In addition to our own title and settlement services, we also coordinate a nationwide network of attorneys, title agents and notaries to service financial institution and relocation clients on a national basis. We also serve as an underwriter of title insurance policies in connection with residential and commercial real estate transactions. This segment also includes the Company's share of equity earnings and losses including start-up costs, for our 49.9% ownership of Guaranteed Rate Affinity our mortgage origination joint venture with Guaranteed Rate, which began doing business in August 2017 on a phased-in basis. See "Item 7.—Management's Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments" and the financial statements, including the notes thereto, included elsewhere in this Annual Report, for further information on our mortgage origination joint venture.
Realogy Leads Group. Realogy Leads Group consists of affinity programs (both company- and client-directed) as well as broker-to-broker referrals. Through our highly concentrated affinity business, we have traditionally provided (and continue to provide) assistance with residential real estate transactions to members of affinity clients such as insurance companies and credit unions that provide our services to their members. Our launch of Realogy Military Rewards in September 2019 marked our entry into offering a home buying and selling assistance program to an affinity group through a Realogy-branded program. Realogy Military Rewards seeks to provide access to benefits similar to those offered under the Company's former USAA affinity program, which had been our largest affinity client and ceased new enrollments in the third quarter of 2019 (See Part II, Item 7. Management's Discussion and Analysis—Recent Developments for additional information). In addition, in 2019, we announced other affinity programs including our announcement in October 2019 of an agreement to create the first-ever real estate benefits program designed for the nearly 38 million AARP members, which is expected to launch nationally in early 2020.
Referrals from our affinity and broker-to-broker programs are handled by the Realogy Broker Network. Member brokers of the Realogy Broker Network, including certain franchisees and company owned brokerages, have traditionally received referrals from Realogy Leads Group in exchange for a referral fee. The Realogy Broker Network has historically been a key contributor to our lead generation strategy, with approximately 99% of the converted leads generated through the network being directed to independent sales agents affiliated with our franchisees and company owned brokerages in 2019.
Discontinued Operations—Cartus Relocation Services. Cartus Relocation Services is reported as held for sale in this Annual Report. As a provider of global relocation services that operates in key international relocation destinations, Cartus Relocation Services offers a broad range of world-class employee relocation services designed to manage all aspects of an employee's move to facilitate a smooth transition in what otherwise may be a complex and difficult process for the employee and employer. In 2019, Cartus Relocation Services served corporations, including 48% of the Fortune 50 companies. As of December 31, 2019, the top 25 relocation clients had an average tenure of approximately 20 years with Cartus Relocation Services.
Member brokers of the Realogy Broker Network have historically received referrals from Cartus Relocation Services generated by our relocation clients in exchange for a referral fee (that is reported in the financial results for Cartus Relocation Services). Realogy will enter into a non-exclusive five-year broker services agreement with SIRVA in connection with the planned sale of Cartus Relocation Services, pursuant to which Realogy Leads Group could, at the discretion of SIRVA, continue to provide high-quality brokerages services via the Realogy Broker Network to relocation clients of SIRVA. Realogy Leads Group will not receive a referral fee in connection with providing such services to SIRVA relocation clients.
Housing Market and Market Share
U.S. Gross Commission Income.Residential real estate brokerage companies typically realize revenues in the form of a sales commission earned from closed homesale sides (either the "buy" side and/or the "sell" side of a real estate transaction), which we refer to as gross commission income. We believe that the level of gross commission income generated in the U.S., which is generally estimated around $70 billion, represents a substantial addressable market. We estimate that more than $70 billion in gross commission income was generated by U.S. residential existing homesale transactions involving a broker in 2017. Our company owned brokerages and franchisees earned approximately $12 billion in gross commission income in 2019, as compared to $13 billion in gross commission income in the same period.2018.
Market Share. As measured in a comparison to the volume of all existing homesale transactions in the U.S. as reported by NAR (regardless of whether an agent or broker was involved in the transaction), we estimate that our market share in 2017 increased modestly2019 decreased year-over-year to approximately 15.9%15.3% compared to 15.7%16.1% in 2016.2018. Our estimated share of all U.S. existing homesale unit transactions in 2017 remained at2019 decreased from approximately 13.5% to approximately 13.0%.
Basis of Calculation
U.S. Gross Commission Income Calculation. We estimate U.S. gross commission income by multiplying NAR’s published existing homesale transaction units, reduced to approximately 88% (to reflect 87% of the total homes that were bought using an agent or broker and 89% of the total homes that were sold using an agent or broker in 2017 according to NAR), by (a) NAR's published average sales price and (b) the average annual broker commission rate published by Real Trends, a provider of residential brokerage industry analysis, of 5.1%.
Market Share Calculation. We measure our market share transaction volume by the ratio of (a) homesale transaction volume (sides times average price) in which we and our franchisees participate to (b) NAR's existing homesale transaction volume (regardless of whether an agent or broker was involved in the transaction)—calculated by doubling the number of existing homesale transactions reported by NAR to account for both the buy and sell sides of a transaction multiplied by NAR's average sales price. Homesale unit transaction market share is calculated similarly but without including average sales price in either the numerator or denominator.
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Our headquarters is located at 175 Park Avenue, Madison, New Jersey 07940. Our general telephone number is (973) 407-2000. We were incorporated on December 14, 2006 in the State of Delaware. The Company files electronically with the Securities and Exchange Commission (the "SEC") required reports on Form 8-K, Form 10-Q and Form 10-K; proxy materials; ownership reports for insiders as required by Section 16 of the Securities Exchange Act of 1934; registration statements and other forms or reports as required. Certain of the Company's officers and directors also file statements of changes in beneficial ownership on Form 4 with the SEC. The public may read and copy any materials that the Company has filed with the SEC at the SEC's Public Reference Room located at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 800-SEC-0330. Such materials may also be accessed electronically on the SEC's Internet site (www.sec.gov). We maintain an Internet website at http://www.realogy.com and make available free of charge on or through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, Section 16 reports and any amendments to these reports in the Investor Relations section of our website as soon as reasonably practicable after such material is
electronically filed with or furnished to the SEC. Our website address is provided as an inactive textual reference. The contents of our website are not incorporated by reference herein or otherwise a part of this Annual Report.
Industry Trends
Industry definition.We primarily operate in the U.S. residential real estate industry, which is approximately a $1.8$1.9 trillion industry based on 20172019 transaction volume (i.e. average homesale price times number of new and existing homesale transactions) and derive substantially all of our revenues from serving the needs of buyers and sellers of existing homes rather than new homes manufactured and sold by homebuilders. Residential real estate brokerage companies typically realize revenues in the form of a commission that is based on a percentage of the price of each home sold. As a result, the real estate industry generally benefits from rising home prices and increasing homesale transactions (and conversely is adversely impacted by falling prices and lower homesale transactions). We believe that existing homesale transactions and the services associated with these transactions,transactions, such as mortgage origination title services and relocationtitle services, represent one of the most attractive segments of the residential real estate industry for the following reasons:
•the existing homesales segment represents a significantly larger addressable market than new homesales. Of the approximately 6.16.0 million homesales in the U.S. in 2017,2019, NAR estimates that approximately 5.55.3 million were existing homesales, representing approximately 90%89% of the overall sales as measured in units;
•existing homesales afford us the opportunity to represent either the buyer or the seller and in some cases both the buyer and the seller; and
•we are able to generate revenues from ancillary services provided to our customers.
Our business model relies heavily on affiliated independent sales agents, who play a critical consumer-facing role in the home buying and selling experience for both our company owned and franchise brokerages. While substantially all homebuyers start their search for a home using the Internet, according to NAR, 87%89% of home buyers and 89% of home sellers used an agent or broker in 2017.2019. We believe that agents or brokers will continue to be directly involved in most home purchases and sales, primarily because real estate transactions have certain characteristics that benefit from the service and value offered by an agent or broker, including the following:
•the average homesale transaction size is very high and generally is the largest transaction one does in a lifetime;
•homesale transactions occur infrequently;
•there is a compelling need for personal service as home preferences are unique to each buyer;
•a high level of support is required given the complexity associated with the process, including specific marketing and technology services;services;
•the consumer preference to visit properties for sale in person, notwithstanding the availability of on-line images and
property tours; and•there is a high variance in price,price, depending on neighborhood, floor plan, architecture, fixtures, and outdoor space.
Cyclical nature of industry.The U.S. residential real estate industry is cyclical but has historically shown strong growth over time. Based on information published by NAR, existing homesale units increased at a compound annual growth rate, or CAGR, of 2.0% from 1972 through 2017,1.6% over the past 30 years, with 2919 annual increases, versus 1610 annual decreases.decreases and 2019 being flat.
During that same period, median existing homesale prices increased at a CAGR of 5.1%3.6% (not adjusted for inflation) from 1972 through 2017,over the past 30 years, a period that included fourthree economic recessions.
According to NAR, the existing homesale transaction volume (median homesale price times existing homesale transactions) grew at a CAGR of 7.2% from 1972 through 2017.5.3% over the past 30 years.
The U.S. residential real estate industry was in a significant and lengthy downturn from the second half of 2005 through 2011. Based upon data published by NAR from 2005 to 2011, the number of annual U.S. existing homesale transactions declined by 40% and the median existing homesale price declined by 24%. Beginning in 2012, the U.S. residential real estate industry began itsa recovery. Based upon data published by NAR from 2011 to 2017,2019, the number of annual U.S. existing homesale units and the median existing homesale price improved by 29%25% and 49%64%, respectively.
Long-term demographics. We believe that long-term demand for housing and the growth of our industry is primarily driven by the affordability of housing, the economic health of the U.S. economy, demographic trends such as population growth,generational transitions, increases in the number of U.S. households, low interest rates,household formation, mortgage rate levels and mortgage availability, certain tax benefits, job growth, increases in renters that qualify as homebuyers, the inherent attributes of homeownership versus renting and locally based factors.the availability of inventory in the consumer's desired location and within the consumer's price range. We believe that the residential real estate market will benefit over the long termlong-term from expected positive fundamentals, including the following factors:
based on U.S. Census data and NAR, the number of existing homesale transactionsexpected growth in 2017 was similar to the average number of homesale transactions in 2001 and 2002 while the number of U.S. households grew from 108 million in 2001 to 126 million in 2017; and
according to the 2017 State of the Nation's Housing Report compiled by the Harvard Joint Center for Housing Studies, household growth is expected to average about 1.36 million annually from 2015–2025 and about 1.15 million annually from 2025–2035. The millennial generation is poised to form millions of new households over the next decade.decade, in particular among the millennial generation.
Participation in Multiple Aspects of the Residential Real Estate Market
We participate in services associated with many aspects of the residential real estate market. Our four complementary businesses and mortgage joint venture work together, allowing us to generate revenue at various points in a residential real estate transaction, including the purchase or sale of homes, corporate relocation and affinity services, settlement and title services, and franchising of our brands. The businesses each benefit from our deep understanding of the industry, strong relationships with real estate brokers, sales agents and other real estate professionals and expertise across the transactional process. Unlike other industry participants who offer only one or two services, we can offer homeowners, our franchisees and our corporate and affinity clients ready access to numerous associated services that facilitate and simplify the home purchase and sale process. These services provide further revenue opportunities for our owned businesses and those of our franchisees. Specifically, our brokerage offices and those of our franchisees participate in purchases and sales of homes involving relocations of corporate transferees and affinity members using Cartus® relocation servicesthrough Realogy Leads Group and we offer customers (purchasers and sellers) of both our owned and franchised brokerage businesses convenient title and settlement services. These services produce incremental revenues for our businesses and franchisees. In addition, we participate in the mortgage process through our 49.9% ownership of Guaranteed Rate Affinity, which began doing business in August 2017 on a phased-in basis. PHH Home Loans, our former mortgage origination joint venture, is the in the final stages of winding down.Affinity. All four of our businesses and our mortgage joint venture can derive revenue from the same real estate transaction.
Our Brands
Our brands are among the most well-known and established real estate brokerage brands in the real estate industry. Our real estate franchise brands are listed in the following chart, which includes information as of December 31, 20172019 for both our franchised and company owned offices:
| | Franchise Brands (1) | | | | | | | | | | |
Worldwide Offices (2) | 8,000 | | 3,200 | | 2,300 | | 950 | | 350 | |
Worldwide Brokers and Sales Agents (2) | 118,600 | | 94,300 | | 39,900 | | 21,900 | | 11,500 | |
Franchise Brands (1) (2) | | Franchise Brands (1) (2) | | | | | | | | | | | | | | |
Worldwide Offices (3) | | Worldwide Offices (3) | 11,600 | | | | 3,100 | | | | 2,300 | | | | 1,000 | | | | 390 | | |
Worldwide Brokers and Sales Agents (3) | | Worldwide Brokers and Sales Agents (3) | 131,800 | | | | 96,300 | | | | 35,400 | | | | 23,300 | | | | 13,000 | | |
| U.S. Annual Sides | 417,337 | | 731,486 | | 133,225 | | 122,475 | | 72,424 | U.S. Annual Sides | 370,289 | | | | 684,981 | | | | 117,126 | | | | 126,211 | | | | 79,351 | | |
| # of Countries with Owned or Franchised Operations | 80 | | 47 | | 32 | | 69 | | 3 | # of Countries with Owned or Franchised Operations | 84 | | | | 43 | | | | 37 | | | | 70 | | | | 5 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Characteristics | A leader in brand awareness and the most recognized name in real estate
Significant international office footprint | | Longest running national real estate brand in the U.S. (since 1906)
Known as an innovator in real estate and a leader in smart home technology | | Driving performance through innovation, collaboration and shared accountability
Highest percentage of international offices among our international brands | | Synonymous with luxury
Strong ties to auction house established in 1744
Rapid international growth | | Unique access to consumers, marketing channels and content through its brand licensing relationship with a leading media company | Characteristics | A leader in brand awareness and the most recognized name in real estate
Significant international office footprint | | | The only real estate brand that has been guiding people home for 114 years | | | Driving performance through innovation, collaboration and shared accountability
Unique branding and products providing the flexibility of choice for our customer, community, agent, and brokerage | | | Synonymous with luxury
Strong ties to auction house established in 1744
Powerful global presence | | | Unique access to consumers, marketing channels and content through its brand licensing relationship with a leading media company | |
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(1) | Does not include Corcoran®,ZipRealty®, Citi HabitatsSM and Climb Real Estate®. Information presented for Coldwell Banker® includes Coldwell Banker Commercial®.
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(2) | Includes an aggregate of approximately 8,800 offices and approximately 97,000 related brokers and independent sales agents of non-U.S. franchisees and franchisors, based upon information they reported to us. |
(1)As of December 31, 2019, does not include Corcoran®, a proprietary brand that we own and franchise and others that we do not franchise. We announced the Company's first Corcoran® franchise affiliate on February 5, 2020. Real Estate(2)Information presented for Coldwell Banker® includes Coldwell Banker Commercial®.
(3)Includes information reported to us by independently owned franchisees (including approximately 12,600 offices and approximately 112,500 related brokers and independent sales agents of non-U.S. franchisees and franchisors).
Realogy Franchise ServicesGroup
Our primary objectives as the largest franchisor of residential real estate brokerages in the world are to retain and expand existing franchises, sell new franchises, and most importantly, provide branding and support to our franchisees.franchisees and their independent sales agents. At December 31, 2017,2019, our real estate franchise systems and proprietary brands had approximately 14,80018,500 offices (which included approximately 790 company owned brokerage offices) worldwide in 116114 countries and territories in North and South America, Europe, Asia, Africa, the Middle East and Australia, including approximately 6,1005,900 brokerage offices in the U.S. (which included approximately 710 company owned brokerage offices).
We derive substantially all of our real estate franchising revenues from royalties and marketing fees received under long-term franchise agreements with our domestic franchisees (typically ten years in duration) and NRT.Realogy Brokerage Group. These royalties are based on a percentage of the franchisees' sales commission earned from closed homesale sides (either the "buy" side and/or the "sell" side of a real estate transaction), which we refer to as gross commission income. Our franchisees pay us royalties, net of volume incentives achieved (other than NRT)Realogy Brokerage Group), for the right to operate under one of our trademarks and to utilize the benefits of the franchise systems. We provide our franchisees with systems and tools that are designed to help our franchisees serve their customers, attract new orand retain existing independent sales agents, and support our franchisees with servicing programs, technology including the Zap® technology platform described below and education, as well as branding-related marketing which is funded through contributions by our franchisees and us (including NRT)Realogy Brokerage Group). We operate and maintain an Internet-based reporting system for our domestic franchisees which generally allows them to electronically transmit listing information and other relevant reporting data to us. We also own and operate websites for each of our
brands for the benefit of our franchisees and their independent sales agents, some of which were re-launched in 2016 and 2017 using our proprietary Zap-based technology.agents.
RFG'sRealogy Franchise Group's domestic annual net royalty revenues from franchisees other than our company owned brokerages can be represented by multiplying (1) that year's total number of closed homesale sides in which those franchisees participated by (2) the average sale price of those homesales by (3) the average brokerage commission rate charged by these franchisees by (4) RFG'sRealogy Franchise Group's net contractual royalty rate. The net contractual royalty rate represents the average percentage of our franchisees' commission revenues paid to us as a royalty, net of volume incentives achieved (or for some largercertain franchisees, flat fee royalties) and net of non-standardother incentives granted to franchisees. Non-standard incentives may be used as consideration for attracting new or growing or extending existing franchisee agreements, though most of our franchisees do not receive non-standard incentives, in contrast to volume incentives. The domestic royalty revenue from NRTRealogy Brokerage Group is calculated by multiplying homesale sides by average sale price by average brokerage commission rate by 6%their contractual royalty rate. NRTRealogy Brokerage Group does not receive volume incentives or non-standardother incentives. In addition to domestic royalty revenue, RFGRealogy Franchise Group earns revenue from marketing fees, listing fees, the preferred alliance program, international affiliates and upfront international fees. The following chart illustrates the key drivers for revenue earned by RFG:
We believe one of our strengths is the strong relationships that we have with our franchisees as evidenced by the retention rate of 98% as of December 31, 2017. Our retention rate represents the annual franchisee gross commission income for the year ended December 31, 2016generated by our franchisees that remain in our franchise systems as of December 31, 2017, measured against the annual gross commission income of all franchisees for the year ended December 31, 2016. 
On average, our domestic franchisees' tenure with our brands was approximately 21.522 years as of December 31, 2017.2019. During 2017,2019, none of our franchisees (other than NRT)Realogy Brokerage Group) generated more than 1% of the total revenue of our real estate franchise business revenues.business.
The franchise agreements impose restrictionsset forth guidelines on the business and operations of the franchisees and require them to comply with the operating andmandatory identity standards set forth in each brand's policy and procedures manuals. A franchisee's failure to comply with these restrictions and standards could result in a termination of the franchise agreement. The franchisees generally are not permitted to terminate the franchise agreements prior to their expiration, and in those cases where termination rights do exist, they are very limited (e.g., if the franchisee retires, becomes disabled or dies). Generally, new domestic franchise agreements have a term of ten years, andalthough we may negotiate shorter extension agreements with existing franchisees.
These franchisee agreements generally require the franchisees to pay us an initial franchise fee for the franchisee's principal office plus, upon the receipt of any commission income, a royalty fee in most cases initially equal to 6% of their
commission income. Each of our franchise systems (other than Coldwell Banker Commercial®) offers aincome, subject to reduction based upon volume incentives. Under the volume incentive program, whereby each franchisee is eligible to receive a refund of a portion of the royalties paid upon the satisfaction of certain conditions.conditions (or in the case of Corcoran®, a reduced royalty based upon volume). The volume incentive is calculated for each eligible franchisee as a progressive percentage of each franchisee's annual gross revenue (paid timely) for each calendar year. Under the current form of the franchise agreements, the volume incentive varies for each franchise system, and will generally result in a net or effective royalty rate of 6% to 3% for each individual franchisee (prior to taking into account other incentives that may be applicable to the franchisee).
Certain franchisees (including some of our largest franchisees) have a flat fee royalty arrangement with us of less than 6% and are not eligible for volume incentives. In addition, the volume incentive program is not offered to Better Homes and Gardens® Real Estate capped model franchisees or Coldwell Banker Commercial® franchisees. Our Better Homes and Gardens® Real Estate franchise business launched a "capped fee model" in 2019 that applies to any new franchisee as well as preexisting franchisees who elect to switch from their current royalty fee structure to the capped fee model. Under this capped fee model, franchisees pay a royalty fee (generally equal to 5% of their commission income) capped at a set amount per independent sales agent per year, subject to our right to annually modify or increase the independent sales associate cap.
We provide a detailed table to each eligible franchisee that describes the gross revenue thresholds required to achieve a volume incentive and the corresponding incentive amounts. We reserve the right to increase or decrease the percentage and/or dollar amounts in the table on an annual basis, subject to certain limitations. Our company owned brokerage offices do
Other incentives may be used as consideration to attract new franchisees, grow franchisees (including through independent sales agent recruitment) or extend existing franchise agreements, although in contrast to volume incentives, the majority of other incentives are not participate in the volume incentive program.
Each franchise system requires all franchisees and company owned offices to make monthly contributions to marketing funds maintained by each brand. These contributions are used primarily for the development, implementation, production, placement and payment of national and regional advertising, marketing, promotions, public relations and/or other marketing-related activities, such as lead generation, all to promote and further the recognition of each brand and its independent franchisees. In addition to the contributions from franchisees and company owned offices, the Real Estate Franchise Services group is generally required to make contributions to one of the marketing funds and may make discretionary contributions (at its option) to any of the marketing funds.
The Company also offers support services to its franchisees, including technology-enabled solutions such as customer relationship management (CRM), lead generation and productivity tools developed by our wholly-owned subsidiary, ZapLabs.
homesale transaction based. Under certain circumstances, we extend conversion notes (development advance notes were issued prior to 2009) to eligible franchisees for the purpose of providing an incentive to join the brand, to renew their franchise agreements, or to facilitate their growth opportunities. Growth opportunities include the expansion of franchisees' existing businesses by opening additional offices, through the consolidation of operations of other franchisees, as well as through the acquisition of independent sales agents and offices operated by independent brokerages. Many franchisees use the proceeds from the conversion notes to change signage andupdate marketing materials, upgrade technology and websites, or to assist in acquiring companies or recruiting agents. The notes are not funded until appropriate credit checks and other due diligence matters are completed, and the business is opened and operating under one of our brands. Upon satisfaction of certain revenue performance basedperformance-based thresholds, the notes are forgiven ratably over the term of the franchise agreement. If the revenue performance thresholds are not met, franchisees may be required to repay all or a portion of the outstanding notes.notes.
Realogy Brokerage Group—our company owned brokerages—pays a contractual royalty rate of approximately 6% and does not participate in volume incentive or other incentive programs.
Each of our current franchise systems require franchisees and company owned offices to make monthly contributions to marketing funds maintained by each brand, which may decrease as certain financial thresholds are achieved in accordance with the applicable franchise agreement. These contributions are used primarily for the development, implementation, production, placement and payment of national and regional advertising, marketing, promotions, public relations and/or other marketing-related activities, such as lead generation, all to promote and further the recognition of each brand and its independent franchisees and their affiliated independent sales agents. In addition to the contributions from franchisees and company owned offices, Realogy Franchise Group may be, in certain instances, required to make contributions to certain marketing funds and may make discretionary contributions (at its option) to any of the marketing funds.
The Company also offers support services to its independent franchisees and their affiliated independent sales agents, including technology-enabled solutions such as customer relationship management (CRM), lead generation and productivity tools.
In addition to offices owned and operated by our franchisees, as of December 31, 2019, we, through NRT,Realogy Brokerage Group, own and operate approximately 750705 offices under the Coldwell Banker®, Coldwell Banker Commercial®and , Sotheby's International Realty® and Corcoran®brand names. NRTRealogy Brokerage Group pays intercompany royalty fees and marketing fees to our Real EstateRealogy Franchise Services SegmentGroup in connection with its operation of these offices. These fees are recognized as income or expense by the applicable segment level and eliminated in the consolidation of our businesses.
In the U.S., we employ a direct franchising model whereby we contract with and provide services directly to independent owner-operators. Elsewhere,We also utilize a direct franchising model outside of the U.S. for all brands other than Sotheby's International Realty® and Corcoran® and, in some cases, Better Homes and Gardens Real Estate®. For all other brands, we generally employ a master franchise model outside of the U.S., whereby we contract with a qualified third party to build a franchise
network in the country or region in which franchising rights have been granted. In the case of Sotheby's International Realty, a direct franchising model is generally utilized. Under both the direct and the master franchise model outside of the U.S., we typically enter into long-term franchise agreements (often 25 years in duration) and receive an initial area development fee and ongoing royalties. Under the master franchise model, the ongoing royalties we receive are generally a percentage of the royalties received by the master franchisor from its franchisees with which it contracts. Under the direct franchise model, a royalty fee is paid to us on transactions conducted by our franchisees in the applicable country or region.
We also offer third-party service providers an opportunity to market their products to our franchisees and their independent sales agents and customers through our preferred alliance program. To participate in this program, service providers generally agree to provide preferred pricing to our franchisees and/or their customers or independent sales agents and to pay us a combination of an initial licensing or access fee, subsequent marketing fees and/or commissions based upon our franchisees' or independent sales agents' usage of the preferred alliance vendors. We also transmit listings to various platforms and services.
We own the trademarks Century 21®, Coldwell Banker®, Coldwell Banker Commercial®, Corcoran®, ERA® and related trademarks and logos, and such trademarks and logos are material to the businesses that are part of our real estate franchise segment. Our franchisees and our subsidiaries actively use these trademarks, and all of the material trademarks are registered (or have applications pending) with the United States Patent and Trademark Office as well as with corresponding trademark offices in major countries worldwide where these businesses have significant franchised operations.
We have an exclusive license to own, operate and franchise the Sotheby's International Realty®brand to qualified residential real estate brokerage offices and individuals operating in eligible markets pursuant to a license agreement with SPTC Delaware LLC, a subsidiary of Sotheby's ("Sotheby's"). Such license agreement has a 100-year term, which consists of an initial 50-year term ending February 16, 2054 and a 50-year renewal option. We pay a licensing fee to Sotheby's for the use of the Sotheby's International Realty® name equal to 9.5% of the net royalties earned by our Real EstateRealogy Franchise Services SegmentGroup attributable to franchisees affiliated with the Sotheby's International Realty® brand, including our company owned offices.
In October 2007, we entered into a long-term license agreement to own, operate and franchise the Better Homes and Gardens®Real Estate brand from Meredith. The license agreement between Realogy and Meredith is for a 50-year term, with a renewal option for another 50 years at our option. We pay a licensing fee to Meredith for the use of the Better Homes and Gardens®Real Estate brand name equal to 9.0% of the net royalties earned by our Real EstateRealogy Franchise Services Segment Group attributable to franchisees affiliated with the Better Homes &and Gardens® Real Estate brand,, subject to a minimum annual licensing fee.
Each of our franchised brands has a consumer website that offers real estate listings, contacts and services. Century21.com, coldwellbanker.com, coldwellbankercommercial.com, sothebysrealty.com, era.com and bhgrealestate.com are the official websites for the Century 21®, Coldwell Banker®, Coldwell Banker Commercial®, Sotheby's International Realty®, ERA® and Better Homes and Gardens®Real Estate franchise systems, respectively. The contents of these websites are not incorporated by reference herein or otherwise a part of this Annual Report.
Company Owned Real EstateRealogy Brokerage ServicesGroup
Through our subsidiary, NRT,Realogy Brokerage Group we own and operate a full-service real estate brokerage business in more than 50many of the 100 largest metropolitan areas in the U.S. Our company owned real estate brokerage business operates under the Coldwell Banker®and, Sotheby's International Realty®franchised brands as well as proprietary brands that we own, but do not currently franchise, such asand Corcoran®,ZipRealty®and Citi HabitatsSM. franchised brands.
As of December 31, 2017,2019, we had approximately 790710 company owned brokerage offices approximately 5,200 employees and approximately 50,30052,200 independent sales agents working with these company owned offices.
Our company owned real estate brokerage business derives revenue primarily from gross commission income received serving as the broker at the closing of real estate transactions. For the year ended December 31, 2017,2019, our average homesale broker commission rate was 2.44%2.41% which represents the average commission rate earned on either the "buy" side or the "sell" side of a homesale transaction. Gross commission income is also earned on non-sale transactions such as home rentals. NRT,Realogy Brokerage Group, as a franchisee of RFG,Realogy Franchise Group, pays a royalty fee of approximately 6% per transaction to RFGRealogy Franchise Group from the commission earned on a real estate transaction. The remainder of gross commission income is split between the broker (Realogy Brokerage Group) and the independent sales agent in accordance with their applicable independent contractor agreement (which specifies the portion of the broker commission to be paid to the agent), which varies by agent.
The following chart illustrates the key drivers for revenue earned by NRT:Realogy Brokerage Group:
In addition, as a full-service real estate brokerage company, we promote the complementary services of our relocation and title and settlement services businesses. We believe we provide integrated services that enhance the customer experience.
When we assist the seller in a real estate transaction, independent sales agents generally provide the seller with a full-service marketing program, which may include developing a direct marketing plan for the property, assisting the seller in pricing the property and preparing it for sale, listing it on multiple listing services, advertising the property (including on websites), showing the property to prospective buyers, assisting the seller in sale negotiations, and assisting the seller in preparing for closing the transaction. When we assist the buyer in a real estate transaction, independent sales agents generally help the buyer in locating specific properties that meet the buyer's personal and financial specifications, show properties to the buyer, assist the buyer in negotiating (where permissible) and preparing for closing the transaction. In addition, NRTRealogy Brokerage Group has relationships with developers, primarily in major cities, to provide marketing and brokerage services in new developments.
At December 31, 2017,2019, we operated approximately 90%89% of our offices under the Coldwell Banker®brand name, approximately 5% of our offices under the Sotheby's International Realty®brand name and 5%6% of our offices primarily under the Corcoran®,Citi HabitatsSM, ZipRealty® and Climb Real Estate® brand names combined.name. Our offices are geographically diverse with a strong presence in the east and west coast areas, primarily around large metropolitan areas in the U.S., where home prices are generally higher. We operate our Coldwell Banker®offices and Sotheby's International Realty®offices in numerous regions throughout the U.S., our Sotheby's International Realtyand Corcoran®offices in several regions throughout the U.S, and Corcoran® offices in New York City, the Hamptons (New York), and Palm Beach and Miami Beach, Florida.
We intend to grow our business organically and, to a lesser extent, through strategic acquisitions focused primarily on expanding our existing markets.organically. To grow organically, we will focus on working with office managers to attract retain and effectively coordinate withretain independent sales agents who can successfully engage and promote transactions from new and existing clients. To complement our residential brokerage services, NRTRealogy Brokerage Group offers home ownership services that include comprehensive single-family residential property management in many of the nation's largest rental markets.
To a lesser extent, we may grow our business through strategic acquisitions focused primarily on expanding our existing markets. Following the completion of an acquisition, we tend to consolidate the newly acquired operations with our existing operations. By consolidating operations weto reduce or eliminate duplicative costs such as advertising, rent and administrative support. By utilizingto leverage our existing infrastructure to coordinate with a broader network of independent sales
agents and revenue base, we can enhance the profitability of our operations. We also seek to enhance the profitability of newly acquired operations by strategies that increase the productivity of thesupport newly affiliated independent sales agents.
Realogy Brokerage Group is a broker within the Realogy Broker Network.
Realogy Title Group
Our title and settlement services business, Realogy Title Group, provides full-service title and settlement (i.e., closing and escrow) services to real estate companies and financial institutions. We offer theseact in the capacity of a title agent and sell title insurance to property buyers and mortgage lenders. We are licensed as a title agent in 42 states and Washington, D.C., and have physical locations in 21 states and Washington, D.C. We issue title insurance policies on behalf of large national underwriters as well as through our Dallas-based subsidiary, Title Resources Guaranty Company ("Title Resources"). Title Resources is a title insurance underwriter licensed in 37 states and Washington, D.C. We operate mostly in major metropolitan areas. As of December 31, 2019, we had approximately 380 offices, approximately 190 of which are co-located within one of our company owned brokerage offices.
Virtually all lenders require their borrowers to obtain title insurance policies at the time mortgage loans are made on real property. The terms and conditions upon which the real property will be insured are determined in accordance with the standard policies and procedures of the title underwriter. When our title agencies sell title insurance, the title search and examination function is performed by the agent. The title agent and underwriter split the premium. The amount of such premium "split" is determined by agreement between the agency and underwriter, or is promulgated by state law. We derive revenue through fees charged in real estate transactions for rendering the services described above, fees charged for escrow
and closing services, and a percentage of the title premium on each title insurance policy sold. We have entered into underwriting agreements with various underwriters, which state the conditions under which we may issue a title insurance policy on their behalf. For policies issued through our agency operations, assuming no negligence on our part, we are not typically liable for losses under those policies; rather the title insurer is typically liable for such losses.
Our company owned brokerage operations are the principal source of our title and settlement services business for homesale transactions. Other sources of our title and settlement services homesale business include our real estate franchise business and unaffiliated brokerage operations. For refinance transactions, we generate title and escrow revenues from financial institutions throughout the mortgage lending industry. Many of our offices have subleased space from and are co-located within our company owned brokerage offices. The capture rate of our title and settlement services business from company owned brokerage operations was approximately 36% in 2019.
We coordinate a national network of escrow and closing agents (some of whom are our employees, while others are attorneys in private practice and independent title companies) to provide full-service title and settlement services to a broad-based group that includes lenders, home buyers and sellers, developers and independent real estate sales agents. Our role is generally that of an intermediary managing the completion of all the necessary documentation and services required to complete a real estate transaction.
Our title and settlement services business measures operating performance based on purchase and refinance closing units and the related title premiums and escrow fees earned on such closings. In addition, we measure net title premiums earned for title policies issued by our underwriting operation.
The following chart illustrates the key drivers for revenue generated by our title and settlement services business:
We intend to grow our title and settlement services business by attracting title and escrow sales agents in existing markets. We will also continue to seek to increase our capture rate of title business from Realogy Brokerage Group homesale sides. In addition, we expect to continue to grow our underwriting business by increasing our agent base.
The equity earnings or losses related to Guaranteed Rate Affinity, our mortgage origination joint venture with Guaranteed Rate, are included in the financial results of Realogy Title Group. We own 49.9% of the home mortgage joint venture and Guaranteed Rate owns the remaining 50.1%.
Realogy Leads Group
Realogy Leads Group consists of affinity programs (both company- and client-directed) as well as broker-to-broker referrals. Referrals generated by Realogy Leads Group are handled by the Realogy Broker Network, a network of real estate brokers consisting of our company owned brokerage operations, select franchisees and independent real estate brokers who have been approved to become members.
Realogy requires that participating brokers and independent sales agents supplemental toolsbe experienced and obtains background checks on all members of the network. Member brokers of the Realogy Broker Network receive referrals in exchange for a referral fee paid to Realogy Leads Group for affinity and broker to broker transactions.
Member brokers of the Realogy Broker Network have also historically received referrals from Cartus Relocation Services generated by our relocation clients in exchange for a referral fee (that is reported in the financial results for Cartus Relocation Services). In connection with the planned sale of Cartus Relocation Services to SIRVA, we will enter into a non-exclusive five-year broker services agreement with SIRVA, pursuant to which Realogy Leads Group could, at the discretion of SIRVA, continue to provide high-quality brokerage services via the Realogy Broker Network to relocation clients of SIRVA. Realogy Leads Group, however, will not receive a referral fee in connection with providing such services.
The Realogy Broker Network has historically been a key contributor to our lead generation strategy, with 99% of the converted leads generated through the network (from Realogy Leads Group and Cartus Relocation Services) being directed to independent sales agents affiliated with our franchisees and company owned brokerages in 2019. As a result of referrals from Realogy Leads Group and Cartus Relocation Services, the Realogy Broker Network closed approximately 78,700 real estate transactions in 2019, with approximately 68,400 transactions attributable to affinity programs and broker-to-broker activity, and approximately 10,300 transactions attributable to relocation clients.
Affinity Services and Broker-to-Broker Overview
Under our affinity services program, Realogy Leads Group provides real estate services, including home buying and selling assistance to members of organizations such as insurance companies and credit unions that have established members who are buying or selling a home. Through a client-directed affinity program, the applicable affinity organization generally offers our affinity services to their members. Through a company-directed affinity program (such as Realogy Military Rewards or AARP), Realogy drives the marketing informationfor the program. Where permitted by law, affinity members can receive a financial incentive for using these services (such as cash or a gift card, or commission credit based on the home purchase/sale price pursuant to the applicable program), with the financial incentive provided by the affinity client for affinity-directed programs or by the Company for company-directed affinity programs.
In 2019, we launched our first Realogy-branded affinity program with Realogy Military Rewards, a program for U.S. military personnel, veterans and their families that seeks to provide access to benefits from Realogy that are often unavailable at smaller firms,similar to those offered under the former USAA affinity program. In addition, in 2019, we announced other affinity programs in collaboration with partners including our announcement in October 2019 of an agreement to create the first-ever real estate benefits program designed for the nearly 38 million AARP members, which is expected to launch nationally in early 2020. We expect that significant time and effort and meaningful investment will be required to increase awareness of and affinity member participation in these new affinity programs.
Broker-to-broker business includes referrals generated by brokers affiliated with the Realogy Broker Network, inclusive of approximately 2,800 intra-company referrals within Realogy Brokerage Group in 2019. Realogy Leads Group does not receive a referral fee for such as accessintra-company referrals.
Following the closing of the planned sale of Cartus Relocation Services, we expect to sophisticated information technologyconsolidate Realogy Leads Group, including the Realogy Broker Network, into Realogy Franchise Group.
Affinity Services Concentration and ongoing technical support, increased brand advertising and brand marketing support, relocation referrals, and a wide offeringDiscontinuation of brokerage-related services.USAA Affinity Program
Our real estate brokerage business has a contract with Cartus under whichaffinity revenues are highly concentrated and our affinity relationships are non-exclusive and terminable at any time at the brokerage business provides brokerage services to relocating employeesoption of the clientsclient. In the third quarter of Cartus. When receiving2019, USAA, which had been our largest affinity client, ceased new enrollments in its long-term affinity program with us. In 2019, referrals generated by the USAA affinity program represented a referral from Cartus, our brokerage business seeks to assist the relocating employee in completing a homesale or home purchase. Upon completion of a homesale or home purchase, our brokerage business receives a commission on the purchase or salesignificant portion of the property78,700 total homesale transactions closed from the Realogy Broker Network. See Part II, Item 7. Management's Discussion and is obligated to pay Analysis—Recent Developments for additional information.
Discontinued Operations—Cartus a portion of such commission as a referral fee. We believe that these fees are comparable to the fees charged by other relocation companies.
Relocation Services
Through our subsidiary, Cartus we are a leading globalRelocation Services is reported as held for sale in this Annual Report. As provider of outsourcedglobal relocation services, that operates in key international relocation destinations, Cartus Relocation Services offers a broad range of world-class employee relocation services. Weservices designed to manage all aspects of an employee's move to facilitate a smooth transition in what otherwise may be a complex and difficult process for employee and employer. In 2019, Cartus Relocation Services served corporations, including 48% of the Fortune 50 companies. As of December 31, 2019, the top 25 relocation clients had an average tenure of approximately 20 years with Cartus.
Cartus Relocation Services provides services in 150 countries and has operations in the U.S., the United Kingdom, Canada, Hong Kong, Singapore, China, India, Brazil, Germany, France, Switzerland and the Netherlands.
Cartus Relocation Services primarily offeroffers corporate clients employee relocation services, such as:
•homesale assistance, including:
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◦ | the valuation, inspection, purchasing and selling of a transferee's home; |
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◦ | the issuance of home equity advances to transferees permitting them to purchase a new home before selling their current home (these advances are generally guaranteed by the individual's employer); |
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◦ | certain home management services; |
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◦ | assistance in locating a new home; and |
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◦ | closing on the sale of the old home, generally at the instruction of the client; |
◦the valuation, inspection, purchasing and selling of a transferee's home;
◦the issuance of home equity advances to transferees permitting them to purchase a new home before selling their current home (these advances are generally guaranteed by the individual's employer);
◦certain home management services;
◦assistance in locating a new home; and
◦closing on the sale of the old home, generally at the instruction of the client;
•expense processing, relocation policy counseling, relocation-related accounting, including international assignment compensation services, and other consulting services;
•arranging household goods moving services, approximately 60,000over 46,000 domestic and international shipments in 2017,2019, and providing support for all aspects of moving a transferee's household goods, including the handling of insurance and claim assistance, invoice auditing and quality control;
•coordinating visa and immigration support, intercultural and language training, and expatriation/repatriation counseling and destination services; and
•group move management services providing coordination for moves involving a large number of transferees to or from a specific regional area over a short period of time.
The wide range of our services allows our Cartus clients to outsource their entire relocation programs to us.
In 2017, we assisted in approximately 162,000 corporate and affinity relocations in nearly 150 countries for approximately 800 active clients, including 54% of the Fortune 50 companies as well as affinity organizations. Cartus has operations in the U.S. and internationally in the United Kingdom, Canada, Hong Kong, Singapore, China, India, Brazil, Germany, France, Switzerland and the Netherlands.Relocation Services.
Substantially all homesale service transactions for clients of Cartus Relocation Services are classified as "no risk." Under "no risk" business, the client is responsible for reimbursement of all direct expenses associated with the homesale. Such expenses include, but are not limited to, appraisal, inspection and real estate brokerage commissions. The client also bears the risk of loss on the resale of the transferee's home. Clients are responsible for reimbursement of all other direct costs associated with the relocation including, but not limited to, costs to move household goods, mortgage origination points, temporary living and travel expenses. Generally, we fund the direct expenses associated with the homesale as well as those associated with the relocation on behalf of the client and the client then reimburses us for these costs plus interest charges on the advanced funds. This limits our exposure on "no risk" homesale services to the credit risk of our clients rather than to the potential fluctuations in the real estate market or to the creditworthiness of the individual transferring employee. Historically, due to the credit quality of our clients, we have had minimal losses with respect to these "no risk" homesale services.
The "at risk" business that we conduct is minimal. In "at risk" homesale service transactions, we acquire the home being sold by relocating employees,the transferring employee, incur the cost for all direct expenses (acquisition, carrying and selling costs) associated with the homesale and bear any loss on the sale of the home.
Substantially all of our contracts with our relocation clients of Cartus Relocation Services are terminable at any time at the option of the client and are non-exclusive and do not require such client to maintain any level of business with us.non-exclusive. If a client ceases or reduces volume under its contract,, we will be compensated for all services performed up to the time that volume ceases and reimbursed for all expenses incurred.
There are a number of different revenue streams associated with relocation services. We earn referral commissions primarily from real estate brokers and household goods moving companies that provide services to the transferee. Clients may also pay transactional fees for the services performed. We also earn net interest income which represents interest earned from clients on the funds we advance on behalf of the transferring employee net of costs associated with the securitization obligations used to finance these payments. Cartus measures operating performance based on initiations, which represent the total number of transferees
Products, Technology and affinity members we serve, and referrals, which represent the number of referrals from which we earn revenue from real estate brokers.Marketing
About 17% of our relocation revenue in 2017 was derived from our affinity services, which provides real estate services, including home buying and selling assistance, as well as mortgage assistanceOur ability to organizations such as insurance companies and credit unions that have established members who are buying or selling a home. Often these organizations offer our affinity services to their members at no cost and, where permitted, provide their members with a financial incentive for using these services. These member benefits and services help the organizations attract new members and retain current members.
To service the needs of our relocation and affinity clients as well as broker-to-broker referrals, we manage the Cartus Broker Network, which is a network of real estate brokers consisting of our company owned brokerage operations, select franchisees and independent real estate brokers who have been approved to become members. Cartus requires experienced brokers and independent sales agents at company owned and obtains background checks on all members of the network. Member brokers of the Cartus Broker Network receive referrals from our relocationfranchised brokerages with compelling data and technology products and services affinity businessto make them more productive and each other in exchange for a referral fee. The Cartus Broker Networktheir businesses more profitable is a key contributorcore to our lead generation strategy, with approximately 97% of the converted leads generated through the network being directed to independent sales agents affiliated with our franchisees and company-owned brokerages in 2017. The Cartus Broker Network closed approximately 78,500 real estate transactions in 2017 related to relocation, affinity, and broker-to-broker activity.
The following chart illustrates the key drivers for revenue generated by Cartus:
Title and Settlement Services
Our title and settlement servicesintegrated business TRG, provides full-service title and settlement (i.e., closing and escrow) services to real estate companies and financial institutions. We act in the capacity of a title agent and sell title insurance to property buyers and mortgage lenders. We are licensed as a title agent in 42 states and Washington, D.C., and have physical locations in 25 states and Washington, D.C. We issue title insurance policies on behalf of large national underwriters as well as through our Dallas-based subsidiary, Title Resources Guaranty Company ("Title Resources"). Title Resources is a title insurance underwriter licensed in 31 states and Washington, D.C. We operate mostly in major metropolitan areas. As of December 31, 2017, we had approximately 443 offices, approximately 218 of which are co-located within one of our company owned brokerage offices.
Virtually all lenders require their borrowers to obtain title insurance policies at the time mortgage loans are made on real property. The terms and conditions upon which the real property will be insured are determined in accordance with the standard policies and procedures of the title underwriter. When our title agencies sell title insurance, the title search and examination function is performed by the agent. The title agent and underwriter split the premium. The amount of such premium "split" is determined by agreement between the agency and underwriter, or is promulgated by state law. We derive
revenue through fees charged in real estate transactions for rendering the services described above, fees charged for escrow and closing services, and a percentage of the title premium on each title insurance policy sold. We have entered into underwriting agreements with various underwriters, which state the conditions under which we may issue a title insurance policy on their behalf. For policies issued through our agency operations, assuming no negligence on our part, we are not typically liable for losses under those policies; rather the title insurer is typically liable for such losses.
Our company owned brokerage operations are the principal source of our title and settlement services business for homesale transactions. Other sources of our title and settlement services homesale business include our real estate franchise business, Cartus and unaffiliated brokerage operations. In addition, in July 2017, TRG completed the formation of a national commercial title services division. For refinance transactions, we generate title and escrow revenues from our mortgage origination joint venture and other financial institutions throughout the mortgage lending industry. Many of our offices have subleased space from, and are co-located within, our company owned brokerage offices. The capture rate of our title and settlement services business from company owned brokerage operations was approximately 39% in 2017.
We coordinate a national network of escrow and closing agents (some of whom are our employees, while others are attorneys in private practice and independent title companies) to provide full-service title and settlement services to a broad-based group that includes lenders, home buyers and sellers, developers and independent real estate sales agents. Our role is generally that of an intermediary managing the completion of all the necessary documentation and services required to complete a real estate transaction.
Our title and settlement services business measures operating performance based on purchase and refinance closing units and the related title premiums and escrow fees earned on such closings. In addition, we measure net title premiums earned for title policies issued by our underwriting operation.
The following chart illustrates the key drivers for revenue generated by our title and settlement services business:
We intend to grow our title and settlement services business by attracting title and escrow sales agents in existing markets and, to a lesser extent, by completing acquisitions to expand our geographic footprint or complement existing operations. We will also continue to seek to increase our capture rate of title business from our NRT homesale sides. In addition, we expect to continue to grow and diversify our lender channel and our underwriting businesses by expanding and adding clients and increasing our agent base, respectively.
The equity earnings or losses related to Guaranteed Rate Affinity, our mortgage origination joint venture that began doing business on a phased-in basis in August 2017, are included in the financial results of TRG. The equity earnings or losses related to our former mortgage origination joint venture, PHH Home Loans, were included in the financial results of NRT.
Marketing and Technologystrategy.
The marketing and technology services and support provided by independent sales agents to their customers are an important element of the value offered by an agent in the home purchase and sale process. Our commitment to continuously develop and improve our marketing and technology products and service is part of our value proposition to our company owned and franchised real estate brokerages, affiliated independent sales agents and their customers as well as to our relocation and title and settlement services segments.other businesses. Increasingly, these products and services are desired on as an integrated tool,set of tools, rather than stand-alone products and services.
Products and Technology
Since 2019, we have developed our product and marketing strategies against the backbone of an open-architecture technology strategy. Our open ecosystem is designed to support the continuous creation and delivery of both our proprietary
tools and third-party products to our agents in order to deliver a more comprehensive platform experience. Through this strategy, we are able to selectively enable qualified third-party vendors and products to access and interface with our products and services so that affiliated independent sales agents will be able to build their own customizable technology platform to drive their performance and productivity.
We have expended, and expect to continue to expend, substantial time, capital, and other resources to identify the needs of our company owned brokerages, franchisees, independent sales agents and their customers and to develop marketing, technology and service offerings to meet the needs of our affiliated independent sales agents.
Real Estate Franchise Operations. Each of our franchise brands operatesIn 2019, we delivered multiple new technology-driven products designed to improve independent sales agent productivity and enhance the customer experience for home buyers and sellers. For example:
•Social Ad Engine helps affiliated agents create an effective Facebook and Instagram ad in under three minutes via a marketing product launched in partnership with Facebook.
•Listing Concierge allows agents affiliated with Coldwell Banker company owned brokerages to create custom marketing with the support of specialists, resulting in high quality materials.
•Design Concierge provides innovative marketing strategies, custom design support, complete and custom rebranding and other marketing tools needed to promote an agent's personal brand to agents affiliated with Coldwell Banker company owned brokerages.
•RealVitalize enables consumer home sellers to make their property ready for sale by providing resources to fund thatstaging and home improvements with no up-front cost via a consumer program from Coldwell Banker’s company owned operations and HomeAdvisor. RealVitalize is funded principallycurrently available in 27 U.S. states.
•RealSure strives to improve the consumer's home selling and buying experience through two core products, RealSure Sell and RealSure Mortgage. Under the RealSure Sell product, home sellers with qualifying properties receive a cash offer valid for 45 days immediately upon listing, and during this time frame have the opportunity to pursue a better price by our franchisees,marketing their property with some contributions from us. The focus of each marketing fund is to build and maintain brand awareness and preference for the brand and drive leads to our franchisees and theiran affiliated independent sales agents,agent. Sellers who are enrolled in RealSure Sell can utilize RealSure Mortgage to make an offer on their next home without sale or financing contingencies before their current home is sold by leveraging their RealSure Sell cash offer. The programs, created in partnership with Home Partners of America, are currently available in 10 U.S. markets.
which is accomplished through a variety of media, including but not limited to social media, advertising, direct marketing and internet advertising.
The Zap platform is the foundation of our online marketing technology strategy. Zap is designed to leverage the collective strength of each brand online, and is updated frequently in order to keep up with changing needs of brokers, agents and consumers to continually strengthen our value proposition. Zap currently powers the Better Homes and Gardens Real Estate, Century 21, Coldwell Banker and ERA brand websites. Each of these brands also leverage Zap’s mobile applications for iPhone, iPad and Android. These mobile applications empower independent sales agents to access contact information and behavioral data as well as respond to requests in Zap while outside of the office. Each independent sales agent also has a personally-branded mobile application that they can customize with their own content and use to market themselves. We believe the Zap technologyOur Realogy-provided platform is designed to increase the value proposition to our independent sales agents, franchisees (and their independent sales agentsagents) and their customersthe consumer by:
•aiding in lead generation and obtaining additional homesale transactions for our franchiseestransactions;
•connecting affiliated agents and their independent sales agents;
connecting those agentsbrokers to a predictive customer relationship management (CRM) tool;CRM tool that allows for the cultivation of productive relationships with consumers at all stages of the transaction;
•enhancing access to listing distributions through mobile applications and websites; and
•informing them withaffiliated agents of valuable client insight to help those agents increase their productivity.productivity;
Our brand websites contain listing information on a regional and national market basis, independent sales agent information, community profiles, home buying and selling advice, relocation tips and mortgage financing information and unique property and neighborhood insights from local agents. The Zap technology platform is designed to empower affiliated sales agents and brokers to cultivate productive relationships with consumers at all stages of the transaction. The Zap technology platform also is intended to provide•providing consumers with a streamlined yet comprehensive user experience to facilitate the necessary steps for researching homes, communities and independent sales agents.agents;
•providing key back office processes, including listing and transaction management, reporting, marketing, and agent profiles; and
•delivering business planning tools that enable our franchisees to track their progress against key business objectives in real time.
In January 2020, we announced that we plan to launch our next generation customer relationship management (CRM) tool as well as new consumer and agent-facing listing websites, both of which will be developed in partnership with a third-party, as well as other tools including a leads engine and transaction management tool. The new CRM is currently in its first pilot phase.
Marketing
Each brandof our brands manages a comprehensive system of marketing tools, systems and sales information and data that can be accessed through freestanding brand intranet sites to assist independent sales agents in becoming the best marketer of their listings. In addition to the Sotheby's International Realty® brand, a leading luxury brand, our franchisees and our company owned brokerages also participate in luxury marketing programs, such as Century 21 Fine Homes & Estates®, Coldwell Banker Global Luxury, ERA® Distinctive Properties and Distinctive Collection by Better Homes and Gardens® Real Estate.
Advertising is primarily used by the brands to drive consumers to their respective websites and in turn convert leads to the independent salesaffiliated agents, ofincrease brand awareness and perception, promote our franchisees. Significant focus is placed on developing websites for each brand to create valuenetwork and offerings to the real estate consumer. industry and engage our customer base.
Each brand website focuses on streamlined, easy search processes for listing inventory and rich descriptive details, multiple photos, full motion videosof our franchise brands operates a marketing fund that is funded principally by our franchisees (including company owned offices), although we may make discretionary contributions to any of the marketing funds and, in some cases virtual reality tours to market the real estate listing. Additionally, each brand website serves as a national distribution point for independent sales agents to market themselves to consumers to enhance the customer experience. We also place significant emphasis on distributing our real estate listings with third-party websites to expand a homebuyer's access to such listings, at times enhancing the presentation of the listings on third-party websitescertain instances, are required to make the listings more attractivecontributions to consumers. Consumers seeking more detailed information about a particular listing on a third-party website are able to click through to a brand website or a company owned brokerage website or telephone the franchisee or company owned brokerage directly.certain marketing funds.
Company Owned Brokerage Operations. OurLikewise, our company owned brokerages sponsor a wide array of marketing programs, materials and opportunities to complement the sales work of our affiliated independent sales agents and increase brand awareness. The effectiveness and quality of marketing programs play a significant role in attracting and retaining independent sales agents.
NRT's sponsoredOur marketing programs and initiatives primarily focus on attracting potential new home buyers and sellers to NRT's affiliated independent sales agents. These programs and initiatives also complement the awareness of our brands by increasing the local recognition of our agents and local brokerages.by:
Much of our marketing efforts are geared toward •showcasing the inventory of our real estate listings and the affiliated independent sales agents who are the sellinglisting agents of these listings. In addition to prominently placingproperties;
•building and maintaining brand awareness and preference for the listing propertybrand; and related selling agent information on numerous real estate websites, we promote
•increasing the sellinglocal recognition of affiliated agents and their properties onbrokerages.
Marketing programs are executed using a variety of media, including but not limited to social media, sitesadvertising, direct marketing and offer tools and systems intended to enhance the home buying and home selling experiences of our
customers.internet advertising. We also offer the independent sales agents broad-based advertising, mailings and other campaigns to generate leads, interest and recognition.
Websites
The Internet has become the primary advertising channel in our industry and we have sought to become a leader among full-service residential real estate brokerage firms in the use and application of marketing technology. We place our property listings on hundreds of real estate websites and we operate a variety of our own websites.
NRT also utilizes both proprietaryOur brand websites contain listing information on a regional and third-party technology to offernational market basis, independent sales agent information, community profiles, home buying and selling advice, relocation tips and mortgage financing information and unique property and neighborhood insights from local agents. Additionally, each brand website allows independent sales agents tools that may enhance their productivityto market themselves to consumers.
Significant focus is placed on developing websites for each brand to create value to the real estate consumer. Each brand website focuses on streamlined, easy search processes for listing inventory and increase their understandingrich descriptive details, multiple photos, full motion videos and in some cases virtual reality tours to market the real estate listing. We also place significant emphasis on distributing our real estate listings with third-party websites to expand a homebuyer's access to such listings, at times enhancing the presentation of their local markets and the impact of their marketing efforts. Some of these tools includelistings on third-party websites to make the HomeBase Transaction Management and InTouch CRM systems, as well as MarketQuest and e-Marketing reporting tools.listings more attractive to consumers. Consumers seeking more detailed information about a particular listing on a third-party website are generally able to click through to a brand website or a company owned brokerage website or telephone the franchisee or company owned brokerage directly.
Education
Each real estate brand provides learning and development materials and access to continuing education to its franchisees to assist them in building their real estate sales businesses. Each brand's engagement program contains different materials and delivery methods. The marketing materials include a detailed description of the services offered by our franchise systems (which will be available to the independent sales agent). Live instructors at conventions and orientation seminars deliver some engagement modules while other modules can be viewed by brokers anywhere in the world through virtual classrooms over the Internet. Most of the programs and materials are then made available in electronic form to franchisees over the respective system's private intranet site. Many of the materials are customizable to allow franchisees to achieve a personalized look and feel and make modifications to certain content as appropriate for their business and marketplace.
Employees
At December 31, 2017, 2019, we had approximately 11,80010,150 employees, including approximately 840730 employees outside of the U.S. Approximately 2,000 employees, including almost all of our employees outside of the U.S., are employed by Cartus Relocation Services. None of our employees are represented by a union. We believe that our employee relations are good.
Seasonality
The residential housing market is seasonal, with a higher level of homesale transactions typically occurring in the second and third quarter of each year. As a result, historically, operating results and revenues for all of our businesses have been strongest in the second and third quarters of the calendar year.
Competition
Real Estate Brokerage Industry. The residentialability of our real estate brokerage franchisees and our company owned brokerage businesses to successfully compete is important to our prospects for growth. Their ability to compete may be affected by the recruitment, retention and performance of independent sales agents, the economic relationship between the broker and the agent (including the share of commission income retained by the agent and fees charged to or paid by the agent for services provided by the broker), the location of offices and target markets, the services provided to independent sales agents, the number and nature of competing offices in the vicinity, affiliation with a recognized brand name, community reputation, technology and other factors, including macro-economic factors such as national, regional and local economic conditions.
We and affiliated franchisees compete for consumer business as well as for independent sales agents with national and regional independent real estate brokerages and franchisors, discount and limited service brokerages, and with franchisees of our brands. Our largest national competitors in this industry is highly competitiveinclude, but are not limited to, HomeServices of America (a Berkshire Hathaway affiliate), Howard Hanna Holdings, EXP Realty, Compass and Weichert, Realtors and several large franchisors: RE/MAX International, Inc., Keller Williams Realty, Inc. and HSF Affiliates LLC (a joint venture controlled by HomeServices of America that operates Berkshire Hathaway HomeServices and Real Living Real Estate). We and affiliated franchisees also compete with low barriers to entryleading listing aggregators, such as Zillow, Inc. and Realtor.com(R) (a listing aggregator held by News Corporation).
Competition for new participants. RecruitmentIndependent Sales Agents. The successful recruitment and retention of independent sales agents and independent sales agent teams are critical to the business and financial results of a brokerage—whether or not they areit is affiliated with a franchisor. Most of a brokerage's real estate listings are sourced through the sphere of influence of theirits independent sales agents, notwithstanding the growing influence of internet-generated leads. Competition for independent sales agents in our industry is high and has intensified particularly with respect to more productive independent sales agents. Competition foragents and in the densely populated metropolitan areas in which we operate. The successful recruitment and retention of independent sales agents is generally subject to numerousinfluenced by many factors, including remuneration (such as sales commission percentage and other financial incentives paid to independent sales agents), other expenses borne by independent sales agents, leads or business opportunities generated for the independent sales agentagents from the brokerage, independent sales agents' perception of the value of the broker's brand affiliation, technology and data offerings as well as marketing and advertising efforts by the brokerage or franchisor, the quality of the office manager, staff and fellow independent sales agents with whom they collaborate daily, as well as technology, continuing professional education, and other services provided by the brokerage or franchisor. See "Item 7.—Management's Discussion
We believe that a variety of factors in recent years have negatively impacted the recruitment and Analysisretention of Financial Conditionindependent sales agents in the industry generally and Resultshave put upward pressure on the average share of Operations—Key Drivers"commissions earned by affiliated independent sales agents, including increasing competition, such as from brokerages that offer a greater share of commission income to independent sales agents (and/or other compensation such as up-front bonuses and equity), changes in the spending patterns of independent sales agents (as more agents purchase services from third parties outside of their affiliated broker), and growth in independent sales agent teams. The recruitment and retention of independent sales agents has been and may continue to be further complicated by competitive models that do not prioritize traditional business objectives. For example, we believe that certain owned-brokerage competitors have investors that have historically allowed the pursuit of increases in market share over profitability, which exacerbates competition for a discussionindependent sales agents and pressure on the share of commission income received by the agent, creating challenges to our and our franchisee’s margins and profitability. Whether and the extent to which this pattern will continue is not yet certain.
Commission Plan Competition Among Real Estate Brokerages.Some of the various compensation models beingfirms competing for sales agents use different commission plans, which may be appealing to certain sales agents. There are several different commission plan variations that have been historically utilized by real estate brokerages to compensate their independent sales agents. One of the most common variations has been the traditional graduated commission model where the independent sales agent receives a percentage of the brokerage commission that increases as the independent sales agent increases his or her volume of homesale transactions, and the brokerage frequently provides independent sales agents with a broad set of support offerings and promotion of properties. Other common plans include a desk rental or 100% commission plan, a fixed
transaction fee commission plan, and a capped commission plan. A capped commission plan generally blends aspects of the traditional graduated commission model with the 100% commission plan.
Although less common, some real estate brokerages employ their sales agents and, in such instances, employee agents may earn smaller brokerage commissions in exchange for other employee benefits or bonuses. Most brokerages focus primarily on one type of commission plan though some may offer one or more of commission plan variations to their sales agents.
In most of their markets, Realogy Brokerage Group offers affiliated independent sales agents and sales agent teams a choice between a traditional graduated commission model or a two-tiered commission model, both of which emphasize our value proposition.
Low Barriers to Entry and Influx of Traditional and Non-Traditional Competition as well as Industry Disrupters. The real estate brokerage industry has minimal barriers to entry for new participants, including participants utilizing historical real estate brokerage models and those pursuing alternative variations of those models as well as non-traditional methods of marketing real estate. The significant size of the U.S. real estate market, in particular the addressable market of commission revenues, has continued to attract outside capital investment in traditional and disruptive competitors that seek to access a portion of this market.
There are also market participants who differentiate themselves by offering consumers flat fees, rebates or lower commission rates on transactions (often coupled with fewer services). Although such competitors have yet to have a material impact on overall brokerage commission rates, this could change in the future if they use greater discounts as a means to increase their market share or improve their value proposition.
While real estate brokers using historical real estate brokerage models typically compete for business primarily on the basis of services offered, reputation, utilization of technology, personal contacts and brokerage commission, participants pursuing non-traditional methods of marketing real estate may compete in other ways, including companies that employ technologies intended to disrupt historical real estate brokerage models or minimize or eliminate the role brokers and sales agents perform in the homesale transaction process. A growing number of companies are competing in non-traditional ways for a portion of the gross commission income generated by homesale transactions. For example, listing aggregators and other web-based real estate service providers compete for our company owned brokerage business by establishing relationships with independent sales agents and/or buyers and sellers of homes and actions by such listing aggregators have and may continue to put pressure on our and other industry participant's revenues and profitability. Other business models that have emerged in recent years consist of companies (including certain listing aggregators) that leverage capital to purchase homes directly from sellers, commonly referred to as iBuying.
Franchise Competition. According to NAR, approximately 43%42% of individual brokers and independent sales agents are affiliated with a franchisor. Competition among the national real estate brokerage brand franchisors to grow their franchise systems is intense. We believe that competition for the sale of franchises in the real estate brokerage industry is based principally upon the perceived value that the franchisor provides to enhance the franchisee's ability to grow its business and improve the recruitment, retention and productivity of its independent sales agents.agents. The value provided by a franchisor encompasses many different aspects including the quality of the brand, tools, technology, marketing and other services, the availability of
financing provided to the franchisees, and the fees the franchisees must pay. Our largest national competitorsFranchisee fees can be structured in this industrynumerous ways and can include butflat royalty and marketing fees, capped royalty fees, and discounted royalty and marketing fees. We launched a capped fee model at one of our brands in 2019 as substantially all of our franchises are not limited to, three large franchisors: Keller Williams Realty, Inc.; HSF Affiliates LLC (a joint venture controlled by HomeServices of America that operates Berkshire Hathaway HomeServicesstructured using a flat fee model and Real Living Real Estate); and RE/MAX International, Inc.
Our company owned brokerages compete with national independent real estate brokerages, franchisees of national and regional real estate franchisors, including our own brands and the other national franchisors described in the preceding paragraph, regional independent real estate brokerages and discount and limited service brokerages. We and others within the industry also encounterwe have faced increasing competition from companies that employ technologies intended to disrupt the traditional brokerage model or eliminate brokers or agents from, or minimize the role they play in, the homesale transaction, such as through the reduction of brokerage commissions. Other non-traditional models that operate outside of the brokerage industry, such as companies that leverage capital to purchase homes directly from sellers, have also been gaining market attention in recent years. Certain of our competitors are also increasingly well-funded, which strengthens their competitive position and ability to offer aggressive compensation arrangements to top-performing sales agents. Moreover, a growing number of companies are competing in non-traditional ways for a portion of the gross commission income generated by homesale transactions. For example, listing aggregators and other web-based real estate service providers not only compete for our company owned brokerage business by establishing relationships with independent sales agents and/or buyers and sellers of homes, they also increasingly charge brokerages and independent sales agents for advertising on their sites.franchisors utilizing alternative models.
The ability of our real estate brokerage franchisees and our company owned brokerage businesses to successfully compete is important to our prospects for growth. Their ability to compete may be affected by the recruitment, retention and performance of independent sales agents, the location of offices and target markets, the services provided to independent sales agents, the fees charged to independent sales agents, the number and nature of competing offices in the vicinity, affiliation with a recognized brand name, community reputation, technology and other factors. A franchisee's success may also be affected by national, regional and local economic conditions.
Relocation Business. Competition in our corporate relocation business is based on capabilities, price and quality. We compete primarily with global outsourced and regional relocation services providers in the corporate relocation business. The larger outsourced relocation services providers that we compete with include BGRS, SIRVA, Inc. and Weichert Relocation Resources, Inc. Competition is expected to continue to intensify as an increasingly higher percentage of relocation clients reduce their global relocation benefits and related spend.
Title and Settlement Business. The title and settlement business is highly competitive and fragmented.competitive. The number and size of competing companies vary in the different areas in which we conduct business. In certain parts of the country we compete with small title agents and attorneys while in other parts of the country our competition is the larger title underwriters and national vendor management companies. In addition, we compete with the various brands of national competitors including Fidelity National Title Insurance Company, First American Title Insurance Company, Stewart Title Guaranty Company and Old Republic Title Company.
Government Regulationand Other Regulations
RESPA. RESPA, state real estate brokerage laws and similar laws in countries in which we do business restrict payments which real estate brokers, title agencies, mortgage bankers, mortgage brokers and other settlement service providers may receive or pay in connection with the sales of residences and referral of settlement services (e.g., mortgages,
homeowners insurance and title insurance). Such laws may to some extent impose limitations on arrangements involving our real estate franchise, real estate brokerage, settlement services and relocation businesses or the business of our mortgage origination joint venture. In addition, with respect to our company owned real estate brokerage, relocation and title and settlement services businesses as well as our mortgage origination joint venture, RESPA and similar state laws generally require timely disclosure of certain relationships or financial interests with providers of real estate settlement services. Pursuant to the Dodd-Frank Act, the Consumer Financial Protection Bureau (the “CFPB”) administers RESPA. Some state authorities have also asserted enforcement rights.
RESPA and related regulations do, however, contain a number of provisions that allow for payments or fee splits between providers, including fee splits between title underwriters and agents, real estate brokers and agents and market-based fees for the provision of goods or services and marketing arrangements. In addition, RESPA allows for referrals to affiliated entities, including joint ventures, when specific requirements have been met. We rely on these provisions in conducting our business activities and believe our arrangements comply with RESPA. However, RESPA compliance may become a greater challenge under certain administrations for most industry participants offering settlement services, including mortgage companies, title companies and brokerages, because of expansive interpretations of RESPA or similar state statutes by certain courts and regulators. Permissible activities under state statutes similar to RESPA may be interpreted more narrowly and enforcement proceedings of those statutes by state regulatory authorities may also be aggressively pursued. RESPA also has been invoked by plaintiffs in private litigation for various purposes. Some regulators and other parties have advanced novel and stringent interpretations of RESPA including assertions that any provision of a thing of value in a separate, but contemporaneous transaction with a referral constitutes a breach of RESPA on the basis that all things of value exchanged should be deemed in exchange for the referral.
Franchise Regulation. In the U.S., the sale of franchises is regulated by various state laws, as well as by federal law under the jurisdiction of the Federal Trade Commission (the "FTC"). The FTC requires that franchisors make extensive disclosure to prospective franchisees but does not require registration. A number of states require registration and/or disclosure in connection with franchise offers and sales. In addition, several states have "franchise relationship laws" or "business opportunity laws" that limit the ability of the franchisorfranchisors to terminate franchise agreements or to withhold consent to the renewal or transfer of these agreements. The states with relationship or other statutes governing the termination of franchises include Alaska, Arkansas, California, Connecticut, Delaware, Hawaii, Idaho, Illinois, Indiana, Iowa, Kentucky, Maryland, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Jersey, Rhode Island, Virginia, Washington and Wisconsin. Puerto Rico and the Virgin Islands also have statutes governing termination of franchises. Some franchise relationship statutes require a mandated notice period for termination and some require a notice and cure period. In addition, some require that the franchisor demonstrate good cause for termination. These statutes do not have a substantial effect on our operations because our franchise agreements generally comport with the statutory requirements for cause for termination, and they provide notice and cure periods for most defaults. When the franchisee is grantedstate law grants a statutory period longer than permitted under the franchise agreement, we extend our notice and/or cure periods to match the statutory requirements. In some states, case law requires a franchisor to renew a franchise agreement unless a franchisee has given cause for non-renewal. Failure to comply with these laws could result in civil liability to the affected franchisees.franchisors. While our franchising operations have not been materially adversely affected by such existing regulation, we cannot predict the effect of any future federal or state legislation or regulation. Internationally, many countries have similar laws affecting franchising.
Real Estate Regulation. RESPA, state real estate brokerage laws and similar laws in countries in which we do business restrict payments which real estate brokers, title agencies, mortgage bankers, mortgage brokers and other settlement service providers may receive or pay in connection with the sales of residences and referral of settlement services (e.g., mortgages, homeowners insurance and title insurance). Such laws may to some extent impose limitations on preferred alliance and other arrangements involving our real estate franchise, real estate brokerage, settlement services and relocation businesses or the business of our mortgage origination joint venture. In addition, with respect to our company owned real estate brokerage, relocation and title and settlement services businesses as well as our mortgage origination joint venture, RESPA and similar state laws require timely disclosure of certain relationships or financial interests with providers of real estate settlement services.
RESPA and related regulations do, however, contain a number of provisions that allow for payments or fee splits between providers, including fee splits between brokers and agents and market-based fees for the provision of actual goods or services. In addition, RESPA allows for referrals to affiliated entities, including joint ventures, when specific requirements have been met. We rely on these provisions in conducting our business activities and believe our arrangements comply with RESPA. RESPA compliance, however, has become a greater challenge in recent years for most industry participants offering settlement services, including mortgage companies, title companies and brokerages, because of changes in the regulatory environment and expansive interpretations of RESPA or similar state statutes by certain courts.
Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"), administration of RESPA has been moved from the Department of Housing and Urban Development ("HUD") to the Consumer Financial Protection Bureau (the "CFPB"). The CFPB has taken, in the recent past, a much stricter approach toward interpretation of RESPA and related regulations than HUD and has significantly increased the use of enforcement proceedings. In the face of this changing regulatory landscape, various industry participants, while disagreeing with the CFPB’s narrow interpretation of RESPA, have nevertheless decided to modify or terminate long-standing business arrangements to avoid the risk of protracted and costly litigation defending such arrangements. At present, leadership at the CFPB is in transition, with a new acting director. In the message accompanying the new five-year Strategic Plan published by the CFPB in February 2018, the acting director summarized the changes at the CFPB -- to fulfill its statutory responsibilities, but to go no further. The
Strategic Plan notes that the CFPB will focus on protecting the legal rights of consumers while engaging in rulemaking where appropriate to address unwarranted regulatory burdens. Beyond the CFPB enforcement practices, private RESPA litigation may also be pursued, including an action settled by us, our former joint venture and PHH that is described in Note 13, "Commitments and Contingencies—Litigation", to our consolidated financial statements included elsewhere in this Annual Report. In addition, permissible activities under state statutes similar to RESPA may be interpreted more narrowly and enforcement proceedings of those statutes by state regulatory authorities may also be aggressively pursued.
State Brokerage Laws. Our company owned real estate brokerage business is also subject to numerous federal, state and local laws and regulations that contain general standards for and limitations on the conduct of real estate brokers and sales agents, including those relating to the licensing of brokers and sales agents, fiduciary, and agency and statutory duties, consumer disclosure obligations, administration of trust funds, collection of commissions, restrictions on information sharing with affiliates, fair housing standards and advertising and consumer disclosures. Under state law, our company owned real estate brokers have certain duties to supervise and are responsible for the conduct of their brokerage businesses.
Worker Classification. Although the legal relationship between residential real estate brokers and licensed sales agents throughout most of the real estate industry historically havehas been classified asthat of independent contractors,contractor, newer rules and interpretations of state and federal employment laws and regulations, including those governing employee classification and wage and hour regulations, may impact industry practices, and our company owned brokerage operations. operations and our affiliated franchisees.
Real estate licensing laws generally permit brokers to engage sales agents as independent contractors. Federal and state agencies have their own rules and tests for classification of independent contractors but requireas well as to determine whether employees meet exemptions from minimum wages and overtime laws. These tests consider many factors that also vary from state to state. The tests continue to evolve based on state case law decisions, regulations and legislative changes. There is active worker
classification litigation in numerous jurisdictions against a variety of industries—including residential real estate brokerages—where the plaintiffs seek to reclassify independent contractors as employees or to challenge the use of federal and state minimum wage and overtime exemptions.
For additional information, see Part I, Item 3. Legal Proceedings and for a summary of certain legal proceedings initiated in California involving the Company that include worker misclassification allegations, see Note 15, "Commitments and Contingencies", in this Annual Report.
Multiple Listing Services Rules. We participate in many multiple listing services ("MLS") and are subject to each MLS' rules, policies, data licenses, and terms of service, which specify, among other things, how we may access and use MLS data and listings and how MLS data and listings must be displayed on our and our franchisees' websites and mobile applications. The rules of each MLS to which we belong can vary widely and are complex.
From time to time, certain industry practices, including MLS rules, have come under regulatory scrutiny. For example, in 2008, the Department of Justice ("DOJ") and the FTC entered into a consent decree with NAR related, in part, to the cooperative sharing of entries in traditional MLSs with online-only brokers, which expired in November 2018. In June 2018, the DOJ and the FTC held a joint public workshop to explore competition issues in the residential real estate brokerage industry since the publication of the FTC and DOJ’s 2007 Report on Competition in the Real Estate Brokerage Industry, including the impact of Internet-enabled technologies on the industry and potential barriers to competition.
In the workshop, there were various panels and participants submitted comments that raised a variety of issues, including: whether the current industry practice involving commission sharing by listing brokers was anti-competitive, whether offers of commission sharing—including commission rates—should be public, whether average broker supervise their activities.commission rates were too high, whether industry platforms should have free access to listings and concerns around dual agency. There can be no assurances as to whether DOJ or the FTC will determine that any industry practices or developments have an anti-competitive effect on the industry. Any such determination by DOJ or the FTC could result in industry investigations, legislative or regulatory action or other actions, any of which could have the potential to disrupt our business.
For a summary of certain legal proceedings in which NAR, Realogy and other large real estate brokerage companies are named defendants see Note 15, "Commitments and Contingencies—Litigation—Real Estate Litigation", in this Annual Report.
Anti-Discrimination Laws. Our company owned and franchised brokerages, and agents affiliated with such brokerages, as well as our other businesses are subject to federal and state housing laws that generally make it illegal to discriminate against protected classes of individuals in housing or brokerage services. For example, the Fair Housing Act, its state and local law counterparts, and the regulations promulgated by the U.S. Department of Housing and Urban Development and various state agencies, all prohibit discrimination in housing on the basis of race or color, national origin, religion, sex, familial status, disability, and, in some states or locales, financial capability, sexual orientation, gender identity, or military status.
Antitrust and Competition Laws. Our business is subject to antitrust and competition laws in the various jurisdictions where we operate, including the Sherman Antitrust Act, the Federal Trade Commission Act and the Clayton Act and related federal and state antitrust and competition laws in the U.S. The penalties for violating antitrust and competition laws can be severe. These laws and regulations generally prohibit competitors from fixing prices, boycotting competitors, dividing markets, or engaging in other conduct that unreasonably restrains competition. Our company owned and franchised brokerages (and independent sales agents affiliated with such brokerages) are also required to comply with state and local laws related to dual agency (such as where the same brokerage represents both the buyer and seller of a home) and increased regulation of dual agency representation may restrict or reduce the ability of impacted brokerages to participate in certain real estate transactions.
Regulation of Title Insurance and Settlement Services. ManyNearly all states license and regulate title agencies/settlement service providers or certain employees and underwriters through their Departments of Insurance or other regulatory body. In many states, title insurance rates are either promulgated by the state or are required to be filed with each state by the agent or underwriter, and some states promulgate the split of title insurance premiums between the agent and underwriter. States sometimes unilaterally lower the insurance rates relative to loss experience and other relevant factors. States also require title agencies and title underwriters to meet certain minimum financial requirements for net worth and working capital. In addition, the insurance laws and regulations of Texas, the jurisdiction in which our title insurance underwriter subsidiary, Title Resources, is domiciled, generally provide that no person may acquire control, directly or indirectly, of a Texas domiciled insurer, unless the person has provided required information to, and the acquisition is approved or not
disapproved by, the Texas Department of Insurance. Generally, any person acquiring beneficial ownership of 10% or more of our voting securities would be presumed to have acquired indirect control of our title insurance underwriter subsidiary unless the Texas Department of Insurance, upon application, determines otherwise. Our insurance underwriter is also subject to a holding company act in its state of domicile, which regulates, among other matters, investment policies and the ability to pay dividends.
Certain states in which we operate have "controlled business" statutes which impose limitations on affiliations between providers of title and settlement services on the one hand, and real estate brokers, mortgage lenders and other real estate service providers on the other hand. We are aware of the states imposing such limits and monitor the others to ensure that if they implement such a limit that we will be prepared to comply with any such rule. "Controlled business" typically is defined as sources controlled by, or which control, directly or indirectly, the title insurer or agent. Pursuant to legislation enacted in the State of New York in late 2014 requiring the licensing of title agents, the New York Department of Insurance has issued regulations that provide that title agents with affiliated businesses must make a good faith effort to obtain and be open for title insurance business from all sources and not business only from affiliated persons, including actively competing in the marketplace. We are not aware of any other recent or pending controlled business legislation. A company's failure to comply with such statutes could result in the payment of fines and penalties or the non-renewal of the Company's license to provide title and settlement services. We provide our services not only to our affiliates but also to third-party businesses in the geographic areas in which we operate. Accordingly, we manage our business in a manner to comply with any applicable "controlled business" statutes by ensuring that we generate sufficient business from sources we do not control. We have never been cited for failing to comply with a "controlled business" statute.
Regulation of the Mortgage IndustryIndustry. We participate in the mortgage origination business through our 49.9% ownership of Guaranteed Rate Affinity. Private mortgage lenders operating in the U.S. are subject to comprehensive state and federal regulation and to significant oversight by the Dodd-Frank Act. government sponsored entities. Dodd-Frank endows the CFPB with rule making, examination and enforcement authority involving consumer financial products and services, including mortgage finance. The CFPB has issued a myriad of proposed and final rules, including TILA-RESPA Integrated Disclosure rules,which could materially and adversely affect the mortgage and housing industries. Dodd-Frank establishes new standards and practices for mortgage originators, including determining a prospective borrower's ability to repay its mortgage and restricting the fees that mortgage originators may collect.impose significant obligations on Guaranteed Rate Affinity.
Cybersecurity and Data Privacy Regulations. WeTo run our business, it is essential for us to store and transmit sensitive personal information about our customers, prospects, employees, independent agents, and relocation transferees in our systems and networks. At the same time, we are subject to numerous laws, regulations, and other requirements, domestically and globally, that require businesses like ours to protect the security of personal information, notify customers and other individuals about our privacy practices, and limit the use, disclosure, sale, or transfer of personal data. Regulators in the U.S. and abroad continue to enact comprehensive new laws or legislative reforms imposing significant privacy and cybersecurity restrictions. The result is that we are subject to increased regulatory scrutiny, additional contractual requirements from corporate customers, and heightened compliance costs. For example, in the U.S., we are required to comply with regulations both in the United StatesGramm-Leach-Bliley Act, which governs the disclosure and in other countries where we do business that regulatesafeguarding of consumer financial information, as well as state statutes governing privacy and cybersecurity and related matters. For example, on March 1, 2017, new cybersecurity rules took effect for financial institutions, insurers and certain other companies, including our title and settlement services subsidiary, supervised bymatters like the New York Department of Financial Services (the “NYDFS("NYDFS") Cybersecurity Regulation, which went into effect in 2017, and the California Consumer Privacy Act ("CCPA"), which went into effect in 2020. The CCPA imposes new and comprehensive requirements on organizations that collect, sell and disclose personal information about California residents and employees. Other states, including New York and Massachusetts, are expected to implement their own privacy statutes in the near term.
Under the NYDFS cybersecurity regulation, regulated financial institutions, including Realogy Title Group, are required to establish a detailed cybersecurity program. Program requirements include corporate governance, incident planning, data management, system testing, vendor oversight, and regulator notification rules. Other state regulatory agencies have or are expected to enact similar requirements following the adoption of the Insurance Data Security Model Law by the National Association of Insurance Commissioners that is consistent with the New York regulation. For example, the South Carolina Insurance Data Security Act, effective January 1, 2019, is based on the Insurance Data Security Model Law and imposes new breach notification and information security requirements on insurers, agents, and other licensed entities authorized to operate under the state’s insurance laws, including Realogy Title Group. Finally, our security systems and IT infrastructure may not adequately protect against all potential security breaches, cyber-attacks, or other unauthorized access to personal information. Third parties, including vendors or suppliers that provide essential services for our global operations, could also be a source of security risk to us if they experience a failure of their own security systems and infrastructure. Any significant violations of privacy and cybersecurity could result in the loss of new or existing business, litigation, regulatory investigations, the payment of fines, damages, and penalties and damage to our reputation, which could have a material adverse effect on our business, financial condition, and results of operations.
Cybersecurity Regulation”). The NYDFS Cybersecurity Regulation imposes new regulatory burdens intended to protect the confidentiality, integrity and availability of information systems.
In addition, we are required to comply with increasingly complex and changing data privacy regulations both in the United States and in other countries and territories where we do business that regulate the collection, use and transfer of personal data, including particularly the transfer of personal data between or among countries. These laws and their interpretations continue to develop and may be inconsistent from jurisdiction to jurisdiction. In many cases, these laws apply not only to third-party transactions, but also to transfers of information between us and our subsidiaries, including employee information. Many of these foreign data privacy regulations (including theEuropean Union’s General Data Protection Regulation ("GDPR"), which becomesbecame effective in the European UnionMay 2018, conferred new and significant privacy rights on May 25, 2018) are more stringent than those in the United Statesindividuals (including employees and may result in significantly greater compliance burdensindependent agents), and costs. In addition, non-compliance with these regulations could result inmaterially increased penalties or significant legal liability for our acts and, potentially, for acts of companies that perform services on our behalf.violations.
Item 1A. Risk Factors.
You should carefully consider each of the following risk factors and all of the other information set forth in this Annual Report. The risk factors generally have been separated into three primary groups: (1) risks relating to our business; (2) risks relating to our indebtedness; and (3) risks relating to an investment in our common stock. Based on the information currently known to us, we believe that the following information identifies the most significant risk factors affecting our Company and our common stock. However, the risks and uncertainties are not limited to those set forth in the risk factors described below. In addition, past financial performance may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods.
Risks Related to Our Business
Macroeconomic Conditions
The residential real estate market is cyclical and we are negatively impacted by downturns and constraints in this market.
The residential real estate market tends to be cyclical and typically is affected by changes in general economic and residential real estate conditions which are beyond our control. The U.S. residential real estate industry was in a significant and lengthy downturn from the second half of 2005 through 2011. Beginning in 2012, the U.S. residential real estate industry began a recovery. However, according to NAR data, in 2018 the industry saw no growth in homesale transaction volume and while there was 3% growth in homesale transaction volume in 2019, all of such growth was attributable to increases in average homesale price as homesale transactions remained flat. We cannot predict whether the housing market will continue to improve or maintain a steady state.improve. If the residential real estate market or the economy as a whole does not continue to improve or worsens, our business, financial condition and liquidity may be materially adversely affected, including our ability to access capital and grow our business.
Any of the following could halt or limit the current growth ofnegatively impact the housing market and have a material adverse effect on our business by causing a lack of sustained growthimprovement or a decline in the number of homesales and/or stagnant or declining home prices which in turn, could adversely affect our revenues and profitability:
•a decline or lack of improvement in the number of homesales;
•insufficient or excessive regional home inventory levels;
•stagnant and/or declining home prices;
•a decrease in the affordability of homes;
•high levels of unemployment and/or continued slow wage growth;
•a period of slow economic growth or recessionary conditions;
•increasing mortgage rates and down payment requirements and/or constraints on the availability of mortgage financing;
weak credit markets;•decelerated or lack of building of new housing for homesales, increased building of new rental properties, or irregular timing of new development closings leading to lower unit sales at Realogy Brokerage Group;
insufficient or excessive regional home inventory levels;
•a low level of consumer confidence in the economy and/or the residential real estate market due to macroeconomic events domestically or internationally;
•instability of financial institutions;
•legislative or regulatory changes (including changes in regulatory interpretations or regulatory practices) that would adversely impact the residential real estate market;
•federal and/or state income tax changes and other tax reform affecting real estate and/or real estate transactions, including, in particular, the impact of the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) as well as certain state and local tax reform, such as the "mansion tax" in New York City;
•other legislative, tax or regulatory changes (including changes in regulatory interpretations or enforcement practices) that would adversely impact the residential real estate market, including changes relating to the Real Estate Settlement Procedures Act ("RESPA"), potential reforms of Fannie Mae and Freddie Mac, immigration
reform, and further potential federal, state or local tax code reform (including, for example, the proposed "pied-a-terre tax" in New York City);
•an increase in potential homebuyers with low credit ratings or inability to afford down payments;
•renewed high levels of foreclosure activity;
adverse changes in local or regional economic conditions, particularly in states where our business is concentrated;
•the inability or unwillingness of homeowners to enter into homesale transactions due tosuch as first-time homebuyer concerns about investing in a home and move-up buyers having limited or negative equity in their existing homes;homes or other factors, including difficult mortgage underwriting standards, attractive rates on existing mortgages and the lack of availability in their market;
a decrease in the affordability•homeowners retaining their homes for longer periods of homes;time;
•decreasing home ownership rates, declining demand for real estate and changing social attitudes toward home ownership;ownership including as compared to renting, such as among potential first-time homebuyers who may delay, or decide not to, purchase a home, as well as existing homeowners who may decide to sell their home and rent their next home;
•a deterioration in other economic factors that particularly impact the residential real estate market and the business segments in which we operate whether broadly or by geography and price segments;
•geopolitical and economic instability; and/or
•natural disasters, such as hurricanes, earthquakes, wildfires, mudslides as well as public health crises, such as pandemics or epidemics and other events that disrupt local or regional real estate markets.
In addition, homesale inventory levels for the mainstream housingexisting home market have been declining over the past several years due to strong demand.demand, in particular in certain highly sought-after geographies and at lower price points. According to NAR, the inventory of existing homes for sale in the U.S. was 1.5 million as of December 2018 and 1.7has decreased to 1.4 million at the end of December 2017 and 2019. As a result, inventory has decreased from 3.7 months of supply in December 2016, respectively. The2018 to 3.0 months as of December 2017 inventory represents a national average supply of 3.2 months at the current homesales pace which is2019. These levels continue to be significantly below the 5.9 month10-year average of 5.4 months, the 15-year average of 6.1 months and the 25-year average as of December 31, 2017. The national average supply at the then-current homesales pace for December 31, 2016, 2015 and
2014 was 3.6 months, 3.9 months and 4.4 months, respectively.5.7 months. If interest rates were to rise, homebuilders may determine to discontinue or delay new projects, which could further contribute to inventory constraints. In addition, real estate industry models that purchase homes for rental or corporate use (rather than immediate resale) can put additional pressure on available housing inventory. While a continuation of low inventory levels may contribute to favorable demand conditions and improved homesale price growth, insufficient inventory levels have had a negative impact on homesale volume growth and may increase competition for homes and limitcan contribute to a reduction in housing affordability, which can result in some potential home buyers deferring entry into the proclivity of current homeowners to purchase an alternate home.residential real estate market. Ongoing constraints on home inventory levels may continue to have an adverse impact on the number of homesale transactions for our company owned brokerage businessclosed by Realogy Brokerage and the businesses of our franchisees,Realogy Franchise Group, which may limit our ability to grow revenue.
Adverse developments in general business and economic conditions could have a material adverse effect on our financial condition and our results of operations.
Our business and operations and those of our franchisees are sensitive to general business and economic conditions in the U.S. and worldwide. These conditions include short-term and long-term interest rates, inflation, fluctuations in debt and equity capital markets, levels of unemployment, consumer confidence, rate of economic growth or contraction, and the general condition of the U.S. and the world economy.
The residential real estate market also depends upon the strength of financial institutions, which are sensitive to changes in the general macroeconomic environment. Lack of available credit or lack of confidence in the financial sector could materially and adversely affect our business, financial condition and results of operations.
A host of factors beyond our control could cause fluctuations in these conditions, including the political environment, disruptions in a major geoeconomic region, or equity or commodity markets and acts or threats of war or terrorism which could have a material adverse effect on our financial condition and our results of operations. For example, the United Kingdom’s withdrawal from the European Union (referred to as Brexit) could cause significant volatility and uncertainty in global stock markets.
Monetary policies of the federal government and its agencies may have a material impact on our operations.
Our business is significantly affected by the monetary policies of the federal government and its agencies. We are particularly affected by the policies of the Federal Reserve Board. These policies regulates the supply of money and credit
in the U.S. and impact the real estate market through their effect on interest rates as well as the cost of our interest-bearing liabilities.
Increases in mortgage rates adversely impact housing affordability and we have been and could again be negatively impacted by a rising interest rate environment. For example, a rise in mortgage rates could result in decreased homesale transaction volume if potential home sellers choose to stay with their lower mortgage rate rather than sell their home and pay a higher mortgage rate with the purchase of another home or, similarly, if potential home buyers choose to rent rather than pay higher mortgage rates. Increases in mortgage rates could also reduce the number of homesale refinancing transactions, which could materially adversely impact our earnings from our mortgage origination joint venture as well as the revenue stream of our title and settlement services segment. Changes in the Federal Reserve Board's policies, the interest rate environment, and the mortgage market are beyond our control, are difficult to predict, and could have a material adverse effect on our business, results of operations and financial condition.
The passage of the 2017 Tax Act may have a negative impact on homeownership rates and homesale transaction activity, which could adversely affect our profitability.
The 2017 Tax Act, which became law on December 22, 2017, includes provisions that, among other things:
reduce individual federal tax brackets at most income levels;
increase the standard deduction from $12,700 to $24,000 for married taxpayers filing a joint return;
caps•cap the aggregate amount of property, sales and state and local income tax deductions at $10,000; and
•reduce the principal amount to which the home mortgage interest deduction will be available to potentially impacted U.S. taxpayers who enter into a mortgage on or after December 15, 2017 from $1,000,000 to $750,000, while entirely suspending interest deductibility of home equity loans; andloans.
suspend the deductibility of certain home moving expenses.
These changes affecting individual taxpayers will cease to apply after December 31, 2025 unless further extended by future legislation. Certain of these provisions of the 2017 Tax Act, alone or in combination, directly impact traditional incentives associated with home ownership and may reduce the financial distinction between renting and owning a home for many households who are U.S. residents for federal income tax purposes at certain income levels, which may have a negative impact on the national homeownership rate. In addition, certain existing homeowners may be less likely to purchase a larger or more expensive home or refinance a mortgage given the reduced mortgage interest deductibility opportunities (from $1,000,000 to $750,000 on mortgages that are not grandfathered) and lessened property tax deductibility. The reduction in state and local tax deductibility impacts all households, including renters, particularly in states with higher taxes. It is unclear whatThis may adversely impact if any, this will have on the mobility of such state residents, make such states less attractive to home buyers, or onadversely impact home values in such geographies, although it may result in some shift in the value of homes from high tax states (where the deductibility of such taxes may be limited beyond previous levels) to those states with low or no state income tax. The effects of the 2017 Tax Act on average homesale prices may be more impactful in states where average home prices, state and local incomes taxes, and/or property taxes are high, including California and the New York tri-state area, where our company owned brokerage and our franchisee businesses maintain a material presence. In addition, the suspension of the deduction for certain moving expenses may result in fewer instances of specific relocation services.
Reductions in the number of homesale transactions or average homesale price or reductions in or changes to the types of relocation services provided could have a material adverse effect on our revenues and profitability.
Adverse developments in general business and economic conditions could have a material adverse effect on our financial condition and our results of operations.
Our business and operations and those of our franchisees are sensitive to general business and economic conditionsMeaningful decreases in the U.S. and worldwide. These conditions include short-term and long-term interest rates, inflation, fluctuations in debt and equity capital markets, levels of unemployment, consumer confidence and the general condition of the U.S. and the world economy.
The residential real estate market also depends upon the strength of financial institutions, which are sensitive to changes in the general macroeconomic environment. Lack of available credit or lack of confidence in the financial sector could materially and adversely affect our business, financial condition and results of operations.
A host of factors beyond our control could cause fluctuations in these conditions, including the political environment, disruptions in a major geoeconomic region, or equity or commodity markets and acts or threats of war or terrorism which could have a material adverse effect on our financial condition and our results of operations.
Monetary policies of the federal government and its agencies may have a material impact on our operations.
Our business is significantly affected by the monetary policies of the federal government and its agencies. We are particularly affected by the policies of the Federal Reserve Board, which regulates the supply of money and credit in the U.S. The Federal Reserve Board's policies impact the real estate market through their effect on interest rates as well as the cost of our interest-bearing liabilities.
We could be negatively impacted by any rising interestaverage brokerage commission rate environment. As mortgage rates rise, the number of homesale transactions may decrease as potential home sellers choose to stay with their lower mortgage rate rather than sell their home and pay a higher mortgage rate with the purchase of another home, and potential home buyers choose to rent rather than pay higher mortgage rates. An increase in mortgage rates would also be expected to reduce the number of homesale refinancing transactions, which could materially adversely impactaffect our earnings from our mortgage origination joint venturefinancial results.
There are a variety of factors that could contribute to declines in the average broker commission rate, including regulation, an increase in the popularity of discount brokers or other utilization of flat fees, rebates or lower commission rates on transactions, the rise of certain other competitive brokerage models as well as other competitive factors.
The average broker commission rate for a homesale transaction is a key driver for both Realogy Brokerage and Realogy Franchise Groups. Since 2014, we have experienced approximately a one basis point decline in the revenue stream ofaverage broker commission rate each year.Meaningful reductions in the average broker commission rate could materially adversely affect our title and settlement services segment. Changes in the Federal Reserve Board's policies, the interest rate environment and mortgage market are beyond our control, are difficult to predict and could have a material adverse effect on our business, results of operationsrevenues, earnings and financial condition.results.
Strategic and Operational
Our ability to grow earnings is significantly dependent upon our and our franchisees' ability to attract and retain independent sales agents and on our ability to attract and retain franchisees.
The core of our integrated business strategy is aimed at significantly growing the base of productive independent sales agents at our company owned and franchisee brokerages and providing them with compelling data and technology products
and services to make them more productive and their businesses more profitable. In addition, in order to grow earnings we need to enter into franchise agreements with new franchisees and renew existing franchise agreements without materially reducing contractual royalty rates or materially increasing the amount and prevalence of sales incentives.
If we are unable to successfully grow the base of productive independent sales agents at our company owned and franchisee brokerages (or if we or they fail to replace departing successful sales agents with similarly productive sales agents) or grow our base of franchisees, we may be unable to maintain or grow revenues or earnings and our results of operations may be materially adversely affected.
A variety of factors could impact our ability to execute on this strategy and grow revenue and earnings, including, but not limited to:
•intense competition from other brokerages, the iBuying model, as well as other types of companies employing technologies or alternative models intended to disrupt historical real estate brokerage models, which among other things, could continue to put upward pressure on our commission expense;
•our ability to react quickly to changing market dynamics, including with respect to our value proposition to both new and existing independent sales agents and franchisees;
•our ability to develop and deliver compelling data and technology products and services to independent sales agents and franchisees, adopt and implement commission plans (or pricing model structures) that are attractive to such agents (or such franchisees);
•worsening macroeconomic conditions, including a further slowdown in the residential real estate market; and
•our ability to attract and retain talent to drive our strategy.
In 2019, we launched or expanded multiple programs designed to enhance our value proposition to independent sales agents and franchisees, including marketing and technology programs as well as a new pricing model structure for one brand and a new franchise brand. Agents and franchisees may not find these programs compelling and if we fail to successfully enhance our value proposition, including through new products and services and appealing franchise models and brands, we may fail to attract new or retain independent sales agents or franchisees, resulting in a reduction in commission income and royalty fees paid to us, which would have a material adverse affect on our results of operations. In addition, the continued execution of our strategy may also take longer or cost more than we currently anticipate and, even if we are successful in our recruitment and retention efforts, any additional revenue generated may not offset the related expenses we incur.
Our share of the commission income generated by homesale transactions may continue to shift to affiliated independent sales agents or erode due to market factors, which would further negatively affect our profitability.
As noted in the prior risk factor, our integrated business strategy is focused on the attraction and retention of independent sales agents to our company owned and franchised brokerage operations. Intense industry competition for agents combined with our strategic emphasis on the recruitment and retention of independent sales agents has and is expected to continue to put upward pressure on our commission expense, which has and could continue to negatively impact our profitability. Other market factors, including the listing aggregator concentration and market power, could further erode our share of commission income.
If independent sales agents affiliated with our company owned brokerages are paid a higher proportion of the commissions earned on a homesale transaction or the level of commission income we receive from a homesale transaction is otherwise reduced, the operating margins of our company owned residential brokerages could continue to be adversely affected. Our franchisees face similar risks and continued downward pressure on the commission income recognized by our franchisees could negatively impact their view of our value proposition and we may fail to attract new franchisees, expiring franchisees may not renew their agreements with us, or we may be required to offer reduced royalty fee arrangements to new and existing franchisees, any of which would result in a further reduction in royalty fees paid to us.
Our company owned brokerage operations are subject to geographic and high-end real estate market risks, which could adversely affect our revenues and profitability.
Our subsidiary, NRT,Realogy Brokerage Group owns real estate brokerage offices located in and around large U.S. metropolitan areas in the U.S. where competition for independent sales agents and independent sales agent teams is particularly intense. Local and regional economic conditions in these locations could differ materially from prevailing conditions in other parts of the country. For the year ended December 31, 2017, NRT2019, Realogy Brokerage Group realized approximately 27%25% of its revenues from California, 22% from the New York metropolitan area and 9%10% from Florida, which in the aggregate totals
approximately 58%57% of its revenues. A downturn in the residential real estate demandmarket or economic conditions that is concentrated in these regions, or in other geographic concentration areas for us, could result in a decline in NRT'sRealogy Brokerage Group's total gross commission income and profitability disproportionate to the downturn experienced throughout the U.S. and could have a material adverse effect on us.
The effects of the 2017 Tax Act on average homesale prices may also be more impactful in states where average home prices, state and local incomes taxes, and/or property taxes are high, including California and the New York tri-state area. In addition, given the significant geographic overlap of our title and settlement services business with our company owned brokerage offices, such regional declines affecting our company owned brokerage operations could have a disproportionate adverse effect on our title and settlement services and mortgage origination business as well. A downturnFor example, negative homesale transaction growth in residential real estate demand or economic conditions2018 and 2019 in these states could result in a decline in our overall revenuesCalifornia and have a material adverse effect on us.New York City negatively impacted the operating results at both Realogy Brokerage Group and Realogy Title Group.
NRTRealogy Brokerage Group has a significant concentration of transactions at the higher end of the U.S. real estate market.market and in high-tax states. A shift in NRT'sRealogy Brokerage Group's mix of property transactions from the high range to lower and middle range homes would adversely affect the average price of NRT'sRealogy Brokerage Group's closed homesales. Such a shift, absent an increase in transactions, would have an adverse effect on our operating results. Due to Realogy Brokerage Group's concentration in high-end real estate, its business may also be adversely impacted by capital controls imposed by foreign governments that restrict the amount of capital individual citizens may legally transfer out of their countries. In addition, NRTRealogy Brokerage Group continues to face heightened competition for both homesale transactions and high performing independent sales agents because of its prominent position in the higher end housing markets.
Moreover, NRTRealogy Brokerage Group also has relationships with developers, primarily in major cities, to provide marketing and brokerage services in new developments. DecelerationThe irregular volume and timing of new development closings may contribute to uneven financial results and deceleration in the building of new housing and/or timing of closings of new developments may lead toresult in lower unit sales in the new development market, which has had and could continue to have a material adverse effect on the revenue generated by NRTRealogy Brokerage Group and our profitability.
Market competition, the influence of independent sales agents and the continued execution ofWe may not successfully develop or procure technology that supports our strategic initiatives may continue to shift a higher proportion of homesale commissions to affiliated independent sales agents or otherwise erode our share of the commission income generated by homesale transactions, which could negatively affect our profitability.
We believe that the influence of independent sales agents and independent sales agent teams has increased during the past five years and, together with increasing competition due to new entrants and the changing practices of existing competitors, has put, and could continue to put, downward pressure on industry margins, which could negatively impact our profitability.
Our company owned brokerage business introduced growth initiatives in late 2016 focused onaimed at the recruitment and retention of high performing independent sales agents through the use of financial incentives and best-in-class retention practices, among other things. While these initiatives enabled us to mitigate declines in market share through the retention
of existingproductive independent sales agents and improved recruiting success, we have experienced and expect to continue to experience adverse pressure on costs and margin from these initiatives.
There are also market participants who differentiate themselves by offering consumers lower commission rates on transactions. Although such competitors have yet to have a material impact on overall brokerage commission rates, this could change in the future if they use greater discounts as a means to increase their market share or improve their value proposition.
If independent sales agents are paid a higher proportion of the commissions earned on a homesale transaction or the level of commission income we earn from a homesale transaction is otherwise reduced, the operating margins of our company owned residential brokerages or our franchisees, could be adversely affected.
We may not successfully develop or procure technology, including Zap® product enhancements, that support the ability of our company owned and franchisee real estate brokerages and their affiliated independent sales agents to compete effectively and efficiently, which could adversely affect our results of operations.
Our future success depends in part on our ability to continuously develop and improve our technology products and services or procure such technology, in particular for our company owned and franchisee real estate brokerages, affiliated independent sales agents and their customers as well as for our relocationother segments. A strong technology value proposition is critical to the ability of Realogy Brokerage Group to recruit and titleretain independent sales agents and settlement services segments. to the ability of Realogy Franchise Group to enter into new or renew existing franchise agreements.
We have expended and expect to continue to expend substantial time, capital, and other resources to identify the needs of our company owned brokerages, franchisees, independent sales agents and their customers and to develop technology and service offerings to meet those needs. In addition, we have made and may continue to make strategic investments in companies developing technologies that support our strategy and we may not realize the anticipated benefits from these investments and such technologies may not become available to us or may become available to our competitors.
We may incur unforeseen expenses in the development of enhancements to the Zap platform or the advancement of other technology products and weservices, or may not be able to introduceexperience competitive delays in introducing new technologies as quickly as we would like or in a cost-effective manner. like. In addition, wethe increasingly competitive industry for technology talent may be unableimpact our ability to attract and retain employees involved in developing our technology products and systems.services. Furthermore, we may not be successful, or as successful asthe investment and pace of technology development continues to accelerate across the industry, creating risk in the relative timing and attractiveness of our competitors, in procuring or developing technologiestechnology products and systems that operate effectively across multiple devices services,and platforms in a way that is appealing or beneficial to our users and there can be no assurance that affiliated franchisees, independent sales agents in our franchise system including(including those affiliated with our company owned brokerages,brokerages), or customers will choose to use the Zap platform or other technology products and services we may develop. develop or that affiliated agents or franchisees will find such products and services compelling.
We are now building our agent- and franchisee-focused technology products with an open architecture in order to selectively enable qualified third-party vendors and products to access and interface with our products. In addition, we recently engaged with a strategic third-party partner to develop the next generation of certain key brand, broker and agent tools, including our customer relationship management product. We may not be able to accomplish the continued evolution of our technology offerings on a timely basis and there can be no assurance that our strategic partner or third parties utilizing our open architecture will integrate with our solutions or create tools that meet the changing needs and expectations of
agents and franchisees in a timely or effective manner, or at all. Any of the foregoing could adversely affect our value proposition to affiliated agents and franchisees and the productivity of independent sales agents, which in turn could adversely affect our results of operations.
Competition in the residential real estate and relocation business is intense and mayhas and could continue to have a negative impact on our homesale transaction volume and market share and put upward pressure on the average share of commissions earned by independent sales agents, any of which has and could continue to adversely affect our financial performance.
We generally face intense competition in the residential real estate services business. Due to competitive factors, we estimate that our market share in 2019 decreased year-over-year to approximately 15.3% compared to 16.1% in 2018.
Some competitive risks are shared among our business units, while others are specific to a business unit. For example, both the Company and our franchisees compete for consumer business as well as for independent sales agents with national and regional independent real estate brokerages and franchisors and discount and limited service brokerages as well as with franchisees of our brands. The recruitment and retention of independent sales agents has been and may continue to be further complicated by competitive models that do not prioritize traditional business objectives. For example, we believe that certain owned-brokerage competitors have investors that have historically allowed the pursuit of increases in market share over profitability, which exacerbates competition for independent sales agents and pressure on the share of commission income received by the agent, creating challenges to both our company owned brokerages and our franchisee’s margins and profitability. Whether and the extent to which this pattern will continue is not yet certain.
We are faced with the following related risks:
Our ability to succeed both through our company owned brokerages and as a franchisor is largely dependent on our and our franchisees' ability to attract and retain independent sales agents.
The successful recruitment and retention of independent sales agents and independent sales agent teams are critical to the business and financial results of a brokerage—whether or not it is affiliated with a franchisor. Most of a brokerage's real estate listings are sourced through the sphere of influence of its independent sales agents, notwithstanding the growing influence of internet-generated leads. Competition for independent sales agents in our industry is high and has intensified particularly with respect to more productive independent sales agents and in the densely populated metropolitan areas in which we operate.
Specifically, the intensity of competition for the affiliation of independent sales agents negatively impacted recruitment and retention efforts in 2019 at both Realogy Brokerage and Realogy Franchise Groups. In 2019, these competitive factors drove a loss in our market share (compared to 2018), contributed to the decline in homesale transaction volume at Realogy Brokerage and Realogy Franchise Group and adversely impacted our financial results.
The successful recruitment and retention of independent sales agents is influenced by many factors, including remuneration (such as sales commission percentage and other financial incentives paid to independent sales agents), other expenses borne by independent sales agents, leads or business opportunities generated for independent sales agents from the brokerage, independent sales agents' perception of the value of the broker's brand affiliation, technology and data offerings as well as marketing and advertising efforts by the brokerage or franchisor, the quality of the office manager, staff and fellow independent sales agents with whom they collaborate daily, as well as continuing professional education, and other services provided by the brokerage or franchisor.
We believe that a variety of factors in recent years have negatively impacted the recruitment and retention of independent sales agents in the industry generally and have put upward pressure on the average share of commissions earned by affiliated independent sales agents, including increasing competition, such as from brokerages that offer a greater share of commission income to independent sales agents and/or other compensation such as up-front bonuses and equity, changes in the spending patterns of independent sales agents (as more agents purchase services from third parties outside of their affiliated broker), and growth in independent sales agent teams.
If we or our franchisees fail to attract and retain successful independent sales agents or we or they fail to replace departing successful independent sales agents with similarly productive independent sales agents, the gross commission income generated by our company owned brokerages and franchises may continue to decrease, resulting in a reduction in our profitability. In addition, competition for sales agents has and could further reduce the commission amounts retained by the Company and our affiliated franchisees after giving effect to the split with independent sales agents, and increase the
amounts that we spend on marketing and the development of products and services that we believe will appeal to such agents.
Some of the firms competing for sales agents use different commission plans, which may be appealing to certain sales agents, and we and our franchisees may be unable to adopt and implement alternative commission plans in a profitable and effective manner, which may hinder our ability to attract and retain those agents.
In most of their markets, Realogy Brokerage Group offers affiliated independent sales agents and sales agent teams a choice between a traditional graduated commission model or a two-tiered commission model, both of which emphasize our value proposition. The traditional graduated commission model has experienced declines in market share over the past several years. Increasingly, independent sales agents have affiliated with brokerages that offer a different mix of services to the agent, allowing the independent sales agent to select the services that they believe allow them to retain a greater percentage of the commission and purchase services from other vendors as needed. If this trend continues and we and our franchisees are unable to adopt and implement alternative commission plans that appeal to a broad base of independent sales agents in a profitable and effective manner, we and our franchisees may fail to attract and retain independent sales agents, which may have a material adverse impact on our ability to grow earnings.
The real estate brokerage industry has minimal barriers to entry for new participants, including traditional participants as well as a growing number of companies that are competing in non-traditional ways for a portion of the gross commission income generated by homesale transactions.
The significant size of the U.S. real estate market, in particular the addressable market of commission revenues, has continued to attract outside capital investment in traditional and disruptive competitors that seek to access a portion of this market.
There are also market participants who differentiate themselves by offering consumers flat fees, rebates or lower commission rates on transactions (often coupled with fewer services). Although such competitors have yet to have a material impact on overall brokerage commission rates, this could change in the future if they use greater discounts as a means to increase their market share or improve their value proposition. A decrease in the average brokerage commission rate may adversely affect our revenues.
While real estate brokers using historical real estate brokerage models typically compete for business primarily on the basis of services offered, reputation, utilization of technology, personal contacts and brokerage commission, participants pursuing non-traditional methods of marketing real estate may compete in other ways, including companies that employ technologies intended to disrupt historical real estate brokerage models or minimize or eliminate the role brokers and sales agents perform in the homesale transaction process.
A growing number of companies are competing in non-traditional ways for a portion of the gross commission income generated by homesale transactions. For example, listing aggregators and other web-based real estate service providers compete for our company owned brokerage business by establishing relationships with independent sales agents and/or buyers and sellers of homes and actions by such listing aggregators have and may continue to put pressure on our and other industry participants' revenues and profitability. Other business models that have emerged in recent years consist of companies (including certain listing aggregators) that leverage capital to purchase homes directly from sellers, commonly referred to as iBuying. If iBuying gains market share in the residential real estate industry, it could disintermediate real estate brokers and independent sales agents from buyers and sellers of homes either entirely or by reducing brokerage commissions that may be earned on those transactions. RealSure, the Company's collaboration with Home Partners of America, shares some traits of the iBuying model, but is intended to keep the independent sales agent at the center of the transaction; however, there can be no assurance that the program will be successful or that it will operate as intended.
As a real estate brokerage franchisor, we are also subject to risks unique to franchising, including:
To remain competitive in the sale of franchises and to retain our existing franchisees, we may have to reduce the fees we charge our franchisees, increase the amount of other incentives we issue or take other actions or employ other models to be competitive with fees charged by competitors.
Competition among the national real estate brokerage brand franchisors to grow their franchise systems is intense. Our products are our brand names and the support services we provide to our franchisees and our ability to grow our franchisor business is also dependent on the operational and financial success of our franchisees,. including the ability of our franchisees to successfully navigate the challenges noted above.
The value provided by a franchisor encompasses many different aspects including the quality of the brand, tools, technology, marketing and other services, the availability of financing provided to the franchisees, and the fees the franchisees must pay. Franchisee fees can be structured in numerous ways and can include flat royalty and marketing fees, capped royalty fees and discounted royalty and marketing fees. We launched a capped fee model at one of our brands in 2019 as substantially all of our franchises are structured using a flat fee model and we have faced increasing competition from franchisors utilizing alternative models. In addition, we launched Corcoran® as a new franchise brand. There can be no assurance that the capped fee model or the new franchise brand will succeed and we may not realize benefits from these investments. If we fail to successfully offer franchisees compelling value propositions, including through compelling products and services as well as through appealing franchise models and brands, we may fail to attract new franchisees and expiring franchisees may not renew their agreements with us, resulting in a reduction in royalty fees paid to us.
Upon the expiration of a franchise agreement, a franchisee may choose to franchise with one of our competitors or operate as an independent broker. Competitors may offer franchisees whose franchise agreements are expiring or prospective franchisees products and services similar to ours at rates that are lower than we charge.
We also face the risk that currently unaffiliated brokers may not enter into franchise agreements with us because they believe they can compete effectively in the market without the need to license a brand of a franchisor and receive services offered by a franchisor. Additionally, unaffiliated brokers may decide not to enter into a franchise relationship with us asfranchisor or because they may believe that their business will be more attractive to a prospective purchaser without the existence of a franchise relationship.
Regional and local franchisors as well as franchisors offering different franchise models or services provide additional competitive pressure in certain areas.pressure. To remain competitive in the sale of franchiseseffectively compete with competitor franchisors and to retain our existingrecruit new franchisees, we may have to reducetake actions that would result in increased costs to us (such as increased sales incentives to franchisees) or decreased royalty payments to us (such as a reduction in the fees we charge our franchisees, increase the amount of non-standard incentives we issue or take other actions or employ other modelsfranchisees), which may have a material adverse effect on our ability to be competitive with fees charged by competitors.grow earnings. In addition, the full-service traditional franchise model that we employ has experienced declines in market share over the past several years. If this trend continues or if we failour continued implementation of strategic initiatives intended to successfully diversify our franchise offerings, we may fail to attractadd new franchisees and existing franchisees may not renew their agreementsgrow our agent base through the introduction of new franchisee fee models and brands, while intended to capture additional market share with us.
Our ability to succeed as a franchisor is largely dependent on the efforts and abilities of our franchisees to attract and retain independent sales agents, which is subject to numerous factors, including the sales commissions or other compensation they receive and their perception of brand value and the value of support services we provide. Competition for sales agents in the real estate services industry, including within our franchise system, is high, in particular with respect to more productive sales agents. Increasingly, independent sales agents have affiliated with brokerages that offer a different mix of services to the independent sales agents, allowing the independent sales agent to retain a greater percentage of the commission and purchase services from other vendors as needed. If our franchisees fail to attract and retain successful independent sales agents or they fail to replace departing successful independent sales agents with similarly productive independent sales agents, our franchisees' gross commission income may decrease, resulting in a reduction in royalty fees paid to us.
Listing aggregators and other web-based real estate service providers may also begin to compete for part of our franchisor service revenue through referral or other fees and could disintermediate our relationshipsbrokers unaffiliated with our franchisees andbrands, could result in greater intra-brand competition among our franchisees' relationships with their independent sales agents and buyers and sellers of homes.brands.
Our company owned brokerage business, like that of our franchisees, generallyRealogy Title Group also faces intense competition. We compete with national and regional independent real estate brokerages and franchisors, franchisees of our brands and other real estate franchisors and discount and limited service brokerages for both business and independent sales agents. Real estate brokers typically compete for business primarily on the basis of services offered, reputation, utilization of technology, personal contacts and brokerage commission.competitive risks:
Competition is particularly severe in the densely populated metropolitan areas in which we operate.
In addition, the real estate brokerage industry has minimal barriers to entry for new participants, including participants pursuing non-traditional methods of marketing real estate, such as brokers who discount their commissions and companies that employ technologies intended to disrupt the traditional brokerage model or minimize or eliminate the role brokers and sales agents perform in the homesale transaction process. Other non-traditional models that operate outside of the brokerage industry, such as companies that leverage capital to purchase homes directly from sellers, having been gaining market attention in recent years. Certain of our competitors are also increasingly well-funded, which strengthens their competitive position and ability to offer aggressive or alternative compensation arrangements to top-performing sales agents. Moreover, a growing number of companies are competing in non-traditional ways for a portion of the gross commission income generated by homesale transactions. For example, listing aggregators and other web-based real estate service providers not only compete for our company owned brokerage business by establishing relationships with independent sales agents and/or buyers and sellers of homes, they also increasingly charge brokerages and independent sales agents new fees for existing and new services.
Our average homesale commission rate per side in our company owned real estate services segment has remained relatively constant from 2002 to 2017, changing from 2.62% in 2002 to 2.44% for the year ended December 31, 2017. As with our real estate franchise business, a decrease in the average brokerage commission rate may adversely affect our revenues.
We also compete for the services of qualified licensed independent sales agents. Some of the firms competing for sales agents use different models of compensation, which may be appealing to certain sales agents and hinder our ability to attract and retain those agents. The ability of our company owned brokerage offices to retain independent sales agents is generally subject to numerous factors, including the sales commissions they receive, their perception of brand value and provided support services, and markets served. Competition for sales agents could reduce the commission amounts retained by our Company after giving effect to the split with independent sales agents and possibly increase the amounts that we spend on marketing.
In our relocation services business, we compete primarily with global and regional outsourced relocation service providers. We have faced greater competition from firms that provide services on a global basis. Competition is expected to continue to intensify as an increasingly higher percentage of relocation clients reduce their global relocation benefits and related spend.
The title and settlement services business is highly competitive and fragmented.
The number and size of competing companies vary in the different areas in which we conduct business. In certain parts of the country we compete with small title agents and attorneys while in other parts of the country our competition is the larger title underwriters and national vendor management companies.In addition, we compete with the various brands of national competitors.
Listing aggregator concentration and market power creates, and is expected to continue to create, disruption in the residential real estate brokerage industry, which may have a material adverse effect on our results of operations and financial condition.
The concentration and market power of the top listing aggregators allow them to monetize their platforms by a variety of actions, including expanding into the brokerage business, charging significant referral fees, charging listing and display fees, diluting the relationship between agents and brokers (and between agents and the consumer), tying referrals to use of their products, consolidating and leveraging data, and engaging in preferential or exclusionary practices to favor or disfavor other industry participants. These actions divert and reduce the earnings of other industry participants, including our company owned and franchised brokerages.
One aggregator has recently introduced an iBuying offering to consumers and if this listing aggregator or another aggregator is successful in gaining market share with such offering, it could control significant industry inventory and an increasing portion of agent referrals, including the ability to direct referrals to agents and brokers that share revenue with them.
Aggregators could intensify their current business tactics or introduce new programs that could be materially disadvantageous to our business and other brokerage participants in the industry, including:
•broadening their programs that charge brokerages and their affiliated sales agents fees including, referral, listing, display, advertising and related fees;
•increasing the fees associated with such programs;
•introducing new fees for new or existing services;
•setting up competing brokerages;
•not including our or our franchisees' listings on their websites;
•reducing listing fees they pay to industry participants;
•controlling significant inventory and agent referrals;
•utilizing its aggregated data for competitive advantage;
•disintermediating our relationship with affiliated franchisees and independent sales agents; and/or
•disintermediating the relationship between the independent sales agent and the buyers and sellers of homes.
Such tactics could further increase pressures on the profitability of our company owned and franchised brokerages and affiliated independent sales agents, reduce our franchisor service revenue and dilute our relationships with our franchisees and our and our franchisees' relationships with affiliated independent sales agents and buyers and sellers of homes.
We currently receive meaningful listing fees for our provision of real estate listings and such fees help defray expenses for lead generation and other programs to benefit affiliated agents and franchisees. We do not expect this revenue stream to extend beyond the first quarter of 2022 because of changes in industry practices around syndication and distribution of listings. The loss of this revenue, which could occur prior to 2022, could have a meaningful adverse effect on our revenues and earnings.
The discontinuation of a long-term, significant affinity client program in 2019 is expected to result in a material decline in earnings at Realogy Leads Group and a comparable dollar reduction in earnings for Realogy Brokerage Group and Realogy Franchise Group.
Our affinity revenues are highly concentrated. In September 2019, USAA, a long-time affinity client, ceased new enrollments under its affinity program with us. USAA was our largest affinity client and in 2019, referrals generated by the USAA affinity program represented a significant portion of the 78,700 total homesale transactions closed by our company owned and franchised brokerages from the Realogy Broker Network. We expect that the discontinuation of the USAA business will result in (1) a material decline in earnings at Realogy Leads Group and (2) a comparable dollar reduction in earnings in the aggregate for Realogy Brokerage Group and Realogy Franchise Group as a result of the loss of the referrals from the USAA affinity program.
If our next largest affinity client ceases or reduces volume under their contract with us, our revenues and profitability would be materially adversely affected.
Contracts with an affinity client are generally terminable at any time at the option of the client, do not require such client to maintain any level of business with us and are non-exclusive. Our affinity revenues are highly concentrated.
If our next largest affinity client ceased or reduced volume under their contract with us, our revenues (including at Realogy Leads, Franchise, Brokerage and Title Groups) and profitability would be materially adversely affected.
We may not be able to grow our company-directed affinity programs and such programs may not generate a meaningful number of high-quality referrals.
A key component of our growth strategy is focused on providing affiliated independent sales agents with high-quality referrals. During 2019, we launched our first company-branded affinity program, Realogy Military Rewards, and announced the expected 2020 launch of an affinity program for AARP members. We expect that significant time and effort and meaningful investment will be required to increase awareness of and affinity member participation in new affinity programs and even if we are successful in these efforts, such programs may not generate a meaningful number of high-quality referrals.
Our financial results are affected by the operating results of our franchisees.
Our real estate franchise services segmentRealogy Franchise Group receives revenue in the form of royalties, which are based on a percentage of gross commission income earned by our franchisees. Accordingly, the financial results of our real estate franchise services segmentRealogy Franchise Group are dependent upon the operational and financial success of our franchisees. If industry trends or economic conditions are not sustainedworsen or do not continue to improve or if one or more of our top performing franchisees become less competitive or leaves our franchise system, our franchisees' financial results may worsen and our royalty revenues may decline, which could have a material adverse effect on our revenues and profitability. In addition, we may have to increase our bad debt and note reserves. We may also have to terminate franchisees due to non-payment.
Consolidation among our top 250 franchisees may cause our royalty revenue to grow at a slower pace than homesale transaction volume.
Although during 2019, none of our franchisees (other than Realogy Brokerage Group) generated more than 1% of the total revenue of our real estate franchise business, a significant majority of this segment's revenue is generated from our top 250 franchisees, which have grown faster than our other franchisees through organic growth and market consolidation in recent years. If the amount of gross commission income generated by our top 250 franchisees continue to grow at a quicker pace relative to our other franchisees, we would expect our royalty revenue to continue to increase, but at a slower pace than homesale transaction volume due to increased volume incentives and other incentives earned by such franchisees, both of which directly impact our royalty revenue.
If a meaningful number of our franchisees do not renew their franchisee agreements with us, our revenues and profitability may be materially adversely affected.
In addition, our franchisees face the same market pressures generally facing the industry (such as margin compression) and may seek lower royalty rates or higher incentives from us. If franchisees, in particular multiple top 250 franchisees, fail to renew their franchise agreements (or otherwise leave our franchise system), or if we continue to induce franchisees to renew these agreements through lower royalty rates or higher incentives, then our royalty revenues may decrease, and profitability may be lower than in the past. These risks and the materiality of the potential impact on our revenues and profitability are pronounced in years when a significant number of franchise agreements, which typically have aan initial ten year term that may be extended for a shorter term, are expiring. In addition, although during 2017, none
Negligence or intentional actions of our franchisees (other than NRT) generated more than 1% of our real estate franchise business, a significant majority of this segment's revenue is generated from our top 250 franchisees. If one or more of our significant franchisees fail to renew their contracts with us, our revenues and profitability could be materially adversely affected.
Our franchisees and their independent sales agents could take actions that could harm our business.
Our franchisees are independent business operators and we do not exercise control over their day-to-day operations. Our franchisees may not successfully operate a real estate brokerage business in a manner consistent with industry standards or may not affiliate with effective independent sales agents or employees. If our franchisees or their independent sales agents were to engage in negligent or intentional misconduct or provide diminished quality of service to customers, our image and reputation may suffer materially and adversely affect our results of operations. ImproperNegligent or improper actions involving our franchisees, including regarding their relationships with independent sales agents, clients and employees, may also lead to direct claims against us based on theories of vicarious liability, negligence, joint operations and joint employer liability which, if determined adversely, could increase costs, negatively impact the business prospects of our franchisees and subject us to incremental liability for their actions.
Additionally, franchisees and their independent sales agents including those handling properties for our relocation business, may engage or be accused of engaging in unlawful or tortious acts, such as violating the anti-discrimination requirements of the Fair Housing Act.Act or failing to make necessary disclosures under federal and state law. Such acts or the accusation of such acts could harm our brands' image, reputation and goodwill or compromise our relocation business relationships with clients.
The activities of franchisees and master franchisees outside of the U.S. are more difficult and more expensive to monitor and improper activities or mismanagement may be more difficult to detect. Negligent or improper activities involving our franchisees and master franchisees, including regarding their relationships with independent sales agents, clients and employees, may result in reputational damage to us and may lead to direct claims against us based on theories of vicarious liability, negligence, joint operations and joint employer liability which, if determined adversely, could increase costs, negatively impact the business prospects of our franchisees and subject us to incremental liability for their actions.
Franchisees, as independent business operators, may from time to time disagree with us and our strategies regarding the business or our interpretation of our respective rights and obligations under the franchise agreement. To the extent we have such disputes, the attention of our management and our franchisees will be diverted, which could have a material adverse effect on our business, financial condition, results of operations or cash flows.
Actions by the Negligence or intentional actions of independent sales agents engaged by our company owned brokerages could materially and adversely affect our reputation and subject us to liability.
Our company owned brokerage operations rely on the performance of independent sales agents. If the independent sales agents were to provide lower quality services to our customers or engage in negligent or intentional misconduct, our image and reputation could be materially adversely affected. In addition, we could also be subject to litigation and regulatory claims arising out of their performance of brokerage services, which if adversely determined, could materially and adversely affect us.
We do not own two of our brands and significant difficulties in the business of the brand owners could negatively reflect on the brand and the brand value.
The Sotheby's International Realty® and Better Homes and Gardens® Real Estate brands are owned by the companies that founded these brands. WeUnder separate long-term license agreements, we are the exclusive party licensed to run brokerage services in residential real estate under those brands, whether through our franchisees or our company owned operations. Our future operations and performance with respect to these brands requires the successful protection of those brands. Any significant difficulties in the business of the brand owners could negatively reflect on the brand and the brand value.
If one or more significant affinity clients or a significant numberSeveral of our relocation clients cease or reduce volume under their contractsrecent strategic initiatives are collaborations with us, our revenuesthird-party partners and profitability could be materially adversely affected.
Substantially all of our contracts with our affinity and relocation clients are terminable at any time at the option of the client, are non-exclusive and do not require such client to maintain any level of business with us. If one or more significant affinity or relocation clients cease or reduce volume under their contracts with us, our revenues and profitability could be materially adversely affected.
If recent trends in corporate relocation practices continue, there could be fewer employee relocations, which may have a material adverse impact on the operating results of our relocation business.
Many of the general residential housing trends impacting our businesses that derive revenue from homesales also impact our relocation services business. Additionally, key performance drivers of our relocation business include global corporate spending on relocation services, which continue to shift to lower cost relocation benefits as corporate clients engage in cost reduction initiatives and/or restructuring programs, as well as changes in employment relocation trends. As a result of a shift in the mix of services and number of services being delivered per move, our relocation business has been increasingly subject to a competitive pricing environment and lower average revenue per relocation. Lower volume growth, in particular with respect to global relocation activity, has also impacted the operating results of our relocation business. These factors may continue to put pressure on the growth and profitability of this segment. In addition, the suspension of the deduction for certain moving expenses under the 2017 Tax Act could potentially contribute to fewer businesses offering these benefits and could result in fewer instances of these services.
Wewe are reliant on third-party vendors to perform services on our behalf.
Aspectsbehalf as well as key components of our business, such aswhich could have a material adverse effect on our relocation segment,business and results of operations.
We have increasingly entered into strategic collaborations with third parties to enhance our value proposition to independent sales agents and franchisees and other aspects of our business are performed on our behalf by third-party vendors and cover a wide variety of servicesservices. Our strategic partners and such vendors may be in possession of personal information of our customers. In many instances, these suppliersthird parties are in direct contact with our customers in order to deliver services on our behalf.behalf or to fulfill their role in the applicable collaboration. If our third-party supplierspartners or vendors were to provide diminished services to our customers or face cybersecurity breaches of their information technology systems, our image and reputation could be materially adversely affected. In addition, we could also be subject to litigation and regulatory claims arising out of the performance of our third-party suppliers and partners based on theories of breach of contract, vicarious liability, negligence or failure to comply with laws and regulations including those related to anti-bribery and anti-corruption, such as the Foreign Corrupt Practices Act and U.K. Bribery Act and those related to data protection and privacy, suchincluding the CCPA and GDPR.
In addition, many components of our business, including information technology, key operational processes (such as accounts payable, payroll, and travel and expense) and critical client systems, are provided or hosted by third parties. Moreover, we are now building our agent- and franchisee-focused technology products with an open architecture in order to selectively enable unaffiliated, qualified third-party vendors and products to access and interface with our products. The actions of our third-party vendors and unaffiliated third-party developers are beyond our control. In addition, we recently engaged with a strategic third-party partner to develop the General Data Protection Regulation, effective May 2018.next generation of certain key brand, broker and agent tools, including our customer relationship management product. If our vendors or third-party applications fail to perform as we expect, or if we fail to adequately monitor their performance, our operations and reputation could suffer. Depending on the function involved, vendor or third-party application failure or error may lead to increased costs, business disruption, processing inefficiencies, the loss of or damage to intellectual property or sensitive data through security breaches or otherwise, effects on financial reporting, loss of customers, litigation or remediation costs, or damage to our reputation. In addition, although we have a Vendor Code of Conduct, we may be subject to the consequences of fraud, bribery, or misconduct by employees of our vendors, which can result in significant financial or reputational harm. We face the same risks with respect to subcontractors that might be engaged by our third-party vendors and partners.
We are reliant upon information technology to operate our business and maintain our competitiveness.
Our ability to leverage our technology and data scale is critical to our long-term strategy. Our business, including our ability to attract employees and independent sales agents, increasingly depends upon the use of sophisticated information technologies and systems, including technology and systems (cloud solutions, mobile and otherwise) utilized for communications, marketing, productivity tools, training, lead generation, records of transactions, business records (employment, accounting, tax, etc.), procurement, call center operations and administrative systems. The operation of these technologies and systems is dependent upon third-party technologies, systems and services for which there are no assurances of continued or uninterrupted availability and support by the applicable third-party vendors on commercially reasonable terms. We also cannot assure that we will be able to continue to effectively operate and maintain our information technologies and systems. In addition, our information technologies and systems are expected to require refinements and enhancements on an ongoing basis, and we expect that advanced new technologies and systems will continue to be introduced. We may not be able to obtain such new technologies and systems, or to replace or introduce new technologies and systems as quickly as our competitors or in a cost-effective manner. Also, we may not achieve the benefits anticipated or required from any new technology or system, and we may not be able to devote financial resources to new technologies and systems in the future.
Tightened mortgage underwriting standards could continue to reduce homebuyers' ability to access the credit markets on reasonable terms.
During the past several years, many lenders have significantly tightened their underwriting standards and many alternative mortgage products have become less available in the marketplace. More stringent mortgage underwriting standards or a reduction in the availability of alternative mortgage products could adversely affect the ability and willingness of prospective buyers to finance home purchases or to sell their existing homes, whichhomes. In addition, the combination of tightened mortgage underwriting standards with first-time homebuyers who have heavy debt and may be unable to satisfy down payment requirements may intensify first-time homebuyer concerns about investing in a home and impact their ability or willingness to enter into a homesale transaction. A decline in the number of homesale transactions due to the foregoing would adversely affect our operating results.
We may not realize the expected benefits from our mortgage origination joint venture.venture or from other existing or future joint ventures.
OurGuaranteed Rate Affinity, our mortgage origination joint venture with Guaranteed Rate, began doing business in August 2017 on a phased-in basis. Wehas been and may not realize the expected benefits (including anticipated earnings and dividends) from the mortgage origination joint venture. For example,again be materially adversely affected by changes affecting the mortgage industry, in general, including but not limited to regulatory changes, increases in mortgage interest rates, high levels of competition and decreases in operating margins, may have a material adverse impact on earnings and dividends from the joint venture. Likewise, operational or liquidity risks that may be faced by themargins. In addition, our joint venture or our partner could face operational or liquidity risks, such as litigation or regulatory investigations that may arise,arise. Any of the foregoing could have a materialan adverse impact, which may be material, on our earnings and dividends from Guaranteed Rate Affinity. Operational, liquidity, regulatory, macroeconomic and competitive risks also apply to our other existing joint ventures and would likely apply to any joint venture we may enter into in the benefits we expect to realize from the venture.future.
In addition, when we hold a minority stake in a joint venture, we generally do not exercise control over day-to-day operations of the joint venture. For example, under the Operating Agreement governing the joint venture,Guaranteed Rate Affinity, we own a 49.9% equity interest and have certain governance rights related to the joint venture, but do not have control of the day-to-day operations of the joint venture. Rather, our joint venture partner, Guaranteed Rate, is the managing partner of the venture and may make decisions with respect to the day-to-day operation of the venture. Our current or future joint venture partners may make decisions which may harm the joint venture or be contrary to our best interestsinterests. Additionally, even if we hold a minority interest in any joint venture, improper actions by our joint venture partners may also lead to direct claims against us based on theories of vicarious liability, negligence, joint operations and joint employer liability, which, if determined adversely, could increase costs, negatively impact our reputation and subject us to liability for their actions. Any of the foregoing may adversely affecthave a material adverse effect on our results of operations or equity interest in the applicable joint venture.
We may be unable to achieve or maintain cost savings and other benefits from our restructuring activities.
We continue to engage in business optimization initiatives that focus on maximizing the efficiency and effectiveness of the cost structure of each of the Company's businesses. These actions are designed to improve client service levels across each of the business units while enhancing the Company's profitability and incremental margins. We may not be able to achieve these improvements in the efficiency and effectiveness of our operations. We also may incur greater costs than currently anticipated to achieve these savings and we may not be able to maintain these cost savings and other benefits in the future.
Failure to successfully complete or integrate acquisitions and joint ventures into our existing operations, or to complete or effectively manage divestitures or refranchisings, could adversely affect our business, financial condition or results of operations.
We regularly review our portfolio of businesses and evaluate potential acquisitions, joint ventures, divestitures, refranchisings and other strategic transactions. Potential issues associated with these activities could include, among other things: our ability to complete or effectively manage such transactions on terms commercially favorable to us or at all; our ability to realize the full extent of the expected returns, benefits, cost savings or synergies as a result of a transaction, within the anticipated time frame, or at all; and diversion of management’s attention from day-to-day operations. In addition, the success of any future acquisition strategy we may pursue will depend upon our ability to fund such acquisitions given our total outstanding indebtedness, find suitable acquisition candidates on favorable terms and for target companies to find our acquisition proposals more favorable than those made by other competitors. If an acquisition or joint venture is not successfully completed or integrated into our existing operations, or if a divestiture or refranchising is not successfully completed or managed or does not result in the benefits or cost savings we expect, our business, financial condition or results of operations may be adversely affected.
Consummation of the planned sale of Cartus Relocation Services is subject to satisfaction or waiver of closing conditions and even if we successfully consummate the planned sale, we may fail to achieve the anticipated benefits of the transaction.
On November 7, 2019, we announced that we have entered into a Purchase and Sale Agreement (the “Purchase Agreement”) with a subsidiary of SIRVA, Inc. (“SIRVA”) under which we have agreed to sell Cartus Relocation Services. Completion of the planned sale is subject to certain closing conditions and there can be no assurance that all such conditions will be satisfied and that the planned sale will be successfully completed on a timely basis or at all. Failure to complete the sale could have a material adverse effect on our business, financial condition and results of operations.
In addition, the transaction may involve unexpected costs, liabilities or delays. While the transaction is pending, we will be subject to uncertainties that could adversely affect our business and results of operations, including the ability of Cartus Relocation Services to obtain or retain business, which in turn, could adversely impact the revenues and financial result of our other business units. We may also experience negative reactions from our relocation clients, stockholders, creditors, franchisees, vendors, and employees, among others.
While we will enter into a non-exclusive five-year broker services agreement with SIRVA in connection with the transaction, pursuant to which Realogy Leads Group could, at the discretion of SIRVA, continue to provide high-quality brokerage services via the Realogy Broker Network to relocation clients of SIRVA, there can be no assurances as to the number of referrals or underlying homesale transactions, if any, that company owned and affiliated franchisee brokerages participating in the network may handle for SIRVA's relocation business and the volume of such referrals and transactions could be materially lower than the historical level of activity generated from Cartus Relocation Services, which could have a negative impact on our earnings (including at Realogy Franchise, Brokerage and Title Groups) and profitability and could reduce the effectiveness of the role of the Realogy Broker Network in our recruitment and retention efforts for independent sales agents and franchisees.
The planned sale involves a number of additional risks, including among other things, certain indemnification risks and risks associated with the provision of transitional services. We have agreed to provide certain transition services to SIRVA, such as technological support and services. In addition, SIRVA will provide certain systems, services and leased space to us during the transition period. There are risks in providing and transitioning away from shared services, as they may incur unanticipated costs and liabilities, may divert our management’s and employees’ attention and may adversely affect our continuing business operations. This transition services agreement with SIRVA may also lead to disputes over rights to certain shared property and over the allocation of costs and revenues for products and operations in connection with the transition services agreement. In addition, there are increased opportunities for errors inherent in maintaining the books and records of two separate unrelated companies on a single enterprise resource planning system.
All of these factors could decrease the anticipated benefits of the transaction and could negatively impact our stock price and our business, financial condition and results of operations.
Regulatory and Legal
There may be adverse financial and operational consequences to us and our franchisees if independent sales agents are reclassified as employees.
The legal relationship between residential real estate brokers and licensed sales agents throughout most of the real estate industry historically has been that of independent contractor. Although we believe our classification practices are proper and consistent with the legal framework for such classification, our company owned brokerage operations could face substantial litigation or disputes in direct claims or regulatory procedures, including the risk of court or regulatory determinations that certain groups of real estate agents should be reclassified as employees and entitled to unpaid minimum wage, overtime, benefits, expense reimbursement and other employment obligations. Franchisees affiliated with one of the Company’s brands face the same risks with respect to their affiliated independent sales agents. In addition, our franchise business may face similar claims as an alleged joint employer of an affiliated franchisee’s independent sales agents.
Real estate laws generally permit brokers to engage sales agents as independent contractors. Federal and state agencies have their own rules and tests for classification of independent contractors as well as to determine whether employees meet exemptions from minimum wages and overtime laws. These tests consider many factors that also vary from state to state. The tests continue to evolve based on state case law decisions, regulations and legislative changes. There is active worker classification litigation in numerous jurisdictions against a variety of industries—including residential real estate brokerages
—where the plaintiffs seek to reclassify independent contractors as employees or to challenge the use of federal and state minimum wage and overtime exemptions.
Certain jurisdictions, including California where Realogy Brokerage Group generated approximately 25% of its revenue in 2019, have adopted or are considering adopting standards that are significantly more restrictive than those historically used in wage and hour cases. Under the newer test, an individual is considered an employee unless the hiring entity satisfies three specific criteria that focus on control of the performance of the work and whether the nature of the work involves a separate trade that is outside the usual course of the hiring entity’s business.
In September 2019, California adopted legislation that codifies the newer test, but also provides an alternate worker classification test applicable to real estate professionals that is less stringent than the jurisdictional test. Since the enactment, there have been several challenges to the constitutionality and enforceability of the law as it applies to other industries, which may ultimately impact the less restrictive test currently applicable to real estate professionals.
Similar to California, a number of other states have separate statutory structures and existing case law that articulate different, less stringent standards for real estate agents operating as independent contractors. How these differing tests will be reconciled is presently unclear, and given the evolving nature of this issue, we are currently unable to estimate what impact, if any, this would have on our operations or financial results. For a summary of certain legal proceedings initiated in California involving the Company that include worker misclassification allegations, see Note 15, "Commitments and Contingencies", in this Annual Report.
Significant sales agent reclassification determinations in the absence of available exemptions from minimum wage or overtime laws, including damages and penalties for prior periods (if assessed), could be disruptive to our business, constrain our operations in certain jurisdictions and could have a material adverse effect on the operational and financial performance of the Company.
Cybersecurity incidents could disrupt business operations and result in the loss of critical and confidential information andor litigation or claims arising from such incidents, any of which may adversely impact our reputation and results of operations.
We face growing risks and costs related to cybersecurity threats to our operations, our data and customer, franchisee, employee and independent sales agent data, including but not limited to:
•the failure or significant disruption of our operations from various causes, including human error, computer malware, ransomware, insecure software, zero dayzero-day threats, threats to or disruption of third-party vendors who provide critical services, or other events related to our critical information technologies and systems;
•the increasing level and sophistication of cybersecurity attacks, including distributed denial of service attacks, data theft, fraud or malicious acts on the part of trusted insiders, social engineering, or other unlawful tactics aimed at compromising the systems and data of our officers, employees, and franchiseefranchisees and company owned brokerage independent sales agents and their customers (including via systems not directly controlled by us, such as those maintained by our franchisees, affiliated independent sales agents, joint venture partners and third party service providers, including our third-party relocation service providers); and
•the reputational and financial risks associated with a loss of data or material data breach (including unauthorized access to our proprietary business information or personal information of our customers, employees and independent sales agents), the transmission of computer malware, or the diversion of homesale transaction closing funds.
Global cybersecurity threats can range from uncoordinated individual attempts to gain unauthorized access to information technology systems via viruses, worms, and other malicious software, to phishing, or to advanced and targeted hacking launched by individuals, organizations or organizations.nation states. These attacks may be directed at the Company, its employees, franchisees, third-party service providers, joint venture partners, and/or the independent sales agents of our franchisee and company owned brokerages and their customers. An attack, threat or breach of one system can travel to one or more other systems.
In the ordinary course of our business, we and our third-party service providers, our franchisee and company owned brokerage sales agents and our relocation business collect, store and storetransmit sensitive data, including our proprietary business information and intellectual property and that of our clients as well as personally identifiablepersonal information, sensitive financial
information and other confidential information of our employees, customers and the customers of our franchisee and company owned brokerage sales agents.
Additionally, we increasingly rely on third-party data processing, storage providers, and critical infrastructure services, including cloud solution providers. The secure processing, maintenance and transmission of this information are critical to our operations and with respect to information collected and stored by our third-party service providers, we are reliant upon their security procedures. A breach or attack affecting one of our third-party service providers or partners could harm our business even if we do not control the service that is attacked.
Moreover, the real estate industry is actively targeted by cyber-attacker attempts to conduct electronic fraudulent activity (such as phishing), security breaches and similar attacks directed at participants in real estate services transactions. These attacks, when successful, can result in fraud, including wire fraud related to the diversion of homesalehome sale transaction
funds, or other harm, which could result in significant claims and reputational damage to us, our brands, our franchisees, and our independent sales agents and could also result in material increases in our operational costs. Further, these threats to our business may be wholly or partially beyond our control as our franchisees as well as our customers, franchisee and company owned brokerage independent sales agents and their customers and third-party service providers may use e-mail, computers, smartphones and other devices and systems that are outside of our security control environment. In addition, real estate transactions involve the transmission of funds by the buyers and sellers of real estate and consumers or other service providers selected by the consumer may be the subject of direct cyber-attacks that result in the fraudulent diversion of funds, notwithstanding efforts we have taken to educate consumers with respect to these risks.
In addition, the increasing prevalence and sophistication of cyber-attacks as well as the evolution of cyber-attacks and other efforts to breach or disrupt our systems or those of our employees, customers, third-party service providers, joint venture partners, and/or franchisee and company owned brokerage sales agents and their customers, has led and will likely continue to lead to increased costs to us with respect to preventing, investigating, mitigating, insuring against and remediating these risks, as well as any related attempted or actual fraud.
Moreover, we are required to comply with growing regulations both in the United States and in other countries where we do business that regulate cybersecurity, privacy and related matters.matters, some of which impose steep fines and penalties for noncompliance.
While we, our third-party service providers, and our franchisees, and franchisee and company owned brokerage independent sales agents, ourand joint venture partners and our relocation business have experienced and expect to continue to experience these types of threats and incidents, none of them to date has been material to the Company. Although we employ measures to prevent, detect, address and mitigate these threats (including access controls, data encryption, penetration testing, vulnerability assessments and maintenance of backup and protective systems), and conduct diligence on the security measures employed by key third-party service providers, cybersecurity incidents, depending on their nature and scope, could potentially result in the misappropriation, destruction, corruption or unavailability of critical systems, data and confidential or proprietary information (our own or that of third parties, including personally identifiablepersonal information and financial information) and the disruption of business operations.
Our corporate errors and omissions and cybersecurity breach insurance may be insufficient to compensate us for losses that may occur. The potential consequences of a material cybersecurity incident include regulatory violations of applicable U.S. and international privacy and other laws, reputational damage, loss of market value, litigation with third parties (which could result in our exposure to material civil or criminal liability), diminution in the value of the services we provide to our customers, and increased cybersecurity protection and remediation costs (that may include liability for stolen assets or information), which in turn could have a material adverse effect on our competitiveness and results of operations.
We may experience significant claims relating to our operations, and losses resulting from fraud, defalcation or misconduct.
We issue title insurance policies which provide coverage for real property to mortgage lenders and buyers of real property. When acting as a title agent issuing a policy on behalf of an underwriter, our insurance risk is typically limited to the first five thousand dollars for claims on any one policy, though our insurance risk is not limited if we are negligent. Our title underwriter typically underwrites title insurance policies of up to $1.5 million. For policies in excess of $1.5 million, we typically obtain a reinsurance policy from a national underwriter to reinsure the excess amount. To date, our title underwriter has experienced claims losses that are significantly below the industry average; however, our claims experience could increase in the future, which could negatively impact the profitability of that business. We may also be subject to legal claims or additional claims losses arising from the handling of escrow transactions and closings by our owned title agencies or our underwriter's independent title agents. We carry errors and omissions insurance for errors made by our company owned brokerage business during the real estate settlement process as well as errors by us related to real estate services. Our franchise agreements also require our franchisees to name us as an additional insured on their errors and omissions and general liability insurance policies. The occurrence of a significant claim in excess of our insurance coverage (including any coverage under franchisee insurance policies) in any given period could have a material adverse effect on our financial condition and results of operations during the period. In addition, insurance carriers may dispute coverage for various reasons and there can be no assurance that all claims will be covered by insurance.
Fraud, defalcation and misconduct by employees are also risks inherent in our business, particularly given the high transactional volumes in our company owned brokerage, title and settlement services and our relocation businesses. We may also from time to time be subject to liability claims based upon the fraud or misconduct of our franchisees. To the extent that any loss or theft of funds substantially exceeds our insurance coverage, our business could be materially adversely affected.
If we fail to protect the privacy and personally identifiablepersonal information of our customers or employees, we may be subject to legal claims, government action and damage to our reputation.
We rely onTo run our business, it is essential for us to store and transmit sensitive personal information about our customers, prospects, employees, independent agents, and relocation transferees in our systems and networks. At the collectionsame time, we are subject to numerous laws, regulations, and useother requirements, domestically and globally, that require businesses like ours to protect the security of personal information, notify customers and other individuals about our privacy practices, and limit the use, disclosure, sale or transfer of personal data. Regulators in the U.S. and abroad continue to enact comprehensive new laws or legislative reforms imposing significant privacy and cybersecurity restrictions. The result is that we are subject to increased regulatory scrutiny, additional contractual requirements from corporate customers, and heightened compliance costs. These ongoing changes to conductprivacy and cybersecurity laws also may make it more difficult for us to operate our business. We
business and may have a material adverse effect on our operations. For example, in the U.S., we are required to comply with increasingly complexthe Gramm-Leach-Bliley Act, which governs the disclosure and changing datasafeguarding of consumer financial information, as well as state statutes governing privacy regulations bothand cybersecurity matters including the CCPA, which went into effect in 2020, and the NYDFS Cybersecurity Regulation, which went into effect in 2017. The CCPA imposes new and comprehensive requirements on organizations that collect, sell and disclose personal information about California residents and employees. Other states, including New York and Massachusetts, are expected to implement their own privacy statutes in the United Statesnear term.
Under the NYDFS cybersecurity regulation, regulated financial institutions, including Realogy Title Group, are required to establish a detailed cybersecurity program. Other state regulatory agencies have or are expected to enact similar requirements following the adoption of the Insurance Data Security Model Law by the National Association of Insurance Commissioners that is consistent with the New York regulation. For example, the South Carolina Insurance Data Security Act, effective January 1, 2019, is based on the Insurance Data Security Model Law and inimposes new breach notification and information security requirements on insurers, agents, and other countries where we do business that regulatelicensed entities authorized to operate under the collection, use and transfer of personal data,state’s insurance laws, including particularly the transfer of personal data between or among countries. These laws and their interpretations continue to develop and may be inconsistent from jurisdiction to jurisdiction. In many cases, these laws apply not only to third-party transactions, but also to transfers of information between us and our subsidiaries, including employee information.
Many of these foreign data privacy regulations (including the General Data Protection Regulation,Realogy Title Group. The European Union’s GDPR, which becomesbecame effective in the European UnionMay 2018, conferred new and significant privacy rights on May 25, 2018) are more stringent than those in the United Statesindividuals (including employees and may result in significantly greater compliance burdensindependent agents), and costs. In addition, non-compliance with these regulationsmaterially increased penalties for violations.
Any significant violations of privacy and cybersecurity could result in the loss of new or existing business, litigation, regulatory investigations, the payment of fines, damages, and penalties or significant legal liability forand damage to our acts and, potentially, for acts of companies that perform servicesreputation, which could have a material adverse effect on our behalf.business, financial condition, and results of operations.
We could also be adversely affected if legislation or regulations are expanded to require changes in our business practices or if governing jurisdictions interpret or implement their legislation or regulations in ways that negatively affect our business, results of operations or financial condition.
In addition, while we disclose our information collection and dissemination practices in a published privacy statement on our websites, which we may modify from time to time, we may be subject to legal claims, government action and damage to our reputation if we act or are perceived to be acting inconsistently with the terms of our privacy statement, customer expectations or state, national and international regulations.
The occurrence of a significant claim in excess of our insurance coverage in any given period could have a material adverse effect on our financial condition and results of operations during the period. In the event we or the vendors with which we contract to provide services on behalf of our customers were to suffer a breach of personal information, our customers, such as our Cartus corporate relocation or affinity clients, their employees or members, respectively, franchisees, independent sales agents and lender channel clients, could terminate their business with us. Further, we may be subject to claims to the extent individual employees or independent contractors breach or fail to adhere to Company policies and practices and such actions jeopardize any personal information.
In addition, concern among potential home buyers or sellers about our privacy practices could result in regulatory investigations, especially in the European Union as related to its Data Privacy Directive or the General Data Protection Regulation once it becomes effective.investigations. Additionally, concern among potential home buyers or sellers could keep them from using our services or require us to incur significant expense to alter our business practices or educate them about how we use personal information.
We are subject to certain risks related to litigation filed by or against us, and adverse results may harm our business and financial condition.
We cannot predict with certainty the cost of defense, the cost of prosecution, insurance coverage or the ultimate outcome of litigation and other proceedings filed by or against us, including remedies or damage awards, and adverse results in such litigation and other proceedings, including treble damages and penalties. Adverse outcomes may harm our business and financial condition. Such litigation and other proceedings may include, but are not limited to:
•actions relating to claims alleging violations of RESPA (see Dodge litigation described in Note 13, "Commitments and Contingencies—Litigation", to our consolidated financial statements included elsewhere in this Annual Report) or state consumer fraud statutes, intellectual property rights, commercial arrangements, franchising arrangements, negligence and fiduciary duty claims arising from franchising arrangements or company owned brokerage operations or violations of similar laws in countries we operate in around the world;
•employment law claims, including claims challenging the classification of sales agents as independent contractors as well as wage and hour and joint employer claims;
cybersecurity incidents, theft•antitrust and anti-competition claims (including claims related to NAR rules regarding buyer broker commissions);
•information security and cyber-crime, including claims under new and emerging data privacy laws related to the protection of customer, employee or third-party information, as well as those related to the diversion of homesale transaction closing funds;
•claims by current or former franchisees that franchise agreements were breached, including improper terminations;
•claims related to the Telephone Consumer Protection Act, including autodialer claims;
•claims generally against the company owned brokerage operations for negligence, misrepresentation or breach claims;of fiduciary duty in connection with the performance of real estate brokerage or other professional services as well as other brokerage claims associated with listing information and property history, including disputes involving buyers of relocation property;
actions against•vicarious or joint liability based upon the conduct of individuals or entities traditionally outside of our title company for defalcations on closing payments or alleging it knew or should have known others were committing mortgage fraud;control, including franchisees and independent sales agents;
•copyright infringement actions, including those alleging improper use of copyrighted photographs on websites or in marketing materials without consent of the copyright holder;
•actions against our title company for defalcations on closing payments or claims against the title agent contending that the agent knew or should have known that a transaction was fraudulent or that the agent was negligent in addressing title defects or conducting settlement;
•claims concerning breach of obligations to make websites and other services accessible for consumers with disabilities; and
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brokerage disputes like the failure to disclose hidden defects in the property as well as other brokerage claims associated with listing information and property history, including disputes involving buyers of relocation property;
vicarious or joint liability based upon the conduct of individuals or entities traditionally outside of our control, including franchisees and independent sales agents;
antitrust and anti-competition claims;
•general fraud claims;claims.
See Note 15, "Commitments and
compliance with wage and hour regulations.
In addition, Contingencies—Litigation", to our consolidated financial statements included elsewhere in this Annual Report for additional information on our litigation matters, including class action litigation. Class action lawsuits can often be particularly burdensome litigation given the breadth of claims, the large potential damages claimed and the significant costs of defense. The risks of litigation become magnified and the costs of settlement increase in class actions in which the courts grant partial or full certification of a large class. In the case of intellectual property litigation and proceedings, adverse outcomes could include the cancellation, invalidation or other loss of material intellectual property rights used in our business and injunctions prohibiting our use of business processes or technology that is subject to third-party patents or other third-party intellectual property rights. In addition, weWe may be required to enter into licensing agreements (if available on acceptable terms or at all) and pay royalties. Insurance coverage may be unavailable for certain types of claims and even where available, insurance carriers may dispute coverage for various reasons, including the cost of defense, and such insurance may not be sufficient to cover the losses we incur.
Adverse decisions in litigation against companies unrelated to us could impact our business practices and those of our franchisees in a manner that adversely impacts our financial condition and results of operations.
Litigation, claims and regulatory proceedings against other participants in the residential real estate or relocation industry may impact the Company when the rulings in those cases cover practices common to the broader industry. Examples may include claims associated with RESPA compliance, broker fiduciary duties, and sales agent classification. Similarly, the Company may be impacted by litigation and other claims against companies in other industries. Rulings on matters such as the enforcement of arbitration agreements and worker classification may adversely affect the Company and other residential real estate industry participants as a result of the classification of sales agents as independent contractors, irrespective of the fact that the parties subject to the rulings are in a different industry. There is active worker classification litigation in numerous jurisdictions, including Massachusetts, California, New Jersey and New York, against a variety of industries where the plaintiffs seek to reclassify independent contractors as employees or to challenge the use of federal and state minimum wage and overtime exemptions. To the extent plaintiffs are successful in these types of litigation matters, and we or our franchisees cannot distinguish our or their practices (or our industry’s practices), we and our franchisees could face significant liability and could be required to modify certain business relationships, either of which could materially and adversely impact our financial condition and results of operations.
We may experience significant claims relating to our operations, and losses resulting from fraud, defalcation or misconduct.
We issue title insurance policies which provide coverage for real property to mortgage lenders and buyers of real property. When acting as a title agent issuing a policy on behalf of an underwriter, our insurance risk is typically limited to the first five thousand dollars for claims on any one policy, though our insurance risk is not limited if we are negligent. Our relationship withtitle underwriter typically underwrites title insurance policies of up to $1.5 million. For policies in excess of $1.5 million, we typically obtain a reinsurance policy from a national underwriter to reinsure the excess amount. To date, our employees istitle underwriter has experienced claims losses that are significantly below the industry average; however, our claims experience could increase in the future, which could negatively impact the profitability of that business. We may also be subject to an arraylegal claims or additional claims losses arising from the handling of different employment, tax reportingescrow transactions and regulatory obligationsclosings by our owned title agencies or our underwriter's independent title agents. We carry errors and any significant failure to comply with these obligations could materially and adversely affectomissions insurance for errors made by our business.
company owned brokerage business during the U.S., these obligations relate to federal and state tax codes, federal and state wage and hour laws, state unemployment, workers’ compensation and disability tax laws, right to organize and anti-discrimination and workplace safety laws. Each state has unique wage and hour laws, which have been the subject of increasing litigation nationwide. In addition, federal agencies and each state have its own rules and tests for classification of independent contractorsreal estate settlement process as well as errors by us related to determine whether employees meet exemptions from minimum wages and overtime laws. These tests consider many factors that also vary from state to state. The tests have evolved based on state case law decisions, regulations and legislative changes, and frequently involve factual analysis. In addition, states have laws and regulations concerning the licensing of real estate agents. While these lawsservices. Our franchise agreements also require our franchisees to name us as an additional insured on their errors and regulations may have separate provisions related to the classificationomissions and general liability insurance policies. The occurrence of sales agents as independent contractors, there can be no assurance that courts will follow the testsa significant claim in these real estate specific laws and regulations when they differ from thoseexcess of our insurance coverage (including any coverage under franchisee insurance policies) in labor statutes and regulations. When companies are found to have misclassified workers as independent contractors instead of employees, courts can impose significant penalties and damages.
We are also subject to the unique wage and payroll-related laws of each other country in which we have employees, including employee right to privacy laws. Failure to comply with these laws could result in significant penalties and damages.
The legal relationship between residential real estate brokers and licensed sales agents throughout the industry historically has been that of independent contractor. Although we believe our classification practices are proper and
consistent with the legal framework for such classification, our company owned brokerage operations could face substantial litigation or disputes in direct claims or regulatory procedures, including the risk of court or regulatory determinations that certain groups of real estate agents should be reclassified as employees and entitled to unpaid minimum wage, overtime, benefits, expense reimbursement and other employment obligations. Significant reclassification determinations in the absence of available exemptions from minimum wage or overtime laws, including damages and penalties for prior periods, could be disruptive to our business, constrain our operations in certain jurisdictions and have a material adverse effect on the operational and financial performance of the Company. In addition, real estate agent reclassificationany given period could have a material adverse effect on our financial condition and results of operations during the operationalperiod. In addition, insurance carriers may dispute coverage for various reasons and financial performancethere can be no assurance that all claims will be covered by insurance.
Fraud, defalcation and misconduct by employees are also risks inherent in our business, particularly given the high transactional volumes in our company owned brokerage, title and settlement services and our relocation businesses. We may also from time to time be subject to liability claims based upon the fraud or misconduct of our franchisees andfranchisees. To the extent that any loss or theft of funds substantially exceeds our competitors.insurance coverage, our business could be materially adversely affected.
The weakening or unavailability of our intellectual property rights could adversely impact our business.business, including through the loss of intellectual property we license.
Our trademarks, trade names, domain names and other intellectual property rights are fundamental to our brands and our franchising business. The steps we take to obtain, maintain and protect our intellectual property rights may not be adequate and, in particular, we may not own all necessary registrations for our intellectual property. Applications we have filed to register our intellectual property may not be approved by the appropriate regulatory authorities. Our intellectual property rights may not be successfully asserted in the future or may be invalidated, circumvented or challenged. We may be unable to prevent third parties from using our intellectual property rights without our authorization or independently developing technology that is similar to ours. Also, third parties may own rights in similar trademarks. Any unauthorized use of our intellectual property by third parties could reduce our competitive advantages or otherwise harm our business and brands. If we had to litigate to protect these rights, any proceedings could be costly, and we may not prevail. Our intellectual property rights, including our trademarks, may fail to provide us with significant competitive advantages in the U.S. and in foreign jurisdictions that do not have or do not enforce strong intellectual property rights.
We cannot be certain that our intellectual property does not and will not infringe issued intellectual property rights of others. We may be subject to legal proceedings and claims in the ordinary course of our business, including claims of alleged infringement of the patents, trademarks and other intellectual property rights of third parties. Any such claims, whether or not meritorious, could result in costly litigation. Depending on the success of these proceedings, we may be required to enter into licensing or consent agreements (if available on acceptable terms or at all), or to pay damages or cease using certain service marks or trademarks.
We franchise our brands to franchisees. While we try to ensure that the quality of our brands is maintained by all of our franchisees, we cannot assure that these franchisees will not take actions that hurt the value of our intellectual property or our reputation.
Our license agreement with Sotheby's for the use of the Sotheby's International Realty® brand is terminable by Sotheby's prior to the end of the license term if certain conditions occur, including but not limited to the following: (1) we attempt to assign any of our rights under the license agreement in any manner not permitted under the license agreement, (2) we become bankrupt or insolvent, (3) a court issues a non-appealable, final judgment that we have committed certain breaches of the license agreement and we fail to cure such breaches within 60 days of the issuance of such judgment, or (4) we discontinue the use of all of the trademarks licensed under the license agreement for a period of twelve consecutive months.
Our license agreement with Meredith Corporation ("Meredith") for the use of the Better Homes and Gardens® Real Estate brand is terminable by Meredith prior to the end of the license term if certain conditions occur, including but not limited to the following: (1) we attempt to assign any of our rights under the license agreement in any manner not permitted under the license agreement, (2) we become bankrupt or insolvent, or (3) a trial court issues a final judgment that we are in material breach of the license agreement or any representation or warranty we made was false or materially misleading when made.
Industry structure changes that disrupt the functioning of the residential real estate market could materially adversely affect our operations and financial results.
Through our brokerages, we participate in many multiple listing services ("MLSs") and are subject to each MLS's rules, policies, data licenses, and terms of service. The rules of each MLS to which we belong can vary widely and are complex.
From time to time, certain industry practices, including MLS rules, have come under regulatory scrutiny. For example, in June 2018, the DOJ and the FTC held a joint public workshop to explore competition issues in the residential real estate brokerage industry including potential barriers to competition. In the workshop, there were various panels and participants submitted comments that raised a variety of issues, including: whether the current industry practice involving commission sharing by listing brokers was anti-competitive, whether offers of commission sharing—including commission rates—should be public, and whether average broker commission rates were too high. There can be no assurances as to whether DOJ or the FTC will determine that any industry practices or developments have an anti-competitive effect on the industry. Any such determination by DOJ or the FTC could result in industry investigations, legislative or regulatory action or other actions, any of which could have the potential to disrupt our business.
In addition, in two putative class action complaints filed in 2019, plaintiffs contend that NAR rules regarding buyer-broker commissions, which are adopted by alleged coercion by certain MLSs, are anti-competitive under the Sherman Act and that commission sharing, which provides for the broker representing the seller sharing or paying a portion of its commission to the broker representing the buyer, is anti-competitive and violates the Sherman Act. In both cases, NAR, Realogy and other large real estate brokerage companies are named defendants (See Note 15, "Commitments and Contingencies—Litigation—Real Estate Litigation", to our consolidated financial statements included elsewhere in this Annual Report for additional information on these matters).
Meaningful changes in industry operations or structure, as a result of governmental pressures, the actions of certain competitors or the introduction or growth of certain competitive models, changes to MLS rules, or otherwise could materially adversely affect our operations, revenues, earnings and financial results.
Several of our businesses are highly regulated and any failure to comply with such regulations or any changes in such regulations could adversely affect our business.
Our company owned real estate brokerage business, our relocation business, our mortgage origination joint venture, our title and settlement service business and the businesses of our franchisees (excluding commercial brokerage transactions) must comply with the Real Estate Settlement Procedures Act (“RESPA”). RESPA and comparable state statutes prohibit providing or receiving payments, or other things of value, for the referral of business to settlement service providers in connection with the closing of real estate transactions involving federally-backed mortgages. Such laws may to some extent impose limitations on arrangements involving our real estate franchise, real estate brokerage, settlement services and relocation businesses or the business of our mortgage origination joint venture. RESPA and related regulations do, however, contain a number of provisions that allow for payments or fee splits between providers, including fee splits between title underwriters and agents, brokers and agents, and market-based fees for the provision of goods or services and marketing arrangements. In addition, RESPA allows for referrals to affiliated entities, including joint ventures, when specific requirements have been met. We rely on these provisions in conducting our business activities and believe our arrangements comply with RESPA. However, RESPA compliance may become a greater challenge under certain administrations for most industry participants offering settlement services, including mortgage companies, title companies and brokerages, because of expansive interpretations of RESPA or similar state statutes by certain courts and regulators. Permissible activities under state statutes similar to RESPA may be interpreted more narrowly and enforcement proceedings of those statutes by state regulatory authorities may also be aggressively pursued. RESPA also has been invoked by plaintiffs in private litigation for various purposes and some state authorities have also asserted enforcement rights. Similar laws exist in other countries where we do business. Some regulators and other parties have advanced novel and stringent interpretations of RESPA including assertions that any provision of a thing of value in a separate, but contemporaneous transaction with a referral constitutes a breach of RESPA on the basis that all things of value exchanged should be deemed in exchange for the referral.
The sale of franchises is regulated by various state laws as well as by the Federal Trade Commission (the “FTC”). The FTC requires that franchisors make extensive disclosure to prospective franchisees but does not require registration. A number of states require registration and/or disclosure in connection with franchise offers and sales. In addition, several states have "franchise relationship laws" or "business opportunity laws" that limit the ability of franchisors to terminate franchise agreements or to withhold consent to the renewal or transfer of these agreements.Internationally, many countries have similar laws affecting franchising.
Our company owned real estate brokerage business must comply with the requirements governing the licensing and conduct of real estate brokerage and brokerage-related businesses in the jurisdictions in which we do business. These laws and regulations contain general standards for and limitations on the conduct of real estate brokers and sales agents, including those relating to licensing of brokers and sales agents, fiduciary, agency and statutory duties, administration of trust funds,
collection of commissions, restrictions on information sharing with affiliates, fair housing standards and advertising and consumer disclosures. Under state law, our real estate brokers have certain duties and are responsible for the conduct of their brokerage business.
Our company owned real estate brokerage business, our relocation business, our mortgage origination joint venture, our titleTitle and settlement service business and the businesses of our franchisees (excluding commercial brokerage transactions) must comply with the Real Estate Settlement Procedures Act (“RESPA”). RESPA and comparable state statutes prohibit providing or receiving payments, or other things of value, for the referral of business to settlement service providers in connection with the closing of real estate transactions involving federally-backed mortgages. RESPA and related regulations do, however, contain a number of provisions that allow for payments or fee splits between providers, including fee splits between brokers and agents, fees splits between brokers, and market-based fees for the provision of actual goods or services. In addition, RESPA allows for referrals to affiliated entities, including joint ventures, when specific requirements have been met. We rely on these provisions in conducting our business activities and believe our arrangements comply with RESPA. RESPA, however, has become a greater challenge in recent years for most industry participants offering settlement services including mortgage companies, title companies and brokerages, because of changes in the regulatory environment and expansive interpretations of RESPA or similar state statutes by certain courts. With the passage of Dodd-Frank in 2010, primary responsibility for enforcement of RESPA has shifted to the CFPB. The CFPB has, in the recent past, taken a much stricter approach toward interpretation of RESPA and related regulations than the prior regulatory authority (the Department of Housing and Urban Development) and has become significantly more active in the use of enforcement proceedings. In the face of this changing regulatory landscape, various industry participants, while disagreeing with the CFPB’s narrow interpretation of RESPA, have nevertheless decided to modify or terminate long-standing business arrangements to avoid the risk of protracted and costly litigation defending such arrangements. RESPA also has been invoked by plaintiffs in private litigation for various purposes. Moreover, a recent change in leadership at the CFPB, which is currently subject to legal challenge, has contributed further uncertainty with respect to RESPA interpretation and compliance. However, permissible activities under state statutes similar to RESPA may be interpreted more narrowly and enforcement proceedings of those statutes by state regulatory authorities may also be aggressively pursued.
are highly regulated.Our title insurance business also is subject to regulation by insurance and other regulatory authorities in each state in which we provide title insurance. Additionally, our relocation business operates certain insurance programs that are subject to certain regulations. State regulations may impede or impose burdensome conditions on our ability to take actions that we may want to take to enhance our operating results.
We are also, to a lesser extent, subject to various other rules and regulations such as "controlled business" statutes, which impose limitations on affiliations between providers of title and settlement services on the one hand, and real estate brokers, mortgage lenders and other real estate service providers on the other hand, or similar laws or regulations that would limit or restrict transactions among affiliates in a manner that would limit or restrict collaboration among our businesses.
We participate in the mortgage origination business through our 49.9% ownership of Guaranteed Rate Affinity. Private mortgage lenders operating in the U.S. are subject to comprehensive state and federal regulation and to significant oversight by government sponsored entities. Dodd-Frank endows the CFPB with rule making, examination and enforcement authority involving consumer financial products and services, including mortgage finance. The CFPB has issued a myriad of rules, including TILA-RESPA Integrated Disclosure rules, which impose significant obligations on Guaranteed Rate Affinity.
General. In all of our business units there is a risk that we could be adversely affected by current laws, regulations or interpretations or that more restrictive laws, regulations or interpretations could increase responsibilities and duties to customers and franchisees and other parties, the adoption of which could make compliance more difficult or expensive. There is also a risk that a change in current laws could adversely affect our business. In addition, any adverse changes in regulatory interpretations, rules and laws that would place additional limitations or restrictions on affiliated transactions could have the effect of limiting or restricting collaboration among our business units. Further, all of our businesses are subject to federal and state law related to numerous topics, including contract, fair trade, antitrust and competition, anti-discrimination, consumer protection, data protection, anti-fraud, disclosure laws, accommodations for disability, tax and employment matters. Increased enforcement of, or regulation with respect to, fair housing (whether at a federal, state or local level) could impact brokerage operations and/or the licenses of affiliated independent sales agents. We cannot assure you that future changes in legislation, regulations or interpretations will not adversely affect our business operations.
For example, in 2008, the Justice Department and the FTC entered into a settlement agreement with NAR related, in part, to the cooperative sharing of entries in traditional multiple listing services with online-only brokers. The 2008 settlement agreement expires in November 2018 and in response to Congressional inquiries, the Justice Department and the FTC will co-host a workshop on competition dynamics in the real estate services industry. There can be no assurances as to whether the Justice Department and the FTC will determine that certain industry practices or developments have an anti-competitive effect on the industry. Any such determination by the Justice Department and the FTC could result in industry investigations, legislative or regulatory action or other actions, any of which could have the potential to disrupt our business.
Regulatory authorities also have relatively broad discretion to grant, renew and revoke licenses and approvals and to implement regulations. Accordingly, such regulatory authorities could prevent or temporarily suspend us from carrying on
some or all of our activities or otherwise penalize us if our financial condition or our practices were found not to comply with the then current regulatory or licensing requirements or any interpretation of such requirements by the regulatory authority. Our failure to comply with any of these requirements or interpretations could limit our ability to renew current franchisees or sign new franchisees or otherwise have a material adverse effect on our operations.
Our international business activities, and in particular our relocation business, must comply with applicable laws and regulations that impose sanctions on improper payments, including the Foreign Corrupt Practices Act, U.K. Bribery Act and similar laws of other countries.
Our failure to comply with any of the foregoing laws and regulations may subject us to fines, penalties, injunctions and/or potential criminal violations. Any changes to these laws or regulations or any new laws or regulations may make it more difficult for us to operate our business and may have a material adverse effect on our operations.
Other Business Risks
We could be subject to significant losses if banks do not honor our escrow and trust deposits.
Our company owned brokerage business and our title and settlement services business act as escrow agents for numerous customers. As an escrow agent, we receive money from customers to hold until certain conditions are satisfied. Upon the satisfaction of those conditions, we release the money to the appropriate party. We deposit this money with various banks and while these deposits are not assets of the Company (and therefore excluded from our consolidated balance sheet), we remain contingently liable for the disposition of these deposits. These escrow and trust deposits totaled $475 million at December 31, 2019. The banks may hold a significant amount of these deposits in excess of the federal deposit insurance limit. If any of our depository banks were to become unable to honor any portion of our deposits, customers could seek to hold us responsible for such amounts and, if the customers prevailed in their claims, we could be subject to significant losses. These escrow and trust deposits totaled $469 million at December 31, 2017.
Our reliance on third-party vendors for key components of our businesscould have a material adverse effect on our business and results of operations.
Many components of our business, including information technology, key operational processes (such as accounts payable, payroll, and travel and expense) and critical client systems, are provided by third parties. The actions of our third-party vendors are beyond our control. If our vendors fail to perform as we expect, or if we fail to adequately monitor their performance, our operations and reputation could suffer. Depending on the function involved, vendor failure or error may lead to increased costs, business disruption, processing inefficiencies, the loss of or damage to intellectual property or sensitive data through security breaches or otherwise, effects on financial reporting, loss of customers, litigation or remediation costs, or damage to our reputation. In addition, although we have instituted a Vendor Code of Conduct, we may be subject to the consequences of fraud, bribery, or misconduct by employees of our vendors, which can result in significant financial or reputational harm.
We may be unable to achieve or maintain cost savings and other benefits from our restructuring activities.
We continue to engage in business optimization initiatives that focus on maximizing the efficiency and effectiveness of the cost structure of each of the Company's business units. The action is designed to improve client service levels across each of the business units while enhancing the Company's profitability and incremental margins. We may not be able to achieve these improvements in the efficiency and effectiveness of our operations. We also may incur greater costs than currently anticipated to achieve these savings and we may not be able to maintain these cost savings and other benefits in the future.
We may not realize anticipated benefits from acquisitions.
Integrating acquired companies involves complex operational and personnel related challenges, including:
the possible defection of a significant number of employees and independent sales agents;
the disruption of our respective ongoing businesses;
possible inconsistencies in policies and procedures, as well as business and IT controls;
the failure to maintain important business relationships and contracts;
unanticipated costs of terminating or relocating facilities and operations;
unanticipated expenses related to the integration;
increased amortization of intangibles; and
potential unknown liabilities associated with acquired businesses.
A prolonged diversion of management's attention and any delays or difficulties encountered in connection with the integration of any business acquisition could prevent us from realizing the anticipated cost savings and revenue growth from our acquisitions.
We may not have the ability to complete future acquisitions.
At varying times, we have pursued an active acquisition strategy as a means of strengthening our geographic footprint, and expanding our scope of operations. We have also focused on integrating acquisitions into our operations to achieve economies of scale. The success of our future acquisition strategy will continue to depend upon our ability to fund such acquisitions given our total outstanding indebtedness, find suitable acquisition candidates on favorable terms and for target companies to find our acquisition proposals more favorable than those made by other competitors.
Potential reform of Fannie Mae or Freddie Mac and Fannie Maeor certain federal agencies or a reduction in U.S.U.S. government support for the housing market could have a material impact on our operations.
Numerous pieces of legislation seeking various types of changes for government sponsored entities or GSEs have been introduced in Congress to reform the U.S. housing finance market including among other things, changes designed to reduce government support for housing finance and the winding down of Fannie Mae or Freddie Mac and Fannie Mae over a period of years. Legislation, if enacted, or additional regulation which curtails Freddie MacFannie Mae's and/or Fannie Mae'sFreddie Mac's activities and/or results in the wind down of these entities could increase mortgage costs and could result in more stringent underwriting guidelines imposed by lenders or cause other disruptions in the mortgage industry, anyindustry. Other legislation or regulation limiting participation of whichthe Federal Housing Administration and Department of Veterans Affairs could increase mortgage costs or limit availability of mortgages for consumers. Any of the foregoing could have a material adverse effect on the housing market in general and our operations in particular.
Changes in accounting standards, subjective assumptions and estimates used by management related to complex accounting matters could have an adverse effect on results of operations.
Generally accepted accounting principles in the United States and related accounting pronouncements, implementation guidance and interpretations with regard to a wide range of matters, such as revenue recognition, lease accounting, stock-based compensation, asset impairments, valuation reserves, income taxes and fair value accounting, are highly complex and involve many subjective assumptions, estimates and judgments made by management. Changes in these rules or their interpretations or changes in underlying assumptions, estimates or judgments made by management could significantly change our reported results.
Our international operations are subject to risks not generally experienced by our U.S. operations.
Our relocation services business operates worldwide, and to a lesser extent, our real estate franchise services segment has international franchisees and master franchisees. For the year ended December 31, 2017, revenues from these operations represented approximately 2% of our total revenues. Our international operations are subject to risks not generally experienced by our U.S. operations. The risks involved in our international operations and relationships that could result in losses against which we are not insured and therefore affect our profitability include:
fluctuations in foreign currency exchange rates;
exposure to local economic conditions and local laws and regulations, including those relating to our employees;
potential adverse changes in the political stability of foreign countries or in their diplomatic relations with the U.S.;
restrictions on the withdrawal of foreign investment and earnings;
government policies against businesses owned by foreigners;
onerous employment laws;
diminished ability to legally enforce our contractual rights and use of our trademarks in foreign countries;
difficulties in registering, protecting or preserving trade names and trademarks in foreign countries;
difficulties in complying with franchise disclosure and registration requirements in foreign countries;
restrictions on the ability to obtain or retain licenses required for operations;
withholding and other taxes on third party cross-border transactions as well as remittances and other payments by subsidiaries;
onerous requirements, subject to broad interpretation, for indirect taxes and income taxes that can result in audits with potentially significant financial outcomes;
changes in foreign taxation structures;
compliance with the Foreign Corrupt Practices Act, the U.K. Bribery Act or similar laws of other countries; and
regional and country specific data protection and privacy laws including, effective May 2018, the General Data Protection Regulation.
In addition, activities of franchisees and master franchisees outside of the U.S. are more difficult and more expensive to monitor and improper activities may be more difficult to detect.
Loss or attrition among our senior executives or other key employees and our inability to develop our existing workforce and to recruit top talent could adversely affect our financial performance.
Our success is largely dependent on the efforts and abilities of our executive officers and other key employees, our ability to develop the skills and talent of our workforce and our ability to recruit, retain and motivate top talent. Talent management has been and continues to be a strategic priority and our ability to recruit and retain our executive officers and key employees, including those with significant experience in the residential real estate market, is generally subject to numerous factors, including the compensation and benefits we pay. If we are unable to internally develop or hire skilled executives and other critical positions or if we encounter challenges associated with change management or the competitiveness of compensation actually realized by our executive officers and other key employees, our ability to continue to execute or evolve our strategy may be impaired and our business may be adversely affected.
Severe weather events or natural disasters, including increasing severity or frequency of such events due to climate change or otherwise, or other catastrophic events may disrupt our business and have an unfavorable impact on homesale activity.
Realogy Brokerage Group has a significant concentration of offices and transactions in geographic regions where home prices are at the higher end of the U.S. real estate market, particularly the east and west coasts. Coastal areas, including California and Florida, are particularly subject to severe weather events (including hurricanes and flooding) and natural disasters. Increasingly, wildfires in the west have been difficult to contain and cover large areas.
The occurrence of a severe weather event or natural disaster can reduce the level and quality of home inventory levels and negatively impact the demand for homes in affected areas, which can delay the closing of homesale transactions and have an unfavorable impact on home prices, homesale transaction volume, relocation transactions, title closing units and broker-to-broker referral fees. These effects may be compounded when the taxes associated with homeownership in the affected area are higher than average. In addition, we could incur damage, which may be significant, to our office locations as a result of severe weather events or natural disasters and our insurance may not be adequate to cover such losses. Certain areas in which our businesses operate,The impact of climate change, such as Californiamore frequent and Florida, are particularly subject to severe weather events and/or long-term shifts in climate patterns, exacerbates these risks. Likewise our business and natural disasters.operating results could suffer as the result of other catastrophic events, including public health crises, such as pandemics and epidemics.
We may incur substantial and unexpected liabilities arising out of our legacy pension plan.
We have a defined benefit pension plan for which participation was frozen as of July 1, 1997; however, the plan is subject to minimum funding requirements. Although the Company to date has met its minimum funding requirements, the pension plan represents a liability on our balance sheet and will continue to require cash contributions from us, which may
increase beyond our expectations in future years based on changing market conditions. In addition, changes in interest rates, mortality rates, health care costs, early retirement rates, investment returns and the market value of plan assets can affect the funded status of our pension plan and cause volatility in the future funding requirements of the plan.
Our ability to use our net operating losses ("NOLs") and other tax attributes may be limited.
As of December 31, 2019, we had approximately $588 million of federal and state NOLs. Our federal NOLs begin to expire in 2030 while certain state NOLs begin to expire in 2020. Our ability to utilize NOLs and other tax attributes could be limited by the "ownership change" we underwent within the meaning of Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"), as a result of the sale of our common stock in our initial public offering and the related transactions. An ownership change is generally defined as a greater than 50 percentage point increase in equity ownership by 5% stockholders in any three-year period. Pursuant to rules under Section 382 of the Code and a published Internal Revenue Service (the "IRS") notice, a company's "net unrealized built-in gain" within the meaning of Section 382 of the Code may reduce the limitation on such company's ability to utilize NOLs resulting from an ownership change. Although there can be no assurance in this regard, we believe that the limitation on our ability to utilize our NOLs resulting from our ownership change should be significantly reduced as a result of our net unrealized built-in gain. Even assuming we are able to use our unrealized built-in gain, the cash tax benefit from our NOLs is dependent upon our ability to generate sufficient taxable income. Although we believe that we will be able to generate sufficient taxable income to fully utilize our NOLs, we may be unable to earn enough taxable income prior to the expiration of our NOLs.In addition, divestitures (including the planned sale of Cartus Relocation Services and any other divestitures we may complete in the future) could result in the accelerated use of our NOLs.
We are responsible for certain of Cendant's contingent and other corporate liabilities.
Although we have resolved various Cendant contingent and other corporate liabilities and have established reserves for most of the remaining unresolved claims of which we have knowledge, adverse outcomes from the unresolved Cendant
liabilities for which Realogy Group has assumed partial liability under the Separation and Distribution Agreement dated as of July 27, 2006 among Cendant, Realogy Group, Wyndham Worldwide and Travelport could be material with respect to our earnings or cash flows in any given reporting period.
Risks Related to Our Indebtedness
Our significant indebtedness and interest obligations could prevent us from meeting our obligations under our debt instruments and could adversely affect our ability to fund our operations, invest in our business or pursue growth opportunities, react to changes in the economy or our industry, or incur additional borrowings under our existing facilities.
We are significantly encumbered by our debt obligations. As of December 31, 2017,2019, our total debt, excluding our securitization obligations, was $3,348$3,445 million (without giving effect to outstanding letters of credit). Our liquidity position has been, and is expected to continue to be, negatively impacted by the substantial interest expense on our debt obligations.
Our leverage could have important consequences, including the following:
•it causes a substantial portion of our cash flows from operations to be dedicated to the payment of interest and required amortization on our indebtedness and not be available for other purposes, including our operations, capital expenditures, technology, share repurchases, dividends and future business opportunities or principal repayment;
•it could cause us to be unable to comply with the senior secured leverage ratio covenant under our Senior Secured Credit Facility and Term Loan A Facility;
•it could cause us to be unable to meet our debt service requirements under our Senior Secured Credit Facility, the Term Loan A Facility or the indentures governing the Unsecured Notes or meet our other financial obligations;
•it may limit our ability to incur additional borrowings under our existing facilities, including our Revolving Credit Facility, to refinance our indebtedness, or securitizations, to obtain additional debt or equity financing for working capital, capital expenditures, business development, debt service requirements, acquisitions or general corporate or other purposes, or to refinance our indebtedness;purposes;
•it exposes us to the risk of increased interest rates because a portion of our borrowings, including borrowings under our Senior Secured Credit Facility and Term Loan A Facility, are at variable rates of interest;
•it may limit our ability to adjust to changing market conditions and place us at a competitive disadvantage compared to our competitors that have no or less debt;
•it may cause a downgrade of our debt and long-term corporate ratings;
•it may limit our ability to repurchase shares;shares or declare dividends;
•it may limit our ability to attract acquisition candidates or to complete future acquisitions;
•it may cause us to be more vulnerable to periods of negative or slow growth in the general economy or in our business, or may cause us to be unable to carry out capital spending that is important to our growth; and
•it may limit our ability to attract and retain key personnel.
An event of default under our Senior Secured Credit Facility, the Term Loan A Facility or the indentures governing our other material indebtedness would adversely affect our operations and our ability to satisfy obligations under our indebtedness.
The Senior Secured Credit Facility (including the Revolving Credit Facility) and Term Loan A Facility contain restrictive covenants, including a requirement that we maintain a specified senior secured leverage ratio of 4.75 to 1.00, which is defined as the ratio of our total senior secured debt (net of unrestricted cash and permitted investments) to trailing four quarter EBITDA calculated on a Pro Forma Basis, as those terms are defined in the credit agreement governing the Senior Secured Credit Facility. Total senior secured net debt does not include unsecured indebtedness, including the Unsecured Notes, or the securitization obligations.
For the trailing four quarters ended December 31, 2019, we were in compliance with the senior secured leverage ratio covenant with a ratio of 3.03 to 1.0 with total senior secured debt (net of unrestricted cash and permitted investments) of $1,895 million and trailing four quarter EBITDA calculated on a Pro Forma Basis of $626 million. Our Operating EBITDA and EBITDA calculated on a Pro Forma basis have declined year-over-year for the past several years. If our EBITDA calculated on a Pro Forma Basis were to continue to decline and/or we were to incur additional senior secured debt (including additional borrowings under the Revolving Credit Facility), our ability to borrow the full capacity under the Revolving Credit Facility (without refinancing secured debt into unsecured debt) could be limited as we must maintain compliance with the senior secured leverage ratio described above of 4.75 to 1.00. Our debt risk may also be increased as a result of competitive pressures that reduce margins and free cash flow. Our need to borrow under the Revolving Credit Facility is generally at its highest at or around the end of the first quarter every year. Any inability to borrow sufficient funds to operate our business, in the first quarter or otherwise, could have a material adverse impact on our business, results of operations and liquidity.
In addition, the covenants in the indenture governing the 9.375% Senior Notes limit our ability to make restricted payments, including our ability to make dividend payments in excess of $45 million per calendar year and our ability to repurchase shares of our common stock in any amount until the Company's consolidated leverage ratio (as defined in the indenture governing the 9.375% Senior Notes) is below 4.00 to 1.00.
An event of default under our Senior Secured Credit Facility, the Term Loan A Facility or the indentures governing our other material indebtedness would adversely affect our operations and our ability to satisfy obligations under our indebtedness.
If we are unable to comply with the senior secured leverage ratio covenant described in the prior risk factor or other restrictive covenants under Senior Secured Credit Facility, Term Loan A Facility or the indentures governing our Senior Notes and we fail to remedy or avoid a default as permitted under the Senior Secured Credit Facility and Term Loan A Facility,applicable debt arrangement, there would be an "event of default" under the Senior Secured Credit Facility and Term Loan A Facility.such arrangement.
Other events of default include, without limitation, nonpayment of principal or interest, material misrepresentations, insolvency, bankruptcy, certain material judgments, change of control, and cross-events of default on material indebtedness as well as, under the Senior Secured Credit Facility and Term Loan A Facility, failure to obtain an unqualified audit opinion by 90 days after the end of any fiscal year. Upon the occurrence of any event of default under the Senior Secured Credit Facility and Term Loan A Facility, the lenders:
•will not be required to lend any additional amounts to us;
•could elect to declare all borrowings outstanding, together with accrued and unpaid interest and fees, to be immediately due and payable;
•could require us to apply all of our available cash to repay these borrowings; or
•could prevent us from making payments on the Unsecured Notes, any of which could result in an event of default under the indentures governing the Unsecured Notes or our Apple Ridge Funding LLC securitization program.
If we were unable to repay the amounts outstanding under our Senior Secured Credit Facility and Term Loan A Facility, the lenders and holders of such debt under our Senior Secured Credit Facility and Term Loan A Facility could proceed against the collateral granted to secure the Senior Secured Credit Facility and Term Loan A Facility. We have pledged a
significant portion of our assets as collateral to secure such indebtedness. If the lenders under our Senior Secured Credit Facility or Term Loan A Facility accelerate the repayment of borrowings, we may not have sufficient assets to repay the Senior Secured Credit Facility and Term Loan A Facility and our other indebtedness or be able to borrow sufficient funds to refinance such indebtedness. InUpon the future, we may need to seek new financing or exploreoccurrence of an event of default under the possibility of amending the terms ofindentures governing our Senior Secured Credit FacilityNotes, the trustee or holders of 25% of the outstanding applicable notes could elect to declare the principal of, premium, if any, and Term Loan A Facility,accrued but unpaid interest on such notes to be due and payable. Any of the foregoing would have a material adverse affect on our business, financial condition and results of operations.
We have substantial indebtedness that will mature or expire beginning in 2021 and 2023 and we may not be able to do sorefinance with terms as favorable as the terms of the maturing debt.
We have substantial indebtedness that will mature in the next few years. We continue to evaluate potential refinancing and financing transactions, including refinancing certain tranches of our indebtedness and extending maturities, among other potential alternatives. There can be no assurance as to which, if any, of these alternatives we may pursue as the choice of any alternative will depend upon numerous factors such as market conditions, our financial performance and the limitations applicable to such transactions under our existing financing agreements and the consents we may need to obtain under the relevant documents. The high-yield market may not be accessible to companies with our debt profile and such or other financing alternatives may not be available to us on commercially reasonable terms, or terms that are acceptable to us, ifor at all.
In addition, if an event of default is continuing under our Senior Secured Credit Facility, Term Loan A Facility, the indentures governing the Unsecured Notes or our other material Any future indebtedness such eventmay impose various additional restrictions and covenants on us which could cause a termination oflimit our ability to respond to market conditions, to make capital investments or to take advantage of business opportunities. Refinancing debt at a higher cost would affect our operating results.
A downgrade, suspension or withdrawal of the rating assigned by a rating agency to us or our indebtedness could make it more difficult for us to refinance our debt or obtain additional debt financing in the future.
Our indebtedness has been rated by nationally recognized rating agencies and may in the future advances under,be rated by additional rating agencies. We cannot assure you that any rating assigned to us or our indebtedness will remain for any given period of time or that a rating will not be lowered or withdrawn entirely by a rating agency if, in that rating agency’s judgment, circumstances relating to the basis of the rating, such as adverse changes in our business, so warrant. As of December 31, 2019, our corporate credit rating was B+ at S&P Global Ratings and amortizationB1 at Moody’s and both such ratings agencies rated our outlook as negative. Any downgrade, suspension or withdrawal of a rating by a rating agency (or any anticipated downgrade, suspension or withdrawal) could make it more difficult or more expensive for us to refinance our Apple Ridge Funding LLC securitization program.debt or obtain additional debt financing in the future.
Variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.
At December 31, 20172019, $1,886$1,965 million of our borrowings under our Senior Secured Credit Facility and Term Loan A Facility was at variable rates of interest thereby exposing us to interest rate risk. If interest rates continue to increase, from their current historically low rates, our debt service obligations on the variable rate indebtedness would increase even if the amount borrowed remained the same, and our net income would decrease. Although we have entered into interest rate swaps involving the exchange of floating for fixed rate interest payments to reduce interest rate volatility for a significant portion of our variable rate borrowings, such interest rate swaps do not eliminate interest rate volatility for all of our variable rate indebtedness at December 31, 20172019.
The phase-out of LIBOR, or the replacement of LIBOR with a different reference rate or modification of the method used to calculate LIBOR, may adversely affect interest rates which may have an adverse impact on us.
Our primary interest rate exposure is interest rate fluctuations, specifically with respect to LIBOR, due to its impact on our variable rate borrowings under our Senior Secured Credit Facility and Term Loan A Facility. Our interest rate swaps are also based on LIBOR.
LIBOR is the subject of recent national, international and other regulatory guidance and proposals for reform. At this time, it is not possible to predict the effect of any changes to LIBOR, any phase out of LIBOR or any establishment of alternative benchmark rates. LIBOR may disappear entirely or perform differently than in the past. Any new benchmark rate will likely not replicate LIBOR exactly and if future rates based upon a successor rate (or a new method of calculating LIBOR) are higher than LIBOR rates as currently determined, it could result in an increase in the cost of our variable rate indebtedness and may have a material adverse effect on our financial condition and results of operations.
Restrictive covenants under our Senior Secured Credit Facility, Term Loan A Facility, Unsecured Letter of Credit Facility and indentures governing the Unsecured Notes may limit the manner in which we operate.
Our Senior Secured Credit Facility, Term Loan A Facility, Unsecured Letter of Credit Facility, and the indentures governing the Unsecured Notes contain, and any future indebtedness we may incur may contain, various negative covenants that restrict our ability to, among other things:
•incur or guarantee additional indebtedness, or issue disqualified stock or preferred stock;
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▪ | pay dividends or make distributions to our stockholders; |
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▪ | repurchase or redeem capital stock; |
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▪ | make investments or acquisitions; |
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▪ | incur restrictions on the ability of certain of our subsidiaries to pay dividends or to make other payments to us; |
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▪ | enter into transactions with affiliates; |
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▪ | merge or consolidate with other companies or transfer all or substantially all of our assets; |
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▪ | transfer or sell assets, including capital stock of subsidiaries; and |
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▪ | prepay, redeem or repurchase certain indebtedness. |
•pay dividends or make distributions to our stockholders;
•repurchase or redeem capital stock;
•make investments or acquisitions;
•incur restrictions on the ability of certain of our subsidiaries to pay dividends or to make other payments to us;
•enter into transactions with affiliates;
•create liens;
•merge or consolidate with other companies or transfer all or substantially all of our assets;
•transfer or sell assets, including capital stock of subsidiaries; and
•prepay, redeem or repurchase certain indebtedness.
As a result of these covenants, we are limited in the manner in which we conduct our business and we may be unable to engage in favorable business activities, repurchase shares of our common stock or finance future operations or capital needs.
We may be unable to continue to securitize certain of our relocation assets, which may adversely impact our liquidity.
At December 31, 2017, $194 million of securitization obligations were outstanding through special purpose entities monetizing certain assets of our relocation services business under two lending facilities. We have provided a performance guaranty which guarantees the obligations of our Cartus subsidiary and its subsidiaries, as originator and servicer under the Apple Ridge securitization program. The securitization markets have experienced, and may again experience, significant disruptions which may have the effect of increasing our cost of funding or reducing our access to these markets in the future.
In addition, the Apple Ridge securitization facility contains terms which if triggered may result in a termination or limitation of new or existing funding under the facility and/or may result in a requirement that all collections on the assets be used to pay down the amounts outstanding under such facility. The triggering events include but are not limited to: (1) those tied to the age and quality of the underlying assets; (2) a change of control; (3) a breach of our senior secured leverage ratio covenant under our Senior Secured Credit Facility if uncured; and (4) the acceleration of indebtedness under our Senior Secured Credit Facility, unsecured notes or other material indebtedness. The occurrence of a trigger event under the Apple Ridge securitization facility could restrict our ability to access new or existing funding under this facility or result in termination of the facility. If securitization financing is not available to us for any reason, we could be required to borrow under the Revolving Credit Facility, which would adversely impact our liquidity, or we may be required to find additional sources of funding which may be on less favorable terms or may not be available at all.
Risks Related to an Investment in Our Common Stock
The price of our common stock may fluctuate significantly.
The market price for our common stock could fluctuate significantly for various reasons, many of which are outside our control, including those described above and the following:
•our operating and financial performance and prospects;
•future sales of substantial amounts of our common stock in the public market, including but not limited to shares we may issue from time to time as consideration for future acquisitions or investments;investments as well as significant sales by one or more of our top investors, in particular in light of the substantial concentration of ownership of our common stock;
•housing and mortgage finance markets;
•the incurrence of additional indebtedness or other adverse changes relating to our debt;
•our quarterly or annual earnings or those of other companies in our industry;
•future announcements concerning our business or our competitors' businesses;
•the public's reaction to our press releases, other public announcements and filings with the SEC;
•changes in earnings estimates, recommendations or recommendationscommentary by sell-side securities analysts who track our common stock or other companies within our industry;
•ratings changes or commentary by rating agencies on our debt;
changes in,•press releases or the elimination of, our stock repurchase programother commentary by industry forecasters or cash dividend;other housing market participants;
the timing and amount of share repurchases, if any;
•market and industry perception of our success, or lack thereof, in pursuing our growth strategy;
•strategic actions by us or our competitors, such as acquisitions or restructurings;competitors;
•actual or potential changes in laws, regulations and regulatory interpretations, including as a result of the 2017 Tax Act;Act and other federal, state or local tax reform;
•changes in housing fundamentals, including:
◦changes in interest rates;rates,
◦changes in demographics relating to housing such as household formation;formation, and
◦changing consumer attitudes concerning home ownership;
•changes in accounting standards, policies, guidance, interpretations or principles;
•arrival and departure of key personnel;
•commencement of new legal or regulatory proceedings against the Company or adverse resolution of new or pending litigation, arbitration or regulatory proceedings against us;
•actions of current or prospective stockholders (including activists or several top stockholders acting alone or together) that may cause temporary or speculative market perceptions, including market rumors and short selling activity in our stock (which has been and, as of the date of this filing, continues to be well above market norms); and
•changes in general market, economic and political conditions in the United States and global economies or financial markets, including those resulting from natural disasters, terrorist attacks, acts of war and responses to such events.
These broad market and industry factors may materially reduce the market price of our common stock, regardless of our operating performance. In addition, price volatility may be greater if the public float and trading volume of our common stock is low.
If any of the foregoing occurs, it could cause our stock price to fall and may expose us to litigation, including class action lawsuits that, even if unsuccessful, could be costly to defend and a distraction to management.
We recently discontinued our dividend and do not anticipate paying any dividends on our common stock in the foreseeable future and accordingly, capital appreciation, if any, will be our stockholders sole source of gain.
We cannot provide assurance thatDirectors discontinued our quarterly dividend and we will continue to paydo not anticipate paying any dividends or purchase shareson our common stock in the foreseeable future. As a result, capital appreciation, if any, of our common stock underwill be our stock repurchase program or thatstockholders sole source of gain for the foreseeable future.
We currently expect to prioritize investing in our capital allocation strategy will enhance stockholder value.
There can be no assurance thatbusiness and reducing indebtedness until we will have sufficient cash or surplus under Delaware law to beare able to continuereduce our consolidated leverage ratio (as defined in the indenture governing the 9.375% Senior Notes) to pay dividends or purchase sharesbelow 4.00 to 1.00 and, even if we are able to successfully reduce our consolidated leverage ratio, our Board of Directors may not reinstate the payment of a dividend. The covenants in the indenture governing the 9.375% Senior Notes restrict our common stock underability to make dividend payments in excess of $45 million per calendar year until our stock repurchase program. Certainconsolidated leverage ratio is below 4.00 to 1.00. In addition, certain of our debt instruments contain covenants that restrict the ability of our subsidiaries to pay dividends to us and repurchase shares of our common stock.us. We are permitted under the terms of our debt instruments to incur additional indebtedness, which may further restrict or prevent us from paying dividends on our common stock. Agreements governing any future indebtedness, in addition to those governing our current indebtedness, may not permit us to pay dividends on our common stock or repurchase shares of our common stock. Because Realogy Holdings is a holding company and has no direct operations, we will only be able to pay dividends or repurchase shares of our common stock from our available cash on hand and any funds we receive from our subsidiaries. Our title insurance underwriter is subject to regulations that limit its ability to pay dividends or make loans or advances to us, principally to protect policyholders. Under Delaware law, dividends may be payable only out of surplus, which is our assets minus our liabilities and our capital or, if we have no surplus, out of our net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. As a result, we may not pay dividends according to our policy or at all if, among other things, we do not have sufficient cash to pay the intended dividends, our financial performance does not achieve expected results or the terms of our indebtedness prohibit it.
Our Board may also decrease or suspend the payment of dividends or our stock repurchase program if the Board deems such action to be in our best interests or those of our stockholders. A reduction or elimination of our cash dividend or stock repurchase program could adversely affect the market price of our common stock. If we do not pay dividends, the price of our common stock must appreciate in order to realize a gain on an investment in Realogy. This appreciation may not occur and our stock may in fact depreciate in value.
In addition, our stock repurchase program and any future dividends will utilize a portion of our cash, which may impact our ability to finance future growth and to pursue possible future strategic opportunities and acquisitions. Moreover, stock repurchases may not enhance stockholder value because the market price of our common stock may decline below the levels at which we repurchased shares of stock. There can be no assurance that our capital allocation strategy, including our cash dividend and stock repurchase program, will enhance short or long-term stockholder value.
Delaware law and our organizational documents may impede or discourage a takeover, which could deprive our investors of the opportunity to receive a premium for their shares.
We are a Delaware corporation, and the anti-takeover provisions of Delaware law impose various impediments to the ability of a third party to acquire control of us, even if a change of control would be beneficial to our existing stockholders. In addition, provisions of our amended and restated certificate of incorporation and amended and restated bylaws may make it more difficult for, or prevent a third party from, acquiring control of us without the approval of our Board of Directors. Among other things, these provisions:
•do not permit cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates;
•delegate the sole power to a majority of the Board of Directors to fix the number of directors;
•provide the power to our Board of Directors to fill any vacancy on our Board of Directors, whether such vacancy occurs as a result of an increase in the number of directors or otherwise;
•authorize the issuance of "blank check" preferred stock without any need for action by stockholders;
•eliminate the ability of stockholders to call special meetings of stockholders;
•prohibit stockholders from acting by written consent; and
•establish advance notice requirements for nominations for election to our Board of Directors or for proposing matters that can be acted on by stockholders at stockholder meetings.
The foregoing factors could impede a merger, takeover or other business combination or discourage a potential investor from making a tender offer for our common stock which, under certain circumstances, could reduce the market value of our common stock and our investors' ability to realize any potential change-in-control premium.
We may issue shares of preferred stock in the future, which could make it difficult for another company to acquire us or could otherwise adversely affect holders of our common stock, which could depress the price of our common stock.
Our amended and restated certificate of incorporation authorizes us to issue one or more series of preferred stock. Our Board of Directors will have the authority to determine the preferences, limitations and relative rights of shares of preferred stock and to fix the number of shares constituting any series and the designation of such series, without any further vote or action by our stockholders. Our preferred stock could be issued with voting, liquidation, dividend and other rights superior to the rights of our common stock. The potential issuance of preferred stock may delay or prevent a change in control of us, discouraging bids for our common stock at a premium to the market price, and materially and adversely affect the market price and the voting and other rights of the holders of our common stock.
Our business could be negatively impacted as a result of actions by activist stockholders or others.
Stockholder activism at public companies has been rising and we may be subject to actions or requests—either formal or informal—from activist stockholders or others. Responding to such actions could be costly and time-consuming, may not align with our business strategies and could divert the attention of our Board of Directors and senior management from the pursuit of our business strategies. Perceived uncertainties as to our future direction as a result of stockholder activism may lead to the perception of a change in the direction of the business or other instability and may make it more difficult to attract and retain qualified personnel, independent sales agents and business partners and may affect our relationships with vendors, customers and other third parties. In addition, actions of activist stockholders may cause significant fluctuations of our stock price based on temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business.
Item 2. Properties.
Corporate headquarters. Our corporate headquarters is located at 175 Park Avenue in Madison, New Jersey with a lease term expiring in December 2029 and consists of approximately 270,000 square feet of space.
Real estate franchise services. Realogy Franchise Group. Our real estate franchise business conducts its main operations at our leased office at 175 Park Avenue in Madison, New Jersey.
Company owned real estate brokerage services. Realogy Brokerage Group. As of December 31, 2017,2019, our company owned real estate brokerage segment leased approximately 4.94.4 million square feet of domestic office space under approximately 1,021946 leases. Its corporate headquarters and one regional headquarters facility are located in leased offices at 175 Park Avenue, Madison, New Jersey. As of December 31, 2017, NRT2019, Realogy Brokerage Group leased 75 facilities serving as regional headquarters, 33 facilities serving as local administration, training facilities or storage, and approximately 790710 brokerage sales offices under 981908 leases. These offices are generally located in shopping centers and small office parks, typically with lease terms of one to five years. Included in the 4.94.4 millionsquare feet is approximately 124,000392,000 square feet of vacant and/or subleased space, principally relating to brokerage sales office consolidations.
Relocation services. Our relocation business has its main corporate operations in a leased building in Danbury, Connecticut with a lease term expiring in November 2030. There are leased offices in the U.S., located in Lisle, Illinois; Irving, Texas; Omaha, Nebraska; Folsom and San Diego, California; Herndon, Virginia; Pensacola, Florida; and Bellevue, Washington. International offices include leased facilities in the United Kingdom, Hong Kong, Singapore, China, Brazil, Germany, France, Switzerland, Canada and the Netherlands.
Realogy Title and settlement services. Group. Our title and settlement services business conducts its main operations at a leased facility in Mount Laurel, New Jersey, pursuant to a lease expiring in December 2021. As of December 31, 2017,2019, this business also has leased regional and branch offices in 2521 states and Washington, D.C.
Cartus Relocation Services. Our relocation business has its main corporate operations in a leased building in Danbury, Connecticut with a lease term expiring in November 2030. There are leased offices in other locations in the U.S., including in Lisle, Illinois; Irving, Texas; Folsom, California; and Bellevue, Washington. International offices include leased facilities in the United Kingdom, Hong Kong, India, Singapore, China, Brazil, Germany, France, Switzerland, Canada and the Netherlands. These leases will transfer to SIRVA upon the closing of the planned sale, with Realogy Leads Group subletting space from SIRVA in Danbury, Connecticut and Irving, Texas.
We believe that all of our properties and facilities are well maintained.
Item 3. Legal Proceedings.
See Note 13,15, "Commitments and Contingencies—Litigation", to our consolidated financial statementsthe Consolidated Financial Statements included elsewhere in this Annual Report for additional information on the Company's legal proceedings, including a description of the Dodge, et al. v. PHH Corporation, et al. litigation, formerly captioned Strader, et al. and Hall v. PHH Corporation, et al. and which we refer to as the Strader legal matter.proceedings.
The Company believes that it has adequately accrued for legal matters as appropriate. The Company records litigation accruals for legal matters which are both probable and estimable.
Litigation and other disputes are inherently unpredictable and subject to substantial uncertainties and unfavorable resolutions could occur.occur and even cases brought by us can involve counterclaims asserted against us. In addition, litigation and other legal matters, including class action lawsuits orand regulatory proceedings challenging practices that have broad
impact can be costly to defend and, depending on the class size and claims, could be costly to settle. As such, the Company could incur judgments or enter into settlements of claims with liability that are materially in excess of amounts accrued and these settlements could have a material adverse effect on the Company’s financial condition, results of operations or cash flows in any particular period.
* * *
Litigation, investigations and claims against other participants in the residential real estate industry may impact the Company and its affiliated franchisees when the rulings or settlements in those cases cover practices common to the broader industry. Examples may include claims associated with RESPA compliance, broker fiduciary duties, andmultiple listing service practices, sales agent classification. One such case is PHH Corp. vs. Consumer Financial Protection Bureau, No. 15-1177. On January 31, 2018, the full D.C. Circuit Court of Appeals issued a decision in that litigation affirming the following RESPA statutory issues:
Section 8(c)(2) of RESPA (which permits “bona fide” payments for goodsclassification and services actually performed), is a viable exception under RESPAfederal and does not constitute a payment for a referral in violation of RESPA where the amount paid does not exceed the reasonable market value of the goods or services;
new CFPB interpretations of RESPA cannot be enforced on a retroactive basis where there is reliance on prior regulatory interpretations; and
the CFPB is bound by the three-year statute of limitations for government enforcement of RESPA.
state fair housing laws. The Company also may be impacted by litigation and other claims against companies in other industries. Rulings on matters such asChanges in current legislation, regulations or interpretations that are applicable to the enforcement of arbitration and class waiver agreements and worker classification may adversely affect the Company and other residential real estate service industry participants asmay also impact the Company.
For example, there is active worker classification litigation in numerous jurisdictions against a resultvariety of industries— including residential real estate brokerages in multiple states, including California and New Jersey—where the classification of sales agents asplaintiffs seek to reclassify independent contractors irrespectiveas employees or to challenge the use of the fact that the parties subject to the rulings are in a different industry. To the extent the defendants are unsuccessful in these types of litigation matters, and we or our franchisees cannot distinguish our or their practices (or our industry’s practices), we and our franchisees could face significant liability and could be required to modify certain business relationships, either of which could materially and adversely impact our financial condition and results of operations. There also are changing employment-related regulatory interpretations at both the federal and state levelsminimum wage and overtime exemptions. This type of litigation has been particularly prolific in California since the California Supreme Court adopted a worker classification test in the second quarter of 2018 that could create risks around historic practicesis significantly more restrictive than those historically used in wage and hour cases. In September 2019, this judicial worker classification test was codified into California statutory law, but the adopted legislation also provides an alternate worker classification test applicable to real estate professionals that could require changesis less restrictive than the judicial test. Since the enactment, there have been several challenges to the constitutionality and enforceability of this law as it applies to other industries, which may ultimately impact the less restrictive test currently applicable to real estate professionals. For a summary of certain legal proceedings initiated in business practices, both for usCalifornia involving the Company that allege worker misclassification, see Note 15, "Commitments and our franchisees.Contingencies—Litigation", in this report.
Item 4. Mine Safety Disclosures.
None.
Information about our Executive Officers
The following provides information regarding individuals who served as executive officers of Realogy Group and Realogy Holdings at February 21, 2020. The age of each individual indicated below is as of February 21, 2020.
Ryan M. Schneider, 50, has served as our Chief Executive Officer and President since December 31, 2017 and as a director since October 20, 2017. From October 23, 2017 until his appointment as our CEO and President, Mr. Schneider served as the Company’s President and Chief Operating Officer. Prior to joining the Company, Mr. Schneider served as President, Card of Capital One Financial Corporation (“Capital One”), a financial holding company, from December 2007 to November 2016 where he was responsible for all of Capital One’s consumer and small business credit card lines of business in the United States, the United Kingdom and Canada. Mr. Schneider held a variety of other positions within Capital One from December 2001 to December 2007, including Executive Vice President and President, Auto Finance and Executive Vice President, U.S. Card. From November 2016 until April 2017, he served as Senior Advisor to Capital One.
Donald J. Casey, 58, has served as the President and Chief Executive Officer of Realogy Title Group LLC (formerly known as Title Resource Group LLC) since April 2002. From 1995 until April 2002, he served as Senior Vice President, Brands of PHH Mortgage. From 1993 to 1995, Mr. Casey served as Vice President, Government Operations of Cendant Mortgage. From 1989 to 1993, Mr. Casey served as a secondary marketing analyst for PHH Mortgage Services (prior to its acquisition by Cendant).
David L. Gordon, 58, has served as our Executive Vice President and Chief Technology Officer since January 2018. From March 2015 to January 2018, Mr. Gordon served as Executive Vice President, U.S. Chief Technology and Operations Officer for Bank of Montreal (BMO) Financial Group, a diversified financial services provider based in North America. From June 2013 to March 2015, Mr. Gordon served in multiple officer roles at Promontory Financial Group, a global financial services consulting firm and wholly-owned subsidiary of IBM, including Chief Administrative Officer and Chief Technology Officer. For 12 years prior thereto, Mr. Gordon held several leadership positions at Capital One Financial Services, a financial holding company, most recently as Senior Vice President, IT Operations from March 2012 to March 2013.
M. Ryan Gorman, 41, has served as the President and Chief Executive Officer of Realogy Brokerage Group LLC (formerly known as NRT LLC) since January 2018 and as CEO of Coldwell Banker (both company owned and franchised brokerages) since January 2020. Previously he served as the Chief Strategy & Operating Officer of NRT LLC from September 2016 to January 2018. From May 2012 to September 2016, Mr. Gorman served at NRT’s Senior Vice President, Strategic Operations and from November 2007 to May 2012 he served as the Company’s Head of Strategic Development. From October 2004 to November 2007, Mr. Gorman served as the Head of Strategic Development of TRG (formerly known as Cendant Settlement Services Group). Before joining the Company, he held advisory and principal investment roles with PricewaterhouseCoopers, Credit Suisse and The Blackstone Group.
Timothy B. Gustavson, 51, has served as our Chief Accounting Officer, Controller and Senior Vice President for Realogy since March 2015. In addition to this role, from November 2018 to March 2019, Mr. Gustavson served as our as Interim Chief Financial Officer and Treasurer. From 2008 until March 2015, he served as our Assistant Corporate Controller and Vice President of Finance. Mr. Gustavson joined Realogy in 2006 as Vice President of External Reporting and prior to Realogy, Mr. Gustavson spent 16 years in public accounting with the KPMG audit practice. Mr. Gustavson is a certified public accountant.
Katrina Helmkamp, 54, has served as the President and Chief Executive Officer of Cartus Corporation since July 2018. Prior to Realogy, Ms. Helmkamp served as Chief Executive Officer of Lenox Corporation, a market leader in quality tabletop and giftware, from November 2016 to June 2018. From 2015 to 2016, she acted as a consultant, primarily working with private equity firms. From 2010 to 2014, she was Chief Executive Officer of SVP Worldwide, the global leader in consumer sewing machines. From 2007 to 2010, she led teams at Whirlpool Corporation as Vice President, Global Refrigeration, and then Senior Vice President, North America Product. From 2005 to 2007, Ms. Helmkamp held leadership roles at ServiceMaster, including as President of Terminix. In addition to her executive experience, she was a partner for six years at The Boston Consulting Group, from 1998 to 2004.
Sunita Holzer, 58, has served as our Executive Vice President and Chief Human Resources Officer ("CHRO") since March 2015. Prior to Realogy, Ms. Holzer served as Executive Vice President and CHRO for Computer Sciences Corporation from 2012 to 2014, where she had oversight of global human resources for 80,000 employees across 60 countries. Ms. Holzer also was Executive Vice President and CHRO at Chubb Insurance from 2003 to 2012. Prior to her tenure at Chubb Insurance, Ms. Holzer held executive HR roles at GE Capital, American Express and American International Group.
John W. Peyton, 52, has served as the Chief Executive Officer of Realogy Franchise Group since April 2017 after serving as Chief Operating Officer and President of Realogy Franchise Group from October 2016. Previously, he served as a senior executive with Starwood Hotels & Resorts Worldwide Inc., a leading hotel and leisure company, for 17 years, most recently as its Chief Marketing Officer from 2014 to September 2016 and as its Senior Vice President of Global Initiatives from 2012 to 2014, where he directed the implementation of key strategic company priorities around the world, including supply chain and revenue management initiatives.
Charlotte Simonelli, 48, has served as our Executive Vice President, Chief Financial Officer and Treasurer since March 2019. Immediately prior to joining Realogy, Ms. Simonelli was employed by Johnson & Johnson as Vice President and Chief Financial Officer, Medical Devices from September 2017 and, prior thereto, as Vice President and Chief Financial Officer, Enterprise Supply Chain from January 2016. Previously, she held various finance roles in large multi-brand global organizations, including Reckitt Benckiser Inc. (a multinational consumer goods company), Kraft Foods Inc. (now Mondelez International Inc.), and PepsiCo, Inc. Ms. Simonelli served at Reckitt Benckiser from 2011 to 2015, including in the roles of Vice President, Finance, North America (from July 2014 to September 2015), Senior Vice President, Finance, ENA (a territory that included Europe and North America) from January 2012 to July 2014 and Senior Vice President, Finance, NAA (a territory that included North America, Australia and New Zealand) from April 2011 to December 2011. Ms. Simonelli began her career at Unilever US, Inc., focused on financial planning and analysis.
Marilyn J. Wasser, 64, has served as our Executive Vice President, General Counsel and Corporate Secretary since May 10, 2007. From May 2005 until May 2007, Ms. Wasser was Executive Vice President, General Counsel and Corporate Secretary for Telcordia Technologies, a provider of telecommunications software and services. From 1983 until 2005, Ms. Wasser served in several positions of increasing responsibility with AT&T Corporation and AT&T Wireless Services, ultimately serving as Executive Vice President, Associate General Counsel and Corporate Secretary of AT&T Wireless Services from September 2002 to February 2005 and immediately prior thereto, from 1995 until 2002, as Executive Vice President, Law, Corporate Secretary and Chief Compliance Officer of AT&T.
PART II
| |
Item 5. | Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Market Price of Common Stock
Our common stock is listed on the New York Stock Exchange ("NYSE") under the symbol "RLGY". As of February 23, 2018,21, 2020, the number of stockholders of record was 22. The following table sets forth the quarterly high and low sales prices per share of RLGY common stock as reported by the NYSE, for the years ended December 31, 2016 and 2017:
|
| | | | | | | | | | | | | | | |
| | 2016 | | 2017 |
| | High | | Low | | High | | Low |
| First Quarter | $ | 36.46 |
| | $ | 27.98 |
| | $ | 30.29 |
| | $ | 25.14 |
|
| Second Quarter | $ | 37.33 |
| | $ | 27.43 |
| | $ | 32.62 |
| | $ | 27.79 |
|
| Third Quarter | $ | 31.48 |
| | $ | 25.39 |
| | $ | 35.18 |
| | $ | 31.82 |
|
| Fourth Quarter | $ | 27.30 |
| | $ | 21.43 |
| | $ | 34.50 |
| | $ | 25.46 |
|
Dividend Policy
In August 2016, the Company’s Board of Directors approved the initiation of a quarterly cash dividend policy of $0.09 per share on its common stock. The Board declared and paid a quarterly cash dividend of $0.09 per share of the Company's common stock during each quarter of 2017, returning a total of $49 million to stockholders in cash dividends.
Pursuant to the Company’s policy, the dividends payable in cash are treated as a reduction of additional paid-in capital since the Company is currently in a retained deficit position.
The declaration and payment of any future dividend will be subject to the discretion of the Board of Directors and will depend on a variety of factors, including the Company’s financial condition and results of operations, contractual restrictions, including restrictive covenants contained in the Company’s credit agreements, and the indentures governing the Company’s outstanding debt securities, capital requirements and other factors that the Board of Directors deems relevant. Because Realogy Holdings is a holding company and has no direct operations, we will only be able to pay dividends from our available cash on hand and any funds we receive from our subsidiaries. Our title insurance underwriter is subject to regulations that limit its ability to pay dividends or make loans or advances to us, principally to protect policyholders. Under Delaware law, dividends may be payable only out of surplus, which is our net assets minus our liabilities and our capital or, if we have no surplus, out of our net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. As a result, we may not pay dividends according to our policy or at all if, among other things, we do not have sufficient cash to pay the intended dividends, if our financial performance does not achieve expected results or the terms of our indebtedness prohibit it.38.
Share Repurchase Program
The Company maydid not repurchase sharescommon stock during the quarter ended December 31, 2019. The Company expects to prioritize investing in its business and reducing indebtedness. See "Item 7.—Management's Discussion and Analysis of itsFinancial Condition and Results of Operations—Financial Condition, Liquidity and Capital Resources" for additional information.
Shares of common stock repurchased by the Company pursuant to authorizations made from its Board of Directors. Shares repurchasedDirectors are retired and not displayed separately as treasury stock on the consolidated financial statements. The par value of the shares repurchased and retired is deducted from common stock and the excess of the purchase price over par value is first charged against any available additional paid-in-capital with the balance charged to retained earnings. Direct costs incurred to repurchase the shares are included in the total cost of the shares.
In February 2016,Although, as of December 31, 2019, $204 million remained available for repurchase under share repurchase programs previously authorized by the Company's Board of Directors authorized a share repurchase program of up to $275 million of the Company’s common stock, which has been fully utilized. In February 2017,Company is prohibited from repurchasing shares under such programs under the indenture governing the 9.375% Senior Notes until the Company's Board of Directors authorized a share repurchase program of upconsolidated leverage ratio falls below 4.00 to an additional $300 million of the Company's common stock. On February 26, 2018, the Board authorized a new share repurchase program of up to $350 million of the Company's common stock, which is in addition1.00 and then only to the remaining authorizationextent of available cumulative credit, as defined under the indenture governing the 9.375% Senior Notes. Accordingly, the Company suspended repurchases in February 2017 share2019. The repurchase program. programs have no time limit and may be discontinued at any time. Repurchases under each programthese programs may be made at management's discretion from time to time on the open market, pursuant to Rule 10b5-1 trading plans or through privately negotiated transactions. The size and timing of theseany future repurchases (if any), subject to the limitation noted above, will depend on price, market and economic conditions, legal and contractual requirements and other factors, and each share repurchase program has no time limit and may be suspended orfactors.
Dividends
In early November 2019, the Company's Board of Directors discontinued atthe Company's quarterly dividend. The Company does not anticipate paying any time. All of the repurchaseddividends on its common stock has been retired. The following table sets forth information relating to repurchase of shares of our common stock
duringin the quarter ended December 31, 2017: |
| | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs |
| October 1-31, 2017 | | 498,100 |
| | $33.11 | | 498,100 |
| | $ | 181,407,680 |
|
| November 1-30, 2017 | | 2,141,680 |
| | $26.61 | | 2,141,680 |
| | $ | 124,417,575 |
|
| December 1-31, 2017 | | 881,098 |
| | $27.17 | | 881,098 |
| | $ | 100,478,142 |
|
During the period January 1, 2018 through February 23, 2018, we repurchased an additional 1.5 million shares at a weighted average market price of $26.82. Giving effect to these repurchases, we had approximately $60 million of remaining capacity authorized under the February 2017 share repurchase program as of February 23, 2018.foreseeable future.
Stock Performance Graph
The stock performance graph set forth below is not deemed filed with the Securities and Exchange Commission and shall not be deemed incorporated by reference into any of our prior or future filings made with the Securities and Exchange Commission.
The following graph compares Realogy's cumulative total shareholder return withassumes a $100 investment on December 31, 2014, and reinvestment of all dividends, in each of the cumulative total return ofCompany’s common stock, the S&P 500 index, the S&P MidCap 400 index and the S&P Home Builders Select Industry Indexindex, or XHB Index. We have included the XHB Index because it provides(which includes a diversified group of holdings representing home building, building products, home furnishings and home appliances, which we believe correlate with the housing industry as a whole.appliances). A portion of our 2015, 20162017, 2018 and 20172019 long-term incentive compensation awards are also tied to the relative performance of our total stockholder return as compared to that indexthe S&P MidCap 400 or XHB Index over the three-year period ending December 31, 2017,2019, December 31, 20182020 and December 31, 2019,2021, respectively. The cumulative total shareholder return for the index as well as the XHB Index includes the reinvestment of dividends. The graph assumes that the value of the investment in the Company's common shares, the index and the peer group was $100 on December 31, 2012 and updates the value through December 31, 2017.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative Total Return |
| | December 31, 2012 | | December 31, 2013 | | December 31, 2014 | | December 31, 2015 | | December 31, 2016 | | December 31, 2017 |
| Realogy Holdings Corp. | $ | 100.00 |
| | $ | 117.9 |
| | $ | 106.03 |
| | $ | 87.39 |
| | $ | 61.75 |
| | $ | 64.38 |
|
| SPDR S&P Homebuilders ETF (XHB) index | $ | 100.00 |
| | $ | 109.4 |
| | $ | 121.90 |
| | $ | 132.32 |
| | $ | 120.69 |
| | $ | 209.21 |
|
| S&P 500 | $ | 100.00 |
| | $ | 132.39 |
| | $ | 150.51 |
| | $ | 152.59 |
| | $ | 170.84 |
| | $ | 208.14 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative Total Return | | | | | | | | | | | |
| December 31, | | | | | | | | | | |
| 2014 | | 2015 | | 2016 | | 2017 | | 2018 | | 2019 |
| Realogy Holdings Corp. | $ | 100.00 | | | $ | 82.42 | | | $ | 58.24 | | | $ | 60.72 | | | $ | 34.20 | | | $ | 23.30 | |
| SPDR S&P Homebuilders ETF (XHB) index | $ | 100.00 | | | $ | 108.55 | | | $ | 99.00 | | | $ | 171.62 | | | $ | 116.27 | | | $ | 175.33 | |
| S&P MidCap 400 index | $ | 100.00 | | | $ | 97.82 | | | $ | 118.11 | | | $ | 137.30 | | | $ | 122.08 | | | $ | 154.07 | |
| S&P 500 index | $ | 100.00 | | | $ | 101.38 | | | $ | 113.51 | | | $ | 138.29 | | | $ | 132.23 | | | $ | 173.86 | |
Item 6. Selected Financial Data.
The following table presents our selected historical consolidated financial data and operating statistics. The consolidated statement of operations data for the years ended December 31, 2017, 2016,2019, 2018, and 20152017 and the consolidated balance sheet data as of December 31, 20172019 and 20162018 have been derived from our audited consolidated financial statements included elsewhere herein. The statement of operations data for the year ended December 31, 20142016 and 20132015 and the consolidated balance sheet data as of December 31, 2015, 20142017, 2016 and 20132015 have been derived from our consolidated financial statements not included elsewhere herein.
In November 2019, the Company entered into a Purchase Agreement under which SIRVA will acquire Cartus Relocation Services. As a result, the operating results of Cartus Relocation Services in the table below are presented as discontinued operations for all periods. See Note 3, "Discontinued Operations", to the Company's Consolidated Financial Statements included in this Annual Report for additional information about discontinued operations.
Neither Realogy Holdings, the indirect parent of Realogy Group, nor Realogy Intermediate, the direct parent company of Realogy Group, conducts any operations other than with respect to its respective direct or indirect ownership of Realogy Group. As a result, the consolidated financial positions and results of operations of Realogy Holdings, Realogy Intermediate and Realogy Group are the same.
The selected historical consolidated financial data and operating statistics presented below should be read in conjunction with our annual consolidated financial statements and accompanying notes and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein. Our annual consolidated financial information may not be indicative of our future performance.
|
| | | | | | | | | | | | | | | | | | | |
| | As of or for the Year Ended December 31, |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| | (In millions, except per share data and operating statistics) |
| Statement of Operations Data: | | | | | | | | | |
| Net revenue | $ | 6,114 |
| | $ | 5,810 |
| | $ | 5,706 |
| | $ | 5,328 |
| | $ | 5,289 |
|
| Total expenses | 5,763 |
| | 5,461 |
| | 5,424 |
| | 5,103 |
| | 5,114 |
|
| Income before income taxes, equity in earnings and noncontrolling interests | 351 |
| | 349 |
| | 282 |
| | 225 |
| | 175 |
|
| Income tax (benefit) expense (a) | (65 | ) | | 144 |
| | 110 |
| | 87 |
| | (242 | ) |
| Equity in earnings of unconsolidated entities | (18 | ) | | (12 | ) | | (16 | ) | | (9 | ) | | (26 | ) |
| Net income | 434 |
| | 217 |
| | 188 |
| | 147 |
| | 443 |
|
| Less: Net income attributable to noncontrolling interests | (3 | ) | | (4 | ) | | (4 | ) | | (4 | ) | | (5 | ) |
| Net income attributable to Realogy Holdings and Realogy Group | $ | 431 |
| | $ | 213 |
| | $ | 184 |
| | $ | 143 |
| | $ | 438 |
|
| | | | | | | | | | |
| Earnings per share attributable to Realogy Holdings: | | |
| Basic earnings per share | $ | 3.15 |
| | $ | 1.47 |
| | $ | 1.26 |
| | $ | 0.98 |
| | $ | 3.01 |
|
| Diluted earnings per share | $ | 3.11 |
| | $ | 1.46 |
| | $ | 1.24 |
| | $ | 0.97 |
| | $ | 2.99 |
|
| Weighted average common and common equivalent shares used in: | | |
| Basic | 136.7 |
| | 144.5 |
| | 146.5 |
| | 146.0 |
| | 145.4 |
|
| Diluted | 138.4 |
| | 145.8 |
| | 148.1 |
| | 147.2 |
| | 146.6 |
|
| | | | | | | | | | |
| Cash dividends declared per share (beginning in August 2016) | $ | 0.36 |
| | $ | 0.18 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Balance Sheet Data: | | | | | | | | | |
| Cash and cash equivalents | $ | 227 |
| | $ | 274 |
| | $ | 415 |
| | $ | 313 |
| | $ | 236 |
|
| Securitization assets (b) | 218 |
| | 238 |
| | 281 |
| | 286 |
| | 268 |
|
| Total assets | 7,337 |
| | 7,421 |
| | 7,531 |
| | 7,304 |
| | 7,092 |
|
| Securitization obligations | 194 |
| | 205 |
| | 247 |
| | 269 |
| | 252 |
|
| Long-term debt, including short-term portion | 3,348 |
| | 3,507 |
| | 3,702 |
| | 3,855 |
| | 3,857 |
|
| Equity | 2,622 |
| | 2,469 |
| | 2,422 |
| | 2,183 |
| | 2,013 |
|
| Statement of Cash Flows Data (c): | | | | | | | | | |
| Net cash provided by operating activities | $ | 667 |
| | $ | 586 |
| | $ | 588 |
| | $ | 452 |
| | $ | 569 |
|
| Net cash used in investing activities | (146 | ) | | (191 | ) | | (211 | ) | | (302 | ) | | (97 | ) |
| Net cash used in financing activities | (570 | ) | | (534 | ) | | (275 | ) | | (75 | ) | | (607 | ) |
55
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of or for the Year Ended December 31, | | | | | | | | |
| 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| (In millions, except per share data and operating statistics) | | | | | | | | |
| Statement of Operations Data: | | | | | | | | | |
| Net revenue | $ | 5,598 | | | $ | 5,782 | | | $ | 5,810 | | | $ | 5,481 | | | $ | 5,373 | |
| Total expenses | 5,756 | | | 5,565 | | | 5,466 | | | 5,152 | | | 5,111 | |
| (Loss) income from continuing operations before income taxes, equity in (earnings) losses and noncontrolling interests | (158) | | | 217 | | | 344 | | | 329 | | | 262 | |
| Income tax (benefit) expense from continuing operations (a) | (22) | | | 67 | | | (66) | | | 134 | | | 103 | |
| Equity in (earnings) losses of unconsolidated entities | (18) | | | 4 | | | (18) | | | (12) | | | (16) | |
| Net (loss) income from continuing operations | (118) | | | 146 | | | 428 | | | 207 | | | 175 | |
| Net (loss) income from discontinued operations | (67) | | | (6) | | | 6 | | | 10 | | | 13 | |
| Net (loss) income | (185) | | | 140 | | | 434 | | | 217 | | | 188 | |
| Less: Net income attributable to noncontrolling interests | (3) | | | (3) | | | (3) | | | (4) | | | (4) | |
| Net (loss) income attributable to Realogy Holdings and Realogy Group | $ | (188) | | | $ | 137 | | | $ | 431 | | | $ | 213 | | | $ | 184 | |
| | | | | | | | | |
| Basic (loss) earnings per share attributable to Realogy Holdings shareholders: | | | | | | | | | |
| Basic (loss) earnings per share from continuing operations | $ | (1.06) | | | $ | 1.15 | | | $ | 3.11 | | | $ | 1.40 | | | $ | 1.17 | |
| Basic (loss) earnings per share from discontinued operations | (0.59) | | | (0.05) | | | 0.04 | | | 0.07 | | | 0.09 | |
| Basic (loss) earnings per share | $ | (1.65) | | | $ | 1.10 | | | $ | 3.15 | | | $ | 1.47 | | | $ | 1.26 | |
| | | | | | | | | |
| Diluted (loss) earnings per share attributable to Realogy Holdings shareholders: | | | | | | | | | |
| Diluted (loss) earnings per share from continuing operations | $ | (1.06) | | | $ | 1.14 | | | $ | 3.07 | | | $ | 1.39 | | | $ | 1.15 | |
| Diluted (loss) earnings per share from discontinued operations | (0.59) | | | (0.05) | | | 0.04 | | | 0.07 | | | 0.09 | |
| Diluted (loss) earnings per share | $ | (1.65) | | | $ | 1.09 | | | $ | 3.11 | | | $ | 1.46 | | | $ | 1.24 | |
| | | | | | | | | |
| Weighted average common and common equivalent shares used in: | | | | | | | | | |
| Basic | 114.2 | | | 124.0 | | | 136.7 | | | 144.5 | | | 146.5 | |
| Diluted | 114.2 | | | 125.3 | | | 138.4 | | | 145.8 | | | 148.1 | |
| | | | | | | | | |
| Cash dividends declared per share (August 2016 through August 2019) | $ | 0.27 | | | $ | 0.36 | | | $ | 0.36 | | | $ | 0.18 | | | $ | — | |
| Balance Sheet Data: | | | | | | | | | |
| Cash and cash equivalents | $ | 235 | | | $ | 203 | | | $ | 196 | | | $ | 240 | | | $ | 391 | |
| Total assets | 7,543 | | | 7,290 | | | 7,337 | | | 7,421 | | | 7,531 | |
| Long-term debt, including short-term portion | 3,445 | | | 3,548 | | | 3,348 | | | 3,507 | | | 3,702 | |
| Equity | 2,096 | | | 2,315 | | | 2,622 | | | 2,469 | | | 2,422 | |
| Statement of Cash Flows Data: | | | | | | | | | |
| Net cash provided by operating activities | $ | 371 | | | $ | 394 | | | $ | 667 | | | $ | 586 | | | $ | 588 | |
| Net cash used in investing activities | (128) | | | (91) | | | (146) | | | (191) | | | (211) | |
| Net cash used in financing activities | (215) | | | (297) | | | (570) | | | (534) | | | (275) | |
|
| | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Operating Statistics: | | | | | | | | | |
Real Estate Franchise Services (d) (e) | | | | | | | | | |
| Closed homesale sides (f) | 1,144,217 |
| | 1,135,344 |
| | 1,101,333 |
| | 1,065,339 |
| | 1,083,424 |
|
| Average homesale price (g) | $ | 288,929 |
| | $ | 272,206 |
| | $ | 263,894 |
| | $ | 250,214 |
| | $ | 233,011 |
|
| Average homesale brokerage commission rate (h) | 2.50 | % | | 2.50 | % | | 2.51 | % | | 2.52 | % | | 2.54 | % |
| Net effective royalty rate (i) | 4.42 | % | | 4.46 | % | | 4.48 | % | | 4.49 | % | | 4.49 | % |
| Net royalty per side (j) | $ | 313 |
| | $ | 299 |
| | $ | 294 |
| | $ | 282 |
| | $ | 265 |
|
Company Owned Real Estate Brokerage Services (e) (k) | | | | | | | |
| Closed homesale sides (f) | 344,446 |
| | 335,699 |
| | 336,744 |
| | 308,332 |
| | 316,640 |
|
Average homesale price (g) | $ | 514,685 |
| | $ | 489,504 |
| | $ | 489,673 |
| | $ | 500,589 |
| | $ | 471,144 |
|
| Average homesale brokerage commission rate (h) | 2.44 | % | | 2.46 | % | | 2.46 | % | | 2.47 | % | | 2.50 | % |
| Gross commission income per side (l) | $ | 13,309 |
| | $ | 12,752 |
| | $ | 12,730 |
| | $ | 13,072 |
| | $ | 12,459 |
|
| Relocation Services | | | | | | | | | |
Initiations (m) | 161,755 |
| | 163,063 |
| | 167,749 |
| | 171,210 |
| | 165,705 |
|
Referrals (n) | 83,678 |
| | 87,277 |
| | 99,531 |
| | 96,755 |
| | 91,373 |
|
| Title and Settlement Services | | | | | | | | | |
| Purchasing title and closing units (o) | 159,113 |
| | 152,997 |
| | 130,541 |
| | 113,074 |
| | 115,572 |
|
| Refinance title and closing units (p) | 28,564 |
| | 50,919 |
| | 38,544 |
| | 27,529 |
| | 76,196 |
|
| Average fee per closing unit (q) | $ | 2,092 |
| | $ | 1,875 |
| | $ | 1,861 |
| | $ | 1,780 |
| | $ | 1,504 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, | | | | | | | | |
| 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| Operating Statistics: | | | | | | | | | |
Realogy Franchise Group (b) | | | | | | | | | |
| Closed homesale sides (c) | 1,061,500 | | | 1,103,857 | | | 1,144,217 | | | 1,135,344 | | | 1,101,333 | |
| Average homesale price (d) | $ | 314,769 | | | $ | 303,750 | | | $ | 288,929 | | | $ | 272,206 | | | $ | 263,894 | |
| Average homesale brokerage commission rate (e) | 2.47 | % | | 2.48 | % | | 2.50 | % | | 2.50 | % | | 2.51 | % |
| Net royalty per side (f) | $ | 327 | | | $ | 323 | | | $ | 313 | | | $ | 299 | | | $ | 294 | |
Realogy Brokerage Group (g) | | | | | | | | | |
| Closed homesale sides (c) | 325,652 | | | 336,806 | | | 344,446 | | | 335,699 | | | 336,744 | |
Average homesale price (d) | $ | 522,282 | | | $ | 523,426 | | | $ | 514,685 | | | $ | 489,504 | | | $ | 489,673 | |
| Average homesale brokerage commission rate (e) | 2.41 | % | | 2.43 | % | | 2.44 | % | | 2.46 | % | | 2.46 | % |
| Gross commission income per side (h) | $ | 13,296 | | | $ | 13,458 | | | $ | 13,309 | | | $ | 12,752 | | | $ | 12,730 | |
| Realogy Title Group | | | | | | | | | |
| Purchasing title and closing units (i) | 146,210 | | | 157,228 | | | 159,113 | | | 152,997 | | | 130,541 | |
| Refinance title and closing units (j) | 26,589 | | | 18,495 | | | 28,564 | | | 50,919 | | | 38,544 | |
| Average fee per closing unit (k) | $ | 2,297 | | | $ | 2,230 | | | $ | 2,092 | | | $ | 1,875 | | | $ | 1,861 | |
_______________
| |
(a) | For(a)The income tax benefit for the year ended December 31, 2017, the Company recorded an income tax benefit of $65 million which related to a $184 million income tax rate change on the Company's net deferred tax liability as a result of the 2017 Tax Act resulting in a smaller net liability and a $32 million change in the reserve for uncertain tax positions, partially offset by income taxes for 2017 income. For the years ended December 31, 2016, 2015 and 2014, the Company recorded a change in reserve for uncertain tax positions of a benefit of $2 million, a benefit of $1 million and an expense of $1 million, respectively. For the year ended December 31, 2013, the Company recorded an income tax benefit of $242 million which was primarily due to a $341 million release of the domestic deferred tax valuation allowance and a $2 million change in the reserve for uncertain tax positions, partially offset by income taxes for 2013 income. |
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(b) | Represents the portion of relocation receivables and advances and other related assets that collateralize our securitization obligations. Refer to Note 8, "Short and Long-Term Debt" in the consolidated financial statements for further information. |
| |
(c) | Statement of Cash Flows Data for 2016 and prior periods are restated to reflect the retrospective adoption of Accounting Standards Updates "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments" and "Restricted Cash" issued by the Financial Accounting Standards Board. See Note 2, "Summary of Significant Accounting Policies" in the consolidated financial statements for additional information.
|
| |
(d) | These amounts include only those relating to third-party franchisees and do not include amounts relating to the Company Owned Real Estate Brokerage Services segment. |
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(e) | In April 2015, the Company Owned Real Estate Brokerage Services segment acquired Coldwell Banker United, a large franchisee of the Real Estate Franchise Services segment. As a result of the acquisition, the drivers of the acquired entity shifted from the Real Estate Franchise Services segment to the Company Owned Real Estate Brokerage Services segment. Closed homesale sides for the Company Owned Real Estate Brokerage segment included 16,746 sides related to the acquisition of Coldwell Banker United in 2015. |
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(f) | A closed homesale side represents either the "buy" side or the "sell" side of a homesale transaction. |
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(g) | Represents the average selling price of closed homesale transactions. |
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(h) | Represents the average commission rate earned on either the "buy" side or "sell" side of a homesale transaction. |
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(i) | Represents the average percentage of our franchisees’ commission income (excluding NRT) paid to the Real Estate Franchise Services segment as a royalty, net of volume incentives achieved. The net effective royalty rate does not include the effect of non-standard incentives granted to certain franchisees. Royalty fees are charged to all franchisees pursuant to the terms of the relevant franchise agreements and are included in each of the real estate brands' franchise disclosure documents. Non-standard incentives may be used as consideration to attract, retain and help grow certain franchisees. Most of our franchisees do not receive these non-standard incentives and in contrast to volume incentives, they are not homesale transaction based. We have accordingly excluded |
the non-standard incentives from the calculation of the net effective royalty rate. Had these non-standard incentives been included, the net effective royalty rate would be lower by approximately 24, 23, 21, 18 and 16 basis points for the years ended December 31, 2017 2016, 2015, 2014reflects the impact of the 2017 Tax Act.
(b)These amounts include only those relating to third-party franchisees and 2013, respectively. We intenddo not include amounts relating to discontinueRealogy Brokerage Group.
(c)A closed homesale side represents either the use"buy" side or the "sell" side of a homesale transaction.
(d)Represents the average selling price of closed homesale transactions.
(e)Represents the average commission rate earned on either the "buy" side or "sell" side of a homesale transaction.
(f)Represents domestic royalties earned from our franchisees net effective royalty rateof volume incentives achieved and other incentives divided by the total number of our franchisees’ closed homesale sides.
(g)Our real estate brokerage business has a significant concentration of offices and transactions in geographic regions where home prices are at the higher end of the U.S. real estate market, particularly the east and west coasts. The real estate franchise business has franchised offices that are more widely dispersed across the United States than our real estate brokerage operations. Accordingly, operating results and homesale statistics may differ between our brokerage and franchise businesses based upon geographic presence and the corresponding homesale activity in each geographic region.
(h)Represents gross commission income divided by closed homesale sides. Gross commission income includes commissions earned in homesale transactions and certain other activities, primarily leasing and property management transactions.
(i)Represents the number of title and closing units processed as an operating statistic in future periodsa result of home purchases.
(j)Represents the number of title and will report "Net royalty per side" in its place; see footnote (j).closing units processed as a result of homeowners refinancing their home loans.
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(j) | Represents domestic royalties earned from our franchisees net of volume incentives achieved and non-standard incentives divided by the total number of our franchisees’ closed homesale sides. The Company believes that net royalty per side, which represents the royalty revenue impact of each incremental side, is a better measure of the profitability of its real estate franchise services segment than net effective royalty rate as it provides visibility into the incremental impact of changes in average homesale price as well as the impact of standard volume or non-standard incentives granted to certain franchisees. |
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(k) | Our real estate brokerage business has a significant concentration of offices and transactions in geographic regions where home prices are at the higher end of the U.S. real estate market, particularly the east and west coasts. The real estate franchise business has franchised offices that are more widely dispersed across the United States than our real estate brokerage operations. Accordingly, operating results and homesale statistics may differ between our brokerage and franchise businesses based upon geographic presence and the corresponding homesale activity in each geographic region. |
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(l) | Represents gross commission income divided by closed homesale sides. Gross commission income includes commissions earned in homesale transactions and certain other activities, primarily leasing and property management transactions.(k)Represents the average fee we earn on purchase title and refinancing title units. |
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(m) | Represents the total number of transferees and affinity members served by the relocation services business. |
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(n) | Represents the number of referrals from which we earned revenue from real estate brokers. |
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(o) | Represents the number of title and closing units processed as a result of home purchases. The amounts presented include 8,351, 18,930 and 13,304 purchase units as a result of acquisitions for 2017, 2016 and 2015, respectively. |
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(p) | Represents the number of title and closing units processed as a result of homeowners refinancing their home loans. The amounts presented include 1,858, 4,469 and 3,403 refinance units as a result of acquisitions for 2017, 2016 and 2015, respectively. |
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(q) | Represents the average fee we earn on purchase title and refinancing title units. |
In presenting the financial data above in conformity with general accepted accounting principles, we are required to make estimates and assumptions that affect the amounts reported. See "Item 7.—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies" for a detailed discussion of the accounting policies that we believe require subjective and complex judgments that could potentially affect reported results.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with our consolidated financial statements and accompanying notes thereto included elsewhere herein. Unless otherwise noted, all dollar amounts in tables are in millions. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements. See "Forward-Looking Statements" and "Item 1A.—Risk Factors" for a discussion of the uncertainties, risks and assumptions associated with these statements. Actual results may differ materially from those contained in any forward-looking statements.
RECENT DEVELOPMENTS
Entry into a Definitive Agreement to Sell Cartus Relocation Services with Realogy to Retain Realogy Leads Group (including affinity and broker-to-broker business and Realogy Broker Network)
We entered into a definitive Purchase and Sale agreement with a subsidiary of SIRVA, Inc. ("SIRVA") on November 6, 2019 (the "Purchase Agreement"), pursuant to which SIRVA will acquire Cartus Relocation Services, our global employee relocation business. Under the terms of the Purchase Agreement, we will receive $375 million in cash at closing, subject to certain closing adjustments set forth in the Purchase Agreement, and a $25 million deferred payment after the closing of the transaction. SIRVA is a portfolio company of Madison Dearborn Partners (MDP), a leading private equity firm, and the deferred payment will be paid upon the consummation of MDP's monetization of its investment in Cartus Relocation Services or such earlier date determined at the discretion of MDP. The Tax Cuts and Jobs Actsale of 2017Cartus Relocation Services is expected to close in the next couple of months, subject to the satisfaction or waiver of closing conditions described in the Purchase Agreement. We intend to use the substantial majority of the net proceeds from the transaction to pay down corporate debt.
The Tax Cutstransaction does not include Realogy Leads Group. Realogy Leads Group consists of affinity programs (both company- and Jobs Actclient-directed) as well as broker-to-broker referrals and the Realogy Broker Network (formerly referred to as the Cartus Broker Network). Referrals generated by Realogy Leads Group are handled by the Realogy Broker Network, a network made up of 2017 (the “2017 Tax Act”) became lawagents and brokers from Realogy’s residential real estate brands and certain independent real estate brokers. Member brokers of the Realogy Broker Network, including certain franchisees and company owned brokerages, receive referrals in exchange for a referral fee paid to Realogy Leads Group.
Member brokers of the Realogy Broker Network have also historically received referrals from Cartus Relocation Services generated by our relocation clients in exchange for a referral fee (that is reported in the financial results for Cartus Relocation Services). In connection with the planned sale of Cartus Relocation Services to SIRVA, we will enter into a non-exclusive five-year broker services agreement with SIRVA, pursuant to which Realogy Leads Group could, at the discretion of SIRVA, continue to provide high-quality brokerage services via the Realogy Broker Network to relocation clients of SIRVA. Realogy Leads Group, however, will not receive a referral fee in connection with providing such services.
The assets and liabilities of Cartus Relocation Services are classified as held for sale in the Consolidated Balance Sheets and the results are reported in this Annual Report as discontinued operations. "Net (loss) income from discontinued operations" is reflected on December 22, 2017.the Consolidated Statements of Operations for all periods presented.
2017 Impact on Corporate Tax RateRealogy Leads Group
For tax years beginningThe Realogy Broker Network has historically been a key contributor to our lead generation strategy, with 99% of the converted leads generated through the network (from Realogy Leads Group and Cartus Relocation Services) being directed to independent sales agents affiliated with our franchisees and company owned brokerages in 2018,2019. As a result of referrals from Realogy Leads Group and Cartus Relocation Services, the U.S. Federal corporate tax rate will be reducedRealogy Broker Network closed approximately 78,700 real estate transactions in 2019, with approximately 68,400 transactions attributable to affinity programs and broker-to-broker activity, and approximately 10,300 transactions attributable to relocation clients.
Our affinity business is highly-concentrated and our affinity relationships are terminable at any time at the option of the client and are non-exclusive.
In the third quarter of 2019, USAA, which had been our largest affinity client, ceased new enrollments in its long-term affinity program with us. In 2019, referrals generated by the USAA affinity program represented a significant portion of the 78,700 total homesale transactions closed from 35% to 21%. Since Realogy’s December 31, 2017 balance sheet reflects a net deferred tax liability, the rate changeRealogy Broker Network. We expect that the discontinuation of the USAA business will result in (1) a smaller net liabilitymaterial decline in earnings at Realogy Leads Group and (2) a comparable dollar reduction in earnings in the Company has recognizedaggregate for the Realogy Brokerage Group and Realogy Franchise Group as a significant tax benefitresult of the loss
of the referrals from the USAA affinity program, with most of the impact expected at Realogy Brokerage Group. Approximately 80% of USAA referrals in both 2018 and 2019 were distributed to franchise brokerages affiliated with Realogy Franchise Group and approximately $18420% were distributed to Realogy Brokerage Group.
In 2019, we launched our first Realogy-branded affinity program with Realogy Military Rewards, a program for U.S. military personnel, veterans and their families that seeks to provide access to benefits from Realogy that are similar to those offered under the former USAA affinity program.In October 2019, we announced an agreement to create the first-ever real estate benefits program designed for the nearly 38 million in 2017.
2018 Impact on Corporate Tax Rate
The Company's effective tax rate,AARP members, which includes state and local income taxes, is estimatedexpected to be 29% beginning in 2018 which will result in lower than previously anticipated cash income taxes once the Company's net operating loss carryforwards are fully utilized. We currently expect to fully utilize our net operating loss carryforwardslaunch nationally in early 2020. The tax reform changes related to interest expense deductibility, executive compensation, income from foreign subsidiariesCompany expects that significant time and mealseffort and entertainment are not expected to have a significant impact on the Company's tax provision.
Impact on Consumers
Among other things, the 2017 Tax Act:
reduces individual federal tax brackets at most income levels;
increases the standard deduction from $12,700 to $24,000 for married taxpayers filing a joint return;
caps the aggregate amount of property, sales and state and local income tax deductions at $10,000;
reduces the principal amount to which the home mortgage interest deductionmeaningful investment will be availablerequired to potentially impacted U.S. taxpayers who enter into a mortgage on or after December 15, 2017 from $1,000,000 to $750,000, while entirely suspending interest deductibilityincrease awareness of home equity loans; and affinity member participation in these new affinity programs.
suspendsFollowing the deductibility of certain home moving expenses.
The impactclose of the income tax changes on individuals as well asplanned sale of Cartus Relocation Services, we expect to consolidate Realogy Leads Group, including the potential impact on homesale transactions is difficult to predict and we are currently unable to estimate the extent to which these provisions of the 2017 Tax Act will affect our business. While certain of these provisions (such as caps on property tax and mortgage interest deductions) negatively impact traditional incentives associated with home ownership and may reduce the financial distinction between renting and owning a home, other provisions (such as the reduction in tax rates and increase in standard deductions) could help individuals accumulate additional funds for the down payment on a house or help support a home mortgage payment. Although the reduction in state and local tax deductibility will impact many individuals, particularly in states with higher taxes it is unclear what impact, if any, this will have on the mobility of such state residents, or on home values in such geographies, although it may result in some shift in the value of homes from high tax states to those states with low or no state income tax. The effects of the 2017 Tax Act on average homesale prices may be more impactful in states where average home prices, state and local incomes taxes, and/or property taxes are high, including California and the New York tri-state area, where our company owned brokerage and our franchisee businesses maintain a material presence. In addition, the suspension of the deduction for certain moving expenses may result in fewer instances of specific relocation services.Realogy Broker Network, into Realogy Franchise Group.
Refinancing
In February 2018, the Company completed debt transactions which:
amended its Revolving Credit Facility, by increasing the capacity from $1,050 million to $1,400 million and extending the maturity date from October 2020 to February 2023 (the "New Revolving Credit Facility");
refinanced the existing aggregate $733 million Term Loan A and Term Loan A-1 tranches due October 2020 and July 2021, respectively, into a new single tranche of $750 million Term Loan A due February 2023 (which included incremental borrowings of $17 million) (the "New Term Loan A"); and
refinanced the existing $1,083 million Term Loan B due July 2022 with a new Term Loan B issued at par in the amount of $1,080 million and with a maturity date in February 2025 (the "New Term Loan B").
The interest rates with respect to the New Revolving Credit Facility and New Term Loan A are the same that had been in place under Term Loan A-1 and are based on, at the Company's option, adjusted London Interbank Offering Rate ("LIBOR") or JPMorgan Chase Bank, N.A.’s prime rate ("ABR") plus an additional margin subject to adjustments based on the Company’s then current senior secured leverage ratio under the Senior Secured Credit Facility. The New Term Loan A provides for quarterly amortization payments on the last day of each quarter, totaling per annum 2.5%, 2.5%, 5.0%, 7.5% and 10.0% of the original principal amount of the New Term Loan A, commencing June 30, 2018, with the balance of the New Term Loan A due in full on February 8, 2023. The interest rate and amortization with respect to New Term Loan B is unchanged. The other terms of the New Revolving Credit Facility, New Term Loan A and New Term Loan B are substantially the same as those in place prior to the transactions.Operational Efficiencies Program
Leadership Realignment and Other Initiatives
Beginning in the first quarter of 2018, the Company2019, we commenced the implementation of a plan to driveaccelerate our business forward and enhance stockholder value. The key initiatives of this plan include senior leadership realignment, an enhanced focus on technology and talent,office consolidation to reduce our storefront costs, as well as further attention on office footprint andinstitute other operational efficiencies includingto drive increased profitability. In addition, beginning in the consolidationfirst quarter of 2019, we commenced a plan to transform and centralize certain aspects of our operational support services providedand drive changes in how we serve our affiliated independent sales agents from a marketing and technology perspective to NRThelp such agents be more productive and RFG.
Mortgage Origination Joint Venture
Duringenable them to make their businesses more profitable. In the third quarter, we expanded our operational efficiencies program to focus on workforce optimization. This workforce optimization initiative is focused on consolidating similar or overlapping roles, reducing the number of hierarchical layers and fourth quarters of 2017, Guaranteed Rate Affinity, LLC (“Guaranteed Rate Affinity”),streamlining work and decision making. Separately, we also reduced headcount in the Company's mortgage origination joint venturethird quarter in connection with Guaranteed Rate, Inc. (“Guaranteed Rate”), acquired certain assetsthe wind down of the mortgage operationsUSAA affinity program. Furthermore, at the end of PHH Home Loans, LLC, the Company's former mortgage origination joint venture with PHH Mortgage Corporation, including its four regional centers and employees across the United States, but not its mortgage assets. Guaranteed Rate Affinity began doing business in August 2017 on a phased-in basis. Guaranteed Rate Affinity originates and markets its mortgage lending services to the Company's real estate brokerage and relocation subsidiaries as well as other real estate brokerage companies across the country. Guaranteed Rate owns a controlling 50.1% stake of Guaranteed Rate Affinity and2019 the Company owns the remaining 49.9%. While the Company has certain governance rightsidentified other strategic initiatives which are expected to result in additional operational and facility related efficiencies in 2020.
As of December 31, 2019, cost savings related to the joint venture, it does not have control of the day-to-day operations of Guaranteed Rate Affinity.
After giving effectrestructuring activities were estimated to the establishment of Guaranteed Rate Affinity and the liquidation of our interest in PHH Home Loans, LLC in the first half of 2018, the Company expects to realize net cash proceeds ofbe approximately $19 million. While the equity earnings or losses related to the Company's former joint venture were included in the financial results of NRT, the equity earnings or losses related to Guaranteed Rate Affinity are included in the financial results of TRG.
Adoption of New Share Repurchase Program
On February 26, 2018, the Board authorized a new share repurchase program of up to $350$50 million on an annual run rate basis, with approximately $30 million of the Company's common stock, which isthose cost savings realized in 2019. In addition to the remaining authorization available under the February 2017 share repurchase program. Refer to "Part II—Item 5. Market for Registrant’s Common Equity, Related Stockholder Mattersapproximately $30 million of cost savings realized from restructuring activities, there were approximately $40 million of additional cost savings initiatives implemented and Issuer Purchases of Equity Securities" for additional information on the Company's share repurchase programs.realized in 2019. These costs savings partially offset inflation and other costs in 2019.
CURRENT BUSINESS AND INDUSTRY TRENDS
According to the National Association of Realtors ("NAR"), during 2017,2019, homesale transaction volume increased 6%3% due to a 5%3% increase in the average homesale price and flat homesale transactions.
During 2018, the housing market faced challenging conditions that intensified in severity during the last four months of 2018, including reduced affordability, constrained inventory, higher average homesale prices and mortgage rate volatility, as well as a 1% increasenumber of other factors, such as personal income tax reform. While we believe that the difficult market environment in late 2018 continued to negatively impact the first half of 2019, we believe that incremental improvement in certain industry fundamentals, in particular declines in average mortgage rates, contributed to improvement in market conditions in the numbersecond half of homesale transactions. The higher increase2019. We believe this is reflected in the average homesales price relative to the6% increase and 11% increase in homesale transactions is a functiontransaction volume in the third and fourth quarter of high demand against a limited supply2019 as reported by NAR, respectively, versus the 4% decrease and flat homesale transaction volume in the first and second quarter of homes for sale. RFG and NRT homesale2019 as reported by NAR.
Homesale transaction volume on a combined basis increased 7% for the year ended December 31, 2017. NRT experiencedRealogy Franchise and Brokerage Groups decreased 1% during 2019 compared to 2018. Homesale transaction volume at Realogy Brokerage Group decreased 4%, as a 5% increase in the average homesale price andresult of a 3% increasedecrease in existing homesale transactions while RFG experienced a 6% increase in the average homesale price remained flat, and homesale transaction volume at our Realogy Franchise Group remained flat, as a 1% increaseresult of a 4% decrease in existing homesale transactions.transactions offset by a 4% increase in average homesale price.
We believe that while the industry fundamentals in late 2018 described above drove a significant portion of our decline in homesale transaction volume in the first half of 2019, our results after the first quarter of 2019 reflect some of the modest improvements in market conditions described above. However, during 2019, we were also negatively impacted by the intense competitive environment as well as our geographic concentration, in particular for our brokerage operations in California and the New York metropolitan area.
Specifically, the intensity of competition for the affiliation of independent sales agents negatively impacted recruitment and retention efforts at both Realogy Franchise and Brokerage Groups. While the number of independent sales agents affiliated with Realogy Brokerage Group grew approximately 4% in 2019, that gain did not fully offset the decline in homesale transaction volume driven by the loss of more productive independent sales agents over the same period. Further, the number of independent sales agents in the U.S. affiliated with Realogy Franchise Group (excluding Realogy Brokerage Group) was down approximately 3% in 2019, driven by the competitive environment for independent sales agents as well as franchisee terminations, including the loss of a large high-volume/low-margin franchisee during the second quarter.
These competitive factors drove a loss in our market share for the full-year 2019 compared to 2018. This loss of market share contributed to the decline in homesale transaction volume at both Realogy Franchise and Brokerage Groups and is expected to continue to adversely impact results.
Our market share is largely dependent on the ability of our company owned and franchised brokerages to recruit and retain independent sales agents, which has been and may continue to be further complicated by competitive models that do not prioritize traditional business objectives. For example, we believe that certain owned-brokerage competitors have investors that have historically allowed the pursuit of increases in market share over profitability, which not only exacerbates competition for independent sales agents, but places additional pressure on the share of commission income received by the agent. During 2018 through much of 2019, the business practices of one such competitor in particular had a material adverse impact on recruiting and retention efforts at both our company owned brokerages and certain franchised brands. While we saw signs of a return to a more rational competitive environment in late third quarter 2019, which continued into the fourth quarter of 2019, industry competition continues to be formidable and we expect to experience increased pressure in favor of agents affiliated with our company owned and franchised brokerages on the share of commission income received by such agents. Moreover, the business practices exhibited by the competitor described above could resume and have a further material adverse impact on our company owned and franchised brokerages.
Inventory. Although inventory levels have shown some signs of improvement during the first half of 2019, inventory levels declined during the second half of 2019 compared to 2018. Low housing inventory levels continue to be an industry-wide concern, in particular in certain highly sought-after geographies and at lower price points. According to NAR, the inventory of existing homes for sale in the U.S. decreased from 1.5 million as of December 2018 to 1.4 million at the end of December 2019. As a result, inventory has decreased from 3.7 months of supply in December 2018 to 3.0 months as of December 2019. These levels continue to be significantly below the 10-year average of 5.4 months, the 15-year average of 6.1 months and the 25-year average of 5.7 months.
Mortgage Rates. According to Freddie Mac, mortgage rates on commitments for a 30-year, conventional, fixed-rate first mortgage averaged 3.94% for 2019 and 4.54% for 2018. While mortgage rates reached as high as 4.87% in November 2018, rates have moderated during 2019, and on December 31, 2019 were 3.72%, according to Freddie Mac. Increases in mortgage rates adversely impact housing affordability and we have been and could again be negatively impacted by a rising interest rate environment. For example, a rise in mortgage rates could result in decreased homesale transaction volume if potential home sellers choose to stay with their lower mortgage rate rather than sell their home and pay a higher mortgage rate with the purchase of another home or, similarly, if potential home buyers choose to rent rather than pay higher mortgage rates.
Affordability. The fixed housing affordability index, as reported by NAR, decreased from 155 for 2018 to 153 for 2019, which we believe is primarily attributable to lower inventory levels, which have continued to put upward pressure on home prices. A housing affordability index above 100 signifies that a family earning the median income has sufficient income to purchase a median-priced home, assuming a 20 percent down payment and ability to qualify for a mortgage.
Recruitment and Retention of Independent Sales Agents; Commission Income. Recruitment and retention of independent sales agents and independent sales agent teams are critical to the business and financial results of a brokerage, including our company owned brokerages and those operated by our affiliated franchisees. CompetitionAggressive competition for independent sales agents and independent sales agent inteams has negatively impacted our industry, including within our franchise system, is high,company owned and franchised brokerages, in particular with respect to more productive sales agents. Most
We believe that a variety of a brokerage's real estate listings are sourced through the sphere of influence of their independent sales agents, notwithstanding the growing influence of internet-generated leads. Competitionfactors in recent years have driven intensifying recruitment and retention tactics for independent sales agents is generally subject to numerousin the industry and has increasingly impacted our recruitment and retention of top producing agents. Such factors including:
remuneration (such as sales commission percentage and other financial incentivesinclude increasing competition, increasing levels of commissions paid to independent sales agents);
other expenses borne by independent sales agents;
leads or business opportunities generated foragents (including up-front payments and equity), changes in the independent sales agent from the brokerage;
independent sales agents' perception of the value of the broker's brand affiliation;
marketing and advertising efforts by the brokerage or franchisor;
the office manager, staff and fellow independent sales agents with whom they collaborate daily; and
technology, continuing professional education, and other services provided by the brokerage or franchisor.
We believe that the influencespending patterns of independent sales agents (as more independent sales agents purchase services from third-parties outside of their affiliated broker) and the growth in independent sales agent teams has increased in recent yearsteams.
Competition for productive agents could continue to have a negative impact on our homesale transaction volume and together with the increasing competition from other brokerages, has negatively impacted the recruitmentmarket share and retention of independent sales agents andcould continue to put upward pressure on the average share of commissions earned by affiliated independent sales agents. These competitive market factors also impact our franchisees and such franchisees have also put pressureand may continue to seek reduced royalty fee arrangements or other incentives from us to offset the continued business pressures on RFG'ssuch franchisees, which would result in a reduction in royalty revenue comparedfees paid to us.
Non-Traditional Market Participants. While real estate brokers using historical real estate brokerage models typically compete for business primarily on the basis of services offered, brokerage commission, reputation, utilization of technology and personal contacts, participants pursuing non-traditional methods of marketing real estate may compete in other ways, including companies that employ technologies intended to disrupt historical real estate brokerage models or minimize or eliminate the role traditional brokers and sales agents perform in the homesale transaction volume asprocess.
A growing number of companies are competing in non-traditional ways for a portion of the economics forgross commission income generated by homesale transactions. For example, many iBuying business models seek to disintermediate real estate brokers and independent sales agents from buyers and sellers of homes by reducing brokerage commissions that may be earned on those transactions. In addition, the concentration and market power of the top listing aggregators allow them to monetize their platforms by a variety of actions, including expanding into the brokerage business, charging significant referral fees, charging listing and display fees, diluting the relationship between agents and agent teams change.
Commencingbrokers (and between agents and the consumer), tying referrals to use of their products, consolidating and leveraging data, and engaging in late 2016, NRT launched strategic initiatives focusedpreferential or exclusionary practices to favor or disfavor other industry participants. These actions divert and reduce the earnings of other industry participants, including our company owned and franchised brokerages. Aggregators could intensify their current business tactics or introduce new programs that could be materially disadvantageous to our business and other brokerage participants in the industry and such tactics could further increase pressures on the targeted recruitmentprofitability of our company owned and retention offranchised brokerages and affiliated independent sales agents. The initiatives built on the full-service real estate brokerage model utilized by NRT in
most markets by placing an even greater focus on the quality ofagents, reduce our servicesfranchisor service revenue and more aggressively utilizing financial incentives to strengthendilute our recruitingrelationships with our franchisees and retention practices. The execution of the initiatives had a positive impact on our efforts to recruit and retain high-performingour franchisees' relationships with affiliated independent sales agents during 2017,and buyers and sellers of homes.
We currently receive meaningful listing fees for our provision of real estate listings and such fees help defray expenses for lead generation and other programs to benefit affiliated agents and franchisees. We do not expect this revenue stream to extend beyond the first quarter of 2022 because of changes in industry practices around syndication and distribution of listings. The loss of this revenue, which we believe wascould occur prior to 2022, could have a key contributor to the rebuilding ofmeaningful adverse effect on our market share in 2017 from declines over the past several years. Execution of these initiatives resulted in increased spending on recruitment effortsrevenues and put upward pressure on the average share of commissions earned by affiliated independent sales agents.earnings.
While the execution of these recruiting and retention initiatives increased NRT's commission expense, and is expected to continue to increase, and adversely impact the margin earned by NRT, we expect that the continued execution of the initiatives and associated revenues from increased homesale transaction volume will (i) immediately positively impact RFG results (via intercompany royalties), (ii) over the longer term, improve NRT's operating results and (iii) continue to positively impact our market share.
NRTNew Development. Realogy Brokerage Group has relationships with developers, primarily in major cities, in particular New York City, to provide marketing and brokerage services in new developments. New development closings generally have a development period of between 18 and 24 monthscan vary significantly from contracted dateyear to closing. During 2017, NRT experienced stronger growth in its new development business with a significant increase in the number of closed transactions from 2016. This growth was largelyyear due to the timing matters that are outside of closings of several major developments during the year. While our current new development pipeline remains robust over the next several years, duecontrol, including long cycle times and irregular project completion timing. Accordingly, earnings attributable to the timing of anticipated closingsthis business can fluctuate meaningfully from year to year, impacting both homesale transaction volume and the cyclical natureshare of this business,gross commission income we expect a reduction in the number of closed transactions in 2018 and a corresponding reduction in related earnings to NRT, with a significant portion of the impact expected in the first half of the year.
As reported by NAR, the housing affordability index has continued to be at historically favorable levels, despite the increases in the average homesale price over the past several years. An index above 100 signifies that a family earning the median income has sufficient income to purchase a median-priced home, assuming a 20 percent down payment and ability to qualify for a mortgage. The composite housing affordability index was 158 for 2017 and 167 for 2016. The housing affordability index remains significantly higher than the 25-year average of 142.
According to Freddie Mac, mortgage ratesrealize on commitments for a 30-year, conventional, fixed-rate first mortgage averaged 3.99% for 2017 and 3.65% for 2016. Although mortgage rates have slightly increased during 2017, they continue to be at low levels compared to the 25-year average of 5.95%. While this increase adversely impacts housing affordability, we believe that rising wages, improving consumer confidence and a continuation of low inventory levels for the mainstream housing market may offset, in whole or in part, rising interest rates and may result in continued favorable demand conditions. To the extent that mortgage rates increase further, consumers continue to have financing alternatives such as adjustable rate mortgages or shorter term mortgages which can be utilized to obtain a lower mortgage rate than a 30-year fixed-rate mortgage.
Partially offsetting the positive impact of historically favorable mortgage rates are low housing inventory levels, which have been in decline over the past several years. According to NAR, the inventory of existing homes for sale in the U.S. was 1.5 million and 1.7 million at the end of December 2017 and December 2016, respectively. The December 2017 inventory represents a national average supply of 3.2 months at the current homesales pace which is significantly below the 5.9 month 25-year average. The national average supply at the then-current homesales pace for December 31, 2016, 2015 and 2014 was 3.6 months, 3.9 months and 4.4, respectively.
Additional offsetting factors include the ongoing rise in home prices, conservative mortgage underwriting standards and certain homeowners having limited or negative equity in homes. Mortgage credit conditions tightened significantly during the last housing downturn, with banks limiting credit availability to more creditworthy borrowers and requiring larger down payments, stricter appraisal standards, and more extensive mortgage documentation. Although mortgage credit conditions appear to be easing, mortgages remain less available to some borrowers with lower FICO scores or credit issues and it frequently takes longer to close a homesale transaction due to current mortgage and underwriting requirements.
transactions.
Existing Homesales
For the year ended December 31, 2017,2019, NAR existing homesale transactions increased to 5.5remained flat at 5.3 million homes or up 1% compared to 20162018. For the year ended December 31, 2017, RFG and NRT2019, homesale transactions on a combined basis increased 1%for Realogy Franchise and Brokerage Groups decreased 4% compared to 20162018. The number of homesale transactions for RFG and NRT has continued to be challenged by inventory constraints, however for NRT there has been improvement in the high end of the housing market. The annual and quarterly year-over-year trends in homesale transactions are as follows:
_______________(a) Historical existing homesale data is as of the most recent NAR press release, which is subject to sampling error.
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(a) | Historical existing homesale data is as of the most recent NAR press release, which is subject to sampling error. |
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(b)(b)Existing homesale data, on a seasonally adjusted basis, is as of the most recent Fannie Mae press release. | Existing homesale data, on a seasonally adjusted basis, is as of the most recent Fannie Mae press release. |
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(c) | In April 2015, NRT acquired Coldwell Banker United, a large franchisee of RFG, and as a result the drivers of Coldwell Banker United shifted from RFG to NRT. In addition, NRT homesale sides include transactions from the acquisition of ZipRealty in August 2014. The year-over-year change in homesale sides, excluding the impact of these acquisitions, would have been 5% for RFG and 2% for NRT. |
As of their most recent releases, NAR is forecasting anexisting homesale transactions to increase 3% in existing homesales of2020 and 1% in 2018 and 3% in 20192021 while Fannie Mae is forecasting an increase in existing homesale transactions ofto increase 2% in both 20182020 and 2019.
to remain flat in 2021.
Existing Homesale Price
In 2017,2019, NAR existing homesale average price increased 5%3% compared to 2016.2018. In 2017, RFG and NRT2019, average homesale price on a combined basisbasis for Realogy Franchise and Brokerage Groups increased 6%2% compared to 2016. The combined2018 and consisted of a 4% increase in average homesale price increase was duefor Realogy Franchise Group and flat average homesale price for Realogy Brokerage Group. Realogy Brokerage Group's geographic concentration and exposure to the increasehigh-end of the market plus the associated competitive pressures drove the year-over-year decline in homesale transactions at the high end of the markets served by RFG and NRT. Both RFG and NRT homesale price also improved as a result of increased demand due in partcompared to the continuation of constrained inventory levels. overall industry. The annual and quarterly year-over-year trends in the price of homes are as follows:
_______________(a) Historical homesale price data is for existing homesale average price and is as of the most recent NAR press release.
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(a) | Historical homesale price data is for existing homesale average price and is as of the most recent NAR press release. |
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(b)
| Existing homesale price data is for median price and is as of the most recent Fannie Mae press release. |
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(c) | In April 2015, NRT acquired Coldwell Banker United, a large franchisee of RFG, and as a result the drivers of Coldwell Banker United shifted from RFG to NRT. In addition, NRT homesale price includes transactions from the acquisition of ZipRealty in August 2014. The acquisition of Coldwell Banker United did not have a significant impact on the average homesale price for RFG. The year-over-year change in average homesale price for NRT, excluding the impact of these acquisitions, would have been 1% for NRT. |
(b) Existing homesale price data is for median price and is as of the most recent Fannie Mae press release.
As of their most recent releases, NAR is forecasting an increase in median existing homesale price ofto increase 4% in 2020 and 3% in both 2018 and 20192021 while Fannie Mae is forecasting anmedian existing homesale price to increase of 5% in 2018 and 4% in 2019.2020 and 3% in 2021.
* * *
We believe that long-term demand for housing and the growth of our industry are primarily driven by the affordability of housing, the economic health of the U.S. economy, demographic trends such as population growth, the increasegenerational transitions, increases in U.S. household formation, mortgage rate levels and mortgage availability, certain tax benefits, job growth, increases in renters that qualify as homebuyers, the inherent attributes of homeownership versus renting and the influenceavailability of local housing dynamics of supply versus demand. inventory in the consumer's desired location and within the consumer's price range. At this time, mostcertain of these factors are generally trending favorably.favorably, such as mortgage rate levels, household formation and job growth. Factors that may negatively affect continued growth in the housing industry include:
•continued insufficient inventory levels or stagnant and/or declining home prices;
•a reduction in the affordability of homes;
•higher mortgage rates due to increases in long-term interest rates and increasing down payment requirements as well as reduced availability of mortgage financing;
•certain provisions of the 2017 Tax Act that directly impact traditional incentives associated with home ownership and may reduce the financial distinction between renting and owning a home, including those that reduce the amount that certain taxpayers would be allowed to deduct for home mortgage interest or state, local and property taxes;
higher mortgage rates due to increases in long-term interest ratestaxes as well as reduced availability of mortgage financing;certain state or local tax reform, such as the "mansion tax" in New York City;
continued insufficient inventory levels;
•decelerated or lack of building of new housing for homesales, increased building of new rental properties, or irregular timing of new development closings leading to lower unit sales at NRT,Realogy Brokerage Group, which has relationships with developers, primarily in major cities, to provide marketing and brokerage services in new developments;
•homeowners retaining their homes for longer periods of time;
•changing attitudes towards home ownership;ownership, particularly among potential first-time homebuyers who may delay, or decide not to, purchase a home, as well as changing preferences to rent versus purchase a home;
•decreasing consumer confidence in the economy and/or the residential real estate market;
•an increase in potential homebuyers with low credit ratings or inability to afford down payments;
•the impact of limited or negative equity of current homeowners, as well as the lack of available inventory may limit their proclivity to purchase an alternative home;
reduced affordability of homes;
•economic stagnation or contraction in the U.S. economy;
•weak credit markets and/or instability of financial institutions;
•increased levels of unemployment and/or stagnant wage growth in the U.S.;
•a decline in home ownership levels in the U.S.;
•other legislative or regulatory reforms, including but not limited to reform that adversely impacts the financing of the U.S. housing market;market, changes relating to RESPA, potential reform of Fannie Mae and Freddie Mac, immigration reform, and further potential federal, state or local tax code reform (including, for example, the proposed "pied-a-terre tax" in New York City);
•renewed high levels of foreclosure activity;
•natural disasters, such as hurricanes, earthquakes, wildfires, mudslides and other events that disrupt local or regional real estate markets; and
•geopolitical and economic instability.
Many of the trends impacting our businesses that derive revenue from homesales also impact Cartus whichRelocation Services is a global provider of outsourced employee relocation services. In addition toimpacted by these general residential housing trends key drivers of Cartus areas well as global corporate spending on relocation services which(which continue to shift to lower cost relocation benefits as corporate clients engage in cost reduction initiatives and/or restructuring programs as well asprograms) and changes in employment relocation trends. Cartus is subject to a competitive pricing environment and lower average revenue per relocation as a result
KEY DRIVERS OF OUR BUSINESSES
Within RFGRealogy Franchise and NRT,Brokerage Groups, we measure operating performance using the following key operating metrics: (i) closed homesale sides, which represents either the "buy" side or the "sell" side of a homesale transaction, (ii) average homesale price, which represents the average selling price of closed homesale transactions, and (iii) average homesale broker commission rate, which represents the average commission rate earned on either the "buy" side or "sell" side of a homesale transaction.
For RFG,Realogy Franchise Group, we also use net royalty per side, which represents the royalty payment to RFGRealogy Franchise Group for each homesale transaction side taking into account royalty rates, average broker commission rates, volume incentives achieved flat royalty rates and non-standardother incentives. We considerutilize net royalty per side the best measure of royalty revenue per transaction as it reflectsincludes the impact of changes in average homesale price as well as all incentives and represents the royalty revenue impact of each incremental side.
Since 2014,For Realogy Brokerage Group, we have experienced approximately a one basis point decline in the average broker commission rate each year and we expect that over the long term the average brokerage commission rates will continue to modestly decline as a result of increases in average homesale prices and, to a lesser extent, competitors providing fewer or similar services for a reduced fee. Continuing growth in the housing market should result in an increase in our revenues, although such increases could be offset by modestly declining brokerage commission rates, lower net effective royalty rates and competitive pressures.
Royalty fees are charged to all franchisees pursuant to the terms of the relevant franchise agreements and are included in each of the real estate brands' franchise disclosure documents. Most of our third-party franchisees are subject to a 6% royalty rate and entitled to volume incentives. Volume incentives are calculated as a progressive percentage of the applicable franchisee's eligible annual gross income and generally result in a net royalty rate ranging from 6% to 3% for the franchisee. Volume incentives increase or decrease as the franchisee'salso use gross commission income generated increases or decreases, respectively. We have the right to adjust the annual volume incentive tables on an annual basis in response to changing market conditions. In addition, some of our larger franchisees have a flat royalty rate of less than 6% and are not eligible for volume incentives.
Since 2013, RFG's net domestic royalty revenue has increased 25% from $287 million to $358 million, while homesale transaction volume at RFG has increased 31% over the same period. While increases in domestic royalty revenue have not kept pace with homesale transaction volume, we have seen an 18% increase in net royalties per side. As a result, the revenue provided from each incremental side, has continued to increase over this time period.
Transaction volume growth has exceeded royalty revenue growth over the past five years due primarily to the growth inwhich represents gross commission income generateddivided by our top 250 franchisees and our increased use of non-standard sales incentives, both of which directly impact royalty revenue. Over the past several years, our top 250 franchisees have grown faster than our other franchisees through organic growth and market consolidation. The grossclosed homesale sides. Gross commission income includes commissions earned by our top 250 franchiseesin homesale transactions and certain other activities, primarily leasing and property management transactions. Realogy Brokerage Group, as a percentagefranchisee of total grossRealogy Franchise Group, pays a royalty fee of approximately 6% per transaction to Realogy Franchise Group from the commission income generated by all of our franchisees was 63% in 2017 compared to 60% in 2013. If such increases in the amountearned on a real estate transaction. The remainder of gross commission income generated by our top 250 franchisees continue to occur at a quicker pace relative to our other franchisees, we would expect our royalty revenue to continue to increase at a slower pace as compared to homesale transaction volume. Likewise, our royalty revenue would continue to increase at a slower pace as compared to homesale transaction volume ifis split between the gross commission income generated by all of our franchisees grows faster than the applicable annual volume incentive table increase or if we increase our use of standard volume or non-standard incentives. However, we expect that any such increases in gross commission income will result in additional royalty payments to us.
Non-standard incentives may also be used as consideration to attract, retainbroker (Realogy Brokerage Group) and help grow certain franchisees. Most of our franchisees do not receive these non-standard incentives and in contrast to volume incentives, the majority are not homesale transaction based. We expect that the trend of increasing non-standard incentives will continue in the future in order to attract, retain and help grow certain franchisees. As noted above, this may result in slower growth in our royalty revenue as compared to homesale transaction volume.
NRT has a significant concentration of real estate brokerage offices and transactions in geographic regions where home prices are at the higher end of the U.S. real estate market, particularly the east and west coasts, while RFG has franchised offices that are more widely dispersed across the United States. Accordingly, operating results and homesale statistics may differ between NRT and RFG based upon geographic presence and the corresponding homesale activity in each geographic region. In addition, the share of commissions earned by independent sales agents directly impacts the margin earned by NRT. Such share of commissions earned by independent sales agents varies by region and commission schedules are generally progressive to incentivize sales agents to achieve higher levels of production. We expect that commission share
will continue to be subject to upward pressure in favor of the independent sales agent because ofin accordance with their applicable independent contractor agreement (which specifies the increased bargaining power of independent sales agents and teams as well as more aggressive recruitment and retention activities taken by us and our competitors.
As described above under "Current Industry Trends," competition for independent sales agents in our industry has intensified and we expect this competition will continue particularly with respect to more productive independent sales agents. Currently, there are several different compensation models being utilized by real estate brokerages to compensate their independent sales agents. The most common models are as follows:
a graduated commission plan, sometimes referred to as the "traditional model" where the independent sales agent receives a percentage of the brokerage commission that increases as the independent sales agent increases his or her volume of homesale transactions and the brokerage frequently provides independent sales agents with a broad set of support offerings and promotion of properties,
a desk rental or 100% plan, where the independent sales agent is entitled to all or nearly allportion of the broker commission and pays the broker on both a monthly and transaction basis for office space, tools, technology and support while also being personally responsible for the promotion of properties and other items,
a capped model, which generally blends aspects of the first two models described herein, and
a fixed transaction fee model where the sales agent is entitled to all of the broker commission and pays a fixed fee per homesale transaction and often receives very limited support from the brokerage.
Although less common, some real estate brokerages employ their sales agents and, in such instances, employee agents may earn smaller brokerage commissions in exchange for other employee benefits or bonuses. Most brokerages focus primarily on one compensation model though some may offer one or more of these models to their sales agents. Increasingly, independent sales agents have affiliated with brokerages that offer a different mix of servicesbe paid to the independent sales agents, allowing the independent salesagent), which varies by agent to retain a greater percentage of the commission. However, there are long-term trade-offs in the level of support independent sales agents receive in areas such as marketing, technology and professional education.
While NRT has historically compensated its independent sales agents using a traditional model, utilizing elements of other models depending upon the geographic market, we are placing an even greater focus on the quality of our services and use of financial incentives to strengthen our recruiting and retention of independent sales agents and teams. These actions include a more aggressive strategy to recruit and retain high performing sales agents. In addition, there is an enhanced focus on the value proposition offered to independent sales agent teams. This strategic emphasis on recruitment and retention is drivenagreement, which varies by our overall goal to sustain or grow market share in various markets and ultimately improve the Company's overall profitability. While we have seen revenue improvements directly related to these initiatives, we have experienced and expect to continue to experience pressure on costs and margin from these initiatives.
Within Cartus, we measure operating performance using the following key operating statistics: (i) initiations, which represent the total number of new transferees and the total number of real estate closings for affinity members and (ii) referrals, which represent the number of referrals from which we earn revenue from real estate brokers.agent.
In TRG,Realogy Title Group, operating performance is evaluated using the following key metrics: (i) purchase title and closing units, which represent the number of title and closing units we process as a result of home purchases, (ii) refinance title and closing units, which represent the number of title and closing units we process as a result of homeowners refinancing their home loans, and (iii) average fee per closing unit, which represents the average fee we earn on purchase title and refinancing title sides. An increase or decrease in homesale transactions will impact the financial results of TRG;Realogy Title Group; however, the financial results are not significantly impacted by a change in homesale price. WeAlthough the average mortgage rate declined in 2019 compared to 2018, we believe that an increaseincreases in mortgage rates in the future willwould most likely have a negative impact on refinancing title and closing units.
Following the close of the planned sale of Cartus Relocation Services, we expect to consolidate Realogy Leads Group, including the Realogy Broker Network, into Realogy Franchise Group, given its size relative to our other business segments. Realogy Leads Group earned referral fee revenue from 64,910 referrals in 2019 as compared to 68,172 referrals in 2018. Cartus Relocation Services earned referral fee revenue from approximately 15,300 referrals in 2019, of which approximately 10,300 were distributed through the Realogy Broker Network.
The following table presents our drivers for the years ended December 31, 2019, 2018 and 2017. See "Results of Operations" below for a discussion as to how these drivers affected our business for the periods presented.
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| Year Ended December 31, | | | | % Change | | Year Ended December 31, | | | | % Change |
| 2019 | | 2018 | | | | 2018 | | 2017 | | |
| Realogy Franchise Group (a) | | | | | | | | | | | |
| Closed homesale sides | 1,061,500 | | | 1,103,857 | | | (4) | % | | 1,103,857 | | | 1,144,217 | | | (4) | % |
| Average homesale price | $ | 314,769 | | | $ | 303,750 | | | 4 | % | | $ | 303,750 | | | $ | 288,929 | | | 5 | % |
| Average homesale broker commission rate | 2.47 | % | | 2.48 | % | | (1) | bps | | 2.48 | % | | 2.50 | % | | (2) | bps |
| Net royalty per side | $ | 327 | | | $ | 323 | | | 1 | % | | $ | 323 | | | $ | 313 | | | 3 | % |
| Realogy Brokerage Group | | | | | | | | | | | |
| Closed homesale sides | 325,652 | | | 336,806 | | | (3) | % | | 336,806 | | | 344,446 | | | (2) | % |
| Average homesale price | $ | 522,282 | | | $ | 523,426 | | | — | % | | $ | 523,426 | | | $ | 514,685 | | | 2 | % |
| Average homesale broker commission rate | 2.41 | % | | 2.43 | % | | (2) | bps | | 2.43 | % | | 2.44 | % | | (1) | bps |
| Gross commission income per side | $ | 13,296 | | | $ | 13,458 | | | (1) | % | | $ | 13,458 | | | $ | 13,309 | | | 1 | % |
| Realogy Title Group | | | | | | | | | | | |
| Purchase title and closing units | 146,210 | | | 157,228 | | | (7) | % | | 157,228 | | | 159,113 | | | (1) | % |
| Refinance title and closing units | 26,589 | | | 18,495 | | | 44 | % | | 18,495 | | | 28,564 | | | (35) | % |
| Average fee per closing unit | $ | 2,297 | | | $ | 2,230 | | | 3 | % | | $ | 2,230 | | | $ | 2,092 | | | 7 | % |
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(a)Includes all franchisees except for Realogy Brokerage Group.
A decline in the number of homesale transactions andand/or decline in homesale prices could adversely affect our results of operations by: (i) reducing the royalties we receive from our franchisees, (ii) reducing the commissions our company owned brokerage operations earn, (iii) reducing the demand for our title and settlement services, (iv) reducing the referral fees we earn in our relocation services business,from Realogy Leads Group, and (v) increasing the risk of franchisee default due to lower homesale volume. Our results could also be negatively affected by a decline in commission rates charged by brokers or greater commission payments to sales agents.agents or by an increase in volume or other incentives paid to franchisees.
Since 2014, we have experienced approximately a one basis point decline in the average homesale broker commission rate each year, which we believe has been largely attributable to increases in average homesale prices (as higher priced homes tend to have a lower broker commission) and, to a lesser extent, competitors providing fewer or similar services for a reduced fee.
Royalty fees are charged to all franchisees pursuant to the terms of the relevant franchise agreements and are included in each of the real estate brands' franchise disclosure documents. Most of our third-party franchisees are subject to a 6% royalty rate and entitled to volume incentives, although a royalty fee generally equal to 5% of franchisee commission (capped at a set amount per independent sales agent per year) is applicable to franchisees operating under the "capped fee model" that was launched for our Better Homes and Gardens® Real Estate franchise business in January 2019. Volume incentives are calculated as a progressive percentage of the applicable franchisee's eligible annual gross commission income and generally result in a net or effective royalty rate ranging from 6% to 3% for the franchisee (prior to taking into account other incentives that may be applicable to the franchisee). Volume incentives increase or decrease as the franchisee's gross commission income generated increases or decreases, respectively. We have the right to adjust the annual volume incentive tables on an annual basis in response to changing market conditions. In addition, certain of our franchisees (including some of our largest franchisees) have a flat royalty rate of less than 6% and are not eligible for volume incentives.
Other incentives may also be used as consideration to attract new franchisees, grow franchisees (including through independent sales agent recruitment) or extend existing franchise agreements, although in contrast to volume incentives, the majority of other incentives are not homesale transaction based.
Transaction volume growth has exceeded royalty revenue growth due primarily to the growth in gross commission income generated by our top 250 franchisees and our increased use of other sales incentives, both of which directly impact royalty revenue. Over the past several years, our top 250 franchisees have grown faster than our other franchisees through organic growth and market consolidation. If the amount of gross commission income generated by our top 250 franchisees continues to grow at a quicker pace relative to our other franchisees, we would expect our royalty revenue to continue to increase, but at a slower pace than homesale transaction volume. Likewise, our royalty revenue would continue to increase, but at a slower pace than homesale transaction volume, if the gross commission income generated by all of our franchisees grows faster than the applicable annual volume incentive table increase or if we increase our use of standard volume or other incentives. However, in the event that the gross commission income generated by our franchisees increases as a result of increased transaction volume, we would expect to recognize an increase in overall royalty payments to us.
We face significant competition from other national real estate brokerage brand franchisors for franchisees and we expect that the trend of increasing incentives will continue in the future in order to attract, retain, and help grow certain franchisees. We expect to experience downward pressures on net royalty per side during 2020, largely due to the impact of competitive market factors noted above, continued concentration among our top 250 franchisees, and the impact of affiliated franchisees of our Better Homes and Gardens® Real Estate brand moving to the "capped fee model" we adopted in 2019.
Realogy Brokerage Group has a significant concentration of real estate brokerage offices and transactions in geographic regions where home prices are at the higher end of the U.S. real estate market, particularly the east and west coasts, while Realogy Franchise Group has franchised offices that are more widely dispersed across the United States. Accordingly, operating results and homesale statistics may differ between Realogy Brokerage Group and Realogy Franchise Group based upon geographic presence and the corresponding homesale activity in each geographic region. In addition, the share of commissions earned by independent sales agents directly impacts the margin earned by Realogy Brokerage Group. Such share of commissions earned by independent sales agents varies by region and commission schedules are generally progressive to incentivize sales agents to achieve higher levels of production. Commission share has been and we expect will continue to be subject to upward pressure in favor of the independent sales agent for a variety of factors, including more aggressive recruitment and retention activities taken by us and our competitors as well as growth in independent sales agent teams.
The following table presents our drivers for the years ended December 31, 2017, 2016 and 2015. See "Results of Operations" below for a discussion as to how these drivers affected our business for the periods presented.
|
| | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | % Change | | Year Ended December 31, | | % Change |
| | 2017 | | 2016 | | | 2016 | | 2015 | |
| RFG (a) | | | | | | | | | | | |
| Closed homesale sides | 1,144,217 |
| | 1,135,344 |
| | 1 | % | | 1,135,344 |
| | 1,101,333 |
| | 3 | % |
| Average homesale price | $ | 288,929 |
| | $ | 272,206 |
| | 6 | % | | $ | 272,206 |
| | $ | 263,894 |
| | 3 | % |
| Average homesale broker commission rate | 2.50 | % | | 2.50 | % | | — |
| | 2.50 | % | | 2.51 | % | | (1 | ) bps |
| Net royalty per side (b) | $ | 313 |
| | $ | 299 |
| | 5 | % | | $ | 299 |
| | $ | 294 |
| | 2 | % |
| NRT | | | | | | | | | | | |
| Closed homesale sides | 344,446 |
| | 335,699 |
| | 3 | % | | 335,699 |
| | 336,744 |
| | — | % |
| Average homesale price | $ | 514,685 |
| | $ | 489,504 |
| | 5 | % | | $ | 489,504 |
| | $ | 489,673 |
| | — | % |
| Average homesale broker commission rate | 2.44 | % | | 2.46 | % | | (2 | ) bps | | 2.46 | % | | 2.46 | % | | — |
|
| Gross commission income per side | $ | 13,309 |
| | $ | 12,752 |
| | 4 | % | | $ | 12,752 |
| | $ | 12,730 |
| | — | % |
| Cartus | | | | | | | | | | | |
| Initiations | 161,755 |
| | 163,063 |
| | (1 | %) | | 163,063 |
| | 167,749 |
| | (3 | %) |
| Referrals | 83,678 |
| | 87,277 |
| | (4 | %) | | 87,277 |
| | 99,531 |
| | (12 | %) |
| TRG | | | | | | | | | | | |
| Purchase title and closing units (c) | 159,113 |
| | 152,997 |
| | 4 | % | | 152,997 |
| | 130,541 |
| | 17 | % |
| Refinance title and closing units (d) | 28,564 |
| | 50,919 |
| | (44 | %) | | 50,919 |
| | 38,544 |
| | 32 | % |
| Average fee per closing unit | $ | 2,092 |
| | $ | 1,875 |
| | 12 | % | | $ | 1,875 |
| | $ | 1,861 |
| | 1 | % |
_______________ | |
(a) | Includes all franchisees except for NRT. |
| |
(b) | Royalty per side amounts have been revised to include the effect of non-standard incentives granted to certain franchisees. |
| |
(c) | The amounts presented include 8,351, 18,930 and 13,304 purchase units as a result of acquisitions for 2017, 2016 and 2015, respectively. |
| |
(d) | The amounts presented include 1,858, 4,469 and 3,403 refinance units as a result of acquisitions for 2017, 2016 and 2015, respectively. |
RESULTS OF OPERATIONS
Discussed below are our consolidated results of operations and the results of operations for each of our reportable segments. The reportable segments presented below represent our operating segments for which separate financial information is available and which is utilized on a regular basis by our chief operating decision maker to assess performance and to allocate resources. In identifying our reportable segments, we also consider the nature of services provided by our operating segments. Management evaluates the operating results of each of our reportable segments based upon revenue and Operating EBITDA. Operating EBITDA is defined by us as net income (loss) before depreciation and amortization, interest (income) expense, net, (other than relocation services interest for securitization assets and securitization obligations) and income taxes, eachand other items that are not core to the operating activities of which is presentedthe Company such as restructuring charges, former parent legacy items, gains or losses on our Consolidated Statementsthe early extinguishment of Operations.debt, impairments, gains or losses on discontinued operations and gains or losses on the sale of investments or other assets. Our presentation of Operating EBITDA may not be comparable to similarly titled measures used by other companies.
Year Ended December 31, 20172019 vs. Year Ended December 31, 20162018
Our consolidated results comprised the following:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | |
| | 2019 | | 2018 | | Change |
| Net revenues | $ | 5,598 | | | $ | 5,782 | | | $ | (184) | |
| Total expenses | 5,756 | | | 5,565 | | | 191 | |
| (Loss) income from continuing operations before income taxes, equity in (earnings) losses and noncontrolling interests | (158) | | | 217 | | | (375) | |
| Income tax (benefit) expense | (22) | | | 67 | | | (89) | |
| Equity in (earnings) losses of unconsolidated entities | (18) | | | 4 | | | (22) | |
| Net (loss) income from continuing operations | (118) | | | 146 | | | (264) | |
| Net loss from discontinued operations | (67) | | | (6) | | | (61) | |
| Net (loss) income | (185) | | | 140 | | | (325) | |
| Less: Net income attributable to noncontrolling interests | (3) | | | (3) | | | — | |
| Net (loss) income attributable to Realogy Holdings and Realogy Group | $ | (188) | | | $ | 137 | | | $ | (325) | |
Net revenues decreased $184 million or 3% for the year ended December 31, 2019 compared with the year ended December 31, 2018 primarily driven by lower homesale transaction volume at Realogy Brokerage Group.
Total expenses increased $191 million or 3% compared to 2018 primarily due to:
•impairments of $249 million including a goodwill impairment charge of $237 million during the third quarter of 2019 which reduced the net carrying value of Realogy Brokerage Group by $180 million after accounting for the related income tax benefit of $57 million (see Note 20, "Selected Quarterly Financial Data", for additional information), and $12 million of other impairment charges primarily related to lease asset impairments;
•a $60 million net increase in interest expense primarily due to a $35 million net expense related to our mark-to-market adjustments for our interest rate swaps that resulted in losses of $39 million for the year ended December 31, 2019 compared to losses of $4 million during the same period of 2018, and a $25 million increase in interest expense primarily due to the refinancing of Senior Notes in the first quarter of 2019;
•an increase of $10 million in variable operating costs at Realogy Title Group primarily due to an increase in refinance revenue and underwriter revenue; and
•a $7 million increase in employee-related costs, professional fees and other operating costs.
The expense increases were comprisedpartially offset by:
•a $126 million decrease in commission and other sales agent-related costs primarily as a result of the following:impact of lower homesale transactions at Realogy Brokerage Group; and
•a $5 million net gain on the early extinguishment of debt during the year ended December 31, 2019 compared to a $7 million loss on the early extinguishment of debt during the year ended December 31, 2018 as a result of the refinancing transactions in February 2018.
Earnings from equity investments were $18 million for the year ended December 31, 2019 compared to losses of $4 million for the year ended December 31, 2018 primarily due to an improvement in earnings of Guaranteed Rate Affinity.
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | Change |
| Net revenues | $ | 6,114 |
| | $ | 5,810 |
| | $ | 304 |
|
| Total expenses (1) | 5,763 |
| | 5,461 |
| | 302 |
|
| Income before income taxes, equity in earnings and noncontrolling interests | 351 |
| | 349 |
| | 2 |
|
| Income tax (benefit) expense | (65 | ) | | 144 |
| | (209 | ) |
| Equity in earnings of unconsolidated entities | (18 | ) | | (12 | ) | | (6 | ) |
| Net income | 434 |
| | 217 |
| | 217 |
|
| Less: Net income attributable to noncontrolling interests | (3 | ) | | (4 | ) | | 1 |
|
| Net income attributable to Realogy Holdings and Realogy Group | $ | 431 |
| | $ | 213 |
| | $ | 218 |
|
The provision for income taxes was a benefit of $22 million for the year ended December 31, 2019 compared to an expense of $67 million for the year ended December 31, 2018. Our effective tax rate was 16% for the year ended December 31, 2019. See Note 12, "Income Taxes", in the Consolidated Financial Statements for additional information and a reconciliation of the Company’s effective income tax rate.
The following table reflects the results of each of our reportable segments during the years ended December 31, 2019 and 2018:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Revenues (a) | | | | $ Change | | % Change | | Operating
EBITDA | | | | $ Change | | % Change | | Operating EBITDA Margin | | | | Change |
| | 2019 | | 2018 | | | | | | 2019 | | 2018 | | | | | | 2019 | | 2018 | | |
| Realogy Franchise Group | $ | 803 | | | $ | 820 | | | (17) | | | (2) | % | | $ | 535 | | | $ | 564 | | | (29) | | | (5) | % | | 67 | % | | 69 | % | | (2) | |
| Realogy Brokerage Group | 4,409 | | | 4,607 | | | (198) | | | (4) | | | 4 | | | 44 | | | (40) | | | (91) | | | — | | | 1 | | | (1) | |
| Realogy Title Group | 596 | | | 580 | | | 16 | | | 3 | | | 68 | | | 49 | | | 19 | | | 39 | | | 11 | | | 8 | | | 3 | |
| Realogy Leads Group | 83 | | | 81 | | | 2 | | | 2 | | | 53 | | | 51 | | | 2 | | | 4 | | | 64 | | | 63 | | | 1 | |
| Corporate and Other | (293) | | | (306) | | | 13 | | | * | | (98) | | | (85) | | | (13) | | | * | | | | | | |
| Total continuing operations | $ | 5,598 | | | $ | 5,782 | | | (184) | | | (3) | % | | $ | 562 | | | $ | 623 | | | (61) | | | (10) | % | | 10 | % | | 11 | % | | (1) | |
| Contribution from discontinued operations | | | | | | | | | 28 | | | 35 | | | | | | | | | | | |
| Operating EBITDA including discontinued operations | | | | | | | | | 590 | | | 658 | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Less: Depreciation and amortization (b) | | | | | | | | | 169 | | | 166 | | | | | | | | | | | |
| Interest expense, net | | | | | | | | | 249 | | | 189 | | | | | | | | | | | |
| Income tax (benefit) expense | | | | | | | | | (22) | | | 67 | | | | | | | | | | | |
| Restructuring costs, net (c) | | | | | | | | | 42 | | | 47 | | | | | | | | | | | |
| Impairments (d) | | | | | | | | | 249 | | | — | | | | | | | | | | | |
| Former parent legacy cost, net (e) | | | | | | | | | 1 | | | 4 | | | | | | | | | | | |
| (Gain) loss on the early extinguishment of debt (e) | | | | | | | | | (5) | | | 7 | | | | | | | | | | | |
| Adjustments attributable to discontinued operations (f) | | | | | | | | | 95 | | | 41 | | | | | | | | | | | |
| Net (loss) income attributable to Realogy Holdings and Realogy Group | | | | | | | | | $ | (188) | | | $ | 137 | | | | | | | | | | | |
_______________
| |
(1) | Total expenses for the year ended December 31, 2017 includes $12 million of restructuring charges, an $8 million expense related to the settlement of the Strader legal matter, an $8 million expense related to the transition of the Company's CEO and $5 million related to losses on the early extinguishment of debt, partially offset by a net benefit of $10 million of former parent legacy items as a result of a reduction in the reserve and $4 million of gains related to mark-to-market adjustments for our interest rate swaps. Total expenses for the year ended December 31, 2016 includes $39 million of restructuring charges and $6 million of losses related to mark-to-market adjustments for our interest rate swaps, partially offset by a net benefit of $2 million of former parent legacy items. |
Net
* not meaningful
(a)Includes the elimination of transactions between segments, which consists of intercompany royalties and marketing fees paid by Realogy Brokerage Group of $293 million and $306 million during the years ended December 31, 2019 and 2018, respectively.
(b)Depreciation and amortization for the year ended December 31, 2018 includes $2 million of amortization expense related to Guaranteed Rate Affinity's purchase accounting included in the "Equity in (earnings) losses of unconsolidated entities" line on the Consolidated Statement of Operations.
(c)Restructuring charges incurred for the year ended December 31, 2019 include $2 million at Realogy Franchise Group, $25 million at Realogy Brokerage Group, $3 million at Realogy Title Group, $2 million at Realogy Leads Group and $10 million at Corporate and Other. Restructuring charges incurred for the year ended December 31, 2018 include $3 million at Realogy Franchise Group, $37 million at Realogy Brokerage Group, $4 million at Realogy Title Group and $3 million at Corporate and Other.
(d)Impairments for the year ended December 31, 2019 includes a goodwill impairment charge of $237 million during the third quarter which reduced the net carrying value of Realogy Brokerage Group by $180 million after accounting for the related income tax benefit of $57 million and $12 million of other impairment charges primarily related to lease asset impairments.
(e)Former parent legacy items and (Gain) loss on the early extinguishment of debt are recorded in Corporate and Other. During the year ended December 31, 2019, the Company recorded a gain on the early extinguishment of debt of $5 million which consisted of a $10 million gain as a result of the repurchase of Senior Notes completed in the third quarter of 2019, partially offset by a $5 million loss as a result of the refinancing transactions in the first quarter of 2019.
(f)Includes depreciation and amortization, interest expense, income tax and restructuring charges related to discontinued operations for the years ended December 31, 2019 and 2018. In addition, the year ended December 31, 2019 includes the estimated loss on the sale of discontinued operations of $22 million and the related tax expense of $38 million.
As described in the aforementioned table, Operating EBITDA margin for "Total continuing operations" expressed as a percentage of revenues decreased 1 percentage point to 10% from 11% for the year ended December 31, 2019 compared to 2018. On a segment basis, Realogy Franchise Group's margin decreased 2 percentage points to 67% from 69% primarily due to a decrease in royalty revenues. Realogy Brokerage Group's margin decreased 1 percentage point to zero from 1% primarily due to lower transaction volume during 2019 compared to 2018. Realogy Title Group's margin increased 3 percentage points to 11% from 8% for the year ended December 31, 2019 compared to 2018 primarily as a result of improved earnings from equity method investments. Realogy Leads Group's margin increased 1 percentage point to 64% from 63% primarily due to higher average fees partially offset by a reduction in referrals, primarily attributable to the discontinuation of the USAA affinity program which ceased new enrollments in the third quarter of 2019.
Corporate and Other Operating EBITDA for the year ended December 31, 2019 declined $13 million to negative $98 million primarily due to an increase in employee-related costs, professional fees and other costs.
Realogy Franchise and Brokerage Groups on a Combined Basis
The following table reflects Realogy Franchise and Brokerage Groups' results before the intercompany royalties and marketing fees, as well as on a combined basis to show the Operating EBITDA contribution of these business units to the overall Operating EBITDA of the Company. The Operating EBITDA margin for the combined segments decreased 1% percentage point from 12% to 11% primarily due to lower transaction volume during the year ended December 31, 2019 compared to 2018:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Revenues | | | | Change | | %
Change | | Operating EBITDA | | | | Change | | %
Change | | Operating EBITDA Margin | | | | Change |
| | 2019 | | 2018 | | | | | | 2019 | | 2018 | | | | | | 2019 | | 2018 | | |
| Realogy Franchise Group (a) | $ | 510 | | | $ | 514 | | | $ | (4) | | | (1) | % | | $ | 242 | | | $ | 258 | | | $ | (16) | | | (6) | % | | 47 | % | | 50 | % | | (3) | |
| Realogy Brokerage Group (a) | 4,409 | | | 4,607 | | | (198) | | | (4) | | | 297 | | | 350 | | | (53) | | | (15) | | | 7 | | | 8 | | | (1) | |
| Realogy Franchise and Brokerage Groups Combined | $ | 4,919 | | | $ | 5,121 | | | $ | (202) | | | (4) | % | | $ | 539 | | | $ | 608 | | | $ | (69) | | | (11) | % | | 11 | % | | 12 | % | | (1) | |
_______________
(a)The segment numbers noted above do not reflect the impact of intercompany royalties and marketing fees paid by Realogy Brokerage Group to Realogy Franchise Group of $293 million and $306 million during the years ended December 31, 2019 and 2018, respectively.
Realogy Franchise Group
Revenues decreased $17 million to $803 million and Operating EBITDA decreased $29 million to $535 million for the year ended December 31, 2019 compared with 2018.
Revenues decreased $17 million primarily as a result of:
•a $13 million decrease in intercompany royalties received from Realogy Brokerage Group;
•an $8 million decrease in third-party domestic franchisee royalty revenue primarily due to flat homesale transaction volume with an increase in the number of transactions closed by our top 250 franchisees, the impact of the "capped fee model" that was launched for our Better Homes and Gardens® Real Estate franchise business in January 2019 and a decrease in the average broker commission rate;
•a $6 million decrease in other revenue primarily related to preferred alliance; and
•a $2 million decrease in international royalties;
partially offset by a $3 million increase in international area development fee revenue as a result of contract terminations of non-performing master franchisors.
Registration revenue and brand marketing fund revenue increased $9 million and related expenses increased $11 million, primarily due to the level and timing of advertising spending and conferences including the RGX event during 2019 compared with 2018.
Realogy Franchise Group revenue includes intercompany royalties received from Realogy Brokerage Group of $282 million and $295 million during the years ended December 31, 2019 and 2018, respectively, which are eliminated in consolidation against the expense reflected in Realogy Brokerage Group's results.
The $29 million decrease in Operating EBITDA was principally due to the $23 million decrease in royalty revenues, the $6 million decrease in other revenues and the net $2 million of marketing expense discussed above, as well as $3 million higher expense for bad debt and notes reserves, partially offset by a $3 million increase in international area development fee revenue as a result of contract terminations discussed above.
Realogy Brokerage Group
Revenues decreased $198 million to $4,409 million and Operating EBITDA decreased $40 million to $4 million for the year ended December 31, 2019 compared with 2018.
The revenue decrease of $198 million was primarily driven by a 4% decrease in homesale transaction volume at Realogy Brokerage Group. Realogy Brokerage Group saw lower transaction volume primarily driven by the competitive environment as well as our geographic concentration.
Operating EBITDA decreased $40 million primarily due to the $198 million decrease in revenues discussed above partially offset by:
•a $126 million decrease in commission expenses paid to independent sales agents from $3,282 million for the year ended December 31, 2018 to $3,156 million for the year ended December 31, 2019. Commission expense decreased primarily as a result of the impact of lower homesale transaction volume as discussed above;
•a $19 million decrease in other costs including occupancy costs, employee-related costs and other operating costs; and
•a $13 million decrease in royalties paid to Realogy Franchise Group from $295 million for the year ended December 31, 2018 to $282 million in 2019.
Realogy Title Group
Revenues increased $16 million to $596 million and Operating EBITDA increased $19 million to $68 million for the year ended December 31, 2019 compared with 2018.
Revenues increased $16 million primarily as a result of a $20 million increase in refinance revenue due to an increase in activity in the refinance market and a $14 million increase in underwriter revenue due to an increase of underwriter premiums as a result of a shift in mix to unaffiliated agents, partially offset by a $17 million decrease in resale revenue due to a decline in purchase transactions.
Operating EBITDA increased $19 million primarily as a result of the $16 million increase in revenue discussed above and a $20 million increase in earnings from equity investments primarily related to Guaranteed Rate Affinity during the year ended December 31, 2019 compared with 2018. These increases were partially offset by an increase of $10 million in operating costs primarily due to an increase in refinance revenue and underwriter revenue with unaffiliated agents where the revenue and expense is recorded on a gross basis and a $7 million increase in employee related and other costs.
Realogy Leads Group
Revenues increased $2 million to $83 million and Operating EBITDA increased $2 million to $53 million for the year ended December 31, 2019 compared with 2018.
Referral revenues increased $304$2 million or 5%driven by higher average fees which was partially offset by lower referral transactions primarily driven by USAA affinity program which ceased new enrollments in the third quarter of 2019. The Company expects that referral revenues for Realogy Leads Group will be materially impacted on a go-forward basis as a result of the discontinuation of the USAA affinity program. See "Recent Developments—Realogy Leads Group" in this Item 7. for additional information.
Operating EBITDA increased $2 million primarily as a result of the $2 million increase in revenues discussed above.
Year Ended December 31, 2018 vs. Year Ended December 31, 2017
Our consolidated results comprised the following:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | |
| | 2018 | | 2017 | | Change |
| Net revenues | $ | 5,782 | | | $ | 5,810 | | | $ | (28) | |
| Total expenses | 5,565 | | | 5,466 | | | 99 | |
| Income from continuing operations before income taxes, equity in losses (earnings) and noncontrolling interests | 217 | | | 344 | | | (127) | |
| Income tax expense (benefit) (a) | 67 | | | (66) | | | 133 | |
| Equity in losses (earnings) of unconsolidated entities | 4 | | | (18) | | | 22 | |
| Net income from continuing operations | 146 | | | 428 | | | (282) | |
| Net (loss) income from discontinued operations | (6) | | | 6 | | | (12) | |
| Net income | 140 | | | 434 | | | (294) | |
| Less: Net income attributable to noncontrolling interests | (3) | | | (3) | | | — | |
| Net income attributable to Realogy Holdings and Realogy Group | $ | 137 | | | $ | 431 | | | $ | (294) | |
_______________
(a)Income tax benefit for the year ended December 31, 2017 reflects the impact of the 2017 Tax Act.
Net revenues decreased $28 million for the year ended December 31, 2018 compared with the year ended December 31, 2016,2017, principally due to increasesa decrease in gross commission income and franchise fees as a result of lower homesale transaction volume increase of 7% on a combined basis for NRT and RFG.at Realogy Brokerage Group.
Total expenses increased $302$99 million or 6%2% primarily due to:
•a $285$52 million increase in commission and other sales agent-related costs due to an increasethe impact of initiatives focused on growing and retaining our productive independent sales agent base and a shift in mix in 2018 to lower closing volume in the new development business which typically has lower commission expense compared to traditional brokerage operations, partially offset by lower homesale transaction volume at NRTvolume;
•$47 million of restructuring costs for the year ended December 31, 2018 primarily for the Company's restructuring program related to leadership realignment and higher sales commissions paidother restructuring activities compared to its independent sales agents;
a $45$12 million increaseof restructuring costs incurred in operating and general and administrative expenses primarily driven by:
| |
◦ | $25 million of additional employee-related costs associated with acquisitions; |
| |
◦ | a $29 million increase in other expenses including professional fees and occupancy costs; |
| |
◦ | an $8 million expense related to the transition of the Company's CEO; and |
| |
◦ | an $8 million expense related to the settlement of the Strader legal matter in 2017; |
partially offset by:
| |
◦ | a $13 million decrease in variable operating costs at TRG primarily due to lower refinance and underwriter volume; and |
| |
◦ | a $16 million decrease in other employee related costs primarily due to lower incentive accruals.
|
a $20 million increase in marketing expenses comprised of $10 million at NRT, $5 million at RFG and $3 million at TRG; and
$5 million2017 related to the losses on the early extinguishment of debt.
Company's business optimization plan;
The expense increases were partially offset by:
•a $16$32 million net decreaseincrease in interest expense to $158$189 million for the year ended December 31, 2018 compared to $157 million for the year ended December 31, 2017 comparedprimarily due to $174an increase in interest expense due to LIBOR rates increases, as well as mark-to-market adjustments for our interest rate swaps that resulted in losses of $4 million for the year ended December 31, 2016. Mark-to-market adjustments for our interest rate swaps resulted in2018 compared to gains of $4 million for the year ended December 31, 2017, comparedand a $2 million write off of financing costs to losses of $6 million for the year ended December 31, 2016. Before the mark-to-market adjustments for our interest rate swaps, interest expense decreased $6 million to $162 million in 2017 from $168 million in 2016 as a result of the refinancing transactions in February 2018; and
•a reduction in total outstanding indebtedness;
a $27net cost of $4 million decrease in restructuring costs related to the Company's business optimization plan (see Note 11, "Restructuring Costs", in the Consolidated Financial Statements for additional information); and
an $8 million increase in the net benefit of former parent legacy items primarily asin 2018 compared to a resultnet benefit of a reduction in the reserve due$10 million for former parent legacy items related to the settlement of a Cendant legacy tax matter.matter in 2017.
EarningsThe expense increases were partially offset by a $31 million decrease in operating and general and administrative expenses primarily driven by:
•a $35 million decrease in employee related and other operating costs primarily due to lower incentive accruals and cost savings initiatives;
•the absence in 2018 of an $8 million expense related to the transition of the Company's CEO which occurred in 2017; and
•the absence in 2018 of an $8 million expense related to the settlement of the Strader legal matter which occurred in 2017;
partially offset by:
•a $22 million increase in costs at Realogy Title Group primarily due to an increase in underwriter revenue with unaffiliated agents where the revenue and expense is recorded on a gross basis and other operating costs.
Losses from equity investments were $18$4 million during the year ended December 31, 2018 primarily related to losses from the operations of Guaranteed Rate Affinity. Guaranteed Rate Affinity, which began doing business in August 2017 comparedon a phased-in basis, experienced operational challenges at the joint venture in addition to $12 million duringtight industry margins in a highly competitive industry as well as rising mortgage rates. During the year ended December 31, 2016. The $62017, the Company recorded earnings from equity investments of $18 million, net increase in earnings is primarily due to:
a $14 million increase in equity earnings at NRT as a result ofwhich related to $35 million ofin earnings from the sale of PHH Home Loans'Loans LLC's ("PHH Home Loans") assets to Guaranteed Rate Affinity, partially offset by the recognition of $7 million exit costs at PHH Home Loans, losses of exit costs. In addition, there was a $14$6 million decrease in earnings due to lower operating results as a resultfrom the continuing operations of lower origination volume, compressed industry marginsPHH Home Loans and lower results due to the level$4 million of organizational change associated with the transition of the operations to Guaranteed Rate Affinity.
The increase in equity earnings was partially offset by:
an $8 million decrease in equity earnings at TRG primarily related to costs associated with the start up of operations of Guaranteed Rate Affinity, including $3 million of amortization of intangible assets recorded in purchase accounting.Affinity.
The provision for income taxes was a benefitan expense of $65$67 million for the year ended December 31, 20172018 compared to expensea benefit of $144$66 million for the year ended December 31, 2016.2017. The benefit is due to the recognition of a significantincome tax benefit of approximately $184 million as a resultfor the year ended December 31, 2017 reflects the impact of the 2017 Tax Act and a $32 million change in our reserve for uncertain tax positions, partially offset by current operating results. The net benefit recorded for the 2017 Tax Act is a provisional amount that reflects the Company’s reasonable estimate at this time, and is subject to adjustment during a measurement period not to exceed one year from enactment in accordance with guidance from the Securities and Exchange Commission. The Company'sAct. Our effective tax rate which includes statewas 31% for the year ended December 31, 2018. See Note 10, "Income Taxes", in the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2018 for additional information and local income taxes, was 40% for 2016. As a resultreconciliation of the 2017 Tax Act, the Company'sCompany’s effective income tax rate is estimated to be 29% beginning in 2018.rate.
Following is a more detailed discussion ofThe following table reflects the results of each of our reportable segments for the years ended December 31, 20172018 and 2016:2017:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Revenues (a) | | % Change | | EBITDA (b) | | % Change | | Margin | | |
| | 2017 | | 2016 | | | 2017 | | 2016 | | | 2017 | | 2016 | | Change |
| RFG | $ | 830 |
| | $ | 781 |
| | 6 | % | | $ | 559 |
| | $ | 516 |
| | 8 | % | | 67 | % | | 66 | % | | 1 |
|
| NRT (c) | 4,643 |
| | 4,344 |
| | 7 |
| | 126 |
| | 137 |
| | (8 | ) | | 3 |
| | 3 |
| | — |
|
| Cartus | 382 |
| | 405 |
| | (6 | ) | | 85 |
| | 96 |
| | (11 | ) | | 22 |
| | 24 |
| | (2 | ) |
| TRG | 570 |
| | 573 |
| | (1 | ) | | 58 |
| | 62 |
| | (6 | ) | | 10 |
| | 11 |
| | (1 | ) |
| Corporate and Other | (311 | ) | | (293 | ) | | * |
| | (103 | ) | | (78 | ) | | * |
| | | | | | |
| Total Company | $ | 6,114 |
| | $ | 5,810 |
| | 5 | % | | $ | 725 |
| | $ | 733 |
| | (1 | )% | | 12 | % | | 13 | % | | (1 | ) |
| Less: Depreciation and amortization (d) | | 201 |
| | 202 |
| | | | | | | | |
| Interest expense, net | | 158 |
| | 174 |
| | | | | | | | |
| Income tax (benefit) expense | | (65 | ) | | 144 |
| | | | | | | | |
| Net income attributable to Realogy Holdings and Realogy Group | | $ | 431 |
| | $ | 213 |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Revenues (a) | | | | $ Change | | % Change | | Operating EBITDA | | | | $ Change | | % Change | | Operating EBITDA Margin | | | | |
| | 2018 | | 2017 | | | | | | 2018 | | 2017 | | | | | | 2018 | | 2017 | | Change |
| Realogy Franchise Group | $ | 820 | | | $ | 830 | | | $ | (10) | | | (1) | % | | $ | 564 | | | $ | 560 | | | $ | 4 | | | 1 | % | | 69 | % | | 67 | % | | 2 | |
| Realogy Brokerage Group | 4,607 | | | 4,643 | | | (36) | | | (1) | | | 44 | | | 135 | | | (91) | | | (67) | | | 1 | | | 3 | | | (2) | |
| Realogy Title Group | 580 | | | 570 | | | 10 | | | 2 | | | 49 | | | 59 | | | (10) | | | (17) | | | 8 | | | 10 | | | (2) | |
| Realogy Leads Group | 81 | | | 78 | | | 3 | | | 4 | | | 51 | | | 45 | | | 6 | | | 13 | | | 63 | | | 58 | | | 5 | |
| Corporate and Other | (306) | | | (311) | | | 5 | | | * | | (85) | | | (107) | | | 22 | | | * | | | | | | |
| Total continuing operations | $ | 5,782 | | | $ | 5,810 | | | $ | (28) | | | — | % | | $ | 623 | | | $ | 692 | | | $ | (69) | | | (10) | % | | 11 | % | | 12 | % | | (1) | |
| Contribution from discontinued operations | | | | | | | | | 35 | | | 40 | | | | | | | | | | | |
| Operating EBITDA including discontinued operations | | | | | | | | | 658 | | | 732 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Less: Depreciation and amortization (c) | | | | | | | | | 166 | | | 169 | | | | | | | | | | | |
| Interest expense, net | | | | | | | | | 189 | | | 157 | | | | | | | | | | | |
| Income tax expense (benefit) (d) | | | | | | | | | 67 | | | (66) | | | | | | | | | | | |
| Restructuring costs, net (e) | | | | | | | | | 47 | | | 12 | | | | | | | | | | | |
| Former parent legacy cost (benefit), net (f) | | | | | | | | | 4 | | | (10) | | | | | | | | | | | |
| Loss on the early extinguishment of debt (f) | | | | | | | | | 7 | | | 5 | | | | | | | | | | | |
| Adjustments attributable to discontinued operations (g) | | | | | | | | | 41 | | | 34 | | | | | | | | | | | |
| Net income attributable to Realogy Holdings and Realogy Group | | | | | | | | | $ | 137 | | | $ | 431 | | | | | | | | | | | |
_______________
* not meaningful
| |
(a) | Includes the elimination of transactions between segments, which consists of intercompany royalties and marketing fees paid by NRT of $311 million and $293 million during the years ended December 31, 2017 and 2016, respectively. |
| |
(b) | EBITDA for the year ended December 31, 2017 includes $12 million of restructuring charges discussed further below, an $8 million expense related to the settlement of the Strader legal matter, an $8 million expense related to the transition of the Company's CEO
|
(a)Includes the elimination of transactions between segments, which consists of intercompany royalties and marketing fees paid by Realogy Brokerage Group of $306 million and $311 million during the years ended December 31, 2018 and 2017, respectively.
(b)Realogy Brokerage Group Operating EBITDA includes $22 million of equity earnings from PHH Home Loans for the year ended December 31, 2017.
60
and $5 millionamortization expense related to Guaranteed Rate Affinity's purchase accounting included in the "Equity in (earnings) losses of unconsolidated entities" line on the Consolidated Statement of Operations.
(d)Income tax benefit for the year ended December 31, 2017 reflects the impact of the 2017 Tax Act.
(e)Restructuring charges incurred for the year ended December 31, 2018 include $3 million at Realogy Franchise Group, $37 million at Realogy Brokerage Group, $4 million at Realogy Title Group and $3 million at Corporate and Other. Restructuring charges incurred for the year ended December 31, 2017 include $1 million at Realogy Franchise Group, $9 million at Realogy Brokerage Group, $1 million at Realogy Title Group and $1 million at Corporate and Other.
(f)Former parent legacy items and Loss on the early extinguishment of debt partially offset by a net benefit of $10 million of former parent legacy items as a result of a reductionare recorded in the reserve. In addition, the Company believes that 2017 EBITDA was also negatively impacted by an estimated $8 million dueCorporate and Other.
(g)Includes depreciation and amortization, interest expense, income tax and restructuring charges related to natural disasters in the third and fourth quarters. EBITDAdiscontinued operations for the yearyears ended December 31, 2016 includes $39 million2018 and 2017.
| |
(c) | NRT EBITDA includes $22 million and $8 million of equity in earnings from PHH Home Loans for the years ended December 31, 2017 and 2016, respectively. |
| |
(d) | Depreciation and amortization the year ended December 31, 2017 includes $3 million of amortization expense related to Guaranteed Rate Affinity's purchase accounting included in the "Equity in earnings of unconsolidated entities" line on the Consolidated Statement of Operations. |
As described in the aforementioned table, Operating EBITDA margin for "Total Company"continuing operations" expressed as a percentage of revenues decreased 1 percentage point to 11% from 12% from 13% for 2017the year ended December 31, 2018 compared to 2016.2017. On a segment basis, RFG'sRealogy Franchise Group's margin increased 12 percentage pointpoints to 69% from 67% from 66%primarily due to an increasea decrease in homesale transaction volume. NRT'semployee related costs as a result of lower incentive accruals. Realogy Brokerage Group's margin remained flat atdecreased 2 percentage points to 1% from 3% primarily due to higher sales commission percentages paid to its independent sales agents offset by lower restructuring costs and an increase in earnings related to the wind down of its equity investment in PHH Home Loans in 2017during 2018 compared to 2016. Cartus'2017 and the impact of lower closing volume in our new development business, which typically has higher margins. Realogy Title Group's margin decreased 2 percentage points to 22%8% from 24% primarily due to lower international revenue and lower foreign currency exchange rate gains, partially offset by lower employee related costs during 2017 compared to 2016 and the absence of restructuring costs incurred in 2016. TRG's margin decreased 1 percentage point to 10% from 11% for the year ended December 31, 20172018 compared to 20162017 primarily as a result of a decrease in refinancing revenue. Realogy Leads Group's margin increased 5 percentage points to 63% from 58% primarily due to a decrease in earnings from equity investments primarilyemployee related to costs associated with the start upas a result of operations of Guaranteed Rate Affinity.cost savings initiatives.
Corporate and Other Operating EBITDA for the year ended December 31, 2017 decreased $252018 improved $22 million to negative $103$85 million primarily due to a $10 million increasethe absence in other costs due to professional fees supporting strategic initiatives and occupancy costs, a $9 million increase in employee costs primarily due to investments in technology development, $8 million2018 of costs related to the transition of the Company's CEO, an $8 million expense related to the settlement of the Strader legal matter and $5which occurred in 2017, the absence in 2018 of $8 million of costs related to losses on the early extinguishmenttransition of debt. These expenses were partially offset by an $8 million increase in the net benefit of former parent legacy items as a result of a reduction in the reserve due to the settlement of a Cendant legacy tax matterCompany's CEO which occurred in 2017 and a $7$2 million decrease in restructuring charges incurred during 2017 comparedother employee costs primarily related to 2016.lower employee incentive accruals offset by an increase in technology related headcount.
EBITDA before restructuring charges was $737 million for the year ended December 31, 2017 compared to $772 million for the year ended December 31, 2016. EBITDA before restructuring charges by reportable segment for the year ended December 31, 2017 was as follows:Realogy Franchise and Brokerage Groups on a Combined Basis
|
| | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | |
| | 2017 | | 2016 | | |
| | EBITDA | | Restructuring Charges | | EBITDA Before Restructuring | | EBITDA Before Restructuring (a) | | %
Change |
| RFG | $ | 559 |
| | $ | 1 |
| | $ | 560 |
| | $ | 520 |
| | 8 | % |
| NRT | 126 |
| | 9 |
| | 135 |
| | 159 |
| | (15 | ) |
| Cartus | 85 |
| | — |
| | 85 |
| | 100 |
| | (15 | ) |
| TRG | 58 |
| | 1 |
| | 59 |
| | 63 |
| | (6 | ) |
| Corporate and Other | (103 | ) | | 1 |
| | (102 | ) | | (70 | ) | | * |
|
| Total Company | $ | 725 |
| | $ | 12 |
| | $ | 737 |
| | $ | 772 |
| | (5 | )% |
_______________
| |
(a) | Excludes $39 million of restructuring charges incurred in 2016 as follows: $4 million at RFG,$22 million at NRT, $4 million at Cartus, $1 million at TRG and $8 million at Corporate and Other.
|
The following table reflects RFGRealogy Franchise and NRTBrokerage Groups' results before the intercompany royalties and marketing fees, as well as on a combined basis forto show the years ended December 31, 2017, 2016 and 2015.Operating EBITDA contribution of these business units to the overall Operating EBITDA of the Company. The Operating EBITDA before restructuring and equity in earnings margin for the combined segments decreased 11% percentage point from 13% to 13% for 2017 from 14% for 201612% primarily due to higher sales commission percentages paid to NRT'sRealogy Brokerage Group's independent sales agents.agents affiliated with Realogy Brokerage Group and the impact of lower closing volume in Realogy Brokerage Groups' new development business, which typically has higher margins:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Revenues (a) | | EBITDA Before Restructuring and Equity in Earnings (b) | | Margin |
| | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
| RFG and NRT Combined | $ | 5,162 |
| | $ | 4,832 |
| | $ | 4,804 |
| | $ | 673 |
| | $ | 671 |
| | $ | 685 |
| | 13 | % | | 14 | % | | 14 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Revenues | | | | Change | | %
Change | | Operating EBITDA | | | | Change | | %
Change | | Operating EBITDA Margin | | | | Change |
| | 2018 | | 2017 | | | | | | 2018 | | 2017 | | | | | | 2018 | | 2017 | | |
| Realogy Franchise Group (a) | $ | 514 | | | $ | 519 | | | $ | (5) | | | (1) | % | | $ | 258 | | | $ | 249 | | | $ | 9 | | | 4 | % | | 50 | % | | 48 | % | | 2 | |
| Realogy Brokerage Group (a)(b) | 4,607 | | | 4,643 | | | (36) | | | (1) | | | 350 | | | 446 | | | (96) | | | (22) | | | 8 | | | 10 | | | (2) | |
| Realogy Franchise and Brokerage Groups Combined | $ | 5,121 | | | $ | 5,162 | | | $ | (41) | | | (1) | % | | $ | 608 | | | $ | 695 | | | $ | (87) | | | (13) | % | | 12 | % | | 13 | % | | (1) | |
_______________
| |
(a) | Excludes transactions between segments, which consists of intercompany royalties and marketing fees paid by NRT to RFG of $311 million, $293 million and $295 million for the years ended December 31, 2017, 2016 and 2015, respectively. |
| |
(b) | EBITDA for the combined RFG and NRT segments excludes $10 million, $26 million and $5 million of restructuring charges and $22 million, $8 million and $14 million of equity in earnings from PHH Home Loans for the years ended December 31, 2017, 2016 and 2015, respectively. We exclude (i) restructuring charges as the frequency and magnitude of these charges may vary widely across periods and (ii) NRT’s equity earnings from PHH Home Loans as this former home mortgage joint venture is in the final stages of liquidation and the results of our new home mortgage joint venture, Guaranteed Rate Affinity, are included in the financial results of TRG. We do not believe these items contribute to a meaningful evaluation of our ongoing operating performance. |
(a)The segment numbers noted above do not reflect the impact of intercompany royalties and marketing fees paid by Realogy Brokerage Group to Realogy Franchise Group of $306 million and $311 million during the years ended December 31, 2018 and 2017, respectively. Real Estate(b)Realogy Brokerage Group Operating EBITDA includes $22 million of equity earnings from PHH Home Loans for the year ended December 31, 2017.
Realogy Franchise Services (RFG)Group
Revenues increased $49decreased $10 million to $830$820 million andwhile Operating EBITDA increased $43$4 million to $559$564 million for the year ended December 31, 20172018 compared with 2016.2017.
The increase in revenue was driven by a $21Revenues decreased $10 million increase in third-party domestic franchisee royalty revenue primarily due to a 1% increase in the number of homesale transactions and a 6% increase in the average homesale price, partially offset by a $2 million increase in non-standard incentive amortization. The increase in revenue was also due to a $17 million increase in royalties received from NRT as a result of volume increases at NRT, a $4 million increase in international revenuesother incentives, a $4 million decrease in intercompany royalties received from Realogy Brokerage Group and a $5$2 million increasedecrease in other revenue primarily due to marketing-related activities andthe timing of brand conferences and franchisee events. Brand marketing fund
Realogy Franchise Group revenue increased $4 million and related expense increased $5 million, primarily due to the level of advertising spending during the year ended December 31, 2017 compared with 2016.
Theincludes intercompany royalties received from NRTRealogy Brokerage Group of $299$295 million and $282$299 million during the years ended December 31, 2018 and 2017, and 2016, respectively, which are eliminated in consolidation against the same expense reflected in NRT's segmentRealogy Brokerage Group's results. See "Company Owned Real Estate Brokerage Services" for a discussion of the drivers related to intercompany royalties paid to RFG.
The $43$4 million increase in Operating EBITDA was principally due to the $49 million increase in revenues discussed above and a $3$9 million decrease in restructuringemployee related costs incurred during the year ended December 31, 2017 compared with 2016, partially offset byprimarily due to lower incentive accruals and a $5 million increase in brand marketing fund expense discussed above and a $3 million increasedecrease in expenses related to the timing of brand conferences and franchisee events.events, partially offset by the $10 million decrease in revenues discussed above.
Company Owned Real Estate73
Realogy Brokerage Services (NRT)Group
Revenues increased $299decreased $36 million to $4,643$4,607 million and Operating EBITDA declined $11decreased $91 million to $126$44 million for the year ended December 31, 20172018 compared with 2016.2017.
The revenue increasedecrease of $299$36 million was comprised of a $229 million increase in commission income earned on homesale transactions by our existing brokerage operations and a $70 million increase in commission income earned from acquisitions. The revenue increase wasprimarily driven by a 3% increase1% decrease in homesale transaction volume at Realogy Brokerage Group which consisted of a 2% decrease in the number of homesale transactions, and a 5% increase in the average price of homes, partiallymostly offset by a 2 basis points decrease2% increase in average homesale price. Realogy Brokerage Group saw lower transaction volume in the average broker commission rate. We believe our positive revenue growth is attributable toNew York metropolitan area and in the recruiting and organic growth focus by NRT managementwest coast, as well as improvementa lower closing volume in the high end of the housing market. In addition, homesaleits new development business, which is generally at a higher price is continuingpoint, compared to increase due to continued constrained inventory levels across the lower and mid price points in the markets served by NRT.2017.
Operating EBITDA decreased $11$91 million primarily due to:
•a $285$52 million increase in commission expenses paid to independent sales agents from $2,945 million for the year ended December 31, 2016 to $3,230 million for the year ended December 31, 2017. The increase in commission2017 to $3,282 million for the year ended December 31, 2018. Commission expense is due to an increase of $241 million by our existing brokerage operationsincreased as a result of the impact of initiatives focused on growing and retaining our productive independent sales agent base and highera shift in mix in 2018 to lower closing volume in the new development business, which typically has lower commission expense compared to traditional brokerage operations, partially offset by the impact of lower homesale transaction volume, as well as volume;
•a $44 million increase related to acquisitions;
a $19 million increase in other costs including occupancy costs of which $7 million related to acquisitions;
a $17 million increase in royalties paid to RFG from $282 million in 2016 to $299 million in 2017;
a $10 million increase in marketing expenses of which $3 million related to acquisitions; and
a $4 million increase in employee-related costs due to a $12 million increase attributable to acquisitions offset by an $8$36 million decrease due primarily due to lower incentive accruals.
These EBITDA decreases were partially offset by:
a $299 million increase in revenues discussed above;
a $14•the absence in 2018 of $22 million increase in earnings forfrom our equity method investment in PHH Home Loans for the year ended December 31, 2017 compared with 2016 as a result of $35 million of earningsprimarily due to gains from the sale of PHH Home Loans' assets to Guaranteed Rate Affinity which occurred in 2017; and
•a $10 million increase in other costs including a $4 million increase in outsourcing costs and a $3 million increase in occupancy costs.
Operating EBITDA decreases were partially offset by $7 million of exit costs. In addition, there was by:
•a $14$21 million decrease in earningsemployee related costs primarily due to lower operating results as incentive accruals;
•a result of lower origination volume, compressed industry margins and lower results due to the level of organizational change associated with the transition of the operations to Guaranteed Rate Affinity; and
a $13$4 million decrease in restructuring costs incurred during the year ended December 31,royalties paid to Realogy Franchise Group from $299 million in 2017 compared with 2016.to $295 million in 2018; and
•a $3 million decrease in marketing expenses. Relocation Services (Cartus)Realogy Title Group
Revenues decreased $23increased $10 million to $382$580 million andwhile Operating EBITDA decreased $11$10 million to $85$49 million for the year ended December 31, 20172018 compared with 2016.2017.
Revenues decreased $23increased $10 million primarily as a result of a $20 million increase in underwriter revenue due to an increase of underwriter premiums as a result of a shift in mix to unaffiliated agents, as well as a $5 million increase in resale revenue due to an increase in average fees, partially offset by a $13 million decrease in international revenue as an increasingly higher percentage of clients are reducing their global relocation activity, as well as an $11 million decrease in other revenue due primarily to lower volume.
EBITDA decreased $11 million primarily as a result of the $23 million decrease in revenues discussed above and a $4 million net negative impact from foreign currency exchange rates, partially offset by an $8 million decrease in employee related costs, the absence of $4 million of restructuring costs incurred during 2016 and a $2 million net decrease in other operating expenses as a result of lower volume.
Title and Settlement Services (TRG)
Revenues decreased $3 million to $570 million and EBITDA decreased $4 million to $58 million for the year ended December 31, 2017 compared with 2016.
The decrease in revenues was driven by a $20 million decrease in refinance revenue and a $10 million decrease in underwriterrefinancing revenue due to an overall decrease in activity in the refinance market in 2017, offset by a $27 million increase in resale revenue of which $16 million was related to acquisitions.market.
Operating EBITDA decreased $4$10 million as a result of a $9an increase of $19 million in costs primarily due to an increase in employee-related costs primarily related to acquisitions,underwriter revenue with unaffiliated agents where the revenue and expense is recorded on a $5 million decrease in earnings from equity investments primarily related to costs associated with the start up of operations of Guaranteed Rate Affinity,gross basis and a $3 million increase in other operating costs, partially offset by the $10 million increase in revenues discussed above and thea $3 million decrease in revenues discussed above. These EBITDA decreases were partially offset by a $13 million decrease in variable operating costs primarily due to lower refinancing and underwriter volume and $2 millionemployee related to the reversal of a legal reserve in 2017.costs.
Year Ended December 31, 2016 vs. Year Ended December 31, 2015
Our consolidated results were comprised of the following:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | Change |
| Net revenues | $ | 5,810 |
| | $ | 5,706 |
| | $ | 104 |
|
| Total expenses (1) | 5,461 |
| | 5,424 |
| | 37 |
|
| Income before income taxes, equity in earnings and noncontrolling interests | 349 |
| | 282 |
| | 67 |
|
| Income tax expense | 144 |
| | 110 |
| | 34 |
|
| Equity in earnings of unconsolidated entities | (12 | ) | | (16 | ) | | 4 |
|
| Net income | 217 |
| | 188 |
| | 29 |
|
| Less: Net income attributable to noncontrolling interests | (4 | ) | | (4 | ) | | — |
|
| Net income attributable to Realogy Holdings and Realogy Group | $ | 213 |
| | $ | 184 |
| | $ | 29 |
|
_______________
| |
(1) | Total expenses for the year ended December 31, 2016 includes $39 million of restructuring costs and $6 million of losses related to mark-to-market adjustments for our interest rate swaps, partially offset by a net benefit of $2 million for former parent legacy items. Total expenses for the year ended December 31, 2015 includes $48 million related to the loss on the early extinguishment of debt, $20 million of losses related to mark-to-market adjustments for our interest rate swaps and $10 million of restructuring costs, partially offset by a net benefit of $15 million for former parent legacy items. |
Net revenuesRevenues increased $104 million or 2% for the year ended December 31, 2016 compared with the year ended December 31, 2015, primarily due to an increase in revenue at TRG as a result of acquisitions, as well as an increase in revenue at RFG driven by higher average homesale price and number of homesale transactions.
Total expenses increased $37 million due to:
a $68 million increase in operating and general and administrative expenses primarily driven by:
| |
◦ | $40 million of additional employee-related costs associated with acquisitions; |
| |
◦ | a $39 million increase in variable operating costs at TRG related to higher volume primarily as a result of acquisitions; and |
| |
◦ | a $3 million increase in employee-related costs primarily driven by $16 million of salary, benefits and other increases, partially offset by a decrease of $13 million due to lower incentive accruals; |
partially offset by:
| |
◦ | the absence in 2016 of $6 million related to certain transaction costs associated with the acquisition of Coldwell Banker United and the settlement of a legal matter in 2015; |
a $29 million increase in restructuring charges related to the Company's business optimization initiative due to $39 million being incurred in 2016 compared to $10 million in 2015;
a $15 million increase in marketing expenses mainly due to higher advertising costs at NRT and TRG primarily related to acquisitions;
a $14 million increase in commission expenses paid to independent real estate sales agents at NRT; and
a $13 million decrease in the net benefit of former parent legacy items as a result of the reduction of a tax liability in 2015.
These increases in total expenses were partially offset by:
a $57 million decrease in interest expense for the year ended December 31, 2016 compared to the year ended December 31, 2015. Before the mark-to-market adjustments for our interest rate swaps, interest expense decreased $43 million to $168$81 million in 2016 from $211 million in 2015 as a result of a reduction in total outstanding indebtedness and a lower weighted average interest rate. Mark-to-market adjustments for our interest rate swaps resulted in losses ofwhile Operating EBITDA increased $6 million in 2016 compared to losses of $20 million in 2015; and
the absence in 2016 of a $48 million loss on the early extinguishment of debt related to transactions in 2015.
Equity in earnings of unconsolidated entities declined $4 million primarily due to a $6 million decrease in earnings from PHH Home Loans.
During the fourth quarter of 2015, the Company began a business optimization initiative that focuses on maximizing the efficiency and effectiveness of the cost structure of each of the Company's business units. The action is designed to improve client service levels across each of the business units while enhancing the Company's profitability and incremental margins. The plan focuses on several key areas of opportunity which include process improvement efficiencies, office footprint optimization, leveraging technology and media spend, centralized procurement, outsourcing administrative services and organizational design. The Company incurred restructuring charges of $10 million in the fourth quarter of 2015 and $39 million in 2016 which consisted of personnel-related costs, facility-related costs and other restructuring-related costs. See Note 11, "Restructuring Costs", in the consolidated financial statements for additional information.
The Company's provision for income taxes was $144$51 million for the year ended December 31, 20162018 compared to $110with 2017.
Revenues increased $3 million for the year ended December 31, 2015. Our effective tax rate was 40% and 37% for the year ended December 31, 2016 and December 31, 2015, respectively. The effective tax rate was positively impacted in 2016, by a reduction in valuation allowance related to our foreign tax credits, offset by an increase in our deferred tax liabilities, primarily driven by stock-based compensation shortfalls and changes to U.S. tax legislation and was positively impacted in 2015, primarily by a reduction in our deferred tax liabilities, driven by changes to state tax legislation.
Following is a more detailed discussion of the results of each of our reportable segments for the years ended December 31, 2016 and 2015:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Revenues (a) | | % Change | | EBITDA (b) | | % Change | | Margin | | |
| | 2016 | | 2015 | | | 2016 | | 2015 | | | 2016 | | 2015 | | Change |
| RFG | $ | 781 |
| | $ | 755 |
| | 3 | % | | $ | 516 |
| | $ | 495 |
| | 4 | % | | 66 | % | | 66 | % | | — |
|
| NRT | 4,344 |
| | 4,344 |
| | — |
| | 137 |
| | 199 |
| | (31 | ) | | 3 |
| | 5 |
| | (2 | ) |
| Cartus | 405 |
| | 415 |
| | (2 | ) | | 96 |
| | 105 |
| | (9 | ) | | 24 |
| | 25 |
| | (1 | ) |
| TRG | 573 |
| | 487 |
| | 18 |
| | 62 |
| | 48 |
| | 29 |
| | 11 |
| | 10 |
| | 1 |
|
| Corporate and Other | (293 | ) | | (295 | ) | | * |
| | (78 | ) | | (121 | ) | | * |
| | | | | | |
| Total Company | $ | 5,810 |
| | $ | 5,706 |
| | 2 | % | | $ | 733 |
| | $ | 726 |
| | 1 | % | | 13 | % | | 13 | % | | — |
|
| Less: Depreciation and amortization | | 202 |
| | 201 |
| | | | | | | | |
| Interest expense, net | | 174 |
| | 231 |
| | | | | | | | |
| Income tax expense | | 144 |
| | 110 |
| | | | | | | | |
| Net income attributable to Realogy Holdings and Realogy Group | | $ | 213 |
| | $ | 184 |
| | | | | | | | |
_______________
| |
(a) | Includes the elimination of transactions between segments, which consists of intercompany royalties and marketing fees paid by NRT of $293 million and $295 million during the year ended December 31, 2016 and 2015, respectively. |
| |
(b) | EBITDA for the year ended December 31, 2016 includes $39 million of restructuring costs, partially offset by a net benefit of $2 million for former parent legacy items. EBITDA for the year ended December 31, 2015 includes $48 million related to the loss on early extinguishment of debt and $10 million of restructuring costs, partially offset by a net benefit of $15 million for former parent legacy items. |
EBITDA before restructuring charges was $772 million for the year ended December 31, 2016 compared to $736 million for the year ended December 31, 2015. EBITDA before restructuring charges by reportable segment for the year ended December 31, 2016 was as follows:
|
| | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | |
| | 2016 | | 2015 | | |
| | EBITDA | | Restructuring Charges | | EBITDA Before Restructuring | | EBITDA Before Restructuring (a) | | %
Change |
| RFG | $ | 516 |
| | $ | 4 |
| | $ | 520 |
| | $ | 495 |
| | 5 | % |
| NRT | 137 |
| | 22 |
| | 159 |
| | 204 |
| | (22 | ) |
| Cartus | 96 |
| | 4 |
| | 100 |
| | 106 |
| | (6 | ) |
| TRG | 62 |
| | 1 |
| | 63 |
| | 48 |
| | 31 |
|
| Corporate and Other | (78 | ) | | 8 |
| | (70 | ) | | (117 | ) | | * |
|
| Total Company | $ | 733 |
| | $ | 39 |
| | $ | 772 |
| | $ | 736 |
| | 5 | % |
_______________
| |
(a) | Excludes $10 million of restructuring charges incurred in 2015 as follows: $5 million at NRT, $1 million at Cartus and $4 million at Corporate and Other. |
As described in the aforementioned table, EBITDA margin for "Total Company" expressed as a percentage of revenues remained flat at 13% for the year ended December 31, 2016 compared to 2015. On a segment basis, RFG's margin remained flat at 66%; however, it increased 1 percentage point to 67% excluding restructuring charges. NRT's margin declined to 3% from 5% primarily due to a decrease in revenue; however, it decreased 1 percentage point to 4% excluding restructuring charges. Cartus' margin decreased 1 percentage point to 24% from 25%; however, excluding restructuring charges, Cartus' margin decreased 1 percentage point to 25% from 26% as a result of a decrease in non-affinity referral revenue due to lower broker-to-broker volume. TRG's margin increased 1 percentage point to 11% from 10% due to an$3 million increase in resaleaffinity revenue primarily driven by higher volume and refinance volume.fees.
Corporate and OtherOperating EBITDA for the year ended December 31, 2016 improved by $43 million to negative $78 million primarily due to:
the absence of $48 million for the loss on early extinguishment of debt incurred in 2015;
the absence ofincreased $6 million of certain transaction costs associated with the acquisition of Coldwell Banker United and the settlement of a legal matter in 2015; and
a $4 million decrease in employee-related costs;
partially offset by:
a $13 million decrease in the net benefit for former parent legacy itemsprimarily as a result of a tax liability reduction in 2015; and
a $4 million increase in restructuring charges related to the Company's business optimization plan.
Real Estate Franchise Services (RFG)
Revenues increased $26 million to $781 million and EBITDA increased $21 million to $516 million for the year ended December 31, 2016 compared with 2015.
The increase in revenue was primarily driven by a $19 million increase in third-party domestic franchisee royalty revenue due to a 3% increase in both the average homesale price and in the number of homesale transactions. The increase in revenue was also due to a $6 million increase in other revenue primarily related to marketing-related activities and the
timing of brand conferences, and a $3 million increase in international revenues. The increase in revenue was partially offset by a $3 million increase in non-standard incentives amortization during the year ended December 31, 2016 compared with 2015.
Intercompany royalties received from NRT were $282 million and $284 million during the years ended December 31, 2016 and 2015, respectively, and are eliminated in consolidation. See "Company Owned Real Estate Brokerage Services" for a discussion of the drivers related to intercompany royalties paid to RFG.
The $21 million increase in EBITDA was principally due to the $26 million increase in revenues discussed above partially offset by $4and a $3 million of restructuringdecrease in employee related costs related to the Company's business optimization plan.
Company Owned Real Estate Brokerage Services (NRT)
Revenues remained flat at $4,344 million and EBITDA declined $62 million to $137 million for the year ended December 31, 2016 compared with 2015.
Revenues remained flat as a result of a $109 million decrease primarily due to lower commission income earned on homesale transactions by our existing brokerage operations, offset by a $109 million increase in revenue primarily due to commission income earned from acquisitions. Revenues were negatively impacted by the slowing of activity in the high-end markets served by NRT, the cumulative impact of market share attrition, and inventory issues in the mid and lower priced homes in many of the markets served by NRT.cost savings initiatives.
EBITDA decreased $62 million primarily due to:
$22 million in restructuring costs related to the Company's business optimization plan in 2016 compared to $5 million in 2015;
a $17 million increase in employee-related costs attributable to acquisitions;
a $14 million increase in commission expenses paid to independent sales agents from $2,931 million in 2015 to $2,945 million in 2016. The increase in commission expense is due to a $65 million increase related to acquisitions, partially offset by a decrease of $51 million by our existing brokerage operations;
a $6 million increase in occupancy costs related to acquisitions;
a $6 million decrease in equity earnings related to our investment in PHH Home Loans; and
a $4 million increase in marketing expenses primarily related to acquisitions.
These decreases were partially offset by:
a $2 million decrease in royalties paid to RFG from $284 million in 2015 to $282 million in 2016.
Relocation Services (Cartus)
Revenues decreased $10 million to $405 million and EBITDA decreased $9 million to $96 million for the year ended December 31, 2016 compared with 2015.
Revenues decreased $10 million as a result of a $17 million decrease in non-affinity referral revenue due to lower broker-to-broker referrals, the absence of a large group move which occurred in 2015 and lower relocation referral volume in 2016 compared to 2015, partially offset by higher average fees. The decrease was partially offset by a $7 million increase in affinity referrals due to higher transaction volume and average fees.
EBITDA decreased $9 million as a result of the $10 million decrease in revenues discussed above as well as $4 million in restructuring costs related to the Company's business optimization plan. These decreases were partially offset by a $5 million net positive impact from foreign currency exchange rates.
Title and Settlement Services (TRG)
Revenues increased $86 million to $573 million and EBITDA increased $14 million to $62 million for the year ended December 31, 2016 compared with 2015.
The increase in revenues was due to a $46 million increase in resale revenue driven by a 17% increase in resale title and closing units of which acquisitions contributed 14 percentage points, as well as a $15 million increase in refinancing revenue driven by a 32% increase in refinancing title and closing units of which acquisitions contributed 11 percentage
points. Underwriter and other revenue increased $18 million and $8 million, respectively, due to the volume increases discussed above.
EBITDA increased $14 million as a result of the $86 million increase in revenues discussed above, partially offset by an increase of $39 million in variable operating costs and a $32 million increase in employee-related costs primarily related to acquisitions.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Financial Condition
| | | | December 31, 2017 | | December 31, 2016 | | Change | | December 31, 2019 | | December 31, 2018 | | Change |
| Total assets | $ | 7,337 |
| | $ | 7,421 |
| | $ | (84 | ) | Total assets | $ | 7,543 | | | $ | 7,290 | | | $ | 253 | |
| Total liabilities | 4,715 |
| | 4,952 |
| | (237 | ) | Total liabilities | 5,447 | | | 4,975 | | | 472 | |
| Total equity | 2,622 |
| | 2,469 |
| | 153 |
| Total equity | 2,096 | | | 2,315 | | | (219) | |
For the year ended December 31, 2017,2019, total assets decreased $84increased $253 million primarily due to:
•the addition of $515 million of operating lease assets to the balance sheet in the first quarter of 2019 as a $96result of the adoption of the new leasing standard;
•a $39 million increase in other current and non-current assets primarily related to strategic investments and prepaid assets;
•a $35 million increase in property and equipment; and
•a $32 million increase in cash and cash equivalents.
Total asset increases were partially offset by:
•a $236 million decrease in goodwill;
•a $76 million net decrease in franchise agreements and other amortizable intangible assets primarily attributabledue to amortization, amortization;
•a $47$49 million decrease in cashassets held for sale; and cash equivalents and
•a $21$6 million decrease in relocationtrade receivables due to lower volume. These decreasespreferred alliance vendor payments.
For the year ended December 31, 2019, total liabilities increased $472 million primarily due to:
•the addition of $589 million of operating lease liabilities to the balance sheet in the first quarter of 2019 as a result of the adoption of the new leasing standard; and
•a $6 million increase in accrued expenses and other current liabilities.
Total liability increases were partially offset by by:
•a $36 million increase in other current and non-current assets primarily due to agent recruiting and retention and higher prepaid expenses, a $22 million increase in property and equipment and a $20 million increase in goodwill from acquisitions.
Total liabilities decreased $237 million due to a $159$103 million decrease in corporate debt primarily due to a $115the repurchase of $93 million reductionof 4.875% Senior Notes during the third quarter of 2019, quarterly amortization payments of $30 million on the term loan facilities and an $80 million decrease in borrowings under the Revolving Credit Facility, and amortization payments on the term loan facilities,partially offset by a $62 million decreasenet increase in deferred tax liabilitiescorporate debt due to the 2017 Tax Actissuance of 9.375% $550 million Senior Notes and redemption of 4.50% $450 million Senior Notes during the first quarter of 2019; and
•a change in our reserve for uncertain tax positions, partially offset by current operating results, a $36$23 million decrease in other non-current liabilities primarily due to the impactreclassification of interest rate swaps and reduceddeferred rent liabilities which were credited against operating lease assets as a result of cash paid for contingent consideration from acquisitions, and an $11 million decrease in securitization obligations driven by lower relocation volume. These decreases werethe adoption of the new leasing standard partially offset by an $15 million increase in accrued expenses and other currentincreased mark-to-market liabilities and a $16 million increase in accounts payable.for the Company's interest rate swaps.
Total equity increased $153decreased $219 million primarily due to a net incomeloss of $431$188 million partially offset byfor the year ended December 31, 2019 and a $280$27 million decrease in additional paid in capital duringfor the year ended December 31, 2017.2019. The decrease in additional paid in capital primarily relatesrelated to the $31 million of dividend payments during the first three quarters of 2019 and the Company's repurchase of $280$20 million of common stock and $49 millionduring the first quarter of dividend payments,2019, partially offset by stock-based compensation activity of $49 million.$22 million for the year ended December 31, 2019.
Liquidity and Capital Resources
We have historically satisfied our liquidity needs with cash flows from operations and funds available under our Revolving Credit Facility. Our primary liquidity needs have been to service our debt and finance our working capital and capital expenditures, whichexpenditures. We currently expect to prioritize investing in our business and reducing indebtedness. Accordingly, we have historically satisfied with cash flows from operations and funds available under our revolving credit facilities and securitization facilities. In February 2018, the Company increased the borrowing capacity under its Revolving Credit Facility from $1,050 million to $1,400 million and extended the maturities of the Revolving Credit Facility, Term Loan B and Term Loan A.
We intend to use future cash flow primarily to acquirediscontinued acquiring stock under our share repurchase program, pay dividends, fund acquisitions, enter into strategic relationshipsprograms in the first quarter of 2019 and reduce indebtedness. In February 2018,discontinued our quarterly dividend in the Company's Boardfourth quarter of Directors authorized a new share repurchase program of up to $350 million of the Company's common stock which is incremental to the remaining authorization under the share repurchase program authorized in 2017. Repurchases under these programs may be made at management's discretion from time to time on the open market, pursuant to Rule 10b5-1 trading plans or privately negotiated transactions. The size and timing of these repurchases will depend on price, market and economic conditions, legal and contractual requirements and other factors. The repurchase programs have no time limit and may be suspended or discontinued at any time.2019.
We are significantly encumbered by our debt obligations. As of December 31, 2017,2019, our total debt, excluding our securitization obligations, was $3,445 million. Our liquidity position has been and is expected to continue to be negatively
impacted by the Company had repurchasedinterest expense on our debt obligations, which could be intensified by a significant increase in LIBOR (or any replacement rate) or ABR. We intend to use the substantial majority of the net proceeds from the planned sale of Cartus Relocation Services to pay down corporate debt, though we will continue to have substantial indebtedness.
We will continue to evaluate potential refinancing and retired 16.5 million sharesfinancing transactions, including refinancing certain tranches of common stock for an aggregateour indebtedness and extending maturities, among other potential alternatives. There can be no assurance as to which, if any, of $475 million underthese alternatives we may pursue as the 2016 and 2017 share repurchase programs at a weighted average market price of $28.77 per share. As of December 31, 2017, approximately $100 million of authorization remains available for repurchase of shares under the 2017 share repurchase program.
During the period January 1, 2018 to February 23, 2018, we repurchased an additional 1.5 million shares under the plan at a weighted average market price of $26.82 per share. Giving effect to these repurchases, we had approximately $60 million of remaining capacity authorized under the February 2017 share repurchase program as of February 23, 2018.
Beginning in August 2016, we initiated and paid a quarterly cash dividend of $0.09 per share and paid $0.09 per share cash dividends in every subsequent quarter. In 2017, we returned $49 million to stockholders through the payment of cash dividends. The declaration and paymentchoice of any future dividend will be subject to the discretion of the Board of Directors andalternative will depend on a variety ofupon numerous factors including the Company’s financial condition and results of operations, contractual restrictions (including restrictive covenants contained in the Company’s credit agreement, and the indenture governing the Company’s outstanding debt securities), capital requirements and other factors that the Board of Directors deems relevant.
In April 2007, the Company established a standby irrevocable letter of credit for the benefit of Avis Budget Group in accordance with the Separation and Distribution Agreement. The letter of credit was utilized to support the Company’s payment obligations with respect to its share of Cendant contingent and other corporate liabilities. In September 2017, the standby irrevocable letter of credit was terminated pursuant to the governing agreementsuch as the aggregate value of the Cendant contingent and other liabilities fell below $30 million with the resolution of a Cendant legacy tax matter in the third quarter of 2017, reducing the capacity and outstanding letters of credit under the Unsecured Letter of Credit Facility. At December 31, 2017, the aggregate value of the former parent contingent liabilities was $18 million.
We may also from time to time seek to repurchase our outstanding notes through tender offers, open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractualfinancial performance and the limitations applicable to such transactions under our existing financing agreements and the consents we may need to obtain under the relevant documents. Financing may not be available to us on commercially reasonable terms, on terms that are acceptable to us, or at all. Any future indebtedness may impose various additional restrictions and other factors.
We are currently experiencing growth in the residential real estate market; however, if the residential real estate market or the economy as a whole does not continue to improve or weakens, our business, financial condition and liquidity may be materially adversely affected, includingcovenants on us which could limit our ability to accessrespond to market conditions, to make capital investments or to take advantage of business opportunities.
In addition, our Senior Secured Credit Facility and growTerm Loan A Facility require us to maintain a senior secured leverage ratio, which may not exceed 4.75 to 1.00. For the trailing twelve months ended December 31, 2019, we were in compliance with the senior secured leverage ratio covenant with a ratio of 3.03 to 1.0 with total senior secured debt (net of unrestricted cash and permitted investments) of $1,895 million and trailing twelve months EBITDA calculated on a Pro Forma Basis (as those terms are defined in the credit agreement governing the Senior Secured Credit Facility) of $626 million. For additional information, see below under the header "Financial Obligations—Covenants under the Senior Secured Credit Facility, Term Loan A Facility and Indentures".
Our Operating EBITDA and EBITDA calculated on a Pro Forma basis has declined year-over-year for the past several years. If our business.EBITDA calculated on a Pro Forma Basis were to continue to decline and/or we were to incur additional senior secured debt (including additional borrowings under the Revolving Credit Facility), our ability to borrow the full capacity under the Revolving Credit Facility (without refinancing secured debt into unsecured debt) could be limited as we must maintain compliance with the senior secure leverage ratio described above of 4.75 to 1.00.
Historically, operating results and revenues for all of our businesses have been strongest in the second and third quarters of the calendar year. A significant portion of the expenses we incur in our real estate brokerage operations are related to marketing activities and commissions and therefore, are variable. However, many of our other expenses, such as interest payments, facilities costs and certain personnel-related costs, are fixed and cannot be reduced during athe seasonal slowdown. fluctuations in the business. Consequently, our debt balances are generally at their highest levels at or around the end of the first quarter of every year.
OurDuring the third quarter of 2019, the Company repurchased $93 million of its 4.875% Senior Notes through open market purchases at an aggregate purchase price of $83 million.
In March 2019, the Company issued $550 million of 9.375% Senior Notes due in April 2027. We used $540 million of the net proceeds to repay a portion of outstanding borrowings under our Revolving Credit Facility. In February 2019, the Company had used borrowings under its Revolving Credit Facility and cash on hand to fund the redemption of all of its outstanding $450 million 4.50% Senior Notes. The covenants in the indenture governing the 9.375% Senior Notes are substantially similar to the covenants in the indentures governing the 5.250% Senior Notes and the 4.785% Senior Notes, with certain exceptions, including changes relating to the Company’s ability to make restricted payments, including its ability to make dividend payments in excess of $45 million per calendar year or its ability to repurchase shares in any amount until the Company's consolidated leverage ratio is below 4.00 to 1.00.
In addition, we are required to pay quarterly amortization payments for the Term Loan B and Term Loan A facilities. We expect payments in 2020 to total $33 million and $11 million for the Term Loan A and Term Loan B facilities, respectively.
We may from time to time seek to repurchase our outstanding Unsecured Notes through tender offers, open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity position has significantly improved but continues to be impacted by our remaining interest expenserequirements, contractual restrictions and would be adversely impacted by stagnation or a downturn ofother factors.
If the residential real estate market or the economy as a whole does not improve or continues to weaken, our business, financial condition and a significant increase in LIBOR or ABR.liquidity may be materially adversely affected, including our ability to access capital, grow our business and return capital to stockholders.
We will continue to evaluate potential refinancing and financing transactions. There can be no assurance as to which, if any,
Cash Flows
Year ended December 31, 20172019 vs. Year ended December 31, 20162018
At December 31, 2017,2019, we had $234$235 million of cash, cash equivalents and restricted cash, a decreasean increase of $47$30 million compared to the balance of $281$205 million at December 31, 2016.2018. The following table summarizes our cash flows for the years ended December 31, 20172019 and 2016:2018:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | Change |
| Cash provided by (used in): | | | | | |
| Operating activities | $ | 667 |
| | $ | 586 |
| | $ | 81 |
|
| Investing activities | (146 | ) | | (191 | ) | | 45 |
|
| Financing activities | (570 | ) | | (534 | ) | | (36 | ) |
| Effects of change in exchange rates on cash, cash equivalents and restricted cash | 2 |
| | (3 | ) | | 5 |
|
| Net change in cash, cash equivalents and restricted cash | $ | (47 | ) | | $ | (142 | ) | | $ | 95 |
|
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | |
| | 2019 | | 2018 | | Change |
| Cash provided by (used in): | | | | | |
| Operating activities | $ | 371 | | | $ | 394 | | | $ | (23) | |
| Investing activities | (128) | | | (91) | | | (37) | |
| Financing activities | (215) | | | (297) | | | 82 | |
| Effects of change in exchange rates on cash, cash equivalents and restricted cash | — | | | (2) | | | 2 | |
| Net change in cash from discontinued operations | 2 | | | 5 | | | (3) | |
| Net change in cash, cash equivalents and restricted cash from continuing operations | $ | 30 | | | $ | 9 | | | $ | 21 | |
For the year ended December 31, 2017, $812019, $23 million moreless cash was provided by operating activities compared to the same period in 2016. The change was2018 principally due to $41$131 million less cash provided by operating results, partially offset by:
•$61 million more cash dividends received from PHH Home Loans, $26provided by discontinued operations;
•$32 million less cash used for accounts payable, accrued expenses and other liabilitiesliabilities;
•$9 million less cash used for other assets; and $19
•$8 million of additionalmore cash provided by other operating results.activities.
For the year ended December 31, 2017,2019, we used $45$37 million more cash for investing activities compared to the same period in 2018 primarily due to:
•the absence in 2019 of $19 million of net cash proceeds received from the dissolution of our interest in PHH Home Loans, LLC which occurred in 2018;
•$16 million more cash used for property and equipment additions; and
•$7 million less cash provided by other investing activities,
partially offset by $3 million less cash used for investments in unconsolidated entities.
For the year ended December 31, 2019, $215 million of cash was used in financing activities compared to $297 million of cash used during the same period in 2018. For the year ended December 31, 2019, $215 million of cash was used for:
•$80 million repayment of borrowings under the Revolving Credit Facility;
•$31 million of dividend payments;
•$30 million of quarterly amortization payments on the term loan facilities;
•$25 million of other financing payments primarily related to finance leases;
•$23 million related to discontinued operations;
•$20 million for the repurchase of our common stock;
•$6 million of tax payments related to net share settlement for stock-based compensation; and
•$3 million for payments of contingent consideration,
partially offset by:
•$3 million of cash received as a result of the refinancing transactions in 2019.
For the year ended December 31, 2018, $297 million of cash was used for:
•$402 million for the repurchase of our common stock;
•$45 million of dividend payments;
•$25 million of other financing payments primarily related to finance/capital leases;
•$25 million of quarterly amortization payments on the term loan facilities;
•$22 million for payments of contingent consideration;
•$10 million of tax payments related to net share settlement for stock-based compensation; and
•$3 million for cash paid as a result of the refinancing transactions in February 2018 related to $16 million of debt issuance costs and $4 million repayment of borrowings under the Term Loan B Facility, partially offset by $17 million of proceeds received under the Term Loan A Facility,
partially offset by:
•$200 million of additional borrowings under the Revolving Credit Facility; and
•$34 million related to discontinued operations.
Year ended December 31, 2018 vs. Year ended December 31, 2017
At December 31, 2018, we had $205 million of cash, cash equivalents and restricted cash, an increase of $9 million compared to the balance of $196 million at December 31, 2017. The following table summarizes our cash flows for the years ended December 31, 2018 and 2017:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | |
| | 2018 | | 2017 | | Change |
| Cash provided by (used in): | | | | | |
| Operating activities | $ | 394 | | | $ | 667 | | | $ | (273) | |
| Investing activities | (91) | | | (146) | | | 55 | |
| Financing activities | (297) | | | (570) | | | 273 | |
| Effects of change in exchange rates on cash, cash equivalents and restricted cash | (2) | | | 2 | | | (4) | |
| Net change in cash from discontinued operations | 5 | | | 3 | | | 2 | |
| Net change in cash, cash equivalents and restricted cash from continuing operations | $ | 9 | | | $ | (44) | | | $ | 51 | |
For the year ended December 31, 2018, $273 million less cash was provided by operating activities compared to the same period in 2017. The change was principally due to:
•$128 million less cash provided by operations;
•$83 million related to discontinued operations;
•$49 million less cash received as dividends from unconsolidated entities primarily related to PHH Home Loans in 2017; and
•$39 million more cash used for accounts payable, accrued expenses and other liabilities,
partially offset by:
•$12 million less cash used for other assets;
•$9 million more cash provided by the net change in trade receivables; and
•$5 million less cash used for other operating activities.
For the year ended December 31, 2018, we used $55 million less cash for investing activities compared to the same period in 20162017 primarily due to:
•$40 million less cash used for investments in unconsolidated entities primarily related to $77Guaranteed Rate Affinity;
•$17 million less cash used for acquisition related payments, $24payments;
•$8 million of net cash proceeds received from the dissolution of our interest in PHH Home Loans, LLC; and
•$7 million more cash provided by other investing activities, and $11 million more cash received from PHH Home Loans,
partially offset by $55$15 million of cash used for our investment in Guaranteed Rate Affinity and $12 million more cash used for property and equipment additions.related to discontinued operations.
For the year ended December 31, 2017, $5702018, $297 million of cash was used in financing activities compared to $534$570 million of cash used during the same period in 2016. 2017. For the year ended December 31, 2018, $297 million of cash was used for:
•$402 million for the repurchase of our common stock;
•$45 million of dividend payments;
•$25 million of other financing payments primarily related to finance/capital leases;
•$25 million of quarterly amortization payments on the term loan facilities;
•$22 million for payments of contingent consideration;
•$10 million of tax payments related to net share settlement for stock-based compensation; and
•$3 million for cash paid as a result of the refinancing transactions in February 2018 related to $16 million of debt issuance costs and $4 million repayment of borrowings under the Term Loan B Facility, partially offset by $17 million of proceeds received under the Term Loan A Facility,
partially offset by:
•$200 million of additional borrowings under the Revolving Credit Facility; and
•$34 million related to discontinued operations.
For the year ended December 31, 2017, $570 million of cash was used for:
•$280 million for the repurchase of our common stock;
•$130 million net repayment of borrowings under the Revolving Credit Facility;Facility
•$49 million of dividend payments;
•$42 million of quarterly amortization payments on the term loan facilities;
•$2630 million of other financing payments partially related to finance/capital leases and interest rate swaps;
•$22 million for payments of contingent consideration;
$11 million net decrease in securitization borrowings;
•$11 million of tax payments related to net share settlement for stock-based compensation;
•$7 million related to discontinued operations; and
•$6 million of debt issuance costs;costs,
partially offset by,by:
•$8 million proceeds from exercise of stock options.
For the year ended December 31, 2016, $534 million of cash was used for:
the repayment of $758 million to reduce the Term Loan B facility;
the repayment of $500 million to retire 3.375% Senior Notes at maturity;
$195 million for the repurchase of our common stock;
$41 million of quarterly amortization payments on the term loan facilities;
$40 million net decrease in securitization borrowings;
$34 million of other financing payments partially related to capital leases and interest rate swaps;
$26 million of dividend payments;
$25 million for payments of contingent consideration;
$16 million of debt issuance costs; and
$6 million of tax payments related to net share settlement for stock-based compensation;
partially offset by,
$750 million of proceeds from the issuance of $250 million of 5.25% Senior Notes and $500 million of 4.875% Senior Notes; and
$355 million proceeds from issuance of the Term Loan A-1 facility.
Year ended December 31, 2016 vs. Year ended December 31, 2015
At December 31, 2016, we had $281 million of cash, cash equivalents and restricted cash, a decrease of $142 million compared to the balance of $423 million at December 31, 2015. The following table summarizes our cash flows for the years ended December 31, 2016 and 2015:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | Change |
| Cash provided by (used in): | | | | | |
| Operating activities | $ | 586 |
| | $ | 588 |
| | $ | (2 | ) |
| Investing activities | (191 | ) | | (211 | ) | | 20 |
|
| Financing activities | (534 | ) | | (275 | ) | | (259 | ) |
| Effects of change in exchange rates on cash, cash equivalents and restricted cash | (3 | ) | | (2 | ) | | (1 | ) |
| Net change in cash, cash equivalents and restricted cash | $ | (142 | ) | | $ | 100 |
| | $ | (242 | ) |
For the year ended December 31, 2016, $2 million less cash was provided by operating activities compared to 2015. The change was principally due to $25 million more cash used for accounts payable, accrued expenses and other liabilities, $6 million more cash used for other operating activities and $2 million less cash provided by operating results, partially offset by $31 million more cash provided by the net change in relocation and trade receivables.
For the year ended December 31, 2016, we used $20 million less cash for investing activities compared to 2015 primarily due to $32 million less cash used for acquisition related payments, partially offset by $9 million more cash used for other investing activities.
For the year ended December 31, 2016, $534 million of cash was used in financing activities compared to $275 million of cash used during 2015. For the year ended December 31, 2016, $534 million of cash was used for:
the repayment of $758 million to reduce the Term Loan B facility;
the repayment of $500 million to retire 3.375% Senior Notes at maturity;
$195 million for the repurchase of our common stock;
$41 million of quarterly amortization payments on the term loan facilities;
$40 million net decrease in securitization borrowings;
$34 million of other financing payments partially related to capital leases and interest rate swaps;
$26 million of dividend payments;
$25 million for payments of contingent consideration;
$16 million of debt issuance costs; and
$6 million of tax payments related to net share settlement for stock-based compensation;
partially offset by,
$750 million of proceeds from the issuance of $250 million of 5.25% Senior Notes and $500 million of 4.875% Senior Notes; and
$355 million proceeds from issuance of the Term Loan A-1 facility.
For the year ended December 31, 2015, $275 million of cash was used for:
$789 million of cash paid for the redemption of all of the outstanding $593 million of First Lien Notes and $196 million of First and a Half Lien Notes;
$39 million of cash paid for fees associated with early extinguishment of debt;
$24 million of other financing payments partially related to interest rate swaps and capital leases;
$21 million net decrease in securitization borrowings;
$19 million of quarterly amortization payments on the Term Loan B Facility;
payment of $10 million of debt transaction costs related to the Revolving Credit Facility amendment and issuance of the new Term Loan A Facility;
$7 million for payments of contingent consideration; and
$6 million of tax payments related to net share settlement for stock-based compensation;
partially offset by,
$435 million of proceeds from the issuance of the Term Loan A Facility; and
$200 million of incremental borrowings under the Revolving Credit Facility.
Financial Obligations
Indebtedness Table
As of December 31, 2017, the Company’s borrowing arrangements were as follows:
|
| | | | | | | | | | | | | | | | |
| | Interest Rate | | Expiration Date | | Principal Amount | | Unamortized Discount and Debt Issuance Costs | | Net Amount |
| Senior Secured Credit Facility: | | | | | | | | | |
Revolving Credit Facility (1) | (2) | | October 2020 | | $ | 70 |
| | $ * |
| | $ | 70 |
|
| Term Loan B | (3) | | July 2022 | | 1,083 |
| | 20 |
| | 1,063 |
|
| Term Loan A Facility: | | | | | | | | | |
| Term Loan A | (4) | | October 2020 | | 391 |
| | 1 |
| | 390 |
|
| Term Loan A-1 | (5) | | July 2021 | | 342 |
| | 3 |
| | 339 |
|
| Senior Notes | 4.50 | % | | April 2019 | | 450 |
| | 6 |
| | 444 |
|
| Senior Notes | 5.25 | % | | December 2021 | | 550 |
| | 4 |
| | 546 |
|
| Senior Notes | 4.875 | % | | June 2023 | | 500 |
| | 4 |
| | 496 |
|
Securitization obligations: (6) | | | | | | | | | |
| Apple Ridge Funding LLC (7) | June 2018 | | 181 |
| | * |
| | 181 |
|
| Cartus Financing Limited (8) | August 2018 | | 13 |
| | * |
| | 13 |
|
| Total (9) | $ | 3,580 |
| | $ | 38 |
| | $ | 3,542 |
|
_______________ | |
* | The debt issuance costs related to our Revolving Credit Facility and securitization obligations are classified as a deferred financing asset within other assets. |
| |
(1) | As of December 31, 2017, the Company had $1,050 million of borrowing capacity under its Revolving Credit Facility leaving $980 million of available capacity. The Revolving Credit Facility expires in October 2020, but is classified on the balance sheet as current due to the revolving nature of the facility. |
| |
(2) | Interest rates with respect to revolving loans under the Senior Secured Credit Facility at December 31, 2017 were based on, at the Company's option, (a) adjusted LIBOR plus an additional margin or (b) ABR plus an additional margin, in each case subject to adjustment based on the then current senior secured leverage ratio. Based on the previous quarter senior secured leverage ratio, the LIBOR margin was 2.00% and the ABR margin was 1.00% for the three months ended December 31, 2017. |
| |
(3) | The Term Loan B provided for quarterly amortization payments totaling 1% per annum of the original principal amount. The interest rate with respect to term loans under the Term Loan B was based on, at the Company’s option, (a) adjusted LIBOR plus 2.25% (with a LIBOR floor of 0.75%) or (b) JPMorgan Chase Bank, N.A.’s prime rate ("ABR") plus 1.25% (with an ABR floor of 1.75%). |
| |
(4) | The Term Loan A provided for quarterly amortization payments, which commenced March 31, 2016, totaling per annum 5%, 5%, 7.5%, 10.0% and 12.5% of the original principal amount of the Term Loan A in 2016, 2017, 2018, 2019 and 2020, respectively. The interest rates with respect to term loans under the Term Loan A were based on, at the Company's option, (a) adjusted LIBOR plus an additional margin or (b) ABR plus an additional margin, in each case subject to adjustment based on the then current senior secured leverage ratio. Based on the previous quarter senior secured leverage ratio, the LIBOR margin was 2.00% and the ABR margin was 1.00% for the three months ended December 31, 2017. |
| |
(5) | The Term Loan A-1 provided for quarterly amortization payments, which commenced on September 30, 2016, totaling per annum 2.5%, 2.5%, 5%, 7.5% and 10.0% of the original principal amount of the Term Loan A-1, with the last amortization payment made on June 30, 2021. The interest rates with respect to term loans under the Term Loan A-1 were based on, at the Company's option, (a) adjusted LIBOR plus an additional margin or (b) ABR plus an additional margin, in each case subject to adjustment based on the then current senior secured leverage ratio. Based on the previous quarter senior secured leverage ratio, the LIBOR margin was 2.00% and the ABR margin was 1.00% for the three months ended December 31, 2017. |
| |
(6) | Available capacity is subject to maintaining sufficient relocation related assets to collateralize these securitization obligations. |
| |
(7) | In November 2017, the capacity of the Apple Ridge facility was reduced from $325 million to $250 million. As of December 31, 2017, the Company had $250 million of borrowing capacity under the Apple Ridge Funding LLC securitization program leaving $69 million of available capacity. |
| |
(8) | Consists of a £10 million revolving loan facility and a £5 million working capital facility. As of December 31, 2017, the Company had $20 million of borrowing capacity under the Cartus Financing Limited securitization program leaving $7 million of available capacity. |
| |
(9) | Not included in this table is the Company's Unsecured Letter of Credit Facility which had a capacity of $74 million with $69 million utilized at a weighted average rate of 3.24% at December 31, 2017. |
Refinancing
In February 2018, the Company completed debt transactions which:
amended its revolving credit facility, by increasing the capacity from $1,050 million to $1,400 million and extending the maturity date from October 2020 to February 2023 (the "New Revolving Credit Facility");
refinanced the existing aggregate $733 million Term Loan A and Term Loan A-1 tranches due October 2020 and July 2021, respectively, into a new single tranche of $750 million Term Loan A due February 2023 (which included incremental borrowings of $17 million) (the "New Term Loan A"); and
refinanced the existing $1,083 million Term Loan B due July 2022 with a new Term Loan B issued at par in the amount of $1,080 million and with a maturity date in February 2025 (the "New Term Loan B").
Pro Forma Indebtedness Table
The following table sets forth the Company's borrowing arrangements as of December 31, 2017 on a pro forma basis giving effect to the debt transactions described above (the "Refinancing"): |
| | | | | | | |
| | Interest Rate | | Expiration Date | | Principal Amount |
| Senior Secured Credit Facility: | | | | | |
New Revolving Credit Facility (1) | (2) | | February 2023 | | $ | 70 |
|
| New Term Loan B | (3) | | February 2025 | | 1,080 |
|
| Term Loan A Facility: | | | | | |
| New Term Loan A | (4) | | February 2023 | | 750 |
|
| Senior Notes | 4.50% | | April 2019 | | 450 |
|
| Senior Notes | 5.25% | | December 2021 | | 550 |
|
| Senior Notes | 4.875% | | June 2023 | | 500 |
|
| Securitization obligations: | | | | | |
| Apple Ridge Funding LLC | June 2018 | | 181 |
|
| Cartus Financing Limited | August 2018 | | 13 |
|
| Total | $ | 3,594 |
|
_______________ | |
(1) | Giving effect to the Refinancing, the Company had $1,400 million of borrowing capacity under its New Revolving Credit Facility. On February 23, 2018, the Company had $242 million in outstanding borrowings under the New Revolving Credit Facility, leaving $1,158 million of available capacity. |
| |
(2) | Interest rates with respect to revolving loans under the Senior Secured Credit Facility continue to be based on, at the Company's option, (a) adjusted LIBOR plus an additional margin or (b) ABR plus an additional margin, in each case subject to adjustment based on the then current senior secured leverage ratio under the Senior Secured Credit Facility, however the pricing grid for the New Revolving Credit Facility has been expanded to include a new pricing adjustment where if the senior secured leverage ratio is less 2.00 to 1.00, the applicable LIBOR margin is 1.75% and the ABR margin is 0.75%. |
| |
(3) | The New Term Loan B continues to provide for quarterly amortization payments totaling 1% per annum of the original principal amount. The interest rate with respect to term loans under the New Term Loan B remains unchanged and is based on, at the Company’s option, (a) adjusted LIBOR plus 2.25% (with a LIBOR floor of 0.75%) or (b) JPMorgan Chase Bank, N.A.’s prime rate ("ABR") plus 1.25% (with an ABR floor of 1.75%). |
| |
(4) | The New Term Loan A provides for quarterly amortization payments on the last day of each quarter, which commence June 30, 2018, totaling per annum 2.5%, 2.5%, 5.0%, 7.5% and 10.0% of the original principal amount of the New Term Loan A, with the balance of the New Term Loan A due in full on February 8, 2023. The interest rates with respect to term loans under the New Term Loan A are the same that had been in place under Term Loan A-1 and are based on, at the Company's option, (a) adjusted LIBOR plus an additional margin or (b) ABR plus an additional margin, in each case subject to adjustment based on the then current senior secured leverage ratio. |
See Note 8, "Short10, "Short and Long-Term Debt", into the consolidated financial statements,Consolidated Financial Statements for additional information on the Company's indebtedness and Note 19, "Subsequent Events"as of December 31, 2019.
LIBOR Transition
In July 2017, the Financial Conduct Authority, the UK regulator responsible for the oversight of the London Interbank Offering Rate ("LIBOR"), announced that it would no longer require banks to participate in the consolidatedLIBOR submission process and would cease oversight over the rate after the end of 2021. Various industry groups continue to discuss replacement benchmark rates, the process for amending existing LIBOR-based contracts, and the potential economic impacts of different alternatives. For example, in the U.S., a proposed replacement benchmark rate is the Secured Overnight Funding Rate ("SOFR"), which is an overnight rate based on secured financing, although uncertainty exists as to the transition process and broad acceptance of SOFR as the primary alternative to LIBOR.
Our primary interest rate exposure is interest rate fluctuations, specifically with respect to LIBOR, due to its impact on our variable rate borrowings under the Senior Secured Credit Facility (for our Revolving Credit Facility and Term Loan B) and the Term Loan A Facility (for our Term Loan A). As of December 31, 2018, we had interest rate swaps based on LIBOR with a notional value of $1,600 million to manage a portion of our exposure to changes in interest rates associated with our variable rate borrowings.
At this time, it is not possible to predict the effect of any changes to LIBOR, any phase out of LIBOR or any establishment of alternative benchmark rates. LIBOR may disappear entirely or perform differently than in the past. Any new benchmark rate will likely not replicate LIBOR exactly and if future rates based upon a successor rate (or a new method of calculating LIBOR) are higher than LIBOR rates as currently determined, it could result in an increase in the cost of our variable rate indebtedness and may have a material adverse effect on our financial statements, for a detailed descriptioncondition and results of the Refinancing.operations.
Covenants under the Senior Secured Credit Facility, Term Loan A Facility and Indentures
The Senior Secured Credit Facility,Agreement, Term Loan A Facility,Agreement, the Unsecured Letter of Credit Facility and the indentures governing the Unsecured Notes contain various covenants that limit (subject to certain exceptions) Realogy Group’s ability to, among other things:
•incur or guarantee additional debt or issue disqualified stock or preferred stock;
•pay dividends or make distributions to Realogy Group’s stockholders, including Realogy Holdings;
•repurchase or redeem capital stock;
•make loans, investments or acquisitions;
•incur restrictions on the ability of certain of Realogy Group's subsidiaries to pay dividends or to make other payments to Realogy Group;
•enter into transactions with affiliates;
•create liens;
•merge or consolidate with other companies or transfer all or substantially all of Realogy Group's and its material subsidiaries' assets;
•transfer or sell assets, including capital stock of subsidiaries; and
•prepay, redeem or repurchase subordinated indebtedness.
As a result of the covenants to which we remain subject, we are limited in the manner in which we conduct our business and we may be unable to engage in favorable business activities or finance future operations or capital needs. In addition, the Senior Secured Credit FacilityAgreement and Term Loan A FacilityAgreement require us to maintain a senior secured leverage ratio. We are further restricted under the indenture governing the 9.375% Senior Notes from making restricted payments, including our ability to issue dividends in excess of $45 million per calendar year or our ability to repurchase shares in any amount for so long as our consolidated leverage ratio is equal to or greater than 4.0 to 1.0 and then (unless that ratio falls below 3:00 to 1:00) only to the extent of available cumulative credit, as defined under the indenture governing the 9.375% Senior Notes.
Senior Secured Leverage Ratio applicable to our Senior Secured Credit Facility and Term Loan A Facility
The senior secured leverage ratio is tested quarterly and may not exceed 4.75 to 1.00. The senior secured leverage ratio is measured by dividing Realogy Group's total senior secured net debt by the trailing twelve-month EBITDA calculated on a Pro Forma Basis, as those terms are defined in the senior secured credit facilities.Senior Secured Credit Agreement. Total senior secured net debt does not include unsecured indebtedness, including the Unsecured Notes, or the securitization obligations. EBITDA calculated on a Pro Forma Basis, as defined in the senior secured credit facilities,Senior Secured Credit Agreement, includes adjustments to EBITDA for restructuring costs, former parent legacy cost (benefit) items, net, loss (gain) on the early extinguishment of debt, non-cash charges and incremental securitization interest costs, as well as pro forma cost savings for restructuring initiatives, the pro forma effect of business optimization initiatives and the pro forma effect of acquisitions and new franchisees, in each case calculated as of the beginning of the twelve-month period. The Company was in compliance with the senior secured leverage ratio covenant at December 31, 2017.2019.
A reconciliation of net loss attributable to Realogy Group to Operating EBITDA and EBITDA calculated on a Pro Forma Basis, as those terms are defined in the Senior Secured Credit Agreement, for the twelve months ended December 31, 2019 is set forth in the following table:
| | | | | | | | |
| | For the Year Ended December 31, 2019 |
| Net loss attributable to Realogy Group (a) | | $ | (188) | |
| Income tax benefit | | (22) | |
| Loss before income taxes | | (210) | |
| Depreciation and amortization | | 169 | |
| Interest expense, net | | 249 | |
| Restructuring costs, net | | 42 | |
| Impairments | | 249 | |
| Former parent legacy cost, net | | 1 | |
| Gain on the early extinguishment of debt | | (5) | |
| Income statement impact of discontinued operations | | 95 | |
| Operating EBITDA (b) | | 590 | |
| Bank covenant adjustments: | | |
| Operating EBITDA for discontinued operations | | (28) | |
| Pro forma effect of business optimization initiatives (c) | | 31 | |
| Non-cash charges (d) | | 30 | |
| Pro forma effect of acquisitions and new franchisees (e) | | 3 | |
| EBITDA as defined by the Senior Secured Credit Agreement | | $ | 626 | |
| Total senior secured net debt (f) | | $ | 1,895 | |
| Senior secured leverage ratio | | 3.03 | x |
_______________
(a)Net loss attributable to Realogy consists of: (i) loss of $99 million for the first quarter of 2019, (ii) income of $69 million for the second quarter of 2019, (iii) loss of $113 million for the third quarter of 2019 and (iv) loss of $45 million for the fourth quarter of 2019.
(b)Consists of total Company Operating EBITDA including discontinued operations of: (i) negative $4 million for the first quarter of 2019, (ii) $245 million for the second quarter of 2019, (iii) $223 million for the third quarter of 2019 and (iv) $126 million for the fourth quarter of 2019.
(c)Represents the twelve-month pro forma effect of business optimization initiatives.
(d)Represents the elimination of non-cash expenses including $28 million of stock-based compensation expense and $2 million for the change in the allowance for doubtful accounts for the twelve months ended December 31, 2019.
(e)Represents the estimated impact of acquisitions and franchise sales activity, net of brokerages that exited our franchise system as if these changes had occurred on January 1, 2019. Franchisee sales activity is comprised of new franchise agreements as well as growth through acquisitions and independent sales agent recruitment by existing franchisees with our assistance. We have made a number of assumptions in calculating such estimates and there can be no assurance that we would have generated the projected levels of Operating EBITDA had we owned the acquired entities or entered into the franchise contracts as of January 1, 2019.
(f)Represents total borrowings under the senior secured credit facilities and borrowings secured by a first priority lien on our assets of $1,965 million plus $35 million of finance lease obligations less $105 million of readily available cash as of December 31, 2019. Pursuant to the terms of our senior secured credit facilities, total senior secured net debt does not include our securitization obligations or unsecured indebtedness, including the Unsecured Notes.
Consolidated Leverage Ratio applicable to our 9.375% Senior Notes
The consolidated leverage ratio is measured by dividing Realogy Group's total net debt by the trailing twelve-month EBITDA. EBITDA, as defined in the indenture governing the 9.375% Senior Notes, is substantially similar to EBITDA calculated on a Pro Forma Basis, as those terms are defined in the Senior Secured Credit Agreement. Net debt under the indenture is Realogy Group's total indebtedness (excluding securitizations) less (i) its cash and cash equivalents in excess of restricted cash and (ii) a $200 million seasonality adjustment permitted when measuring the ratio on a date during the period of March 1 to May 31.
The consolidated leverage ratio under the indenture governing the 9.375% Senior Notes for the twelve months ended December 31, 2019 is set forth in the following table:
| | | | | | | | |
| | As of December 31, 2019 |
| Revolver | | $ | 190 | |
| Term Loan A | | 717 | |
| Term Loan B | | 1,058 | |
| 5.25% Senior Notes | | 550 | |
| 4.875% Senior Notes | | 407 | |
| 9.375% Senior Notes | | 550 | |
| Finance lease obligations | | 35 | |
| Corporate Debt (excluding securitizations) | | 3,507 | |
| Less: Cash and cash equivalents | | 235 | |
| Net debt under the indenture governing the 9.375% Senior Notes due 2027 | | $ | 3,272 | |
| | |
| EBITDA as defined under the indenture governing the 9.375% Senior Notes due 2027 (a) | | $ | 626 | |
| | |
| Consolidated leverage ratio under the indenture governing the 9.375% Senior Notes due 2027 | | 5.2 | x |
_______________
(a)As set forth in the immediately preceding table, for the twelve months ended December 31, 2019, EBITDA, as defined under the indenture governing the 9.375% Senior Notes, was the same as EBITDA calculated on a Pro Forma Basis, as those terms are defined in the Senior Secured Credit Agreement.
See Note 8,10, "Short and Long-Term Debt—Senior Secured Credit Facility" and "Short and Long-Term Debt—, "—Term Loan A Facility" and "—Unsecured Notes" to the Consolidated Financial Statements for additional information.
At December 31, 2019, the amount of the Company's cumulative credit under the 9.375% Senior Notes was approximately $74 million. The Company made approximately $21 million in dividend payments since issuance of the 9.375% Senior Notes, which applied against the cumulative credit basket under the indenture governing the 9.375% Senior Notes, would result in approximately $53 million remaining under that basket for restricted payments. This basket cannot be utilized until the Company's consolidated leverage ratio is less than 4.0 to 1.0.
Non-GAAP Financial Measures
The SEC has adopted rules to regulate the use in filings with the SEC and in public disclosures of "non-GAAP financial measures," such as EBITDA and Operating EBITDA. These measures are derived on the basis of methodologies other than in accordance with GAAP.
Operating EBITDA is defined by us as net income (loss) before depreciation and amortization, interest expense, net, (other than relocation services interest for securitization assets and securitization obligations) and income taxes, and is our primary non-GAAP measure. Operating EBITDA is defined by usother items that are not core to the operating activities of the Company such as EBITDA before restructuring losscharges, former parent legacy items, gains or losses on the early extinguishment of debt, impairments, gains or losses on discontinued operations and former parent legacy items andgains or losses on the sale of investments or other assets. Operating EBITDA is used as a supplementary financialour primary non-GAAP measure.
We present EBITDA and Operating EBITDA because we believe they areit is useful as a supplemental measuresmeasure in evaluating the performance of our operating businesses and provideprovides greater transparency into our results of operations. Our management, including our chief operating decision maker, uses Operating EBITDA as a factor in evaluating the performance of our business. EBITDA and Operating EBITDA should not be considered in isolation or as a substitute for net income or other statement of operations data prepared in accordance with GAAP.
We believe Operating EBITDA facilitates company-to-company operating performance comparisons by backing out potential differences caused by variations in capital structures (affecting net interest expense), taxation, the age and book depreciation of facilities (affecting relative depreciation expense) and the amortization of intangibles, as well as other items that are not core to the operating activities of the Company such as restructuring charges, gains or losses on the early extinguishment of debt, former parent legacy items, impairments, gains or losses on discontinued operations and gains or losses on the sale of investments or other assets, which may vary for different companies for reasons unrelated to operating performance. We further believe that Operating EBITDA is frequently used by securities analysts, investors and other interested parties in their evaluation of companies, many of which present an Operating EBITDA measure when reporting their results.
Operating EBITDA havehas limitations as an analytical tools,tool, and you should not consider EBITDA and Operating EBITDA either in isolation or as substitutesa substitute for analyzing our results as reported under GAAP. Some of these limitations are:
these measures do•this measure does not reflect changes in, or cash required for, our working capital needs;
these measures do•this measure does not reflect our interest expense (except for interest related to our securitization obligations), or the cash requirements necessary to service interest or principal payments on our debt;
these measures do•this measure does not reflect our income tax expense or the cash requirements to pay our taxes;
these measures do•this measure does not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments;
•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often require replacement in the future, and these measures dothis measure does not reflect any cash requirements for such replacements; and
•other companies may calculate these measuresthis measure differently so they may not be comparable.
Set forth in the table below is a reconciliation of net income attributable to Realogy to EBITDA and Operating EBITDA for the years ended December 31, 2017, 2016 and 2015:
|
| | | | | | | | | | | |
| | For the Year Ended December 31 |
| | 2017 | | 2016 | | 2015 |
| Net income attributable to Realogy | $ | 431 |
| | $ | 213 |
| | $ | 184 |
|
| Income tax (benefit) expense | (65 | ) | | 144 |
| | 110 |
|
| Income before income taxes | 366 |
| | 357 |
| | 294 |
|
| Interest expense, net | 158 |
| | 174 |
| | 231 |
|
| Depreciation and amortization (a) | 201 |
| | 202 |
| | 201 |
|
| EBITDA | 725 |
| | 733 |
| | 726 |
|
| EBITDA adjustments: | | | | | |
| Restructuring costs | 12 |
| | 39 |
| | 10 |
|
| Former parent legacy benefit, net | (10 | ) | | (2 | ) | | (15 | ) |
| Loss on the early extinguishment of debt | 5 |
| | — |
| | 48 |
|
| Operating EBITDA | $ | 732 |
| | $ | 770 |
| | $ | 769 |
|
_______________
| |
(a) | Depreciation and amortization for the year endedDecember 31, 2017 includes $3 million of amortization expense related to Guaranteed Rate Affinity's purchase accounting included in the "Equity in earnings of unconsolidated entities" line on the Consolidated Statement of Operations.
|
Contractual Obligations
The following table summarizes our future contractual obligations as of December 31, 2017:2019:
| | | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Thereafter | | Total | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | Thereafter | | Total |
| Revolving Credit Facility (a) | $ | — |
| | $ | — |
| | $ | 70 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 70 |
| Revolving Credit Facility (a) | $ | — | | | $ | — | | | $ | — | | | $ | 190 | | | $ | — | | | $ | — | | | $ | 190 | |
| Term Loan B (b) | 11 |
| | 11 |
| | 11 |
| | 11 |
| | 1,039 |
| | — |
| | 1,083 |
| Term Loan B (b) | 11 | | | 11 | | | 11 | | | 11 | | | 11 | | | 1,003 | | | 1,058 | |
| Term Loan A (c) | 33 |
| | 44 |
| | 314 |
| | — |
| | — |
| | — |
| | 391 |
| Term Loan A (c) | 33 | | | 51 | | | 70 | | | 563 | | | — | | | — | | | 717 | |
| Term Loan A-1 (d) | 13 |
| | 22 |
| | 31 |
| | 276 |
| | — |
| | — |
| | 342 |
| |
| 4.50% Senior Notes | — |
| | 450 |
| | — |
| | — |
| | — |
| | — |
| | 450 |
| |
| 5.25% Senior Notes | — |
| | — |
| | — |
| | 550 |
| | — |
| | — |
| | 550 |
| 5.25% Senior Notes | — | | | 550 | | | — | | | — | | | — | | | — | | | 550 | |
| 4.875% Senior Notes | — |
| | — |
| | — |
| | — |
| | — |
| | 500 |
| | 500 |
| 4.875% Senior Notes | — | | | — | | | — | | | 407 | | | — | | | — | | | 407 | |
| Interest payments on long-term debt (e) | 158 |
| | 141 |
| | 120 |
| | 99 |
| | 47 |
| | 12 |
| | 577 |
| |
| Securitized obligations (f) | 194 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 194 |
| |
| Operating leases (g) | 163 |
| | 142 |
| | 116 |
| | 91 |
| | 72 |
| | 196 |
| | 780 |
| |
| Capital leases (including imputed interest) | 14 |
| | 9 |
| | 5 |
| | 3 |
| | — |
| | — |
| | 31 |
| |
| 9.375% Senior Notes | | 9.375% Senior Notes | — | | | — | | | — | | | — | | | — | | | 550 | | | 550 | |
| Interest payments on long-term debt (d) | | Interest payments on long-term debt (d) | 194 | | | 192 | | | 160 | | | 114 | | | 99 | | | 127 | | | 886 | |
| Securitized obligations (e) | | Securitized obligations (e) | 206 | | | — | | | — | | | — | | | — | | | — | | | 206 | |
| Leases (including imputed interest) (f)(g) | | Leases (including imputed interest) (f)(g) | 164 | | | 146 | | | 118 | | | 89 | | | 66 | | | 153 | | | 736 | |
| Purchase commitments (h) | 57 |
| | 23 |
| | 15 |
| | 13 |
| | 18 |
| | 222 |
| | 348 |
| Purchase commitments (h) | 44 | | | 24 | | | 11 | | | 9 | | | 8 | | | 217 | | | 313 | |
| Total (i)(j) | $ | 643 |
| | $ | 842 |
| | $ | 682 |
| | $ | 1,043 |
| | $ | 1,176 |
| | $ | 930 |
| | $ | 5,316 |
| Total (i)(j) | $ | 652 | | | $ | 974 | | | $ | 370 | | | $ | 1,383 | | | $ | 184 | | | $ | 2,050 | | | $ | 5,613 | |
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(a) | The Revolving Credit Facility expires in October 2020; however outstanding borrowings under this facility are classified on the balance sheet as current due to the revolving nature of the facility. |
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(b) | The Company’s Term Loan B has quarterly amortization payments totaling 1% per annum of the $1,100 million original principal amount of the Term Loan B issued under the Amended and Restated Credit Agreement with the balance payable in July 2022. |
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(c) | The Company’s Term Loan A has quarterly amortization payments, which commenced March 31, 2016, totaling per annum 5%, 5%, 7.5%, 10.0% and 12.5% of the $435 million original principal amount of the Term Loan A in 2017, 2018, 2019, 2020 and 2021, respectively, with the balance payable in October 2020. |
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(d) | The Company’s Term Loan A-1 has quarterly amortization payments, which commenced September 30, 2016, totaling per annum 2.5%, 2.5%, 5%, 7.5% and 10.0% of the $355 million original principal amount of the Term Loan A-1, with the last amortization payment made on June 30, 2021. |
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(e) | Interest payments are based on applicable interest rates in effect at December 31, 2017 and include the impact of derivative instruments designed to fix the interest rate of a portion of the Company's variable rate debt.(a)The Revolving Credit Facility expires in February 2023; however outstanding borrowings under this facility are classified on the balance sheet as current due to the revolving nature of the facility. (b)The Company’s Term Loan B has quarterly amortization payments totaling 1% per annum of the $1,080 million original principal amount of the Term Loan B issued under the Amended and Restated Credit Agreement with the balance payable in February 2025. (c)The Company’s Term Loan A has quarterly amortization payments, which commenced June 30, 2018, totaling per annum 2.5%, 2.5%, 5.0%, 7.5% and 10.0% of the $750 million original principal amount of the Term Loan A with the balance payable in February 2023. (d)Interest payments are based on applicable interest rates in effect at December 31, 2019 and include the impact of derivative instruments designed to fix the interest rate of a portion of the Company's variable rate debt. (e)The securitization facilities are held by Cartus Relocation Services and will no longer be assets or obligations of the Company after the planned sale of that business. (f)The lease amounts included in the above table are not discounted and do not include variable costs. (g)Includes $7 million associated with operating leases related to discontinued operations. (h)Purchase commitments include a minimum licensing fee that the Company is required to pay to Sotheby’s from 2009 through 2054. The annual minimum licensing fee is approximately $2 million. Purchase commitments also include a minimum licensing fee to be paid to Meredith from 2009 through 2058 for the licensing of the Better Homes and Gardens Real Estate brand. The annual minimum fee was $4 million in 2019 and will generally remain the same thereafter. (i)The contractual obligations table does not include other non-current liabilities such as pension liabilities of $35 million and unrecognized tax benefits of $20 million as the Company is not able to estimate the year in which these liabilities could be paid. (j)The contractual obligations table does not include other incentives offered to certain franchisees which are paid at certain points during the franchise agreement period provided the franchisee maintains a certain level of annual gross commission income and the franchisee is in compliance with the terms of the franchise agreement at the time of payment. If current annual gross commission income levels are maintained by our franchisees, we would pay a total of $14 million over the next five years.
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(f) | The Apple Ridge securitization facility expires in June 2018 and the Cartus Financing Limited agreements expire in August 2018. |
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(g) | The operating lease amounts included in the above table do not include variable costs such as maintenance, insurance and real estate taxes. |
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(h) | Purchase commitments include a minimum licensing fee that the Company is required to pay to Sotheby’s from 2009 through 2054. The annual minimum licensing fee is approximately $2 million. Purchase commitments also include a minimum licensing fee to be paid to Meredith from 2009 through 2058 for the licensing of the Better Homes and Gardens Real Estate brand. The annual minimum fee was $4 million in 2017 and will generally remain the same thereafter.
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(i) | The contractual obligations table does not include other non-current liabilities such as pension liabilities of $33 million and unrecognized tax benefits of $22 million as the Company is not able to estimate the year in which these liabilities could be paid.
|
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(j) | The contractual obligations table does not include non-standard incentives offered to certain franchisees which are paid at certain points during the franchise agreement period provided the franchisee maintains a certain level of annual gross commission income and the franchisee is in compliance with the terms of the franchise agreement at the time of payment. If current annual gross commission income levels are maintained by our franchisees, we would pay a total of $5 million over the next two years. |
Critical Accounting Policies
The preparation of our consolidated financial statements in accordance with generally accepted accounting principles is based on the selection and application of accounting policies that require us to make significant estimates and assumptions about the effects of matters that are inherently uncertain. Several of the estimates and assumptions we are required to make relate to matters that are inherently uncertain as they pertain to future events. We consider the accounting policies discussed below to be critical to the understanding of our financial statements and involve subjective and complex judgments that could potentially affect reported results. Actual results could differ from our estimates and assumptions and any such differences could be material to our consolidated financial statements.
Impairment of goodwill and other indefinite-lived intangible assets
Goodwill represents the excess of acquisition costs over the fair value of the net tangible assets and identifiable intangible assets acquired in a business combination. Indefinite-livedOther indefinite-lived intangible assets primarily consist of trademarks acquired in business combinations. Goodwill and other indefinite-lived assets are not amortized, but are subject to impairment testing. The aggregate carrying values of our goodwill and other indefinite-lived intangible assets were $3,710$3,300 million and $767$692 million, respectively, at December 31, 20172019 and are subject to an impairment testingassessment annually as of October 1, or whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. This testingassessment compares carrying values of the goodwill reporting units and other indefinite lived intangible assets to their respective fair values and, when appropriate, the carrying value is reduced to fair value.
In testing goodwill, the fair value of oureach reporting unitsunit is estimated using the income approach, a discounted cash flow approach utilizingapproach. For the other indefinite lived intangible assets, fair value is estimated using the relief from royalty method. Management utilizes long-term cash flow forecasts and ourthe Company's annual operating plans adjusted for terminal value assumptions.
We determine the The fair value of ourthe Company's reporting units and other indefinite lived intangible assets are determined utilizing ourthe best estimate of future revenues, operating expenses, cash flows,including commission expense, market and general economic conditions, trends in the industry, as well as assumptions that we believemanagement believes marketplace participants would utilize including discount rates, cost of capital, trademark royalty rates, and long-term growth rates. The trademark royalty rate was determined by reviewing similar trademark agreements with third parties. Although we believe ourmanagement believes that assumptions are reasonable, actual results may vary significantly. These impairment testsassessments involve the use of accounting estimates and assumptions, changes in which could materially impact our financial condition or operating performance if actual results differ from such estimates and assumptions. To address this uncertainty, we performa sensitivity analysis is performed on key estimates and assumptions.
Based upon the impairment analysis performed in the fourth quarter of 2017, there was no impairment of goodwill or other indefinite-lived intangible assets for 2017. However, significantSignificant negative industry or economic trends, disruptions to our business, unexpected significant changes or planned changes in use of the assets, a decrease in our business results, growth rates that fall below our assumptions, divestitures, and a sustained decline in our stock price and market capitalization declines may have a negative effect on the fair values.values and key valuation assumptions, and such changes could result in changes to our estimates of our fair value and a material impairment of goodwill or other indefinite-lived intangible assets.
During the third quarter of 2019, management determined that the decrease in the stock price of the Company and the impact on future earnings related to the discontinuation of the USAA affinity program qualified as triggering events for all of its reporting units and accordingly management performed an impairment assessment of goodwill and other indefinite-lived intangible assets as of September 1, 2019. The impairment assessment indicated that the carrying value of Realogy Brokerage Group exceeded its estimated fair value by $180 million primarily as a result of a reduction in Realogy Brokerage Group's long-term forecast. Accounting Standard Update No. 2017-04 (Topic 350), "Simplifying the Test of Goodwill Impairment", which the Company early adopted in the third quarter of 2019, requires that the impairment charge and deferred tax effect are calculated using the simultaneous equation method which effectively grosses up the goodwill impairment charge to account for the related tax benefit so that the resulting carrying value does not exceed the calculated fair value. As a result, management recognized a goodwill impairment charge to reduce goodwill at Realogy Brokerage Group by $237 million offset by an income tax benefit of $57 million resulting in a net reduction in carrying value of $180 million. The impairment charge is recorded on the impairment line in the accompanying Consolidated Statements of Operations and is non-cash in nature.
The results of the Company's interim impairment test indicated no other impairment charges were required for the other reporting units or other indefinite-lived intangibles. Management evaluated the effect of lowering the estimated fair value for each of the passing reporting units by 10% and determined that no impairment of goodwill or other indefinite-lived intangible assets would have been recognized under this evaluation. Based upon the impairment assessment performed in the fourth
quarter of 2019, 2018 and 2017, there was no impairment of goodwill or other indefinite-lived intangible assets for these years. Management evaluated the effect of lowering the estimated fair value for each of the passing reporting units by 10% and determined no impairment of goodwill or other indefinite-lived intangible assets would have been recognized under this evaluation for 2018 or 2017.
Common stock valuation
On an annual basis, we grant stock-based awards to certain senior management, employees and directors. These awards are measured based on the fair value on the grant date. The fair value of restricted stock, restricted stock units and performance share units without a market condition is equal to the closing sale price of the Company's common stock on the date of grant. The fair value of options is estimated on the date of grant using the Black-Scholes option-pricing model and the fair value of performance share units with market conditions is estimated on the date of grant using the Monte Carlo Simulation method. Expense for stock-based awards is recognized over the service period based on the vesting requirements, or when requisite performance metrics or milestones are achieved, and forfeitures are recognized as they occur. Determining the fair value of stock-based awards at the grant date requires considerable judgment, including estimating expected volatility, expected term and risk-free rate.
Our expected volatility is based on the average volatility rates of the Company and similar actively traded companies since we only have trading history as a public company since October 2012. The expected term is calculated based on the simplified method and is estimated to be 6.25 years for time vesting stock options. The risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of the grant using the estimated grant holding period. If factors change and we employ different assumptions, the fair value of future awards and resulting stock-based compensation expense may differ significantly from what we have estimated historically.
Income taxes
Deferred tax assets and liabilities are determined based on the difference between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Our provision for income taxes is based on domestic and international statutory income tax rates in the jurisdictions in which we operate. Significant judgment is required in determining income tax provisions as well as deferred tax asset and liability balances, including the estimation of valuation allowances and the evaluation of tax positions.
Net deferred tax assets and liabilities are primarily comprised of temporary differences, net operating loss carryforwards and tax credit carryforwards that are available to reduce taxable income in future periods. The determination of the amount of valuation allowance to be provided on deferred tax assets involves estimates regarding (1) the timing and
amount of the reversal of taxable temporary differences, (2) expected future taxable income, and (3) the impact of tax planning strategies.
Significant judgment is required in determining income tax provisions and in evaluating tax positions. We establish additional reserves for income taxes when, despite the belief that tax positions are fully supportable, there remain certain positions that do not meet the minimum recognition threshold. The approach for evaluating certain and uncertain tax positions is defined by the authoritative guidance and this guidance determines when a tax position is more likely than not to be sustained upon examination by the applicable taxing authority. In the normal course of business, the Company and its subsidiaries are examined by various federal, state and foreign tax authorities. We regularly assess the potential outcomes of these examinations and any future examinations for the current or prior years in determining the adequacy of our provision for income taxes. We continually assess the likelihood and amount of potential adjustments and adjust the income tax provision, the current tax liability and deferred taxes in the period in which the facts that give rise to a revision become known.
See "Item 7.—Management’s Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of the 2017 Tax Act.
Recently Issued Accounting Pronouncements
See Note 2 of the Notes to the Consolidated Financial Statements for a discussion of recently issued accounting pronouncements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risks.
We are exposed to market risk from changes in interest rates primarily through our senior secured debt. At December 31, 2017,2019, our primary interest rate exposure was to interest rate fluctuations, specifically LIBOR, due to its impact on our variable rate borrowings of our Revolving Credit Facility and Term Loan B under the Senior Secured Credit Facility and the Term Loan A Facility. Given that our borrowings under the Senior Secured Credit Facility and Term Loan
A Facility are generally based upon LIBOR, this rate (or any replacement rate) will be the Company's primary market risk exposure for the foreseeable future.future. We do not have significant exposure to foreign currency risk nor do we expect to have significant exposure to foreign currency risk in the foreseeable future.
We assess our market risk based on changes in interest rates utilizing a sensitivity analysis. The sensitivity analysis measures the potential impact on earnings, fair values and cash flows based on a hypothetical change (increase and decrease) in interest rates. We exclude the fair values of relocation receivables and advances and securitization borrowings from our sensitivity analysis because we believe the interest rate risk on these assets and liabilities is mitigated as the rate we earn on relocation receivables and advances and the rate we incur on our securitization borrowings are based on similar variable indices.
At December 31, 2017,2019, we had variable interest rate long-term debt outstanding under our Senior Secured Credit Facility and Term Loan A Facility of $1,886 million, which excludes $194 million of securitization obligations.$1,965 million. The weighted average interest rate on the outstanding amounts under our Senior Secured Credit Facility and Term Loan A Facility at December 31, 20172019 was 3.70%4.01%. The interest rate with respect to the Term Loan B is based on adjusted LIBOR plus 2.25% (with a LIBOR floor of 0.75%). The interest rates with respect to the Revolving Credit Facility and term loans under the Term Loan A Facility are based on adjusted LIBOR plus an additional margin subject to adjustment based on the current senior secured leverage ratio. Based on the December 31, 20172019 senior secured leverage ratio, the LIBOR margin was 2.00%2.25%. At December 31, 20172019, the one-month LIBOR rate was 1.56%1.76%; therefore, we have estimated that a 0.25% increase in LIBOR would have a $5 million impact on our annual interest expense.
We have entered intoAs of December 31, 2019, we had interest rate swaps with a notional value of $1,475$1,600 million at December 31, 2017 to manage a portion of our exposure to changes in interest rates associated with our $1,886$1,965 million of variable rate borrowings. Our interest rate swaps were as follows:
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| | | | | | | |
| Notional Value (in millions) | | Commencement Date | | Expiration Date | |
$225600 | August 2015 | July 2012 | | February 2018 | (a)August 2020 |
$200450 | November 2017 | January 2013 | | February 2018 | (a)November 2022 |
$600400 | | August 2015 | | August 2020 | August 2025 |
$450150 | | November 2017 | (a) | November 2022 | November 2027 |
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(a) | Interest rates swaps with a notional value of $425 million expired February 10, 2018, and interest rate swaps with a notional value of $450 million commenced in the fourth quarter of 2017. |
The swaps help protect our outstanding variable rate borrowings from future interest rate volatility. The fixed interest rates on the swaps range from 2.07% to 2.89%3.11%. The Company had a liability of $47 million for the fair value of the interest rate swaps at December 31, 2019, and an asset of $13$6 million and $33a liability of $16 million at December 31, 2017 and 2016, respectively.2018. The fair value of these interest rate swaps is subject to movements in LIBOR and will fluctuate in future periods. We have estimated that a 0.25% increase in the LIBOR yield curve would increase the fair value of our interest rate swaps by $9$10 million and would decrease interest expense. While these results may be used as a benchmark, they should not be viewed as a forecast of future results.
Item 8. Financial Statements and Supplementary Data.
See "Index to Financial Statements" on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
Item 9A. Controls and Procedures.
Controls and Procedures for Realogy Holdings Corp.
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(a) | Realogy Holdings Corp. ("Realogy Holdings") maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its filings under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to its management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Realogy Holdings' management, including the Chief Executive Officer and the Chief Financial Officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. |
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(b) | As of the end of the period covered by this Annual Report on Form 10-K, Realogy Holdings has carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that Realogy Holdings' disclosure controls and procedures are effective at the "reasonable assurance" level. |
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(c) | There has not been any change in Realogy Holdings' internal control over financial reporting during the period covered by this Annual Report on Form 10-K that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting. |
(a)Realogy Holdings Corp. ("Realogy Holdings") maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its filings under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to its management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Realogy Holdings' management, including the Chief Executive Officer and the Chief Financial Officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
(b)As of the end of the period covered by this Annual Report on Form 10-K, Realogy Holdings has carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and
procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that Realogy Holdings' disclosure controls and procedures are effective at the "reasonable assurance" level.
(c)There has not been any change in Realogy Holdings' internal control over financial reporting during the period covered by this Annual Report on Form 10-K that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting for Realogy Holdings Corp.
Realogy Holdings' management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Realogy Holdings' internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Realogy Holdings' internal control over financial reporting includes those policies and procedures that:
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(i) | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of Realogy Holdings' assets; |
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(ii) | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of Realogy Holdings' management and directors; and |
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(iii) | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Realogy Holdings' assets that could have a material effect on the financial statements. |
i.pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of Realogy Holdings' assets;
ii.provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of Realogy Holdings' management and directors; and
iii.provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Realogy Holdings' assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of Realogy Holdings' internal control over financial reporting as of December 31, 2017.2019. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in its 2013 Internal Control-Integrated Framework. Based on this assessment, management determined that Realogy Holdings maintained effective internal control over financial reporting as of December 31, 2017.2019.
Auditor Report on the Effectiveness of Realogy Holdings Corp.’s Internal Control Over Financial Reporting
PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited the financial statements included in this Annual Report, has issued an attestation report on the effectiveness of Realogy Holdings' internal control over financial reporting, which is included within their audit opinion on page F-2.
* * *
Controls and Procedures for Realogy Group LLC
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(a) | Realogy Group LLC ("Realogy Group") maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its filings under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to its management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Realogy Group's management, including the Chief Executive Officer and the Chief Financial Officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. |
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(b) | As of the end of the period covered by this Annual Report on Form 10-K, Realogy Group has carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that Realogy Group's disclosure controls and procedures are effective at the "reasonable assurance" level. |
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(c) | There has not been any change in Realogy Group's internal control over financial reporting during the period covered by this Annual Report on Form 10-K that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting. |
(a)Realogy Group LLC ("Realogy Group") maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its filings under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to its management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Realogy Group's management, including the Chief Executive Officer and the Chief Financial Officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
(b)As of the end of the period covered by this Annual Report on Form 10-K, Realogy Group has carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that Realogy Group's disclosure controls and procedures are effective at the "reasonable assurance" level.
(c)There has not been any change in Realogy Group's internal control over financial reporting during the period covered by this Annual Report on Form 10-K that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting for Realogy Group LLC
Realogy Group’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Realogy Group’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Realogy Group’s internal control over financial reporting includes those policies and procedures that:
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(i) | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of Realogy Group’s assets; |
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(ii) | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of Realogy Group’s management and directors; and |
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(iii) | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Realogy Group’s assets that could have a material effect on the financial statements. |
(i)pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of Realogy Group’s assets;
(ii)provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of Realogy Group’s management and directors; and
(iii)provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Realogy Group’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of Realogy Group’s internal control over financial reporting as of December 31, 2017.2019. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in its 2013 Internal Control-Integrated Framework. Based on this assessment, management determined that Realogy Group maintained effective internal control over financial reporting as of December 31, 2017.2019.
Auditor Report on the Effectiveness of Realogy Group LLC's Internal Control Over Financial Reporting
PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited the financial statements included in this Annual Report, has issued an attestation report on the effectiveness of Realogy Group's internal control over financial reporting, which is included within their audit opinion on page F-4.F-5.
Item 9B. Other Information.
Director Not Standing for Re-Election. On February 26, 2018, Raul Alvarez notified Realogy Holdings Corp.24, 2020, the Compensation Committee of his decision not to stand for re-election to the Board of Directors when his current term expires at the(the “Committee”) of Realogy Holdings Corp. 2018 Annual Meeting(the “Company”), awarded John Peyton (the “Executive”), a special cash bonus of Stockholders. Mr. Alvarez’s decision not$1.0 million (the “Award”) in order to stand for re-election was based solelyassure continuity in leadership across business operations. The Award will vest and be payable in three equal installments on his other personaleach of February 24, 2021, February 24, 2022 and professional time commitments and was not due to any disagreementFebruary 24, 2023.
In making the Award, the Committee considered that, since commencing employment with the Company.Company in 2017, the Executive has assumed evolving levels of responsibility for the Company’s business, has consistently demonstrated exemplary leadership and has provided critical assistance in the implementation of the Company’s strategic objectives.The Committee also considered the competitive landscape for executive talent, in particular with respect to the Executive, and the potential business distribution likely to be caused by unplanned attrition.
The Award will remain subject to repayment if the Executive is found to be in breach of his restrictive covenant agreements with the Company (per the terms of such agreements), including those related to non-competition and non-solicitation. Any unvested tranches of the Award will be forfeited in the event that the Executive voluntarily terminates his employment with the Company without “good reason” or is terminated by the Company with “cause” (as such terms are defined in the Company’s 2018 Long-Term Incentive Plan). If the Executive’s employment with the Company is terminated by the Company other than for cause or by the Executive for good reason, he will be entitled to receive a pro-rated payment of the portion of the Award applicable to the year the termination event occurs, but future unvested tranches will be forfeited.
The summary above is qualified in its entirety by the Award agreement, which is attached as Exhibit 10.80 to this Annual Report.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Identification of Directors
The information required by this item is included in the Proxy Statement under the caption "Election"Proposal 1: Election of Directors" and is incorporated by reference to this report.
Identification of Executive Officers
The following provides information regarding individuals who served asrelating to executive officers of Realogy Group and Realogy Holdings at February 23, 2018. The age of each individual indicated below is as of February 23, 2018.
Ryan M. Schneider, 48, has served as our Chief Executive Officer and President since December 31, 2017 and as a director since October 20, 2017. From October 23, 2017 until his appointment as our CEO and President, Mr. Schneider served as the Company’s President and Chief Operating Officer. Prior to joining the Company, Mr. Schneider served as President, Card of Capital One Financial Corporation (“Capital One”), a financial holding company, from December 2007 to November 2016 where he was responsible for all of Capital One’s consumer and small business credit card lines of business in the United States, the United Kingdom and Canada. Mr. Schneider held a variety of other positions within Capital One from December 2001 to December 2007, including Executive Vice President and President, Auto Finance and Executive Vice President, U.S. Card. From November 2016 until April 2017, he served as Senior Advisor to Capital One.
Donald J. Casey, 56, has served as the President and Chief Executive Officer of TRG (formerly known as Cendant Settlement Services Group) since April 2002. From 1995 until April 2002, he served as Senior Vice President, Brands of PHH Mortgage. From 1993 to 1995, Mr. Casey served as Vice President, Government Operations of Cendant Mortgage. From 1989 to 1993, Mr. Casey served as a secondary marketing analyst for PHH Mortgage Services (prior to its acquisition by Cendant).
David L. Gordon, 56, has served as our Executive Vice President and Chief Technology Officer since January 2018. From March 2015 to January 2018, Mr. Gordon served as Executive Vice President, U.S. Chief Technology and Operations Officer for Bank of Montreal (BMO) Financial Group, a diversified financial services provider based in North America. From June 2013 to March 2015, Mr. Gordon served in multiple officer roles at Promontory Financial Group, a global financial services consulting firm and wholly owned subsidiary of IBM, including Chief Administrative Officer and Chief Technology Officer. For 12 years prior thereto, Mr. Gordon held several leadership positions at Capital One Financial Services, a financial holding company, most recently as Senior Vice President, IT Operations.
M. Ryan Gorman, 39, has served as the President and Chief Executive Officer of NRT LLC since January 2018 and as Chief Strategy & Operating Officer of NRT from September 2016 to January 2018. From May 2012 to September 2016, Mr. Gorman served at NRT’s Senior Vice President, Strategic Operations and from November 2007 to May 2012 he served as the Company’s Head of Strategic Development. From October 2004 to November 2007, Mr. Gorman served as the Head of Strategic Development of TRG (formerly known as Cendant Settlement Services Group). Before joining the Company, he held advisory and principal investment roles with PricewaterhouseCoopers, Credit Suisse and The Blackstone Group.
Timothy B. Gustavson, 49, has served as our Senior Vice President, Chief Accounting Officer and Controller since March 2015. From 2008 until March 2015, Mr. Gustavson served as Realogy’s Assistant Corporate Controller and Vice President of Finance. Mr. Gustavson joined Realogy in 2006 as Vice President of External Reporting and prior to Realogy, Mr. Gustavson spent 16 years in public accounting with the KPMG audit practice. Mr. Gustavson is a certified public accountant.
Sunita Holzer, 56, has served as our Executive Vice President and Chief Human Resources Officer ("CHRO") since March 2015. Prior to Realogy, Ms. Holzer served as Executive Vice President and CHRO for Computer Sciences Corporation from 2012 to 2014, where she had oversight of global human resources for 80,000 employees across 60 countries. Ms. Holzer also was Executive Vice President and CHRO at Chubb Insurance from 2003 to 2012. Prior to her tenure at Chubb Insurance, Ms. Holzer held executive HR roles at GE Capital, American Express and American International Group.
Anthony E. Hull, 59, has served as our Executive Vice President, Chief Financial Officer and Treasurer since our separation from Cendant in July 2006. From December 14, 2007 to February 3, 2008, Mr. Hull performed the functions of our Chief Accounting Officer. Mr. Hull was Executive Vice President, Finance of Cendant from October 2003 until our
separation from Cendant in July 2006. From January 1996 to September 2003, Mr. Hull served as Chief Financial Officer for DreamWorks, a diversified entertainment company. From 1990 to 1994, Mr. Hull worked in various capacities for Paramount Communications, a diversified entertainment and publishing company. From 1984 to 1990, Mr. Hull worked in investment banking at Morgan Stanley.
John W. Peyton, 50, has served as the Chief Executive Officer of Realogy Franchise Group since April 2017 after serving as Chief Operating Officer and President of Realogy Franchise Group from October 2016. Previously, he served as a senior executive with Starwood Hotels & Resorts Worldwide Inc., a leading hotel and leisure company, for 17 years, most recently as its Chief Marketing Officer from 2014 to September 2016 and as its Senior Vice President of Global Initiatives from 2012 to 2014, where he directed the implementation of key strategic company priorities around the world, including supply chain and revenue management initiatives.
Marilyn J. Wasser, 62, has served as our Executive Vice President, General Counsel and Corporate Secretary since May 10, 2007. From May 2005 until May 2007, Ms. Wasser was Executive Vice President, General Counsel and Corporate Secretary for Telcordia Technologies, a provider of telecommunications software and services. From 1983 until 2005, Ms. Wasser served in several positions of increasing responsibility with AT&T Corporation and AT&T Wireless Services, ultimately serving as Executive Vice President, Associate General Counsel and Corporate Secretary of AT&T Wireless Services from September 2002 to February 2005 and immediately prior thereto, from 1995 until 2002, as EVP Law, Corporate Secretary and Chief Compliance Officer of AT&T.
Compliance with Section 16(a) of the Exchange Act
The information required by this item is included herein in the Proxy StatementPart I under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" and is incorporated by reference to this report.“Information about our Executive Officers.”
Code of Ethics
The information required by this item is included in the Proxy Statement under the caption "Code of Business Conduct and Ethics" and is incorporated by reference to this Annual Report.
Corporate Governance
The information required by this item is included in the Proxy Statement under the caption "Governance of the Company" and is incorporated by reference to this Annual Report.
Item 11. Executive Compensation.
The information required by this item is included in the Proxy Statement under the captions "Governance of the Company—Compensation of Directors," "Governance of the Company—Committees of the Board" and "Executive Compensation" and is incorporated by reference to this Annual Report.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information required by this item relatingabout shares of our common stock that may be issued upon the exercise of options, that may vest pursuant to securities authorized for issuanceawards of restricted stock units, performance stock units or that may be issued under deferred stock units under all of our existing equity compensation plans is includedas of December 31, 2019.
| | | | | | | | | | | | | | | | | | | | | | | |
| Plan Category | | Number of Securities to be Issued Upon Exercise or Vesting of Outstanding Options, Warrants and Rights | | Weighted Average Exercise Price of Outstanding Options, Warrants and Rights | | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans | |
| Equity compensation plans approved by stockholders | | 12,358,323 | | (1) | $27.04 | | (2) | 643,698 | | (3) |
| Equity compensation plan not approved by stockholders | | 287,955 | | (4) | | $32.80 | | (5) | | — | | |
_______________
(1)Consists of 4,063,618 outstanding options, 3,666,737 restricted stock units, 52,874 performance restricted stock units, 4,460,593 performance stock units and 114,501 deferred stock units issuable under the 2007 Stock Incentive Plan, the 2012 Plan and the 2018 Plan. The amount set forth in the Proxy Statementtable assumes maximum payout under the caption "Proposal 4. Approvalunvested performance share unit awards. The number of shares, if any, to be issued pursuant to unvested performance stock unit awards will be determined based upon the extent to which the performance goals are achieved.
(2)Weighted average exercise price of outstanding stock options under the 2007 Stock Incentive Plan, the 2012 Plan and the 2018 Plan. The weighted average remaining term of outstanding options is 5.2 years. The other outstanding awards do not have exercise prices and are accordingly excluded from this column.
(3)Consists of shares available for future grant under the 2018 Plan.
(4)Consists of 261,234 outstanding options and 25,407 unvested restricted stock units granted to Mr. Schneider on October 23, 2017 (the "Grant Date") as an inducement material to his entry into employment with us, as well as 1,314 unvested dividend equivalent units accrued on the restricted stock unit award as of December 31, 2019. If the underlying restricted stock unit award fails to vest, such dividend equivalent units will be forfeited.
Each grant was approved by our Compensation Committee and disclosed in a press release. Under applicable NYSE Listing Rules, inducement grants are not subject to security holder approval.
The terms of each inducement grant are materially consistent with the terms of awards made under the 2012 and 2018 Plans. The stock options expire ten years from the Grant Date and vest over a four-year period, in equal annual installments on each anniversary date of the Grant Date. The restricted stock units vest over a three-year period, in equal annual installments on each anniversary date of the Grant Date and carry dividend equivalent rights related to any cash dividend paid by the Company while the restricted stock units are outstanding. Vesting of the equity awards accelerate if employment terminates due to death or disability. The equity awards contain "double trigger" provisions that provide for accelerated vesting upon a qualifying termination within 24 months of a change in control of the Company (or, if the awards are not assumed or equitably converted by the successor company, upon the change in control).
(5)Exercise price of options granted to Mr. Schneider on October 23, 2017.
See Note 14, "Stock-Based Compensation", in the Consolidated Financial Statements for additional information on the 2007 Stock Incentive Plan, the Amended and Restated 2012 Long-Term Incentive Plan and 2018 Long-Term Incentive Plan" and is incorporated by reference to this report.Plan.
The remaining information required by this item is included in the Proxy Statement under the caption "Governance of the Company—Ownership of Our Common Stock" and is incorporated by reference to this report.Annual Report.
| |
Item 13. | Certain Relationships and Related Transactions, and Director Independence. |
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this item is included in the Proxy Statement under the captions "Governance of the Company"Company—Director Independence Criteria and —Determination of Director Independence" and "Related Person Transactions" and is incorporated by reference to this Annual Report.
Item 14. Principal Accounting Fees and Services.
The information required by this item is included in the Proxy Statement under the captions "Disclosure About Fees" and "Pre-Approval of Audit and Non-Audit Services" under the section entitled "Proposal 3.3: Ratification of the Appointment of the Independent Registered Public Accounting Firm" and is incorporated by reference to this Annual Report.
PART IV
Item 15. Exhibits, Financial Statements and Schedules.
(A)(1) and (2) Financial Statements
The consolidated financial statements of the registrants listed in the "Index to Financial Statements" on page F-1 together with the reports of PricewaterhouseCoopers LLP, independent auditors, are filed as part of this Annual Report.
(A)(3) Exhibits
See Index to Exhibits.
The agreements included or incorporated by reference as exhibits to this Annual Report contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties were made solely for the benefit of the other parties to the applicable agreement and (i) were not intended to be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate; (ii) may have been qualified in such agreement by disclosures that were made to the other party in connection with the negotiation of the applicable agreement; (iii) may apply contract standards of "materiality" that are different from "materiality" under the applicable securities laws; and (iv) were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement. We acknowledge that, notwithstanding the inclusion of the foregoing cautionary statements, we are responsible for considering whether additional specific disclosures of material information regarding material contractual provisions are required to make the statements in this Annual Report not misleading.
(A)(4) Consolidated Financial Statement Schedules
Schedule II—Valuation and Qualifying Accounts for the years ended December 31, 2017, 20162019, 2018 and 2015:2017:
| | | (in millions) | | | Additions | | | | | (in millions) | | | Additions | | | | | |
| Description | Balance at Beginning of Period | | Charged to Costs and Expenses | | Charged to Other Accounts | | Deductions | | Balance at End of Period | Description | Balance at
Beginning of
Period | | Charged to
Costs and
Expenses | | Charged to
Other
Accounts | | Deductions | | Balance at
End of
Period |
Allowance for doubtful accounts (a) | Allowance for doubtful accounts (a) | Allowance for doubtful accounts (a) | |
| Year ended December 31, 2019 | | Year ended December 31, 2019 | $ | 9 | | | $ | 5 | | | $ | — | | | $ | (3) | | | $ | 11 | |
| Year ended December 31, 2018 | | Year ended December 31, 2018 | 11 | | | 1 | | | — | | | (3) | | | 9 | |
| Year ended December 31, 2017 | $ | 13 |
| | $ | 3 |
| | $ | — |
| | $ | (5 | ) | | $ | 11 |
| Year ended December 31, 2017 | 13 | | | 3 | | | — | | | (5) | | | 11 | |
| Year ended December 31, 2016 | 20 |
| | 2 |
| | — |
| | (9 | ) | | 13 |
| |
| Year ended December 31, 2015 | 27 |
| | 6 |
| | — |
| | (13 | ) | | 20 |
| |
| | | | | | | | | | | |
| Deferred tax asset valuation allowance | Deferred tax asset valuation allowance | Deferred tax asset valuation allowance | |
| Year ended December 31, 2019 | | Year ended December 31, 2019 | $ | 14 | | | $ | — | | | $ | — | | | $ | — | | | $ | 14 | |
| Year ended December 31, 2018 | | Year ended December 31, 2018 | 10 | | | 4 | | | — | | | — | | | 14 | |
| Year ended December 31, 2017 | $ | 10 |
| | $ | 3 |
| | $ | — |
| | $ | — |
| | $ | 13 |
| Year ended December 31, 2017 | 6 | | | 4 | | | — | | | — | | | 10 | |
| Year ended December 31, 2016 | 11 |
| | (1 | ) | | — |
| | — |
| | 10 |
| |
| Year ended December 31, 2015 | 10 |
| | 1 |
| | — |
| | — |
| | 11 |
| |
_______________
| |
(a) | The deduction column represents uncollectible accounts written off, net of recoveries from Trade Receivables, in the Consolidated Balance Sheets. |
(a)The deduction column represents uncollectible accounts written off, net of recoveries from Trade Receivables, in the Consolidated Balance Sheets. Item 16. Form 10-K Summary.
None.
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities Exchange Act of 1934, the registrants have duly caused this Annual Report on Form 10-K to be signed on their behalf by the undersigned, thereunto duly authorized, on February 27, 2018.25, 2020.
REALOGY HOLDINGS CORP.
and
REALOGY GROUP LLC
(Registrants)
| |
Title: | Chief Executive Officer and President |
By: /s/ RYAN M. SCHNEIDER
Name: Ryan M. Schneider
Title: Chief Executive Officer and President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Ryan M. Schneider, Anthony E. HullCharlotte C. Simonelli and Marilyn J. Wasser, and each of them severally, his or her true and lawful attorney-in-fact with power of substitution and resubstitution to sign in his or her name, place and stead, in any and all capacities, to do any and all things and execute any and all instruments that such attorney may deem necessary or advisable under the Securities Exchange Act of 1934 and any rules, regulations and requirements of the U.S. Securities and Exchange Commission in connection with this Annual Report on Form 10-K and any and all amendments hereto, as fully and for all intents and purposes as he or she might do or could do in person, and hereby ratifies and confirms all said attorneys-in-fact and agents, each acting alone, and his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons in the capacities and on the dates indicated below on behalf of each of the Registrants. | | | | | | | | | | | | | | |
| Name | | Title | | Date |
| | | | |
| /s/ RYAN M. SCHNEIDER | | Chief Executive Officer, President and Director
(Principal Executive Officer) | | February 25, 2020 |
| Ryan M. Schneider | | | | |
| | | | |
Name | | Title | | Date |
| | | | |
/s/ RYAN M. SCHNEIDERCHARLOTTE C. SIMONELLI | | Chief Executive Officer
and President
(Principal Executive Officer)
| | February 27, 2018 |
Ryan M. Schneider | | | | |
| | | | |
/s/ ANTHONY E. HULL | | Executive Vice President, Chief Financial Officer
and Treasurer
(Principal Financial Officer)
| | February 27, 201825, 2020 |
Anthony E. HullCharlotte C. Simonelli | | | | |
| | | | |
| /s/ TIMOTHY B. GUSTAVSON | | Senior Vice President, Chief Accounting Officer
and Controller
(Principal Accounting Officer)
| | February 27, 201825, 2020 |
| Timothy B. Gustavson | | | | |
| | | | |
| /s/ MICHAEL J. WILLIAMS | | Chairman of the Board of Directors of Realogy Holdings Corp. and Manager of Realogy Group LLC | | February 27, 201825, 2020 |
| Michael J. Williams | | | | |
| | | | |
/s/ RAUL ALVAREZFIONA P. DIAS | | Director of Realogy Holdings Corp. and
Manager of Realogy Group LLC
| | February 27, 201825, 2020 |
Raul AlvarezFiona P. Dias | | | | |
| | | | |
/s/ FIONA P. DIASMATTHEW J. ESPE | | Director of Realogy Holdings Corp. and
Manager of Realogy Group LLC
| | February 27, 201825, 2020 |
Fiona P. DiasMatthew J. Espe | | | | |
| | | | |
/s/ MATTHEW J. ESPEV. ANN HAILEY | | Director of Realogy Holdings Corp. and
Manager of Realogy Group LLC
| | February 27, 201825, 2020 |
Matthew J. EspeV. Ann Hailey | | | | |
| | | | |
/s/ V. ANN HAILEYBRYSON KOEHLER | | Director of Realogy Holdings Corp. and
Manager of Realogy Group LLC
| | February 27, 201826, 2019 |
V. Ann HaileyBryson Koehler | | | | |
| | | | |
| /s/ DUNCAN L. NIEDERAUER | | Director of Realogy Holdings Corp. and
Manager of Realogy Group LLC
| | February 27, 201825, 2020 |
| Duncan L. Niederauer | | | | |
| | | | |
/s/ SHERRY M. SMITHENRIQUE SILVA | | Director of Realogy Holdings Corp. and
Manager of Realogy Group LLC
| | February 27, 201825, 2020 |
Sherry M. SmithEnrique Silva | | | | |
| | | | |
/s/ CHRIS TERRILLSHERRY M. SMITH | | Director of Realogy Holdings Corp. and
Manager of Realogy Group LLC
| | February 27, 201825, 2020 |
Chris TerrillSherry M. Smith | | | | |
| | | | |
| /s/ CHRIS TERRILL | | Director of Realogy Holdings Corp. and
Manager of Realogy Group LLC | | February 25, 2020 |
| Chris Terrill | | | | |
| | | | |
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Realogy Holdings Corp.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Realogy Holdings Corp. and its subsidiaries ("the Company"(the "Company") as of December 31, 20172019 and December 31, 2016,2018, and the related consolidated statements of operations, of comprehensive (loss) income, of equity and of cash flows for each of the three years in the period ended December 31, 2017,2019, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 20172019 appearing under Item 15(A)(4) (collectively referred to as the “consolidated"consolidated financial statements”statements"). We also have audited the Company's internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20172019and December 31, 2016,2018, and the results of theirits operations and theirits cash flows for each of the three years in the period ended December 31, 20172019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included inManagement's Report on Internal Control overOver Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company's consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB")(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Goodwill Impairment Assessment
As described in Notes 2 and 6 to the consolidated financial statements, the Company’s consolidated goodwill balance was $3,300 million as of December 31, 2019. Management conducts an impairment assessment as of October 1 of each year, or whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. This assessment compares the carrying values of the reporting units to their respective fair values and when appropriate, the carrying value is reduced to fair value. Fair value of each reporting unit is estimated using the income approach, a discounted cash flow approach. The fair value of the Company's reporting units are determined utilizing the best estimate of future revenues, operating expenses, including commission expense, market and general economic conditions, as well as assumptions that management believes marketplace participants would utilize including discount rates, cost of capital, and long-term growth rates. During the third quarter of 2019, management determined that the decrease in the stock price of the Company and the impact on future earnings related to the discontinuation of the USAA affinity program qualified as triggering events for all of its reporting units and accordingly management performed an impairment assessment of goodwill and other indefinite-lived intangible assets as of September 1, 2019. As a result of the interim impairment test, management recognized a goodwill impairment charge totaling $237 million related to Realogy Brokerage Group.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment is a critical audit matter are there was significant judgment by management when developing the fair value measurement of the reporting units. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence relating to management’s cash flow projections and significant assumptions, including future revenues, operating expenses. including commission expense, and the discount rates. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over the determination of the fair value of the Company’s reporting units. These procedures also included, among others, testing management’s process for developing the fair value estimates, testing the completeness and accuracy of the underlying data used in the valuation model, and evaluating the reasonableness of the significant assumptions, including future revenues, operating expenses, including commission expense, and discount rates. Evaluating management’s assumptions related to future revenues and operating expenses, including commission expense involved evaluating whether the assumptions used by management were reasonable considering the current and past performance of the reporting units and whether the assumptions were consistent with evidence obtained in other areas of the audit. Additionally, for future revenues, the evaluation also considered whether the assumption was consistent with external market and industry data. Professionals with specialized skill and knowledge were used to assist in the evaluation of the appropriateness of the Company’s discounted cash flow model and discount rates.
Other Indefinite-Lived Assets Impairment Assessment – Trademark Intangible Assets
As described in Notes 2 and 6 to the consolidated financial statements, the Company’s consolidated other indefinite-lived intangible assets balance was $692 million as of December 31, 2019, including trademark intangible assets of $673 million. Management conducts an impairment assessment as of October 1 of each year, or whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. This assessment compares the carrying values
of the other indefinite lived assets to their respective fair values and, when appropriate, the carrying value is reduced to fair value. Fair value of the other indefinite-lived intangible assets is estimated using the relief from royalty method. The fair value of the Company's other indefinite lived intangible assets are determined utilizing the best estimate of future revenues, market and general economic conditions as well as assumptions that management believes marketplace participants would utilize including discount rates, cost of capital, trademark royalty rates, and long-term growth rates. During the third quarter of 2019, management determined that the decrease in the stock price of the Company and the impact on future earnings related to the discontinuation of the USAA affinity program qualified as triggering events for all of its reporting units and accordingly management performed an impairment assessment of goodwill and other indefinite-lived intangible assets as of September 1, 2019.
The principal considerations for our determination that performing procedures relating to the other indefinite-lived intangible assets impairment assessment - trademark intangible assets is a critical audit matter are there was significant judgment by management when developing the fair value measurement of the trademark intangible assets. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence relating to management’s significant assumptions, including future revenues and the discount rates. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s trademark intangible asset impairment assessment, including controls over the determination of the fair value of the Company’s trademark intangible assets. These procedures also included, among others, testing management’s process for developing the fair value estimates, testing the completeness and accuracy of the underlying data used in the valuation model and evaluating the reasonableness of the significant assumptions, including future revenues and discount rates. Evaluating management’s assumption related to future revenues involved evaluating whether the assumption used by management was reasonable considering the current and past performance of the business associated with the trademark, consistency with external market and industry data, and whether the assumption was consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of the appropriateness of the Company’s relief from royalty method, the trademark royalty rates, and discount rates.
/s/ PricewaterhouseCoopers LLP
Florham Park, New Jersey
February 27, 201825, 2020
We have served as the Company's auditor since 2009.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholder of Realogy Group LLC
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Realogy Group LLC and its subsidiaries (the "Company") as of December 31, 20172019 and December 31, 2016,2018, and the related consolidated statements of operations, of comprehensive (loss) income equity and of cash flows for each of the three years in the period ended December 31, 2017,2019, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 20172019 appearing under Item 15(A)(4) (collectively referred to as the “consolidated"consolidated financial statements”statements"). We also have audited the Company's internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20172019and December 31, 2016,2018, and the results of theirits operations and theirits cash flows for each of the three years in the period ended December 31, 20172019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included inManagement's Report on Internal Control overOver Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company's consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB")(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Florham Park, New Jersey
February 27, 201825, 2020
We have served as the Company's auditor since 2009.
REALOGY HOLDINGS CORP. AND REALOGY GROUP LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | |
| | 2019 | | 2018 | | 2017 |
| Revenues | | | | | |
| Gross commission income | $ | 4,330 | | | $ | 4,533 | | | $ | 4,576 | |
| Service revenue | 673 | | | 654 | | | 638 | |
| Franchise fees | 386 | | | 393 | | | 396 | |
| Other | 209 | | | 202 | | | 200 | |
| Net revenues | 5,598 | | | 5,782 | | | 5,810 | |
| Expenses | | | | | |
| Commission and other agent-related costs | 3,156 | | | 3,282 | | | 3,230 | |
| Operating | 1,345 | | | 1,351 | | | 1,344 | |
| Marketing | 262 | | | 256 | | | 258 | |
| General and administrative | 288 | | | 265 | | | 303 | |
| Former parent legacy cost (benefit), net | 1 | | | 4 | | | (10) | |
| Restructuring costs, net | 42 | | | 47 | | | 12 | |
| Impairments | 249 | | | — | | | — | |
| Depreciation and amortization | 169 | | | 164 | | | 166 | |
| Interest expense, net | 249 | | | 189 | | | 157 | |
| (Gain) loss on the early extinguishment of debt | (5) | | | 7 | | | 5 | |
| Other expense, net | — | | | — | | | 1 | |
| Total expenses | 5,756 | | | 5,565 | | | 5,466 | |
| (Loss) income from continuing operations before income taxes, equity in (earnings) losses and noncontrolling interests | (158) | | | 217 | | | 344 | |
| Income tax (benefit) expense from continuing operations | (22) | | | 67 | | | (66) | |
| Equity in (earnings) losses of unconsolidated entities | (18) | | | 4 | | | (18) | |
| Net (loss) income from continuing operations | (118) | | | 146 | | | 428 | |
| | | | | |
| (Loss) income from discontinued operations, net of tax | (7) | | | (6) | | | 6 | |
| Estimated loss on the sale of discontinued operations, net of tax | (60) | | | — | | | — | |
| Net (loss) income from discontinued operations | (67) | | | (6) | | | 6 | |
| | | | | |
| Net (loss) income | (185) | | | 140 | | | 434 | |
| Less: Net income attributable to noncontrolling interests | (3) | | | (3) | | | (3) | |
| Net (loss) income attributable to Realogy Holdings and Realogy Group | $ | (188) | | | $ | 137 | | | $ | 431 | |
| | | | | |
| Basic (loss) earnings per share attributable to Realogy Holdings shareholders: | | | | | |
| Basic (loss) earnings per share from continuing operations | $ | (1.06) | | | $ | 1.15 | | | $ | 3.11 | |
| Basic (loss) earnings per share from discontinued operations | (0.59) | | | (0.05) | | | 0.04 | |
| Basic (loss) earnings per share | $ | (1.65) | | | $ | 1.10 | | | $ | 3.15 | |
| Diluted (loss) earnings per share attributable to Realogy Holdings shareholders: | | | | | |
| Diluted (loss) earnings per share from continuing operations | $ | (1.06) | | | $ | 1.14 | | | $ | 3.07 | |
| Diluted (loss) earnings per share from discontinued operations | (0.59) | | | (0.05) | | | 0.04 | |
| Diluted (loss) earnings per share | $ | (1.65) | | | $ | 1.09 | | | $ | 3.11 | |
| Weighted average common and common equivalent shares of Realogy Holdings outstanding: | | | | | |
| Basic | 114.2 | | | 124.0 | | | 136.7 | |
| Diluted | 114.2 | | | 125.3 | | | 138.4 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Revenues | | | | | |
| Gross commission income | $ | 4,576 |
| | $ | 4,277 |
| | $ | 4,288 |
|
| Service revenue | 938 |
| | 955 |
| | 882 |
|
| Franchise fees | 396 |
| | 372 |
| | 353 |
|
| Other | 204 |
| | 206 |
| | 183 |
|
| Net revenues | 6,114 |
| | 5,810 |
| | 5,706 |
|
| Expenses | | | | | |
| Commission and other agent-related costs | 3,230 |
| | 2,945 |
| | 2,931 |
|
| Operating | 1,544 |
| | 1,542 |
| | 1,458 |
|
| Marketing | 261 |
| | 241 |
| | 226 |
|
| General and administrative | 364 |
| | 321 |
| | 337 |
|
| Former parent legacy benefit, net | (10 | ) | | (2 | ) | | (15 | ) |
| Restructuring costs, net | 12 |
| | 39 |
| | 10 |
|
| Depreciation and amortization | 198 |
| | 202 |
| | 201 |
|
| Interest expense, net | 158 |
| | 174 |
| | 231 |
|
| Loss on the early extinguishment of debt | 5 |
| | — |
| | 48 |
|
| Other expense (income), net | 1 |
| | (1 | ) | | (3 | ) |
| Total expenses | 5,763 |
| | 5,461 |
| | 5,424 |
|
| Income before income taxes, equity in earnings and noncontrolling interests | 351 |
| | 349 |
| | 282 |
|
| Income tax (benefit) expense | (65 | ) | | 144 |
| | 110 |
|
| Equity in earnings of unconsolidated entities | (18 | ) | | (12 | ) | | (16 | ) |
| Net income | 434 |
| | 217 |
| | 188 |
|
| Less: Net income attributable to noncontrolling interests | (3 | ) | | (4 | ) | | (4 | ) |
| Net income attributable to Realogy Holdings and Realogy Group | $ | 431 |
| | $ | 213 |
| | $ | 184 |
|
| | | | | | |
| Earnings per share attributable to Realogy Holdings: | | | | | |
| Basic earnings per share | $ | 3.15 |
| | $ | 1.47 |
| | $ | 1.26 |
|
| Diluted earnings per share | $ | 3.11 |
| | $ | 1.46 |
| | $ | 1.24 |
|
| Weighted average common and common equivalent shares of Realogy Holdings outstanding: |
| Basic | 136.7 |
| | 144.5 |
| | 146.5 |
|
| Diluted | 138.4 |
| | 145.8 |
| | 148.1 |
|
| | | | | | |
| Cash dividends declared per share (beginning in August 2016) | $ | 0.36 |
| | $ | 0.18 |
| | $ | — |
|
See Notes to Consolidated Financial Statements.
F-6F-7
REALOGY HOLDINGS CORP. AND REALOGY GROUP LLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In millions)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
| 2019 | | 2018 | | 2017 |
| Net (loss) income | $ | (185) | | | $ | 140 | | | $ | 434 | |
| Currency translation adjustment | — | | | (3) | | | 3 | |
| Defined Benefit Plans: | | | | | |
| Actuarial loss for the plans | (8) | | | (6) | | | (1) | |
| Less: amortization of actuarial loss to periodic pension cost | (2) | | | (2) | | | (2) | |
| Defined benefit plans | (6) | | | (4) | | | 1 | |
| Other comprehensive (loss) income, before tax | (6) | | | (7) | | | 4 | |
| Income tax (benefit) expense related to items of other comprehensive income (loss) | (2) | | | (1) | | | 1 | |
| Other comprehensive (loss) income, net of tax | (4) | | | (6) | | | 3 | |
| Comprehensive (loss) income | (189) | | | 134 | | | 437 | |
| Less: comprehensive income attributable to noncontrolling interests | (3) | | | (3) | | | (3) | |
| Comprehensive (loss) income attributable to Realogy Holdings and Realogy Group | $ | (192) | | | $ | 131 | | | $ | 434 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Net income | $ | 434 |
| | $ | 217 |
| | $ | 188 |
|
| Currency translation adjustment | 3 |
| | (5 | ) | | (4 | ) |
| Defined Benefit Plans: | | | | | |
| Actuarial gain (loss) for the plans | (1 | ) | | (3 | ) | | 1 |
|
| Less: amortization of actuarial loss to periodic pension cost | (2 | ) | | (1 | ) | | (2 | ) |
| Defined benefit plans | 1 |
| | (2 | ) | | 3 |
|
| Other comprehensive income (loss), before tax | 4 |
| | (7 | ) | | (1 | ) |
| Income tax expense (benefit) related to items of other comprehensive income (loss) amounts | 1 |
| | (3 | ) | | — |
|
| Other comprehensive income (loss), net of tax | 3 |
| | (4 | ) | | (1 | ) |
| Comprehensive income | 437 |
| | 213 |
| | 187 |
|
| Less: comprehensive income attributable to noncontrolling interests | (3 | ) | | (4 | ) | | (4 | ) |
| Comprehensive income attributable to Realogy Holdings and Realogy Group | $ | 434 |
| | $ | 209 |
| | $ | 183 |
|
See Notes to Consolidated Financial Statements.
F-7F-8
REALOGY HOLDINGS CORP. AND REALOGY GROUP LLC
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
| | | | | | | | | | | |
| | December 31, | | |
| | 2019 | | 2018 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 235 | | | $ | 203 | |
| Restricted cash | — | | | 2 | |
| Trade receivables (net of allowance for doubtful accounts of $11 and $9) | 79 | | | 85 | |
| Other current assets | 147 | | | 140 | |
| Current assets - held for sale | 750 | | | 338 | |
| Total current assets | 1,211 | | | 768 | |
| Property and equipment, net | 308 | | | 273 | |
| Operating lease assets, net | 515 | | | — | |
| Goodwill | 3,300 | | | 3,536 | |
| Trademarks | 673 | | | 673 | |
| Franchise agreements, net | 1,160 | | | 1,227 | |
| Other intangibles, net | 72 | | | 80 | |
| Other non-current assets | 304 | | | 272 | |
| Non-current assets - held for sale | — | | | 461 | |
| Total assets | $ | 7,543 | | | $ | 7,290 | |
| LIABILITIES AND EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 84 | | | $ | 83 | |
| Current portion of long-term debt | 234 | | | 748 | |
| Current portion of operating lease liabilities | 122 | | | — | |
| Accrued expenses and other current liabilities | 350 | | | 344 | |
| Current liabilities - held for sale | 356 | | | 352 | |
| Total current liabilities | 1,146 | | | 1,527 | |
| Long-term debt | 3,211 | | | 2,800 | |
| Long-term operating lease liabilities | 467 | | | — | |
| Deferred income taxes | 390 | | | 389 | |
| Other non-current liabilities | 233 | | | 256 | |
| Non-current liabilities - held for sale | — | | | 3 | |
| Total liabilities | 5,447 | | | 4,975 | |
| Commitments and contingencies (Note 15) | | | |
| Equity: | | | |
| Realogy Holdings preferred stock: $0.01 par value; 50,000,000 shares authorized, NaN issued and outstanding at December 31, 2019 and December 31, 2018 | — | | | — | |
| Realogy Holdings common stock: $0.01 par value;400,000,000 shares authorized, 114,355,519 shares issued and outstanding at December 31, 2019 and 114,620,499 shares issued and outstanding at December 31, 2018 | 1 | | | 1 | |
| Additional paid-in capital | 4,842 | | | 4,869 | |
| Accumulated deficit | (2,695) | | | (2,507) | |
| Accumulated other comprehensive loss | (56) | | | (52) | |
| Total stockholders' equity | 2,092 | | | 2,311 | |
| Noncontrolling interests | 4 | | | 4 | |
| Total equity | 2,096 | | | 2,315 | |
| Total liabilities and equity | $ | 7,543 | | | $ | 7,290 | |
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 227 |
| | $ | 274 |
|
| Restricted cash | 7 |
| | 7 |
|
| Trade receivables (net of allowance for doubtful accounts of $11 and $13) | 153 |
| | 152 |
|
| Relocation receivables | 223 |
| | 244 |
|
| Other current assets | 179 |
| | 141 |
|
| Total current assets | 789 |
| | 818 |
|
| Property and equipment, net | 289 |
| | 267 |
|
| Goodwill | 3,710 |
| | 3,690 |
|
| Trademarks | 749 |
| | 748 |
|
| Franchise agreements, net | 1,294 |
| | 1,361 |
|
| Other intangibles, net | 284 |
| | 313 |
|
| Other non-current assets | 222 |
| | 224 |
|
| Total assets | $ | 7,337 |
| | $ | 7,421 |
|
| | | | |
| LIABILITIES AND EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 156 |
| | $ | 140 |
|
| Securitization obligations | 194 |
| | 205 |
|
| Current portion of long-term debt | 127 |
| | 242 |
|
| Accrued expenses and other current liabilities | 478 |
| | 463 |
|
| Total current liabilities | 955 |
| | 1,050 |
|
| Long-term debt | 3,221 |
| | 3,265 |
|
| Deferred income taxes | 327 |
| | 389 |
|
| Other non-current liabilities | 212 |
| | 248 |
|
| Total liabilities | 4,715 |
| | 4,952 |
|
| Commitments and contingencies (Note 13) |
| |
|
| Equity: | | | |
| Realogy Holdings preferred stock: $.01 par value; 50,000,000 shares authorized, none issued and outstanding at December 31, 2017 and December 31, 2016 | — |
| | — |
|
| Realogy Holdings common stock: $.01 par value; 400,000,000 shares authorized, 131,636,870 shares issued and outstanding at December 31, 2017 and 140,227,692 shares issued and outstanding at December 31, 2016 | 1 |
| | 1 |
|
| Additional paid-in capital | 5,285 |
| | 5,565 |
|
| Accumulated deficit | (2,631 | ) | | (3,062 | ) |
| Accumulated other comprehensive loss | (37 | ) | | (40 | ) |
| Total stockholders' equity | 2,618 |
| | 2,464 |
|
| Noncontrolling interests | 4 |
| | 5 |
|
| Total equity | 2,622 |
| | 2,469 |
|
| Total liabilities and equity | $ | 7,337 |
| | $ | 7,421 |
|
See Notes to Consolidated Financial Statements.
F-8F-9
REALOGY HOLDINGS CORP. AND REALOGY GROUP LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | |
| | 2019 | | 2018 | | 2017 |
| Operating Activities | | | | | |
| Net (loss) income | $ | (185) | | | $ | 140 | | | $ | 434 | |
| Net loss (income) from discontinued operations | 67 | | | 6 | | | (6) | |
| Net (loss) income from continuing operations | (118) | | | 146 | | | 428 | |
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 169 | | | 164 | | | 166 | |
| Deferred income taxes | (34) | | | 71 | | | (64) | |
| Impairments | 249 | | | — | | | — | |
| Amortization of deferred financing costs and debt discount | 10 | | | 15 | | | 16 | |
| (Gain) loss on the early extinguishment of debt | (5) | | | 7 | | | 5 | |
| Equity in (earnings) losses of unconsolidated entities | (18) | | | 4 | | | (18) | |
| Stock-based compensation | 28 | | | 37 | | | 47 | |
| Mark-to-market adjustments on derivatives | 39 | | | 4 | | | (4) | |
| Other adjustments to net (loss) income | (3) | | | — | | | — | |
| Net change in assets and liabilities, excluding the impact of acquisitions and dispositions: | | | | | |
| Trade receivables | 5 | | | 7 | | | (2) | |
| Other assets | 1 | | | (8) | | | (20) | |
| Accounts payable, accrued expenses and other liabilities | (11) | | | (43) | | | (4) | |
| Dividends received from unconsolidated entities | 3 | | | 3 | | | 52 | |
| Other, net | 1 | | | (7) | | | (12) | |
| Net cash provided by operating activities from continuing operations | 316 | | | 400 | | | 590 | |
| Net cash provided by (used in) operating activities from discontinued operations | 55 | | | (6) | | | 77 | |
| Net cash provided by operating activities | 371 | | | 394 | | | 667 | |
| Investing Activities | | | | | |
| Property and equipment additions | (108) | | | (92) | | | (90) | |
| Payments for acquisitions, net of cash acquired | (1) | | | (1) | | | (18) | |
| Investment in unconsolidated entities | (12) | | | (15) | | | (55) | |
| Proceeds from investments in unconsolidated entities | — | | | 19 | | | 11 | |
| Other, net | 4 | | | 11 | | | 4 | |
| Net cash used in investing activities from continuing operations | (117) | | | (78) | | | (148) | |
| Net cash (used in) provided by investing activities from discontinued operations | (11) | | | (13) | | | 2 | |
| Net cash used in investing activities | $ | (128) | | | $ | (91) | | | $ | (146) | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Operating Activities | | | | | |
| Net income | $ | 434 |
| | $ | 217 |
| | $ | 188 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: |
| Depreciation and amortization | 198 |
| | 202 |
| | 201 |
|
| Deferred income taxes | (63 | ) | | 124 |
| | 96 |
|
| Amortization of deferred financing costs and discount | 16 |
| | 16 |
| | 18 |
|
| Loss on the early extinguishment of debt | 5 |
| | — |
| | 48 |
|
| Equity in earnings of unconsolidated entities | (18 | ) | | (12 | ) | | (16 | ) |
| Stock-based compensation | 52 |
| | 57 |
| | 57 |
|
| Mark-to-market adjustments on derivatives | (2 | ) | | 4 |
| | 18 |
|
| Other adjustments to net income | 1 |
| | (4 | ) | | (4 | ) |
| Net change in assets and liabilities, excluding the impact of acquisitions and dispositions: |
| Trade receivables | (1 | ) | | (10 | ) | | (27 | ) |
| Relocation receivables | 23 |
| | 31 |
| | 17 |
|
| Other assets | (25 | ) | | (22 | ) | | (25 | ) |
| Accounts payable, accrued expenses and other liabilities | 9 |
| | (17 | ) | | 8 |
|
| Dividends received from unconsolidated entities | 52 |
| | 11 |
| | 13 |
|
| Other, net | (14 | ) | | (11 | ) | | (4 | ) |
| Net cash provided by operating activities | 667 |
| | 586 |
| | 588 |
|
| Investing Activities | | | | | |
| Property and equipment additions | (99 | ) | | (87 | ) | | (84 | ) |
| Payments for acquisitions, net of cash acquired | (18 | ) | | (95 | ) | | (127 | ) |
| Investment in unconsolidated entities | (55 | ) | | — |
| | — |
|
| Proceeds from investments in unconsolidated entities | 11 |
| | — |
| | — |
|
| Other, net | 15 |
| | (9 | ) | | — |
|
| Net cash used in investing activities | (146 | ) | | (191 | ) | | (211 | ) |
| Financing Activities | | | | | |
| Net change in revolving credit facilities | (130 | ) | | — |
| | 200 |
|
| Repayment of amended Term Loan B Facility | — |
| | (758 | ) | | — |
|
| Proceeds from issuance of Term Loan A and A-1 facilities | — |
| | 355 |
| | 435 |
|
| Amortization payments on term loan facilities | (42 | ) | | (41 | ) | | (19 | ) |
| Redemption of First Lien Notes and First and a Half Lien Notes | — |
| | — |
| | (789 | ) |
| Proceeds from issuance of Senior Notes | — |
| | 750 |
| | — |
|
| Redemption of Senior Notes | — |
| | (500 | ) | | — |
|
| Net change in securitization obligations | (11 | ) | | (40 | ) | | (21 | ) |
| Debt issuance costs | (6 | ) | | (16 | ) | | (10 | ) |
| Cash paid for fees associated with early extinguishment of debt | (1 | ) | | — |
| | (39 | ) |
| Repurchase of common stock | (280 | ) | | (195 | ) | | — |
|
| Dividends paid on common stock | (49 | ) | | (26 | ) | | — |
|
| Proceeds from exercise of stock options | 8 |
| | 2 |
| | 5 |
|
| Taxes paid related to net share settlement for stock-based compensation | (11 | ) | | (6 | ) | | (6 | ) |
| Payments of contingent consideration related to acquisitions | (22 | ) | | (25 | ) | | (7 | ) |
| Other, net | (26 | ) | | (34 | ) | | (24 | ) |
| Net cash used in financing activities | (570 | ) | | (534 | ) | | (275 | ) |
| Effect of changes in exchange rates on cash, cash equivalents and restricted cash | 2 |
| | (3 | ) | | (2 | ) |
| Net (decrease) increase in cash, cash equivalents and restricted cash | (47 | ) | | (142 | ) | | 100 |
|
| Cash, cash equivalents and restricted cash, beginning of period | 281 |
| | 423 |
| | 323 |
|
| Cash, cash equivalents and restricted cash, end of period | $ | 234 |
| | $ | 281 |
| | $ | 423 |
|
| | | | | | |
| Supplemental Disclosure of Cash Flow Information | | | | | |
| Interest payments (including securitization interest of $7, $6 and $6 respectively) | $ | 172 |
| | $ | 181 |
| | $ | 244 |
|
| Income tax payments, net | 12 |
| | 24 |
| | 17 |
|
See Notes to Consolidated Financial Statements.
F-9F-10
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | |
| | 2019 | | 2018 | | 2017 |
| Financing Activities | | | | | |
| Net change in Revolving Credit Facility | $ | (80) | | | $ | 200 | | | $ | (130) | |
| Payments for refinancing of Term Loan B | — | | | (4) | | | — | |
| Proceeds from refinancing of Term Loan A & A-1 | — | | | 17 | | | — | |
| Proceeds from issuance of Senior Notes | 550 | | | — | | | — | |
| Redemption and repurchase of Senior Notes | (533) | | | — | | | — | |
| Amortization payments on term loan facilities | (30) | | | (25) | | | (42) | |
| Debt issuance costs | (9) | | | (16) | | | (6) | |
| Cash paid for fees associated with early extinguishment of debt | (5) | | | — | | | (1) | |
| Repurchase of common stock | (20) | | | (402) | | | (280) | |
| Dividends paid on common stock | (31) | | | (45) | | | (49) | |
| Proceeds from exercise of stock options | — | | | 1 | | | 8 | |
| Taxes paid related to net share settlement for stock-based compensation | (6) | | | (10) | | | (11) | |
| Payments of contingent consideration related to acquisitions | (3) | | | (22) | | | (22) | |
| Other, net | (25) | | | (25) | | | (30) | |
| Net cash used in financing activities from continuing operations | (192) | | | (331) | | | (563) | |
| Net cash (used in) provided by financing activities from discontinued operations | (23) | | | 34 | | | (7) | |
| Net cash used in financing activities | (215) | | | (297) | | | (570) | |
| Effect of changes in exchange rates on cash, cash equivalents and restricted cash | — | | | (2) | | | 2 | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | 28 | | | 4 | | | (47) | |
| Cash, cash equivalents and restricted cash, beginning of period | 238 | | | 234 | | | 281 | |
| Cash, cash equivalents and restricted cash, end of period | 266 | | | 238 | | | 234 | |
| Less cash, cash equivalents and restricted cash of discontinued operations, end of period | 31 | | | 33 | | | 38 | |
| Cash, cash equivalents and restricted cash of continuing operations, end of period | $ | 235 | | | $ | 205 | | | $ | 196 | |
| | | | | |
| Supplemental Disclosure of Cash Flow Information | | | | | |
| Interest payments for continuing operations | $ | 201 | | | $ | 176 | | | $ | 165 | |
| Income tax (refunds) payments for continuing operations, net | (3) | | | 6 | | | 11 | |
See Notes to Consolidated Financial Statements.
F-11
REALOGY HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF EQUITY
(In millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Realogy Holdings Stockholders' Equity | | | | | | | | | | | | |
| | Common Stock | | | | Additional
Paid-In
Capital | | Accumulated
Deficit | | Accumulated
Other
Comprehensive
Loss | | Non-
controlling
Interests | | Total
Equity |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Shares | | Amount | | | | | | | | | | |
| Balance at January 1, 2017 | 140.2 | | | $ | 1 | | | $ | 5,565 | | | $ | (3,062) | | | $ | (40) | | | $ | 5 | | | $ | 2,469 | |
| Net income | — | | | — | | | — | | | 431 | | | — | | | 3 | | | 434 | |
| Other comprehensive income | — | | | — | | | — | | | — | | | 3 | | | — | | | 3 | |
| Repurchase of common stock | (9.5) | | | — | | | (280) | | | — | | | — | | | — | | | (280) | |
| Exercise of stock options | 0.3 | | | — | | | 8 | | | — | | | — | | | — | | | 8 | |
| Stock-based compensation | — | | | — | | | 52 | | | — | | | — | | | — | | | 52 | |
| Issuance of shares for vesting of equity awards | 1.0 | | | — | | | — | | | — | | | — | | | — | | | — | |
| Shares withheld for taxes on equity awards | (0.4) | | | — | | | (11) | | | — | | | — | | | — | | | (11) | |
| Dividends ($0.36 per share) | — | | | — | | | (49) | | | — | | | — | | | (4) | | | (53) | |
| Balance at December 31, 2017 | 131.6 | | | $ | 1 | | | $ | 5,285 | | | $ | (2,631) | | | $ | (37) | | | $ | 4 | | | $ | 2,622 | |
| Cumulative effect of adoption of new accounting pronouncements | — | | | — | | | — | | | (13) | | | (9) | | | — | | | (22) | |
| Net income | — | | | — | | | — | | | 137 | | | — | | | 3 | | | 140 | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | (6) | | | — | | | (6) | |
| Repurchase of common stock | (17.9) | | | — | | | (402) | | | — | | | — | | | — | | | (402) | |
| Exercise of stock options | — | | | — | | | 1 | | | — | | | — | | | — | | | 1 | |
| Stock-based compensation | — | | | — | | | 40 | | | — | | | — | | | — | | | 40 | |
| Issuance of shares for vesting of equity awards | 1.2 | | | — | | | — | | | — | | | — | | | — | | | — | |
| Shares withheld for taxes on equity awards | (0.3) | | | — | | | (10) | | | — | | | — | | | — | | | (10) | |
| Dividends ($0.36 per share) | — | | | — | | | (45) | | | — | | | — | | | (3) | | | (48) | |
| Balance at December 31, 2018 | 114.6 | | | $ | 1 | | | $ | 4,869 | | | $ | (2,507) | | | $ | (52) | | | $ | 4 | | | $ | 2,315 | |
| Net (loss) income | — | | | — | | | — | | | (188) | | | — | | | 3 | | | (185) | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | (4) | | | — | | | (4) | |
| Repurchase of common stock | (1.2) | | | — | | | (20) | | | — | | | — | | | — | | | (20) | |
| Stock-based compensation | — | | | — | | | 30 | | | — | | | — | | | — | | | 30 | |
| Issuance of shares for vesting of equity awards | 1.4 | | | — | | | — | | | — | | | — | | | — | | | — | |
| Shares withheld for taxes on equity awards | (0.4) | | | — | | | (6) | | | — | | | — | | | — | | | (6) | |
| Dividends ($0.27 per share) | — | | | — | | | (31) | | | — | | | — | | | (3) | | | (34) | |
| Balance at December 31, 2019 | 114.4 | | | $ | 1 | | | $ | 4,842 | | | $ | (2,695) | | | $ | (56) | | | $ | 4 | | | $ | 2,096 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Realogy Holdings Stockholders' Equity | | | | |
| | | Common Stock | | Additional Paid-In Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Non- controlling Interests | | Total Equity |
| |
| | |
| | | Shares | | Amount | |
| | Balance at January 1, 2015 | 146.4 |
| | $ | 1 |
| | $ | 5,677 |
| | $ | (3,464 | ) | | $ | (35 | ) | | $ | 4 |
| | $ | 2,183 |
|
| | Net income | — |
| | — |
| | — |
| | 184 |
| | — |
| | 4 |
| | 188 |
|
| | Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) |
| | Exercise of stock options | 0.2 |
| | — |
| | 5 |
| | — |
| | — |
| | — |
| | 5 |
|
| | Stock-based compensation | — |
| | — |
| | 57 |
| | — |
| | — |
| | — |
| | 57 |
|
| | Issuance of shares for vesting of equity awards, net of forfeitures | 0.2 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| | Shares withheld for taxes on equity awards | (0.1 | ) | | — |
| | (6 | ) | | — |
| | — |
| | — |
| | (6 | ) |
| | Dividends | — |
| | — |
| | — |
| | — |
| | — |
| | (4 | ) | | (4 | ) |
| | Balance at December 31, 2015 | 146.7 |
| | $ | 1 |
| | $ | 5,733 |
| | $ | (3,280 | ) | | $ | (36 | ) | | $ | 4 |
| | $ | 2,422 |
|
| | Cumulative effect of adoption of new accounting pronouncements related to stock-based compensation | — |
| | — |
| | — |
| | 5 |
| | — |
| | — |
| | 5 |
|
| | Net income | — |
| | — |
| | — |
| | 213 |
| | — |
| | 4 |
| | 217 |
|
| | Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (4 | ) | | — |
| | (4 | ) |
| | Repurchase of common stock | (6.9 | ) | | — |
| | (195 | ) | | — |
| | — |
| | — |
| | (195 | ) |
| | Exercise of stock options | 0.1 |
| | — |
| | 2 |
| | — |
| | — |
| | — |
| | 2 |
|
| | Stock-based compensation | — |
| | — |
| | 57 |
| | — |
| | — |
| | — |
| | 57 |
|
| | Issuance of shares for vesting of equity awards | 0.5 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| | Shares withheld for taxes on equity awards | (0.2 | ) | | — |
| | (6 | ) | | — |
| | — |
| | — |
| | (6 | ) |
| | Dividends | — |
| | — |
| | (26 | ) | | — |
| | — |
| | (3 | ) | | (29 | ) |
| | Balance at December 31, 2016 | 140.2 |
| | $ | 1 |
| | $ | 5,565 |
| | $ | (3,062 | ) | | $ | (40 | ) | | $ | 5 |
| | $ | 2,469 |
|
| | Net income | — |
| | — |
| | — |
| | 431 |
| | — |
| | 3 |
| | 434 |
|
| | Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 3 |
| | — |
| | 3 |
|
| | Repurchase of common stock | (9.5 | ) | | — |
| | (280 | ) | | — |
| | — |
| | — |
| | (280 | ) |
| | Exercise of stock options | 0.3 |
| | — |
| | 8 |
| | — |
| | — |
| | — |
| | 8 |
|
| | Stock-based compensation | — |
| | — |
| | 52 |
| | — |
| | — |
| | — |
| | 52 |
|
| | Issuance of shares for vesting of equity awards | 1.0 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| | Shares withheld for taxes on equity awards | (0.4 | ) | | — |
| | (11 | ) | | — |
| | — |
| | — |
| | (11 | ) |
| | Dividends | — |
| | — |
| | (49 | ) | | — |
| | — |
| | (4 | ) | | (53 | ) |
| | Balance at December 31, 2017 | 131.6 |
| | $ | 1 |
| | $ | 5,285 |
| | $ | (2,631 | ) | | $ | (37 | ) | | $ | 4 |
| | $ | 2,622 |
|
See Notes to Consolidated Financial Statements.
F-10F-12
REALOGY HOLDINGS CORP. AND REALOGY GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise noted, all amounts are in millions, except per share amounts)
1. BASIS OF PRESENTATION
Realogy Holdings Corp. ("Realogy Holdings", "Realogy" or the "Company") is a holding company for its consolidated subsidiaries including Realogy Intermediate Holdings LLC ("Realogy Intermediate") and Realogy Group LLC ("Realogy Group") and its consolidated subsidiaries. Realogy, through its subsidiaries, is a global provider of residential real estate services. Neither Realogy Holdings, the indirect parent of Realogy Group, nor Realogy Intermediate, the direct parent company of Realogy Group, conducts any operations other than with respect to its respective direct or indirect ownership of Realogy Group. As a result, the consolidated financial positions, results of operations, comprehensive income (loss) and cash flows of Realogy Holdings, Realogy Intermediate and Realogy Group are the same.
The accompanying Consolidated Financial Statements include the financial statements of Realogy Holdings and Realogy Group. Realogy Holdings' only asset is its investment in the common stock of Realogy Intermediate, and Realogy Intermediate's only asset is its investment in Realogy Group. Realogy Holdings' only obligations are its guarantees of certain borrowings and certain franchise obligations of Realogy Group. All expenses incurred by Realogy Holdings and Realogy Intermediate are for the benefit of Realogy Group and have been reflected in Realogy Group’s consolidated financial statements. The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America. All intercompany balances and transactions have been eliminated.
On November 6, 2019, the Company entered into a Purchase and Sale Agreement (the "Purchase Agreement") with a subsidiary of SIRVA, Inc. ("SIRVA"). Pursuant to the Purchase Agreement, Realogy has agreed to sell its Cartus Relocation Services business, held by Cartus Corporation, an indirect subsidiary of the Company (“Cartus”) to SIRVA. Subject to the terms and conditions of the Purchase Agreement, and following the completion of certain restructuring steps to separate from Cartus the affinity, broker-to-broker referral, and broker network management businesses that Realogy will retain under the name Realogy Leads Group, SIRVA will purchase all of the outstanding equity interests in Cartus for an aggregate purchase price of $400 million, consisting of $375 million in cash payable at the closing of the transaction, subject to certain adjustments set forth in the Purchase Agreement, and a $25 million deferred payment payable after the closing. The transaction is expected to close in the next couple of months, subject to satisfaction or waiver of the closing conditions set forth in the Purchase Agreement.
As a result, the Company met the requirements of ASC 360 to report the operating results of the Cartus Relocation Services business as discontinued operations, and reflected the (loss) income in "Net (loss) income from discontinued operations" on the Consolidated Statements of Operations for all periods presented. In addition, the related assets and liabilities as of November 6, 2019 have been reported as assets and liabilities held for sale in the Consolidated Balance Sheets. The cash flows related to discontinued operations have been segregated and are included in the Consolidated Statements of Cash Flows. Unless otherwise noted, discussion within these notes to the consolidated financial statements relates only to continuing operations. Refer to Note 3, "Discontinued Operations", for additional information related to discontinued operations.
Business Description
The Company reports its operations in the following four business segments:segments (the number of offices and agents are unaudited):
| |
• | Real Estate Franchise Services (known as Realogy Franchise Group or RFG)—franchises the Century 21®, Coldwell Banker®, Coldwell Banker Commercial®,ERA®, Sotheby's International Realty® and Better Homes and Gardens® Real Estate brand names. As of December 31, 2017, our franchise systems and proprietary brands had approximately 14,800 offices (which included approximately 790 company owned brokerage offices) and approximately 289,000 independent sales agents (which included approximately 50,300 company owned brokerage independent sales agents) operating in the U.S. and 115 other countries and territories around the world.
|
Our wholly-owned subsidiary, ZapLabs LLC•Realogy Franchise Group (formerly referred to as Real Estate Franchise Services, or RFG)—franchises the Century 21®, is the developerColdwell Banker®, Coldwell Banker Commercial®,Corcoran®,ERA®, Sotheby's International Realty® and Better Homes and Gardens® Real Estate brand names. As of December 31, 2019, our proprietary technology platform for the real estate brokerages franchise systems and proprietary brands had approximately 302,400 independent sales agents in our franchise system as well as their customers. We believe the Zap technology platform will increase the value proposition to franchisees, worldwide, including approximately 189,900independent sales agents and customers as well as improveoperating in the productivity ofU.S. (which included approximately 52,200 company owned brokerage independent sales agents.agents). As of December 31, 2019, our real estate franchise systems and proprietary brands had approximately 18,500 offices worldwide in 114 countries and territories, including approximately 5,900 brokerage offices in the U.S. (which included approximately 710 company owned brokerage offices).
| |
• | Company Owned Real Estate Brokerage Services (known as NRT)—operates a full-service real estate brokerage business with approximately 790 owned and operated brokerage offices with approximately 50,300 independent sales agents principally under the Coldwell Banker®, Corcoran®, Sotheby’s International Realty®, ZipRealty® and Citi HabitatsSM brand names in more than 50 of the 100 largest metropolitan areas in the U.S. This segment also includes the Company's share of earnings for our PHH Home Loans venture, which is in the final stages of winding down as we transition to our new mortgage origination joint venture with Guaranteed Rate Affinity, which will be included in the financial results
•Realogy Brokerage Group (formerly referred to as Company Owned Real Estate Brokerage Services, or NRT)—operates a full-service real estate brokerage business with approximately 710 owned and operated brokerage offices with approximately 52,200 independent sales agents principally under the Coldwell Banker®, Corcoran® and Sotheby’s International Realty® brand names in many of the largest metropolitan areas in the U.S. •Realogy Title Group (formerly referred to as Title and Settlement Services, segment. |
| |
• | Relocation Services (known as Cartus®)—primarily offers clients employee relocation services such as homesale assistance, providing home equity advances to transferees (generally guaranteed by the individual's employer), home finding and other destination services, expense processing, relocation policy counseling and consulting services, arranging household goods moving services, coordinating visa and immigration support, intercultural and language training and group move management services. In addition, we provide home buying and selling assistance to members of affinity clients.
|
Title and Settlement Services (known as Title Resource Group or TRG)—provides full-service title and settlement services to real estate companies, affinity groups, corporations and financial institutions with many of these services provided in connection with the Company's real estate brokerage and relocation services business.brokerage. This segment also includes the Company's share of equity earnings including start-up costs,and losses for our Guaranteed Rate Affinity mortgage origination joint venture.
•Realogy Leads Group (previously formed part of Relocation Services)—Realogy Leads Group consists of affinity programs (both company- and client-directed) as well as broker-to-broker referrals. Through its highly concentrated affinity business, this segment has traditionally provided and continues to provide assistance with residential real estate transactions to members of affinity clients. Referrals from affinity programs are handled by the Realogy Broker Network. Member brokers of the Realogy Broker Network, including certain franchisees and company owned brokerages, have traditionally received referrals from the Cartus Relocation Services, Realogy Leads Group and from each other through broker-to-broker referrals in exchange for a referral fee.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
In presenting the consolidated financial statements, management makes estimates and assumptions that affect the amounts reported and related disclosures. Estimates, by their nature, are based on judgment and available information. Accordingly, actual results could differ materially from those estimates.
REVENUE RECOGNITION
Real Estate Franchise ServicesASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
The Company franchisesreports the results of operations of a business as discontinued operations if a disposal represents a strategic shift that has or will have a major effect on the Company's operations and financial results when the business is sold and classified as held for sale, in accordance with the criteria of Accounting Standard Codification (“ASC”) Topic 205 Presentation of Financial Statements ("ASC 205") and ASC Topic 360 Property, Plant and Equipment (“ASC 360”). Assets and liabilities of a business classified as held for sale are recorded at the lower of its real estate brandscarrying amount or estimated fair value less cost to real estate brokerage businessessell and depreciation ceases on the date that the held for sale criteria are independently owned and operated. Franchise revenue principally consists of royalty and marketing fees frommet. If the Company’s franchisees. The royalty received is primarily based on a percentagecarrying amount of the franchisee’s gross commission income. Royalty feesbusiness exceeds its estimated fair value less cost to sell, a loss is recognized. Assets and liabilities related to a business classified as held for sale are accruedsegregated in the current and prior balance sheets in the period in which the business is classified as the underlying franchisee revenue is earned (upon closeheld for sale. The results of the homesale transaction). Annual volume incentives given to certain franchisees on royalty feesdiscontinued operations are recorded as a reduction to revenue and are accrued forreported in relative proportion to the recognition of the underlying gross franchise revenue. Non-standard sales incentives are recorded as a reduction to revenue ratably over the related performance period or"Net (loss) income from the date of issuance through the remaining life of the related franchise agreement. Franchise revenue also includes initial franchise fees and initial area development fees, which are generally non-refundable and recognized by the Company as revenue when all material services or conditions relating to the sale have been substantially performed. The Company also earns marketing fees from its franchisees and utilizes such fees to fund marketing campaigns on behalf of its franchisees. As such, marketing revenue is earned as these funds are spent.
Company Owned Real Estate Brokerage Services
As an owner-operator of real estate brokerages, the Company assists home buyers and sellers in listing, marketing, selling and finding homes. Real estate commissions earned by the Company’s real estate brokerage business are recorded as revenue on a gross basis upon the closing of a real estate transaction (i.e., purchase or sale of a home), which are referred to as gross commission income. The commissions the Company pays to real estate agents are recognized concurrently with associated revenues and presented as the commission and other agent-related costs line item on the accompanying Consolidated Statements of Operations.
Relocation Services
The Company provides relocation services to corporate and government clients for the transfer of their employees ("transferees"). Such services include homesale assistance including the purchasing and/or selling of a transferee’s home and providing home equity advances to transferees (generally guaranteed by the individual's employer), arranging household goods moving services, and other relocation services such as expense processing, relocation policy counseling, relocation-related accounting, coordinating visa and immigration support, intercultural and language training and destination services. Clients may pay a bundled outsourcing management fee that can cover several of the relocation services listed, according the clients’ specific needs. In many cases, Cartus charges an outsourcing fee to the client that covers multiple relocation services that Cartus will deliver to the transferee. The Company earns revenues from fees charged to clients for the performance and/or facilitation of these services and recognizes such revenue as services are provided. In the majority of relocation transactions, the gain or loss on the sale of a transferee’s home is generally borne by the individual's employer. Furthermore, the Company recognizes household goods commission revenue for arranging household goods moving services on a net basis when the household goods reach the destination location. In addition, we provide home buying and selling assistance to members of Affinity organizations.
The Company earns referral commission revenue primarily from real estate brokers for the home sale and purchase of transferees and Affinity members, which is recognized at the time the underlying property closes, and revenues from other third-party service providers where the Company earns a referral commission, which is recognized at the time of completion of services.
Additionally, the Company generally earns interest income on the funds it advances on behalf of the transferring employee, which is recorded within other revenue (as is the corresponding interest expense on the securitization obligations)discontinued operations" in the accompanying Consolidated Statements of Operations.
TitleOperations for the current and Settlement Services
The Company provides titleprior periods commencing in the period in which the business meets the criteria, and includes any gain or loss recognized on closing, services, which include title search procedures for title insurance policies, homesale escrow and other closing services. Title revenues, which are recorded net of amounts remitted to third-party insurance underwriters, and title and closing service fees are recorded at the time a homesale transaction or refinancing closes. The Company also owns an underwriter of title insurance. For independent title agents, the underwriter recognizes policy premium revenue on a gross basis (before deduction of agent commission) upon notice of policy issuance from the agent. For affiliated title agents, the underwriter recognizes the incremental policy premium revenue upon the effective dateadjustment of the title policy ascarrying amount to fair value less cost to sell. Transactions between the agent commission revenue is already recognized bybusinesses held for sale and businesses held for use that are expected to continue to exist after the affiliated title agent.disposal are not eliminated to appropriately reflect the continuing operations and balances held for sale. See Note 3, "Discontinued Operations", for further discussion.
LEASES
See Note 4, "Leases", for discussion.
REVENUE RECOGNITION
See Note 5, "Revenue Recognition", for discussion.
CONSOLIDATION
The Company consolidates any VIEvariable interest entity ("VIE") for which it is the primary beneficiary with a controlling financial interest. Also, the Company consolidates an entity not deemed a VIE if its ownership, direct or indirect, exceeds 50% of the outstanding voting shares of an entity and/or it has the ability to control the financial or operating policies through its voting rights, board representation or other similar rights. For entities where the Company does not have a controlling interest (financial or operating), the investments in such entities are accounted for using the equity method or at fair value with changes in fair value recognized in net income, as appropriate. The Company applies the equity method of accounting when it has the ability to exercise significant influence over operating and financial policies of an investee. The
Company measures all other investments at fair value with changes in fair value recognized in net income or in the case that an equity investment does not have readily determinable fair values, at cost minus impairment (if any) plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments with remaining maturities not exceeding three months at the date of purchase to be cash equivalents.
RESTRICTED CASH
Restricted cash primarily relates to amounts specifically designated as collateral for the repayment of outstanding borrowings under the Company’s securitization facilities. Such amounts approximated $7 million at both December 31, 2017 and 2016.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company estimates the allowance necessary to provide for uncollectible accounts receivable. The estimate is based on historical experience, combined with a review of current developments and includes specific accounts for which payment has become unlikely. The process by which the Company calculates the allowance begins in the individual business units where specific problem accounts are identified and reserved primarily based upon the age profile of the receivables and specific payment issues.
ADVERTISING EXPENSES
Advertising costs are generally expensed in the period incurred. Advertising expenses, recorded within the marketing expense line item on the Company’s Consolidated Statements of Operations, were approximately $211$196 million,, $198 $207 million and $194$211 million for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively.
DEBT ISSUANCE COSTS
Debt issuance costs include costs incurred in connection with obtaining debt and extending existing debt. These financing costs are presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount, with the exception of the debt issuance costs related to the Revolving Credit Facility and securitization obligations which are classified as a deferred financing asset within other assets. The debt issuance costs are amortized via the effective interest method and the amortization period is the life of the related debt.
INCOME TAXES
The Company’s provision for income taxes is determined using the asset and liability method, under which deferred tax assets and liabilities are calculated based upon the temporary differences between the financial statement and income tax
bases of assets and liabilities using currently enacted tax rates. These differences are based upon estimated differences between the book and tax basis of the assets and liabilities for the Company. Certain tax assets and liabilities of the Company may be adjusted in connection with the finalization of income tax audits.
The Company’s deferred tax assets are recorded net of a valuation allowance when, based on the weight of available evidence, it is more likely than not that all or some portion of the recorded deferred tax balances will not be realized in future periods. Decreases to the valuation allowance are recorded as reductions to the Company’s provision for income taxes and increases to the valuation allowance result in additional provision for income taxes.
DERIVATIVE INSTRUMENTS
The Company records derivatives and hedging activities on the balance sheet at their respective fair values. The Company uses foreign currency forward contracts largelyinterest rate swaps to manage its exposure to changes in foreign currency exchange ratesfuture interest rate volatility associated with its foreign currency denominated receivables and payables. The Company primarily manages its foreign currency exposure to the Euro, British Pound, Swiss Franc and Canadian Dollar.variable rate borrowings. The Company has not elected to utilize hedge accounting for these forward contracts;instruments; therefore, any change in fair value is recorded in the Consolidated Statements of Operations. However, the fluctuations in the value of these forward contractsinstruments generally offset the impact of changes in the value of the underlying risk that they are intended to economically hedge.
The Company also enters into interest rate swaps to manage its exposure to changes in interest rates associated with its variable rate borrowings. At December 31, 2017, the Company has interest rate swaps with an aggregate notional value See Note 18, "Risk Management and Fair Value of $1,475 million to offset the variability in cash flows resulting from the term loan facilities as follows:
|
| | | | | |
Notional Value (in millions) | | Commencement Date | | Expiration Date | |
$225 | | July 2012 | | February 2018 | (a) |
$200 | | January 2013 | | February 2018 | (a) |
$600 | | August 2015 | | August 2020 | |
$450 | | November 2017 | (a) | November 2022 | |
_______________
| |
(a) | Interest rates swaps with a notional value of $425 million expired February 10, 2018, and interest rate swaps with a notional value of $450 million commenced in the fourth quarter of 2017. |
The swaps help to protect our outstanding variable rate borrowings from future interest rate volatility. The Company has not elected to utilize hedge accountingFinancial Instruments", for these interest rate swaps; therefore, any change in fair value is recorded in the Consolidated Statements of Operations.further discussion.
INVESTMENTS
The Company owned 49.9% of PHH Home Loans, a mortgage origination venture formed in 2005 for the purpose of originating and selling mortgage loans primarily sourced through the Company’s real estate brokerage and relocation businesses, while PHH Corporation ("PHH") owned the remaining percentage. In February 2017, Realogy announced that it and Guaranteed Rate, Inc. (“Guaranteed Rate”) agreed to form a new mortgage origination joint venture, Guaranteed Rate Affinity, LLC ("Guaranteed Rate Affinity"). During the third and fourth quarters of 2017, Guaranteed Rate Affinity, acquired certain assets of the mortgage operations of PHH Home Loans, including its four regional centers and employees across the United States, but not its mortgage assets. Guaranteed Rate Affinity began doing business in August 2017 on a phased-in basis.
Guaranteed Rate Affinity originates and markets its mortgage lending services to the Company's real estate brokerage and relocation subsidiaries as well as other real estate brokerage companies across the country. Guaranteed Rate, Inc. ("Guaranteed Rate") owns a controlling 50.1% stake of Guaranteed Rate Affinity and the Company owns 49.9%. The Company has certain governance rights related to the joint venture, however it does not have controlcontrol of the day-to-day operations of Guaranteed Rate Affinity. WhileDuring the first quarter of 2018, the Company's interest in PHH Home Loans LLC
("PHH Home Loans"), the Company's former 49.9% mortgage joint venture, was sold to a subsidiary of PHH Corporation and the Company received net cash proceeds of $19 million reducing the investment balance in PHH Home Loans to 0. Guaranteed Rate Affinity began doing business in August 2017 on a phased-in basis. The equity earnings or losses related to PHH Home Loans were included in the financial results of the Company Owned Real EstateRealogy Brokerage Services segment,Group and the equity earnings or losses related to Guaranteed Rate Affinity are included in the financial results of theRealogy Title and Settlement Services segment.Group.
At December 31, 20172019 and 2016,2018, the Company had various equity method investments aggregating $74$69 million and $66$51 million, respectively, which are recorded within other current and non-current assets on the accompanying Consolidated Balance Sheets. The $74$69 million investment balance at December 31, 20172019 included $48 million for the Company's
investment in Guaranteed Rate Affinity and $19$60 million for the Company's investment in PHH Home Loans, which has ceased operations.Guaranteed Rate Affinity. The Company's remaining interest in PHH Home Loans is expected to be liquidated in the first half of 2018 and the Company expects to realize net cash proceeds of $19 million, reducing the investment balance to zero. The $66$51 million investment balance at December 31, 20162018 included $59$43 million for the Company's investment in PHH Home Loans.Guaranteed Rate Affinity.
For the year ended December 31, 2019, the Company recorded equity earnings of $18 million at Realogy Title Group primarily related to earnings from the operations of Guaranteed Rate Affinity.
For the year ended December 31, 2018, the Company recorded equity losses of $4 million at Realogy Title Group primarily related to losses from the operations of Guaranteed Rate Affinity.
For the year ended December 31, 2017, the Company recorded equity earnings of $18 million which consisted of $35 million of earnings from the sale of PHH Home Loans' assets to Guaranteed Rate Affinity, partially offset by $7 million of exit costs and losses of $6 million from the continuing operations of PHH Home Loans. In addition, there was a $4 million loss from equity method investments at theRealogy Title and Settlement Services segmentGroup primarily related to costs associated with the start up of operations of Guaranteed Rate Affinity, including $3 million of amortization of intangible assets recorded in purchase accounting.
For the years ended December 31, 2016 and 2015, the Company recorded equity earnings of $12 million and $16 million, respectively, which consisted of $8 million and $14 million, respectively, relating to its investment in PHH Home Loans.
The Company received $60$3 million, $7$3 million and $10$63 million in cash dividends primarily from PHH Home Loans,equity method investments during the years ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively. The Company invested $2 million, $4 million and $55 million of cash into Guaranteed Rate Affinity during the yearyears ended December 31, 2017.2019, 2018 and 2017, respectively.
PROPERTY AND EQUIPMENT
Property and equipment (including leasehold improvements) are initially recorded at cost, net of accumulated depreciation and amortization. Depreciation, recorded as a component of depreciation and amortization on the Consolidated Statements of Operations, is computed utilizing the straight-line method over the estimated useful lives of the related assets. Amortization of leasehold improvements, also recorded as a component of depreciation and amortization, is computed utilizing the straight-line method over the estimated benefit period of the related assets or the lease term, if shorter. Useful lives are 30 years for buildings, up to 20 years for leasehold improvements, and from 3 to 7 years for furniture, fixtures and equipment.
The Company capitalizes the costs of software developed for internal use which commences during the development phase of the project. The Company amortizes software developed or obtained for internal use on a straight-line basis, generally from 1 to 5 years, when such software is ready for use. The net carrying value of software developed or obtained for internal use was $86$97 million and $83$93 million at December 31, 20172019 and 2016,2018, respectively.
IMPAIRMENT OF GOODWILL, INTANGIBLE ASSETS AND OTHER LONG-LIVED ASSETS
Goodwill represents the excess of acquisition costs over the fair value of the net tangible assets and identifiable intangible assets acquired in a business combination. Indefinite-livedOther indefinite-lived intangible assets primarily consist of trademarks acquired in business combinations. Goodwill and other indefinite-lived assets are not amortized, but are subject to impairment testing. The aggregate carrying values of our goodwill and other indefinite-lived intangible assets were $3,710$3,300 million and $767$692 million, respectively, at December 31, 20172019 and are subject to an impairment testingassessment annually as of October 1, or whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. This testingassessment compares carrying values of the goodwill reporting units and other indefinite lived intangible assets to their respective fair values and, when appropriate, the carrying value is reduced to fair value.
In testing goodwill, the fair value of oureach reporting unitsunit is estimated utilizingusing the income approach, a discounted cash flow approach utilizingapproach. For the other indefinite lived intangible assets, fair value is estimated using the relief from royalty method. Management utilizes long-term cash flow forecasts and ourthe Company's annual operating plans adjusted for terminal value assumptions.
We determine the The fair value of ourthe Company's reporting units and other indefinite lived intangible assets are determined
utilizing ourthe best estimate of future revenues, operating expenses cash flows,including commission expense, market and general economic conditions, trends in the industry, as well as assumptions that we believemanagement believes marketplace participants would utilize including discount rates, cost of capital, trademark royalty rates, and long-term growth rates. The trademark royalty rate was determined by reviewing similar trademark agreements with third parties. Although we believe ourmanagement believes that assumptions are reasonable, actual results may vary significantly. These impairment testsassessments involve the use of accounting estimates and assumptions, changes in which could materially impact our financial condition or operating performance if actual results differ from such estimates and assumptions. To address this uncertainty, we performa sensitivity analysis is performed on key estimates and assumptions.
During the third quarter of 2019, management determined that the decrease in the stock price of the Company and the impact on future earnings related to the discontinuation of the USAA affinity program qualified as triggering events for all of its reporting units and accordingly management performed an impairment assessment of goodwill and other indefinite-lived intangible assets as of September 1, 2019. The impairment assessment indicated that the carrying value of Realogy Brokerage Group exceeded its estimated fair value by $180 million primarily as a result of a reduction in Realogy Brokerage Group's long-term forecast. Accounting Standard Update No. 2017-04 (Topic 350), "Simplifying the Test of Goodwill Impairment", which the Company early adopted in the third quarter of 2019, requires that the impairment charge and deferred tax effect are calculated using the simultaneous equation method which effectively grosses up the goodwill impairment charge to account for the related tax benefit so that the resulting carrying value does not exceed the calculated fair value. As a result, management recognized a goodwill impairment charge to reduce goodwill at Realogy Brokerage Group by $237 million offset by an income tax benefit of $57 million resulting in a net reduction in carrying value of $180 million.
The results of the Company's interim impairment test indicated no other impairment charges were required for the other reporting units or other indefinite-lived intangibles. Management evaluated the effect of lowering the estimated fair value for each of the passing reporting units by 10% and determined no impairment of goodwill or other indefinite-lived intangible assets would have been recognized under this evaluation. Based upon the impairment analysisassessment performed in the fourth quarter of 2017, 20162019, 2018 and 2015,2017, there was no impairment of goodwill or other indefinite-lived intangible assets for these years. Management evaluated the effect of lowering the
estimated fair value for each of the passing reporting units by 10% and determined that no impairment of goodwill or other indefinite-lived intangible assets would have been recognized under this evaluation for 2017, 20162018 or 2015.2017.
The Company evaluates the recoverability of its other long-lived assets, including amortizable intangible assets, if circumstances indicate an impairment may have occurred. This analysisassessment is performed by comparing the respective carrying values of the assets to the current and expected future cash flows, on an undiscounted basis, to be generated from such assets. Property and equipment is evaluated separately within each business unit. If such analysisassessment indicates that the carrying value of these assets is not recoverable, then the carrying value of such assets is reduced to fair value through a charge to the Company’s Consolidated Statements of Operations. There were no impairments relating to other long-lived assets, including amortizable intangible assets, during 2017, 2016 or 2015.
SUPPLEMENTAL CASH FLOW INFORMATION
Significant non-cash transactions in 2017, 2016 and 2015 included $18 million, $14 million and $17 million, respectively, in capital lease additions, which resulted in non-cash additions to property and equipment, net and other non-current liabilities.
STOCK-BASED COMPENSATION
The Company grants stock-based awards to certain senior management, employees and directors including non-qualified stock options, restricted stock, restricted stock units and performance share units.
The fair value of non-qualified stock options is estimated using the Black-Scholes option pricing model on the grant date and is recognized as expense over the service period based on the vesting requirements. The fair value of restricted stock, restricted stock units and performance share units without a market condition is measured based on the closing price of the Company's common stock on the grant date and is recognized as expense over the service period of the award, or when requisite performance metrics or milestones are probable of being achieved. The fair value of awards with a market condition are estimated using the Monte Carlo simulation method and expense is recognized on a straight-line basis over the requisite service period of the award. The Company recognizes forfeitures as they occur. Determining the fair value of stock-based awards at the grant date requires considerable judgment, including estimating expected volatility and expected term, risk-free rate.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
Adoption of the New Leasing Standard
In AugustFebruary 2016, the FASB issued a new standard on classification of cash receipts and paymentsAccounting Standard Update No. 2016-02 (Topic 842) "Leases" (the "new leasing standard") which requires virtually all leases to be recognized on the statementbalance sheet. Effective January 1, 2019, the Company adopted the new leasing standard using the modified retrospective transition approach with optional transition relief and recognized the cumulative effect of cash flows intendingapplying the new leasing standard to reduce diversityexisting contracts on the balance sheet on January 1, 2019. Therefore, results for reporting periods beginning after January 1, 2019 are presented under the new leasing standard; however, the comparative prior period amounts have not been restated and continue to be reported in practiceaccordance with historical accounting under ASC Topic 840. The most significant effects of adoption of the new leasing standard relate to the recognition of new right-of-use assets and lease liabilities on how certain transactions are classified.the balance sheet for operating leases. The new leasing standard did not impact our Consolidated Statement of Operations and Consolidated Statement of Cash Flows. The impact of the changes to the Consolidated Balance Sheets for the adoption of the new leasing standard were as follows:
| | | | | | | | | | | | | | | | | |
| | Balance Sheet accounts prior to the new leasing standard adoption adjustments | | Adjustments due to the adoption of the new leasing standard | | Balance Sheet accounts after the new leasing standard adoption adjustments |
| ASSETS | | | | | |
| Current assets: | | | | | |
| Other current assets | $ | 140 | | | $ | (13) | | | $ | 127 | |
| Current assets - held for sale | 338 | | | (1) | | | 337 | |
| Total current assets | 768 | | | (14) | | | 754 | |
| Operating lease assets, net | — | | | 525 | | | 525 | |
| Other non-current assets | 272 | | | — | | | 272 | |
| Non-current assets - held for sale | 461 | | | 41 | | | 502 | |
| Total assets (a) | $ | 7,290 | | | $ | 552 | | | $ | 7,842 | |
| | | | | |
| LIABILITIES AND EQUITY | | | | | |
| Current liabilities: | | | | | |
| Current portion of operating lease liabilities | $ | — | | | $ | 126 | | | $ | 126 | |
| Accrued expenses and other current liabilities | 344 | | | (12) | | | 332 | |
| Current liabilities - held for sale | 352 | | | — | | | 352 | |
| Total current liabilities | 1,527 | | | 114 | | | 1,641 | |
| Long-term operating lease liabilities | — | | | 458 | | | 458 | |
| Other non-current liabilities | 256 | | | (60) | | | 196 | |
| Non-current liabilities - held for sale | 3 | | | 40 | | | 43 | |
| Total liabilities | 4,975 | | | 552 | | | 5,527 | |
| Total equity | 2,315 | | | — | | | 2,315 | |
| Total liabilities and equity | $ | 7,290 | | | $ | 552 | | | $ | 7,842 | |
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(a)The $552 million adjustment to Total assets due to the adoption of the new leasing standard consists of $414 million at Realogy Brokerage Group, $52 million at Corporate and Other, $46 million at Realogy Title Group and $40 million of assets held for sale related to the pending sale of Cartus' Relocation Services business.
The Company elected a package of practical expedients that were consequently applied to all leases. The Company did not reassess whether expired or existing contracts contain leases under the new definition of a lease, lease classification for expired or existing leases, nor whether previously capitalized initial direct costs would qualify for capitalization under the new standard. Upon transition, the Company did not elect to use hindsight with respect to lease renewals and purchase options when accounting for existing leases, as well as assessing the impairment of right-of-use assets. Therefore, lease terms largely remained unchanged. In addition, the Company elected the short-term lease recognition exemption and did not recognize a lease obligation and right-of-use asset on its balance sheet for all leases with terms of 12 months or less. The Company elected the practical expedient to combine lease and non-lease components in November 2016,total gross rent for all of its leases which resulted in a larger lease liability recorded on the balance sheet.
Adoption of Other Accounting Pronouncements
In January 2017, the FASB issued Accounting Standard Update No. 2017-04 (Topic 350), "Simplifying the Test of Goodwill Impairment." This update simplifies how the Company is required to test goodwill for impairment by eliminating step two, which requires a hypothetical purchase price allocation, from the goodwill impairment test. Under the new standard requiringguidance, a goodwill impairment will equal the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The new guidance requires that the statement of cash flows explainimpairment charge and deferred tax effect are calculated using the changesimultaneous equation method which effectively grosses up the goodwill impairment charge to account for the related tax benefit so that the resulting carrying value does not exceed the calculated fair value. The standard is effective for interim or annual goodwill impairment tests during the period in the total of cash, cash equivalents,fiscal years beginning after December 15, 2019, with early adoption permitted, and amounts generally described as restricted cash or restricted cash equivalents.should be applied prospectively. The Company elected to early adopt these ASUs in the fourth quarterthis standard as of 2017 using retrospective application at the beginning of the earliest comparative period presented in the year of adoption, JanuarySeptember 1, 2015. Adoption of the new guidance resulted in the following key changes:2019.
Contingent consideration for business acquisitions - Prior to adoption of the new guidance, the Company classified payments of contingent consideration for business acquisitions on a separate line in the financing section of its Consolidated Statement of Cash Flows. Under the new guidance, payments of contingent consideration are separated and classified as investing activities for payments made soon after the acquisition’s consummation date (three months or less), financing activities for payments made up to the original acquisition date amount of the contingent consideration liability and operating activities for payments made in excess of the original amount of the contingent consideration liability.
Debt prepayments or extinguishment - Prior to adoption of the new guidance, the Company classified cash paid for fees associated with the prepayment or extinguishment of debt in the operating section of its Consolidated Statement of Cash Flows as part of net income (loss), adding back only the non-cash portion as an adjustment to reconcile net income (loss) to net cash provided (used) by operating activities. Under the new guidance, all cash paid for fees associated with the prepayment or extinguishment of debt is classified as financing activities and the total of the cash and non-cash portions are added back in the operating section.
Restricted Cash - Prior to adoption of the new guidance, the Company presented the change in restricted cash as a separate line in the investing section of its Consolidated Statement of Cash Flows. Under the new guidance, restricted cash is presented with cash and cash equivalents on the Consolidated Statement of Cash Flows and the
activity is now reflected in the total change in cash, cash equivalents and restricted cash. Additionally, for reconciliation purposes, the Company broke out restricted cash as a separate line on the Company’s Consolidated Balance Sheet.
Adoption of the new guidance resulted in reclassifications between cash flow categories, but no net cash impact to its Consolidated Statement of Cash Flows.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Company considers the applicability and impact of all Accounting Standards Updates. ASUs not listed belowRecently issued standards were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial position or results of operations.
In February 2018,
3. DISCONTINUED OPERATIONS
The Company entered into the FASB issued a new standardPurchase Agreement on November 6, 2019 (the "Purchase Agreement"), pursuant to which permits companies to reclassify certain income tax effects resulting fromSIRVA will acquire Cartus Relocation Services, the 2017 Tax Act, called "stranded tax effects", from accumulated other comprehensive income ("AOCI") to retained earnings. According toCompany's global employee relocation business. Under the new guidance, the reclassification amount should include the effectterms of the changePurchase Agreement, the Company will receive $375 million in cash at closing, subject to certain adjustments set forth in the U.S. federal corporate income tax rate onPurchase Agreement, and a $25 million deferred payment after the gross deferred tax amounts and related valuation allowances, if any, at the date of enactmentclosing of the 2017 Tax Act relatedtransaction. The $375 million purchase price is subject to adjustments for cash, indebtedness, working capital, securitization obligations and other items, remaining in AOCI. The guidance is effective for all companies for fiscal years beginning after December 15, 2018,as defined and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period for public companies who have not yet issued financial statements. The Company expects to adopt this standarddescribed in the first quarter of 2018 whichPurchase Agreement. The transaction is expected to close in the next couple of months, subject to the satisfaction of closing conditions described in the Purchase Agreement.
The transaction includes all of Cartus Relocation Services, but does not include Realogy Leads Group. Realogy Leads Group is comprised of the Company's affinity and broker-to-broker business, as well as the broker network made up of agents and brokers from Realogy’s residential real estate brands and certain independent real estate brokers (which was formerly referred to as the Cartus Broker Network).
As a result of the pending transaction, the Company met the requirements under ASC 360 and ASC 205 and accordingly the assets and liabilities of Cartus Relocation Services are classified as held for sale in the Consolidated Balance Sheets and the operating results of Cartus Relocation Services are reported as discontinued operations and reflected in "Net (loss) income from discontinued operations" on the Consolidated Statements of Operations for all periods presented. The cash flows related to discontinued operations have been segregated and are included in the Consolidated Statements of Cash Flows.
The following table summarizes the operating results of discontinued operations described above and reflected within "Net (loss) income from discontinued operations" in the Company’s Consolidated Statements of Operations for each of the periods presented:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | |
| | 2019 | | 2018 | | 2017 |
| Net revenues | $ | 272 | | | $ | 297 | | | $ | 304 | |
| Total expenses | 281 | | | 305 | | | 297 | |
| (Loss) income from discontinued operations | (9) | | | (8) | | | 7 | |
| Estimated loss on the sale of discontinued operations (a) | (22) | | | — | | | — | |
| Income tax expense (benefit) from discontinued operations (b) | 36 | | | (2) | | | 1 | |
| Net (loss) income from discontinued operations | $ | (67) | | | $ | (6) | | | $ | 6 | |
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(a)Adjustment to record assets and liabilities held for sale at the lower of carrying value or fair value less any costs to sell based on the Purchase Agreement.
(b)Income tax expense for the year ended December 31, 2019 relates to tax expense as a result of the expected taxable gain on the sale of Cartus Relocation Services, primarily as a result of the Company's low tax basis in goodwill, trademarks and other intangibles.
Assets and liabilities held for sale related to discontinued operations presented in the Consolidated Balance Sheets at December 31, 2019 and 2018 are as follows:
| | | | | | | | | | | |
| | December 31, | | |
| | 2019 (a) | | 2018 |
| Carrying amounts of the major classes of assets held for sale | | | |
| Cash and cash equivalents | $ | 28 | | | $ | 22 | |
| Restricted cash | 3 | | | 11 | |
| Trade receivables | 46 | | | 61 | |
| Relocation receivables | 203 | | | 231 | |
| Other current assets | 12 | | | 13 | |
| Total current assets | | | | 338 | |
| Property and equipment, net | 36 | | | 31 | |
| Operating lease assets, net | 36 | | | — | |
| Goodwill | 176 | | | 176 | |
| Trademarks | 76 | | | 76 | |
| Other intangibles, net | 156 | | | 174 | |
| Other non-current assets | — | | | 4 | |
| Total non-current assets | | | | 461 | |
| Allowance for reduction of assets held for sale (b) | (22) | | | |
| Total assets classified as held for sale | $ | 750 | | | $ | 799 | |
| | | |
| Carrying amounts of the major classes of liabilities held for sale | | | |
| Accounts payable | $ | 53 | | | $ | 64 | |
| Securitization obligations | 206 | | | 231 | |
| Current portion of operating lease liabilities | 6 | | | — | |
| Accrued expenses and other current liabilities | 62 | | | 57 | |
| Total current liabilities | | | | 352 | |
| Long-term operating lease liabilities | 29 | | | — | |
| Other non-current liabilities | — | | | 3 | |
| Total non-current liabilities | | | | 3 | |
| Total liabilities classified as held for sale | $ | 356 | | | $ | 355 | |
_______________
(a)The assets and liabilities of Cartus Relocation Services are classified as current on the December 31, 2019 balance sheet because it is probable that the sale will occur and proceeds will be collected within one year.
(b)Adjustment to record assets and liabilities held for sale at the lower of carrying value or fair value less any costs to sell based on the Purchase Agreement.
Securitization Obligations
Securitization Obligations in the table above are further broken out as follows:
| | | | | | | | | | | |
| | December 31, | | |
| | 2019 | | 2018 |
| Securitization Obligations: | | | |
| Apple Ridge Funding LLC | $ | 195 | | | $ | 218 | |
| Cartus Financing Limited | 11 | | | 13 | |
| Total Securitization Obligations | $ | 206 | | | $ | 231 | |
Realogy Group has secured obligations through Apple Ridge Funding LLC under a securitization program which expires in June 2020. As of December 31, 2019, the Company had $250 million of borrowing capacity under the Apple Ridge Funding LLC securitization program with $195 million being utilized leaving $55 million of available capacity.
Realogy Group, through a special purpose entity known as Cartus Financing Limited, has agreements providing for a £10 million revolving loan facility and a £5 million working capital facility which expires in August 2020. As of December 31, 2019, there were $11 million of outstanding borrowings under the facilities leaving $9 million of available capacity. These Cartus Financing Limited facilities are secured by the relocation assets of a U.K. government contract in this special purpose entity and are therefore classified as permitted securitization financings as defined in Realogy Group’s Senior Secured Credit Agreement and the indentures governing the Unsecured Notes.
The Apple Ridge entities and the Cartus Financing Limited entity are consolidated special purpose entities that are utilized to securitize relocation receivables and related assets. These assets are generated from advancing funds on behalf of clients of Realogy Group’s relocation business in order to facilitate the relocation of their employees. Assets of these special purpose entities are not available to pay Realogy Group’s general obligations. Under the Apple Ridge program, provided no termination or amortization event has occurred, any new receivables generated under the designated relocation management agreements are sold into the securitization program and as new eligible relocation management agreements are entered into, the new agreements are designated to the program. The Apple Ridge program has restrictive covenants and trigger events, including performance triggers linked to the age and quality of the underlying assets, foreign obligor limits, multicurrency limits, financial reporting requirements, restrictions on mergers and change of control, any uncured breach of Realogy Group’s senior secured leverage ratio under Realogy Group’s Senior Secured Credit Facility, and cross-defaults to Realogy Group’s material indebtedness. The occurrence of a trigger event under the Apple Ridge securitization facility could restrict our ability to access new or existing funding under this facility or result in a debittermination of the facility, either of which would adversely affect the operation of our relocation business.
Certain of the funds that Realogy Group receives from relocation receivables and related assets must be utilized to AOCIrepay securitization obligations. These obligations were collateralized by $200 million and a credit$238 million of underlying relocation receivables and other related relocation assets at December 31, 2019 and 2018, respectively. Substantially all relocation related assets are realized in less than twelve months from the transaction date.
Interest incurred in connection with borrowings under these facilities amounted to Retained Earnings/Accumulated Deficit$8 million and $9 million for the years ended December 31, 2019 and 2018, respectively. These securitization obligations represent floating rate debt for which the average weighted interest rate was 4.2% and 3.8% for the years ended December 31, 2019 and 2018, respectively.
4. LEASES
The Company's lease portfolio consists primarily of office space and equipment. The Company has approximately $9 million.
1,100 real estate leases with lease terms ranging from less than 1 year to 17 years and includes the Company's brokerage sales offices, regional and branch offices for our title and relocation businesses, corporate headquarters, regional headquarters, and facilities serving as local administration, training and storage. The Company's brokerage sales offices are generally located in shopping centers and small office parks, typically with lease terms of 1 year to 5 years. In February 2016,addition, the FASB issued its new standard onCompany has equipment leases which requires virtually all leasesprimarily consist of furniture, computers and other office equipment.
Right-of-use assets represent the Company's right to be recognized onuse an underlying asset for the balance sheet. Lessees will recognizelease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. At lease commencement, the Company records a liability for its lease obligation measured at the present value of future lease payments and a right-of-use asset and aequal to the lease liability adjusted for all leases (other than leases that meet the definition of a short-term lease).prepayments and lease incentives. The liability will be equalCompany uses its collateralized incremental borrowing rate to calculate the present value of lease payments.liabilities as most of its leases do not provide an implicit rate that is readily determinable. The Company does not recognize a lease obligation and right-of-use asset will be based on the liability, subjectits balance sheet for any leases with an initial term of 12 months or less. Some real estate leases include one or more options to adjustment, such as for initial direct costs. For income statement purposes, the FASB retainedrenew or terminate a dual model, requiring leases to be classified as either operatinglease. The exercise of a lease renewal or finance leases. Operating leases will result in straight-line expense, similar to current operating leases, while finance leases will result in a front-loaded expense pattern, similar to current capital leases. Classification will be based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines. The new standardtermination option is effective for annual periods beginning after December 15, 2018. Early adoption is permitted. The new leasing standard requires modified retrospective transition, which requires applicationassessed at commencement of the new guidance at the beginning of the earliest comparative period presentedlease and only reflected in the year of adoption. In January 2018, the FASB issued a proposed ASU that would allow entities to elect a simplified transition approach which would require applying the provisions of the new guidance at the effective date (e.g., January 1, 2019) as opposed to the earliest period presented under the modified retrospective approach (January 1, 2017). Whilelease term if the Company is still evaluatingreasonably certain to exercise the impact of the standard on its consolidated financial statements, it does expect that the right to use asset and lease liability recorded on its Consolidated Balance Sheets will be material. The Company currently discloses its future lease obligations in Note 13. "Commitments and Contingencies". The Company is in the process of implementing a new lease management system which will be utilized to account for leases under the new guidance once adopted.
In May 2014, the FASB issued a standard on revenue recognition that will impact most companies to some extent. The objective of the revenue standard is to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability within industries, across industries, and across capital markets. The revenue standard contains principles that an entity will apply to determine the measurement of revenue and the timing of revenue recognition. The new standard permits for two alternative implementation methods, the use of either (1) full retrospective application to each prior reporting period presented or (2) modified retrospective application in which the cumulative effect of initially applying the revenue standard is recognized as an adjustment to the opening balance of retained earnings in the period of adoption. The Company will adopt the new standard in the first quarter of 2018 using the modified retrospective transition method.option. The Company has redraftedlease agreements that contain both lease and non-lease components, such as common area maintenance fees, and has made a policy election to combine both fixed lease and non-lease components in total gross rent for all of its leases. Expense for operating leases is recognized on a straight-line basis over the lease term. Finance lease assets are amortized on a straight-line basis over the shorter of the estimated useful life of the underlying asset or the lease term. The interest component of a finance lease is included in interest expense and recognized using the effective interest method over the lease term.
Supplemental balance sheet information related to the Company's leases was as follows:
| | | | | | | | | | | | | | |
| Lease Type | | Balance Sheet Classification | | December 31, 2019 |
| Assets: | | | | |
| Operating lease assets | | Operating lease assets, net | | $ | 515 | |
| Finance lease assets (a) | | Property and equipment, net | | 41 | |
| Total lease assets, net | | | | $ | 556 | |
| | | | |
| Liabilities: | | | | |
| Current: | | | | |
| Operating lease liabilities | | Current portion of operating lease liabilities | | $ | 122 | |
| Finance lease liabilities | | Accrued expenses and other current liabilities | | 13 | |
| Non-current: | | | | |
| Operating lease liabilities | | Long-term operating lease liabilities | | 467 | |
| Finance lease liabilities | | Other non-current liabilities | | 22 | |
| Total lease liabilities | | | | $ | 624 | |
| | | | |
| Weighted Average Lease Term and Discount Rate | | | | |
| Weighted average remaining lease term (years): | | | | |
| Operating leases | | | | 6.1 |
| Finance leases | | | | 3.1 |
| | | | |
| Weighted average discount rate: | | | | |
| Operating leases | | | | 5.1 | % |
| Finance leases | | | | 4.1 | % |
_______________
(a)Finance lease assets are recorded net of accumulated amortization of $34 million.
As of December 31, 2019, maturities of lease liabilities by fiscal year were as follows:
| | | | | | | | | | | | | | | | | | | | |
| Maturity of Lease Liabilities | | Operating Leases | | Finance Leases | | Total |
| 2020 | | $ | 144 | | | $ | 13 | | | $ | 157 | |
| 2021 | | 135 | | | 11 | | | 146 | |
| 2022 | | 110 | | | 8 | | | 118 | |
| 2023 | | 85 | | | 4 | | | 89 | |
| 2024 | | 64 | | | 2 | | | 66 | |
| Thereafter | | 153 | | | — | | | 153 | |
| Total lease payments | | 691 | | | 38 | | | 729 | |
| Less: Interest | | 102 | | | 3 | | | 105 | |
| Present value of lease liabilities | | $ | 589 | | | $ | 35 | | | $ | 624 | |
Supplemental income statement information related to the Company's leases is as follows:
| | | | | | | | |
| | Year Ended |
| Lease Costs | | December 31, 2019 |
| Operating lease costs | | $ | 158 | |
| Finance lease costs: | | |
| Amortization of leased assets | | 13 | |
| Interest on lease liabilities | | 1 | |
| Other lease costs (a) | | 28 | |
| Impairment (b) | | 12 | |
| Less: Sublease income, gross | | 3 | |
| Net lease cost | | $ | 209 | |
_______________
(a)Primarily consists of variable lease costs.
(b)Impairment charges relate to the exit and sublease of certain real estate operating leases.
Supplemental cash flow information related to leases was as follows:
| | | | | | | | |
| | Year Ended |
| | December 31, 2019 |
| Supplemental cash flow information: | | |
| Operating cash flows from operating leases | | | $ | 153 | |
| Operating cash flows from finance leases | | | 1 | |
| Financing cash flows from finance leases | | | 14 | |
| | |
| Supplemental non-cash information: | | |
| Lease assets obtained in exchange for lease obligations: | | | |
| Operating leases | | | $ | 153 | |
| Finance leases | | | 18 | |
As previously disclosed in our 2018 Annual Report on Form 10-K and under historical lease accounting guidance:
Future minimum lease payments for noncancelable operating leases as of December 31, 2018 were as follows:
| | | | | | | | |
| Year | | As of December 31, 2018 |
| 2019 | | $ | 156 | |
| 2020 | | 136 | |
| 2021 | | 113 | |
| 2022 | | 90 | |
| 2023 | | 75 | |
| Thereafter | | 175 | |
| Total | | $ | 745 | |
Capital lease obligations were $33 million, net of $2 million of imputed interest as of December 31, 2018.
The Company incurred rent expense of $196 million and $192 million for the years ended December 31, 2018 and 2017, respectively.
Significant non-cash transactions included finance lease additions of $20 million and $18 million for the years ended December 31, 2018 and 2017, respectively, which resulted in non-cash additions to property and equipment, net and other non-current liabilities.
5. REVENUE RECOGNITION
Revenue is recognized upon the transfer of control of promised services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those services in accordance with the revenue recognition accounting policies affectedstandard. The Company's revenue is disaggregated by the standard, assessed the redesignmajor revenue categories on our Consolidated Statements of internal controls,Operations and further disaggregated by business segment as well as evaluated the expanded disclosure requirements. After thorough reviewfollows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, 2019 vs December 31, 2018 | | | | | | | | | | | | | | | | | | | | | | |
| | Realogy
Franchise
Group | | | | Realogy
Brokerage
Group | | | | Realogy
Title
Group | | | | Realogy
Leads
Group | | | | Corporate
and
Other | | | | Total
Company | | |
| 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 |
| Gross commission income (a) | $ | — | | | $ | — | | | $ | 4,330 | | | $ | 4,533 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 4,330 | | | $ | 4,533 | |
| Service revenue (b) | — | | | — | | | 11 | | | 9 | | | 579 | | | 564 | | | 83 | | | 81 | | | — | | | — | | | 673 | | | 654 | |
| Franchise fees (c) | 668 | | | 688 | | | — | | | — | | | — | | | — | | | — | | | — | | | (282) | | | (295) | | | 386 | | | 393 | |
| Other (d) | 135 | | | 132 | | | 68 | | | 65 | | | 17 | | | 16 | | | — | | | — | | | (11) | | | (11) | | | 209 | | | 202 | |
| Net revenues | $ | 803 | | | $ | 820 | | | $ | 4,409 | | | $ | 4,607 | | | $ | 596 | | | $ | 580 | | | $ | 83 | | | $ | 81 | | | $ | (293) | | | $ | (306) | | | $ | 5,598 | | | $ | 5,782 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, 2018 vs December 31, 2017 (e) | | | | | | | | | | | | | | | | | | | | | | |
| | Realogy
Franchise
Group | | | | Realogy
Brokerage
Group | | | | Realogy
Title
Group | | | | Realogy
Leads
Group | | | | Corporate
and
Other | | | | Total
Company | | |
| 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 |
| Gross commission income (a) | $ | — | | | $ | — | | | $ | 4,533 | | | $ | 4,576 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 4,533 | | | $ | 4,576 | |
| Service revenue (b) | — | | | — | | | 9 | | | 9 | | | 564 | | | 551 | | | 81 | | | 78 | | | — | | | — | | | 654 | | | 638 | |
| Franchise fees (c) | 688 | | | 695 | | | — | | | — | | | — | | | — | | | — | | | — | | | (295) | | | (299) | | | 393 | | | 396 | |
| Other (d) | 132 | | | 135 | | | 65 | | | 58 | | | 16 | | | 19 | | | — | | | — | | | (11) | | | (12) | | | 202 | | | 200 | |
| Net revenues | $ | 820 | | | $ | 830 | | | $ | 4,607 | | | $ | 4,643 | | | $ | 580 | | | $ | 570 | | | $ | 81 | | | $ | 78 | | | $ | (306) | | | $ | (311) | | | $ | 5,782 | | | $ | 5,810 | |
_______________
(a)Approximately 80% of the Company's revenue streams, the Company determined that the new standard will not have a material impact on financial results as the majority of the Company's revenuetotal net revenues is related to gross commission income at Realogy Brokerage Group, which is recognized at a point in time at the completionclosing of a homesale transaction, which will not change under the new revenue recognition guidance.transaction.
Assets acquired and liabilities assumed in business combinations were recorded in the Company’s Consolidated Balance Sheets as(b)Approximately 10% of the respective acquisition dates based upon their estimated fair valuesCompany's total net revenues is related to service fees primarily consisting of title and escrow fees at such dates. The resultsRealogy Title Group, which are recognized at a point in time at the closing of a homesale transaction.
operations of businesses acquired by the Company have been included in the Company’s Consolidated Statements of Operations since their respective dates of acquisition.
In connection with the Company’s acquisition of real estate brokerage operations, the Company obtains contractual pendings and listings intangible assets, which represent the estimated fair value of homesale transactions that are pending closing or homes listed for sale by the acquired brokerage operations. Pendings and listings intangible assets are amortized over the estimated closing period(c)Approximately 7% of the Company's total net revenues is related to franchise fees at Realogy Franchise Group, primarily domestic royalties, which are recognized at a point in time when the underlying contractsfranchisee revenue is earned (upon close of the homesale transaction).
(d)Less than 5% of the Company's total net revenues is related to other revenue, which comprised of brand marketing funds received at Realogy Franchise Group from franchisees, third-party listing fees and homes listedother miscellaneous revenues across all of the business segments.
(e)Amounts for sale, which in most cases is approximately five months.
2017 Acquisitions
During the year ended December 31, 2017 have not been adjusted under the modified retrospective method.
The Company's revenue streams are discussed further below by business segment:
Realogy Franchise Group
The Company acquired sixteenfranchises its real estate brands to real estate brokerage operationsbusinesses that are independently owned and operated. Franchise revenue principally consists of royalty and marketing fees from the Company’s franchisees. The royalty received is primarily based on a gross percentage (generally 6%) of the franchisee’s gross commission income. Royalty fees are accrued as the underlying franchisee revenue is earned (upon close of the homesale transaction). Annual volume incentives given to certain franchisees on royalty fees are recorded as a reduction to revenue and are accrued for in relative proportion to the recognition of the underlying gross franchise revenue. Other sales incentives are generally recorded as a reduction to revenue ratably over the related performance period or from the date of issuance through the remaining life of the related franchise agreement. Franchise revenue also includes domestic initial franchise fees which are generally non-refundable and recognized by the Company as revenue upon the execution or opening of a new franchisee office to cover the upfront costs associated with opening the franchisee for business under one of Realogy’s brands.
The Company also earns marketing fees from its wholly owned subsidiary, NRT,franchisees and utilizes such fees to fund marketing campaigns on behalf of its franchisees. As such, brand marketing fund fees are recorded as deferred revenue when received and recognized into revenue as earned when these funds are spent on marketing activities. The balance for aggregate cash consideration of $11deferred brand marketing fund fees increased from $12 million and established $3at January 1, 2019 to $13 million of contingent consideration. These acquisitions resulted in goodwill of $10 million, pendings and listings of $2 million, customer relationships of $1 million and other intangibles of $1 million.
Duringat December 31, 2019 primarily due to additional fees received from franchisees, partially offset by amounts recognized into revenue matching expenses for marketing activities during the year ended December 31, 2017,2019.
The Company collects initial area development fees ("ADFs") for international territory transactions, which are recorded as deferred revenue when received and are classified as current or non-current liabilities in the Company acquired two titleConsolidated Balance Sheets based on the expected timing of revenue recognition. ADFs are recognized into franchise revenue over the average 25 year life of the related franchise agreement as consideration for the right to access and settlement operations throughbenefit from Realogy’s brands. In the event an ADF agreement is terminated prior to the end of its wholly owned subsidiary, TRG,term, the unamortized deferred revenue balance will be recognized into revenue immediately upon termination. The balance for cash considerationdeferred ADFs decreased from $54 million at January 1, 2019 to $48 million at December 31, 2019 due to revenues of $8 million and established $4 million of contingent consideration. These acquisitions resulted in goodwill of $9 million, pendings of $2 million and other intangible items of $1 million including tradenames.
None of the 2017 acquisitions were significant to the Company’s results of operations, financial position or cash flows individually or in the aggregate.
2016 Acquisitions
Duringrecognized during the year ended December 31, 2016,2019 that were included in the Company acquired eleven real estate brokerage and property management operations through its wholly owned subsidiary, NRT, for aggregate cash considerationdeferred revenue balance at the beginning of $74 million and established $9the period, partially offset by $2 million of contingent consideration. These acquisitions resulted in goodwill of $52 million, customer relationships of $20 million, pendings and listings of $6 million, other intangibles of $3 million, other assets of $5 million and other liabilities of $3 million.
Duringadditional area development fees received during the year ended December 31, 2016,2019.
In addition, the Company acquiredrecognizes a deferred asset for commissions paid to Realogy franchise sales employees upon the sale of a new franchise as these are considered costs of obtaining a contract with a customer that are expected to provide benefits to the Company for longer than one titleyear. The Company classifies prepaid commissions as current or non-current
assets in the Consolidated Balance Sheets based on the expected timing of recognizing expense. The amount of commissions is calculated as a percentage of the anticipated gross commission income of the new franchisee or ADF and settlement operation through its wholly owned subsidiary, TRG,is amortized over 30 years for cash considerationdomestic franchise agreements or the agreement term for international franchise agreements (generally 25 years). The amount of prepaid commissions was $24 million and established$25 million at December 31, 2019 and 2018, respectively.
Realogy Brokerage Group
As an owner-operator of real estate brokerages, the Company assists home buyers and sellers in listing, marketing, selling and finding homes. Real estate commissions earned by the Company’s real estate brokerage business are recorded as revenue at a point in time which is upon the closing of a real estate transaction (i.e., purchase or sale of a home). These revenues are referred to as gross commission income. The commissions the Company pays to real estate agents are recognized concurrently with associated revenues and presented as the commission and other agent-related costs line item on the accompanying Consolidated Statements of Operations.
The Company has relationships with developers, primarily in major cities, to provide marketing and brokerage services in new developments. New development closings generally have a development period of between 18 and 24 months from contracted date to closing. In some cases, the Company receives advanced commissions which are recorded as deferred revenue when received and recognized as revenue when the new development closes. The balance of advanced commissions related to developments decreased from $10 million at January 1, 2019 to $9 million at December 31, 2019 due to a $2 million decrease as a result of revenues recognized on units closed, partially offset by a $1 million increase related to additional commissions received for new developments.
Realogy Title Group
The Company provides title and closing services, which include title search procedures for title insurance policies, homesale escrow and other closing services. Title revenues and title and closing service fees are recorded at a point in time which occurs at the time a homesale transaction or refinancing closes. The Company also owns an underwriter of title insurance. For unaffiliated agents, the underwriter recognizes policy premium revenue on a gross basis (before deduction of agent commission) upon notice of policy issuance from the agent. For affiliated title agents, the underwriter recognizes the incremental policy premium revenue upon the effective date of the title policy as the agent commission revenue is already recognized by the affiliated title agent.
Realogy Leads Group
The Company provides home buying and selling assistance to members of affinity organizations. The Company earns referral commission revenue primarily from real estate brokers for the home sale and purchase for affinity members, which is recognized at a point in time when the underlying property closes. Realogy Leads Group also manages the Realogy Broker Network, which is a network of real estate brokers consisting of our company owned brokerage operations, select franchisees and independent real estate brokers who have been approved to become members. Network fees are billed in advance and recognized into revenue on a straight-line basis each month during the membership period. The balance for deferred network fees increased from 0 at January 1, 2019 to $3 million at December 31, 2019 due to a $13 million increase related to new network fees, partially offset by $10 million of contingent consideration. This acquisition resultedrevenues recognized during the year that were included in goodwill of $20 million, title plant of $7 million, pendings of $5 million, trademarks of $3 million, other intangibles of $2 million, other assets of $6 million and other liabilities of $9 million.
Nonethe deferred revenue balance at the beginning of the 2016 acquisitions were significant toperiod.
Contract Balances (Deferred Revenue)
The following table shows the Company’s results of operations, financial position or cash flows individually orchange in the aggregate.
2015 Acquisitions
During the year ended December 31, 2015, the Company acquired thirteen real estate brokerage related operations through its wholly owned subsidiary, NRT, including a large franchisee of the Real Estate Franchise segment, for aggregate cash consideration of $96 million and established $13 million ofCompany's contract liabilities related to contingent consideration and other acquisition related liabilities. These acquisitions resulted in goodwill of $94 million, pendings and listings of $10 million, other intangibles of $1 million, other assets of $7 million and other liabilities of $3 million.revenue contracts by reportable segment for the period:
During the year ended December 31, 2015, the Company acquired three title and settlement operations through its wholly owned subsidiary, TRG, for cash consideration of $34 million and established $37 million of liabilities related to contingent consideration. These acquisitions resulted in goodwill of $47 million, trademarks of $9 million, pendings of $8 million, other intangibles of $5 million, title plant shares of $1 million and other assets of $1 million.
None of the 2015 acquisitions were significant to the Company’s results of operations, financial position or cash flows individually or in the aggregate.
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2019 | | | | | | |
| | Beginning Balance at January 1, 2019 | | Additions during the period | | Recognized as Revenue during the period | | Ending Balance at
December 31, 2019 |
| Realogy Franchise Group (a) | $ | 78 | | | $ | 118 | | | $ | (127) | | | $ | 69 | |
| Realogy Brokerage Group | 14 | | | 8 | | | (9) | | | 13 | |
| Realogy Leads Group | — | | | 13 | | | (10) | | | 3 | |
| Total | $ | 92 | | | $ | 139 | | | $ | (146) | | | $ | 85 | |
_______________
(a)Revenues recognized include intercompany marketing fees paid by Realogy Brokerage Group.
The majority of the Company's contracts are transactional in nature or have a duration of one-year or less. Accordingly, the Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.
6. GOODWILL AND INTANGIBLE ASSETS
Goodwill by segmentreporting unit and changes in the carrying amount are as follows:
|
| | | | | | | | | | | | | | | | | | | |
| | Real Estate Franchise Services | | Company Owned Brokerage Services | | Relocation Services | | Title and Settlement Services | | Total Company |
| Balance at January 1, 2015 | $ | 2,292 |
| | $ | 747 |
| | $ | 360 |
| | $ | 78 |
| | $ | 3,477 |
|
| Goodwill acquired | — |
| | 94 |
| | — |
| | 47 |
| | 141 |
|
| Balance at December 31, 2015 | 2,292 |
| | 841 |
| | 360 |
| | 125 |
| | 3,618 |
|
| Goodwill acquired | — |
| | 52 |
| | — |
| | 20 |
| | 72 |
|
| Balance at December 31, 2016 | 2,292 |
| | 893 |
| | 360 |
| | 145 |
| | 3,690 |
|
| Goodwill acquired | — |
| | 11 |
| | — |
| | 9 |
| | 20 |
|
| Balance at December 31, 2017 | $ | 2,292 |
| | $ | 904 |
| | $ | 360 |
| | $ | 154 |
| | $ | 3,710 |
|
| Goodwill and accumulated impairment summary | | | | | | | | |
| Gross goodwill | $ | 3,315 |
| | $ | 1,062 |
| | $ | 641 |
| | $ | 478 |
| | $ | 5,496 |
|
| Accumulated impairment losses (a) | (1,023 | ) | | (158 | ) | | (281 | ) | | (324 | ) | | (1,786 | ) |
| Balance at December 31, 2017 | $ | 2,292 |
| | $ | 904 |
| | $ | 360 |
| | $ | 154 |
| | $ | 3,710 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Realogy Franchise Group | | Realogy Brokerage Group | | Realogy
Title
Group | | Realogy
Leads
Group | | Total Company |
| Balance at January 1, 2017 | $ | 2,292 | | | $ | 893 | | | $ | 145 | | | $ | 184 | | | $ | 3,514 | |
| Goodwill acquired (a) | — | | | 11 | | | 9 | | | — | | | 20 | |
| Balance at December 31, 2017 | 2,292 | | | 904 | | | 154 | | | 184 | | | 3,534 | |
| Goodwill acquired (b) | — | | | 2 | | | — | | | — | | | 2 | |
| Balance at December 31, 2018 | 2,292 | | | 906 | | | 154 | | | 184 | | | 3,536 | |
| Goodwill acquired (c) | — | | | — | | | 1 | | | — | | | 1 | |
| Impairment (d) | — | | | (237) | | | — | | | — | | | (237) | |
| Balance at December 31, 2019 | $ | 2,292 | | | $ | 669 | | | $ | 155 | | | $ | 184 | | | $ | 3,300 | |
| Goodwill and accumulated impairment summary | | | | | | | | | |
| Gross goodwill | $ | 3,315 | | | $ | 1,064 | | | $ | 479 | | | $ | 321 | | | $ | 5,179 | |
| Accumulated impairments (e) | (1,023) | | | (395) | | | (324) | | | (137) | | | (1,879) | |
| Balance at December 31, 2019 | $ | 2,292 | | | $ | 669 | | | $ | 155 | | | $ | 184 | | | $ | 3,300 | |
_______________
| |
(a) | During the fourth quarter of 2008 and 2007 the Company recorded impairment charges, which reduced goodwill by $1,279 million and $507 million, respectively. No goodwill or unamortized intangible asset impairments have been recorded since 2008. |
(a)Goodwill acquired during the year ended December 31, 2017 relates to the acquisition of 16 real estate brokerage operations and 2 title and settlement operations.
(b)Goodwill acquired during the year ended December 31, 2018 relates to the acquisition of 3 real estate brokerage operations.
(c)Goodwill acquired during the year ended December 31, 2019 relates to the acquisition of 2 title and settlement operations.
(d)The Company recognized a goodwill impairment charge of $237 million during the third quarter of 2019 related to Realogy Brokerage Group. The impairment charge of $237 million was offset by an income tax benefit of $57 million resulting in a net reduction in the carrying value of Realogy Brokerage Group of $180 million (see Note 20, "Selected Quarterly Financial Data", for additional information).
(e)Includes impairment charges which reduced goodwill by $237 million, $1,153 million and $489 million during the third quarter of 2019, fourth quarter of 2008 and fourth quarter of 2007, respectively.
Intangible assets are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2017 | | As of December 31, 2016 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Amortizable—Franchise agreements (a) | $ | 2,019 |
| | $ | 725 |
| | $ | 1,294 |
| | $ | 2,019 |
| | $ | 658 |
| | $ | 1,361 |
|
| Indefinite life—Trademarks (b) | $ | 749 |
| | | | $ | 749 |
| | $ | 748 |
| | | | $ | 748 |
|
| Other Intangibles | | | | | | | | | | | |
| Amortizable—License agreements (c) | $ | 45 |
| | $ | 10 |
| | $ | 35 |
| | $ | 45 |
| | $ | 9 |
| | $ | 36 |
|
| Amortizable—Customer relationships (d) | 549 |
| | 335 |
| | 214 |
| | 550 |
| | 312 |
| | 238 |
|
| Indefinite life—Title plant shares (e) | 18 |
| | | | 18 |
| | 18 |
| | | | 18 |
|
| Amortizable—Pendings and listings (f) | 2 |
| | 1 |
| | 1 |
| | 6 |
| | 5 |
| | 1 |
|
| Amortizable—Other (g) | 33 |
| | 17 |
| | 16 |
| | 33 |
| | 13 |
| | 20 |
|
| Total Other Intangibles | $ | 647 |
| | $ | 363 |
| | $ | 284 |
| | $ | 652 |
| | $ | 339 |
| | $ | 313 |
|
_______________
| |
(a) | Generally amortized over a period of 30 years. |
| |
(b) | Primarily relates to the Century 21®, Coldwell Banker®, ERA®, Corcoran®, Coldwell Banker Commercial® and Cartus tradenames, which are expected to generate future cash flows for an indefinite period of time.
|
| |
(c) | Relates to the Sotheby’s International Realty® and Better Homes and Gardens® Real Estate agreements which are being amortized over 50 years (the contractual term of the license agreements).
|
| |
(d) | Relates to the customer relationships at the Relocation Services segment, the Title and Settlement Services segment, the Real Estate Franchise Services segment and our Company Owned Real Estate Brokerage Services segment. These relationships are being amortized over a period of 2 to 20 years. |
| |
(e) | Ownership in a title plant is required to transact title insurance in certain states. The Company expects to generate future cash flows for an indefinite period of time. |
| |
(f) | Generally amortized over a period of 5 months. |
| |
(g) | Consists of covenants not to compete which are amortized over their contract lives and other intangibles which are generally amortized over periods ranging from 5 to 10 years. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2019 | | | | | | As of December 31, 2018 | | | | |
| | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Amount | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Amount |
| Amortizable—Franchise agreements (a) | $ | 2,019 | | | $ | 859 | | | $ | 1,160 | | | $ | 2,019 | | | $ | 792 | | | $ | 1,227 | |
| Indefinite life—Trademarks (b) | $ | 673 | | | | | $ | 673 | | | $ | 673 | | | | | $ | 673 | |
| Other Intangibles | | | | | | | | | | | |
| Amortizable—License agreements (c) | $ | 45 | | | $ | 12 | | | $ | 33 | | | $ | 45 | | | $ | 11 | | | $ | 34 | |
| Amortizable—Customer relationships (d) | 71 | | | 57 | | | 14 | | | 71 | | | 55 | | | 16 | |
| Indefinite life—Title plant shares (e) | 19 | | | | | 19 | | | 18 | | | | | 18 | |
| Amortizable—Other (f) | 27 | | | 21 | | | 6 | | | 33 | | | 21 | | | 12 | |
| Total Other Intangibles | $ | 162 | | | $ | 90 | | | $ | 72 | | | $ | 167 | | | $ | 87 | | | $ | 80 | |
_______________
(a)Generally amortized over a period of 30 years.
(b)Primarily related to real estate franchise brands which are expected to generate future cash flows for an indefinite period of time.
(c)Relates to the Sotheby’s International Realty® and Better Homes and Gardens® Real Estate agreements which are being amortized over 50 years (the contractual term of the license agreements).
(d)Relates to the customer relationships at Realogy Title Group and Realogy Brokerage Group. These relationships are being amortized over a period of 2 to 12 years.
(e)Ownership in a title plant is required to transact title insurance in certain states. The Company expects to generate future cash flows for an indefinite period of time.
(f)Consists of covenants not to compete which are amortized over their contract lives and other intangibles which are generally amortized over periods ranging from 5 to 10 years.
Intangible asset amortization expense is as follows:
| | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, | | | | |
| | 2019 | | 2018 | | 2017 |
| Franchise agreements | $ | 67 | | | $ | 67 | | | $ | 67 | |
| License agreements | 1 | | | 1 | | | 1 | |
| Customer relationships | 2 | | | 3 | | | 4 | |
| Other | 6 | | | 5 | | | 9 | |
| Total | $ | 76 | | | $ | 76 | | | $ | 81 | |
|
| | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Franchise agreements | $ | 67 |
| | $ | 67 |
| | $ | 67 |
|
| License agreements | 1 |
| | 1 |
| | 1 |
|
| Customer relationships | 25 |
| | 28 |
| | 28 |
|
| Pendings and listings | 4 |
| | 12 |
| | 16 |
|
| Other | 5 |
| | 5 |
| | 5 |
|
| Total | $ | 102 |
| | $ | 113 |
| | $ | 117 |
|
Based on the Company’s amortizable intangible assets as of December 31, 2017,2019, the Company expects related amortization expense to be approximately $98$73 million, $97$71 million, $95$70 million, $93$70 million, $92$70 million and $1,085$859 million in 2018, 2019, 2020,, 2021,, 2022, 2023, 2024 and thereafter, respectively.
| |
5. | FRANCHISING AND MARKETING ACTIVITIES |
7. FRANCHISING AND MARKETING ACTIVITIES
Franchise fee revenue includes domestic initial franchise fees and international area development fees of $9 million, $6 million and $8 million for each of the years ended December 31, 2017, 20162019, 2018 and 2015. In addition, franchise fee revenue is net of annual volume incentives provided to real estate franchisees of $62 million, $56 million and $51 million for the years ended December 31, 2017, 2016 and 2015, respectively. The Company’s real estate franchisees may receive volume incentives on their royalty payments. Such annual incentives are based upon the amount of the franchisees commission income earned and paid to the Company during the calendar year. Each brand has several different annual incentive schedules currently in effect. Franchise fee revenue is recorded net of annual volume incentives provided to real estate franchisees of $50 million, $52 million and $62 million for the years ended December 31, 2019, 2018 and 2017, respectively.
The Company’s wholly ownedwholly-owned real estate brokerage services segment, NRT,Realogy Brokerage Group, pays royalties to the Company’s franchise business; however, such amounts are eliminated in consolidation. NRTRealogy Brokerage Group paid royalties to the Real EstateRealogy Franchise Services segmentGroup of $299 million, $282 million, $295 million and $284$299 million for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively.
Marketing fees are generally paid by the Company’s real estate franchisees and are generally calculated based on a specified percentage of gross closed commissions earned on real estate transactions, and may be subject to certain minimum and maximum payments. Brand marketing fund revenue was $87$90 million, $83$86 million and $83$87 million for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively, which included marketing fees paid to the Real EstateRealogy Franchise Services segmentGroup from NRTRealogy Brokerage Group of $12$11 million, $11 million and $11$12 million for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively. As provided for in the franchise agreements and generally at the Company’s discretion, all of these fees are to be expended for marketing purposes.
The number of franchised and company owned offices in operation are as follows:
|
| | | | | | | | |
| | (Unaudited) As of December 31, |
| | 2017 | | 2016 | | 2015 |
| Franchised: | | | | | |
Century 21® | 7,973 |
| | 7,330 |
| | 6,897 |
|
ERA® | 2,298 |
| | 2,347 |
| | 2,355 |
|
Coldwell Banker® | 2,330 |
| | 2,289 |
| | 2,258 |
|
Coldwell Banker Commercial® | 180 |
| | 180 |
| | 163 |
|
Sotheby’s International Realty® | 905 |
| | 836 |
| | 794 |
|
Better Homes and Gardens® Real Estate | 353 |
| | 332 |
| | 304 |
|
| Total Franchised | 14,039 |
| | 13,314 |
| | 12,771 |
|
| Company Owned: | | | | | |
Coldwell Banker® | 707 |
| | 708 |
| | 708 |
|
Sotheby’s International Realty® | 41 |
| | 41 |
| | 41 |
|
Corcoran®/Other | 41 |
| | 40 |
| | 38 |
|
| Total Company Owned | 789 |
| | 789 |
| | 787 |
|
| | | | | | | | | | | | | | | | | |
| | (Unaudited) As of December 31, | | | | |
| | 2019 | | 2018 | | 2017 |
| Franchised (domestic and international): | | | | | |
Century 21® | 11,640 | | | 9,637 | | | 7,973 | |
ERA® | 2,301 | | | 2,331 | | | 2,298 | |
Coldwell Banker® | 2,323 | | | 2,380 | | | 2,330 | |
Coldwell Banker Commercial® | 159 | | | 171 | | | 180 | |
Sotheby’s International Realty® | 962 | | | 949 | | | 905 | |
Better Homes and Gardens® Real Estate | 391 | | | 362 | | | 353 | |
| Total Franchised | 17,776 | | | 15,830 | | | 14,039 | |
| Company owned: | | | | | |
Coldwell Banker® | 634 | | | 672 | | | 707 | |
Sotheby’s International Realty® | 37 | | | 41 | | | 41 | |
Corcoran®/Other | 42 | | | 42 | | | 41 | |
| Total Company Owned | 713 | | | 755 | | | 789 | |
The number of franchised and company owned offices (in the aggregate) changed as follows:
| | | | | | | | | | | | | | | | | |
| | (Unaudited) For the Year Ended December 31, | | | | |
| | 2019 | | 2018 | | 2017 |
| Franchised (domestic and international): | | | | | |
| Beginning balance | 15,830 | | | 14,039 | | | 13,314 | |
| Additions | 2,399 | | | 2,149 | | | 1,137 | |
| Terminations | (453) | | | (358) | | | (412) | |
| Ending balance | 17,776 | | | 15,830 | | | 14,039 | |
| Company owned: | | | | | |
| Beginning balance | 755 | | | 789 | | | 789 | |
| Additions | 4 | | | 8 | | | 20 | |
| Closures | (46) | | | (42) | | | (20) | |
| Ending balance | 713 | | | 755 | | | 789 | |
|
| | | | | | | | |
| | (Unaudited) For the Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Franchised: | | | | | |
| Beginning balance | 13,314 |
| | 12,771 |
| | 12,769 |
|
| Additions | 1,137 |
| | 847 |
| | 445 |
|
| Terminations | (412 | ) | | (304 | ) | | (443 | ) |
| Ending balance | 14,039 |
| | 13,314 |
| | 12,771 |
|
| Company Owned: | | | | | |
| Beginning balance | 789 |
| | 787 |
| | 727 |
|
| Additions | 20 |
| | 38 |
| | 74 |
|
| Closures | (20 | ) | | (36 | ) | | (14 | ) |
| Ending balance | 789 |
| | 789 |
| | 787 |
|
As of December 31, 2017,2019, there were an insignificant number of franchise agreements that were executed for which offices are not yet operating. Additionally, as of December 31, 2017,2019, there were an insignificant number of franchise agreements pending termination.
In order to assist franchisees in converting to one of the Company’s brands or as an incentive to renew their franchise agreement, the Company may at its discretion, provide non-standard incentives, primarily in the form of conversion notes. Provided the franchisee meets certain minimum annual revenue thresholds during the term of the notes and is in compliance with the terms of the franchise agreement, the amount of the note is forgiven annually in equal ratable amounts generally over the life of the franchise agreement. Otherwise, related principal is due and payable to the Company. The amount of such franchisee conversion notes were $124$134 million net of less than $1and $131 million, of reserves, and $123 million, net of less than $1 million of reserves, at December 31, 20172019 and 2016,2018, respectively. These notes are principally classified within other non-current assets in the Company’s Consolidated Balance Sheets. The Company recorded a contra-revenue in the statement of operations related to the forgiveness and impairment of these notes and other sales incentives of $25$29 million, $24$29 million and $22$25 million for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively.
| |
6. | PROPERTY AND EQUIPMENT, NET |
8. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of:
| | | | December 31, | | December 31, | |
| | 2017 | | 2016 | | 2019 | | 2018 |
| Furniture, fixtures and equipment | $ | 281 |
| | $ | 254 |
| Furniture, fixtures and equipment | $ | 162 | | | $ | 176 | |
| Capitalized software | 366 |
| | 351 |
| Capitalized software | 334 | | | 293 | |
| Finance/capital lease assets | | Finance/capital lease assets | 76 | | | 64 | |
| Building and leasehold improvements | 265 |
| | 235 |
| Building and leasehold improvements | 292 | | | 275 | |
| Land | 3 |
| | 3 |
| Land | 3 | | | 3 | |
| Gross property and equipment | 915 |
| | 843 |
| Gross property and equipment | 867 | | | 811 | |
| Less: accumulated depreciation | (626 | ) | | (576 | ) | Less: accumulated depreciation | (559) | | | (538) | |
| Property and equipment, net | $ | 289 |
| | $ | 267 |
| Property and equipment, net | $ | 308 | | | $ | 273 | |
The Company recorded depreciation expense related to property and equipment of $96$93 million, $89$88 million and $84$85 million for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively.
9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
F-21
| |
7. | ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES |
Accrued expenses and other current liabilities consisted of:
| | | | | | | | | | | |
| | December 31, | | |
| | 2019 | | 2018 |
| Accrued payroll and related employee costs | $ | 103 | | | $ | 106 | |
| Accrued volume incentives | 35 | | | 37 | |
| Accrued commissions | 32 | | | 30 | |
| Restructuring accruals | 11 | | | 14 | |
| Deferred income | 43 | | | 50 | |
| Accrued interest | 18 | | | 15 | |
| Current portion of finance/capital lease liabilities | 13 | | | 12 | |
| Due to former parent | 18 | | | 21 | |
| Other | 77 | | | 59 | |
| Total accrued expenses and other current liabilities | $ | 350 | | | $ | 344 | |
10. SHORT AND LONG-TERM DEBT
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| Accrued payroll and related employee costs | $ | 140 |
| | $ | 138 |
|
| Accrued volume incentives | 41 |
| | 40 |
|
| Accrued commissions | 38 |
| | 31 |
|
| Restructuring accruals | 5 |
| | 14 |
|
| Deferred income | 68 |
| | 69 |
|
| Accrued interest | 13 |
| | 13 |
|
| Contingent consideration for acquisitions | 26 |
| | 24 |
|
| Due to former parent | 18 |
| | 28 |
|
| Other | 129 |
| | 106 |
|
| Total accrued expenses and other current liabilities | $ | 478 |
| | $ | 463 |
|
| |
8. | SHORT AND LONG-TERM DEBT |
Total indebtedness is as follows:
| | | | | | | | | | | |
| | December 31, | | |
| | 2019 | | 2018 |
| Senior Secured Credit Facility: | | | |
| Revolving Credit Facility | $ | 190 | | | $ | 270 | |
| Term Loan B | 1,045 | | | 1,053 | |
| Term Loan A Facility: | | | |
| Term Loan A | 714 | | | 732 | |
| 4.50% Senior Notes | — | | | 449 | |
| 5.25% Senior Notes | 548 | | | 547 | |
| 4.875% Senior Notes | 405 | | | 497 | |
| 9.375% Senior Notes | 543 | | | — | |
| Total Short-Term & Long-Term Debt | $ | 3,445 | | | $ | 3,548 | |
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| Senior Secured Credit Facility: | | | |
| Revolving Credit Facility | $ | 70 |
| | $ | 200 |
|
| Term Loan B | 1,063 |
| | 1,069 |
|
| Term Loan A Facility: | | | |
| Term Loan A | 390 |
| | 411 |
|
| Term Loan A-1 | 339 |
| | 347 |
|
| 4.50% Senior Notes | 444 |
| | 439 |
|
| 5.25% Senior Notes | 546 |
| | 545 |
|
| 4.875% Senior Notes | 496 |
| | 496 |
|
| Total Short-Term & Long-Term Debt | $ | 3,348 |
| | $ | 3,507 |
|
| Securitization obligations: | | | |
| Apple Ridge Funding LLC | $ | 181 |
| | $ | 192 |
|
| Cartus Financing Limited | 13 |
| | 13 |
|
| Total securitization obligations | $ | 194 |
| | $ | 205 |
|
Indebtedness Table
As of December 31, 2017,2019, the Company’s borrowing arrangements were as follows:
|
| | | | | | | | | | | | | | | |
| | Interest Rate | | Expiration Date | | Principal Amount | | Unamortized Discount and Debt Issuance Costs | | Net Amount |
| Senior Secured Credit Facility: | | | | | | | | | |
Revolving Credit Facility (1) | (2) | | October 2020 | | $ | 70 |
| | $ * |
| | $ | 70 |
|
| Term Loan B | (3) | | July 2022 | | 1,083 |
| | 20 |
| | 1,063 |
|
| Term Loan A Facility: | | | | | | | | | |
| Term Loan A | (4) | | October 2020 | | 391 |
| | 1 |
| | 390 |
|
| Term Loan A-1 | (5) | | July 2021 | | 342 |
| | 3 |
| | 339 |
|
| Senior Notes | 4.50% | | April 2019 | | 450 |
| | 6 |
| | 444 |
|
| Senior Notes | 5.25% | | December 2021 | | 550 |
| | 4 |
| | 546 |
|
| Senior Notes | 4.875% | | June 2023 | | 500 |
| | 4 |
| | 496 |
|
Securitization obligations: (6) | | | | | | | | | |
| Apple Ridge Funding LLC (7) | June 2018 | | 181 |
| | * |
| | 181 |
|
| Cartus Financing Limited (8) | August 2018 | | 13 |
| | * |
| | 13 |
|
| Total (9) | $ | 3,580 |
| | $ | 38 |
| | $ | 3,542 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest
Rate | | Expiration
Date | | Principal Amount | | Unamortized Discount and Debt Issuance Costs | | Net Amount |
| Senior Secured Credit Facility: | | | | | | | | | |
Revolving Credit Facility (1) | (2) | | | February 2023 | | $ | 190 | | | $ * | | | $ | 190 | |
| Term Loan B | (3) | | | February 2025 | | 1,058 | | | 13 | | | 1,045 | |
| Term Loan A Facility: | | | | | | | | | |
| Term Loan A | (4) | | | February 2023 | | 717 | | | 3 | | | 714 | |
| Senior Notes | 5.25% | | | December 2021 | | 550 | | | 2 | | | 548 | |
| Senior Notes | 4.875% | | | June 2023 | | 407 | | | 2 | | | 405 | |
| Senior Notes | 9.375% | | | April 2027 | | 550 | | | 7 | | | 543 | |
| Total | | | | | $ | 3,472 | | | $ | 27 | | | $ | 3,445 | |
_______________
| |
* | The debt issuance costs related to our Revolving Credit Facility and securitization obligations are classified as a deferred financing asset within other assets. |
| |
(1) | As of December 31, 2017, the Company had $1,050 million of borrowing capacity under its Revolving Credit Facility, leaving $980 million of available capacity. The Revolving Credit Facility expires in October 2020, but is classified on the balance sheet as current due to the revolving nature of the facility. On February 23, 2018, the Company had $242 million in outstanding borrowings under the New Revolving Credit Facility, leaving $1,158 million of available capacity. See Note 19, "Subsequent Events" for a description of the February 2018 refinancing. |
| |
(2) | Interest rates with respect to revolving loans under the Senior Secured Credit Facility at December 31, 2017 were based on, at the Company's option, (a) adjusted LIBOR plus an additional margin or (b) ABR plus an additional margin, in each case subject to adjustment based on the then current senior secured leverage ratio. Based on the previous quarter senior secured leverage ratio, the LIBOR margin was 2.00% and the ABR margin was 1.00% for the three months ended December 31, 2017.* The debt issuance costs related to our Revolving Credit Facility are classified as a deferred financing asset within other assets. (1)As of December 31, 2019, the $1,425 million Revolving Credit Facility had outstanding borrowings of $190 million, as well as $57 million of outstanding letters of credit. The Revolving Credit Facility expires in February 2023 but is classified on the balance sheet as current due to the revolving nature and terms and conditions of the facility. On February 21, 2020, the Company had $310 million in outstanding borrowings under the Revolving Credit Facility and $57 million of outstanding letters of credit. (2)Interest rates with respect to revolving loans under the Senior Secured Credit Facility at December 31, 2019 were based on, at the Company's option, (a) adjusted London Interbank Offering Rate ("LIBOR") plus an additional margin or (b) JP Morgan Chase Bank, N.A.'s prime rate ("ABR") plus an additional margin, in each case subject to adjustment based on the then current senior secured leverage ratio. Based on the previous quarter's senior secured leverage ratio, the LIBOR margin was 2.25% and the ABR margin was 1.25% for the three months ended December 31, 2019. (3)The Term Loan B provides for quarterly amortization payments totaling 1% per annum of the original principal amount. The interest rate with respect to term loans under the Term Loan B is based on, at the Company’s option, (a) adjusted LIBOR plus 2.25% (with a LIBOR floor of 0.75%) or (b) ABR plus 1.25% (with an ABR floor of 1.75%). (4)The Term Loan A provides for quarterly amortization payments, which commenced on June 30, 2018, totaling per annum 2.5%, 2.5%, 5.0%, 7.5% and 10.0% of the original principal amount of the Term Loan A, with the balance of the Term Loan A due at maturity on February 8, 2023. The interest rates with respect to the Term Loan A are based on, at the Company's option, (a) adjusted LIBOR plus an additional margin or (b) ABR plus an additional margin, in each case subject to adjustment based on the then current senior secured leverage ratio. Based on the previous quarter's senior secured leverage ratio, the LIBOR margin was 2.25% and the ABR margin was 1.25% for the three months ended December 31, 2019. |
| |
(3) | The Term Loan B provided for quarterly amortization payments totaling 1% per annum of the original principal amount. The interest rate with respect to term loans under the Term Loan B was based on, at the Company’s option, (a) adjusted LIBOR plus 2.25% (with a LIBOR floor of 0.75%) or (b) JPMorgan Chase Bank, N.A.’s prime rate ("ABR") plus 1.25% (with an ABR floor of 1.75%). See Note 19, "Subsequent Events" for a description of the February 2018 refinancing. |
| |
(4) | The Term Loan A provided for quarterly amortization payments, which commenced March 31, 2016, totaling per annum 5%, 5%, 7.5%, 10.0% and 12.5% of the original principal amount of the Term Loan A in 2016, 2017, 2018, 2019 and 2020, respectively. The interest rates with respect to term loans under the Term Loan A were based on, at the Company's option, (a) adjusted LIBOR plus an additional margin or (b) ABR plus an additional margin, in each case subject to adjustment based on the then current senior secured leverage ratio. Based on the previous quarter senior secured leverage ratio, the LIBOR margin was 2.00% and the ABR margin was 1.00% for the three months ended December 31, 2017. See Note 19, "Subsequent Events" for a description of the February 2018 refinancing. |
| |
(5) | The Term Loan A-1 provided for quarterly amortization payments, which commenced on September 30, 2016, totaling per annum 2.5%, 2.5%, 5%, 7.5% and 10.0% of the original principal amount of the Term Loan A-1, with the last amortization payment made on June 30, 2021. The interest rates with respect to term loans under the Term Loan A-1 were based on, at the Company's option, (a) adjusted LIBOR plus an additional margin or (b) ABR plus an additional margin, in each case subject to adjustment based on the then current senior secured leverage ratio. Based on the previous quarter senior secured leverage ratio, the LIBOR margin was 2.00% and the ABR margin was 1.00% for the three months ended December 31, 2017. See Note 19, "Subsequent Events" for a description of the February 2018 refinancing. |
| |
(6) | Available capacity is subject to maintaining sufficient relocation related assets to collateralize these securitization obligations. |
| |
(7) | In November 2017, the capacity of the Apple Ridge facility was reduced from $325 million to $250 million. As of December 31, 2017, the Company had $250 million of borrowing capacity under the Apple Ridge Funding LLC securitization program leaving $69 million of available capacity. |
| |
(8) | Consists of a £10 million revolving loan facility and a £5 million working capital facility. As of December 31, 2017, the Company had $20 million of borrowing capacity under the Cartus Financing Limited securitization program leaving $7 million of available capacity. |
| |
(9) | Not included in this table is the Company's Unsecured Letter of Credit Facility which had a capacity of $74 million with $69 million utilized at a weighted average rate of 3.24% at December 31, 2017. |
Maturities Table
As of December 31, 2017,2019, the combined aggregate amount of maturities for long-term borrowings excluding securitization obligations, for each of the next five years is as follows:
| | | Year | | Amount | Year | | Amount | |
| 2018 (a) | | $ | 127 |
| |
| 2019 | | 527 |
| |
| 2020 | | 356 |
| |
| 2020 (a) | | 2020 (a) | | $ | 234 | |
| 2021 | | 837 |
| 2021 | | 612 | |
| 2022 | | 1,039 |
| 2022 | | 81 | |
| 2023 | | 2023 | | 981 | |
| 2024 | | 2024 | | 11 | |
_______________
| |
(a) | The current portion of long-term debt consists of four quarters of 2018 amortization payments totaling $33 million, $13 million and $11 million for the Term Loan A, Term Loan A-1 and Term Loan B facilities, respectively, as well as $70 million of revolver borrowings under the revolving credit facility which expires in October 2020, but are classified on the balance sheet as current due to the revolving nature of the facility. See Note 19, "Subsequent Events" for a description of the February 2018 refinancing. |
(a)The current portion of long term debt consists of four quarters of 2020 amortization payments totaling $33 million and $11 million for the Term Loan A and Term Loan B facilities, respectively, as well as $190 million of revolver borrowings under the Revolving Credit Facility which expires in February 2023, but is classified on the balance sheet as current due to the revolving nature and terms and conditions of the facility.
Senior Secured Credit Facility
In July 2016, the CompanyFebruary 2018, Realogy Group entered into a thirdfifth amendment (the "Third"Fifth Amendment") to the Amended and Restated Senior Secured Credit Agreement dated as of March 5, 2013, as amended. The Third Amendment(as amended, amended and restated, modified or supplemented from time to time, the "Senior Secured Credit Agreement") that replaced the $1,858Term Loan B due July 2022 with a new $1,080 million Term Loan B due March 2020 with a new $1,100 million Term Loan B due July 20, 2022. February 2025.
In January 2017, the CompanyFebruary 2018, Realogy Group entered into a fourththe sixth amendment (the "Fourth"Sixth Amendment") to the Amended and Restated Credit Agreement (as so amended, the "Senior Secured Credit Agreement") that repriced the Term Loan B through a refinancing of the existing term loan with a new Term Loan B. The Fourth Amendment reduced the interest rate by 75 basis points but did not change the maturity date for the Term Loan B. The Company also entered into an Incremental Assumption Agreement to the Senior Secured Credit Agreement pursuant to which the Company increased the borrowing capacity under its Revolving Credit Facility to $1,050$1,400 million from the existing $815prior $1,050 million and extended the maturity date to February 2023. In March 2019, Realogy Group entered into an incremental assumption agreement to the Senior Secured Credit Agreement that provided for an incremental revolving facility commitment of $25 million, increasing the borrowing capacity under the Revolving Credit Facility to $1,425 million.
The Senior Secured Credit Agreement provides for:
| |
(a) | a Term Loan B issued in the original aggregate principal amount of $1,100 million with a maturity date of July 2022. The Term Loan B has quarterly amortization payments totaling 1% per annum of the initial aggregate principal amount. The interest rate with respect to term loans under the Term Loan B is based on, at Realogy Group's option, adjusted LIBOR plus 2.25% (with a LIBOR floor of 0.75%) or ABR plus 1.25% (with an ABR floor of 1.75%); and |
| |
(b) | a $1,050 million Revolving Credit Facility with a maturity date of October 23, 2020, which includes (i) a $125 million letter of credit subfacility and (ii) a swingline loan subfacility. The interest rate with respect to revolving loans under the Revolving Credit Facility is based on, at Realogy Group's option, adjusted LIBOR or ABR plus an additional margin subject to the following adjustments based on the Company’s then current senior secured leverage ratio: |
(a)the Term Loan B issued in the original aggregate principal amount of $1,080 million with a maturity date of February 2025. The Term Loan B has quarterly amortization payments totaling 1% per annum of the initial aggregate principal amount. The interest rate with respect to term loans under the Term Loan B is based on, at Realogy Group's option, adjusted LIBOR plus 2.25% (with a LIBOR floor of 0.75%) or ABR plus 1.25% (with an ABR floor of 1.75%); and |
| | | | |
| Senior Secured Leverage Ratio | | Applicable LIBOR Margin | | Applicable ABR Margin |
| Greater than 3.50 to 1.00 | | 2.50% | | 1.50% |
| Less than or equal to 3.50 to 1.00 but greater than or equal to 2.50 to 1.00 | | 2.25% | | 1.25% |
| Less than 2.50 to 1.00 | | 2.00% | | 1.00% |
| | | | | | | | | | | | | | |
| Senior Secured Leverage Ratio | | Applicable LIBOR Margin | | Applicable ABR Margin |
| Greater than 3.50 to 1.00 | | 2.50% | | | 1.50% | |
| Less than or equal to 3.50 to 1.00 but greater than or equal to 2.50 to 1.00 | | 2.25% | | | 1.25% | |
| Less than 2.50 to 1.00 but greater than or equal to 2.00 to 1.00 | | 2.00% | | | 1.00% | |
| Less than 2.00 to 1.00 | | 1.75% | | | 0.75% | |
The Senior Secured Credit Agreement permits the Company to obtain up to $500 million of additional credit facilities on a combined basis with the Term Loan A Agreement (less any amounts previously incurred under this provision) from lenders reasonably satisfactory to the administrative agent and us, without the consent of the existing lenders under the new senior secured credit facility, plus an unlimited amount if Realogy Group's senior secured leverage ratio is less than 3.50 to 1.00 on a pro forma basis. Subject to certain restrictions, the Senior Secured Credit Agreement also permits usthe Company to issue senior secured or unsecured notes in lieu of any incremental facility.
The obligations under the Senior Secured Credit Agreement are secured to the extent legally permissible by substantially all of the assets of Realogy Group, Realogy Intermediate and all of their domestic subsidiaries, other than certain excluded subsidiaries.
Realogy Group’s Senior Secured Credit Agreement contains financial, affirmative and negative covenants and requires Realogy Group to maintain (so long as the Revolving Credit Facility is outstanding) a senior secured leverage ratio, not to exceed 4.75 to 1.00. The leverage ratio is tested quarterly regardless of the amount of borrowings outstanding and letters of credit issued under the revolverRevolving Credit Facility at the testing date. Total senior secured net debt does not include unsecured indebtedness, including the Unsecured Notes as well as the securitization obligations.Notes. At December 31, 2017,2019, Realogy Group was in compliance with the senior secured leverage ratio covenant.
See Note 19, "Subsequent Events" for a description of the Refinancing inTerm Loan A Facility
In February 2018, which resulted in: (i) increasingRealogy Group entered into a second amendment to the capacity ofTerm Loan A Agreement. Under the revolving credit facility from $1,050 million to $1,400 million and extendingamendment, the maturity date from October 2020 to February 2023; (ii) aggregatingCompany aggregated the existing $435 million Term Loan A and $355 million Term Loan A-1 tranches due October 2020 and July 2021, respectively, into a new single tranche of $750 million Term Loan A due February 2023; and (iii) refinancing the existing $1,083 million Term Loan B due July 2022 with a new Term Loan B issued at par in the amount of $1,080 million with a maturity date in February 2025.
Term Loan A Facility
In October 2015, Realogy Group entered into the Term Loan A senior secured credit agreement which provides for a five-year, $435 million loan issued at par with a maturity date of October 23, 2020 (the “Term Loan A”) and has terms substantially similar to the Senior Secured Credit Agreement.2023. The Term Loan A provides for quarterly amortization payments which commenced March 31, 2016, totaling the amount per annum equal to the following percentages2.5%, 2.5%, 5.0%, 7.5% and 10.0% of the original principal amount of the Term Loan A: 5%, 5%, 7.5%, 10.0%A, which commenced on June 30, 2018 and 12.5% for amortizations payable in 2016, 2017, 2018, 2019 and 2020, with the balance payable upon the final maturity date.continue through February 8,
2023. The interest rates with respect to term loans under the Term Loan A are based on, at our option, adjusted LIBOR or ABR plus an additional margin subject to the following adjustments based on the Company’s then current senior secured leverage ratio:
|
| | | | |
| Senior Secured Leverage Ratio | | Applicable LIBOR Margin | | Applicable ABR Margin |
| Greater than 3.50 to 1.00 | | 2.50% | | 1.50% |
| Less than or equal to 3.50 to 1.00 but greater than or equal to 2.50 to 1.00 | | 2.25% | | 1.25% |
| Less than 2.50 to 1.00 | | 2.00% | | 1.00% |
In July 2016, Realogy Group entered into a first amendment to the Term Loan A senior secured credit agreement. Under the amendment, the Company issued the Term Loan A-1 in the amount of $355 million with a maturity date in July 2021 under its existing Term Loan A Facility and on terms substantially similar to its existing Term Loan A. The Term Loan A-1 provides for quarterly amortization payments totaling per annum 2.5%, 2.5%, 5.0%, 7.5% and 10.0% of the original principal amount of the Term Loan A-1, which commenced September 30, 2016 continuing through June 30, 2021. The interest rates with respect to term loans under the Term Loan A-1 are based on, at our option, adjusted LIBOR or ABR plus an additional margin subject to the following adjustments based on the Company’s then current senior secured leverage ratio:
| | | | | | | | | | | | | | |
| Senior Secured Leverage Ratio | | Applicable LIBOR Margin | | Applicable ABR Margin |
| Greater than 3.50 to 1.00 | | 2.50% | | | 1.50% | |
| Less than or equal to 3.50 to 1.00 but greater than or equal to 2.50 to 1.00 | | 2.25% | | | 1.25% | |
| Less than 2.50 to 1.00 but greater than or equal to 2.00 to 1.00 | | 2.00% | | | 1.00% | |
| Less than 2.00 to 1.00 | | 1.75% | | | 0.75% | |
Consistent with the Senior Secured Credit Agreement, the Term Loan A FacilityAgreement permits the Company to obtain up to $500 million of additional credit facilities on a combined basis with the Senior Secured Credit Agreement (less any amounts previously incurred under this provision) from lenders reasonably satisfactory to the administrative agent and the company,Company, without the consent of the existing lenders under the Term Loan A, plus an unlimited amount if the Company's senior secured leverage ratio is less than 3.50 to 1.00 on a pro forma basis. Subject to certain restrictions, the Term Loan A Facility also permits usthe Company to issue senior secured or unsecured notes in lieu of any incremental facility. The Term Loan A Agreement contains negative covenants consistent with those included in the Senior Secured Credit Agreement.
Unsecured Notes
TheIn February 2019, the Company used borrowings under its Revolving Credit Facility and cash on hand to fund the redemption of all of its outstanding $450 million 4.50% Senior Notes. In March 2019, the Company issued $550 million of 9.375% Senior Notes due in April 2027. The Company used $540 million of the net proceeds to repay a portion of outstanding borrowings under its Revolving Credit Facility.
During the third quarter of 2019, Realogy Group used cash on hand to repurchase $93 million of its 4.875% Senior Notes in open market purchases at an aggregate purchase price of $83 million, plus accrued interest to the repurchase date. In conjunction with the repurchase, the Company recorded a gain on the early extinguishment of debt of $10 million.
The 5.25% Senior Notes, and 4.875% Senior Notes (each as defined below, collectivelyand the 9.375% Senior Notes (collectively the "Unsecured Notes") are unsecured senior obligations of Realogy Group that mature on April 15, 2019, December 1, 2021, and June 1, 2023 and April 1, 2027, respectively. Interest on the Unsecured Notes is payable each year semiannually on April 15 and October 15 for the 4.50% Senior Notes and June 1 and December 1 for both the 5.25% Senior Notes and 4.875% Senior Notes, and on April 1 and October 1 for the 9.375% Senior Notes.
The Unsecured Notes are guaranteed on an unsecured senior basis by each domestic subsidiary of Realogy Group that is a guarantor under the Senior Secured Credit Facility and Realogy Group's outstanding debt securities, and are guaranteed by Realogy Holdings on an unsecured senior subordinated basis.
The indentures governing the Unsecured Notes contain various negative covenants that limit Realogy Group's and its restricted subsidiaries’ ability to take certain actions, which covenants are subject to a number of important exceptions and qualifications. These covenants include limitations on Realogy Group's and its restricted subsidiaries’ ability to (a) incur or guarantee additional indebtedness, or issue disqualified stock or preferred stock, (b) pay dividends or make distributions to their stockholders, (c) repurchase or redeem capital stock, (d) make investments or acquisitions, (e) incur restrictions on the ability of certain of their subsidiaries to pay dividends or to make other payments to Realogy Group, (f) enter into transactions with affiliates, (g) create liens, (h) merge or consolidate with other companies or transfer all or substantially all of their assets, (i) transfer or sell assets, including capital stock of subsidiaries and (j) prepay, redeem or repurchase debt that is subordinated in right of payment to the Unsecured Notes.
The covenants in the indenture governing the 9.375% Senior Notes are substantially similar to the covenants in the indentures governing the other Unsecured Notes, with certain exceptions, including several changes relating to Realogy Group’s ability to make restricted payments, and, in particular, its ability to repurchase shares and pay dividends. Specifically, (a) the cumulative credit basket for restricted payments (i) was reset to 0 and builds from January 1, 2019, (ii) builds at 25% of Consolidated Net Income (as defined in the indenture governing the 9.375% Senior Notes) when the consolidated leverage ratio (as defined below) is equal to or greater than 4.0 to 1.0 (and 50% of Consolidated Net Income when it is less than 4.0 to 1.0) and, consistent with the indentures governing the other Unsecured Notes, is reduced by 100% of the deficit when Consolidated Net Income is a deficit and (iii) may not be used when the consolidated leverage ratio is equal to or greater than 4.0 to 1.0; (b) the $100 million general restricted payment basket may be used only for Restricted Investments (as defined in the indenture governing the 9.375% Senior Notes); (c) the indenture governing the 9.375%
Senior Notes requires the consolidated leverage ratio to be less than 3.0 to 1.0 to use the unlimited general restricted payment basket (which payments will reduce the cumulative credit basket, but not below zero); and (d) the indenture governing the 9.375% Senior Notes contains a new restricted payment basket that may be used for up to $45 million of dividends per calendar year.
The consolidated leverage ratio is measured by dividing Realogy Group's total net debt by the trailing twelve-month EBITDA. EBITDA, as defined in the indenture governing the 9.375% Senior Notes, is substantially similar to EBITDA calculated on a Pro Forma Basis, as those terms are defined in the Senior Secured Credit Agreement. Net debt under the indenture is Realogy Group's total indebtedness less (i) its cash and cash equivalents in excess of restricted cash and (ii) a $200 million seasonality adjustment permitted when measuring the ratio on a date during the period of March 1 to May 31.
Other Debt Facilities
The Company hashad an Unsecured Letter of Credit Facility to provide for the issuance of letters of credit required for general corporate purposes by the Company.purposes. At December 31, 2017,2018, the capacity of the facility was $74$66 million, with $69$63 million being utilizedutilized. The Facility expired in December 2019 and at December 31, 2016, the capacity of the facility was $131 million with $127 million being
utilized. In August 2017, the standby irrevocable letter of credit, which was utilized to support the Company's payment obligations with respect to its share of Cendant contingent and other corporate liabilities, was terminated as a result of the resolution of a Cendant legacy tax matter, reducing the capacity andnot renewed. All outstanding letters of credit are currently under the Unsecured Letter of Credit Facility. The facility's expiration dates are as follows:
|
| |
Capacity (in millions) | Expiration Date |
$8 | September 2018 |
$66 | December 2019 |
The fixed pricing to the Company is based on a spread above the credit default swap rate for senior unsecured debt obligations of the Company over the applicable letter of credit period. Realogy Group's obligations under the Unsecured Letter ofCompany's Revolving Credit Facility are guaranteed on an unsecured senior basis by each domestic subsidiaryas of Realogy Group that is a guarantor under the Senior Secured Credit Facility and Realogy Group's outstanding debt securities.
Securitization Obligations
Realogy Group has secured obligations through Apple Ridge Funding LLC under a securitization program. In June 2017, Realogy Group extended the program until June 2018. In November 2017, the capacity of the Apple Ridge facility was reduced from $325 million to $250 million. At December 31, 2017, Realogy Group had $181 million of outstanding borrowings under the facility.2019.
Realogy Group, through a special purpose entity known as Cartus Financing Limited, has agreements providing for a £10 million revolving loan facility and a £5 million working capital facility. In September 2017, Realogy Group extended the existing Cartus Financing Limited securitization program to August 2018. There were $13 million of outstanding borrowings on the facilities at December 31, 2017. These Cartus Financing Limited facilities are secured by the relocation assets of a U.K. government contract in this special purpose entity and are therefore classified as permitted securitization financings as defined in Realogy Group’s Senior Secured Credit Facility and the indentures governing the Unsecured Notes.
The Apple Ridge entities and the Cartus Financing Limited entity are consolidated special purpose entities that are utilized to securitize relocation receivables and related assets. These assets are generated from advancing funds on behalf of clients of Realogy Group’s relocation business in order to facilitate the relocation of their employees. Assets of these special purpose entities are not available to pay Realogy Group’s general obligations. Under the Apple Ridge program, provided no termination or amortization event has occurred, any new receivables generated under the designated relocation management agreements are sold into the securitization program and as new eligible relocation management agreements are entered into, the new agreements are designated to the program. The Apple Ridge program has restrictive covenants and trigger events, including performance triggers linked to the age and quality of the underlying assets, foreign obligor limits, multicurrency limits, financial reporting requirements, restrictions on mergers and change of control, any uncured breach of Realogy Group’s senior secured leverage ratio under Realogy Group’s Senior Secured Credit Facility, and cross-defaults to Realogy Group’s material indebtedness. The occurrence of a trigger event under the Apple Ridge securitization facility could restrict our ability to access new or existing funding under this facility or result in termination of the facility, either of which would adversely affect the operation of our relocation business.
Certain of the funds that Realogy Group receives from relocation receivables and related assets must be utilized to repay securitization obligations. These obligations were collateralized by $218 million and $238 million of underlying relocation receivables and other related relocation assets at December 31, 2017 and 2016, respectively. Substantially all relocation related assets are realized in less than twelve months from the transaction date. Accordingly, all of Realogy Group’s securitization obligations are classified as current in the accompanying Consolidated Balance Sheets.
Interest incurred in connection with borrowings under these facilities amounted to $7 million and $6 million for the years ended December 31, 2017 and December 31, 2016, respectively. This interest is recorded within net revenues in the accompanying Consolidated Statements of Operations as related borrowings are utilized to fund Realogy Group's relocation business where interest is generally earned on such assets. These securitization obligations represent floating rate debt for which the average weighted interest rate was 3.3% and 2.6% for the years ended December 31, 2017 and 2016, respectively.
Gain/Loss on the Early Extinguishment of Debt and Write-Off of Financing Costs
During the year ended December 31, 2019, the Company recorded a gain on the early extinguishment of debt of $5 million which consisted of a $10 million gain as a result of the repurchase of $93 million of its 4.875% Senior Notes during the third quarter of 2019, partially offset by a $5 million loss as a result of the refinancing transactions in the first quarter of 2019.
As a result of the refinancing transactions in February 2018, the Company recorded a loss on the early extinguishment of debt of $7 million and wrote off financing costs of $2 million to interest expense during the year ended December 31, 2018.
As a result of the refinancing transaction in January of 2017 and a reduction of the Unsecured Letter of Credit Facility in September of 2017, the Company recorded losses on the early extinguishment of debt of $5 million during the year ended December 31, 2017.
11. EMPLOYEE BENEFIT PLANS
F-26
As a result of refinancing transactions, note repurchases and note redemptions, the Company recorded a loss on the early extinguishment of debt of $48 million during the year ended December 31, 2015.
DEFINED BENEFIT PENSION PLAN
The Company’s defined benefit pension plan was closed to new entrants as of July 1, 1997 and existing participants do not accrue any additional benefits. The net periodic pension cost for both 2017 and 20162019 was $1$2 million and was comprised of interest cost of approximately $6$5 million and the amortization of the actuarial net loss of $2 million, partiallyoffset by a benefit of $5 million for the expected return on assets. The net periodic pension cost for 2018 was less than $1 million and was comprised of interest cost of approximately $5 million and the amortization of the actuarial net loss of $2 million, offset by a benefit of $7 million for the expected return on assets.
At December 31, 20172019 and 2016,2018, the accumulated benefit obligation of this plan was $145$143 million and $147$128 million, respectively, and the fair value of the plan assets were $108$100 million and $104$90 million, respectively, resulting in an unfunded accumulated benefit obligation of $37$43 million and $43$38 million, respectively, which is recorded in Other current and non-current liabilities in the Consolidated Balance Sheets.
Estimated future benefit payments as of December 31, 20172019 are as follows:
| | | Year | | Amount | Year | | Amount |
| 2018 | | $ | 9 |
| |
| 2019 | | 9 |
| |
| 2020 | | 9 |
| 2020 | | $ | 9 | |
| 2021 | | 10 |
| 2021 | | 9 | |
| 2022 | | 10 |
| 2022 | | 9 | |
| 2023 through 2027 | | 47 |
| |
| 2023 | | 2023 | | 9 | |
| 2024 | | 2024 | | 9 | |
| 2025 through 2029 | | 2025 through 2029 | | 45 | |
The minimum funding required during 20182020 is estimated to be $3$8 million.
The following table presents the fair values of plan assets by category as of December 31, 2017:2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Asset Category | | Quoted Price in Active Market for Identical Assets
(Level I) | | Significant Other Observable Inputs
(Level II) | | Significant Unobservable Inputs
(Level III) | | Total |
| Cash and cash equivalents | | $ | 1 | | | $ | — | | | $ | — | | | $ | 1 | |
| Equity securities | | — | | | 51 | | | — | | | 51 | |
| Fixed income securities | | — | | | 48 | | | — | | | 48 | |
| Total | | $ | 1 | | | $ | 99 | | | $ | — | | | $ | 100 | |
|
| | | | | | | | | | | | | | | | |
| Asset Category | | Quoted Price in Active Market for Identical Assets (Level I) | | Significant Other Observable Inputs (Level II) | | Significant Unobservable Inputs (Level III) | | Total |
| Cash and cash equivalents | | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | 1 |
|
| Equity securities | | — |
| | 71 |
| | — |
| | 71 |
|
| Fixed income securities | | — |
| | 36 |
| | — |
| | 36 |
|
| Total | | $ | 1 |
| | $ | 107 |
| | $ | — |
| | $ | 108 |
|
The following table presents the fair values of plan assets by category as of December 31, 2016:2018:
| | | Asset Category | | Quoted Price in Active Market for Identical Assets (Level I) | | Significant Other Observable Inputs (Level II) | | Significant Unobservable Inputs (Level III) | | Total | Asset Category | | Quoted Price in Active Market for Identical Assets
(Level I) | | Significant Other Observable Inputs
(Level II) | | Significant Unobservable Inputs
(Level III) | | Total |
| Cash and cash equivalents | | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | 1 |
| Cash and cash equivalents | | $ | 3 | | | $ | — | | | $ | — | | | $ | 3 | |
| Equity securities | | — |
| | 74 |
| | — |
| | 74 |
| Equity securities | | — | | | 43 | | | — | | | 43 | |
| Fixed income securities | | — |
| | 29 |
| | — |
| | 29 |
| Fixed income securities | | — | | | 44 | | | — | | | 44 | |
| Total | | $ | 1 |
| | $ | 103 |
| | $ | — |
| | $ | 104 |
| Total | | $ | 3 | | | $ | 87 | | | $ | — | | | $ | 90 | |
OTHER EMPLOYEE BENEFIT PLANS
The Company also maintains post-retirement health and welfare plans for certain subsidiaries and a non-qualified pension plan for certain individuals. At both December 31, 20172019 and 2016,2018, the related projected benefit obligation for these plans accrued on the Company’s Consolidated Balance Sheets (primarily within other non-current liabilities) was $6 million.$5 million for both periods.
DEFINED CONTRIBUTION SAVINGS PLAN
The Company sponsors a defined contribution savings plan that provides certain of its eligible employees an opportunity to accumulate funds for retirement and has a Company match for a portion of the contributions made by participating employees. The Company’s cost for contributions to this plan was $17 million, $16 million $15 million and $14$16 million for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively.
12. INCOME TAXES
The components of pretax income for domestic and foreign operations consisted of the following:
| | | | Year Ended December 31, | | Year Ended December 31, | |
| | 2017 | | 2016 | | 2015 | | 2019 | | 2018 | | 2017 |
| Domestic | $ | 365 |
| | $ | 351 |
| | $ | 290 |
| Domestic | $ | (140) | | | $ | 213 | | | $ | 362 | |
| Foreign | 4 |
| | 10 |
| | 8 |
| Foreign | — | | | — | | | — | |
| Pretax income | $ | 369 |
| | $ | 361 |
| | $ | 298 |
| |
| Pretax (loss) income | | Pretax (loss) income | $ | (140) | | | $ | 213 | | | $ | 362 | |
The components of income tax expense (benefit) expense consisted of the following:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | |
| | 2019 | | 2018 | | 2017 |
| Current: | | | | | |
| Federal | $ | 3 | | | $ | (11) | | | $ | (8) | |
| State | 7 | | | 5 | | | 4 | |
| Foreign | 2 | | | 2 | | | 2 | |
| Total current | 12 | | | (4) | | | (2) | |
| Deferred: | | | | | |
| Federal | (25) | | | 61 | | | (73) | |
| State | (9) | | | 10 | | | 9 | |
| Foreign | — | | | — | | | — | |
| Total deferred | (34) | | | 71 | | | (64) | |
| Income tax (benefit) expense | $ | (22) | | | $ | 67 | | | $ | (66) | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Current: | | | | | |
| Federal | $ | (7 | ) | | $ | 10 |
| | $ | 8 |
|
| State | 4 |
| | 8 |
| | 3 |
|
| Foreign | 1 |
| | 2 |
| | 3 |
|
| Total current | (2 | ) | | 20 |
| | 14 |
|
| Deferred: | | | | | |
| Federal | (72 | ) | | 107 |
| | 91 |
|
| State | 9 |
| | 16 |
| | 4 |
|
| Foreign | — |
| | 1 |
| | 1 |
|
| Total deferred | (63 | ) | | 124 |
| | 96 |
|
| Income tax (benefit) expense | $ | (65 | ) | | $ | 144 |
| | $ | 110 |
|
The Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”), which became law on December 22, 2017, will reducereduced the U.S. Federal corporate tax rate from 35% to 21% for tax years beginning in 2018. The $65$66 million income tax benefit includesin 2017 included a tax benefit of approximately $184 million due to the re-measurement of the Company’s net deferred tax liabilities associated with the 2017 Tax Act and a $32 million reduction in the Company's reserve for uncertain tax positions, partially offset by current operating results. The recorded net benefit related to the 2017 Tax Act is a provisional amount that reflects the Company’s reasonable estimate at this time, and is subject to adjustment during a measurement period not to exceed one year from enactment in accordance with guidance from the Securities and Exchange Commission.
A reconciliation of the Company’s effective income tax rate at the U.S. federal statutory rate of 35%21% to the actual expense was as follows:
|
| | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Federal statutory rate | 35 | % | | 35 | % | | 35 | % |
| State and local income taxes, net of federal tax benefits | 4 |
| | 4 |
| | 2 |
|
| Impact of the 2017 Tax Act | (50 | ) | | — |
| | — |
|
| Permanent differences | — |
| | 1 |
| | 1 |
|
| Uncertain tax positions | (9 | ) | | — |
| | — |
|
| Net change in valuation allowance | 1 |
| | — |
| | 1 |
|
| Other | 1 |
| | — |
| | (2 | ) |
| Effective tax rate | (18 | %) | | 40 | % | | 37 | % |
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | |
| | 2019 | | 2018 | | 2017 |
| Federal statutory rate | 21 | % | | 21 | % | | 35 | % |
| State and local income taxes, net of federal tax benefits | 6 | | | 5 | | | 4 | |
| Impact of the 2017 Tax Act | — | | | — | | | (50) | |
| Non-deductible equity compensation | (4) | | | 2 | | | — | |
| Non-deductible executive compensation | (1) | | | 1 | | | — | |
| Goodwill impairment | (3) | | | — | | | — | |
| Meals & entertainment | (2) | | | — | | | — | |
| Other permanent differences | (1) | | | 1 | | | — | |
| Uncertain tax positions | — | | | (1) | | | (9) | |
| Net change in valuation allowance | — | | | 2 | | | 1 | |
| Other | — | | | — | | | 1 | |
| Effective tax rate | 16 | % | | 31 | % | | (18) | % |
Deferred income taxes result from temporary differences between the amount of assets and liabilities recognized for financial reporting and tax purposes. The components of the deferred income tax assets and liabilities, as of December 31, are as follows:
|
| | | | | | | |
| | 2017 | | 2016 |
| Deferred income tax assets: | | | |
| Net operating loss carryforwards | $ | 288 |
| | $ | 503 |
|
| Tax credit carryforwards | 35 |
| | 41 |
|
| Accrued liabilities and deferred income | 85 |
| | 131 |
|
| Minimum pension obligations | 16 |
| | 23 |
|
| Provision for doubtful accounts | 8 |
| | 16 |
|
| Liability for unrecognized tax benefits | 1 |
| | 3 |
|
| Interest rate swaps | 2 |
| | 8 |
|
| Total deferred tax assets | 435 |
| | 725 |
|
| Less: valuation allowance | (13 | ) | | (10 | ) |
| Total deferred income tax assets after valuation allowance | 422 |
| | 715 |
|
| Deferred income tax liabilities: | | | |
| Depreciation and amortization | 736 |
| | 1,099 |
|
| Prepaid expenses | 2 |
| | 1 |
|
| Undistributed foreign earnings | — |
| | 2 |
|
| Basis difference in investment in joint ventures | 10 |
| | 2 |
|
| Total deferred tax liabilities | 748 |
| | 1,104 |
|
| Net deferred income tax liabilities | $ | (326 | ) | | $ | (389 | ) |
Deferred tax assets and deferred tax liabilities are netted by tax jurisdiction. The Net deferred income tax liability of $326 million as of December 31, 2017 is included in the accompanying Consolidated Balance Sheets with $327 million in deferred income taxes (non-current liabilities) and $1 million in other non-current assets. The Net deferred income tax liability of $389 million as of December 31, 2016 is included in the accompanying Consolidated Balance Sheets with the entire $389 million in deferred income taxes (non-current liabilities). | | | | | | | | | | | |
| 2019 | | 2018 |
| Deferred income tax assets: | | | |
| Net operating loss carryforwards | $ | 173 | | | $ | 236 | |
| Tax credit carryforwards | 29 | | | 24 | |
| Accrued liabilities and deferred income | 77 | | | 92 | |
| Operating leases | 169 | | | — | |
| Minimum pension obligations | 18 | | | 16 | |
| Provision for doubtful accounts | 7 | | | 7 | |
| Liability for unrecognized tax benefits | 1 | | | 1 | |
| Interest rate swaps | 12 | | | 5 | |
| Total deferred tax assets | 486 | | | 381 | |
| Less: valuation allowance | (14) | | | (14) | |
| Total deferred income tax assets after valuation allowance | 472 | | | 367 | |
| Deferred income tax liabilities: | | | |
| Depreciation and amortization | 704 | | | 747 | |
| Operating leases | 146 | | | — | |
| Prepaid expenses | 8 | | | 8 | |
| Basis difference in investment in joint ventures | 2 | | | 1 | |
| Other | 2 | | | — | |
| Total deferred tax liabilities | 862 | | | 756 | |
| Net deferred income tax liabilities | $ | (390) | | | $ | (389) | |
As of December 31, 2017,2019, the Company had gross federal and state net operating loss carryforwards of $1,026$588 million. The federal net operating loss carryforwards expire between 20272030 and 2033 and the state net operating loss carryforwards expire between 20182020 and 2033.
Accounting for Uncertainty in Income Taxes
The Company utilizes the FASB guidance for accounting for uncertainty in income taxes, which prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. The Company reflects changes in its liability for unrecognized tax benefits as income tax expense in the Consolidated Statements of Operations. As of December 31, 2017,2019, the Company’s gross liability for unrecognized tax benefits was $22$20 million,, of which $19$17 million would affect the Company’s effective tax rate, if recognized. The Company does not expect that its unrecognized tax benefits will significantly change over the next 12twelve months.
The Company files U.S., state and foreign income tax returns in jurisdictions with varying statutes of limitations. Tax returns for the 2006 through 20172019 tax years remain subject to examination by federal and certain state tax authorities. In significant foreign jurisdictions, tax returns for the 20082015 through 20172019 tax years generally remain subject to examination by their respective tax authorities. The Company believes that it is reasonably possible that the total amount of its unrecognized tax benefits could decrease by $2$1 million in certain taxing jurisdictions where the statute of limitations is set to expire within the next 12twelve months.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in interest expense and operating expenses, respectively. The Company did not recognize a change of interest expense for the year ended December 31, 2019. Additionally, the Company recognized a reduction of interest expense of $1 million for the year ended December 31, 2018 and a reduction of interest expense of $2 million for the year ended December 31, 2017, a reduction of interest expense of $4 million for the year ended December 31, 2016 and reduction of interest expense of $1 million for the year ended December 31, 2015.
2017.
The rollforward of unrecognized tax benefits are summarized in the table below:
|
| | | |
| Unrecognized tax benefits—January 1, 2015 | $ | 106 |
|
| Gross decreases—tax positions in prior periods | (4 | ) |
| Gross increases—tax positions in current period | 1 |
|
| Settlements | (23 | ) |
| Reduction due to lapse of statute of limitations | (2 | ) |
| Unrecognized tax benefits—December 31, 2015 | 78 |
|
| Gross increases—tax positions in prior periods | 3 |
|
| Reduction due to lapse of statute of limitations | (3 | ) |
| Unrecognized tax benefits—December 31, 2016 | 78 |
|
| Gross increases—tax positions in prior periods | 1 |
|
| Gross decreases—tax positions in prior periods | (54 | ) |
| Reduction due to lapse of statute of limitations | (3 | ) |
| Unrecognized tax benefits—December 31, 2017 | $ | 22 |
|
| | | | | |
| Unrecognized tax benefits—January 1, 2017 | $ | 75 | |
| Gross decreases—tax positions in prior periods | (54) | |
| Reduction due to lapse of statute of limitations | (1) | |
| Unrecognized tax benefits—December 31, 2017 | 20 | |
| Reduction due to lapse of statute of limitations | (1) | |
| Unrecognized tax benefits—December 31, 2018 | 19 | |
| Gross increases—tax positions in prior periods | 1 | |
| Unrecognized tax benefits—December 31, 2019 | $ | 20 | |
The Company is subject to income taxes in the United States and several foreign jurisdictions. Significant judgment is required in determining the worldwide provision for income taxes and recording related assets and liabilities. In the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is uncertain. The Company is regularly under audit by tax authorities whereby the outcome of the audits is uncertain. The Company believes there is appropriate support for positions taken on its tax returns. The liabilities that have been recorded represent the best estimates of the probable loss on certain positions and are adequate for all open years based on an assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter. However, the outcomes of tax audits are inherently uncertain.
Tax Sharing Agreement
Under the Tax Sharing Agreement with Cendant, Wyndham Worldwide and Travelport, the Company is generally responsible for 62.5% of payments made to settle claims with respect to tax periods ending on or prior to December 31, 2006 that relate to income taxes imposed on Cendant and certain of its subsidiaries, the operations (or former operations) of which were determined by Cendant not to relate specifically to the respective businesses of Realogy, Wyndham Worldwide, Avis Budget or Travelport. With respect to any remaining residual legacy Cendant tax liabilities, the Company and its former parent believe there is appropriate support for the positions taken on Cendant’s tax returns. However, tax audits and any related litigation, including disputes or litigation on the allocation of tax liabilities between parties under the Tax Sharing Agreement, could result in outcomes for the Company that are different from those reflected in the Company’s historical financial statements.
13. RESTRUCTURING COSTS
Restructuring charges for the years ended December 31, 2019, 2018 and 2017 2016 and 2015 were $12$42 million, $39$47 million and $10$12 million, respectively. The components of the restructuring charges for the years ended December 31, 2017, 20162019, 2018 and 20152017 were as follows:
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Personnel-related costs (1) | $ | 7 |
| | $ | 22 |
| | $ | 3 |
|
| Facility-related costs (2) | 3 |
| | 10 |
| | 3 |
|
| Accelerated depreciation on asset disposals | 1 |
| | 1 |
| | — |
|
| Other restructuring costs (3) | 1 |
| | 6 |
| | 4 |
|
| Total restructuring charges | $ | 12 |
| | $ | 39 |
| | $ | 10 |
|
| | | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | | | |
| 2019 | | 2018 | | 2017 |
| Personnel-related costs (1) | $ | 24 | | | $ | 17 | | | $ | 7 | |
| Facility-related costs (2) | 17 | | | 20 | | | | 4 | |
| Internal use software impairment (3) | — | | | 10 | | | — | |
| Other restructuring costs (4) | 1 | | | — | | | 1 | |
| Total restructuring charges (5) | $ | 42 | | | $ | 47 | | | $ | 12 | |
_______________
| |
(1) | Personnel-related costs consist of severance costs provided to employees who have been terminated and duplicate payroll costs during transition. |
(1)Personnel-related costs consist of severance costs provided to employees who have been terminated and duplicate payroll costs during transition.
(2)Facility-related costs consist of costs associated with planned facility closures such as contract termination costs, amortization of lease assets that will continue to be incurred under the contract for its remaining term without economic benefit to the Company, accelerated depreciation on asset disposals and other facility and employee relocation related costs.
F-30
| |
(2) | Facility-related costs consist of costs associated with planned facility closures such as contract termination costs, lease payments that will continue to be incurred under the contract for its remaining term without economic benefit to the Company and other facility and employee relocation related costs. |
| |
(3) | Other restructuring costs consist of costs related to professional fees, consulting fees and other costs associated with restructuring activities which are primarily included in the Corporate and Other business segment. |
Business Optimization Initiative(3)Internal use software impairment relates to development costs capitalized for a project that was determined to not meet the Company's strategic goals when analyzed by the Company's new leadership team.
During(4)Other restructuring costs consist of costs related to professional fees, consulting fees and other costs associated with restructuring activities which are primarily included in the Corporate and Other business segment.
(5)The year ended December 31, 2019 includes $38 million of expense related to the Facility and Operational Efficiencies Program and $4 million of expense related to prior restructuring programs. The years ended December 31, 2018 and December 31, 2017 relate to prior restructuring programs.
Facility and Operational Efficiencies Program
Beginning in the first quarter of 2019, the Company commenced the implementation of a plan to accelerate its office consolidation to reduce storefront costs, as well as institute other operational efficiencies to drive profitability. In addition, the Company commenced a plan to transform and centralize certain aspects of the operational support and drive changes in how it serves its affiliated independent sales agents from a marketing and technology perspective to help such agents be more productive and enable them to make their businesses more profitable. In the fourth quarter of 2015,2019, the Company began a businessexpanded its operational efficiencies program to focus on workforce optimization. This workforce optimization initiative thatis focused on maximizingconsolidating similar or overlapping roles, reducing the efficiencynumber of hierarchical layers and effectiveness ofstreamlining work and decision making. Separately, the cost structure of each ofCompany also reduced headcount in the Company's business units. The action was designed to improve client service levels across each of the business units while enhancing the Company's profitability and incremental margins. The plan focused on several key areas of opportunity which include process improvement efficiencies, office footprint optimization, leveraging technology and media spend, centralized procurement, outsourcing administrative services and organizational design. The expected costs of activities undertakenthird quarter in connection with the restructuring planwind down of a former affinity program. Furthermore, at the end of 2019 the Company identified other strategic initiatives which are largely complete.expected to result in additional operational and facility related efficiencies in 2020.
The following is a reconciliation of the beginning and ending restructuring reserve balances forrelated to the Business Optimization Initiative:Facility and Operational Efficiencies Program:
| | | | | | | | | | | | | | | | | | | | | | | |
| Personnel-related costs | | | Facility-related costs (1) | | | Other restructuring costs | | Total |
| Balance at December 31, 2018 | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Restructuring charges | 21 | | | 16 | | | 1 | | | 38 | |
| Costs paid or otherwise settled | (15) | | | (11) | | | (1) | | | (27) | |
| Balance at December 31, 2019 | $ | 6 | | | $ | 5 | | | $ | — | | | $ | 11 | |
_______________
(1)In addition, the Company incurred an additional $12 million related to lease asset impairments in connection with the Facility and Operational Efficiencies Program during the year ended December 31, 2019.
|
| | | | | | | | | | | | | | | | | | | |
| | Personnel-related costs | | Facility-related costs | | Accelerated depreciation asset disposals | | Other restructuring costs | | Total |
| Balance at October 1, 2015 | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Restructuring charges | 3 |
| | 3 |
| | — |
| | 4 |
| | 10 |
|
| Costs paid or otherwise settled | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
| Balance at December 31, 2015 | $ | 3 |
| | $ | 3 |
| | $ | — |
| | $ | 3 |
| | $ | 9 |
|
| Restructuring charges | 22 |
| | 10 |
| | 1 |
| | 6 |
| | 39 |
|
| Costs paid or otherwise settled | (16 | ) | | (6 | ) | | (1 | ) | | (9 | ) | | (32 | ) |
| Balance at December 31, 2016 | $ | 9 |
| | $ | 7 |
| | $ | — |
| | $ | — |
| | $ | 16 |
|
| Restructuring charges | 7 |
| | 3 |
| | 1 |
| | 1 |
| | 12 |
|
| Costs paid or otherwise settled | (13 | ) | | (7 | ) | | — |
| | (1 | ) | | (21 | ) |
| Balance at December 31, 2017 | $ | 3 |
| | $ | 3 |
| | $ | 1 |
| | $ | — |
| | $ | 7 |
|
The following table shows the total restructuring costs currently expected to be incurred by type of cost forrelated to the Business Optimization Initiative:Facility and Operational Efficiencies Program:
| | | | | | | | | | | | | | | | | |
| Total amount expected to be incurred | | Amount incurred
through
December 31, 2019 | | Total amount remaining to be incurred |
| Personnel-related costs | $ | 24 | | | $ | 21 | | | $ | 3 | |
| Facility-related costs (1) | 46 | | | 16 | | | 30 | |
| Other restructuring costs | 1 | | | 1 | | | — | |
| Total | $ | 71 | | | $ | 38 | | | $ | 33 | |
|
| | | | | | | | | | | |
| | Total amount expected to be incurred | | Amount incurred to date | | Total amount remaining to be incurred |
| Personnel-related costs | $ | 32 |
| | $ | 32 |
| | $ | — |
|
| Facility-related costs | 16 |
| | 16 |
| | — |
|
| Accelerated depreciation related to asset disposals | 3 |
| | 2 |
| | 1 |
|
| Other restructuring costs | 12 |
| | 11 |
| | 1 |
|
| Total | $ | 63 |
| | $ | 61 |
| | $ | 2 |
|
(1)Facility-related costs includes lease asset impairments expected to be incurred under the Facility and Operational Efficiencies Program.
The following table shows the total restructuring costs currently expected to be incurred by reportable segment forrelated to the Business Optimization Initiative:Facility and Operational Efficiencies Program:
| | | | | | | | | | | | | | | | | |
| Total amount expected to be incurred | | Amount incurred
through
December 31, 2019 | | Total amount remaining to be incurred |
| Realogy Franchise Group | $ | 3 | | | $ | 2 | | | $ | 1 | |
| Realogy Brokerage Group | 54 | | | 25 | | | 29 | |
| Realogy Title Group | 2 | | | 2 | | | — | |
| Realogy Leads Group | 2 | | | 2 | | | — | |
| Corporate and Other | 10 | | | 7 | | | 3 | |
| Total | $ | 71 | | | $ | 38 | | | $ | 33 | |
Leadership Realignment and Other Restructuring Activities
Beginning in the first quarter of 2018, the Company commenced the implementation of a plan to drive its business forward and enhance stockholder value. The key aspects of this plan included senior leadership realignment, an enhanced focus on technology and talent, as well as further attention to office footprint and other operational efficiencies. The activities undertaken in connection with the restructuring plan are complete. At December 31, 2018, the remaining liability was $17 million. During the year ended December 31, 2019, the Company incurred personnel-related costs of $3 million, paid or settled costs of $12 million and reclassified $3 million to offset related lease assets upon adoption of the new leasing standard, resulting in a remaining accrual of $5 million related to personnel and facility related liabilities.
14. STOCK-BASED COMPENSATION
|
| | | | | | | | | | | |
| | Total amount expected to be incurred | | Amount incurred to date | | Total amount remaining to be incurred |
| Real Estate Franchise Services | $ | 5 |
| | $ | 5 |
| | $ | — |
|
| Company Owned Real Estate Brokerage Services | 36 |
| | 36 |
| | — |
|
| Relocation Services | 5 |
| | 5 |
| | — |
|
| Title and Settlement Services | 2 |
| | 2 |
| | — |
|
| Corporate and Other | 15 |
| | 13 |
| | 2 |
|
| Total | $ | 63 |
| | $ | 61 |
| | $ | 2 |
|
| |
12. | STOCK-BASED COMPENSATION |
The Company issues incentive equitygrants stock-based compensation awards such as to certain senior management, employees and directors including non-qualified stock options, restricted stock units ("RSUs"), performance restricted stock units ("PRSUs") and performance share units ("PSUs"), to employees, consultants and directors of Realogy under its 2012.
The Company's stockholders approved the 2018 Long-Term Incentive Plan and(the "2018 Plan") at the 2018 Annual Meeting of Stockholders held on May 2, 2018. Upon approval of the 2018 Plan, the 2012 Amended and Restated 2012 Long-Term Incentive Plan, ("as amended (the "2012 Plan") was terminated, no future awards were permitted to be granted under the Plans"). The Plans include2012 Plan, and any shares available for future issuance under the 2012 Plan were canceled. Under the 2018 Plan, 6 million shares were authorized for issuance plus any shares that expire or are forfeited under the 2012 Plan after March 1, 2018. As of December 31, 2019, there are approximately 0.6 million shares available for future grants.
Each of the 2012 and 2018 Plan includes a retirement provision for equity grants which provide for continued vesting of awards once an employee has attained the age of 65 years, or 55 years of age or older plus at least ten years of tenure with the Company, provided they have been employed or provided services to the Company for one year following the date of grant or start of the performance period. There has been a total
Incentive Equity Awards Granted by the Company
In October 2017, the Company announced that Ryan Schneider had been elected as President and Chief Operating Officer of the Company and appointed as a member of the Company’s Board of Directors. In accordance with the succession plan developed by the Board, Mr. Schneider was named Chief Executive Officer (the “CEO”) on December 31, 2017. Mr. Schneider was granted an inducement equity award with an aggregate grant date fair value of $5 million consisting of: (i) $2.5 million in RSUs and (ii) $2.5 million in non-qualified stock options, with the RSUs vesting in equal annual installments over a three-year period and with the options becoming exercisable in equal annual installments over a four-year period, in each case, based on continued service through the vesting date.
A summary of activity for the year ended December 31, 20172019 is presented below (number of shares in millions):
| | | | | | | | | | | | | | | | | | | | | | | Restricted Stock Units | | Weighted Average Grant Date Fair Value | | Performance Share Units (a) | | Weighted Average Grant Date Fair Value | | Options (e) | | Weighted Average Exercise Price |
| | Restricted Stock Units | | Weighted Average Grant Date Fair Value | | Performance Share Units (a) | | Weighted Average Grant Date Fair Value | | Options (f) | | Weighted Average Exercise Price | |
| Outstanding at January 1, 2017 | 1.5 |
| | $ | 37.72 |
| | 1.4 |
| | $ | 38.31 |
| | 3.3 |
| | $ | 31.69 |
| |
| Outstanding at January 1, 2019 | | Outstanding at January 1, 2019 | 2.2 | | | $ | 27.37 | | | 1.7 | | | $ | 28.10 | | | 3.7 | | | $ | 30.98 | |
| Granted | 1.2 |
| | 28.61 |
| | 0.7 |
| | 27.70 |
| | 0.7 |
| | 29.60 |
| Granted | 2.5 | | | 13.41 | | | 0.9 | | | 11.06 | | | 0.8 | | | 13.44 | |
| Distributed/Exercised | (0.6 | ) | (b) | 39.64 |
| | (0.3 | ) | (c) | 42.30 |
| | (0.3 | ) | (d) | 23.29 |
| Distributed/Exercised | (1.0) | | (b) | | 28.17 | | | (0.2) | | (c) | | 32.66 | | | — | | | — | |
| Forfeited/Expired | (0.1 | ) | | 30.90 |
| | — |
| | — |
| | (0.1 | ) | | 50.24 |
| Forfeited/Expired | (0.3) | | | 18.81 | | | (0.1) | | | 19.35 | | | (0.4) | | | 28.74 | |
| Outstanding at December 31, 2017 | 2.0 |
| | $ | 31.71 |
| | 1.8 |
| | $ | 33.16 |
| | 3.6 |
| (e) | $ | 31.75 |
| |
| Outstanding at December 31, 2019 | | Outstanding at December 31, 2019 | 3.4 | | | $ | 17.89 | | | 2.3 | | | $ | 19.16 | | | 4.1 | | (d) | | $ | 27.50 | |
_______________
| |
(a) | The PSU amounts in the table are shown at the target amount of the award. |
| |
(b) | The total fair value of RSUs which were distributed during the year ended December 31, 2017 was $26 million. |
| |
(c) | The total fair value of PSUs which were distributed during the year ended December 31, 2017 was $14 million, which includes the distribution of PSUs awarded in 2014, measuring performance over a three-year performance period ended December 31, 2016, at a fair value of $10 million. Amounts distributed do not include 0.2 million PSUs awarded in 2015, measuring performance over a three-year period ended and vested December 31, 2017, at a fair value of $9 million and at a weighted average grant date fair value of $46.46. These PSUs were distributed in early 2018. |
| |
(d) | The intrinsic value of options exercised during the year ended December 31, 2017 was $2 million. Cash received from options exercised during the year ended December 31, 2017 was $8 million. |
| |
(e) | Options outstanding at December 31, 2017 have an intrinsic value of $6 million and have a weighted average remaining contractual life of 5.8 years. |
(f)(a)The followingPSU amounts in the table summarizes information regarding exercisable stock options asare shown at the target amount of the award.
(b)The total fair value of RSUs which were distributed during the year ended December 31, 2019 was $27 million.
(c)The total fair value of PSUs which were distributed during the year ended December 31, 2019 was $8 million.
(d)Options outstanding at December 31, 2019 have an intrinsic value of 0 and have a weighted average remaining contractual life of 5.7 years.
(e)As of December 31, 2017: |
| | | | | | | | | | | | | |
| Range of Exercise Prices | | Options Vested | | Weighted Average Exercise Price | | Aggregate Intrinsic Value | | Weighted Average Remaining Contractual Life |
| $15.00 to $50.00 | | 2.4 |
| | $ | 27.86 |
| | $ | 6.3 |
| | 4.7 years |
| $50.01 and above | | 0.1 |
| | $ | 140.26 |
| | $ | — |
| | 2.8 years |
Awards granted annually include a mix of RSUs (PRSUs for the CEO and direct reports)reports in 2017), options and PSUs.
The RSUs and PRSUs vest over three years, with 33.33% vesting on each anniversary of the grant date. The fair value of RSUs and PRSUs are equal to the closing sale price of the Company's common stock on the date of grant. Time-vesting of the PRSUs forgranted to the CEO and direct reports isin 2017 was subject to achievement of a minimum EBITDA performance goal during the year that the award was granted.
The PSUs are incentives that reward grantees based upon the Company's financial performance over a three-yearthree-year performance period which begins January 1st of the grant year and ends on December 31st of the third year following the grant year. There are two2 PSU awards: one1 is based upon the total stockholder return of Realogy's common stock relative to the total stockholder return of the SPDR S&P Homebuilders Index ("XHB") or the S&P MidCap 400 index (the "RTSR award"), and the other is based upon the achievement of cumulative free cash flow goals. The number of shares that may be issued under theeach PSU award is variable and based upon the extent to which the performance goals are achieved over the performance period (with a range of payout from 0% to 175% of target for the RTSR award and 0% to 200% of target for the achievement of cumulative free cash flow award). The shares earned will be distributed during the first quarter after the end of the performance period. The fair value of PSUs without a market condition is equal to the closing sale price of the Company's common stock on the date of grant. The fair value of the PSU RTSR awardawards was estimated on the date of grant using the Monte Carlo Simulation method utilizing the following assumptions:
| | | | 2017 RTSR PSU | | 2016 RTSR PSU | | 2015 RTSR PSU | | 2019 RTSR PSU | | 2018 RTSR PSU | | 2017 RTSR PSU |
| Weighted average grant date fair value | $ | 27.98 |
| | $ | 27.99 |
| | $ | 41.08 |
| Weighted average grant date fair value | $ | 7.82 | | | $ | 25.45 | | | $ | 27.98 | |
| Weighted average expected volatility (a) | 29.0 | % | | 28.1 | % | | 25.1 | % | Weighted average expected volatility (a) | 34.8 | % | | 29.8 | % | | 29.0 | % |
| Weighted average volatility of S&P 400 | | Weighted average volatility of S&P 400 | 13.5 | % | | | | | | |
| Weighted average volatility of XHB | 18.4 | % | | 19.4 | % | | 21.1 | % | Weighted average volatility of XHB | | | | 17.9 | % | | 18.4 | % |
| Weighted average correlation coefficient | 0.53 |
| | 0.58 |
| | 0.57 |
| Weighted average correlation coefficient | 0.42 | | | 0.44 | | | 0.53 | |
| Weighted average risk-free interest rate | 1.5 | % | | 0.9 | % | | 1.0 | % | Weighted average risk-free interest rate | 2.5 | % | | 2.6 | % | | 1.5 | % |
| Weighted average dividend yield | — |
| | — |
| | — |
| Weighted average dividend yield | — | | | — | | | — | |
_______________
| |
(a) | Expected volatility is based on historical volatilities of the Company and select comparable companies. |
(a)Expected volatility is based on historical volatilities of the Company and select comparable companies.
The stock options have a maximum term of ten years and vest over four years, with 25% vesting on each anniversary date of the grant date. The options have an exercise price equal to the closing sale price of the Company's common stock on the date of grant. The fair value of the options was estimated on the date of grant using the Black-Scholes option-pricing model utilizing the following assumptions: | | | | 2017 Options | | 2016 Options | | 2015 Options | | 2019 Options | | 2018 Options | | 2017 Options |
| Weighted average grant date fair value | $ | 8.61 |
| | $ | 10.81 |
| | $ | 17.66 |
| Weighted average grant date fair value | $ | 3.40 | | | $ | 7.12 | | | $ | 8.61 | |
| Weighted average expected volatility (a) | 30.7 | % | | 31.7 | % | | 36.1 | % | Weighted average expected volatility (a) | 31.4 | % | | 28.5 | % | | 30.7 | % |
| Weighted average expected term (years) (b) | 6.25 |
| | 6.25 |
| | 6.25 |
| Weighted average expected term (years) (b) | 6.25 | | 6.25 | | 6.25 |
| Weighted average risk-free interest rate (c) | 2.0 | % | | 1.3 | % | | 1.6 | % | Weighted average risk-free interest rate (c) | 2.5 | % | | 2.7 | % | | 2.0 | % |
| Weighted average dividend yield | 1.2 | % | | 0.1 | % | | — | % | Weighted average dividend yield | 2.7 | % | | 1.4 | % | | 1.2 | % |
_______________
| |
(a) | Expected volatility was based on historical volatilities of the Company and select comparable companies. |
| |
(b) | The expected term of the options granted represents the period of time that options are expected to be outstanding and is based on the simplified method. |
| |
(c) | The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the time of the grant, which corresponds to the expected term of the options. |
(a)Expected volatility was based on historical volatilities of the Company and select comparable companies.
(b)The expected term of the options granted represents the period of time that options are expected to be outstanding and is based on the simplified method.
(c)The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the time of the grant, which corresponds to the expected term of the options.
Stock-Based Compensation Expense
As of December 31, 2017,2019, based on current performance achievement expectations, there was $36$35 million of unrecognized compensation cost related to incentive equity awards under the plans which willwould be recorded in future periods as compensation expense over a remaining weighted average period of approximately 1.9 years.years. The Company recorded stock-based compensation expense related to the incentive equity awards of $52$28 million,, $57 $37 million and $57$47 million for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively.
| |
13. | COMMITMENTS AND CONTINGENCIES |
15. COMMITMENTS AND CONTINGENCIES
Litigation
The Company is involved in claims, legal proceedings, alternative dispute resolution and governmental inquiries related to alleged contract disputes, business practices, intellectual property and other commercial, employment, regulatory and tax matters. Examples of such matters include but are not limited to allegations:
•that the Company is vicariously liable for the acts of franchisees under theories of actual or apparent agency;
by current or former franchisees that franchise agreements were breached including improper terminations;
concerning claims for alleged RESPA or state real estate law violations including but not limited to claims challenging the validity of sales agent indemnification, and administrative fees;
thatindependent residential real estate sales agents engaged by NRT—Realogy Brokerage Group or by affiliated franchisees—under certain state or federal laws—are potentially employees instead of independent contractors, and they or regulators therefore may bring claims against NRTRealogy Brokerage Group for breach of contract, wage and hour classification claims, wrongful discharge, unemployment and workers' compensation and could seek benefits, back wages, overtime, indemnification, penalties related to classification practices and expense reimbursement available to employees;employees or similar claims against Realogy Franchise Group as an alleged joint employer of an affiliated franchisee’s independent sales agents;
•concerning other employment law matters, including other types of worker classification claims as well as wage and hour claims and retaliation claims;
•concerning anti-trust and anti-competition matters;
•that the Company is vicariously liable for the acts of franchisees under theories of actual or apparent agency;
•by current or former franchisees that franchise agreements were breached including improper terminations;
•concerning alleged RESPA or state real estate law violations;
•concerning claims related to the Telephone Consumer Protection Act, including autodialer claims;
•concerning claims generally against the company owned brokerage operations for negligence, misrepresentation or breach of fiduciary duty in connection with the performance of real estate brokerage or other professional services as well as other brokerage claims associated with listing information and property history;
•related to copyright law, including infringement actions alleging improper use of copyrighted photographs on websites or in marketing materials without consent of the copyright holder;
•concerning breach of obligations to make websites and other services accessible for consumers with disabilities;
•concerning claims generally against the title companyagent contending that as the escrow company, the companyagent knew or should have known that a transaction was fraudulent or concerning otherthat the agent was negligent in addressing title defects or settlement errors;conducting the settlement;
•concerning information security and cyber-crime, including claims under new and emerging data privacy laws related to the protection of customer, employee or third-party information, as well as those related to the diversion of homesale transaction closing funds and/or the protection of the privacyfunds; and personally identifiable information of our customers and employees;
concerning anti-trust and anti-competition matters; and
•those related to general fraud claims.
Worker Classification Litigation
Whitlach v. Premier Valley, Inc. d/b/a Century 21 M&M and Century 21 Real Estate LLC (Superior Court of California, Stanislaus County). This was filed as a putative class action complaint on December 20, 2018 by plaintiff James Whitlach against Premier Valley Inc., a Century 21 Real Estate independently-owned franchisee doing business as Century 21 M&M (“Century 21 M&M”). The complaint also names Century 21 Real Estate LLC, a wholly-owned subsidiary of the Company and the franchisor of Century 21 Real Estate (“Century 21”), as an alleged joint employer of the franchisee’s independent sales agents and seeks to certify a class that could potentially include all agents of both Century 21 M&M and Century 21 in California. The plaintiff alleges that Century 21 M&M misclassified all of its independent real estate agents, salespeople, sales professionals, broker associates and other similar positions as independent contractors, failed to pay minimum wages, failed to provide meal and rest breaks, failed to pay timely wages, failed to keep proper records, failed to provide appropriate wage statements, made unlawful deductions from wages, and failed to reimburse plaintiff and the putative class for business related expenses, resulting in violations of the California Labor Code. The complaint also asserts an unfair business practice claim based on the alleged violations described above.
On February 15, 2019, the plaintiff amended his complaint to assert claims pursuant to the California Private Attorneys General Act (“PAGA”). The PAGA claims included in the amended complaint are substantively similar to those asserted in the original complaint. Under California law, PAGA claims are generally not subject to arbitration and may result in exposure in the form of additional penalties. In April 2019, the defendants filed motions to compel arbitration of the non-PAGA claims and to stay the PAGA claims pending resolution of the arbitrable claims. On June 5, 2019, the court dismissed the plaintiff’s non-PAGA claims without prejudice and withdrew the defendants’ motion to compel arbitration by stipulation of the parties. The plaintiff continues to pursue his PAGA claims as a representative of purported "aggrieved employees" as defined by PAGA. The plaintiff currently seeks, as the representative of all purported aggrieved employees, all non-individualized relief available to the purported aggrieved employees under PAGA, as well as attorneys’ fees. On November 15, 2019, Century 21 M&M filed a demurrer to the complaint, seeking to dismiss the remaining claim in the action, to which Century 21 filed a joinder, and on February 12, 2020 a brief in opposition was filed by the plaintiff.
Fenley v. Realogy Franchise Group LLC, Sotheby’s International Realty, Inc., Wish Properties, Inc. and DOES 1-100 (Superior Court of California, Kern County). This is a putative class action complaint filed on April 25, 2019 by plaintiff Elizabeth Fenley against Wish Properties, Inc, a Sotheby’s International Realty independently-owned franchisee doing business as Wish Sotheby’s International Realty (“Wish SIR”). The complaint also names Realogy Franchise Group LLC and Sotheby’s International Realty, Inc., wholly-owned subsidiaries of the Company, as alleged joint employers of the franchisee’s independent sales agents and seeks to certify a class that could potentially include all agents in California affiliated with any Realogy Franchise Group brand. The plaintiff alleges that all defendants are jointly responsible for misclassifying Wish SIR’s agents as independent contractors and failed to reimburse for business expenses, provide accurate wage statements and pay wages timely, all in violation of the California Labor Code. The complaint also asserts an unfair business practice claim based on the violations previously described. The plaintiff seeks reimbursement of allegedly necessary expenses, liquidated damages, waiting time penalties, civil penalties, pre- and post-judgment interest, restitution, injunctive relief, and attorneys’ fees and costs. On September 17, 2019, the Court denied the defendants’ motions to compel arbitration. In February 2020, the matter was settled on an individual basis.
These cases raise various previously unlitigated claims and the PAGA claims in the Whitlach matter add additional litigation, financial and operating uncertainties. There are similar classification cases pending against several other brokerages in the state of California and developments in one or more of those cases could impact progress in these cases.
Real Estate BusinessIndustry Litigation
Dodge, et al.Moehrl, Cole, Darnell, Nager, Ramey, Sawbill Strategic, Inc., Umpa and Ruh v. PHH Corporation, et al.The National Association of Realtors, Realogy Holdings Corp., formerly captioned Strader, et al.Homeservices of America, Inc., BHH Affiliates, LLC, The Long & Foster Companies, Inc., RE/MAX LLC, and HallKeller Williams Realty, Inc. (U.S. District Court for the Northern District of Illinois). This amended putative class action complaint (the "amended Moehler complaint"), filed on June 14, 2019, (i) consolidates the Moehrl and Sawbill
litigation reported in our Form 10-Q for the period ended March 31, 2019, (ii) adds certain plaintiffs and defendants, and (iii) serves as a response to the separate motions to dismiss filed on May 17, 2019 in the prior Moehrl litigation by each of NAR and the Company (along with the other defendants named in the prior Moehrl complaint).
In the amended Moehrl complaint, the plaintiffs allege that the defendants engaged in a continuing contract, combination, or conspiracy to unreasonably restrain trade and commerce in violation of Section 1 of the Sherman Act because defendant NAR allegedly established mandatory anticompetitive policies for the multiple listing services and its member brokers that require brokers to make an offer of buyer broker compensation when listing a property. The plaintiffs further allege that commission sharing, which provides for the broker representing the seller sharing or paying a portion of its commission to the broker representing the buyer, is anticompetitive and violates the Sherman Act, and that the defendant franchisors conspired with NAR by requiring their respective franchisees to comply with NAR’s policies and Code of Ethics. The plaintiffs seek a permanent injunction enjoining the defendants from requiring home sellers to pay buyer broker commissions or to otherwise restrict competition among buyer brokers, an award of damages and/or restitution, attorneys fees and costs of suit. Plaintiffs' counsel has filed a motion to appoint lead counsel in the case, which has yet to be decided by the court. On August 9, 2019, NAR and the Company (together with the other defendants named in the amended Moehler complaint) each filed separate motions to dismiss this litigation. The plaintiffs filed their opposition to the motions to dismiss on September 13, 2019, and the defendants filed their replies in support of the motions on October 18, 2019.
Sitzer and Winger v. PHH Corporation, et al. The National Association of Realtors, Realogy Holdings Corp., Homeservices of America, Inc., RE/MAX Holdings, Inc., and Keller Williams Realty, Inc. (U.S. District Court for the CentralWestern District of California)Missouri). This is a purportedputative class action broughtcomplaint filed on April 29, 2019 and amended on June 21, 2019 by four California residentsplaintiffs Joshua Sitzer and Amy Winger against 15 defendants, includingNAR, the Company, Homeservices of America, Inc., RE/MAX Holdings, Inc., and Keller Williams Realty, Inc. The complaint contains substantially similar allegations, and seeks the same relief under the Sherman Act, as the Moehrl litigation. The Sitzer litigation is limited both in allegations and relief sought to the State of Missouri and includes an additional cause of action for alleged violation of the Missouri Merchandising Practices Act, or MMPA. On August 22, 2019, the Court denied defendants' motions to transfer the Sitzer matter to the U.S. District Court for the Northern District of Illinois and on October 16, 2019, denied the motions to dismiss this litigation filed respectively by NAR and the Company (together with the other named brokerage/franchisor defendants).
Securities Litigation
Tanaskovic v. Realogy Holdings Corp., et. al. (U.S. District Court for the District of New Jersey). This is a putative class action complaint filed on July 11, 2019 by plaintiff Sasa Tanaskovic against the Company and certain of its current and former executive officers. The lawsuit alleges violations of Sections 10(b), 20(a) and Rule 10b-5 of the Exchange Act in connection with allegedly false and misleading statements made by the Company about its business, operations, and prospects. The plaintiffs seek, among other things, compensatory damages for purchasers of the Company’s common stock between February 24, 2017 through May 22, 2019, as well as attorneys’ fees and costs. Locals 302 and 612 of the International Union of Operating Engineers-Employers Construction Industry Retirement Trust (the “Retirement Trust”), was appointed lead plaintiff on November 7, 2019. Lead plaintiff has until March 6, 2020 to file its amended complaint per the stipulation of the parties entered by the Court on January 8, 2020.
Fried v. Realogy Holdings Corp., et al. (U.S. District Court for the District of New Jersey). This is a putative derivative action filed on October 23, 2019 by plaintiff Adam Fried against the Company (as nominal defendant) and certain of its current and former executive officers and members of its Board of Directors (as defendants). The lawsuit alleges violations of Section 14(a) of the Exchange Act and breach of fiduciary duties for, among other things, allegedly false and misleading statements made by the Company about its business, operations and prospects as well as unjust enrichment claims. The plaintiff seeks, among other things, compensatory damages, disgorgement of improper compensation, certain reforms to the Company’s corporate governance and internal procedures and attorneys’ fees and costs. On December 23, 2019, the Court approved a motion staying this case pending further action in the Tanaskovic matter.
The Company disputes the allegations in each of the captioned matters described above and will vigorously defend these actions. Given the early stages of each of these cases, we cannot estimate a range of reasonably possible losses for this litigation.
The Company believes that it has adequately accrued for legal matters as appropriate. The Company records litigation accruals for legal matters which are both probable and estimable.
Litigation and other disputes are inherently unpredictable and subject to substantial uncertainties and unfavorable resolutions could occur. In addition, class action lawsuits can be costly to defend and, depending on the class size and
claims, could be costly to settle. As such, the Company could incur judgments or enter into settlements of claims with liability that are materially in excess of amounts accrued and these settlements could have a material adverse effect on the Company’s financial condition, results of operations or cash flows in any particular period.
* * *
Company-Initiated Litigation
Realogy Holdings Corp., NRT New York LLC (d/b/a The Corcoran Group), Sotheby’s International Realty, Inc., Coldwell Banker Residential Brokerage Company, Coldwell Banker Residential Real Estate LLC, NRT West, Inc., Martha Turner Properties, L.P. And Better Homes and Gardens Real Estate LLC v. Urban Compass, Inc., and Compass, Inc. (Supreme Court New York, New York County). On July 10, 2019, the Company and certain of its subsidiaries, PHH Corporationfiled a complaint against Urban Compass, Inc. and PHH Home Loans, LLC (a joint venture between RealogyCompass, Inc. (together, "Compass") alleging misappropriation of trade secrets; tortious interference with contract; intentional and PHH), allegingtortious interference with prospective economic advantage; unfair competition under New York common law; violations of the California Unfair Competition Law, Business and Professional Code Section 8(a)17200 et. seq. (unfair competition); violations of RESPA. Plaintiffs seek to represent two subclasses comprisedNew York General Business Law Section 349 (deceptive acts or practices); violations of all persons in the United States who, since January 31, 2005, (1) obtained a RESPA-covered mortgage loan from either (a) PHH Home Loans, LLC or oneNew York General Business Law Sections 350 and 350-a (false advertising); conversion; and aiding and abetting breach of its subsidiaries, or (b) one of the mortgage services managed by PHH Corporation for other lenders, and (2) paid a fee for title insurance or settlement services to TRG or one of its subsidiaries. Plaintiffs allege,contract. The Company seeks, among other things, that PHH Home Loans, LLC operates in violation of RESPAactual and that the other defendants violate RESPA by referring business to one another under agreements or arrangements. Plaintiffs seek treblecompensatory damages, injunctive relief, and an award of attorneys’ fees costs and disbursements.costs. On May 19, 2017,September 6, 2019, Compass filed a motion to dismiss this litigation. On September 26, 2019, the parties held a mediation session, atCompany filed an amended complaint, which they agreedadds certain factual allegations in principle to a settlementsupport of the action, pursuantCompany’s claims, withdraws the count for aiding and abetting breach of contract and adds a count for defamation. On November 25, 2019, Compass filed a motion to whichcompel arbitration of the claims asserted by The Corcoran Group as well as a separate motion to dismiss this litigation. On January 14, 2020, the Company would pay approximately $8 million (or one-half of the settlement). As a result, the Company accrued $8 million in the second quarter of 2017opposed both motions and the liability is included in accrued expenses and other current liabilities on the Consolidated Balance Sheets. On July 31, 2017, the fourth amended complaint wasFebruary 10, 2020 Compass filed changing the named plaintiffs. At a hearingreply briefs on the plaintiffs' motion for preliminary approval of the settlement held October 19, 2017, the Court indicated that if certain modest revisions were made to the settlement agreement and an amended motion for preliminary approval filed, the Court would grant preliminary approval. On January 29, 2018, the Court issued an order granting preliminary approval of the settlement, directed class notices to be sent by February 2018 and set the hearing on final approval of the settlement for August 16, 2018.both motions.
* * *
The Company is involved in certain other claims and legal actions arising in the ordinary course of our business. Such litigation, regulatory actions and other proceedings may include, but are not limited to, actions relating to intellectual property, commercial arrangements, franchising arrangements, actions against our title company alleging it knew or should have known that others were committing mortgage fraud,the fiduciary duties of brokers, standard brokerage disputes like the failure to disclose accurate square footage or hidden defects in the property such as mold, vicarious liability based upon conduct of individuals or entities outside of our control, including franchisees and independent sales agents, antitrust and anti-competition claims, general fraud claims (including wire fraud associated with third-party diversion of funds from a brokerage transaction), employment law claims, including claims challenging the classification of our sales agents as independent contractors, wage and hour classification claims and claims alleging violations of RESPA or state consumer fraud statutes or federal consumer protection statutes. While the results of such claims and legal actions cannot be predicted with certainty, we do not believe based on information currently available to us that the final outcome of current proceedings against the Company will have a material adverse effect on our consolidated financial position, results of operations or cash flows. In addition, with the increasing requirements resulting from government laws and regulations concerning data breach notifications and data privacy and protection obligations, claims associated with these laws may become more common. While most litigation involves claims against the Company, from time to time the Company commences litigation, including litigation against former employees, franchisees and competitors when it alleges that such persons or entities have breached agreements or engaged in other wrongful conduct.
* * *
Cendant Corporate LitigationLiabilities and Guarantees to Cendant and Affiliates
Realogy Group (then Realogy Corporation) separated from Cendant on July 31, 2006 (the "Separation"), pursuant to a plan by Cendant (now known as Avis Budget Group, Inc.) to separate into four independent companies-onecompanies—one for each of Cendant's business units-real estate services (Realogy Group), travel distribution services ("Travelport"), hospitality services, including timeshare resorts ("Wyndham Worldwide"), and vehicle rental ("Avis Budget Group"). Pursuant to the Separation and Distribution Agreement dated as of July 27, 2006 among Cendant, Realogy Group, Wyndham Worldwide and Travelport, (the "Separation and Distribution Agreement"), each of Realogy Group, Wyndham Worldwide and Travelport have assumed certain contingent and other corporate liabilities (and related costs and expenses), which are primarily related to each of their respective businesses. In addition, Realogy Group has assumed 62.5% and Wyndham Worldwide has assumed 37.5% of certain contingent and other corporate liabilities (and related costs and expenses) of Cendant or its subsidiaries, which are not primarily related to anyCendant.
* * *
The Company believes that it has adequately accrued for legal matters as appropriate. The Company records litigation accruals for legal matters which are both probable and estimable.
Litigation and other disputes are inherently unpredictable and subject to substantial uncertainties and unfavorable resolutions could occur. In addition, class action lawsuits can be costly to defend and, depending on the class size and claims, could be costly to settle. As such, the Company could incur judgments or enter into settlements of claims with liability that are materially in excess of amounts accrued and these settlements could have a material adverse effect on the Company’s financial condition, results of operations or cash flows in any particular period.
Transfer of Cendant Corporate Liabilities, Issuance of Guarantees to Cendant and Affiliates and Contingent Liability Letter of Credit
Realogy Group has certain guarantee commitments with Cendant (pursuant to the assumption of certain liabilities and the obligation to indemnify Cendant, Wyndham Worldwide and Travelport for such liabilities). These guarantee arrangements primarily relate to certain contingent litigation liabilities, contingent tax liabilities, and other corporate liabilities, of which Realogy Group assumed and is generally responsible for 62.5%. Upon separation from Cendant, the liabilities assumed by Realogy Group were comprised of certain Cendant corporate liabilities which were recorded on the historical books of Cendant as well as additional liabilities which were established for guarantees issued at the date of Separation related to certain unresolved contingent matters that could arise during the guarantee period. Regarding the guarantees, if any of the companies responsible for all or a portion of such liabilities were to default in its payment of costs or expenses related to any such liability, Realogy Group would be responsible for a portion of the defaulting party or parties’ obligation. To the extent such recorded liabilities are in excess or are not adequate to cover the ultimate payment amounts, such excess or deficiency will be reflected in the results of operations in future periods.
In April 2007, the Company established a standby irrevocable letter of credit for the benefit of Avis Budget Group in accordance with the Separation and Distribution Agreement. The letter of credit was utilized to support the Company’s payment obligations with respect to its share of Cendant contingent and other corporate liabilities. The stated amount of the standby irrevocable letter of credit was subject to periodic adjustment to reflect the then current estimate of Cendant contingent and other liabilities. The standby irrevocable letter of credit terminates if (i) the Company’s senior unsecured credit rating is raised to BB by Standard and Poor’s or Ba2 by Moody’s or (ii) the aggregate value of the former parent contingent liabilities falls below $30 million.
The letter of credit was $53 million at December 31, 2016. With the resolution of a Cendant legacy tax matter in 2017, the aggregate value of the former parent contingent liabilities fell below $30 million and therefore the standby irrevocable letter of credit was terminated in accordance with the agreement.
The due to former parent balance was $18 million and $28$21 million at December 31, 20172019 and December 31, 2016,2018, respectively. The due to former parent balance was comprised of the Company’s portion of the following: (i) Cendant’s remaining state and foreign contingent tax liabilities, (ii) accrued interest on contingent tax liabilities, (iii) potential liabilities related to Cendant’s terminated or divested businesses, and (iv) potential liabilities related to the residual portion of accruals for Cendant operations.
Tax Matters
The Company is subject to income taxes in the United States and several foreign jurisdictions. Significant judgment is required in determining the worldwide provision for income taxes and recording related assets and liabilities. In the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is uncertain. The Company is regularly under audit by tax authorities whereby the outcome of the audits is uncertain. The Company believes there is appropriate support for positions taken on its tax returns. The liabilities that have been recorded represent the best estimates of the probable loss on certain positions and are adequate for all open years based on an assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter. However, the outcomes of tax audits are inherently uncertain.
Under the Tax Sharing Agreement with Cendant, Wyndham Worldwide and Travelport, the Company is generally responsible for 62.5% of payments made to settle claims with respect to tax periods ending on or prior to December 31, 2006 that relate to income taxes imposed on Cendant and certain of its subsidiaries, the operations (or former operations) of which were determined by Cendant not to relate specifically to the respective businesses of Realogy, Wyndham Worldwide, Avis Budget or Travelport.
With respect to any remaining legacy Cendant tax liabilities, the Company and its former parent believe there is appropriate support for the positions taken on Cendant’s tax returns. However, tax audits and any related litigation, including disputes or litigation on the allocation of tax liabilities between parties under the Tax Sharing Agreement, could result in outcomes for the Company that are different from those reflected in the Company’s historical financial statements.
Escrow and Trust Deposits
As a service to its customers, the Company administers escrow and trust deposits which represent undisbursed amounts received for the settlement of real estate transactions. Deposits at FDIC-insured institutions are insured up to $250 thousand.$250 thousand. These escrow and trust deposits totaled $469$475 million and $415$426 million at December 31, 20172019 and 2016,2018, respectively. These escrow and trust deposits are not assets of the Company and, therefore, are excluded from the accompanying Consolidated Balance Sheets. However, the Company remains contingently liable for the disposition of these deposits.
Leases
The Company is committed to making rental payments under noncancelable operating leases covering various facilities and equipment. Future minimum lease payments required under noncancelable operating leases as of December 31, 2017 are as follows:
|
| | | | |
| Year | | Amount |
| 2018 | | $ | 163 |
|
| 2019 | | 142 |
|
| 2020 | | 116 |
|
| 2021 | | 91 |
|
| 2022 | | 72 |
|
| Thereafter | | 196 |
|
| Total | | $ | 780 |
|
Capital lease obligations were $29 million, net of $2 million of imputed interest, at December 31, 2017 and $27 million, net of $2 million of imputed interest, at December 31, 2016.
The Company incurred rent expense of $192 million, $186 million and $179 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Purchase Commitments and Minimum Licensing Fees
In the normal course of business, the Company makes various commitments to purchase goods or services from specific suppliers, including those related to capital expenditures. The purchase commitments made by the Company as of December 31, 20172019 are approximately $94 million.$73 million.
The Company is required to pay a minimum licensing fee to Sotheby’s which began in 2009 and continues through 2054. The annual minimum licensing fee is approximately $2$2 million per year. The Company is also required to pay a
minimum licensing fee to Meredith Corporation for the licensing of the Better Homes and Gardens Real Estate brand. The annual minimum licensing fee began in 2009 at $0.5 million and increased to $4 million in 2014, where it will generally remain through 2058.
Future minimum payments for these purchase commitments and minimum licensing fees as of December 31, 20172019 are as follows:
| | | Year | | Amount | Year | | Amount | |
| 2018 | | $ | 57 |
| |
| 2019 | | 23 |
| |
| 2020 | | 15 |
| 2020 | | $ | 44 | |
| 2021 | | 13 |
| 2021 | | 24 | |
| 2022 | | 18 |
| 2022 | | 11 | |
| 2023 | | 2023 | | 9 | |
| 2024 | | 2024 | | 8 | |
| Thereafter | | 222 |
| Thereafter | | 217 | |
| Total | | $ | 348 |
| Total | | $ | 313 | |
Standard Guarantees/Indemnifications
In the ordinary course of business, the Company enters into numerous agreements that contain standard guarantees and indemnities whereby the Company indemnifies another party for breaches of representations and warranties. In addition, many of these parties are also indemnified against any third-party claim resulting from the transaction that is contemplated in the underlying agreement. Such guarantees or indemnifications are granted under various agreements, including those governing: (i) purchases, sales or outsourcing of assets or businesses, (ii) leases and sales of real estate, (iii) licensing of trademarks, (iv) use of derivatives, and (v) issuances of debt securities. The guarantees or indemnifications issued are for the benefit of the: (i) buyers in sale agreements and sellers in purchase agreements, (ii) landlords in lease contracts, (iii) franchisees in licensing agreements, (iv) financial institutions in derivative contracts, and (v) underwriters in issuances
of securities. While some of these guarantees extend only for the duration of the underlying agreement, many survive the expiration of the term of the agreement or extend into perpetuity (unless subject to a legal statute of limitations). There are no specific limitations on the maximum potential amount of future payments that the Company could be required to make under these guarantees, nor is the Company able to develop an estimate of the maximum potential amount of future payments to be made under these guarantees as the triggering events are not subject to predictability. With respect to certain of the aforementioned guarantees, such as indemnifications of landlords against third-party claims for the use of real estate property leased by the Company, the Company maintains insurance coverage that mitigates any potential payments to be made.
Other Guarantees/Indemnifications
In the normal course of business, the Company coordinates numerous events for its franchisees and thus reserves a number of venues with certain minimum guarantees, such as room rentals at hotels local to the conference center. However, such room rentals are paid by each individual franchisee. If the franchisees do not meet the minimum guarantees, the Company is obligated to fulfill the minimum guaranteed fees. The maximum potential amount of future payments that the Company would be required to make under such guarantees is approximately $7$10 million. The Company would only be required to pay this maximum amount if none of the franchisees conducted their planned events at the reserved venues. Historically, the Company has not been required to make material payments under these guarantees.
Insurance and Self-Insurance
At December 31, 20172019 and 2016,2018, the Consolidated Balance Sheets include approximately $40$25 million and $31$24 million, respectively, of liabilities relating to: (i) self-insured risks for errors and omissions and other legal matters incurred in the ordinary course of business within the Company Owned Real EstateRealogy Brokerage Services segment,Group and (ii) vacant dwellings and household goods in transit and storage within the Relocation Services segment, and (iii) premium and claim reserves for the Company’s title underwriting business. The Company may also be subject to legal claims arising from the handling of escrow transactions and closings. The Company’s subsidiary, NRT,Realogy Brokerage Group carries errors and omissions insurance for errors made during the real estate settlement process of $15$15 million in the aggregate, subject to a deductible of $1$1 million per occurrence. In addition, the Company carries an additional errors and omissions insurance policy for Realogy Holdings Corp. and its subsidiaries for errors made for real estate related services up to $35$45 million in the aggregate, subject to a deductible of $2.5$2.5 million per occurrence. This policy also provides excess coverage to NRTRealogy Brokerage Group creating an aggregate limit of $50$60 million,, subject to the NRTRealogy Brokerage Group's deductible of $1$1 million per occurrence.
The Company issues title insurance policies which provide coverage for real property to mortgage lenders and buyers of real property. When acting as a title agent issuing a policy on behalf of an underwriter, assuming no negligence on part of the title agent, the Company is not liable for losses under those policies but rather the title insurer is typically liable for such losses. The title underwriter which the Company acquired in January 2006 typically underwrites title insurance policies of up to $1.5 million.$1.5 million. For policies in excess of $1.5$1.5 million,, the Company typically obtains a reinsurance policy from a national underwriter to reinsure the excess amount. The Company, as an underwriter, manages our claims losses through strict agent vetting, clear underwriting guidelines, training and frequent communications with our agents.
Fraud, defalcation and misconduct by employees are also risks inherent in the business. The Company is the custodian of cash deposited by customers with specific instructions as to its disbursement from escrow, trust and account servicing files. The Company maintains Fidelity insurance covering the loss or theft of funds of up to $30$30 million per occurrence, subject to a deductible of $750 thousand per occurrence.
The Company also maintains self-insurance arrangements relating to health and welfare, workers’ compensation, auto and general liability in addition to other benefits provided to the Company’s employees. The accruals for these self-insurance arrangements totaled approximately $16$15 million and $21 million at for both December 31, 20172019 and 2016, respectively.2018.
16. EQUITY
Changes in Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive losses are as follows:
| | | | | | | | | | | | | | Currency Translation Adjustments (1) | | Minimum Pension Liability Adjustment | | Accumulated Other Comprehensive Loss (2) |
| | Currency Translation Adjustments (1) | | Minimum Pension Liability Adjustment | | Accumulated Other Comprehensive Loss (2) | |
| Balance at January 1, 2015 | $ | — |
| | $ | (35 | ) | | $ | (35 | ) | |
| Balance at January 1, 2017 | | Balance at January 1, 2017 | $ | (6) | | | $ | (34) | | | $ | (40) | |
| Other comprehensive income (loss) before reclassifications | (4 | ) | | 1 |
| | (3 | ) | Other comprehensive income (loss) before reclassifications | 3 | | | (1) | | | 2 | |
| Amounts reclassified from accumulated other comprehensive income | — |
| | 2 |
| (3) | 2 |
| |
| Income tax (expense) benefit | 1 |
| | (1 | ) | | — |
| |
| Current period change | (3 | ) | | 2 |
| | (1 | ) | |
| Balance at December 31, 2015 | (3 | ) | | (33 | ) | | (36 | ) | |
| Other comprehensive loss before reclassifications | (5 | ) | | (3 | ) | | (8 | ) | |
| Amounts reclassified from accumulated other comprehensive income | — |
| | 1 |
| (3) | 1 |
| |
| Income tax benefit | 2 |
| | 1 |
| | 3 |
| |
| Current period change | (3 | ) | | (1 | ) | | (4 | ) | |
| Balance at December 31, 2016 | (6 | ) | | (34 | ) | | (40 | ) | |
| Other comprehensive income (loss) before reclassifications | 3 |
| | (1 | ) | | 2 |
| |
| Amounts reclassified from accumulated other comprehensive income | — |
| | 2 |
| (3) | 2 |
| |
| Amounts reclassified from accumulated other comprehensive loss | | Amounts reclassified from accumulated other comprehensive loss | — | | | 2 | | (3) | | 2 | |
| Income tax expense | (1 | ) | | — |
| | (1 | ) | Income tax expense | (1) | | | — | | | (1) | |
| Current period change | 2 |
| | 1 |
| | 3 |
| Current period change | 2 | | | 1 | | | 3 | |
| Balance at December 31, 2017 | $ | (4 | ) | | $ | (33 | ) | | $ | (37 | ) | Balance at December 31, 2017 | (4) | | | (33) | | | (37) | |
| Adoption of a new accounting pronouncement | | Adoption of a new accounting pronouncement | (1) | | (4) | | (8) | | (4) | | (9) | |
| Other comprehensive loss before reclassifications | | Other comprehensive loss before reclassifications | (3) | | | (6) | | | (9) | |
| Amounts reclassified from accumulated other comprehensive loss | | Amounts reclassified from accumulated other comprehensive loss | — | | | 2 | | (3) | | 2 | |
| Income tax benefit | | Income tax benefit | — | | | 1 | | | 1 | |
| Current period change | | Current period change | (4) | | | (11) | | | (15) | |
| Balance at December 31, 2018 | | Balance at December 31, 2018 | (8) | | | (44) | | | (52) | |
| Other comprehensive loss before reclassifications | | Other comprehensive loss before reclassifications | — | | | (8) | | | | (8) | |
| Amounts reclassified from accumulated other comprehensive loss | | Amounts reclassified from accumulated other comprehensive loss | — | | | 2 | | (3) | | 2 | |
| Income tax benefit | | Income tax benefit | — | | | 2 | | | 2 | |
| Current period change | | Current period change | — | | | (4) | | | (4) | |
| Balance at December 31, 2019 | | Balance at December 31, 2019 | $ | (8) | | | $ | (48) | | | $ | (56) | |
_______________
| |
(1) | Assets and liabilities of foreign subsidiaries having non-U.S. dollar functional currencies are translated at exchange rates at the balance sheet dates and equity accounts are translated at historical spot rates. Revenues and expenses are translated at average exchange rates during the periods presented. The gains or losses resulting from translating foreign currency financial statements into U.S. dollars are included in accumulated other comprehensive income (loss). Gains or losses resulting from foreign currency transactions are included in the Consolidated Statements of Operations. |
| |
(2) | As of December 31, 2017, the Company does not have any after-tax components of accumulated other comprehensive loss attributable to noncontrolling interests.(1)Assets and liabilities of foreign subsidiaries having non-U.S. dollar functional currencies are translated at exchange rates at the balance sheet dates and equity accounts are translated at historical spot rates. Revenues and expenses are translated at average exchange rates during the periods presented. The gains or losses resulting from translating foreign currency financial statements into U.S. dollars are included in accumulated other comprehensive income (loss). Gains or losses resulting from foreign currency transactions are included in the Consolidated Statements of Operations and primarily relate to discontinued operations. (2)As of December 31, 2019, the Company does not have any after-tax components of accumulated other comprehensive loss attributable to noncontrolling interests. (3)These amounts represent the amortization of actuarial loss to periodic pension cost and were reclassified from accumulated other comprehensive income to the general and administrative expenses line on the statement of operations. (4)These amounts represent adjustments for the adoption of the accounting standard update on stranded tax effects related to the 2017 Tax Act which resulted in a debit to Accumulated other comprehensive loss and a credit to Accumulated deficit of $9 million during the first quarter of 2018. |
| |
(3) | These amounts represent the amortization of actuarial loss to periodic pension cost and were reclassified from accumulated other comprehensive income to the general and administrative expenses line on the statement of operations. |
Dividend Policy
In August 2016, the Company’s Board of Directors approved the initiation of a quarterly cash dividend policy of $0.09 per share on its common stock. The Board declared and paid a quarterly cash dividenddividends of $0.09 per share of the Company's common stock during each quartersince August 2016. In early November 2019, the Company's Board of 2017, returningDirectors determined that, effective immediately, it will no longer pay a dividend. The Company returned a total of $31 million, $45 million and $49 million to stockholders.
The declarationstockholders in cash dividends during the years ended December 31, 2019, 2018 and payment of any future dividend will be subject to the discretion of the Board of Directors and will depend on a variety of factors, including the Company’s financial condition and results of operations, contractual restrictions, including restrictive covenants contained in the Company’s credit agreements, and the indentures governing the Company’s outstanding debt securities, capital requirements and other factors that the Board of Directors deems relevant.2017, respectively.
Pursuant to the Company’s policy, the dividends payable in cash are treated as a reduction of additional paid-in capital since the Company is currently in an accumulated deficit position.
Realogy Group Statements of Equity for the years ended December 31, 2017, 20162019, 2018 and 20152017
Total equity for Realogy Group equals that of Realogy Holdings, but the components, common stock and additional paid-in capital are different. The table below presents information regarding the balances and changes in common stock and additional paid-in capital of Realogy Group for each of the three years ended December 31, 2017, 20162019, 2018 and 2015.2017.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Realogy Group Stockholder’s Equity | | | | | | | | | | | | |
| Common Stock | | | | Additional
Paid-In
Capital | | Accumulated
Deficit | | Accumulated Other Comprehensive Loss | | Non-
controlling
Interests | | Total
Equity |
| Shares | | Amount | | | | | | | | | | |
| Balance at January 1, 2017 | — | | | $ | — | | | $ | 5,566 | | | $ | (3,062) | | | $ | (40) | | | $ | 5 | | | $ | 2,469 | |
| Net income | — | | | — | | | — | | | 431 | | | — | | | 3 | | | 434 | |
| Other comprehensive income | — | | | — | | | — | | | — | | | 3 | | | — | | | 3 | |
| Repurchase of Common Stock | — | | | — | | | (280) | | | — | | | — | | | — | | | (280) | |
| Contributions from Realogy Holdings | — | | | — | | | 8 | | | — | | | — | | | — | | | 8 | |
| Stock-based compensation | — | | | — | | | 41 | | | — | | | — | | | — | | | 41 | |
| Dividends | — | | | — | | | (49) | | | — | | | — | | | (4) | | | (53) | |
| Balance at December 31, 2017 | — | | | $ | — | | | $ | 5,286 | | | $ | (2,631) | | | $ | (37) | | | $ | 4 | | | $ | 2,622 | |
| Cumulative effect of adoption of new accounting pronouncements | — | | | — | | | — | | | (13) | | | (9) | | | — | | | (22) | |
| Net income | — | | | — | | | — | | | 137 | | | — | | | 3 | | | 140 | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | (6) | | | — | | | (6) | |
| Repurchase of Common Stock | — | | | — | | | (402) | | | — | | | — | | | — | | | (402) | |
| Contributions from Realogy Holdings | — | | | — | | | 1 | | | — | | | — | | | — | | | 1 | |
| Stock-based compensation | — | | | — | | | 30 | | | — | | | — | | | — | | | 30 | |
| Dividends | — | | | — | | | (45) | | | — | | | — | | | (3) | | | (48) | |
| Balance at December 31, 2018 | — | | | $ | — | | | $ | 4,870 | | | $ | (2,507) | | | $ | (52) | | | $ | 4 | | | $ | 2,315 | |
| Net (loss) income | — | | | — | | | — | | | (188) | | | — | | | 3 | | | (185) | |
| Other comprehensive income | — | | | — | | | — | | | — | | | (4) | | | — | | | (4) | |
| Repurchase of Common Stock | — | | | — | | | (20) | | | — | | | — | | | — | | | (20) | |
| Stock-based compensation | — | | | — | | | 24 | | | — | | | — | | | — | | | 24 | |
| Dividends | — | | | — | | | (31) | | | — | | | — | | | (3) | | | (34) | |
| Balance at December 31, 2019 | — | | | $ | — | | | $ | 4,843 | | | $ | (2,695) | | | $ | (56) | | | $ | 4 | | | $ | 2,096 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Realogy Group Stockholder’s Equity | | | | |
| | Common Stock | | Additional Paid-In Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Non- controlling Interests | | Total Equity |
| | Shares | | Amount | |
| Balance at January 1, 2015 | — |
| | $ | — |
| | $ | 5,678 |
| | $ | (3,464 | ) | | $ | (35 | ) | | $ | 4 |
| | $ | 2,183 |
|
| Net income | — |
| | — |
| | — |
| | 184 |
| | — |
| | 4 |
| | 188 |
|
| Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) |
| Contributions from Realogy Holdings | — |
| | — |
| | 5 |
| | — |
| | — |
| | — |
| | 5 |
|
| Stock-based compensation | — |
| | — |
| | 51 |
| | — |
| | — |
| | — |
| | 51 |
|
| Dividends | — |
| | — |
| | — |
| | — |
| | — |
| | (4 | ) | | (4 | ) |
| Balance at December 31, 2015 | — |
| | $ | — |
| | $ | 5,734 |
| | $ | (3,280 | ) | | $ | (36 | ) | | $ | 4 |
| | $ | 2,422 |
|
Cumulative effect of adoption of new accounting pronouncements related to stock-based compensation
| — |
| | — |
| | — |
| | 5 |
| | — |
| | — |
| | 5 |
|
| Net income | — |
| | — |
| | — |
| | 213 |
| | — |
| | 4 |
| | 217 |
|
| Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (4 | ) | | — |
| | (4 | ) |
| Repurchase of Common Stock | — |
| | — |
| | (195 | ) | | — |
| | — |
| | — |
| | (195 | ) |
| Contributions from Realogy Holdings | — |
| | — |
| | 2 |
| | — |
| | — |
| | — |
| | 2 |
|
| Stock-based compensation | — |
| | — |
| | 51 |
| | — |
| | — |
| | — |
| | 51 |
|
| Dividends | — |
| | — |
| | (26 | ) | | — |
| | — |
| | (3 | ) | | (29 | ) |
| Balance at December 31, 2016 | — |
| | $ | — |
| | $ | 5,566 |
| | $ | (3,062 | ) | | $ | (40 | ) | | $ | 5 |
| | $ | 2,469 |
|
| Net income | — |
| | — |
| | — |
| | 431 |
| | — |
| | 3 |
| | 434 |
|
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 3 |
| | — |
| | 3 |
|
| Repurchase of Common Stock | — |
| | — |
| | (280 | ) | | — |
| | — |
| | — |
| | (280 | ) |
| Contributions from Realogy Holdings | — |
| | — |
| | 8 |
| | — |
| | — |
| | — |
| | 8 |
|
| Stock-based compensation | — |
| | — |
| | 41 |
| | — |
| | — |
| | — |
| | 41 |
|
| Dividends | — |
| | — |
| | (49 | ) | | — |
| | — |
| | (4 | ) | | (53 | ) |
| Balance at December 31, 2017 | — |
| | $ | — |
| | $ | 5,286 |
| | $ | (2,631 | ) | | $ | (37 | ) | | $ | 4 |
| | $ | 2,622 |
|
15.17. EARNINGS (LOSS) PER SHARE
Earnings (loss) per share attributable to Realogy Holdings
Basic earnings (loss) per share is computed based on net income (loss) attributable to Realogy Holdings stockholders divided by the basic weighted-average shares outstanding during the period. Dilutive earnings per share is computed consistently with the basic computation while giving effect to all dilutive potential common shares and common share equivalents that were outstanding during the period. Realogy Holdings uses the treasury stock method to reflect the potential dilutive effect of unvested stock awards and unexercised options. The following table sets forth the computation of basic and diluted earnings (loss) per share: |
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| (in millions, except per share data) | | 2017 | | 2016 | | 2015 |
| Net income attributable to Realogy Holdings shareholders | | $ | 431 |
| | $ | 213 |
| | $ | 184 |
|
| Basic weighted average shares | | 136.7 |
| | 144.5 |
| | 146.5 |
|
| Stock options, restricted stock, restricted stock units and performance share units (a) | | 1.7 |
| | 1.3 |
| | 1.6 |
|
| Weighted average diluted shares | | 138.4 |
| | 145.8 |
| | 148.1 |
|
| | | | | | | |
| Earnings Per Share: | | | | | | |
| Basic | | $ | 3.15 |
| | $ | 1.47 |
| | $ | 1.26 |
|
| Diluted | | $ | 3.11 |
| | $ | 1.46 |
| | $ | 1.24 |
|
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
| (in millions, except per share data) | 2019 | | 2018 | | 2017 |
| Numerator: | | | | | |
| Numerator for earnings per share—continuing operations | | | | | |
| Net income (loss) from continuing operations | $ | (118) | | | $ | 146 | | | $ | 428 | |
| Less: Net income attributable to noncontrolling interests | (3) | | | (3) | | | (3) | |
| Net (loss) income from continuing operations attributable to Realogy Holdings | $ | (121) | | | $ | 143 | | | $ | 425 | |
| | | | | |
| Numerator for earnings per share—discontinued operations | | | | | |
| Net (loss) income from discontinued operations | $ | (67) | | | $ | (6) | | | $ | 6 | |
| | | | | |
| Net (loss) income attributable to Realogy Holdings shareholders | $ | (188) | | | $ | 137 | | | $ | 431 | |
| | | | | |
| Denominator: | | | | | |
| Weighted average common shares outstanding (denominator for basic (loss) earnings per share calculation) | 114.2 | | | 124.0 | | | 136.7 | |
| Dilutive effect of stock-based compensation (a) (b) | — | | | 1.3 | | | 1.7 | |
| Weighted average common shares outstanding (denominator for diluted (loss) earnings per share calculation) | 114.2 | | | 125.3 | | | 138.4 | |
| | | | | |
| Basic (loss) earnings per share attributable to Realogy Holdings shareholders: | | | | | |
| Basic (loss) earnings per share from continuing operations | $ | (1.06) | | | $ | 1.15 | | | $ | 3.11 | |
| Basic (loss) earnings per share from discontinued operations | (0.59) | | | (0.05) | | | 0.04 | |
| Basic (loss) earnings per share | $ | (1.65) | | | $ | 1.10 | | | $ | 3.15 | |
| | | | | |
| Diluted (loss) earnings per share attributable to Realogy Holdings shareholders: | | | | | |
| Diluted (loss) earnings per share from continuing operations | $ | (1.06) | | | $ | 1.14 | | | $ | 3.07 | |
| Diluted (loss) earnings per share from discontinued operations | (0.59) | | | (0.05) | | | 0.04 | |
| Diluted (loss) earnings per share | $ | (1.65) | | | $ | 1.09 | | | $ | 3.11 | |
_______________
| |
(a) | Excludes 5.3 million, 4.5 million and 3.5 million shares of common stock issuable for incentive equity awards, including performance share units based on the achievement of target amounts, for the years ended December 31, 2017, 2016 and 2015, respectively, which are anti-dilutive to the diluted earnings per share computation.(a)The Company was in a net loss position for the year ended December 31, 2019 and therefore the impact of incentive equity awards were excluded from the computation of dilutive loss per share as the inclusion of such amounts would be anti-dilutive (see Note 14, "Stock-Based Compensation", for outstanding equity awards as of December 31, 2019). (b)The years ended December 31, 2018 and 2017, respectively, exclude 6.9 million and 5.3 million shares of common stock issuable for incentive equity awards which includes performance share units based on the achievement of target amounts, that are anti-dilutive to the diluted earnings per share computation. |
Under the 20162017, 2018 and 20172019 share repurchase programs, the Company's Board of Directors authorized up to $575$825 million of the Company’s common stock. In the first quarter of 2019, the Company repurchased and retired 1.2 million shares of common stock for $20 million at a weighted average market price of $17.21 per share. The Company did not repurchase any shares under the share repurchase programs during the second, third and fourth quarters of 2019. For the year ended December 31, 2018, the Company repurchased and retired 17.9 million shares of common stock for $402 million at a weighted average market price of $22.47 per share. For the year ended December 31, 2017, the Company repurchased and retired 9.4 million shares of common stock for $276 million at a weighted average market price of $29.38 per share. For the year ended December 31, 2016, the Company repurchased and retired 7.1 million shares of common stock for $199 million at a weighted average market price of $27.96 per share, which includes 0.2 million shares for which the trade date occurred in late December 2016 while settlement occurred in January 2017. The purchase of shares under these plans reduce the weighted-average number of shares outstanding in the basic earnings per share calculation.
18. RISK MANAGEMENT AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The following is a description of the Company’s risk management policies.
Interest Rate Risk
The Company is exposed to market risk from changes in interest rates primarily through senior secured debt. At December 31, 2017,2019, the Company's primary interest rate exposure was to interest rate fluctuations, specifically LIBOR, due to its impact on variable rate borrowings of Revolving Credit Facility and Term Loan B under the Senior Secured Credit Agreement and Term Loan A Facility. Given that borrowings under the Senior Secured Credit Agreement and Term Loan A Facility are generally based upon LIBOR, this rate will be the Company's primary market risk exposure for the foreseeable future. At December 31, 2017,2019, the Company had variable interest rate long-term debt, which was based on LIBOR, from the outstanding term loans and revolver under its Senior Secured Credit Facility and Term Loan A Facility of $1,886 million, excluding $194 million of securitization obligations.$1,965 million.
The Company has interest rate swaps with an aggregate notional value of $1,475$1,600 million to manage a portion of the Company's exposure to changes in interest rate associated with variable rate borrowings. The fixed interest rates on the swaps range from 2.07% to 2.89%3.11%. Although we havethe Company has entered into these interest rate swaps, involving the exchange of floating for fixed rate interest payments, such interest rate swaps do not eliminate interest rate volatility for all of ourthe Company's variable rate indebtedness at December 31, 2017.2019. In addition, the fair value of the interest rate swaps is also subject to movements in LIBOR and will fluctuate in future periods. The Company has recognized a liability of $13$47 million for the
fair value of the interest rate swaps at December 31, 2017.2019. Therefore, an increase in the LIBOR yield curve could increase the fair value of the interest rate swaps and decrease interest expense.
In the normal course of business, the Company borrows funds under its securitization facilities and utilizes such funds to generate assets on which it generally earns interest income. The Company does not believe it is exposed to significant interest rate risk in connection with these activities as the rate it incurs on such borrowings and the rate it earns on such assets are generally based on similar variable indices, thereby providing a natural hedge.
Credit Risk and Exposure
The Company is exposed to counterparty credit risk in the event of nonperformance by counterparties to various agreements and sales transactions. The Company manages such risk by evaluating the financial position and creditworthiness of such counterparties and by requiring collateral in instances in which financing is provided. The Company mitigates counterparty credit risk associated with its derivative contracts by monitoring the amounts at risk with each counterparty to such contracts, periodically evaluating counterparty creditworthiness and financial position, and where possible, dispersing its risk among multiple counterparties.
As of December 31, 2017,2019, there were no significant concentrations of credit risk with any individual counterparty or a group of counterparties. The Company actively monitors the credit risk associated with the Company’s receivables.
Market Risk Exposure
The Company Owned Real EstateRealogy Brokerage Services segment, NRT,Group owns real estate brokerage offices located in and around large metropolitan areas in the U.S. NRTRealogy Brokerage Group has more offices and realizes more of its revenues in California, Florida and the New York metropolitan area than any other regions of the country. For the year ended December 31, 2019, Realogy Brokerage Group generated approximately 25% of its revenues from California, 22% from the New York metropolitan area and 10% from Florida. For the year ended December 31, 2018, Realogy Brokerage Group generated approximately 27% of its revenues from California, 20% from the New York metropolitan area and 9% from Florida. For the year ended December 31, 2017,, NRT Realogy Brokerage Group generated approximately 27% of its revenues from California, 22% from the New York metropolitan area and 9% from Florida. For the year ended December 31, 2016, NRT generated approximately 26% of its revenues from California, 22% from the New York metropolitan area and 9% from Florida. For the year ended December 31, 2015, NRT generated approximately 27% of its revenues from California, 23% from the New York metropolitan area and 10% from Florida.
Derivative Instruments
The Company records derivatives and hedging activities on the balance sheet at their respective fair values. The Company uses foreign currency forward contracts largely to manage its exposure to changes in foreign currency exchange rates associated with its foreign currency denominated receivables and payables. The Company primarily manages its foreign currency exposure to the Euro, British Pound, Swiss Franc and Canadian Dollar. The Company has not elected to utilize hedge accounting for these forward contracts; therefore, any change in fair value is recorded in the Consolidated Statements of Operations. However, the fluctuations in the value of these forward contracts generally offset the impact of changes in the value of the underlying risk that they are intended to economically hedge. As of December 31, 2017, the Company had outstanding foreign currency forward contracts in a liability position with a fair value of less than $1 million and a notional value of $25 million. As of December 31, 2016, the Company had outstanding foreign currency forward contracts in a liability position with a fair value of $2 million and a notional value of $29 million.
The Company also enters into interest rate swaps to manage its exposure to changes in interest rates associated with its variable rate borrowings. At As of December 31, 2017,2019, the Company hashad interest rate swaps with an aggregate notional value of $1,475$1,600 million to offset the variability in cash flows resulting from the term loan facilities as follows:
|
| | | | | | | |
| Notional Value (in millions) | | Commencement Date | | Expiration Date | |
$225600 | August 2015 | July 2012 | | February 2018 | (a)August 2020 |
$200450 | November 2017 | January 2013 | | February 2018 | (a)November 2022 |
$600400 | | August 2015 | | August 2020 | August 2025 |
$450150 | | November 2017 | (a) | November 2022 | November 2027 |
_______________
| |
(a) | Interest rates swaps with a notional value of $425 million expired February 10, 2018, and interest rate swaps with a notional value of $450 million commenced in the fourth quarter of 2017. |
F-49
The swaps help to protect our outstanding variable rate borrowings from future interest rate volatility. The Company has not elected to utilize hedge accounting for these interest rate swaps; therefore, any change in fair value is recorded in the Consolidated Statements of Operations.
The fair value of derivative instruments was as follows:
| | | Liability Derivatives | | Fair Value | |
| Not Designated as Hedging Instruments | | Balance Sheet Location | | December 31, 2017 | | December 31, 2016 | Not Designated as Hedging Instruments | | Balance Sheet Location | | December 31, 2019 | | December 31, 2018 |
| Interest rate swap contracts | | Other current and non-current liabilities | | $ | 13 |
| | $ | 33 |
| Interest rate swap contracts | | Other non-current assets | | $ | — | | | $ | 6 | |
| Interest rate swap contracts | | | | Other current and non-current liabilities | | 47 | | | 16 | |
The effect of derivative instruments on earnings was as follows:
|
| | | | | | | | | | | | | | |
Derivative Instruments Not Designated as Hedging Instruments | | Location of (Gain) or Loss Recognized for Derivative Instruments | | (Gain) or Loss Recognized on Derivatives |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
| Interest rate swap contracts | | Interest expense | | $ | (4 | ) | | $ | 6 |
| | $ | 20 |
|
| Foreign exchange contracts | | Operating expense | | 2 |
| | (2 | ) | | (2 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Derivative Instruments Not
Designated as Hedging Instruments | | Location of (Gain) or Loss Recognized for Derivative Instruments | | (Gain) or Loss Recognized on Derivatives | | | | |
| | | | Year Ended December 31, | | | | |
| | | | 2019 | | 2018 | | 2017 |
| Interest rate swap contracts | | Interest expense | | $ | 39 | | | $ | 4 | | | $ | (4) | |
Fair Value Measurements
The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value.
|
| | | | | | | |
| Level Input: | | Input Definitions: |
| Level I | | Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date. |
| | |
| Level II | | Inputs other than quoted prices included in Level I that are observable for the asset or liability through corroboration with market data at the measurement date. |
| | |
| Level III | | Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. |
The availability of observable inputs can vary from asset to asset and is affected by a wide variety of factors including, for example, the type of asset, whether the asset is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level III. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
The fair value of financial instruments is generally determined by reference to quoted market values. In cases where quoted market prices are not available, fair value is based on estimates using present value or other valuation techniques, as appropriate. The fair value of interest rate swaps is determined based upon a discounted cash flow approach.
The Company measures financial instruments at fair value on a recurring basis and recognizes transfers within the fair value hierarchy at the end of the fiscal quarter in which the change in circumstances that caused the transfer occurred.
The following table summarizes fair value measurements by level at December 31, 20172019 for assets and liabilities measured at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | |
| Level I | | Level II | | Level III | | Total |
| Deferred compensation plan assets (included in other non-current assets) | $ | 2 | | | $ | — | | | $ | — | | | $ | 2 | |
| Interest rate swaps (included in other current and non-current liabilities) | — | | | 47 | | | — | | | 47 | |
| Contingent consideration for acquisitions (included in accrued expenses and other current liabilities and other non-current liabilities) | — | | | — | | | 4 | | | 4 | |
|
| | | | | | | | | | | | | | | |
| | Level I | | Level II | | Level III | | Total |
| Interest rate swaps (included in other current and non-current liabilities) | $ | — |
| | $ | 13 |
| | $ | — |
| | $ | 13 |
|
| Deferred compensation plan assets (included in other non-current assets) | 3 |
| | — |
| | — |
| | 3 |
|
| Contingent consideration for acquisitions (included in accrued expenses and other current liabilities and non-current liabilities) | — |
| | — |
| | 34 |
| | 34 |
|
The following table summarizes fair value measurements by level at December 31, 20162018 for assets and liabilities measured at fair value on a recurring basis:
| | | | | | | | | | | | Level I | | Level II | | Level III | | Total |
| | Level I | | Level II | | Level III | | Total | |
| Deferred compensation plan assets (included in other non-current assets) | | Deferred compensation plan assets (included in other non-current assets) | $ | 2 | | | $ | — | | | $ | — | | | $ | 2 | |
| Interest rate swaps (included in other non-current assets) | | Interest rate swaps (included in other non-current assets) | — | | | 6 | | | — | | | 6 | |
| Interest rate swaps (included in other non-current liabilities) | $ | — |
| | $ | 33 |
| | $ | — |
| | $ | 33 |
| Interest rate swaps (included in other non-current liabilities) | — | | | 16 | | | — | | | 16 | |
| Deferred compensation plan assets (included in other non-current assets) | 3 |
| | — |
| | — |
| | 3 |
| |
| Contingent consideration for acquisitions (included in accrued expenses and other current liabilities and non-current liabilities) | — |
| | — |
| | 50 |
| | 50 |
| |
| Contingent consideration for acquisitions (included in accrued expenses and other current liabilities and other non-current liabilities) | | Contingent consideration for acquisitions (included in accrued expenses and other current liabilities and other non-current liabilities) | — | | | — | | | 10 | | | 10 | |
The fair value of the Company’s contingent consideration for acquisitions is measured using a probability weighted-average discount rate to estimate future cash flows based upon the likelihood of achieving future operating results for individual acquisitions. These assumptions are deemed to be unobservable inputs and as such the Company’s contingent consideration is classified within Level III of the valuation hierarchy. The Company reassesses the fair value of the contingent consideration liabilities on a quarterly basis.
The following table presents changes in Level III financial liabilities measured at fair value on a recurring basis:
|
| | | | |
| | | Level III |
| Fair value of contingent consideration at December 31, 2016 | | $ | 50 |
|
| Additions: contingent consideration related to acquisitions completed during the period | | 7 |
|
| Reductions: payments of contingent consideration | | (22 | ) |
| Changes in fair value (reflected in the Consolidated Statement of Operations) | | (1 | ) |
| Fair value of contingent consideration at December 31, 2017 | | $ | 34 |
|
| | | | | | | | |
| | Level III |
| Fair value of contingent consideration at December 31, 2018 | | $ | 10 | |
| Additions: contingent consideration related to acquisitions completed during the period | | — | |
| Reductions: payments of contingent consideration | | (4) | |
| Changes in fair value (reflected in general and administrative expenses) | | (2) | |
| Fair value of contingent consideration at December 31, 2019 | | $ | 4 | |
The following table summarizes the principal amount of the Company’s indebtedness compared to the estimated fair value, primarily determined by quoted market values, at:
| | | | December 31, 2017 | | December 31, 2016 | | December 31, 2019 | | | December 31, 2018 | |
| Debt | Principal Amount | | Estimated Fair Value (a) | | Principal Amount | | Estimated Fair Value (a) | Debt | Principal Amount | | Estimated
Fair Value (a) | | Principal Amount | | Estimated
Fair Value (a) |
| Senior Secured Credit Facility: | | | | | | | | Senior Secured Credit Facility: | | | | | | | |
| Revolving Credit Facility | $ | 70 |
| | $ | 70 |
| | $ | 200 |
| | $ | 200 |
| Revolving Credit Facility | $ | 190 | | | $ | 190 | | | $ | 270 | | | $ | 270 | |
| Term Loan B | 1,083 |
| | 1,085 |
| | 1,094 |
| | 1,100 |
| Term Loan B | 1,058 | | | 1,048 | | | 1,069 | | | 1,010 | |
| Term Loan A Facility: | | | | | | | | Term Loan A Facility: | |
| Term Loan A | 391 |
| | 393 |
| | 413 |
| | 414 |
| Term Loan A | 717 | | | 705 | | | 736 | | | 707 | |
| Term Loan A-1 | 342 |
| | 343 |
| | 351 |
| | 351 |
| |
| 4.50% Senior Notes | 450 |
| | 457 |
| | 450 |
| | 461 |
| 4.50% Senior Notes | — | | | — | | | 450 | | | 447 | |
| 5.25% Senior Notes | 550 |
| | 569 |
| | 550 |
| | 562 |
| 5.25% Senior Notes | 550 | | | 557 | | | 550 | | | 524 | |
| 4.875% Senior Notes | 500 |
| | 495 |
| | 500 |
| | 483 |
| 4.875% Senior Notes | 407 | | | 401 | | | 500 | | | 434 | |
| Securitization obligations | 194 |
| | 194 |
| | 205 |
| | 205 |
| |
| 9.375% Senior Notes | | 9.375% Senior Notes | 550 | | | 572 | | | — | | | — | |
_______________
| |
(a) | The fair value of the Company's indebtedness is categorized as Level II. |
(a)The fair value of the Company's indebtedness is categorized as Level II.
19. SEGMENT INFORMATION
The reportable segments presented below represent the Company’s operating segments for which separate financial information is available and which is utilized on a regular basis by its chief operating decision maker to assess performance and to allocate resources. In identifying its reportable segments, the Company also considers the nature of services provided by its operating segments. Management evaluates the operating results of each of its reportable segments based upon revenue and Operating EBITDA. Operating EBITDA which is defined by us as net income (loss) before depreciation and amortization, interest (income) expense, net, (other than Relocation Services interest for relocation receivables and securitization obligations) and income taxes, eachand other items that are not core to the operating activities of which is presented in the Company’s Consolidated StatementsCompany such as restructuring charges, former parent legacy items, gains or losses on the early extinguishment of Operations.debt, impairments, gains or losses on discontinued operations and gains or losses on the sale of investments or other assets. The Company’s presentation of Operating EBITDA may not be comparable to similar measures used by other companies.
|
| | | | | | | | | | | |
| | Revenues (a) (b) |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Real Estate Franchise Services | $ | 830 |
| | $ | 781 |
| | $ | 755 |
|
| Company Owned Real Estate Brokerage Services | 4,643 |
| | 4,344 |
| | 4,344 |
|
| Relocation Services | 382 |
| | 405 |
| | 415 |
|
| Title and Settlement Services | 570 |
| | 573 |
| | 487 |
|
| Corporate and Other (c) | (311 | ) | | (293 | ) | | (295 | ) |
| Total Company | $ | 6,114 |
| | $ | 5,810 |
| | $ | 5,706 |
|
| | | | | | | | | | | | | | | | | |
| | Revenues (a) (b) | | | | |
| | Year Ended December 31, | | | | |
| | 2019 | | 2018 | | 2017 |
| Realogy Franchise Group | $ | 803 | | | $ | 820 | | | $ | 830 | |
| Realogy Brokerage Group | 4,409 | | | 4,607 | | | 4,643 | |
| Realogy Title Group | 596 | | | 580 | | | 570 | |
| Realogy Leads Group | 83 | | | 81 | | | 78 | |
| Corporate and Other (c) | (293) | | | (306) | | | (311) | |
| Total Company | $ | 5,598 | | | $ | 5,782 | | | $ | 5,810 | |
_______________
| |
(a) | Transactions between segments are eliminated in consolidation. Revenues for the Real Estate Franchise Services segment include intercompany royalties and marketing fees paid by the Company Owned Real Estate Brokerage Services segment of $311 million, $293 million and $295 million for the years ended December 31, 2017, 2016 and 2015, respectively. Such amounts are eliminated through the Corporate and Other line.
|
| |
(b) | Revenues for the Relocation Services segment include intercompany referral commissions paid by the Company Owned Real Estate Brokerage Services segment of $40 million, $43 million and $49 million for the years ended December 31, 2017, 2016 and 2015, respectively. Such amounts are recorded as contra-revenues by the Company Owned Real Estate Brokerage Services segment. There are no other material intersegment transactions.
|
| |
(c) | Includes the elimination of transactions between segments. |
|
| | | | | | | | | | | |
| | EBITDA |
| | Year Ended December 31, |
| | 2017 (a) | | 2016 (b) | | 2015 (c) |
| Real Estate Franchise Services | $ | 559 |
| | $ | 516 |
| | $ | 495 |
|
| Company Owned Real Estate Brokerage Services | 126 |
| | 137 |
| | 199 |
|
| Relocation Services | 85 |
| | 96 |
| | 105 |
|
| Title and Settlement Services | 58 |
| | 62 |
| | 48 |
|
| Corporate and Other (d) | (103 | ) | | (78 | ) | | (121 | ) |
| Total Company | $ | 725 |
| | $ | 733 |
| | $ | 726 |
|
______________ | |
(a) | For the year ended December 31, 2017, the Real Estate Franchise Services segment includes restructuring charges of $1 million; the Company Owned Real Estate Brokerage Services segment includes restructuring charges of $9 million; the Title and Settlement Services segment includes restructuring charges of $1 million; and Corporate and Other includes an $8 million expense related to the settlement of the Strader legal matter, an $8 million expense related to the transition of the Company's CEO, $5 million related to the losses on the early extinguishment of debt and restructuring charges of $1 million, partially offset by a net benefit of $10 million of former parent legacy items. |
| |
(b) | For the year ended December 31, 2016, the Real Estate Franchise Services segment includes restructuring charges of $4 million; the Company Owned Real Estate Brokerage Services segment includes restructuring charges of $22 million; the Relocation Services segment includes restructuring charges of $4 million; the Title and Settlement Services segment includes restructuring charges of $1 million; and Corporate and Other includes restructuring charges of $8 million, partially offset by a net benefit of $2 million of former parent legacy items. |
| |
(c) | For the year ended December 31, 2015, the Company Owned Real Estate Brokerage Services segment includes restructuring charges of $5 million; the Relocation Services segment includes restructuring charges of $1 million; and Corporate and Other includes $48 million related to the loss on the early extinguishment of debt and restructuring charges of $4 million, partially offset by a net benefit of $15 million of former parent legacy items.
|
(a)Transactions between segments are eliminated in consolidation. Revenues for Realogy Franchise Group include intercompany royalties and marketing fees paid by Realogy Brokerage Group of $293 million, $306 million and $311 million for the years ended December 31, 2019, 2018 and 2017, respectively. Such amounts are eliminated through the Corporate and Other line.
(b)Revenues for Realogy Leads Group include intercompany referral commissions paid by Realogy Brokerage Group of $18 million for each of the years ended December 31, 2019, 2018 and 2017. Such amounts are recorded as contra-revenues by Realogy Brokerage Group. There are no other material intersegment transactions.
F-44
| |
(d) | Includes the elimination of transactions between segments. |
ProvidedSet forth in the tables below is a reconciliation of Net (loss) income to Operating EBITDA to Net income attributable to Realogy Holdings and Realogy Group:Operating EBITDA presented by reportable segment for the years ended December 31, 2019, 2018 and 2017:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | |
| | 2019 | | 2018 | | 2017 |
| Net (loss) income attributable to Realogy Holdings and Realogy Group | $ | (188) | | | $ | 137 | | | $ | 431 | |
| Less: Net (loss) income from discontinued operations | (67) | | | (6) | | | 6 | |
| Add: Income tax (benefit) expense from continuing operations (a) | (22) | | | 67 | | | (66) | |
| (Loss) income from continuing operations before income taxes | (143) | | | 210 | | | 359 | |
| Add: Depreciation and amortization (b) | 169 | | | 166 | | | 169 | |
| Interest expense, net | 249 | | | 189 | | | 157 | |
| Restructuring costs, net (c) | 42 | | | 47 | | | 12 | |
| Impairments (d) | 249 | | | — | | | — | |
| Former parent legacy cost (benefit) (e) | 1 | | | 4 | | | (10) | |
| (Gain) loss on the early extinguishment of debt (e) | (5) | | | 7 | | | 5 | |
| Operating EBITDA | $ | 562 | | | $ | 623 | | | $ | 692 | |
| | | | | | | | | | | | | | | | | |
| | Operating EBITDA | | | | |
| | Year Ended December 31, | | | | |
| | 2019 | | 2018 | | 2017 |
| Realogy Franchise Group | $ | 535 | | | $ | 564 | | | $ | 560 | |
| Realogy Brokerage Group (f) | 4 | | | 44 | | | 135 | |
| Realogy Title Group | 68 | | | 49 | | | 59 | |
| Realogy Leads Group | 53 | | | 51 | | | 45 | |
| Corporate and Other (e)(g) | (98) | | | (85) | | | (107) | |
| Total | $ | 562 | | | $ | 623 | | | $ | 692 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Net income attributable to Realogy Holdings and Realogy Group | $ | 431 |
| | $ | 213 |
| | $ | 184 |
|
| Add: Depreciation and amortization (a) | 201 |
| | 202 |
| | 201 |
|
| Interest expense, net | 158 |
| | 174 |
| | 231 |
|
| Income tax (benefit) expense | (65 | ) | | 144 |
| | 110 |
|
| EBITDA | $ | 725 |
| | $ | 733 |
| | $ | 726 |
|
_______________(a)Income tax benefit for the year ended December 31, 2017 reflects the impact of the 2017 Tax Act.
| |
(a) | Depreciation and amortization for the year ended December 31, 2017 includes $3 million of amortization expense related to Guaranteed Rate Affinity's purchase accounting included in the "Equity in earnings of unconsolidated entities" line on the Consolidated Statement of Operations. |
(b)Depreciation and amortization for the years ended December 31, 2018 and 2017 includes $2 million and $3 million, respectively, of amortization expense related to Guaranteed Rate Affinity's purchase accounting included in the "Equity in (earnings) losses of unconsolidated entities" line on the Consolidated Statement of Operations.
(c)The year ended December 31, 2019 includes restructuring charges of $2 million at Realogy Franchise Group, $25 million at Realogy Brokerage Group, $3 million at Realogy Title Group, $2 million at Realogy Leads Group and $10 million at Corporate and Other.
The year ended December 31, 2018 includes restructuring charges of $3 million at Realogy Franchise Group, $37 million at Realogy Brokerage Group, $4 million at Realogy Title Group and $3 million at Corporate and Other.
The year ended December 31, 2017 includes restructuring charges of $1 million at Realogy Franchise Group, $9 million at Realogy Brokerage Group, $1 million at Realogy Title Group and $1 million at Corporate and Other.
(d)Impairments for the year ended December 31, 2019 includes a goodwill impairment charge of $237 million at Realogy Brokerage Group. The impairment charge of $237 million was offset by an income tax benefit of $57 million resulting in a net reduction in the carrying value of Realogy Brokerage Group of $180 million (see Note 2, "Summary of Significant Accounting Policies", for additional information). In addition, other impairment charges, primarily related to lease asset impairments, of $12 million were incurred for the year ended December 31, 2019.
(e)Former parent legacy items and (Gain) loss on the early extinguishment of debt are recorded in Corporate and Other.
(f)Includes $22 million of equity earnings from PHH Home Loans for the year ended December 31, 2017.
(g)Includes the elimination of transactions between segments.
Depreciation and Amortization
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Real Estate Franchise Services | $ | 79 |
| | $ | 77 |
| | $ | 77 |
|
| Company Owned Real Estate Brokerage Services | 50 |
| | 49 |
| | 46 |
|
| Relocation Services | 33 |
| | 31 |
| | 33 |
|
| Title and Settlement Services | 16 |
| | 23 |
| | 25 |
|
| Corporate and Other | 20 |
| | 22 |
| | 20 |
|
| Total Company | $ | 198 |
| | $ | 202 |
| | $ | 201 |
|
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | |
| | 2019 | | 2018 | | 2017 |
| Realogy Franchise Group | $ | 77 | | | $ | 77 | | | $ | 79 | |
| Realogy Brokerage Group | 54 | | | 51 | | | 50 | |
| Realogy Title Group | 13 | | | 13 | | | 16 | |
| Realogy Leads Group | 1 | | | 2 | | | 1 | |
| Corporate and Other | 24 | | | 21 | | | 20 | |
| Total Company | $ | 169 | | | $ | 164 | | | $ | 166 | |
Segment Assets
|
| | | | | | | |
| | As of December 31, |
| | 2017 | | 2016 |
| Real Estate Franchise Services | $ | 4,413 |
| | $ | 4,477 |
|
| Company Owned Real Estate Brokerage Services | 1,258 |
| | 1,249 |
|
| Relocation Services | 1,029 |
| | 1,081 |
|
| Title and Settlement Services | 486 |
| | 416 |
|
| Corporate and Other | 151 |
| | 198 |
|
| Total Company | $ | 7,337 |
| | $ | 7,421 |
|
| | | | | | | | | | | |
| | As of December 31, | | |
| | 2019 | | 2018 |
| Realogy Franchise Group | $ | 4,317 | | | $ | 4,388 | |
| Realogy Brokerage Group | 1,448 | | | 1,228 | |
| Realogy Title Group | 576 | | | 492 | |
| Realogy Leads Group | 192 | | | 193 | |
| Corporate and Other | 260 | | | 190 | |
| Assets - held for sale | 750 | | | 799 | |
| Total Company | $ | 7,543 | | | $ | 7,290 | |
Capital Expenditures
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | |
| | 2019 | | 2018 | | 2017 |
| Realogy Franchise Group | $ | 19 | | | $ | 10 | | | $ | 9 | |
| Realogy Brokerage Group | 56 | | | 44 | | | 44 | |
| Realogy Title Group | 10 | | | 11 | | | 13 | |
| Realogy Leads Group | 2 | | | — | | | 2 | |
| Corporate and Other | 21 | | | 27 | | | 22 | |
| Total Company | $ | 108 | | | $ | 92 | | | $ | 90 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Real Estate Franchise Services | $ | 9 |
| | $ | 8 |
| | $ | 8 |
|
| Company Owned Real Estate Brokerage Services | 44 |
| | 44 |
| | 41 |
|
| Relocation Services | 11 |
| | 12 |
| | 14 |
|
| Title and Settlement Services | 13 |
| | 9 |
| | 8 |
|
| Corporate and Other | 22 |
| | 14 |
| | 13 |
|
| Total Company | $ | 99 |
| | $ | 87 |
| | $ | 84 |
|
20. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Revision of Third Quarter 2019 Financial Statements
The geographic segment information provided below is classified based onCompany performed an interim impairment analysis of goodwill and indefinite-lived intangible assets as of September 1, 2019 and early adopted the geographic locationnew goodwill guidance in connection with this assessment. The new standard has a new requirement that calls for the impairment charge and deferred tax effect to be adjusted using the "simultaneous equation method" which effectively grosses up the goodwill impairment charge to account for the related income tax benefit so that the resulting carrying value does not exceed the calculated fair value. When the Company recorded the impairment charge of $180 million for the Realogy Brokerage Group in the third quarter it did not apply the simultaneous equation method, which resulted in an understatement of the Company’s subsidiaries.non-cash impairment charge for the quarter ended September 30, 2019. The Company evaluated the impact of the revision in accordance with SEC Staff Accounting Bulletin (SAB) No. 99, "Materiality" and concluded that it was not material to the third quarter 2019 reporting period. As such, the revision is reflected below and will be included in the third quarter 2020 Form 10-Q containing such financial information.
As a result of the pending sale of Cartus Relocation Services, the Company met the held for sale requirements under ASC 360 and the discontinued operations criteria under ASC 205 in the fourth quarter of 2019. Therefore, amounts reported in the Company's Form 10-Q for the third quarter of 2019 were not adjusted for discontinued operations. The table below includes the "revised" numbers for the third quarter of 2019 as presented in the third quarter as well as "revised and adjusted for discontinued operations" to reflect the impact of discontinued operations as presented in the 10-K for the year ended December 31, 2019.
The impact of the revision to the Condensed Consolidated Statements of Operations as filed in the Company's Form 10-Q for the three and nine months ended September 30, 2019, as well as for the three and nine months ended September 30, 2019 as a result of the revision are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2019 | | | | | | |
| | As Previously Reported | | Adjustment | | Revised | | Revised and adjusted for discontinued operations |
| Expenses | | | | | | | |
| Impairments | $ | 183 | | | $ | 57 | | | $ | 240 | | | $ | 240 | |
| Total expenses | 1,713 | | | 57 | | | 1,770 | | | 1,700 | |
| Loss from continuing operations before income taxes, equity in earnings and noncontrolling interests | (84) | | | (57) | | | (141) | | | (150) | |
| Income tax benefit from continuing operations | (8) | | | (14) | | | (22) | | | (23) | |
| Net loss | (69) | | | (43) | | | (112) | | | (112) | |
| Net loss attributable to Realogy Holdings and Realogy Group | $ | (70) | | | $ | (43) | | | $ | (113) | | | $ | (113) | |
| Loss per share attributable to Realogy Holdings shareholders: | | | | | | | |
| Basic loss per share | $ | (0.61) | | | $ | (0.38) | | | $ | (0.99) | | | $ | (0.99) | |
| Diluted loss per share | $ | (0.61) | | | $ | (0.38) | | | $ | (0.99) | | | $ | (0.99) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2019 | | | | | | |
| | As Previously Reported | | Adjustment | | Revised | | Revised and adjusted for discontinued operations |
| Expenses | | | | | | | |
| Impairments | $ | 186 | | | $ | 57 | | | $ | 243 | | | $ | 243 | |
| Total expenses | 4,600 | | | 57 | | | 4,657 | | | 4,441 | |
| Loss from continuing operations before income taxes, equity in earnings and noncontrolling interests | (122) | | | (57) | | | (179) | | | (173) | |
| Income tax benefit from continuing operations | (9) | | | (14) | | | (23) | | | (22) | |
| Net loss | (98) | | | (43) | | | (141) | | | (141) | |
| Net loss attributable to Realogy Holdings and Realogy Group | $ | (100) | | | $ | (43) | | | $ | (143) | | | $ | (143) | |
| Loss per share attributable to Realogy Holdings shareholders: | | | | | | | |
| Basic loss per share | $ | (0.88) | | | $ | (0.37) | | | $ | (1.25) | | | $ | (1.25) | |
| Diluted loss per share | $ | (0.88) | | | $ | (0.37) | | | $ | (1.25) | | | $ | (1.25) | |
|
| | | | | | | | | | | |
| | United States | | All Other Countries | | Total |
| On or for the year ended December 31, 2017 | | | | | |
| Net revenues | $ | 5,997 |
| | $ | 117 |
| | $ | 6,114 |
|
| Total assets | 7,261 |
| | 76 |
| | 7,337 |
|
| Net property and equipment | 287 |
| | 2 |
| | 289 |
|
| On or for the year ended December 31, 2016 | | | | | |
| Net revenues | $ | 5,683 |
| | $ | 127 |
| | $ | 5,810 |
|
| Total assets | 7,347 |
| | 74 |
| | 7,421 |
|
| Net property and equipment | 265 |
| | 2 |
| | 267 |
|
| On or for the year ended December 31, 2015 | | | | | |
| Net revenues | $ | 5,579 |
| | $ | 127 |
| | $ | 5,706 |
|
| Total assets | 7,450 |
| | 81 |
| | 7,531 |
|
| Net property and equipment | 252 |
| | 2 |
| | 254 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2019 | | | | | | |
| | As Previously Reported | | Adjustment | | Revised | | Revised and adjusted for discontinued operations |
| Net loss | $ | (69) | | | $ | (43) | | | $ | (112) | | | $ | (112) | |
| Comprehensive loss | (70) | | | (43) | | | (113) | | | (113) | |
| Comprehensive loss attributable to Realogy Holdings and Realogy Group | $ | (71) | | | $ | (43) | | | $ | (114) | | | $ | (114) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2019 | | | | | | |
| | As Previously Reported | | Adjustment | | Revised | | Revised and adjusted for discontinued operations |
| Net loss | $ | (98) | | | $ | (43) | | | $ | (141) | | | $ | (141) | |
| Comprehensive loss | (98) | | | (43) | | | (141) | | | (141) | |
| Comprehensive loss attributable to Realogy Holdings and Realogy Group | $ | (100) | | | $ | (43) | | | $ | (143) | | | $ | (143) | |
The impact of the change to the Condensed Consolidated Balance Sheets as of September 30, 2019 as a result of the revision is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| As of September 30, 2019 | | | | | | |
| | As Previously Reported | | Adjustment | | Revised | | Revised and adjusted for discontinued operations |
| ASSETS | | | | | | | |
| Goodwill | $ | 3,532 | | | $ | (57) | | | $ | 3,475 | | | $ | 3,300 | |
| Total assets | 7,717 | | | (57) | | | 7,660 | | | 7,660 | |
| LIABILITIES AND EQUITY | | | | | | | |
| Deferred income taxes | 374 | | | (14) | | | 360 | | | 360 | |
| Total liabilities | 5,534 | | | (14) | | | 5,520 | | | 5,520 | |
| Accumulated deficit | (2,607) | | | (43) | | | (2,650) | | | (2,650) | |
| Total stockholders' equity | 2,179 | | | (43) | | | 2,136 | | | 2,136 | |
| Total equity | 2,183 | | | (43) | | | 2,140 | | | 2,140 | |
| Total liabilities and equity | $ | 7,717 | | | $ | (57) | | | $ | 7,660 | | | $ | 7,660 | |
The impact of the change to the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 as a result of the revision is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2019 | | | | | | |
| | As Previously Reported | | Adjustment | | Revised | | Revised and adjusted for discontinued operations |
| Operating Activities | | | | | | | |
| Net loss from continuing operations | $ | (98) | | | $ | (43) | | | $ | (141) | | | $ | (136) | |
| Adjustments to reconcile net loss from continuing operations to net cash provided by operating activities: | | | | | | | | | | |
| Deferred income taxes | (16) | | | (14) | | | (30) | | | (29) | |
| Impairments | 186 | | | 57 | | | 243 | | | 243 | |
| Net cash provided by operating activities | $ | 230 | | | $ | — | | | $ | 230 | | | $ | 230 | |
| |
18. | SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) |
Selected Quarterly Financial Data
Provided below is selected unaudited quarterly financial data for 20172019 and 2016.2018.
|
| | | | | | | | | | | | | | | |
| | 2017 |
| | First | | Second | | Third | | Fourth |
| Net revenues | | | | | | | |
| Real Estate Franchise Services | $ | 170 |
| | $ | 237 |
| | $ | 224 |
| | $ | 199 |
|
| Company Owned Real Estate Brokerage Services | 897 |
| | 1,392 |
| | 1,267 |
| | 1,087 |
|
| Relocation Services | 77 |
| | 102 |
| | 111 |
| | 92 |
|
| Title and Settlement Services | 120 |
| | 157 |
| | 154 |
| | 139 |
|
| Corporate and Other (a) | (61 | ) | | (95 | ) | | (82 | ) | | (73 | ) |
| Total Company | $ | 1,203 |
| | $ | 1,793 |
| | $ | 1,674 |
| | $ | 1,444 |
|
Income (loss) before income taxes, equity in earnings and noncontrolling interests (b) | | | | |
| Real Estate Franchise Services | $ | 82 |
| | $ | 146 |
| | $ | 139 |
| | $ | 113 |
|
| Company Owned Real Estate Brokerage Services | (35 | ) | | 65 |
| | 36 |
| | (14 | ) |
| Relocation Services | (5 | ) | | 21 |
| | 32 |
| | 15 |
|
| Title and Settlement Services | (3 | ) | | 23 |
| | 19 |
| | 6 |
|
| Corporate and Other | (73 | ) | | (72 | ) | | (73 | ) | | (71 | ) |
| Total Company | $ | (34 | ) | | $ | 183 |
| | $ | 153 |
| | $ | 49 |
|
| Net income (loss) attributable to Realogy Holdings and Realogy Group | $ | (28 | ) | | $ | 109 |
| | $ | 95 |
| | $ | 255 |
|
Income (loss) per share attributable to Realogy Holdings (c): | | | | | | | |
| Basic income (loss) per share | $ | (0.20 | ) | | $ | 0.79 |
| | $ | 0.70 |
| | $ | 1.91 |
|
| Diluted income (loss) per share | $ | (0.20 | ) | | $ | 0.78 |
| | $ | 0.69 |
| | $ | 1.89 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2019 | | | | | | |
| | First (d) | | Second (d) | | Third (d) | | Fourth |
| Net revenues | | | | | | | |
| Realogy Franchise Group | $ | 163 | | | $ | 234 | | | $ | 216 | | | $ | 190 | |
| Realogy Brokerage Group | 816 | | | 1,331 | | | 1,222 | | | 1,040 | |
| Realogy Title Group | 114 | | | 160 | | | 170 | | | 152 | |
| Realogy Leads Group | 16 | | | 26 | | | 24 | | | 17 | |
| Corporate and Other (a) | (55) | | | (87) | | | (82) | | | (69) | |
| Total Company | $ | 1,054 | | | $ | 1,664 | | | $ | 1,550 | | | $ | 1,330 | |
(Loss) income from continuing operations before income taxes, equity in earnings and noncontrolling interests (b) | | | | | | | |
| Realogy Franchise Group | $ | 71 | | | $ | 142 | | | $ | 134 | | | $ | 108 | |
| Realogy Brokerage Group | (80) | | | 25 | | | (231) | | | (38) | |
| Realogy Title Group | (13) | | | 22 | | | 21 | | | 7 | |
| Realogy Leads Group | 8 | | | 16 | | | 16 | | | 11 | |
| Corporate and Other | (104) | | | (110) | | | (90) | | | (73) | |
| Total Company | $ | (118) | | | $ | 95 | | | $ | (150) | | | $ | 15 | |
| | | | | | | |
| Net (loss) income from continuing operations attributable to Realogy Holdings shareholders | $ | (85) | | | $ | 68 | | | $ | (121) | | | $ | 17 | |
| Net (loss) income from discontinued operations attributable to Realogy Holdings shareholders | (14) | | | 1 | | | 8 | | | (62) | |
| Net (loss) income attributable to Realogy Holdings and Realogy Group | $ | (99) | | | $ | 69 | | | $ | (113) | | | $ | (45) | |
| | | | | | | |
(Loss) earnings per share attributable to Realogy Holdings (c): | | | | | | | |
| Basic (loss) earnings per share from continuing operations | $ | (0.75) | | | $ | 0.59 | | | $ | (1.06) | | | $ | 0.15 | |
| Basic (loss) earnings per share from discontinued operations | (0.12) | | | 0.01 | | | 0.07 | | | (0.54) | |
| Basic (loss) earnings per share | (0.87) | | | 0.60 | | | (0.99) | | | (0.39) | |
| Diluted (loss) earnings per share from continuing operations | (0.75) | | | 0.59 | | | (1.06) | | | 0.15 | |
| Diluted (loss) earnings per share from discontinued operations | (0.12) | | | 0.01 | | | 0.07 | | | (0.54) | |
| Diluted (loss) earnings per share | $ | (0.87) | | | $ | 0.60 | | | $ | (0.99) | | | $ | (0.39) | |
_______________
| |
(a) | (a)Represents the elimination of transactions primarily between the Real Estate Franchise Services segment and the Company Owned Real Estate Brokerage Services segment. |
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(b) | The quarterly results include the following: |
an $8 million expense related to the settlementelimination of transactions primarily between Realogy Franchise Group and Realogy Brokerage Group.
(b)The quarterly results include the Strader legal matter in the second quarter;following:
•restructuring charges of $5$9 million, $2$9 million, $2$11 million and $3$13 million in the first, second, third and fourth quarters, respectively;
former parent legacy net benefit•a goodwill impairment charge of $11$237 million in the third quarter which reduced the net carrying value of Realogy Brokerage Group by $180 million after accounting for the related income tax benefit of $57 million and $1 million, $2 million, $3 million and $6 million of other impairment charges primarily related to lease asset impairments incurred in the first, second, quarterthird and fourth quarters, respectively;
•former parent legacy net cost of $1$1 million in the third quarter; and
•a loss on the early extinguishment of debt of $4 million and $1 million in the first and third quarters, respectively;
mark-to-market adjustments for interest rate swaps of a $1 million gain, a $5 million loss, and an $8 million gain in the first, second and fourth quarters, respectively; and
an $8 million expense related to the transition of the Company's CEO in the fourth quarter.
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(c) | Basic and diluted EPS amounts in each quarter are computed using the weighted-average number of shares outstanding during that quarter, while basic and diluted EPS for the full year is computed using the weighted-average number of shares outstanding during the year. Therefore, the sum of the four quarters’ basic or diluted EPS may not equal the full year basic or diluted EPS (see Note 15 "Earnings Per Share" for further information). |
|
| | | | | | | | | | | | | | | |
| | 2016 |
| | First | | Second | | Third | | Fourth |
| Net revenues | | | | | | | |
| Real Estate Franchise Services | $ | 157 |
| | $ | 221 |
| | $ | 215 |
| | $ | 188 |
|
| Company Owned Real Estate Brokerage Services | 841 |
| | 1,268 |
| | 1,231 |
| | 1,004 |
|
| Relocation Services | 83 |
| | 109 |
| | 116 |
| | 97 |
|
| Title and Settlement Services | 111 |
| | 149 |
| | 164 |
| | 149 |
|
| Corporate and Other (a) | (58 | ) | | (85 | ) | | (82 | ) | | (68 | ) |
| Total Company | $ | 1,134 |
| | $ | 1,662 |
| | $ | 1,644 |
| | $ | 1,370 |
|
Income (loss) before income taxes, equity in earnings and noncontrolling interests (b) | | |
| Real Estate Franchise Services | $ | 73 |
| | $ | 130 |
| | $ | 133 |
| | $ | 102 |
|
| Company Owned Real Estate Brokerage Services | (32 | ) | | 63 |
| | 55 |
| | (8 | ) |
| Relocation Services | (1 | ) | | 22 |
| | 34 |
| | 16 |
|
| Title and Settlement Services | (5 | ) | | 21 |
| | 17 |
| | 6 |
|
| Corporate and Other | (101 | ) | | (83 | ) | | (63 | ) | | (30 | ) |
| Total Company | $ | (66 | ) | | $ | 153 |
| | $ | 176 |
| | $ | 86 |
|
| Net income (loss) attributable to Realogy Holdings and Realogy Group | $ | (42 | ) | | $ | 92 |
| | $ | 106 |
| | $ | 57 |
|
Income (loss) per share attributable to Realogy Holdings (c): | | | | | | | |
| Basic income (loss) per share | $ | (0.29 | ) | | $ | 0.63 |
| | $ | 0.74 |
| | $ | 0.40 |
|
| Diluted income (loss) per share | $ | (0.29 | ) | | $ | 0.63 |
| | $ | 0.73 |
| | $ | 0.40 |
|
_______________
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(a) | Represents the elimination of transactions primarily between the Real Estate Franchise Services segment and the Company Owned Real Estate Brokerage Services segment. |
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(b) | The quarterly results include the following: |
former parent legacy net cost of $1 million in the first quarter and former parent legacy net benefita gain on the early extinguishment of $3debt of $10 million in the third quarter.
(c)Basic and diluted EPS amounts in each quarter are computed using the weighted-average number of shares outstanding during that quarter, while basic and diluted EPS for the full year is computed using the weighted-average number of shares outstanding during the year. Therefore, the sum of the four quarters’ basic or diluted EPS may not equal the full year basic or diluted EPS (see Note 17 "Earnings (Loss) Per Share" for further information).
(d)As a result of the pending sale of Cartus Relocation Services, the Company met held for sale requirements under ASC 360 and discontinued operations under ASC 205 in the fourth quarter;quarter of 2019. Therefore, amounts presented in the Company's Form 10-Qs for the periods prior to the fourth quarter of 2019 did not reflect discontinued operations, but have been adjusted to reflect discontinued operations in the tables above.
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2018 | | | | | | |
| | First (d) | | Second (d) | | Third (d) | | Fourth (d) |
| Net revenues | | | | | | | |
| Realogy Franchise Group | $ | 176 | | | $ | 237 | | | $ | 221 | | | $ | 186 | |
| Realogy Brokerage Group | 917 | | | 1,408 | | | 1,268 | | | 1,014 | |
| Realogy Title Group | 120 | | | 162 | | | 162 | | | 136 | |
| Realogy Leads Group | 16 | | | 25 | | | 23 | | | 17 | |
| Corporate and Other (a) | (63) | | | (92) | | | (83) | | | (68) | |
| Total Company | $ | 1,166 | | | $ | 1,740 | | | $ | 1,591 | | | $ | 1,285 | |
(Loss) income from continuing operations before income taxes, equity in earnings and noncontrolling interests (b) | | | | | | | |
| Realogy Franchise Group | $ | 85 | | | $ | 152 | | | $ | 141 | | | $ | 107 | |
| Realogy Brokerage Group | (76) | | | 45 | | | 22 | | | (37) | |
| Realogy Title Group | (8) | | | 26 | | | 18 | | | 1 | |
| Realogy Leads Group | 7 | | | 17 | | | 16 | | | 9 | |
| Corporate and Other | (66) | | | (73) | | | (67) | | | (102) | |
| Total Company | $ | (58) | | | $ | 167 | | | $ | 130 | | | $ | (22) | |
| | | | | | | | | | | |
| Net (loss) income from continuing operations attributable to Realogy Holdings shareholders | $ | (49) | | | $ | 118 | | | $ | 93 | | | $ | (19) | |
| Net (loss) income from discontinued operations attributable to Realogy Holdings shareholders | (18) | | | 5 | | | 10 | | | (3) | |
| Net (loss) income attributable to Realogy Holdings and Realogy Group | $ | (67) | | | $ | 123 | | | $ | 103 | | | $ | (22) | |
| | | | | | | |
| (Loss) earnings per share attributable to Realogy Holdings (c): | | | | | | | |
| Basic (loss) earnings per share from continuing operations | $ | (0.38) | | | $ | 0.93 | | | $ | 0.76 | | | $ | (0.16) | |
| Basic (loss) earnings per share from discontinued operations | (0.13) | | | 0.04 | | | 0.08 | | | (0.03) | |
| Basic (loss) earnings per share | (0.51) | | | 0.97 | | | 0.84 | | | (0.19) | |
| Diluted (loss) earnings per share from continuing operations | (0.38) | | | 0.92 | | | 0.75 | | | (0.16) | |
| Diluted (loss) earnings per share from discontinued operations | (0.13) | | | 0.04 | | | 0.08 | | | (0.03) | |
| Diluted (loss) earnings per share | $ | (0.51) | | | $ | 0.96 | | | $ | 0.83 | | | $ | (0.19) | |
_______________
(a)Represents the elimination of transactions primarily between Realogy Franchise Group and Realogy Brokerage Group.
(b)The quarterly results include the following:
•restructuring charges of $9$22 million, $12$5 million, $9 million and $9$11 million in the first, second, third and fourth quarters, respectively;
•former parent legacy net cost of $4 million in the fourth quarter; and
mark-to-market adjustments for interest rate swaps•a loss on the early extinguishment of a $31debt of $7 million loss, a $14 million loss, a $5 million gain, and a $34 million gain in the first second, thirdquarter.
(c)Basic and diluted EPS amounts in each quarter are computed using the weighted-average number of shares outstanding during that quarter, while basic and diluted EPS for the full year is computed using the weighted-average number of shares outstanding during the year. Therefore, the sum of the four quarters’ basic or diluted EPS may not equal the full year basic or diluted EPS.
(d)As a result of the pending sale of Cartus Relocation Services, the Company met held for sale requirements under ASC 360 and discontinued operations under ASC 205 in the fourth quarters, respectively.quarter of 2019. Therefore, amounts presented in the Company's Form 10-Qs for the periods prior to the fourth quarter of 2019 did not reflect discontinued operations, but have been adjusted to reflect discontinued operations in the tables above.
| |
(c) | Basic and diluted EPS amounts in each quarter are computed using the weighted-average number of shares outstanding during that quarter, while basic and diluted EPS for the full year is computed using the weighted-average number of shares outstanding during the year. Therefore, the sum of the four quarters’ basic or diluted EPS may not equal the full year basic or diluted EPS. |
Refinancing
In February 2018, the Company completed debt transactions which:
amended its revolving credit facility, by increasing the capacity from $1,050 million to $1,400 million and extending the maturity date from October 2020 to February 2023 (the "New Revolving Credit Facility");
refinanced the existing aggregate $733 million Term Loan A and Term Loan A-1 tranches due October 2020 and July 2021, respectively, into a new single tranche of $750 million Term Loan A due February 2023 (which included incremental borrowings of $17 million) (the "New Term Loan A"). The New Term Loan A Facility provides for quarterly amortization payments on the last day of each quarter, totaling per annum 2.5%, 2.5%, 5.0%, 7.5% and 10.0% of the original principal amount of the New Term Loan A, commencing June 30, 2018, with the balance of the New Term Loan A due in full on February 8, 2023; and
refinanced the existing $1,083 million Term Loan B due July 2022 with a new Term Loan B issued at par in the amount of $1,080 million and with a maturity date in February 2025 (the "New Term Loan B").
The interest rates with respect to the New Revolving Credit Facility and the New Term Loan A are the same that had been in place under Term Loan A-1 and are based on, at the Company's option, adjusted LIBOR or ABR plus an additional margin subject to adjustments based on the Company’s then current senior secured leverage ratio. The interest rate and amortization with respect to New Term Loan B is unchanged. The other terms of the New Revolving Credit Facility, New Term Loan A and New Term Loan B are substantially the same as those in place prior to the transactions.
Adoption of New Share Repurchase Program
On February 26, 2018, the Board authorized a new share repurchase program of up to $350 million of the Company's common stock, which is in addition to the remaining authorization available under the February 2017 share repurchase program. Repurchases under the new program may be made at management's discretion from time to time on the open market, pursuant to Rule 10b5-1 trading plans or through privately negotiated transactions. The size and timing of these repurchases will depend on price, market and economic conditions, legal and contractual requirements and other factors. Similarly, the new repurchase program has no time limit and may be suspended or discontinued at any time.
EXHIBIT INDEX
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4.1 | Indenture, dated as of April 2, 2014, among Realogy Group LLC, as Issuer, Realogy Co-Issuer Corp., as Co-Issuer, Realogy Holdings Corp., the Note Guarantors (as defined therein), and The Bank of New York Mellon Trust Company, N.A., as Trustee, governing the 4.500% Senior Notes due 2019 (the "4.500% Senior Note Indenture") (Incorporated by reference to Exhibit 4.1 to the Registrants' Form 10-Q for the three months ended March 31, 2014). |
ExhibitDescription
4.1 Indenture, dated as of November 21, 2014, among Realogy Group LLC, as Issuer, Realogy Co-Issuer Corp., as Co-Issuer, Realogy Holdings Corp., the Note Guarantors (as defined therein), and The Bank of New York Mellon Trust Company, N.A., as Trustee, governing the 5.250% Senior Notes due 2021 (the "5.250% Senior Note Indenture") (Incorporated by reference to Exhibit 4.27 to Registrants' Form 10-K for the year ended December 31, 2014). 4.10 Indenture, dated as of June 1, 2016, among Realogy Group LLC, as Issuer, Realogy Co-Issuer Corp., as Co-Issuer, Realogy Holdings Corp., the Note Guarantors (as defined therein), and The Bank of New York Mellon Trust Company, N.A., as Trustee, governing the 4.875% Senior Notes due 2023 (the "4.875% Senior Note Indenture") (Incorporated by reference to Exhibit 4.1 to Registrants' Current Report on Form 8-K filed on June 3, 2016).
ExhibitDescription
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4.11 | Indenture, dated as of November 21, 2014, among Realogy Group LLC, as Issuer, Realogy Co-Issuer Corp., as Co-Issuer, Realogy Holdings Corp., the Note Guarantors (as defined therein), and The Bank of New York Mellon Trust Company, N.A., as Trustee, governing the 5.250% Senior Notes due 2021 (the "5.250% Senior Note Indenture") (Incorporated by reference to Exhibit 4.27 to Registrants' Form 10-K for the year ended December 31, 2014). |
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4.19 | Indenture, dated as of June 1, 2016, among Realogy Group LLC, as Issuer, Realogy Co-Issuer Corp., as Co-Issuer, Realogy Holdings Corp., the Note Guarantors (as defined therein), and The Bank of New York Mellon Trust Company, N.A., as Trustee, governing the 4.875% Senior Notes due 2023 (the "4.875% Senior Note Indenture") (Incorporated by reference to Exhibit 4.1 to Registrants' Current Report on Form 8-K filed on June 3, 2016). |
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10.3 | Amended and Restated Credit Agreement, dated as of March 5, 2013, among Realogy Intermediate Holdings LLC, Realogy Group LLC, the lenders party thereto from time to time, JPMorgan Chase Bank, N.A., as administrative agent for the lenders, and the other financial institutions parties thereto (Incorporated by reference to Exhibit 10.4 to Registrants' Form 10-Q for the three months ended March 31, 2013). |
4.16 Indenture, dated as of March 29, 2019, among Realogy Group LLC, as Issuer, Realogy Co-Issuer Corp., as Co-Issuer, Realogy Holdings Corp., the Note Guarantors (as defined therein) and The Bank of New York Mellon Trust Company, N.A., as Trustee, governing the 9.375% Senior Notes due 2027 (Incorporated by reference to Exhibit 4.1 to the Registrants' Current Report on Form 8-K filed on March 29, 2019). 10.3 Amended and Restated Credit Agreement, dated as of March 5, 2013, among Realogy Intermediate Holdings LLC, Realogy Group LLC, the lenders party thereto from time to time, JPMorgan Chase Bank, N.A., as administrative agent for the lenders, and the other financial institutions parties thereto (Incorporated by reference to Exhibit 10.4 to Registrants' Form 10-Q for the three months ended March 31, 2013). 10.4 First Amendment, dated as of March 10, 2014, to the Amended and Restated Credit Agreement, dated as of March 5, 2013, among Realogy Intermediate Holdings LLC, Realogy Group LLC, the lenders from time to time party thereto, JPMorgan Chase Bank, N.A., as administrative agent, and the other agents parties thereto (Incorporated by reference to Exhibit 10.1 to Registrants' Current Report on Form 8-K filed on March 10, 2014). 10.5 Second Amendment, dated as of October 23, 2015, to the Amended and Restated Credit Agreement, dated as of March 5, 2013, as amended, among Realogy Intermediate Holdings LLC, Realogy Group LLC, the several lenders parties thereto from time to time, JPMorgan Chase Bank, N.A., as administrative agent for the lenders, and the other agents parties thereto (Incorporated by reference to Exhibit 10.1 to Registrants' Current Report on Form 8-K filed on October 28, 2015). 10.6 Third Amendment, dated as of July 20, 2016, to the Amended and Restated Credit Agreement, dated as of March 5, 2013, as amended, among Realogy Intermediate Holdings LLC, Realogy Group LLC, the several lenders parties thereto from time to time, JPMorgan Chase Bank, N.A., as administrative agent for the lenders, and the other agents parties thereto (Incorporated by reference to Exhibit 10.2 to Registrants' Current Report on Form 8-K filed on July 22, 2016). 10.7 Fourth Amendment, dated as of January 23, 2017, to the Amended and Restated Credit Agreement, dated as of March 5, 2013, as amended, among Realogy Intermediate Holdings LLC, Realogy Group LLC, the several lenders parties thereto from time to time, JPMorgan Chase Bank, N.A., as administrative agent for the lenders, and the other agents parties thereto (Incorporated by reference to Exhibit 10.1 to Registrants' Current Report on Form 8-K filed on January 23, 2017). 10.8 Fifth Amendment, dated as of February 8, 2018, to the Amended and Restated Credit Agreement, dated as of March 5, 2013, as amended, among Realogy Intermediate Holdings LLC, Realogy Group LLC, the several lenders parties thereto from time to time, JPMorgan Chase Bank, N.A., as administrative agent for the lenders, and the other agents parties thereto (Incorporated by reference to Exhibit 10.1 to Registrants' Current Report on Form 8-K filed on February 8, 2018).
ExhibitDescription
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10.4 | First Amendment, dated as of March 10, 2014, to the Amended and Restated Credit Agreement, dated as of March 5, 2013, among Realogy Intermediate Holdings LLC, Realogy Group LLC, the lenders from time to time party thereto, JPMorgan Chase Bank, N.A., as administrative agent, and the other agents parties thereto (Incorporated by reference to Exhibit 10.1 to Registrants' Current Report on Form 8-K filed on March 10, 2014). |
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10.5 | Second Amendment, dated as of October 23, 2015, to the Amended and Restated Credit Agreement, dated as of March 5, 2013, as amended, among Realogy Intermediate Holdings LLC, Realogy Group LLC, the several lenders parties thereto from time to time, JPMorgan Chase Bank, N.A., as administrative agent for the lenders, and the other agents parties thereto (Incorporated by reference to Exhibit 10.1 to Registrants' Current Report on Form 8-K filed on October 28, 2015). |
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10.6 | Third Amendment, dated as of July 20, 2016, to the Amended and Restated Credit Agreement, dated as of March 5, 2013, as amended, among Realogy Intermediate Holdings LLC, Realogy Group LLC, the several lenders parties thereto from time to time, JPMorgan Chase Bank, N.A., as administrative agent for the lenders, and the other agents parties thereto (Incorporated by reference to Exhibit 10.2 to Registrants' Current Report on Form 8-K filed on July 22, 2016). |
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10.7 | Fourth Amendment, dated as of January 23, 2017, to the Amended and Restated Credit Agreement, dated as of March 5, 2013, as amended, among Realogy Intermediate Holdings LLC, Realogy Group LLC, the several lenders parties thereto from time to time, JPMorgan Chase Bank, N.A., as administrative agent for the lenders, and the other agents parties thereto (Incorporated by reference to Exhibit 10.1 to Registrants' Current Report on Form 8-K filed on January 23, 2017). |
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10.8 | Fifth Amendment, dated as of February 8, 2018, to the Amended and Restated Credit Agreement, dated as of March 5, 2013, as amended, among Realogy Intermediate Holdings LLC, Realogy Group LLC, the several lenders parties thereto from time to time, JPMorgan Chase Bank, N.A., as administrative agent for the lenders, and the other agents parties thereto (Incorporated by reference to Exhibit 10.1 to Registrants' Current Report on Form 8-K filed on February 8, 2018). |
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10.9 | Sixth Amendment, dated as of February 8, 2018, to the Amended and Restated Credit Agreement, dated as of March 5, 2013, as amended, among Realogy Intermediate Holdings LLC, Realogy Group LLC, the several lenders parties thereto from time to time, JPMorgan Chase Bank, N.A., as administrative agent for the lenders, and the other agents parties thereto (Incorporated by reference to Exhibit 10.1 to Registrants' Current Report on Form 8-K filed on February 8, 2018). |
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10.13 | First Amendment, dated as of July 20, 2016, to the Term Loan A Agreement, dated as of October 23, 2015, among Realogy Intermediate Holdings LLC, Realogy Group LLC, the lenders party thereto from time to time and JPMorgan Chase Bank, N.A., as administrative agent for the lenders (Incorporated by reference to Exhibit 10.1to Registrants' Current Report on Form 8-K filed on July 22, 2016). |
10.9 Sixth Amendment, dated as of February 8, 2018, to the Amended and Restated Credit Agreement, dated as of March 5, 2013, as amended, among Realogy Intermediate Holdings LLC, Realogy Group LLC, the several lenders parties thereto from time to time, JPMorgan Chase Bank, N.A., as administrative agent for the lenders, and the other agents parties thereto (Incorporated by reference to Exhibit 10.2 to Registrants' Current Report on Form 8-K filed on February 8, 2018). 10.10 Eighth Amendment, dated as of August 2, 2019, to the Amended and Restated Credit Agreement, dated as of March 5, 2013, as amended, among Realogy Intermediate Holdings LLC, Realogy Group LLC, the several lenders parties thereto from time to time, JPMorgan Chase Bank, N.A., as administrative agent for the lenders, and the other agents parties thereto (Incorporated by reference to Exhibit 10.2 to the Registrants' Quarterly Report on Form 10-Q for the three month period ended June 30, 2019). 10.15 First Amendment, dated as of July 20, 2016, to the Term Loan A Agreement, dated as of October 23, 2015, among Realogy Intermediate Holdings LLC, Realogy Group LLC, the lenders party thereto from time to time and JPMorgan Chase Bank, N.A., as administrative agent for the lenders (Incorporated by reference to Exhibit 10.1to Registrants' Current Report on Form 8-K filed on July 22, 2016). 10.16 Second Amendment, dated as of February 8, 2018, to the Term Loan A Agreement, dated as of October 23, 2015, among Realogy Intermediate Holdings LLC, Realogy Group LLC, the lenders party thereto from time to time and JPMorgan Chase Bank, N.A., as administrative agent for the lenders (Incorporated by reference to Exhibit 10.3 to Registrants' Current Report on Form 8-K filed on February 8, 2018). Note: The Term Loan A Agreement reflecting the cumulative effect of all amendments through February 8, 2018 is attached as Exhibit A to this Exhibit 10.14. 10.18 Intercreditor Agreement, dated as of February 2, 2012, among Realogy Group LLC (f/k/a Realogy Corporation), the other Grantors (as defined therein) from time to time party hereto, JPMorgan Chase Bank, N.A., as collateral agent for the Credit Agreement Secured Parties (as defined therein) and as Authorized Representative for the Credit Agreement Secured Parties, The Bank of New York, Mellon Trust Company, N.A., as the collateral agent and Authorized Representative for the Initial Additional First Lien Priority Note Secured Parties (as defined therein) (Incorporated by reference as Exhibit 10.13 to Registrants' Form 10-K for the year ended December 31, 2011).
ExhibitDescription
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10.14 | Second Amendment, dated as of February 8, 2018, to the Term Loan A Agreement, dated as of October 23, 2015, among Realogy Intermediate Holdings LLC, Realogy Group LLC, the lenders party thereto from time to time and JPMorgan Chase Bank, N.A., as administrative agent for the lenders (Incorporated by reference to Exhibit 10.1to Registrants' Current Report on Form 8-K filed on February 8, 2018). Note: The Term Loan A Agreement reflecting the cumulative effect of all amendments through February 8, 2018 is attached as Exhibit A to this Exhibit 10.14. |
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10.16 | Intercreditor Agreement, dated as of February 2, 2012, among Realogy Group LLC (f/k/a Realogy Corporation), the other Grantors (as defined therein) from time to time party hereto, JPMorgan Chase Bank, N.A., as collateral agent for the Credit Agreement Secured Parties (as defined therein) and as Authorized Representative for the Credit Agreement Secured Parties, The Bank of New York, Mellon Trust Company, N.A., as the collateral agent and Authorized Representative for the Initial Additional First Lien Priority Note Secured Parties (as defined therein) (Incorporated by reference as Exhibit 10.13 to Registrants' Form 10-K for the year ended December 31, 2011). |
ExhibitDescription
10.44 Amendment No. 3 to Trademark License Agreement dated January 14, 2011, by and among SPTC Delaware LLC (as assignee of SPTC, Inc.) and Sotheby’s, as successor by merger to Sotheby’s Holdings, Inc., on the one hand, and Realogy Group LLC (f/k/a Realogy Corporation) , as successor to Cendant Corporation, and Sotheby’s International Realty Licensee (f/k/a Monticello Licensee Corporation) (Incorporated by reference to Exhibit 10.49 to Realogy Group LLC's (f/k/a Realogy Corporation's) Form 10-K for the year ended December 31, 2010). 10.48 Note Purchase Agreement (Secured Variable Funding Notes, Series 2011-1) dated as of December 14, 2011, among Apple Ridge Funding LLC, Cartus Corporation, the commercial paper conduit purchasers party thereto, the financial institutions party thereto, the managing agents party thereto, and committed purchases and managing agents party thereto and Crédit Agricole Corporate and Investment Bank, as administrative and lead arranger (Incorporated by reference to Exhibit 10.60 to Registrants' Form 10-K for the year ended December 31, 2011). 10.49 Amendment dated June 13, 2014 to the Note Purchase Agreement dated as of December 14, 2011, by and among Apple Ridge Funding LLC, Cartus Corporation, Realogy Group LLC, the managing agents, committed purchasers and conduit purchasers named therein, and Crédit Agricole Corporate and Investment Bank, as administrative agent (Incorporated by reference to Exhibit 10.1 to the Registrants' Form 10-Q for the three months ended June 30, 2014). 10.50 Amendment dated November 10, 2014 to the Note Purchase Agreement dated as of December 14, 2011, by and among Apple Ridge Funding LLC, Cartus Corporation, Realogy Group LLC, the managing agents, committed purchasers and conduit purchasers named therein, and Crédit Agricole Corporate and Investment Bank, as administrative agent (Incorporated by reference to Exhibit 10.49 to Registrants' Form 10-K for the year ended December 31, 2014). 10.51 Amendment to Note Purchase Agreement, dated as of June 1, 2016, among Apple Ridge Funding LLC, Cartus Corporation, Realogy Group LLC, the Managing Agents, Committed Purchasers and Conduit Purchasers, and Crédit Agricole Corporate and Investment Bank, as Administrative Agent (Incorporated by reference to Exhibit 10.1 to Registrants' Current Report on Form 8-K filed with the Securities and Exchange Commission on June 3, 2016).
ExhibitDescription
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10.43 | Amendment No. 3 to Trademark License Agreement dated January 14, 2011, by and among SPTC Delaware LLC (as assignee of SPTC, Inc.) and Sotheby’s, as successor by merger to Sotheby’s Holdings, Inc., on the one hand, and Realogy Group LLC (f/k/a Realogy Corporation) , as successor to Cendant Corporation, and Sotheby’s International Realty Licensee (f/k/a Monticello Licensee Corporation) (Incorporated by reference to Exhibit 10.49 to Realogy Group LLC's (f/k/a Realogy Corporation's) Form 10-K for the year ended December 31, 2010). |
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10.47 | Note Purchase Agreement (Secured Variable Funding Notes, Series 2011-1) dated as of December 14, 2011, among Apple Ridge Funding LLC, Cartus Corporation, the commercial paper conduit purchasers party thereto, the financial institutions party thereto, the managing agents party thereto, and committed purchases and managing agents party thereto and Crédit Agricole Corporate and Investment Bank, as administrative and lead arranger (Incorporated by reference to Exhibit 10.60 to Registrants' Form 10-K for the year ended December 31, 2011). |
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10.48 | Amendment dated June 13, 2014 to the Note Purchase Agreement dated as of December 14, 2011, by and among Apple Ridge Funding LLC, Cartus Corporation, Realogy Group LLC, the managing agents, committed purchasers and conduit purchasers named therein, and Crédit Agricole Corporate and Investment Bank, as administrative agent (Incorporated by reference to Exhibit 10.1 to the Registrants' Form 10-Q for the three months ended June 30, 2014). |
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10.49 | Amendment dated November 10, 2014 to the Note Purchase Agreement dated as of December 14, 2011, by and among Apple Ridge Funding LLC, Cartus Corporation, Realogy Group LLC, the managing agents, committed purchasers and conduit purchasers named therein, and Crédit Agricole Corporate and Investment Bank, as administrative agent (Incorporated by reference to Exhibit 10.49 to Registrants' Form 10-K for the year ended December 31, 2014). |
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10.50 | Amendment to Note Purchase Agreement, dated as of June 1, 2016, among Apple Ridge Funding LLC, Cartus Corporation, Realogy Group LLC, the Managing Agents, Committed Purchasers and Conduit Purchasers, and Crédit Agricole Corporate and Investment Bank, as Administrative Agent (Incorporated by reference to Exhibit 10.1 to Registrants' Current Report on Form 8-K filed with the Securities and Exchange Commission on June 3, 2016). |
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10.51 | Series 2011-1 Indenture Supplement, dated as of December 16, 2011, between Apple Ridge Funding LLC and U.S. Bank National Association, as indenture trustee, paying agent, authentication agent, transfer agent and registrar, which modifies the Master Indenture, dated as of April 25, 2000, among Apple Ridge Funding LLC and U.S. Bank National Association, as indenture trustee, paying agent, authentication agent, transfer agent and registrar (Incorporated by reference to Exhibit 10.61 to Registrants' Form 10-K for the year ended December 31, 2011). |
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10.52 | Eighth Omnibus Amendment, dated as of September 11, 2013, among Cartus Corporation, Cartus Financial Corporation, Apple Ridge Services Corporation, Apple Ridge Funding LLC, Realogy Group LLC, U.S. Bank National Association, the managing agents party to the Note Purchase Agreement dated December 14, 2011 and Crédit Agricole Corporate and Investment Bank (Incorporated by reference to Exhibit 10.1 to Registrants' Current Report on Form 8-K filed on September 13, 2013). |
10.52 Series 2011-1 Indenture Supplement, dated as of December 16, 2011, between Apple Ridge Funding LLC and U.S. Bank National Association, as indenture trustee, paying agent, authentication agent, transfer agent and registrar, which modifies the Master Indenture, dated as of April 25, 2000, among Apple Ridge Funding LLC and U.S. Bank National Association, as indenture trustee, paying agent, authentication agent, transfer agent and registrar (Incorporated by reference to Exhibit 10.61 to Registrants' Form 10-K for the year ended December 31, 2011). G-6
10.53 TableEighth Omnibus Amendment, dated as of ContentsSeptember 11, 2013, among Cartus Corporation, Cartus Financial Corporation, Apple Ridge Services Corporation, Apple Ridge Funding LLC, Realogy Group LLC, U.S. Bank National Association, the managing agents party to the Note Purchase Agreement dated December 14, 2011 and Crédit Agricole Corporate and Investment Bank (Incorporated by reference to Exhibit 10.1 to Registrants' Current Report on Form 8-K filed on September 13, 2013). 10.54 Ninth Omnibus Amendment, dated as of June 11, 2015, among Cartus Corporation, Cartus Financial Corporation, Apple Ridge Services Corporation, Apple Ridge Funding LLC, Realogy Group LLC, U.S. Bank National Association, the managing agents party to the Note Purchase Agreement dated December 14, 2011 and Crédit Agricole Corporate and Investment Bank. (Incorporated by reference to Exhibit 10.1 to the Registrants' Current Report on Form 8-K filed on June 12, 2015).
10.55 Tenth Omnibus Amendment, dated as of June 9, 2017, among Cartus Corporation, Cartus Financial Corporation, Apple Ridge Services Corporation, Apple Ridge Funding LLC, Realogy Group LLC, U.S. Bank National Association, the managing agents party to the Note Purchase Agreement dated December 14, 2011 and Crédit Agricole Corporate and Investment Bank. (Incorporated by reference to Exhibit 10.1 to the Registrants' Current Report on Form 8-K filed on June 13, 2017).10.56 Eleventh Omnibus Amendment, dated as of June 8, 2018, among Cartus Corporation, Cartus Financial Corporation, Apple Ridge Services Corporation, Apple Ridge Funding LLC, Realogy Group LLC, U.S. Bank National Association, the managing agents party to the Note Purchase Agreement dated December 14, 2011 and Crédit Agricole Corporate and Investment Bank. (Incorporated by reference to Exhibit 10.1 to the Registrants' Current Report on Form 8-K filed on June 11, 2018). | |
10.53 | Ninth Omnibus Amendment, dated as of June 11, 2015, among Cartus Corporation, Cartus Financial Corporation, Apple Ridge Services Corporation, Apple Ridge Funding LLC, Realogy Group LLC, U.S. Bank National Association, the managing agents party to the Note Purchase Agreement dated December 14, 2011 and Crédit Agricole Corporate and Investment Bank. (Incorporated by reference to Exhibit 10.1 to the Registrants' Current Report on Form 8-K filed on June 12, 2015). |
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10.54 | Tenth Omnibus Amendment, dated as of June 9, 2017, among Cartus Corporation, Cartus Financial Corporation, Apple Ridge Services Corporation, Apple Ridge Funding LLC, Realogy Group LLC, U.S. Bank National Association, the managing agents party to the Note Purchase Agreement dated December 14, 2011 and Crédit Agricole Corporate and Investment Bank. (Incorporated by reference to Exhibit 10.1 to the Registrants' Current Report on Form 8-K filed on June 13, 2017). |
10.56*10.57 Twelfth Omnibus Amendment, dated as of June 7, 2019, among Cartus Corporation, Cartus Financial Corporation, Apple Ridge Services Corporation, Apple Ridge Funding LLC, Realogy Group LLC, U.S. Bank National Association, the managing agents party to the Note Purchase Agreement dated December 14, 2011, as amended, and Crédit Agricole Corporate and Investment Bank (Incorporated by reference to Exhibit 10.1 to the Registrants' Current Report on Form 8-K filed on June 7, 2019).10.58* Thirteenth Omnibus Amendment, dated as of December 6, 2019, among Cartus Corporation, Cartus Financial Corporation, Apple Ridge Services Corporation, Apple Ridge Funding LLC, Realogy Group LLC, U.S. Bank National Association, the managing agents party to the Note Purchase Agreement dated December 14, 2011, as amended, and Crédit Agricole Corporate and Investment Bank.
ExhibitDescription
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32.2* |
101 The following information from Realogy's Annual Report on Form 10-K for the fiscal year ended December 31, 2019, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) the Consolidated Balance Sheets as of December 31, 2019 and 2018; (ii) the Consolidated Statements of Operations for the years ended December 31, 2019, 2018 and 2017; (iii) the Consolidated Statements of Comprehensive (Loss) Income for the years ended December 31, 2019, 2018 and 2017; (iv) the Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2019, 2018 and 2017; (v) the Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017; and (vi) the Notes to the Consolidated Financial Statements. 104 Cover Page Interactive Data File (formatted in iXBRL and contained in Exhibit 101). |
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101.INS ^ | XBRL Instance Document. |
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101.SCH ^ | XBRL Taxonomy Extension Schema Document. |
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101.CAL^ | XBRL Taxonomy Extension Calculation Linkbase Document. |
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101.DEF ^ | XBRL Taxonomy Extension Definition Linkbase Document. |
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101.LAB ^ | XBRL Taxonomy Extension Label Linkbase Document. |
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101.PRE ^ | XBRL Taxonomy Extension Presentation Linkbase Document. |
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** | * Filed herewith. ** Compensatory plan or arrangement. |
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^ | Furnished electronically with this report. |
