Segment Overview
We report our operations in fourthree segments, each of which receives fees based upon services performed for our customers: Real Estate
•Realogy Franchise Services ("RFG"), Company Owned Real Estate Brokerage Services ("NRT"), Relocation Services ("Cartus®") and Title and Settlement Services ("TRG").
•Realogy Brokerage Group. Operates a new franchise brand, which has historically been operated solely as part of our company owned brokerage segment.
•Realogy Title Group. Provides full-service title, escrow and settlement services to our former 49.9% ownershipconsumers, real estate companies, corporations and financial institutions primarily in support of PHH Home Loans LLC ("PHH Home Loans"), our formerresidential real estate transactions. Our title insurance underwriter, Title Resources Guaranty Company, provides title underwriting services relating to the closing of home mortgagepurchases and refinancing of home loans, working with affiliated and unaffiliated agents. In the fourth quarter of 2021, the Company entered into a transaction pursuant to which it plans to sell the title insurance underwriter in exchange for cash and a 30% stake in the form of common units in a title insurance underwriter joint venture with PHH Mortgage Corporation ("PHH"), which was sold to PHH(which will indirectly own Title Resources Guaranty Company). The Company currently expects that this transaction will close in the first quarter of 2018. The Company's share2022, subject to the receipt of equity earningscertain regulatory approvals as well as the satisfaction or losses related to our 49.9% ownershipwaiver of Guaranteed Rate Affinity, LLC ("Guaranteed Rate Affinity"), our current mortgage origination joint venture, which began doing business in August 2017 on a phased-in basis, is included in the financial results of the Title and Settlement Services segment.
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 $100 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 2018. Our company owned brokerages and franchisees earned approximately $13$18 billion in gross commission income in the same period.2021, as compared to $14 billion in gross commission income in 2020.
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 20182021 increased modestly year-over-year to approximately 16.1%16.4% as compared to 15.9%approximately 15.3% in 2017. 2020.
Our estimated share of all U.S. existing homesale unit transactions in 2018 remained at2021 decreased slightly to approximately 13.5%.12.5% as compared to 12.6% in 2020.
Basis of Calculation
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 statementsownership reports for insiders as required by Section 16 of changes in beneficial ownership on Form 4 with the SEC.Securities Exchange Act of 1934. Such materials may 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$2.6 trillion industry based on 20182021 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, such as mortgage origination, title services and relocation 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 6.06.9 million homesales in the U.S. in 2018,2021, NAR estimates that approximately 5.36.1 million were existing homesales, representing approximately 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, approximately 87% of home buyers and 91%90% of home sellers used an agent or broker in 2018.2021. 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 sizevalue 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;
•the consumer preference to visit properties for sale in person, notwithstanding the availability of online images and property tours; and
•there is a high variance in price, depending on neighborhood, floor plan, architecture, fixtures, and outdoor space.
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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 1.9% from 1972 through 2018, with 29 annual increases, versus 17 annual decreases.
According to NAR, the existing homesale transaction volume (median homesale price times existing homesale transactions) grew at a CAGR of 7.1% from 1972 through 2018.6.5% 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 a recovery. Based upon data published by NAR from 2011 to 2018,2021, the number of annual U.S. existing homesale units and the median existing homesale price improved by 25%44% and 56%109%, respectively. However,
In 2020, in 2018connection with the COVID-19 pandemic, the U.S. residential real estate industry experienced significant volatility with a 16% decline in closed homesale transaction volume did not grow from 2017, driven(existing homesale average price times existing homesale transactions) in the second quarter of 2020 followed by a 3% year-over-year decline in homesale transactions to 5.3 million homes offset by a 3%29% increase in closed homesale transaction volume in the average homesale price.second half of 2020, in each instance as compared to the prior year according to NAR. While the industry improved markedly from the COVID-19 related low seen in the second quarter of 2020, we cannot predict the duration or continued strength of housing demand.
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 generational 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. We believe that the residential real estate market will benefit over the long-term from expected positive fundamentals, including expected growth in the number of U.S. households over the next decade, in particular among the millennial generation.
A continuation of beneficial consumer and business trends that gained momentum during the COVID-19 crisis (such as preferences for certain geographies, demand in the high-end market and the increasing ease and acceptance of remote work) may also have a positive impact on homesale transactions.
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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 minority-held joint ventures, including our mortgage origination 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 affinitylead generation 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 affinityreal estate benefit program 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 services 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. All four of our businesses and our mortgageminority-owned joint ventureventures 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.
Together with our strategic joint ventures, our brands allow us to leverage our strengths, while participating in multiple markets within the real estate industry. Specifically, while all of our brands compete to varying extents in the high-end markets, our Sotheby’s International Realty® and Corcoran® brands are particularly well-positioned to benefit from growth in the high-end. Likewise, while all of our brands utilize offerings through Realogy Title Group, our company owned Coldwell Banker® brand shares deep synergies with our title business and mortgage joint venture that allow us to progress against our goal to integrate the residential real estate transaction. In addition, our global franchise brands including, Better Homes and Gardens® Real Estate, CENTURY 21®, ERA®, and Sotheby’s International Realty® as well as franchised Coldwell Banker® brokerages, provide us with attractive scale and afford us the ability to offer versatility of choice to franchisees and consumers.
Our real estate franchise brands are listed in the following chart, which includes information as of December 31, 20182021 for both our franchised and company owned offices:
Franchise Brands (1) (2) |  |  |  |  |  | |||||||||
Worldwide Offices (3) | 9,600 | 3,200 | 2,300 | 1,000 | 360 | |||||||||
Worldwide Brokers and Sales Agents (3) | 127,500 | 94,200 | 40,300 | 22,600 | 12,100 | |||||||||
| U.S. Annual Sides | 393,184 | 709,117 | 128,416 | 123,113 | 76,844 | |||||||||
| # of Countries with Owned or Franchised Operations | 80 | 44 | 36 | 72 | 4 | |||||||||
| 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 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 Established global presence | Unique access to consumers, marketing channels and content through its brand licensing relationship with a leading media company | |||||||||
Brands (1) |  |  |  |  |  |  | |||||||||||||||||||||||||||||||||||||||||||||||
Worldwide Offices (2) | 14,200 | 2,800 | 1,000 | 2,400 | 400 | 200 | |||||||||||||||||||||||||||||||||||||||||||||||
Worldwide Brokers and Sales Agents (2) | 147,800 | 101,900 | 25,300 | 40,300 | 12,600 | 5,500 | |||||||||||||||||||||||||||||||||||||||||||||||
| U.S. Annual Sides | 377,898 | 753,355 | 173,108 | 113,862 | 88,980 | 26,969 | |||||||||||||||||||||||||||||||||||||||||||||||
| # of Countries with Owned or Franchised Operations | 85 | 41 | 79 | 33 | 5 | 4 | |||||||||||||||||||||||||||||||||||||||||||||||
| Characteristics | A 50+ year leader in brand awareness and a top recognized and respected name in real estate Significant international office footprint | The only real estate brand that has been guiding people home for 116 years | Synonymous with luxury Strong ties to auction house established in 1744 Powerful global presence | Driving performance through innovation, collaboration, diversity and growth Unique opportunity for flexible branding | Unique access to consumers, marketing channels and content through its brand licensing relationship with a leading media company | Leading residential real estate brand for nearly 50 years Commitment to white-glove service, customer-centric brand, and "Live Who You Are" philosophy | |||||||||||||||||||||||||||||||||||||||||||||||
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(1)Information presented for Coldwell Banker® includes Coldwell Banker Commercial®. (2)Includes information reported to us by independently owned franchisees (including approximately 15,200 offices and approximately 136,700 related brokers and independent sales agents of non-U.S. franchisees and franchisors). 9 Realogy Franchise Group Overview—Franchise Business Realogy Franchise Group is comprised of our franchise business as well as our leads generation and relocation services operation. As of |
As shown in the table above, as of December 31, 2021, independent sales agents affiliated with our company owned brokerages grew by 6% (based on the Company’s internal data) and independent sales agents affiliated with our franchised brokerages grew by 2% (based on information provided by our affiliated franchisees), in each case as compared to December 31, 2020.
The average tenure among our U.S. franchisees is approximately 23 years as of December 31, 2021. 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, training, education, learning and development to facilitate our franchisees in growing their business and increasing their revenue and profitability.
Our primary objectives as a franchisor of residential real estate brokerages are to retain and expand existing franchises, sell new franchises, and most importantly, provide branding and support (including via proprietary and third-party products and services) to our franchisees and their independent sales agents.
Operations—Franchising
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. 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 thatRoyalties are designedbased on a percentage of the franchisees’ sales commission earned from closed homesale sides, which we refer to help our franchisees serve their customers, attract new or retain existing independent sales agents, and support our franchisees with servicing programs, technology and education, as well as branding-related marketing which is funded through contributions by our franchisees and us (including NRT). 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.gross commission income.
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sides (either the "buy" side and/or the "sell" side of a real estate transaction) 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. TheRealogy Franchise Group's 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 or capped royalties) and net of non-standardother incentives granted to franchisees. Non-standard incentives may be used as consideration to attract new franchisees, grow franchisees (including through independent sales agent recruitment) or extend existing franchisee agreements, although such incentives are generally not available to most franchisees, in contrast to volume incentives. The domestic royalty revenue from NRT is calculated by multiplying homesale sides by average sale price by average brokerage commission rate by 6% royalty rate. NRT does not receive volume incentives or non-standard incentives.
In addition to domestic royalty revenue, RFGRealogy Franchise Group earns revenue from marketing fees, listing fees, the preferredstrategic alliance program, international affiliates and upfront international fees. The following chart illustrates the key drivers for revenue earned by RFG:
Domestic Franchisees. Franchise agreements set forth guidelines on the business and operations of the franchisees and require them to comply with the mandatory 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 franchiseesfranchisee to pay us an initial franchise fee for the franchisee's principal office plus upon the receipt of any commission income, a royalty fee that is a percentage of gross commission income, if any, earned by the franchisee. Franchisee fees can be structured in most casesnumerous ways and we have and may continue, from time to time, to introduce pilot programs or restructure or revise the model used at one or more franchised brands, including with respect to fee structures, minimum production requirements or other terms.
Certain of our brands utilize a volume-based incentive model with a royalty fee rate that is initially equal to 6% of theirthe franchisee's gross commission income. One exceptionincome, but subject to this flat 6% royalty fee structure is our Better Homes and Gardens® Real Estate franchise business, which launched a "capped fee model" on January 9, 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.reduction based upon volume incentives. 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. Our franchise systems offer a 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 (or in the case of Corcoran, a reduced royalty based upon volume).conditions. 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, theThe volume incentive varies for each franchise system, and will generally resultresults in a net or effective royalty rate of 6% to 3% for each individual franchisee. The volume incentive program is not offeredfranchisee (prior to Better Homes and Gardens® Real Estate capped model franchisees or Coldwell Banker Commercial® franchisees.
taking into account other incentives that may be applicable to the franchisee). 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.
Certain franchisees (including some of our largest franchisees) have a flat percentage royalty fee model. Under this model, franchisees pay a fixed percentage (generally less than 6%) of their commission income to us and the percentage does not change during the year or over the term of their franchise agreement. Franchisees on this model are generally not eligible for volume incentives.
Our company owned brokerage offices doBetter Homes and Gardens® Real Estate franchise business utilizes a capped fee model, which has applied to any new franchisee since 2019 as well as preexisting franchisees who elect to switch from their current royalty fee structure to the capped fee model. Under this 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 agent cap. Franchisees on this model are generally not participateeligible for volume incentives.
Our Corcoran franchise business utilizes a tiered royalty fee model under which franchisees pay us a percentage of their gross commission income as a royalty fee. The royalty fee percentage is generally set at an initial rate of 6% and decreases in steps during each calendar year as the franchisee’s gross commission income reaches certain levels to a minimum of 4%. Similarly, our Coldwell Banker residential franchise business began offering a tiered royalty fee model in 2021, under which the royalty fee percentage is generally set at an initial rate of 5.5% and decreases in steps during the calendar year as the franchisee’s gross commission income reaches certain levels to a minimum of 3%. Under this model, we reserve the right to annually modify or increase the gross commission income levels, subject to certain limitations. Franchisees on the tiered royalty fee model are generally not eligible for volume incentive program.
incentives.
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agent recruitment) or extend existing franchise agreements. Under certain circumstances, we extend conversion notes 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 franchiseesFranchisees may also use the proceeds from the conversion notes to update marketing materials or upgrade technology and websites, or to assist in acquiring companies or recruiting agents.websites. 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.
Each of our current franchise systems require franchisees and company owned brokerages 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 (other than with respect to company owned brokerages). 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, in certain instances, Realogy Franchise Group may be required to make contributions to certain marketing funds and may make discretionary contributions (at its option) to any of the marketing funds.
In addition to offices owned and operated by our third-party franchisees, as of December 31, 2018,2021, we, through NRT,Realogy Brokerage Group, own and operate approximately 710680 offices under the Coldwell Banker®, Coldwell Banker Commercial®and , Sotheby's International Realty® and Corcoran®brand names. NRTThe domestic royalty revenue from Realogy Brokerage Group is calculated by multiplying homesale sides by average sale price by average brokerage commission rate by their contractual royalty rate. Realogy Brokerage Group pays intercompany royalty fees of approximately 6% 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. Realogy Brokerage Group does not participate in volume incentive or other incentive programs.
International Third-Party Franchisees. In the U.S., we employ a direct franchising model whereby we contract with and provide services directly to independent owner-operators. We also utilize a direct franchising model outside of the U.S. for Sotheby's International Realty® and Corcoran® and, in some cases, Better Homes and Gardens® Real Estate®.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. Under both the direct and the master franchise modelmodels 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 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. Our license agreement 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
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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.
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.Meredith Operations Corporation, successor in interest to Meredith Corporation ("Meredith Ops"). The license agreement between Realogy and Meredith Ops is for a 50-year term, with a renewal option for another 50 years at our option. We pay a licensing fee to Meredith Ops 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 SegmentGroup attributable to franchisees affiliated with the Better Homes and Gardens® Real Estate brand, subject to a minimum annual licensing fee.
Operations—Other
Lead Generation Programs. Through Realogy Leads Group, a part of this Annual Report.Realogy Franchise Group, we seek to provide high-quality leads to affiliated agents, including through real estate benefit programs that provide home-buying and selling assistance to customers of lenders, members of organizations such as credit unions and interest groups that have established members who are buying or selling a home as well as to consumers and corporations who have expressed interest in a certain brand, product or service (such as relocation services), including those offered by Realogy. Where permitted by law, consumers participating in certain real estate benefit programs can receive a financial benefit for using these services (such as cash or a gift card, or real estate brokerage commission credit based on the home purchase/sale price pursuant to the applicable program). Realogy Leads Group also operates our broker-to-broker business, pursuant to which brokers affiliated with one of our customized agent and brokerage networks refer business to other in-network brokers.
To service the needs of consumers and clients participating in one of our real estate benefit programs (including our relocation program with Cartus Relocation Services) or engaged through a broker-to-broker lead, we manage customized agent and brokerage networks. Our networks consist of real estate brokers, including our company owned brokerage operations, as well as franchisees and independent real estate brokers who have been approved to become members of one or more networks. Member brokers of our networks receive leads from our real estate benefit programs (including via our relocation program with Cartus Relocation Services) and each other in exchange for a commission split paid to Realogy Leads Group.
Cartus Relocation Services. Cartus Relocation Services, a provider of global 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 employee and employer. The wide range of services we offer allow our clients to outsource their entire relocation programs to us. Our broad array of services include, but are not limited to homesale assistance, relocation policy counseling and group move management services, expense processing and relocation-related accounting, and visa and immigration support. We also arrange household goods moving services and provide support for all aspects of moving a transferee's household goods.
We primarily offer corporate clients employee relocation services, including 42% of the Fortune 50 companies in 2021. As of December 31, 2021, the top 25 relocation clients had an average tenure of approximately 23 years with us. Substantially all of our contracts with our relocation clients are terminable at any time at the option of the client and are 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.
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There are a number of different revenue streams associated with relocation services. We earn a commission split 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. Furthermore, Cartus Relocation Services continues to provide value through the generation of leads to real estate agent and brokerage participants in the networks maintained by Realogy Leads Group, which drives downstream revenue for our businesses.
Strategic Alliance Program. We offer third-party service providers an opportunity to market their products to our franchisees and their independent sales agents and customers through our strategic 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 strategic alliance vendors.
Realogy Brokerage ServicesGroup
Overview
Through our subsidiary, NRT,Realogy Brokerage Group we own and operate a full-service real estate brokerage business in many of the largest metropolitan areas in the U.S. Our brokerage 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. Our company owned real estate brokerage business operates under the Coldwell Banker®and, Sotheby's International Realty® and Corcoran®franchised brands as well as proprietary brands that we own, but do not currently franchise, such as Corcoran®,Climbbrands. This segment also includes our share of equity earnings or losses from our RealSure and Real Estate®, ZipRealty®and Citi HabitatsSM (although we launched franchise sales of Corcoran® in January 2019). Auction joint ventures.
As of December 31, 2018,2021, we had approximately 760680 company owned brokerage offices approximately 4,900 employees and approximately 50,20056,300 independent sales agents working with these company owned offices. Of those offices, we operated approximately 90% of our offices under the Coldwell Banker®brand name, approximately 6% of our offices under the Sotheby's International Realty®brand name and 4% of our offices under the Corcoran® brand name.
We intend to grow our business both organically and through strategic acquisitions. To grow organically, we focus on working with office managers to attract and retain independent sales agents who can successfully engage and promote transactions from new and existing clients. Following the completion of an acquisition, we tend to consolidate the newly acquired operations with our existing operations to reduce or eliminate duplicative costs and to leverage our existing infrastructure to support newly affiliated independent sales agents.
Operations—Brokerage
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, 2018,2021, our average homesale broker commission rate was 2.43%2.42% 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 marketing fees and a royalty fee of approximately 6% of the gross commission income earned per real estate transaction to RFG fromRealogy Franchise Group; however such amounts are eliminated in consolidation. Realogy Brokerage Group paid marketing fees and royalties to Realogy Franchise Group of $407 million and $316 million for the commission earned on a real estate transaction. years ended December 31, 2021 and 2020, respectively.
The remainder of gross commission income is split between the broker (NRT)(Realogy Brokerage Group) and the independent sales agent. The following chart illustratesagent in accordance with their applicable independent contractor agreement (which specifies the key drivers for revenue earnedportion of the broker commission to be paid to the agent), which varies by NRT:
In addition, as a full-service real estate brokerage company, we promote the complementary services ofoffered through our relocation andother segments, including title, escrow and settlement, services businesses.mortgage origination and relocation services. 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
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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.
Operations—Other
RealSure Joint Venture. RealSure products and services are offered through RealSure LLC, or RealSure, our joint venture with Home Partners of America. RealSure was formed in 2020 following a pilot launch of similar products in 2018 by Realogy and Home Partners of America.
Under the Operating Agreement (the "RealSure Agreement") between Realogy Brokerage Group and an indirect wholly-owned subsidiary of Home Partners of America (the "HPA Member"), we own 49% of the joint venture and Home Partners of America indirectly owns the remaining 51%. While we have certain governance rights, we do not have a controlling financial or operating interest in the joint venture. Our share of equity earnings or losses are included in Realogy Brokerage Group.
RealSure offers RealSure® Sell in 24 U.S. cities as of December 31, 2021 and, in the fourth quarter of 2021, launched a pilot program for a new offering called RealSure® Buy in three U.S. cities, with plans to expand the offering in certain states in 2022. These offerings are designed to offer home buyers and sellers options that give them a competitive edge when buying or selling a home, while also keeping the expertise of an independent sales agent at the center of the transaction. RealSure highlights our continued investment in innovating and improving the experience of buying and selling homes and aims to provide affiliated agents and franchise owners the opportunity to win more listings and drive incremental business. RealSure expects to introduce additional products over time aimed at reducing stress and removing barriers to buying and selling. The Company expects to continue to invest in the RealSure joint venture as a strategic growth priority and competitive advantage.
Subject to certain exceptions, until the later of December 31, 2022 or 90 days after the date on which the applicable member no longer owns any membership interests, none of Realogy Brokerage Group, the HPA Member or any of their respective affiliates (other than RealSure) are permitted to offer products or services in the United States that are substantially similar to the RealSure programs. Similar exclusivity provisions applicable to RealSure expire on June 5, 2022.
Either Realogy Brokerage Group or the HPA Member can dissolve RealSure upon the occurrence of certain events, including upon bankruptcy, certain change in control events, or the material breach of the RealSure Agreement or certain related agreements between the parties. In addition, the joint venture would be dissolved upon agreement of the parties or in the event that the parties were unable, following good faith negotiations, to break a voting deadlock related to certain matters, and neither party elected to initiate buy/sell procedures. Such matters include without limitation the parties’ inability to approve an annual business plan.
Real Estate Auction Joint Venture. This segment also includes our 50% share of equity earnings or losses from our unconsolidated joint venture with Sotheby’s. The joint venture, formed in 2021, holds an 80% ownership stake in Concierge Auctions, a global luxury real estate auction marketplace that partners with real estate agents to host luxury online auctions for clients. This joint venture supports our strategic growth initiatives in the high-end real estate markets and serves as an additional tool for agents to market and sell unique luxury properties around the world. While we have certain governance rights, we do not have a controlling financial or operating interest in the joint venture.
Realogy Title Group
Overview
In 2021, Realogy Title Group consisted of three primary businesses: a title agency business that conducts title, escrow and settlement services, a title underwriting business and the Company's share of equity earnings and losses from its minority interest in a non-exclusive mortgage origination joint venture. In the fourth quarter of 2021, we entered into a transaction pursuant to which we plan to sell our title underwriting business, Title Resources Guaranty Company ("Title Resources"), in exchange for cash and a 30% equity interest in a title insurance underwriter joint venture (see "Title Underwriting" below for additional information).
We intend to grow our business organically. To grow organically, we focus on working with office managers to attract and retain independent sales agents who can successfully engage and promote transactions from new and existing clients. To complement our 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.
Operations
Title Agency, or Title, Escrow 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.Settlement Services. We are licensed as a title agent in 4244 states and Washington, D.C., and have physical locations in 20 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 3524 states and Washington, D.C. We operate mostly in major metropolitan areas. As of December 31, 2018,2021, we had approximately 400392 offices, approximately 200166 of which are co-located within one of our company owned brokerage offices. In addition to our own title, escrow and settlement services, we also coordinate a nationwide network of attorneys, title agents and notaries to service financial institution clients on a national basis.
Our title, escrow and settlement services business provides full-service title, escrow and settlement (i.e., closing and escrow) services to consumers, real estate companies, corporations and financial institutions with many of these services provided in connection with the Company's real estate brokerage and relocation services businesses. We provide closing and escrow services relating to the closing of home purchases and refinancing of home loans. For refinance transactions, we generate title and escrow revenues from financial institutions throughout the mortgage lending industry.
Our company owned brokerage operations are the principal source of our title, escrow and settlement services business for homesale transactions. Many of our offices have subleased space from and are co-located within our company owned brokerage offices. In 2021, our title, escrow and settlement business was involved in approximately 220,000 transactions of which approximately 59,000 related to Realogy Brokerage Group. The capture rate of our title, escrow and settlement services business from buyers or sellers represented by our company owned brokerages was approximately 32% in 2021. Other sources of our title, escrow and settlement services homesale business include Realogy Franchise Group, Realogy Leads Group, home builders and unaffiliated brokerage operations.
We provide our title, escrow and settlement services through a national network of escrow and closing agents (some of whom are our agencies, while others are attorneys in private practice and independent title companies) to provide full-service title, escrow 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.
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 generally determined by agreement between the agency and underwriter orand, in some states, 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, including Title Resources, 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.
Title Insurance Underwriter. Title Resources is a title insurance underwriter licensed in 37 states and Washington, D.C. In 2021, Title Resources worked with both unaffiliated and affiliated title agencies to provide title underwriting services relating to the closing of home purchases and refinancing of home loans.
In the fourth quarter of 2021, we entered into a strategic transaction with Centerbridge Partners, L.P. ("Centerbridge") pursuant to which we plan to sell Title Resources in exchange for cash and a 30% equity stake in the form of common units in a title insurance underwriter joint venture (which will indirectly own Title Resources). Our joint venture partners will hold the remaining 70% equity stake in the joint venture in the form of preferred units that carry liquidation preference rights. Following close of the sale transaction, we will have certain governance rights, but we will not have a controlling
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financial or operating interest in the joint venture. Our share of equity earnings and losses for our minority interest in the joint venture will be reported in Realogy Title Group. We currently expect that this transaction will close in the first quarter of 2022, subject to the receipt of certain regulatory approvals as well as the satisfaction or waiver of other customary closing conditions.
Other Revenue. Other revenue generated by our title agency business includes closing protection letters, title searches, survey business, tax search, wire fees, and other fees ancillary to their services.
Mortgage Origination Joint Venture. Guaranteed Rate Affinity, our non-exclusive mortgage origination joint venture with Guaranteed Rate, Inc. ("Guaranteed Rate") began doing business in August 2017. Guaranteed Rate Affinity originates mortgage loans, including both purchase and refinancing transactions, to be sold in the secondary market to mortgage companies and the government-sponsored enterprises. Guaranteed Rate Affinity originates and markets its mortgage lending services to real estate agents across the country (including to independent sales agents affiliated with our company owned brokerage operationsand franchised brokerages) and relocation companies (including our relocation operations) as well as a broad consumer audience. Our equity earnings or losses related to Guaranteed Rate Affinity are included in the principal sourcefinancial results 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. For refinance transactions, we generate title and escrow revenues from financial institutions throughout the mortgage lending industry. Realogy Title Group, but are not reported as revenue to Realogy Title Group.
Many of ourGuaranteed Rate Affinity’s 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 fromOur company owned brokerage operations wasrepresented approximately 37% in 2018.
Under the Operating Agreement (the "GRA Agreement") between a subsidiary of Realogy Title Group and a subsidiary of Guaranteed Rate that began doing business on a phased-in basis in August 2017, are included in (the financial results of TRG. We"GRA Member"), we own 49.9% of the home mortgage joint venture and Guaranteed Rate indirectly owns the remaining 50.1%. Under the GRA Agreement, Guaranteed Rate Affinity is to distribute to each of the Company and Guaranteed Rate the distributable net income based on each member's ownership interest percentage following the close of each quarter. While we have certain governance rights, we do not have a controlling financial or operating interest in the joint venture. Guaranteed Rate Affinity is licensed to conduct mortgage operations in 49 states and Washington, D.C.
The GRA Agreement is for an initial 10-year term (ending August 2027) and automatically renews for additional 5 year terms, unless either party provides advance notice to terminate, provided that if certain performance metrics are achieved after the fifth year of the agreement, the first 5-year extension is not subject to termination upon advance notice. Either party can terminate the GRA Agreement upon the occurrence of certain events including, but not limited to, a change in control of the other member, subject to certain exceptions, or upon material breach by the other member not remediated within the cure period. We have certain additional performance-based termination rights.
The GRA Agreement does not prohibit Guaranteed Rate, directly or indirectly through joint ventures, from operating its separate mortgage origination business in locations where Guaranteed Rate Affinity and its subsidiaries will have offices and does not limit the Company, Guaranteed Rate, or either of their subsidiaries from operating non-mortgage origination lines of business in locations where Guaranteed Rate Affinity operates. In addition, the Company is permitted to have ventures with other mortgage loan originators, but Guaranteed Rate has a 30-day right-of-first-refusal to acquire any mortgage origination business that we intend to acquire.
Our ability to provide independent sales agents at company owned and franchised brokerages with compelling data and technologytechnology-powered products and services to make them more productive and their businesses more profitable is core to our integrated business strategy.
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 technologytechnology-powered products and serviceservices is part of our value proposition to 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 as an integrated tool,set of tools, rather than stand-alone products and services.
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Products and Technology
We continue to develop product and marketing capabilities against the backbone of an open ecosystem architecture approach, which is designed to support the continuous creation and delivery of both our proprietary tools and third-party products to affiliated independent sales 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 configurable technology platform to drive their performance and productivity.
Our open ecosystem is designed to offer affiliated independent sales agents and brokers seamless access to third-party products, enabling choice among such agents and brokers to leverage the mix of tools that best serve their needs. In 2021 we began rolling out the MoxiWorks® product suite to company owned and franchised brokerages and their affiliated independent sales agents. The MoxiWorks® product suite includes solutions for marketing, recruiting and website creation and leverages our open technology ecosystem to provide an integrated experience including with our proprietary leads engine that enables lead routing to affiliated independent sales agents.
We have expended,invested, and expect to continue to expend,invest, substantial time, capital, and other resources to identify the needs of company owned brokerages, franchisees, independent sales agents and their customers and to develop or procure marketing, technology and service offerings to meet the needs of affiliated independent sales agents. We are now building our agent- and franchisee-focused technologyExamples of technology-driven products with an open architecture in orderavailable to enable third-party vendors and products to access and interface with our products.
•RealSure® Sell is accomplisheddesigned to provide consumers with a competitive cash offer for their home alongside the option to list their home with a trusted sales agent. Home sellers that accept the cash offer from RealSure have the flexibility to stay in their home for a limited period after closing. RealSure Sell is available in 24 U.S. cities as of December 31, 2021. In the fourth quarter of 2021, RealSure® Buy was launched in three pilot cities in the U.S. RealSure Buy is designed to provide home buyers a competitive edge and home sellers more certainty by providing qualified buyers the opportunity to work with a loan officer to remove the risk of mortgage-related financing and appraisal contingencies to make their offers equivalent to a cash offer.
•RealVitalize® enables home sellers to make their property ready for sale by providing resources to fund staging and home improvements with no up-front cost via a proprietary consumer program offered in partnership with Angi. RealVitalize is available nationally through participating Realogy company-owned and franchise brokerages, with the exception of Rhode Island, Delaware, Louisiana, North Dakota and South Dakota as of December 31, 2021.
•Listing ConciergeSM, a varietyproprietary property marketing product, allows agents affiliated with Coldwell Banker company owned brokerages and certain franchisees to access a simple-to-use platform that delivers creative, consistent property marketing.
•Design ConciergeSM, a proprietary agent branding and custom design product, allows agents affiliated with Coldwell Banker to work with the Design Concierge team to create their own complementary personal brand.
Our Realogy-provided platform is designed to increase the value proposition to our independent sales agents, franchisees (and their independent sales agents) and consumers by:
•aiding in lead generation and obtaining additional homesale transactions;
•connecting affiliated agents and brokers to a CRM tool that allows for the cultivation of media,productive relationships with consumers at all stages of the transaction;
•enhancing access to listing distributions through mobile applications and websites;
•informing affiliated agents of valuable client insight to help those agents increase their productivity;
•providing consumers with a streamlined yet comprehensive user experience to facilitate the necessary steps for researching homes, communities and independent sales agents;
•providing key back office processes, including but not limited to social media, advertising, directlisting and transaction management, reporting, marketing, and internet advertising.agent profiles; and
•delivering business planning tools that enable our franchisees to track their progress against key business objectives in real time.
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The COVID-19 crisis has accelerated the need for, and adoption of, digital and virtual products and services that facilitate a remote home buying and selling experience. Our brands and businesses have access to a range of tools to assist consumers with virtual staging, virtual open houses, and remote online notarization for title, escrow and settlement closings.
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. Advertising is primarily used by the brands to drive leads to ouraffiliated agents, increase brand awareness and perception, promote our network and offerings to the real estate industry and engage our customer base.
•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.
Listings and Websites
The Internet has becomeinternet is 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 transmit listings to various platforms and services, place our property listings on hundreds of real estate websites, and we operate a variety of our own websites. We 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 websites to make the listings more attractive to consumers.
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 instructorsEngagement modules may be delivered at conventions and orientation seminars, deliver some engagement modules while other modules can be viewed by brokers anywhere in the worldincluding virtual conventions and seminars, or through virtual classrooms over the Internet.classrooms. 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.
Human Capital Resources
Employees.Our employees are critical to the success of our business strategy. Our team includes a broad range of professionals, given the breadth of services offered by our three business segments and Corporate. The wide array of skills, experience and industry knowledge of our key employees significantly benefits our operations and performance.
At December 31, 20182021, we had approximately 11,400approximately 9,665 full-time employees including approximately 855and 165 part-time employees. At December 31, 2021, approximately 585 of our employees were located outside of the U.S., almost all of whom were employed by Cartus Relocation Services (a part of Realogy Franchise Group).
None of our employees are represented by a union. Employment relationships in Brazil (where we had less than 10 employees at December 31, 2021) are governed by rules set forth under collective bargaining agreements.
Engagement. To assess and improve employee retention and engagement, we annually survey employees with the assistance of third-party consultants and implement actions to address areas of employee feedback. In 2021, we achieved a 91% engagement score and an 89% response rate.
Training. All employees are required to participate in annual training programs designed to address subjects of key importance to our business, including the Company’s Code of Ethics. 100% of active employees in each of the past three years have completed our annual Code of Ethics training. Code of Ethics training in 2021 covered topics such as respect in the workplace, integrity and honesty, and compliance with RESPA and anti-corruption laws. Other mandatory training in 2021 included Global Information Security and Information Management, given the critical nature of these topics to our business. Biennially, employees are also required to complete a training module focused on the U.S. Fair Housing Act and annually, a training module on unconscious bias is required for all people managers. In 2021, all employees were required to complete unconscious bias training. The U.S. Fair Housing Act online module, as well as in-person training sessions related to local fair housing laws, are also made available to independent sales agents affiliated with our company owned and franchise brokerages. In 2021, we made our Fair Housing training available on a customized basis to diversity industry partners, including the National Association of Hispanic Real Estate Professionals, Asian Real Estate Association of America, National Association of Minority Mortgage Professionals, and LGBTQ+ Real Estate Alliance. Additional mandatory training (such as sexual harassment training) is delivered based upon the employee position or local requirements.RealU, our learning and development platform, offers employees additional resources to continue to grow professionally, including access to on-demand training through LinkedIn learning and tools for career management.
Health & Safety. The protection of the health and safety of our employees is a Company priority. Throughout the COVID-19 crisis we have worked to comply with state and local regulators to ensure safe working conditions for our employees. In 2020, we began planning the transformation of our corporate headquarters to an open-plan innovation hub, which is slated for completion in 2022. We have streamlined our headquarters footprint to one floor that is designed to welcome approximately 200 transitional employees each day, instead of the approximately 1,000 employees designated to static spaces in the traditional office. At December 31, 2021, approximately half of our employees worked remotely on a full-time basis, other employees, in particular consumer-facing employees at our company owned brokerages, were operating in an office-based environment, while other employees remained on a hybrid model. We continue to monitor the COVID-19 crisis and are prepared to pivot as needed for the health and safety of our employees.
Diversity, Equity and Inclusion. Since our inception, Realogy has had a focus on diversity to improve representation and foster inclusion through employee and business resource groups across the enterprise. Employee Resources Groups (“ERGs”) promote an inclusive culture throughout the organization. At December 31, 2021, we had eight active ERGs—Asian and Pacific Islander Alliance, ACE (African-American and Caribbean), ONEVOZ (Hispanic & Latino), NextGen, REALDisabilities, RealPride, SERVICE (Veterans) and Women's—across the Company. Improving ethnic and racial representation remains a priority and a key performance objective for senior leadership.
Independent Sales Agents.As noted elsewhere in this Annual Report, the successful recruitment and retention of independent sales agents and independent sales agent teams are critical to the business and financial results of our company owned brokerage operations. Additional information about the base of independent sales agents affiliated with company owned brokerages as well as franchisees is located in this Item 1. under "Realogy Franchise Group—Overview."
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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. Although industry seasonality experienced volatility in 2020 and 2021, we believe that the industry will begin to realign with historical seasonality patterns in 2022.
Competition
Real Estate Brokerage Industry. 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 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), consumer preferences, the numberlocation of offices and nature of competing offices intarget markets, the vicinity,services provided to independent sales agents, affiliation with a recognized brand name, community reputation, technology and other factors, including macro-economic factors such as national, regional and local economic conditions. In addition, the legal and regulatory environment as well as the rules of NAR, industry associations and MLSs can impact competition. See "Government and Other Regulations" below.
We and ouraffiliated 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, non-traditional market participants, and with franchisees of our brands. Our largest national competitors in this industry include, but are not limited to, HomeServices of America (a Berkshire Hathaway affiliate), Howard Hanna Holdings, EXP Realty (a subsidiary of eXp World Holdings, Inc.), Compass, Inc., Redfin Corporation 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(operates Berkshire Hathaway HomeServices and Real Living Real Estate) and @properties. We and affiliated franchisees also compete with leading listing aggregators, such as Zillow, Inc. and Realtor.com® (a listing aggregator held by News Corporation). In addition, we and affiliated franchisees compete for consumer business with newer industry participants, including iBuying models such as Opendoor and Offerpad.
Competition for Independent Sales Agents. Agents. The successful recruitment and retention of independent sales agents and independent sales agent teams areis critical to the business and financial results of a brokerage—traditional brokerages—whether or not it isthey are affiliated with a franchisor. Competition for productive independent sales agents in our industry is high.
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 and other company-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. The successfulMany factors impact recruitment and retention of independent sales agents is influenced by many factors,efforts, 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, the location and quality of office space, as well as technology, 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 increasingly impacted our recruitment and retention of top producing agents and put upward pressure on the average share of commissions earned by affiliated independent sales agents, includingagents. Such factors include increasing competition, such as from brokerages that offer a greater shareincreasing levels of commission incomecommissions paid to independent sales agents (including up-front payments and equity), changes in the spending patterns of independent sales agents (as more agents purchase services from third parties outside of their affiliated broker), a heightening focus on leads or business opportunities generated for the independent sales agent from the brokerage, differentiation in the bundling of agent services or industry offerings (including virtual brokerages or other brokerages that offer the sales agent fewer services, but a higher percentage of commission income, or other compensation, such as sign-on or equity awards), and the growth in independent sales agent teams. Certain of our privately-held competitors have investorsCompetition comes from newer models as well, including brokerages that appearprovide certain services to be supportive of a model that pursues increases in market share over profitability, which exacerbates competition for independent sales agents and pressureagent teams, but with branding focused on the sharename of commission income received by the agent creating challenges to our and our franchisee’s margins and profitability.or agent team, rather than the brokerage brand.
Commission Plan Competition Among Real Estate Brokerages.Brokerages.Some of the firms 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
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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(sometimes referred to as a 100% commission plan,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.
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 historichistorical real estate brokerage models and those pursuing alternative variations of those models (including virtual brokerages and brokerages that offer the sales agent fewer services, but a higher percentage of commission income) 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.
(such as iBuyers). 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 suchThe significant size of the U.S. real estate market has continued to attract outside capital investment in disruptive and traditional competitors have yetthat seek to haveaccess a material impact on overall brokerage commission rates,portion of this could changemarket. These competitors and their investors may pursue increases in the future if they use greater discounts as a means to increase their market share or improve their value proposition.over profitability, further complicating the competitive landscape.
Non-Traditional Competition and Industry Disruption. While real estate brokers using historichistorical real estate brokerage models typically compete for business primarily on the basis of services offered, brokerage commission, reputation, utilization of technology and 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 historichistorical real estate brokerage models or minimize or eliminate the role brokers and sales agents perform in the homesale transaction process. process and/or shift the nature of the residential real estate transaction from the historic consumer-to-consumer model to a corporate-to-consumer model.
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, virtual brokerage models directly compete with traditional brokerage models and may dilute the relationship between the brokerage and the agent. In addition, we believe certain alternative transaction models, such as iBuying and home swap models (and related models that help buyers compete as cash buyers), are less reliant on brokerages and sales agents, which could have a negative impact on such brokerages and agents as well as on the average homesale broker commission rate. These models also look to capture ancillary real estate services such as title and mortgage services and referral fees. RealSure offers consumers alternatives to such models through products and services designed to offer home buyers and sellers options that give them a competitive edge when buying or selling a home, while also keeping the expertise of an independent sales agent at the center of the transaction. Changes to industry rules and/or the introduction of disruptive products and services may also result in an increase in the number of transactions that do not utilize the services of independent sales agents, including for sale by owner 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, but not limited to, setting up competing brokerages and/or expanding their offerings to include products (such as agent tools) and other web-basedservices ancillary to the real estate service providers not onlytransaction, such as title, escrow and mortgage origination services, that compete forwith services offered by us, charging significant referral, 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. Aggregators could intensify their current business tactics or introduce new programs that could be materially disadvantageous to our business and other brokerage business by establishing relationships withparticipants in the industry and such tactics could further increase pressures on the profitability of our company owned and franchised brokerages and affiliated independent sales agents, and/orreduce our franchisor service revenue and dilute our relationships with affiliated franchisees and such franchisees' relationships with affiliated independent sales agents and buyers and sellers of homes, they also increasingly charge brokerages and independent sales agents additional fees for new and existing services. Other business models that have emerged in recent years consisthomes.
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Franchise Competition. Competition.According to NAR, approximately 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. 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 volume and other incentives, flat royalty and marketing fees, capped royalty fees, and discounted royalty and marketing fees. In order to remain competitive, we may need to modify the traditional volume-based franchise model utilized by many of our brands. We recently 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. Taking into account competitive factors, we have and may continue, from time to time, to introduce pilot programs or restructure or revise the model used at one or more franchised brands, including with respect to fee structures, minimum production requirements or other terms.
Leads Generation Business. The ability of a brokerage, whether company owned or franchised, to provide its independent sales agents with high-quality leads is increasingly important to the recruitment and retention of independent sales agents and sale agent teams and the attraction and retention of franchisees. Numerous companies that market and sell residential real estate leads to independent sales agents, including listing aggregators, compete with our real estate benefit programs and other lead generation programs.
Relocation Business. Operations.Competition in our corporate relocation businessoperations is based on capabilities, price and quality. We compete primarily with global outsourced and regional relocation services providers in the corporate relocation business.operations. The larger outsourced relocation services providers that we compete with include BGRS, SIRVA, Inc. and, BGRS, Weichert Relocation Resources, Inc., Aires and Graebel Companies, 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 SettlementAgency Business. The title, escrow and settlement services business is highly competitive.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 competeour title agency business competes 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,
Integrated Services and Ancillary Services.Increasingly residential real estate market participants have sought to establish more integrated business models that include the provision of ancillary services to the consumer, such as title agency, mortgage origination and underwriting. Similarly, certain mortgage origination providers seek to broaden their access to the profit pools surrounding the residential real estate transaction, including real estate brokerage commissions. Some mortgage companies have created their own agent networks and may expand further into real estate. These factors have resulted in additional competitive pressure to our individual business units as well as the Company as a whole.
For additional information on the competitive risks facing our businesses, see "Item 1A.—Risk Factors—Strategic & Operational Risks", in particular under the caption "The businesses in which we, compete with the various brands of national competitors including Fidelity National Title Insurance Company, First American Title Insurance Company, Stewart Title Guaranty Companyour joint ventures, and Old Republic Title Company.our franchisees operate are intensely competitive."
Government and Other Regulations
For a summary of certain legal proceedings in which Realogy is a named defendant see Note 14, "Commitments and Contingencies", in this Annual Report. For additional information with respect to related risks facing our business, see "Item 1A. Risk Factors," in particular under the heading "Regulatory and Legal Risks", in this Annual Report.
Legal and Regulatory Environment. All of our businesses, as well as the businesses of our joint ventures (such as mortgage origination, RealSure and real estate auction) and the businesses of our franchisees are highly regulated and subject to shifts in public policy, statutory interpretation and enforcement priorities of regulators and other government authorities as well as amendments to existing regulations and regulatory guidance. Likewise, litigation, investigations, claims and regulatory proceedings against other participants in the residential real estate industry or relocation industry—or against companies in other industries—may impact the Company and its affiliated franchisees when the rulings or settlements in those cases cover practices common to the broader industry or business community and may generate litigation or investigations for the Company. In addition, through our subsidiaries, employees and/or affiliated agents, we are a participant in many multiple listing services ("MLSs"), a member-owner of certain MLSs, and a member of the National Association of Realtors ("NAR") and respective state realtor associations. The rules and policies for these organizations are also subject to change due to shifts in internal policy, regulatory developments, litigation or other legal
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action. Changes in the rules and policies of NAR and/or any MLSs can also be driven by changes in membership, including the entry of new industry participants, and other industry forces.
From time to time, certain industry practices have come under federal or state scrutiny or have been the subject of litigation. The industry is currently experiencing increased scrutiny by regulators and other government offices, both on a federal and state level. Three of the more active areas of in our industry have been antitrust and competition, compliance with RESPA (and similar state statutes) and worker classification. Other examples include, but are not limited to, consumer protection, mortgage lending and debt collection laws, federal and state fair housing laws, various broker fiduciary duties, false or fraudulent claims laws, and state laws limiting or prohibiting inducements, cash rebates and gifts to consumers.
Antitrust, Competition and Bribery 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.
In July 2021, the Department of Justice (“DOJ”) filed a notice of withdrawal of consent to its November 2020 proposed consent decree with NAR to settle a civil lawsuit in which the DOJ alleged that NAR established and enforced illegal restraints on competition in the real estate industry. The DOJ also filed to voluntarily dismiss the civil lawsuit without prejudice in July 2021, stating in a concurrently filed press release that “[t]he department determined that the [November 2020] settlement will not adequately protect the department’s rights to investigate other conduct by NAR that could impact competition in the real estate market…” The DOJ further noted in its press release that it “is taking this action to permit a broader investigation of NAR’s rules and conduct to proceed without restriction.” Although we were not a party to or a participant in the DOJ’s civil lawsuit against, or settlement agreement with, NAR, and may not agree with certain of the allegations asserted, we do believe the settlement provisions generally were reasonable and would modernize the practices at issue. In November 2021, NAR modified its rules to implement most of the changes the DOJ settlement sought, and we (through our subsidiaries, employees and/or affiliated agents) will comply with all of the rule changes.
In addition to the announcements by DOJ, there have been recent statements and actions by the Federal Trade Commission (“FTC”) and the executive branch focused on increasing competition across industries. For example, an Executive Order issued by the White House in July 2021 identified areas of interest for further investigation—including real estate brokerage and listings. Also, in July 2021, the FTC rescinded its generally applicable 2015 antitrust policy statement, noting in a press release that such statement “has constrained the agency’s use of its authority to stop anticompetitive business tactics under Section 5 of the FTC Act.” Additional action has been taken by the FTC, including a withdrawal of the 2020 Vertical Merger Guidelines in September 2021 and hosting a workshop focused on the welfare of workers and restrictions on competition (such as non-compete and non-disclosure agreements) in December 2021.
In 2018, the DOJ and FTC held a joint public workshop to explore competition issues in the residential real estate services industry at which a variety of issues, beyond those alleged in the DOJ's November 2020 civil lawsuit against NAR, were raised that could be determined to be anti-competitive in the future.
Our international business activities, and in particular our relocation operations, must comply with applicable laws and regulations that impose sanctions on improper payments, including the U.S. Foreign Corrupt Practices Act, U.K. Bribery Act and similar laws of other countries.
RESPA. RESPA, state real estate brokerage laws, state title insurance 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, home warranty and title insurance). Such laws may to some extent impose limitations on arrangements involving our real estate franchise, real estate brokerage, settlementtitle agency and underwriting services, lead generation, and relocation businessesoperations or the businessbusinesses of our joint ventures (including mortgage origination, joint venture.RealSure, and real estate auction). In addition, with respect to our company owned real estate brokerage, lead generation, relocation and title, escrow and
settlement and title underwriting services businesses as well as the businesses of certain of ourjoint ventures (including mortgage origination joint venture,and RealSure), 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”"CFPB") administers RESPA. Some state authorities have also asserted enforcement rights.
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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 their 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 however, hasmay become a greater challenge under certain administrations, including the current administration, 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.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. Violations of RESPA or similar state statutes can lead to claims of substantial damages, which may include (but are not limited to) fines, treble damages and attorneys' fees.
Worker Classification. Although 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, newer rules and interpretations of state and federal employment laws and regulations, including those governing employee classification and wage and hour regulations in our and other industries, may impact industry practices, our company owned brokerage operations and our affiliated franchisees.
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
For example, in worker classification litigation in numerous jurisdictions against a variety of industries—now including residentialinvolving real estate brokerages—whereagents at a competing brokerage, the plaintiffs seekNew Jersey Appellate Division recently applied a strict classification test to reclassifya wage and hour case. The brokerage has appealed the case to the New Jersey Supreme Court. In its holding in that matter, the New Jersey Appellate Division recognized that legislative statutory amendments made in 2018 may affect worker classification claims related to real estate agents in New Jersey on a go-forward basis. In January 2022, the New Jersey legislature clarified that the 2018 amendments explicitly provide that the amendments applied retroactively, which may impact the pending worker classification litigation against the competing brokerage. Also, there have been several challenges to the constitutionality and enforceability of a California worker classification statute adopted in 2019 as it applies to other industries, which if found unconstitutional, could have the effect of eliminating that statute's less restrictive test applicable to real estate professionals in California. We continue to monitor these matters as well as related federal and state developments.
Cybersecurity and Data Privacy Regulations. To run our business, it is essential for us to store and transmit sensitive personal information about our customers, prospects, employees, independent contractorsagents, 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 the Gramm-Leach-Bliley Act, which governs the disclosure and safeguarding of consumer financial information, as well as state statutes governing privacy and cybersecurity matters like the California Consumer Privacy Act ("CCPA") and the New York Department of Financial Services ("NYDFS") Cybersecurity Regulation.
The CCPA imposes comprehensive requirements on organizations that collect, sell and disclose personal information about California residents and employees. In November 2020, California passed Proposition 24, establishing the California Privacy Rights Act (“CPRA”), which will take effect January 1, 2023. The CPRA provides further requirements that will impact our businesses’ compliance efforts and operational risks as the CPRA differentiates “personal information” and “sensitive information,” expands the term “sale” to include sharing of personal information, and imposes data minimization
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and data retention requirements. The CPRA also established a new California Privacy Protection Agency, which is intended to take a more active role in enforcement of the law. Virginia and Colorado both passed privacy legislation in 2021, both of which will take effect in 2023, and which differ from the CPRA in how they will be implemented. Other states are likely 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. 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.
Internationally, the European Union’s General Data Protection Regulation ("GDPR") has conferred significant privacy rights on individuals (including employees and independent agents) and materially increased penalties for violations. In 2020, the Court of Justice of the European Union invalidated the E.U.-U.S. Privacy Shield, one of the methods for transfers of personal data into the U.S. As a result, companies may have to rely on standard contractual clauses, or to challengebinding corporate rules for the transfer of personal data while awaiting further guidance or regulation. In 2021, the European Commission issued an implementing decision regarding the use of federalStandard Contractual Clauses. Other countries have also recently expanded on their data privacy laws and state minimum wage and overtime exemptions.regulations.
For a summary of legal proceedings initiated against a wholly-owned subsidiary franchisor of the Company and an affiliated franchisee alleging worker misclassification,additional information with respect to related risks facing our business, see "Part I - Item 3. Legal Proceedings""Item 1A. Risk Factors" in this Annual Report.Report, in particular under the caption "Cybersecurity incidents could disrupt business operations and result in the loss of critical and confidential information or litigation or claims arising from such incidents, any of which could have a material adverse effect on our reputation and results of operations."
The Telephone Consumer Protection Act (“TCPA”) restricts certain types of telemarketing calls and the use of automatic telephone dialing systems and artificial or prerecorded voice messages. The TCPA also established a national Do-Not-Call registry. The TCPA defines autodialing broadly and requires express written consent for certain communications to cellphones. Florida recently updated its equivalent of the TCPA to expand it in certain respects. Our industry is vulnerable to claims made by class action consumers for contacts made by independent contractor real estate agents.
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, multiple states and U.S. territories have "franchise relationship laws" or "business opportunity laws" that limit the ability of franchisors to terminate franchise agreements (including mandated notice or cure periods), to discriminate unfairly among franchisees, or to withhold consent to the renewal or transfer of these agreements. Failure to comply with these laws could result in civil liability to the 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.
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.
Multiple Listing Services Rules. We participate in many multiple listing services ("MLS")MLSs, NAR and are subject torespective state realtor associations each MLS'maintain rules, policies, data licenses, and terms of service, which specify, among other things, how we may access and use MLS data and listings may be accessed, used, 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. Changes in the rules and policies of NAR and the MLSs can also be driven by changes in membership, including the entry of new industry participants, as well as other industry forces including those discussed under the "Legal and Regulatory Environment" heading in this section.
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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, military status, or source of income. Certain states or locales, such as New York, have or are in the process of expanding their laws.
Regulation of Title Insurance and Settlement Services. Nearly all states license and regulate title agencies/settlement service providers or certain employeesagencies, escrow companies 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 filedfiled 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 unilaterallymay periodically lower the insurance rates relative to loss experience and other relevant factors. States may also require title agencies, escrow companies and title underwriters to meet certain minimum financial requirements for net worth and working capital.
Title Resources is domiciled in Texas. In addition,connection with the planned sale of Title Resources in exchange for cash and a 30% equity interest in a title insurance joint venture that owns Title Resources, we made filings with the Texas Department of Insurance required under the insurance laws and regulations of Texas, the jurisdiction in which our title insurance underwriter subsidiary, Title Resources, is domiciled,Texas. These laws and regulations 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 underwriterTitle Resources is also subject to athe holding company act in its state of domicile, which regulates, among other matters, investment policies and the ability to pay dividends. Title Resources must also defer a portion of premiums as an unearned premium reserve for the protection of policyholders (in addition to their reserves for known claims) and must maintain qualified assets based on statutory requirements.
Certain states in which we operate have "controlled business" statutes which impose limitations on affiliations between providersthe level of business our title and settlement services, on the one hand, andescrow companies can receive from its affiliated real estate brokers, mortgage lenders and other real estate service providers, on the other hand.providers. 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, or are under common control with, the title insurer or agent. Pursuant to legislation enactedregulations 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. 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, escrow 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 Industry. 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 proposed and final rules, including TILA-RESPA Integrated Disclosure rules, which could materiallyimpose significant obligations on Guaranteed Rate Affinity. The Federal Trade Commission (FTC) and adversely affectDepartment of Justice (DOJ) also regulate the mortgage and housing industries. Dodd-Frank established 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 and could establish new standardslending industry, specifically in the future which could be costly to comply withareas of fair lending and present material operating risks.
practices.
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 significantmaterial risk factors affecting our Company and our common stock. However, the risksThe events and uncertainties are not limited to those set forthconsequences discussed in thethese risk factors described below. In addition,could, in circumstances we may not be able to accurately predict, recognize, or control, have a material adverse effect on our business, growth, reputation, prospects, financial condition, operating results, cash flows, liquidity, and stock price. Please be advised that 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.the future.
Risks Related to Our Business
Macroeconomic Conditions
The residential real estate market is cyclical and we are negatively impacted by downturns and constraintsdisruptions 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. TheFor example, the U.S. residential real estate industry was in a significant and lengthy downturn from the second half of 2005 through 2011. BeginningIn 2020, in 2012,connection with the COVID-19 pandemic, U.S. residential real estate industry began a recovery. However, based upon data published by NAR,experienced significant volatility. While the housing market showed no volume growthindustry improved markedly from the COVID-19 related low seen in 2018 compared to 6% growth in 2017. In addition, the lastsecond quarter of 2018 was significantly worse than the rest of the year, with homesale transaction volume declining 4% during the fourth quarter of 2018 as compared to 2017. We2020, we cannot predict whether the duration or continued strength of housing market will continue to weaken.demand. If the residential real estate market were to materially slow or deteriorate, if the economy as a whole does not improve, or worsens,if the broader real estate industry (including REITs, commercial and rental markets) were to experience a significant downtown, our business, financial condition and liquidity may be materially adversely affected, including our ability to access capital and grow our business.business and return capital to stockholders.
Any of the following factors related to the real estate industry could negatively impact the housing market and have a material adverse effect on our business by causing a lack of improvement 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:
•insufficient or excessive regional home inventory levels;levels by market or price point;
•increases in mortgage rates or inflation;
•a decreasereduction in the affordability of homes;homes, including in connection with rising home prices;
•an increase in potential homebuyers with low credit ratings or inability to macroeconomic events domesticallyafford down payments;
•stringent mortgage standards, reduced availability of mortgage financing or internationally;increasing down payment requirements or other mortgage challenges;
•legislative or regulatory changes (including changes in regulatory interpretations or regulatory practices) that would adversely impact the residential real estate market;
•federal, state and/or local income tax changes and Freddie Mac, immigrationother tax reform and further potential tax code reform;affecting real estate and/or real estate transactions;
•homeowners retaining their homes for longer periods of time;time, including as a result of inventory shortages in new and existing housing;
•other changes in consumer preferences, including weakening in the consumer trends that have benefited the Company since the second half of 2020.
Adverse developments in general business and rent their next home;economic conditions could have a material adverse effect on our financial condition and our results of operations.
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the business segments in which we operate whether broadly or by geography and price segments;segments could have a material adverse effect on our results of operations and financial results. These factors include, but are not limited to: short-term and long-term interest rates, inflation, fluctuations in debt and equity capital markets, levels of unemployment, rate of wage growth, consumer confidence, rate of economic growth or contraction, U.S. fiscal policy (including government spending and tax reform) 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. Weak capital, credit and financial markets, instability of financial institutions, and/or the 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 pandemics and natural disasters, the political environment, U.S. immigration policies, disruptions in a major geoeconomic region or equity or commodity markets, acts or threats of war or terrorism or sustained pervasive civil unrest, or other geopolitical or economic instability, any of which could have a material adverse effect on our business, financial condition and results of operations.
For example, the COVID-19 crisis has had and is expected to continue to have a profound effect on the global economy and financial markets, which materially impacted relocation volume and contributed to significant homesale transaction volume volatility in 2021. Contraction in the U.S. economy, including the impact of recessions, slow economic growth, or a deterioration in other economic factors such as hurricanes, earthquakes, wildfires, mudslidespotential consumer, business or governmental defaults or delinquencies due to the COVID-19 crisis or otherwise could have a material adverse impact on our business, financial condition and other events that disrupt local or regionalresults of operations.
Monetary policies of the federal government and its agencies may have a material adverse 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 regulate the supply of money and credit in the U.S. and impact the real estate markets.market through their effect on interest rates as well as the cost of our interest-bearing liabilities. In December 2021, the Federal Reserve Board announced its intention to accelerate the reduction of its purchases of mortgage-backed securities (which could result in this stimulus program concluding in March 2022) and released economic projections that showed officials expect to raise interest rates three times in 2022 and could determine to taper its purchases of other securities as well - any of which could increase interest rates. If interest rates were to rise, homebuilders may determine to discontinue or delay new projects, which could further contribute to inventory constraints. 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.
Increases in mortgage rates or tightened mortgage underwriting standards may result in declines in homesale transaction growth as well as mortgage and refinancing activity.
We have been and could again be negatively impacted by a rising interest rate environment as increases in mortgage rates generally have a negative impact on mortgage unit, closing and refinancing volumes, housing affordability and homesale transaction volume. 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. If the pace of existing homesale transactions slows (due to increases in mortgage rates or otherwise), we would also expect decreased title services and mortgage origination activity. Refinancing volumes are highly correlated with fluctuations in mortgage rates as well (although they are also inherently cyclical), as home owners are less likely to refinance their mortgage during periods of increasing rates.
In addition, the imposition of more stringent mortgage underwriting standards or a reduction in the availability of alternative mortgage products could also reduce homebuyers' ability to access the credit markets on reasonable terms andadversely affect the ability and willingness of prospective buyers to finance home purchases or to sell their existing homes. 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. Changes in policy can impact other home buyers as well. For example, the Federal Housing Finance Agency recently introduce a new pricing framework that will increase fees for certain high-balance and second home loans, which could reduce demand by investors and consumers for homesale transactions with such financing. A significant decline in the number of homesale transactions or mortgage, title and refinancing activity due to any of the foregoing would adversely affect our financial and operating results.
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Meaningful decreases in the average brokerage commission rate could materially adversely affect our financial results.
There are a variety of factors that could contribute to declines in the average broker commission rate, including regulation, the rise of certain other competitive brokerage or non-traditional competitor models (including iBuying and home swap business models and related models that help buyers compete as cash buyers), an increase in the popularity of discount brokers or other utilization of flat fees, rebates or lower commission rates on transactions 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. Meaningful reductions in the average broker commission rate could materially adversely affect our revenues, earnings and financial results.
Continued or accelerated declines in inventory may result in insufficient supply, which could have a negative impact on homesale transaction growth and ancillary homesale services, including title and mortgage.
Inventory levels for the existing home market have been declining over the past several years due to strong demand, in particular in certain highly sought-after geographies and at lower price points. According to NAR, thepoints and are significantly below historical average levels. Additional inventory pressure arises from periods of existingslow or decelerated new housing construction. In addition, real estate industry models that purchase homes for sale in the U.S. was 1.52 millionrental or corporate use (rather than immediate resale) can put additional pressure on available housing inventory, as of January 2018 and has increased to 1.53 million at the end of December 2018. As a result, the inventory has increased from 3.4 months of supply in January 2018 to 3.7 monthsmay alternative competitors, such as of December 2018. However, these levels continue to be significantly below the 10-year average of 5.8 months, the 15-year average of 6.1 months and the 25-year average of 5.8 months. If interest rates were to rise, homebuilders may determine to discontinue or delay new projects, which could further contribute to inventory constraints.iBuying models. While a continuation of low inventory levels may contribute to favorable demand conditions and improved homesale price growth, insufficient inventory levels generally have had a negative impact on homesale volume growth and combined with rising mortgage rates, has ledcan contribute to a reduction in housing affordability, which we believe has contributed tocan result in some potential home buyers deferring entry into the residential real estate market. Ongoing constraints onIn periods of rapid inventory turnover there is an increased risk that new real estate listings will not keep pace with demand, which could also negatively impact homesale transaction volume. Constraints in home inventory levels along with reduced affordability due to higher average homesale priceshave typically had and rising mortgage rates, may continue to have an adverse impact on the number of homesale transactions forclosed by Realogy Franchise and Brokerage Groups (and on ancillary homesale services, including title and mortgage), which could materially adversely affect our company owned brokeragerevenues, earnings and financial results.
The COVID-19 crisis has and may again amplify risks to our business and worsening economic consequences of the businessescrisis or the reinstatement of our franchisees, which may limit our ability to grow revenue.
The impact of the COVID-19 crisis and the corresponding economic and other consequences stemming from the pandemic on our business and financial conditionresults will depend largely on future developments, which we are unable to accurately predict, including, but not limited to: the extent, duration and severity of the spread of the COVID-19 pandemic; the impact of vaccines and virus mutations; the extent of any related governmental regulation (including those that preclude or strictly limit in-person showings of properties); the extent of related government financial support for franchisees, independent sales agents, consumers and corporations, including federal and/or state monetary or fiscal programs meant to assist businesses and individuals navigate COVID-19 related financial challenges; evolving societal reactions to the pandemic; the duration and severity of the impact on the U.S. economy (including economic contraction) as well as capital, credit and financial markets (including with respect to increasing down payment requirements from mortgage lenders or other tighter mortgage standards or a reduction in the availability of mortgage financing as well as with respect to consumer, business and governmental credit defaults); the materiality of increases in mortgage delinquencies or foreclosure rates; the magnitude and duration of unemployment rates and adverse impact to wage growth; the related impact on consumer confidence, preferences and spending; and the magnitude of the financial and operational consequences to our resultsfranchisees, all of operations.which are highly uncertain.
Our business could be negatively impacted if the crisis, including adverse economic consequences of the crisis, worsen, if directives and mandates requiring businesses to again curtail or cease normal operations are reinstated, if mortgage rates rise, if beneficial consumer trends weaken (including changes in consumer behavior in connection with wide-spread vaccination), if mortgage delinquencies or foreclosure rates materially increase, or if housing inventory constraints, across geographies and thoseprice point, limit homesale transaction growth. The impact on our business may be further amplified in the event that our affiliated franchisees experience adverse financial effects from the COVID-19 crisis or if the crisis is particularly acute in geographies or the high-end markets in which our company owned brokerages are concentrated.
In addition, we believe that certain trends related to the COVID-19 crisis, such a growing acceptance of work from home arrangements, have supported recent beneficial consumer trends in the residential real estate industry, including demand in certain geographies and in the high-end markets. A prolonged slowdown or end to the crisis could result in a
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reversal of such trends or give rise to new trends, the impact of which are currently unknown to us, but could be adverse to our business or the businesses of our franchiseesjoint ventures and franchisees. Further, we have observed continued strength in certain beneficial consumer trends that we believe are sensitivelargely driven by behavioral changes related to general businessthe COVID-19 crisis, including home buyer preferences for certain geographies (including attractive tax and economic conditionsweather destinations), which we believe has contributed to the sustained high levels of demand 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,residential real estate market. We can provide no assurance as to whether these consumer confidence andtrends may continue, whether at the general condition ofsame strength, or at all, or whether such trends will continue to have a positive effect on the U.S. and the world economy.
Negative impacts from the strength of financial institutions, which are sensitive tocrisis or related changes in the general macroeconomic environment. Lack of available credit or lack of confidenceconsumer behavior may be more pronounced in the financial sector could materially and adversely affect our business, financial condition and results of operations.
Strategic and Operational Risks
Our ability to grow earnings is significantly dependent upon our and our franchisees' ability to attract and retain independent sales agents.
If we and providing them with compelling data and technology products and services to make them more productive and their businesses more profitable. If weour franchisees, as applicable, 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 if we are unable to 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 strategyattract and grow revenueretain independent sales agents and earnings,franchisees, including but not limited to:
to, intense competition from other brokerages as well as companies employing technologies or alternative models intended to disrupt historichistorical real estate brokerage models, which, amongsuch as iBuying and home swap models and other things, could continue to put upward pressure on our commission expense;
corporate-to-consumer models that minimize the role of agents; our ability to develop and deliver compelling data and technology products and services to independent sales agents and franchisees; our ability to generate high-quality leads to independent sales agents and franchisees; and our ability to adopt and implement commission plans (or pricing model structures) that are attractive to such agents;agents (or such franchisees).
If we fail to successfully enhance our abilityvalue proposition, we may fail to attract new or retain productive independent sales agents or franchisees, resulting in a reduction in commission income and retain talentroyalty fees paid to driveus, which would have a material adverse effect on our strategy.
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
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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 or increased incentive arrangements to new and existing franchisees, any of which would result in a further reduction in royalty or other 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.
Moreover, NRTRealogy Brokerage Group also has relationships with developers, primarily in major cities, to provide marketing and brokerage services in new developments. During 2018, there was a decrease in revenue related to ourThe irregular volume and timing of new development business in New York City as a result of lower closing volume dueclosings may contribute to long cycle times with irregular project completion timing. Decelerationuneven financial results and deceleration in the building of new housing and/or timing of closings of new developments has led, and may continue to 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.
We may not successfully develop or procure products, services and technology including Zap® product enhancements, that supportssupport our strategy to grow the base of productive independent sales agents at our company owned and franchisee real estate brokerages or assist those agents in competing effectively and efficiently,strategic initiatives, which could adversely affecthave a material adverse effect on 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 ownedproducts, services, and franchisee real estate brokerages, affiliatedtechnologies that are compelling to independent sales agents, franchisees and their customers as well as forconsumers (including consumers of our relocation and title and settlementancillary services segments.businesses). 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 technologyproduct, service and servicetechnology offerings to meet their needs as well as those needs. In addition, we have made and may continue to make strategic investments in companies developing technologies that supportwill further complement 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.businesses.
We may incur unforeseen expenses in the development of, or enhancements to, technology products, (including Zap®),services and technology, or may experience competitive delays in introducing new technologiesofferings as quickly as we would like. We also rely on third parties for the provision or development of certain key products that we offer to affiliated independent sales agents and brokers. Delays or other issues with such products could have a negative impact on our recruitment and retention efforts, which may be material. In addition, the increasingly competitive industry for technology talent may impact our ability to attract and retain employees involved in developing our technology products and systems. services.
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Furthermore, the investment and pace of technology development continuescontinue to increaseaccelerate across the industry, creating risk in the relative timing and attractiveness of our technology products and services,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 technology products, services or technologies we may develop. develop or that affiliated agents or franchisees will find such products, services and technologies compelling. We may encounter delays or be unable to maintain and scale the technology underlying our offerings due to operational interruptions or failures, which could negatively impact the security and availability of our services and technologies. In addition, weour competitors may develop or make available products, services or technologies that are now buildingpreferred by agents, franchisees and/or consumers, which could have a negative impact on our agent-competitive position, financial results and franchisee-focused technology products with anstock price. Further, third parties utilizing our open architecture in order to enable third-party vendors and products to access and interface with our products. Weplatform may not be able to accomplish this transition on a timely basiscreate tools that meet the needs of agents and there can be no assurance that third parties will integrate with our solutionsfranchisees in a timely or effective manner. manner, or at all.
In addition, we have made and may continue to make strategic investments in companies and joint ventures developing products, services and technologies that we believe will support our strategy and we may not realize the anticipated benefits from these investments or be able to recover our investments in such companies and joint ventures and such offerings may not become available to us or may become available to our competitors. For example, our RealSure joint venture may not result in increased revenues or earnings if competitors provide more attractive offers or are perceived as providing a better transactional experience by agents or consumers.
Any of the foregoing could adversely affect our value proposition to affiliated agents and franchisees, the productivity of independent sales agents, our appeal to consumers, or our ability to capture increased economics associated with homesale transactions, which in turn could adversely affect our competitive position, business and results of operations.
We generally face intense competition in the residential real estate services business.
These competitive market factors also impact our franchisees and such franchisees have and may continue to seek reduced royalty fee arrangements or other incentives from us to offset the continued business pressures on such franchisees, which has and could continue to result in a reduction in royalty fees paid to us or other associated costs.
We expect this trend continueshighly competitive environment to continue and, accordingly, we and our affiliated franchisees may fail to attract and retain independent sales agents if we are unable to adopt and implement alternativecompete with a combination of continuously improved value proposition and/or commission plans that appeal to a broad base of independent sales agents in a profitable and effective manner,manner.
If we andor our franchisees may 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 decrease, which may have a material adverse impact on our ability to grow earnings.business and financial results.
also highly competitive. 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
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lower than we charge.charge or a combination of products and services that are more attractive to the franchisee. We also face the risk that currently unaffiliated brokers may not enter into or renew franchise agreements with us for a variety of reasons, including 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, because competitive costs associated with agent recruitment makes affiliation with a brand economically challenging, or because they may believe that their business will be more attractive to a prospective purchaser without the existence of a franchise relationship. RegionalAdditional competitive pressure is provided by regional and local franchisors as well as franchisors offering different franchise models or services provide additionalservices.
To remain competitive pressure. To effectively compete with competitor franchisorsin the sale of franchises and to recruit newretain our existing franchisees, we have taken and may havecontinue to take actions that would result in increased costs to us (such as increased non-standardsales incentives to franchisees) or decreased royalty payments to us (such as a reduction in or cap on the fees we charge our franchisees)franchisees, including lower royalty rates), which may have a material adverse effect on our abilityearnings and growth opportunities. If we fail to grow earnings. successfully offer franchisees compelling value propositions, 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.
In addition, our continued implementation of strategic initiatives intended to add new franchisees and grow our agent base through the introduction of new franchisee fee models and brands, while intended to capture additional market share with brokers unaffiliated with our brands, could result in greater intra-brand competition among our brands. In order to enhance our competitive profile, we may increase the amounts that we spend on marketing and the development of products and services that we believe will appeal to independent sales agents, franchisees and consumers.
Competition in our related businesses and the businesses of our joint ventures is also acute. See "Item 1.—Business—Competition" in this Annual Report for additional information.
Consumer preferences for the home buying and selling experience may change more quickly than we can adapt our businesses, which may have a material adverse effect on our results of operations and financial condition.
The real estate brokerage industry has minimal barriers to entry for new participants and a growing number of companies are competing in non-traditional ways for a portion of the gross commission income generated by homesale transactions, including new entrants that provideemploy technologies intended to disrupt historical real estate brokerage models, minimize or eliminate the role brokers and sales agents perform in the homesale transaction process, and/or shift the nature of the residential real estate transaction from the historic consumer-to-consumer model to a corporate-to-consumer model.
Some of these models, such as traditional iBuying or home swap models, may have less exposure to risks related to the continued rise of sales agent's share of commission income generated by homesale transactions, as they are less reliant on agent services. Changes to industry rules and/or the introduction of disruptive products and services may also result in an increase in the number of transactions that do not utilize the services of independent sales agents, including for sale by owner transactions.
The significant size of the U.S. real estate market has continued to attract outside capital investment in disruptive competitors that seek to access a portion of this market, which has and is likely to continue to contribute to the competitive environment. Meaningful gains in market share by these alternative models, including traditional iBuying or home swap models, and/or the introduction of other industry-disruptive competitors may adversely impact our market share and reduce homesale and ancillary transaction volume if we are unable to introduce competing products and services that are more attractive to consumers in a timely manner. A loss of market share or reduction in such transaction volume may have a material adverse effect on a global basis. Competitionour operations and financial performance.
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
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other industry participants. These actions divert and reduce the earnings of other industry participants, including our company owned and franchised brokerages.
Aggregators could intensify as an increasingly higher percentage of relocation clients reduce their global relocation benefitscurrent business tactics or introduce new programs that could be materially disadvantageous to our business and other brokerage participants in the industry including, but not limited to:
•broadening and/or increasing fees for their programs that charge brokerages and their affiliated sales agents fees including, referral, listing, display, advertising and related spend.fees or introducing new fees for new or existing services;
•expanding their offerings to include products (including agent tools) and services ancillary to the real estate transaction, such as title, escrow and settlementmortgage origination services, that compete with services offered by us;
•bundling their listing services with such ancillary offerings;
•not including our or our franchisees' listings on their websites;
•controlling significant inventory and agent referrals, tying referrals to use of their products, and/or engaging in preferential or exclusionary practices to favor or disfavor other industry participants;
•leveraging their position to compel the use of their platforms exclusively, which may include requiring disclosure of competitively sensitive information;
•aggregating consumer data from their listing sites and ancillary services for competitive advantage;
•establishing oppressive contract terms, including with respect to data sharing requirements;
•disintermediating our relationship with affiliated franchisees and independent sales agents; and/or
•disintermediating the relationship between the sales agent and the buyers and sellers of homes, including through the promotion of products or services designed to replace the role of the sales agent in both buy side and sell side transactions.
Such tactics could further increase pressures on the profitability of our company owned and franchised brokerages and affiliated independent sales agents, reduce our market share, reduce our franchisor service revenue and dilute our relationships with our franchisees and our franchisees' relationships with affiliated independent sales agents and buyers and sellers of homes.
We may not be able to generate a meaningful number of high-quality leads for affiliated independent sales agents and franchisees, which could materially adversely impact our revenues and profitability.
A key component of our growth strategy is focused on providing affiliated independent sales agents and franchisees with high-quality leads, including through company-directed real estate benefit programs. We expect that significant time and effort and meaningful investment will be required to increase awareness of and consumer participation in existing and new real estate benefit programs and other lead generation programs and partnerships. In addition, our leads generation business is highly competitiveregulated, subject to complex federal and fragmented.
Our financial results are affected by the operating results of our franchisees.
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system, Realogy Franchise Group's 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.reserves, including with respect to the conversion notes we extend to eligible franchisees, which are forgiven ratably over the term of the franchise agreement upon satisfaction of certain revenue performance-based thresholds. We may also have to terminate franchisees due to non-payment. Moreover, the ownership model for some larger franchisees has shifted to control by private investor groups that are more likely to have a higher proportion of debt and may have different priorities than historic franchisee owners, which increases franchisee liquidity, termination and non-renewal risks.
Consolidation among our top 250 franchisees may cause our royalty revenue to grow at a slower pace than homesale transaction volume.
Negligence or intentional actions of our franchisees and their independent sales agents could harm our business.
Our franchisees (other than our company owned brokerages at Realogy Brokerage Group) 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, andwhich could adversely affect our results of operations. Negligent or improper actions involving our franchisees or master franchisees, including regarding their relationships with independent sales agents, clients and employees, have and may in the future 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(including those handling properties for our relocation business,operations) may engage or be accused of engaging in unlawful or tortious acts, such as violating the anti-discrimination requirements of the Fair Housing 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 businessoperations relationships with clients.
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 or changes in the licensing strategy of, or disagreements or complications in our relationship with, the brand owners could disrupt our business and/or 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. In 2021, we formed a strategic joint venture with one of the brand owners that acquired a stake in an online
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residential auction platform. Any significantdisagreements or complications in our relationship with, or difficulties in the business or changes in the licensing strategy of,the brand owners could disrupt our business and/or negatively reflect on the brand and the brand value. For additional information see "Item 1.—Business—Realogy Franchise Group—Intellectual Property".
If recent trends in corporateour largest real estate benefit program client or multiple significant relocation practices continue, there couldclients cease or reduce volume under their contracts with us, our revenues and profitability would be fewer employee relocations, which may have a material adverse impact onmaterially adversely affected.
Contracts with our real estate benefit program and relocation clients are generally terminable at any time at the operating resultsoption of the client, do not require such client to maintain any level of business with us and are non-exclusive. Our real estate benefit program revenues are highly concentrated. If our largest real estate benefit program client or multiple significant relocation business.clients cease or reduce volume under their contracts with us, our revenues (including downstream revenue at Realogy Franchise, Brokerage and Title Groups) and profitability would be materially adversely affected.
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 continuehas continued 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 as well as lower volume growth, our relocation business hasoperations have been increasingly subject to aan increasingly competitive pricing environment and lower average revenue per relocation. Lower volume growth, in particular with respect to global relocation, activity, has also impactedwhich negatively impacts the operating results of our relocation business. These factors mayoperations. The COVID-19 crisis along with related ongoing travel restrictions in the U.S. and elsewhere, has exacerbated these trends and is expected to continue to put pressure on the growth and profitabilityfinancial results of this segment.Cartus Relocation Services. We are unable to determine when, or if, relocation volumes will return to levels consistent with those prior to the onset of the COVID-19 crisis. In addition, the suspensiongreater acceptance of remote work arrangements has the deduction for certain moving expenses underpotential to have a negative impact on relocation volumes in the 2017 Tax Act could potentially contributelong-term.
The failure of third-party vendors or partners to fewer businesses offering these benefits andperform as we expect or appropriately manage risks, or our failure to adequately monitor third-party performance, could result in fewer instances of these services.
If our third-party supplierspartners or vendors were to fail to perform as we expect, fail to appropriately manage risks, provide diminished or delayed 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 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, such as the General Data Protection Regulation, which became effective in May 2018.
The actions of our third-party vendors and unaffiliated third-party developers are beyond our control. 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.
Cybersecurity incidents could disrupt business operations and result in the loss of critical and confidential information or litigation or claims arising from such incidents, any of which may adversely impactcould have a material adverse effect on 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-day threats, threats to or disruption of joint venture partners or 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 businesses, 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)providers); and
•the reputational, business continuity and financial risks associated with a loss of data or material data breach (including unauthorized access to, or destruction or corruption of, our proprietary business information or personal information of our customers, employees and
independent sales agents), the transmission of computer malware, cyberattacks, or the diversion of homesale transaction closing funds.
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 businessoperations collect, store and transmit sensitive data, including our proprietary business information and intellectual property and that of our clients as well as personal information, sensitive financial information and other confidential information of our employees, customers and the customers of our franchisee and company owned brokerage sales agents.
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
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control as our franchisees as well as our customers, franchisee and company owned brokerage independent sales agents and their customers, joint venture partners 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.
Our security systems and IT infrastructure may not adequately protect against all potential security breaches, cyber-attacks, or other unauthorized access to personal information, including ransomware incidents. We, our third-party service providers, franchisees, franchisee and company owned brokerage independent sales agents, and joint venture partners have experienced and expect to continue to experience these types of threats and incidents. Cyberattacks have led and will likely continue to lead to increased costs to us with respect to preventing, investigating, mitigating, insuring against and remediating these incidents and risks, as well as any related attempted or actual fraud. Our corporate errors and omissions and cybersecurity breach insurance, or that of applicable third parties, may be insufficient to compensate us for losses that may occur.
Moreover, we are required to comply with growing laws and regulations both in the United States and in other countries where we do business that regulate cybersecurity, privacy and related matters. With an increased percentage of our business occurring virtually, there is an increased risk of a potential violation of these expanding laws and regulations. Any significant violations of such laws and regulations could result in the loss of new or existing business, litigation, regulatory investigations, the payment of fines and/or penalties (which may not be covered by cybersecurity breach insurance) and damage to our reputation. Any of the foregoing could have a material adverse effect on our business, financial condition, and results of operations.
We may not realize the expected benefits from our existing or future joint ventures or strategic partnerships.
We have entered into several important strategic joint ventures with third party partners, including Guaranteed Rate Affinity (our non-exclusive mortgage origination joint venture) and RealSure as well as a real estate auction joint venture and several other joint ventures at Realogy Title Group. We also expect to form a title insurance underwriter joint venture in connection with the planned sale of Title Resources. We hold (or will hold, with respect to the title insurance underwriter joint venture) a minority stake in each of these joint ventures. While we have certain governance rights, we do not (or will not, with respect to the title insurance underwriter), have a controlling financial or operating interest in these joint ventures. Likewise, we do not realize the full economic benefit of profits from these businesses (nor do we bear the full losses from these ventures).
There are inherent risks to joint ventures, including execution risks that could arise if our strategic priorities do not align with those of our partners. Such risks may increase with particularly complex joint ventures that offer innovative products, such as our RealSure joint venture and there can be no assurance that such products will be successful or will operate as intended. Our current or future joint venture partners may make decisions which may harm the joint venture or are contrary to our best interests, including by pursuing opportunities outside of the joint venture. For example, our mortgage origination joint venture is not exclusive and our joint venture partner could continue to expand relationships with competitors or pursue relationships with other competitors to our detriment.
Additionally, even when we hold a minority interest in a 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 have a material adverse effect on our results of operations or equity interest in the applicable joint venture.
Each of our existing joint ventures faces risks specific to their business as well. For example, our mortgage origination joint venture has been and may again be materially adversely affected by changes affecting the mortgage and mortgage refinancing industry, which is inherently cyclical in nature. Such changes may include, but are not limited to, regulatory changes, increases in mortgage interest rates or other changes in market conditions, consumer trends (including those related to refinancing transactions), high levels of competition, decreases in operating margins and gain-on-sale margins, and declines in the mark-to-market value of the mortgage loan pipeline. In addition, although we intend to continue to invest meaningfully in our RealSure joint venture, such products may not be well-received by franchisees, brokerages, affiliated agents or consumers.
In addition, our joint ventures or our joint venture partners could face operational or liquidity risks, such as litigation or regulatory investigations that may arise. Any of the foregoing could have an adverse impact, which may be material, on our earnings and dividends from the applicable joint venture. Operational, liquidity, regulatory, macroeconomic and competitive risks would likely apply to any joint venture we may enter into in the future.
Consummation of the planned sale of our title underwriting business is subject to satisfaction of closing conditions, including the receipt of certain regulatory approvals, and, even if we successfully consummate the planned sale, we may fail to achieve the anticipated benefits of the transaction.
Completion of the planned sale of our title insurance underwriter (in exchange for cash and a 30% equity interest in a title insurance underwriter joint venture) is subject to certain closing conditions, including the receipt of certain required regulatory approvals, among others. There can be no assurance that any of such conditions will be satisfied or that the planned sale will be successfully completed on a timely basis or at all.
In addition, the transaction is subject to additional risks, including that we may not achieve the anticipated benefits of the transaction; the transaction may involve unexpected costs, liabilities or delays; the transaction may disrupt the title underwriter’s plans and operations or adversely affect employee retention or otherwise adversely impact the business of the title underwriter; and the joint venture may be adversely affected by other economic, business and/or competitive factors as well as the ongoing COVID-19 crisis. We may also experience negative reactions from our clients, stockholders, creditors, vendors, and employees, among others. There can be no assurances as to whether the joint venture will successfully grow the underwriting business and its volume of business could be lower than the historical level of activity generated under Realogy Title Group.
Any of these factors could decrease or eliminate the anticipated benefits of the transaction and could negatively impact our stock price and our business, financial condition and results of operations.
We may be unable to simplify and modernize our business in support of growth and strategic initiatives and achieve or maintain cost savings and other benefits from our cost-saving initiatives.
We continue to engage in business optimization and cost-saving 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 or cost structure and, even if achieved, any cost-savings realized may not be sufficient to offset ongoing inflationary pressures, including those related to employees and leases, or to offset continued upward pressure on the share of commission income paid to affiliated independent sales agents. 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 improve the efficiency and effectiveness of our cost structure could have a material adverse effect on our competitive position (including with respect to the recruitment and retention of production independent sales agents and franchisees), business, financial condition, results of operations and cash flows.
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
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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 majority-held joint venture is not successfully completed or integrated into our existing operations (including our internal controls and compliance environment), 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.
Risks Related to Our Indebtedness
Our liquidity has been, and is expected to continue to be, negatively impacted by the substantial interest expense on our debt obligations.
We are significantly encumbered by our debt obligations. As of December 31, 2021, our total debt, excluding our securitization obligations, was $3,042 million (without giving effect to outstanding letters of credit). As a result, a substantial portion of our cash flows from operations must be dedicated to the payment of interest on our indebtedness and, as a result, is not available for other purposes, including our operations, capital expenditures, technology, share repurchases, dividends and future business opportunities or principal repayment. Our liquidity position has been, and is expected to continue to be, negatively impacted by the substantial interest expense on our debt obligations.
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.
Our leverage could have important consequences, including the following:
•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 debt agreements 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 to obtain additional debt or equity financing for working capital, capital expenditures, business development, debt service requirements, acquisitions or general corporate or other purposes;
•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 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.
A material decline in our ability to generate EBITDA calculated on a Pro Forma Basis, as defined in the Senior Secured Credit Agreement governing the Senior Secured Credit Facility could result in our failure to comply with the senior secured leverage ratio covenant under our Senior Secured Credit Facility (including the Revolving Credit Facility) and Term Loan A Facility, which would result in an event of default if we fail to remedy or avoid a default as permitted under the applicable debt arrangement.
Our debt risk may also be increased as a result of competitive pressures that reduce margins and free cash flow. If our EBITDA calculated on a Pro Forma Basis were to decline and/or we were to incur additional senior secured debt (including 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 under the Senior Secured Credit Agreement. Any inability to borrow sufficient funds to operate our business could have a material adverse impact on our business, results of operations and liquidity.
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Restrictive covenants under our Senior Secured Credit Facility, Term Loan A Facility, and indentures governing the Unsecured Notes may limit the manner in which we operate.
Our Senior Secured Credit Facility, Term Loan A 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;
•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 or finance future operations or capital needs.
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 under the Senior Secured Credit Facility or Term Loan A Facility due to a material decline in our ability to generate EBITDA calculated on a Pro Forma Basis (as defined in the Senior Secured Credit Agreement) or otherwise or if we are unable to comply with other restrictive covenants under those agreements or the indentures governing our Unsecured Notes and we fail to remedy or avoid a default as permitted under the applicable debt arrangement, there would be an "event of default" under 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 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 such notes or our Apple Ridge Funding LLC securitization program.
If we were unable to repay the amounts outstanding under our Senior Secured Credit Facility or Term Loan A Facility, the lenders and holders of such debt could proceed against the collateral granted to secure those debt arrangements. We have pledged a significant portion of our assets as collateral to secure such indebtedness. If the lenders under those debt arrangements accelerate the repayment of borrowings, we may not have sufficient assets to repay the Senior Secured Credit Facility or Term Loan A Facility and our other indebtedness or be able to borrow sufficient funds to refinance such indebtedness. Upon the occurrence of an event of default under the indentures governing our Unsecured Notes, the trustee or holders of 25% of the outstanding applicable notes could elect to declare the principal of, premium, if any, and accrued but unpaid interest on such notes to be due and payable. Any of the foregoing would have a material adverse effect on our business, financial condition and results of operations.
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The exchangeable note hedge and warrant transactions may affect the value of our common stock.
Concurrent with the offering of the Exchangeable Senior Notes, we entered into exchangeable note hedge transactions and warrant transactions with certain counterparties (the "Option Counterparties"). The exchangeable note hedge transactions are expected generally to reduce the potential dilution upon exchange of the notes and/or offset any cash payments we are required to make in excess of the principal amount of exchanged notes, as the case may be. However, the warrant transactions could separately have a dilutive effect on our common stock to the extent that the market price per share of common stock exceeds the strike price of the warrants.
The Option Counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling the common stock or other securities of ours in secondary market transactions prior to the maturity of the Exchangeable Senior Notes (and are likely to do so during any observation period related to an exchange of the notes). This activity could cause or avoid an increase or a decrease in the market price of our common stock.
We are subject to counterparty risk with respect to the exchangeable note hedge transactions.
The Option Counterparties are financial institutions or affiliates of financial institutions, and we are subject to the risk that one or more of such Option Counterparties may default under the exchangeable note hedge transactions. Our exposure to the credit risk of the Option Counterparties is not secured by any collateral. If any Option Counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at that time under the exchangeable note hedge transaction. Our exposure will depend on many factors but, generally, the increase in our exposure will be correlated to the increase in our common stock market price and in the volatility of the market price of our common stock. In addition, upon a default by the Option Counterparty, we may suffer adverse tax consequences and dilution with respect to our common stock. We can provide no assurance as to the financial stability or viability of any Option Counterparty.
We have substantial indebtedness and we may not be able to refinance any such debt on terms as favorable as those of currently outstanding debt.
We consistently evaluate potential refinancing and financing transactions with respect to our debt, including repaying or 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, terms that are acceptable to us, or at all. Any future indebtedness may impose various additional restrictions and covenants on us which could limit 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. We could also issue public or private placements of our common stock or preferred stock or convertible notes, any of which could, among other things, dilute our current stockholders and materially and adversely affect the market price of our common stock.
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 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. Any downgrade, suspension or withdrawal of a rating by a rating agency (or any anticipated downgrade, suspension or withdrawal) as well as any actual or anticipated placement on negative outlook by a rating agency could make it more difficult or more expensive for us to refinance our 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, 2021, $232 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 increase, our debt service
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obligations on the variable rate indebtedness would increase even if the amount borrowed remained the same, and our net income would decrease.
The phase-out of LIBOR, or the replacement of LIBOR with SOFR or 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. As a result of concerns about the accuracy of the calculation of LIBOR, a number of British Bankers’ Association member banks entered into settlements with certain regulators and law enforcement agencies with respect to the alleged manipulation of LIBOR, and LIBOR and other “benchmark” rates are subject to ongoing national and international regulatory scrutiny and reform. The cessation date for submission and publication of rates for certain tenors of LIBOR has since been extended by the ICE Benchmark Administration until mid-2023. In response to concerns regarding the future of LIBOR, the United States Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing LIBOR with a new index calculated by short-term repurchase agreements, backed by U.S. Treasury securities: the Secured Overnight Financing Rate, or ‘‘SOFR.’’ We are unable to predict whether SOFR will attain market traction as a LIBOR replacement or the impact of other reforms, whether currently enacted or enacted in the future. Any new benchmark rate, including SOFR, will likely not replicate LIBOR exactly and if future rates based upon a successor rate 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.
We may be unable to continue to securitize certain of the relocation assets of Cartus Relocation Services, which may adversely impact our liquidity.
At December 31, 2021, $118 million of securitization obligations were outstanding through special purpose entities monetizing certain assets of Cartus Relocation Services under two lending facilities. We have provided a performance guaranty which guarantees the obligations of Cartus Relocation Services and its subsidiaries, as originator and servicer under the Apple Ridge securitization program. Our significant debt obligations may limit our ability to incur additional borrowings under our existing securitization facilities. The securitization markets have experienced, and may again experience, significant disruptions, including in connection with the COVID-19 crisis, 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. 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.
Regulatory and Legal Risks
There may be adverse financial and operational consequences to us and our franchisees if independent sales agents are reclassified as employees.
Although 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, newer rules and interpretations of state and federal employment laws and regulations, including those governing employee classification and wage and hour regulations in our and other industries, may impact industry practices, our company owned brokerage operations, and our affiliated franchisees. Certain jurisdictions have adopted or are considering adopting standards that are significantly more restrictive than those historically used in wage and hour cases, which could have a material adverse effect on our business and results of operations. See "Item 1.—Business—Government and Other Regulations" in this Annual Report for additional information.
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
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our operations in certain jurisdictions and could have a material adverse effect on the operational and financial performance of the Company.
If we fail to protect the privacy and personal information of our customers or employees, we may be subject to legal claims, government action and damage to our reputation.
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. These ongoing changes to privacy and cybersecurity laws also may make it more difficult for us to operate our business and may have a material adverse effect on our operations.
Any significant violations of privacy and cybersecurity laws and regulations (including those involving joint ventures or our third-party vendors or partners) could result in the loss of new or existing business (including potential home buyers or sellers, our corporate relocation or real estate benefit program clients, their employees or members, franchisees, independent sales agents and lender channel clients), 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. With an increased percentage of our business occurring virtually, there is an enhanced risk of a potential violation of the expanding privacy and cybersecurity laws and regulations.
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.
Industry structure changes that disrupt the functioning of the residential real estate market could materially adversely affect our operations and financial results.
All of our businesses and the businesses of our joint ventures and our franchisees are highly regulated and subject to shifts in public policy, statutory interpretation and enforcement priorities of regulators and other government authorities as well as amendments to existing regulations and regulatory guidance. In addition, through our subsidiaries, employees and/or affiliated agents, we are a participant in many MLSs, a member-owner of certain MLSs, and a member of NAR and respective state realtor associations. The rules and policies for these organizations are also subject to change due to shifts in internal policy, regulatory developments, litigation or other legal action. Changes in the eventrules and policies of NAR and/or any MLSs can also be driven by changes in membership, including the entry of new industry participants, and other industry forces. We cannot assure you that changes in legislation, regulations, interpretations or regulatory guidance, enforcement priorities, or the rules and policies of NAR and/or any MLSs will not result in additional limitations or restrictions on our business or otherwise adversely affect us.
From time to time, certain industry practices have come under federal or state scrutiny or have been the subject of litigation. Examples may include, but are not limited to, various NAR and MLS rules, compliance with RESPA or similar state statutes (including, but not limited to, those related to the broker-to-broker exception, marketing agreements or consumer rebates), sales agent classification and worker classification statutes, broker fiduciary duties, federal and state fair
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housing laws, consumer lending and debt collection laws, false or fraudulent claims laws, and state laws limiting or prohibiting inducements, cash rebates and gifts to consumers.
Heightened scrutiny can follow changes in administration, and the industry is currently experiencing such increased interest by regulators and other government offices, both on a federal and state level. See "Item 1.—Business—Government and Other Regulations"" for additional information.
Realogy, NAR and other industry participants are also currently named in putative class action complaints under which the plaintiffs contend that certain NAR or MLS rules are anti-competitive under the Sherman Act. See Note 14, "Commitments and Contingencies—Litigation—Real Estate Litigation", to our Consolidated Financial Statements included elsewhere in this Annual Report for additional information on these matters.
There can be no assurances as to whether the DOJ or FTC, their state counterparts, state or federal courts, or other governmental body will determine that any industry practices or developments have an anti-competitive effect on the industry or are otherwise proscribed. Any such determination could result in industry investigations, enforcement actions, changes in legislation, regulations, interpretations or regulatory guidance or other legislative or regulatory action or other actions, any of which could have the potential to result in additional limitations or restrictions on our business, cause material disruption to our business or otherwise adversely affect us.
Moreover, we believe certain industry participants, including listing aggregators and participants pursuing non-traditional methods of marketing real estate, are pursuing changes to MLS and NAR rules and legal regulations that are intended to benefit their competitive position to the disadvantage of historical real estate brokerage models.
Meaningful changes in industry operations or structure, as a result of any of the foregoing or as the result other governmental pressures or the vendorsintroduction or growth of certain competitive models, or otherwise could have a material adverse effect on our operations, revenues, earnings and financial results.
Our businesses and the businesses of our joint ventures and affiliated franchisees are highly regulated and any failure to comply with such regulations or any changes in such regulations could adversely affect our business.
As noted in the prior risk factor, all of our businesses (including company owned brokerage, franchise, leads generation, relocation, title underwriting and title agency) and the businesses of our joint ventures (including mortgage origination, RealSure and real estate auction) as well as the businesses of our franchisees are highly regulated and subject to changing economic and political influences. We must comply with numerous laws and regulations both domestically and abroad.
For example, we must comply with RESPA, state real estate brokerage laws, state title insurance laws, and similar laws in countries in which we contractdo business, which restrict payments that 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, home warranty and title insurance). Such laws may to providesome extent impose limitations on arrangements involving our real estate franchise, real estate brokerage, title agency and underwriting services, on behalflead generation, and relocation operations or the business of our customers werejoint ventures (including mortgage origination, RealSure and real estate auction). RESPA compliance may become a greater challenge under certain administrations, including the current administration, 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 sufferRESPA 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 personal information, our customers, such as our Cartus corporateRESPA on the basis that all things of value exchanged should be deemed in exchange for the referral. Violations of RESPA 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 subjectsimilar state statutes can lead to claims of substantial damages, which may include (but are not limited to) fines, treble damages and attorneys' fees.
Moreover, we are required 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.
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 businesses. We cannot assure you that future changes in legislation, regulations or interpretations will not adversely affect our business operations. 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 compliance efforts may result in increased expenses, diversion of management's time or changes to the manner in which we conduct our business. Our failure to comply with laws and regulations may subject us to fines, penalties, injunctions and/or potential criminal violations. Any changes to these laws, regulations or interpretations or any new laws or regulations may make it more difficult for us to operate our business. Likewise, all of the foregoing could adversely affect the businesses of our joint ventures or franchisees. Any of the foregoing may have a material adverse effect on our operations.
We are subject to certain risks related to litigation filed by or against us or against affiliated agents, franchisees or our joint ventures, 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 or against affiliated agents or franchisees, including remedies or damage awards, and adverse results in such litigation and other proceedings, including treble damages and penalties. Adverse outcomes may materially harm our business and financial condition. Such litigation and other proceedings may include, but are not limited to:
•antitrust and anti-competition claims (including claims related to NAR or MLS rules regarding buyer broker commissions);
•actions relating to claims alleging violations of RESPA or state consumer fraud statutes, intellectual property rights, commercial arrangements, franchising arrangements, negligence and fiduciary duty claims arising from franchising arrangementsfederal consumer protection statutes or company owned brokerage operations or violations of similar laws in countries we operate in around the world;other state real estate law violations;
•employment law claims, including claims challenging the classification of sales agents as independent contractors as well as joint employer, wage and hour and joint employerretaliation claims;
•information security, including claims (funder new and emerging data privacy laws related to the protection of customer, employee or a summarythird-party information;
•cyber-crime, including claims related to the diversion of legal proceedings initiatedhomesale 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 a wholly-owned subsidiary franchisorthe company owned brokerage operations for negligence, misrepresentation or breach of fiduciary duty in connection with the Company franchisor and an affiliated franchisee alleging worker misclassification, see "Part I - Item 3. Legal Proceedings" in this Annual Report);
performance of real estate brokerage disputes like the failure to disclose hidden defects in the propertyor other professional services as well as other brokerage claims associated with listing information and property history, including disputes involving buyers of relocation property;
history;•vicarious or joint liability based upon the conduct of individuals or entities traditionally outside of our control, including franchisees and independent sales agents;agents, under joint employer claims or other theories of actual or apparent agency;
•claims related to intellectual property or copyright law, including infringement actions including those alleging improper use of copyrighted photographs on websites or in marketing materials without consent of the copyright holder;holder or claims challenging our trademarks;
•actions against our title company for defalcations on closing payments or alleging itclaims against the title agent contending that the agent knew or should have known others were committing mortgage fraud;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;
•claims related to disclosure or securities law violations as well as derivative suits; and
•general fraud claims.
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Other ordinary court legal proceedings that may arise from time to time include those related to commercial arrangements, indemnification (under contract or common law), franchising arrangements, 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, claims under the False Claims Act (or similar state laws), consumer lending and debt collection law claims, employment law claims related to business actions responsive to the COVID-19 outbreak and governmental and regulatory directives thereto, state auction law, and violations of similar laws in countries we operate in around the world with respect to any of the foregoing.
See Note 14, "Commitments and 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(in particular, if the courts grant partial or full certification of a large class. Inclass) and the casesignificant costs 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. We may be required to enter into licensing agreements (if available on acceptable terms or at all) and pay royalties.defense. 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, there is a deductible for each such case, and such insurance may not be sufficient to cover the losses we incur.
Adverse decisions in litigation or regulatory actions 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, investigations, claims and regulatory proceedings against other participants in the residential real estate or relocation industry may impact the Company and its affiliated franchisees when the rulings or settlements in those cases cover practices common to the broader industry.industry or business community and may generate litigation for the Company. Examples may include RESPA, worker classification, or antitrust and anti-competition claims, associated with RESPA compliance, broker fiduciary duties, and sales agent classification.among others. Similarly, the Company may be impacted by litigation and other claims against companies in other industries. 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 title underwriter typically underwrites title insurance policiesassumes the risk of up to $1.5the first $1.5 million. For policies in excess of $1.5 million,
on each transaction it insures. However, we typically obtainmaintain a reinsurance policy from a national underwriter toarrangement under which we may reinsure the excess amount.amounts over $1.5 million on certain transactions. 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.our underwriter. 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 title and escrow companies, by our company owned brokerage business during the real estate settlement process, as well as errorsand 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 inand significant funds that flow though our company owned brokerage, title, escrow and settlement services and our relocation businesses.operations. 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.
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
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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, including formerly affiliated franchisees, 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 onAdverse outcomes in intellectual property litigation and proceedings could include the successcancellation, invalidation or other loss of these proceedings, wematerial intellectual property rights used in our business and injunctions prohibiting our use of intellectual property that is subject to third-party patents or other third-party intellectual property rights. We may be required to enter into licensing or consent agreements (if available on acceptable terms or at all), or to pay damages or royalties or cease using certain service marks, trademarks, technology or trademarks.other intellectual property.
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 propertybrands or our reputation.
Our liquidity has been, and is expected to continue to be, negatively impacted by the substantial interest expense on our debt obligations.
Weare significantly encumbered by our debt obligations. As of December 31, 2021, our total debt, excluding our securitization obligations, was $3,042 million (without giving effect to outstanding letters of credit). As a result, a substantial portion of our cash flows from operations must be dedicated to the payment of interest on our indebtedness and, as a result, is not available for other purposes, including our operations, capital expenditures, technology, share repurchases, dividends and future business opportunities or principal repayment. Our liquidity position has been, and is expected to continue to be, negatively impacted by the substantial interest expense on our debt obligations.
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.
Our leverage could have important consequences, including the following:
•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 debt agreements 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 to obtain additional debt or equity financing for working capital, capital expenditures, business development, debt service requirements, acquisitions or general corporate or other purposes;
•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 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.
A material decline in our ability to generate EBITDA calculated on a Pro Forma Basis, as defined in the Senior Secured Credit Agreement governing the Senior Secured Credit Facility could result in our failure to comply with the senior secured leverage ratio covenant under our Senior Secured Credit Facility (including the Revolving Credit Facility) and Term Loan A Facility, which would result in an event of default if we fail to remedy or avoid a default as permitted under the applicable debt arrangement.
Our debt risk may also be increased as a result of competitive pressures that reduce margins and free cash flow. If our EBITDA calculated on a Pro Forma Basis were to decline and/or we were to incur additional senior secured debt (including 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 subjectlimited as we must maintain compliance with the senior secured leverage ratio under the Senior Secured Credit Agreement. Any inability to significant losses if banks do not honorborrow sufficient funds to operate our escrowbusiness could have a material adverse impact on our business, results of operations and trust deposits.liquidity.
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Restrictive covenants under our Senior Secured Credit Facility, Term Loan A Facility, and indentures governing the Unsecured Notes may limit the manner in which we operate.
Our company owned brokerageSenior Secured Credit Facility, Term Loan A 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;
•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 or finance future operations or capital needs.
An event of default under our titleSenior Secured Credit Facility, the Term Loan A Facility or the indentures governing our other material indebtedness would adversely affect our operations and settlement services business actour ability to satisfy obligations under our indebtedness.
If we are unable to comply with the senior secured leverage ratio covenant under the Senior Secured Credit Facility or Term Loan A Facility due to a material decline in our ability to generate EBITDA calculated on a Pro Forma Basis (as defined in the Senior Secured Credit Agreement) or otherwise or if we are unable to comply with other restrictive covenants under those agreements or the indentures governing our Unsecured Notes and we fail to remedy or avoid a default as escrow agents for numerous customers. Aspermitted under the applicable debt arrangement, there would be an escrow agent, we receive money from customers"event of default" under 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 hold until certain conditions are satisfied.obtain an unqualified audit opinion by 90 days after the end of any fiscal year. Upon the satisfactionoccurrence 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 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 such notes or our Apple Ridge Funding LLC securitization program.
If we were unable to repay the amounts outstanding under our Senior Secured Credit Facility or Term Loan A Facility, the lenders and holders of such debt could proceed against the collateral granted to secure those conditions,debt arrangements. We have pledged a significant portion of our assets as collateral to secure such indebtedness. If the lenders under those debt arrangements accelerate the repayment of borrowings, we releasemay not have sufficient assets to repay the moneySenior Secured Credit Facility or Term Loan A Facility and our other indebtedness or be able to borrow sufficient funds to refinance such indebtedness. Upon the appropriate party. We deposit this money with various banks and while these deposits are not assetsoccurrence of an event of default under the indentures governing our Unsecured Notes, the trustee or holders of 25% of the Company (and therefore excluded fromoutstanding applicable notes could elect to declare the principal of, premium, if any, and accrued but unpaid interest on such notes to be due and payable. Any of the foregoing would have a material adverse effect on our consolidated balance sheet),business, financial condition and results of operations.
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The exchangeable note hedge and warrant transactions may affect the value of our common stock.
Concurrent with the offering of the Exchangeable Senior Notes, we remain contingently liable forentered into exchangeable note hedge transactions and warrant transactions with certain counterparties (the "Option Counterparties"). The exchangeable note hedge transactions are expected generally to reduce the dispositionpotential dilution upon exchange of these deposits. These escrow and trust deposits totaled $426 million at December 31, 2018. The banks may hold a significant amount of these depositsthe notes and/or offset any cash payments we are required to make in excess of the federal deposit insurance limit.principal amount of exchanged notes, as the case may be. However, the warrant transactions could separately have a dilutive effect on our common stock to the extent that the market price per share of common stock exceeds the strike price of the warrants.
The Option Counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling the common stock or other securities of ours in secondary market transactions prior to the maturity of the Exchangeable Senior Notes (and are likely to do so during any observation period related to an exchange of the notes). This activity could cause or avoid an increase or a decrease in the market price of our common stock.
We are subject to counterparty risk with respect to the exchangeable note hedge transactions.
The Option Counterparties are financial institutions or affiliates of financial institutions, and we are subject to the risk that one or more of such Option Counterparties may default under the exchangeable note hedge transactions. Our exposure to the credit risk of the Option Counterparties is not secured by any collateral. If any Option Counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at that time under the exchangeable note hedge transaction. Our exposure will depend on many factors but, generally, the increase in our exposure will be correlated to the increase in our common stock market price and in the volatility of the market price of our depository banks werecommon stock. In addition, upon a default by the Option Counterparty, we may suffer adverse tax consequences and dilution with respect to become unableour common stock. We can provide no assurance as to honorthe financial stability or viability of 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.Option Counterparty.
We may be unable to achieve or maintain cost savings and other benefits from our restructuring activities.
We consistently evaluate potential refinancing and financing transactions with respect to our debt, including repaying or 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, terms that are acceptable to us, or at all. Any future indebtedness may impose various additional restrictions and covenants on us which could limit our ability to respond to market conditions, to make capital investments or to take advantage of business opportunities. Refinancing debt at a higher cost savingswould affect our operating results. We could also issue public or private placements of our common stock or preferred stock or convertible notes, any of which could, among other things, dilute our current stockholders and other benefitsmaterially and adversely affect the market price of our common stock.
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.
Variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.
At December 31, 2021, $232 million of our borrowings under our Senior Secured Credit Facility and joint ventures intoTerm Loan A Facility was at variable rates of interest thereby exposing us to interest rate risk. If interest rates increase, our existing operations,debt service
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obligations on the variable rate indebtedness would increase even if the amount borrowed remained the same, and our net income would decrease.
The phase-out of LIBOR, or the replacement of LIBOR with SOFR or a different reference rate or modification of the method used to complete or effectively manage divestitures or refranchisings, couldcalculate 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 business,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. As a result of concerns about the accuracy of the calculation of LIBOR, a number of British Bankers’ Association member banks entered into settlements with certain regulators and law enforcement agencies with respect to the alleged manipulation of LIBOR, and LIBOR and other “benchmark” rates are subject to ongoing national and international regulatory scrutiny and reform. The cessation date for submission and publication of rates for certain tenors of LIBOR has since been extended by the ICE Benchmark Administration until mid-2023. In response to concerns regarding the future of LIBOR, the United States Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing LIBOR with a new index calculated by short-term repurchase agreements, backed by U.S. Treasury securities: the Secured Overnight Financing Rate, or ‘‘SOFR.’’ We are unable to predict whether SOFR will attain market traction as a LIBOR replacement or the impact of other reforms, whether currently enacted or enacted in the future. Any new benchmark rate, including SOFR, will likely not replicate LIBOR exactly and if future rates based upon a successor rate 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 orand results of operations.
We regularly reviewmay be unable to continue to securitize certain of the relocation assets of Cartus Relocation Services, which may adversely impact our portfolioliquidity.
At December 31, 2021, $118 million of businessessecuritization obligations were outstanding through special purpose entities monetizing certain assets of Cartus Relocation Services under two lending facilities. We have provided a performance guaranty which guarantees the obligations of Cartus Relocation Services and evaluate potential acquisitions, joint ventures, divestitures, refranchisingsits subsidiaries, as originator and other strategic transactions. Potential issues associated with these activities could include, among other things:servicer under the Apple Ridge securitization program. Our significant debt obligations may limit our ability to completeincur additional borrowings under our existing securitization facilities. The securitization markets have experienced, and may again experience, significant disruptions, including in connection with the COVID-19 crisis, which may have the effect of increasing our cost of funding or effectively manage such transactions on terms commercially favorablereducing our access to us or at all; ourthese markets in the future.
Regulatory and for target companiesLegal Risks
There may be adverse financial and operational consequences to findus and our acquisition proposalsfranchisees if independent sales agents are reclassified as employees.
Although 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, newer rules and interpretations of state and federal employment laws and regulations, including those governing employee classification and wage and hour regulations in our and other industries, may impact industry practices, our company owned brokerage operations, and our affiliated franchisees. Certain jurisdictions have adopted or are considering adopting standards that are significantly more favorablerestrictive 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 resulthistorically used in the benefits or cost savings we expect, our business, financial condition or results of operations may be adversely affected.
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our operations in certain jurisdictions and could result in more stringent underwriting guidelines imposed by lenders or cause other disruptions in the mortgage industry. Other legislation or regulation limiting participation of the 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 marketoperational and financial performance of the Company.
If we fail to protect the privacy and personal information of our customers or employees, we may be subject to legal claims, government action and damage to our reputation.
Regulators in generalthe 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 as a result of 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 operations in particular.
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. These ongoing changes to privacy and cybersecurity laws also may make it more difficult for us to operate our business and may have a material adverse effect on our operations.
Any significant violations of privacy and cybersecurity laws and regulations (including those involving joint ventures or our third-party vendors or partners) could result in the loss of new or existing business (including potential home buyers or sellers, our corporate relocation or real estate benefit program clients, their employees or members, franchisees, independent sales agents and lender channel clients), 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. With an increased percentage of our business occurring virtually, there is an enhanced risk of a potential violation of the expanding privacy and cybersecurity laws and 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.
Industry structure changes that disrupt the functioning of the residential real estate market could materially adversely affect our operations and financial results.
All of our businesses and the businesses of our joint ventures and our franchisees are highly regulated and subject to shifts in public policy, statutory interpretation and enforcement priorities of regulators and other government authorities as well as amendments to existing regulations and regulatory guidance. In addition, through our subsidiaries, employees and/or affiliated agents, we are a participant in many MLSs, a member-owner of certain MLSs, and a member of NAR and respective state realtor associations. The rules and policies for these organizations are also subject to change due to shifts in internal policy, regulatory developments, litigation or other legal action. Changes in the rules and policies of NAR and/or any MLSs can also be driven by changes in membership, including the entry of new industry participants, and other industry forces. We cannot assure you that changes in legislation, regulations, interpretations or regulatory guidance, enforcement priorities, or the rules and policies of NAR and/or any MLSs will not result in additional limitations or restrictions on our business or otherwise adversely affect us.
From time to time, certain industry practices have come under federal or state scrutiny or have been the subject of litigation. Examples may include, but are not limited to, various NAR and MLS rules, compliance with RESPA or similar state statutes (including, but not limited to, those related to the broker-to-broker exception, marketing agreements or consumer rebates), sales agent classification and worker classification statutes, broker fiduciary duties, federal and state fair
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housing laws, consumer lending and debt collection laws, false or fraudulent claims laws, and state laws limiting or prohibiting inducements, cash rebates and gifts to consumers.
Heightened scrutiny can follow changes in administration, and the industry is currently experiencing such increased interest by regulators and other government offices, both on a federal and state level. See "Item 1.—Business—Government and Other Regulations"" for additional information.
Realogy, NAR and other industry participants are also currently named in putative class action complaints under which the plaintiffs contend that certain NAR or MLS rules are anti-competitive under the Sherman Act. See Note 14, "Commitments and Contingencies—Litigation—Real Estate Litigation", to our Consolidated Financial Statements included elsewhere in this Annual Report for additional information on these matters.
There can be no assurances as to whether the DOJ or FTC, their state counterparts, state or federal courts, or other governmental body will determine that any industry practices or developments have an anti-competitive effect on the industry or are otherwise proscribed. Any such determination could result in industry investigations, enforcement actions, changes in legislation, regulations, interpretations or regulatory guidance or other legislative or regulatory action or other actions, any of which could have the potential to result in additional limitations or restrictions on our business, cause material disruption to our business or otherwise adversely affect us.
Moreover, we believe certain industry participants, including listing aggregators and participants pursuing non-traditional methods of marketing real estate, are pursuing changes to MLS and NAR rules and legal regulations that are intended to benefit their competitive position to the disadvantage of historical real estate brokerage models.
Meaningful changes in industry operations or structure, as a result of any of the foregoing or as the result other governmental pressures or the introduction or growth of certain competitive models, or otherwise could have a material adverse effect on our operations, revenues, earnings and financial results.
Our businesses and the businesses of our joint ventures and affiliated franchisees are highly regulated and any failure to comply with such regulations or any changes in such regulations could adversely affect our business.
As noted in the prior risk factor, all of our businesses (including company owned brokerage, franchise, leads generation, relocation, title underwriting and title agency) and the businesses of our joint ventures (including mortgage origination, RealSure and real estate auction) as well as the businesses of our franchisees are highly regulated and subject to changing economic and political influences. We must comply with numerous laws and regulations both domestically and abroad.
For example, we must comply with RESPA, state real estate brokerage laws, state title insurance laws, and similar laws in countries in which we do business, which restrict payments that 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, home warranty and title insurance). Such laws may to some extent impose limitations on arrangements involving our real estate franchise, real estate brokerage, title agency and underwriting services, lead generation, and relocation operations or the business of our joint ventures (including mortgage origination, RealSure and real estate auction). RESPA compliance may become a greater challenge under certain administrations, including the current administration, 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. Violations of RESPA or similar state statutes can lead to claims of substantial damages, which may include (but are not limited to) fines, treble damages and attorneys' fees.
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 accounting pronouncements, implementation guidancematters, some of which impose steep fines 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 madepenalties for noncompliance, which would likely not be covered 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.
parties, the adoption of which could make compliance more difficult or expensive.
Our compliance efforts may result in increased expenses, diversion of management's time or changes to the skillsmanner in which we conduct our business. Our failure to comply with laws and talentregulations may subject us to fines, penalties, injunctions and/or potential criminal violations. Any changes to these laws, regulations or interpretations or any new laws or regulations may make it more difficult for us to operate our business. Likewise, all of the foregoing could adversely affect the businesses of our workforcejoint ventures or franchisees. Any of the foregoing may have a material adverse effect on our operations.
We are subject to certain risks related to litigation filed by or against us or against affiliated agents, franchisees or our joint ventures, and adverse results may harm our abilitybusiness 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 or against affiliated agents or franchisees, including remedies or damage awards, and adverse results in such litigation and other proceedings, including treble damages and penalties. Adverse outcomes may materially harm our business and financial condition. Such litigation and other proceedings may include, but are not limited to:
•antitrust and anti-competition claims (including claims related to recruit, retainNAR or MLS rules regarding buyer broker commissions);
•actions relating to claims alleging violations of RESPA or state consumer fraud statutes, federal consumer protection statutes or other state real estate law violations;
•employment law claims, including claims challenging the classification of sales agents as independent contractors as well as joint employer, wage and motivate top talent. Talent management has beenhour and continuesretaliation claims;
•information security, including claims under new and emerging data privacy laws related to the protection of customer, employee or third-party information;
•cyber-crime, including claims 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 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;
•vicarious or joint liability based upon the conduct of individuals or entities traditionally outside of our control, including franchisees and independent sales agents, under joint employer claims or other theories of actual or apparent agency;
•claims related to intellectual property or copyright law, including infringement actions alleging improper use of copyrighted photographs on websites or in marketing materials without consent of the copyright holder or claims challenging our trademarks;
•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;
•claims related to disclosure or securities law violations as well as derivative suits; and
•general fraud claims.
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Other ordinary court legal proceedings that may arise from time to time include those related to commercial arrangements, indemnification (under contract or common law), franchising arrangements, 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, claims under the False Claims Act (or similar state laws), consumer lending and debt collection law claims, employment law claims related to business actions responsive to the COVID-19 outbreak and governmental and regulatory directives thereto, state auction law, and violations of similar laws in countries we operate in around the world with respect to any of the foregoing.
See Note 14, "Commitments and 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 (in particular, if the courts grant partial or full certification of a strategic prioritylarge class) and the significant costs of defense. 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, there is a deductible for each such case, and such insurance may not be sufficient to cover the losses we incur.
Adverse decisions in litigation or regulatory actions against companies unrelated to us could impact our ability to recruitbusiness practices and retainthose of our executive officersfranchisees in a manner that adversely impacts our financial condition and key employees, including those with significant experienceresults of operations.
Litigation, investigations, claims and regulatory proceedings against other participants in the residential real estate market,or relocation industry may impact the Company and its affiliated franchisees when the rulings or settlements in those cases cover practices common to the broader industry or business community and may generate litigation for the Company. Examples may include RESPA, worker classification, or antitrust and anti-competition claims, among others. Similarly, the Company may be impacted by litigation and other claims against companies in other industries. 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 generallytypically 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 assumes the risk of the first $1.5 million on each transaction it insures. However, we maintain a reinsurance arrangement under which we may reinsure amounts over $1.5 million on certain transactions. 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 our underwriter. We may also be subject to numerous factors, includinglegal claims or additional claims losses arising from the compensationhandling of escrow transactions and benefits we pay. If we are unableclosings by our owned title agencies or our underwriter's independent title agents. We carry errors and omissions insurance for errors made by our title and escrow companies, by our company owned brokerage business during the real estate settlement process, and by us related to internally develop or hire skilled executivesreal estate services. Our franchise agreements also require our franchisees to name us as an additional insured on their errors and other critical positions or if we encounter challenges associated with change management, our ability to continue to execute or evolve our strategy may be impairedomissions and our business may be adversely affected.
general liability insurance policies. The occurrence of a severe weather event or natural disaster can reduce home inventory levelssignificant 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 negatively impactresults of operations during the demand for homes in affected areas, which can delay the closing of homesale transactions and have an unfavorable impact on homesale transaction volume, relocation transactions, title closing units and broker-to-broker referral fees.period. In addition, we could incur damage, whichinsurance carriers may be significant, to our office locations as a result of severe weather events or natural disastersdispute coverage for various reasons and our insurance may not be adequate to cover such losses. Certain areas in which our businesses operate, such as California and Florida, are particularly subject to severe weather events and natural disasters.
Fraud, defalcation and misconduct by employees are also risks inherent in this regard, we believeour business, particularly given the high transactional volumes and significant funds that flow though our company owned brokerage, title, escrow and settlement services and relocation operations. We may also from time to time be subject to liability claims based upon the limitation on our ability to utilize our NOLs resulting from our ownership change should be significantly reduced as a resultfraud or misconduct of our net unrealized built-in gain. Even assumingfranchisees. To the extent that any loss or theft of funds substantially exceeds our insurance coverage, our business could be materially adversely affected.
The weakening or unavailability of our intellectual property rights could adversely impact our business, including through the loss of intellectual property we license.
Our trademarks, trade names, domain names and other intellectual property rights are ablefundamental to use our unrealized built-in gain,brands and our franchising business. The steps we take to obtain, maintain and protect our intellectual property rights may not be
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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 cash tax benefit from our NOLs is dependent upon our ability to generate sufficient taxable income. Although we believe that we willappropriate regulatory authorities. Our intellectual property rights may not be able to generate sufficient taxable income to fully utilize our NOLs, wesuccessfully asserted in the future or may be invalidated, circumvented or challenged. We may be unable to earn enough taxable incomeprevent 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, including formerly affiliated franchisees, 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. Adverse outcomes in intellectual property litigation and proceedings could include the cancellation, invalidation or other loss of material intellectual property rights used in our business and injunctions prohibiting our use of intellectual property that is subject to third-party patents or other third-party intellectual property rights. We may be required to enter into licensing or consent agreements (if available on acceptable terms or at all), or to pay damages or royalties or cease using certain service marks, trademarks, technology or other intellectual property.
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 brands or our reputation. In addition, our license agreements for the use of the Sotheby's International Realty® and Better Homes and Gardens® Real Estate brands are terminable by the respective licensor prior to the expiration of our NOLs.
Risks Related to Our Indebtedness
Our liquidity has been, and is expected to continue to be, negatively impacted by the substantial interest expense on our debt obligations.
We are significantly encumbered by our debt obligations. As of December 31, 2021, our total debt, excluding our securitization obligations, was $3,042 million (without giving effect to outstanding letters of credit). As a result, a substantial portion of our cash flows from operations must be dedicated to the payment of interest on our indebtedness and, as a result, is not available for other purposes, including our operations, capital expenditures, technology, share repurchases, dividends and future business opportunities or principal repayment. Our liquidity position has been, and is expected to continue to be, negatively impacted by the substantial interest expense on our debt obligations.
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.
Our leverage could have important consequences, including the following:
•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 Notesdebt agreements 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 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 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.
Our debt risk may also be increased as a result of December 31, 2018.competitive pressures that reduce margins and free cash flow. If our EBITDA calculated on a Pro Forma Basis were to decline and/or we were to incur additional senior secured debt (including additional borrowings under the Revolving Credit Facility), our ability to borrow incremental amountsthe 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 need to borrow under the RevolvingSenior Secured Credit Facility is generally at its highest at or around the end of the first quarter every year.Agreement. 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.
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Restrictive covenants under our Senior Secured Credit Facility, Term Loan A Facility, and indentures governing the Unsecured Notes may limit the manner in which we operate.
Our Senior Secured Credit Facility, Term Loan A 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;
•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 or finance future operations or capital needs.
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 describedunder the Senior Secured Credit Facility or Term Loan A Facility due to a material decline in our ability to generate EBITDA calculated on a Pro Forma Basis (as defined in the prior risk factorSenior Secured Credit Agreement) or otherwise or if we are unable to comply with other restrictive covenants under Senior Secured Credit Facility and Term Loan A Facilitythose agreements or the indentures governing our Unsecured 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 Notessuch notes or our Apple Ridge Funding LLC securitization program.
If we were unable to repay the amounts outstanding under our Senior Secured Credit Facility andor 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.those debt arrangements. 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 Facilitythose debt arrangements accelerate the repayment of borrowings, we may not have sufficient assets to repay the Senior Secured Credit Facility andor Term Loan A Facility and our other indebtedness or be able to borrow sufficient funds to refinance such indebtedness. Upon the occurrence of an event of default under the indentures governing our Unsecured Notes, the trustee or holders of 25% of the outstanding applicable notes could elect to declare the principal of, premium, if any, and accrued but unpaid interest on such notes to be due and payable. Any of the foregoing would have a material adverse effect on our business, financial condition and results of operations.
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The exchangeable note hedge and warrant transactions may affect the value of our common stock.
Concurrent with the offering of the Exchangeable Senior Notes, we entered into exchangeable note hedge transactions and warrant transactions with certain counterparties (the "Option Counterparties"). The exchangeable note hedge transactions are expected generally to reduce the potential dilution upon exchange of the notes and/or offset any cash payments we are required to make in excess of the principal amount of exchanged notes, as the case may be. However, the warrant transactions could separately have a dilutive effect on our common stock to the extent that the market price per share of common stock exceeds the strike price of the warrants.
The Option Counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling the common stock or other securities of ours in secondary market transactions prior to the maturity of the Exchangeable Senior Notes (and are likely to do so during any observation period related to an exchange of the notes). This activity could cause or avoid an increase or a decrease in the market price of our common stock.
We are subject to counterparty risk with respect to the exchangeable note hedge transactions.
The Option Counterparties are financial institutions or affiliates of financial institutions, and we are subject to the risk that one or more of such Option Counterparties may default under the exchangeable note hedge transactions. Our exposure to the credit risk of the Option Counterparties is not secured by any collateral. If any Option Counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at that time under the exchangeable note hedge transaction. Our exposure will depend on many factors but, generally, the increase in our exposure will be correlated to the increase in our common stock market price and in the volatility of the market price of our common stock. In addition, upon a default by the future,Option Counterparty, we may needsuffer adverse tax consequences and dilution with respect to seek new financingour common stock. We can provide no assurance as to the financial stability or explore the possibilityviability of amending the terms of our Senior Secured Credit Facility and Term Loan A Facility,any Option Counterparty.
We have substantial indebtedness and we may not be able to do sorefinance any such debt on terms as favorable as those of currently outstanding debt.
We consistently evaluate potential refinancing and financing transactions with respect to our debt, including repaying or 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.
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 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. Any downgrade, suspension or withdrawal of a rating by a rating agency (or any anticipated downgrade, suspension or withdrawal) as well as any actual or anticipated placement on negative outlook by a rating agency could make it more difficult or more expensive for us to refinance our 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, 20182021, $2,075$232 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, our debt service
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obligations on the variable rate indebtedness would increase even if the amount borrowed remained the same, and our net income would decrease. Although we
The phase-out of LIBOR, or the replacement of LIBOR with SOFR or a different reference rate or modification of the method used to calculate LIBOR, may adversely affect interest rates which may have entered intoan adverse impact on us.
Our primary interest rate swaps involving the exchange of floating for fixed rate interest payments to reduceexposure is interest rate volatility for a significant portion offluctuations, specifically with respect to LIBOR, due to its impact on our variable rate borrowings suchunder our Senior Secured Credit Facility and Term Loan A Facility. Our interest rate swaps do not eliminate interest rate volatility for all of our variable rate indebtedness at December 31, 2018.are also based on LIBOR.
We may be unable to continue to securitize certain of ourthe relocation assets of Cartus Relocation Services, which may adversely impact our liquidity.
At December 31, 2018, $2312021, $118 million of securitization obligations were outstanding through special purpose entities monetizing certain assets of our relocation services businessCartus Relocation Services under two lending facilities. We have provided a performance guaranty which guarantees the obligations of our Cartus subsidiaryRelocation Services and its subsidiaries, as originator and servicer under the Apple Ridge securitization program. Our significant debt obligations may limit our ability to incur additional borrowings under our existing securitization facilities. The securitization markets have experienced, and may again experience, significant disruptions, including in connection with the COVID-19 crisis, 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.
Regulatory and Legal Risks
There may be adverse financial and operational consequences to us and our franchisees if independent sales agents are reclassified as employees.
Although 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, newer rules and interpretations of state and federal employment laws and regulations, including those governing employee classification and wage and hour regulations in our and other industries, may impact industry practices, our company owned brokerage operations, and our affiliated franchisees. Certain jurisdictions have adopted or are considering adopting standards that are significantly more restrictive than those historically used in wage and hour cases, which could have a material adverse effect on our business and results of operations. See "Item 1.—Business—Government and Other Regulations" in this Annual Report for additional information.
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
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our operations in certain jurisdictions and could have a material adverse effect on the operational and financial performance of the Company.
If we fail to protect the privacy and personal information of our customers or employees, we may be subject to legal claims, government action and damage to our reputation.
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 as a result of 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. These ongoing changes to privacy and cybersecurity laws also may make it more difficult for us to operate our business and may have a material adverse effect on our operations. For example, we are required to comply with the European Union's GDPR and in the U.S. we are required to comply with numerous federal and state statutes governing privacy and cybersecurity matters such as the CCPA, CPRA and the NYDFS Cybersecurity Regulation. States like Washington, Colorado and Virginia have also enacted privacy laws and many other states have draft proposals pending before their legislatures. See "Item 1.—Business—Government and Other Regulations—Cybersecurity and Data Privacy Regulations" in this Annual Report for additional information.
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. These ongoing changes to privacy and cybersecurity laws also may make it more difficult for us to operate our business and may have a material adverse effect on our operations.
Any significant violations of privacy and cybersecurity laws and regulations (including those involving joint ventures or our third-party vendors or partners) could result in the loss of new or existing business (including potential home buyers or sellers, our corporate relocation or real estate benefit program clients, their employees or members, franchisees, independent sales agents and lender channel clients), 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. With an increased percentage of our business occurring virtually, there is an enhanced risk of a potential violation of the expanding privacy and cybersecurity laws and regulations.
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.
Industry structure changes that disrupt the functioning of the residential real estate market could materially adversely affect our operations and financial results.
All of our businesses and the businesses of our joint ventures and our franchisees are highly regulated and subject to shifts in public policy, statutory interpretation and enforcement priorities of regulators and other government authorities as well as amendments to existing regulations and regulatory guidance. In addition, through our subsidiaries, employees and/or affiliated agents, we are a participant in many MLSs, a member-owner of certain MLSs, and a member of NAR and respective state realtor associations. The rules and policies for these organizations are also subject to change due to shifts in internal policy, regulatory developments, litigation or other legal action. Changes in the rules and policies of NAR and/or any MLSs can also be driven by changes in membership, including the entry of new industry participants, and other industry forces. We cannot assure you that changes in legislation, regulations, interpretations or regulatory guidance, enforcement priorities, or the rules and policies of NAR and/or any MLSs will not result in additional limitations or restrictions on our business or otherwise adversely affect us.
From time to time, certain industry practices have come under federal or state scrutiny or have been the subject of litigation. Examples may include, but are not limited to, various NAR and MLS rules, compliance with RESPA or similar state statutes (including, but not limited to, those related to the broker-to-broker exception, marketing agreements or consumer rebates), sales agent classification and worker classification statutes, broker fiduciary duties, federal and state fair
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housing laws, consumer lending and debt collection laws, false or fraudulent claims laws, and state laws limiting or prohibiting inducements, cash rebates and gifts to consumers.
Heightened scrutiny can follow changes in administration, and the industry is currently experiencing such increased interest by regulators and other government offices, both on a federal and state level. See "Item 1.—Business—Government and Other Regulations"" for additional information.
Realogy, NAR and other industry participants are also currently named in putative class action complaints under which the plaintiffs contend that certain NAR or MLS rules are anti-competitive under the Sherman Act. See Note 14, "Commitments and Contingencies—Litigation—Real Estate Litigation", to our Consolidated Financial Statements included elsewhere in this Annual Report for additional information on these matters.
There can be no assurances as to whether the DOJ or FTC, their state counterparts, state or federal courts, or other governmental body will determine that any industry practices or developments have an anti-competitive effect on the industry or are otherwise proscribed. Any such determination could result in industry investigations, enforcement actions, changes in legislation, regulations, interpretations or regulatory guidance or other legislative or regulatory action or other actions, any of which could have the potential to result in additional limitations or restrictions on our business, cause material disruption to our business or otherwise adversely affect us.
Moreover, we believe certain industry participants, including listing aggregators and participants pursuing non-traditional methods of marketing real estate, are pursuing changes to MLS and NAR rules and legal regulations that are intended to benefit their competitive position to the disadvantage of historical real estate brokerage models.
Meaningful changes in industry operations or structure, as a result of any of the foregoing or as the result other governmental pressures or the introduction or growth of certain competitive models, or otherwise could have a material adverse effect on our operations, revenues, earnings and financial results.
Our businesses and the businesses of our joint ventures and affiliated franchisees are highly regulated and any failure to comply with such regulations or any changes in such regulations could adversely affect our business.
As noted in the prior risk factor, all of our businesses (including company owned brokerage, franchise, leads generation, relocation, title underwriting and title agency) and the businesses of our joint ventures (including mortgage origination, RealSure and real estate auction) as well as the businesses of our franchisees are highly regulated and subject to changing economic and political influences. We must comply with numerous laws and regulations both domestically and abroad.
For example, we must comply with RESPA, state real estate brokerage laws, state title insurance laws, and similar laws in countries in which we do business, which restrict payments that 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, home warranty and title insurance). Such laws may to some extent impose limitations on arrangements involving our real estate franchise, real estate brokerage, title agency and underwriting services, lead generation, and relocation operations or the business of our joint ventures (including mortgage origination, RealSure and real estate auction). RESPA compliance may become a greater challenge under certain administrations, including the current administration, 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. Violations of RESPA or similar state statutes can lead to claims of substantial damages, which may include (but are not limited to) fines, treble damages and attorneys' fees.
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, some of which impose steep fines and penalties for noncompliance, which would likely not be covered by cybersecurity breach insurance. Certain additional laws and regulations impacting our business are described under "Item 1.—Business—Government and Other Regulations" in this Annual Report. In all of our businesses 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.
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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 businesses. We cannot assure you that future changes in legislation, regulations or interpretations will not adversely affect our business operations. 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 compliance efforts may result in increased expenses, diversion of management's time or changes to the manner in which we conduct our business. Our failure to comply with laws and regulations may subject us to fines, penalties, injunctions and/or potential criminal violations. Any changes to these laws, regulations or interpretations or any new laws or regulations may make it more difficult for us to operate our business. Likewise, all of the foregoing could adversely affect the businesses of our joint ventures or franchisees. Any of the foregoing may have a material adverse effect on our operations.
We are subject to certain risks related to litigation filed by or against us or against affiliated agents, franchisees or our joint ventures, 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 or against affiliated agents or franchisees, including remedies or damage awards, and adverse results in such litigation and other proceedings, including treble damages and penalties. Adverse outcomes may materially harm our business and financial condition. Such litigation and other proceedings may include, but are not limited to:
•antitrust and anti-competition claims (including claims related to NAR or MLS rules regarding buyer broker commissions);
•actions relating to claims alleging violations of RESPA or state consumer fraud statutes, federal consumer protection statutes or other state real estate law violations;
•employment law claims, including claims challenging the classification of sales agents as independent contractors as well as joint employer, wage and hour and retaliation claims;
•information security, including claims under new and emerging data privacy laws related to the protection of customer, employee or third-party information;
•cyber-crime, including claims 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 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;
•vicarious or joint liability based upon the conduct of individuals or entities traditionally outside of our control, including franchisees and independent sales agents, under joint employer claims or other theories of actual or apparent agency;
•claims related to intellectual property or copyright law, including infringement actions alleging improper use of copyrighted photographs on websites or in marketing materials without consent of the copyright holder or claims challenging our trademarks;
•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;
•claims related to disclosure or securities law violations as well as derivative suits; and
•general fraud claims.
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Other ordinary court legal proceedings that may arise from time to time include those related to commercial arrangements, indemnification (under contract or common law), franchising arrangements, 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, claims under the False Claims Act (or similar state laws), consumer lending and debt collection law claims, employment law claims related to business actions responsive to the COVID-19 outbreak and governmental and regulatory directives thereto, state auction law, and violations of similar laws in countries we operate in around the world with respect to any of the foregoing.
See Note 14, "Commitments and 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 (in particular, if the courts grant partial or full certification of a large class) and the significant costs of defense. 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, there is a deductible for each such case, and such insurance may not be sufficient to cover the losses we incur.
Adverse decisions in litigation or regulatory actions 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, investigations, claims and regulatory proceedings against other participants in the residential real estate or relocation industry may impact the Company and its affiliated franchisees when the rulings or settlements in those cases cover practices common to the broader industry or business community and may generate litigation for the Company. Examples may include RESPA, worker classification, or antitrust and anti-competition claims, among others. Similarly, the Company may be impacted by litigation and other claims against companies in other industries. 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 title underwriter assumes the risk of the first $1.5 million on each transaction it insures. However, we maintain a reinsurance arrangement under which we may reinsure amounts over $1.5 million on certain transactions. 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 our underwriter. 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 title and escrow companies, by our company owned brokerage business during the real estate settlement process, and 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 and significant funds that flow though our company owned brokerage, title, escrow and settlement services and relocation operations. 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.
The weakening or unavailability of our intellectual property rights could adversely impact our 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
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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, including formerly affiliated franchisees, 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. Adverse outcomes in intellectual property litigation and proceedings could include the cancellation, invalidation or other loss of material intellectual property rights used in our business and injunctions prohibiting our use of intellectual property that is subject to third-party patents or other third-party intellectual property rights. We may be required to enter into licensing or consent agreements (if available on acceptable terms or at all), or to pay damages or royalties or cease using certain service marks, trademarks, technology or other intellectual property.
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 brands or our reputation. In addition, our license agreements for the use of the Sotheby's International Realty® and Better Homes and Gardens® Real Estate brands are terminable by the respective licensor prior to the end of the license term if certain conditions occur and the loss of either of these licenses could have a material adverse effect on our business and results of operations.
Other Business Risks
Our goodwill and other long-lived assets are subject to potential impairment which could negatively impact our earnings.
A significant portion of our assets consists of goodwill and other long-lived assets, the carrying value of which may be reduced if we determine that those assets are impaired. If actual results differ from the assumptions and estimates used in the goodwill and long-lived asset valuation calculations, we could incur impairment charges, which would negatively impact our earnings. We have recognized significant non-cash impairment charges in the past, including as related to management’s estimates with respect to the potential impact of the COVID-19 crisis on our business, and we may be required to take additional such charges in the future, which may be material.
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, escrow 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 $601 million at December 31, 2021. 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.
Potential reform of Fannie Mae or Freddie Mac or certain federal agencies or a reduction in 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 the federal conservatorship of Fannie Mae or Freddie Mac over a period of years. Legislation, if enacted, or additional regulation which curtails Fannie Mae's and/or Freddie Mac's activities and/or results in the wind down of the federal conservatorship 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
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industry. 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 we have other international operations and relationships, including but not limited to international franchisees and master franchisees. Such operations and relationships are subject to risks that are not generally experienced by our U.S. operations and could result in losses against which we are not insured and have a negative impact on our profitability. Such risks include, but are not limited to, heightened exposure to local economic conditions and local laws and regulations (including those related to employees), fluctuations in foreign currency exchange rates, and potential adverse changes in the political stability of foreign countries or in their diplomatic relations with the U.S. In addition, 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.
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 subject to numerous factors, including the compensation and benefits we pay. The prevalence of virtual and remote-work arrangements has accelerated in connection with the COVID-19 crisis, leading to the increased mobility of our employee base, which could result in additional competition for critical talent. If we are unable to internally develop or hire skilled executives and other critical positions, successfully plan for succession of employees holding key management 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 or man-made 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 or man-made disaster can reduce the level and quality of home inventory and negatively impact the demand for homes in affected areas, which can disrupt local or regional real estate markets, delay the closing of homesale transactions and have an unfavorable impact on home prices, homesale transaction volume, relocation transactions, and title closing units. These effects may be compounded when the taxes or insurance costs 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. The impact of climate change, such as more frequent and severe weather events and/or long-term shifts in climate patterns, exacerbates these risks. Likewise our business and operating results could suffer as the result of other catastrophic events, including public health crises, such as pandemics and epidemics.
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Increasing scrutiny and changing expectations from investors and customers with respect to corporate sustainability practices may impose additional costs on us or expose us to reputational or other risks.
There is an increasing focus from certain investors and other stakeholders concerning corporate responsibility, specifically related to environmental, social and governance (ESG) factors. We publicly share certain information about our ESG initiatives and we may face increased scrutiny related to these activities, including if we fail to achieve progress in these areas on a timely basis, if at all. We could also be criticized for the scope of such initiatives or goals.
Some investors may use ESG factors to guide their investment strategies and, in some cases, may choose not to invest in us if they believe our related policies are inadequate. In addition, certain clients may require that we implement certain additional ESG procedures or standards in order to continue to do business with us. Meeting these evolving expectations could be costly and failure (or perceived failure) to satisfy investor, client, consumer or other stakeholder expectations and standards, could also cause reputational harm to our business and brands.
Market forecasts and estimates may prove to be inaccurate and, even if achieved, our business could fail to grow at similar rates.
We use forecasts and data from a wide variety of industry sources (including NAR, Fannie Mae and other independent sources) in addition to good faith estimates derived from management's knowledge of the industry to inform our own forecasts and estimates for key market trends. Forecasts regarding rates of home ownership, median sales price, volume of homesales, and other housing industry metrics are inherently uncertain or speculative in nature and actual results for any period could materially differ. Even if the markets in which we compete achieve the growth forecasted by an industry source like NAR or Fannie Mae, our business could fail to grow at similar rates, if at all. See "Item 1.—Business—Market and Industry Data and Forecasts" in this Annual Report for additional information.
Our tax rate is dependent upon a number of factors, a change in any of which could impact our future tax rates and net income.
If our effective tax rate increases, our net income and cash flow could be adversely affected. Our effective income tax rate can vary significantly between periods due to a number of complex factors including projected levels of taxable income; increases in expenses that are not deductible for tax purposes; changes in tax laws or the interpretation of such tax laws; tax audits conducted and settled by various tax authorities; changes to assessments of uncertain tax positions; adjustments to estimated taxes upon finalization of various tax returns; the ability to claim certain tax credits; increases or decreases to valuation allowances recorded against deferred tax assets; and fluctuations in our stock price, impacting deductions for equity grants.
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.
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.
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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, but not limited to, those described above and the following:
•our quarterly or annual earnings or those of other companies in our industry;
•our business and/or financial guidance, any revisions to such guidance and/or failure to achieve results consistent with such guidance;
•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 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;market;
•the incurrence of additional indebtedness or other adverse changes relating to our debt;
•changes in, or the elimination of, our quarterlystock repurchase program or annual earnings or those of other companies in our industry;stock repurchases, if any;
•changes in earnings estimates recommendations or commentary by sell-side securities analysts who trackcovering our common stock or other companies within our industry or stock;
•ratings changes or commentary by rating agencies on our debt;
•press releases or other commentary by industry forecasters or other housing market participants;
•market and industry perception of our success, or lack thereof, in pursuing our growth strategy;
•actual or potential changes in laws, regulations and legal and regulatory interpretations, including as a result of the 2017 Tax Act;interpretations;
•changes in housing fundamentals, including:or mortgage finance markets or other housing fundamentals;
•changes in accounting standards, policies, guidance, interpretations or principles;
•arrival and departure of key personnel;
•commencement of new, or adverse resolution of, new or pending litigation, arbitrationlegal or regulatory proceedings against us;the Company;
•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 stockstock; and market rumors; 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.
If any of the foregoing occurs, it could cause our stock price to fall or experience volatility and may expose us to litigation, including class action lawsuits that, even if unsuccessful, could be costly to defend and a distraction to management.
Under the share repurchase program authorized by our currentBoard of Directors in the first quarter of 2022, we are authorized to repurchase our common stock. Such program does not have an expiration date and we are not be obligated to repurchase a specified number or futuredollar value of shares. The actual timing, number and value of shares repurchased will be determined by us and may fluctuate based on a number of factors, including, but not limited to, our priorities for the use of cash, price, market and economic conditions, and legal requirements and contractual requirements (including compliance with the terms of our debt agreements). Any such repurchase program could also be suspended or terminated at any time.
Repurchases pursuant to a share repurchase program could affect our stock price and increase its volatility. The existence of a share repurchase programs or thatprogram could also cause our capital allocation strategy willstock price to be higher than it would be in the absence of such a program and could diminish our cash reserves. Even if such a share repurchase program was to be fully implemented, it may not enhance 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
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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.
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Item 2. Properties.
Substantially all of our properties are leased commercial space; we do not own any real property of significance. From December 31, 2020 to December 31, 2021, we decreased our leased-office footprint from approximately 5.7 million square feet to approximately 5.2 million square feet, of which as of December 31, 2021, approximately 0.8 million square feet are impaired or restructured.
Corporate headquarters. headquarters; Realogy Franchise and Brokerage Groups. Our corporate headquarters is located at 175 Park Avenue in Madison, New Jersey with a lease term expiring in December 20292029. This office also serves as the main operating space for Realogy Franchise Group and as corporate headquarters (and one regional headquarters) for Realogy Brokerage Group. The space consists of approximately 270,000 square feet, of space.which our businesses currently utilize approximately 56%.
Realogy Title and settlement services. Group. Our title and settlement servicesagency business conducts its main operations at a leased facility in Mount Laurel, New Jersey, pursuant to a lease expiring in December 2021.2026. Our title underwriting business is headquartered in Dallas, Texas, with a lease expiring in July 2026. As of December 31, 2018, this business2021, these businesses also hashave leased regional and branch offices in 2024 states and Washington, D.C.
We believe that all of our properties and facilities are well maintained.
Item 3. Legal Proceedings.
See "Item 1. Business—Government and Other Regulations" in this Annual Report for additional information on important legal and regulatory matters that impact our business, including a description of:summary of the Dodge, et al. v. PHH Corporation, et al. litigation, formerly captioned Strader, et al.current legal and Hall v. PHH Corporation, et al. and which we refer to as the Strader legal matter.
regulatory environment.
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.
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 23, 2022. Our executive officers also serve as officers or directors of certain of our other subsidiaries or minority-owned joint ventures. The age of each individual indicated below is as of February 23, 2022.
Ryan M. Schneider, 52, 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. Under the terms of his employment agreement, Mr. Schneider serves as a member of the Board of Realogy. He is also a member of the Board of Directors of Anthem, Inc.
Rizwan Akhtar, 46, has served as our Executive Vice President, Chief Technology Officer—Business Technology since November 2020, having previously served as our Senior Vice President, Chief Information Officer at Cartus Corporation from August 2018. Prior to joining the Company, Mr. Akhtar served as Managing Director, Personal & Business Banking U.S. at BMO Harris, a North American bank, from April 2017 to August 2018, where he was responsible for technology solutions and products supporting bank customers. From November 2007 to March 2017, he served as Group Vice President, M&T Bank, a financial holding company, where he was responsible for enterprise digital channels (online and mobile) across M&T Bank business lines. Mr. Akhtar has over 20 years of diverse experience in business-focused IT leadership, including support of business strategies enabling growth and transformation.
Donald J. Casey, 60, 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).
M. Ryan Gorman, 43, 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, 54, 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, 56, has served as the President and Chief Executive Officer of Realogy Leads Group and Cartus Relocation Services 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.
Nashira Layade, 42, has served as our Executive Vice President, Chief Technology Officer—Technology Services since November 2020, having previously served as our Senior Vice President, Chief Information Security Officer since July 2016. Prior to joining the Company, Ms. Layade served as Executive Director at Time Warner, Inc., a multinational media and entertainment conglomerate, from August 2011 to June 2016, where she responsible to protect the digital assets of Time Warner Inc., and collaborated with Time Warner’s business, technology, and legal executives to effectively manage Time Warner’s risk and reputational profile. She has 20 years’ experience as a thought leader in information security, data privacy and risk managements, having previously served at Prudential Financial as Director, Information Security, Citigroup Inc. as Vice President, Senior Risk Control Officer and Bloomberg LP as Global Head.
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Melissa K. McSherry, 49, has served as our Chief Operating Officer since February 22, 2022. Prior to joining the Company, Ms. McSherry served as Senior Vice President, Global Head of Risk and Identity Solutions at Visa, Inc., a multinational financial services corporation, from 2016 to February 2022. While at Visa, Ms. McSherry led a cross functional team of approximately 500 persons that spanned product, engineering, sales, data science, client success, operations, and product marketing, among others. From 2014 to 2016, Ms. McSherry founded and served as the Chief Executive Officer of Firinne, advising CEOs, owners, and boards on strategy and execution. Ms. McSherry also served at Capital One Financial Corporation from 2002 until 2014, most recently in the role of Senior Vice President, Card Partnerships from 2010 until 2014.
Tanya Reu-Narvaez, 45, has served as our Executive Vice President, Chief People Officer since January 2021, having previously served as our Senior Vice President, Human Resources since 2018, where she oversaw the team responsible for supporting Realogy Brokerage Group and the Realogy Franchise Group. From 2009 to 2018, she served as Senior Vice President of Human Resources for the Company’s corporate and franchise group divisions. In that role, she was responsible for implementing strategic talent initiatives aligned to business objectives including talent management and acquisition, employee engagement, retention and diversity and inclusion. Ms. Reu-Narvaez joined Cendant Corporation in 2002, where she last held the role of Vice President of Human Resources before joining Realogy in 2006 at the time of its spin-off from Cendant in the same role. She is a member and former Chair of the Corporate Board of Governors of the National Association of Hispanic Real Estate Professionals (NAHREP).
Charlotte Simonelli, 50, 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. She is also a member of the board of directors of NielsenIQ and serves as their Audit Committee Chair.
Marilyn J. Wasser, 66, 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.
Susan Yannaccone, 46, has served as our Executive Vice President, President and Chief Executive Officer of Realogy Franchise Group since November 30, 2020, having previously served as Regional Executive Vice President of Realogy Brokerage Group LLC, heading the Eastern Seaboard and Midwest regions for Coldwell Banker Realty, the brand’s owned brokerage operations since March 2018. Ms. Yannaccone joined Realogy in 2015, serving as Chief Operating Officer of ERA from July 2015 to September 2016 and as President and Chief Executive Officer of ERA from September 2016 to March 2018. Prior to that time, she served as Senior Vice President, Network Services for HSF Affiliates from 2013 to July 2015 and Vice President of Operations for Real Living from 2010 to 2012.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock is listed on the New York Stock Exchange ("NYSE") under the symbol "RLGY". As of February 22, 2019,23, 2022, the number of stockholders of record was 22.
Share Repurchase Program
The Company may repurchase shares of its common stock pursuant to authorizations made from its Board of Directors. Shares repurchased 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.
Dividends
In early November 2019, the Company's Board of Directors discontinued the repurchasedCompany's quarterly dividend. The Company does not anticipate paying any dividends on its common stock has been retired.
| 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 2018 | 2,330,478 | $19.15 | 2,330,478 | $ | 104,137,018 | |||||||
| November 2018 | 2,228,647 | $18.34 | 2,228,647 | $ | 63,263,632 | |||||||
| December 2018 | 780,838 | $18.57 | 780,838 | $ | 48,763,470 | |||||||
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 with the cumulative total returnassumes a $100 investment on December 31, 2016, and reinvestment of the S&P 500 index andall dividends, in the S&P MidCap 400 index which are broad equity market indices as well asand the S&P Home Builders Select Industry Indexindex, or XHB Index as a published industry index. The Company was added to the S&P MidCap 400 Index in September 2018 and, based on the size of the companies included, we believe that this index provides a more relevant and useful comparison for the Company. Accordingly, we intend to discontinue presentation of the S&P 500 index in future stock performance graphs. 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 2016, 20172019, 2020 and 20182021 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 over the three-year periodperiods ending December 31, 2018, December 31, 20192021, 2022 and December 31, 2020, respectively. The cumulative total shareholder return for the broader equity market indices 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, 2013 and updates the value through December 31, 2018.
| Cumulative Total Return | |||||||||||||||||||||||
| December 31, | |||||||||||||||||||||||
| 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | ||||||||||||||||||
| Realogy Holdings Corp. | $ | 100.00 | $ | 89.93 | $ | 74.13 | $ | 52.38 | $ | 54.61 | $ | 30.76 | |||||||||||
| SPDR S&P Homebuilders ETF (XHB) index | $ | 100.00 | $ | 111.43 | $ | 120.95 | $ | 110.32 | $ | 191.24 | $ | 129.56 | |||||||||||
| S&P MidCap 400 index | $ | 100.00 | $ | 109.77 | $ | 107.38 | $ | 129.65 | $ | 150.71 | $ | 134.01 | |||||||||||
| S&P 500 index | $ | 100.00 | $ | 113.69 | $ | 115.26 | $ | 129.05 | $ | 157.22 | $ | 150.33 | |||||||||||
| Cumulative Total Return | |||||||||||||||||||||||||||||||||||
| December 31, | |||||||||||||||||||||||||||||||||||
| 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | ||||||||||||||||||||||||||||||
| Realogy Holdings Corp. | $ | 100.00 | $ | 104.26 | $ | 58.72 | $ | 40.01 | $ | 54.23 | $ | 69.48 | |||||||||||||||||||||||
| SPDR S&P Homebuilders ETF (XHB) index | $ | 100.00 | $ | 173.35 | $ | 117.44 | $ | 177.10 | $ | 220.46 | $ | 331.46 | |||||||||||||||||||||||
| S&P MidCap 400 index | $ | 100.00 | $ | 116.24 | $ | 103.36 | $ | 130.44 | $ | 148.26 | $ | 184.97 | |||||||||||||||||||||||
Item 6. Selected Financial Data.[Reserved]
| As of or for the Year Ended December 31, | |||||||||||||||||||
| 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
| (In millions, except per share data and operating statistics) | |||||||||||||||||||
| Statement of Operations Data: | |||||||||||||||||||
| Net revenue | $ | 6,079 | $ | 6,114 | $ | 5,810 | $ | 5,706 | $ | 5,328 | |||||||||
| Total expenses | 5,870 | 5,763 | 5,461 | 5,424 | 5,103 | ||||||||||||||
| Income before income taxes, equity in losses (earnings) and noncontrolling interests | 209 | 351 | 349 | 282 | 225 | ||||||||||||||
| Income tax expense (benefit) (a) | 65 | (65 | ) | 144 | 110 | 87 | |||||||||||||
| Equity in losses (earnings) of unconsolidated entities | 4 | (18 | ) | (12 | ) | (16 | ) | (9 | ) | ||||||||||
| Net income | 140 | 434 | 217 | 188 | 147 | ||||||||||||||
| Less: Net income attributable to noncontrolling interests | (3 | ) | (3 | ) | (4 | ) | (4 | ) | (4 | ) | |||||||||
| Net income attributable to Realogy Holdings and Realogy Group | $ | 137 | $ | 431 | $ | 213 | $ | 184 | $ | 143 | |||||||||
| Earnings per share attributable to Realogy Holdings: | |||||||||||||||||||
| Basic earnings per share | $ | 1.10 | $ | 3.15 | $ | 1.47 | $ | 1.26 | $ | 0.98 | |||||||||
| Diluted earnings per share | $ | 1.09 | $ | 3.11 | $ | 1.46 | $ | 1.24 | $ | 0.97 | |||||||||
| Weighted average common and common equivalent shares used in: | |||||||||||||||||||
| Basic | 124.0 | 136.7 | 144.5 | 146.5 | 146.0 | ||||||||||||||
| Diluted | 125.3 | 138.4 | 145.8 | 148.1 | 147.2 | ||||||||||||||
| Cash dividends declared per share (beginning in August 2016) | $ | 0.36 | $ | 0.36 | $ | 0.18 | $ | — | $ | — | |||||||||
| Balance Sheet Data: | |||||||||||||||||||
| Cash and cash equivalents | $ | 225 | $ | 227 | $ | 274 | $ | 415 | $ | 313 | |||||||||
| Securitization assets (b) | 238 | 218 | 238 | 281 | 286 | ||||||||||||||
| Total assets | 7,290 | 7,337 | 7,421 | 7,531 | 7,304 | ||||||||||||||
| Securitization obligations | 231 | 194 | 205 | 247 | 269 | ||||||||||||||
| Long-term debt, including short-term portion | 3,548 | 3,348 | 3,507 | 3,702 | 3,855 | ||||||||||||||
| Equity | 2,315 | 2,622 | 2,469 | 2,422 | 2,183 | ||||||||||||||
| Statement of Cash Flows Data: | |||||||||||||||||||
| Net cash provided by operating activities | $ | 394 | $ | 667 | $ | 586 | $ | 588 | $ | 452 | |||||||||
| Net cash used in investing activities | (91 | ) | (146 | ) | (191 | ) | (211 | ) | (302 | ) | |||||||||
| Net cash used in financing activities | (297 | ) | (570 | ) | (534 | ) | (275 | ) | (75 | ) | |||||||||
| For the Year Ended December 31, | |||||||||||||||||||
| 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
| Operating Statistics: | |||||||||||||||||||
Real Estate Franchise Services (c) (d) | �� | ||||||||||||||||||
| Closed homesale sides (e) | 1,103,857 | 1,144,217 | 1,135,344 | 1,101,333 | 1,065,339 | ||||||||||||||
| Average homesale price (f) | $ | 303,750 | $ | 288,929 | $ | 272,206 | $ | 263,894 | $ | 250,214 | |||||||||
| Average homesale brokerage commission rate (g) | 2.48 | % | 2.50 | % | 2.50 | % | 2.51 | % | 2.52 | % | |||||||||
| Net royalty per side (h) | $ | 323 | $ | 313 | $ | 299 | $ | 294 | $ | 282 | |||||||||
Company Owned Real Estate Brokerage Services (d) (i) | |||||||||||||||||||
| Closed homesale sides (e) | 336,806 | 344,446 | 335,699 | 336,744 | 308,332 | ||||||||||||||
Average homesale price (f) | $ | 523,426 | $ | 514,685 | $ | 489,504 | $ | 489,673 | $ | 500,589 | |||||||||
| Average homesale brokerage commission rate (g) | 2.43 | % | 2.44 | % | 2.46 | % | 2.46 | % | 2.47 | % | |||||||||
| Gross commission income per side (j) | $ | 13,458 | $ | 13,309 | $ | 12,752 | $ | 12,730 | $ | 13,072 | |||||||||
| Relocation Services | |||||||||||||||||||
Initiations (k) | 171,442 | 161,755 | 163,063 | 167,749 | 171,210 | ||||||||||||||
Referrals (l) | 88,445 | 83,678 | 87,277 | 99,531 | 96,755 | ||||||||||||||
| Title and Settlement Services | |||||||||||||||||||
| Purchasing title and closing units (m) | 157,228 | 159,113 | 152,997 | 130,541 | 113,074 | ||||||||||||||
| Refinance title and closing units (n) | 18,495 | 28,564 | 50,919 | 38,544 | 27,529 | ||||||||||||||
| Average fee per closing unit (o) | $ | 2,230 | $ | 2,092 | $ | 1,875 | $ | 1,861 | $ | 1,780 | |||||||||
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
On January 10, 2022, the year,Company issued $1,000 million of 5.25% Senior Notes due 2030. On February 4, 2022, we used the net proceeds from the issuance, together with homesale transaction volume declining 4% duringcash on hand, to redeem in full both the fourth quarter$550 million of 20189.375% Senior Notes and the $550 million of 7.625% Senior Secured Second Lien Notes, each at a redemption price of 100% plus the applicable "make whole" premium, together with accrued interest to the redemption date on both such notes.
See the pro forma debt table as comparedof December 31, 2021 after giving effect to 2017. For additional information on existing homesales and existing homesale price (on both a year-over-year basis as well as by quarter for 2018 as compared to 2017) see the information presentedforegoing refinancing transactions under the captions "Current Industry Trends—Existing Homesales"header "Financial Obligations" below. See Note 9, "Short and "—Existing Homesale Price" in this Management's DiscussionLong-Term Debt", and Analysis.
additional information.
CURRENT BUSINESS AND INDUSTRY TRENDS
During 2021, we commenced a plan to transform certain aspectsbelieve sustained high levels of our operational support and drive changes in how we support our agents from a marketing and technology perspective to help our agents be more productive and their businesses more profitable.
On a combined basis for Realogy Franchise and stock market volatility. We are unable to extrapolate the relative impact that each of these factors may have had on regional and local markets in the United States.
•Homesale transaction volume decreased 1%at Realogy Franchise Group increased 27% during such period, primarily as a result of a 2% decrease19% increase in average homesale price and a 7% increase in existing homesale transactions, offset by a 2%transactions.
The 20% increase in thehomesale transaction volume reported by NAR was attributed to an 11% increase in average homesale price.price and a 9% increase in existing homesale transactions.
_______________
(a) Historical existing homesale data is as of the U.S. real estate market, in particular the addressable market of commission revenues, has continuedmost recent NAR press release, which is subject to attract outside capital investment in traditional and disruptive competitors that seek to access a portion of this market. Certain of our privately-held competitors have investors that appear to be supportive of a model that pursues 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.
sampling error.
Existing Homesales
For the year ended December 31, 2018,2021, NAR existing homesale transactions decreasedincreased to 5.36.1 million homes or down 3%up 9% compared to 20172020. For the year ended December 31, 2018, RFG and NRT2021, homesale transactions on a combined basis decreased 3%for Realogy Franchise and Brokerage Groups increased 8% compared to 2017.2020 due primarily to continued strong demand, particularly at the high-end of the market. Realogy Brokerage Group also benefited from its concentrated geographic footprint in certain major metropolitan markets, including New York City. We believe that constrained inventory contributed to the year-over-year decline in homesale transactions in the second half of 2021. 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. (b)Existing homesale data, on a seasonally adjusted basis, is as of the most recent Fannie Mae press release. |
As of their most recent releases, NAR is forecasting existing homesale transactions to decrease 3% in 2022 and to increase 2% for 2019 and increase 4% for 2020in 2023 while Fannie Mae is forecasting existing homesale transactions to remain flat for 2019decrease 5% in 2022 and increase 2% for 2020.
4% in 2023.
Existing Homesale Price
In 2018,2021, NAR existing homesale average price increased 3%11% compared to 2017. In 2018, RFG and NRT's2020. For the year ended December 31, 2021, average homesale price on a combined basis for Realogy Franchise and Brokerage Groups increased 4%20% compared to 20172020 with approximately equal contribution from each. Strong demand in the overall housing market benefited both Realogy Franchise Group and consisted of RFG'sRealogy Brokerage Group. Low inventory also contributed to higher average homesale price, increasewith both Realogy Franchise Group and Realogy Brokerage Group also benefiting from strength at the high-end of 5% and NRT's average homesale price increase of 2%. The difference between the average homesale price increase for RFG compared to NRT is due to lower closing volumehousing market. Realogy Brokerage Group also benefited from its concentrated geographic footprint in NRT's new development business which is typically at a higher price point as well as lower transaction volume in thecertain major metropolitan markets, including New York metropolitan market. City. 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.
(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 of 2% for 2019to increase 5% in 2022 and 3% for 20204% in 2023 while Fannie Mae is forecasting anmedian existing homesale price to increase of 3% for both 201911% in 2022 and 2020.
4% in 2023.
Given the cyclical nature of the industry, there remain significant uncertainties regarding whether the strong demand and other beneficial consumer trends discussed above will be maintained at the same strength or at all, and whether such trends will continue to have a positive effect on our financial results, as well as significant uncertainties related to the COVID-19 crisis, including the impact of vaccines and virus mutations on the severity, duration and extent of the pandemic.
2020 Temporary Cost-Saving Measures. Quarterly earnings comparisons were challenged in 2021 by the absence of the temporary cost-saving measures we took in the second and third quarters of 2020 in response to the COVID-19 crisis. Those temporary cost saving measures resulted in approximately $150 million of aggregate savings in the second and third quarter of 2020, with approximately two-thirds of such amount recognized in the second quarter of 2020. Substantially all of these measures were reversed during the third quarter of 2020 and we do not expect to realize comparable cost-savings from these prior temporary measures in future periods.
Realogy Title Group, including Mortgage Origination Joint Venture.We believehave been in an unusually prolonged period of low interest rates. Our financial results are typically favorably impacted by a low interest rate environment as a decline in mortgage rates generally drives increased refinancing activity as well as homesale transactions that long-term demand for housingin turn drives increased title services and mortgage origination activity. If the growthpace of our industryexisting homesale transactions slows (due to increases in mortgage rates, declines in affordability, or otherwise), we would also expect decreased title services and mortgage origination activity. For example, the number of purchase title and closing units declined 2% in the fourth quarter of 2021 compared to the prior period, as the number of homesale transactions declined.
However, while refinancing volumes are highly correlated with (and particularly sensitive to) increases in mortgage rates, they are also inherently cyclical. Refinancing volumes were exceptionally strong throughout 2020 and into the first quarter of 2021, but began to soften during the second and third quarters of 2021. In the fourth quarter of 2021, refinancing title and closing units at Realogy Title Group declined 44% compared to the prior period. Given the strength of refinancing volumes in the first quarter of 2021, we expect year-over-year comparisons to continue to be challenging in the first quarter of 2022.
Equity in earnings at Guaranteed Rate Affinity declined from $126 million in 2020 to $49 million in 2021, primarily driven by the impact of mark-to-market adjustments on the mortgage loan pipeline and gain-on-sale margin compression, partially offset by strong purchase volume growth. Operating margins and mark-to-market adjustments may continue to be compressed due to competitive factors related to decreased demand as well as any mortgage rate increases.
Mortgage Rates. As noted above, mortgage rate increases generally have a negative impact on multiple aspects of our business. A wide variety of factors can contribute to mortgage rates, including Treasury note yields, federal interest rates, inflation, demand, consumer income, unemployment levels and foreclosure rates. Yields on the 10-year Treasury note hit all-time lows during the COVID-19 crisis, but as of December 31, 2021 were 1.52% as compared to 0.93% as of December 31, 2020.
Fiscal and monetary policies of the federal government and its agencies can also adversely impact rates, including reductions in the level of its purchases of mortgage-backed securities. In December 2021, the Federal Reserve Board announced its intention to accelerate the reduction of its purchases of mortgage-backed securities (which could result in this stimulus program concluding in March 2022) and released economic projections that showed officials expect to raise interest rates three times in 2022.
Although mortgage rates began to increase during 2021 from the lows seen in late 2020, they continued during the year to be at low levels compared to the 10-year average of 3.79% on a 30-year fixed-rate mortgage, according to Freddie Mac. On December 31, 2021, mortgage rates on a 30-year fixed-rate mortgage were 3.10%, or approximately 40 basis points higher than on December 31, 2020 and approximately 70 basis points lower than the 10-year average, according to Freddie Mac. For the week ending February 24, 2022, mortgage rates on a 30-year fixed-rate mortgage averaged 3.89%, according to Freddie Mac.
Banks may tighten mortgage standards, even if rates remain at low levels or decline, which could limit the availability of mortgage financing. In addition, many federal and/or state monetary or fiscal programs meant to assist individuals and businesses in the navigation of COVID-related financial challenges (including mortgage forbearance programs) have ended or are expected to end in the near term, which could have a negative impact on consumer financial health.
Inventory. Insufficient inventory levels generally have a negative impact on homesale transaction growth and we believe this factor contributed to the decline in homesale transactions in the second half of 2021. We have also seen an intensified pace of inventory supply turnover since the second half of 2020. For example, at our company owned Coldwell
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Banker brokerages, the speed at which a home that was listed for sale went under contract reduced to a median of 19 days on the market in the fourth quarter of 2021 from a median of 21 days on the market in the fourth quarter of 2020 and a median of 37 days on the market in the fourth quarter of 2019. Continued or accelerated declines in inventory have and may continue to result in insufficient supply to meet any increased demand driven by the lower interest rate environment and beneficial consumer trends. Additional inventory pressure arises from periods of slow or decelerated new housing construction, real estate models that purchase homes for rental or corporate use (rather than immediate resale), and alternative competitors, such as traditional iBuying models.
Low housing inventory levels have been a persistent industry-wide concern for years, 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 approximately 17% from 1.0 million as of January 2021 to 0.9 million as of January 2022, representing a record-setting low since 1999, when NAR started tracking the data. As a result, inventory has decreased from 1.9 months of supply in January 2021 to 1.6 months as of January 2022. These levels continue to be significantly below the 10-year average of 4.2 months, the 15-year average of 5.8 months and the 25-year average of 5.5 months.
Affordability.The fixed housing affordability index, as reported by NAR, decreased from 173 for December 2020 to 147 for December 2021 which is the lowest it has been since 2018. 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. Housing affordability may be impacted in future periods by inflationary pressures, increases in mortgage rates and average homesale price, further or accelerated declines in inventory, or a rise in unemployment or other economic challenges.
Recruitment and Retention of housing,Independent Sales Agents; Commission Income.Recruitment and retention of independent sales agents and independent sales agent teams are critical to the economic healthbusiness and financial results of a brokerage, including our company owned brokerages and those operated by our affiliated franchisees. In 2021, agents affiliated with our company owned brokerages grew 6% and, based on information from such franchisees, agents affiliated with our U.S. franchisees increased 2%, in each case as compared to 2020.
Aggressive competition for the affiliation of independent sales agents in this industry continues to make recruitment and retention efforts at both Realogy Franchise and Brokerage Groups challenging, in particular with respect to more productive sales agents, and has had in the past and may again in the future have a negative impact on our market share. These competitive market factors along with other trends (such as changes in the spending patterns of independent sales agents, as more agents purchase services from third parties outside of their affiliated broker) are expected to continue to put upward pressure on the average share of commissions earned by independent sales agents. 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. Similarly, franchisees have and may continue to seek reduced royalty fee arrangements or other incentives from us to offset the continued business pressures on such franchisees, which would result in a reduction in royalty fees paid to us. For additional information, see "Item 1.—Business—Competition."
Non-Traditional Competition and Industry Disruption. The significant size of the U.S. economy, demographic trendsreal estate market has continued to attract outside capital investment in disruptive and traditional competitors that seek to access a portion of this market. These competitors and their investors may pursue increases in market share over profitability, further complicating the competitive landscape.
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, virtual brokerages and other brokerages that offer the sales agent fewer services, but a higher percentage of commission income (or other compensation, such as generational transitions, increases in U.S. household formation, mortgage rate levelssign-on or equity awards), directly compete with traditional brokerage models and mortgage availability, certain tax benefits, job growth, increases in renters that qualify as homebuyers, may dilute the inherent attributes of homeownership versus rentingrelationship between the brokerage and the influence of local housing dynamics of supply versus demand. At this time,agent and add additional competitive pressure for independent sales agent talent.
We believe that certain of these factors are trending favorably,alternative transaction models, such as household formationiBuying and job growth. Factorshome swap models (and related models that may negatively affect growth in the housing industry include:
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expertise of an independent sales agent at the center of the transaction. RealSure® Sell is available in 24 U.S. cities as of December 31, 2021. We are investing to expand the scale of RealSure. In the fourth quarter of 2021, RealSure® Buy was launched in three pilot cities in the affordability of homes;U.S.
Relocation Spending.Global corporate spending on relocation services which continuehas continued 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. Cartus is subject to a competitive pricing environment and lower average revenue per relocation asAs a result of a shift in the mix of services and number of services being delivered per move. These factorsmove, as well as lower volume growth, our relocation operations have been increasingly subject to a competitive pricing environment and maylower average revenue per relocation. The COVID-19 crisis, along with related ongoing travel restrictions in the U.S. and elsewhere, has exacerbated these trends and is expected to continue to put pressure on the growthfinancial results of Cartus Relocation Services (part of the Realogy Franchise Group segment). We are unable to determine when, or if, relocation volumes will return to levels consistent with those prior to the onset of the COVID-19 crisis. In addition, the greater acceptance of remote work arrangements during the COVID-19 crisis has the potential to have a negative impact on relocation volumes in the long-term.
Leads Generation.Through Realogy Leads Group, a part of Realogy Franchise Group, we seek to provide high-quality leads to affiliated agents, including through real estate benefit programs that provide home-buying and profitabilityselling assistance to members of organizations such as credit unions and interest groups that have established members who are buying or selling a home as well as to consumers and corporations who have expressed interest in a certain brand, product or service (such as relocation services). We operate several real estate benefit programs, including a program with a large long-term client as well as other programs we have launched in the past two years, including AARP® Real Estate Benefits. There can be no assurance that we will be able to maintain or expand these programs, and even if we are successful in these efforts, such programs may not generate a meaningful number of high-quality leads.
Legal & Regulatory Environment. See Part I., "Item 1.—Business—Government and Other Regulations" of this segment.Annual Report for a discussion of the current legal and regulatory environment and how such environment could potentially impact us.
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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, homesale price, average broker commission rates, volume incentives achieved and non-standardother incentives. We utilize net royalty revenue per transactionside 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.
The following table presents our drivers for the years ended December 31, 2018, 20172021, 2020 and 2016.2019. 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 | ||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2020 | 2019 | ||||||||||||||||||||||||||||||||
| Realogy Franchise Group (a) | |||||||||||||||||||||||||||||||||||
| Closed homesale sides | 1,163,036 | 1,090,345 | 7 | % | 1,090,345 | 1,061,500 | 3 | % | |||||||||||||||||||||||||||
| Average homesale price | $ | 424,436 | $ | 355,214 | 19 | % | $ | 355,214 | $ | 314,769 | 13 | % | |||||||||||||||||||||||
| Average homesale broker commission rate | 2.45 | % | 2.48 | % | (3) | bps | 2.48 | % | 2.47 | % | 1 | bps | |||||||||||||||||||||||
| Net royalty per side | $ | 406 | $ | 353 | 15 | % | $ | 353 | $ | 327 | 8 | % | |||||||||||||||||||||||
| Realogy Brokerage Group | |||||||||||||||||||||||||||||||||||
| Closed homesale sides | 371,135 | 333,736 | 11 | % | 333,736 | 325,652 | 2 | % | |||||||||||||||||||||||||||
| Average homesale price | $ | 657,307 | $ | 553,081 | 19 | % | $ | 553,081 | $ | 522,282 | 6 | % | |||||||||||||||||||||||
| Average homesale broker commission rate | 2.42 | % | 2.43 | % | (1) | bps | 2.43 | % | 2.41 | % | 2 | bps | |||||||||||||||||||||||
| Gross commission income per side | $ | 16,486 | $ | 13,990 | 18 | % | $ | 13,990 | $ | 13,296 | 5 | % | |||||||||||||||||||||||
| Realogy Title Group | |||||||||||||||||||||||||||||||||||
| Purchase title and closing units (b) | 163,187 | 144,271 | 13 | % | 144,271 | 142,926 | 1 | % | |||||||||||||||||||||||||||
| Refinance title and closing units (c) | 56,675 | 62,887 | (10) | % | 62,887 | 25,383 | 148 | % | |||||||||||||||||||||||||||
| Average fee per closing unit (d) | $ | 2,709 | $ | 2,291 | 18 | % | $ | 2,291 | $ | 2,358 | (3) | % | |||||||||||||||||||||||
_______________
(a)Includes all franchisees except for Realogy Brokerage Group.
(b)Purchase title and closing units for the years ended December 31, 2020 and 2019 were revised to reflect a decrease of 4,855 and 3,284 units, respectively. The change was for the number of units only and did not impact revenue.
(c)Refinance title and closing units for the years ended December 31, 2020 and 2019 were revised to reflect a decrease of 2,437 and 1,206 units, respectively. The change was for the number of units only and did not impact revenue.
(d)With the change in units noted above, Average fee per closing unit for the years ended December 31, 2020 and 2019 was updated to reflect an increase of $78 and $61, respectively.
| Year Ended December 31, | % Change | Year Ended December 31, | % Change | ||||||||||||||||||
| 2018 | 2017 | 2017 | 2016 | ||||||||||||||||||
| RFG (a) | |||||||||||||||||||||
| Closed homesale sides | 1,103,857 | 1,144,217 | (4 | %) | 1,144,217 | 1,135,344 | 1 | % | |||||||||||||
| Average homesale price | $ | 303,750 | $ | 288,929 | 5 | % | $ | 288,929 | $ | 272,206 | 6 | % | |||||||||
| Average homesale broker commission rate | 2.48 | % | 2.50 | % | (2 | ) bps | 2.50 | % | 2.50 | % | — | ||||||||||
| Net royalty per side (b) | $ | 323 | $ | 313 | 3 | % | $ | 313 | $ | 299 | 5 | % | |||||||||
| NRT | |||||||||||||||||||||
| Closed homesale sides | 336,806 | 344,446 | (2 | %) | 344,446 | 335,699 | 3 | % | |||||||||||||
| Average homesale price | $ | 523,426 | $ | 514,685 | 2 | % | $ | 514,685 | $ | 489,504 | 5 | % | |||||||||
| Average homesale broker commission rate | 2.43 | % | 2.44 | % | (1 | ) bps | 2.44 | % | 2.46 | % | (2 | ) bps | |||||||||
| Gross commission income per side | $ | 13,458 | $ | 13,309 | 1 | % | $ | 13,309 | $ | 12,752 | 4 | % | |||||||||
| Cartus | |||||||||||||||||||||
| Initiations | 171,442 | 161,755 | 6 | % | 161,755 | 163,063 | (1 | %) | |||||||||||||
| Referrals | 88,445 | 83,678 | 6 | % | 83,678 | 87,277 | (4 | %) | |||||||||||||
| TRG | |||||||||||||||||||||
| Purchase title and closing units (c) | 157,228 | 159,113 | (1 | %) | 159,113 | 152,997 | 4 | % | |||||||||||||
| Refinance title and closing units (d) | 18,495 | 28,564 | (35 | %) | 28,564 | 50,919 | (44 | %) | |||||||||||||
| Average fee per closing unit | $ | 2,230 | $ | 2,092 | 7 | % | $ | 2,092 | $ | 1,875 | 12 | % | |||||||||
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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 ourservices offered through Realogy Title Group, including title, escrow and settlement services (iv) reducingor the referral fees we earn inservices of our relocation services business,mortgage origination or other joint ventures, and (v)(iv) 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 independent sales agents.agents, lower royalty rates from franchisees or an increase in other incentives paid to franchisees, among other factors.
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
Transaction volume growth has generally exceeded royalty revenue growth due primarily to the growth in gross commission income generated by our top 250 franchisees and our increased use of non-standardother 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 continuecontinues 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 non-standardother incentives. However, we expectin the event that any such increases inthe gross commission income willgenerated by our franchisees increases as a result of increased transaction volume, we would expect to recognize an increase in increased overall royalty payments to us.
We expect to experience pressures on net royalty per side, 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; however, these pressures were more than offset by increases in homesale prices in the three and twelve-month periods ended December 31, 2021.
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 RFGRealogy Franchise Group has franchised offices that are more widely dispersed across the United States. Accordingly, operating results and homesale statistics may differ between NRTRealogy Brokerage Group and RFGRealogy 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 NRT.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. We expect that commission share will continue to be subject to upward pressure in favor of the independent sales agent because of the increased bargaining power of independent sales agents and independent sales teams as well as more aggressive recruitment and retention activities taken by us and our competitors.
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 expense, net (other than relocation services interest for securitization assets and securitization obligations), income taxes, and other items that are not core to the operating activities of the Company such as restructuring charges, former parent legacy items, gains or losses on the early extinguishment of debt, asset 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, 20182021 vs. Year Ended December 31, 20172020
Our consolidated results were comprised of the following:
| Year Ended December 31, | |||||||||||||||||
| 2021 | 2020 | Change | |||||||||||||||
| Net revenues | $ | 7,983 | $ | 6,221 | $ | 1,762 | |||||||||||
| Total expenses | 7,548 | 6,812 | 736 | ||||||||||||||
| Income (loss) before income taxes, equity in earnings and noncontrolling interests | 435 | (591) | 1,026 | ||||||||||||||
| Income tax expense (benefit) | 133 | (104) | 237 | ||||||||||||||
| Equity in earnings of unconsolidated entities | (48) | (131) | 83 | ||||||||||||||
| Net income (loss) | 350 | (356) | 706 | ||||||||||||||
| Less: Net income attributable to noncontrolling interests | (7) | (4) | (3) | ||||||||||||||
| Net income (loss) attributable to Realogy Holdings and Realogy Group | $ | 343 | $ | (360) | $ | 703 | |||||||||||
| Year Ended December 31, | |||||||||||
| 2018 | 2017 | Change | |||||||||
| Net revenues | $ | 6,079 | $ | 6,114 | $ | (35 | ) | ||||
| Total expenses | 5,870 | 5,763 | 107 | ||||||||
| Income before income taxes, equity in losses (earnings) and noncontrolling interests | 209 | 351 | (142 | ) | |||||||
| Income tax expense (benefit) (1) | 65 | (65 | ) | 130 | |||||||
| Equity in losses (earnings) of unconsolidated entities | 4 | (18 | ) | 22 | |||||||
| 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 | ) | ||||
Net revenues decreased $35increased $1,762 million or 1%28% for the year ended December 31, 20182021 compared with the year ended December 31, 2017, principally due to a decrease in gross commission income as a result of lower2020 driven by higher homesale transaction volume at NRT.Realogy Franchise and Brokerage Groups and an increase in volume at Realogy Title Group, in each case due primarily to continued strong demand and higher prices in the residential real estate market, which we attribute to certain beneficial consumer trends supported by other factors, including a favorable mortgage rate environment and low inventory contributing to higher average homesale price. Year-over-year comparisons, on a Company-wide and individual segment basis, also benefited from comparison against the sharp decline in homesale transactions that occurred in the second quarter of 2020 due to factors related to the COVID-19 crisis.
Total expenses increased $107$736 million or 2%11% compared to 2020 primarily due to:
•a $52$1,226 million increase in commission and other sales agent-related costs due to the 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;
•a $225 million increase in operating and general and administrative expenses, largely the result of the absence in 2021 of the benefit of the temporary cost savings measures that resultedwere taken in lossesthe second and third quarters of $42020 in response to the COVID-19 crisis and due to higher employee incentive accruals;
•a $48 million forincrease in marketing expense primarily due to higher advertising costs as compared to the year ended December 31, 2018 compared2020, during which such expenses were reduced due to gainsthe COVID-19 crisis, and
•a $21 million loss on the early extinguishment of $4 million for the year ended December 31, 2017, and a $2 million write off of financing costs to interest expensedebt primarily as a result of the refinancing transactions in February 2018; and
partially offset by:
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•a $56 million net decrease in interest expense primarily due to a $65 million decrease in expense related to mark-to-market adjustments for interest rate swaps that resulted in $14 million of gains for the year ended December 31, 2021 compared to $51 million of losses for the year ended December 31, 2020, partially offset by an increase in interest expense associated with the amortization of the debt discount on the Exchangeable Senior Notes since issuance in the second quarter of 2021;
•a $50 million decrease in restructuring costs; and
•an $11 million net gain on the sale of business.
Equity in earnings were $48 million for the year ended December 31, 2021 compared to earnings of $131 million for the year ended December 31, 2020. Equity in earnings primarily related to losses from the operations of Guaranteed Rate Affinity. Guaranteed Rate Affinity which began doing business in August 2017was $49 million for the year ended December 31, 2021, decreasing by $77 million from $126 million for the year ended December 31, 2020. The decrease was primarily driven by the impact of mark-to-market adjustments on a phased-in basis, has experienced operational challenges at the joint venture in addition to tight industry margins in a highly competitive industry as well as rising mortgage rates. loan pipeline and gain-on-sale margin compression, partially offset by strong purchase volume growth.
During the year ended December 31, 2017,2021, we incurred $17 million of restructuring costs compared to $67 million for the Company recorded earnings from equity investments of $18 million, whichyear ended December 31, 2020 primarily related to $35the Company's restructuring program focused on office consolidation and instituting operational efficiencies to drive profitability. The Company expects the estimated total cost of the program to be approximately $170 million, in earnings fromwith $129 million incurred to date and $41 million remaining primarily related to future expenses as a result of reducing the sale of PHH Home Loans' assetsleased-office footprints. See Note 12, "Restructuring Costs", to Guaranteed Rate Affinity, partially offset by the recognition of $7 million exit costs at PHH Home Loans, losses of $6 million from the continuing operations of PHH Home Loans and $4 million of costs associated with the start up of operations of Guaranteed Rate Affinity.Consolidated Financial Statements for additional information.
The provision for income taxes was an expense of $65$133 million for the year ended December 31, 20182021 compared to a benefit of $65$104 million for the year ended December 31, 2017. The income2020. Our effective tax benefitrate was 28% and 23% for the year ended December 31, 2017 reflects the impact of the 2017 Tax Act. Our effective tax rate was 32% for the year ended December 31, 2018.2021 and 2020, respectively. See Note 10,11, "Income Taxes", into the Consolidated Financial Statements for additional information and a reconciliation of the Company’s effective income tax rate. The Company's 2019 effective tax rate is estimated to be 32%.
The following table reflects the results of each of our reportable segments forduring the years ended December 31, 20182021 and 2017:
| Revenues (a) | $ Change | % Change | Operating EBITDA | $ Change | % Change | Operating EBITDA Margin | Change | |||||||||||||||||||||||||||||
| 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||||||||
| RFG | $ | 820 | $ | 830 | (10 | ) | (1 | )% | $ | 564 | $ | 560 | 4 | 1 | % | 69 | % | 67 | % | 2 | ||||||||||||||||
| NRT (b) | 4,607 | 4,643 | (36 | ) | (1 | ) | 44 | 135 | (91 | ) | (67 | ) | 1 | 3 | (2 | ) | ||||||||||||||||||||
| Cartus | 378 | 382 | (4 | ) | (1 | ) | 86 | 85 | 1 | 1 | 23 | 22 | 1 | |||||||||||||||||||||||
| TRG | 580 | 570 | 10 | 2 | 49 | 59 | (10 | ) | (17 | ) | 8 | 10 | (2 | ) | ||||||||||||||||||||||
| Corporate | (306 | ) | (311 | ) | 5 | * | (85 | ) | (107 | ) | 22 | * | ||||||||||||||||||||||||
| Total Company | $ | 6,079 | $ | 6,114 | (35 | ) | (1 | )% | $ | 658 | $ | 732 | (74 | ) | (10 | )% | 11 | % | 12 | % | (1 | ) | ||||||||||||||
| Less: Depreciation and amortization (c) | 197 | 201 | ||||||||||||||||||||||||||||||||||
| Interest expense, net | 190 | 158 | ||||||||||||||||||||||||||||||||||
| Income tax expense (benefit) (d) | 65 | (65 | ) | |||||||||||||||||||||||||||||||||
| Restructuring costs, net (e) | 58 | 12 | ||||||||||||||||||||||||||||||||||
| Former parent legacy cost (benefit), net (f) | 4 | (10 | ) | |||||||||||||||||||||||||||||||||
| Loss on the early extinguishment of debt (f) | 7 | 5 | ||||||||||||||||||||||||||||||||||
| Net income attributable to Realogy Holdings and Realogy Group | $ | 137 | $ | 431 | ||||||||||||||||||||||||||||||||
| Revenues (a) | $ Change | % Change | Operating EBITDA | $ Change | % Change | Operating EBITDA Margin | Change | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Realogy Franchise Group | $ | 1,249 | $ | 1,059 | 190 | 18 | $ | 751 | $ | 594 | 157 | 26 | 60 | % | 56 | % | 4 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Realogy Brokerage Group | 6,189 | 4,742 | 1,447 | 31 | 109 | 48 | 61 | 127 | 2 | 1 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Realogy Title Group | 952 | 736 | 216 | 29 | 200 | 226 | (26) | (12) | 21 | 31 | (10) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Corporate and Other | (407) | (316) | (91) | (a) | (158) | (142) | (16) | (11) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Company | $ | 7,983 | $ | 6,221 | 1,762 | 28 | $ | 902 | $ | 726 | 176 | 24 | 11 | % | 12 | % | (1) | ||||||||||||||||||||||||||||||||||||||||||||||||
| Less: Depreciation and amortization | 204 | 186 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest expense, net | 190 | 246 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income tax expense (benefit) | 133 | (104) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Restructuring costs, net (b) | 17 | 67 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Impairments (c) | 4 | 682 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Former parent legacy cost, net (d) | 1 | 1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Loss on the early extinguishment of debt (d) | 21 | 8 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gain on the sale of business, net (e) | (11) | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) attributable to Realogy Holdings and Realogy Group | $ | 343 | $ | (360) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
_______________
(a)Revenues include the elimination of transactions between segments, which consists of intercompany royalties and marketing fees paid by Realogy Brokerage Group of $407 million and $316 million during the years ended December 31, 2021 and 2020, respectively, and are eliminated through the Corporate and Other line.
(b)Restructuring charges incurred for the year ended December 31, 2021 include $5 million at Realogy Franchise Group, $7 million at Realogy Brokerage Group and $5 million at Corporate and Other. Restructuring charges incurred for the year ended December 31, 2020 include $15 million at Realogy Franchise Group, $37 million at Realogy Brokerage Group, $4 million at Realogy Title Group and $11 million at Corporate and Other.
(c)Non-cash impairments for the year ended December 31, 2021 primarily relate to software and lease asset impairments. Non-cash impairments for the year ended December 31, 2020 include:
•a goodwill impairment charge of $413 million related to Realogy Brokerage Group;
•an impairment charge of $30 million related to Realogy Franchise Group's trademarks;
•$133 million of impairment charges during the nine months ended September 30, 2020 (while Cartus Relocation Services was held for sale) to reduce the net assets to the estimated proceeds;
•a goodwill impairment charge of $22 million related to Cartus Relocation Services;
•an impairment charge of $34 million related to Cartus Relocation Services' trademarks; and
•other asset impairments of $50 million primarily related to lease asset impairments.
(d)Former parent legacy items and Loss on the early extinguishment of debt are recorded in Corporate and Other.
(e)Gain on the sale of business, net is primarily recorded in Realogy Brokerage Group.
As described in the aforementioned table, Operating EBITDA margin for "Total Company" expressed as a percentage of revenues decreased 1 percentage point to 11% from 12% for the year ended December 31, 20182021 compared to 2017. On2020. Operating EBITDA margin for "Total Company", as well as on a segment basis, RFG'swas negatively impacted by the absence in 2021 of the benefit of the temporary cost savings measures that were taken in the second and third quarters of 2020 in response to the COVID-19 crisis. Realogy Franchise Group's margin increased 24 percentage points to 69%60% from 67%56% primarily due to a decreasean increase in employee related costsroyalty revenue as a result of lower incentive accruals. NRT's margin decreased 2 percentage points to 1% from 3% primarily due to higher sales commission percentages paid to its independent sales agents during 2018 compared to 2017 andan increase in homesale transaction volume, partially offset by the impactresult of lower closing volume in our new development business, which typically has higher margins. Cartus'the absence of the cost savings measures discussed above. Realogy Brokerage Group's margin increased 1 percentage point to 23%2% from 22%1% primarily due to higher transaction volume, partially offset by the result of the absence of the cost savings measures discussed above and higher agent commission costs driven by a shift in mix to more productive, higher compensated agents, the impact of recruiting and retention efforts, as well as business and geographic mix. Realogy Title Group's margin decreased 10 percentage points to 21% from 31% due to a decrease in employee relatedequity in earnings of Guaranteed Rate Affinity, mostly the result of the impact of mark to market adjustments on the mortgage loan pipeline, as well as gain-on-sale margin compression. Realogy Title Group's margin, excluding equity in earnings of Guaranteed Rate Affinity, increased 2 percentage points to 16% from 14% largely the result of an increase in resale and underwriter revenue, partially offset by the absence of the cost savings measures discussed above, higher variable costs as a result of cost savings initiatives. TRG's margin decreased 2 percentage points to 8% from 10% for the year ended December 31, 2018 compared to 2017 primarily as a result of a decrease in refinancing revenue.higher volume and higher employee incentive accruals.
Corporate and Other Operating EBITDA for the year ended December 31, 2018 improved $222021 declined $16 million to negative $85$158 million, largely the result of the absence in 2021 of the benefit of the temporary cost savings measures that were taken in the second and third quarters of 2020 in response to the COVID-19 crisis as well as higher employee incentive accruals.
Realogy Franchise Group
Revenues increased $190 million to $1,249 million and Operating EBITDA increased $157 million to $751 million for the year ended December 31, 2021 compared with 2020.
Revenues increased $190 million primarily as a result of:
•a $90 million increase in third-party domestic franchisee royalty revenue primarily due to a 27% increase in homesale transaction volume at Realogy Franchise Group which consisted of a 19% increase in average homesale price and a 7% increase in existing homesale transactions;
•an $87 million increase in intercompany royalties received from Realogy Brokerage Group; and
•a $24 million increase in brand marketing fund revenue and related expense primarily due to higher advertising costs in 2021 as compared to 2020, when such expenses were reduced due to the COVID-19 crisis,
partially offset by:
•a $6 million decrease in revenue related to the early termination of third party listing fee agreements during 2020; and
•a $5 million decrease in service and other revenue as a result of a $16 million net decrease in revenue from our relocation and lead generation operations primarily in the first quarter of 2021, driven by lower volume largely related to the impact of the COVID-19 pandemic, partially offset by an increase in international royalty revenue.
Realogy Franchise Group revenue includes intercompany royalties received from Realogy Brokerage Group of $393 million and $306 million during the years ended December 31, 2021 and 2020, respectively, which are eliminated in consolidation against the expense reflected in Realogy Brokerage Group's results.
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The $157 million increase in Operating EBITDA was primarily due to the $190 million increase in revenues discussed above and $14 million of lower expense for bad debt and notes reserves. These Operating EBITDA increases were partially offset by the $24 million increase in marketing expense discussed above and a $23 million increase in employee and other operating costs, largely the result of the absence in 2021 of the benefit of the temporary cost savings measures that were taken in the second and third quarters of 2020 in response to the COVID-19 crisis and due to higher employee incentive accruals.
Realogy Brokerage Group
Revenues increased $1,447 million to $6,189 million and Operating EBITDA increased $61 million to $109 million for the year ended December 31, 2021 compared with 2020.
The revenue increase of $1,447 million was primarily driven by a 32% increase in homesale transaction volume at Realogy Brokerage Group which consisted of a 19% increase in average homesale price and an 11% increase in existing homesale transactions. Realogy Brokerage Group's revenue results during the year ended December 31, 2021 benefited from continued strong demand and higher prices in the residential real estate market which we attribute to certain beneficial consumer trends supported by other factors, including a favorable mortgage rate environment and low inventory contributing to higher average homesale price.
Operating EBITDA increased $61 million primarily due to the $1,447 million increase in revenues discussed above, partially offset by:
•a $1,226 million increase in commission expenses paid to independent sales agents from $3,527 million for the year ended December 31, 2020 to $4,753 million for the year ended December 31, 2021. Commission expense increased primarily as a result of the impact of higher homesale transaction volume as discussed above, as well as higher agent commission costs primarily driven by a shift in mix to more productive, higher compensated agents, the impact of recruiting and retention efforts, as well as business and geographic mix;
•an $87 million increase in royalties paid to Realogy Franchise Group from $306 million during the year ended December 31, 2020 to $393 million during the year ended December 31, 2021 associated with the homesale transaction volume increase as described above;
•a $42 million increase in employee-related and other costs, largely the result of the absence in 20182021 of an $8the benefit of the temporary cost savings measures that were taken in the second and third quarters of 2020 in response to the COVID-19 crisis and due to higher employee incentive accruals;
•a $24 million increase in marketing expense primarily due to higher advertising costs as compared to 2020, when such expenses were reduced due to the COVID-19 crisis; and
•$7 million of losses in equity in earnings related to the settlementRealSure joint venture.
Realogy Franchise and Brokerage Groups on a Combined Basis
The following table reflects Realogy Franchise and Brokerage Groups' results before intercompany royalties and marketing fees as well as on a combined basis to show the Operating EBITDA contribution of these business segments to the overall Operating EBITDA of the Strader legal matter which occurred in 2017,Company. The Operating EBITDA margin for the combined segments remained flat at 12% during the year ended December 31, 2021 compared to 2020 primarily due to higher homesale transaction volume, offset by the absence in 20182021 of $8the benefit of the temporary cost savings measures that were taken in 2020 in response to COVID-19 crisis and higher agent commission costs driven by a shift in mix to more productive, higher compensated agents, the impact of recruiting and retention efforts, as well as business and geographic mix:
_______________
| Revenues | $ Change | % Change | Operating EBITDA | $ Change | % Change | Operating EBITDA Margin | Change | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Realogy Franchise Group (a) | $ | 842 | $ | 743 | 99 | 13 | $ | 344 | $ | 278 | 66 | 24 | 41 | % | 37 | % | 4 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Realogy Brokerage Group (a) | 6,189 | 4,742 | 1,447 | 31 | 516 | 364 | 152 | 42 | 8 | 8 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Realogy Franchise and Brokerage Groups Combined | $ | 7,031 | $ | 5,485 | 1,546 | 28 | $ | 860 | $ | 642 | 218 | 34 | 12 | % | 12 | % | — | ||||||||||||||||||||||||||||||||||||||||||||||||
(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 $407 million and $316 million during the years ended December 31, 2021 and 2020, respectively.
70
Realogy Title Group
Revenues increased $216 million to $952 million and Operating EBITDA decreased $26 million to $200 million for the year ended December 31, 2021 compared with 2020.
Revenues increased $216 million primarily as a result of a $104 million increase in resale revenue due to increased purchase unit activity and increased homesale prices that benefited from continued strong demand in the residential real estate market, which we attribute to certain beneficial consumer trends supported by other factors, including a favorable mortgage rate environment and low inventory contributing to higher average homesale price. In addition, there was a $103 million increase in underwriter revenue (including a $101 million increase in underwriter revenue with unaffiliated agents, which had a $22 million net positive impact on Operating EBITDA due to the related expense increase of $79 million) and an $9 million increase in refinance and other revenue. Equity earnings or losses related to our minority interest in Guaranteed Rate Affinity are included in the financial results of Realogy Title Group, but are not reported as revenue to Realogy Title Group.
Operating EBITDA decreased $26 million primarily as a result of a $93 million increase in employee and other operating costs largely the result of the absence in 2021 of the benefit of the temporary cost savings measures that were taken in 2020 in response to the COVID-19 crisis and due to higher variable costs as a result of higher volume and higher employee incentive accruals, and a $79 million increase in variable operating costs related to the transitionincrease in underwriter revenue with unaffiliated agents discussed above where the revenue and expense are recorded on a gross basis. In addition, equity in earnings decreased $76 million from $131 million for the year ended December 31, 2020 to $55 million for the year ended December 31, 2021 primarily related to Guaranteed Rate Affinity, mostly driven by the impact of mark-to-market adjustments on the mortgage loan pipeline and gain-on-sale margin compression, partially offset by strong purchase volume growth. These decreases were partially offset by the $216 million increase in revenues discussed above and a $6 million unrealized gain on an investment.
Year Ended December 31, 2020 vs. Year Ended December 31, 2019
Our consolidated results comprised the following:
| Year Ended December 31, | |||||||||||||||||
| 2020 | 2019 | Change | |||||||||||||||
| Net revenues | $ | 6,221 | $ | 5,870 | $ | 351 | |||||||||||
| Total expenses | 6,812 | 6,059 | 753 | ||||||||||||||
| Loss before income taxes, equity in earnings and noncontrolling interests | (591) | (189) | (402) | ||||||||||||||
| Income tax (benefit) expense | (104) | 14 | (118) | ||||||||||||||
| Equity in earnings of unconsolidated entities | (131) | (18) | (113) | ||||||||||||||
| Net loss | (356) | (185) | (171) | ||||||||||||||
| Less: Net income attributable to noncontrolling interests | (4) | (3) | (1) | ||||||||||||||
| Net loss attributable to Realogy Holdings and Realogy Group | $ | (360) | $ | (188) | $ | (172) | |||||||||||
Net revenues increased $351 million or 6% for the year ended December 31, 2020 compared with the year ended December 31, 2019 driven by higher homesale transaction volume at Realogy Brokerage Group and Realogy Franchise Group and an increase in volume at Realogy Title Group due to a strong recovery in the residential real estate market which began late in the second quarter of 2020, following a period of sharp decline in homesale transactions starting in the final weeks of the first quarter of 2020 due to the COVID-19 pandemic. We attribute the recovery in 2020 to increased demand driven by a favorable mortgage rate environment and low inventory contributing to higher average homesale price. In addition, we have observed continued strength in certain trends that we believe are largely driven by behavioral changes related to the COVID-19 crisis, including home buyer preferences for certain geographies, including suburban locations and attractive tax and weather destinations and second home purchases.
Total expenses increased $753 million or 12% compared to 2019 primarily due to:
•non-cash impairments of $682 million during the year ended December 31, 2020 compared to $271 million during the year ended December 31, 2019. Non-cash impairments during the year ended December 31, 2020 include:
◦a goodwill impairment charge of $413 million related to Realogy Brokerage Group during the first quarter of 2020;
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◦an impairment charge of $30 million related to Realogy Franchise Group's trademarks during the first quarter of 2020;
◦$133 million of reserves recorded during the nine months ended September 30, 2020 (while Cartus Relocation Services was held for sale) to reduce the net assets to the estimated proceeds which were included in Impairments in connection with the reclassification of Cartus Relocation Services as continuing operations during the fourth quarter of 2020;
◦a goodwill impairment charge of $22 million related to Cartus Relocation Services during the fourth quarter of 2020;
◦an impairment charge of $34 million related to Cartus Relocation Services' trademarks during the fourth quarter of 2020; and
◦other asset impairments of $50 million primarily related to lease asset impairments,
compared to a non-cash impairments during the year ended December 31, 2019, which includes a goodwill impairment charge of $237 million related to Realogy Brokerage Group, a $22 million reduction to record net assets held for sale at the lower of carrying value or fair value, less costs to sell, for Cartus Relocation Services which was presented as held for sale at December 31, 2019 and $12 million of other impairment charges primarily related to lease asset impairments.
•a $371 million increase in commission and other sales agent-related costs primarily due to an increase in homesale transaction volume as well as a result of higher agent commission costs primarily driven by a shift in mix to more productive, higher compensated agents, the impact of recruitment and retention efforts, and business and geographic mix;
•a $15 million increase in restructuring costs;
•an $8 million loss on the early extinguishment of debt during the year ended December 31, 2020 as a result of the refinancing transactions in June 2020 compared to a $5 million net gain on the early extinguishment of debt during the year ended December 31, 2019 primarily due to the repurchase of Senior Notes during the third quarter of 2019; and
•a $10 million increase in operating and general and administrative expenses primarily due to higher employee incentive accruals, partially offset by lower employee-related, occupancy and other operating costs as a result of temporary COVID-19 related cost savings initiatives in the second and third quarter of 2020,
partially offset by:
•a $49 million decrease in marketing expense primarily due to the absence of in person meetings and conferences and lower advertising costs due to the COVID-19 pandemic during 2020; and
•a $4 million net decrease in interest expense primarily due to LIBOR rate decreases and lower revolver borrowings, partially offset by a $12 million increase in expense related to mark-to-market adjustments for interest rate swaps that resulted in losses of $51 million for the year ended December 31, 2020 compared to losses of $39 million during the same period of 2019.
Equity in earnings were $131 million for the year ended December 31, 2020 compared to earnings of $18 million for the year ended December 31, 2019 primarily due to an improvement in earnings of Guaranteed Rate Affinity at Realogy Title Group. Equity in earnings for Guaranteed Rate Affinity was $126 million, representing approximately 17% of the Company's CEOOperating EBITDA for the year ended December 31, 2020, increasing by $111 million from $15 million for the year ended December 31, 2019. This improvement was the result of the low mortgage rate environment, an increase in refinancing transactions and improved margins in the venture. Equity in earnings for Realogy Title Group's other equity method investments was $5 million for the year ended December 31, 2020 which occurred in 2017 and aincreased by $2 million decrease in other employeefrom $3 million for the year ended December 31, 2019.
During the year ended December 31, 2020, we incurred $67 million of restructuring costs primarily related to the Company's restructuring program focused on office consolidation and instituting operational efficiencies to drive profitability. The two most significant lease impairments recognized by the Company during 2020 were the corporate headquarters in Madison, New Jersey which has a lease term expiring in December 2029 for which approximately 44% of the space (approximately 120,000 square feet) was impaired and the relocation service's main corporate operations in Danbury, Connecticut which has a lease term expiring in November 2030 with an early termination date in November 2025.
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The provision for income taxes was a benefit of $104 million for the year ended December 31, 2020 compared to an expense of $14 million for the year ended December 31, 2019. Our effective tax rate was 23% and negative 8% for the year ended December 31, 2020 and 2019, respectively.
The following table reflects the results of each of our reportable segments during the years ended December 31, 2020 and 2019:
| Revenues (a) | $ Change | % Change | Operating EBITDA | $ Change | % Change | Operating EBITDA Margin | Change | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Realogy Franchise Group | $ | 1,059 | $ | 1,158 | (99) | (9) | $ | 594 | $ | 616 | (22) | (4) | 56 | % | 53 | % | 3 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Realogy Brokerage Group | 4,742 | 4,409 | 333 | 8 | 48 | 4 | 44 | 1,100 | 1 | — | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Realogy Title Group | 736 | 596 | 140 | 23 | 226 | 68 | 158 | 232 | 31 | 11 | 20 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Corporate and Other | (316) | (293) | (23) | (a) | (142) | (98) | (44) | (45) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Company | $ | 6,221 | $ | 5,870 | 351 | 6 | $ | 726 | $ | 590 | 136 | 23 | 12 | % | 10 | % | 2 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Less: Depreciation and amortization | 186 | 195 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest expense, net | 246 | 250 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income tax (benefit) expense | (104) | 14 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Restructuring costs, net (b) | 67 | 52 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Impairments (c) | 682 | 271 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Former parent legacy cost, net (d) | 1 | 1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Loss (gain) on the early extinguishment of debt (e) | 8 | (5) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss attributable to Realogy Holdings and Realogy Group | $ | (360) | $ | (188) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
_______________
(a)Revenues includes the elimination of transactions between segments, which consists of intercompany royalties and marketing fees paid by Realogy Brokerage Group of $316 million and $293 million during the years ended December 31, 2020 and 2019, respectively, and are eliminated through the Corporate and Other line.
(b)Restructuring charges incurred for the year ended December 31, 2020 include $15 million at Realogy Franchise Group, $37 million at Realogy Brokerage Group, $4 million at Realogy Title Group and $11 million at Corporate and Other. Restructuring charges incurred for the year ended December 31, 2019 include $14 million at Realogy Franchise Group, $25 million at Realogy Brokerage Group, $3 million at Realogy Title Group and $10 million at Corporate and Other.
(c)Non-cash impairments for the year ended December 31, 2020 include:
•a goodwill impairment charge of $413 million related to Realogy Brokerage Group during the first quarter of 2020;
•an impairment charge of $30 million related to Realogy Franchise Group's trademarks during the first quarter of 2020;
•$133 million of reserves recorded during the nine months ended September 30, 2020 (while Cartus Relocation Services was held for sale) to reduce the net assets to the estimated proceeds which were included in Impairments in connection with the reclassification of Cartus Relocation Services as continuing operations during the fourth quarter of 2020;
•a goodwill impairment charge of $22 million related to Cartus Relocation Services during the fourth quarter of 2020;
•an impairment charge of $34 million related to Cartus Relocation Services' trademarks during the fourth quarter of 2020; and
•other asset impairments of $50 million primarily related to lease asset impairments.
Non-cash impairments for the year ended December 31, 2019 include a goodwill impairment charge of $237 million related to Realogy Brokerage Group, a $22 million reduction to record net assets held for sale at the lower of carrying value or fair value, less costs to sell, for Cartus Relocation Services which was presented as held for sale at December 31, 2019 and $12 million of other impairment charges primarily related to lease asset impairments.
(d)Former parent legacy items are recorded in Corporate and Other.
(e)Loss (gain) on the early extinguishment of debt is recorded in Corporate and Other. During the year ended December 31, 2019, the Company recorded a net 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.
As described in the aforementioned table, Operating EBITDA margin for "Total Company" expressed as a percentage of revenues increased 2 percentage points to 12% from 10% for the year ended December 31, 2020 compared to 2019. On a segment basis, Realogy Franchise Group's margin increased 3 percentage points to 56% from 53% primarily due to an increase in royalty revenue as a result of an increase in homesale transaction volume, partially offset by a decrease in revenue related to the early termination of third party listing fee agreements. Realogy Brokerage Group's margin increased
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1 percentage point to 1% from zero primarily due to lower operating expenses principally driven by temporary COVID-19 related cost savings initiatives, partially offset by higher agent commission costs driven by a shift in mix to more productive, higher compensated agents, the impact of recruiting and retention efforts, as well as business and geographic mix. Realogy Title Group's margin increased 20 percentage points to 31% from 11% for the year ended December 31, 2020 compared to 2019 primarily due to a $111 million increase in equity in earnings of Guaranteed Rate Affinity as a result of the low mortgage rate environment, an increase in refinancing transactions and improved margins in the venture, as well as an increase in underwriter, refinance and resale activity at Realogy Title Group.
Corporate and Other Operating EBITDA for the year ended December 31, 2020 declined $44 million to negative $142 million primarily due to higher employee incentive accruals.
Realogy Franchise Group
Revenues decreased $99 million to $1,059 million and Operating EBITDA decreased $22 million to $594 million for the year ended December 31, 2020 compared with 2019.
Third-party domestic franchisee royalty revenue increased $35 million primarily due to a 16% increase in homesale transaction volume at Realogy Franchise Group, which consisted of a 13% increase in average homesale price and a 3% increase in existing homesale transactions, and a $24 million increase in intercompany royalties received from Realogy Brokerage Group.
Realogy Franchise Group revenue includes intercompany royalties received from Realogy Brokerage Group of $306 million and $282 million during the years ended December 31, 2020 and 2019, respectively, which are eliminated in consolidation against the expense reflected in Realogy Brokerage Group's results.
Royalty revenue increases were offset by:
•a $113 million decrease in service and other revenue primarily related to a $110 million decrease in relocation service revenue, driven by lower volume largely related to the COVID-19 pandemic, and a decrease in revenues from our lead generation and relocation operations, driven by lower volume and lead transactions primarily due to discontinuation of the USAA real estate benefit program that ceased new enrollments in the third quarter of 2019, which at the time was our largest real estate benefit program;
•a $28 million decrease in registration revenue and brand marketing fund revenue (associated with the waiver of marketing fees from affiliates in the second quarter of 2020 in response to the COVID-19 pandemic), which had a related expense decrease of $37 million resulting in a net $9 million net positive impact on Operating EBITDA, due to the absence of in person meetings and conferences and lower advertising costs due to the COVID-19 pandemic; and
•a $17 million decrease in revenue related to the early termination of third party listing fee agreements.
The $22 million decrease in Operating EBITDA was primarily due to the $99 million decrease in revenues discussed above and $7 million of higher expense for bad debt primarily due to the early termination of third party listing fee agreements. These Operating EBITDA decreases were partially offset by a $47 million decrease in employee and other operating costs principally due to cost savings initiatives, including temporary COVID-19 related cost savings initiatives during the second and third quarters of 2020, partially offset by higher employee incentive accruals, and the $37 million decrease in marketing expense discussed above.
Realogy Brokerage Group
Revenues increased $333 million to $4,742 million and Operating EBITDA increased $44 million to $48 million for the year ended December 31, 2020 compared with 2019.
The revenue increase of $333 million was primarily driven by a 9% increase in homesale transaction volume at Realogy Brokerage Group which primarily consisted of a 6% increase in average homesale price and a 2% increase in existing homesale transactions. There was a strong recovery in the residential real estate market which began in the late second quarter of 2020 following a period of sharp decline in homesale transactions starting in the final weeks of the first quarter of 2020.
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Operating EBITDA increased $44 million primarily due to:
•the $333 million increase in revenues discussed above;
•a $76 million decrease in employee-related, occupancy and other operating costs due primarily to temporary COVID-19 related cost savings initiatives, partially offset by anhigher employee incentive accruals;
•a $27 million decrease in marketing expense due to lower advertising costs as a result of the COVID-19 pandemic; and
•a $3 million gain on the sale of assets,
partially offset by:
•a $371 million increase in headcount at ZapLabs.commission expenses paid to independent sales agents from $3,156 million for the year ended December 31, 2019 to $3,527 million for the year ended December 31, 2020. Commission expense increased primarily as a result of the impact of higher homesale transaction volume as discussed above, as well as higher agent commission costs primarily driven by a shift in mix to more productive, higher compensated agents, the impact of recruiting and retention efforts, as well as business and geographic mix; and
•a $24 million increase in royalties paid to Realogy Franchise Group from $282 million during the year ended December 31, 2019 to $306 million during the year ended December 31, 2020 associated with the homesale transaction volume increase as described above.
The following table reflects RFGRealogy Franchise and NRTBrokerage 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 unitssegments to the overall Operating EBITDA of the Company. The Operating EBITDA margin for the combined segments decreased 1% percentage point from 13%remained flat at 12% during the year ended December 31, 2020 compared to 12% primarily due to higher sales commission percentages paid to independent sales agents affiliated with NRT and2019:
| Revenues | $ Change | % Change | Operating EBITDA | $ Change | % Change | Operating EBITDA Margin | Change | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Realogy Franchise Group (a) | $ | 743 | $ | 865 | (122) | (14) | % | $ | 278 | $ | 323 | (45) | (14) | % | 37 | % | 37 | % | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Realogy Brokerage Group (a) | 4,742 | 4,409 | 333 | 8 | 364 | 297 | 67 | 23 | 8 | 7 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Realogy Franchise and Brokerage Groups Combined | $ | 5,485 | $ | 5,274 | 211 | 4 | % | $ | 642 | $ | 620 | 22 | 4 | % | 12 | % | 12 | % | — | ||||||||||||||||||||||||||||||||||||||||||||||
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(a)The segment numbers noted above do not reflect the impact of lower closing volume in NRT's new development business, which typically has higher margins:intercompany royalties and marketing fees paid by Realogy Brokerage Group to Realogy Franchise Group of $316 million and $293 million during the years ended December 31, 2020 and 2019, respectively.
Realogy Title Group
| Revenues | Change | % Change | Operating EBITDA | Change | % Change | Operating EBITDA Margin | Change | |||||||||||||||||||||||||||||||
| 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||||||||||
| RFG (a) | $ | 514 | $ | 519 | $ | (5 | ) | (1 | )% | $ | 258 | $ | 249 | $ | 9 | 4 | % | 50 | % | 48 | % | 2 | ||||||||||||||||
| NRT (a) (b) | 4,607 | 4,643 | (36 | ) | (1 | ) | 350 | 446 | (96 | ) | (22 | ) | 8 | 10 | (2 | ) | ||||||||||||||||||||||
| RFG and NRT Combined | $ | 5,121 | $ | 5,162 | $ | (41 | ) | (1 | )% | $ | 608 | $ | 695 | $ | (87 | ) | (13 | %) | 12 | % | 13 | % | (1 | ) | ||||||||||||||
Revenues decreased $10 million as a result of a $4 million increase in non-standard incentives, a $4 million decrease in intercompany royalties received from NRT and a $2 million decrease in other revenue primarily due to the timing of brand conferences and franchisee events.
Operating EBITDA increased $158 million primarily as a result of the $140 million increase in revenues discussed above and a $3 million decrease in employee related costs.
| Year Ended December 31, | |||||||||||
| 2017 | 2016 | Change | |||||||||
| Net revenues | $ | 6,114 | $ | 5,810 | $ | 304 | |||||
| Total expenses | 5,763 | 5,461 | 302 | ||||||||
| Income before income taxes, equity in earnings and noncontrolling interests | 351 | 349 | 2 | ||||||||
| Income tax (benefit) expense (1) | (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 | |||||
| Revenues (a) | $ Change | % Change | Operating EBITDA | $ Change | % Change | Operating EBITDA Margin | ||||||||||||||||||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | Change | ||||||||||||||||||||||||||||||||
| RFG | $ | 830 | $ | 781 | $ | 49 | 6 | % | $ | 560 | $ | 520 | $ | 40 | 8 | % | 67 | % | 67 | % | — | |||||||||||||||||
| NRT (b) | 4,643 | 4,344 | 299 | 7 | 135 | 159 | (24 | ) | (15 | ) | 3 | 4 | (1 | ) | ||||||||||||||||||||||||
| Cartus | 382 | 405 | (23 | ) | (6 | ) | 85 | 100 | (15 | ) | (15 | ) | 22 | 25 | (3 | ) | ||||||||||||||||||||||
| TRG | 570 | 573 | (3 | ) | (1 | ) | 59 | 63 | (4 | ) | (6 | ) | 10 | 11 | (1 | ) | ||||||||||||||||||||||
| Corporate and Other | (311 | ) | (293 | ) | (18 | ) | * | (107 | ) | (72 | ) | (35 | ) | * | ||||||||||||||||||||||||
| Total Company | $ | 6,114 | $ | 5,810 | $ | 304 | 5 | % | $ | 732 | $ | 770 | $ | (38 | ) | (5 | )% | 12 | % | 13 | % | (1 | ) | |||||||||||||||
| Less: Depreciation and amortization (c) | 201 | 202 | ||||||||||||||||||||||||||||||||||||
| Interest expense, net | 158 | 174 | ||||||||||||||||||||||||||||||||||||
| Income tax (benefit) expense (d) | (65 | ) | 144 | |||||||||||||||||||||||||||||||||||
| Restructuring costs, net (e) | 12 | 39 | ||||||||||||||||||||||||||||||||||||
| Former parent legacy benefit, net (f) | (10 | ) | (2 | ) | ||||||||||||||||||||||||||||||||||
| Loss on the early extinguishment of debt (f) | 5 | — | ||||||||||||||||||||||||||||||||||||
| Net income attributable to Realogy Holdings and Realogy Group | $ | 431 | $ | 213 | ||||||||||||||||||||||||||||||||||
| Revenues | Change | % Change | Operating EBITDA | Change | % Change | Operating EBITDA Margin | Change | |||||||||||||||||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||||||||||||||
| RFG (a) | $ | 519 | $ | 488 | $ | 31 | 6 | % | $ | 249 | $ | 227 | $ | 22 | 10 | % | 48 | % | 47 | % | 1 | |||||||||||||||||
| NRT (a) (b) | 4,643 | 4,344 | 299 | 7 | 446 | 452 | (6 | ) | (1 | ) | 10 | 10 | — | |||||||||||||||||||||||||
| RFG and NRT Combined | $ | 5,162 | $ | 4,832 | $ | 330 | 7 | % | $ | 695 | $ | 679 | $ | 16 | 2 | % | 13 | % | 14 | % | (1 | ) | ||||||||||||||||
higher volume and higher employee incentive accruals, partially offset by temporary COVID-19 related cost savings initiatives.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Financial Condition
| December 31, 2018 | December 31, 2017 | Change | |||||||||
| Total assets | $ | 7,290 | $ | 7,337 | $ | (47 | ) | ||||
| Total liabilities | 4,975 | 4,715 | 260 | ||||||||
| Total equity | 2,315 | 2,622 | (307 | ) | |||||||
| December 31, 2021 | December 31, 2020 | Change | |||||||||||||||
| Total assets | $ | 7,210 | $ | 6,934 | $ | 276 | |||||||||||
| Total liabilities | 5,018 | 5,167 | (149) | ||||||||||||||
| Total equity | 2,192 | 1,767 | 425 | ||||||||||||||
For the year ended December 31, 2018,2021, total assets decreased $47increased $276 million primarily due to:
•a $215 million increase in cash and cash equivalents due to cash flows from operations, partially offset by debt repayments;
•a $97$134 million increase in other current and non-current assets primarily due to technology and agent incentives, as well as equity method investments;
•a $13 million increase in goodwill primarily due to acquisitions at Realogy Brokerage Group in the fourth quarter of 2021, partially offset by the sale of a business at Realogy Brokerage Group in the second quarter of 2021; and
•a $7 million increase in indefinite life intangible assets,
partially offset by:
•an $89 million net decrease in franchise agreements and other amortizable intangible assets primarily due to amortizationamortization; and
•a $26$7 million decrease in other current assets, partially offset by a $54property and equipment.
For the year ended December 31, 2021, total liabilities decreased $149 million increase in other non-current assets primarily due to the adjustment to prepaid expenses as to:
•a result of the adoption of the new revenue standard related to commissions paid to Realogy franchise sales employees, an increase in interest rate swaps, an increase in long-term investments and an increase in deferred financing costs related to the debt transactions that occurred during the first quarter of 2018, and a $15$257 million increase in property and equipment.
•a $62$35 million increase in deferred tax liabilities, a $47 million increasedecrease in other non-current liabilities primarily due to deferred income for area development fees for international transactions as mark-to-market adjustments on the Company's interest rate swaps; and
•a result of the adoption of the new revenue standard and $14 million decrease in operating lease liabilities,
partially offset by:
•a $37$77 million increase in securitization obligations. These increases were partially offset by deferred tax liabilities;
•a $77$66 million decreaseincrease in accrued expenses and other current liabilities primarily due to lowerhigher employee-related accruals and $23an increase in accrued interest due to timing, partially offset by a decline in advances from clients; and
•a $12 million increase in payments of contingent consideration.securitization obligations.
Total equity decreased $307increased $425 million primarily due to net income of $343 million and a $416$71 million decreaseincrease in additional paid in capital primarily related to the Company's repurchaseissuance of $402 millionthe Exchangeable Senior Notes in the second quarter of common stock and $45 million of dividend payments, partially offset by stock-based compensation activity of $31 million. The decrease in total equity was partially offset by a $124 million increase which consists of net income of $137 million for the year ended December 31, 2018, partially offset by $13 million due to the cumulative impact of adopting new accounting standards.2021.
Liquidity and Capital Resources
Our primary uses of liquidity include working capital, business investment and capital expenditures, as well as debt service.
Business investments may include investments in strategic initiatives, including our existing or future joint ventures, products and services that are designed to redeemsimplify the 4.50%home sale and purchase transaction, independent sales agent recruitment and retention, franchisee system growth and acquisitions.
Debt service includes contractual amortization and interest payments on our long-term debt. As described below, we took steps in 2021 and the first quarter of 2022 to extend our debt maturity profile, reduce interest expense, and improve the mix of secured and unsecured debt, resulting in multiple credit rating upgrades. We intend to repay or refinance our 4.875% Senior Notes due 2023 at or prior to maturity. In addition, we may, from time to time, seek to repay or refinance certain of our other debt.
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In the first quarter of 2021, we issued $900 million of 5.75% Senior Notes due in 2029 and in the second quarter of 2021, we issued $403 million of 0.25% Exchangeable Senior Notes due in 2026, which contributed to the debt reduction described in the table below. In the first quarter of 2022, we issued $1,000 million of 5.25% Senior Notes due in 2030. Since the beginning of 2021, we have repaid or redeemed the following debt, including all of our Non-extended Term Loan A, Term Loan B Facility, 9.375% Senior Notes and plan to refinance on a long-term basis all or a portion of the funds used to redeem the 4.50%7.625% Senior Notes, subject to market conditions. AsSecured Second Lien Notes:
| Reporting Period | Amount Paid/Redeemed | Debt Instrument | Source of Funds | ||||||||
| Q1 2021 | $250 million | Term Loan A Facility | Issuance of $900 million of 5.75% Senior Notes | ||||||||
$655 million | Term Loan B Facility | ||||||||||
| Q2 2021 | $150 million | Term Loan B Facility | Cash on hand | ||||||||
| Q3 2021 | $197 million | Term Loan A Facility | Cash on hand | ||||||||
| $238 million | Term Loan B Facility | ||||||||||
| Q1 2022 | $596 million* | 9.375% Senior Notes | Issuance of $1,000 million of 5.25% Senior Notes, together with cash on hand | ||||||||
| $584 million* | 7.625% Senior Secured Second Lien Notes | ||||||||||
* includes "make whole" premium, but excludes accrued interest paid.
On February 22, 2019, the Company had $880 million of available capacity under the Revolving Credit Facility.
Debt Obligations (including Interest Payments). As of December 31, 2021, on a pro forma basis, the residential real estate marketprincipal amount of our total short-term and long-term debt was $2,942 million, after giving effect to the refinancing transactions that took place in the first quarter of 2022 (see below under the header "Financial Obligations—Pro Forma Indebtedness Table" for our borrowing arrangements as of December 31, 2021 on a pro forma basis). Taking into consideration the refinancing transactions in the first quarter of 2022, we expect to pay approximately $165 million in cash interest payments in 2022 to service our corporate indebtedness, assuming a constant interest rate of 1.85% for variable rate debt, including payments on our interest rate swaps and excluding the make-whole premium paid in connection with the redemption in full of the 9.375% Senior Notes and 7.625% Senior Secured Second Lien Notes.
After giving effect to the refinancing transactions that took place in the first quarter of 2022, we had $2,710 million of fixed rate debt with a weighted average interest rate of 4.6%.
At December 31, 2021, our variable interest rate debt includes amounts outstanding under our Term Loan A Facility of $232 million. The interest rate on the outstanding amounts under our Term Loan A Facility at December 31, 2021 was 1.85% which is based on adjusted LIBOR plus an additional margin subject to adjustment based on our current senior secured leverage ratio.
No principal payments, with the exception of amortization payments on the Extended Term Loan A of $10 million, are due in 2022. The next debt maturity relates to our $407 million 4.875% Senior Notes which are due in June 2023. See Note 9, "Short and Long-Term Debt", and Note 19, "Subsequent Events", to the Consolidated Financial Statements for additional information.
Taxes. While we have historically utilized net operating losses to offset the majority of our federal and state income tax payments, we utilized substantially all of our remaining net operating losses during 2021 and therefore expect to be a full cash taxpayer in 2022 and future years.
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Leases. As of December 31, 2021, we approximate $642 million of future lease payments with $157 million due in 2022. See Note 3, "Leases", to the Consolidated Financial Statements for additional information regarding our lease obligations.
Purchase Commitments. As of December 31, 2021, we had $82 million related to purchase commitments due in 2022 and $298 million thereafter, approximately 75% of which relates to the minimum licensing fees we are required to pay to the owners of the two brands we do not own under 50 year license agreements. See Note 14, "Commitments and Contingencies", to the Consolidated Financial Statements for additional information regarding our purchase obligations.
Joint Ventures. We have multiple unconsolidated joint ventures, including Guaranteed Rate Affinity (our mortgage origination joint venture) as well as our RealSure and Real Estate Auction joint ventures. Equity in earnings or losses related to the economyfinancial results of unconsolidated joint ventures are recorded on the equity in earnings line (and, accordingly impact Operating EBITDA), but are not reported as revenue. We have undertaken various commitments as a whole does not improveresult of those arrangements, including the investment or continuesadvancement of additional funds in certain instances, if required. We also may, from time to weaken,time, elect to make additional investments in existing and future unconsolidated joint ventures. See Note 2, "Summary of Significant Accounting Policies—Investments", to the Consolidated Financial Statements for additional information regarding our business,unconsolidated joint ventures.
Upon the close of the title insurance underwriter transactions described herein, we will receive proceeds of $210 million (prior to tax and closing adjustments) and will have a 30% non-controlling equity interest in the resulting joint venture (which will indirectly own Title Resources). Accordingly, we will no longer consolidate the results of the title insurance underwriter in our financial conditionstatements and liquidity mayour share of earnings from the title insurance underwriter will be materially adversely affected, includingcorrespondingly reduced. Moreover, cash held as statutory reserves by the title insurance underwriter (approximately $150 million at December 31, 2021) will no longer be included in our ability to access capitalConsolidated Balance Sheets as cash and grow our business.cash equivalents.
Historically, operating results and revenues for all of our businesses have been strongest in the second and third quarters of the calendar year. Although industry seasonality experienced volatility in 2020 and 2021, we believe that the industry will begin to realign with historical seasonality patterns in 2022. 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 the seasonal fluctuations in the business.Consequently, our debtneed to borrow under the Revolving Credit Facility and corresponding debt balances areare generally at their highest levels at or around the end of the first quarter of every year.
We believe that we will continue to evaluate potential refinancing and financing transactions. There can be no assurance as to which, if any, of these alternativesmeet our cash flow needs during the next twelve months, through the sources outlined above. Additionally, we may pursue as the choice of any alternative will depend upon numerous factors such as market conditions, our financial performance and the limitations applicableseek additional financing to such transactions underfund future growth or refinance our existing financing agreements andindebtedness through the consentsdebt capital markets, but we may need to obtain under the relevant documents. There cancannot be no assuranceassured that such financing will be available to us on acceptablefavorable terms, or at all. Over the longer-term, to the extent these sources of liquidity are insufficient to meet our needs, we may also conduct additional private or public offerings of debt or our common stock or dispose of certain assets.
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Cash Flows
Year ended December 31, 20182021 vs. Year ended December 31, 20172020
At December 31, 2018,2021, we had $238$743 million of cash, cash equivalents and restricted cash, an increase of $4$220 million compared to the balance of $234$523 million at December 31, 2017.2020. The following table summarizes our cash flows for the years ended December 31, 20182021 and 2017:2020:
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||
| 2018 | 2017 | Change | 2021 | 2020 | Change | |||||||||||||||||||||||
| Cash provided by (used in): | Cash provided by (used in): | |||||||||||||||||||||||||||
| Operating activities | $ | 394 | $ | 667 | $ | (273 | ) | Operating activities | $ | 643 | $ | 748 | $ | (105) | ||||||||||||||
| Investing activities | (91 | ) | (146 | ) | 55 | Investing activities | (147) | (90) | (57) | |||||||||||||||||||
| Financing activities | (297 | ) | (570 | ) | 273 | Financing activities | (275) | (402) | 127 | |||||||||||||||||||
| Effects of change in exchange rates on cash, cash equivalents and restricted cash | (2 | ) | 2 | (4 | ) | Effects of change in exchange rates on cash, cash equivalents and restricted cash | (1) | 1 | (2) | |||||||||||||||||||
| Net change in cash, cash equivalents and restricted cash | $ | 4 | $ | (47 | ) | $ | 51 | Net change in cash, cash equivalents and restricted cash | $ | 220 | $ | 257 | $ | (37) | ||||||||||||||
For the year ended December 31, 2018, $2732021, $105 million less cash was provided by operating activities compared to the same period in 2017. The change was2020 principally due to $148 million less cash provided by operations, $80to:
•$203 million more cash used for accounts payable, accrued expenses and other liabilities, $49 million less cash received as dividends from unconsolidated entities primarily related to PHH Home Loans in 2017 and $24liabilities;
•$56 million less cash provided by the net change in relocation and trade receivables, partially offset by $19receivables;
•$50 million less cash from dividends received primarily from Guaranteed Rate Affinity;
•$39 million more cash used for other assets primarily due to payments to agents and $9other receivables, as well as sales incentives to franchisees; and
•$8 million lessmore cash used for other operating activities.activities,
partially offset by $251 million more cash provided by operating results.
For the year ended December 31, 2018,2021, we used $55$57 million lessmore cash for investing activities compared to the same period in 20172020 primarily due to $40to:
•$34 million lessmore cash used for investments in unconsolidated entities primarily related to Guaranteed Rate Affinity, $17entities;
•$25 million lessmore cash used for acquisition related payments and $8payments;
•$8 million less of net cash proceeds received from the dissolutionsale of our interest in PHH Home Loans, LLC, partially offset by $6business; and
•$6 million more cash used for property and equipment additions, and $4
partially offset by $16 million less cash provided byused for other investing activities.
For the year ended December 31, 2018, $2972021, $275 million of cash was used in financing activities compared to $570$402 million of cash used during the same period in 2017.2020. For the year ended December 31, 2018, $2972021, $275 million of cash was used for:as follows:
•$402 million for the repurchase of our common stock;
•$2934 million of other financing payments primarily related to capital leases;finance leases and contracts;
•$2510 million of quarterly amortization payments on the term loan facilities; and
•$22 million for payments of contingent consideration;
partially offset by
For the year ended December 31, 2017, $5702020, $402 million of cash was used for:in financing activities as follows:
•$280190 million for the repurchase of our common stock;
•$4999 million of dividend payments;net decrease in securitization borrowings;
•$4243 million of quarterly amortization payments on the term loan facilities;
•$2643 million of other financing payments partiallyprimarily related to capital leases and interest rate swaps;finance leases;
•$22 million for payments of contingent consideration;cash paid primarily as a result of the refinancing transactions in the second quarter of 2020; and
•$11 million net decrease in securitization borrowings;
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Year ended December 31, 20172020 vs. Year ended December 31, 20162019
At December 31, 2017,2020, we had $234$523 million of cash, cash equivalents and restricted cash, a decreasean increase of $47$257 million compared to the balance of $281$266 million at December 31, 2016.2019. The following table summarizes our cash flows for the years ended December 31, 20172020 and 2016:2019:
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||
| 2017 | 2016 | Change | 2020 | 2019 | Change | |||||||||||||||||||||||
| Cash provided by (used in): | Cash provided by (used in): | |||||||||||||||||||||||||||
| Operating activities | $ | 667 | $ | 586 | $ | 81 | Operating activities | $ | 748 | $ | 371 | $ | 377 | |||||||||||||||
| Investing activities | (146 | ) | (191 | ) | 45 | Investing activities | (90) | (128) | 38 | |||||||||||||||||||
| Financing activities | (570 | ) | (534 | ) | (36 | ) | Financing activities | (402) | (215) | (187) | ||||||||||||||||||
| Effects of change in exchange rates on cash, cash equivalents and restricted cash | 2 | (3 | ) | 5 | Effects of change in exchange rates on cash, cash equivalents and restricted cash | 1 | — | 1 | ||||||||||||||||||||
| Net change in cash, cash equivalents and restricted cash | $ | (47 | ) | $ | (142 | ) | $ | 95 | Net change in cash, cash equivalents and restricted cash | $ | 257 | $ | 28 | $ | 229 | |||||||||||||