UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________
FORM 10-K
☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20192022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
| | | | | |
| Commission File No. 001-35674 | Commission File No. 333-148153 |
REALOGY HOLDINGS CORP.Anywhere Real Estate Inc. | REALOGY GROUPAnywhere Real Estate Group LLC |
| (Exact name of registrant as specified in its charter) | (Exact name of registrant as specified in its charter) |
| 20-8050955 | 20-4381990 |
| (I.R.S. Employer Identification Number) | (I.R.S. Employer Identification Number) |
___________________________________________________________________________________________________Delaware
(State or other jurisdiction of incorporation or organization)
175 Park Avenue
Madison, NJ 07940
(Address of principal executive offices) (Zip Code)
(973) 407-2000
(Registrants' telephone number, including area code)
___________________________ | | | | | |
| Delaware | 175 Park Avenue |
| (State or other jurisdiction of incorporation or organization) | Madison, New Jersey 07940 |
| (973) 407-2000 | (Address of principal executive offices, including zip code) |
| (Registrants' telephone number, including area code) | |
| | | | | | | | | | | |
| Securities registered pursuant to Section 12(b) of the Act: | | | |
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Realogy Holdings Corp.Anywhere Real Estate Inc. | Common Stock, par value $0.01 per share | RLGYHOUS | New York Stock Exchange |
RealogyAnywhere Real Estate Group LLC | None | None | None |
Securities registered pursuant to Section 12(g) of the Act: None
___________________________
Indicate by check mark if the Registrants are a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Realogy Holdings Corp.Anywhere Real Estate Inc. Yes þ No ¨ RealogyAnywhere Real Estate Group LLC Yes ¨ No þ
Indicate by check mark if the Registrants are not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Realogy Holdings Corp.Anywhere Real Estate Inc. Yes ¨ No þ RealogyAnywhere Real Estate Group LLC Yes þ No ¨
Indicate by check mark whether the Registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.
Realogy Holdings Corp. Anywhere Real Estate Inc. Yes þ No ¨ RealogyAnywhere Real Estate Group LLC Yes ¨ No þ
Indicate by check mark whether the Registrants have submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrants were required to submit such files).
Realogy Holdings Corp.Anywhere Real Estate Inc. Yes þ No ¨ RealogyAnywhere Real Estate Group LLC Yes þ No ¨
Indicate by check mark whether the Registrants are large accelerated filers, accelerated filers, non-accelerated filers, smaller reporting companies, or emerging growth companies. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Large accelerated filer | | Accelerated filer | | Non-accelerated filer | | Smaller reporting company | | Emerging growth company |
| | | | | | | | | |
Realogy Holdings Corp.Anywhere Real Estate Inc. | þ | | ¨ | | ¨ | | ☐ | | ☐ |
RealogyAnywhere Real Estate Group LLC | ¨ | | ¨ | | þ | | ☐ | | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. þ
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b) ☐
Indicate by check mark whether the Registrants are a shell company (as defined in Rule 12b-2 of the Exchange Act).
Realogy Holdings Corp.Anywhere Real Estate Inc. Yes ☐ No þ RealogyAnywhere Real Estate Group LLC Yes ☐ No þ
The aggregate market value of the voting and non-voting common equity of Realogy Holdings Corp.Anywhere Real Estate Inc. held by non-affiliates as of the close of business on June 30, 20192022 was $824 million.$1.1 billion. There were 114,379,296109,480,844 shares of Common Stock, $0.01 par value, of Realogy Holdings Corp.Anywhere Real Estate Inc. outstanding as of February 21, 2020.2023.
RealogyAnywhere Real Estate Group LLC meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this Form with the reduced disclosure format applicable to RealogyAnywhere Real Estate Group LLC.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement prepared for the Annual Meeting of Stockholders to be held May 6, 20203, 2023 are incorporated by reference into Part III of this report.
| | | | | | | | |
| PART I | | |
| | |
| Item 1. | | |
| Item 1A. | | |
| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
| | |
| | |
| PART II | | |
| | |
| Item 5. | | |
| Item 6. | | |
| Item 7. | | |
| Item 7A. | | |
| Item 8. | | |
| Item 9. | | |
| Item 9A. | | |
Item 9B. | | |
| | |
| PART III | | |
| | |
| Item 10. | | |
| Item 11. | | |
| Item 12. | | |
| Item 13. | | |
| Item 14. | | |
| | |
| PART IV | | |
| | |
| Item 15. | | |
| Item 16. | | |
| | |
| | |
| | |
| | |
| | |
FORWARD-LOOKING STATEMENTS
Forward-looking statements included in this Annual Report on Form 10-K (this "Annual Report") and our other public filings or other public statements that we make from time to time are based on various facts and derived utilizing numerous important assumptions and are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements include the information concerning our future financial performance, business strategy, projected plans and objectives, as well as projections of macroeconomic and industry trends, which are inherently unreliable due to the multiple factors that impact economic trends, and any such variations may be material. Statements preceded by, followed by or that otherwise include the words "believes," "expects," "anticipates," "intends," "projects," "estimates," "plans," and similar expressions or future or conditional verbs such as "will," "should," "would," "may" and "could" are generally forward-looking in nature and not historical facts. You should understand that the following important factors could affect our future results and may cause actual results to differ materially from those expressed in the forward-looking statements:
•adverse developments or the absence of sustained improvement in general business, economic or political conditions or the U.S. residential real estate markets, either regionally or nationally, including but not limited to:
◦a decline or a lack of improvement in the number of homesales;
◦insufficient or excessive home inventory levels by market and price point;
◦stagnant or declining home prices;
◦a reduction in the affordability of housing;
◦increasing mortgage rates and/or constraints on the availability of mortgage financing;
◦a lack of improvement or deceleration in the building of new housing and/or irregular timing or volume of new development closings;
◦the potential negative impact of certain provisions of the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) on (i) home values over time in states with high property, sales and state and local income taxes and (ii) homeownership rates, in particular in light of our market concentration in high-tax states; and/or
◦the impact of recessions, slow economic growth, or a deterioration in other economic factors that particularly impact the residential real estate market and the business segments in which we operate, whether broadly or by geography and price segments;
•the impact of increased competition in the industry for clients, for the affiliation of independent sales agents and for the affiliation of franchisees on our results of operations and market share, including competition from:
◦real estate brokerages,statements, including those seeking to disrupt historical real estate brokerage models;
◦other industry participants seeking to eliminate brokers or agents from, or minimize the role they playlisted directly below under "Summary of Risk Factors" and as described in the homesale transaction;
◦other industry participants otherwise competing for a portion of gross commission income; and
◦other residential real estate franchisors;
•the impact of disruption in the residential real estate brokerage industry, and on our results of operations and financial condition, as a result of listing aggregator concentration and market power;
•continuing pressure on the share of gross commission income paid by our company owned brokerages and affiliated franchisees to affiliated independent sales agents and independent sales agent teams;
•our inability to successfully develop products, technology and programs (including our company-directed affinity programs) that support our strategy to grow the base of independent sales agents at our company owned and franchisee real estate brokerages and the base of our franchisees;
•our geographic and high-end market concentration, including the heightened competition for independent sales agents in those geographies and price points;
•our inability to enter into franchise agreements with new franchisees or renew existing franchise agreements, without reducing contractual royalty rates or increasing the amount and prevalence of sales incentives;
•the lack of revenue growth or declining profitability of our franchisees and company owned brokerage operations or declines in other revenue streams, such as third-party listing fees;
•the potential impact of negative industry or business trends (including further declines in our market capitalization) on our valuation of goodwill and intangibles;
•the extent of the negative impact of the discontinuation of the USAA affinity program on the Company’s revenues and profits derived from affinity program referrals (including revenue to Realogy Leads, Realogy Brokerage, Realogy Franchise, and Realogy Title Groups);
•the loss of our next largest affinity client;
•risks related to the planned sale of Cartus Relocation Services to a subsidiary of SIRVA, Inc., including with respect to expected timing, anticipated benefits and the financial impact to our business;
•an increase in the experienced claims losses of our title underwriter;
•our failure or alleged failure to comply with laws, regulations and regulatory interpretations and any changes or stricter interpretations of any of the foregoing (whether through private litigation or governmental action), including but not limited to (1) state or federal employment laws or regulations that would require reclassification of independent contractor sales agents to employee status, (2) privacy or data security laws and regulations, (3) the Real Estate Settlement Procedures Act ("RESPA") or other federal or state consumer protection or similar laws, and (4) antitrust laws and regulations;
•risks related to the impact on our operations and financial results that may be caused by any future meaningful changes in industry operations or structure as a result of governmental pressures, the actions of certain competitors, the introduction or growth of certain competitive models, changes to the rules of the multiple listing services ("MLS"), or otherwise;
•risks relating to our ability to return capital to stockholders including, among other risks, the impact of restrictions contained in our debt agreements, in particular the indenture governing the 9.375% Senior Notes;
•risks associated with our substantial indebtedness and interest obligations and restrictions contained in our debt agreements, including risks relating to having to dedicate a significant portion of our cash flows from operations to service our debt and risks relating to our ability to refinance or repay our indebtedness or incur additional indebtedness; and
•risks and growing costs related to both cybersecurity threats to our data and customer, franchisee, employee and independent sales agent data, as well as those related to our compliance with the growing number of laws, regulations and other requirements related to the protection of personal information.
Other factors not identified above, including those describedmore detail under "Item 1A.—Risk Factors" and those described in "Item 7.—Management’s Discussion and Analysis of Financial Condition and Results of Operations" of this Annual Report, may also cause actual results to differ materially from those described in our forward-looking statements.Report. Most of these factors are difficult to anticipate and are generally beyond our control. You should consider these factors in connection with any forward-looking statements that may be made by us and our businesses generally.
All forward-looking statements herein speak only as of the date of this report and are expressly qualified in their entirety by the cautionary statements included in or incorporated by reference into this report. Except as is required by law, we expressly disclaim any obligation to publicly release any revisions to forward-looking statements to reflect events after the date of this report. For any forward-looking statement contained in this Annual Report, our public filings or other public statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
SUMMARY OF RISK FACTORS
The following summary of risk factors is not exhaustive. We are subject to other risks discussed under "Item 1A.—Risk Factors," and that we may discuss under "Item 7.—Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as risks that may be discussed in other reports filed with the SEC. As noted under "Forward-Looking Statements" above, these factors could affect our future results and cause actual results to differ materially from those expressed in our forward-looking statements. Investors and other readers are urged to consider all of these risks, uncertainties and other factors carefully in evaluating our business.
•The residential real estate market is cyclical, and we are negatively impacted by adverse developments or the absence of sustained improvement in the U.S. residential real estate markets, either regionally or nationally, which could include, but are not limited to factors that impact homesale transaction volume (homesale sides times average homesale price), such as:
◦continued or accelerated declines in the number of home sales;
◦stagnant or declining home prices;
◦continued or accelerated increases in mortgage rates or a prolonged high interest rate environment;
◦continued or accelerated reductions in housing affordability;
◦continued or accelerated declines in consumer demand; and
◦continued or accelerated declines in inventory or excessive inventory;
•We are negatively impacted by adverse developments or the absence of sustained improvement in macroeconomic conditions (such as business, economic or political conditions) on a global, domestic or local basis, which could include, but are not limited to:
◦contraction or stagnation in the U.S. economy;
◦geopolitical and economic instability, including as related to the conflict in Ukraine;
◦continued or accelerated increases in inflation; and
◦fiscal and monetary policies of the federal government and its agencies, particularly those that may result in unfavorable changes to the interest rate environment or tax reform;
•Adverse developments or outcomes in current or future litigation, in particular pending class action antitrust litigation and litigation related to the Telephone Consumer Protection Act ("TCPA"), may materially harm our business, results of operations and financial condition;
•We are subject to risks related to industry structure changes that disrupt the functioning of the residential real estate market, including as a result of legal or regulatory developments, revisions to the rules of the multiple listing services ("MLSs") or the National Association of Realtors ("NAR") or otherwise;
•Risks related to the impact of evolving competitive and consumer dynamics, whether driven by competitive or regulatory factors or other changes to industry rules, which could include, but are not limited to:
◦continued erosion of our share of the commission income generated by homesale transactions could continue to negatively affect our profitability;
◦our ability to compete against traditional and non-traditional competitors;
◦our ability to adapt our business to changing consumer preferences, including any decrease in the use of agents and brokers in residential real estate transactions;
◦further disruption in the residential real estate brokerage industry related to listing aggregator market power and concentration, including with respect to ancillary services; and
◦meaningful decreases in the average broker commission rate;
•Our business and financial results may be materially and adversely impacted if we are unable to execute our business strategy, including if we are not successful in our efforts to:
◦recruit and retain productive independent sales agents and/or independent sales agent teams;
◦attract and retain franchisees or renew existing franchise agreements without reducing contractual royalty rates or increasing the amount and prevalence of sales incentives;
◦develop or procure products, services and technology that support our strategic initiatives;
◦simplify and modernize our business and achieve or maintain a beneficial cost structure or savings and other benefits from our cost-saving initiatives;
◦generate a meaningful number of high-quality leads for independent sales agents and franchisees;
◦complete or integrate acquisitions and joint ventures or effectively manage divestitures; and
◦realize the expected benefits from our existing or future joint ventures and strategic partnerships
•Our substantial indebtedness could adversely limit our operations and/or adversely impact our liquidity including, but not limited to, with respect to our interest obligations and the negative covenant restrictions contained in our debt agreements and our ability, and any actions we may take, to refinance, restructure or repay our indebtedness or incur additional indebtedness;
•An event of default under our material debt agreements would adversely affect our operations and our ability to satisfy obligations under our indebtedness;
•Our financial condition and/or results of operations may be adversely impacted by risks related to our business structure, including, but not limited to:
◦the operating results of affiliated franchisees and their ability to pay franchise and related fees;
◦continued consolidation among our top 250 franchisees;
◦difficulties in the business of, or challenges in our relationships with, the owners of the two brands we do not own;
◦the geographic and high-end market concentration of our company owned brokerages;
◦the loss of our largest real estate benefit program client or multiple significant relocation clients;
◦the failure of third-party vendors or partners to perform as expected or our failure to adequately monitor them;
◦our reliance on information technology to operate our business and maintain our competitiveness; and
◦the negligence or intentional actions of affiliated franchisees and their independent sales agents or independent sales agents engaged by our company owned brokerages;
•We are subject to risks related to legal and regulatory matters, which may cause us to incur increased costs (including significant judgments or settlements as well as in connection with compliance efforts) and/or result in adverse financial, operational or reputational consequences to us, including but not limited to, our failure or alleged failure to comply with laws, regulations and regulatory interpretations and any changes or stricter interpretations of any of the foregoing (whether through private litigation or governmental action), including but not limited to: (1) antitrust laws and regulations, (2) the Real Estate Settlement Procedures Act ("RESPA") or other federal or state consumer protection or similar laws, (3) state or federal employment laws or regulations that would require reclassification of independent contractor sales agents to employee status, (4) the TCPA and any related laws limiting solicitation of business, and (5) privacy or cybersecurity laws and regulations;
•We face reputational, business continuity and legal and financial risks associated with cybersecurity incidents;
•Our goodwill and other long-lived assets are subject to further impairment which could negatively impact our earnings;
•We could be subject to significant losses if banks do not honor our escrow and trust deposits;
•Changes in accounting standards and management assumptions and estimates could have a negative impact on us;
•We face risks related to the attrition among our senior executives or other key employees;
•We are subject to risks related to the issuance of the Exchangeable Senior Notes and exchangeable note hedge and warrant transactions, including the potential impact on the value of our common stock and counterparty risk;
•We face risks related to severe weather events or natural disasters, including increasing severity or frequency of such events due to climate change or otherwise, or other catastrophic events, including public health crises, such as pandemics and epidemics;
•Increasing scrutiny and changing expectations related to corporate sustainability practices may impose additional costs on us or expose us to reputational or other risks;
•Market forecasts and estimates, including our internal estimates, may prove to be inaccurate and, even if achieved, our business could fail to grow; and
•We face risks related to our common stock, including that price of our common stock may fluctuate significantly as well as that Delaware law and our organizational documents may impede or discourage a takeover.
TRADEMARKS AND SERVICE MARKS
We own or have rights to use the trademarks, service marks and trade names that we use in conjunction with the operation of our business. Some of the more important trademarks that we own or have rights to use that appear in this Annual Report include the CENTURY 21®, COLDWELL BANKER®, ERA®, CORCORAN®, COLDWELL BANKER COMMERCIAL®, SOTHEBY’S INTERNATIONAL REALTY®, BETTER HOMES AND GARDENS® Real Estate, and CARTUS® marks, which are registered in the United States and/or registered or pending registration in other jurisdictions, as appropriate to the needs of our relevant business. Each trademark, trade name or service mark of any other company appearing in this Annual Report is owned by such company.
MARKET AND INDUSTRY DATA AND FORECASTS
This Annual Report includes data, forecasts and information obtained from independent trade associations, industry publications and surveys, and other information available to us. Some data is also based on our good faith estimates, which are derived from management’s knowledge of the industry and independent sources. As noted in this Annual Report, the National Association of Realtors ("NAR"), the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac") were the primary sources for third-party industry data and forecasts. While data provided by NAR and Fannie Mae are two indicators of the direction of the residential housing market, we believe that homesale statistics will continue to vary between us and NAR and Fannie Mae because:
•they use survey data and estimates in their historical reports and forecasting models, which are subject to sampling error, whereas we use data based on actual reported results;
•there are geographical differences and concentrations in the markets in which we operate versus the national market. For example, many of our company owned brokerage offices are geographically located where average homesale prices are generally higher than the national average and therefore NAR survey data will not correlate with Realogy Brokerage Group's results;
•comparability is also diminished due to NAR’s utilization of seasonally adjusted annualized rates whereas we report actual period-over-period changes and their use of median price for their forecasts compared to our average price;
•NAR historical data is subject to periodic review and revision and these revisions have been material in the past, and could be material in the future; and
•NAR and Fannie Mae generally update their forecasts on a monthly basis and a subsequent forecast may change materially from a forecast that was previously issued.
In addition, we base our estimate of the gross commission income generated in the United States in part on data from Real Trends, a provider of residential brokerage industry analysis, and we also base certain estimates on data from various MLS systems and the U.S. Census Bureau. While we believe that the industry data presented herein is derived from the most widely recognized sources for reporting U.S. residential housing market statistical data, we do not endorse or suggest reliance on this data alone.
Forecasts regarding rates of home ownership, median sales price, volume of homesales, and other metrics included in this Annual Report to describe the housing industry are inherently uncertain or speculative in nature and actual results for any period could materially differ. Industry publications, surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but such information may not be accurate or complete. We have not independently verified any of the data from third-party sources nor have we ascertained the underlying economic assumptions relied upon therein. Statements as to our market position are based on market data currently available to us. While we are not aware of any misstatements regarding industry data provided herein, our estimates involve risks and uncertainties and are subject to change based upon various factors, including those discussed under the headings "Risk Factors" and "Forward-Looking Statements." Similarly, we believe our internal research is reliable, even though such research has not been verified by any independent sources.
PART I
Except as otherwise indicated or unless the context otherwise requires, the terms "we," "us," "our," "our company," "Realogy," "Realogy Holdings""Anywhere" and the "Company" refer to Realogy Holdings Corp.Anywhere Real Estate Inc., a Delaware corporation, and its consolidated subsidiaries, including RealogyAnywhere Intermediate Holdings LLC, a Delaware limited liability company ("RealogyAnywhere Intermediate"), and RealogyAnywhere Real Estate Group LLC, a Delaware limited liability company ("RealogyAnywhere Group"). Neither Realogy Holdings,Anywhere, the indirect parent of RealogyAnywhere Group, nor RealogyAnywhere Intermediate, the direct parent company of RealogyAnywhere Group, conducts any operations other than with respect to its respective direct or indirect ownership of RealogyAnywhere Group. As a result, the consolidated financial positions, results of operations and cash flows of Realogy Holdings, RealogyAnywhere, Anywhere Intermediate and RealogyAnywhere Group are the same.
Realogy Holdings is not a partyAs used in this Annual Report:
•"Senior Secured Credit Agreement" refers to the Amended and Restated Credit Agreement dated as of March 5, 2013, as amended, amended and restated, modified or supplemented from time to time, (the "Senior Secured Credit Agreement") that governs ourthe senior secured credit facility, (theor "Senior Secured Credit Facility", which includes ourthe "Revolving Credit Facility" and ourthe "Term Loan B") andB Facility" (paid in full in September 2021);
•"Term Loan A Agreement" refers to the Term Loan A Agreement dated as of October 23, 2015, as amended, amended and restated, modified or supplemented from time to time (thetime;
•"Non-extended Term Loan A" (paid in full in September 2021) and "Extended Term Loan A" each refer to the applicable portion of the Term Loan A facility under the Term Loan A Agreement and are referred to collectively as the "Term Loan A Agreement") that governs our senior secured term loan A credit facility (the "Term Loan A Facility") and certain references in this Annual Report to our consolidated indebtedness exclude Realogy Holdings with respect to indebtedness under the Senior Secured Credit Facility and Term Loan A Facility. In addition, while Realogy Holdings is a guarantor of Realogy Group's obligations under its unsecured notes, Realogy Holdings is not subject to the restrictive covenants in the indentures governing such indebtedness.Facility;"
As used in this Annual Report, the terms "5.25% Senior Notes", "4.875%•"5.75% Senior Notes" and "9.375%"5.25% Senior Notes" refer to our 5.75% Senior Notes due 2029 and 5.25% Senior Notes due 2021, our 4.875% Senior Notes due 2023, and our 9.375% Senior Notes due 2027,2030, respectively, and are referred to collectively as the "Unsecured Notes.Notes;" The term "4.50%
•"4.875% Senior Notes" refer to our 4.875% Senior Notes due 2023 (redeemed in full in November 2022),"9.375% Senior Notes" refers to 9.375% Senior Notes due 2027 (redeemed in full in February 2022) and "7.625% Senior Secured Second Lien Notes" refers to our 7.625% Senior Secured Second Lien Notes due 2025 (redeemed in full in February 2022); and
•"Exchangeable Senior Notes" refers to our 4.50%0.25% Exchangeable Senior Notes due 2019 (paid in full in February 2019).2026.
Item 1. Business.
Our Company
We are the leading and mostA leader of integrated provider of residential real estate services in the U.S. We are the world's largest franchisor of residential real estate brokerages with, Anywhere includes franchise, brokerage, relocation, and title and settlement businesses, as well as mortgage and title insurance underwriter joint ventures, supporting approximately 1.2 million home transactions in 2022. The diverse Anywhere brand portfolio includes some of the most recognized brandsnames in the real estate industry, the leading U.S. residential real estate brokerage (based upon transaction volume)estate: Better Homes and Gardens® Real Estate, CENTURY 21®, Coldwell Banker®, Coldwell Banker Commercial®, Corcoran®, ERA®, and a significant provider of title and settlement services.
The core of our integrated business strategy is to grow the base of productive independent sales agents at our company owned and franchisee brokerages and provide them with compellingSotheby’s International Realty®. Using innovative technology, data and technologymarketing products, and services, including high-quality lead generation programs, to makeand best-in-class learning and support services, Anywhere fuels the productivity of its approximately 195,000 independent sales agents in the U.S. and approximately 142,400 independent sales agents in 118 other countries and territories, helping them more productivebuild stronger businesses and their businesses more profitable.
Our revenue is derived on a fee-for-service basis, and given our breadth of complementary service offerings, we are able to generate fees from multiple aspects of a residential real estate transaction. Our operating platform is supported by our portfolio of industry leading franchise brokerage brands, including Century 21®, Coldwell Banker®, Coldwell Banker Commercial®, Corcoran®, ERA®, Sotheby's International Realty®and Better Homes and Gardens®Real Estate.best serve today’s consumers.
We also own and operate company owned brokerages primarily under the Coldwell Banker®, Corcoran® and Sotheby's International Realty® brands.
Our multiple brands and operations allow us to derive revenue from multiple segments of the residential real estate market, in many different geographies and at varying price points.
Segment Overview
On November 6, 2019, the Company entered into a definitive Purchase and Sale Agreement (the "Purchase Agreement") with a subsidiary of SIRVA, Inc. ("SIRVA"), pursuant to which SIRVA will acquire our global employee relocation business, or "Cartus Relocation Services," held by Cartus Corporation, an indirect subsidiary of the Company (“Cartus”). The transaction is expected to close in the next couple of months, subject to the satisfaction or waiver of the closing conditions therein. The sale does not include our affinity and broker-to-broker businesses, nor does it include our broker network made up of agents and brokers from Realogy’s residential real estate brands and certain independent real estate brokers (which was formerly referred to as the Cartus Broker Network and is referred to herein as the "Realogy Broker Network"). In this report, we refer to this business that will be retained as "Realogy Leads Group."
We report our operations in fourthree segments, each of which receives fees based upon services performed for our customers:
•Realogy Anywhere Brands ("Franchise Group (formerly referred to as Real Estate Franchise Services, or RFG);
•Group")Realogy Brokerage Group (formerly referred to as Company Owned Real Estate Brokerage Services, or NRT);
•Realogy Title Group (formerly referred to as Title and Settlement Services, or TRG); and
•Realogy Leads Group (as noted above previously formed part of Cartus, which we formerly referred to as Relocation Services).
The assets and liabilities of Cartus Relocation Services are classified as held for sale in the Consolidated Balance Sheets and the results are reported in this Annual Report as discontinued operations. "Net (loss) income from discontinued operations" is reflected on the Consolidated Statements of Operations for all periods presented.
Realogy Franchise Group. We are the largest franchisor of residential real estate brokerages in the world through ourGroup, franchises a portfolio of well-known, industry-leading franchise brokerage brands, including Better Homes and Gardens®Real Estate, Century 21®, Coldwell Banker®, Coldwell Banker Commercial®,Corcoran®, ERA®,and Sotheby's International Realty®. This segment also includes our lead generation activities through Anywhere Leads Group ("Leads Group") and global relocation services operation through Cartus® and Better Homes and GardensRelocation Services ("Cartus").®Real Estate.
As of December 31, 2019, our real estate franchise systems and proprietary brands had approximately 302,400 independent sales agents worldwide, including approximately 189,900 independent sales agents operating in the U.S. (which included approximately 52,200 company owned brokerage independent sales agents). As of December 31, 2019, our real estate franchise systems and proprietary brands had approximately 18,500 offices worldwide in 114 countries and territories, including approximately 5,900 brokerage offices in the U.S. (which included approximately 710 company owned brokerage offices).
The average tenure among our U.S. franchisees is approximately 22 years•Anywhere Advisors ("Owned Brokerage Group") formerly referred to as of December 31, 2019. Our franchisees pay us fees for the right to operate under one of our trademarks and to enjoy the benefits of the systems and business enhancing tools provided by our real estate franchise operations. In addition to highly competitive brands that provide unique offerings to our franchisees, we support our franchisees with dedicated national marketing and servicing programs, technology, training, education, learning and development to facilitate our franchisees in growing their business and increasing their revenue and profitability.
Realogy Brokerage Group. Group,We own and operate the leading residentialoperates a full-service real estate brokerage business (based upon transaction volume) in the U.S. primarilyprincipally under the Coldwell Banker®, Corcoran® and Sotheby's International Realty®brand names. We offer full-service residential brokerage servicesnames in many of the largest metropolitan areas ofin the U.S. Realogy Brokerage Group, as the broker for a home buyerThis segment also includes our share of equity earnings or seller, derives revenues primarilylosses from gross commission income received at the closing ofour minority-owned real estate transactions. Realogy Brokerage Group also has relationships with developers, primarily in major cities, to provide marketingauction joint venture and brokerage services in new developments.our former RealSure joint venture.
•Anywhere Integrated Services ("Title Group") formerly referred to as Realogy Title Group. We assist with the closing of real estate transactions by providingGroup, provides full-service title, escrow and settlement (i.e., closing and escrow) services to customers,consumers, real estate companies, affinity groups, corporations and financial institutions with manyprimarily in support of these services provided in connection with the Company's real estate brokerage. In 2019, Realogy Title Group was involved in the closing of approximately 173,000 transactions of which approximately 49,000 related to Realogy Brokerage Group. In addition to our own title and settlement services, we also coordinate a nationwide network of attorneys, title agents and notaries to service financial institution and relocation clients on a national basis. We also serve as an underwriter of title insurance policies in connection with residential and commercial real estate transactions. This segment also includes the Company'sour share of equity earnings andor losses for ourfrom Guaranteed Rate Affinity, our minority-owned mortgage origination joint venture.
Realogy Leads Group. Realogy Leads Group consists of affinity programs (both company-venture, and client-directed) as well as broker-to-broker referrals. Through our highly concentrated affinity business, we have traditionally provided (and continue to provide) assistance with residential real estate transactions to members of affinity clients such as insurance companies and credit unions that provide our services to their members. Our launch of Realogy Military Rewards in September 2019 marked our entry into offering a home buying and selling assistance program to an affinity group through a Realogy-branded program. Realogy Military Rewards seeks to provide access to benefits similar to those offered under the Company's former USAA affinity program, which had been our largest affinity client and ceased new enrollments in the third quarter of 2019 (See Part II, Item 7. Management's Discussion and Analysis—Recent Developments for additional information). In addition, in 2019, we announced other affinity programs including our announcement in October 2019 of an agreement to create the first-ever real estate benefits program designed for the nearly 38 million AARP members, which is expected to launch nationally in early 2020.
Referrals from our affinity and broker-to-broker programs are handled by the Realogy Broker Network. Member brokers of the Realogy Broker Network, including certain franchisees and company owned brokerages, have traditionally received referrals from Realogy Leads Group in exchange for a referral fee. The Realogy Broker Network has historically been a key contributor to our lead generation strategy, with approximately 99% of the converted leads generated through the network being directed to independent sales agents affiliated with our franchisees and company owned brokerages in 2019.
Discontinued Operations—Cartus Relocation Services. Cartus Relocation Services is reported as held for sale in this Annual Report. As a provider of global relocation services that operates in key international relocation destinations, Cartus Relocation Services offers a broad range of world-class employee relocation services designed to manage all aspects of an employee's move to facilitate a smooth transition in what otherwise may be a complex and difficult process for the employee and employer. In 2019, Cartus Relocation Services served corporations, including 48% of the Fortune 50 companies. As of December 31, 2019, the top 25 relocation clients had an average tenure of approximately 20 years with Cartus Relocation Services.
Member brokers of the Realogy Broker Network have historically received referrals from Cartus Relocation Services generated by our relocation clients in exchange for a referral fee (that is reported in the financial results for Cartus Relocation Services). Realogy will enter into a non-exclusive five-year broker services agreement with SIRVA in connection with the planned sale of Cartus Relocation Services, pursuant to which Realogy Leads Group could, at the discretion of SIRVA, continue to provide high-quality brokerages services via the Realogy Broker Network to relocation clients of SIRVA. Realogy Leads Group will not receive a referral fee in connection with providing such services to SIRVA relocation clients.
Housing Market and Market Share
U.S. Gross Commission Income.Residential real estate brokerage companies typically realize revenues in the form of a sales commission earned from closed homesale sides (either the "buy" side and/or the "sell" side of a real estate transaction), which we refer to as gross commission income. We believe that the level of gross commission income generated in the U.S., which is generally estimated around $70 billion, represents a substantial addressable market. Our company owned brokerages and franchisees earned approximately $12 billion in gross commission income in 2019, as compared to $13 billion in gross commission income in 2018.
Market Share. As measured in a comparison to the volume of all existing homesale transactions in the U.S. as reported by NAR (regardless of whether an agent or broker was involved in the transaction), we estimate that our market share in 2019 decreased year-over-year to approximately 15.3% compared to 16.1% in 2018. Our estimated share of all U.S. existing homesale unit transactions in 2019 decreased from approximately 13.5% to approximately 13.0%.
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.minority-owned title insurance underwriter joint venture.
* * *
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.comanywhere.re 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 RelationsInvestors 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.
MARKET AND INDUSTRY DATA AND FORECASTS
This Annual Report includes historical data, forecasts and information obtained from independent sources such as the Federal Home Loan Mortgage Corporation ("Freddie Mac"), the U.S. Bureau of Labor Statistics, the U.S. Federal Reserve Board, the Federal Reserve Bank of Atlanta, the National Association of Realtors ("NAR"), the Federal National Mortgage Association ("Fannie Mae"), trade associations, industry publications and surveys, and other information available to us. Some data is also based on our good faith estimates, which are derived from management’s knowledge of the industry and independent source. While we believe that the industry data presented herein is derived from the most widely recognized sources for reporting U.S. residential housing market statistical data, we caution that such information is subject to change and do not endorse or suggest reliance on this data or information alone.
Forecasts regarding rates of home ownership, sales price, volume of homesales, and other metrics included in this Annual Report to describe the housing industry are inherently uncertain or speculative in nature and actual results for any period could materially differ. Industry publications, surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but such information may not be accurate or complete. We have not independently verified any of the data from third-party sources nor have we ascertained the underlying economic assumptions relied upon therein. Statements as to our market position are based on market data currently available to us. While we are not aware of any misstatements regarding industry data provided herein, our estimates involve risks and uncertainties and are subject to change based upon various factors, including those discussed under the headings "Risk Factors" and "Forward-Looking Statements." Similarly, we believe our internal research is reliable, even though such research has not been verified by any independent sources.
7
Industry TrendsOverview
Industry definition. We primarily operate in the U.S. residential real estate industry which is approximately a $1.9 trillion industry based on 2019 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 titlerelocation 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 6.05.7 million homesales in the U.S. in 2019,2022, NAR estimates that approximately 5.35 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, 89%approximately 86% of home buyers and home sellers used an agent or broker in 2019.2022. 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;services as well as assistance with the inspection process;
•the consumer preference to visit properties for sale in person, notwithstanding the availability of on-lineonline images and property tours; and
•there is a high variance in price, depending on neighborhood, floor plan, architecture, fixtures, and outdoor space.
Cyclical nature of industry.industry, long-term demographics and seasonality. The U.S. residential real estate industry tends to be cyclical, with downturns (such as that experienced from 2006 to 2011) followed by periods of recovery and growth (such as that experienced from 2012 to 2021). The industry typically is cyclical but has historically shown strong growth over time. Based on information publishedaffected by NAR, existing homesale units increased at a compound annual growth rate, or CAGR, of 1.6% over the past 30 years, with 19 annual increases, 10 annual decreaseschanges in general economic and 2019 being flat.
During that same period, median existing homesale prices increased at a CAGR of 3.6% (not adjusted for inflation) over the past 30 years, a period that included three economic recessions.
According to NAR, the existing homesale transaction volume (median homesale price times existing homesale transactions) grew at a CAGR of 5.3% over the past 30 years.
The U.S. residential real estate industry was in a significant and lengthy downturn from the second half of 2005 through 2011. Based upon data published by NAR from 2005 to 2011, the number of annual U.S. existing homesale transactions declined by 40% and the median existing homesale price declined by 24%. Beginning in 2012, the U.S. residential real estate industry began a recovery. Based upon data published by NAR from 2011 to 2019, the number of annual U.S. existing homesale units and the median existing homesale price improved by 25% and 64%, respectively.conditions which are beyond our control.
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 availability of inventory in the consumer's desired location and within the consumer's price range. WeWhile the U.S. residential real estate market experienced significant declines in 2022 and third-parties, including Fannie Mae and NAR, forecast continued declines in 2023, 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 and the increasing ease and acceptance of remote work) may also have a positive impact on homesale transactions.
The U.S. residential housing market is also 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 stronger in the second and third quarters of the calendar year.
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 complementary businesses and minority-held joint ventures, including our mortgage origination and title insurance underwriter joint ventureventures, work together, allowing us to generate revenue at various points in a residential real estate transaction, including the purchase or sale of homes, affinitycorporate relocation and lead 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 affinitycorporate and real 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 affinity members through Realogy Leads Group and we offer customers (purchasers and sellers) of both our owned and franchised brokerage businesses convenient title and settlement services. These services produce incremental revenues for our businesses and franchisees. In addition, we participate in the mortgage process through our 49.9% ownership of Guaranteed Rate Affinity. All 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 high-end markets. Likewise, while all of our brands utilize offerings through Title Group, our company owned Coldwell Banker® brand shares deep synergies with our title business as well as our mortgage origination and title insurance underwriter joint ventures that allow us to progress towards 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, 20192022, for both our franchised and company owned offices:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Franchise Brands (1) (2) | | | | | | | | | | | | | | |
Worldwide Offices (3) | 11,600 | | | | 3,100 | | | | 2,300 | | | | 1,000 | | | | 390 | | |
Worldwide Brokers and Sales Agents (3) | 131,800 | | | | 96,300 | | | | 35,400 | | | | 23,300 | | | | 13,000 | | |
| U.S. Annual Sides | 370,289 | | | | 684,981 | | | | 117,126 | | | | 126,211 | | | | 79,351 | | |
| # of Countries with Owned or Franchised Operations | 84 | | | | 43 | | | | 37 | | | | 70 | | | | 5 | | |
| | | | | | | | | | | | | | |
| Characteristics | A leader in brand awareness and the most recognized name in real estate
Significant international office footprint | | | The only real estate brand that has been guiding people home for 114 years | | | Driving performance through innovation, collaboration and shared accountability
Unique branding and products providing the flexibility of choice for our customer, community, agent, and brokerage | | | Synonymous with luxury
Strong ties to auction house established in 1744
Powerful global presence | | | Unique access to consumers, marketing channels and content through its brand licensing relationship with a leading media company | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Brands (1) | | | | | | | | | | | |
Worldwide Offices (2) | 13,600 | | 2,900 | | 1,100 | | 2,400 | | 400 | | 100 |
Worldwide Brokers and Sales Agents (2) | 148,600 | | 103,400 | | 26,300 | | 42,300 | | 12,400 | | 4,400 |
| U.S. Annual Sides | 298,562 | | 608,728 | | 132,230 | | 91,606 | | 72,053 | | 25,498 |
| # of Countries with Owned or Franchised Operations | 85 | | 39 | | 81 | | 35 | | 6 | | 6 |
| | | | | | | | | | | |
| Characteristics | A 50+ year leader in brand awareness and a top recognized and respected name in real estate
Significant international office footprint | | 117-year legacy in real estate Coldwell Banker Global Luxury® program to uniquely market top tier listings Long-time industry leader in effective advertising | | Synonymous with luxury
Strong ties to auction house established in 1744
Powerful global presence
Longstanding commitment to technology and innovation | | 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
|
_______________
(1)As of December 31, 2019, does not include Corcoran®, a proprietary brand that we own and franchise and others that we do not franchise. We announced the Company's first Corcoran® franchise affiliate on February 5, 2020.
(2)Information presented for Coldwell Banker® includes Coldwell Banker Commercial®.
(3)(2)Includes information reported to us by independently owned franchisees (including approximately 12,60014,800 offices and approximately 112,500142,400 related brokers and independent sales agents of non-U.S. franchisees and franchisors).
Realogy Anywhere Brands—Franchise Group
Our primary objectivesOverview—Franchise Business
Franchise Group is comprised of our franchise business as the largest franchisorwell as our lead generation and relocation services operations.
As of residential real estate brokerages in the world are to retain and expand existing franchises, sell new franchises, and most importantly, provide branding and support to our franchisees and their independent sales agents. At December 31, 2019,2022, our real estate franchise systems and proprietary brands had approximately 18,500337,400 independent sales agents worldwide, including approximately 195,000 independent sales agents operating in the U.S. (which included approximately 59,800 company owned brokerage independent sales agents). As of December 31, 2022, our real estate franchise systems and proprietary brands had approximately 20,500 offices worldwide in 114119 countries and territories in North and South America, Europe, Asia, Africa, the Middle East and Australia, including approximately 5,9005,700 brokerage offices in the U.S. (which included approximately 710680 company owned brokerage offices).
As shown in the table above, as of December 31, 2022, 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 declined by 4% (based on information provided by our affiliated franchisees), in each case as compared to December 31, 2021.
The average tenure among our U.S. franchisees is approximately 24 years as of December 31, 2022. 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, and learning and development to facilitate our franchisees in developing their business.
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 and RealogyOwned Brokerage Group. These royalties are based on a percentage of the franchisees' sales commission earned from closed homesale sides (either the "buy" side and/or the "sell" side of a real estate transaction), which we refer to as gross commission income. Our franchisees pay us royalties, net of volume incentives achieved (other than Realogy Brokerage Group),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 and 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 Realogy Brokerage Group). We operate and maintain an Internet-based reporting system for our domestic franchisees which generally allows them to electronically transmit listing information and other relevant reporting data to us. We also operate websites for each of our brands for the benefit of our franchisees and their independent sales agents.gross commission income.
Realogy Franchise Group's domestic annual net royalty revenues from franchisees other(other than our company owned brokerages at Owned Brokerage Group) can be represented by multiplying (1) that year's total number of closed homesale 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) Realogy Franchise Group's net contractual royalty rate. TheFranchise 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 certain franchisees, flat fee royalties)if applicable, and net of other incentives granted to franchisees. The 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 does not receive volume incentives or other incentives.
In addition to domestic royalty revenue, Realogy 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 Realogy Franchise Group:
On average, our domestic franchisees' tenure with our brands was approximately 22 years as of December 31, 2019. During 2019,2022, none of our franchisees (other than RealogyOwned Brokerage Group) generated more than 1%3% of the total revenue of our real estate franchise business.
The franchiseOur franchisees (other than our company owned brokerages at Owned Brokerage Group) are independent business operators and we do not exercise control over their day-to-day operations.
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 limited (e.g., if the franchisee retires, becomes disabled or dies). Generally, new domestic franchise agreements have a term of ten years, although we may negotiate shorter extension agreements with existing franchisees.years.
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 their
the franchisee's gross commission income, but subject to reduction based upon volume incentives. Under this model, the volume incentive program, 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 generally result in a net or effective royalty rate of 6% to 3% for each individual franchisee (prior to taking into account other incentives that may be applicable to the franchisee).
Certain franchisees (including some of our largest franchisees) have a flat fee royalty arrangement with us of less than 6% and are not eligible for volume incentives. In addition, the volume incentive program is not offered to Better Homes and Gardens® Real Estate capped model franchisees or Coldwell Banker Commercial® franchisees. Our Better Homes and Gardens® Real Estate franchise business launched a "capped fee model" in 2019 that applies to any new franchisee as well as preexisting franchisees who elect to switch from their current royalty fee structure to the capped fee model. Under this capped fee model, franchisees pay a royalty fee (generally equal to 5% of their commission income) capped at a set amount per independent sales agent per year, subject to our right to annually modify or increase the independent sales associate cap.
system. 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. 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 Better 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 eligible 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 tiered royalty fee 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 incentives.
Other incentives may be used as consideration to attract new franchisees, grow franchisees (including through independent sales agent recruitment) or extend existing franchise agreements, although in contrast to volume incentives, the majority of other incentives are not homesale transaction based.agreements. Under certain circumstances, we extend conversion notes or other note-backed funding 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 notesnote-backed funding 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-based thresholds, the notes are forgiven ratably generally over the term of the franchise agreement. If the revenue performance thresholds are not met or the franchise agreement terminates, franchisees may be required to repay a portion of the outstanding notes.
Realogy Brokerage Group—our company owned brokerages—pays a contractual royalty rate of approximately 6% and does not participate in volume incentive or other incentive programs.
Each of our current franchise systems require franchisees and company owned officesbrokerages to make monthly contributions to marketing funds maintained by each brand which may decrease as certain financial thresholds are achieved in accordance with the applicable franchise agreement. These contributions are used primarily for the development, implementation, production, placement and payment of national and regional advertising, marketing, promotions, public relations, broker and agent marketing tools and products 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, Realogyin certain instances, Franchise Group may be in certain instances, required to make contributions to certain marketing funds and may make discretionary contributions (at its option) to any of the marketing funds.
The Company also offers support services to its independent franchisees and their affiliated independent sales agents, including technology-enabled solutions such as customer relationship management (CRM), lead generation and productivity tools.
In addition to offices owned and operated by our third-party franchisees, as of December 31, 2019,2022, we, through RealogyOwned Brokerage Group, own and operate approximately 705680 offices under the Coldwell Banker®, Coldwell Banker Commercial®, Sotheby's International Realty® and Corcoran® brand names. RealogyThe domestic royalty revenue from Owned Brokerage Group is calculated by multiplying homesale sides by average sale price by average brokerage commission rate by their contractual royalty rate. Owned Brokerage Group pays intercompany royalty fees of approximately 6% and marketing fees to Realogy Franchise Group 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. Owned 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 also offer third-party service providers an opportunity to market their products to our franchisees and their independent sales agents and customers through our preferred alliance program. To participate in this program, service providers generally agree to provide preferred pricing to our franchisees and/or their customers or independent sales agents and to pay us a combination of an initial licensing or access fee, subsequent marketing fees and/or commissions based upon our franchisees' or independent sales agents' usage of the preferred alliance vendors. We also transmit listings to various platforms and services.Intellectual Property
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 Realogy Franchise Group 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 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 RealogyAnywhere 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 Realogy Franchise Group attributable to franchisees affiliated with the Better Homes and Gardens® Real Estate brand, subject to a minimum annual licensing fee.
Each Our license agreement is terminable by Meredith Ops 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 franchised brands hasrights under the license agreement in any manner not permitted under the license agreement, (2) we become bankrupt or insolvent, or (3) a consumer websitetrial court issues a final judgment that offerswe are in material breach of the license agreement or any representation or warranty we made was false or materially misleading when made.
Operations—Other
Lead Generation. Through Leads Group, a part of Franchise Group, we seek to provide high-quality leads to independent sales agents, including through real estate listings, contactsbenefit 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 Anywhere. 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). Leads Group also manages its own broker-to-broker business, pursuant to which brokers affiliated with one of its customized agent and brokerage networks refer business to other in-network brokers.
Our real estate benefit program revenues are highly concentrated, with one client-directed real estate benefit program contributing a substantial majority of the high-quality leads generated through our lead generation programs, and our client-directed programs are non-exclusive and terminable at any time at the option of the client. We also maintain Company-driven real estate benefit programs and additional leads may be generated via other strategic initiatives, including through consumer-focused products and services we may develop or offer. We expect that significant time and effort and meaningful investment will be required to increase awareness of, and participation in, programs, partnerships or products and services that are intended to aid in lead generation.
To service the needs of consumers and clients participating in one of our real estate benefit programs (including our relocation program with Cartus) 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) and each other in exchange for a commission split paid to Leads Group.
Cartus® Relocation Services. Cartus, 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 40% of the Fortune 50 companies in 2022. As of December 31, 2022, 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.
There are a number of different revenue streams associated with relocation services. We earn a commission 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 continues to provide value through the generation of leads
to real estate agent and brokerage participants in the networks maintained by 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 an initial access fee, subsequent marketing fees and/or commissions based upon our franchisees' or independent sales agents' usage of the strategic alliance vendors.
RealogyAnywhere Advisors—Owned Brokerage Group
Overview
Through RealogyOwned 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®, Sotheby's International Realty® and Corcoran® franchised brands. This segment also includes our share of equity earnings or losses from our minority-owned real estate auction joint venture and our former RealSure joint venture.
As of December 31, 2019,2022, we had approximately 710680 company owned brokerage offices and approximately 52,20059,800 independent sales agents working with these company owned offices. Of those offices, we operated approximately 89% of our offices under the Coldwell Banker®brand name, approximately 7% of our offices under the Sotheby's International Realty®brand name and 4% of our offices under the Corcoran® brand name.
We intend to continue to seek to increase the productivity of company owned brokerage offices, including by optimizing efficiencies and reducing redundancies. We will continue to work with office managers to attract and retain independent sales agents who can successfully engage and promote transactions from new and existing clients. From time to time, we may also execute strategic acquisitions. 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, 2019,2022, our average homesale broker commission rate was 2.41%2.40%, 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. RealogyOwned Brokerage Group, as a franchisee of Realogy Franchise Group, pays marketing fees and a royalty fee of approximately 6% of the gross commission income earned per real estate transaction to RealogyFranchise Group; however, such amounts are eliminated in consolidation. Owned Brokerage Group paid marketing fees and royalties to Franchise Group fromof $373 million and $407 million for the commission earned on a real estate transaction. years ended December 31, 2022 and 2021, respectively.
The remainder of gross commission income is split between the broker (Realogy(Owned Brokerage Group) and the independent sales agent in accordance with their applicable independent contractor agreement (which specifies the portion of the broker commission to be paid to the agent), which varies by agent.
The following chart illustrates the key drivers for revenue earned by Realogy Brokerage Group:
In addition, as a full-service real estate brokerage company, we promote the complementary services ofoffered through our other 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 properties to the buyer, assist the buyer in negotiating (where permissible) and preparing for closing the transaction. In
addition, RealogyOwned Brokerage Group has relationships with developers primarily in select major cities (in particular New York City) to provide marketing and brokerage services in new developments.
At December 31, 2019,Operations—Joint Ventures
Our share of equity earnings or losses from our 50% interest in our real estate auction joint venture with Sotheby's and our 49% interest in our former RealSure joint venture with Home Partners of America are included in Owned Brokerage Group. The joint venture with Sotheby's, 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. During the fourth quarter of 2022, the Company and Home Partners of America agreed to cease operations of the RealSure joint venture. While we operated approximately 89%have certain governance rights, we do not have a controlling financial or operating interest in these non-exclusive joint ventures.
Anywhere Integrated Services—Title Group
Overview
Title Group is comprised of our officestitle agency business that conducts title, escrow and settlement services and also includes the Company' share of equity earnings and losses from certain non-exclusive joint ventures, including, among others, Guaranteed Rate Affinity (a mortgage origination joint venture) and the title insurance underwriter joint venture (see below under the Coldwell Banker®brand name, approximately 5% of our offices underheader "Title Insurance Underwriter Joint Venture" for additional information). Our equity earnings or losses related to minority-owned joint ventures such as Guaranteed Rate Affinity and the Sotheby's International Realty®brand name and 6% of our offices primarily under the Corcoran® brand name. Our officestitle insurance underwriter joint venture are geographically diverse with a strong presenceincluded in the eastfinancial results of Title Group but are not reported as revenue to Title Group.
Our title agency business provides title search, examination, clearance and west coast areas, primarily around large metropolitan areas inpolicy issuance services and conducts the U.S., where home prices are generally higher. We operate our Coldwell Banker®officesclosing process and Sotheby's International Realty®offices in numerous regions throughout the U.S.,funds disbursement for lenders, real estate agents, attorneys and Corcoran® offices in New York City, the Hamptons (New York),homebuilders and Palm Beachtheir customers on purchase transactions and Miami Beach, Florida.lenders and their customers on refinance transactions.
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, Realogy Brokerage Group offers home ownership services that include comprehensive single-family residential property management in many of the nation's largest rental markets.
To a lesser extent, we may grow our business through strategic acquisitions focused primarily on expanding our existing markets. Following the completion of an acquisition, we tend to consolidate the newly acquired operations with our existing operations to reduce or eliminate duplicative costs and to leverage our existing infrastructure to support newly affiliated independent sales agents.
Realogy Brokerage Group is a broker within the Realogy Broker Network.
Realogy Title Group
Our title, escrow and settlement services business Realogy Title Group, provides full-serviceby recruiting successful title and settlement (i.e., closingescrow sales personnel in existing markets. We will also seek to increase our capture rate of title business from Owned Brokerage Group homesale sides.
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 21 states and Washington, D.C. We issue title insurance policies on behalf of large national underwriters as well as through our Dallas-based subsidiary, Title Resources Guaranty Company ("Title Resources"). Title Resources is a title insurance underwriter licensed in 3725 states and Washington, D.C. We operate mostly in major metropolitan areas. As of December 31, 2019,2022, we had approximately 380383 offices, approximately 190151 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 and loan officers 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 2022, our title, escrow and settlement business was involved in approximately 152,000 transactions of which approximately 48,000 related to Owned 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 31% in 2022. Other sources of our title, escrow and settlement services homesale business include Franchise Group, Leads Group, home builders and unaffiliated brokerage operations.
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 andmay be performed by the title agent, an underwriter or contracted to a third party while the examination function is always 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
revenue through fees charged in real estate transactions for rendering the services described above, fees charged for escrow and closing services, and a percentage of the title premium on each title insurance policy sold.
We have entered into underwriting agreements with various underwriters, which state the conditions under which we may issue a title insurance policy on their behalf. For policies issued through our agency operations, assuming no negligence on our part, we are not typically liable for losses under those policies; rather the title insurer is typically liable for such losses.
OurOther 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.
Joint Ventures.
Mortgage Origination. Guaranteed Rate Affinity, our 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. 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 operations are the principal source ofand franchised brokerages) and relocation companies (including our title and settlement services business for homesale transactions. Other sources of our title and settlement services homesale business include our real estate franchise business and unaffiliated brokerage operations. For refinance transactions, we generate title and escrow revenues from financial institutions throughout the mortgage lending industry. relocation operations) as well as a broad consumer audience.
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 36% in 2019.
We coordinate a national networkhalf of escrow and closing agents (somepurchase transactions, as well as approximately half of whom are our employees, while others are attorneys in private practice and independent title companies) to provide full-service title and settlement services to a broad-based group that includes lenders, home buyers and sellers, developers and independent real estate sales agents. Our role is generally that of an intermediary managing the completion of all the necessary documentation and services required to complete a real estate transaction.
Our title and settlement services business measures operating performance based on purchase and refinance closing units and the related title premiums and escrow fees earned on such closings. In addition, we measure net title premiums earned for title policies issued by our underwriting operation.
The following chart illustrates the key drivers for revenue generated by our title and settlement services business:
We intend to grow our title and settlement services business by attracting title and escrow sales agents in existing markets. We will also continue to seek to increase our capture rate of title business from Realogy Brokerage Group homesale sides. In addition, we expect to continue to grow our underwriting business by increasing our agent base.
The equity earnings or losses related to Guaranteed Rate Affinity, ourAffinity’s mortgage origination joint venture with business for the year-ended December 31, 2022.
Under the Operating Agreement (the "GRA Agreement") between a subsidiary of Title Group and a subsidiary of Guaranteed Rate are included in (the financial results of Realogy Title Group. We"GRA Member"), we own 49.9% of the home mortgage joint venture and Guaranteed Rate indirectly owns the remaining 50.1%.
Realogy Leads Group
Realogy Leads Group consists of affinity programs (both company- and client-directed) as well as broker-to-broker referrals. Referrals generated by Realogy Leads Group are handled by Under the Realogy Broker Network, a network of real estate brokers consisting of our company owned brokerage operations, select franchisees and independent real estate brokers who have been approvedGRA Agreement, Guaranteed Rate Affinity is to become members.
Realogy requires that participating brokers and independent sales agents be experienced and obtains background checks on all membersdistribute to each of the network. Member brokersCompany 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 Realogy Broker Network receive referrals in exchange for a referral fee paidagreement, the first 5-year extension is not subject to Realogy Leads Group for affinity and broker to broker transactions.
Member brokerstermination upon advance notice. Either party can terminate the GRA Agreement upon the occurrence of the Realogy Broker Network have also historically received referrals from Cartus Relocation Services generated by our relocation clients in exchange for a referral fee (that is reported in the financial results for Cartus Relocation Services). In connection with the planned sale of Cartus Relocation Services to SIRVA, we will enter into a non-exclusive five-year broker services agreement with SIRVA, pursuant to which Realogy Leads Group could, at the discretion of SIRVA, continue to provide high-quality brokerage services via the Realogy Broker Network to relocation clients of SIRVA. Realogy Leads Group, however, will not receive a referral fee in connection with providing such services.
The Realogy Broker Network has historically been a key contributor to our lead generation strategy, with 99% of the converted leads generated through the network (from Realogy Leads Group and Cartus Relocation Services) being directed to independent sales agents affiliated with our franchisees and company owned brokerages in 2019. As a result of referrals from Realogy Leads Group and Cartus Relocation Services, the Realogy Broker Network closed approximately 78,700 real estate transactions in 2019, with approximately 68,400 transactions attributable to affinity programs and broker-to-broker activity, and approximately 10,300 transactions attributable to relocation clients.
Affinity Services and Broker-to-Broker Overview
Under our affinity services program, Realogy Leads Group provides real estate services, including home buying and selling assistance to members of organizations such as insurance companies and credit unions that have established members who are buying or selling a home. Through a client-directed affinity program, the applicable affinity organization generally offers our affinity services to their members. Through a company-directed affinity program (such as Realogy Military Rewards or AARP), Realogy drives the marketing for the program. Where permitted by law, affinity members can receive a financial incentive for using these services (such as cash or a gift card, or commission credit based on the home purchase/sale price pursuant to the applicable program), with the financial incentive provided by the affinity client for affinity-directed programs or by the Company for company-directed affinity programs.
In 2019, we launched our first Realogy-branded affinity program with Realogy Military Rewards, a program for U.S. military personnel, veterans and their families that seeks to provide access to benefits from Realogy that are similar to those offered under the former USAA affinity program. In addition, in 2019, we announced other affinity programs in collaboration with partners including our announcement in October 2019 of an agreement to create the first-ever real estate benefits program designed for the nearly 38 million AARP members, which is expected to launch nationally in early 2020. We expect that significant time and effort and meaningful investment will be required to increase awareness of and affinity member participation in these new affinity programs.
Broker-to-broker business includes referrals generated by brokers affiliated with the Realogy Broker Network, inclusive of approximately 2,800 intra-company referrals within Realogy Brokerage Group in 2019. Realogy Leads Group does not receive a referral fee for such intra-company referrals.
Following the closing of the planned sale of Cartus Relocation Services, we expect to consolidate Realogy Leads Group, including the Realogy Broker Network, into Realogy Franchise Group.
Affinity Services Concentration and Discontinuation of USAA Affinity Program
Our affinity revenues are highly concentrated and our affinity relationships are non-exclusive and terminable at any time at the option of the client. In the third quarter of 2019, USAA, which had been our largest affinity client, ceased new enrollments in its long-term affinity program with us. In 2019, referrals generated by the USAA affinity program represented a significant portion of the 78,700 total homesale transactions closed from the Realogy Broker Network. See Part II, Item 7. Management's Discussion and Analysis—Recent Developments for additional information.
Discontinued Operations—Cartus Relocation Services
Cartus Relocation Services is reported as held for sale in this Annual Report. As provider of global relocation services, that operates in key international relocation destinations, Cartus Relocation Services offers a broad range of world-class employee relocation services designed to manage all aspects of an employee's move to facilitate a smooth transition in what otherwise may be a complex and difficult process for employee and employer. In 2019, Cartus Relocation Services served corporations, including 48% of the Fortune 50 companies. As of December 31, 2019, the top 25 relocation clients had an average tenure of approximately 20 years with Cartus.
Cartus Relocation Services provides services in 150 countries and has operations in the U.S., the United Kingdom, Canada, Hong Kong, Singapore, China, India, Brazil, Germany, France, Switzerland and the Netherlands.
Cartus Relocation Services primarily offers corporate clients employee relocation services, such as:
•homesale assistance, including:
◦the valuation, inspection, purchasing and selling of a transferee's home;
◦the issuance of home equity advances to transferees permitting them to purchase a new home before selling their current home (these advances are generally guaranteed by the individual's employer);
◦certain home management services;
◦assistance in locating a new home; and
◦closing on the sale of the old home, generally at the instruction of the client;
•expense processing, relocation policy counseling, relocation-related accounting, including international assignment compensation services, and other consulting services;
•arranging household goods moving services, over 46,000 domestic and international shipments in 2019, and providing support for all aspects of moving a transferee's household goods, including the handling of insurance and claim assistance, invoice auditing and quality control;
•coordinating visa and immigration support, intercultural and language training, and expatriation/repatriation counseling and destination services; and
•group move management services providing coordination for moves involving a large number of transferees to or from a specific regional area over a short period of time.
The wide range of services allows clients to outsource their entire relocation programs to Cartus Relocation Services.
Substantially all homesale service transactions for clients of Cartus Relocation Services are classified as "no risk." Under "no risk" business, the client is responsible for reimbursement of all direct expenses associated with the homesale. Such expenses include, but are not limited to, appraisal, inspection and real estate brokerage commissions. The client also bears the risk of loss on the resale of the transferee's home. Clients are responsible for reimbursement of all other direct costs associated with the relocationevents including, but not limited to, costsa change in control of the other member, subject to move household goods,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 with other parties, from operating its separate mortgage origination points, temporary livingbusiness and travel expenses. Generally, we funddoes not limit the direct expenses associatedCompany, 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 the homesale as well as those associated with the relocation on behalf of the client and the client then reimburses us for these costs plus interest charges on the advanced funds. This limits our exposure on "no risk" homesale servicesother mortgage loan originators, but Guaranteed Rate has a 30-day right-of-first-refusal to the credit risk of our clients rather than to the potential fluctuations in the real estate market or to the creditworthiness of the individual transferring employee. Historically, due to the credit quality of our clients, we have had minimal losses with respect to these "no risk" homesale services.
The "at risk"acquire any mortgage origination business that we conduct is minimal.intend to acquire.
Title Insurance Underwriter Joint Venture. In "at risk" homesale service transactions,March 2022, the Company sold its title insurance underwriter, Title Resources Guaranty Company (the "Title Underwriter") (previously reported in the Title Group reportable segment) in exchange for cash and a minority equity stake in the form of common units in a title insurance underwriter joint venture that owns the Title Underwriter (the "Title Insurance Underwriter Joint Venture"). Other joint venture partners own a majority equity stake in the joint venture in the form of preferred units that carry liquidation preference rights. While we acquirehave certain governance rights, we do not have a controlling financial or operating interest in the home being sold by the transferring employee, incur the cost for all direct expenses (acquisition, carrying and selling costs) associated with the homesale and bear any loss on the sale of the home.
Substantially all of our contracts with relocation clients of Cartus Relocation Services 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.
There are a number of different revenue streams associated with relocation services. We earn referral commissions primarily from real estate brokers and household goods moving companies that provide services to the transferee. Clients may also pay transactional fees for the services performed. We also earn net interest income which represents interest earned from clients on the funds we advance on behalf of the transferring employee net of costs associated with the securitization obligations used to finance these payments.joint venture.
Products, Technology and Marketing
Products and Technology—Agents. 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 other businesses. Increasingly, these products and services are desired as an integrated set of tools, rather than stand-alone products and services.
Products and Technology
Since 2019, we have developed ourWe continue to develop product and marketing strategies against the backbone of an open-architecture technology strategy. Our open ecosystem iscapabilities designed to support the continuous creation and delivery of both our proprietary
tools and third-party products to ouraffiliated 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 customizableconfigurable technology platform to drive their performance and productivity.
Our technology platform 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 business productivity, marketing, recruiting and agent and broker websites and leverages our technology platform 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.
In 2019, we delivered multiple new technology-driven products designed to improve independent sales agent productivity and enhance the customer experience for home buyers and sellers. For example:
•Social Ad Engine helps affiliated agents create an effective Facebook and Instagram ad in under three minutes via a marketing product launched in partnership with Facebook.
•Listing Concierge allows agents affiliated with Coldwell Banker company owned brokerages to create custom marketing with the support of specialists, resulting in high quality materials.
•Design Concierge provides innovative marketing strategies, custom design support, complete and custom rebranding and other marketing tools needed to promote an agent's personal brand to agents affiliated with Coldwell Banker company owned brokerages.
•RealVitalize enables consumer home sellers to make their property ready for sale by providing resources to fund staging and home improvements with no up-front cost via a consumer program from Coldwell Banker’s company owned operations and HomeAdvisor. RealVitalize is currently available in 27 U.S. states.
•RealSure strives to improve the consumer's home selling and buying experience through two core products, RealSure Sell and RealSure Mortgage. Under the RealSure Sell product, home sellers with qualifying properties receive a cash offer valid for 45 days immediately upon listing, and during this time frame have the opportunity to pursue a better price by marketing their property with an affiliated independent sales agent. Sellers who are enrolled in RealSure Sell can utilize RealSure Mortgage to make an offer on their next home without sale or financing contingencies before their current home is sold by leveraging their RealSure Sell cash offer. The programs, created in partnership with Home Partners of America, are currently available in 10 U.S. markets.
Our Realogy-providedAnywhere-provided platform is designed to increase the value proposition to our independent sales agents, franchisees (and their independent sales agents) and the consumerconsumers 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 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 officeback-office processes, including listing and transaction management, reporting, marketing, and agent profiles; and
•delivering business planning tools that enable our franchisees to track their progress against key business objectives in real time.
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.
Products and Technology—Consumers. In January 2020,2022, we announced that we planour intention to launch our next generation customer relationship management (CRM) toolfocus on the consumer experience as well, as new consumerseeking to improve the experience of buying and agent-facing listing websites, bothselling a home by creating an easier and integrated experience for all parts of which will be developeda consumer's transaction. We expect to continue to invest in partnership with a third-party, as well as other tools including a leads enginethe development and/or procurement of products and transaction management tool. The new CRM is currently in its first pilot phase.technology designed to deliver valuable capabilities via digital channels throughout the lifecycle of home ownership.
Marketing
Marketing. Each of 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 our company owned brokerages and affiliated franchisees and their respective independent sales agents in becoming the best marketer of their listings. Advertising is primarily used by the brands to drive leads to affiliated agents, increase brand awareness and perception, promote our network and offerings to the real estate industry and engage our customer base.
Each of our franchise brands operates a marketing fund that is funded principally by our franchisees (including company owned offices), although we may make discretionary contributions to any of the marketing funds and in certain instances are required to make contributions to certain marketing funds.
Likewise, our company owned brokerages sponsor a wide array of marketing programs, materials and opportunities to complement the sales work of our affiliated independent sales agents and increase brand awareness. The effectiveness and quality of marketing programs play a significant role in attracting and retaining independent sales agents.
Our marketing programs, tools and initiatives primarily focus on attracting potential new home buyers and sellers to our company owned brokerages and affiliated franchisees and their respective affiliated independent sales agents by:
•showcasing the inventory of our real estate listings and the affiliated independent sales agents who are the listing agents of these properties;
•building and maintaining brand awareness and preference for the brand; and
•increasing the local recognition of affiliated agents and brokerages.
Marketing programs are executed using a variety of media including, but not limited to social media, advertising, direct marketing and internet advertising. We also offer the independent sales agents broad-based advertising, mailings
Listings and other campaigns to generate leads, interest and recognition.
Websites
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.
Our brand websites contain listing information on a regional and national market basis, independent sales agent information, community profiles, home buying and selling advice, relocation tips and mortgage financing information and unique property and neighborhood insights from local agents. Additionally, each brand website allows independent sales agents to market themselves to consumers.
Significant focus is placed on developing websites for each brand to create value to the real estate consumer. Each brand website focuses on streamlined, easy search processes for listing inventory and rich descriptive details, multiple photos, full motion videos and in some cases virtual reality tours to market the real estate listing. We also place significant emphasis on distributing our real estate listings with third-party websites to expand a homebuyer's access to such listings, at times enhancing the presentation of the listings on third-party websites to make the listings more attractive to consumers. Consumers seeking more detailed information about a particular listing on a third-party website are generally able to click through to a brand website or a company owned brokerage website or telephone the franchisee or company owned brokerage directly.
Education
Each real estate brand provides learning and development materials andfranchisees access to learning, development, and continuing education to its franchisees to assist them materials for use in buildingconnection with their real estate sales businessesbusinesses. Use of such materials by affiliated brokers and independent sales agents is voluntary and discretionary. Independent sales agents affiliated with a company owned brokerage must complete compliance training related to fair housing (in addition to their state licensing fair housing obligations).
Human Capital Resources
Employees.. Each brand's engagement program contains different materials and delivery methods. The marketing materials includeOur employees are critical to the success of our business strategy. Our team includes a detailed descriptionbroad range of professionals, given the breadth of services offered by our franchise systems (which will be available to the independent sales agent). Live instructors at conventionsthree business segments and orientation seminars deliver some engagement modules while other modules can be viewed by brokers anywhere in the world through virtual classrooms over the Internet. MostCorporate. The wide array of the programsskills, experience and materials are then made available in electronic form to franchisees over the respective system's private intranet site. Manyindustry knowledge of the materials are customizable to allow franchisees to achieve a personalized lookour key employees significantly benefits our operations and feel and make modifications to certain content as appropriate for their business and marketplace.performance.
Employees
At December 31, 2019, 2022, we had approximately 10,150approximately 8,890 full-time employees including approximately 730 employees outside of the U.S. Approximately 2,000 employees, including almost alland 135 part-time employees. At December 31, 2022, approximately 685 of our employees were located outside of the U.S., arealmost all of whom were employed by Cartus Relocation Services. (a part of Anywhere Brands).
None of our employees are represented by a union. Employment relationships in Brazil (where we had less than 10 employees at December 31, 2022) 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 2022, we achieved an 88% engagement score and an 86% 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. Nearly 100% of active employees in each of the past three years have completed our annual Code of Ethics training. Code of Ethics training in 2022 covered topics such as promoting an ethical culture, reporting conflicts of interest, and compliance with RESPA. Other mandatory training in 2022 included Global Information Security and a course on valuing diversity, 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. In 2022, all people managers were also required to complete a training module on unconscious bias. 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
Seasonalityindependent sales agents affiliated with our company owned and franchise brokerages. We have also 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.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 residential housing marketprotection of the health and safety of our employees is seasonal,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 2022, we completed the transformation of our corporate headquarters to an open-plan innovation hub, which streamlined our headquarters footprint to a higher levelsingle floor designed to welcome approximately 200 transitional employees each day, instead of homesale transactions typically occurringthe approximately 1,000 employees designated to static spaces in the second and third quarter of each year. As a result, historically, operating results and revenues for alltraditional office. At December 31, 2022, approximately half of our businesses have been strongestemployees 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 secondCOVID-19 crisis and third quartersare prepared to pivot as needed for the health and safety of our employees.
Diversity, Equity and Inclusion. Since our inception, Anywhere has had a focus on diversity to improve representation and foster inclusion through employee and business resource groups across the calendar year.enterprise. Employee Resources Groups (“ERGs”) promote an inclusive culture throughout the organization. At December 31, 2022, 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 "Anywhere Brands—Overview."
Competition
Real Estate Brokerage Industry.The ability of our real estate brokerage franchisees and our company ownedcompany-owned brokerage businesses to successfully compete is important to our prospects for growth. Their ability to compete may be affected by the recruitment, retention and performance of independent sales agents, the economic relationship between the broker and the agent (including the share of commission income retained by the agent and fees charged to or paid by the agent for services provided by the broker), consumer preferences, the location of offices and target markets, the services provided to independent sales agents, the number and nature of competing offices in the vicinity, affiliation with a recognized brand name, community reputation, technology and other factors, including macro-economic factors such as national, regional and local economic conditions. 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 affiliated franchisees compete for consumer business as well as for independent sales agents with national and regional independent real estate brokerages and franchisors, discount and limited service brokerages, 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, andInc., Redfin Corporation, Weichert, Realtors and @properties as well as several large franchisors:franchisors, including 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). We and affiliated franchisees also compete with leading listing aggregators, such as Zillow, Inc. and Realtor.com(R)® (a listing aggregator held by News Corporation).Corp.) as well as CoStar Group, Inc. 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 and competition is most intense for highly productive independent sales agents with strong reputations in their respective communities.
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 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 bypaid to 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 (and/or other compensation such as(including up-front bonusespayments 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. The recruitment and retention of independent sales agents has been and may continueCompetition comes from newer models as well, including brokerages that provide certain services to be further complicated by competitive models that do not prioritize traditional business objectives. For example, we believe that certain owned-brokerage competitors have investors that have historically allowed the pursuit of increases in market share over profitability, which exacerbates competition for independent sales agents and 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. Whether and or agent team, rather than the extent to which this pattern will continue is not yet certain.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 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.
In mostmany of their markets, RealogyOwned Brokerage Group offers affiliated independent sales agents and sales agent teams a choice between a traditional graduated commission model, or a two-tieredwhich emphasizes our value proposition. The traditional graduated commission model bothhas experienced declines in market share over the past several years. Increasingly, independent sales agents have affiliated with brokerages that offer a different mix of which emphasize our value proposition.services to the agent, allowing the independent sales agent to select the services that they believe allow them to retain a greater percentage of the commission and purchase services from other vendors as needed.
Low Barriers to Entry and Influx of Traditional and Non-Traditional Competition as well as Industry Disrupters. . The real estate brokerage industry has minimal barriers to entry for new participants, including participants utilizing historical real estate brokerage models and those pursuing alternative variations of those models (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 historical real estate brokerage models typically compete for business primarily on the basis of services offered, brokerage commission, reputation, utilization of technology and personal contacts, and brokerage commission, participants pursuing non-traditional methods of marketing real estate may compete in other ways, including companies that employ technologies intended to disrupt historical real estate brokerage models or minimize or eliminate the role brokers and sales agents perform in the homesale transaction process. 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 and 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), directly compete with traditional brokerage models and may dilute the relationship between the brokerage and the agent and add additional competitive pressure for independent sales agent talent. We believe certain alternative transaction models, such as iBuying and home swap models (and related models that help buyers compete as cash buyers), charge significant fees to purchase homes and 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. 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 that are a part of or ancillary to the real estate service providerstransaction, 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 and actions by such listing aggregators have and may continue to put pressure on our and other industry participant's revenues and profitability. Other business models that have emerged in recent years consist of companies (including certain listing aggregators) that leverage capital to purchase homes directly from sellers, commonly referred to as iBuying.homes.
Franchise Competition.Competition. According to NAR, approximately 42%41% 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. We launched a capped feeTaking 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.
Lead 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 sales 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 brandsreal estate benefit programs and other lead generation programs.
Relocation Operations. Competition in 2019our corporate relocation operations is based on capabilities, price and quality. We compete primarily with global outsourced and regional relocation services providers in the corporate relocation operations. The larger outsourced relocation services providers that we compete with include SIRVA BGRS Worldwide, Inc., Weichert Relocation Resources, Inc., Aires and Graebel Companies, Inc. Competition is expected to continue to intensify as substantially allan increasingly higher percentage of our franchises are structured using a flat fee modelrelocation clients reduce their global relocation benefits and we have faced increasing competition from franchisors utilizing alternative models.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
See Note 15, "Commitments and Contingencies", to the Consolidated Financial Statements included elsewhere in this Annual Report for additional information on the Company's legal proceedings. 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, title insurance underwriting, 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 us or 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") and a member-owner of certain non-NAR controlled MLSs. Our affiliated agents may be members 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 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. Four of the more active areas of in our industry have been antitrust and competition, compliance with RESPA (and similar state statutes), compliance with the Telephone Consumer Protection Act ("TCPA") (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.” In connection with the foregoing, the DOJ issued a new and comprehensive civil investigative demand, or CID, that renewed demands related to the prior investigation, and also sought new categories of materials. In January 2023, the U.S. District Court for the D.C. District granted NAR's petition to set aside the new CID. 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 follow the new practices that are a result of NAR's rule changes.
In addition to the announcements by the DOJ, statements and actions by the Federal Trade Commission (“FTC”) and the executive branch have been focused on increasing competition enforcement 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. In January 2023, the FTC proposed a rule that, if enacted, would prohibit employers from entering into non-compete clauses with workers and require employers to rescind existing non-complete clauses. Additional action has been taken by the FTC, including its rescission of its generally applicable 2015 antitrust enforcement principles policy statement in July 2021 and its withdrawal of the 2020 Vertical Merger Guidelines in September 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 alleged or determined in the future to be anti-competitive.
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, settlement servicestitle agency, lead generation, and relocation businessesoperations or the businessbusinesses of our joint ventures (including mortgage origination, joint venture.title underwriting and real estate auction). In addition, with respect to many of our company owned real estate brokerage, relocation and title and settlement services businesses as well as the businesses of certain of our mortgage origination joint venture,ventures, RESPA and similar state laws generally require timely disclosure of certain relationships or financial interests with providers of real estate settlement services. Pursuant to the Dodd-Frank Act, the Consumer Financial Protection Bureau (the “CFPB”) administers RESPA. Some state authorities have also asserted enforcement rights.
RESPA and related regulations do, however, contain a number of provisions that allow for payments or fee splits between providers, including fee splits between title underwriters and their agents, real estate brokers and agents and market-based fees for the provision of goods or services, andincluding marketing arrangements.services. In addition, RESPA allows for referrals tothe operation of affiliated entities,business arrangements, including joint ventures, when specific requirements have been met. We rely on these provisions in conducting our business activities and believe our arrangements comply with RESPA. However, RESPA compliance may become a greater challenge under certain administrations, 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.
Franchise Regulation. In the U.S., the sale of franchises is regulated by various state laws, as well as by federal law under the jurisdiction of the Federal Trade Commission (the "FTC"). The FTC requires that franchisors make extensive disclosure to prospective franchisees but does not require registration. A number of states require registration and/or disclosure in connection with franchise offers and sales. In addition, several states have "franchise relationship laws" or "business opportunity laws" that limit the ability of franchisors to terminate franchise agreements or to withhold consent to the renewal or transfer of these agreements. The states with relationship or other statutes governing the termination of franchises include Alaska, Arkansas, California, Connecticut, Delaware, Hawaii, Idaho, Illinois, Indiana, Iowa, Kentucky, Maryland, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Jersey, Rhode Island, Virginia, Washington and Wisconsin. Puerto Rico and the Virgin Islands also have statutes governing termination of franchises. Some franchise relationship statutes require a mandated notice period for termination and some require a notice and cure period. In addition, some require that the franchisor demonstrate good cause for termination. These statutes do not have a substantial effect on our operations because our franchise agreements generally comport with the statutory requirements for cause for termination, and they provide notice and cure periods for most defaults. When state law grants a period longer than permitted under the franchise agreement, we extend our notice and/or cure periods to match the statutory requirements. In some states, case law requires a franchisor to renew a franchise agreement unless a franchisee has given cause for non-renewal. Failure to comply with these laws could result in civil liability to the 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.
State Brokerage Laws. Our company owned real estate brokerage business isWe are also subject to numerous federal, state laws limiting or prohibiting inducements, cash rebates and local laws and regulations that contain general standards for and limitations on the conduct of real estate brokers and sales agents, including those relatinggifts to the licensing of brokers and sales agents, fiduciary, and agency and statutory duties, consumer disclosure obligations, administration of trust funds, collection of commissions, restrictions on information sharing with affiliates, fair housing standards and advertising and consumer disclosures. Under state law,consumers, which impacts our company owned real estate brokers have certain duties to supervise and are responsible for the conduct of their brokerage businesses.lead generation business.
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.franchisees by seeking to reclassify licensed sales agents as employees.
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 involving real estate agents at a competing brokerage, the New Jersey Supreme Court recently remanded a case that had applied a strict classification test to a wage and hour case. The New Jersey Supreme Court recognized that a 2022 New Jersey legislative amendment clarified that an earlier 2018 amendment to the Brokerage Act affecting worker classification claims related to real estate agents should be applied retroactively. On remand, the New Jersey Appellate Division held that the strict test did not apply when determining classification of real
estate agents, and that such determination applied retroactively based on the 2022 legislative amendment. The ruling notwithstanding, the Appellate Division did not dismiss the case due to remaining factual determinations to be made and declined to opine on the appropriate test to be applied when determining classification litigation in numerous jurisdictions against a variety of industries—including residential real estate brokerages—where the plaintiffs seek to reclassify independent contractors as employees or to challenge the use of federal and state minimum wage and overtime exemptions.
For additional information, see Part I, Item 3. Legal Proceedings and for a summary of certain legal proceedings initiated in California involving the Company that include worker misclassification allegations, see Note 15, "Commitments and Contingencies", in this Annual Report.
Multiple Listing Services Rules. We participate in many multiple listing services ("MLS") and are subject to each MLS' rules, policies, data licenses, and terms of service, which specify, among other things, how we may access and use MLS data and listings and how MLS data and listings must be displayed on our and our franchisees' websites and mobile applications. The rules of each MLS to which we belong can vary widely and are complex.
From time to time, certain industry practices, including MLS rules,agents. Also, there have come under regulatory scrutiny. For example, in 2008, the Department of Justice ("DOJ") and the FTC entered into a consent decree with NAR related, in part,been several challenges to the cooperative sharingconstitutionality and enforceability of entriesa California worker classification statute adopted in traditional MLSs with online-only brokers,2019 as it applies to other industries, which expired in November 2018. In June 2018, the DOJ and the FTC held a joint public workshop to explore competition issues in the residential real estate brokerage industry since the publication of the FTC and DOJ’s 2007 Report on Competition in the Real Estate Brokerage Industry, including the impact of Internet-enabled technologies on the industry and potential barriers to competition.
In the workshop, there were various panels and participants submitted comments that raised a variety of issues, including: whether the current industry practice involving commission sharing by listing brokers was anti-competitive, whether offers of commission sharing—including commission rates—should be public, whether average broker commission rates were too high, whether industry platforms should have free access to listings and concerns around dual agency. There can be no assurances as to whether DOJ or the FTC will determine that any industry practices or developments have an anti-competitive effect on the industry. Any such determination by DOJ or the FTC could result in industry investigations, legislative or regulatory action or other actions, any of whichif found unconstitutional, could have the potentialeffect of eliminating that statute's less restrictive test applicable to disrupt our business.
For a summary of certain legal proceedings in which NAR, Realogy and other large real estate brokerage companies are named defendants see Note 15, "Commitments and Contingencies—Litigation—Real Estate Litigation",professionals in this Annual Report.
Anti-Discrimination Laws. Our company owned and franchised brokerages, and agents affiliated with such brokerages,California. We continue to monitor these matters as well as our other businesses are subject to federal and state housing laws that generally make it illegal to discriminate against protected classes of individuals in housing or brokerage services. For example, the Fair Housing Act, its state and local law counterparts, and the regulations promulgated by the U.S. Department of Housing and Urban Development and various state agencies, all prohibit discrimination in housing on the basis of race or color, national origin, religion, sex, familial status, disability, and, in some states or locales, financial capability, sexual orientation, gender identity, or military status.
Antitrust and Competition Laws. Our business is subject to antitrust and competition laws in the various jurisdictions where we operate, including the Sherman Antitrust Act, the Federal Trade Commission Act and the Clayton Act and related federal and state antitrust and competition laws in the U.S. The penalties for violating antitrust and competition laws can be severe. These laws and regulations generally prohibit competitors from fixing prices, boycotting competitors, dividing markets, or engaging in other conduct that unreasonably restrains competition. Our company owned and franchised brokerages (and independent sales agents affiliated with such brokerages) are also required to comply with state and local laws related to dual agency (such as where the same brokerage represents both the buyer and seller of a home) and increased regulation of dual agency representation may restrict or reduce the ability of impacted brokerages to participate in certain real estate transactions.
Regulation of Title Insurance and Settlement Services. Nearly all states license and regulate title agencies/settlement service providers or certain employees and underwriters through their Departments of Insurance or other regulatory body. In many states, title insurance rates are either promulgated by the state or are required to be filed with each state by the agent or underwriter, and some states promulgate the split of title insurance premiums between the agent and underwriter. States sometimes unilaterally lower the insurance rates relative to loss experience and other relevant factors. States also require title agencies and title underwriters to meet certain minimum financial requirements for net worth and working capital. In addition, the insurance laws and regulations of Texas, the jurisdiction in which our title insurance underwriter subsidiary, Title Resources, is domiciled, generally provide that no person may acquire control, directly or indirectly, of a Texas domiciled insurer, unless the person has provided required information to, and the acquisition is approved or not
disapproved by, the Texas Department of Insurance. Generally, any person acquiring beneficial ownership of 10% or more of our voting securities would be presumed to have acquired indirect control of our title insurance underwriter subsidiary unless the Texas Department of Insurance, upon application, determines otherwise. Our insurance underwriter is also subject to a holding company act in its state of domicile, which regulates, among other matters, investment policies and the ability to pay dividends.
Certain states in which we operate have "controlled business" statutes which impose limitations on affiliations between providers of title and settlement services on the one hand, and real estate brokers, mortgage lenders and other real estate service providers on the other hand. We are aware of the states imposing such limits and monitor the others to ensure that if they implement such a limit that we will be prepared to comply with any such rule. "Controlled business" typically is defined as sources controlled by, or which control, directly or indirectly, the title insurer or agent. Pursuant to legislation enacted in the State of New York in late 2014 requiring the licensing of title agents, the New York Department of Insurance has issued regulations that provide that title agents with affiliated businesses must make a good faith effort to obtain and be open for title insurance business from all sources and not business only from affiliated persons, including actively competing in the marketplacedevelopments. A company's failure to comply with such statutes could result in the payment of fines and penalties or the non-renewal of the Company's license to provide title and settlement services. We provide our services not only to our affiliates but also to third-party businesses in the geographic areas in which we operate. Accordingly, we manage our business in a manner to comply with any applicable "controlled business" statutes by ensuring that we generate sufficient business from sources we do not control. We have never been cited for failing to comply with a "controlled business" statute.
Regulation of the Mortgage 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 rules, including TILA-RESPA Integrated Disclosure rules, which impose significant obligations on Guaranteed Rate Affinity.
Cybersecurity and Data Privacy Regulations. To run our business, it is essential for us to collect, store and transmit sensitive personal information about our customers, prospects, employees, independent agents, and relocation transferees in our systems and networks. At the same time, we are subject to numerous laws, regulations, and other requirements, domestically and globally, that require businesses like ours to protect the security of personal information, notify customers and other individuals about our privacy practices, and limit the use, disclosure, sale, or transfer of personal data. Regulators in the U.S. and abroad continue to enact comprehensive new laws or legislative reforms imposing significant privacy and cybersecurity restrictions. The result is that we are subject to increased regulatory scrutiny, additional contractual requirements from corporate customers, and heightened compliance costs. For example, in the U.S., we are required to comply with 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, which went into effect in 2017, and the California Consumer Privacy Act ("CCPA"), which went into effect in 2020. Regulation.
The CCPA imposes new and 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 took 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 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. Other states including New Yorkhave passed privacy legislation that will take effect in 2023, and Massachusetts,which differ from the CPRA in how they will be implemented. Other states are expectedlikely to implement their own privacy statutes in the near term.
Under the NYDFS cybersecurity regulation, regulated financial institutions, including Realogy Title Group, are required to establish a detailed cybersecurity program. Program requirements include corporate governance, incident planning, data management, system testing, vendor oversight, and regulator notification rules. Other state regulatory agencies have or are expected to enact similar requirements following the adoption of the Insurance Data Security Model Law by the National Association of Insurance Commissioners that is consistent with the New York regulation.
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 binding 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 Standard Contractual Clauses. Other countries have also recently expanded on their data privacy laws and regulations.
For example, the South Carolina Insurance Data Security Act, effective January 1, 2019, is based on the Insurance Data Security Model Law and imposes new breach notification andadditional information security requirements on insurers, agents, and other licensed entities authorizedwith respect to operaterelated risks facing our business, see "Item 1A. Risk Factors" in this Annual Report, in particular under the state’s insurance laws, including Realogy Title Group. Finally, our security systemscaption "Cybersecurity incidents could disrupt business operations and IT infrastructure may not adequately protect against all potential security breaches, cyber-attacks, or other unauthorized access to personal information. Third parties, including vendors or suppliers that provide essential services for our global operations, could also be a source of security risk to us if they experience a failure of their own security systems and infrastructure. Any significant violations of privacy and cybersecurity could result in the loss of newcritical and confidential information or existing business, litigation regulatory investigations, the paymentor claims arising from such incidents, any of fines, damages, and penalties and damage to our reputation, which could have a material adverse effect on our business, financial condition,reputation and results of operations."
The Telephone Consumer Protection Act. The TCPA restricts certain types of telemarketing calls and text messaging, 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. Certain states have also adopted, or may in the future adopt, state equivalents of the TCPA. We are vulnerable to claims made by class action consumers alleging that we are liable 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 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.
State Brokerage Laws. Our company owned real estate brokerage business is also subject to numerous federal, state and local laws and regulations that contain general standards for and limitations on the conduct of real estate brokers and sales agents, including those relating to the licensing of brokers and sales agents, fiduciary, and agency and statutory duties, consumer disclosure obligations, administration of trust funds, collection of commissions, restrictions on information sharing with affiliates, fair housing standards and advertising and consumer disclosures. Under state law, our company owned real estate brokers have certain duties to supervise and are responsible for the conduct of their brokerage businesses.
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. MLSs, NAR and respective state realtor associations each maintain rules, policies, data licenses, and terms of service, that specify, among other things, how MLS data and listings may be accessed, used, and displayed on websites and mobile applications. The rules of each MLS 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.
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, escrow companies and underwriters through their Departments of Insurance or other regulatory body. In addition,many states, title insurance rates are either promulgated by the European Union’s General Data Protection state or are required to be filed with each state by the agent or underwriter, and some states promulgate the split of title insurance premiums between the agent and underwriter. States may 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.
Certain states in which we operate have "controlled business" statutes which impose limitations on the level of business our title and escrow companies can receive from its affiliated real estate brokers, mortgage lenders and other real estate service providers. We are aware of the states imposing such limits and monitor the others to ensure that if they implement such a limit, 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 agent. Pursuant to regulations in New York, 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. The 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.
Regulation ("GDPR"), which became effectiveof the Mortgage Industry. We participate in May 2018, conferred newthe 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 privacy rights on individuals (including employees and independent agents), and materially increased penalties for violations.oversight by government sponsored entities.
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. The significant declines experienced in U.S. residential real estate industry wasmarket in a significant2022 negatively impacted our 2022 financial results and lengthy downturn from the second half of 2005 through 2011. Beginningthird parties, including Fannie Mae and NAR, forecast continued declines in 2012, the U.S. residential real estate industry began a recovery. However, according to NAR data, in 2018 the industry saw no growth in homesale transaction volume and while there was 3% growth in homesale transaction volume in 2019, all of such growth was attributable to increases in average homesale price as homesale transactions remained flat. We cannot predict whether the housing market will continue to improve.2023. If the residential real estate market or the economy as a whole does not continue to improve, or worsens, our business, financial condition and liquidity may be materially adversely affected, including our ability to access capital and grow our business.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:
•increases in mortgage rates or inflation, or prolonged periods of a decline or lack of improvement in the number of homesales;
•insufficient or excessive regional home inventory levels;
•stagnant and/or declining home prices;high mortgage rate environment;
•a decreasereduction in the affordability of homes;
•high levels of unemployment and/or continued slow wage growth;declines in consumer demand;
•a period of slow economic growthinsufficient or recessionary conditions;excessive home inventory levels by market or price point;
•increasing mortgage rates and down payment requirements and/or constraints on the availability of mortgage financing;
•decelerated or lack of building of new housing for homesales, increased building of new rental properties, or irregular timing of new development closings leading to lower unit sales at Realogy Brokerage Group;
•a low level ofdecreasing consumer confidence in the economy and/or the residential real estate market due to macroeconomic events domestically or internationally;market;
•instabilityan increase in potential homebuyers with low credit ratings or inability to afford down payments;
•stringent mortgage standards, reduced availability of financial institutions;mortgage financing or increasing down payment requirements or other mortgage challenges;
•an increase in foreclosure activity;
•legislative or regulatory changes (including changes in regulatory interpretations or regulatory practices) that would adversely impact the residential real estate market;
•federal and/or state income tax changes and other tax reform affecting real estate and/or real estate transactions, including, in particular, the impact of the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) as well as certain state and local tax reform, such as the "mansion tax" in New York City;
•other legislative, tax or regulatory changes (including changes in regulatory interpretations or enforcement practices) that would adversely impact the residential real estate market, including changes relating to the Real Estate Settlement Procedures Act ("RESPA"), potential reforms of Fannie Mae and Freddie Mac, immigration
reform, and further potential federal, state or local tax code reform (including, for example, the proposed "pied-a-terre tax" in New York City);
•an increase in potential homebuyers with low credit ratings or inability to afford down payments;RESPA;
•renewed high levels of foreclosure activity;federal, state and/or local income tax changes and other tax reform affecting real estate and/or real estate transactions;
•the inabilitydecelerated or unwillingness of homeowners to enter into homesale transactions such as first-time homebuyer concerns about investing in a home and move-up buyers having limited or negative equity in their existing homes or other factors, including difficult mortgage underwriting standards, attractive rates on existing mortgages and the lack of availability in their market;building of new housing for homesales or increased building of new rental properties;
•irregular timing of new development closings leading to lower unit sales at Owned Brokerage Group;
•homeowners retaining their homes for longer periods of time;time as a result of the high mortgage rate environment, inventory shortages in new and existing housing or otherwise; and
•decreasinga decline in home ownership rates, declining demand for real estate andlevels in the U.S., including as a result of affordability or changing social attitudes towardtowards home ownership, including as compared to renting, such asparticularly among potential first-time homebuyers who may delay, or decide not to, purchase a home, as well as existing homeowners who may decide to sell their home and rent their next home;
•a deterioration in other economic factors that particularly impact the residential real estate market and the business segments in which we operate whether broadly or by geography and price segments;
•geopolitical and economic instability; and/or
•natural disasters, such as hurricanes, earthquakes, wildfires, mudslides as well as public health crises, such as pandemics or epidemics and other events that disrupt local or regional real estate markets.
In addition, homesale inventory levels for the 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, the inventory of existing homes for sale in the U.S. was 1.5 million as of December 2018 and has decreased to 1.4 million at the end of December 2019. As a result, inventory has decreased from 3.7 months of supply in December 2018 to 3.0 months as of December 2019. These levels continue to be significantly below the 10-year average of 5.4 months, the 15-year average of 6.1 months and the 25-year average of 5.7 months. If interest rates were to rise, homebuilders may determine to discontinue or delay new projects, which could further contribute to inventory constraints. In addition, real estate industry models that purchase homes for rental or corporate use (rather than immediate resale) can put additional pressure on available housing inventory. While a continuation of low inventory levels may contribute to favorable demand conditions and improved homesale price growth, insufficient inventory levels have a negative impact on homesale volume growth and can contribute to a reduction in housing affordability, which can result in some potential home buyers deferring entry into the residential real estate market. Ongoing constraints on home inventory levels may continue to have an adverse impactlimits on the numberproclivity of homesale transactions closed by Realogy Brokerage and Realogy Franchise Group, which may limit our abilityhome owners to grow revenue.purchase an alternative home, or changes in preferences to rent versus purchase a home.
Adverse developments in general business and economic conditions could have a material adverse effect on our financial condition and our results of operations.
Our business and operations and those of our franchisees are sensitive to general business and economic conditions in the U.S. and worldwide. Contraction in the U.S. economy, including the impact of recessions, slow economic growth, or a deterioration in other economic factors such as potential consumer, business or governmental defaults or delinquencies, could have a material adverse impact on our business, financial condition and results of operations. A deterioration in economic factors that particularly impact the residential real estate market and the business segments in which we operate,
whether broadly or by geography and price segments have and could continue to have an adverse effect on our results of operations and financial results, which may be material. These conditionsfactors 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 related matters (such as debt ceiling negotiations), 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. LackWeak 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 the political environment, U.S. immigration policies, disruptions in a major geoeconomic region or(such as Russia's invasion of Ukraine), changes in equity or commodity markets, and acts or threats of war or terrorism or sustained pervasive civil unrest, other geopolitical or economic instability or pandemics and natural disasters (such as the COVID-19 crisis), any of which could have a material adverse effect on our business, financial condition and our results of operations. For example, the United Kingdom’s withdrawal from the European Union (referred to as Brexit) could cause significant volatility and uncertainty in global stock markets.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 U.S. Federal Reserve Board. These policies regulatesregulate the supply of money and credit
in the U.S. and impact the real estate market through their effect on interest rates (and mortgage rates) as well as the cost of our interest-bearing liabilities.
Increases The U.S. Federal Reserve Board took aggressive action intended to try to control inflation in 2022, including raising the target federal funds rate and reducing its holdings of mortgage-backed securities and has indicated its expectation to continue to pursue these strategies in 2023. Rising interest rates generally contribute to rising mortgage rates, adversely impact housing affordability and we have been andwhich could again be negatively impacted by a rising interest rate environment. For example, a risefurther contribute to declines in mortgage rates could result in decreasedresidential real estate homesale transaction volume, if potential home sellers chooseor to stay with their lower mortgage rate rather than sell their home and pay a higher mortgage rate with the purchase of another homehomebuilders discontinuing or similarly, if potential home buyers choose to rent rather than pay higher mortgage rates. Increases in mortgage rates could also reduce the number of homesale refinancing transactions,delaying new projects, which could materially adversely impact our earnings from our mortgage origination joint venture as well as the revenue stream of our title and settlement services segment.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.
Increasing mortgage rates have resulted, and may continue to result, in declines in homesale transactions as well as title, mortgage and refinancing activity.
The passagerising interest rate environment has negatively impacted and is expected to continue to negatively impact multiple aspects of the 2017 Tax Act mayour business, as increases in mortgage rates (as well as prolonged periods of high mortgage rates) generally have a negativean adverse impact on homeownership rates and homesale transaction activity, whichvolume, housing affordability, and title, mortgage and refinancing volumes. We believe the high mortgage rate environment is a key contributor to declines in residential real estate homesale transaction volume, as potential home sellers choose to stay with their lower mortgage rate rather than sell their home and pay a higher mortgage rate with the purchase of another home and potential home buyers choose to rent rather than pay higher mortgage rates. If existing homesale transactions continue to decline (due to increases in mortgage rates or otherwise), we would also expect to continue to experience decreased title, mortgage origination and refinancing activity.
The imposition of more stringent mortgage underwriting standards (due to changes in policy or otherwise) 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 our profitability.
The 2017 Tax Act, which became law on December 22, 2017, includes provisions that, among other things:
•cap the aggregate amountability and willingness of property, sales and state and local income tax deductions at $10,000; and
•reduce the principal amountprospective buyers to which thefinance home mortgage interest deduction will be availablepurchases or to potentially impacted U.S. taxpayers who enter into a mortgage on or after December 15, 2017 from $1,000,000 to $750,000, while entirely suspending interest deductibility of home equity loans.
These changes affecting individual taxpayers will cease to apply after December 31, 2025 unless further extended by future legislation. Certain of these provisions of the 2017 Tax Act, alone or in combination, directly impact traditional incentives associated with home ownership and may reduce the financial distinction between renting and owning a home for many households who are U.S. residents for federal income tax purposes at certain income levels, which may have a negative impact on the national homeownership rate. In addition, certainsell their existing homeowners may be less likely to purchase a larger or more expensive home or refinance a mortgage given the reduced mortgage interest deductibility opportunities (from $1,000,000 to $750,000 on mortgages that are not grandfathered) and lessened property tax deductibility. The reduction in state and local tax deductibility impacts all households, particularly in states with higher taxes. This may adversely impact the mobility of such state residents, make such states less attractive to home buyers, or adversely impact home values in such geographies, although it may result in some shift in the value of homes from high tax states (where the deductibility of such taxes may be limited beyond previous levels) to those states with low or no state income tax. The effects of the 2017 Tax Act on average homesale prices may be more impactful in states where average home prices, state and local incomes taxes, and/or property taxes are high, including California and the New York tri-state area, where our company owned brokerage and our franchisee businesses maintain a material presence.
Reductionshomes. A significant decline in the number of homesale transactions or average homesale price could have a material adverse effect ontitle, mortgage and refinancing activity due to any of the foregoing would adversely affect our revenuesfinancial and profitability.operating results, which may be material.
Meaningful decreases in the average homesale brokerage commission rate could materially adversely affect our financial results.
There are a variety of factors that could contribute to declines in the average homesale broker commission rate, including regulation, litigation (including pending litigation described elsewhere in this Annual Report), the rise of certain competitive brokerage or non-traditional competitor models, an increase in the popularity of discount brokers or other utilization of flat fees, rebates or lower commission rates on transactions the rise of certain other competitive brokerage models as well as other competitive factors. Average homesale price and geographic mix have and could continue to contribute to declines in the average homesale broker commission rate, as higher priced homes tend to have a lower broker commission rate.
The average homesale broker commission rate for a homesale transaction is a key driver for both RealogyOwned Brokerage Group and Realogy Franchise Groups. Since 2014, we have experienced approximately a one basis point decline in the average broker commission rate each year.Group. 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 continue to have a negative impact on homesale transaction sides and ancillary homesale services, including title and mortgage.
Overall 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. Insufficient inventory levels generally have a negative impact on homesale transaction sides and can contribute to a reduction in housing affordability, which could result in some potential home buyers deferring entry into the residential real estate market. Declines in homesale sides have also had a negative impact on ancillary homesale services, including title and mortgage. Additional inventory pressure arises from periods of slow or decelerated new housing construction, real estate models that purchase homes for rental use (rather than resale), and alternative competitors.
We believe constraints in home inventory levels have contributed to a decline in homesale transaction sides and this factor may continue to have an adverse impact on the number of homesale transaction sides closed by Franchise and Owned Brokerage Groups (and on ancillary homesale services, including title and mortgage), which could materially adversely affect our revenues, earnings and financial results.
Strategic and Operational Risks
Our ability to grow earnings is significantly dependent upon our and our franchisees' ability to attract and retain productive independent sales agents and on our ability to attract and retain franchisees.
The core of our integrated business strategy is aimed at significantly growing the base of productive independent sales agents at our company owned and franchisee brokerages and providing them with compelling data and technology products
and services to make them more productive and their businesses more profitable. In addition, in order to grow earnings we need to enter into franchise agreements with new franchisees and renew existing franchise agreements without materially reducing contractual royalty rates or materially increasing the amount and prevalence of sales incentives.
If we and our 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 the iBuying model, as well as other types of companies employing technologies or alternative models intended to disrupt historical 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;
•our ability to react quickly to changing market dynamics, including with respect to our value proposition to both new and existing independent sales agents and franchisees;
•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,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 (or such franchisees);.
•worsening macroeconomic conditions, including a further slowdown inOur franchisees face the residential real estate market;same challenges with respect to productive sales agent recruitment and
•our ability to attract and retain talent to drive our strategy.
In 2019, we launched or expanded multiple programs designed to enhance our value proposition to independent sales agents and franchisees, including marketing and technology programs retention as well as other market pressures generally facing the industry (such as margin compression). When a new pricing model structure for one brandfranchisee is unable to maintain or grow their affiliated sales agent base, the homesale transaction volume generated by such franchisee is more likely to decline. Such declines have and could continue to result in a newdeclines in our royalty revenues, which could be material. In addition, franchisees have and may continue to seek lower royalty rates or higher incentives from us to moderate market pressures. Such pressures also induce certain franchisees to exit our franchisee system from time to time. If franchisees, in particular multiple larger franchisees, fail to renew their franchise brand. Agentsagreements (or otherwise leave our franchise system), or if we induce franchisees to renew these agreements through lower royalty rates or higher incentives (as we have done from time to time), then our royalty revenues may decrease, and franchiseesprofitability may not find these programs compelling and ifbe lower than in the past.
If we fail to successfully enhance our value proposition, including through new products and services and appealing franchise models and brands, we may fail to attract new or retain productive independent sales agents or franchisees, resulting in a reduction in commission income and royalty fees paid to us, which would have a material adverse affecteffect on our results of operations. In addition, the continued execution of our strategy may also take longer or cost more than we currently anticipate and, evenEven if we are successful in our recruitment and retention efforts, any additional revenue generated may not offset the related expenses we incur.
OurContinued erosion of our share of the commission income generated by homesale transactions maycould continue to shift to affiliated independent sales agents or erode due to market factors, which would further negatively affect our profitability.
As noted in the prior risk factor, our integrated business strategy is focused on the attraction and retention of independent sales agents to our company owned and franchised brokerage operations. Intense industry competition for agents combined with our strategic emphasis on the recruitment and retention of independent sales agents has and is expected to continue to put upward pressure on our commission expense, whichexpense. This trend has negatively impacted and could continue to negatively impact our profitability. Other market factors, including, thebut not
limited to, competitors with access to outside capital that pursue increases in market share over profitability, models that operate at lower margins, including virtual brokerages and brokerages that operate in a more virtual fashion or reduced cost platforms, and listing aggregator concentration and market power couldis expected to further erode our share of commission income.
If independent sales agents affiliated with our company owned brokerages are paid a higher proportion of the commissions earned on a homesale transaction or the level of commission income we receive from a homesale transaction is otherwise reduced, the operating margins of our company owned residential brokerages could continue to be adversely affected.
Our franchisees face similar risks and continued downward pressure on the commission income recognized by our franchisees could negatively impact their view of our value proposition and we may fail to attract new franchisees, expiring franchisees may not renew their agreements with us, or we may be required to offer reduced royalty fee or increased incentive arrangements to new and existing franchisees, all of which have occurred from time to time, and any of which would result in a further reduction in royalty or other fees paid to us.
We may not successfully develop or procure products, services and technology that support our strategic initiatives, which could have a material adverse effect on our results of operations.
Our future success depends on our ability to continuously develop and improve, or procure, products, services, and technologies that are compelling to independent sales agents, franchisees and consumers (including consumers of our ancillary services 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 product, service and technology offerings to meet their needs as well as those that will further complement our businesses. We will continue to prioritize certain offerings over others and our resource allocation decisions may cause us to fail to capitalize on opportunities that could later prove to have greater commercial potential.
We may incur unforeseen expenses in the development or procurement of, or enhancements to, products, services and technology, or may experience competitive delays in introducing new offerings 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 services.
Furthermore, the investment and pace of technology development continue to accelerate across the industry, creating risk in the relative timing and attractiveness of our technology products and services,and there can be no assurance that the targeted end user will choose to use the products, services or technologies we may develop or that they will find such products, services and technologies compelling. We may be unable to maintain and scale the technology underlying our offerings, which could negatively impact the security and availability of our services and technologies. In addition, our competitors may develop or make available products, services or technologies that are preferred by agents, franchisees and/or consumers. Further, third parties utilizing our platform may not create tools that meet the needs of agents and franchisees in a timely or effective 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.
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, financial condition and results of operations.
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 long-term strategy is focused on providing affiliated independent sales agents and franchisees with high-quality leads. We expect that significant time and effort and meaningful investment will be required to increase awareness of, and consumer participation in, programs, partnerships or products and services that are intended to aid in lead
generation. Even if we are successful in these efforts, such programs, partnerships or products may not generate a meaningful number of high-quality leads, which could negatively impact our ability to recruit and retain independent sales agents and attract and retain new franchisees and could materially adversely affect our revenues and profitability, including as a result of the loss of downstream revenues at our franchise, brokerage and title businesses as well as our minority-owned mortgage origination and title insurance underwriter joint ventures. In addition, our lead generation business is highly regulated, subject to complex federal and state laws (including RESPA and similar state laws as well as state laws limiting or prohibiting inducements, cash rebates and gifts to consumers), and subject to changing economic and political influences. A change in such laws, or more restrictive interpretations of such laws by administrative, legislative or other governmental bodies, could have a material adverse effect on this business.
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 pressure from the increasing share of commission income paid to affiliated independent sales agents. In connection with our implementation of cost-savings, simplification and modernization initiatives we may experience disruptions in our business, including with respect to agent and franchisee recruitment and retention efforts and the diversion of a significant amount of management and employee time and focus. 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.
Our company owned brokerage operations are subject to geographic and high-end real estate market risks, which could adversely affect our revenues and profitability.
RealogyOwned Brokerage Group ownsoperates real estate brokerage offices located in and around large U.S. metropolitan areas in the U.S. where competition for independent sales agents and independent sales agent teams is particularly intense. Local and regional economic conditions in these locations couldat times differ materially from prevailing conditions in other parts of the country. For the year ended December 31, 2019, 2022, OwnedRealogy Brokerage Group realized approximately 25%23% of its revenues from California, 22%21% from the New York metropolitan area and 10%13% from Florida, which in the aggregate totals
approximately 57% of its revenues. A downturnDownturns in the residential real estate market or economic conditions that isare concentrated in these regions, or in other geographic concentration areas for us, could result in a declinedeclines in OwnedRealogy Brokerage Group's total gross commission income and profitability that are disproportionate to the downturn experienced throughout the U.S. and could have a material adverse effect on us.
The effects of the 2017 Tax Act on average homesale prices may also be more impactful in states where average home prices, state and local incomes taxes, and/or property taxes are high, including California and the New York tri-state area. In addition, given the significant geographic overlap of our title, escrow and settlement services business with our company owned brokerage offices, such regional declines affecting our company owned brokerage operations couldgenerally have a disproportionate adverse effect on our title, escrow and settlement services business and mortgage origination businessjoint venture as well. For example, negative homesale transaction growth in 2018 and 2019 in California and New York CityThese factors have negatively impacted, the operatingand could continue to negatively impact, our financial results at both Realogyand such impact could have a material adverse effect on our financial position.
Owned Brokerage Group and Realogy Title Group.
Realogy Brokerage Groupalso has a significant concentration of transactions at the higher end of the U.S. real estate market and in high-tax states. Accordingly, the effects of certain state and local tax reform may have a deeper impact on our business. A shift in transactions from high-tax to low-tax states or in OwnedRealogy Brokerage Group's mix of property transactions from the high range to lower and middle range homes would adversely affect the average price of OwnedRealogy Brokerage Group's closed homesales. Such a shift, absent an increase in transactions, would have an adverse effect on our operating results. Due to OwnedRealogy Brokerage Group's concentration in high-end real estate, its business may also be adversely impacted by capital controls imposed by foreign governments that restrict the amount of capital individual citizens may legally transfer out of their countries. In addition, OwnedRealogy Brokerage Group continues to face heightened competition for both homesale transactions and high performing independent sales agents because of its prominent position in the higher end housing markets.
Moreover, OwnedRealogy Brokerage Group also has relationships with developers primarily in select major cities (in particular, New York City) to provide marketing and brokerage services in new developments. The irregular volume and timing of new development closings may contribute to uneven financial results and deceleration in the building of new housing may result
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 OwnedRealogy Brokerage Group and our profitability.
We may not successfully develop or procure technology that supportsThe businesses in which we, our strategic initiatives aimed at the recruitmentjoint ventures, and retention of productive independent sales agents andour franchisees which could adversely affect our results of operations.
Our future success depends in part on our ability to continuously develop and improve our technology products and services or procure such technology, in particular for our company owned and franchisee real estate brokerages, affiliated independent sales agents and their customers as well as for our other segments. A strong technology value proposition is critical to the ability of Realogy Brokerage Group to recruit and retain independent sales agents and to the ability of Realogy Franchise Group to enter into new or renew existing franchise agreements.operate are intensely competitive.
We have expended and expect to continue to expend substantial time, capital, and other resources to identify the needs of our company owned brokerages, franchisees, independent sales agents and their customers and to develop technology and service offerings to meet those needs. In addition, we have made and may continue to make strategic investments in companies developing technologies that support our strategy and we may not realize the anticipated benefits from these investments and such technologies may not become available to us or may become available to our competitors.
We may incur unforeseen expenses in the development of enhancements to technology products and services, or may experience competitive delays in introducing new technologies as quickly as we would like. 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 services. Furthermore, the investment and pace of technology development continues to accelerate 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 those affiliated with our company owned brokerages), or customers will choose to use the technology products and services we may develop or that affiliated agents or franchisees will find such products and services compelling.
We are now building our agent- and franchisee-focused technology products with an open architecture in order to selectively enable qualified third-party vendors and products to access and interface with our products. In addition, we recently engaged with a strategic third-party partner to develop the next generation of certain key brand, broker and agent tools, including our customer relationship management product. We may not be able to accomplish the continued evolution of our technology offerings on a timely basis and there can be no assurance that our strategic partner or third parties utilizing our open architecture will integrate with our solutions or create tools that meet the changing needs and expectations of
agents and franchisees in a timely or effective manner, or at all. Any of the foregoing could adversely affect our value proposition to affiliated agents and franchisees and the productivity of independent sales agents, which in turn could adversely affect our results of operations.
Competition in the residential real estate business is intense and has and could continue to have a negative impact on our homesale transaction volume and market share and put upward pressure on the average share of commissions earned by independent sales agents, any of which has and could continue to adversely affect our financial performance.
We generally face intense competition in the residential real estate services business. Duebusiness, in particular with respect to competitive factors, we estimate that our market share in 2019 decreased year-over-year to approximately 15.3% compared to 16.1% in 2018.
Some competitive risks are shared among our business units, while others are specific to a business unit. For example, both the Company and our franchisees compete for consumer business as well as forproductive independent sales agents with national and regional independent real estate brokerages and franchisors and discount and limited service brokerages as well as with franchisees of our brands. Theagent recruitment and retentionretention. Aggressive competition for the affiliation of independent sales agents has been and may continuecontinues to be further complicated by competitive models that do not prioritize traditional business objectives. For example, we believe that certain owned-brokerage competitors have investors that have historically allowed the pursuit of increases in market share over profitability, which exacerbates competition for independent sales agents and pressure on the share of commission income received by the agent, creating challenges to both our company owned brokerages and our franchisee’s margins and profitability. Whether and the extent to which this pattern will continue is not yet certain.
We are faced with the following related risks:
Our ability to succeed both through our company owned brokerages and as a franchisor is largely dependent on our and our franchisees' ability to attract and retain independent sales agents.
The successfulmake recruitment and retention of independent sales agentsefforts at both Owned Brokerage Group and independent sales agent teams are critical to the business and financial results of a brokerage—whether or not it is affiliated with a franchisor. Most of a brokerage's real estate listings are sourced through the sphere of influence of its independent sales agents, notwithstanding the growing influence of internet-generated leads. Competition for independent sales agentsFranchise Group challenging, in our industry is high and has intensified particularlyparticular with respect to more productive independent sales agents and in the densely populated metropolitan areas in which we operate.
Specifically, the intensity of competition for the affiliation of independent sales agents negatively impacted recruitmentoperate. The competitive environment has had, and retention efforts in 2019 at both Realogy Brokerage and Realogy Franchise Groups. In 2019, these competitive factors drovemay continue to have, a loss innegative impact on our market share (comparedand may continue to 2018), contributed to the decline in homesale transaction volume at Realogy Brokerageput pressure on our and Realogy Franchise Groupour franchisees' operating margins and adversely impacted our financial results.
The successful recruitment and retention of independent sales agents is influenced by many factors, including remuneration (such as sales commission percentage and other financial incentives paid to independent sales agents), other expenses borne by independent sales agents, leads or business opportunities generatedCompetitive pressures for independent sales agents come from the brokerage, independent sales agents' perceptiona variety of the value of the broker's brand affiliation, technology and data offeringssources, including traditional brokerages as well as marketing and advertising efforts bynewer brokerage models, including discount brokerages, virtual brokerages (and other brokerages that offer the brokerage or franchisor, the qualitysales agent fewer services, but a higher percentage of the office manager, staff and fellow independent sales agents with whom they collaborate daily,commission income) as well as continuing professional education,brokerages that provide certain services to agents and other services provided byagent teams, but with branding focused on the name of the agent or agent team, rather than the brokerage or franchisor.brand.
We believe that a variety of factors in recent years have negatively impacted the recruitment and retention of independent sales agents in the industry generally and have put upward pressure on the average share of commissions earned by affiliated independent sales agents, including increasing competition, such as from brokerages that offer a greater share of commission income to independent sales agents and/or other compensation such as up-front bonuses and equity, changes in the spending patterns of independent sales agents (as more agents purchase services from third parties outside of their affiliated broker), and growth in independent sales agent teams.
If we or our franchisees fail to attract and retain successful independent sales agents or we or they fail to replace departing successful independent sales agents with similarly productive independent sales agents, the gross commission income generated by our company owned brokerages and franchises may continue to decrease, resulting in a reduction in our profitability. In addition, competition for sales agents has and could further reduce the commission amounts retained by the Company and our affiliated franchisees after giving effect to the split with independent sales agents, and increase the
amounts that we spend on marketing and the development of products and services that we believe will appeal to such agents.
Some of the firms competing for sales agents use different commission plans, which may be appealing to certain sales agents, and we and our franchisees may be unable to adopt and implement alternative commission plans in a profitable and effective manner, which may hinder our ability to attract and retain those agents.
In most of their markets, Realogy Brokerage Group offers affiliated independent sales agents and sales agent teams a choice between a traditional graduated commission model or a two-tiered commission model, both of which emphasize our value proposition. The traditional graduated commission model has experienced declines in market share over the past several years. Increasingly, independent sales agents have affiliated with brokerages that offer a different mix of services to the agent, allowing the independent sales agent to select the services that they believe allow them to retain a greater percentage of the commission and purchase services from other vendors as needed. IfIn addition, certain types of compensation that may be appealing to independent sales agents, such as equity awards, may not be available to us at a reasonable cost or at all.
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.
The real estate brokerage industry has minimal barriers to entry for new participants, including traditional participants as well as a growing number of companies that are competing in non-traditional ways for a portion of the gross commission income generated by homesale transactions.
The significant size of the U.S. real estate market, in particular the addressable market of commission revenues, has continued to attract outside capital investment in traditional and disruptive competitors that seek to access a portion of this market.
There are also market participants who differentiate themselves by offering consumers flat fees, rebates or lower commission rates on transactions (often coupled with fewer services). Although such competitors have yet to have a material impact on overall brokerage commission rates, this could change in the future if they use greater discounts as a means to increase their market share or improve their value proposition. A decrease in the average brokerage commission rate may adversely affect our revenues.
While real estate brokers using historical real estate brokerage models typically compete for business primarily on the basis of services offered, reputation, utilization of technology, personal contacts and brokerage commission, participants pursuing non-traditional methods of marketing real estate may compete in other ways, including companies that employ technologies intended to disrupt historical real estate brokerage models or minimize or eliminate the role brokers and sales agents perform in the homesale transaction process.
A growing number of companies are competing in non-traditional ways for a portion of the gross commission income generated by homesale transactions. For example, listing aggregators and other web-based real estate service providers compete for our company owned brokerage business by establishing relationships with independent sales agents and/or buyers and sellers of homes and actions by such listing aggregators have and may continue to put pressure on our and other industry participants' revenues and profitability. Other business models that have emerged in recent years consist of companies (including certain listing aggregators) that leverage capital to purchase homes directly from sellers, commonly referred to as iBuying. If iBuying gains market share in the residential real estate industry, it could disintermediate real estate brokers and independent sales agents from buyers and sellers of homes either entirely or by reducing brokerage commissions that may be earned on those transactions. RealSure, the Company's collaboration with Home Partners of America, shares some traits of the iBuying model, but is intended to keep the independent sales agent at the center of the transaction; however, there can be no assurance that the program will be successful or that it will operate as intended.
As a real estate brokerage franchisor, we are also subject to risks unique to franchising, including:
To remain competitive in the sale of franchises and to retain our existing franchisees, we may have to reduce the fees we charge our franchisees, increase the amount of other incentives we issue or take other actions or employ other models to be competitive with fees charged by competitors.
Competition among the national real estate brokerage brand franchisors to grow theirOur franchise systems is intense. Our products are our brand names and the support services we provide to our franchisees and our ability to grow our franchisor business is dependent on the operational and financial success of our franchisees, including the ability of our franchisees to successfully navigate the challenges noted above.
The value provided by a franchisor encompasses many different aspects including the quality of the brand, tools, technology, marketing and other services, the availability of financing provided to the franchisees, and the fees the franchisees must pay. Franchisee fees can be structured in numerous ways and can include flat royalty and marketing fees, capped royalty fees and discounted royalty and marketing fees. We launched a capped fee model at one of our brands in 2019 as substantially all of our franchises are structured using a flat fee model and we have faced increasing competition from franchisors utilizing alternative models. In addition, we launched Corcoran® as a new franchise brand. There can be no assurance that the capped fee model or the new franchise brand will succeed and we may not realize benefits from these investments. If we fail to successfully offer franchisees compelling value propositions, including through compelling products and services as well as through appealing franchise models and brands, we may fail to attract new franchisees and expiring franchisees may not renew their agreements with us, resulting in a reduction in royalty fees paid to us.
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 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.
We expect that the trend of increasing incentives will continue in the future in order to attract, retain, and help grow certain franchisees. For example, 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 sales 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). Taking into account competitive factors, from time to time, we have and may continue 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. If we fail to 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. Any of the foregoing may have a material adverse effect on our earnings and growth opportunities.
As noted in the following risk factor, we and our franchisees also face substantial competition from non-traditional market participants.
Competition in our related businesses and the businesses of our joint ventures is also intense. 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 abilityresults of operations and financial condition.
The real estate brokerage industry has minimal barriers to grow earnings. In addition, our continued implementationentry for new participants and a growing number of strategic initiativescompanies are competing in non-traditional ways for a portion of the gross commission income generated by homesale transactions, including new entrants that employ technologies intended to add new franchiseesdisrupt historical real estate brokerage models, minimize or eliminate the role brokers and grow oursales 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 iBuying or home swap models, may have less exposure to risks related to the continued rise of the sales agent's share of commission income generated by homesale transactions, as they are less reliant on agent base throughservices, or may operate under a lower cost structure, such as virtual or discount brokerages. Changes to industry rules and/or the introduction of new franchisee fee modelsdisruptive products and brands, while intendedservices may also result in an increase in the number of transactions that do not utilize the services of sales agents, including for sale by owner transactions.
The significant size of the U.S. real estate market has continued to capture additionalattract 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 with brokers unaffiliated withby these alternative models and/or the introduction of other industry-disruptive competitors may adversely impact our brands, could resultmarket 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 greater intra-brand competition amonga timely manner. A loss of market share or reduction in such transaction volume may have a material adverse effect on our brands.
Realogy Title Group also faces competitive risks:
The titleoperations and settlement services business is highly competitive and fragmented.
The number and size of competing companies vary in the different areas in which we conduct business. In certain parts of the country we compete with small title agents and attorneys while in other parts of the country our competition is the larger title underwriters and national vendor management companies. In addition, we compete with the various brands of national competitors.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 (andand between agents and the consumer),consumer, tying referrals to use of their products, consolidating and leveraging data, and engaging in preferential or exclusionary practices to favor or disfavor other industry participants. These actions divert and reduce the earnings of other industry participants, including our company owned and franchised brokerages.
One aggregator has recently introduced an iBuying offering to consumers and if this listing aggregator or another aggregator is successful in gaining market share with such offering, it could control significant industry inventory and an increasing portion of agent referrals, including the ability to direct referrals to agents and brokers that share revenue with them.
Aggregators could intensify their current business tactics or introduce new programs that could be materially disadvantageous to our business and other brokerage participants in the industry including: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 fees;
•increasing the fees associated with such programs;
•or introducing new fees for new or existing services;
•setting up competing brokerages;brokerages and/or businesses, which could include the capture of property listings, directing referrals to agents and brokers that share revenue with them, or the recruitment of agents or franchisees;
•expanding their offerings to include products (including agent tools) and services that are a part of or ancillary to the real estate transaction, such as title, escrow and mortgage 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;
•reducing listing fees they paycontrolling 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;
•controlling significant inventory and agent referrals;leveraging their position to compel the use of their platforms exclusively, which may include requiring disclosure of competitively sensitive information;
•utilizing its aggregatedaggregating 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 independent sales agent and the buyers and sellers of homes.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, independent sales agents and ourconsumers and our franchisees' relationships with affiliated independent sales agents and buyers and sellers of homes.consumers.
We currently receive meaningful listing fees for our provision of real estate listings and such fees help defray expenses for lead generation and other programs to benefit affiliated agents and franchisees. We do not expect this revenue stream to extend beyond the first quarter of 2022 because of changes in industry practices around syndication and distribution of listings. The loss of this revenue, which could occur prior to 2022, could have a meaningful adverse effect on our revenues and earnings.
The discontinuation of a long-term, significant affinity client program in 2019 is expected to result in a material decline in earnings at Realogy Leads Group and a comparable dollar reduction in earnings for Realogy Brokerage Group and Realogy Franchise Group.
Our affinity revenues are highly concentrated. In September 2019, USAA, a long-time affinity client, ceased new enrollments under its affinity program with us. USAA was our largest affinity client and in 2019, referrals generated by the USAA affinity program represented a significant portion of the 78,700 total homesale transactions closed by our company owned and franchised brokerages from the Realogy Broker Network. We expect that the discontinuation of the USAA business will result in (1) a material decline in earnings at Realogy Leads Group and (2) a comparable dollar reduction in earnings in the aggregate for Realogy Brokerage Group and Realogy Franchise Group as a result of the loss of the referrals from the USAA affinity program.
If our next largest affinity client ceases or reduces volume under their contract with us, our revenues and profitability would be materially adversely affected.
Contracts with an affinity client are generally terminable at any time at the option of the client, do not require such client to maintain any level of business with us and are non-exclusive. Our affinity revenues are highly concentrated.
If our next largest affinity client ceased or reduced volume under their contract with us, our revenues (including at Realogy Leads, Franchise, Brokerage and Title Groups) and profitability would be materially adversely affected.
We may not be able to grow our company-directed affinity programs and such programs may not generate a meaningful number of high-quality referrals.
A key component of our growth strategy is focused on providing affiliated independent sales agents with high-quality referrals. During 2019, we launched our first company-branded affinity program, Realogy Military Rewards, and announced the expected 2020 launch of an affinity program for AARP members. We expect that significant time and effort and meaningful investment will be required to increase awareness of and affinity member participation in new affinity programs and even if we are successful in these efforts, such programs may not generate a meaningful number of high-quality referrals.
Our financial results are affected by the operating results of our franchisees.
Realogy Franchise Group receives revenue in the form of royalties, which are based on a percentage of gross commission income earned by our franchisees. Accordingly, the financial results of Realogy Franchise Group are dependent upon the operational and financial success of our franchisees, in particular with respect to our largest franchisees. If industry trends or economic conditions worsen or do not improve or if one or more of our top performing franchisees become less competitive or leavesleave our franchise system, our franchisees'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, from time to time, we may have had to increase our bad debt and note reserves.reserves, including with respect to the conversion notes or other note-backed funding we extend to eligible franchisees, which are forgiven ratably generally 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.
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.
Although during 2019, none of our franchisees (other than Realogy Brokerage Group) generated more than 1% of the total revenue of our real estate franchise business, aA significant majority of this segment's revenue at Franchise Group is generated from our top 250 franchisees, which have grown faster than our other franchisees through organic growth and market consolidation in recent years. The growing concentration in our top 250 franchisees puts pressure on our ability to renew or negotiate franchise agreements with favorable terms, including with respect to contractual royalty rates, sales incentives and covered geographies. In addition, such concentration increases risks related to the financial health of our franchisees as well as with respect to franchisee non-renewal or termination. 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 to experience pressure on our royalty revenue, which we would expect to continue to increase, but at a slower pace than homesale transaction volume due to increased volume incentives, lower negotiated rates, and other incentives earned by such franchisees, bothall of which directly impact our royalty revenue.
If a meaningful number of our franchisees do not renew their franchisee agreements with us, our revenues and profitability may be materially adversely affected.
In addition, our franchisees face the same market pressures generally facing the industry (such as margin compression) and may seek lower royalty rates or higher incentives from us. If franchisees, in particular multiple top 250 franchisees, fail to renew their franchise agreements (or otherwise leave our franchise system), or if we induce franchisees to renew these agreements through lower royalty rates or higher incentives, then our royalty revenues may decrease, and profitability may be lower than in the past. These risks and the materiality of the potential impact on our revenues and profitability are pronounced in years when a significant number of franchise agreements, which typically have an initial ten year term that may be extended for a shorter term, are expiring.
Negligence or intentional actions of our franchisees and their independent sales agents could harm our business.
Our franchisees (other than our company owned brokerages) 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 those handling properties for our relocation 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.
The activities of franchisees and master franchisees outside of the U.S. are more difficult and more expensive to monitor and improper activities or mismanagement may be more difficult to detect. Negligent or improper activities involving our franchisees and master franchisees, including regarding their relationships with independent sales agents, clients and employees, may result in reputational damage to us and may lead to direct claims against us based on theories of vicarious liability, negligence, joint operations and joint employer liability which, if determined adversely, could increase costs, negatively impact the business prospects of our franchisees and subject us to incremental liability for their actions.
Franchisees, as independent business operators, may from time to time disagree with us and our strategies regarding the business or our interpretation of our respective rights and obligations under the franchise agreement. To the extent we have such disputes, the attention of our management and our franchisees will be diverted, which could have a material adverse effect on our business, financial condition, results of operations or cash flows.
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 ownedcompany-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 or ancillary 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. Under 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 Sotheby's that acquired a stake in an online 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—Franchise Group—Intellectual Property".
If our largest real estate benefit program client or multiple significant relocation clients cease or reduce volume under their contracts with us, our revenues and profitability would be materially adversely affected.
Contracts with our real estate benefit program and relocation clients are generally terminable at any time at the option of the client, do not require such client to maintain any level of business with us and are non-exclusive. Our real estate benefit program revenues are highly concentrated. If our largest real estate benefit program client or multiple significant relocation clients cease or reduce volume under their contracts with us, our revenues (including downstream revenue at Franchise, Owned Brokerage and Title Groups) and profitability would be materially adversely affected.
SeveralMany of the general residential housing trends impacting our recent strategicbusinesses that derive revenue from homesales also impact our relocation services business. Additionally, global corporate spending on relocation services has continued to shift to lower cost relocation benefits as corporate clients engage in cost reduction initiatives are collaborations with third-party partners and we are reliant on third-party vendors to perform services on our behalfand/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 key componentsoperations have been subject to an increasingly competitive pricing environment and lower average revenue per relocation, which negatively impacts the operating results of our business,relocation operations. The COVID-19 crisis along with related ongoing travel restrictions in the U.S. and elsewhere, previously exacerbated these trends and could again put pressure on the financial results of Cartus, which may not return to levels consistent with those prior to the onset of the crisis. In addition, the greater acceptance of remote work arrangements has the potential to have a negative impact on relocation volumes in the long-term.
The failure of third-party vendors or partners could result in harm to our reputation and have a material adverse effect on our business and results of operations.
We have increasingly entered into strategic collaborationsengage with third parties to enhance our value proposition to independent sales agents and franchisees and other aspects of our business are performed on our behalf by third-party vendors and coverpartners in a wide variety of services. Ourways, ranging from strategic partnerscollaborations and vendors may be in possession of personal information of our customers.joint ventures and product development to running key internal operational processes and critical client systems. In many instances, these third parties are in direct contact with our customers in order to deliver services on our behalf or to fulfill their role in the applicable collaboration. In some instances, these third parties may be in possession of personal information of our customers or employees. In other instances, these third parties may play a critical role in developing products and services central to our business strategy. For example, we have partnered with a strategic third party to provide our product suite to affiliated agents, brokerages and franchisees, and these products form an important part of our value proposition to such parties. In addition, we have engaged with another strategic third-party partner on key software development projects and have other strategic projects in place with other third parties. Our third-party vendors and partners may encounter difficulties in the provision of required deliverables or may fail to provide us with timely services, which may delay us, and also may make decisions that may harm us or that are contrary to our best interests, including by pursuing opportunities outside of the applicable Company project or program, to the detriment of such project or program.
If our third-party partners or vendorsvendors were to fail to perform as we expect, fail to appropriately manage risks, provide diminished or delayed services to our customers, experience operational or liquidity concerns (whether related to market downturns or other factors), or face cybersecurity breaches of their information technology systems, our image and reputation could be materially adversely affected. In addition, we could also be subject to litigation and regulatory claims arising out of the performance of our third-party suppliers and partners based on theories of breach of contract, vicarious liability, negligence or failure to comply with laws and regulations including those related to anti-bribery and anti-corruption, and those related to data protection and privacy, including the CCPA and GDPR.
In addition, many components of our business, including information technology, key operational processes (such as accounts payable, payroll, and travel and expense) and critical client systems, are provided or hosted by third parties. Moreover, we are now building our agent- and franchisee-focused technology products with an open architecture in order to selectively enable unaffiliated, qualified third-party vendors and products to access and interface with our products. The actions of our third-party vendors and unaffiliated third-party developers are beyond our control. In addition, we recently engaged with a strategic third-party partner to develop the next generation of certain key brand, broker and agent tools, including our customer relationship management product. If our vendors or third-party applications fail to perform as we expect, or if we fail to adequately monitor their performance, our operations and reputation could suffer.be materially adversely affected, in particular with respect to any such failures related to the provision or development of key products. Depending on the function involved, vendor or third-party application failure or error may lead to increased costs, business disruption, distraction to management, processing inefficiencies,inefficiencies, the loss of or damage to intellectual property or sensitive data through security breaches or otherwise, effects on financial reporting, loss of customers, damage to our reputation, or litigation, regulatory claims and/or remediation costs (including claims based on theories of breach of contract, vicarious liability, negligence or damagefailure to our reputation.comply with laws and regulations). Third-party vendors and partners may also fail to maintain or keep adequate levels of insurance, which could result in a loss to us or expose us to litigation. In addition, although we have a Vendor Code of Conduct, we may be subject to the consequences of fraud, bribery, or misconduct by employees of our vendors, which cancould result in significant financial or reputational harm. 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 could 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 or negligent 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, franchisees and company owned brokerage independent sales agents and their customers (including via systems not directly controlled by us, such as those maintained by our franchisees, affiliated independent sales agents, joint venture partners and third party service providers, including our third-party relocation service providers); and
•the reputational, 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 independent sales agents and our relocation operations 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.
Third parties, including vendors or suppliers that provide essential services for our global operations, could also be a source of security risk to us if they experience a failure of their own security systems and infrastructure. We increasingly rely on third-party data processing, storage providers, and critical infrastructure services, including but not limited to cloud solution providers. The secure processing, maintenance and transmission of this information is critical to our operations and with respect to information collected and stored by our third-party service providers, we are reliant upon their security procedures, which may not be as robust as our own procedures. A breach or attack affecting one of our third-party service providers or partners could harm our business even if we do not control the service that is attacked.
Moreover, the real estate industry is actively targeted by cyber-attacker attempts to conduct electronic fraudulent activity directed at participants in real estate services transactions. These attacks, when successful, can result in fraud, including wire fraud related to the diversion of home sale transaction funds, or other harm, which could result in significant claims and reputational damage to us, our brands, franchisees, and independent sales agents and could also result in material increases in our operational costs. Further, these threats to our business may be wholly or partially beyond our control as our franchisees as well as our customers, franchisee and company owned brokerage independent sales agents and their customers, 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.
Cybersecurity incidents, depending on their nature and scope, could result in, among other things, the misappropriation, destruction, corruption or unavailability of critical systems, data and confidential or proprietary information (our own or that of third parties, including personal information and financial information) and the disruption of business operations. The potential consequences of a material cybersecurity incident include regulatory violations of applicable U.S. and international privacy and other laws, reputational damage, loss of market value, litigation with third parties (which could result in our exposure to material civil or criminal liability), diminution in the value of the services we provide to our customers, and increased cybersecurity protection and remediation costs (that may include liability for stolen assets or information), which in turn could have a material adverse effect on our competitiveness and results of operations.
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. In some of these joint ventures, such as Guaranteed Rate Affinity and our Title Insurance Underwriter Joint Venture, we hold a minority stake and, while we have certain governance rights, we do not have a controlling financial or operating interest.
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. There can be no assurance that such venture (or products offered by such ventures) 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. Our joint
Tightened mortgage underwriting standards could continue to reduce homebuyers' ability to access the credit markets on reasonable terms.
More stringent mortgage underwriting standards or a reduction in the availability of alternative mortgage products could adversely affect the abilityventures generally are not exclusive 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. A decline in the number of homesale transactions due to the foregoing would adversely affect our operating results.
We may not realize the expected benefits from our mortgage origination joint venture or from other existing or future joint ventures.
Guaranteed Rate Affinity, our mortgage origination joint venture with Guaranteed Rate, has been and may again be materially adversely affected by changes affecting the mortgage industry, including but not limited to regulatory changes, increases in mortgage interest rates, high levels of competition and decreases in operating margins. In addition, our joint venture partners could expand existing relationships with competitors or our partner 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 Guaranteed Rate Affinity. Operational, liquidity, regulatory, macroeconomic and competitive risks also applypursue relationships with other competitors to our other existing joint ventures and would likely apply to any joint venture we may enter into in the future.detriment.
In addition, when we hold a minority stake in a joint venture, we generally do not exercise control over day-to-day operations of the joint venture. For example, under the Operating Agreement governing Guaranteed Rate Affinity, we own a 49.9% equity interest and have certain governance rights related to the joint venture, but do not have control of the day-to-day operations of the joint venture. Rather, our joint venture partner, Guaranteed Rate, is the managing partner of the venture and may make decisions with respect to the day-to-day operation of the venture. Our current or future joint venture partners may make decisions which may harm the joint venture or be contrary to our best interests. Additionally, even ifwhen we hold a minority interest in anya 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.
Each of our existing joint ventures faces risks specific to their business as well, including regulatory changes, consumer trends and preferences and other market conditions. For example, our mortgage origination joint venture has been materially adversely affected by increases in mortgage interest rates, high levels of competition, decreases in operating margins and lower gain-on-sale margins.
In addition, our joint ventures or our joint venture partners could face operational or liquidity risks, due to market downturns or other factors such as litigation or regulatory investigations that may arise. Any of the foregoing could have an adverse impact, which may have abe material, adverse effect on our earnings and dividends from the applicable joint venture or our results of operations or equity interest in the applicable joint venture.
We may be unable to achieve or maintain cost savings and other benefits from our restructuring activities.
We continue to engage in business optimization initiatives that focus on maximizing the efficiency and effectiveness of the cost structure of each of the Company's businesses. These actions are designed to improve client service levels across each of the business units while enhancing the Company's profitability and incremental margins. We may not be able to achieve these improvements in the efficiency and effectiveness of our operations. We also may incur greater costs than currently anticipated to achieve these savings and we may not be able to maintain these cost savings and other benefits in the future..
Failure to successfully complete or integrate acquisitions and joint ventures into our existing operations, or to complete or effectively manage divestitures or refranchisings, could adversely affect our business, financial condition or results of operations.
We regularly review our portfolio of businesses and evaluate potential acquisitions, joint ventures, divestitures, refranchisings and other strategic transactions. Potential issues associated with these activities could include, among other things: our ability to complete or effectively manage such transactions on terms commercially favorable to us or at all; our ability to realize the full extent of the expected returns, benefits, cost savings or synergies as a result of a transaction, within the anticipated time frame, or at all; and diversion of management’s attention from day-to-day operations. In addition, the success of any future acquisition strategy we may pursue will depend upon our ability to fund such acquisitions given our total outstanding indebtedness, find suitable acquisition candidates on favorable terms and for target companies to find our acquisition proposals more favorable than those made by other competitors. If an acquisition or 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, 2022, our total debt, excluding our securitization obligations, was $2,875 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. Risks associated with our debt obligations are heightened during industry downturns or broader recessions that decrease our revenues, earnings and cash flows from operations.
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;
Consummation•it may limit our ability to incur additional borrowings under our existing facilities, including our Revolving Credit Facility, to refinance or restructure 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 first lien 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.
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 or restructure 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 planned saleoutstanding applicable notes could elect to declare the principal of, Cartus Relocation Services is subjectpremium, if any, and accrued but unpaid interest on such notes to satisfaction or waiver of closing conditionsbe due and even if we successfully consummate the planned sale, we may fail to achieve the anticipated benefitspayable. Any of the transaction.
On November 7, 2019, we announced that we have entered into a Purchase and Sale Agreement (the “Purchase Agreement”) with a subsidiary of SIRVA, Inc. (“SIRVA”) under which we have agreed to sell Cartus Relocation Services. Completion of the planned sale is subject to certain closing conditions and there can be no assurance that all such conditions will be satisfied and that the planned sale will be successfully completed on a timely basis or at all. Failure to complete the sale couldforegoing would have a material adverse effect on our business, financial condition and results of operations.
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 or restructure 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 restructuring our debt or 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 or restructuring 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 or restructure 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 or restructure 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.
At December 31, 2022, $572 million of our borrowings under our Revolving 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 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, may adversely affect interest rates which may have an adverse impact on us.
Our primary interest rate exposure is interest rate fluctuations due to the impact on our variable rate borrowings under our Senior Secured Credit Facility (for our Revolving Credit Facility) and the Term Loan A Facility. The cessation date for submission and publication of U.S. dollar LIBOR is expected to be mid-2023. In connection with the amendment of our Senior Secured Credit Facility in July 2022, LIBOR was replaced with a Secured Overnight Financing Rate, or SOFR, based rate plus a 10 basis point SOFR credit spread adjustment as the applicable benchmark for the Revolving Credit Facility. SOFR will likely not replicate LIBOR exactly and if future rates based upon SOFR 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 an 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, which may adversely impact our liquidity.
At December 31, 2022, $163 million of securitization obligations were outstanding through special purpose entities monetizing certain assets of Cartus under one lending facility. We have provided a performance guaranty which guarantees the obligations of Cartus 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, which may have the effect of increasing our cost of funding or reducing our access to these markets in the future.
In addition, the transactionApple Ridge securitization facility contains terms which if triggered may involve unexpected costs, liabilitiesresult in a termination or delays. Whilelimitation of new or existing funding under the transactionfacility 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 pending,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
Adverse developments or resolutions in litigation filed against us or against affiliated agents, franchisees or our joint ventures, may materially harm our business, results of operations and financial condition.
As described in Note 15, "Commitments and Contingencies—Litigation" to our Consolidated Financial Statements included elsewhere in this Annual Report ("Note 15"), we are a party to material litigation (including certified and putative class actions) in the areas of antitrust, TCPA and worker classification. We cannot provide any assurances that results in this litigation or other litigation in which we are or may be named will benot have a material adverse effect on our business, results of operations or financial condition, either individually or in the aggregate.
Litigation and other disputes are inherently unpredictable and subject to substantial uncertainties and unfavorable developments and resolutions could occur and even cases brought by us can involve counterclaims asserted against us. In addition, litigation and other legal matters, including class action lawsuits and regulatory proceedings challenging practices that have broad impact, can be costly to defend and, depending on the class size and claims, could adversely affectbe costly to settle.
Insurance coverage may be unavailable for certain types of claims (including antitrust and TCPA litigation) and even where available, insurance carriers may dispute coverage for various reasons (including the cost of defense). Additionally, there is a deductible for each such case and such insurance may not be sufficient to cover the losses the Company incurs.
Likewise, we cannot predict with certainty the cost of defense, the cost of prosecution, insurance coverage or the ultimate outcome of other litigation and proceedings that has been or may be filed by or against us or against affiliated independent sales agents or franchisees or our joint ventures and adverse developments and outcomes may materially harm our business and resultsfinancial condition. Such litigation and other proceedings may include, but are not limited to:
•antitrust and anti-competition claims;
•TCPA claims;
•claims alleging violations of operations,RESPA, state consumer fraud statutes, federal consumer protection statutes or other state real estate law violations;
•employment law claims, including claims challenging the abilityclassification of Cartus Relocation Servicesindependent sales agents as independent contractors as well as joint employer, wage and hour and retaliation claims;
•information security claims, including claims under new and emerging data privacy laws related to obtainthe protection of customer, employee or retain business, which in turn, could adversely impactthird-party information;
•cyber-crime claims, including claims related to the revenues and financial resultdiversion of homesale transaction closing funds;
•vicarious or joint liability claims 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 business units. We may also experience negative reactions from our relocation clients, stockholders, creditors, franchisees, vendors, and employees, among others.theories of actual or apparent agency
While we will enter into a •non-exclusive five-year broker services agreement with SIRVAclaims by current or former franchisees that franchise agreements were breached, including improper terminations;
•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;
•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;
•claims concerning breach of obligations to make websites and other services accessible for consumers with disabilities;
•claims against the title agent contending that the agent knew or should have known that a transaction pursuantwas fraudulent or that the agent was negligent in addressing title defects or conducting settlement;
•claims related to disclosure or securities law violations as well as derivative suits; and
•fraud, defalcation or misconduct claims.
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 and a member-owner of certain non-NAR controlled MLSs. Our affiliated agents may be members 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, or 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, litigation 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. The industry is currently experiencing increased scrutiny by regulators and other government offices, both on a federal and state level. Four of the more active areas in our industry have been antitrust and competition, compliance with RESPA (and similar state statutes), TCPA (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. See "Item 1.—Business—Government and Other Regulations" for additional information.
As noted in the prior risk factor and described in Note 15, Anywhere and other industry participants are also currently named in class actions that challenge residential real estate industry rules and practices for seller payment of buyer broker commissions. Developments or outcomes in such litigation or other legal proceedings involving the Company or industry participants could result in a change to the broker commission structure, the effect of which Realogy Leads Group could atresult in reductions to the discretionshare of SIRVA, continue to provide high-quality brokerage services via the Realogy Broker Network to relocation clients of SIRVA, therecommission income received by us and our franchisees.
There can be no assurances as to whether the numberDOJ 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 referrals or underlying homesale transactions, if any, that company owned and affiliated franchisee brokerages participating in the network may handle for SIRVA's relocation business and the volume of such referrals and transactions could be materially lower than the historical level of activity generated from Cartus Relocation Services, which could have a negative impactthe potential to result in additional limitations or restrictions on our earnings (including at Realogy Franchise, Brokeragebusiness, cause material disruption to our business, result in judgments, settlements, penalties or fines (which may be material), or otherwise adversely affect us.
Moreover, we believe certain industry participants, including listing aggregators and Title Groups)participants pursuing non-traditional methods of marketing real estate, are pursuing changes to MLS and profitabilityNAR rules and could reducelegal regulations that are intended to benefit their competitive position to the effectivenessdisadvantage of historical real estate brokerage models.
Meaningful changes in industry operations or structure, as a result of any of the roleforegoing or as the result of other governmental pressures, the Realogy Broker Networkintroduction 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 our recruitment and retention efforts for independent sales agents and franchisees.
The planned sale involves a number of additional risks, including among other things, certain indemnification risks and risks associated with the provision of transitional services. We have agreed to provide certain transition services to SIRVA, such as technological support and services. In addition, SIRVA will provide certain systems, services and leased space to us during the transition period. There are risks in providing and transitioning away from shared services, as they may incur unanticipated costs and liabilities, may divert our management’s and employees’ attention and mayregulations could adversely affect our continuingbusiness.
As noted in the prior risk factor, all of our businesses and the businesses of our joint ventures 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. See "Item 1.—Business—Government and Other Regulations" in this Annual Report for additional information concerning laws and regulations impacting our business, including antitrust, competition and bribery laws, RESPA, worker classification and the TCPA, among others.
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. 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. This transition services agreement with SIRVA mayRegulatory authorities also leadhave relatively broad discretion to disputes over rightsgrant, renew and revoke licenses and approvals and to certain shared property and over the allocationimplement regulations. Accordingly, such regulatory authorities could prevent or temporarily suspend us from carrying on some or all of costs and revenues for products and operations in connectionour activities or otherwise penalize us if our financial condition or our practices were found not to comply with the transition services agreement. In addition, there are increased opportunities for errors inherent in maintainingthen current regulatory or licensing requirements or any interpretation of such requirements by the books and records of two separate unrelated companies on a single enterprise resource planning system.
Allregulatory authority. Our failure to comply with any of these factorsrequirements or interpretations could decreaselimit 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 anticipated benefitsmanner 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 transaction and foregoing could negativelyadversely affect the businesses of our joint ventures or franchisees. Any of the foregoing may have a material adverse effect on our operations.
Adverse decisions in litigation or regulatory actions against companies unrelated to us could impact our stock pricebusiness practices and those of our business,franchisees in a manner that adversely impacts our financial condition and results of operations.
RegulatoryLitigation, investigations, claims and Legalregulatory 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 and/or practices, either of which could materially and adversely impact our financial condition and results of operations.
There may be adverse financial and operational consequences to us and our franchisees if independent sales agents are reclassified as employees.
TheAlthough the legal relationship between residential real estate brokers and licensed sales agents throughout most of the real estate industry historically has been that of independent contractor. Although we believecontractor, newer rules and interpretations of state and federal employment laws and regulations, including those governing employee classification and wage and hour regulations in our classificationand other industries, may impact industry practices, are proper and consistent with the legal framework for such classification, our company owned brokerage operations, could face substantial litigation or disputes in direct claims or regulatory procedures, including the risk of court or regulatory determinations that certain groups of real estate agents should be reclassified as employees and entitledour affiliated franchisees by seeking to unpaid minimum wage, overtime, benefits, expense reimbursement and other employment obligations. Franchisees affiliated with one of the Company’s brands face the same risks with respect to their affiliated independent sales agents. In addition, our franchise business may face similar claims as an alleged joint employer of an affiliated franchisee’s independent sales agents.
Real estate laws generally permit brokers to engagereclassify licensed sales agents as independent contractors. Federal and state agencies have their own rules and tests for classification of independent contractors as well as to determine whether employees meet exemptions from minimum wages and overtime laws. These tests consider many factors that also vary from state to state. The tests continue to evolve based on state case law decisions, regulations and legislative changes. There is active worker classification litigation in numerous jurisdictions against a variety of industries—including residential real estate brokerages
—where the plaintiffs seek to reclassify independent contractors as employees or to challenge the use of federal and state minimum wage and overtime exemptions.
employees. Certain jurisdictions including California where Realogy Brokerage Group generated approximately 25% of its revenue in 2019, have adopted or are considering adopting standards that are significantly more restrictive than those historically used in wage and hour cases. Under the newer test, an individual is considered an employee unless the hiring entity satisfies three specific criteria that focus on control of the performance of the work and whether the nature of the work involvescases, which could have a separate trade that is outside the usual course of the hiring entity’s business.
In September 2019, California adopted legislation that codifies the newer test, but also provides an alternate worker classification test applicable to real estate professionals that is less stringent than the jurisdictional test. Since the enactment, there have been several challenges to the constitutionality and enforceability of the law as it applies to other industries, which may ultimately impact the less restrictive test currently applicable to real estate professionals.
Similar to California, a number of other states have separate statutory structures and existing case law that articulate different, less stringent standards for real estate agents operating as independent contractors. How these differing tests will be reconciled is presently unclear, and given the evolving nature of this issue, we are currently unable to estimate what impact, if any, this would havematerial adverse effect on our operations or financial results. For a summarybusiness and results of certain legal proceedings initiated in California involving the Company that include worker misclassification allegations, see Note 15, "Commitmentsoperations. See "Item 1.—Business—Government and Contingencies",Other Regulations" in this Annual Report.Report for additional information.
Significant determinations to reclassify sales agent reclassification determinationsagents as employees in the absence of available exemptions from minimum wage or overtime laws, including damages and penalties for prior periods (if assessed), could be disruptive to our business, constrain our operations in certain jurisdictions and could have a material adverse effect on the operational and financial performance of the Company.
Cybersecurity incidents could disrupt business operations and result in the loss of critical and confidential information or litigation or claims arising from such incidents, any of which may adversely impact our reputation and results of operations.
We face growing risks and costs related to cybersecurity threats to our operations, our data and customer, franchisee, employee and independent sales agent data, including but not limited to:
•the failure or significant disruption of our operations from various causes, including human error, computer malware, ransomware, insecure software, zero-day threats, threats to or disruption of third-party vendors who provide critical services, or other events related to our critical information technologies and systems;
•the increasing level and sophistication of cybersecurity attacks, including distributed denial of service attacks, data theft, fraud or malicious acts on the part of trusted insiders, social engineering, or other unlawful tactics aimed at compromising the systems and data of our officers, employees, franchisees and company owned brokerage independent sales agents and their customers (including via systems not directly controlled by us, such as those maintained by our franchisees, affiliated independent sales agents, joint venture partners and third party service providers, including our third-party relocation service providers); and
•the reputational and financial risks associated with a loss of data or material data breach (including unauthorized access to our proprietary business information or personal information of our customers, employees and independent sales agents), the transmission of computer malware, or the diversion of homesale transaction closing funds.
Global cybersecurity threats can range from uncoordinated individual attempts to gain unauthorized access to information technology systems via viruses, worms, and other malicious software, to phishing, or to advanced and targeted hacking launched by individuals, organizations or nation states. These attacks may be directed at the Company, its employees, franchisees, third-party service providers, joint venture partners, and/or the independent sales agents of our franchisee and company owned brokerages and their customers. An attack, threat or breach of one system can travel to one or more other systems.
In the ordinary course of our business, we and our third-party service providers, our franchisee and company owned brokerage sales agents and our relocation business collect, store and 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.
Additionally, we increasingly rely on third-party data processing, storage providers, and critical infrastructure services, including cloud solution providers. The secure processing, maintenance and transmission of this information are critical to our operations and with respect to information collected and stored by our third-party service providers, we are reliant upon their security procedures. A breach or attack affecting one of our third-party service providers or partners could harm our business even if we do not control the service that is attacked.
Moreover, the real estate industry is actively targeted by cyber-attacker attempts to conduct electronic fraudulent activity (such as phishing), security breaches and similar attacks directed at participants in real estate services transactions. These attacks, when successful, can result in fraud, including wire fraud related to the diversion of home sale transaction funds, or other harm, which could result in significant claims and reputational damage to us, our brands, our franchisees, and our independent sales agents and could also result in material increases in our operational costs. Further, these threats to our business may be wholly or partially beyond our control as our franchisees as well as our customers, franchisee and company owned brokerage independent sales agents and their customers and third-party service providers may use e-mail, computers, smartphones and other devices and systems that are outside of our security control environment. In addition, real estate transactions involve the transmission of funds by the buyers and sellers of real estate and consumers or other service providers selected by the consumer may be the subject of direct cyber-attacks that result in the fraudulent diversion of funds, notwithstanding efforts we have taken to educate consumers with respect to these risks.
In addition, the increasing prevalence and sophistication of cyber-attacks as well as the evolution of cyber-attacks and other efforts to breach or disrupt our systems or those of our employees, customers, third-party service providers, joint venture partners, and/or franchisee and company owned brokerage sales agents and their customers, has led and will likely continue to lead to increased costs to us with respect to preventing, investigating, mitigating, insuring against and remediating these risks, as well as any related attempted or actual fraud.
Moreover, we are required to comply with growing regulations both in the United States and in other countries where we do business that regulate cybersecurity, privacy and related matters, some of which impose steep fines and penalties for noncompliance.
While 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, none of them to date has been material to the Company. Although we employ measures to prevent, detect, address and mitigate these threats (including access controls, data encryption, penetration testing, vulnerability assessments and maintenance of backup and protective systems), and conduct diligence on the security measures employed by key third-party service providers, cybersecurity incidents, depending on their nature and scope, could potentially result in the misappropriation, destruction, corruption or unavailability of critical systems, data and confidential or proprietary information (our own or that of third parties, including personal information and financial information) and the disruption of business operations.
Our corporate errors and omissions and cybersecurity breach insurance may be insufficient to compensate us for losses that may occur. The potential consequences of a material cybersecurity incident include regulatory violations of applicable U.S. and international privacy and other laws, reputational damage, loss of market value, litigation with third parties (which could result in our exposure to material civil or criminal liability), diminution in the value of the services we provide to our customers, and increased cybersecurity protection and remediation costs (that may include liability for stolen assets or information), which in turn could have a material adverse effect on our competitiveness and results of operations.
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.
To run our business, itRegulators in the U.S. and abroad continue to enact comprehensive new laws or legislative reforms imposing significant privacy and cybersecurity restrictions. The result is essential for us to store and transmit sensitive personal information about our customers, prospects, employees, independent agents, and relocation transferees in our systems and networks. At the same time,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. Regulators in the U.S. and abroad continue to enact comprehensive new laws or legislative reforms imposing significant privacy and cybersecurity restrictions. The result is that we are subject to increased regulatory scrutiny, additional contractual requirements from corporate customers, and heightened compliance costs. These ongoing changes to 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. Additional states have enacted their own privacy laws and many other states are likely to implement their own privacy
business and may have a material adverse effect on our operations. 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 including the CCPA, which went into effect in 2020, and the NYDFS Cybersecurity Regulation, which went into effect in 2017. The CCPA imposes new and comprehensive requirements on organizations that collect, sell and disclose personal information about California residents and employees. Other states, including New York and Massachusetts, are expected to implement their own privacy statutes in the near term.
Under the NYDFS cybersecurity regulation, regulated financial institutions, including Realogy Title Group, are required to establish a detailed cybersecurity program. See "Item 1.—Business—Government and Other state regulatory agencies have or are expected to enact similar requirements following the adoption of the InsuranceRegulations—Cybersecurity and Data Security Model Law by the National Association of Insurance Commissioners that is consistent with the New York regulation. For example, the South Carolina Insurance Data Security Act, effective January 1, 2019, is based on the Insurance Data Security Model Law and imposes new breach notification and information security requirements on insurers, agents, and other licensed entities authorized to operate under the state’s insurance laws, including Realogy Title Group. The European Union’s GDPR, which became effectivePrivacy Regulations" in May 2018, conferred new and significant privacy rights on individuals (including employees and independent agents), and materially increased penaltiesthis Annual Report for violations.
Any significant violations of privacy and cybersecurity could result in the loss of new or existing business, litigation, regulatory investigations, the payment of fines, damages, and penalties and damage to our reputation, which could have a material adverse effect on our business, financial condition, and results of operations.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, any of 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. In the event we or the vendors with which we contract to provide services on behalf of our customers were to suffer a breach of personal information, our customers, such as our corporate relocation or affinity clients, their employees or members, respectively, franchisees, independent sales agents and lender channel clients, could terminate their business with us. Further, we may be subject to claims to the extent individual employees or independent contractors breach or fail to adhere to Company policies and practices and such actions jeopardize any personal information.
In addition, concern among potential home buyers or sellers about our privacy practices could result in regulatory investigations. Additionally, concern among potential home buyers or sellers could keep them from using our services or require us to incur significant expense to alter our business practices or educate them about how we use personal information.
We are subject to certain risks related to litigation filed by or against us, and adverse results may harm our business and financial condition.
We cannot predict with certainty the cost of defense, the cost of prosecution, insurance coverage or the ultimate outcome of litigation and other proceedings filed by or against us, including remedies or damage awards, and adverse results in such litigation and other proceedings, including treble damages and penalties. Adverse outcomes may harm our business and financial condition. Such litigation and other proceedings may include, but are not limited to:
•actions relating to claims alleging violations of RESPA or state consumer fraud statutes, intellectual property rights, commercial arrangements, franchising arrangements, negligence and fiduciary duty claims arising from franchising arrangements or company owned brokerage operations or violations of similar laws in countries we operate in around the world;
•employment law claims, including claims challenging the classification of sales agents as independent contractors as well as wage and hour and joint employer claims;
•antitrust and anti-competition claims (including claims related to NAR rules regarding buyer broker commissions);
•information security and cyber-crime, including claims under new and emerging data privacy laws related to the protection of customer, employee or third-party information, as well as those related to the diversion of homesale transaction closing funds;
•claims by current or former franchisees that franchise agreements were breached, including improper terminations;
•claims related to the Telephone Consumer Protection Act, including autodialer claims;
•claims generally against the company owned brokerage operations for negligence, misrepresentation or breach of fiduciary duty in connection with the performance of real estate brokerage or other professional services as well as other brokerage claims associated with listing information and property history, including disputes involving buyers of relocation property;
•vicarious or joint liability based upon the conduct of individuals or entities traditionally outside of our control, including franchisees and independent sales agents;
•copyright infringement actions, including those alleging improper use of copyrighted photographs on websites or in marketing materials without consent of the copyright holder;
•actions against our title company for defalcations on closing payments or claims against the title agent contending that the agent knew or should have known that a transaction was fraudulent or that the agent was negligent in addressing title defects or conducting settlement;
•claims concerning breach of obligations to make websites and other services accessible for consumers with disabilities; and
•general fraud claims.
See Note 15, "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 the courts grant partial or full certification of a large class. In the case of intellectual property litigation and proceedings, adverse outcomes could include the cancellation, invalidation or other loss of material intellectual property rights used in our business and injunctions prohibiting our use of business processes or technology that is subject to third-party patents or other third-party intellectual property rights. We may be required to enter into licensing agreements (if available on acceptable terms or at all) and pay royalties. Insurance coverage may be unavailable for certain types of claims and even where available, insurance carriers may dispute coverage for various reasons, including the cost of defense, and such insurance may not be sufficient to cover the losses we incur.
Adverse decisions in litigation against companies unrelated to us could impact our business practices and those of our franchisees in a manner that adversely impacts our financial condition and results of operations.
Litigation, claims and regulatory proceedings against other participants in the residential real estate or relocation industry may impact the Company when the rulings in those cases cover practices common to the broader industry. Examples may include claims associated with RESPA compliance, broker fiduciary duties, and sales agent classification. Similarly, the Company may be impacted by litigation and other claims against companies in other industries. 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 policies of up to $1.5 million. For policies in excess of $1.5 million, we typically obtain a reinsurance policy from a national underwriter to reinsure the excess amount. To date, our title underwriter has experienced claims losses that are significantly below the industry average; however, our claims experience could increase in the future, which could negatively impact the profitability of that business. We may also be subject to legal claims or additional claims losses arising from the handling of escrow transactions and closings by our owned title agencies or our underwriter's independent title agents. We carry errors and omissions insurance for errors made by our
company owned brokerage business during the real estate settlement process as well as errors by us related to real estate services. Our franchise agreements also require our franchisees to name us as an additional insured on their errors and omissions and general liability insurance policies. The occurrence of a significant claim in excess of our insurance coverage (including any coverage under franchisee insurance policies) in any given period could have a material adverse effect on our financial condition and results of operations during the period. In addition, insurance carriers may dispute coverage for various reasons and there can be no assurance that all claims will be covered by insurance.
Fraud, defalcation and misconduct by employees are also risks inherent in our business, particularly given the high transactional volumes in our company owned brokerage, title and settlement services and our relocation businesses. We may also from time to time be subject to liability claims based upon the fraud or misconduct of our franchisees. To the extent that any loss or theft of funds substantially exceeds our insurance coverage, our business could be materially adversely affected.
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 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 or improper use of our intellectual property by third parties, including current or formerly affiliated franchisees or independent sales agents, 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 In addition, our license agreement with Sotheby'sagreements for the use of the Sotheby's International Realty® brand isand Better Homes and Gardens® Real Estate brands are terminable by Sotheby'sthe respective licensor prior to the end of the license term if certain conditions occur including but not limited toand the following: (1) we attempt to assign anyloss of either of these licenses could have a material adverse effect on our rights under the license agreement in any manner not permitted under the license agreement, (2) we become bankrupt or insolvent, (3) a court issues a non-appealable, final judgment that we have committed certain breachesbusiness and results of the license agreement and we fail to cure such breaches within 60 days of the issuance of such judgment, or (4) we discontinue the use of all of the trademarks licensed under the license agreement for a period of twelve consecutive months.
Our license agreement with Meredith Corporation ("Meredith") for the use of the Better Homes and Gardens® Real Estate brand is terminable by Meredith prior to the end of the license term if certain conditions occur, including but not limited to the following: (1) we attempt to assign any of our rights under the license agreement in any manner not permitted under the license agreement, (2) we become bankrupt or insolvent, or (3) a trial court issues a final judgment that we are in material breach of the license agreement or any representation or warranty we made was false or materially misleading when made.
Industry structure changes that disrupt the functioning of the residential real estate market could materially adversely affect our operations and financial results.
Through our brokerages, we participate in many multiple listing services ("MLSs") and are subject to each MLS's rules, policies, data licenses, and terms of service. The rules of each MLS to which we belong can vary widely and are complex.operations.
From time to time, certain industry practices, including MLS rules, have come under regulatory scrutiny. For example, in June 2018, the DOJ and the FTC held a joint public workshop to explore competition issues in the residential real estate brokerage industry including potential barriers to competition. In the workshop, there were various panels and participants submitted comments that raised a variety of issues, including: whether the current industry practice involving commission sharing by listing brokers was anti-competitive, whether offers of commission sharing—including commission rates—should be public, and whether average broker commission rates were too high. There can be no assurances as to whether DOJ or the FTC will determine that any industry practices or developments have an anti-competitive effect on the industry. Any such determination by DOJ or the FTC could result in industry investigations, legislative or regulatory action or other actions, any of which could have the potential to disrupt our business.
In addition, in two putative class action complaints filed in 2019, plaintiffs contend that NAR rules regarding buyer-broker commissions, which are adopted by alleged coercion by certain MLSs, are anti-competitive under the Sherman Act and that commission sharing, which provides for the broker representing the seller sharing or paying a portion of its commission to the broker representing the buyer, is anti-competitive and violates the Sherman Act. In both cases, NAR, Realogy and other large real estate brokerage companies are named defendants (See Note 15, "Commitments and Contingencies—Litigation—Real Estate Litigation", to our consolidated financial statements included elsewhere in this Annual Report for additional information on these matters).
Meaningful changes in industry operations or structure, as a result of governmental pressures, the actions of certain competitors or the introduction or growth of certain competitive models, changes to MLS rules, or otherwise could materially adversely affect our operations, revenues, earnings and financial results.
Several of our businesses are highly regulated and any failure to comply with such regulations or any changes in such regulations could adversely affect our business.
Our company owned real estate brokerage business, our relocation business, our mortgage origination joint venture, our title and settlement service business and the businesses of our franchisees (excluding commercial brokerage transactions) must comply with the Real Estate Settlement Procedures Act (“RESPA”). RESPA and comparable state statutes prohibit providing or receiving payments, or other things of value, for the referral of business to settlement service providers in connection with the closing of real estate transactions involving federally-backed mortgages. Such laws may to some extent impose limitations on arrangements involving our real estate franchise, real estate brokerage, settlement services and relocation businesses or the business of our mortgage origination joint venture. RESPA and related regulations do, however, contain a number of provisions that allow for payments or fee splits between providers, including fee splits between title underwriters and agents, brokers and agents, and market-based fees for the provision of goods or services and marketing arrangements. In addition, RESPA allows for referrals to affiliated entities, including joint ventures, when specific requirements have been met. We rely on these provisions in conducting our business activities and believe our arrangements comply with RESPA. However, RESPA compliance may become a greater challenge under certain administrations for most industry participants offering settlement services, including mortgage companies, title companies and brokerages, because of expansive interpretations of RESPA or similar state statutes by certain courts and regulators. Permissible activities under state statutes similar to RESPA may be interpreted more narrowly and enforcement proceedings of those statutes by state regulatory authorities may also be aggressively pursued. RESPA also has been invoked by plaintiffs in private litigation for various purposes and some state authorities have also asserted enforcement rights. Similar laws exist in other countries where we do business. Some regulators and other parties have advanced novel and stringent interpretations of RESPA including assertions that any provision of a thing of value in a separate, but contemporaneous transaction with a referral constitutes a breach of RESPA on the basis that all things of value exchanged should be deemed in exchange for the referral.
The sale of franchises is regulated by various state laws as well as by the Federal Trade Commission (the “FTC”). The FTC requires that franchisors make extensive disclosure to prospective franchisees but does not require registration. A number of states require registration and/or disclosure in connection with franchise offers and sales. In addition, several states have "franchise relationship laws" or "business opportunity laws" that limit the ability of franchisors to terminate franchise agreements or to withhold consent to the renewal or transfer of these agreements. Internationally, many countries have similar laws affecting franchising.
Our company owned real estate brokerage business must comply with the requirements governing the licensing and conduct of real estate brokerage and brokerage-related businesses in the jurisdictions in which we do business. These laws and regulations contain general standards for and limitations on the conduct of real estate brokers and sales agents, including those relating to licensing of brokers and sales agents, fiduciary, agency and statutory duties, administration of trust funds,
collection of commissions, restrictions on information sharing with affiliates, fair housing standards and advertising and consumer disclosures. Under state law, our real estate brokers have certain duties and are responsible for the conduct of their brokerage business.
Title and settlement services are highly regulated. Our title insurance business also is subject to regulation by insurance and other regulatory authorities in each state in which we provide title insurance. State regulations may impede or impose burdensome conditions on our ability to take actions that we may want to take to enhance our operating results.
We are also, to a lesser extent, subject to various other rules and regulations such as "controlled business" statutes, which impose limitations on affiliations between providers of title and settlement services on the one hand, and real estate brokers, mortgage lenders and other real estate service providers on the other hand, or similar laws or regulations that would limit or restrict transactions among affiliates in a manner that would limit or restrict collaboration among our businesses.
We participate in the mortgage origination business through our 49.9% ownership of Guaranteed Rate Affinity. Private mortgage lenders operating in the U.S. are subject to comprehensive state and federal regulation and to significant oversight by government sponsored entities. Dodd-Frank endows the CFPB with rule making, examination and enforcement authority involving consumer financial products and services, including mortgage finance. The CFPB has issued a myriad of rules, including TILA-RESPA Integrated Disclosure rules, which impose significant obligations on Guaranteed Rate Affinity.
General. In all of our business units there is a risk that we could be adversely affected by current laws, regulations or interpretations or that more restrictive laws, regulations or interpretations could increase responsibilities and duties to customers and franchisees and other parties, the adoption of which could make compliance more difficult or expensive. There is also a risk that a change in current laws could adversely affect our business. In addition, any adverse changes in regulatory interpretations, rules and laws that would place additional limitations or restrictions on affiliated transactions could have the effect of limiting or restricting collaboration among our business units. Further, all of our businesses are subject to federal and state law related to numerous topics, including contract, fair trade, antitrust and competition, anti-discrimination, consumer protection, data protection, anti-fraud, disclosure laws, accommodations for disability, tax and employment matters. Increased enforcement of, or regulation with respect to, fair housing (whether at a federal, state or local level) could impact brokerage operations and/or the licenses of affiliated independent sales agents. We cannot assure you that future changes in legislation, regulations or interpretations will not adversely affect our business operations.
Regulatory authorities also have relatively broad discretion to grant, renew and revoke licenses and approvals and to implement regulations. Accordingly, such regulatory authorities could prevent or temporarily suspend us from carrying on some or all of our activities or otherwise penalize us if our financial condition or our practices were found not to comply with the then current regulatory or licensing requirements or any interpretation of such requirements by the regulatory authority. Our failure to comply with any of these requirements or interpretations could limit our ability to renew current franchisees or sign new franchisees or otherwise have a material adverse effect on our operations.
Our international business activities, and in particular our relocation business, must comply with applicable laws and regulations that impose sanctions on improper payments, including the Foreign Corrupt Practices Act, U.K. Bribery Act and similar laws of other countries.
Our failure to comply with any of the foregoing laws and regulations may subject us to fines, penalties, injunctions and/or potential criminal violations. Any changes to these laws or regulations or any new laws or regulations may make it more difficult for us to operate our business and may have a material adverse effect on our operations.
Other Business Risks
We could be subject Related to significant losses if banks do not honor our escrow and trust deposits.Our Indebtedness
Our company owned brokerage businessliquidity has been, and is expected to continue to be, negatively impacted by the substantial interest expense on our title and settlement services business act as escrow agents for numerous customers.debt obligations.
We are significantly encumbered by our debt obligations. As an escrow agent, we receive money from customers to hold until certain conditions are satisfied. Upon the satisfaction of those conditions, we release the money to the appropriate party. We deposit this money with various banks and while these deposits are not assets of the Company (and therefore excluded from our consolidated balance sheet), we remain contingently liable for the disposition of these deposits. These escrow and trust deposits totaled $475 million at December 31, 2019. The banks may hold2022, our total debt, excluding our securitization obligations, was $2,875 million (without giving effect to outstanding letters of credit). As 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 anyresult, a substantial portion of our deposits, customerscash 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. Risks associated with our debt obligations are heightened during industry downturns or broader recessions that decrease our revenues, earnings and cash flows from operations.
Our significant indebtedness and interest obligations could seekprevent us from meeting our obligations under our debt instruments and could adversely affect our ability to holdfund 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 responsible for such amountsto be unable to comply with the senior secured leverage ratio covenant under our Senior Secured Credit Facility and if the customers prevailed in their claims, weTerm Loan A Facility;
•it could cause us to be subjectunable to significant losses.meet our debt service requirements under our debt agreements or meet our other financial obligations;
Potential reform•it may limit our ability to incur additional borrowings under our existing facilities, including our Revolving Credit Facility, to refinance or restructure 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 Fannie Maeour debt and long-term corporate ratings;
•it may limit our ability to repurchase shares or Freddie Macdeclare dividends;
•it may limit our ability to attract acquisition candidates or certain federal agenciesto complete future acquisitions;
•it may cause us to be more vulnerable to periods of negative 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 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 resultsslow growth in the wind down of these entities could increase mortgage costsgeneral 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 more stringent underwriting guidelines imposed by lendersour 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 cause other disruptions inavoid a default as permitted under the mortgage industry. Other legislation 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 regulation limiting participation ofwe were to incur additional first lien senior secured debt (including borrowings under the Federal Housing Administration and Department of Veterans AffairsRevolving Credit Facility), our ability to borrow the full capacity under the Revolving Credit Facility (without refinancing secured debt into unsecured debt) could increase mortgage costs or limit availability of mortgages for consumers.be limited as we must maintain compliance with the senior secured leverage ratio under the Senior Secured Credit Agreement. Any of the foregoinginability to borrow sufficient funds to operate our business could have a material adverse effectimpact on our business, results of operations and liquidity.
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 housing market in generalability 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 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•prepay, redeem or repurchase certain indebtedness.
As a result of operations.
Generally accepted accounting principlesthese covenants, we are limited in the United Statesmanner in which we conduct our business and related accounting pronouncements, implementation guidance and interpretations with regardwe may be unable to a wide rangeengage in favorable business activities or finance future operations or capital needs.
An event 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 rulesdefault under our Senior Secured Credit Facility, the Term Loan A Facility or their interpretations or changes in underlying assumptions, estimates or judgments made by management could significantly changethe indentures governing our reported results.
Loss or attrition among our senior executives or other key employees and our inability to develop our existing workforce and to recruit top talent couldmaterial indebtedness would 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 workforceoperations and our ability to recruit, retain and motivate top talent. Talent management has been and continues to be a strategic priority andsatisfy obligations under our ability to recruit and retain our executive officers and key employees, including those with significant experience in the residential real estate market, is generally subject to numerous factors, including the compensation and benefits we pay. indebtedness.
If we are unable to internally developcomply with the senior secured leverage ratio covenant under the Senior Secured Credit Facility or hire skilled executives and other critical positions 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 encounter challenges associatedare unable to comply 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.restrictive covenants
Severe weather events or natural disasters, including increasing severity or frequency of such events due to climate change or otherwise, or other catastrophic events may disrupt our business and have an unfavorable impact on homesale activity.
Realogy Brokerage Group has a significant concentration of offices and transactions in geographic regions where home prices are at the higher end of the U.S. real estate market, particularly the east and west coasts. Coastal areas, including California and Florida, are particularly subject to severe weather events (including hurricanes and flooding) and natural disasters. Increasingly, wildfires in the west have been difficult to contain and cover large areas.
The occurrence of a severe weather event or natural disaster can reduce the level and quality of home inventory and negatively impact the demand for homes in affected areas, which can delay the closing of homesale transactions and have an unfavorable impact on home prices, homesale transaction volume, relocation transactions, title closing units and broker-to-broker referral fees. These effects may be compounded when the taxes associated with homeownership in the affected area are higher than average. In addition, we could incur damage, which may be significant, to our office locations as a result of severe weather events or natural disasters and our insurance may not be adequate to cover such losses. 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.
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
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 or restructure 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.
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 beyondor a decrease in the market price of our expectationscommon 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 future years basedthose proceedings with a claim equal to our exposure at that time under the exchangeable note hedge transaction. Our exposure will depend on changingmany factors but, generally, the increase in our exposure will be correlated to the increase in our common stock market conditions.price and in the volatility of the market price of our common stock. In addition, changes in interest rates, mortality rates, health care costs, early retirement rates, investment returnsupon 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 or restructure 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 restructuring our debt or 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 valuemay 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 plan assets canbusiness opportunities. Refinancing or restructuring 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 funded statusmarket price of our pension plancommon 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 or restructure our debt or obtain additional debt financing in the future.
Our indebtedness has been rated by nationally recognized rating agencies and cause volatilitymay in the future funding requirementsbe 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 plan.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 or restructure 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.
At December 31, 2022, $572 million of our borrowings under our Revolving 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 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, may adversely affect interest rates which may have an adverse impact on us.
Our primary interest rate exposure is interest rate fluctuations due to the impact on our variable rate borrowings under our Senior Secured Credit Facility (for our Revolving Credit Facility) and the Term Loan A Facility. The cessation date for submission and publication of U.S. dollar LIBOR is expected to be mid-2023. In connection with the amendment of our Senior Secured Credit Facility in July 2022, LIBOR was replaced with a Secured Overnight Financing Rate, or SOFR, based rate plus a 10 basis point SOFR credit spread adjustment as the applicable benchmark for the Revolving Credit Facility. SOFR will likely not replicate LIBOR exactly and if future rates based upon SOFR 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 an 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, which may adversely impact our liquidity.
At December 31, 2022, $163 million of securitization obligations were outstanding through special purpose entities monetizing certain assets of Cartus under one lending facility. We have provided a performance guaranty which guarantees the obligations of Cartus and its subsidiaries, as originator and servicer under the Apple Ridge securitization program. Our significant debt obligations may limit our ability to useincur additional borrowings under our net operating lossesexisting securitization facilities. The securitization markets have experienced, and may again experience, significant disruptions, which may have the effect of increasing our cost of funding or reducing our access to these markets in the future.
In addition, the Apple Ridge securitization facility contains terms which if triggered may result in a termination or limitation of new or existing funding under the facility and/or may result in a requirement that all collections on the assets be used to pay down the amounts outstanding under such facility. 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
Adverse developments or resolutions in litigation filed against us or against affiliated agents, franchisees or our joint ventures, may materially harm our business, results of operations and financial condition.
As described in Note 15, "Commitments and Contingencies—Litigation" to our Consolidated Financial Statements included elsewhere in this Annual Report ("NOLs"Note 15"), we are a party to material litigation (including certified and putative class actions) in the areas of antitrust, TCPA and worker classification. We cannot provide any assurances that results in this litigation or other litigation in which we are or may be named will not have a material adverse effect on our business, results of operations or financial condition, either individually or in the aggregate.
Litigation and other tax attributesdisputes are inherently unpredictable and subject to substantial uncertainties and unfavorable developments and resolutions could occur and even cases brought by us can involve counterclaims asserted against us. In addition, litigation and other legal matters, including class action lawsuits and 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.
Insurance coverage may be limited.unavailable for certain types of claims (including antitrust and TCPA litigation) and even where available, insurance carriers may dispute coverage for various reasons (including the cost of defense). Additionally, there is a deductible for each such case and such insurance may not be sufficient to cover the losses the Company incurs.
Likewise, we cannot predict with certainty the cost of defense, the cost of prosecution, insurance coverage or the ultimate outcome of other litigation and proceedings that has been or may be filed by or against us or against affiliated independent sales agents or franchisees or our joint ventures and adverse developments and outcomes may materially harm our business and financial condition. Such litigation and other proceedings may include, but are not limited to:
As•antitrust and anti-competition claims;
•TCPA claims;
•claims alleging violations of December 31, 2019,RESPA, state consumer fraud statutes, federal consumer protection statutes or other state real estate law violations;
•employment law claims, including claims challenging the classification of independent sales agents as independent contractors as well as joint employer, wage and hour and retaliation claims;
•information security claims, including claims under new and emerging data privacy laws related to the protection of customer, employee or third-party information;
•cyber-crime claims, including claims related to the diversion of homesale transaction closing funds;
•vicarious or joint liability claims 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 by current or former franchisees that franchise agreements were breached, including improper terminations;
•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;
•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;
•claims concerning breach of obligations to make websites and other services accessible for consumers with disabilities;
•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 related to disclosure or securities law violations as well as derivative suits; and
•fraud, defalcation or misconduct claims.
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 had approximately $588 millionare a participant in many MLSs and a member-owner of certain non-NAR controlled MLSs. Our affiliated agents may be members 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, or 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, litigation 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. The industry is currently experiencing increased scrutiny by regulators and other government offices, both on a federal and state NOLs. Ourlevel. Four of the more active areas in our industry have been antitrust and competition, compliance with RESPA (and similar state statutes), TCPA (and similar state statutes) and worker classification. Other examples include, but are not limited to, consumer protection, mortgage lending and debt collection laws, federal NOLs beginand 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 expireconsumers. See "Item 1.—Business—Government and Other Regulations" for additional information.
As noted in 2030 while certain state NOLs begin to expirethe prior risk factor and described in 2020. Our ability to utilize NOLsNote 15, Anywhere and other tax attributesindustry participants are also currently named in class actions that challenge residential real estate industry rules and practices for seller payment of buyer broker commissions. Developments or outcomes in such litigation or other legal proceedings involving the Company or industry participants could result in a change to the broker commission structure, the effect of which could result in reductions to the share of commission income received by us and our franchisees.
There can be limited byno assurances as to whether the "ownership change"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, result in judgments, settlements, penalties or fines (which may be material), or otherwise adversely affect us.
Moreover, we underwent withinbelieve 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 meaningdisadvantage of Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"),historical real estate brokerage models.
Meaningful changes in industry operations or structure, as a result of any of the saleforegoing or as the result of other governmental pressures, 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 common stockjoint 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 initial public offeringbusiness.
As noted in the prior risk factor, all of our businesses and the related transactions. An ownership change is generally definedbusinesses of our joint ventures as a greater than 50 percentage point increase in equity ownership by 5% stockholders in any three-year period. Pursuantwell as the businesses of our franchisees are highly regulated and subject to rules under Section 382 of the Codechanging economic and a published Internal Revenue Service (the "IRS") notice, a company's "net unrealized built-in gain" within the meaning of Section 382 of the Code may reduce the limitation on such company's ability to utilize NOLs resulting from an ownership change. Although there can be no assurancepolitical influences. We must comply with numerous laws and regulations both domestically and abroad. See "Item 1.—Business—Government and Other Regulations" in this regard,Annual Report for additional information concerning laws and regulations impacting our business, including antitrust, competition and bribery laws, RESPA, worker classification and the TCPA, among others.
In all of our businesses there is a risk that we believecould 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 limitationadoption 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 utilizerenew current franchisees or sign new franchisees or otherwise have a material adverse effect on our NOLs resultingoperations.
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.
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 and/or practices, either of which could materially and adversely impact our financial condition and results of operations.
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 by seeking to reclassify licensed sales agents as employees. 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 determinations to reclassify sales agents as employees 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 ownership change shouldbusiness, constrain 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 significantly reducedsubject 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 net unrealized built-in gain. Even assumingprivacy 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 ablerequired to usecomply 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. Additional states have enacted their own privacy laws and many other states are likely to implement their own privacy
statutes in the near term. 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 unrealized built-in gain,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 cash taxloss 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, any of 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 NOLs is dependent uponreputation if we act or are perceived to be acting inconsistently with the terms of our abilityprivacy 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.
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 generate sufficient taxable income. Althoughour brands and our franchising business. The steps we believe thattake to obtain, maintain and protect our intellectual property rights may not be adequate and, in particular, we willmay not own all necessary registrations for our intellectual property. Applications we have filed to register our intellectual property may not be able to generate sufficient taxable income to fully utilize our NOLs, weapproved 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 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 or improper use of our intellectual property by third parties, including current or formerly affiliated franchisees or independent sales agents, 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. In addition, divestitures (including the planned sale of Cartus Relocation Services and any other divestitures we may complete in the future) could result in the accelerated use of our NOLs.
We are responsible for certain of Cendant's contingent and other corporate liabilities.
Although we have resolved various Cendant contingent and other corporate liabilities and have established reserves for mostend of the remaining unresolved claimslicense term if certain conditions occur and the loss of which weeither of these licenses could have knowledge,a material adverse outcomes from the unresolved Cendant liabilities for which Realogy Group has assumed partial liability under the Separationeffect on our business and Distribution Agreement dated asresults 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.operations.
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, 2022, our total debt, excluding our securitization obligations, was $2,875 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. Risks associated with our debt obligations are heightened during industry downturns or broader recessions that decrease our revenues, earnings and cash flows from operations.
Our significant indebtedness and interest obligations could prevent us from meeting our obligations under our debt instruments and could adversely affect our ability to fund our operations, invest in our business or pursue growth opportunities, react to changes in the economy or our industry, or incur additional borrowings under our existing facilities.
We are significantly encumbered by our debt obligations. As of December 31, 2019, our total debt, excluding our securitization obligations, was $3,445 million (without giving effect to outstanding letters of credit). Our liquidity position has been, and is expected to continue to be, negatively impacted by the substantial interest expense on our debt obligations.
Our leverage could have important consequences, including the following:
•it causes a substantial portion of our cash flows from operations to be dedicated to the payment of interest and required amortization on our indebtedness and not be available for other purposes, including our operations, capital expenditures, technology, share repurchases, dividends and future business opportunities or principal repayment;
•it could cause us to be unable to comply with the senior secured leverage ratio covenant under our Senior Secured Credit Facility and Term Loan A Facility;
•it could cause us to be unable to meet our debt service requirements under our Senior Secured Credit Facility, the Term Loan A Facility or the indentures governing the Unsecured 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 or restructure 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 exposes us to the risk of increased interest rates because a portion of our borrowings, including borrowings under our Senior Secured Credit Facility and Term Loan A Facility, are at variable rates of interest;
•it may limit our ability to adjust to changing market conditions and place us at a competitive disadvantage compared to our competitors that have no or less debt;
•it may cause a downgrade of our debt and long-term corporate ratings;
•it may limit our ability to repurchase shares 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.
TheA 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, contain restrictive covenants, includingwhich would result in an event of default if we fail to remedy or avoid a requirementdefault as permitted under the applicable debt arrangement.
Our debt risk may also be increased as a result of competitive pressures that we maintain a specified senior secured leverage ratio of 4.75 to 1.00, which is defined as the ratio of our total senior secured debt (net of unrestrictedreduce margins and free cash and permitted investments) to trailing four quarter EBITDA calculated on a Pro Forma Basis, as those terms are defined in the credit agreement governing the Senior Secured Credit Facility. Total senior secured net debt does not include unsecured indebtedness, including the Unsecured Notes, or the securitization obligations.
For the trailing four quarters ended December 31, 2019, we were in compliance with the senior secured leverage ratio covenant with a ratio of 3.03 to 1.0 with total senior secured debt (net of unrestricted cash and permitted investments) of $1,895 million and trailing four quarter EBITDA calculated on a Pro Forma Basis of $626 million. Our Operating EBITDA and EBITDA calculated on a Pro Forma basis have declined year-over-year for the past several years.flow. If our EBITDA calculated on a Pro Forma Basis were to continue to decline and/or we were to incur additional first lien senior secured debt (including additional borrowings under the Revolving Credit Facility), our ability to borrow the full capacity under the Revolving Credit Facility (without refinancing secured debt into unsecured debt) could be limited as we must maintain compliance with the senior secured leverage ratio described above of 4.75 to 1.00. Our debt risk may also be increased as a result of competitive pressures that reduce margins and free cash flow. Our need to borrow under the 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.
In addition, the covenants in the indenture governing the 9.375% Senior Notes limit our ability to make restricted payments, including our ability to make dividend payments in excess of $45 million per calendar year and our ability to repurchase shares of our common stock in any amount until the Company's consolidated leverage ratio (as defined in the indenture governing the 9.375% Senior Notes) is below 4.00 to 1.00.
An event of default under our Senior Secured Credit Facility, the Term Loan A Facility or the indentures governing our other material indebtedness would adversely affect our operations and our ability to satisfy obligations under our indebtedness.
If we are unable to comply with the senior secured leverage ratio covenant described in the prior risk factor or other restrictive covenants under Senior Secured Credit Facility, Term Loan A Facility or the indentures governing our Senior Notes and we fail to remedy or avoid a default as permitted under the 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 and unpaid interest and fees, to be immediately due and payable;
•could require us to apply all of our available cash to repay these borrowings; or
•could prevent us from making payments on the Unsecured Notes, any of which could result in an event of default under the indentures governing the Unsecured Notes or our Apple Ridge Funding LLC securitization program.
If we were unable to repay the amounts outstanding under our Senior Secured Credit Facility and Term Loan A Facility, the lenders and holders of such debt under our Senior Secured Credit Facility and Term Loan A Facility could proceed against the collateral granted to secure the Senior Secured Credit Facility and Term Loan A Facility. We have pledged a
significant portion of our assets as collateral to secure such indebtedness. If the lenders under our Senior Secured Credit Facility or Term Loan A Facility accelerate the repayment of borrowings, we may not have sufficient assets to repay the Senior Secured Credit Facility and Term Loan A Facility and our other indebtedness or be able to borrow sufficient funds to refinance such indebtedness. Upon the occurrence of an event of default under the indentures governing our Senior 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 affect on our business, financial condition and results of operations.
We have substantial indebtedness that will mature or expire beginning in 2021 and 2023 and we may not be able to refinance with terms as favorable as the terms of the maturing debt.
We have substantial indebtedness that will mature in the next few years. We continue to evaluate potential refinancing and financing transactions, including refinancing certain tranches of our indebtedness and extending maturities, among other potential alternatives. There can be no assurance as to which, if any, of these alternatives we may pursue as the choice of any alternative will depend upon numerous factors such as market conditions, our financial performance and the limitations applicable to such transactions under our existing financing agreements and the consents we may need to obtain under the relevant documents. The high-yield market may not be accessible to companies with our debt profile and such or other financing alternatives may not be available to us on commercially reasonable terms, 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.
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. As of December 31, 2019, our corporate credit rating was B+ at S&P Global Ratings and B1 at Moody’s and both such ratings agencies rated our outlook as negative. Any downgrade, suspension or withdrawal of a rating by a rating agency (or any anticipated downgrade, suspension or withdrawal) could make it more difficult or more expensive for us to refinance our 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, 2019, $1,965 million of our borrowings under our Senior Secured Credit Facility and Term Loan A Facility was at variable rates of interest thereby exposing us to interest rate risk. If interest rates continue to increase, our debt service obligations on the variable rate indebtedness would increase even if the amount borrowed remained the same, and our net income would decrease. Although we have entered into interest rate swaps involving the exchange of floating for fixed rate interest payments to reduce interest rate volatility for a significant portion of our variable rate borrowings, such interest rate swaps do not eliminate interest rate volatility for all of our variable rate indebtedness at December 31, 2019.
The phase-out of LIBOR, or the replacement of LIBOR with a different reference rate or modification of the method used to calculate LIBOR, may adversely affect interest rates which may have an adverse impact on us.
Our primary interest rate exposure is interest rate fluctuations, specifically with respect to LIBOR, due to its impact on our variable rate borrowings under our Senior Secured Credit Facility and Term Loan A Facility. Our interest rate swaps are also based on LIBOR.
LIBOR is the subject of recent national, international and other regulatory guidance and proposals for reform. At this time, it is not possible to predict the effect of any changes to LIBOR, any phase out of LIBOR or any establishment of alternative benchmark rates. LIBOR may disappear entirely or perform differently than in the past. Any new benchmark rate will likely not replicate LIBOR exactly and if future rates based upon a successor rate (or a new method of calculating LIBOR) are higher than LIBOR rates as currently determined, it could result in an increase in the cost of our variable rate indebtedness and may have a material adverse effect on our financial condition and results of operations.
Restrictive covenants under our Senior Secured Credit Facility, Term Loan A Facility, 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 repurchase shares of our common stock 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 or restructure 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.
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 or restructure 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 restructuring our debt or 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 or restructuring 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 or restructure 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 or restructure 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.
At December 31, 2022, $572 million of our borrowings under our Revolving 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 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, may adversely affect interest rates which may have an adverse impact on us.
Our primary interest rate exposure is interest rate fluctuations due to the impact on our variable rate borrowings under our Senior Secured Credit Facility (for our Revolving Credit Facility) and the Term Loan A Facility. The cessation date for submission and publication of U.S. dollar LIBOR is expected to be mid-2023. In connection with the amendment of our Senior Secured Credit Facility in July 2022, LIBOR was replaced with a Secured Overnight Financing Rate, or SOFR, based rate plus a 10 basis point SOFR credit spread adjustment as the applicable benchmark for the Revolving Credit Facility. SOFR will likely not replicate LIBOR exactly and if future rates based upon SOFR 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 an 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, which may adversely impact our liquidity.
At December 31, 2022, $163 million of securitization obligations were outstanding through special purpose entities monetizing certain assets of Cartus under one lending facility. We have provided a performance guaranty which guarantees the obligations of Cartus 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, 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
Adverse developments or resolutions in litigation filed against us or against affiliated agents, franchisees or our joint ventures, may materially harm our business, results of operations and financial condition.
As described in Note 15, "Commitments and Contingencies—Litigation" to our Consolidated Financial Statements included elsewhere in this Annual Report ("Note 15"), we are a party to material litigation (including certified and putative class actions) in the areas of antitrust, TCPA and worker classification. We cannot provide any assurances that results in this litigation or other litigation in which we are or may be named will not have a material adverse effect on our business, results of operations or financial condition, either individually or in the aggregate.
Litigation and other disputes are inherently unpredictable and subject to substantial uncertainties and unfavorable developments and resolutions could occur and even cases brought by us can involve counterclaims asserted against us. In addition, litigation and other legal matters, including class action lawsuits and 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.
Insurance coverage may be unavailable for certain types of claims (including antitrust and TCPA litigation) and even where available, insurance carriers may dispute coverage for various reasons (including the cost of defense). Additionally, there is a deductible for each such case and such insurance may not be sufficient to cover the losses the Company incurs.
Likewise, we cannot predict with certainty the cost of defense, the cost of prosecution, insurance coverage or the ultimate outcome of other litigation and proceedings that has been or may be filed by or against us or against affiliated independent sales agents or franchisees or our joint ventures and adverse developments and 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;
•TCPA claims;
•claims alleging violations of RESPA, state consumer fraud statutes, federal consumer protection statutes or other state real estate law violations;
•employment law claims, including claims challenging the classification of independent sales agents as independent contractors as well as joint employer, wage and hour and retaliation claims;
•information security claims, including claims under new and emerging data privacy laws related to the protection of customer, employee or third-party information;
•cyber-crime claims, including claims related to the diversion of homesale transaction closing funds;
•vicarious or joint liability claims 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 by current or former franchisees that franchise agreements were breached, including improper terminations;
•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;
•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;
•claims concerning breach of obligations to make websites and other services accessible for consumers with disabilities;
•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 related to disclosure or securities law violations as well as derivative suits; and
•fraud, defalcation or misconduct claims.
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 and a member-owner of certain non-NAR controlled MLSs. Our affiliated agents may be members 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, or 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, litigation 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. The industry is currently experiencing increased scrutiny by regulators and other government offices, both on a federal and state level. Four of the more active areas in our industry have been antitrust and competition, compliance with RESPA (and similar state statutes), TCPA (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. See "Item 1.—Business—Government and Other Regulations" for additional information.
As noted in the prior risk factor and described in Note 15, Anywhere and other industry participants are also currently named in class actions that challenge residential real estate industry rules and practices for seller payment of buyer broker commissions. Developments or outcomes in such litigation or other legal proceedings involving the Company or industry participants could result in a change to the broker commission structure, the effect of which could result in reductions to the share of commission income received by us and our franchisees.
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, result in judgments, settlements, penalties or fines (which may be material), 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 of other governmental pressures, 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 and the businesses of our joint ventures 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. See "Item 1.—Business—Government and Other Regulations" in this Annual Report for additional information concerning laws and regulations impacting our business, including antitrust, competition and bribery laws, RESPA, worker classification and the TCPA, among others.
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. 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.
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 and/or practices, either of which could materially and adversely impact our financial condition and results of operations.
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 by seeking to reclassify licensed sales agents as employees. 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 determinations to reclassify sales agents as employees in the absence of available exemptions from minimum wage or overtime laws, including damages and penalties for prior periods (if assessed), could be disruptive to our business, constrain our operations in certain jurisdictions and could have a material adverse effect on the operational and financial performance of the Company.
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. Additional states have enacted their own privacy laws and many other states are likely to implement their own privacy
statutes in the near term. 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, any of 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.
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 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 or improper use of our intellectual property by third parties, including current or formerly affiliated franchisees or independent sales agents, 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 (due to the risks reflected in this Annual Report or otherwise), we could incur impairment charges, which would negatively impact our earnings. We have recognized significant non-cash impairment charges 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 $794 million at December 31, 2022. 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.
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, privacy and data storage, and other compliance issues, including sanction programs), 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. Our recruitment and retention efforts may be hindered by present or future restructurings or cost savings initiatives. The increasing prevalence of virtual and remote-work arrangements adds additional competition for critical talent. Additionally, recent actions by the FTC that, if enacted, would prohibit employers from entering into non-compete clauses with workers and require employers to rescind existing non-compete clauses, could have an adverse impact on our business. 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 (including public health crises) may disrupt our business and have an unfavorable impact on homesale activity.
Owned 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. For example, the COVID-19 crisis contributed to material reductions in relocation volume and significant homesale transaction volume volatility in 2021 and our business could again be negatively impacted by the COVID-19 crisis.
Increasing scrutiny and changing expectations from investors, customers and regulators 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, regulators 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, including our internal 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.
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 Anywhere Group has assumed partial liability under the Separation and Distribution Agreement dated as of July 27, 2006 among Cendant, Anywhere Group, Wyndham Worldwide and Travelport could be material with respect to our earnings or cash flows in any given reporting period.
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;
•housing and mortgage finance markets;market;
•the incurrence of additional indebtedness or other adverse changes relating to our debt;
•our quarterlycommencement of new, or annual earningsadverse resolution of or those of other companiesdevelopments in, ourlegal or regulatory proceedings against the Company or the industry;
•futurethe public's reaction to announcements concerning our business or our competitors' businesses;
•the public's reaction to our press releases, other public announcements and filings with the SEC;
•changes in earnings estimates recommendations or commentary by sell-side securities analysts who trackcovering our common stock or other companies within our industry;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 growthbusiness strategy;
•strategic actions by us or our competitors;
•actual or potential changes in laws, regulations and legal and regulatory interpretations, including as a result of the 2017 Tax Act and other federal, state or local tax reform;interpretations;
•changes in housing or mortgage finance markets or other housing fundamentals, including:
◦including changes in interest rates,
◦changes in demographics relating to housing such as household formation, and
◦changing consumer attitudes concerning home ownership; mortgage rates;
•changes in accounting standards, policies, guidance, interpretations or principles;
•arrival and departure of key personnel;
•commencement of new legal or regulatory proceedings against the Company or adverse resolution of new or pending litigation, arbitration or regulatory proceedings against us;
•actions of current or prospective stockholders (including activists or several top stockholders acting alone or together) that may cause temporary or speculative market perceptions, including market rumors and short selling activity in our stock (which has been and, as of the date of this filing, continues to be well above market norms);stock; 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.markets.
These broad market and industry factors may materially reduce the market price of our common stock, regardless of our operating performance. In addition, price volatility may be greater if the public float and trading volume of our common stock is low.
If any of the foregoing occurs, it could cause our stock price to fall 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.
We recently discontinued our dividend and do not anticipate paying any dividends onShare repurchase programs could affect the price of our common stock inand could be suspended or terminated at any time.
Under the foreseeable future and accordingly, capital appreciation, if any, will be our stockholders sole source of gain.
In early November 2019,share repurchase program authorized by our Board of Directors discontinuedin the first quarter of 2022, we are authorized to repurchase our quarterly dividendcommon stock. Such program does not have an expiration date and we doare not anticipate paying any dividends on our common stock in the foreseeable future. Asobligated to repurchase a result, capital appreciation, if any,specified number or dollar value of our common stockshares. 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 stockholders sole source of gainpriorities for the foreseeable future.
We currently expect to prioritize investing in our businessuse of cash, price, market and reducing indebtedness until we are able to reduce our consolidated leverage ratio (as defined in the indenture governing the 9.375% Senior Notes) to below 4.00 to 1.00economic conditions, and even if we are able to successfully reduce our consolidated leverage ratio, our Board of Directors may not reinstate the payment of a dividend. The covenants in the indenture governing the 9.375% Senior Notes restrict our ability to make dividend payments in excess of $45 million per calendar year until our consolidated leverage ratio is below 4.00 to 1.00. In addition, certain of our debt instruments contain covenants that restrict the ability of our subsidiaries to pay dividends to us. We are permitted underlegal requirements and contractual requirements (including compliance with the terms of our debt instrumentsagreements). The share repurchase program may be suspended or terminated at any time.
Repurchases pursuant to incur additional indebtedness, which may further restrict or prevent us from paying dividends ona share repurchase program could affect our common stock. Agreements governing any future indebtedness,stock price and increase its volatility. The existence of a share repurchase program could also cause our stock price to be higher than it would be in additionthe absence of such a program and could diminish our cash reserves. Even if such a share repurchase program was to those governing our current indebtedness,be fully implemented, it may not permit us to pay dividends on our common stock. Because Realogy Holdings is a holding company and hasenhance long-term stockholder value. We can provide no direct operations,assurance that we will only be able to pay dividends from our available cash on hand and any funds we receive from our subsidiaries. Our title insurance underwriter is subject to regulations that limit its ability to pay dividends or make loans or advances to us, principally to protect policyholders. Under Delaware law, dividends may be payable only out of surplus, which is our assets minus our liabilities and our capital or,repurchase shares at favorable prices, if we have no surplus, out of our net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. As a result, we may not pay dividends if, among other things, we do not have sufficient cash to pay the intended dividends, our financial performance does not achieve expected results or the terms of our indebtedness prohibit it.at all.
Delaware law and our organizational documents may impede or discourage a takeover, which could deprive our investors of the opportunity to receive a premium for their shares.
We are a Delaware corporation, and the anti-takeover provisions of Delaware law impose various impediments to the ability of a third party to acquire control of us, even if a change of control would be beneficial to our existing stockholders. In addition, provisions of our amended and restated certificate of incorporation and amended and restated bylaws may make it more difficult for, or prevent a third party from, acquiring control of us without the approval of our Board of Directors. Among other things, these provisions:
•do not permit cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates;
•delegate the sole power to a majority of the Board of Directors to fix the number of directors;
•provide the power to our Board of Directors to fill any vacancy on our Board of Directors, whether such vacancy occurs as a result of an increase in the number of directors or otherwise;
•authorize the issuance of "blank check" preferred stock without any need for action by stockholders;
•eliminate the ability of stockholders to call special meetings of stockholders;
•prohibit stockholders from acting by written consent; and
•establish advance notice requirements for nominations for election to our Board of Directors or for proposing matters that can be acted on by stockholders at stockholder meetings.
The foregoing factors could impede a merger, takeover or other business combination or discourage a potential investor from making a tender offer for our common stock which, under certain circumstances, could reduce the market value of our common stock and our investors' ability to realize any potential change-in-control premium.
We may issue shares of preferred stock in the future, which could make it difficult for another company to acquire us or could otherwise adversely affect holders of our common stock, which could depress the price of our common stock.
Our amended and restated certificate of incorporation authorizes us to issue one or more series of preferred stock. Our Board of Directors will have the authority to determine the preferences, limitations and relative rights of shares of preferred stock and to fix the number of shares constituting any series and the designation of such series, without any further vote or action by our stockholders. Our preferred stock could be issued with voting, liquidation, dividend and other rights superior to the rights of our common stock. The potential issuance of preferred stock may delay or prevent a change in control of us, discouraging bids for our common stock at a premium to the market price, and materially and adversely affect the market price and the voting and other rights of the holders of our common stock.
Item 2. Properties.
Substantially all of our properties are leased commercial space; we do not own any real property of significance. From December 31, 2021 to December 31, 2022, we decreased our leased-office footprint from approximately 5.2 million square feet to approximately 5 million square feet, of which as of December 31, 2022, approximately 0.6 million square feet are impaired or restructured.
Corporate headquarters.headquarters; Franchise and Owned 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 Franchise Group and as corporate headquarters (and one regional headquarters) for Owned Brokerage Group. The space consists of approximately 270,000 square feet, of space.which our businesses currently utilize approximately 30%.
Realogy Franchise Group. Our real estate franchise business conducts its main operations at our leased office at 175 Park Avenue in Madison, New Jersey.
RealogyOther Owned Brokerage Group. As of December 31, 2019, our company owned real estate brokerage segment2022, Owned Brokerage Group leased approximately 4.43.9 million square feet of domestic office space under approximately 946911 leases. Its corporate headquarters and one regional headquarters facility are located in leased offices at 175 Park Avenue, Madison, New Jersey. As of December 31, 2019, 2022, OwnedRealogy Brokerage Group leased 5 facilities serving as regional headquarters, 3346 facilities serving as local administration, training facilities or storage, and approximately 710680 brokerage sales offices under 908865 leases. These sales offices are generally located in shopping centers and small office parks, typically with lease terms of one to five years. Included in the 4.43.9 million square feet is approximately 392,0000.3 million square feet of vacant and/or subleased space, principally relating to brokerage sales office consolidations.
Realogy Title 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. As of December 31, 2019,2022, this business also hashad leased regional and branch offices in 2125 states and Washington, D.C.
Cartus Relocation Services. Our relocation business has its main corporate operations in a leased building in Danbury, Connecticut with a lease term expiring in November 2030. There are leased offices in other locations in the U.S., including in Lisle, Illinois; Irving, Texas; Folsom, California; and Bellevue, Washington. International offices include leased facilities in the United Kingdom, Hong Kong, India, Singapore, China, Brazil, Germany, France, Switzerland, Canada and the Netherlands. These leases will transfer to SIRVA upon the closing of the planned sale, with Realogy Leads Group subletting space from SIRVA in Danbury, Connecticut and Irving, Texas.
We believe that all of our properties and facilities are well maintained.
Item 3. Legal Proceedings.
See Note 15, "Commitments and Contingencies—Litigation", to the Consolidated Financial Statements included elsewhere in this Annual Report for additional information on the Company's legal proceedings.
The Company believesSee "Item 1. Business—Government and Other Regulations" in this Annual Report for additional information on important legal and regulatory matters that it hasimpact our business, including a summary of the current legal and regulatory environment.
We believe that we have adequately accrued for legal matters as appropriate. The Company recordsWe record litigation accruals for legal matters which arewhen it is both probable that a liability will be incurred, and estimable.the amount of the loss can be reasonably estimated. Where the reasonable estimate of the probable loss is a range, we record as an accrual in its financial statements the most likely estimate of the loss, or the low end of the range if there is no one best estimate. For other litigation for which a loss is reasonably possible, we are unable to estimate a range of reasonably possible losses.
Litigation and other disputes are inherently unpredictable and subject to substantial uncertainties and unfavorable developments and resolutions could occur and even cases brought by us can involve counterclaims asserted against us.us. In addition, litigation and other legal matters, including class action lawsuits and 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. AsInsurance coverage may be unavailable for certain types of claims (including antitrust and TCPA litigation) 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 Companylosses we incur. From time to time, even if we believe we have substantial defenses, we may consider litigation settlements based on a variety of circumstances.
Due to the foregoing factors as well as the additional factors set forth in Note 15, we could incur charges or judgments or enter into settlements of claims, based upon future events or developments, with liabilityliabilities that are materially in excess of amounts accrued and these judgments or settlements could have a material adverse effect on the Company’sour financial condition, results of operations or cash flows in any particular period. As such, an increase in accruals for one or more of these matters in any reporting period may have a material adverse effect on our results of operations and cash flows for that period. We cannot provide any assurances that results in such litigation, individually or in the aggregate, will not have a material adverse effect on our business, results of operations or financial condition.
The captioned matters described in Note 15 involve evolving, complex litigation and we assess our accruals on an ongoing basis taking into account the procedural stage and developments in the litigation. One of the antitrust matters (the Burnett litigation) is scheduled to go to trial in October 2023 and the TCPA case is scheduled to go to trial in May 2023.
The Company disputes the allegations against it in each of the captioned matters set forth in Note 15, believes it has substantial defenses against plaintiffs’ claims and is vigorously defending these actions.
Litigation, investigations, claims and claimsregulatory 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. Examples may include claims associated with RESPA compliance, broker fiduciary duties, multiple listing service practices, sales agentindustry or business community (such as in the areas of worker classification and federalantitrust and state fair housing laws. The Company alsocompetition, among others) and may be impacted bygenerate litigation and other claims against companies in other industries. Changes in current legislation, regulations or interpretations that are applicable to the residential real estate service industry may also impactinvestigations for the Company.
For example, there is active worker classification litigation in numerous jurisdictions against a variety of industries— including residential real estate brokerages in multiple states, including California and New Jersey—where the plaintiffs seek to reclassify independent contractors as employees or to challenge the use of federal and state minimum wage and overtime exemptions. This type of litigation has been particularly prolific in California since the California Supreme Court adopted a worker classification test in the second quarter of 2018 that is significantly more restrictive than those historically used in wage and hour cases. In September 2019, this judicial worker classification test was codified into California statutory law, but the adopted legislation also provides an alternate worker classification test applicable to real estate professionals that is less restrictive than the judicial test. Since the enactment, there have been several challenges to the constitutionality and enforceability of this law as it applies to other industries, which may ultimately impact the less restrictive test currently applicable to real estate professionals. For a summary of certain legal proceedings initiated in California involving the Company that allege worker misclassification, see Note 15, "Commitments and Contingencies—Litigation", in this report.
Item 4. Mine Safety Disclosures.
None.
Information about our Executive Officers
The following provides information regarding individuals who served as executive officers of RealogyAnywhere Group and Realogy HoldingsAnywhere at February 21, 2020.2023. 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 21, 2020.2023.
Ryan M. Schneider, 50,53, 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 Anywhere. He is also a member of the Board of Directors of Elevance Health, Inc.
Donald J. Casey, 58,61, has served as the President and Chief Executive Officer of Realogy Title GroupAnywhere Integrated Services LLC (formerly known as Title Resource Group LLC) since April 2002. In December 2022, he assumed responsibility for certain operational, agent service delivery and consumer experience aspects of the Company’s owned brokerage and title operations to the extent related to Coldwell Banker company owned brokerages and, in January 2023, he assumed leadership of Cartus. From 1995 until April 2002, he served as Senior Vice President, Brands of PHH Mortgage. From 1993 to 1995, Mr. Casey served as Vice President, Government Operations of Cendant Mortgage. From 1989 to 1993, Mr. Casey served as a secondary marketing analyst for PHH Mortgage Services (prior to its acquisition by Cendant).
David L. Gordon, 58, has served as our Executive Vice President and Chief Technology Officer since January 2018. From March 2015 to January 2018, Mr. Gordon served as Executive Vice President, U.S. Chief Technology and Operations Officer for Bank of Montreal (BMO) Financial Group, a diversified financial services provider based in North America. From June 2013 to March 2015, Mr. Gordon served in multiple officer roles at Promontory Financial Group, a global financial services consulting firm and wholly-owned subsidiary of IBM, including Chief Administrative Officer and Chief Technology Officer. For 12 years prior thereto, Mr. Gordon held several leadership positions at Capital One Financial Services, a financial holding company, most recently as Senior Vice President, IT Operations from March 2012 to March 2013.
M. Ryan Gorman, 41, has served as the President and Chief Executive Officer of Realogy Brokerage Group LLC (formerly known as NRT LLC) since January 2018 and as CEO of Coldwell Banker (both company owned and franchised brokerages) since January 2020. Previously he served as the Chief Strategy & Operating Officer of NRT LLC from September 2016 to January 2018. From May 2012 to September 2016, Mr. Gorman served at NRT’s Senior Vice President, Strategic Operations and from November 2007 to May 2012 he served as the Company’s Head of Strategic Development. From October 2004 to November 2007, Mr. Gorman served as the Head of Strategic Development of TRG (formerly known as Cendant Settlement Services Group). Before joining the Company, he held advisory and principal investment roles with PricewaterhouseCoopers, Credit Suisse and The Blackstone Group.
Timothy B. Gustavson, 51,55, 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 Realogythe Company in 2006 as Vice President of External Reporting and prior to Realogy,joining the Company, Mr. Gustavson spent 16 years in public accounting with the KPMG audit practice. Mr. Gustavson is a certified public accountant.
Katrina Helmkamp,Melissa K. McSherry, 54, has served as the President and Chief Executive Officer of Cartus Corporation since July 2018. Prior to Realogy, Ms. Helmkamp served as Chief Executive Officer of Lenox Corporation, a market leader in quality tabletop and giftware, from November 2016 to June 2018. From 2015 to 2016, she acted as a consultant, primarily working with private equity firms. From 2010 to 2014, she was Chief Executive Officer of SVP Worldwide, the global leader in consumer sewing machines. From 2007 to 2010, she led teams at Whirlpool Corporation as Vice President, Global Refrigeration, and then Senior Vice President, North America Product. From 2005 to 2007, Ms. Helmkamp held leadership roles at ServiceMaster, including as President of Terminix. In addition to her executive experience, she was a partner for six years at The Boston Consulting Group, from 1998 to 2004.
Sunita Holzer, 58,50, has served as our Executive Vice President, and Chief Human ResourcesOperating Officer ("CHRO") since March 2015.February 2022. Prior to Realogy,joining the Company, Ms. HolzerMcSherry served as ExecutiveSenior Vice President, Global Head of Risk and CHRO for Computer Sciences CorporationIdentity Solutions at Visa, Inc., a multinational financial services corporation, from 20122016 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 where she had oversight of global human resources for 80,000 employees across 60 countries.to 2016, Ms. Holzer also was Executive Vice PresidentMcSherry founded and CHRO at Chubb Insurance from 2003 to 2012. Prior to her tenure at Chubb Insurance, Ms. Holzer held executive HR roles at GE Capital, American Express and American International Group.
John W. Peyton, 52, has served as the Chief Executive Officer of Realogy Franchise Group since April 2017 after serving as Chief Operating OfficerFirinne, 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, of Realogy Franchise GroupCard Partnerships from October 2016. Previously, he2010 until 2014.
Tanya Reu-Narvaez, 46, has served as a senior executive with Starwood Hotels & Resorts Worldwide Inc., a leading hotelour 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 Owned Brokerage Group and leisure company, for 17 years, most recentlyFranchise Group. From 2009 to 2018, she served as its Chief Marketing Officer from 2014 to September 2016 and as its Senior Vice President of Global InitiativesHuman Resources for the Company’s corporate and franchise group divisions. Ms. Reu-Narvaez joined Cendant Corporation in 2002, where she last held the role of Vice President of Human Resources before joining the Company in
2006 at the time of its spin-off from 2012 to 2014, where he directedCendant in the implementationsame role. She is a member and former Chair of key strategic company priorities around the world, including supply chain and revenue management initiatives.Corporate Board of Governors of the National Association of Hispanic Real Estate Professionals (NAHREP).
Charlotte Simonelli, 48,51, has served as our Executive Vice President, Chief Financial Officer and Treasurer since March 2019. Immediately prior to joining Realogy,the Company, 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, 64,67, 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, 47, has served as Executive Vice President, President and Chief Executive Officer of Anywhere Brands LLC since November 2020 and as President and Chief Executive Officer of Anywhere Advisors LLC since December 2022. She previously served as Regional Executive Vice President of Anywhere Advisors LLC, heading the Eastern Seaboard and Midwest regions for Coldwell Banker Realty, the brand’s owned brokerage operations from March 2018 to November 2020. Ms. Yannaccone joined the Company 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.
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""HOUS". As of February 21, 2020,2023, the number of stockholders of record was 38.50.
Share Repurchase Program
The Company did not repurchase common stock during the quarter ended December 31, 2019. The Company expects to prioritize investing in its business and reducing indebtedness. See "Item 7.—Management's Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition, Liquidity and Capital Resources" for additional information.2022.
Shares of common stock repurchased by the Company pursuant to authorizations made from its Board of Directors 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.
The Company's Board of Directors authorized a share repurchase program of up to $300 million of the Company's common stock in February 2022. Although, as of December 31, 2019, $2042022, $203 million remained available for repurchase under the share repurchase programs previously authorized by the Company's Board of Directorsprogram, the Company is prohibited from repurchasing shares under such programs under the indentureindentures governing the 9.375% Seniorits Unsecured Notes until the Company's consolidated leverage ratio falls below 4.00 to 1.00 and then only to the extent of available cumulative credit, as defined under the indenture governing the 9.375% Senior Notes. Accordingly, the Company suspended repurchases in February 2019. applicable indentures.
The share repurchase programs haveprogram has no time limit and may be suspended or discontinued at any time. Repurchases under these programs may be made at management's discretion from time to time on the open market, pursuant to Rule 10b5-1 trading plans or through privately negotiated transactions. The size and timing of any future repurchases (if any), subject to the limitation noted above, will depend on price, market and economic conditions, legal and contractual requirements (including compliance with the terms of our debt agreements) and other factors.
Dividends
In early November 2019, the Company's Board of Directors discontinued the Company's quarterly dividend. The Company does not anticipate paying any dividends on its common stock in the 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 assumes a $100 investment on December 31, 2014,2017, and reinvestment of all dividends, in each of the Company’s common stock, the S&P 500 index, the S&P MidCap 400 index and the S&P Home Builders Select Industry index, or XHB Index (which includes a diversified group of holdings representing home building, building products, home furnishings and home appliances). A portion of our 2017, 20182020, 2021 and 20192022 long-term incentive compensation awards are tied to the relative performance of our total stockholder return as compared to the S&P MidCap 400 or XHB Index over the three-year periodperiods ending December 31, 2019, December 31, 20202022, 2023 and December 31, 2021, respectively.2024.
| | Cumulative Total Return | Cumulative Total Return | | Cumulative Total Return |
| | December 31, | | | December 31, |
| | 2014 | | 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 |
| Realogy Holdings Corp. | $ | 100.00 | | | $ | 82.42 | | | $ | 58.24 | | | $ | 60.72 | | | $ | 34.20 | | | $ | 23.30 | | |
| Anywhere Real Estate Inc. | | Anywhere Real Estate Inc. | $ | 100.00 | | | $ | 56.32 | | | $ | 38.38 | | | $ | 52.02 | | | $ | 66.65 | | | $ | 25.33 | |
| SPDR S&P Homebuilders ETF (XHB) index | SPDR S&P Homebuilders ETF (XHB) index | $ | 100.00 | | | $ | 108.55 | | | $ | 99.00 | | | $ | 171.62 | | | $ | 116.27 | | | $ | 175.33 | | SPDR S&P Homebuilders ETF (XHB) index | $ | 100.00 | | | $ | 67.75 | | | $ | 102.16 | | | $ | 127.18 | | | $ | 191.22 | | | $ | 154.40 | |
| S&P MidCap 400 index | S&P MidCap 400 index | $ | 100.00 | | | $ | 97.82 | | | $ | 118.11 | | | $ | 137.30 | | | $ | 122.08 | | | $ | 154.07 | | S&P MidCap 400 index | $ | 100.00 | | | $ | 88.92 | | | $ | 112.21 | | | $ | 127.54 | | | $ | 159.12 | | | $ | 138.34 | |
| S&P 500 index | $ | 100.00 | | | $ | 101.38 | | | $ | 113.51 | | | $ | 138.29 | | | $ | 132.23 | | | $ | 173.86 | | |
Item 6. Selected Financial Data.[Reserved]
The following table presents our selected historical consolidated financial data and operating statistics. The consolidated statement of operations data for the years ended December 31, 2019, 2018, and 2017 and the consolidated balance sheet data as of December 31, 2019 and 2018 have been derived from our audited consolidated financial statements included elsewhere herein. The statement of operations data for the year ended December 31, 2016 and 2015 and the consolidated balance sheet data as of December 31, 2017, 2016 and 2015 have been derived from our consolidated financial statements not included elsewhere herein.
In November 2019, the Company entered into a Purchase Agreement under which SIRVA will acquire Cartus Relocation Services. As a result, the operating results of Cartus Relocation Services in the table below are presented as discontinued operations for all periods. See Note 3, "Discontinued Operations", to the Company's Consolidated Financial Statements included in this Annual Report for additional information about discontinued operations.
Neither Realogy Holdings, the indirect parent of Realogy Group, nor Realogy Intermediate, the direct parent company of Realogy Group, conducts any operations other than with respect to its respective direct or indirect ownership of Realogy Group. As a result, the consolidated financial positions and results of operations of Realogy Holdings, Realogy Intermediate and Realogy Group are the same.
The selected historical consolidated financial data and operating statistics presented below should be read in conjunction with our annual consolidated financial statements and accompanying notes and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein. Our annual consolidated financial information may not be indicative of our future performance.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of or for the Year Ended December 31, | | | | | | | | |
| 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| (In millions, except per share data and operating statistics) | | | | | | | | |
| Statement of Operations Data: | | | | | | | | | |
| Net revenue | $ | 5,598 | | | $ | 5,782 | | | $ | 5,810 | | | $ | 5,481 | | | $ | 5,373 | |
| Total expenses | 5,756 | | | 5,565 | | | 5,466 | | | 5,152 | | | 5,111 | |
| (Loss) income from continuing operations before income taxes, equity in (earnings) losses and noncontrolling interests | (158) | | | 217 | | | 344 | | | 329 | | | 262 | |
| Income tax (benefit) expense from continuing operations (a) | (22) | | | 67 | | | (66) | | | 134 | | | 103 | |
| Equity in (earnings) losses of unconsolidated entities | (18) | | | 4 | | | (18) | | | (12) | | | (16) | |
| Net (loss) income from continuing operations | (118) | | | 146 | | | 428 | | | 207 | | | 175 | |
| Net (loss) income from discontinued operations | (67) | | | (6) | | | 6 | | | 10 | | | 13 | |
| Net (loss) income | (185) | | | 140 | | | 434 | | | 217 | | | 188 | |
| Less: Net income attributable to noncontrolling interests | (3) | | | (3) | | | (3) | | | (4) | | | (4) | |
| Net (loss) income attributable to Realogy Holdings and Realogy Group | $ | (188) | | | $ | 137 | | | $ | 431 | | | $ | 213 | | | $ | 184 | |
| | | | | | | | | |
| Basic (loss) earnings per share attributable to Realogy Holdings shareholders: | | | | | | | | | |
| Basic (loss) earnings per share from continuing operations | $ | (1.06) | | | $ | 1.15 | | | $ | 3.11 | | | $ | 1.40 | | | $ | 1.17 | |
| Basic (loss) earnings per share from discontinued operations | (0.59) | | | (0.05) | | | 0.04 | | | 0.07 | | | 0.09 | |
| Basic (loss) earnings per share | $ | (1.65) | | | $ | 1.10 | | | $ | 3.15 | | | $ | 1.47 | | | $ | 1.26 | |
| | | | | | | | | |
| Diluted (loss) earnings per share attributable to Realogy Holdings shareholders: | | | | | | | | | |
| Diluted (loss) earnings per share from continuing operations | $ | (1.06) | | | $ | 1.14 | | | $ | 3.07 | | | $ | 1.39 | | | $ | 1.15 | |
| Diluted (loss) earnings per share from discontinued operations | (0.59) | | | (0.05) | | | 0.04 | | | 0.07 | | | 0.09 | |
| Diluted (loss) earnings per share | $ | (1.65) | | | $ | 1.09 | | | $ | 3.11 | | | $ | 1.46 | | | $ | 1.24 | |
| | | | | | | | | |
| Weighted average common and common equivalent shares used in: | | | | | | | | | |
| Basic | 114.2 | | | 124.0 | | | 136.7 | | | 144.5 | | | 146.5 | |
| Diluted | 114.2 | | | 125.3 | | | 138.4 | | | 145.8 | | | 148.1 | |
| | | | | | | | | |
| Cash dividends declared per share (August 2016 through August 2019) | $ | 0.27 | | | $ | 0.36 | | | $ | 0.36 | | | $ | 0.18 | | | $ | — | |
| Balance Sheet Data: | | | | | | | | | |
| Cash and cash equivalents | $ | 235 | | | $ | 203 | | | $ | 196 | | | $ | 240 | | | $ | 391 | |
| Total assets | 7,543 | | | 7,290 | | | 7,337 | | | 7,421 | | | 7,531 | |
| Long-term debt, including short-term portion | 3,445 | | | 3,548 | | | 3,348 | | | 3,507 | | | 3,702 | |
| Equity | 2,096 | | | 2,315 | | | 2,622 | | | 2,469 | | | 2,422 | |
| Statement of Cash Flows Data: | | | | | | | | | |
| Net cash provided by operating activities | $ | 371 | | | $ | 394 | | | $ | 667 | | | $ | 586 | | | $ | 588 | |
| Net cash used in investing activities | (128) | | | (91) | | | (146) | | | (191) | | | (211) | |
| Net cash used in financing activities | (215) | | | (297) | | | (570) | | | (534) | | | (275) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Year Ended December 31, | | | | | | | | |
| 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| Operating Statistics: | | | | | | | | | |
Realogy Franchise Group (b) | | | | | | | | | |
| Closed homesale sides (c) | 1,061,500 | | | 1,103,857 | | | 1,144,217 | | | 1,135,344 | | | 1,101,333 | |
| Average homesale price (d) | $ | 314,769 | | | $ | 303,750 | | | $ | 288,929 | | | $ | 272,206 | | | $ | 263,894 | |
| Average homesale brokerage commission rate (e) | 2.47 | % | | 2.48 | % | | 2.50 | % | | 2.50 | % | | 2.51 | % |
| Net royalty per side (f) | $ | 327 | | | $ | 323 | | | $ | 313 | | | $ | 299 | | | $ | 294 | |
Realogy Brokerage Group (g) | | | | | | | | | |
| Closed homesale sides (c) | 325,652 | | | 336,806 | | | 344,446 | | | 335,699 | | | 336,744 | |
Average homesale price (d) | $ | 522,282 | | | $ | 523,426 | | | $ | 514,685 | | | $ | 489,504 | | | $ | 489,673 | |
| Average homesale brokerage commission rate (e) | 2.41 | % | | 2.43 | % | | 2.44 | % | | 2.46 | % | | 2.46 | % |
| Gross commission income per side (h) | $ | 13,296 | | | $ | 13,458 | | | $ | 13,309 | | | $ | 12,752 | | | $ | 12,730 | |
| Realogy Title Group | | | | | | | | | |
| Purchasing title and closing units (i) | 146,210 | | | 157,228 | | | 159,113 | | | 152,997 | | | 130,541 | |
| Refinance title and closing units (j) | 26,589 | | | 18,495 | | | 28,564 | | | 50,919 | | | 38,544 | |
| Average fee per closing unit (k) | $ | 2,297 | | | $ | 2,230 | | | $ | 2,092 | | | $ | 1,875 | | | $ | 1,861 | |
_______________
(a)The income tax benefit for the year ended December 31, 2017 reflects the impact of the 2017 Tax Act.
(b)These amounts include only those relating to third-party franchisees and do not include amounts relating to Realogy Brokerage Group.
(c)A closed homesale side represents either the "buy" side or the "sell" side of a homesale transaction.
(d)Represents the average selling price of closed homesale transactions.
(e)Represents the average commission rate earned on either the "buy" side or "sell" side of a homesale transaction.
(f)Represents domestic royalties earned from our franchisees net of volume incentives achieved and other incentives divided by the total number of our franchisees’ closed homesale sides.
(g)Our real estate brokerage business has a significant concentration of offices and transactions in geographic regions where home prices are at the higher end of the U.S. real estate market, particularly the east and west coasts. The real estate franchise business has franchised offices that are more widely dispersed across the United States than our real estate brokerage operations. Accordingly, operating results and homesale statistics may differ between our brokerage and franchise businesses based upon geographic presence and the corresponding homesale activity in each geographic region.
(h)Represents gross commission income divided by closed homesale sides. Gross commission income includes commissions earned in homesale transactions and certain other activities, primarily leasing and property management transactions.
(i)Represents the number of title and closing units processed as a result of home purchases.
(j)Represents the number of title and closing units processed as a result of homeowners refinancing their home loans.
(k)Represents the average fee we earn on purchase title and refinancing title units.
In presenting the financial data above in conformity with general accepted accounting principles, we are required to make estimates and assumptions that affect the amounts reported. See "Item 7.—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies" for a detailed discussion of the accounting policies that we believe require subjective and complex judgments that could potentially affect reported results.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with our consolidated financial statements and accompanying notes thereto included elsewhere herein. Unless otherwise noted, all dollar amounts in tables are in millions. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements. See "Forward-Looking Statements" and "Item 1A.—Risk Factors" for a discussion of the uncertainties, risks and assumptions associated with these statements. Actual results may differ materially from those contained in any forward-looking statements.
The following section generally discusses our financial condition and results of operations for the year ended December 31, 2022 compared to the year ended December 31, 2021. Discussion regarding our financial condition and results of operations for the year ended December 31, 2021 compared December 31, 2020 is included in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 25, 2022.
RECENT DEVELOPMENTS
Entry into a Definitive Agreement to Sell Cartus Relocation Services with Realogy to Retain Realogy Leads Group (including affinityCost Savings and broker-to-broker business and Realogy Broker Network)Operational Efficiencies
We entered into a definitive Purchase and Sale agreement with a subsidiary of SIRVA, Inc. ("SIRVA") on November 6, 2019 (the "Purchase Agreement"), pursuant to which SIRVA will acquire Cartus Relocation Services, our global employee relocation business. Under the terms of the Purchase Agreement, we will receive $375 millionBeginning in cash at closing, subject to certain closing adjustments set forth in the Purchase Agreement, and a $25 million deferred payment after the closing of the transaction. SIRVA is a portfolio company of Madison Dearborn Partners (MDP), a leading private equity firm, and the deferred payment will be paid upon the consummation of MDP's monetization of its investment in Cartus Relocation Services or such earlier date determined at the discretion of MDP. The sale of Cartus Relocation Services is expected to close in the next couple of months, subject to the satisfaction or waiver of closing conditions described in the Purchase Agreement. We intend to use the substantial majority of the net proceeds from the transaction to pay down corporate debt.
The transaction does not include Realogy Leads Group. Realogy Leads Group consists of affinity programs (both company- and client-directed) as well as broker-to-broker referrals and the Realogy Broker Network (formerly referred to as the Cartus Broker Network). Referrals generated by Realogy Leads Group are handled by the Realogy Broker Network, a network made up of agents and brokers from Realogy’s residential real estate brands and certain independent real estate brokers. Member brokers of the Realogy Broker Network, including certain franchisees and company owned brokerages, receive referrals in exchange for a referral fee paid to Realogy Leads Group.
Member brokers of the Realogy Broker Network have also historically received referrals from Cartus Relocation Services generated by our relocation clients in exchange for a referral fee (that is reported in the financial results for Cartus Relocation Services). In connection with the planned sale of Cartus Relocation Services to SIRVA, we will enter into a non-exclusive five-year broker services agreement with SIRVA, pursuant to which Realogy Leads Group could, at the discretion of SIRVA, continue to provide high-quality brokerage services via the Realogy Broker Network to relocation clients of SIRVA. Realogy Leads Group, however, will not receive a referral fee in connection with providing such services.
The assets and liabilities of Cartus Relocation Services are classified as held for sale in the Consolidated Balance Sheets and the results are reported in this Annual Report as discontinued operations. "Net (loss) income from discontinued operations" is reflected on the Consolidated Statements of Operations for all periods presented.
Realogy Leads Group
The Realogy Broker Network has historically been a key contributor to our lead generation strategy, with 99% of the converted leads generated through the network (from Realogy Leads Group and Cartus Relocation Services) being directed to independent sales agents affiliated with our franchisees and company owned brokerages in 2019. As a result of referrals from Realogy Leads Group and Cartus Relocation Services, the Realogy Broker Network closed approximately 78,700 real estate transactions in 2019, with approximately 68,400 transactions attributable to affinity programs and broker-to-broker activity, and approximately 10,300 transactions attributable to relocation clients.
Our affinity business is highly-concentrated and our affinity relationships are terminable at any time at the option of the client and are non-exclusive.
In the third quarter and continuing in the fourth quarter of 2019, USAA, which had been2022, we took additional cost savings actions to offset, in part, expected declines in homesale transaction volume, including reductions in the near term on spending on certain variable and semi-variable expenses and streamlining our largest affinity client, ceased new enrollmentsadministrative support cost structure. Cost savings related to these restructuring activities was approximately $30 million. In addition to the cost savings related to restructuring activities, there was an additional $120 million of cost savings realized in its long-term affinity program with us. In 2019, referrals generated by2022. Due the USAA affinity program represented a significant portiontiming of when some of the 78,700 total homesale transactions closedcost savings actions were initiated in 2022, approximately $50 million of additional savings from the Realogy Broker Network. We expect that the discontinuation of the USAA businessthese actions will resultbe realized in (1) a material decline in earnings at Realogy Leads Group and (2) a comparable dollar reduction in earnings in the aggregate for the Realogy Brokerage Group and Realogy Franchise Group as a result of the loss2023.
As discussed at the Company’s Investor Day in May 2022, we believe that industry dynamics and customer demands will require simplified and more integrated and digitized offerings, systems and support. Delivering the Company’s business model more digitally is an increasing part of our improving the referrals from the USAA affinity program, with most of the impact expected at Realogy Brokerage Group. Approximately 80% of USAA referrals in both 2018consumer experience and 2019 were distributed to franchise brokerages affiliated with Realogy Franchise Group and approximately 20% were distributed to Realogy Brokerage Group.
In 2019, we launched our first Realogy-branded affinity program with Realogy Military Rewards, a program for U.S. military personnel, veterans and their families that seeks to provide access to benefits from Realogy that are similar to those offered under the former USAA affinity program.In October 2019, we announced an agreement to create the first-ever real estate benefits program designed for the nearly 38 million AARP members, which is expected to launch nationally in early 2020.ongoing cost focus. The Company expects that significant timeto continue to prioritize investments in efforts to support our independent sales agents, franchisees and effortconsumers. This includes investments in technology and meaningful investment will be required to increase awarenessinnovative products, lead generation and franchisee support.
Impairment of Goodwill and affinity member participation in these new affinity programs.
Following the close of the planned sale of Cartus Relocation Services, we expect to consolidate Realogy Leads Group, including the Realogy Broker Network, into Realogy Franchise Group.
Facility and Operational Efficiencies ProgramOther Indefinite-lived Intangibles
Beginning inDuring the firstfourth quarter of 2019, we commenced2022, the implementationCompany performed its annual impairment assessment of goodwill and other indefinite-lived intangible assets. As previously discussed, the Company experienced a plandecline in transaction volume during the third quarter largely due to accelerate our office consolidation to reduce our storefront costs,rapidly rising mortgage rates, high inflation, reduced affordability, and broader macroeconomic concerns. These challenges within the residential real estate industry continued during the fourth quarter and resulted in lower homesale transaction volume for the brokerage and franchise business and lower referral volume for the leads business. Additionally, industry forecasts now anticipate continued homesale transaction volume declines in 2023. These market conditions as well as institute other operational efficiencies to drive increased profitability. In addition, beginningan increase in the first quarterweighted average cost of 2019, we commenced a plan to transform and centralize certain aspects of our operational support and drive changes in how we serve our affiliated independent sales agents from a marketing and technology perspective to help such agents be more productive and enable them to make their businesses more profitable. In the third quarter, we expanded our operational efficiencies program to focus on workforce optimization. This workforce optimization initiative is focused on consolidating similar or overlapping roles, reducing the number of hierarchical layers and streamlining work and decision making. Separately, we also reduced headcountcapital resulted in the third quarter in connection with the wind downrecognition of the USAA affinity program. Furthermore,an impairment of goodwill at the endOwned Brokerage Group reporting unit of 2019$280 million, an impairment of goodwill at the Company identified other strategic initiatives which are expected to result in additional operational and facility related efficiencies in 2020.Franchis
Ase Group segment of December 31, 2019, cost savings$114 million related to the restructuring activities were estimated to be approximately $50 millionCartus/Leads Group reporting unit and an impairment of franchise trademarks of $76 million. The impairment charges are recorded on an annual run rate basis, with approximately $30 milliona separate line in the accompanying Consolidated Statements of those cost savings realizedOperations and are non-cash in 2019. In additionnature.
See Note 2, "Summary of Significant Accounting Policies—Impairment of Goodwill, Intangible Assets and Other Long-Lived Assets", and Note 7, "Goodwill and Intangible Assets", to the approximately $30 million of cost savings realized from restructuring activities, there were approximately $40 million ofConsolidated Financial Statements for additional cost savings initiatives implemented and realized in 2019. These costs savings partially offset inflation and other costs in 2019.information.
CURRENT BUSINESS AND INDUSTRY TRENDS
According to the National Association of Realtors ("NAR"), during 2019,The table below sets forth changes in homesale transaction volume, increased 3% due to a 3% increase in theclosed homesale sides (homesale transactions) and average homesale price at Franchise Group and flatOwned Brokerage Group, both on a combined and individual basis, for the year ended December 31, 2022 as compared to 2021:
| | | | | | | | |
| | Year Ended
December 31, 2022 |
| Anywhere Combined | | |
| Homesale transaction volume* | | (14)% |
| Closed homesale sides | | (20)% |
| Average homesale price | | 8% |
| Anywhere Brands - Franchise Group | | |
| Homesale transaction volume* | | (16)% |
| Closed homesale sides | | (22)% |
| Average homesale price | | 7% |
| Anywhere Advisors - Owned Brokerage Group | | |
| Homesale transaction volume* | | (9)% |
| Closed homesale sides | | (14)% |
| Average homesale price | | 6% |
_______________
* Homesale transaction volume is measured by multiplying closed homesale transactions.
During 2018, the housing market faced challenging conditions that intensified in severity during the last four months of 2018, including reduced affordability, constrained inventory, highersides by average homesale prices and mortgage rate volatility, as well as a number of other factors, such as personal income tax reform. While we believe that the difficult market environment in late 2018 continued to negatively impact the first half of 2019, we believe that incremental improvement in certain industry fundamentals, in particular declines in average mortgage rates, contributed to improvement inprice.
Weakening market conditions in the residential real estate industry accelerated during the second half of 2019. We believe this is reflected in the 6% increase2022, with rapidly rising mortgage rates, high inflation, reduced affordability, and 11% increasebroader macroeconomic concerns driving significant declines in homesale transaction volume, as well as purchase and refinancing unit and mortgage origination volume. While the low inventory environment further contributed to declines in the third and fourth quarter of 2019 as reported by NAR, respectively, versus the 4% decrease and flatclosed homesale transaction volumesides, insufficient inventory levels also strongly contributed to higher average homesale price in the first and second quarterthree quarters of 2019 as reported by NAR.
Homesale transaction volume on a combined basis for Realogy Franchise and Brokerage Groups decreased 1% during 2019 compared to 2018. Homesale transaction volume at Realogy Brokerage Group decreased 4%, as a result of a 3% decrease in existing homesale transactions while the average homesale price remained flat, and homesale transaction volume at our Realogy Franchise Group remained flat, as a result of a 4% decrease in existing homesale transactions offset by a 4% increase in average homesale price.
We believe that while the industry fundamentals in late 2018 described above drove a significant portion of our decline in homesale transaction volume in the first half of 2019, our results after the first quarter of 2019 reflect some of the modest improvements in market conditions described above. However, during 2019, we were also negatively impacted by the intense competitive environment as well as our geographic concentration, in particular for our brokerage operations in California and the New York metropolitan area.2022.
Specifically,The graphic below shows the intensitytrend of competition for the affiliation of independent sales agents negatively impacted recruitment and retention efforts at both Realogy Franchise and Brokerage Groups. While the number of independent sales agents affiliated with Realogy Brokerage Group grew approximately 4% in 2019, that gain did not fully offset the decline in homesale transaction volume driven by the loss of more productive independent sales agents over the same period. Further, the number of independent sales agentsquarter in the U.S. affiliated with Realogy Franchise Group (excluding Realogy Brokerage Group) was down approximately 3% in 2019, driven by the competitive environment for independent sales agents2022 as well as franchisee terminations, including the loss of a large high-volume/low-margin franchisee during the second quarter.
These competitive factors drove a loss in our market share for the full-year 2019 compared to 2018. This lossthe prior year period.
Recent industry forecasts predict significant declines in existing homesales in 2023, including Fannie Mae forecasting existing homesale transactions to decrease 19% for full year 2023, as of market share contributed to the declinetheir most recently released forecast which reflects an expectation that declines in homesale transaction volume at both Realogy Franchise and Brokerage Groups and is expected to continue to adversely impact results.
Our market share is largely dependent on the ability of our company owned and franchised brokerages to recruit and retain independent sales agents, which has been and may continue toexisting homesales will be further complicated by competitive models that do not prioritize traditional business objectives. For example, we believe that certain owned-brokerage competitors have investors that have historically allowed the pursuit of increasesmost significant in market share over profitability, which not only exacerbates competition for independent sales agents, but places additional pressure on the share of commission income received by the agent. During 2018 through much of 2019, the business practices of one such competitor in particular had a material adverse impact on recruiting and retention efforts at both our company owned brokerages and certain franchised brands. While we saw signs of a return to a more rational competitive environment in late third quarter 2019, which continued into the fourth quarter of 2019, industry competition continues to be formidable and we expect to experience increased pressure in favor of agents affiliated with our company owned and franchised brokerages on the share of commission income received by such agents. Moreover, the business practices exhibited by the competitor described above could resume and have a further material adverse impact on our company owned and franchised brokerages.
Inventory. Although inventory levels have shown some signs of improvement during the first half of 2019, inventory levels declined2023 and may gradually moderate throughout the year.
Title Group's 2022 results were also adversely impacted by the high interest rate environment, with refinancing title and closing units declining 67%, purchase title and closing units declining 18%, and equity in earnings from Guaranteed Rate Affinity declining $71 million, during the second halfyear ended December 31, 2022 as compared to the prior year. In addition, as a result of 2019 comparedthe sale of our former title underwriter late in the first quarter of 2022, underwriter revenue declined $312 million and Operating EBITDA declined $62 million during 2022 as compared to 2018. Low housing inventory levels2021, partially offset by $6 million of equity in earnings attributable to our minority equity interest in our Title Insurance Underwriter Joint Venture. The sale of our former title underwriter will continue to be an industry-wide concern,have a negative impact on period-over-period comparisons in particular in certain highly sought-after geographies and at lower price points.the first quarter of 2023.
Mortgage Rates. According to NAR, the inventory of existing homes for sale in the U.S. decreased from 1.5 million as of December 2018 to 1.4 million at the end of December 2019. As a result, inventory has decreased from 3.7 months of supply in December 2018 to 3.0 months as of December 2019. These levels continue to be significantly below the 10-year average of 5.4 months, the 15-year average of 6.1 months and the 25-year average of 5.7 months.
Mortgage Rates. According to Freddie Mac, average mortgage rates on commitments for a 30-year, conventional, fixed-rate first mortgage averaged 3.94% for 2019 and 4.54% for 2018. While mortgage rates reachedmore than doubled in 2022, reaching as high as 4.87%7.08% at times in November 2018,the fourth quarter of 2022 and increasing from an average of 3.10% in December 2021 to 6.36% in December 2022, which is approximately 240 basis points higher than the 10-year average of 3.95%. For the week ending February 23, 2023, mortgage rates have moderated during 2019, and on December 31, 2019 were 3.72%a 30-year fixed-rate mortgage averaged 6.50%, according to Freddie Mac. Increases
A wide variety of factors can contribute to mortgage rates, including federal interest rates, Treasury note yields, inflation, demand, consumer income, unemployment levels and foreclosure rates, to name a few. The U.S. Federal Reserve Board took aggressive action in 2022 intended to try to control inflation, including raising the target federal funds rate by over 400 basis points during 2022. In February 2023, the Federal Reserve raised the rate by an additional 25 basis points and noted that it anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. Yields on the 10-year Treasury note were 3.88% as of December 31, 2022 compared to 1.52% as of December 31, 2021. Fiscal and monetary policies of the federal government and its agencies can also adversely impact mortgage rates. In February 2023, the Federal Reserve confirmed that it will continue reducing its holdings of agency mortgage-backed securities and debt as well as Treasury securities. Additionally, banks may tighten mortgage standards, which could limit the availability of mortgage financing.
The rising interest rate environment has negatively impacted multiple aspects of our business, as increases in mortgage rates adverselygenerally have an adverse impact on homesale transaction volume, housing affordability and we have beenpurchase and could againrefinancing unit and mortgage origination volume. We expect that our business will continue to be negativelyadversely impacted by a rising interestthe current high mortgage rate environment. For example, a rise inwe believe the high mortgage rates could result inrate environment is contributing to decreased homesale transaction volume, ifas 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, ifand potential home buyers choose to rent rather than pay higher mortgage rates.
Inflation. U.S. consumers have been and may continue to be impacted by the current inflationary environment. The Consumer Price Index for All Urban Consumers, or CPI, rose 6.5% (not seasonally adjusted) for the 12-months ending December 31, 2022, according to the U.S. Bureau of Labor Statistics. The CPI measures the average change in prices paid by urban consumers for a market basket of consumer goods and services. Volatility in the macroeconomic environment, including disruptions related to Russia's invasion of Ukraine, may further exacerbate inflationary pressures.
Affordability.The fixed housing affordability index, as reported by NAR, decreased from 155 for 2018 to 153 The rapid increase in mortgage rates and inflation discussed above has had a corresponding negative impact on affordability, which has also been meaningfully impacted by rising home prices that are related, in part, to prolonged inventory constraints. Housing affordability has declined significantly year-over-year, as well as since the first quarter of 2022, according to the Home Ownership Affordability Monitor (HOAM) Index issued by the Federal Reserve Bank of Atlanta, which reports that in November 2022, the HOAM index value was 68.1 as compared to 88.5 in January 2022 and 91.8 in November 2021. The HOAM index measures the ability of a median-income household to absorb the estimated annual costs associated with owning a median-priced home, with affordability considered a HOAM index value of greater than 100. Housing affordability may be further impacted in future periods by inflationary pressures, increases in mortgage rates and average homesale price, further or accelerated declines in inventory, declining or stagnant wages, or other economic challenges.
Inventory & Turnover. Continued or accelerated declines in inventory have and may continue to result in insufficient supply to meet demand. Overall housing inventory levels have been a persistent industry-wide concern for 2019,years, in particular in certain highly sought-after geographies and at lower price points. Average sales price has increased significantly over the past two years, which we believe is primarily attributablehas contributed to further deterioration of inventory at lower price points. Additional inventory levels,pressure arises from periods of slow or decelerated new housing construction, real estate models that purchase homes for rental use (rather than resale), and alternative competitors, such as iBuying models.
We believe speed of inventory supply turnover, which have continuedhad increased significantly over the past two years, slowed in the second half of 2022. For example, at our company owned Coldwell Banker brokerages, the speed at which a home that was listed for sale went under contract was a median of 29 days in the fourth quarter of 2022 compared to put upward pressurea median of 19 days on home prices. A housing affordability index above 100 signifies thatthe market in the fourth quarter of 2021, a family earningmedian of 21 days on the market in the fourth quarter of 2020 and a median income has sufficient income to purchase a median-priced home, assuming a 20 percent down payment and ability to qualify for a mortgage.of 37 days on the market in the fourth quarter of 2019.
Recruitment and Retention of Independent Sales Agents; Commission Income. Recruitment and retention of independent sales agents and independent sales agent teams are critical to the business and financial results of a brokerage, including our company owned brokerages and those operated by our affiliated franchisees. In the fourth quarter of 2022, independent sales agents affiliated with our company owned brokerages grew 6% and, based on information from such franchisees, independent sales agents affiliated with our U.S. franchisees declined 4%, in each case as compared to December 31, 2021.
Aggressive competition for the affiliation of independent sales agents in this industry continues to make recruitment and independent sales agent teams has negatively impacted our company ownedretention efforts at both Franchise Group and franchised brokerages,Owned Brokerage Group challenging, in particular with respect to more productive sales agents.
We believe that a variety of factors in recent years have driven intensifying recruitment and retention tactics for independent sales agents, in the industry and has increasingly impactedhad and may continue to have a negative impact on our recruitment and retention of top producing agents. Suchmarket share. These competitive market factors include increasing competition, increasing levels of commissions paid to agents (including up-front payments and equity),along with other trends (such as changes in the spending patterns of independent sales agents, (asas more independent sales agents purchase services from third-partiesthird parties outside of their affiliated broker) and the growth in independent sales agent teams.
Competition for productive agents could continueare expected to have a negative impact on our homesale transaction volume and market share and could continue to put upward pressure on the average share of commissions earned by independent sales agents. These competitive market factors also impactIf independent sales agents affiliated with our franchisees and suchcompany 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 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.
Non-Traditional Market ParticipantsCompetition and Industry Disruption. While real estate brokers using historical real estate brokerage models typically compete for business primarily on the basisSee Part I., "Item 1.—Business—Competition" of services offered, brokerage commission, reputation, utilization of technology and personal contacts, participants pursuing non-traditional methods of marketing real estate may compete in other ways, including companies that employ technologies intended to disrupt historical real estate brokerage models or minimize or eliminate the role traditional brokers and sales agents perform in the homesale transaction process.
A growing number of companies are competing in non-traditional waysthis Annual Report for a portiondiscussion of the gross commission income generated by homesale transactions. For example, many iBuying business models seekcurrent competitive environment, including with respect to disintermediate real estate brokers and independent sales agents from buyers and sellers of homes by reducing brokerage commissions that may be earned on those transactions. In addition, the concentration and market power of the top listing aggregators allow them to monetize their platforms by a variety of actions, including expanding into the brokerage business, charging significant referral fees, charging listing and display fees, diluting the relationship between agents and 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 participants 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, reduce our franchisor service revenue and dilute our relationships with our franchisees and our and our franchisees' relationships with affiliatedcompetition for independent sales agents and buyersfranchisees as well as non-traditional competition and sellersindustry disruption.
Legal & Regulatory Environment. For a discussion of homes.
We currently receive meaningful listing fees for our provision of real estate listingsmaterial litigation involving the Company see "Part I., Item 3.—Legal Proceedings" and such fees help defray expenses for lead generationNote 15, "Commitments and other programsContingencies—Litigation", to benefit affiliated agents and franchisees. We do not expectthe Consolidated Financial Statements in this revenue stream to extend beyond the first quarter of 2022 because of changes in industry practices around syndication and distribution of listings. The loss of this revenue, which could occur prior to 2022, could have a meaningful adverse effect on our revenues and earnings.
New Development. Realogy Brokerage Group has relationships with developers, primarily in major cities, in particular New York City, to provide marketing and brokerage services in new developments. New development closings can vary significantly from year to year due to timing matters that are outside of our control, including long cycle times and irregular project completion timing. Accordingly, earnings attributable to this business can fluctuate meaningfully from year to year, impacting both homesale transaction volume and the share of gross commission income we realize on such transactions.Annual Report.
Existing Homesales
For the year ended December 31, 2019, NAR existing homesale transactions remained flat at 5.3 million homes compared to 2018. For the year ended December 31, 2019, homesale transactions on a combined basis for Realogy Franchise and Brokerage Groups decreased 4% compared to 2018. The annual and quarterly year-over-year trends in homesale transactions are as follows:
_______________
(a) Historical existing homesale data is asdiscussion 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 increase 3%current legal and regulatory environment and how such environment could potentially impact us, see "Part I., Item 1.—Business—Government and Other Regulations" in 2020 and 1% in 2021 while Fannie Mae is forecasting existing homesale transactions to increase 2% in 2020 and to remain flat in 2021.
Existing Homesale Price
In 2019, NAR existing homesale average price increased 3% compared to 2018. In 2019, average homesale price on a combined basis for Realogy Franchise and Brokerage Groups increased 2% compared to 2018 and consisted of a 4% increase in average homesale price for Realogy Franchise Group and flat average homesale price for Realogy Brokerage Group. Realogy Brokerage Group's geographic concentration and exposure to the high-end of the market plus the associated competitive pressures drove the year-over-year decline in homesale price compared to the overall industry. The annual and quarterly year-over-year trends in the price of homes are as follows:
_______________
(a) Historical homesale price data is for existing homesale average price and is as of the most recent NAR press release.
(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 median existing homesale price to increase 4% in 2020 and 3% in 2021 while Fannie Mae is forecasting median existing homesale price to increase 4% in 2020 and 3% in 2021.
* * *
We believe that long-term demand for housing and the growth of our industry are primarily driven by the affordability of housing, the economic health of the U.S. economy, demographic trends such as 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 availability of inventory in the consumer's desired location and within the consumer's price range. At this time, certain of these factors are trending favorably, such as mortgage rate levels, household formation and job growth. Factors that may negatively affect growth in the housing industry include:
•continued insufficient inventory levels or stagnant and/or declining home prices;
•a reduction in the affordability of homes;
•higher mortgage rates due to increases in long-term interest rates and increasing down payment requirements as well as reduced availability of mortgage financing;
•certain provisions of the 2017 Tax Act that directly impact traditional incentives associated with home ownership and may reduce the financial distinction between renting and owning a home, including those that reduce the amount that certain taxpayers would be allowed to deduct for home mortgage interest or state, local and property taxes as well as certain state or local tax reform, such as the "mansion tax" in New York City;
•decelerated or lack of building of new housing for homesales, increased building of new rental properties, or irregular timing of new development closings leading to lower unit sales at Realogy Brokerage Group, which has relationships with developers, primarily in major cities, to provide marketing and brokerage services in new developments;
•homeowners retaining their homes for longer periods of time;
•changing attitudes towards home ownership, particularly among potential first-time homebuyers who may delay, or decide not to, purchase a home, as well as changing preferences to rent versus purchase a home;
•decreasing consumer confidence in the economy and/or the residential real estate market;
•an increase in potential homebuyers with low credit ratings or inability to afford down payments;
•the impact of limited or negative equity of current homeowners, as well as the lack of available inventory may limit their proclivity to purchase an alternative home;
•economic stagnation or contraction in the U.S. economy;
•weak credit markets and/or instability of financial institutions;
•increased levels of unemployment and/or stagnant wage growth in the U.S.;
•a decline in home ownership levels in the U.S.;
•other legislative or regulatory reforms, including but not limited to reform that adversely impacts the financing of the U.S. housing market, changes relating to RESPA, potential reform of Fannie Mae and Freddie Mac, immigration reform, and further potential federal, state or local tax code reform (including, for example, the proposed "pied-a-terre tax" in New York City);
•renewed high levels of foreclosure activity;
•natural disasters, such as hurricanes, earthquakes, wildfires, mudslides and other events that disrupt local or regional real estate markets; and
•geopolitical and economic instability.
Cartus Relocation Services is impacted by these general residential housing trends as well as global corporate spending on relocation services (which continue to shift to lower cost relocation benefits as corporate clients engage in cost reduction initiatives and/or restructuring programs) and changes in employment relocation trends.Annual Report.
KEY DRIVERS OF OUR BUSINESSES
Within Realogy Franchise Group and Owned Brokerage Groups,Group, 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 Realogy Franchise Group, we also use net royalty per side, which represents the royalty payment to Realogy Franchise Group for each homesale transaction side taking into account royalty rates, homesale price, average homesale broker commission rates, volume incentives achieved and other incentives. We utilize net royalty per side as it includes the impact of changes in average homesale price as well as all incentives and represents the royalty revenue impact of each incremental side.
For RealogyOwned Brokerage Group, we also use gross commission income per side, which represents gross commission income divided by closed homesale sides. Gross commission income includes commissions earned in homesale transactions and certain other activities, primarily leasing and property management transactions. RealogyOwned Brokerage Group, as a franchisee of Realogy Franchise Group, pays a royalty fee of approximately 6% per transaction to Realogy Franchise Group from the commission earned on a real estate transaction. The remainder of gross commission income is split between the broker (Realogy(Owned Brokerage Group) and the independent sales agent in accordance with their applicable independent contractor agreement (which specifies the portion of the broker commission to be paid to the agent), which varies by agent agreement, which varies by agent.agreement.
In RealogyFor Title Group, operating performance is evaluated using the following key metrics: (i) purchase title and closing units, which represent the number of title and closing units we process as a result of home purchases, (ii) refinance title and closing units, which represent the number of title and closing units we process as a result of homeowners refinancing their home loans, and (iii) average fee per closing unit, which represents the average fee we earn on purchase title and refinancing title sides. An increase or decrease in homesale transactions will impact the financial results of Realogy Title Group; however, the financial results are not significantly impacted by a change in homesale price. Although the average mortgage rate declined in 2019 compared to 2018, we believe that increases in mortgage rates in the future would most likely have a negative impact on refinancing title and closing units.
Following the close of the planned sale of Cartus Relocation Services, we expect to consolidate Realogy Leads Group, including the Realogy Broker Network, into Realogy Franchise Group, given its size relative to our other business segments. Realogy Leads Group earned referral fee revenue from 64,910 referrals in 2019 as compared to 68,172 referrals in 2018. Cartus Relocation Services earned referral fee revenue from approximately 15,300 referrals in 2019, of which approximately 10,300 were distributed through the Realogy Broker Network.
The following table presents our drivers for the years ended December 31, 2019, 20182022, 2021 and 2017.2020. 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 | | Year Ended December 31, | | % Change | | Year Ended December 31, | | % Change |
| | 2019 | | 2018 | | | | 2018 | | 2017 | | | % Change | | 2022 | | 2021 | | % Change | | | 2020 | | % Change |
| Realogy Franchise Group (a) | | | | | | | | | | | | |
| Anywhere Brands - Franchise Group (a) | | Anywhere Brands - Franchise Group (a) | | | | | | | | | | | |
| Closed homesale sides | Closed homesale sides | 1,061,500 | | | 1,103,857 | | | (4) | % | | 1,103,857 | | | 1,144,217 | | | (4) | % | Closed homesale sides | 911,077 | | | 1,163,036 | | | (22) | % | | 1,163,036 | | | 1,090,345 | | | 7 | % |
| Average homesale price | Average homesale price | $ | 314,769 | | | $ | 303,750 | | | 4 | % | | $ | 303,750 | | | $ | 288,929 | | | 5 | % | Average homesale price | $ | 454,864 | | | $ | 424,436 | | | 7 | % | | $ | 424,436 | | | $ | 355,214 | | | 19 | % |
| Average homesale broker commission rate | Average homesale broker commission rate | 2.47 | % | | 2.48 | % | | (1) | bps | | 2.48 | % | | 2.50 | % | | (2) | bps | Average homesale broker commission rate | 2.43 | % | | 2.45 | % | | (2) | bps | | 2.45 | % | | 2.48 | % | | (3) | bps |
| Net royalty per side | Net royalty per side | $ | 327 | | | $ | 323 | | | 1 | % | | $ | 323 | | | $ | 313 | | | 3 | % | Net royalty per side | $ | 425 | | | $ | 406 | | | 5 | % | | $ | 406 | | | $ | 353 | | | 15 | % |
| Realogy Brokerage Group | | |
| Anywhere Advisors - Owned Brokerage Group | | Anywhere Advisors - Owned Brokerage Group | |
| Closed homesale sides | Closed homesale sides | 325,652 | | | 336,806 | | | (3) | % | | 336,806 | | | 344,446 | | | (2) | % | Closed homesale sides | 317,600 | | | 371,135 | | | (14) | % | | 371,135 | | | 333,736 | | | 11 | % |
| Average homesale price | Average homesale price | $ | 522,282 | | | $ | 523,426 | | | — | % | | $ | 523,426 | | | $ | 514,685 | | | 2 | % | Average homesale price | $ | 699,016 | | | $ | 657,307 | | | 6 | % | | $ | 657,307 | | | $ | 553,081 | | | 19 | % |
| Average homesale broker commission rate | Average homesale broker commission rate | 2.41 | % | | 2.43 | % | | (2) | bps | | 2.43 | % | | 2.44 | % | | (1) | bps | Average homesale broker commission rate | 2.40 | % | | 2.42 | % | | (2) | bps | | 2.42 | % | | 2.43 | % | | (1) | bps |
| Gross commission income per side | Gross commission income per side | $ | 13,296 | | | $ | 13,458 | | | (1) | % | | $ | 13,458 | | | $ | 13,309 | | | 1 | % | Gross commission income per side | $ | 17,435 | | | $ | 16,486 | | | 6 | % | | $ | 16,486 | | | $ | 13,990 | | | 18 | % |
| Realogy Title Group | | | |
| Anywhere Integrated Services - Title Group | | Anywhere Integrated Services - Title Group | |
| Purchase title and closing units | Purchase title and closing units | 146,210 | | | 157,228 | | | (7) | % | | 157,228 | | | 159,113 | | | (1) | % | Purchase title and closing units | 133,055 | | | 163,187 | | | (18) | % | | 163,187 | | | 144,271 | | | 13 | % |
| Refinance title and closing units | Refinance title and closing units | 26,589 | | | 18,495 | | | 44 | % | | 18,495 | | | 28,564 | | | (35) | % | Refinance title and closing units | 18,470 | | | 56,675 | | | (67) | % | | 56,675 | | | 62,887 | | | (10) | % |
| Average fee per closing unit | Average fee per closing unit | $ | 2,297 | | | $ | 2,230 | | | 3 | % | | $ | 2,230 | | | $ | 2,092 | | | 7 | % | Average fee per closing unit | $ | 3,146 | | | $ | 2,709 | | | 16 | % | | $ | 2,709 | | | $ | 2,291 | | | 18 | % |
_______________
(a)Includes all franchisees except for RealogyOwned Brokerage Group.
A declineDeclines in the number of closed homesale transactionssides and/or declinedeclines in average homesale prices couldprice 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, and (iii) reducing the demand for ourservices offered through Title Group, including title, escrow and settlement services (iv) reducingor the referral fees we earn from Realogy Leads Group, and (v) increasingservices of our mortgage origination, title underwriter insurance, or other joint ventures. Additionally, declining closed homesale sides and/or declines in average homesale price increase the risk of franchisee default due to lower homesale volume. OurFurther, our results could alsohave been and may continue to be negatively affected by a decline in commission rates charged by brokers, or greater commission payments to independent sales agents, lower royalty rates from franchisees or by an increase in volume or other incentives paid to franchisees.franchisees, among other factors.
Since 2014,We attribute the 2 basis point decline in average homesale broker commission rate in 2022 at Owned Brokerage Group and Franchise Group over the prior period to price and geographic mix. Over the past 10 years, we have experienced an average of approximately a one basis point decline in the average homesale broker commission rate each year, which we believe has been largely attributable to increases in average homesale prices (as higher priced homes tend to have a lower broker commission) and, to a lesser extent, competitors providing fewer or similar services for a reduced fee.
Royalty fees are charged to all franchisees pursuant to the terms of the relevant franchise agreements and are included in each of the real estate brands' franchise disclosure documents. Most of our third-party franchisees are subject to a 6% royalty rate and entitled to volume incentives, although a royalty fee generally equal to 5% of franchisee commission (capped at a set amount per independent sales agent per year) is applicable to franchisees operating under the "capped fee model" that was launched for our Better Homes and Gardens® Real Estate franchise business in January 2019. Volume incentives are calculated as a progressive percentage of the applicable franchisee's eligible annual gross commission income and generally result in a net or effective royalty rate ranging from 6% to 3% for the franchisee (prior to taking into account other incentives that may be applicable to the franchisee). Volume incentives increase or decrease as the franchisee's gross commission income generated increases or decreases, respectively. We have the right to adjust the annual volume incentive tables on an annual basis in response to changing market conditions. In addition, certain of our franchisees (including some of our largest franchisees) have a flat royalty rate of less than 6% and are not eligible for volume incentives.
Other incentives may also be used as consideration to attract new franchisees, grow franchisees (including through independent sales agent recruitment) or extend existing franchise agreements, although in contrast to volume incentives, the majority of other incentives are not homesale transaction based. See "Item 1.—Business—Franchise Group—Operations—Franchising" for additional information.
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 other sales incentives, both of which directly impact royalty revenue. Over the past several years, our top 250 franchisees have grown faster than our other franchisees through organic growth and market consolidation. If the amount ofconsolidation, which puts pressure on our ability to renew or negotiate franchise agreements with favorable terms due to their ability to generate gross commission income generated by our top 250 franchisees continues to grow at a quicker pace relative to our other franchisees, we would expect our royalty revenue to continue to increase, but at a slower pace than homesale transaction volume. Likewise, our royalty revenue would continue to increase, but at a slower pace than homesale transaction volume, if the gross commission income generated by all of our franchisees grows faster than the applicable annual volume incentive table increase or if we increase our use of standard volume or other incentives. However, in the event that the gross commission income generated by our franchisees increases as a result of increased transaction volume, we would expect to recognize an increase in overall royalty payments to us.income.
We face significant competition from other national real estate brokerage brand franchisors for franchisees and we expect that the trend of increasing incentives will continue in the future in order to attract, retain, and help grow certain franchisees. Taking into account competitive factors, from time to time, we have and may continue 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. We expect to experience downward pressures on net royalty per side, during 2020, largely due to the impact of competitive market factors noted above and continued concentration among our top 250 franchisees, and the impact of affiliated franchisees of our Better Homes and Gardens® Real Estate brand movingfranchisees; however, these pressures were more than offset by increases in homesale prices during 2020 to the "capped fee model" we adopted in 2019.2022.
RealogyOwned Brokerage Group has a significant concentration of real estate brokerage offices and transactions in geographic regions where home prices are at the higher end of the U.S. real estate market, particularly the east and west coasts, while Realogy Franchise Group has franchised offices that are more widely dispersed across the United States. Accordingly, operating results and homesale statistics may differ between RealogyOwned Brokerage Group and Realogy Franchise Group based upon geographic presence and the corresponding homesale activity in each geographic region. In addition, the share of commissions earned by independent sales agents directly impacts the margin earned by RealogyOwned Brokerage Group. Such share of commissions earned by independent sales agents varies by region and commission schedules are generally progressive to incentivize sales agents to achieve higher levels of production. Commission share has been and we expect will continue to be subject to upward pressure in favor of the independent sales agent for a variety of factors, including more aggressive recruitment and retention activities taken by us and our competitors as well as growth in independent sales agent teams.
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 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 segments. Management evaluates the operating results of each of our reportable segments based upon revenue and Operating EBITDA. Operating EBITDA is a non-GAAP financial measure and 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, impairments, gains or losses on discontinued operations and gains or losses on the sale of businesses, investments or other assets. Our presentation of Operating EBITDA may not be comparable to similarly titled measures used by other companies. See below under the header "Financial Condition, Liquidity and Capital Resources—Non-GAAP Financial Measures" for additional information.
Year Ended December 31, 20192022 vs. Year Ended December 31, 20182021
Our consolidated results comprised the following: | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | Change |
| Net revenues | $ | 6,908 | | | $ | 7,983 | | | $ | (1,075) | |
| Total expenses | 7,231 | | | 7,548 | | | (317) | |
| (Loss) income before income taxes, equity in losses (earnings) and noncontrolling interests | (323) | | | 435 | | | (758) | |
| Income tax (benefit) expense | (68) | | | 133 | | | (201) | |
| Equity in losses (earnings) of unconsolidated entities | 28 | | | (48) | | | 76 | |
| Net (loss) income | (283) | | | 350 | | | (633) | |
| Less: Net income attributable to noncontrolling interests | (4) | | | (7) | | | 3 | |
| Net (loss) income attributable to Anywhere and Anywhere Group | $ | (287) | | | $ | 343 | | | $ | (630) | |
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | |
| | 2019 | | 2018 | | Change |
| Net revenues | $ | 5,598 | | | $ | 5,782 | | | $ | (184) | |
| Total expenses | 5,756 | | | 5,565 | | | 191 | |
| (Loss) income from continuing operations before income taxes, equity in (earnings) losses and noncontrolling interests | (158) | | | 217 | | | (375) | |
| Income tax (benefit) expense | (22) | | | 67 | | | (89) | |
| Equity in (earnings) losses of unconsolidated entities | (18) | | | 4 | | | (22) | |
| Net (loss) income from continuing operations | (118) | | | 146 | | | (264) | |
| Net loss from discontinued operations | (67) | | | (6) | | | (61) | |
| Net (loss) income | (185) | | | 140 | | | (325) | |
| Less: Net income attributable to noncontrolling interests | (3) | | | (3) | | | — | |
| Net (loss) income attributable to Realogy Holdings and Realogy Group | $ | (188) | | | $ | 137 | | | $ | (325) | |
Net revenues decreased $184$1,075 million or 3%13% for the year ended December 31, 20192022 compared with the year ended December 31, 20182021 driven primarily driven by lower homesale transaction volume at RealogyOwned Brokerage Group.Group and Franchise Group as the decline in homesale transactions more than offset homesale price appreciation. In addition, net revenues decreased $312 million due to the absence of revenue as a result of the sale of the Title Underwriter during the first quarter of 2022.
Total expenses increased $191decreased $317 million or 3%4% for the year ended December 31, 2022 compared to 20182021 primarily due to:
•impairments of $249a $345 million including a goodwill impairment charge of $237 million during the third quarter of 2019 which reduced the net carrying value of Realogy Brokerage Group by $180 million after accounting for the related income tax benefit of $57 million (see Note 20, "Selected Quarterly Financial Data", for additional information),decrease in operating and $12 million of other impairment charges primarily related to lease asset impairments;
•a $60 million net increase in interest expensegeneral and administrative expenses primarily due to a $35 million net expense related to our mark-to-market adjustments for our interest rate swaps that resulteddecrease in lossesunderwriter costs as a result of $39 million for the year ended December 31, 2019 compared to lossessale of $4 million during the same period of 2018, and a $25 million increase in interest expense primarily due to the refinancing of Senior NotesTitle Underwriter in the first quarter of 2019;
•an increase of $10 million in variable2022 and lower employee-related and other operating costs at Realogy Title Group primarily due to cost savings initiatives and lower employee incentive accruals, partially offset by higher costs in the first half of the year and an increase in refinance revenue and underwriter revenue; andaccruals for several legal matters;
•a $7 million increase in employee-related costs, professional fees and other operating costs.
The expense increases were partially offset by:
•a $126$338 million decrease in commission and other sales agent-related costs primarily due to lower homesale transaction volume, partially offset by an approximately $110 million increase in the portion of sales commissions received by independent sales agents which was primarily driven by agent mix with more productive, higher compensated agents closing more volume as a resultpercent of the total and the impact of lower homesale transactionsrecruitment and retention efforts;
•$140 million in other income primarily due to the gain recorded at RealogyTitle Group for the sale of the Title Underwriter during the first quarter of 2022 and the disposition during the second quarter of 2022 of a portion of our minority interest in the Title Insurance Underwriter Joint Venture compared to $15 million of other income primarily due to the gain recorded at Owned Brokerage Group;Group related to the sale of a business during 2021; and
•a $5$77 million net gain on the early extinguishmentdecrease in interest expense primarily due to a reduction in total outstanding indebtedness and lower interest rates as a result of debtrefinancing activities during 2022 compared to 2021 and a $26 million fair value adjustment related to mark-to-market adjustments for interest rate swaps that resulted in $40 million of gains during the year ended December 31, 20192022 compared to $14 million of gains during 2021,
partially offset by:
•$483 million of impairment expense during 2022 which includesan impairment of goodwill at the Owned Brokerage Group reporting unit of $280 million, an impairment of goodwill at the Franchise Group segment of $114 million related to the Cartus/Leads Group reporting unit, an impairment of franchise trademarks of $76 million and $13 million of other impairment charges related to lease asset, investment and software impairments compared to $4 million of impairment expense during 2021 primarily related to software and lease asset impairments;
•a $7$96 million loss on the early extinguishment of debt during the year ended December 31, 2018 as a result of the refinancing transactions in February 2018.
Earnings from equity investments were $18 million forduring the year ended December 31, 20192022 which includes approximately $80 million related to make-whole premiums paid in connection with the early redemption of the 7.625% Senior Secured Second Lien Notes and 9.375% Senior Notes during the first quarter, compared to lossesa $21 million loss on the early extinguishment of $4 million fordebt as a result of the year ended December 31, 2018 primarily due to an improvement in earnings of Guaranteed Rate Affinity.refinancing transactions during 2021; and
During the year ended December 31, 2019, we incurred $42•a $15 million ofincrease in restructuring costs primarily related to the Company's restructuring program focused on office consolidation and institutingrelated to operational efficiencies which began during the third quarter of 2022.
Equity in losses were $28 million for the year ended December 31, 2022 compared to drive profitability.earnings of $48 million during the same period of 2021. Equity in losses for the year ended December 31, 2022 consisted of $22 million of losses from Guaranteed Rate Affinity and $17 million of losses from the RealSure joint venture, partially offset by $6 million of earnings from the Title Insurance Underwriter Joint Venture and $5 million of earnings from the operations of our other title related equity method investments. Equity in earnings for the year ended December 31, 2021 consisted of $49 million of earnings from Guaranteed Rate Affinity and $6 million of earnings from the operations of our other title related equity method investments, partially offset by $7 million of losses from the RealSure joint venture. The decrease from Guaranteed Rate Affinity was primarily driven by significantly higher mortgage rates and margin compression.
Beginning in the third and continuing in the fourth quarter of 2022, we took additional cost savings actions to offset, in part, expected declines in homesale transaction volume, including reductions in the near term on spending on certain variable and semi-variable expenses and streamlining our administrative support cost structure. As a result, we implemented a restructure plan ("Operational Efficiencies Plan") under which we incurred $20 million of costs including $14 million of personnel related costs and $6 million of facility related costs during the year ended December 31, 2022. Total expected restructuring costs under the Operational Efficiencies Plan are currently anticipated to be $35 million. Cost savings related to these restructuring activities was approximately $30 million. In addition to the cost savings related to restructuring activities, there was an additional $120 million of cost savings realized in 2022. Of the cost savings initiated during 2022, approximately $50 million of additional savings will be realized in 2023.
Furthermore, in connection with prior restructuring programs, we incurred $12 million of restructuring costs during the year ended December 31, 2022 compared to $17 million during 2021. These costs primarily related to operational and facility related efficiencies including the transformation of our corporate headquarters. See Note 13,14, "Restructuring Costs", in the Consolidated Financial Statements for additional information.
The provision for income taxes was a benefit of $22$68 million for the year ended December 31, 20192022 compared to an expense of $67$133 million for the year ended December 31, 2018.2021. Our effective tax rate was 16%19% and 28% for the yearyears ended December 31, 2019.2022 and 2021, respectively. See Note 12, "Income Taxes", into the Consolidated Financial Statements for additional information and a reconciliation of the Company’s effective income tax rate.
The following table reflects a reconciliation of Net (loss) income attributable to Anywhere and Anywhere Group to Operating EBITDA and the results of each of our reportable segments during the years ended December 31, 20192022 and 2018:2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Revenues (a) | | | | $ Change | | % Change | | Operating
EBITDA | | | | $ Change | | % Change | | Operating EBITDA Margin | | | | Change |
| | 2019 | | 2018 | | | | | | 2019 | | 2018 | | | | | | 2019 | | 2018 | | |
| Realogy Franchise Group | $ | 803 | | | $ | 820 | | | (17) | | | (2) | % | | $ | 535 | | | $ | 564 | | | (29) | | | (5) | % | | 67 | % | | 69 | % | | (2) | |
| Realogy Brokerage Group | 4,409 | | | 4,607 | | | (198) | | | (4) | | | 4 | | | 44 | | | (40) | | | (91) | | | — | | | 1 | | | (1) | |
| Realogy Title Group | 596 | | | 580 | | | 16 | | | 3 | | | 68 | | | 49 | | | 19 | | | 39 | | | 11 | | | 8 | | | 3 | |
| Realogy Leads Group | 83 | | | 81 | | | 2 | | | 2 | | | 53 | | | 51 | | | 2 | | | 4 | | | 64 | | | 63 | | | 1 | |
| Corporate and Other | (293) | | | (306) | | | 13 | | | * | | (98) | | | (85) | | | (13) | | | * | | | | | | |
| Total continuing operations | $ | 5,598 | | | $ | 5,782 | | | (184) | | | (3) | % | | $ | 562 | | | $ | 623 | | | (61) | | | (10) | % | | 10 | % | | 11 | % | | (1) | |
| Contribution from discontinued operations | | | | | | | | | 28 | | | 35 | | | | | | | | | | | |
| Operating EBITDA including discontinued operations | | | | | | | | | 590 | | | 658 | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Less: Depreciation and amortization (b) | | | | | | | | | 169 | | | 166 | | | | | | | | | | | |
| Interest expense, net | | | | | | | | | 249 | | | 189 | | | | | | | | | | | |
| Income tax (benefit) expense | | | | | | | | | (22) | | | 67 | | | | | | | | | | | |
| Restructuring costs, net (c) | | | | | | | | | 42 | | | 47 | | | | | | | | | | | |
| Impairments (d) | | | | | | | | | 249 | | | — | | | | | | | | | | | |
| Former parent legacy cost, net (e) | | | | | | | | | 1 | | | 4 | | | | | | | | | | | |
| (Gain) loss on the early extinguishment of debt (e) | | | | | | | | | (5) | | | 7 | | | | | | | | | | | |
| Adjustments attributable to discontinued operations (f) | | | | | | | | | 95 | | | 41 | | | | | | | | | | | |
| Net (loss) income attributable to Realogy Holdings and Realogy Group | | | | | | | | | $ | (188) | | | $ | 137 | | | | | | | | | | | |
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
| Net (loss) income attributable to Anywhere and Anywhere Group | $ | (287) | | | $ | 343 | |
| Income tax (benefit) expense | (68) | | | 133 | |
| (Loss) income before income taxes | (355) | | | 476 | |
| Add: Depreciation and amortization | 214 | | | 204 | |
| Interest expense, net | 113 | | | 190 | |
| Restructuring costs, net (a) | 32 | | | 17 | |
| Impairments (b) | 483 | | | 4 | |
| Former parent legacy cost, net (c) | 1 | | | 1 | |
| Loss on the early extinguishment of debt (c) | 96 | | | 21 | |
| Gain on the sale of businesses, investments or other assets, net (d) | (135) | | | (11) | |
| Operating EBITDA | $ | 449 | | | $ | 902 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenues (e) | | $ Change | | %
Change | | Operating EBITDA | | $ Change | | % Change | | Operating EBITDA Margin | | Change |
| 2022 | | 2021 | | | | 2022 | | 2021 | | | | 2022 | | 2021 | |
| Franchise Group | $ | 1,145 | | | $ | 1,249 | | | $ | (104) | | | (8)% | | $ | 670 | | | $ | 751 | | | $ | (81) | | | (11)% | | 59 | % | | 60% | | (1) | |
| Owned Brokerage Group | 5,606 | | | 6,189 | | | (583) | | | (9) | | (86) | | | 109 | | | (195) | | | (179) | | (2) | | | 2 | | (4) | |
| Title Group | 530 | | | 952 | | | (422) | | | (44) | | 9 | | | 200 | | | (191) | | | (96) | | 2 | | | 21 | | (19) | |
| Corporate and Other | (373) | | | (407) | | | 34 | | | (e) | | (144) | | | (158) | | | 14 | | | 9 | | | | | | |
| Total Company | $ | 6,908 | | | $ | 7,983 | | | $ | (1,075) | | | (13)% | | $ | 449 | | | $ | 902 | | | $ | (453) | | | (50)% | | 6 | % | | 11% | | (5) | |
_______________
* not meaningful
(a)Includes the elimination of transactions between segments, which consists of intercompany royalties and marketing fees paid by Realogy Brokerage Group of $293 million and $306 million during the years ended December 31, 2019 and 2018, respectively.
(b)Depreciation and amortization for the year ended December 31, 2018 includes $2 million of amortization expense related to Guaranteed Rate Affinity's purchase accounting included in the "Equity in (earnings) losses of unconsolidated entities" line on the Consolidated Statement of Operations.
(c)Restructuring charges incurred for the year ended December 31, 20192022 include $2$1 million at Realogy Franchise Group, $25$19 million at RealogyOwned Brokerage Group $3 million at Realogy Title Group, $2 million at Realogy Leads Group and $10$12 million at Corporate and Other. Restructuring charges incurred for the year ended December 31, 20182021 include $3$5 million at Realogy Franchise Group, $37$7 million at RealogyOwned Brokerage Group $4 million at Realogy Title Group and $3$5 million at Corporate and Other.
(d)(b)ImpairmentsNon-cash impairments for the year ended December 31, 2019 includes a2022 include an impairment of goodwill impairment charge of $237 million duringat the third quarter which reduced the net carrying value of RealogyOwned Brokerage Group by $180reporting unit of $280 million, after accounting foran impairment of goodwill at the Franchise Group segment of $114 million related income tax benefitto the Cartus/Leads Group reporting unit, an impairment of $57franchise trademarks of $76 million and $12$13 million of other impairment charges primarily related to lease asset, impairments.
(e)Former parent legacy itemsinvestment and (Gain) loss on the early extinguishment of debt are recorded in Corporate and Other. During the year ended December 31, 2019, the Company recorded a gain on the early extinguishment of debt of $5 million which consisted of a $10 million gain as a result of the repurchase of Senior Notes completed in the third quarter of 2019, partially offset by a $5 million loss as a result of the refinancing transactions in the first quarter of 2019.
(f)Includes depreciation and amortization, interest expense, income tax and restructuring charges related to discontinued operations for the years ended December 31, 2019 and 2018. In addition, the year ended December 31, 2019 includes the estimated loss on the sale of discontinued operations of $22 million and the related tax expense of $38 million.
As described in the aforementioned table, Operating EBITDA margin for "Total continuing operations" expressed as a percentage of revenues decreased 1 percentage point to 10% from 11%software impairments. Non-cash impairments for the year ended December 31, 2019 compared2021 primarily relate to 2018. On a segment basis, Realogy Franchise Group's margin decreased 2 percentage points to 67% from 69% primarily due to a decrease in royalty revenues. Realogy Brokerage Group's margin decreased 1 percentage point to zero from 1% primarily due to lower transaction volume during 2019 compared to 2018. Realogy Title Group's margin increased 3 percentage points to 11% from 8% for the year ended December 31, 2019 compared to 2018 primarily as a result of improved earnings from equity method investments. Realogy Leads Group's margin increased 1 percentage point to 64% from 63% primarily due to higher average fees partially offset by a reduction in referrals, primarily attributable to the discontinuation of the USAA affinity program which ceased new enrollments in the third quarter of 2019.
Corporatesoftware and Other Operating EBITDA for the year ended December 31, 2019 declined $13 million to negative $98 million primarily due to an increase in employee-related costs, professional fees and other costs.
Realogy Franchise and Brokerage Groups on a Combined Basis
The following table reflects Realogy Franchise and Brokerage Groups' results before the intercompany royalties and marketing fees, as well as on a combined basis to show the Operating EBITDA contribution of these business units to the overall Operating EBITDA of the Company. The Operating EBITDA margin for the combined segments decreased 1% percentage point from 12% to 11% primarily due to lower transaction volume during the year ended December 31, 2019 compared to 2018:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Revenues | | | | Change | | %
Change | | Operating EBITDA | | | | Change | | %
Change | | Operating EBITDA Margin | | | | Change |
| | 2019 | | 2018 | | | | | | 2019 | | 2018 | | | | | | 2019 | | 2018 | | |
| Realogy Franchise Group (a) | $ | 510 | | | $ | 514 | | | $ | (4) | | | (1) | % | | $ | 242 | | | $ | 258 | | | $ | (16) | | | (6) | % | | 47 | % | | 50 | % | | (3) | |
| Realogy Brokerage Group (a) | 4,409 | | | 4,607 | | | (198) | | | (4) | | | 297 | | | 350 | | | (53) | | | (15) | | | 7 | | | 8 | | | (1) | |
| Realogy Franchise and Brokerage Groups Combined | $ | 4,919 | | | $ | 5,121 | | | $ | (202) | | | (4) | % | | $ | 539 | | | $ | 608 | | | $ | (69) | | | (11) | % | | 11 | % | | 12 | % | | (1) | |
_______________
(a)The segment numbers noted above do not reflect the impact of intercompany royalties and marketing fees paid by Realogy Brokerage Group to Realogy Franchise Group of $293 million and $306 million during the years ended December 31, 2019 and 2018, respectively.
Realogy Franchise Group
Revenues decreased $17 million to $803 million and Operating EBITDA decreased $29 million to $535 million for the year ended December 31, 2019 compared with 2018.
Revenues decreased $17 million primarily as a result of:
•a $13 million decrease in intercompany royalties received from Realogy Brokerage Group;
•an $8 million decrease in third-party domestic franchisee royalty revenue primarily due to flat homesale transaction volume with an increase in the number of transactions closed by our top 250 franchisees, the impact of the "capped fee model" that was launched for our Better Homes and Gardens® Real Estate franchise business in January 2019 and a decrease in the average broker commission rate;
•a $6 million decrease in other revenue primarily related to preferred alliance; and
•a $2 million decrease in international royalties;
partially offset by a $3 million increase in international area development fee revenue as a result of contract terminations of non-performing master franchisors.
Registration revenue and brand marketing fund revenue increased $9 million and related expenses increased $11 million, primarily due to the level and timing of advertising spending and conferences including the RGX event during 2019 compared with 2018.
Realogy Franchise Group revenue includes intercompany royalties received from Realogy Brokerage Group of $282 million and $295 million during the years ended December 31, 2019 and 2018, respectively, which are eliminated in consolidation against the expense reflected in Realogy Brokerage Group's results.
The $29 million decrease in Operating EBITDA was principally due to the $23 million decrease in royalty revenues, the $6 million decrease in other revenues and the net $2 million of marketing expense discussed above, as well as $3 million higher expense for bad debt and notes reserves, partially offset by a $3 million increase in international area development fee revenue as a result of contract terminations discussed above.
Realogy Brokerage Group
Revenues decreased $198 million to $4,409 million and Operating EBITDA decreased $40 million to $4 million for the year ended December 31, 2019 compared with 2018.
The revenue decrease of $198 million was primarily driven by a 4% decrease in homesale transaction volume at Realogy Brokerage Group. Realogy Brokerage Group saw lower transaction volume primarily driven by the competitive environment as well as our geographic concentration.
Operating EBITDA decreased $40 million primarily due to the $198 million decrease in revenues discussed above partially offset by:
•a $126 million decrease in commission expenses paid to independent sales agents from $3,282 million for the year ended December 31, 2018 to $3,156 million for the year ended December 31, 2019. Commission expense decreased primarily as a result of the impact of lower homesale transaction volume as discussed above;
•a $19 million decrease in other costs including occupancy costs, employee-related costs and other operating costs; and
•a $13 million decrease in royalties paid to Realogy Franchise Group from $295 million for the year ended December 31, 2018 to $282 million in 2019.
Realogy Title Group
Revenues increased $16 million to $596 million and Operating EBITDA increased $19 million to $68 million for the year ended December 31, 2019 compared with 2018.
Revenues increased $16 million primarily as a result of a $20 million increase in refinance revenue due to an increase in activity in the refinance market and a $14 million increase in underwriter revenue due to an increase of underwriter premiums as a result of a shift in mix to unaffiliated agents, partially offset by a $17 million decrease in resale revenue due to a decline in purchase transactions.
Operating EBITDA increased $19 million primarily as a result of the $16 million increase in revenue discussed above and a $20 million increase in earnings from equity investments primarily related to Guaranteed Rate Affinity during the year ended December 31, 2019 compared with 2018. These increases were partially offset by an increase of $10 million in operating costs primarily due to an increase in refinance revenue and underwriter revenue with unaffiliated agents where the revenue and expense is recorded on a gross basis and a $7 million increase in employee related and other costs.
Realogy Leads Group
Revenues increased $2 million to $83 million and Operating EBITDA increased $2 million to $53 million for the year ended December 31, 2019 compared with 2018.
Referral revenues increased $2 million driven by higher average fees which was partially offset by lower referral transactions primarily driven by USAA affinity program which ceased new enrollments in the third quarter of 2019. The Company expects that referral revenues for Realogy Leads Group will be materially impacted on a go-forward basis as a result of the discontinuation of the USAA affinity program. See "Recent Developments—Realogy Leads Group" in this Item 7. for additional information.
Operating EBITDA increased $2 million primarily as a result of the $2 million increase in revenues discussed above.
Year Ended December 31, 2018 vs. Year Ended December 31, 2017
Our consolidated results comprised the following:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | |
| | 2018 | | 2017 | | Change |
| Net revenues | $ | 5,782 | | | $ | 5,810 | | | $ | (28) | |
| Total expenses | 5,565 | | | 5,466 | | | 99 | |
| Income from continuing operations before income taxes, equity in losses (earnings) and noncontrolling interests | 217 | | | 344 | | | (127) | |
| Income tax expense (benefit) (a) | 67 | | | (66) | | | 133 | |
| Equity in losses (earnings) of unconsolidated entities | 4 | | | (18) | | | 22 | |
| Net income from continuing operations | 146 | | | 428 | | | (282) | |
| Net (loss) income from discontinued operations | (6) | | | 6 | | | (12) | |
| Net income | 140 | | | 434 | | | (294) | |
| Less: Net income attributable to noncontrolling interests | (3) | | | (3) | | | — | |
| Net income attributable to Realogy Holdings and Realogy Group | $ | 137 | | | $ | 431 | | | $ | (294) | |
_______________
(a)Income tax benefit for the year ended December 31, 2017 reflects the impact of the 2017 Tax Act.
Net revenues decreased $28 million for the year ended December 31, 2018 compared with the year ended December 31, 2017, principally due to a decrease in gross commission income as a result of lower homesale transaction volume at Realogy Brokerage Group.
Total expenses increased $99 million or 2% primarily due to:
•a $52 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;
•$47 million of restructuring costs for the year ended December 31, 2018 primarily for the Company's restructuring program related to leadership realignment and other restructuring activities compared to $12 million of restructuring costs incurred in 2017 related to the Company's business optimization plan;
•a $32 million net increase in interest expense to $189 million for the year ended December 31, 2018 compared to $157 million for the year ended December 31, 2017 primarily due to an increase in interest expense due to LIBOR rates increases, as well as mark-to-market adjustments for our interest rate swaps that resulted in losses of $4 million for the year ended December 31, 2018 compared to gains of $4 million for the year ended December 31, 2017, and a $2 million write off of financing costs to interest expense as a result of the refinancing transactions in February 2018; and
•a net cost of $4 million for former parent legacy items in 2018 compared to a net benefit of $10 million for former parent legacy items related to the settlement of a Cendant legacy tax matter in 2017.
The expense increases were partially offset by a $31 million decrease in operating and general and administrative expenses primarily driven by:
•a $35 million decrease in employee related and other operating costs primarily due to lower incentive accruals and cost savings initiatives;
•the absence in 2018 of an $8 million expense related to the transition of the Company's CEO which occurred in 2017; and
•the absence in 2018 of an $8 million expense related to the settlement of the Strader legal matter which occurred in 2017;
partially offset by:
•a $22 million increase in costs at Realogy Title Group primarily due to an increase in underwriter revenue with unaffiliated agents where the revenue and expense is recorded on a gross basis and other operating costs.
Losses from equity investments were $4 million during the year ended December 31, 2018 primarily related to losses from the operations of Guaranteed Rate Affinity. Guaranteed Rate Affinity, which began doing business in August 2017 on a phased-in basis, experienced operational challenges at the joint venture in addition to tight industry margins in a highly competitive industry as well as rising mortgage rates. During the year ended December 31, 2017, the Company recorded earnings from equity investments of $18 million, which related to $35 million in earnings from the sale of PHH Home Loans LLC's ("PHH Home Loans") assets to Guaranteed Rate Affinity, partially offset by the recognition of $7 million exit costs at PHH Home Loans, losses of $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.
The provision for income taxes was an expense of $67 million for the year ended December 31, 2018 compared to a benefit of $66 million for the year ended December 31, 2017. The income tax benefit for the year ended December 31, 2017 reflects the impact of the 2017 Tax Act. Our effective tax rate was 31% for the year ended December 31, 2018. See Note 10, "Income Taxes", in the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2018 for additional information and a reconciliation of the Company’s effective income tax rate.
The following table reflects the results of each of our reportable segments for the years ended December 31, 2018 and 2017:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Revenues (a) | | | | $ Change | | % Change | | Operating EBITDA | | | | $ Change | | % Change | | Operating EBITDA Margin | | | | |
| | 2018 | | 2017 | | | | | | 2018 | | 2017 | | | | | | 2018 | | 2017 | | Change |
| Realogy Franchise Group | $ | 820 | | | $ | 830 | | | $ | (10) | | | (1) | % | | $ | 564 | | | $ | 560 | | | $ | 4 | | | 1 | % | | 69 | % | | 67 | % | | 2 | |
| Realogy Brokerage Group | 4,607 | | | 4,643 | | | (36) | | | (1) | | | 44 | | | 135 | | | (91) | | | (67) | | | 1 | | | 3 | | | (2) | |
| Realogy Title Group | 580 | | | 570 | | | 10 | | | 2 | | | 49 | | | 59 | | | (10) | | | (17) | | | 8 | | | 10 | | | (2) | |
| Realogy Leads Group | 81 | | | 78 | | | 3 | | | 4 | | | 51 | | | 45 | | | 6 | | | 13 | | | 63 | | | 58 | | | 5 | |
| Corporate and Other | (306) | | | (311) | | | 5 | | | * | | (85) | | | (107) | | | 22 | | | * | | | | | | |
| Total continuing operations | $ | 5,782 | | | $ | 5,810 | | | $ | (28) | | | — | % | | $ | 623 | | | $ | 692 | | | $ | (69) | | | (10) | % | | 11 | % | | 12 | % | | (1) | |
| Contribution from discontinued operations | | | | | | | | | 35 | | | 40 | | | | | | | | | | | |
| Operating EBITDA including discontinued operations | | | | | | | | | 658 | | | 732 | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Less: Depreciation and amortization (c) | | | | | | | | | 166 | | | 169 | | | | | | | | | | | |
| Interest expense, net | | | | | | | | | 189 | | | 157 | | | | | | | | | | | |
| Income tax expense (benefit) (d) | | | | | | | | | 67 | | | (66) | | | | | | | | | | | |
| Restructuring costs, net (e) | | | | | | | | | 47 | | | 12 | | | | | | | | | | | |
| Former parent legacy cost (benefit), net (f) | | | | | | | | | 4 | | | (10) | | | | | | | | | | | |
| Loss on the early extinguishment of debt (f) | | | | | | | | | 7 | | | 5 | | | | | | | | | | | |
| Adjustments attributable to discontinued operations (g) | | | | | | | | | 41 | | | 34 | | | | | | | | | | | |
| Net income attributable to Realogy Holdings and Realogy Group | | | | | | | | | $ | 137 | | | $ | 431 | | | | | | | | | | | |
_______________
* not meaningful
(a)Includes the elimination of transactions between segments, which consists of intercompany royalties and marketing fees paid by Realogy Brokerage Group of $306 million and $311 million during the years ended December 31, 2018 and 2017, respectively.
(b)Realogy Brokerage Group Operating EBITDA includes $22 million of equity earnings from PHH Home Loans for the year ended December 31, 2017.lease asset impairments.
(c)Depreciation and amortization for the years ended December 31, 2018 and 2017 includes $2 million and $3 million, respectively, of amortization expense related to Guaranteed Rate Affinity's purchase accounting included in the "Equity in (earnings) losses of unconsolidated entities" line on the Consolidated Statement of Operations.
(d)Income tax benefit for the year ended December 31, 2017 reflects the impact of the 2017 Tax Act.
(e)Restructuring charges incurred for the year ended December 31, 2018 include $3 million at Realogy Franchise Group, $37 million at Realogy Brokerage Group, $4 million at Realogy Title Group and $3 million at Corporate and Other. Restructuring charges incurred for the year ended December 31, 2017 include $1 million at Realogy Franchise Group, $9 million at Realogy Brokerage Group, $1 million at Realogy Title Group and $1 million at Corporate and Other.
(f)Former parent legacy items and Loss on the early extinguishment of debt are recorded in Corporate and Other.
(g)(d)Includes depreciationGain on the sale of businesses, investments or other assets, net for the year ended December 31, 2022 is recorded in Title Group and amortization, interest expense, income tax and restructuring charges related to discontinued operationsthe sale of the Title Underwriter during the first quarter of 2022 and the sale of a portion of the Company's ownership in the Title Insurance Underwriter Joint Venture during the second quarter of 2022. Gain on the sale of businesses, investments or other assets, net for the year ended December 31, 2021 is primarily recorded in Owned Brokerage Group.
(e)Revenues include the elimination of transactions between segments, which consists of intercompany royalties and marketing fees paid by Owned Brokerage Group of $373 million and $407 million during the years ended December 31, 20182022 and 2017.2021, respectively, and are eliminated through the Corporate and Other line.
As described in the aforementioned table, Operating EBITDA margin for "Total Company" expressed as a percentage of revenues decreased 5 percentage points to 6% for the year ended December 31, 2022 compared to 11% in 2021. Franchise Group's margin decreased 1 percentage point to 59% from 60% primarily due to a decrease in royalty revenue, partially offset by an increase in revenue from our relocation business. Owned Brokerage Group's margin decreased 4 percentage points to negative 2% from 2% primarily due to increases in the portion of sales commissions received by independent sales agents which is primarily driven by agent mix with more productive, higher compensated agents closing more volume as a percent of the total and the impact of recruitment and retention efforts. Title Group's margin decreased 19 percentage points to 2% from 21% largely the result of a decrease in equity in earnings from Guaranteed Rate Affinity and a decline in purchase and refinance revenue. Title Group's margin, excluding equity in earnings and the impact of the sale of the Title Underwriter, decreased 11 percentage points to 3% from 14% largely the result of a decline in purchase and refinance revenue.
Corporate and Other Operating EBITDA for the year ended December 31, 2022 improved $14 million to negative $144 million primarily due to lower employee incentive accruals, partially offset by an increase in accruals for several legal matters.
Anywhere Brands—Franchise Group
Revenues decreased $104 million to $1,145 million and Operating EBITDA decreased $81 million to $670 million for the year ended December 31, 2022 compared with 2021.
Revenues decreased $104 million primarily as a result of a $96 million decrease in third-party domestic franchisee royalty revenue, primarily driven by a 16% decrease in homesale transaction volume at Franchise Group which consisted of a 22% decrease in existing homesale transactions, partially offset by a 7% increase in average homesale price, a $35 million decrease in intercompany royalties received from Owned Brokerage Group and a $6 million decrease in international and other franchise revenue. The revenue decreases were partially offset by a $36 million net increase in revenue from our relocation operations driven principally by higher volume.
Franchise Group's revenue includes intercompany royalties received from Owned Brokerage Group of $358 million and $393 million during the years ended December 31, 2022 and 2021, respectively, which are eliminated in consolidation against the expense reflected in Owned Brokerage Group's results.
The $81 million decrease in Operating EBITDA was primarily due to the $104 million decrease in revenues discussed above, partially offset by a $23 million decrease in employee-related and other operating costs primarily due to lower employee incentive accruals, partially offset by higher costs in the first half of the year.
As described in the aforementioned table, Operating EBITDA margin for "Total continuing operations" expressed as a percentage of revenues decreased 1 percentage point to 11% from 12% for the year ended December 31, 2018 compared to 2017. On a segment basis, Realogy Franchise Group's margin increased 2 percentage points to 69% from 67% primarily due to a decrease in employee related costs as a result of lower incentive accruals. RealogyAnywhere Advisors—Owned Brokerage Group'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 and the impact of lower closing volume in our new development business, which typically has higher margins. Realogy Title Group's margin decreased 2 percentage points to 8% from 10% for the year ended December 31, 2018 compared to 2017 primarily as a result of a decrease in refinancing revenue. Realogy Leads Group's margin increased 5 percentage points to 63% from 58% primarily due to a decrease in employee related costs as a result of cost savings initiatives.
Corporate and Other Operating EBITDA for the year ended December 31, 2018 improved $22 million to negative $85 million primarily due to the absence in 2018 of an $8 million expense related to the settlement of the Strader legal matter which occurred in 2017, the absence in 2018 of $8 million of costs related to the transition of the Company's CEO which occurred in 2017 and a $2 million decrease in other employee costs primarily related to lower employee incentive accruals offset by an increase in technology related headcount.
Realogy Franchise and Brokerage Groups on a Combined Basis
The following table reflects Realogy Franchise and Brokerage Groups' results before the intercompany royalties and marketing fees, as well as on a combined basis to show the Operating EBITDA contribution of these business units to the overall Operating EBITDA of the Company. The Operating EBITDA margin for the combined segments decreased 1% percentage point from 13% to 12% primarily due to higher sales commission percentages paid to Realogy Brokerage Group's independent sales agents affiliated with Realogy Brokerage Group and the impact of lower closing volume in Realogy Brokerage Groups' new development business, which typically has higher margins:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Revenues | | | | Change | | %
Change | | Operating EBITDA | | | | Change | | %
Change | | Operating EBITDA Margin | | | | Change |
| | 2018 | | 2017 | | | | | | 2018 | | 2017 | | | | | | 2018 | | 2017 | | |
| Realogy Franchise Group (a) | $ | 514 | | | $ | 519 | | | $ | (5) | | | (1) | % | | $ | 258 | | | $ | 249 | | | $ | 9 | | | 4 | % | | 50 | % | | 48 | % | | 2 | |
| Realogy Brokerage Group (a)(b) | 4,607 | | | 4,643 | | | (36) | | | (1) | | | 350 | | | 446 | | | (96) | | | (22) | | | 8 | | | 10 | | | (2) | |
| Realogy Franchise and Brokerage Groups Combined | $ | 5,121 | | | $ | 5,162 | | | $ | (41) | | | (1) | % | | $ | 608 | | | $ | 695 | | | $ | (87) | | | (13) | % | | 12 | % | | 13 | % | | (1) | |
_______________
(a)The segment numbers noted above do not reflect the impact of intercompany royalties and marketing fees paid by Realogy Brokerage Group to Realogy Franchise Group of $306 million and $311 million during the years ended December 31, 2018 and 2017, respectively.
(b)Realogy Brokerage Group Operating EBITDA includes $22 million of equity earnings from PHH Home Loans for the year ended December 31, 2017.
Realogy Franchise Group
Revenues decreased $10$583 million to $820$5,606 million whileand Operating EBITDA increased $4decreased $195 million to $564a loss of $86 million for the year ended December 31, 20182022 compared with 2017.
Revenues decreased $10 million as a result of a $4 million increase in other incentives, a $4 million decrease in intercompany royalties received from Realogy Brokerage Group and a $2 million decrease in other revenue primarily due to the timing of brand conferences and franchisee events.
Realogy Franchise Group revenue includes intercompany royalties received from Realogy Brokerage Group of $295 million and $299 million during the years ended December 31, 2018 and 2017, respectively, which are eliminated in consolidation against the expense reflected in Realogy Brokerage Group's results.
The $4 million increase in Operating EBITDA was principally due to a $9 million decrease in employee related costs primarily due to lower incentive accruals and a $5 million decrease in expenses related to the timing of brand conferences and franchisee events, partially offset by the $10 million decrease in revenues discussed above.
Realogy Brokerage Group
Revenues decreased $36 million to $4,607 million and Operating EBITDA decreased $91 million to $44 million for the year ended December 31, 2018 compared with 2017.2021.
The revenue decrease of $36$583 million was primarily driven by a 1%9% decrease in homesale transaction volume at RealogyOwned Brokerage Group which consisted of a 2%14% decrease in the number ofexisting homesale transactions mostlyand a decline in the average homesale broker commission rate, partially offset by a 2%6% increase in average homesale price. Realogy Brokerage Group saw lower transaction volume in the New York metropolitan area and in the west coast, as well as a lower closing volume in its new development business, which is generally at a higher price point, compared to 2017.
Operating EBITDA decreased $91$195 million primarily due to:
•the $583 million decrease in revenues discussed above; and
•a $52$10 million increase in equity in losses primarily related to our former investment in the RealSure joint venture,
partially offset by:
•a $338 million decrease in commission expenses paid to independent sales agents from $3,230$4,753 million for the year ended December 31, 20172021 to $3,282$4,415 million for the year ended December 31, 2018.2022. Commission expense increaseddecreased as a result of the impact of initiatives focused on growing and retaining our productive independent sales agent base and a shift in mix in 2018 to lower closinghomesale transaction volume in the new development business, which typically has lower commission expense compared to traditional brokerage operations,as discussed above, partially offset by an approximately $110 million increase in the portion of sales commissions received by independent sales agents which is primarily driven by agent mix with more productive, higher compensated agents closing more volume as a percent of the total and the impact of lower homesale transaction volume;recruitment and retention efforts;
•a $36 million decrease in revenues discussed above;
•the absence in 2018 of $22 million in earnings from our equity method investment in PHH Home Loans primarily due to gains from the sale of PHH Home Loans' assets to Guaranteed Rate Affinity which occurred in 2017; and
•a $10 million increase in other costs including a $4 million increase in outsourcing costs and a $3 million increase in occupancy costs.
Operating EBITDA decreases were partially offset by:
•a $21 million decrease in employee related costs primarily due to lower incentive accruals;
•a $4$35 million decrease in royalties paid to Realogy Franchise Group from $299 million in 2017 to $295 million in 2018; and
•a $3 million decrease in marketing expenses.
Realogy Title Group
Revenues increased $10 million to $580 million while Operating EBITDA decreased $10 million to $49$393 million for the year ended December 31, 2018 compared2021 to $358 million for the same period in 2022 associated with 2017.the homesale transaction volume declines described above; and
Revenues increased $10 million as •a result of a $20 million increase in underwriter revenue due to an increase of underwriter premiums as a result of a shift in mix to unaffiliated agents, as well as a $5 million increase in resale revenue due to an increase in average fees, partially offset by a $13$25 million decrease in refinancing revenue due to an overall decrease in activity in the refinance market.
Operating EBITDA decreased $10 million as a result of an increase of $19 million inother operating costs primarily due to a net decrease in employee-related costs primarily a result of lower employee incentive accruals and cost savings initiatives, partially offset by an increase in underwriter revenue with unaffiliated agents where the revenue and expense is recorded on a gross basis and a $3 million increase in other operating costs, partially offset by the $10 million increase in revenues discussed above and a $3 million decrease in employee related costs.legal accruals.
Realogy Leads
Anywhere Integrated Services—Title Group
Revenues increased $3decreased $422 million to $81$530 million whileand Operating EBITDA increased $6decreased $191 million to $51$9 million for the year ended December 31, 20182022 compared with 2017.2021.
Revenues increased $3decreased $422 million primarily due to a $312 million decrease in underwriter revenue during the year ended December 31, 2022 compared to the same period in 2021 as a result of the sale of the Title Underwriter during the first quarter of 2022. Furthermore, purchase revenue decreased $64 million due to a $3 milliondecrease in transactions, partially offset by an increase in affinitythe average fee per closing unit. In addition, refinance revenue primarily driven by higher volume and fees.decreased $46 million due to a decrease in activity as average mortgage rates increased approximately 240 basis points during the year ended December 31, 2022 over the prior year.
Operating EBITDA increased $6decreased $191 million primarily due to the $110 million decrease in purchase and refinance revenues discussed above, a $66 million decrease in equity in earnings discussed further below and a $62 million net decline as a result of the sale of the Title Underwriter, partially offset by a $47 million decrease in employee-related and other operating costs primarily as a result of the $3 million increasedeclines in revenues discussed above and a $3 million decrease in employee relatedvariable operating costs primarily due to lower volume, lower employee incentive accruals and cost savings initiatives.
Equity in earnings decreased $66 million from earnings of $55 million during the year ended December 31, 2021 to losses of $11 million during the same period in 2022. The decrease primarily related to Guaranteed Rate Affinity which decreased $71 million from earnings of $49 million during the year ended December 31, 2021 to losses of $22 million during the same period in 2022. The decline in equity in earnings from Guaranteed Rate Affinity was mostly driven by significantly higher mortgage rates and margin compression. The decline in equity in earnings from Guaranteed Rate Affinity was partially offset by $6 million of earnings from our Title Insurance Underwriter Joint Venture during the year ended December 31, 2022.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Financial Condition
| | | | | | | | | | | | | | | | | |
| December 31, 2019 | | December 31, 2018 | | Change |
| Total assets | $ | 7,543 | | | $ | 7,290 | | | $ | 253 | |
| Total liabilities | 5,447 | | | 4,975 | | | 472 | |
| Total equity | 2,096 | | | 2,315 | | | (219) | |
| | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 | | Change |
| Total assets | $ | 6,383 | | | $ | 7,210 | | | $ | (827) | |
| Total liabilities | 4,616 | | | 5,018 | | | (402) | |
| Total equity | 1,767 | | | 2,192 | | | (425) | |
For the year ended December 31, 2019,2022, total assets increased $253decreased $827 million primarily due to:
•a $521 million decrease in cash and cash equivalents as discussed below under the addition of $515 million of operating lease assets to the balance sheet in the first quarter of 2019 as a result of the adoption of the new leasing standard;header "Cash Flows";
•a $39$483 million increasedecrease in other current and non-currenttotal assets primarily related to strategic investmentsimpairments during 2022 which includean impairment of goodwill at the Owned Brokerage Group reporting unit of $280 million, an impairment of goodwill at the Franchise Group segment of $114 million related to the Cartus/Leads Group reporting unit, an impairment of franchise trademarks of $76 million and prepaid assets;$13 million of other impairment charges related to lease asset, investment and software impairments;
•a $35 million increase in property and equipment; and
•a $32 million increase in cash and cash equivalents.
Total asset increases were partially offset by:
•a $236 million decrease in goodwill;
•a $76$91 million net decrease in franchise agreements and other amortizable intangible assets primarily due to amortization;
•a $49 million decrease in assets held for sale; and
•a $6$31 million net decrease in operating lease assets,
partially offset by:
•a $149 million increase in relocation and trade receivables primarily due to preferred alliance vendor payments.increases in volume at our relocation operations; and
For•a $137 million increase in other current and non-current assets primarily due to our $75 million equity investment in the year ended December 31, 2019, totalTitle Insurance Underwriter Joint Venture and prepaid independent sales agent incentives.
Total liabilities increased $472decreased $402 million primarily due to:
•the addition of $589a $196 million of operating leasedecrease in accrued expenses and other current liabilities primarily due to lower employee-related accruals, partially offset by an increase in accruals for several legal matters;
•a $114 million decrease in deferred tax liabilities primarily due to the balance sheet inrecognition of an income tax benefit related to impairment charges during the firstfourth quarter of 20192022 and as a result of the adoption of ASU 2020-06 on January 1, 2022 which resulted in the new leasing standard; andreversal of the deferred tax liability related to the Exchangeable Senior Notes;
•a $6$101 million increase in accrued expenses and other current liabilities.
Total liability increases were partially offset by:
•a $103 millionnet decrease in corporate debt primarily due to the repurchase of $93related to:
◦a $100 million of 4.875% Senior Notes during the third quarter of 2019, quarterly amortization payments of $30 million on the term loan facilities and an $80 millionnet decrease in borrowings under the Revolving Credit Facility, partially offset by a net increase in corporate debt due to the issuance of 9.375% $550$1,000 million aggregate principal amount of 5.25% Senior Notes and redemptionrepayment of 4.50% $450$550 million aggregate principal amount of 7.625% Senior Secured Second Lien Notes and $550 million aggregate principal amount of 9.375% Senior Notes during the first quarter of 2019;2022;
◦the repurchase of $67 millionin principal amount of our 4.875% Senior Notes through open market purchases during the second and third quarters of 2022; and
◦the redemption of all of our outstanding $340 million 4.875% Senior Notes utilizing borrowings under the Revolving Credit Facility together with cash on hand during the fourth quarter of 2022,
partially offset by:
◦$350 million of additional borrowings under the Revolving Credit Facility; and
◦a $65 million increase to the 0.25% Exchangeable Senior Notes liability due to the adoption of ASU 2020-06 on January 1, 2022 which resulted in the reversal of the unamortized debt discount and related equity component;
•a $52 million decrease in operating lease liabilities; and
•a $23$38 million decrease in other non-current liabilities related to a favorable fair value adjustment related to mark-to-market adjustments on the Company's interest rate swaps which were terminated in September 2022, as well as a decrease in certain liabilities of the Title Underwriter due to the sale,
partially offset by:
•a $54 million increase in accounts payable; and
•a $45 million increase in securitization obligations.
Total equity decreased $425 million for the year ended December 31, 2022 due to:
•a net loss of $287 million which was primarily driven by impairments of $483 million; and
•a $142 million decrease in additional paid-in capital primarily due to the reclassificationrepurchase of deferred rent liabilities8.8 million shares of common stock for $97 million during the second and third quarters of 2022 and a $53 million reduction on January 1, 2022 related to the adoption of ASU 2020-06 which were credited against operating lease assetsresulted in the reversal of the equity component related to the Exchangeable Senior Notes,
partially offset by:
•a $5 million reduction to accumulated deficit on January 1, 2022 related to the reversal of cumulative interest expense recognized for the amortization of the debt discount on the Exchangeable Senior Notes since issuance as a result of the adoption of the new leasing standard partially offset by increased mark-to-market liabilities for the Company's interest rate swaps.ASU 2020-06.
Total equity decreased $219 million primarily dueSee Note 2, "Summary of Significant Accounting Policies—Recently Adopted Accounting Pronouncements", to a net loss of $188 millionthe Consolidated Financial Statements for the year ended December 31, 2019 and a $27 million decrease in additional paid in capital for the year ended December 31, 2019. The decrease in additional paid in capital primarilyfurther discussion related to the $31 millionadoption of dividend payments during the first three quarters of 2019 and the Company's repurchase of $20 million of common stock during the first quarter of 2019, partially offset by stock-based compensation activity of $22 million for the year ended December 31, 2019.ASU 2020-06.
Liquidity and Capital Resources
We have historically satisfied our liquidity needs with cash Cash flows from operations and distributions from our unconsolidated joint ventures, supplemented by funds available under our Revolving Credit Facility and Apple Ridge securitization facility, are our primary sources of liquidity.
In July 2022, the Company amended its Senior Secured Credit Facility to, among other things, extend the maturity of the Revolving Credit Facility to July 2027 (subject to certain earlier springing maturity dates), terminate the revolving credit commitments due February 2023, and replace LIBOR with a Term SOFR-based rate as the applicable benchmark for the Revolving Credit Facility. Following the amendment, the Revolving Credit Facility has an aggregate capacity of $1.1 billion.
Our primary uses of liquidity needs have been to service our debt and finance ourinclude working capital, business investment and capital expenditures.expenditures, as well as debt service. We currently expecthave used and may also use future cash flows to prioritize investing in our businessrepurchase or redeem outstanding indebtedness and reducing indebtedness. Accordingly, we discontinued acquiringto acquire stock under our share repurchase programsprogram.
Business investments may include investments in strategic initiatives, including our existing or future joint ventures, products and services that are designed to simplify the home sale and purchase transaction, independent sales agent recruitment and retention, and franchisee system growth and acquisitions.
Debt service includes contractual amortization and interest payments. In addition, we may, from time to time, seek to repay, refinance or restructure all or a portion of our debt or to repurchase our outstanding debt through, as applicable, tender offers, exchange offers, open market purchases, privately negotiated transactions or otherwise. Such transactions, if any, will depend on a number of factors, including prevailing market conditions, our liquidity requirements and contractual requirements (including compliance with the terms of our debt agreements), among other factors.
In the first quarter of 20192022, we issued $1,000 million aggregate principal amount of 5.25% Senior Notes due in 2030. We used the net proceeds from the issuance, together with cash on hand, to redeem in full the 9.375% Senior Notes and discontinued our quarterly dividend the 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. Aggregate consideration paid for the redemption of the 9.375% Senior Notes and the 7.625% Senior Secured Second Lien Notes, together with debt issuance costs associated with the 5.25% Senior Notes, totaled $1,220 million.
During the second and third quarters of 2022, we repurchased $67 million in principal amount of the 4.875% Senior Notes through open market purchases at approximately par value. In the fourth quarter of 2019.2022, we redeemed in full the remaining $340 million aggregate principal amount of 4.875% Senior Notes using cash on hand and borrowings under our Revolving Credit Facility at a redemption price of 100% plus the applicable "make whole" premium, together with accrued interest to the redemption date of such notes for aggregate consideration of $350 million. See Note 9, "Short and Long-Term Debt", to the Consolidated Financial Statements.
We are significantly encumbered by our debt obligations.During the year ended December 31, 2022, the Company repurchased and retired 8.8 million shares of common stock for $97 million. As of December 31, 2019, our total debt, excluding our securitization obligations, was $3,445 million. Our liquidity position has been2022, $203 million remained available for repurchase under the share repurchase program. See "Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and is expected to continue to be negativelyIssuer Purchases of Equity Securities."
impacted byOur material cash requirements from known contractual and other obligations as of December 31, 2022, were as follows:
Debt Obligations (including Interest Payments). As of December 31, 2022, the principal amount of our total short-term and long-term debt was $2,875 million, which includes:
•$2,303 million of fixed interest rate debt with a weighted average interest rate of 4.6%;
•$222 million of variable interest rate debt under our Term Loan A Facility; and
•$350 million of variable interest rate debt under our Revolving Credit Facility.
At December 31, 2022, the interest expenserate on our debt obligations, which could be intensified by a significant increase in LIBOR (or any replacement rate) or ABR. We intend to use the substantial majority of the net proceeds from the planned sale of Cartus Relocation Services to pay down corporate debt, though we will continue to have substantial indebtedness.
We will continue to evaluate potential refinancing and financing transactions, including refinancing certain tranches of our indebtedness and extending maturities, among other potential alternatives. There can be no assurance as to which, if any, of these alternatives we may pursue as the choice of any alternative will depend upon numerous factors such as market conditions, our financial performance and the limitations applicable to such transactionsoutstanding amounts under our existing financing agreements and the consents we may need to obtain under the relevant documents. Financing may not be available to us on commercially reasonable terms, on terms that are acceptable to us, or at all. Any future indebtedness may impose various additional restrictions and covenants on us which could limit our ability to respond to market conditions, to make capital investments or to take advantage of business opportunities.
In addition, our Senior Secured Credit Facility and(i) Term Loan A Facility require uswas 6.14% (based on adjusted LIBOR plus an additional margin subject to maintain aadjustment based on our current senior secured leverage ratio, whichratio) and (ii) Revolving Credit Facility was 6.21% (based on a term SOFR-based rate including a 10 basis point credit spread adjustment plus an additional margin subject to adjustment based on our current senior secured leverage ratio). From time to time, the Company may not exceed 4.75utilize interest rate swap arrangements to 1.00. For the trailing twelve months endedmanage our exposure to changes in interest rates associated with our variable interest rate debt, but no such arrangements were in place as of December 31, 2019,2022.
Based on our debt profile as of December 31, 2022, we wereexpect to pay approximately $150 million in cash interest payments in 2023 to service our fixed and variable rate debt which will fluctuate based on the then-applicable interest rate and amounts outstanding. Amortization payments on the Extended Term Loan A of $16 million and $22 million are due in 2023 and 2024, respectively, with the balance of the Extended Term Loan A due at maturity on February 8, 2025 — the nearest term maturity of our outstanding indebtedness. As of December 31, 2022, no principal payments on our debt are due in 2023 other than the Extended Term Loan A amortization payment described above. See Note 9, "Short and Long-Term Debt", to the Consolidated Financial Statements for additional information regarding our debt.
Leases. As of December 31, 2022, we had approximately $579 million of future lease payments with $142 million due in 2023. See Note 6, "Leases", to the Consolidated Financial Statements for additional information regarding our lease obligations.
Purchase Commitments. As of December 31, 2022, we had $63 million related to purchase commitments due in 2023 and $274 million thereafter, approximately 80% 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 15, "Commitments and Contingencies", to the Consolidated Financial Statements for additional information regarding our purchase obligations.
Minority-Owned Joint Ventures. We have multiple unconsolidated joint ventures and equity in earnings or losses related to the financial results of unconsolidated joint ventures are recorded on the Equity in losses (earnings) of unconsolidated entities line in the accompanying Consolidated Statements of Operations (and accordingly impact Operating EBITDA), but are not reported as revenue. We may, from time to time, elect or commit to make investments in existing and future unconsolidated joint ventures. See Note 1, "Basis of Presentation—Sale of the Title Insurance Underwriter" and Note 4, "Equity Method Investments", to the Consolidated Financial Statements for additional information regarding our unconsolidated joint ventures, including with respect to the sale of the Title Underwriter in the first quarter of 2022 in exchange for cash and a minority interest in the Title Insurance Underwriter Joint Venture.
Other material factors that may impact our liquidity, include, but are not limited to, the following:
Market and Macroeconomic Conditions. If the residential real estate market or the economy as a whole does not improve or weakens, our business, financial condition and liquidity may be materially adversely affected, including our need to increase borrowings under our Revolving Credit Facility, our ability to access capital, grow our business and return capital to stockholders.
Material Litigation. We are a party to certain material litigation, including with respect to antitrust matters, compliance with the senior secured leverage ratio covenantTCPA and worker classification, as described in Note 15, "Commitments and Contingencies—Litigation", to the Consolidated Financial Statements. We dispute the allegations against the Company in each of these matters, believe we have substantial defenses against plaintiffs’ claims and are vigorously defending these actions, however it is not feasible to predict the ultimate outcome of litigation. Adverse outcomes in these matters may materially harm our business and financial condition, including with a ratio of 3.03respect to 1.0 with total senior secured debt (net of unrestricted cash and permitted investments) of $1,895 million and trailing twelve months EBITDA calculated on a Pro Forma Basis (as those terms are defined in the credit agreement governing the Senior Secured Credit Facility) of $626 million. For additional information, see below under the header "Financial Obligations—Covenants under the Senior Secured Credit Facility, Term Loan A Facility and Indentures".liquidity.
Our Operating EBITDA and EBITDA calculated on a Pro Forma basis has declined year-over-year for the past several years. If our EBITDA calculated on a Pro Forma Basis were to continue to decline and/or we were to incur additional senior secured debt (including additional borrowings under the Revolving Credit Facility), our ability to borrow the full capacity under the Revolving Credit Facility (without refinancing secured debt into unsecured debt) could be limited as we must maintain compliance with the senior secure leverage ratio described above of 4.75 to 1.00.
Seasonality. Historically, operating results and revenues for all of our businesses have been strongest in the second and third quarters of the calendar year.A significant portion of the expenses we incur in our real estate brokerage operations are
related to marketing activities and commissions and therefore, are variable.However, many of our other expenses, such as interest payments, facilities costs and certain personnel-related costs, are fixed and cannot be reduced during 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.
DuringWe believe that we will continue to meet our cash flow needs during the thirdnext twelve months, through the sources outlined above. Additionally, we may seek additional financing to fund future growth or refinance or restructure our existing indebtedness through the debt capital markets, but we cannot provide assurance that such financing will be available on favorable terms, or at all. 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.
Cash Flows
Year ended December 31, 2022 vs. Year ended December 31, 2021
At December 31, 2022, we had $218 million of cash, cash equivalents and restricted cash, a decrease of $525 million compared to the balance of $743 million at December 31, 2021. The following table summarizes our cash flows for the years ended December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | Change |
| Cash (used in) provided by: | | | | | |
| Operating activities | $ | (92) | | | $ | 643 | | | $ | (735) | |
| Investing activities | (55) | | | (147) | | | 92 | |
| Financing activities | (376) | | | (275) | | | (101) | |
| Effects of change in exchange rates on cash, cash equivalents and restricted cash | (2) | | | (1) | | | (1) | |
| Net change in cash, cash equivalents and restricted cash | $ | (525) | | | $ | 220 | | | $ | (745) | |
For the year ended December 31, 2022, $735 million more cash was used in operating activities compared to the same period in 2021 principally due to:
•$331 million less cash provided by operating results;
•$212 million more cash used for accounts payable, accrued expenses and other liabilities primarily related to the payment of higher employee incentive compensation in the first quarter of 2019,2022;
•$155 million less cash as a result of higher relocation and trade receivables volume in 2022; and
•$48 million less cash received from dividends primarily related to the Company repurchased $93absence of Guaranteed Rate Affinity dividends in 2022.
For the year ended December 31, 2022, $92 million less cash was used for investing activities compared to the same period in 2021 primarily due to:
•$48 million more cash proceeds from the sale of businesses primarily related to the sale of the Title Underwriter in the first quarter of 2022 which included $208 million of itscash received, partially offset by the absence of $152 million of cash held as statutory reserves by the Title Underwriter and no longer included in our Consolidated Balance Sheet;
•$17 million less cash used for investments;
•$13 million more cash proceeds received from investments; and
•$13 million more cash from other investing activities which included the $12 million dividend received from the Title Insurance Underwriter Joint Venture.
For the year ended December 31, 2022, $376 million of cash was used in financing activities compared to $275 million of cash used in financing activities during the same period in 2021. For the year ended December 31, 2022, $376 million of cash was used in financing activities as follows:
•$261 million of net cash paid as a result of:
◦the issuance of 5.25% Senior Notes and redemption of both the 9.375% Senior Notes and 7.625% Senior Secured Second Lien Notes in the first quarter of 2022; and
◦redemption and repurchases of the 4.875% Senior Notes through open market purchases at an aggregate purchase price of $83 million.
In March 2019, the Company issued $550 million of 9.375% Senior Notes dueand increase in April 2027. We used $540 million of the net proceeds to repay a portion of outstanding borrowings under our Revolving Credit Facility. In February 2019, the Company had used borrowings under its Revolving Credit Facility and cash on hand to fundas a result of the redemption during the fourth quarter of all of its outstanding $450 million 4.50% Senior Notes. The covenants in the indenture governing the 9.375% Senior Notes are substantially similar to the covenants in the indentures governing the 5.250% Senior Notes and the 4.785% Senior Notes, with certain exceptions, including changes relating to the Company’s ability to make restricted payments, including its ability to make dividend payments in excess of $45 million per calendar year or its ability to repurchase shares in any amount until the Company's consolidated leverage ratio is below 4.00 to 1.00.
In addition, we are required to pay quarterly amortization payments for the Term Loan B and Term Loan A facilities. We expect payments in 2020 to total $33 million and $11 million for the Term Loan A and Term Loan B facilities, respectively.
We may from time to time seek to repurchase our outstanding Unsecured Notes through tender offers, open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.
If the residential real estate market or the economy as a whole does not improve or continues to weaken, our business, financial condition and liquidity may be materially adversely affected, including our ability to access capital, grow our business and return capital to stockholders.2022;
Cash Flows
Year ended December 31, 2019 vs. Year ended December 31, 2018
At December 31, 2019, we had $235 million of cash, cash equivalents and restricted cash, an increase of $30 million compared to the balance of $205 million at December 31, 2018. The following table summarizes our cash flows for the years ended December 31, 2019 and 2018:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | |
| | 2019 | | 2018 | | Change |
| Cash provided by (used in): | | | | | |
| Operating activities | $ | 371 | | | $ | 394 | | | $ | (23) | |
| Investing activities | (128) | | | (91) | | | (37) | |
| Financing activities | (215) | | | (297) | | | 82 | |
| Effects of change in exchange rates on cash, cash equivalents and restricted cash | — | | | (2) | | | 2 | |
| Net change in cash from discontinued operations | 2 | | | 5 | | | (3) | |
| Net change in cash, cash equivalents and restricted cash from continuing operations | $ | 30 | | | $ | 9 | | | $ | 21 | |
For the year ended December 31, 2019, $23 million less cash was provided by operating activities compared to the same period in 2018 principally due to $131 million less cash provided by operating results, partially offset by:
•$61 million more cash provided by discontinued operations;
•$32 million less cash used for accounts payable, accrued expenses and other liabilities;
•$9 million less cash used for other assets; and
•$8 million more cash provided by other operating activities.
For the year ended December 31, 2019, we used $37 million more cash for investing activities compared to the same period in 2018 primarily due to:
•the absence in 2019 of $19 million of net cash proceeds received from the dissolution of our interest in PHH Home Loans, LLC which occurred in 2018;
•$16 million more cash used for property and equipment additions; and
•$7 million less cash provided by other investing activities,
partially offset by $3 million less cash used for investments in unconsolidated entities.
For the year ended December 31, 2019, $215 million of cash was used in financing activities compared to $297 million of cash used during the same period in 2018. For the year ended December 31, 2019, $215 million of cash was used for:
•$80 million repayment of borrowings under the Revolving Credit Facility;
•$31 million of dividend payments;
•$30 million of quarterly amortization payments on the term loan facilities;
•$25 million of other financing payments primarily related to finance leases;
•$23 million related to discontinued operations;
•$2097 million for the repurchase of our common stock;
•$636 million of other financing payments primarily related to finance leases and contracts;
•$16 million of tax payments related to net share settlement for stock-based compensation; and
•$3 million for payments of contingent consideration,
partially offset by:
•$3 million of cash received as a result of the refinancing transactions in 2019.
For the year ended December 31, 2018, $297 million of cash was used for:
•$402 million for the repurchase of our common stock;
•$45 million of dividend payments;
•$25 million of other financing payments primarily related to finance/capital leases;
•$2510 million of quarterly amortization payments on the term loan facilities;facilities,
77
cash was used in financing activities as follows:•$22234 million of net cash paid as a result of the pay downs of outstanding borrowings under the Term Loan B Facility and Non-extended Term Loan A, in the second and third quarters of 2021, partially offset by the issuance of the Exchangeable Senior Notes, which included payments for purchase of an exchangeable note hedge and proceeds from the issuance of warrants in the second quarter of 2021;
•$34 million of other financing payments of contingent consideration;primarily related to finance leases and contracts;
•$10 million of quarterly amortization payments on the term loan facilities; and
•$9 million of tax payments related to net share settlement for stock-based compensation; and
•$3 million for cash paid as a result of the refinancing transactions in February 2018 related to $16 million of debt issuance costs and $4 million repayment of borrowings under the Term Loan B Facility, partially offset by $17 million of proceeds received under the Term Loan A Facility,
partially offset by:
•$200 million of additional borrowings under the Revolving Credit Facility; and
•$34 million related to discontinued operations.
Year ended December 31, 2018 vs. Year ended December 31, 2017
At December 31, 2018, we had $205 million of cash, cash equivalents and restricted cash, an increase of $9 million compared to the balance of $196 million at December 31, 2017. The following table summarizes our cash flows for the years ended December 31, 2018 and 2017:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | |
| | 2018 | | 2017 | | Change |
| Cash provided by (used in): | | | | | |
| Operating activities | $ | 394 | | | $ | 667 | | | $ | (273) | |
| Investing activities | (91) | | | (146) | | | 55 | |
| Financing activities | (297) | | | (570) | | | 273 | |
| Effects of change in exchange rates on cash, cash equivalents and restricted cash | (2) | | | 2 | | | (4) | |
| Net change in cash from discontinued operations | 5 | | | 3 | | | 2 | |
| Net change in cash, cash equivalents and restricted cash from continuing operations | $ | 9 | | | $ | (44) | | | $ | 51 | |
For the year ended December 31, 2018, $273 million less cash was provided by operating activities compared to the same period in 2017. The change was principally due to:
•$128 million less cash provided by operations;
•$83 million related to discontinued operations;
•$49 million less cash received as dividends from unconsolidated entities primarily related to PHH Home Loans in 2017; and
•$39 million more cash used for accounts payable, accrued expenses and other liabilities,
partially offset by:
•$12 million less cash used for other assets;
•$9 million more cash provided by the net change in trade receivables; and
•$5 million less cash used for other operating activities.
For the year ended December 31, 2018, we used $55 million less cash for investing activities compared to the same period in 2017 primarily due to:
•$40 million less cash used for investments in unconsolidated entities primarily related to Guaranteed Rate Affinity;
•$17 million less cash used for acquisition related payments;
•$8 million of net cash proceeds received from the dissolution of our interest in PHH Home Loans, LLC; and
•$7 million more cash provided by other investing activities,compensation,
partially offset by $15 million related to discontinued operations.
For the year ended December 31, 2018, $297 million of cash was used in financing activities compared to $570 million of cash used during the same period in 2017. For the year ended December 31, 2018, $297 million of cash was used for:
•$402 million for the repurchase of our common stock;
•$45 million of dividend payments;
•$25 million of other financing payments primarily related to finance/capital leases;
•$25 million of quarterly amortization payments on the term loan facilities;
•$22 million for payments of contingent consideration;
•$10 million of tax payments related to net share settlement for stock-based compensation; and
•$3 million for cash paid as a result of the refinancing transactions in February 2018 related to $16 million of debt issuance costs and $4 million repayment of borrowings under the Term Loan B Facility, partially offset by $17 million of proceeds received under the Term Loan A Facility,
partially offset by:
•$200 million of additional borrowings under the Revolving Credit Facility; and
•$34 million related to discontinued operations.
For the year ended December 31, 2017, $570 million of cash was used for:
•$280 million for the repurchase of our common stock;
•$130$12 million net repayment of borrowings under the Revolving Credit Facility
•$49 million of dividend payments;
•$42 million of quarterly amortization payments on the term loan facilities;
•$30 million of other financing payments partially related to finance/capital leases and interest rate swaps;
•$22 million for payments of contingent consideration;
•$11 million of tax payments related to net share settlement for stock-based compensation;
•$7 million related to discontinued operations; and
•$6 million of debt issuance costs,
partially offset by:
•$8 million proceeds from exercise of stock options.increase in securitization borrowings.
Financial Obligations
See Note 10, "Short9, "Short and Long-Term Debt", to the Consolidated Financial Statements, for additional information on the Company's indebtedness as of December 31, 2019.2022.
LIBOR Transition
In July 2017, the Financial Conduct Authority, the UK regulator responsibleThe cessation date for the oversightsubmission and publication of the London Interbank Offering Rate ("LIBOR"), announced that it would no longer require banksU.S. dollar LIBOR is expected to participatebe mid-2023. LIBOR is expected to be replaced in the LIBOR submission process and would cease oversight over the rate after the end of 2021. Various industry groups continue to discuss replacement benchmark rates, the process for amending existing LIBOR-based contracts, and the potential economic impacts of different alternatives. For example, in the U.S., with a proposed replacement benchmark rate isnew index calculated by short-term repurchase agreements, backed by U.S. Treasury securities: the Secured Overnight FundingFinancing Rate, ("SOFR"), which is an overnight rate based on secured financing, although uncertainty exists asor "SOFR."
In connection with the July 2022 Amendment to the transition process and broad acceptance of SOFR as the primary alternative to LIBOR.
Our primary interest rate exposure is interest rate fluctuations, specifically with respect to LIBOR, due to its impact on our variable rate borrowings under the Senior Secured Credit Facility, (for ourLIBOR was replaced with a term SOFR-based rate plus a 10 basis point SOFR credit spread adjustment as the applicable benchmark for the Revolving Credit Facility and Term Loan B) and the Term Loan A Facility (for our Term Loan A). As of December 31, 2018, we had interest rate swaps based on LIBOR with a notional value of $1,600 million to manage a portion of our exposure to changes in interest rates associated with our variable rate borrowings.
At this time, it is not possible to predict the effect of any changes to LIBOR, any phase out of LIBOR or any establishment of alternative benchmark rates. LIBOR may disappear entirely or perform differently than in the past. Any new benchmark rateFacility. SOFR will likely not replicate LIBOR exactly and if future rates based upon a successor rate (or a new method of calculating LIBOR)SOFR 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 materialan adverse effect on our financial condition and results of operations.
Our primary interest rate exposure is interest rate fluctuations due to the impact on our variable rate borrowings under the Senior Secured Credit Facility (for our Revolving Credit Facility) and the Term Loan A Facility.
Covenants under the Senior Secured Credit Facility, Term Loan A Facility and IndenturesIndentures; Events of Default
The Senior Secured Credit Agreement, Term Loan A Agreement the Unsecured Letter of Credit Facility and the indentures governing the Unsecured Notes contain various covenants that limit (subject to certain exceptions) RealogyAnywhere Group’s ability to, among other things:
•incur or guarantee additional debt or issue disqualified stock or preferred stock;
•pay dividends or make distributions to RealogyAnywhere Group’s stockholders, including Realogy Holdings;Anywhere
•repurchase or redeem capital stock;
•make loans, investments or acquisitions;
•incur restrictions on the ability of certain of RealogyAnywhere Group's subsidiaries to pay dividends or to make other payments to RealogyAnywhere Group;
•enter into transactions with affiliates;
•create liens;
•merge or consolidate with other companies or transfer all or substantially all of AnywhereRealogy Group's and its material subsidiaries' assets;
•transfer or sell assets, including capital stock of subsidiaries; and
•prepay, redeem or repurchase subordinated indebtedness.
As a result of the covenants to which we remain subject, we are limited in the manner in which we conduct our business and we may be unable to engage in favorable business activities or finance future operations or capital needs. In addition, the Senior Secured Credit Agreement and Term Loan A Agreement require us to maintain a senior secured leverage ratio. We are further restricted under the indenture governing the 9.375% Senior Notes from making restricted payments, including our ability to issue dividends in excess of $45 million per calendar year or our ability to repurchase shares in any amount for so long as our consolidated leverage ratio is equal to or greater than 4.0 to 1.0 and then (unless that ratio falls below 3:00 to 1:00) only to the extent of available cumulative credit, as defined under the indenture governing the 9.375% Senior Notes.
Senior Secured Leverage Ratio applicable to our Senior Secured Credit Facility and Term Loan A Facility
The senior secured leverage ratio is tested quarterly and may not exceed 4.75 to 1.00. The senior secured leverage ratio is measured by dividing RealogyAnywhere Group's total senior secured net debt by the trailing twelve-month EBITDA calculated on a Pro Forma Basis, as those terms are defined in the Senior Secured Credit Agreement. Total senior secured net debt does not include unsecuredinclude our unsecured indebtedness, including the Unsecured Notes and Exchangeable Senior Notes, or the securitization obligations. EBITDA calculated on a Pro Forma Basis, as defined in the Senior Secured Credit Agreement, includes adjustments to EBITDA for restructuring restructuring, retention and disposition costs, former parent legacy cost (benefit) items, net, loss (gain) on the early extinguishment of debt, non-cash charges and incremental securitization interest costs, as well as pro forma cost savings for restructuring initiatives, the pro forma effect of business optimization initiatives and the pro forma effect of acquisitions and new franchisees, in each case calculated as of the beginning of the twelve-month period. The Company was in compliance with the senior secured leverage ratio covenant at December 31, 2019.
A reconciliation of net loss attributable to Realogy Group to Operating EBITDA and EBITDA calculated on a Pro Forma Basis, as those terms are defined in the Senior Secured Credit Agreement, for the twelve months ended December 31, 2019 is set forth in the following table:
| | | | | | | | |
| | For the Year Ended December 31, 2019 |
Net loss attributable to Realogy Group (a) | | $ | (188) | |
Income tax benefit | | (22) | |
Loss before income taxes | | (210) | |
Depreciation and amortization | | 169 | |
Interest expense, net | | 249 | |
Restructuring costs, net | | 42 | |
Impairments | | 249 | |
Former parent legacy cost, net | | 1 | |
Gain on the early extinguishment of debt | | (5) | |
Income statement impact of discontinued operations | | 95 | |
Operating EBITDA (b) | | 590 | |
Bank covenant adjustments: | | |
Operating EBITDA for discontinued operations | | (28) | |
Pro forma effect of business optimization initiatives (c) | | 31 | |
Non-cash charges (d) | | 30 | |
Pro forma effect of acquisitions and new franchisees (e) | | 3 | |
EBITDA as defined by the Senior Secured Credit Agreement | | $ | 626 | |
Total senior secured net debt (f) | | $ | 1,895 | |
Senior secured leverage ratio | | 3.03 | x |
_______________
(a)Net loss attributable to Realogy consists of: (i) loss of $99 million for the first quarter of 2019, (ii) income of $69 million for the second quarter of 2019, (iii) loss of $113 million for the third quarter of 2019 and (iv) loss of $45 million for the fourth quarter of 2019.
(b)Consists of total Company Operating EBITDA including discontinued operations of: (i) negative $4 million for the first quarter of 2019, (ii) $245 million for the second quarter of 2019, (iii) $223 million for the third quarter of 2019 and (iv) $126 million for the fourth quarter of 2019.
(c)Represents the twelve-month pro forma effect of business optimization initiatives.
(d)Represents the elimination of non-cash expenses including $28 million of stock-based compensation expense and $2 million for the change in the allowance for doubtful accounts for the twelve months ended December 31, 2019.
(e)Represents the estimated impact of acquisitions and franchise sales activity, net of brokerages that exited our franchise system as if these changes had occurred on January 1, 2019. Franchisee sales activity is comprised of new franchise agreements as well as growth through acquisitions and independent sales agent recruitment by existing franchisees with our assistance. We have made a number of assumptions in calculating such estimates and there can be no assurance that we would have generated the projected levels of Operating EBITDA had we owned the acquired entities or entered into the franchise contracts as of January 1, 2019.
(f)Represents total borrowings under the senior secured credit facilities and borrowings secured by a first priority lien on our assets of $1,965 million plus $35 million of finance lease obligations less $105 million of readily available cash as of December 31, 2019. Pursuant to the terms of our senior secured credit facilities, total senior secured net debt does not include our securitization obligations or unsecured indebtedness, including the Unsecured Notes.
Consolidated Leverage Ratio applicable to our 9.375% Senior Notes
The consolidated leverage ratio is measured by dividing Realogy Group's total net debt by the trailing twelve-month EBITDA. EBITDA, as defined in the indenture governing the 9.375% Senior Notes, is substantially similar to EBITDA calculated on a Pro Forma Basis, as those terms are defined in the Senior Secured Credit Agreement. Net debt under the indenture is Realogy Group's total indebtedness (excluding securitizations) less (i) its cash and cash equivalents in excess of restricted cash and (ii) a $200 million seasonality adjustment permitted when measuring the ratio on a date during the period of March 1 to May 31.
The consolidated leverage ratio under the indenture governing the 9.375% Senior Notes for the twelve months ended December 31, 2019 is set forth in the following table:
| | | | | | | | |
| | As of December 31, 2019 |
Revolver | | $ | 190 | |
Term Loan A | | 717 | |
Term Loan B | | 1,058 | |
5.25% Senior Notes | | 550 | |
4.875% Senior Notes | | 407 | |
9.375% Senior Notes | | 550 | |
Finance lease obligations | | 35 | |
Corporate Debt (excluding securitizations) | | 3,507 | |
Less: Cash and cash equivalents | | 235 | |
Net debt under the indenture governing the 9.375% Senior Notes due 2027 | | $ | 3,272 | |
| | |
EBITDA as defined under the indenture governing the 9.375% Senior Notes due 2027 (a) | | $ | 626 | |
| | |
Consolidated leverage ratio under the indenture governing the 9.375% Senior Notes due 2027 | | 5.2 | x |
_______________
(a)As set forth in the immediately preceding table, for the twelve months ended December 31, 2019, EBITDA, as defined under the indenture governing the 9.375% Senior Notes, was the same as EBITDA calculated on a Pro Forma Basis, as those terms are defined in the Senior Secured Credit Agreement.2022.
See Note 10,9, "Short and Long-Term Debt—Senior Secured Credit Facility", "—Term Loan A Facility" and "—Unsecured Notes", to the Consolidated Financial Statements for additional information.
At December 31, 2019,Events of Default
Certain events would constitute an event of default under the amountSenior Secured Credit Facility or Term Loan A Facility as well as the indentures governing the Unsecured Notes. Such events of default include, without limitation, failure to comply with the senior secured leverage ratio covenant, 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. If such an event of default were to occur and the Company failed to obtain a waiver from the applicable lenders or holders of the Company's cumulative credit under the 9.375% SeniorUnsecured Notes, was approximately $74 million. The Company made approximately $21 million in dividend payments since issuanceour financial condition, results of the 9.375% Senior Notes, which applied against the cumulative credit basket under the indenture governing the 9.375% Senior Notes,operations and business would result in approximately $53 million remaining under that basket for restricted payments. This basket cannot be utilized until the Company's consolidated leverage ratio is less than 4.0 to 1.0.materially adversely affected.
Non-GAAP Financial Measures
The SEC has adopted rules to regulate the use in filings with the SEC and in public disclosures of "non-GAAP financial measures," such as Operating EBITDA. These measures are derived on the basis of methodologies other than in accordance with GAAP.
Operating EBITDA is defined by us as net income (loss) before depreciation and amortization, interest expense, net (other than relocation services interest for securitization assets and securitization obligations), 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, impairments, gains or losses on discontinued operations and gains or losses on the sale of businesses, investments or other assets. Operating EBITDA is our primary non-GAAP measure.
We present Operating EBITDA because we believe it is useful as a supplemental measure in evaluating the performance of our operating businesses and provides greater transparency into our results of operations. Our management, including our chief operating decision maker, uses Operating EBITDA as a factor in evaluating the performance of our business. Operating EBITDA should not be considered in isolation or as a substitute for net income or other statement of operations data prepared in accordance with GAAP.
We believe Operating EBITDA facilitates company-to-company operating performance comparisons by backing out potential differences caused by variations in capital structures (affecting net interest expense), taxation, the age and book depreciation of facilities (affecting relative depreciation expense) and the amortization of intangibles, as well as other items that are not core to the operating activities of the Company such as restructuring charges, gains or losses on the early extinguishment of debt, former parent legacy items, impairments, gains or losses on discontinued operations and gains or losses on the sale of businesses, investments or other assets, which may vary for different companies for reasons unrelated to operating performance. We further believe that Operating EBITDA is frequently used by securities analysts, investors and other interested parties in their evaluation of companies, many of which present an Operating EBITDA measure when reporting their results.
Operating EBITDA has limitations as an analytical tool, and you should not consider Operating EBITDA either in isolation or as a substitute for analyzing our results as reported under GAAP. Some of these limitations are:
•this measure does not reflect changes in, or cash required for, our working capital needs;
•this measure does not reflect our interest expense (except for interest related to our securitization obligations), or the cash requirements necessary to service interest or principal payments on our debt;
•this measure does not reflect our income tax expense or the cash requirements to pay our taxes;
•this measure does not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments;
•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often require replacement in the future, and this measure does not reflect any cash requirements for such replacements; and
•other companies may calculate this measure differently so they may not be comparable.
Contractual Obligations
The following table summarizes our future contractual obligations as of December 31, 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | Thereafter | | Total |
| Revolving Credit Facility (a) | $ | — | | | $ | — | | | $ | — | | | $ | 190 | | | $ | — | | | $ | — | | | $ | 190 | |
| Term Loan B (b) | 11 | | | 11 | | | 11 | | | 11 | | | 11 | | | 1,003 | | | 1,058 | |
| Term Loan A (c) | 33 | | | 51 | | | 70 | | | 563 | | | — | | | — | | | 717 | |
| 5.25% Senior Notes | — | | | 550 | | | — | | | — | | | — | | | — | | | 550 | |
| 4.875% Senior Notes | — | | | — | | | — | | | 407 | | | — | | | — | | | 407 | |
| 9.375% Senior Notes | — | | | — | | | — | | | — | | | — | | | 550 | | | 550 | |
| Interest payments on long-term debt (d) | 194 | | | 192 | | | 160 | | | 114 | | | 99 | | | 127 | | | 886 | |
| Securitized obligations (e) | 206 | | | — | | | — | | | — | | | — | | | — | | | 206 | |
| Leases (including imputed interest) (f)(g) | 164 | | | 146 | | | 118 | | | 89 | | | 66 | | | 153 | | | 736 | |
| Purchase commitments (h) | 44 | | | 24 | | | 11 | | | 9 | | | 8 | | | 217 | | | 313 | |
| Total (i)(j) | $ | 652 | | | $ | 974 | | | $ | 370 | | | $ | 1,383 | | | $ | 184 | | | $ | 2,050 | | | $ | 5,613 | |
_______________
(a)The Revolving Credit Facility expires in February 2023; however outstanding borrowings under this facility are classified on the balance sheet as current due to the revolving nature of the facility.
(b)The Company’s Term Loan B has quarterly amortization payments totaling 1% per annum of the $1,080 million original principal amount of the Term Loan B issued under the Amended and Restated Credit Agreement with the balance payable in February 2025.
(c)The Company’s Term Loan A has quarterly amortization payments, which commenced June 30, 2018, totaling per annum 2.5%, 2.5%, 5.0%, 7.5% and 10.0% of the $750 million original principal amount of the Term Loan A with the balance payable in February 2023.
(d)Interest payments are based on applicable interest rates in effect at December 31, 2019 and include the impact of derivative instruments designed to fix the interest rate of a portion of the Company's variable rate debt.
(e)The securitization facilities are held by Cartus Relocation Services and will no longer be assets or obligations of the Company after the planned sale of that business.
(f)The lease amounts included in the above table are not discounted and do not include variable costs.
(g)Includes $7 million associated with operating leases related to discontinued operations.
(h)Purchase commitments include a minimum licensing fee that the Company is required to pay to Sotheby’s from 2009 through 2054. The annual minimum licensing fee is approximately $2 million. Purchase commitments also include a minimum licensing fee to be paid to Meredith from 2009 through 2058 for the licensing of the Better Homes and Gardens Real Estate brand. The annual minimum fee was $4 million in 2019 and will generally remain the same thereafter.
(i)The contractual obligations table does not include other non-current liabilities such as pension liabilities of $35 million and unrecognized tax benefits of $20 million as the Company is not able to estimate the year in which these liabilities could be paid.
(j)The contractual obligations table does not include other incentives offered to certain franchisees which are paid at certain points during the franchise agreement period provided the franchisee maintains a certain level of annual gross commission income and the franchisee is in compliance with the terms of the franchise agreement at the time of payment. If current annual gross commission income levels are maintained by our franchisees, we would pay a total of $14 million over the next five years.
Critical Accounting PoliciesEstimates
The preparation of our consolidated financial statements in accordance with generally accepted accounting principles is based onin the selection and application of accounting policies that requireUnited States ("GAAP") requires us to make significant estimates and assumptions aboutthat affect the effects of matters that are inherently uncertain.reported amounts in the consolidated financial statements and related notes. Several of the estimates and assumptions we are required to make relate to matters that are inherently uncertain as they pertain to future events. We consider theuse our best judgment when measuring these estimates and routinely review our accounting policies discussed below to be critical to the understanding of our financial statements and involve subjective and complex judgments that could potentially affect reported results. Actualassumptions. However, actual results could differ from our estimates and assumptions and any such differences could be material to our consolidated financial statements. We consider the following critical accounting estimates to involve subjective and complex judgments that could potentially affect reported results. Refer to Note 2, "Summary of Significant Accounting Policies", of the consolidated financial statements for a discussion of all our significant accounting policies.
Impairment of goodwill and other indefinite-lived intangible assets
Goodwill represents the excess of acquisition costs over the fair value of the net tangible assets and identifiable intangible assets acquired in a business combination. Other indefinite-lived intangible assets primarily consist of trademarks acquired in business combinations. Goodwill and other indefinite-lived assets are not amortized, but are subject to impairment testing. The aggregate carrying values of our goodwill and other indefinite-lived intangible assets were $3,300 million and $692 million, respectively, at December 31, 2019 and are subject to an impairment assessment annually as of October 1, or whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. The impairment assessment is performed at the reporting unit level which includes Owned Brokerage Group, franchise services (reported within the Franchise Group reportable segment), Title Group and Cartus/Leads Group (includes lead generation and relocation services both of which are reported within the Franchise Group reportable segment). This assessment compares the carrying valuesvalue of each reporting unit and the goodwill reporting units andcarrying value of each other indefinite lived intangible assetsasset to their respective fair values and, when appropriate the carrying value is reduced to fair value.value and an impairment charge for the excess is recorded on a separate line in the Consolidated Statements of Operations.
In testing goodwill, the fair value of each reporting unit is estimated using the income approach, a discounted cash flow approach.method. For the other indefinite lived intangible assets, fair value is estimated using the relief from royalty method. Management utilizes long-term cash flow forecasts and the Company's annual operating plans adjusted for terminal value assumptions. The fair value of the Company's reporting units and other indefinite lived intangible assets are determined utilizing the best estimate of future revenues, operating expenses, including commission expense, market and general economic conditions, trends in the industry, as well as assumptions that management believes marketplace participants would utilize includingutilize. These assumptions include discount rates based on the Company's best estimate of the weighted average cost of capital, long-term growth rates based on the Company's best estimate of terminal growth rates, and trademark royalty rates and long-term growth rates. The trademark royalty rate waswhich are determined by reviewing similar trademark agreements with third parties.
Although management believes that assumptions are reasonable, actual results may vary significantly. These impairment assessments involve the use of accounting estimates and assumptions, changes in which could materially impact our financial condition or operating performance if actual results differ from such estimates and assumptions. To address this uncertainty, a sensitivity analysis is performed on key estimates and assumptions.
SignificantFurthermore, significant negative industry or economic trends, disruptions to our business, unexpected significant changes or planned changes in use of the assets, a decrease in our business results, growth rates that fall below our assumptions, divestitures, and a sustained decline in our stock price and market capitalization may have a negative effect on the fair values and key valuation assumptions, and suchassumptions. Such changes could result in changes to our estimates of our fair value and a material impairment of goodwill or other indefinite-lived intangible assets. To address this uncertainty, a sensitivity analysis is performed on key estimates and assumptions.
During the thirdfourth quarter of 2019, management determined that the decrease in the stock price of2022, the Company and the impact on future earnings related to the discontinuation of the USAA affinity program qualified as triggering events for all ofperformed its reporting units and accordingly management performed anannual impairment assessment of goodwill and other indefinite-lived intangible assets as of September 1, 2019. The impairment assessment indicated that the carrying value of Realogy Brokerage Group exceeded its estimated fair value by $180 million primarily as a result of a reduction in Realogy Brokerage Group's long-term forecast. Accounting Standard Update No. 2017-04 (Topic 350), "Simplifying the Test of Goodwill Impairment", whichassets. As previously discussed, the Company early adoptedexperienced a decline in transaction volume during the third quarter of 2019, requires thatlargely due to rapidly rising mortgage rates, high inflation, reduced affordability, and broader macroeconomic concerns. These challenges within the impairment chargeresidential real estate industry continued during the fourth quarter and deferred tax effect are calculated using the simultaneous equation method which effectively grosses up the goodwill impairment charge to accountresulted in lower homesale transaction volume for the related tax benefit so thatbrokerage and franchise business and lower referral volume for the resulting carrying value does not exceedleads business. Additionally, industry forecasts now anticipate continued homesale transaction volume declines in 2023. These market conditions as well as an increase in the calculated fair value. As a result, management recognized a goodwillweighted average cost of capital resulted in the recognition of an impairment charge to reduceof goodwill at Realogythe Owned Brokerage Group by $237reporting unit of $280 million, offset by an income tax benefitimpairment of $57goodwill at the Franchise Group segment of $114 million resulting in a net reduction in carrying valuerelated to the Cartus/Leads Group reporting unit and an impairment of $180franchise trademarks of $76 million. The impairment charge is recorded on the impairment line in the accompanying Consolidated Statements of Operations and is non-cash in nature.
The results of the Company's interimannual impairment testassessment indicated no other impairment charges were required for the other reporting units or other indefinite-lived intangibles. Management evaluated the effect of lowering the estimated fair value for each of the passing reporting units and indefinite-lived intangible assets by 10% and determined that no impairment of goodwill or other indefinite-lived intangible assets would have been recognized under this evaluation. Based upon the impairment assessment performed in the fourth
quarter of 2019, 2018 and 2017, there was no impairment of goodwill or other indefinite-lived intangible assets for these years. Management evaluated the effect of lowering the estimated fair value for each of the passing reporting units by 10% and determined no impairment of goodwill or other indefinite-lived intangible assetsintangibles would have been recognized under this evaluation for 2018 or 2017.
Common stock valuation
On an annual basis, we grant stock-based awards to certain senior management, employees and directors. These awards are measured based on2022 with the fair value onexception of the grant date.title trademark. The fair value of restricted stock, restricted stock units and performance share units without a market conditiontrademarks is equal to the closing sale price of the Company's common stock on the date of grant. The fair value of options is estimated on the date of grantdetermined using the Black-Scholes option-pricing model and the fair value of performance share units with market conditionsrelief from royalty method which is estimated on the date of grant using the Monte Carlo Simulation method. Expense for stock-based awards is recognized over the service period based on the vesting requirements, or when requisite performance metrics or milestones are achieved, and forfeitures are recognized as they occur. Determining the fair value of stock-based awards at the grant date requires considerable judgment, including estimating expected volatility, expected term and risk-free rate.
Our expected volatility is based on the average volatility rates of the Company and similar actively traded companies since we only have trading history as a public company since October 2012. The expected term is calculated based on the simplified method and is estimatedsensitive to be 6.25 years for time vesting stock options. The risk-free rate is derived from the U.S. Treasury yield curvefluctuations in effect at the time of the grant using the estimated grant holding period. If factors change and we employ different assumptions, the fair value of future awards and resulting stock-based compensation expense may differ significantly from what we have estimated historically.projected revenues.
Income taxes
Deferred tax assets and liabilities are determined based on the difference between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Our provision for income taxes is based on domestic and international statutory income tax rates in the jurisdictions in which we operate. Significant judgment is required in determining income tax provisions as well as deferred tax asset and liability balances, including the estimation of valuation allowances and the evaluation of tax positions.
Net deferred tax assets and liabilities are primarily comprised of temporary differences, net operating loss carryforwards and tax credit carryforwards that are available to reduce taxable income in future periods. The determination of the amount of valuation allowance to be provided on deferred tax assets involves estimates regarding (1) the timing and amount of the reversal of taxable temporary differences, (2) expected future taxable income, and (3) the impact of tax planning strategies.
Significant judgment is required in determining income tax provisions and in evaluating tax positions. We establish additional reserves for income taxes when, despite the belief that tax positions are fully supportable, there remain certain positions that do not meet the minimum recognition threshold. The approach for evaluating certain and uncertain tax positions is defined by the authoritative guidance and this guidance determines when a tax position is more likely than not to be sustained upon examination by the applicable taxing authority. In the normal course of business, the Company and its subsidiaries are examined by various federal, state and foreign tax authorities. We regularly assess the potential outcomes of these examinations and any future examinations for the current or prior years in determining the adequacy of our provision for income taxes. We continually assess the likelihood and amount of potential adjustments and adjust the income tax provision, the current tax liability and deferred taxes in the period in which the facts that give rise to a revision become known.
Recently Issued Accounting Pronouncements
See Note 2, "Summary of the NotesSignificant Accounting Policies", to the Consolidated Financial Statements for a discussion of recently issued FASB accounting pronouncements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risks.
We are exposed to market risk from changes in interest rates primarily through our senior secured debt. At December 31, 2019,2022, our primary interest rate exposure was to interest rate fluctuations, specifically LIBOR, due to its impact on our variable rate borrowings of our Revolving Credit Facility and Term Loan B under the Senior Secured Credit Facility and the Term Loan A Facility. Given thatFacility, and to term SOFR, due to its impact on our borrowings under the Senior SecuredRevolving Credit Facility and Term Loan
A Facility are generally based upon LIBOR, this rate (or any replacement rate) will be the Company's primary market risk exposure for the foreseeable futurFacility.e. We do not have significant exposure to foreign currency risk, nor do we expect to have significant exposure to foreign currency risk in the foreseeable future.
We assess our market risk based on changes in interest rates utilizing a sensitivity analysis. The sensitivity analysis measures the potential impact on earnings, fair values and cash flows based on a hypothetical change (increase and decrease) in interest rates. We exclude the fair values of relocation receivables and advances and securitization borrowings from our sensitivity analysis because we believe the interest rate risk on these assets and liabilities is mitigated as the rate we earn on relocation receivables and advances and the rate we incur on our securitization borrowings are based on similar variable indices.
At December 31, 2019,2022, we had variable interest rate long-term debt outstanding under our Senior SecuredRevolving Credit Facility and Term Loan A Facility of $1,965$572 million. The weighted average interest rate on the outstanding amounts under our Senior SecuredRevolving Credit Facility and Term Loan A Facility at December 31, 20192022 was 4.01%6.18%. The interest rate with respect to the Revolving Credit Facility is based on a term SOFR-based rate including a 10 basis point credit spread adjustment plus an additional margin subject to adjustment based on the current senior secured leverage ratio. The interest rate with respect to the Term Loan B is based on adjusted LIBOR plus 2.25% (with a LIBOR floor of 0.75%). The interest rates with respect to the Revolving Credit Facility and term loans under the Term Loan A Facility areis based on adjusted LIBOR plus an additional margin subject to adjustment based on the current senior secured leverage ratio. Based on the December 31, 20192022 senior secured leverage ratio, both the SOFR and LIBOR margin was 2.25%1.75%. At December 31, 2019,2022, the one-month SOFR and LIBOR rate was 1.76%;4.36% and 4.39%, respectively; therefore, we have estimated that a 0.25% increase in SOFR and LIBOR would have a $5an approximately $2 million impact on our annual interest expense.
As of December 31, 2019, we had interest rate swaps with a notional value of $1,600 million to manage a portion of our exposure to changes in interest rates associated with our $1,965 million of variable rate borrowings. Our interest rate swaps were as follows:
| | | | | | | | |
Notional Value (in millions) | Commencement Date | Expiration Date |
$600 | August 2015 | August 2020 |
$450 | November 2017 | November 2022 |
$400 | August 2020 | August 2025 |
$150 | November 2022 | November 2027 |
The swaps help protect our outstanding variable rate borrowings from future interest rate volatility. The fixed interest rates on the swaps range from 2.07% to 3.11%. The Company had a liability of $47 million for the fair value of the interest rate swaps at December 31, 2019, and an asset of $6 million and a liability of $16 million at December 31, 2018. The fair value of these interest rate swaps is subject to movements in LIBOR and will fluctuate in future periods. We have estimated that a 0.25% increase in the LIBOR yield curve would increase the fair value of our interest rate swaps by $10 million and would decrease interest expense. While these results may be used as a benchmark, they should not be viewed as a forecast of future results.
Item 8. Financial Statements and Supplementary Data.
See "Index to Financial Statements" on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
Item 9A. Controls and Procedures.
Controls and Procedures for Realogy Holdings Corp.Anywhere Real Estate Inc.
(a)Realogy Holdings Corp.Anywhere Real Estate Inc. ("Realogy Holdings"Anywhere") maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its filings under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to its management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Realogy Holdings'Anywhere's management, including the Chief Executive Officer and the Chief Financial Officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
(b)As of the end of the period covered by this Annual Report on Form 10-K, Realogy HoldingsAnywhere has carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and
procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that Realogy Holdings'Anywhere's disclosure controls and procedures are effective at the "reasonable assurance" level.
(c)There has not been any change in Realogy Holdings'Anywhere's internal control over financial reporting during the period covered by this Annual Report on Form 10-K that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting for Realogy Holdings Corp.Anywhere Real Estate Inc.
Realogy Holdings'Anywhere's management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Realogy Holdings'Anywhere's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Realogy Holdings'Anywhere's internal control over financial reporting includes those policies and procedures that:
i.pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of Realogy Holdings'Anywhere's assets;
ii.provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of Realogy Holdings'Anywhere's management and directors; and
iii.provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Realogy Holdings'Anywhere's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of Realogy Holdings'Anywhere's internal control over financial reporting as of December 31, 2019.2022. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in its 2013 Internal Control-Integrated Framework. Based on this assessment, management determined that Realogy HoldingsAnywhere maintained effective internal control over financial reporting as of December 31, 2019.2022.
Auditor Report on the Effectiveness of Realogy Holdings Corp.Anywhere Real Estate Inc.’s Internal Control Over Financial Reporting
PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited the financial statements included in this Annual Report, has issued an attestation report on the effectiveness of Realogy Holdings'Anywhere's internal control over financial reporting, which is included within their audit opinion on page F-2.
* * *
Controls and Procedures for RealogyAnywhere Group LLC
(a)RealogyAnywhere Group LLC ("RealogyAnywhere Group") maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its filings under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to its management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. RealogyAnywhere Group's management, including the Chief Executive Officer and the Chief Financial Officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
(b)As of the end of the period covered by this Annual Report on Form 10-K, RealogyAnywhere Group has carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that RealogyAnywhere Group's disclosure controls and procedures are effective at the "reasonable assurance" level.
(c)There has not been any change in RealogyAnywhere Group's internal control over financial reporting during the period covered by this Annual Report on Form 10-K that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting for RealogyAnywhere Group LLC
RealogyAnywhere Group’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. RealogyAnywhere Group’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. RealogyAnywhere Group’s internal control over financial reporting includes those policies and procedures that:
(i)pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of RealogyAnywhere Group’s assets;
(ii)provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of RealogyAnywhere Group’s management and directors; and
(iii)provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of RealogyAnywhere Group’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of RealogyAnywhere Group’s internal control over financial reporting as of December 31, 2019.2022. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in its 2013 Internal Control-Integrated Framework. Based on this assessment, management determined that RealogyAnywhere Group maintained effective internal control over financial reporting as of December 31, 2019.2022.
Auditor Report on the Effectiveness of RealogyAnywhere Group LLC's Internal Control Over Financial Reporting
PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited the financial statements included in this Annual Report, has issued an attestation report on the effectiveness of RealogyAnywhere Group's internal control over financial reporting, which is included within their audit opinion on page F-5.
Item 9B. Other Information.
On February 24, 2020, the Compensation Committee of the Board of Directors (the “Committee”) of Realogy Holdings Corp. (the “Company”), awarded John Peyton (the “Executive”), a special cash bonus of $1.0 million (the “Award”) in order to assure continuity in leadership across business operations. The Award will vest and be payable in three equal installments on each of February 24, 2021, February 24, 2022 and February 24, 2023.
In making the Award, the Committee considered that, since commencing employment with the Company in 2017, the Executive has assumed evolving levels of responsibility for the Company’s business, has consistently demonstrated exemplary leadership and has provided critical assistance in the implementation of the Company’s strategic objectives.The Committee also considered the competitive landscape for executive talent, in particular with respect to the Executive, and the potential business distribution likely to be caused by unplanned attrition.
The Award will remain subject to repayment if the Executive is found to be in breach of his restrictive covenant agreements with the Company (per the terms of such agreements), including those related to non-competition and non-solicitation. Any unvested tranches of the Award will be forfeited in the event that the Executive voluntarily terminates his employment with the Company without “good reason” or is terminated by the Company with “cause” (as such terms are defined in the Company’s 2018 Long-Term Incentive Plan). If the Executive’s employment with the Company is terminated by the Company other than for cause or by the Executive for good reason, he will be entitled to receive a pro-rated payment of the portion of the Award applicable to the year the termination event occurs, but future unvested tranches will be forfeited.
The summary above is qualified in its entirety by the Award agreement, which is attached as Exhibit 10.80 to this Annual Report.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Identification of Directors
The information required by this item is included in the Proxy Statement under the caption "Proposal 1: Election of Directors" and is incorporated by reference to this report.
Identification of Executive Officers
The information relating to executive officers required by this item is included herein in Part I under the caption “Information about our Executive Officers.”
Code of Ethics
The information required by this item is included in the Proxy Statement under the caption "Code of Business Conduct and Ethics" and is incorporated by reference to this Annual Report.
Corporate Governance
The information required by this item is included in the Proxy Statement under the caption "Governance of the Company" and is incorporated by reference to this Annual Report.
Item 11. Executive Compensation.
The information required by this item is included in the Proxy Statement under the captions "Governance of the Company—Compensation of Independent Directors," "Governance of the Company—Committees of the Board" and "Executive Compensation" and is incorporated by reference to this Annual Report.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information about shares of our common stock that may be issued upon the exercise of options, that may vest pursuantrequired by this item relating to awards of restricted stock units, performance stock units or that may be issuedsecurities authorized for issuance under deferred stock units under all of our existing equity compensation plans as of December 31, 2019.
| | | | | | | | | | | | | | | | | | | | | | | |
| Plan Category | | Number of Securities to be Issued Upon Exercise or Vesting of Outstanding Options, Warrants and Rights | | Weighted Average Exercise Price of Outstanding Options, Warrants and Rights | | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans | |
| Equity compensation plans approved by stockholders | | 12,358,323 | | (1) | $27.04 | | (2) | 643,698 | | (3) |
| Equity compensation plan not approved by stockholders | | 287,955 | | (4) | | $32.80 | | (5) | | — | | |
_______________
(1)Consists of 4,063,618 outstanding options, 3,666,737 restricted stock units, 52,874 performance restricted stock units, 4,460,593 performance stock units and 114,501 deferred stock units issuableis included in the Proxy Statement under the 2007 Stock Incentive Plan, the 2012 Plan and the 2018 Plan. The amount set forth in the table assumes maximum payout under the unvested performance share unit awards. The number of shares, if any, to be issued pursuant to unvested performance stock unit awards will be determined based upon the extent to which the performance goals are achieved.
(2)Weighted average exercise price of outstanding stock options under the 2007 Stock Incentive Plan, the 2012 Plan and the 2018 Plan. The weighted average remaining term of outstanding options is 5.2 years. The other outstanding awards do not have exercise prices and are accordingly excluded from this column.
(3)Consists of shares available for future grant under the 2018 Plan.
(4)Consists of 261,234 outstanding options and 25,407 unvested restricted stock units granted to Mr. Schneider on October 23, 2017 (the "Grant Date") as an inducement material to his entry into employment with us, as well as 1,314 unvested dividend equivalent units accrued on the restricted stock unit award as of December 31, 2019. If the underlying restricted stock unit award fails to vest, such dividend equivalent units will be forfeited.
Each grant was approved by our Compensation Committee and disclosed in a press release. Under applicable NYSE Listing Rules, inducement grants are not subject to security holder approval.
The terms of each inducement grant are materially consistent with the terms of awards made under the 2012 and 2018 Plans. The stock options expire ten years from the Grant Date and vest over a four-year period, in equal annual installments on each anniversary datecaption "Proposal 4. Approval of the Grant Date. The restricted stock units vest over a three-year period, in equal annual installments on each anniversary date of the Grant Date and carry dividend equivalent rights related to any cash dividend paid by the Company while the restricted stock units are outstanding. Vesting of the equity awards accelerate if employment terminates due to death or disability. The equity awards contain "double trigger" provisions that provide for accelerated vesting upon a qualifying termination within 24 months of a change in control of the Company (or, if the awards are not assumed or equitably converted by the successor company, upon the change in control).
(5)Exercise price of options granted to Mr. Schneider on October 23, 2017.
See Note 14, "Stock-Based Compensation", in the Consolidated Financial Statements for additional information on the 2007 Stock Incentive Plan, theSecond Amended and& Restated 2012 Long-Term Incentive Plan and 2018 Long-Term Incentive Plan.Plan" and is incorporated by reference to this report.
The remaining information required by this item is included in the Proxy Statement under the caption "Governance of the Company—Ownership of Our Common Stock" and is incorporated by reference to this Annual Report.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this item is included in the Proxy Statement under the captions "Governance of the Company—Director Independence Criteria and —Determination of Director Independence"Independence and "Related—Related Person Transactions" and is incorporated by reference to this Annual Report.
Item 14. Principal Accounting Fees and Services.
The information required by this item is included in the Proxy Statement under the captions "Disclosure About Fees" and "Pre-Approval of Audit and Non-Audit Services" under the section entitled "Proposal 3: Ratification of the Appointment of the Independent Registered Public Accounting Firm" and is incorporated by reference to this Annual Report.
PART IV
Item 15. Exhibits, Financial Statements and Schedules.
(A)(1) and (2) Financial Statements
The consolidated financial statements of the registrants listed in the "Index to Financial Statements" on page F-1 together with the reports of PricewaterhouseCoopers LLP (PCAOB ID 238), independent auditors, are filed as part of this Annual Report.
(A)(3) Exhibits
See Index to Exhibits.
The agreements included or incorporated by reference as exhibits to this Annual Report contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties were made solely for the benefit of the other parties to the applicable agreement and (i) were not intended to be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate; (ii) may have been qualified in such agreement by disclosures that were made to the other party in connection with the negotiation of the applicable agreement; (iii) may apply contract standards of "materiality" that are different from "materiality" under the applicable securities laws; and (iv) were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement. We acknowledge that, notwithstanding the inclusion of the foregoing cautionary statements, we are responsible for considering whether additional specific disclosures of material information regarding material contractual provisions are required to make the statements in this Annual Report not misleading.
(A)(4) Consolidated Financial Statement Schedules
Schedule II—Valuation and Qualifying Accounts for the years ended December 31, 2019, 20182022, 2021 and 2017:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | | Additions | | | | | | |
| Description | Balance at
Beginning of
Period | | Charged to
Costs and
Expenses | | Charged to
Other
Accounts | | Deductions | | Balance at
End of
Period |
Allowance for doubtful accounts (a) | | | | | | | | | |
| Year ended December 31, 2019 | $ | 9 | | | $ | 5 | | | $ | — | | | $ | (3) | | | $ | 11 | |
| Year ended December 31, 2018 | 11 | | | 1 | | | — | | | (3) | | | 9 | |
| Year ended December 31, 2017 | 13 | | | 3 | | | — | | | (5) | | | 11 | |
| | | | | | | | | |
| Deferred tax asset valuation allowance | | | | | | | | | |
| Year ended December 31, 2019 | $ | 14 | | | $ | — | | | $ | — | | | $ | — | | | $ | 14 | |
| Year ended December 31, 2018 | 10 | | | 4 | | | — | | | — | | | 14 | |
| Year ended December 31, 2017 | 6 | | | 4 | | | — | | | — | | | 10 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | | | Additions | | | | |
| Description | Balance at
Beginning of
Period | | Charged to
Costs and
Expenses | | Charged to
Other
Accounts | | Deductions | | Balance at
End of
Period |
Allowance for doubtful accounts (a) |
| Year ended December 31, 2022 | $ | 11 | | | $ | 2 | | | $ | — | | | $ | (1) | | | $ | 12 | |
| Year ended December 31, 2021 | 13 | | | 2 | | | — | | | (4) | | | 11 | |
| Year ended December 31, 2020 | 11 | | | 9 | | | — | | | (7) | | | 13 | |
| | | | | | | | | |
| Deferred tax asset valuation allowance |
| Year ended December 31, 2022 | $ | 20 | | | $ | — | | | $ | — | | | $ | — | | | $ | 20 | |
| Year ended December 31, 2021 | 21 | | | (1) | | | — | | | — | | | 20 | |
| Year ended December 31, 2020 | 17 | | | 4 | | | — | | | — | | | 21 | |
_______________
(a)The deduction column represents uncollectible accounts written off, net of recoveries from Trade Receivables, in the Consolidated Balance Sheets.
Item 16. Form 10-K Summary.
None.
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities Exchange Act of 1934, the registrants have duly caused this Annual Report on Form 10-K to be signed on their behalf by the undersigned, thereunto duly authorized, on February 25, 2020.24, 2023.
REALOGY HOLDINGS CORP.ANYWHERE REAL ESTATE INC.
and
REALOGYANYWHERE REAL ESTATE GROUP LLC
(Registrants)
By: /s/ RYAN M. SCHNEIDER
Name: Ryan M. Schneider
Title: Chief Executive Officer and President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Ryan M. Schneider, Charlotte C. Simonelli and Marilyn J. Wasser, and each of them severally, his or her true and lawful attorney-in-fact with power of substitution and resubstitution to sign in his or her name, place and stead, in any and all capacities, to do any and all things and execute any and all instruments that such attorney may deem necessary or advisable under the Securities Exchange Act of 1934 and any rules, regulations and requirements of the U.S. Securities and Exchange Commission in connection with this Annual Report on Form 10-K and any and all amendments hereto, as fully and for all intents and purposes as he or she might do or could do in person, and hereby ratifies and confirms all said attorneys-in-fact and agents, each acting alone, and his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons in the capacities and on the dates indicated below on behalf of each of the Registrants.
| | | | | | | | | | | | | | |
| Name | | Title | | Date |
| | | | |
| /s/ RYAN M. SCHNEIDER | | Chief Executive Officer, President and Director
(Principal Executive Officer) | | February 25, 202024, 2023 |
| Ryan M. Schneider | | | | |
| | | | |
| /s/ CHARLOTTE C. SIMONELLI | | Executive Vice President, Chief Financial Officer
and Treasurer
(Principal Financial Officer) | | February 25, 202024, 2023 |
| Charlotte C. Simonelli | | | | |
| | | | |
| /s/ TIMOTHY B. GUSTAVSON | | Senior Vice President, Chief Accounting Officer
and Controller
(Principal Accounting Officer) | | February 25, 202024, 2023 |
| Timothy B. Gustavson | | | | |
| | | | |
| /s/ MICHAEL J. WILLIAMS | | Chairman of the Board of Directors of Realogy Holdings Corp.Anywhere Real Estate Inc. and Manager of RealogyAnywhere Real Estate Group LLC | | February 25, 202024, 2023 |
| Michael J. Williams | | | | |
| | | | |
| /s/ FIONA P. DIAS | | Director of Realogy Holdings Corp.Anywhere Real Estate Inc. and
Manager of RealogyAnywhere Real Estate Group LLC | | February 25, 202024, 2023 |
| Fiona P. Dias | | | | |
| | | | |
| | | | | | | | | | | | | | |
| /s/ MATTHEW J. ESPE | | Director of Realogy Holdings Corp.Anywhere Real Estate Inc. and
Manager of RealogyAnywhere Real Estate Group LLC | | February 25, 202024, 2023 |
| Matthew J. Espe | | | | |
| | | | |
| /s/ V. ANN HAILEY | | Director of Realogy Holdings Corp.Anywhere Real Estate Inc. and
Manager of RealogyAnywhere Real Estate Group LLC | | February 25, 202024, 2023 |
| V. Ann Hailey | | | | |
| | | | |
| /s/ BRYSON KOEHLER | | Director of Realogy Holdings Corp.Anywhere Real Estate Inc. and
Manager of RealogyAnywhere Real Estate Group LLC | | February 26, 201924, 2023 |
| Bryson Koehler | | | | |
| | | | |
| /s/ DUNCAN L. NIEDERAUER | | Director of Realogy Holdings Corp.Anywhere Real Estate Inc. and
Manager of RealogyAnywhere Real Estate Group LLC | | February 25, 202024, 2023 |
| Duncan L. Niederauer | | | | |
| | | | |
| /s/ EGBERT L.J. PERRY | | Director of Anywhere Real Estate Inc. and
Manager of Anywhere Real Estate Group LLC | | February 24, 2023 |
| Egbert L.J. Perry | | | | |
| | | | |
| /s/ ENRIQUE SILVA | | Director of Realogy Holdings Corp.Anywhere Real Estate Inc. and
Manager of RealogyAnywhere Real Estate Group LLC | | February 25, 202024, 2023 |
| Enrique Silva | | | | |
| | | | |
| /s/ SHERRY M. SMITH | | Director of Realogy Holdings Corp.Anywhere Real Estate Inc. and
Manager of RealogyAnywhere Real Estate Group LLC | | February 25, 202024, 2023 |
| Sherry M. Smith | | | | |
| | | | |
| /s/ CHRIS TERRILL | | Director of Realogy Holdings Corp.Anywhere Real Estate Inc. and
Manager of RealogyAnywhere Real Estate Group LLC | | February 25, 202024, 2023 |
| Chris Terrill | | | | |
| | | | |
| /s/ FELICIA WILLIAMS | | Director of Anywhere Real Estate Inc. and
Manager of Anywhere Real Estate Group LLC | | February 24, 2023 |
| Felicia Williams | | | | |
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Realogy Holdings Corp.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Realogy Holdings Corp. and its subsidiaries (the "Company") as of December 31, 2019 and 2018, and the related consolidated statements of operations, of comprehensive (loss) income, of equity and of cash flows for each of the three years in the period ended December 31, 2019, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 2019 appearing under Item 15(A)(4) (collectively referred to as the "consolidated financial statements"). We also have audited the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included inManagement's Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company's consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Goodwill Impairment Assessment
As described in Notes 2 and 6 to the consolidated financial statements, the Company’s consolidated goodwill balance was $3,300 million as of December 31, 2019. Management conducts an impairment assessment as of October 1 of each year, or whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. This assessment compares the carrying values of the reporting units to their respective fair values and when appropriate, the carrying value is reduced to fair value. Fair value of each reporting unit is estimated using the income approach, a discounted cash flow approach. The fair value of the Company's reporting units are determined utilizing the best estimate of future revenues, operating expenses, including commission expense, market and general economic conditions, as well as assumptions that management believes marketplace participants would utilize including discount rates, cost of capital, and long-term growth rates. During the third quarter of 2019, management determined that the decrease in the stock price of the Company and the impact on future earnings related to the discontinuation of the USAA affinity program qualified as triggering events for all of its reporting units and accordingly management performed an impairment assessment of goodwill and other indefinite-lived intangible assets as of September 1, 2019. As a result of the interim impairment test, management recognized a goodwill impairment charge totaling $237 million related to Realogy Brokerage Group.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment is a critical audit matter are there was significant judgment by management when developing the fair value measurement of the reporting units. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence relating to management’s cash flow projections and significant assumptions, including future revenues, operating expenses. including commission expense, and the discount rates. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over the determination of the fair value of the Company’s reporting units. These procedures also included, among others, testing management’s process for developing the fair value estimates, testing the completeness and accuracy of the underlying data used in the valuation model, and evaluating the reasonableness of the significant assumptions, including future revenues, operating expenses, including commission expense, and discount rates. Evaluating management’s assumptions related to future revenues and operating expenses, including commission expense involved evaluating whether the assumptions used by management were reasonable considering the current and past performance of the reporting units and whether the assumptions were consistent with evidence obtained in other areas of the audit. Additionally, for future revenues, the evaluation also considered whether the assumption was consistent with external market and industry data. Professionals with specialized skill and knowledge were used to assist in the evaluation of the appropriateness of the Company’s discounted cash flow model and discount rates.
Other Indefinite-Lived Assets Impairment Assessment – Trademark Intangible Assets
As described in Notes 2 and 6 to the consolidated financial statements, the Company’s consolidated other indefinite-lived intangible assets balance was $692 million as of December 31, 2019, including trademark intangible assets of $673 million. Management conducts an impairment assessment as of October 1 of each year, or whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. This assessment compares the carrying values
of the other indefinite lived assets to their respective fair values and, when appropriate, the carrying value is reduced to fair value. Fair value of the other indefinite-lived intangible assets is estimated using the relief from royalty method. The fair value of the Company's other indefinite lived intangible assets are determined utilizing the best estimate of future revenues, market and general economic conditions as well as assumptions that management believes marketplace participants would utilize including discount rates, cost of capital, trademark royalty rates, and long-term growth rates. During the third quarter of 2019, management determined that the decrease in the stock price of the Company and the impact on future earnings related to the discontinuation of the USAA affinity program qualified as triggering events for all of its reporting units and accordingly management performed an impairment assessment of goodwill and other indefinite-lived intangible assets as of September 1, 2019.
The principal considerations for our determination that performing procedures relating to the other indefinite-lived intangible assets impairment assessment - trademark intangible assets is a critical audit matter are there was significant judgment by management when developing the fair value measurement of the trademark intangible assets. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence relating to management’s significant assumptions, including future revenues and the discount rates. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s trademark intangible asset impairment assessment, including controls over the determination of the fair value of the Company’s trademark intangible assets. These procedures also included, among others, testing management’s process for developing the fair value estimates, testing the completeness and accuracy of the underlying data used in the valuation model and evaluating the reasonableness of the significant assumptions, including future revenues and discount rates. Evaluating management’s assumption related to future revenues involved evaluating whether the assumption used by management was reasonable considering the current and past performance of the business associated with the trademark, consistency with external market and industry data, and whether the assumption was consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of the appropriateness of the Company’s relief from royalty method, the trademark royalty rates, and discount rates.
/s/ PricewaterhouseCoopers LLP
Florham Park, New Jersey
February 25, 2020
We have served as the Company's auditor since 2009.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and StockholderStockholders of Realogy Group LLCAnywhere Real Estate Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Realogy Group LLCAnywhere Real Estate Inc. and its subsidiaries (the "Company") as of December 31, 20192022 and 2018,2021, and the related consolidated statements of operations, of comprehensive (loss) income, of equity and of cash flows for each of the three years in the period ended December 31, 2019,2022, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 20192022 appearing under Item 15(A)(4) (collectively referred to as the "consolidated financial statements"). We also have audited the Company's internal control over financial reporting as of December 31, 2019,2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20192022 and 2018,2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20192022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,2022, based on criteria established in Internal Control - Control—Integrated Framework(2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control Overover Financial Reporting for Anywhere Real Estate Inc. appearing under Item 9A. Our responsibility is to express opinions on the Company's consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Annual Goodwill Impairment Assessment—Owned Brokerage Group and Cartus/Leads Group Reporting Units
As described in Notes 2 and 7 to the consolidated financial statements, the Company’s consolidated goodwill balance was $2,523 million as of December 31, 2022, a portion of which related to the Cartus/Leads Group reporting unit within the Franchise Group segment, and the goodwill associated with the Owned Brokerage Group reporting unit was $0. Management conducts an impairment assessment annually as of October 1, or whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. This assessment compares the carrying value of each reporting unit to their respective fair values and, when appropriate, the carrying value is reduced to fair value. The fair value of each reporting unit is estimated using the income approach, a discounted cash flow method. The fair value of the Company’s reporting units is determined utilizing the best estimate of future revenues, operating expenses, including commission expense, market and general economic conditions, trends in the industry, as well as assumptions that management believes marketplace participants would utilize including discount rates, cost of capital, and long-term growth rates. During the fourth quarter of 2022, the Company performed its annual impairment assessment of goodwill. This assessment resulted in the recognition of an impairment of all of the goodwill related to the Owned Brokerage Group reporting unit of $280 million and an impairment of goodwill at the Franchise Group segment related to the Cartus/Leads Group reporting unit of $114 million.
The principal considerations for our determination that performing procedures relating to the annual goodwill impairment assessment of the Owned Brokerage Group and Cartus/Leads Group reporting units is a critical audit matter are (i) the significant judgment by management when developing the fair value estimates of the reporting units; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to future revenues, certain operating expenses (which includes commission expense for the Owned Brokerage Group reporting unit), and discount rates; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s annual goodwill impairment assessment, including controls over the valuation of the Owned Brokerage Group and Cartus/Leads Group reporting units. These procedures also included, among others (i) testing management’s process for developing the fair value estimates of the Owned Brokerage Group and Cartus/Leads Group reporting units; (ii) evaluating the appropriateness of the discounted cash flow method; (iii) testing the completeness and accuracy of the underlying data used in the discounted cash flow method; and (iv) evaluating the significant assumptions used by management related to future revenues, certain operating expenses (which includes commission expense for the Owned Brokerage Group reporting unit), and discount rates. Evaluating management’s assumptions related to future revenues and certain operating expenses (which includes commission expense for the Owned Brokerage Group reporting unit) involved evaluating whether the assumptions used by management were (i) reasonable considering the current and past performance of the reporting units, (ii) consistent with external market and industry data, and (iii) consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s discounted cash flow method and the discount rates assumption.
Annual Indefinite-Lived Asset Impairment Assessment—Franchise Trademarks Intangible Asset
As described in Notes 2 and 7 to the consolidated financial statements, the Company’s consolidated indefinite-lived intangible assets balance was $639 million as of December 31, 2022, including trademark intangible assets of $611 million, a portion of which relates to the franchise trademarks intangible asset. Management conducts an impairment assessment
annually as of October 1, or whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. This assessment compares the carrying values of the other indefinite lived intangible assets to their respective fair values and, when appropriate, the carrying value is reduced to fair value. The fair value of each indefinite-lived intangible asset is estimated using the relief from royalty method. The fair value of the Company’s indefinite lived intangible assets are determined utilizing the best estimate of future revenues, market and general economic conditions, trends in the industry, as well as assumptions that management believes marketplace participants would utilize including discount rates, cost of capital, trademark royalty rates, and long-term growth rates. During the fourth quarter of 2022, the Company performed its annual impairment assessment of indefinite-lived intangible assets. This assessment resulted in the recognition of an impairment of the franchise trademarks intangible asset for $76 million.
The principal considerations for our determination that performing procedures relating to the impairment assessment of the franchise trademarks intangible asset is a critical audit matter are (i) the significant judgment by management when developing the fair value estimate of the franchise trademarks intangible asset; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to future revenues and discount rate; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s annual trademarks intangible asset impairment assessment, including controls over the valuation of the franchise trademarks intangible asset. These procedures also included, among others (i) testing management’s process for developing the fair value estimate of the franchise trademarks intangible asset; (ii) evaluating the appropriateness of the relief from royalty method; (iii) testing the completeness and accuracy of the underlying data used in the relief from royalty method; and (iv) evaluating the significant assumptions used by management related to future revenues and discount rate. Evaluating management’s assumption related to future revenues involved evaluating whether the assumption used by management was (i) reasonable considering the current and past performance of the business associated with the trademark, (ii) consistent with external market and industry data, and (iii) consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s relief from royalty method and the discount rate assumption.
/s/ PricewaterhouseCoopers LLP
Florham Park, New Jersey
February 24, 2023
We have served as the Company's auditor since 2009.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholder of Anywhere Real Estate Group LLC
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Anywhere Real Estate Group LLC and its subsidiaries (the "Company") as of December 31, 2022 and 2021, and the related consolidated statements of operations, of comprehensive (loss) income and of cash flows for each of the three years in the period ended December 31, 2022, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 2022 appearing under Item 15(A)(4) (collectively referred to as the "consolidated financial statements"). We also have audited the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included inManagement's Report on Internal Control over Financial Reporting for Anywhere Real Estate Group LLC appearing under Item 9A. Our responsibility is to express opinions on the Company's consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLPCritical Audit Matters
Florham Park, New JerseyThe critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
February 25, 2020Annual Goodwill Impairment Assessment—Owned Brokerage Group and Cartus/Leads Group Reporting Units
We have served asThe principal considerations for our determination that performing procedures relating to the Company'sannual goodwill impairment assessment of the Owned Brokerage Group and Cartus/Leads Group reporting units is a critical audit matter are (i) the significant judgment by management when developing the fair value estimates of the reporting units; (ii) a high degree of auditor since 2009.judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to future revenues, certain operating expenses (which includes commission expense for the Owned Brokerage Group reporting unit), and discount rates; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s annual goodwill impairment assessment, including controls over the valuation of the Owned Brokerage Group and Cartus/Leads Group reporting units. These procedures also included, among others (i) testing management’s process for developing the fair value estimates of the Owned Brokerage Group and Cartus/Leads Group reporting units; (ii) evaluating the appropriateness of the discounted cash flow method; (iii) testing the completeness and accuracy of the underlying data used in the discounted cash flow method; and (iv) evaluating the significant assumptions used by management related to future revenues, certain operating expenses (which includes commission expense for the Owned Brokerage Group reporting unit), and discount rates. Evaluating management’s assumptions related to future revenues and certain operating expenses (which includes commission expense for the Owned Brokerage Group reporting unit) involved evaluating whether the assumptions used by management were (i) reasonable considering the current and past performance of the reporting units, (ii) consistent with external market and industry data, and (iii) consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s discounted cash flow method and the discount rates assumption.
REALOGY HOLDINGS CORP. AND REALOGY GROUP LLCAnnual Indefinite-Lived Asset Impairment Assessment—Franchise Trademarks Intangible Asset
CONSOLIDATED STATEMENTS OF OPERATIONSAs described in Notes 2 and 7 to the consolidated financial statements, the Company’s consolidated indefinite-lived intangible assets balance was $639 million as of December 31, 2022, including trademark intangible assets of $611 million, a portion of which relates to the franchise trademarks intangible asset. Management conducts an impairment assessment annually as of October 1, or whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. This assessment compares the carrying values of the other indefinite lived intangible assets to their respective fair values and, when appropriate, the carrying value is reduced to fair value. The fair value of each indefinite-lived intangible asset is estimated using the relief from royalty method. The fair value of the Company’s indefinite lived intangible assets are determined utilizing the best estimate of future revenues, market and general economic conditions, trends in the industry, as well as assumptions that management believes marketplace participants would utilize including discount rates, cost of capital, trademark royalty rates, and long-term growth rates. During the fourth quarter of 2022, the Company performed its annual impairment assessment of indefinite-lived intangible assets. This assessment resulted in the recognition of an impairment of the franchise trademarks intangible asset for $76 million.
(In millions, except per share data)The principal considerations for our determination that performing procedures relating to the impairment assessment of the franchise trademarks intangible asset is a critical audit matter are (i) the significant judgment by management when developing the fair value estimate of the franchise trademarks intangible asset; (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to future revenues and discount rate; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | |
| | 2019 | | 2018 | | 2017 |
| Revenues | | | | | |
| Gross commission income | $ | 4,330 | | | $ | 4,533 | | | $ | 4,576 | |
| Service revenue | 673 | | | 654 | | | 638 | |
| Franchise fees | 386 | | | 393 | | | 396 | |
| Other | 209 | | | 202 | | | 200 | |
| Net revenues | 5,598 | | | 5,782 | | | 5,810 | |
| Expenses | | | | | |
| Commission and other agent-related costs | 3,156 | | | 3,282 | | | 3,230 | |
| Operating | 1,345 | | | 1,351 | | | 1,344 | |
| Marketing | 262 | | | 256 | | | 258 | |
| General and administrative | 288 | | | 265 | | | 303 | |
| Former parent legacy cost (benefit), net | 1 | | | 4 | | | (10) | |
| Restructuring costs, net | 42 | | | 47 | | | 12 | |
| Impairments | 249 | | | — | | | — | |
| Depreciation and amortization | 169 | | | 164 | | | 166 | |
| Interest expense, net | 249 | | | 189 | | | 157 | |
| (Gain) loss on the early extinguishment of debt | (5) | | | 7 | | | 5 | |
| Other expense, net | — | | | — | | | 1 | |
| Total expenses | 5,756 | | | 5,565 | | | 5,466 | |
| (Loss) income from continuing operations before income taxes, equity in (earnings) losses and noncontrolling interests | (158) | | | 217 | | | 344 | |
| Income tax (benefit) expense from continuing operations | (22) | | | 67 | | | (66) | |
| Equity in (earnings) losses of unconsolidated entities | (18) | | | 4 | | | (18) | |
| Net (loss) income from continuing operations | (118) | | | 146 | | | 428 | |
| | | | | |
| (Loss) income from discontinued operations, net of tax | (7) | | | (6) | | | 6 | |
| Estimated loss on the sale of discontinued operations, net of tax | (60) | | | — | | | — | |
| Net (loss) income from discontinued operations | (67) | | | (6) | | | 6 | |
| | | | | |
| Net (loss) income | (185) | | | 140 | | | 434 | |
| Less: Net income attributable to noncontrolling interests | (3) | | | (3) | | | (3) | |
| Net (loss) income attributable to Realogy Holdings and Realogy Group | $ | (188) | | | $ | 137 | | | $ | 431 | |
| | | | | |
| Basic (loss) earnings per share attributable to Realogy Holdings shareholders: | | | | | |
| Basic (loss) earnings per share from continuing operations | $ | (1.06) | | | $ | 1.15 | | | $ | 3.11 | |
| Basic (loss) earnings per share from discontinued operations | (0.59) | | | (0.05) | | | 0.04 | |
| Basic (loss) earnings per share | $ | (1.65) | | | $ | 1.10 | | | $ | 3.15 | |
| Diluted (loss) earnings per share attributable to Realogy Holdings shareholders: | | | | | |
| Diluted (loss) earnings per share from continuing operations | $ | (1.06) | | | $ | 1.14 | | | $ | 3.07 | |
| Diluted (loss) earnings per share from discontinued operations | (0.59) | | | (0.05) | | | 0.04 | |
| Diluted (loss) earnings per share | $ | (1.65) | | | $ | 1.09 | | | $ | 3.11 | |
| Weighted average common and common equivalent shares of Realogy Holdings outstanding: | | | | | |
| Basic | 114.2 | | | 124.0 | | | 136.7 | |
| Diluted | 114.2 | | | 125.3 | | | 138.4 | |
/s/ PricewaterhouseCoopers LLP
Florham Park, New Jersey
February 24, 2023
We have served as the Company's auditor since 2009.
See Notes to Consolidated Financial Statements.
F-7
REALOGY HOLDINGS CORP.ANYWHERE REAL ESTATE INC. AND REALOGYANYWHERE REAL ESTATE GROUP LLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOMEOPERATIONS
(In millions)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
| 2019 | | 2018 | | 2017 |
| Net (loss) income | $ | (185) | | | $ | 140 | | | $ | 434 | |
| Currency translation adjustment | — | | | (3) | | | 3 | |
| Defined Benefit Plans: | | | | | |
| Actuarial loss for the plans | (8) | | | (6) | | | (1) | |
| Less: amortization of actuarial loss to periodic pension cost | (2) | | | (2) | | | (2) | |
| Defined benefit plans | (6) | | | (4) | | | 1 | |
| Other comprehensive (loss) income, before tax | (6) | | | (7) | | | 4 | |
| Income tax (benefit) expense related to items of other comprehensive income (loss) | (2) | | | (1) | | | 1 | |
| Other comprehensive (loss) income, net of tax | (4) | | | (6) | | | 3 | |
| Comprehensive (loss) income | (189) | | | 134 | | | 437 | |
| Less: comprehensive income attributable to noncontrolling interests | (3) | | | (3) | | | (3) | |
| Comprehensive (loss) income attributable to Realogy Holdings and Realogy Group | $ | (192) | | | $ | 131 | | | $ | 434 | |
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Revenues | | | | | |
| Gross commission income | $ | 5,538 | | | $ | 6,118 | | | $ | 4,669 | |
| Service revenue | 793 | | | 1,180 | | | 983 | |
| Franchise fees | 417 | | | 521 | | | 419 | |
| Other | 160 | | | 164 | | | 150 | |
| Net revenues | 6,908 | | | 7,983 | | | 6,221 | |
| Expenses | | | | | |
| Commission and other agent-related costs | 4,415 | | | 4,753 | | | 3,527 | |
| Operating | 1,377 | | | 1,669 | | | 1,473 | |
| Marketing | 252 | | | 263 | | | 215 | |
| General and administrative | 388 | | | 441 | | | 412 | |
| Former parent legacy cost, net | 1 | | | 1 | | | 1 | |
| Restructuring costs, net | 32 | | | 17 | | | 67 | |
| Impairments | 483 | | | 4 | | | 682 | |
| Depreciation and amortization | 214 | | | 204 | | | 186 | |
| Interest expense, net | 113 | | | 190 | | | 246 | |
| Loss on the early extinguishment of debt | 96 | | | 21 | | | 8 | |
| Other income, net | (140) | | | (15) | | | (5) | |
| Total expenses | 7,231 | | | 7,548 | | | 6,812 | |
| (Loss) income before income taxes, equity in losses (earnings) and noncontrolling interests | (323) | | | 435 | | | (591) | |
| Income tax (benefit) expense | (68) | | | 133 | | | (104) | |
| Equity in losses (earnings) of unconsolidated entities | 28 | | | (48) | | | (131) | |
| Net (loss) income | (283) | | | 350 | | | (356) | |
| Less: Net income attributable to noncontrolling interests | (4) | | | (7) | | | (4) | |
| Net (loss) income attributable to Anywhere and Anywhere Group | $ | (287) | | | $ | 343 | | | $ | (360) | |
| | | | | |
| (Loss) earnings per share attributable to Anywhere shareholders: | | | | | |
| Basic (loss) earnings per share | $ | (2.52) | | | $ | 2.95 | | | $ | (3.13) | |
| Diluted (loss) earnings per share | $ | (2.52) | | | $ | 2.85 | | | $ | (3.13) | |
| Weighted average common and common equivalent shares of Anywhere outstanding: |
| Basic | 113.8 | | | 116.4 | | | 115.2 | |
| Diluted | 113.8 | | | 120.2 | | | 115.2 | |
See Notes to Consolidated Financial Statements.
F-8
REALOGY HOLDINGS CORP.ANYWHERE REAL ESTATE INC. AND REALOGYANYWHERE REAL ESTATE GROUP LLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In millions) | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Net (loss) income | $ | (283) | | | $ | 350 | | | $ | (356) | |
| Currency translation adjustment | — | | | (1) | | | — | |
| Defined Benefit Plans: | | | | | |
| Actuarial gain (loss) for the plans | 1 | | | 10 | | | (6) | |
| Less: amortization of actuarial gain (loss) to periodic pension cost | (2) | | | (3) | | | (2) | |
| Defined benefit plans | 3 | | | 13 | | | (4) | |
| Other comprehensive income (loss), before tax | 3 | | | 12 | | | (4) | |
| Income tax expense (benefit) related to items of other comprehensive income (loss) | 1 | | | 3 | | | (1) | |
| Other comprehensive income (loss), net of tax | 2 | | | 9 | | | (3) | |
| Comprehensive (loss) income | (281) | | | 359 | | | (359) | |
| Less: comprehensive income attributable to noncontrolling interests | (4) | | | (7) | | | (4) | |
| Comprehensive (loss) income attributable to Anywhere and Anywhere Group | $ | (285) | | | $ | 352 | | | $ | (363) | |
See Notes to Consolidated Financial Statements.
F-9
ANYWHERE REAL ESTATE INC. AND ANYWHERE REAL ESTATE GROUP LLC
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
| | | | | | | | | | | |
| | December 31, | | |
| | 2019 | | 2018 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 235 | | | $ | 203 | |
| Restricted cash | — | | | 2 | |
| Trade receivables (net of allowance for doubtful accounts of $11 and $9) | 79 | | | 85 | |
| Other current assets | 147 | | | 140 | |
| Current assets - held for sale | 750 | | | 338 | |
| Total current assets | 1,211 | | | 768 | |
| Property and equipment, net | 308 | | | 273 | |
| Operating lease assets, net | 515 | | | — | |
| Goodwill | 3,300 | | | 3,536 | |
| Trademarks | 673 | | | 673 | |
| Franchise agreements, net | 1,160 | | | 1,227 | |
| Other intangibles, net | 72 | | | 80 | |
| Other non-current assets | 304 | | | 272 | |
| Non-current assets - held for sale | — | | | 461 | |
| Total assets | $ | 7,543 | | | $ | 7,290 | |
| LIABILITIES AND EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 84 | | | $ | 83 | |
| Current portion of long-term debt | 234 | | | 748 | |
| Current portion of operating lease liabilities | 122 | | | — | |
| Accrued expenses and other current liabilities | 350 | | | 344 | |
| Current liabilities - held for sale | 356 | | | 352 | |
| Total current liabilities | 1,146 | | | 1,527 | |
| Long-term debt | 3,211 | | | 2,800 | |
| Long-term operating lease liabilities | 467 | | | — | |
| Deferred income taxes | 390 | | | 389 | |
| Other non-current liabilities | 233 | | | 256 | |
| Non-current liabilities - held for sale | — | | | 3 | |
| Total liabilities | 5,447 | | | 4,975 | |
| Commitments and contingencies (Note 15) | | | |
| Equity: | | | |
| Realogy Holdings preferred stock: $0.01 par value; 50,000,000 shares authorized, NaN issued and outstanding at December 31, 2019 and December 31, 2018 | — | | | — | |
| Realogy Holdings common stock: $0.01 par value;400,000,000 shares authorized, 114,355,519 shares issued and outstanding at December 31, 2019 and 114,620,499 shares issued and outstanding at December 31, 2018 | 1 | | | 1 | |
| Additional paid-in capital | 4,842 | | | 4,869 | |
| Accumulated deficit | (2,695) | | | (2,507) | |
| Accumulated other comprehensive loss | (56) | | | (52) | |
| Total stockholders' equity | 2,092 | | | 2,311 | |
| Noncontrolling interests | 4 | | | 4 | |
| Total equity | 2,096 | | | 2,315 | |
| Total liabilities and equity | $ | 7,543 | | | $ | 7,290 | |
| | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 214 | | | $ | 735 | |
| Restricted cash | 4 | | | 8 | |
| Trade receivables (net of allowance for doubtful accounts of $12 and $11) | 201 | | | 123 | |
| Relocation receivables | 210 | | | 139 | |
| Other current assets | 205 | | | 183 | |
| Total current assets | 834 | | | 1,188 | |
| Property and equipment, net | 317 | | | 310 | |
| Operating lease assets, net | 422 | | | 453 | |
| Goodwill | 2,523 | | | 2,923 | |
| Trademarks | 611 | | | 687 | |
| Franchise agreements, net | 954 | | | 1,021 | |
| Other intangibles, net | 150 | | | 171 | |
| Other non-current assets | 572 | | | 457 | |
| Total assets | $ | 6,383 | | | $ | 7,210 | |
| LIABILITIES AND EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 184 | | | $ | 130 | |
| Securitization obligations | 163 | | | 118 | |
| Current portion of long-term debt | 366 | | | 10 | |
| Current portion of operating lease liabilities | 122 | | | 128 | |
| Accrued expenses and other current liabilities | 470 | | | 666 | |
| Total current liabilities | 1,305 | | | 1,052 | |
| Long-term debt | 2,483 | | | 2,940 | |
| Long-term operating lease liabilities | 371 | | | 417 | |
| Deferred income taxes | 239 | | | 353 | |
| Other non-current liabilities | 218 | | | 256 | |
| Total liabilities | 4,616 | | | 5,018 | |
| Commitments and contingencies (Note 15) | | | |
| Equity: | | | |
| Anywhere preferred stock: $0.01 par value; 50,000,000 shares authorized, none issued and outstanding at December 31, 2022 and December 31, 2021 | — | | | — | |
| Anywhere common stock: $0.01 par value; 400,000,000 shares authorized, 109,480,357 shares issued and outstanding at December 31, 2022 and 116,588,430 shares issued and outstanding at December 31, 2021 | 1 | | | 1 | |
| Additional paid-in capital | 4,805 | | | 4,947 | |
| Accumulated deficit | (2,994) | | | (2,712) | |
| Accumulated other comprehensive loss | (48) | | | (50) | |
| Total stockholders' equity | 1,764 | | | 2,186 | |
| Noncontrolling interests | 3 | | | 6 | |
| Total equity | 1,767 | | | 2,192 | |
| Total liabilities and equity | $ | 6,383 | | | $ | 7,210 | |
See Notes to Consolidated Financial Statements.
F-9F-10
REALOGY HOLDINGS CORP.ANYWHERE REAL ESTATE INC. AND REALOGYANYWHERE REAL ESTATE GROUP LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | |
| | 2019 | | 2018 | | 2017 |
| Operating Activities | | | | | |
| Net (loss) income | $ | (185) | | | $ | 140 | | | $ | 434 | |
| Net loss (income) from discontinued operations | 67 | | | 6 | | | (6) | |
| Net (loss) income from continuing operations | (118) | | | 146 | | | 428 | |
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 169 | | | 164 | | | 166 | |
| Deferred income taxes | (34) | | | 71 | | | (64) | |
| Impairments | 249 | | | — | | | — | |
| Amortization of deferred financing costs and debt discount | 10 | | | 15 | | | 16 | |
| (Gain) loss on the early extinguishment of debt | (5) | | | 7 | | | 5 | |
| Equity in (earnings) losses of unconsolidated entities | (18) | | | 4 | | | (18) | |
| Stock-based compensation | 28 | | | 37 | | | 47 | |
| Mark-to-market adjustments on derivatives | 39 | | | 4 | | | (4) | |
| Other adjustments to net (loss) income | (3) | | | — | | | — | |
| Net change in assets and liabilities, excluding the impact of acquisitions and dispositions: | | | | | |
| Trade receivables | 5 | | | 7 | | | (2) | |
| Other assets | 1 | | | (8) | | | (20) | |
| Accounts payable, accrued expenses and other liabilities | (11) | | | (43) | | | (4) | |
| Dividends received from unconsolidated entities | 3 | | | 3 | | | 52 | |
| Other, net | 1 | | | (7) | | | (12) | |
| Net cash provided by operating activities from continuing operations | 316 | | | 400 | | | 590 | |
| Net cash provided by (used in) operating activities from discontinued operations | 55 | | | (6) | | | 77 | |
| Net cash provided by operating activities | 371 | | | 394 | | | 667 | |
| Investing Activities | | | | | |
| Property and equipment additions | (108) | | | (92) | | | (90) | |
| Payments for acquisitions, net of cash acquired | (1) | | | (1) | | | (18) | |
| Investment in unconsolidated entities | (12) | | | (15) | | | (55) | |
| Proceeds from investments in unconsolidated entities | — | | | 19 | | | 11 | |
| Other, net | 4 | | | 11 | | | 4 | |
| Net cash used in investing activities from continuing operations | (117) | | | (78) | | | (148) | |
| Net cash (used in) provided by investing activities from discontinued operations | (11) | | | (13) | | | 2 | |
| Net cash used in investing activities | $ | (128) | | | $ | (91) | | | $ | (146) | |
See Notes to Consolidated Financial Statements.
F-10
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | |
| | 2019 | | 2018 | | 2017 |
| Financing Activities | | | | | |
| Net change in Revolving Credit Facility | $ | (80) | | | $ | 200 | | | $ | (130) | |
| Payments for refinancing of Term Loan B | — | | | (4) | | | — | |
| Proceeds from refinancing of Term Loan A & A-1 | — | | | 17 | | | — | |
| Proceeds from issuance of Senior Notes | 550 | | | — | | | — | |
| Redemption and repurchase of Senior Notes | (533) | | | — | | | — | |
| Amortization payments on term loan facilities | (30) | | | (25) | | | (42) | |
| Debt issuance costs | (9) | | | (16) | | | (6) | |
| Cash paid for fees associated with early extinguishment of debt | (5) | | | — | | | (1) | |
| Repurchase of common stock | (20) | | | (402) | | | (280) | |
| Dividends paid on common stock | (31) | | | (45) | | | (49) | |
| Proceeds from exercise of stock options | — | | | 1 | | | 8 | |
| Taxes paid related to net share settlement for stock-based compensation | (6) | | | (10) | | | (11) | |
| Payments of contingent consideration related to acquisitions | (3) | | | (22) | | | (22) | |
| Other, net | (25) | | | (25) | | | (30) | |
| Net cash used in financing activities from continuing operations | (192) | | | (331) | | | (563) | |
| Net cash (used in) provided by financing activities from discontinued operations | (23) | | | 34 | | | (7) | |
| Net cash used in financing activities | (215) | | | (297) | | | (570) | |
| Effect of changes in exchange rates on cash, cash equivalents and restricted cash | — | | | (2) | | | 2 | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | 28 | | | 4 | | | (47) | |
| Cash, cash equivalents and restricted cash, beginning of period | 238 | | | 234 | | | 281 | |
| Cash, cash equivalents and restricted cash, end of period | 266 | | | 238 | | | 234 | |
| Less cash, cash equivalents and restricted cash of discontinued operations, end of period | 31 | | | 33 | | | 38 | |
| Cash, cash equivalents and restricted cash of continuing operations, end of period | $ | 235 | | | $ | 205 | | | $ | 196 | |
| | | | | |
| Supplemental Disclosure of Cash Flow Information | | | | | |
| Interest payments for continuing operations | $ | 201 | | | $ | 176 | | | $ | 165 | |
| Income tax (refunds) payments for continuing operations, net | (3) | | | 6 | | | 11 | |
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Operating Activities | | | | | |
| Net (loss) income | $ | (283) | | | $ | 350 | | | $ | (356) | |
| Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: |
| Depreciation and amortization | 214 | | | 204 | | | 186 | |
| Deferred income taxes | (96) | | | 72 | | | (114) | |
| Impairments | 483 | | | 4 | | | 682 | |
| Amortization of deferred financing costs and debt discount (premium) | 9 | | | 18 | | | 11 | |
| Loss on the early extinguishment of debt | 96 | | | 21 | | | 8 | |
| Gain on the sale of businesses, investments or other assets, net | (135) | | | (11) | | | — | |
| Equity in losses (earnings) of unconsolidated entities | 28 | | | (48) | | | (131) | |
| Stock-based compensation | 22 | | | 29 | | | 39 | |
| Mark-to-market adjustments on derivatives | (40) | | | (14) | | | 51 | |
| Other adjustments to net (loss) income | (7) | | | (3) | | | (5) | |
| Net change in assets and liabilities, excluding the impact of acquisitions and dispositions: |
| Trade receivables | (55) | | | 4 | | | (4) | |
| Relocation receivables | (96) | | | — | | | 64 | |
| Other assets | (13) | | | (10) | | | 29 | |
| Accounts payable, accrued expenses and other liabilities | (195) | | | 17 | | | 220 | |
| Dividends received from unconsolidated entities | 3 | | | 51 | | | 101 | |
| Other, net | (27) | | | (41) | | | (33) | |
| Net cash (used in) provided by operating activities | (92) | | | 643 | | | 748 | |
| Investing Activities | | | | | |
| Property and equipment additions | (109) | | | (101) | | | (95) | |
| Payments for acquisitions, net of cash acquired | (17) | | | (26) | | | (1) | |
| Net proceeds from the sale of businesses | 63 | | | 15 | | | 23 | |
| Investment in unconsolidated entities | (22) | | | (39) | | | (5) | |
| Proceeds from the sale of investments in unconsolidated entities | 13 | | | — | | | — | |
| Other, net | 17 | | | 4 | | | (12) | |
| Net cash used in investing activities | (55) | | | (147) | | | (90) | |
See Notes to Consolidated Financial Statements.
F-11
REALOGY HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF EQUITY
(In millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Realogy Holdings Stockholders' Equity | | | | | | | | | | | | |
| | Common Stock | | | | Additional
Paid-In
Capital | | Accumulated
Deficit | | Accumulated
Other
Comprehensive
Loss | | Non-
controlling
Interests | | Total
Equity |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Shares | | Amount | | | | | | | | | | |
| Balance at January 1, 2017 | 140.2 | | | $ | 1 | | | $ | 5,565 | | | $ | (3,062) | | | $ | (40) | | | $ | 5 | | | $ | 2,469 | |
| Net income | — | | | — | | | — | | | 431 | | | — | | | 3 | | | 434 | |
| Other comprehensive income | — | | | — | | | — | | | — | | | 3 | | | — | | | 3 | |
| Repurchase of common stock | (9.5) | | | — | | | (280) | | | — | | | — | | | — | | | (280) | |
| Exercise of stock options | 0.3 | | | — | | | 8 | | | — | | | — | | | — | | | 8 | |
| Stock-based compensation | — | | | — | | | 52 | | | — | | | — | | | — | | | 52 | |
| Issuance of shares for vesting of equity awards | 1.0 | | | — | | | — | | | — | | | — | | | — | | | — | |
| Shares withheld for taxes on equity awards | (0.4) | | | — | | | (11) | | | — | | | — | | | — | | | (11) | |
| Dividends ($0.36 per share) | — | | | — | | | (49) | | | — | | | — | | | (4) | | | (53) | |
| Balance at December 31, 2017 | 131.6 | | | $ | 1 | | | $ | 5,285 | | | $ | (2,631) | | | $ | (37) | | | $ | 4 | | | $ | 2,622 | |
| Cumulative effect of adoption of new accounting pronouncements | — | | | — | | | — | | | (13) | | | (9) | | | — | | | (22) | |
| Net income | — | | | — | | | — | | | 137 | | | — | | | 3 | | | 140 | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | (6) | | | — | | | (6) | |
| Repurchase of common stock | (17.9) | | | — | | | (402) | | | — | | | — | | | — | | | (402) | |
| Exercise of stock options | — | | | — | | | 1 | | | — | | | — | | | — | | | 1 | |
| Stock-based compensation | — | | | — | | | 40 | | | — | | | — | | | — | | | 40 | |
| Issuance of shares for vesting of equity awards | 1.2 | | | — | | | — | | | — | | | — | | | — | | | — | |
| Shares withheld for taxes on equity awards | (0.3) | | | — | | | (10) | | | — | | | — | | | — | | | (10) | |
| Dividends ($0.36 per share) | — | | | — | | | (45) | | | — | | | — | | | (3) | | | (48) | |
| Balance at December 31, 2018 | 114.6 | | | $ | 1 | | | $ | 4,869 | | | $ | (2,507) | | | $ | (52) | | | $ | 4 | | | $ | 2,315 | |
| Net (loss) income | — | | | — | | | — | | | (188) | | | — | | | 3 | | | (185) | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | (4) | | | — | | | (4) | |
| Repurchase of common stock | (1.2) | | | — | | | (20) | | | — | | | — | | | — | | | (20) | |
| Stock-based compensation | — | | | — | | | 30 | | | — | | | — | | | — | | | 30 | |
| Issuance of shares for vesting of equity awards | 1.4 | | | — | | | — | | | — | | | — | | | — | | | — | |
| Shares withheld for taxes on equity awards | (0.4) | | | — | | | (6) | | | — | | | — | | | — | | | (6) | |
| Dividends ($0.27 per share) | — | | | — | | | (31) | | | — | | | — | | | (3) | | | (34) | |
| Balance at December 31, 2019 | 114.4 | | | $ | 1 | | | $ | 4,842 | | | $ | (2,695) | | | $ | (56) | | | $ | 4 | | | $ | 2,096 | |
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Financing Activities | | | | | |
| Net change in Revolving Credit Facility | 350 | | | — | | | (190) | |
| Repayments of Term Loan A Facility and Term Loan B Facility | — | | | (1,490) | | | — | |
| Proceeds from issuance of Senior Notes | 1,000 | | | 905 | | | — | |
| Proceeds from issuance of Senior Secured Lien Notes | — | | | — | | | 550 | |
| Redemption and repurchases of Senior Notes | (956) | | | — | | | (550) | |
| Redemption of Senior Secured Second Lien Notes | (550) | | | — | | | — | |
| Proceeds from issuance of Exchangeable Senior Notes | — | | | 403 | | | — | |
| Payments for purchase of Exchangeable Senior Notes hedge transactions | — | | | (67) | | | — | |
| Proceeds from issuance of Exchangeable Senior Notes warrant transactions | — | | | 46 | | | — | |
| Amortization payments on term loan facilities | (10) | | | (10) | | | (43) | |
| Net change in securitization obligations | 44 | | | 12 | | | (99) | |
| Debt issuance costs | (22) | | | (20) | | | (15) | |
| Cash paid for fees associated with early extinguishment of debt | (83) | | | (11) | | | (7) | |
| Repurchase of common stock | (97) | | | — | | | — | |
| Taxes paid related to net share settlement for stock-based compensation | (16) | | | (9) | | | (5) | |
| Other, net | (36) | | | (34) | | | (43) | |
| Net cash used in financing activities | (376) | | | (275) | | | (402) | |
| Effect of changes in exchange rates on cash, cash equivalents and restricted cash | (2) | | | (1) | | | 1 | |
| Net (decrease) increase in cash, cash equivalents and restricted cash | (525) | | | 220 | | | 257 | |
| Cash, cash equivalents and restricted cash, beginning of period | 743 | | | 523 | | | 266 | |
| Cash, cash equivalents and restricted cash, end of period | $ | 218 | | | $ | 743 | | | $ | 523 | |
| | | | | |
| Supplemental Disclosure of Cash Flow Information | | | | | |
| Interest payments (including securitization interest of $7, $4 and $5 respectively) | $ | 164 | | | $ | 188 | | | $ | 209 | |
| Income tax payments, net | 62 | | | 64 | | | — | |
See Notes to Consolidated Financial Statements.
F-12
REALOGY HOLDINGS CORP.ANYWHERE REAL ESTATE INC.
CONSOLIDATED STATEMENTS OF EQUITY
(In millions) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Anywhere Stockholders' Equity | | | | |
| | Common Stock | | Additional
Paid-In
Capital | | Accumulated
Deficit | | Accumulated
Other
Comprehensive
Loss | | Non-
controlling
Interests | | Total
Equity |
|
|
| Shares | | Amount | |
| Balance at January 1, 2020 | 114.4 | | | $ | 1 | | | $ | 4,842 | | | $ | (2,695) | | | $ | (56) | | | $ | 4 | | | $ | 2,096 | |
| Net (loss) income | — | | | — | | | — | | | (360) | | | — | | | 4 | | | (356) | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | (3) | | | — | | | (3) | |
| Stock-based compensation | — | | | — | | | 39 | | | — | | | — | | | — | | | 39 | |
| Issuance of shares for vesting of equity awards | 1.7 | | | — | | | — | | | — | | | — | | | — | | | — | |
| Shares withheld for taxes on equity awards | (0.6) | | | — | | | (5) | | | — | | | — | | | — | | | (5) | |
| Dividends | — | | | — | | | — | | | — | | | — | | | (4) | | | (4) | |
| Balance at December 31, 2020 | 115.5 | | | $ | 1 | | | $ | 4,876 | | | $ | (3,055) | | | $ | (59) | | | $ | 4 | | | $ | 1,767 | |
| Net income | — | | | — | | | — | | | 343 | | | — | | | 7 | | | 350 | |
| Other comprehensive income | — | | | — | | | — | | | — | | | 9 | | | — | | | 9 | |
| Equity component of Exchangeable Senior Notes issuance, net | — | | | — | | | 53 | | | — | | | — | | | — | | | 53 | |
| Purchase of Exchangeable Senior Notes note hedge transactions | — | | | — | | | (67) | | | — | | | — | | | — | | | (67) | |
| Tax benefit related to purchase of Exchangeable Senior Notes note hedge transactions | — | | | — | | | 18 | | | — | | | — | | | — | | | 18 | |
| Issuance of Exchangeable Senior Notes warrant transactions | — | | | — | | | 46 | | | — | | | — | | | — | | | 46 | |
| Exercise of stock options | 0.1 | | | — | | | 1 | | | — | | | — | | | — | | | 1 | |
| Stock-based compensation | — | | | — | | | 29 | | | — | | | — | | | — | | | 29 | |
| Issuance of shares for vesting of equity awards | 1.5 | | | — | | | — | | | — | | | — | | | — | | | — | |
| Shares withheld for taxes on equity awards | (0.5) | | | — | | | (9) | | | — | | | — | | | — | | | (9) | |
| Dividends | — | | | — | | | — | | | — | | | — | | | (5) | | | (5) | |
| Balance at December 31, 2021 | 116.6 | | | $ | 1 | | | $ | 4,947 | | | $ | (2,712) | | | $ | (50) | | | $ | 6 | | | $ | 2,192 | |
| Cumulative effect adjustment due to the adoption of ASU 2020-06 | — | | | — | | | (53) | | | 5 | | | — | | | — | | | (48) | |
| Net (loss) income | — | | | — | | | — | | | (287) | | | — | | | 4 | | | (283) | |
| Other comprehensive income | — | | | — | | | — | | | — | | | 2 | | | — | | | 2 | |
| Repurchase of common stock | (8.8) | | | — | | | (97) | | | — | | | — | | | — | | | (97) | |
| Exercise of stock options | 0.1 | | | — | | | 2 | | | — | | | — | | | — | | | 2 | |
| Stock-based compensation | — | | | — | | | 22 | | | — | | | — | | | — | | | 22 | |
| Issuance of shares for vesting of equity awards | 2.4 | | | — | | | — | | | — | | | — | | | — | | | — | |
| Shares withheld for taxes on equity awards | (0.8) | | | — | | | (16) | | | — | | | — | | | — | | | (16) | |
| Dividends | — | | | — | | | — | | | — | | | — | | | (8) | | | (8) | |
| Contributions from non-controlling interests | — | | | — | | | — | | | — | | | — | | | 1 | | | 1 | |
| Balance at December 31, 2022 | 109.5 | | | $ | 1 | | | $ | 4,805 | | | $ | (2,994) | | | $ | (48) | | | $ | 3 | | | $ | 1,767 | |
See Notes to Consolidated Financial Statements.
F-13
ANYWHERE REAL ESTATE INC. AND REALOGYANYWHERE REAL ESTATE GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise noted, all amounts are in millions, except per share amounts)
1. BASIS OF PRESENTATION
The Company changed its name from Realogy Holdings Corp. to Anywhere Real Estate Inc. effective June 9, 2022. Anywhere Real Estate Inc. ("Realogy Holdings", "Realogy"Anywhere" or the "Company") is a holding company for its consolidated subsidiaries including RealogyAnywhere Intermediate Holdings LLC ("RealogyAnywhere Intermediate") and RealogyAnywhere Real Estate Group LLC ("RealogyAnywhere Group") and its consolidated subsidiaries. Realogy,Anywhere, through its subsidiaries, is a global provider of residential real estate services. Neither Realogy Holdings,Anywhere, the indirect parent of RealogyAnywhere Group, nor RealogyAnywhere Intermediate, the direct parent company of RealogyAnywhere Group, conducts any operations other than with respect to its respective direct or indirect ownership of RealogyAnywhere Group. As a result, the consolidated financial positions, results of operations, comprehensive (loss) income (loss) and cash flows of Realogy Holdings, RealogyAnywhere, Anywhere Intermediate and RealogyAnywhere Group are the same.
The accompanying Consolidated Financial Statements include the financial statements of Realogy HoldingsAnywhere and RealogyAnywhere Group. Realogy Holdings'Anywhere's only asset is its investment in the common stock of RealogyAnywhere Intermediate, and RealogyAnywhere Intermediate's only asset is its investment in RealogyAnywhere Group. Realogy Holdings'Anywhere's only obligations are its guarantees of certain borrowings and certain franchise obligations of RealogyAnywhere Group. All expenses incurred by Realogy HoldingsAnywhere and RealogyAnywhere Intermediate are for the benefit of RealogyAnywhere Group and have been reflected in RealogyAnywhere Group’s consolidated financial statements. The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America. All intercompany balances and transactions have been eliminated.
On November 6, 2019, the Company entered into a Purchase and Sale Agreement (the "Purchase Agreement") with a subsidiary of SIRVA, Inc. ("SIRVA"). Pursuant to the Purchase Agreement, Realogy has agreed to sell its Cartus Relocation Services business, held by Cartus Corporation, an indirect subsidiary of the Company (“Cartus”) to SIRVA. Subject to the terms and conditions of the Purchase Agreement, and following the completion of certain restructuring steps to separate from Cartus the affinity, broker-to-broker referral, and broker network management businesses that Realogy will retain under the name Realogy Leads Group, SIRVA will purchase all of the outstanding equity interests in Cartus for an aggregate purchase price of $400 million, consisting of $375 million in cash payable at the closing of the transaction, subject to certain adjustments set forth in the Purchase Agreement, and a $25 million deferred payment payable after the closing. The transaction is expected to close in the next couple of months, subject to satisfaction or waiver of the closing conditions set forth in the Purchase Agreement.
As a result, the Company met the requirements of ASC 360 to report the operating results of the Cartus Relocation Services business as discontinued operations, and reflected the (loss) income in "Net (loss) income from discontinued operations" on the Consolidated Statements of Operations for all periods presented. In addition, the related assets and liabilities as of November 6, 2019 have been reported as assets and liabilities held for sale in the Consolidated Balance Sheets. The cash flows related to discontinued operations have been segregated and are included in the Consolidated Statements of Cash Flows. Unless otherwise noted, discussion within these notes to the consolidated financial statements relates only to continuing operations. Refer to Note 3, "Discontinued Operations", for additional information related to discontinued operations.
Business Description
The Company reports its operations in the following fourthree business segments (the number of offices and agents are unaudited):
•Realogy Anywhere Brands ("Franchise Group Group")(, formerly referred to as Realogy Franchise Group—franchises a portfolio of well-known, industry-leading franchise brokerage brands, including Better Homes and Gardens®Real Estate, Franchise Services, or RFG)—franchises the Century 21®, Coldwell Banker®, Coldwell Banker Commercial®,Corcoran®,ERA®, and Sotheby's International Realty® and Better Homes and Gardens® Real Estate brand names.. As of December 31, 2019, our2022, the Company's real estate franchise systems and proprietary brands had approximately 302,400337,400 independent sales agents worldwide, including approximately 189,900195,000 independent sales agents operating in the U.S. (which(which included approximately 52,20059,800 company owned brokerage independent sales agents). As of December 31, 2019, our2022, the Company's real estate franchise systems and proprietary brands had approximately 18,50020,500 offices worldwide in 114119 countries and territories, including approximately 5,9005,700 brokerage offices in the U.S. (which(which included approximately 710680 company owned brokerage offices). This segment also includes the Company's lead generation activities through Anywhere Leads Group ("Leads Group") and global relocation services operation through Cartus® Relocation Services ("Cartus").
•Anywhere Advisors("Owned Brokerage Group"), formerly referred to as Realogy Brokerage Group—operates a full-service real estate brokerage business with approximately 680 owned and operated brokerage offices with approximately 59,800 independent sales agents principally under the Coldwell Banker®, Corcoran® and Sotheby’s International Realty® brand names in many of the largest metropolitan areas in the U.S. This segment also includes the Company's share of equity earnings or losses from its minority-owned real estate auction joint venture and former RealSure joint venture.
•Anywhere Integrated Services ("Title Group"), formerly referred to as Realogy Title Group—provides full-service title, escrow and settlement services to consumers, real estate companies, corporations and financial institutions primarily in support of residential real estate transactions. This segment also includes the Company's share of equity earnings or losses from Guaranteed Rate Affinity, its minority-owned mortgage origination joint venture, and from its minority-owned title insurance underwriter joint venture.
•Realogy Brokerage Group (formerly referred to as Company Owned Real Estate Brokerage Services, or NRT)—operates a full-service real estate brokerage business with approximately 710 owned and operated brokerage offices with approximately 52,200 independent sales agents principally under the Coldwell Banker®, Corcoran® and Sotheby’s International Realty® brand names in manySale of the largest metropolitan areasTitle Insurance Underwriter
On March 29, 2022, the Company sold its title insurance underwriter, Title Resources Guaranty Company (the "Title Underwriter") (previously reported in the U.S.Title Group reportable segment), to an affiliate of Centerbridge for $210 million (prior to expenses and tax) and a 30% equity stake in the form of common units in a title insurance underwriter joint venture that owns the Title Underwriter (the "Title Insurance Underwriter Joint Venture"). Upon closing of the transaction, the Company received $208 million of cash and recorded a $90 million investment related to its 30% equity interest in the Title Insurance Underwriter Joint Venture. As a result of the transaction, the Company disposed of $166 million of net assets, including $152 million of cash held as statutory reserves by the Title Underwriter and $32 million of goodwill, and recognized a gain of $131 million, net of fees, recorded in the Other income, net line on the Consolidated Statements of Operations. As this transaction did not represent a strategic shift that will have a major effect on the Company’s operations or financial results, the Title Underwriter's operations have not been classified as discontinued operations.
•RealogyIn April 2022, the Company sold a portion of its interest in the Title Group (formerly referredInsurance Underwriter Joint Venture to as Title and Settlement Services, or TRG)—provides full-service title and settlement services to real estate companies, affinity groups, corporations and financial institutions with many of these services provided in connection witha third party, reducing the Company's real estate brokerage. This segment also includesequity stake from 30% to 26%. The sale resulted in a gain of $4 million recorded in the Company's shareOther income, net line on the Consolidated Statements of equity earnings and lossesOperations. Refer to Note 4, "Equity Method Investments", for our Guaranteed Rate Affinity mortgage origination joint venture.
•Realogy Leads Group (previously formed part of Relocation Services)—Realogy Leads Group consists of affinity programs (both company- and client-directed) as well as broker-to-broker referrals. Through its highly concentrated affinity business, this segment has traditionally provided and continues to provide assistance with residential real estate transactions to members of affinity clients. Referrals from affinity programs are handled by the Realogy Broker Network. Member brokers of the Realogy Broker Network, including certain franchisees and company owned brokerages, have traditionally received referrals from the Cartus Relocation Services, Realogy Leads Group and from each other through broker-to-broker referrals in exchange for a referral fee.additional information.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
In presenting the consolidated financial statements, management makes estimates and assumptions that affect the amounts reported and related disclosures. Estimates, by their nature, are based on judgment and available information. Accordingly, actual results could differ materially from those estimates.
ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONSCONSOLIDATION
The Company reportsconsolidates any variable interest entity ("VIE") for which it is the resultsprimary beneficiary with a controlling financial interest. Also, the Company consolidates an entity not deemed a VIE if its ownership, direct or indirect, exceeds 50% of operationsthe outstanding voting shares of an entity and/or it has the ability to control the financial or operating policies through its voting rights, board representation or other similar rights. For entities where the Company does not have a controlling financial or operating interest, the investments in such entities are accounted for using the equity method or at fair value with changes in fair value recognized in net income, as appropriate. See Note 4, "Equity Method Investments" for discussion.
REVENUE RECOGNITION
See Note 3, "Revenue Recognition", for discussion.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments with remaining maturities not exceeding three months at the date of purchase to be cash equivalents.
RESTRICTED CASH
Restricted cash primarily relates to amounts specifically designated as collateral for the repayment of outstanding borrowings under the Company’s securitization facilities. Such amounts approximated $4 million and $8 million at December 31, 2022 and 2021, respectively.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company estimates the allowance necessary to provide for uncollectible accounts receivable. The estimate is based on historical experience, combined with a review of current conditions and forecasts of future losses, and includes specific accounts for which payment has become unlikely. The process by which the Company calculates the allowance begins in the individual business units where specific problem accounts are identified and reserved primarily based upon the age profile of the receivables and specific payment issues, combined with reasonable and supportable forecasts of future losses.
DEBT ISSUANCE COSTS
Debt issuance costs include costs incurred in connection with obtaining debt and extending existing debt. These financing costs are presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a businessdebt discount, with the exception of the debt issuance costs related to the Revolving Credit Facility and securitization obligations which are classified as discontinued operations if a disposal represents a strategic shift that has or will have a major effectdeferred financing asset within other assets. The debt issuance costs are amortized via the effective interest method and the amortization period is the life of the related debt.
DERIVATIVE INSTRUMENTS
The Company records derivatives and hedging activities on the balance sheet at their respective fair values. The Company historically used interest rate swaps to manage its exposure to future interest rate volatility associated with its variable rate borrowings. During September 2022, the Company terminated $550 million of its interest rate swaps which had expiration dates of August 2025 and November 2027 and the Company's operationsremaining interest rate swaps, which had a value of $450 million, expired in November 2022. The Company did not elect to utilize hedge accounting for these instruments; therefore, any change in fair value was recorded in the Consolidated Statements of Operations. See Note 18, "Risk Management and financial results when the business is sold and classified as held for sale, in accordance with the criteria of Accounting Standard Codification (“ASC”) Topic 205 PresentationFair Value of Financial Statements ("ASC 205")Instruments", for further discussion.
PROPERTY AND EQUIPMENT
Property and ASC Topic 360 Property, Plant and Equipment (“ASC 360”). Assets and liabilities of a business classified as held for saleequipment (including leasehold improvements) are initially recorded at the lowercost, net of its carrying amount or estimated fair value less cost to sellaccumulated depreciation and amortization. Depreciation, recorded as a component of depreciation ceasesand amortization on the date that the held for sale criteria are met. If the carrying amount of the business exceeds its estimated fair value less cost to sell, a loss is recognized. Assets and liabilities related to a business classified as held for sale are segregated in the current and prior balance sheets in the period in which the business is classified as held for sale. The results of discontinued operations are reported in "Net (loss) income from discontinued operations" in the accompanying Consolidated Statements of Operations, foris computed utilizing the current and prior periods commencing instraight-line method over the period in which the business meets the criteria, and includes any gain or loss recognized on closing, or adjustmentestimated useful lives of the related assets. Amortization of leasehold improvements, also recorded as a component of depreciation and amortization, is computed utilizing the straight-line method over the estimated benefit period of the related assets or the lease term, if shorter. Useful lives are 30 years for buildings, up to 20 years for leasehold improvements, and from 3 to 7 years for furniture, fixtures and equipment.
The Company capitalizes the costs of software developed for internal use which commences during the development phase of the project. The Company amortizes software developed or obtained for internal use on a straight-line basis, generally from 1 to 5 years, when such software is ready for use. The net carrying amount to fair value less cost to sell. Transactions between the businesses heldof software developed or obtained for saleinternal use was $140 million and businesses held for use that are expected to continue to exist after the disposal are not eliminated to appropriately reflect the continuing operations$126 million at December 31, 2022 and balances held for sale. See Note 3, "Discontinued Operations", for further discussion.2021, respectively.
LEASES
See Note 4,6, "Leases", for discussion.
REVENUE RECOGNITIONIMPAIRMENT OF GOODWILL, INTANGIBLE ASSETS AND OTHER LONG-LIVED ASSETS
See Note 5, "Revenue Recognition", for discussion.
CONSOLIDATION
The Company consolidates any variable interest entity ("VIE") for which it isGoodwill represents the primary beneficiary with a controlling financial interest. Also,excess of acquisition costs over the Company consolidates an entity not deemed a VIE if its ownership, direct or indirect, exceeds 50%fair value of the outstanding voting sharesnet tangible assets and identifiable intangible assets acquired in a business combination. Other indefinite-lived intangible assets primarily consist of trademarks acquired in business combinations. Goodwill and other indefinite-lived assets are not amortized but are subject to impairment testing. The aggregate carrying values of our goodwill and other indefinite-lived intangible assets were $2,523 million and $639 million, respectively, at December 31, 2022 and are subject to an entity and/impairment assessment annually as of October 1, or it haswhenever events or changes in circumstances indicate that the abilitycarrying amount may not be fully recoverable. The impairment assessment is performed at the reporting unit level which includes Owned Brokerage Group, franchise services (reported within the Franchise Group reportable segment), Title Group and Cartus/Leads Group (includes lead generation and relocation services, both of which are reported within the Franchise Group reportable segment). This assessment compares the carrying value of each reporting unit and the carrying value of each other indefinite lived intangible asset to controltheir respective fair values and, when appropriate the financial or operating policies through its voting rights, board representation or other similar rights. For entities wherecarrying value is reduced to fair value and an impairment charge for the Company does not have a controlling interest (financial or operating),excess is recorded on the investments"Impairments" line in such entities are accounted forthe accompanying Consolidated Statements of Operations.
In testing goodwill, the fair value of each reporting unit is estimated using the equity method or atincome approach, a discounted cash flow method. For the other indefinite lived intangible assets, fair value with changes inis estimated using the relief from royalty method. Management utilizes long-term cash flow forecasts and the Company's annual operating plans adjusted for terminal value assumptions. The fair value recognized in net income, as appropriate. The Company appliesof the equity methodCompany's reporting units and other indefinite lived intangible assets is determined utilizing the best estimate of accounting when it has the ability to exercise significant influence overfuture revenues, operating expenses including commission expense, market and financial policies of an investee. Thegeneral
Company measures all other investments ateconomic conditions, trends in the industry, as well as assumptions that management believes marketplace participants would utilize including discount rates, cost of capital, trademark royalty rates, and long-term growth rates. The trademark royalty rate was determined by reviewing similar trademark agreements with third parties.
Although management believes that assumptions are reasonable, actual results may vary significantly. These impairment assessments involve the use of accounting estimates and assumptions, changes in which could materially impact our financial condition or operating performance if actual results differ from such estimates and assumptions. Furthermore, significant negative industry or economic trends, disruptions to the business, unexpected significant changes or planned changes in use of the assets, a decrease in business results, growth rates that fall below management's assumptions, divestitures, and a sustained decline in the Company's stock price and market capitalization may have a negative effect on the fair values and key valuation assumptions. Such changes could result in changes to management's estimates of the Company's fair value with changesand a material impairment of goodwill or other indefinite-lived intangible assets. To address this uncertainty, a sensitivity analysis is performed on key estimates and assumptions.
During the fourth quarter of 2022, the Company performed its annual impairment assessment of goodwill and other indefinite-lived intangible assets. As previously discussed, the Company experienced a decline in transaction volume during the third quarter largely due to rapidly rising mortgage rates, high inflation, reduced affordability, and broader macroeconomic concerns. These challenges within the residential real estate industry continued during the fourth quarter and resulted in lower homesale transaction volume for the brokerage and franchise business and lower referral volume for the leads business. Additionally, industry forecasts now anticipate continued homesale transaction volume declines in 2023. These market conditions as well as an increase in the weighted average cost of capital resulted in the recognition of an impairment of goodwill at the Owned Brokerage Group reporting unit of $280 million, an impairment of goodwill at the Franchise Group segment of $114 million related to the Cartus/Leads Group reporting unit and an impairment of franchise trademarks of $76 million. The results of the Company's annual impairment assessment indicated no other impairment charges were required for the other reporting units or other indefinite-lived intangibles. Management evaluated the effect of lowering the estimated fair value for each of the passing reporting units and indefinite-lived intangible assets by 10% and determined that no impairment of goodwill or indefinite-lived intangibles would have been recognized under this evaluation for 2022 with the exception of the title trademark. The fair value of trademarks is determined using the relief from royalty method which is sensitive to fluctuations in net incomeprojected revenues.
During the year ended December 31, 2021, there was no impairment of goodwill or other indefinite-lived intangible assets. Management evaluated the effect of lowering the estimated fair value for each of the reporting units by 10% and determined that no impairment of goodwill would have been recognized under this evaluation for 2021.
During the year ended December 31, 2020, the Company recorded the following non-cash impairments related to goodwill and intangible assets:
•an impairment of franchise trademarks of $30 million and a goodwill impairment of $413 million related to Owned Brokerage Group in the case that first quarter of 2020 driven by the impact on future earnings related to the COVID-19 pandemic primarily due to a significant increase in the weighted average cost of capital as a result of the volatility in the capital and debt markets due to COVID-19 and the related lower projected financial results;
•impairment charges of $105 million related to goodwill and $18 million related to customer relationships during the nine months ended September 30, 2020 (while Cartus was held for sale) to reduce the net assets to the estimated proceeds; and
•an equity investment does not have readily determinable fair values, at cost minusadditional goodwill impairment (if any) plus or minus changescharge of $22 million and a trademark impairment charge of $34 million related to Cartus in the fourth quarter of 2020 as a result of the impact of the COVID-19 crisis resulting from observable price changes in orderly transactionslower relocation activity which negatively impacted the operating results of relocation services.
The results of the Company's annual impairment assessment indicated no other impairment charges were required for the identicalother reporting units or other indefinite-lived intangibles during 2020. Management evaluated the effect of lowering the estimated fair value for each of the passing reporting units by 10% and determined that no impairment of goodwill would have been recognized under this evaluation for 2020. Due to the impairments during 2020 for the Franchise Group and Cartus trademarks, there was little to no excess fair value over carrying value as of December 31, 2020.
The impairment charges are recorded on a similar investment.separate line in the accompanying Consolidated Statements of Operations and are non-cash in nature.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments with remaining maturities not exceeding three months atevaluates the daterecoverability of purchaseits other long-lived assets, including amortizable intangible assets, if circumstances indicate an impairment may have occurred. This assessment is performed by comparing the respective carrying values of the assets to the current and expected future cash flows, on an undiscounted basis, to be cash equivalents.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company estimatesgenerated from such assets. If such assessment indicates that the allowance necessarycarrying value of these assets is not recoverable, then the carrying value of such assets is reduced to provide for uncollectible accounts receivable. The estimate is based on historical experience, combined withfair value through a reviewcharge to the Company’s Consolidated Statements of current developments and includes specific accounts for which payment has become unlikely. The process by which the Company calculates the allowance begins in the individual business units where specific problem accounts are identified and reserved primarily based upon the age profile of the receivables and specific payment issues.Operations.
ADVERTISING EXPENSES
Advertising costs are generally expensed in the period incurred. Advertising expenses, recorded within the marketing expense line item on the Company’s Consolidated Statements of Operations, were approximately $196$175 million, $207$192 million and $211$157 million for the years ended December 31, 2019, 20182022, 2021 and 2017,2020, respectively.
DEBT ISSUANCE COSTS
Debt issuance costs include costs incurred in connection with obtaining debt and extending existing debt. These financing costs are presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount, with the exception of the debt issuance costs related to the Revolving Credit Facility which are classified as a deferred financing asset within other assets. The debt issuance costs are amortized via the effective interest method and the amortization period is the life of the related debt.
INCOME TAXES
The Company’s provision for income taxes is determined using the asset and liability method, under which deferred tax assets and liabilities are calculated based upon the temporary differences between the financial statement and income tax bases of assets and liabilities using currently enacted tax rates. These differences are based upon estimated differences between the book and tax basis of the assets and liabilities for the Company. Certain tax assets and liabilities of the Company may be adjusted in connection with the finalization of income tax audits.
The Company’s deferred tax assets are recorded net of a valuation allowance when, based on the weight of available evidence, it is more likely than not that all or some portion of the recorded deferred tax balances will not be realized in future periods. Decreases to the valuation allowance are recorded as reductions to the Company’s provision for income taxes and increases to the valuation allowance result in additional provision for income taxes.
DERIVATIVE INSTRUMENTS
The Company records derivatives and hedging activities on the balance sheet at their respective fair values. The Company uses interest rate swaps to manage its exposure to future interest rate volatility associated with its variable rate borrowings. The Company has not elected to utilize hedge accounting for these instruments; therefore, any change in fair value is recorded in the Consolidated Statements of Operations. However, the fluctuations in the value of these instruments generally offset the impact of changes in the value of the underlying risk that they are intended to economically hedge. See Note 18, "Risk Management and Fair Value of Financial Instruments", for further discussion.
INVESTMENTS
Guaranteed Rate Affinity, LLC ("Guaranteed Rate Affinity") originates and markets its mortgage lending services to the Company's real estate brokerage as well as other real estate brokerage companies across the country. Guaranteed Rate, Inc. ("Guaranteed Rate") owns a controlling 50.1% stake of Guaranteed Rate Affinity and the Company owns 49.9%. The Company has certain governance rights related to the joint venture, however it does not have control of the day-to-day operations of Guaranteed Rate Affinity. During the first quarter of 2018, the Company's interest in PHH Home Loans LLC
("PHH Home Loans"), the Company's former 49.9% mortgage joint venture, was sold to a subsidiary of PHH Corporation and the Company received net cash proceeds of $19 million reducing the investment balance in PHH Home Loans to 0. Guaranteed Rate Affinity began doing business in August 2017 on a phased-in basis. The equity earnings or losses related to PHH Home Loans were included in the financial results of Realogy Brokerage Group and the equity earnings or losses related to Guaranteed Rate Affinity are included in the financial results of Realogy Title Group.
At December 31, 2019 and 2018, the Company had various equity method investments aggregating $69 million and $51 million, respectively, which are recorded within other non-current assets on the accompanying Consolidated Balance Sheets. The $69 million investment balance at December 31, 2019 included $60 million for the Company's investment in Guaranteed Rate Affinity. The $51 million investment balance at December 31, 2018 included $43 million for the Company's investment in Guaranteed Rate Affinity.
For the year ended December 31, 2019, the Company recorded equity earnings of $18 million at Realogy Title Group primarily related to earnings from the operations of Guaranteed Rate Affinity.
For the year ended December 31, 2018, the Company recorded equity losses of $4 million at Realogy Title Group primarily related to losses from the operations of Guaranteed Rate Affinity.
For the year ended December 31, 2017, the Company recorded equity earnings of $18 million which consisted of $35 million of earnings from the sale of PHH Home Loans' assets to Guaranteed Rate Affinity, partially offset by $7 million of exit costs and losses of $6 million from the continuing operations of PHH Home Loans. In addition, there was a $4 million loss from equity method investments at Realogy Title Group primarily related to costs associated with the start up of operations of Guaranteed Rate Affinity, including $3 million of amortization of intangible assets recorded in purchase accounting.
The Company received $3 million, $3 million and $63 million in cash dividends from equity method investments during the years ended December 31, 2019, 2018 and 2017, respectively. The Company invested $2 million, $4 million and $55 million of cash into Guaranteed Rate Affinity during the years ended December 31, 2019, 2018 and 2017, respectively.
PROPERTY AND EQUIPMENT
Property and equipment (including leasehold improvements) are initially recorded at cost, net of accumulated depreciation and amortization. Depreciation, recorded as a component of depreciation and amortization on the Consolidated Statements of Operations, is computed utilizing the straight-line method over the estimated useful lives of the related assets. Amortization of leasehold improvements, also recorded as a component of depreciation and amortization, is computed utilizing the straight-line method over the estimated benefit period of the related assets or the lease term, if shorter. Useful lives are 30 years for buildings, up to 20 years for leasehold improvements, and from 3 to 7 years for furniture, fixtures and equipment.
The Company capitalizes the costs of software developed for internal use which commences during the development phase of the project. The Company amortizes software developed or obtained for internal use on a straight-line basis, generally from 1 to 5 years, when such software is ready for use. The net carrying value of software developed or obtained for internal use was $97 million and $93 million at December 31, 2019 and 2018, respectively.
IMPAIRMENT OF GOODWILL, INTANGIBLE ASSETS AND OTHER LONG-LIVED ASSETS
Goodwill represents the excess of acquisition costs over the fair value of the net tangible assets and identifiable intangible assets acquired in a business combination. Other indefinite-lived intangible assets primarily consist of trademarks acquired in business combinations. Goodwill and other indefinite-lived assets are not amortized, but are subject to impairment testing. The aggregate carrying values of our goodwill and other indefinite-lived intangible assets were $3,300 million and $692 million, respectively, at December 31, 2019 and are subject to an impairment assessment annually as of October 1, or whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. This assessment compares carrying values of the goodwill reporting units and other indefinite lived intangible assets to their respective fair values and, when appropriate, the carrying value is reduced to fair value.
In testing goodwill, the fair value of each reporting unit is estimated using the income approach, a discounted cash flow approach. For the other indefinite lived intangible assets, fair value is estimated using the relief from royalty method. Management utilizes long-term cash flow forecasts and the Company's annual operating plans adjusted for terminal value assumptions. The fair value of the Company's reporting units and other indefinite lived intangible assets are determined
utilizing the best estimate of future revenues, operating expenses including commission expense, market and general economic conditions, trends in the industry, as well as assumptions that management believes marketplace participants would utilize including discount rates, cost of capital, trademark royalty rates, and long-term growth rates. The trademark royalty rate was determined by reviewing similar trademark agreements with third parties. Although management believes that assumptions are reasonable, actual results may vary significantly. These impairment assessments involve the use of accounting estimates and assumptions, changes in which could materially impact our financial condition or operating performance if actual results differ from such estimates and assumptions. To address this uncertainty, a sensitivity analysis is performed on key estimates and assumptions.
During the third quarter of 2019, management determined that the decrease in the stock price of the Company and the impact on future earnings related to the discontinuation of the USAA affinity program qualified as triggering events for all of its reporting units and accordingly management performed an impairment assessment of goodwill and other indefinite-lived intangible assets as of September 1, 2019. The impairment assessment indicated that the carrying value of Realogy Brokerage Group exceeded its estimated fair value by $180 million primarily as a result of a reduction in Realogy Brokerage Group's long-term forecast. Accounting Standard Update No. 2017-04 (Topic 350), "Simplifying the Test of Goodwill Impairment", which the Company early adopted in the third quarter of 2019, requires that the impairment charge and deferred tax effect are calculated using the simultaneous equation method which effectively grosses up the goodwill impairment charge to account for the related tax benefit so that the resulting carrying value does not exceed the calculated fair value. As a result, management recognized a goodwill impairment charge to reduce goodwill at Realogy Brokerage Group by $237 million offset by an income tax benefit of $57 million resulting in a net reduction in carrying value of $180 million.
The results of the Company's interim impairment test indicated no other impairment charges were required for the other reporting units or other indefinite-lived intangibles. Management evaluated the effect of lowering the estimated fair value for each of the passing reporting units by 10% and determined no impairment of goodwill or other indefinite-lived intangible assets would have been recognized under this evaluation. Based upon the impairment assessment performed in the fourth quarter of 2019, 2018 and 2017, there was no impairment of goodwill or other indefinite-lived intangible assets for these years. Management evaluated the effect of lowering the estimated fair value for each of the passing reporting units by 10% and determined no impairment of goodwill or other indefinite-lived intangible assets would have been recognized under this evaluation for 2018 or 2017.
The Company evaluates the recoverability of its other long-lived assets, including amortizable intangible assets, if circumstances indicate an impairment may have occurred. This assessment is performed by comparing the respective carrying values of the assets to the current and expected future cash flows, on an undiscounted basis, to be generated from such assets. If such assessment indicates that the carrying value of these assets is not recoverable, then the carrying value of such assets is reduced to fair value through a charge to the Company’s Consolidated Statements of Operations.
STOCK-BASED COMPENSATION
The Company grants stock-based awards to certain senior management members, employees and directors includingnon-qualified stock options, restricted stock units and performance share units. The fair value of non-qualified stock options is estimated using the Black-Scholes option pricing model on the grant date and is recognized as expense over the service period based on the vesting requirements. The fair value of restricted stock units and performance share units without a market condition is measured based on the closing price of the Company's common stock on the grant date and is recognized as expense over the service period of the award, or when requisite performance metrics or milestones are probable of being achieved. The fair value of awards with a market condition are estimated using the Monte Carlo simulation method and expense is recognized on a straight-line basis over the requisite service period of the award. The Company recognizes forfeitures as they occur. Determining
ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
The Company reports the fair valueresults of stock-based awards at the grant date requires considerable judgment, including estimating expected volatility and expected term, risk-free rate.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
Adoption of the New Leasing Standard
In February 2016, the FASB issued Accounting Standard Update No. 2016-02 (Topic 842) "Leases" (the "new leasing standard") which requires virtually all leases to be recognizeda business as discontinued operations if a disposal represents a strategic shift that has or will have a major effect on the balance sheet. Effective January 1, 2019,Company's operations and financial results when the Company adopted the new leasing standard using the modified retrospective transition approach with optional transition reliefbusiness is sold and recognized the cumulative effect of applying the new leasing standard to existing contracts on the balance sheet on January 1, 2019. Therefore, resultsclassified as held for reporting periods beginning after January 1, 2019 are presented under the new leasing standard; however, the comparative prior period amounts have not been restated and continue to be reportedsale, in accordance with historical accounting underthe criteria of Accounting Standard Codification (“ASC”) Topic 205 Presentation of Financial Statements and ASC Topic 840. The most significant effects360 Property, Plant and Equipment. Assets and liabilities of adoption of the new leasing standard relate to the recognition of new right-of-use assets and lease liabilities on the balance sheet for operating leases. The new leasing standard did not impact our Consolidated Statement of Operations and Consolidated Statement of Cash Flows. The impact of the changes to the Consolidated Balance Sheets for the adoption of the new leasing standard werea business classified as follows:
| | | | | | | | | | | | | | | | | |
| | Balance Sheet accounts prior to the new leasing standard adoption adjustments | | Adjustments due to the adoption of the new leasing standard | | Balance Sheet accounts after the new leasing standard adoption adjustments |
| ASSETS | | | | | |
| Current assets: | | | | | |
| Other current assets | $ | 140 | | | $ | (13) | | | $ | 127 | |
| Current assets - held for sale | 338 | | | (1) | | | 337 | |
| Total current assets | 768 | | | (14) | | | 754 | |
| Operating lease assets, net | — | | | 525 | | | 525 | |
| Other non-current assets | 272 | | | — | | | 272 | |
| Non-current assets - held for sale | 461 | | | 41 | | | 502 | |
| Total assets (a) | $ | 7,290 | | | $ | 552 | | | $ | 7,842 | |
| | | | | |
| LIABILITIES AND EQUITY | | | | | |
| Current liabilities: | | | | | |
| Current portion of operating lease liabilities | $ | — | | | $ | 126 | | | $ | 126 | |
| Accrued expenses and other current liabilities | 344 | | | (12) | | | 332 | |
| Current liabilities - held for sale | 352 | | | — | | | 352 | |
| Total current liabilities | 1,527 | | | 114 | | | 1,641 | |
| Long-term operating lease liabilities | — | | | 458 | | | 458 | |
| Other non-current liabilities | 256 | | | (60) | | | 196 | |
| Non-current liabilities - held for sale | 3 | | | 40 | | | 43 | |
| Total liabilities | 4,975 | | | 552 | | | 5,527 | |
| Total equity | 2,315 | | | — | | | 2,315 | |
| Total liabilities and equity | $ | 7,290 | | | $ | 552 | | | $ | 7,842 | |
_______________
(a)The $552 million adjustment to Total assets due to the adoption of the new leasing standard consists of $414 million at Realogy Brokerage Group, $52 million at Corporate and Other, $46 million at Realogy Title Group and $40 million of assets held for sale are recorded at the lower of its carrying amount or estimated fair value, less cost to sell, and depreciation ceases on the date that the held for sale criteria are met. If the carrying amount of the business exceeds its estimated fair value less cost to sell, a loss is recognized. Assets and liabilities related to a business classified as held for sale are segregated in the pending salecurrent and prior balance sheets in the period in which the business is classified as held for sale. The results of Cartus' Relocation Services business.
The Company elected a package of practical expedients that were consequently applied to all leases. The Company did not reassess whether expired or existing contracts contain leases under the new definition of a lease, lease classification for expired or existing leases, nor whether previously capitalized initial direct costs would qualify for capitalization under the new standard. Upon transition, the Company did not elect to use hindsight with respect to lease renewals and purchase options when accounting for existing leases, as well as assessing the impairment of right-of-use assets. Therefore, lease terms largely remained unchanged. In addition, the Company elected the short-term lease recognition exemption and did not recognize a lease obligation and right-of-use asset on its balance sheet for all leases with terms of 12 months or less. The Company elected the practical expedient to combine lease and non-lease components in total gross rent for all of its leases which resulteddiscontinued operations are reported in a larger lease liability recordedseparate line in the Consolidated Statements of Operations commencing in the period in which the business meets the criteria, and includes any gain or loss recognized on closing, or adjustment of the balance sheet.carrying amount to fair value less cost to sell. Transactions between the businesses held for sale and businesses held and used that are expected to continue to exist after the disposal are not eliminated to appropriately reflect the continuing operations and balances held for sale.
Adoption of Other Accounting PronouncementsRECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
InOn January 2017,1, 2022, the FASB issuedCompany adopted Accounting Standard Update No. 2017-04 (Topic 350)2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity ("ASU 2020-06"), "Simplifyingwhich simplifies the Testaccounting for instruments with characteristics of Goodwill Impairment."liabilities and equity, including convertible debt. ASU 2020-06 reduces the number of accounting models for convertible debt instruments and convertible preferred stock resulting in fewer embedded conversion features being separately recognized from the host contract and the interest rate of more convertible debt instruments being closer to the coupon interest rate, as compared with prior guidance. In addition, ASU 2020-06 changes the diluted earnings per share calculation for instruments that may be settled in cash or shares and for convertible instruments requiring the use of the if-converted method. ASU 2020-06 is effective for reporting periods beginning on or after December 15, 2021 and permits the use of either the modified retrospective or fully retrospective method of transition.
The Company adopted ASU 2020-06 on January 1, 2022 using the modified retrospective method. In accordance with the transition guidance, the Company applied the new guidance to its Exchangeable Senior Notes that were outstanding as of January 1, 2022 with the cumulative effect of adoption recognized as an adjustment to the opening balance of Accumulated deficit. Upon adoption, the Company re-combined the liability and equity components associated with the Exchangeable Senior Notes into single liability and derecognized the unamortized debt discount and related equity component. This update simplifies howresulted in an increase to Long-term debt of $65 million, a reduction to Additional paid-in capital of $53 million, net of taxes, and a reduction to Deferred tax liabilities of $17 million. The Company recorded a cumulative effect of adoption adjustment of $5 million, net of taxes, as a reduction to Accumulated deficit on January 1, 2022 related to the reversal of cumulative interest expense recognized for the amortization of the debt discount on its Exchangeable Senior Notes since issuance.
The cumulative effect of adoption on the Company's consolidated balance sheets as of January 1, 2022 is summarized below:
| | | | | | | | | | | | | | | | | |
| Balance as of December 31, 2021 | | Impact of the adoption of ASU 2020-06 | | Balance as of January 1, 2022 after the adoption of ASU 2020-06 |
| LIABILITIES AND EQUITY | | | | | |
| Long-term debt | $ | 2,940 | | | $ | 65 | | | $ | 3,005 | |
| Deferred income taxes | 353 | | | (17) | | | 336 | |
| Total liabilities | 5,018 | | | 48 | | | 5,066 | |
| | | | | |
| Equity: | | | | | |
| Additional paid-in capital | 4,947 | | | (53) | | | 4,894 | |
| Accumulated deficit | (2,712) | | | 5 | | | (2,707) | |
| Total stockholders' equity | 2,186 | | | (48) | | | 2,138 | |
| Total equity | 2,192 | | | (48) | | | 2,144 | |
| Total liabilities and equity | $ | 7,210 | | | $ | — | | | $ | 7,210 | |
Furthermore, upon adoption, the Company is required to test goodwill for impairment by eliminating step two, which requiresuse the "if converted" method when calculating the dilutive impact of convertible debt on earnings per share, however this change did not have a hypothetical purchase price allocation, fromfinancial impact upon adoption as the goodwill impairment test. Under the new guidance, a goodwill impairment will equal the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The new guidance requires that the impairment charge and deferred tax effect are calculated using the simultaneous equation method which effectively grosses up the goodwill impairment charge to account for the related tax benefit so that the resulting carrying value does not exceed the calculated fair value. The standard is effective for interim or annual goodwill impairment tests during fiscal years beginning after December 15, 2019, with early adoption permitted, and should be applied prospectively. The Company elected to early adopt this standard as of September 1, 2019.Company's Exchangeable Senior Notes have been antidilutive since issuance.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Company considers the applicability and impact of all Accounting Standards Updates. Recently issued standards were assessed and determined to be either not applicable or are expected to have minimal impact on ourthe Company's consolidated financial position or results of operations.
3. DISCONTINUED OPERATIONSREVENUE RECOGNITION
The Company entered intoRevenue is recognized upon the Purchase Agreement on November 6, 2019 (the "Purchase Agreement"), pursuanttransfer of control of promised services to which SIRVA will acquire Cartus Relocation Services,customers in an amount that reflects the Company's global employee relocation business. Under the terms of the Purchase Agreement,consideration the Company willexpects to receive $375 million in cash at closing, subject to certain adjustments set forthexchange for those services in accordance with the Purchase Agreement, and a $25 million deferred payment after the closing of the transaction.revenue accounting standard. The $375 million purchase priceCompany's revenue is subject to adjustments for cash, indebtedness, working capital, securitization obligations and other items, as defined and described in the Purchase Agreement. The transaction is expected to close in the next couple of months, subject to the satisfaction of closing conditions described in the Purchase Agreement.
The transaction includes all of Cartus Relocation Services, but does not include Realogy Leads Group. Realogy Leads Group is comprised of the Company's affinity and broker-to-broker business, as well as the broker network made up of agents and brokers from Realogy’s residential real estate brands and certain independent real estate brokers (which was formerly referred to as the Cartus Broker Network).
As a result of the pending transaction, the Company met the requirements under ASC 360 and ASC 205 and accordingly the assets and liabilities of Cartus Relocation Services are classified as held for sale in the Consolidated Balance Sheets and the operating results of Cartus Relocation Services are reported as discontinued operations and reflected in "Net (loss) income from discontinued operations"disaggregated by major revenue categories on
theour Consolidated Statements of Operations
for all periods presented. The cash flows related to discontinued operations have been segregated and
are included in the Consolidated Statements of Cash Flows.further disaggregated by business segment as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, 2022 vs December 31, 2021 |
| |
Franchise Group | | Owned Brokerage
Group | |
Title Group | | Corporate and
Other | | Total
Company |
| 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
| Gross commission income (a) | $ | — | | | $ | — | | | $ | 5,538 | | | $ | 6,118 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 5,538 | | | $ | 6,118 | |
| Service revenue (b) | 260 | | | 227 | | | 22 | | | 29 | | | 511 | | | 924 | | | — | | | — | | | 793 | | | 1,180 | |
| Franchise fees (c) | 775 | | | 914 | | | — | | | — | | | — | | | — | | | (358) | | | (393) | | | 417 | | | 521 | |
| Other (d) | 110 | | | 108 | | | 46 | | | 42 | | | 19 | | | 28 | | | (15) | | | (14) | | | 160 | | | 164 | |
| Net revenues | $ | 1,145 | | | $ | 1,249 | | | $ | 5,606 | | | $ | 6,189 | | | $ | 530 | | | $ | 952 | | | $ | (373) | | | $ | (407) | | | $ | 6,908 | | | $ | 7,983 | |
The following table summarizes the operating results of discontinued operations described above and reflected within "Net (loss) income from discontinued operations" in the Company’s Consolidated Statements of Operations for each of the periods presented:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | |
| | 2019 | | 2018 | | 2017 |
| Net revenues | $ | 272 | | | $ | 297 | | | $ | 304 | |
| Total expenses | 281 | | | 305 | | | 297 | |
| (Loss) income from discontinued operations | (9) | | | (8) | | | 7 | |
| Estimated loss on the sale of discontinued operations (a) | (22) | | | — | | | — | |
| Income tax expense (benefit) from discontinued operations (b) | 36 | | | (2) | | | 1 | |
| Net (loss) income from discontinued operations | $ | (67) | | | $ | (6) | | | $ | 6 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, 2021 vs December 31, 2020 |
| |
Franchise Group | | Owned Brokerage
Group | |
Title Group | | Corporate and
Other | | Total
Company |
| 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
| Gross commission income (a) | $ | — | | | $ | — | | | $ | 6,118 | | | $ | 4,669 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 6,118 | | | $ | 4,669 | |
| Service revenue (b) | 227 | | | 243 | | | 29 | | | 26 | | | 924 | | | 714 | | | — | | | — | | | 1,180 | | | 983 | |
| Franchise fees (c) | 914 | | | 725 | | | — | | | — | | | — | | | — | | | (393) | | | (306) | | | 521 | | | 419 | |
| Other (d) | 108 | | | 91 | | | 42 | | | 47 | | | 28 | | | 22 | | | (14) | | | (10) | | | 164 | | | 150 | |
| Net revenues | $ | 1,249 | | | $ | 1,059 | | | $ | 6,189 | | | $ | 4,742 | | | $ | 952 | | | $ | 736 | | | $ | (407) | | | $ | (316) | | | $ | 7,983 | | | $ | 6,221 | |
_______________
(a)Adjustment to record assets and liabilities held for saleGross commission income at Owned Brokerage Group is recognized at a point in time at the lowerclosing of carrying value or fair value less any costs to sell based on the Purchase Agreement.a homesale transaction.
(b)Income tax expense forService revenue primarily consists of title and escrow fees at Title Group and are recognized at a point in time at the year ended December 31, 2019 relatesclosing of a homesale transaction. Service revenue at Franchise Group includes relocation fees, which are recognized as revenue when or as the related performance obligation is satisfied dependent on the type of service performed, and fees related to tax expenseleads and related services, which are recognized at a point in time at the closing of a homesale transaction or at the completion of the related service.
(c)Franchise fees at Franchise Group primarily include domestic royalties which are recognized at a point in time when the underlying franchisee revenue is earned (upon close of the homesale transaction).
(d)Other revenue is comprised of brand marketing funds received from franchisees at Franchise Group, and other miscellaneous revenues across all of the business segments.
The Company's revenue streams are discussed further below by business segment:
Franchise Group
Domestic Franchisees
In the U.S., the Company employs a direct franchising model whereby it franchises its real estate brands to real estate brokerage businesses that are independently owned and operated. Franchise revenue principally consists of royalty and marketing fees from the Company’s franchisees. The royalty received is primarily based on a gross percentage of the franchisee’s gross commission income. Royalty fees are recorded as the underlying franchisee revenue is earned (upon close of the homesale transaction). Annual volume incentives given to certain franchisees on royalty fees are recorded as a resultreduction to revenue and are accrued for in relative proportion to the recognition of the expected taxable gain on the sale of Cartus Relocation Services, primarilyunderlying gross franchise revenue. Other sales incentives are generally recorded as a resultreduction to revenue ratably over the related performance period or from the date of issuance through the remaining life of the Company's low tax basis in goodwill, trademarksrelated franchise agreement. Franchise revenue also includes domestic initial franchise fees which are generally non-refundable and other intangibles.recognized by the Company as revenue upon the execution or opening of a new franchisee office to cover the upfront costs associated with opening the franchisee for business under one of Anywhere’s brands.
The Company also earns marketing fees from its franchisees and utilizes such fees to fund marketing campaigns on behalf of its franchisees. As such, brand marketing fund fees are recorded as deferred revenue when received and recognized
Assetsinto revenue as earned when these funds are spent on marketing activities. The balance for deferred brand marketing fund fees increased from $25 million at January 1, 2022 to $26 million at December 31, 2022 primarily due to additional fees received from franchisees, offset by amounts recognized into revenue matching expenses for marketing activities during the year ended December 31, 2022.
International Franchisees
The Company utilizes a direct franchising model outside of the U.S. for Sotheby's International Realty® and liabilities held for sale relatedCorcoran® and, in some cases, Better Homes and Gardens® Real Estate. For all other brands, the Company generally employs a master franchise model outside of the U.S., whereby it contracts with a qualified third party to discontinued operations presentedbuild a franchise network in the country or region in which franchising rights have been granted. Under both the direct and master franchise models outside of the U.S., the Company enters into long-term franchise agreements (generally 25 years in duration) and receives an initial area development fee ("ADF") and ongoing royalties. Ongoing royalties are generally a percentage of the royalties received by the master franchisor from its franchisees with which it contracts and are recorded once the funds are received by the master franchisor. Under the direct franchise model, a royalty fee is paid to the Company on transactions conducted by its franchisees in the applicable country or region. The ADFs that the Company collects are recorded as deferred revenue when received and are classified as current or non-current liabilities in the Consolidated Balance Sheets based on the expected timing of revenue recognition. ADFs are recognized into franchise revenue over the average 25 year life of the related franchise agreement as consideration for the right to access and benefit from Anywhere’s brands. In the event an ADF agreement is terminated prior to the end of its term, the unamortized deferred revenue balance will be recognized into revenue immediately upon termination. The balance for deferred ADFs decreased from $41 million at January 1, 2022 to $40 million at December 31, 20192022 due to $3 million of revenues recognized during the year ended December 31, 2022 that were included in the deferred revenue balance at the beginning of the period, partially offset by $2 million of ADFs received during the year ended December 31, 2022.
In addition, the Company recognizes a deferred asset for commissions paid to Anywhere franchise sales employees upon the sale of a new franchise as these are considered costs of obtaining a contract with a customer that are expected to provide benefits to the Company for longer than one year. The Company classifies prepaid commissions as current or non-current assets in the Consolidated Balance Sheets based on the expected timing of expense recognition. The amount of commissions is calculated as a percentage of the anticipated gross commission income of the new franchisee or ADF and 2018is amortized over 30 years for domestic franchise agreements or the agreement term for international franchise agreements (generally 25 years). The amount of prepaid commissions was $28 million and $26 million at December 31, 2022 and 2021, respectively.
Lead Generation Programs
Through Leads Group, a part of the Franchise Group segment, the Company provides high-quality leads to independent sales 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 follows: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 Anywhere. Leads Group also directs the Company's broker-to-broker business, which generates leads by brokers affiliated with one of its customized agent and brokerage networks, including the Anywhere Leads Network. The networks consist of real estate brokers, including 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 the networks receive leads from the Company's real estate benefit programs (including via Cartus) and each other in exchange for a fee paid to Leads Group. Network fees are billed in advance and recognized into revenue on a straight-line basis each month during the membership period. The balance for deferred network fees remained flat at zero at January 1, 2022 and December 31, 2022 and consisted of $6 million of revenues recognized during the year that were included in the deferred revenue balance at the beginning of the period offset by a $6 million increase related to new network fees.
| | | | | | | | | | | |
| | December 31, | | |
| | 2019 (a) | | 2018 |
| Carrying amounts of the major classes of assets held for sale | | | |
| Cash and cash equivalents | $ | 28 | | | $ | 22 | |
| Restricted cash | 3 | | | 11 | |
| Trade receivables | 46 | | | 61 | |
| Relocation receivables | 203 | | | 231 | |
| Other current assets | 12 | | | 13 | |
| Total current assets | | | | 338 | |
| Property and equipment, net | 36 | | | 31 | |
| Operating lease assets, net | 36 | | | — | |
| Goodwill | 176 | | | 176 | |
| Trademarks | 76 | | | 76 | |
| Other intangibles, net | 156 | | | 174 | |
| Other non-current assets | — | | | 4 | |
| Total non-current assets | | | | 461 | |
| Allowance for reduction of assets held for sale (b) | (22) | | | |
| Total assets classified as held for sale | $ | 750 | | | $ | 799 | |
| | | |
| Carrying amounts of the major classes of liabilities held for sale | | | |
| Accounts payable | $ | 53 | | | $ | 64 | |
| Securitization obligations | 206 | | | 231 | |
| Current portion of operating lease liabilities | 6 | | | — | |
| Accrued expenses and other current liabilities | 62 | | | 57 | |
| Total current liabilities | | | | 352 | |
| Long-term operating lease liabilities | 29 | | | — | |
| Other non-current liabilities | — | | | 3 | |
| Total non-current liabilities | | | | 3 | |
| Total liabilities classified as held for sale | $ | 356 | | | $ | 355 | |
Through Cartus, a part of the Franchise Group segment, the Company offers a broad range of employee relocation services to clients designed to manage all aspects of transferring their employees ("transferees"). These 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. The Company also arranges household goods moving services and provides support for all aspects of moving a transferee's household goods. There are a number of
different revenue streams associated with relocation services including fees earned from real estate brokers and household goods moving companies that provide services to the transferee which are recognized at a point in time at the completion of services. The Company earns revenues from outsourcing management fees charged to clients that may cover several of the relocation services listed above, according to the clients' specific needs. Outsourcing management fees are recorded as deferred revenue when billed (usually at the start of the relocation) and are recognized as revenue over the average time period required to complete the transferee's move, or a phase of the move that the fee covers, which is typically 3 to 6 months depending on the move type. The balance for deferred outsourcing management fees remained flat at $4 million at January 1, 2022 and December 31, 2022 due to a $58 million increase primarily related to additions for management fees billed on new relocation files in advance of the Company satisfying its performance obligation, offset by $58 million of revenues recognized during the year as performance obligations were satisfied. Furthermore, Cartus continues to provide value through the generation of leads to real estate agent and brokerage participants in the networks maintained by Leads Group, which drives downstream revenue for our businesses. The Company also earns net interest income which represents interest earned from clients on the funds it advances on behalf of the transferring employee net of costs associated with the securitization obligations used to finance these payments, which is recorded within other revenue in the accompanying Consolidated Statements of Operations.
Owned Brokerage Group
As an owner-operator of real estate brokerages, the Company assists home buyers and sellers in listing, marketing, selling and finding homes. Real estate commissions earned by the Company’s real estate brokerage business are recorded as revenue at a point in time which is upon the closing of a real estate transaction (i.e., purchase or sale of a home). These revenues are referred to as gross commission income. The commissions the Company pays to real estate agents are recognized concurrently with associated revenues and presented as the commission and other agent-related costs line item on the accompanying Consolidated Statements of Operations.
The Company has relationships with developers in select major cities (in particular, New York City) to provide marketing and brokerage services in new developments. New development closings generally have a development period of between 18 and 24 months from contracted date to closing. In some cases, the Company receives advanced commissions which are recorded as deferred revenue when received and recognized as revenue when units within the new development close. The balance of advanced commissions related to developments remained flat at $11 million at January 1, 2022 and December 31, 2022 due to a $3 million increase related to additional commissions received for new developments, offset by a $3 million decrease as a result of revenues recognized on units closed.
Title Group
The Company provides title, escrow and settlement 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. These services relate to the closing of home purchases and refinancing of home loans and therefore, title revenues and title and closing service fees are recorded at a point in time which occurs at the time a homesale transaction or refinancing closes.
Deferred Revenue
The following table shows the total change in the Company's contract liabilities related to revenue contracts by reportable segment (as discussed in detail above) for the year ended December 31, 2022: | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 |
| | Beginning Balance at January 1, 2022 | | Additions during the period | | Recognized as Revenue during the period | | Ending Balance at December 31, 2022 |
| Franchise Group (a) | $ | 79 | | | $ | 190 | | | $ | (189) | | | $ | 80 | |
| Owned Brokerage Group | 14 | | | 7 | | | (7) | | | 14 | |
| Total | $ | 93 | | | $ | 197 | | | $ | (196) | | | $ | 94 | |
_______________
(a)Revenues recognized include intercompany marketing fees paid by Owned Brokerage Group.
The majority of the Company's contracts are transactional in nature or have a duration of one-year or less. Accordingly, the Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.
4. EQUITY METHOD INVESTMENTS
The Company applies the equity method of accounting when it has the ability to exercise significant influence over operating and financial policies of an investee but does not have a controlling financial or operating interest in the joint venture. The Company records its share of the net earnings or losses of its equity method investments on the “Equity in losses (earnings) of unconsolidated entities” line in the accompanying Consolidated Statements of Operations. Investments not accounted for using the equity method are measured at fair value with changes in fair value recognized in net income or in the case that an investment does not have readily determinable fair values, at cost minus impairment (if any) plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment.
The Company has various equity method investments which are recorded within other non-current assets on the accompanying Consolidated Balance Sheets. The Company's share of equity earnings or losses related to these investments are included in the financial results of the Title Group and Owned Brokerage Group reportable segments. The Company's equity method investment balances at December 31, 2022 and 2021 were as follows:
| | | | | | | | | | | |
| December 31, |
| | 2022 | | 2021 |
| Guaranteed Rate Affinity | $ | 72 | | | $ | 94 | |
| Title Insurance Underwriter Joint Venture | 75 | | | — | |
| Other Title Group equity method investments | 10 | | | 8 | |
| Total Title Group equity method investments | 157 | | | 102 | |
| Owned Brokerage Group equity method investments | 27 | | | 29 | |
| Total equity method investments | $ | 184 | | | $ | 131 | |
Guaranteed Rate Affinity, the Company's 49.9% minority-owned mortgage origination joint venture with Guaranteed Rate, Inc., originates and markets its mortgage lending services to the Company's real estate brokerage as well as other real estate brokerage companies across the country. While the Company has certain governance rights, the Company does not have a controlling financial or operating interest in the joint venture. The Company's investment in Guaranteed Rate Affinity had balances of $72 million and $94 million at December 31, 2022 and 2021, respectively. The Company recorded equity in losses of $22 million, earnings of $49 million and earnings of $126 million related to its investment in Guaranteed Rate Affinity during the years ended December 31, 2022, 2021 and 2020, respectively. The Company received no cash dividends during the year ended December 31, 2022 and $44 million and $96 million in cash dividends from Guaranteed Rate Affinity during the years ended December 31, 2021 and 2020, respectively.
The Company’s 26% equity interest in the Title Insurance Underwriter Joint Venture as of December 31, 2022 is accounted for as an equity method investment. While the Company has certain governance rights, the Company does not have a controlling financial or operating interest in the joint venture. In March 2022, the Company recorded a $90 million investment at the closing of the Title Underwriter sale transaction which represented the fair value of the Company's 30% equity interest based upon the agreed upon purchase price. Subsequent to the closing, the Company received a dividend equal to $12 million from the Title Insurance Underwriter Joint Venture. This dividend reduced the Company’s investment balance to $78 million as of March 31, 2022. In April 2022, the Company sold a portion of its interest in the Title Insurance Underwriter Joint Venture to a third party reducing the Company's equity stake from 30% to 26%. The sale resulted in a gain of $4 million recorded in the Other income, net line on the Consolidated Statements of Operations. The Company recorded equity in earnings of $6 million from the Title Insurance Underwriter Joint Venture during the year ended December 31, 2022.
Title Group's various other equity method investments had investment balances totaling $10 million and $8 million at December 31, 2022 and 2021, respectively. The Company recorded equity earnings from the operations of Title Group's various other title related equity method investments of $5 million, $6 million and $5 million during the years ended December 31, 2022, 2021 and 2020, respectively. The Company received $3 million, $7 million and $5 million in cash dividends from these equity method investments during the years ended December 31, 2022, 2021 and 2020, respectively.
Owned Brokerage Group's equity method investments include its former investment in RealSure, the real estate auction joint venture and other brokerage related investments. RealSure is the Company's 49% owned joint venture with Home Partners of America which was formed in 2020. The Company and Home Partners of America agreed to cease operations of the joint venture in the fourth quarter of 2022 which resulted in a $4 million impairment of the investment. The real estate auction joint venture, the Company's 50% owned unconsolidated joint venture with Sotheby's, was formed in 2021 and
holds an 80% ownership stake in Sotheby's Concierge Auctions, a global luxury real estate auction marketplace that partners with real estate agents to host luxury online auctions for clients. While the Company has certain governance rights over these equity method investments, the Company does not have a controlling financial or operating interest in the joint ventures. These equity method investments had investment balances totaling $27 million and $29 million at December 31, 2022 and 2021, respectively. The Company recorded equity in losses of $17 million, $7 million and none from the operations of Owned Brokerage Group's equity method investments for the years ended December 31, 2022, 2021 and 2020, respectively. The Company invested $19 million, $34 million and $2 million of cash into these equity method investments during the years ended December 31, 2022, 2021 and 2020, respectively.
5. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of: | | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
| Furniture, fixtures and equipment | $ | 174 | | | $ | 166 | |
| Capitalized software | 492 | | | 463 | |
| Finance lease assets | 85 | | | 78 | |
| Building and leasehold improvements | 290 | | | 295 | |
| Land | 3 | | | 3 | |
| Gross property and equipment | 1,044 | | | 1,005 | |
| Less: accumulated depreciation | (727) | | | (695) | |
| Property and equipment, net | $ | 317 | | | $ | 310 | |
The Company recorded depreciation expense related to property and equipment of $118 million, $110 million and $109 million for the years ended December 31, 2022, 2021 and 2020, respectively.
6. LEASES
The Company's lease portfolio consists primarily of office space and equipment. The Company has approximately 1,200 real estate leases with lease terms ranging from less than 1 year to 17 years and includes the Company's brokerage sales offices, regional and branch offices for title and relocation operations, corporate headquarters, regional headquarters, and facilities serving as local administration, training and storage. The Company's brokerage sales offices are generally located in shopping centers and small office parks, typically with lease terms of 1 year to 5 years. In addition, the Company has equipment leases which primarily consist of furniture, computers and other office equipment.
Right-of-use assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. At lease commencement, the Company records a liability for its lease obligation measured at the present value of future lease payments and a right-of-use asset equal to the lease liability adjusted for prepayments and lease incentives. The Company uses its collateralized incremental borrowing rate to calculate the present value of lease liabilities as most of its leases do not provide an implicit rate that is readily determinable. The Company does not recognize a lease obligation and right-of-use asset on its balance sheet for any leases with an initial term of 12 months or less. Some real estate leases include one or more options to renew or terminate a lease. The exercise of a lease renewal or termination option is assessed at commencement of the lease and only reflected in the lease term if the Company is reasonably certain to exercise the option. The Company has lease agreements that contain both lease and non-lease components, such as common area maintenance fees, and has made a policy election to combine both fixed lease and non-lease components in total gross rent for all of its leases. Expense for operating leases is recognized on a straight-line basis over the lease term. Finance lease assets are amortized on a straight-line basis over the shorter of the estimated useful life of the underlying asset or the lease term. The interest component of a finance lease is included in interest expense and recognized using the effective interest method over the lease term.
The Company recognizes impairment charges related to the exit and sublease of certain real estate operating leases. As part of the Company's plan to reduce its office footprint costs and centralize certain aspects of its operational support structure as discussed in Note 14, "Restructuring Costs," the Company will incur right-of-use asset impairments.
Supplemental balance sheet information related to the Company's leases was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | | December 31, |
| Lease Type | | Balance Sheet Classification | | 2022 | | 2021 |
| Assets: | | | | | | |
| Operating lease assets | | Operating lease assets, net | | $ | 422 | | | $ | 453 | |
| Finance lease assets (a) | | Property and equipment, net | | 34 | | | 33 | |
| Total lease assets, net | | $ | 456 | | | $ | 486 | |
| Liabilities: | | | | | | |
| Current: | | | | | | |
| Operating lease liabilities | | Current portion of operating lease liabilities | | $ | 122 | | | $ | 128 | |
| Finance lease liabilities | | Accrued expenses and other current liabilities | | 11 | | | 11 | |
| Non-current: | | | | | | |
| Operating lease liabilities | | Long-term operating lease liabilities | | 371 | | | 417 | |
| Finance lease liabilities | | Other non-current liabilities | | 14 | | | 13 | |
| Total lease liabilities | | $ | 518 | | | $ | 569 | |
| | | | | | |
| Weighted Average Lease Term and Discount Rate | | | | |
| Weighted average remaining lease term (years): | | | | |
| Operating leases | | 5.3 | | 5.6 |
| Finance leases | | 2.9 | | 2.7 |
| | | | | | |
| Weighted average discount rate: | | | | |
| Operating leases | | 4.3 | % | | 4.2 | % |
| Finance leases | | 3.9 | % | | 3.4 | % |
_______________
(a)Finance lease assets are recorded net of accumulated amortization of $50 million and $45 million at December 31, 2022 and 2021, respectively.
As of December 31, 2022, maturities of lease liabilities by fiscal year were as follows:
| | | | | | | | | | | | | | | | | | | | |
| Maturity of Lease Liabilities | | Operating Leases | | Finance Leases | | Total |
| 2023 | | $ | 132 | | | $ | 10 | | | $ | 142 | |
| 2024 | | 120 | | | 8 | | | 128 | |
| 2025 | | 94 | | | 4 | | | 98 | |
| 2026 | | 69 | | | 3 | | | 72 | |
| 2027 | | 46 | | | 1 | | | 47 | |
| Thereafter | | 92 | | | — | | | 92 | |
| Total lease payments | | 553 | | | 26 | | | 579 | |
| Less: Interest | | 60 | | | 1 | | | 61 | |
| Present value of lease liabilities | | $ | 493 | | | $ | 25 | | | $ | 518 | |
Supplemental income statement information related to the Company's leases is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| Lease Costs | | 2022 | | 2021 | | 2020 |
| Operating lease costs | | $ | 140 | | | $ | 141 | | | $ | 150 | |
| Finance lease costs: | | | | | | |
| Amortization of leased assets | | 12 | | | 12 | | | 12 | |
| Interest on lease liabilities | | 1 | | | 1 | | | 2 | |
| Other lease costs (a) | | 23 | | | 24 | | | 24 | |
| Impairment (b) | | 6 | | | 2 | | | 46 | |
| Less: Sublease income, gross | | 2 | | | 2 | | | 2 | |
| Net lease cost | | $ | 180 | | | $ | 178 | | | $ | 232 | |
_______________
(a)Primarily consists of variable lease costs.
(b)Impairment charges relate to the exit and sublease of certain real estate operating leases. In 2020, the Company impaired or restructured a portion of its corporate headquarters in Madison, New Jersey and the relocation operations' main corporate location in Danbury, Connecticut.
Supplemental cash flow information related to leases was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Supplemental cash flow information: | | | | | | |
| Operating cash flows from operating leases | | $ | 162 | | | $ | 162 | | | $ | 165 | |
| Operating cash flows from finance leases | | 1 | | | 1 | | | 2 | |
| Financing cash flows from finance leases | | 13 | | | 13 | | | 14 | |
| | | | | | |
| Supplemental non-cash information: | | | | | | |
| Lease assets obtained in exchange for lease obligations: | | | | | | |
| Operating leases | | $ | 92 | | | $ | 134 | | | $ | 103 | |
| Finance leases | | 14 | | | 6 | | | 11 | |
7. GOODWILL AND INTANGIBLE ASSETS
Impairment of Goodwill and Other Indefinite-lived Intangibles
During the fourth quarter of 2022, the Company performed its impairment assessment of goodwill and other indefinite-lived intangible assets. This assessment resulted in the recognition of an impairment of goodwill at the Owned Brokerage Group reporting unit of $280 million, an impairment of goodwill at the Franchise Group segment of $114 million related to the Cartus/Leads Group reporting unit and an impairment of franchise trademarks of $76 million. See Note 2, "Summary of Significant Accounting Policies—Impairment of Goodwill, Intangible Assets and Other Long-Lived Assets", for additional information.
Goodwill
Goodwill by reportable segment and changes in the carrying amount are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Franchise Group | | Owned Brokerage Group | |
Title
Group | | Total Company |
| Balance at January 1, 2020 | $ | 2,636 | | | $ | 669 | | | $ | 155 | | | $ | 3,460 | |
| Goodwill acquired | — | | | — | | | 1 | | | 1 | |
| Goodwill reduction for sale of a business | — | | | (11) | | | — | | | (11) | |
| Impairment (a) | (127) | | | (413) | | | — | | | (540) | |
| Balance at December 31, 2020 | 2,509 | | | 245 | | | 156 | | | 2,910 | |
| Goodwill acquired (b) | — | | | 24 | | | 2 | | | 26 | |
| Goodwill reduction for sale of business (c) | (3) | | | (10) | | | — | | | (13) | |
| Balance at December 31, 2021 | 2,506 | | | 259 | | | 158 | | | 2,923 | |
| Goodwill acquired (d) | — | | | 21 | | | 5 | | | 26 | |
| Goodwill reduction for sale of a business (e) | — | | | — | | | (32) | | | (32) | |
| Impairment (f) | (114) | | | (280) | | | — | | | (394) | |
| Balance at December 31, 2022 | $ | 2,392 | | | $ | — | | | $ | 131 | | | $ | 2,523 | |
| Goodwill and accumulated impairment summary: | | | | | | |
| Gross goodwill | $ | 3,953 | | | $ | 1,088 | | | $ | 455 | | | $ | 5,496 | |
| Accumulated impairments (g) | (1,561) | | | (1,088) | | | (324) | | | (2,973) | |
| Balance at December 31, 2022 | $ | 2,392 | | | $ | — | | | $ | 131 | | | $ | 2,523 | |
_______________
(a)During the year ended December 31, 2020, the Company recognized a goodwill impairment charges of $413 million related to Owned Brokerage Group and $127 million at Franchise Group which related to $105 million during the nine months ended September 30, 2020 (while Cartus was held for sale) to reduce the net assets to the estimated proceeds and an additional goodwill impairment charge of $22 million during the fourth quarter of 2020 related to Cartus.
(b)Goodwill acquired during the year ended December 31, 2021 relates to the acquisition of three real estate brokerage operations and one title and settlement operation.
(c)Goodwill reduction during the year ended December 31, 2021 relates to the sale of a relocation-related business during the first quarter of 2021 and the sale of a business at Owned Brokerage Group during the second quarter of 2021.
(d)Goodwill acquired during the year ended December 31, 2022 relates to the acquisition of four real estate brokerage operations and two title and settlement operations.
(e)Goodwill reduction during the year ended December 31, 2022 relates to the sale of the Title Underwriter during the first quarter of 2022 (see Note 1, "Basis of Presentation", for a description of the transaction).
(f)During the year ended December 31, 2022, the Company recognized a goodwill impairment charge of $280 million related to Owned Brokerage Group reporting unit and a goodwill impairment charge of $114 million related to the Cartus/Leads Group reporting unit which is reported within the Franchise Group reportable segment.
(g)Includes impairment charges which reduced goodwill by $394 million during 2022, $540 million during 2020, $253 million during 2019, $1,279 million during 2008 and $507 million during 2007.
Brokerage Acquisitions
None of the acquisitions were significant to the Company’s results of operations, financial position or cash flows individually or in the aggregate.
During the year ended December 31, 2022, the Company acquired four real estate brokerage operations through its wholly owned subsidiary, Owned Brokerage Group, for aggregate cash consideration of $16 million and established $11 million of contingent consideration. These acquisitions resulted in goodwill of $21 million, other intangibles of $6 million, other assets of $26 million and other liabilities of Cartus Relocation Services$26 million.
During the year ended December 31, 2021, the Company acquired three real estate brokerage operations through its wholly owned subsidiary, Owned Brokerage Group, for aggregate cash consideration of $26 million and established $6 million of contingent consideration. These acquisitions resulted in goodwill of $24 million, trademarks of $2 million, other intangibles of $4 million, other assets of $12 million and other liabilities of $10 million.
Intangible Assets
Intangible assets are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2022 | | As of December 31, 2021 |
| | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Amount | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Amount |
| Amortizable—Franchise agreements (a) | $ | 2,010 | | | $ | 1,056 | | | $ | 954 | | | $ | 2,010 | | | $ | 989 | | | $ | 1,021 | |
| Indefinite life—Trademarks (b) | $ | 611 | | | | | $ | 611 | | | $ | 687 | | | | | $ | 687 | |
| Other Intangibles | | | | | | | | | | | |
| Amortizable—License agreements (c) | $ | 45 | | | $ | 15 | | | $ | 30 | | | $ | 45 | | | $ | 14 | | | $ | 31 | |
| Amortizable—Customer relationships (d) | 456 | | | 366 | | | 90 | | | 456 | | | 345 | | | 111 | |
| Indefinite life—Title plant shares (e) | 28 | | | | | 28 | | | 25 | | | | | 25 | |
| Amortizable—Other (f) | 11 | | | 9 | | | 2 | | | 16 | | | 12 | | | 4 | |
| Total Other Intangibles | $ | 540 | | | $ | 390 | | | $ | 150 | | | $ | 542 | | | $ | 371 | | | $ | 171 | |
_______________
(a)Generally amortized over a period of 30 years.
(b)Primarily related to real estate franchise, title and relocation trademarks which are expected to generate future cash flows for an indefinite period of time. Franchise trademarks were impaired by $76 million during the fourth quarter of 2022.
(c)Relates to the Sotheby’s International Realty® and Better Homes and Gardens® Real Estate agreements which are being amortized over 50 years (the contractual term of the license agreements).
(d)Relates to the customer relationships at Franchise Group, Title Group and Owned Brokerage Group. These relationships are being amortized over a period of 7 to 20 years.
(e)Ownership in a title plant is required to transact title insurance in certain states. The Company expects to generate future cash flows for an indefinite period of time.
(f)Consists of covenants not to compete which are amortized over their contract lives and other intangibles which are generally amortized over periods ranging from 3 to 5 years.
Intangible asset amortization expense is as follows:
| | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Franchise agreements | $ | 67 | | | $ | 67 | | | $ | 67 | |
| License agreements | 1 | | | 1 | | | 1 | |
| Customer relationships | 21 | | | 22 | | | 5 | |
| Other | 7 | | | 4 | | | 4 | |
| Total | $ | 96 | | | $ | 94 | | | $ | 77 | |
Based on the Company’s amortizable intangible assets as of December 31, 2022, the Company expects related amortization expense to be approximately $90 million, $89 million, $89 million, $89 million, $74 million and $645 million in 2023, 2024, 2025, 2026, 2027 and thereafter, respectively.
8. OTHER CURRENT ASSETS AND ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Other current assets consisted of: | | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
| Prepaid contracts and other prepaid expenses | $ | 81 | | | $ | 65 | |
| Prepaid agent incentives | 55 | | | 42 | |
| Franchisee sales incentives | 30 | | | 26 | |
| Other | 39 | | | 50 | |
| Total other current assets | $ | 205 | | | $ | 183 | |
Accrued expenses and other current liabilities consisted of: | | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
| Accrued payroll and related employee costs | $ | 110 | | | $ | 284 | |
| Advances from clients | 15 | | | 31 | |
| Accrued volume incentives | 39 | | | 60 | |
| Accrued commissions | 44 | | | 49 | |
| Restructuring accruals | 14 | | | 10 | |
| Deferred income | 62 | | | 59 | |
| Accrued interest | 40 | | | 42 | |
| Current portion of finance lease liabilities | 11 | | | 11 | |
| Due to former parent | 20 | | | 19 | |
| Other | 115 | | | 101 | |
| Total accrued expenses and other current liabilities | $ | 470 | | | $ | 666 | |
9. SHORT AND LONG-TERM DEBT
Total indebtedness is as follows: | | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
| Revolving Credit Facility | $ | 350 | | | $ | — | |
| Extended Term Loan A | 221 | | | 231 | |
| 7.625% Senior Secured Second Lien Notes | — | | | 542 | |
| 4.875% Senior Notes | — | | | 406 | |
| 9.375% Senior Notes | — | | | 545 | |
| 5.75% Senior Notes | 899 | | | 898 | |
| 5.25% Senior Notes | 985 | | | — | |
| 0.25% Exchangeable Senior Notes | 394 | | | 328 | |
| Total Short-Term & Long-Term Debt | $ | 2,849 | | | $ | 2,950 | |
| Securitization Obligations: | | | |
| Apple Ridge Funding LLC | $ | 163 | | | $ | 116 | |
| Cartus Financing Limited | — | | | 2 | |
| Total Securitization Obligations | $ | 163 | | | $ | 118 | |
Indebtedness Table
As of December 31, 2022, the Company’s borrowing arrangements were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest
Rate | | Expiration
Date | | Principal Amount | | Unamortized Discount (Premium) and Debt Issuance Costs | | Net Amount |
| Revolving Credit Facility (1) | (2) | | July 2027 (2) | | $ | 350 | | | $ * | | $ | 350 | |
| Extended Term Loan A | (2) | | February 2025 | | 222 | | | 1 | | | 221 | |
| Senior Notes (3) | 5.75% | | January 2029 | | 900 | | | 1 | | | 899 | |
| Senior Notes (3) | 5.25% | | April 2030 | | 1,000 | | | 15 | | | 985 | |
| Exchangeable Senior Notes (4) | 0.25% | | June 2026 | | 403 | | | 9 | | | 394 | |
| Total Short-Term & Long-Term Debt | $ | 2,875 | | | $ | 26 | | | $ | 2,849 | |
| Securitization obligations: (5) | | | | | | | | | |
| Apple Ridge Funding LLC | | June 2023 | | $ | 163 | | | $ * | | $ | 163 | |
_______________
*The debt issuance costs related to our Revolving Credit Facility and securitization obligations are classified as a deferred financing asset within other assets.
(1)As of December 31, 2022, the Company had $1,100 million of borrowing capacity under its Revolving Credit Facility, with $750 million of available capacity. As of December 31, 2022, there were $350 million outstanding borrowings under the Revolving Credit Facility and $42 million of outstanding undrawn letters of credit. On February 22, 2023, the Company had $384 million outstanding borrowings under the Revolving Credit Facility and $35 million of outstanding undrawn letters of credit.
(2)See below under the header "Senior Secured Credit Agreement and Term Loan A Agreement" for additional information.
(3)See below under the header "Unsecured Notes" for additional information.
(4)See below under the header "Exchangeable Senior Notes" for additional information and Note 2, "Summary of Significant Accounting Policies—Recently Adopted Accounting Pronouncements", related to the January 1, 2022 adoption of the new standard on "Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity".
(5)See below under the header "Securitization Obligations" for additional information.
Maturities Table
As of December 31, 2022, the combined aggregate amount of maturities for long-term borrowings for each of the next five years is as follows:
| | | | | | | | |
| Year | | Amount |
| 2023 (a) | | $ | 366 | |
| 2024 | | 22 | |
| 2025 | | 184 | |
| 2026 | | 403 | |
| 2027 | | — | |
_______________
(a)The current portion of long-term debt of $366 million shown on the Consolidated Balance Sheets consists of $350 million outstanding borrowings under the Revolving Credit Facility as of December 31, 20192022 and four quarters of 2023 amortization payments totaling $16 million for the Extended Term Loan A. Outstanding borrowings under the Revolving Credit Facility are classified on the balance sheet because it is probableas current due to the revolving nature and terms and conditions of the facilities.
Senior Secured Credit Agreement and Term Loan A Agreement
The Company’s Amended and Restated Credit Agreement dated as of March 5, 2013 (as amended, amended and restated, modified or supplemented from time to time, the "Senior Secured Credit Agreement") governs its senior secured revolving credit facility (the "Revolving Credit Facility") and, until its repayment in full in September 2021, its term loan B facility (the "Term Loan B Facility", and collectively with the Revolving Credit Facility, the "Senior Secured Credit Facility") and the Company's Term Loan A Agreement dated as of October 23, 2015 (as amended, amended and restated, modified or supplemented from time to time, the "Term Loan A Agreement") governs its senior secured term loan A credit facility (the "Term Loan A Facility").
In July 2022, Anywhere Group entered into an amendment to the Senior Secured Credit Agreement that terminated the sale will occurrevolving credit commitments due February 2023, replaced LIBOR with a Term SOFR-based rate as the applicable benchmark for the Revolving Credit Facility, and proceedsextended the maturity of the Revolving Credit Facility to July 2027, subject to certain earlier springing maturity dates. The maturity date of the Revolving Credit Facility may spring forward to an earlier date as follows: (i) if on or before March 16, 2026, the 0.25% Exchangeable Senior Notes have not been extended, refinanced or replaced to have a maturity date after October 26, 2027 (or are not otherwise discharged, defeased or repaid by March 16, 2026), the maturity date of the Revolving Credit Facility will be collected within one year.March 16, 2026 and (ii) if on or before February 8, 2025, the "term A loans" under the Term Loan A Agreement have not been extended, refinanced or replaced to have a maturity date after October 26, 2027 (or are not otherwise repaid by February 8, 2025), the maturity date of the Revolving Credit Facility will be February 8, 2025.
(b)AdjustmentSenior Secured Credit Facility
The Senior Secured Credit Facility includes a $1,100 million Revolving Credit Facility which includes a $150 million letter of credit sub-facility.
The interest rate with respect to record assets and liabilities held for salerevolving loans under the Revolving Credit Facility is based on, at Anywhere Group's option, a term SOFR-based rate including a 10 basis point credit spread adjustment or JP Morgan Chase Bank, N.A.'s prime rate ("ABR") plus (in each case) an additional margin subject to the lower of carrying value or fair value less any costs to sellfollowing adjustments based on the PurchaseCompany’s then current senior secured leverage ratio:
| | | | | | | | | | | | | | |
| Senior Secured Leverage Ratio | | Applicable SOFR Margin | | Applicable ABR Margin |
| Greater than 3.50 to 1.00 | | 2.50% | | 1.50% |
| Less than or equal to 3.50 to 1.00 but greater than or equal to 2.50 to 1.00 | | 2.25% | | 1.25% |
| Less than 2.50 to 1.00 but greater than or equal to 2.00 to 1.00 | | 2.00% | | 1.00% |
| Less than 2.00 to 1.00 | | 1.75% | | 0.75% |
Based on the previous quarter's senior secured leverage ratio, the SOFR margin was 1.75% and the ABR margin was 0.75% for the three months ended December 31, 2022.
The obligations under the Senior Secured Credit Agreement are secured to the extent legally permissible by substantially all of the assets of Anywhere Group, Anywhere Intermediate and all of their domestic subsidiaries, other than certain excluded subsidiaries and subject to certain exceptions.
The Senior Secured Credit Agreement contains financial, affirmative and negative covenants as well as a financial covenant that Anywhere Group maintain (so long as commitments under the Revolving Credit Facility are outstanding) a maximum permitted senior secured leverage ratio, not to exceed 4.75 to 1.00. The leverage ratio is tested quarterly regardless of the amount of borrowings outstanding and letters of credit issued under the Revolving Credit Facility at the testing date. Total senior secured net debt does not include the Apple Ridge securitization obligations or our unsecured indebtedness, including the Unsecured Notes and the Exchangeable Senior Notes. At December 31, 2022, Anywhere Group was in compliance with the senior secured leverage ratio covenant.
Term Loan A Facility
The Term Loan A Facility includes the outstanding loans under the Term Loan A Facility (the "Extended Term Loan A") due February 2025. Until its repayment in full in September 2021, the Term Loan A Facility also included the Non-extended Term Loan A due February 2023. The Extended Term Loan A provides for quarterly amortization based on a percentage of the original principal amount of $237 million, which commenced on June 30, 2021, as follows: 0.625% per quarter from June 30, 2021 to March 31, 2022; 1.25% per quarter from June 30, 2022 to March 31, 2023; 1.875% per quarter from June 30, 2023 to March 31, 2024; and 2.50% per quarter for periods ending on or after June 30, 2024, with the balance of the Extended Term Loan A due at maturity on February 8, 2025.
The interest rate with respect to the Term Loan A Facility is based on, at Anywhere Group's option, adjusted LIBOR or ABR, plus (in each case) an additional margin subject to adjustment based on the Company’s then current senior secured leverage ratio:
| | | | | | | | | | | | | | |
| Senior Secured Leverage Ratio | | Applicable LIBOR Margin | | Applicable ABR Margin |
| Greater than 3.50 to 1.00 | | 2.50% | | 1.50% |
| Less than or equal to 3.50 to 1.00 but greater than or equal to 2.50 to 1.00 | | 2.25% | | 1.25% |
| Less than 2.50 to 1.00 but greater than or equal to 2.00 to 1.00 | | 2.00% | | 1.00% |
| Less than 2.00 to 1.00 | | 1.75% | | 0.75% |
Based on the previous quarter's senior secured leverage ratio, the LIBOR margin was 1.75% and the ABR margin was 0.75% for the three months ended December 31, 2022.
The Term Loan A Agreement contains covenants that are substantially similar to those in the Senior Secured Credit Agreement.
Repurchase and Redemption of 4.875% Senior Notes
During the second and third quarters of 2022, the Company used cash on hand to repurchase $67 million in principal amount of its 4.875% Senior Notes in open market purchases approximately at par value plus accrued interest to the repurchase date. In the fourth quarter of 2022, the Company redeemed all of its outstanding $340 million 4.875% Senior Notes utilizing borrowings under its Revolving Credit Facility, together with cash on hand. The 4.875% Senior Notes were paid at a redemption price of 100% plus the applicable "make whole" premium (as determined pursuant to the indenture governing the 4.875% Senior Notes), together with accrued interest to the redemption date. The 4.875% Senior Notes were scheduled to mature on June 1, 2023 and interest was payable semiannually on June 1 and December 1 of each year.
5.25% Senior Notes Issuance and Redemption of 9.375% Senior Notes and 7.625% Senior Secured Second Lien Notes
In the first quarter of 2022, the Company redeemed in full the outstanding 7.625% Senior Secured Second Lien Notes and 9.375% Senior Notes using net proceeds, together with cash on hand, from its issuance of 5.25% Senior Notes. The 7.625% Senior Secured Second Lien Notes and 9.375% Senior Notes were each paid at a redemption price of 100% plus the applicable "make whole" premium (as determined pursuant to the indenture governing the 7.625% Senior Secured Second Lien Notes or 9.375% Senior Notes, as applicable), together with accrued interest to the redemption date. The 7.625% Senior Secured Second Lien Notes were scheduled to mature on June 15, 2025 and interest was payable semiannually on
June 15 and December 15 of each year. The 9.375% Senior Notes were scheduled to mature on April 1, 2027 and interest was payable semi-annually on April 1 and October 1 of each year.
Unsecured Notes
The 5.75% Senior Notes and 5.25% Senior Notes (collectively the "Unsecured Notes") are unsecured senior obligations of Anywhere Group. The 5.75% Senior Notes mature on January 15, 2029 with interest on such notes payable each year semiannually on January 15 and July 15. The 5.25% Senior Notes mature on April 15, 2030 with interest on such notes payable each year semiannually on April 15 and October 15 which commenced April 15, 2022.
The Company may redeem all or a portion of the 5.75% Senior Notes or 5.25% Senior Notes, as applicable, at the redemption price set forth in the applicable indenture governing such notes, commencing on January 15, 2024 and April 15, 2025, respectively. Prior to those dates, the Company may redeem the applicable notes at its option, in whole or in part, at a redemption price equal to 100% of the principal amount of such notes redeemed plus a "make-whole" premium as set forth in the applicable indenture governing such notes. In addition, prior to the dates noted above, the Company may redeem up to 40% of the notes from the proceeds of certain equity offerings as set forth in the applicable indenture governing such notes.
The Unsecured Notes are guaranteed on an unsecured senior basis by each domestic subsidiary of Anywhere Group that is a guarantor under the Senior Secured Credit Facility, Term Loan A Facility and Anywhere Group's outstanding debt securities and are guaranteed by Anywhere Holdings on an unsecured senior subordinated basis.
The indentures governing the Unsecured Notes contain various negative covenants that limit Anywhere Group's and its restricted subsidiaries' ability to take certain actions, which covenants are subject to a number of important exceptions and qualifications. These covenants include limitations on Anywhere Group's and its restricted subsidiaries' ability to (a) incur or guarantee additional indebtedness, or issue disqualified stock or preferred stock, (b) pay dividends or make distributions to their stockholders, (c) repurchase or redeem capital stock, (d) make investments or acquisitions, (e) incur restrictions on the ability of certain of their subsidiaries to pay dividends or to make other payments to Anywhere Group, (f) enter into transactions with affiliates, (g) create liens, (h) merge or consolidate with other companies or transfer all or substantially all of their assets, (i) transfer or sell assets, including capital stock of subsidiaries and (j) prepay, redeem or repurchase debt that is subordinated in right of payment to the Unsecured Notes.
In particular, under the Unsecured Notes:
•the cumulative credit basket is not available to repurchase shares to the extent the consolidated leverage ratio is equal to or greater than 4.0 to 1.0 on a pro forma basis giving effect to such repurchase;
•the consolidated leverage ratio must be less than 3.0 to 1.0 to use the unlimited general restricted payment basket; and
•a restricted payment basket is available for up to $45 million of dividends per calendar year (with any actual dividends deducted from the available cumulative credit basket).
The consolidated leverage ratio is measured by dividing Anywhere Group's total net debt (excluding securitizations) by the trailing twelve-month EBITDA. EBITDA, as defined in the applicable indentures governing the Unsecured Notes, is substantially similar to EBITDA calculated on a Pro Forma Basis, as those terms are defined in the Senior Secured Credit Agreement. Net debt under the indenture governing the Unsecured Notes is Anywhere Group's total indebtedness (excluding securitizations) less (i) its cash and cash equivalents in excess of restricted cash and (ii) a $200 million seasonality adjustment permitted when measuring the ratio on a date during the period of March 1 to May 31.
Exchangeable Senior Notes
In June 2021, Anywhere Group issued an aggregate principal amount of $403 million of 0.25% Exchangeable Senior Notes due 2026. The Company used a portion of the net proceeds from this offering to pay the cost of the exchangeable note hedge transactions described below (with such cost partially offset by the proceeds to the Company from the sale of the warrants pursuant to the warrant transactions described below).
The Exchangeable Senior Notes are unsecured senior obligations of Anywhere Group that mature on June 15, 2026. Interest on the Exchangeable Senior Notes is payable each year semiannually on June 15 and December 15.
The Exchangeable Senior Notes are guaranteed on an unsecured senior basis by each domestic subsidiary of Anywhere Group that is a guarantor under the Senior Secured Credit Facility, Term Loan A Facility and Anywhere Group's outstanding debt securities and are guaranteed by Anywhere on an unsecured senior subordinated basis.
Before March 15, 2026, noteholders will have the right to exchange their Exchangeable Senior Notes upon the occurrence of certain events described in the indenture governing the notes. On or after March 15, 2026, noteholders may exchange their Exchangeable Senior Notes at any time at their election until the close of business on the second scheduled trading day immediately before the maturity date of the notes.
Upon exchange, Anywhere Group will pay cash up to the aggregate principal amount of the Exchangeable Senior Notes to be exchanged and pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at Anywhere Group's election, in respect of the remainder, if any, of its exchange obligation in excess of the aggregate principal amount of the Exchangeable Senior Notes being exchanged.
The initial exchange rate for Exchangeable Senior Notes is 40.8397 shares of the Company’s common stock per $1,000 principal amount of notes (which represents an initial exchange price of approximately $24.49 per share of the Company’s common stock). The exchange rate and exchange price of the Exchangeable Senior Notes are subject to customary adjustments upon the occurrence of certain events. In addition, if a “Make-Whole Fundamental Change” (as defined in the indenture governing the Exchangeable Senior Notes) occurs, then the exchange rate of the Exchangeable Senior Notes will, in certain circumstances, be increased for a specified period of time. Initially, a maximum of approximately 23,013,139 shares of the Company’s common stock may be issued upon the exchange of the Exchangeable Senior Notes, based on the initial maximum exchange rate of 57.1755 shares of the Company’s common stock per $1,000 principal amount of notes, which is subject to customary anti-dilution adjustment provisions.
The Exchangeable Senior Notes will be redeemable, in whole or in part (subject to a partial redemption limitation described in the indenture governing the notes), at Anywhere Group's option at any time, and from time to time, on or after June 20, 2024 and on or before the 30th scheduled trading day immediately before the maturity date, at a cash redemption price equal to the principal amount of the Exchangeable Senior Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, but only if the last reported sale price per share of the Company’s common stock exceeds 130% of the exchange price on (1) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date it sends the related redemption notice; and (2) the trading day immediately before the date it sends such notice. In addition, calling any Exchangeable Senior Notes for redemption will constitute a Make-Whole Fundamental Change with respect to that note, in which case the exchange rate applicable to the exchange of that note will be increased in certain circumstances if it is exchanged with an exchange date occurring during the period from, and including, the date Anywhere Group sends the redemption notice to, and including, the second business day immediately before the related redemption date.
If certain corporate events that constitute a "Fundamental Change" (as defined in the indenture governing the Exchangeable Senior Notes) of the Company occur, then noteholders may require Anywhere Group to repurchase their Exchangeable Senior Notes at a cash repurchase price equal to the principal amount of the notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date. The definition of Fundamental Change includes, among other things, certain business combination transactions involving the Company and certain de-listing events with respect to the Company’s common stock.
The indenture governing the Exchangeable Senior Notes also provides for events of default which, if any of them occurs, would permit or require the principal of and accrued interest on the Exchangeable Senior Notes to become or to be declared due and payable.
Under the accounting standards applicable at the time of issuance, exchangeable debt instruments that may be settled in cash were required to be separated into liability and equity components. The allocation to the liability component was based on the fair value of a similar instrument that does not contain an equity conversion option. Based on this debt-to-equity ratio, debt issuance costs are then allocated to the liability and equity components in a similar manner. Accordingly, at issuance on June 2, 2021, the Company allocated $319 million to the debt liability and $53 million to additional paid in capital. The difference between the principal amount of the Exchangeable Senior Notes and the liability component, inclusive of issuance costs, represented the debt discount, which the Company amortized to interest expense over the term of the Exchangeable Senior Notes using an effective interest rate of 4.375%. As a result, the Company recognized non-cash interest expense of $8 million related to the Exchangeable Senior Notes during 2021.
Upon the adoption of ASU 2020-06 on January 1, 2022, the Company was required to account for its Exchangeable Senior Notes as a single liability resulting in the recombination of the debt liability and equity components. As a result, the Company derecognized the unamortized debt discount and related equity component associated with its Exchangeable Senior Notes resulting in an increase to Long-term debt of $65 million, a reduction to Additional paid-in capital of
$53 million, net of taxes, and a reduction to Deferred tax liabilities of $17 million. The Company recorded a cumulative effect of adoption adjustment of $5 million, net of taxes, as a reduction to Accumulated deficit on January 1, 2022 related to the reversal of cumulative interest expense recognized for the amortization of the debt discount on its Exchangeable Senior Notes since issuance. See Note 2, "Summary of Significant Accounting Policies—Recently Adopted Accounting Pronouncements," for additional information.
Exchangeable Note Hedge and Warrant Transactions
In connection with the pricing of the Exchangeable Senior Notes (and with the exercise by the initial purchasers of the notes to purchase additional notes), Anywhere Group entered into exchangeable note hedge transactions with certain counterparties (the "Option Counterparties"). The exchangeable note hedge transactions cover, subject to anti-dilution adjustments substantially similar to those applicable to the Exchangeable Senior Notes, the number of shares of the Company’s common stock underlying the Notes. The total cost of such exchangeable note hedge transactions was $67 million.
Concurrently with Anywhere Group entering into the exchangeable note hedge transactions, the Company entered into warrant transactions with the Option Counterparties whereby the Company sold to the Option Counterparties warrants to purchase, subject to customary adjustments, up to the same number of shares of the Company’s common stock. The initial strike price of the warrant transactions is $30.6075 per share. The Company received $46 million in cash proceeds from the sale of these warrant transactions.
Taken together, the purchase of such exchangeable note hedges and the sale of such warrants are intended to offset (in whole or in part) any potential dilution and/or cash payments upon the exchange of the Exchangeable Senior Notes, and to effectively increase the overall exchange price from $24.49 to $30.6075 per share.
At issuance, the Company recorded a deferred tax liability of $20 million related to the Exchangeable Senior Notes debt discount and a deferred tax asset of $18 million related to the exchangeable note hedge transactions. The deferred tax liability and deferred tax asset were recorded net within deferred income taxes in the Consolidated Balance Sheets upon issuance. The deferred tax liability related to the Exchangeable Senior Notes debt discount was reversed on January 1, 2022 upon the adoption of ASU 2020-06 as discussed above.
Securitization Obligations
Securitization Obligations in the table above are further broken out as follows:
| | | | | | | | | | | |
| | December 31, | | |
| | 2019 | | 2018 |
| Securitization Obligations: | | | |
| Apple Ridge Funding LLC | $ | 195 | | | $ | 218 | |
| Cartus Financing Limited | 11 | | | 13 | |
| Total Securitization Obligations | $ | 206 | | | $ | 231 | |
Realogy Group has secured obligations through Apple Ridge Funding LLC under a securitization program which expires in June 2020. As of December 31, 2019, the Company had $250 million of borrowing capacity under the Apple Ridge Funding LLC securitization program with $195 million being utilized leaving $55 million of available capacity.
Realogy Group, through a special purpose entity known as Cartus Financing Limited, has agreements providing for a £10 million revolving loan facility and a £5 million working capital facility which expires in August 2020. As of December 31, 2019, there were $11 million of outstanding borrowings under the facilities leaving $9 million of available capacity. These Cartus Financing Limited facilities are secured by the relocation assets of a U.K. government contract in this special purpose entity and are therefore classified as permitted securitization financings as defined in Realogy Group’s Senior Secured Credit Agreement and the indentures governing the Unsecured Notes.
The Apple Ridge entities and the Cartus Financing Limited entity are consolidated special purpose entities that are utilized to securitize relocation receivables and related assets. These assets are generated from advancing funds on behalf of clients of Realogy Group’s relocation business in order to facilitate the relocation of their employees. Assets of these special purpose entities are not available to pay Realogy Group’s general obligations. Under the Apple Ridge program, provided no termination or amortization event has occurred, any new receivables generated under the designated relocation management agreements are sold into the securitization program and as new eligible relocation management agreements are entered into, the new agreements are designated to the program. The Apple Ridge program has restrictive covenants and trigger events, including performance triggers linked to the age and quality of the underlying assets, foreign obligor limits, multicurrency limits, financial reporting requirements, restrictions on mergers and change of control, any uncured breach of Realogy Group’s senior secured leverage ratio under Realogy Group’s Senior Secured Credit Facility, and cross-defaults to Realogy Group’s material indebtedness. The occurrence of a trigger event under the Apple Ridge securitization facility could restrict our ability to access new or existing funding under this facility or result in termination of the facility, either of which would adversely affect the operation of our relocation business.
Certain of the funds that Realogy Group receives from relocation receivables and related assets must be utilized to repay securitization obligations. These obligations were collateralized by $200 million and $238 million of underlying relocation receivables and other related relocation assets at December 31, 2019 and 2018, respectively. Substantially all relocation related assets are realized in less than twelve months from the transaction date.
Interest incurred in connection with borrowings under these facilities amounted to $8 million and $9 million for the years ended December 31, 2019 and 2018, respectively. These securitization obligations represent floating rate debt for which the average weighted interest rate was 4.2% and 3.8% for the years ended December 31, 2019 and 2018, respectively.
4. LEASES
The Company's lease portfolio consists primarily of office space and equipment. The Company has approximately 1,100 real estate leases with lease terms ranging from less than 1 year to 17 years and includes the Company's brokerage sales offices, regional and branch offices for our title and relocation businesses, corporate headquarters, regional headquarters, and facilities serving as local administration, training and storage. The Company's brokerage sales offices are generally located in shopping centers and small office parks, typically with lease terms of 1 year to 5 years. In addition, the Company has equipment leases which primarily consist of furniture, computers and other office equipment.
Right-of-use assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. At lease commencement, the Company records a liability for its lease obligation measured at the present value of future lease payments and a right-of-use asset equal to the lease liability adjusted for prepayments and lease incentives. The Company uses its collateralized incremental borrowing rate to calculate the present value of lease liabilities as most of its leases do not provide an implicit rate that is readily determinable. The Company does not recognize a lease obligation and right-of-use asset on its balance sheet for any leases with an initial term of 12 months or less. Some real estate leases include one or more options to renew or terminate a lease. The exercise of a lease renewal or termination option is assessed at commencement of the lease and only reflected in the lease term if the Company is reasonably certain to exercise the option. The Company has lease agreements that contain both lease and non-lease components, such as common area maintenance fees, and has made a policy election to combine both fixed lease and non-lease components in total gross rent for all of its leases. Expense for operating leases is recognized on a straight-line basis over the lease term. Finance lease assets are amortized on a straight-line basis over the shorter of the estimated useful life of the underlying asset or the lease term. The interest component of a finance lease is included in interest expense and recognized using the effective interest method over the lease term.
Supplemental balance sheet information related to the Company's leases was as follows:
| | | | | | | | | | | | | | |
Lease Type | | Balance Sheet Classification | | December 31, 2019 |
Assets: | | | | |
Operating lease assets | | Operating lease assets, net | | $ | 515 | |
Finance lease assets (a) | | Property and equipment, net | | 41 | |
Total lease assets, net | | | | $ | 556 | |
| | | | |
Liabilities: | | | | |
Current: | | | | |
Operating lease liabilities | | Current portion of operating lease liabilities | | $ | 122 | |
Finance lease liabilities | | Accrued expenses and other current liabilities | | 13 | |
Non-current: | | | | |
Operating lease liabilities | | Long-term operating lease liabilities | | 467 | |
Finance lease liabilities | | Other non-current liabilities | | 22 | |
Total lease liabilities | | | | $ | 624 | |
| | | | |
Weighted Average Lease Term and Discount Rate | | | | |
Weighted average remaining lease term (years): | | | | |
Operating leases | | | | 6.1 |
Finance leases | | | | 3.1 |
| | | | |
Weighted average discount rate: | | | | |
Operating leases | | | | 5.1 | % |
Finance leases | | | | 4.1 | % |
_______________
(a)Finance lease assets are recorded net of accumulated amortization of $34 million.
As of December 31, 2019, maturities of lease liabilities by fiscal year were as follows:
| | | | | | | | | | | | | | | | | | | | |
| Maturity of Lease Liabilities | | Operating Leases | | Finance Leases | | Total |
| 2020 | | $ | 144 | | | $ | 13 | | | $ | 157 | |
| 2021 | | 135 | | | 11 | | | 146 | |
| 2022 | | 110 | | | 8 | | | 118 | |
| 2023 | | 85 | | | 4 | | | 89 | |
| 2024 | | 64 | | | 2 | | | 66 | |
| Thereafter | | 153 | | | — | | | 153 | |
| Total lease payments | | 691 | | | 38 | | | 729 | |
| Less: Interest | | 102 | | | 3 | | | 105 | |
| Present value of lease liabilities | | $ | 589 | | | $ | 35 | | | $ | 624 | |
Supplemental income statement information related to the Company's leases is as follows:
| | | | | | | | |
| | Year Ended |
Lease Costs | | December 31, 2019 |
Operating lease costs | | $ | 158 | |
Finance lease costs: | | |
Amortization of leased assets | | 13 | |
Interest on lease liabilities | | 1 | |
Other lease costs (a) | | 28 | |
Impairment (b) | | 12 | |
Less: Sublease income, gross | | 3 | |
Net lease cost | | $ | 209 | |
_______________
(a)Primarily consists of variable lease costs.
(b)Impairment charges relate to the exit and sublease of certain real estate operating leases.
Supplemental cash flow information related to leases was as follows:
| | | | | | | | |
| | Year Ended |
| | December 31, 2019 |
Supplemental cash flow information: | | |
Operating cash flows from operating leases | | | $ | 153 | |
Operating cash flows from finance leases | | | 1 | |
Financing cash flows from finance leases | | | 14 | |
| | |
Supplemental non-cash information: | | |
Lease assets obtained in exchange for lease obligations: | | | |
Operating leases | | | $ | 153 | |
Finance leases | | | 18 | |
As previously disclosed in our 2018 Annual Report on Form 10-K and under historical lease accounting guidance:
Future minimum lease payments for noncancelable operating leases as of December 31, 2018 were as follows:
| | | | | | | | |
| Year | | As of December 31, 2018 |
| 2019 | | $ | 156 | |
| 2020 | | 136 | |
| 2021 | | 113 | |
| 2022 | | 90 | |
| 2023 | | 75 | |
| Thereafter | | 175 | |
| Total | | $ | 745 | |
Capital lease obligations were $33 million, net of $2 million of imputed interest as of December 31, 2018.
The Company incurred rent expense of $196 million and $192 million for the years ended December 31, 2018 and 2017, respectively.
Significant non-cash transactions included finance lease additions of $20 million and $18 million for the years ended December 31, 2018 and 2017, respectively, which resulted in non-cash additions to property and equipment, net and other non-current liabilities.
5. REVENUE RECOGNITION
Revenue is recognized upon the transfer of control of promised services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those services in accordance with the revenue standard. The Company's revenue is disaggregated by major revenue categories on our Consolidated Statements of Operations and further disaggregated by business segment as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, 2019 vs December 31, 2018 | | | | | | | | | | | | | | | | | | | | | | |
| | Realogy
Franchise
Group | | | | Realogy
Brokerage
Group | | | | Realogy
Title
Group | | | | Realogy
Leads
Group | | | | Corporate
and
Other | | | | Total
Company | | |
| 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 |
| Gross commission income (a) | $ | — | | | $ | — | | | $ | 4,330 | | | $ | 4,533 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 4,330 | | | $ | 4,533 | |
| Service revenue (b) | — | | | — | | | 11 | | | 9 | | | 579 | | | 564 | | | 83 | | | 81 | | | — | | | — | | | 673 | | | 654 | |
| Franchise fees (c) | 668 | | | 688 | | | — | | | — | | | — | | | — | | | — | | | — | | | (282) | | | (295) | | | 386 | | | 393 | |
| Other (d) | 135 | | | 132 | | | 68 | | | 65 | | | 17 | | | 16 | | | — | | | — | | | (11) | | | (11) | | | 209 | | | 202 | |
| Net revenues | $ | 803 | | | $ | 820 | | | $ | 4,409 | | | $ | 4,607 | | | $ | 596 | | | $ | 580 | | | $ | 83 | | | $ | 81 | | | $ | (293) | | | $ | (306) | | | $ | 5,598 | | | $ | 5,782 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, 2018 vs December 31, 2017 (e) | | | | | | | | | | | | | | | | | | | | | | |
| | Realogy
Franchise
Group | | | | Realogy
Brokerage
Group | | | | Realogy
Title
Group | | | | Realogy
Leads
Group | | | | Corporate
and
Other | | | | Total
Company | | |
| 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 |
| Gross commission income (a) | $ | — | | | $ | — | | | $ | 4,533 | | | $ | 4,576 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 4,533 | | | $ | 4,576 | |
| Service revenue (b) | — | | | — | | | 9 | | | 9 | | | 564 | | | 551 | | | 81 | | | 78 | | | — | | | — | | | 654 | | | 638 | |
| Franchise fees (c) | 688 | | | 695 | | | — | | | — | | | — | | | — | | | — | | | — | | | (295) | | | (299) | | | 393 | | | 396 | |
| Other (d) | 132 | | | 135 | | | 65 | | | 58 | | | 16 | | | 19 | | | — | | | — | | | (11) | | | (12) | | | 202 | | | 200 | |
| Net revenues | $ | 820 | | | $ | 830 | | | $ | 4,607 | | | $ | 4,643 | | | $ | 580 | | | $ | 570 | | | $ | 81 | | | $ | 78 | | | $ | (306) | | | $ | (311) | | | $ | 5,782 | | | $ | 5,810 | |
_______________
(a)Approximately 80% of the Company's total net revenues is related to gross commission income at Realogy Brokerage Group, which is recognized at a point in time at the closing of a homesale transaction.
(b)Approximately 10% of the Company's total net revenues is related to service fees primarily consisting of title and escrow fees at Realogy Title Group, which are recognized at a point in time at the closing of a homesale transaction.
(c)Approximately 7% of the Company's total net revenues is related to franchise fees at Realogy Franchise Group, primarily domestic royalties, which are recognized at a point in time when the underlying franchisee revenue is earned (upon close of the homesale transaction).
(d)Less than 5% of the Company's total net revenues is related to other revenue, which comprised of brand marketing funds received at Realogy Franchise Group from franchisees, third-party listing fees and other miscellaneous revenues across all of the business segments.
(e)Amounts for the year ended December 31, 2017 have not been adjusted under the modified retrospective method.
The Company's revenue streams are discussed further below by business segment:
Realogy Franchise Group
The Company franchises its real estate brands to real estate brokerage businesses that are independently owned and operated. Franchise revenue principally consists of royalty and marketing fees from the Company’s franchisees. The royalty received is primarily based on a gross percentage (generally 6%) of the franchisee’s gross commission income. Royalty fees are accrued as the underlying franchisee revenue is earned (upon close of the homesale transaction). Annual volume incentives given to certain franchisees on royalty fees are recorded as a reduction to revenue and are accrued for in relative proportion to the recognition of the underlying gross franchise revenue. Other sales incentives are generally recorded as a reduction to revenue ratably over the related performance period or from the date of issuance through the remaining life of the related franchise agreement. Franchise revenue also includes domestic initial franchise fees which are generally non-refundable and recognized by the Company as revenue upon the execution or opening of a new franchisee office to cover the upfront costs associated with opening the franchisee for business under one of Realogy’s brands.
The Company also earns marketing fees from its franchisees and utilizes such fees to fund marketing campaigns on behalf of its franchisees. As such, brand marketing fund fees are recorded as deferred revenue when received and recognized into revenue as earned when these funds are spent on marketing activities. The balance for deferred brand marketing fund fees increased from $12 million at January 1, 2019 to $13 million at December 31, 2019 primarily due to additional fees received from franchisees, partially offset by amounts recognized into revenue matching expenses for marketing activities during the year ended December 31, 2019.
The Company collects initial area development fees ("ADFs") for international territory transactions, which are recorded as deferred revenue when received and are classified as current or non-current liabilities in the Consolidated Balance Sheets based on the expected timing of revenue recognition. ADFs are recognized into franchise revenue over the average 25 year life of the related franchise agreement as consideration for the right to access and benefit from Realogy’s brands. In the event an ADF agreement is terminated prior to the end of its term, the unamortized deferred revenue balance will be recognized into revenue immediately upon termination. The balance for deferred ADFs decreased from $54 million at January 1, 2019 to $48 million at December 31, 2019 due to revenues of $8 million recognized during the year ended December 31, 2019 that were included in the deferred revenue balance at the beginning of the period, partially offset by $2 million of additional area development fees received during the year ended December 31, 2019.
In addition, the Company recognizes a deferred asset for commissions paid to Realogy franchise sales employees upon the sale of a new franchise as these are considered costs of obtaining a contract with a customer that are expected to provide benefits to the Company for longer than one year. The Company classifies prepaid commissions as current or non-current
assets in the Consolidated Balance Sheets based on the expected timing of recognizing expense. The amount of commissions is calculated as a percentage of the anticipated gross commission income of the new franchisee or ADF and is amortized over 30 years for domestic franchise agreements or the agreement term for international franchise agreements (generally 25 years). The amount of prepaid commissions was $24 million and $25 million at December 31, 2019 and 2018, respectively.
Realogy Brokerage Group
As an owner-operator of real estate brokerages, the Company assists home buyers and sellers in listing, marketing, selling and finding homes. Real estate commissions earned by the Company’s real estate brokerage business are recorded as revenue at a point in time which is upon the closing of a real estate transaction (i.e., purchase or sale of a home). These revenues are referred to as gross commission income. The commissions the Company pays to real estate agents are recognized concurrently with associated revenues and presented as the commission and other agent-related costs line item on the accompanying Consolidated Statements of Operations.
The Company has relationships with developers, primarily in major cities, to provide marketing and brokerage services in new developments. New development closings generally have a development period of between 18 and 24 months from contracted date to closing. In some cases, the Company receives advanced commissions which are recorded as deferred revenue when received and recognized as revenue when the new development closes. The balance of advanced commissions related to developments decreased from $10 million at January 1, 2019 to $9 million at December 31, 2019 due to a $2 million decrease as a result of revenues recognized on units closed, partially offset by a $1 million increase related to additional commissions received for new developments.
Realogy Title Group
The Company provides title and closing services, which include title search procedures for title insurance policies, homesale escrow and other closing services. Title revenues and title and closing service fees are recorded at a point in time which occurs at the time a homesale transaction or refinancing closes. The Company also owns an underwriter of title insurance. For unaffiliated agents, the underwriter recognizes policy premium revenue on a gross basis (before deduction of agent commission) upon notice of policy issuance from the agent. For affiliated title agents, the underwriter recognizes the incremental policy premium revenue upon the effective date of the title policy as the agent commission revenue is already recognized by the affiliated title agent.
Realogy Leads Group
The Company provides home buying and selling assistance to members of affinity organizations. The Company earns referral commission revenue primarily from real estate brokers for the home sale and purchase for affinity members, which is recognized at a point in time when the underlying property closes. Realogy Leads Group also manages the Realogy Broker Network, which is a network of real estate brokers consisting of our company owned brokerage operations, select franchisees and independent real estate brokers who have been approved to become members. Network fees are billed in advance and recognized into revenue on a straight-line basis each month during the membership period. The balance for deferred network fees increased from 0 at January 1, 2019 to $3 million at December 31, 2019 due to a $13 million increase related to new network fees, partially offset by $10 million of revenues recognized during the year that were included in the deferred revenue balance at the beginning of the period.
Contract Balances (Deferred Revenue)
The following table shows the change in the Company's contract liabilities related to revenue contracts by reportable segment for the period:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2019 | | | | | | |
| | Beginning Balance at January 1, 2019 | | Additions during the period | | Recognized as Revenue during the period | | Ending Balance at
December 31, 2019 |
| Realogy Franchise Group (a) | $ | 78 | | | $ | 118 | | | $ | (127) | | | $ | 69 | |
| Realogy Brokerage Group | 14 | | | 8 | | | (9) | | | 13 | |
| Realogy Leads Group | — | | | 13 | | | (10) | | | 3 | |
| Total | $ | 92 | | | $ | 139 | | | $ | (146) | | | $ | 85 | |
_______________
(a)Revenues recognized include intercompany marketing fees paid by Realogy Brokerage Group.
The majority of the Company's contracts are transactional in nature or have a duration of one-year or less. Accordingly, the Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.
6. GOODWILL AND INTANGIBLE ASSETS
Goodwill by reporting unit and changes in the carrying amount are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Realogy Franchise Group | | Realogy Brokerage Group | | Realogy
Title
Group | | Realogy
Leads
Group | | Total Company |
| Balance at January 1, 2017 | $ | 2,292 | | | $ | 893 | | | $ | 145 | | | $ | 184 | | | $ | 3,514 | |
| Goodwill acquired (a) | — | | | 11 | | | 9 | | | — | | | 20 | |
| Balance at December 31, 2017 | 2,292 | | | 904 | | | 154 | | | 184 | | | 3,534 | |
| Goodwill acquired (b) | — | | | 2 | | | — | | | — | | | 2 | |
| Balance at December 31, 2018 | 2,292 | | | 906 | | | 154 | | | 184 | | | 3,536 | |
| Goodwill acquired (c) | — | | | — | | | 1 | | | — | | | 1 | |
| Impairment (d) | — | | | (237) | | | — | | | — | | | (237) | |
| Balance at December 31, 2019 | $ | 2,292 | | | $ | 669 | | | $ | 155 | | | $ | 184 | | | $ | 3,300 | |
| Goodwill and accumulated impairment summary | | | | | | | | | |
| Gross goodwill | $ | 3,315 | | | $ | 1,064 | | | $ | 479 | | | $ | 321 | | | $ | 5,179 | |
| Accumulated impairments (e) | (1,023) | | | (395) | | | (324) | | | (137) | | | (1,879) | |
| Balance at December 31, 2019 | $ | 2,292 | | | $ | 669 | | | $ | 155 | | | $ | 184 | | | $ | 3,300 | |
_______________
(a)Goodwill acquired during the year ended December 31, 2017 relates to the acquisition of 16 real estate brokerage operations and 2 title and settlement operations.
(b)Goodwill acquired during the year ended December 31, 2018 relates to the acquisition of 3 real estate brokerage operations.
(c)Goodwill acquired during the year ended December 31, 2019 relates to the acquisition of 2 title and settlement operations.
(d)The Company recognized a goodwill impairment charge of $237 million during the third quarter of 2019 related to Realogy Brokerage Group. The impairment charge of $237 million was offset by an income tax benefit of $57 million resulting in a net reduction in the carrying value of Realogy Brokerage Group of $180 million (see Note 20, "Selected Quarterly Financial Data", for additional information).
(e)Includes impairment charges which reduced goodwill by $237 million, $1,153 million and $489 million during the third quarter of 2019, fourth quarter of 2008 and fourth quarter of 2007, respectively.
Intangible assets are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2019 | | | | | | As of December 31, 2018 | | | | |
| | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Amount | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Amount |
| Amortizable—Franchise agreements (a) | $ | 2,019 | | | $ | 859 | | | $ | 1,160 | | | $ | 2,019 | | | $ | 792 | | | $ | 1,227 | |
| Indefinite life—Trademarks (b) | $ | 673 | | | | | $ | 673 | | | $ | 673 | | | | | $ | 673 | |
| Other Intangibles | | | | | | | | | | | |
| Amortizable—License agreements (c) | $ | 45 | | | $ | 12 | | | $ | 33 | | | $ | 45 | | | $ | 11 | | | $ | 34 | |
| Amortizable—Customer relationships (d) | 71 | | | 57 | | | 14 | | | 71 | | | 55 | | | 16 | |
| Indefinite life—Title plant shares (e) | 19 | | | | | 19 | | | 18 | | | | | 18 | |
| Amortizable—Other (f) | 27 | | | 21 | | | 6 | | | 33 | | | 21 | | | 12 | |
| Total Other Intangibles | $ | 162 | | | $ | 90 | | | $ | 72 | | | $ | 167 | | | $ | 87 | | | $ | 80 | |
_______________
(a)Generally amortized over a period of 30 years.
(b)Primarily related to real estate franchise brands which are expected to generate future cash flows for an indefinite period of time.
(c)Relates to the Sotheby’s International Realty® and Better Homes and Gardens® Real Estate agreements which are being amortized over 50 years (the contractual term of the license agreements).
(d)Relates to the customer relationships at Realogy Title Group and Realogy Brokerage Group. These relationships are being amortized over a period of 2 to 12 years.
(e)Ownership in a title plant is required to transact title insurance in certain states. The Company expects to generate future cash flows for an indefinite period of time.
(f)Consists of covenants not to compete which are amortized over their contract lives and other intangibles which are generally amortized over periods ranging from 5 to 10 years.
Intangible asset amortization expense is as follows:
| | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, | | | | |
| | 2019 | | 2018 | | 2017 |
| Franchise agreements | $ | 67 | | | $ | 67 | | | $ | 67 | |
| License agreements | 1 | | | 1 | | | 1 | |
| Customer relationships | 2 | | | 3 | | | 4 | |
| Other | 6 | | | 5 | | | 9 | |
| Total | $ | 76 | | | $ | 76 | | | $ | 81 | |
Based on the Company’s amortizable intangible assets as of December 31, 2019, the Company expects related amortization expense to be approximately $73 million, $71 million, $70 million, $70 million, $70 million and $859 million in 2020, 2021, 2022, 2023, 2024 and thereafter, respectively.
7. FRANCHISING AND MARKETING ACTIVITIES
Franchise fee revenue includes domestic initial franchise fees and international area development fees of $9 million, $6 million and $8 million for each of the years ended December 31, 2019, 2018 and 2017, respectively. The Company’s real estate franchisees may receive volume incentives on their royalty payments. Such annual incentives are based upon the amount of the franchisees commission income earned and paid to the Company during the calendar year. Each brand has several different annual incentive schedules currently in effect. Franchise fee revenue is recorded net of annual volume incentives provided to real estate franchisees of $50 million, $52 million and $62 million for the years ended December 31, 2019, 2018 and 2017, respectively.
The Company’s wholly-owned real estate brokerage services segment, Realogy Brokerage Group, pays royalties to the Company’s franchise business; however, such amounts are eliminated in consolidation. Realogy Brokerage Group paid royalties to Realogy Franchise Group of $282 million, $295 million and $299 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Marketing fees are generally paid by the Company’s real estate franchisees and are generally calculated based on a specified percentage of gross closed commissions earned on real estate transactions, and may be subject to certain minimum and maximum payments. Brand marketing fund revenue was $90 million, $86 million and $87 million for the years ended December 31, 2019, 2018 and 2017, respectively, which included marketing fees paid to Realogy Franchise Group from Realogy Brokerage Group of $11 million, $11 million and $12 million for the years ended December 31, 2019, 2018 and 2017, respectively. As provided for in the franchise agreements and generally at the Company’s discretion, all of these fees are to be expended for marketing purposes.
The number of franchised and company owned offices in operation are as follows:
| | | | | | | | | | | | | | | | | |
| | (Unaudited) As of December 31, | | | | |
| | 2019 | | 2018 | | 2017 |
| Franchised (domestic and international): | | | | | |
Century 21® | 11,640 | | | 9,637 | | | 7,973 | |
ERA® | 2,301 | | | 2,331 | | | 2,298 | |
Coldwell Banker® | 2,323 | | | 2,380 | | | 2,330 | |
Coldwell Banker Commercial® | 159 | | | 171 | | | 180 | |
Sotheby’s International Realty® | 962 | | | 949 | | | 905 | |
Better Homes and Gardens® Real Estate | 391 | | | 362 | | | 353 | |
| Total Franchised | 17,776 | | | 15,830 | | | 14,039 | |
| Company owned: | | | | | |
Coldwell Banker® | 634 | | | 672 | | | 707 | |
Sotheby’s International Realty® | 37 | | | 41 | | | 41 | |
Corcoran®/Other | 42 | | | 42 | | | 41 | |
| Total Company Owned | 713 | | | 755 | | | 789 | |
The number of franchised and company owned offices (in the aggregate) changed as follows:
| | | | | | | | | | | | | | | | | |
| | (Unaudited) For the Year Ended December 31, | | | | |
| | 2019 | | 2018 | | 2017 |
| Franchised (domestic and international): | | | | | |
| Beginning balance | 15,830 | | | 14,039 | | | 13,314 | |
| Additions | 2,399 | | | 2,149 | | | 1,137 | |
| Terminations | (453) | | | (358) | | | (412) | |
| Ending balance | 17,776 | | | 15,830 | | | 14,039 | |
| Company owned: | | | | | |
| Beginning balance | 755 | | | 789 | | | 789 | |
| Additions | 4 | | | 8 | | | 20 | |
| Closures | (46) | | | (42) | | | (20) | |
| Ending balance | 713 | | | 755 | | | 789 | |
As of December 31, 2019, there were an insignificant number of franchise agreements that were executed for which offices are not yet operating. Additionally, as of December 31, 2019, there were an insignificant number of franchise agreements pending termination.
In order to assist franchisees in converting to one of the Company’s brands or as an incentive to renew their franchise agreement, the Company may at its discretion, provide incentives, primarily in the form of conversion notes. Provided the franchisee meets certain minimum annual revenue thresholds during the term of the notes and is in compliance with the terms of the franchise agreement, the amount of the note is forgiven annually in equal ratable amounts generally over the life of the franchise agreement. Otherwise, related principal is due and payable to the Company. The amount of such franchisee conversion notes were $134 million and $131 million, at December 31, 2019 and 2018, respectively. These notes are principally classified within other non-current assets in the Company’s Consolidated Balance Sheets. The Company recorded a contra-revenue in the statement of operations related to the forgiveness and impairment of these notes and other sales incentives of $29 million, $29 million and $25 million for the years ended December 31, 2019, 2018 and 2017, respectively.
8. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of:
| | | | | | | | | | | |
| | December 31, | | |
| | 2019 | | 2018 |
| Furniture, fixtures and equipment | $ | 162 | | | $ | 176 | |
| Capitalized software | 334 | | | 293 | |
| Finance/capital lease assets | 76 | | | 64 | |
| Building and leasehold improvements | 292 | | | 275 | |
| Land | 3 | | | 3 | |
| Gross property and equipment | 867 | | | 811 | |
| Less: accumulated depreciation | (559) | | | (538) | |
| Property and equipment, net | $ | 308 | | | $ | 273 | |
The Company recorded depreciation expense related to property and equipment of $93 million, $88 million and $85 million for the years ended December 31, 2019, 2018 and 2017, respectively.
9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of:
| | | | | | | | | | | |
| | December 31, | | |
| | 2019 | | 2018 |
| Accrued payroll and related employee costs | $ | 103 | | | $ | 106 | |
| Accrued volume incentives | 35 | | | 37 | |
| Accrued commissions | 32 | | | 30 | |
| Restructuring accruals | 11 | | | 14 | |
| Deferred income | 43 | | | 50 | |
| Accrued interest | 18 | | | 15 | |
| Current portion of finance/capital lease liabilities | 13 | | | 12 | |
| Due to former parent | 18 | | | 21 | |
| Other | 77 | | | 59 | |
| Total accrued expenses and other current liabilities | $ | 350 | | | $ | 344 | |
10. SHORT AND LONG-TERM DEBT
Total indebtedness is as follows:
| | | | | | | | | | | |
| | December 31, | | |
| | 2019 | | 2018 |
| Senior Secured Credit Facility: | | | |
| Revolving Credit Facility | $ | 190 | | | $ | 270 | |
| Term Loan B | 1,045 | | | 1,053 | |
| Term Loan A Facility: | | | |
| Term Loan A | 714 | | | 732 | |
| 4.50% Senior Notes | — | | | 449 | |
| 5.25% Senior Notes | 548 | | | 547 | |
| 4.875% Senior Notes | 405 | | | 497 | |
| 9.375% Senior Notes | 543 | | | — | |
| Total Short-Term & Long-Term Debt | $ | 3,445 | | | $ | 3,548 | |
IndebtednessMaturities Table
As of December 31, 2019,2022, the Company’s borrowing arrangements werecombined aggregate amount of maturities for long-term borrowings for each of the next five years is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest
Rate | | Expiration
Date | | Principal Amount | | Unamortized Discount and Debt Issuance Costs | | Net Amount |
| Senior Secured Credit Facility: | | | | | | | | | |
Revolving Credit Facility (1) | (2) | | | February 2023 | | $ | 190 | | | $ * | | | $ | 190 | |
| Term Loan B | (3) | | | February 2025 | | 1,058 | | | 13 | | | 1,045 | |
| Term Loan A Facility: | | | | | | | | | |
| Term Loan A | (4) | | | February 2023 | | 717 | | | 3 | | | 714 | |
| Senior Notes | 5.25% | | | December 2021 | | 550 | | | 2 | | | 548 | |
| Senior Notes | 4.875% | | | June 2023 | | 407 | | | 2 | | | 405 | |
| Senior Notes | 9.375% | | | April 2027 | | 550 | | | 7 | | | 543 | |
| Total | | | | | $ | 3,472 | | | $ | 27 | | | $ | 3,445 | |
| | | | | | | | |
| Year | | Amount |
| 2023 (a) | | $ | 366 | |
| 2024 | | 22 | |
| 2025 | | 184 | |
| 2026 | | 403 | |
| 2027 | | — | |
_______________
*(a)The current portion of long-term debt issuance costs related to ourof $366 million shown on the Consolidated Balance Sheets consists of $350 million outstanding borrowings under the Revolving Credit Facility as of December 31, 2022 and four quarters of 2023 amortization payments totaling $16 million for the Extended Term Loan A. Outstanding borrowings under the Revolving Credit Facility are classified as a deferred financing asset within other assets.
(1)As of December 31, 2019, the $1,425 million Revolving Credit Facility had outstanding borrowings of $190 million, as well as $57 million of outstanding letters of credit. The Revolving Credit Facility expires in February 2023 but is classified on the balance sheet as current due to the revolving nature and terms and conditions of the facility. Onfacilities.
Senior Secured Credit Agreement and Term Loan A Agreement
The Company’s Amended and Restated Credit Agreement dated as of March 5, 2013 (as amended, amended and restated, modified or supplemented from time to time, the "Senior Secured Credit Agreement") governs its senior secured revolving credit facility (the "Revolving Credit Facility") and, until its repayment in full in September 2021, its term loan B facility (the "Term Loan B Facility", and collectively with the Revolving Credit Facility, the "Senior Secured Credit Facility") and the Company's Term Loan A Agreement dated as of October 23, 2015 (as amended, amended and restated, modified or supplemented from time to time, the "Term Loan A Agreement") governs its senior secured term loan A credit facility (the "Term Loan A Facility").
In July 2022, Anywhere Group entered into an amendment to the Senior Secured Credit Agreement that terminated the revolving credit commitments due February 21, 2020,2023, replaced LIBOR with a Term SOFR-based rate as the Company had $310 million in outstanding borrowings underapplicable benchmark for the Revolving Credit Facility, and $57extended the maturity of the Revolving Credit Facility to July 2027, subject to certain earlier springing maturity dates. The maturity date of the Revolving Credit Facility may spring forward to an earlier date as follows: (i) if on or before March 16, 2026, the 0.25% Exchangeable Senior Notes have not been extended, refinanced or replaced to have a maturity date after October 26, 2027 (or are not otherwise discharged, defeased or repaid by March 16, 2026), the maturity date of the Revolving Credit Facility will be March 16, 2026 and (ii) if on or before February 8, 2025, the "term A loans" under the Term Loan A Agreement have not been extended, refinanced or replaced to have a maturity date after October 26, 2027 (or are not otherwise repaid by February 8, 2025), the maturity date of the Revolving Credit Facility will be February 8, 2025.
Senior Secured Credit Facility
The Senior Secured Credit Facility includes a $1,100 million Revolving Credit Facility which includes a $150 million letter of outstanding letters of credit.credit sub-facility.
(2)Interest ratesThe interest rate with respect to revolving loans under the Senior SecuredRevolving Credit Facility at December 31, 2019 wereis based on, at the Company'sAnywhere Group's option, (a) adjusted London Interbank Offering Rate ("LIBOR") plus an additional margina term SOFR-based rate including a 10 basis point credit spread adjustment or (b) JP Morgan Chase Bank, N.A.'s prime rate ("ABR") plus (in each case) an additional margin subject to the following adjustments based on the Company’s then current senior secured leverage ratio:
| | | | | | | | | | | | | | |
| Senior Secured Leverage Ratio | | Applicable SOFR Margin | | Applicable ABR Margin |
| Greater than 3.50 to 1.00 | | 2.50% | | 1.50% |
| Less than or equal to 3.50 to 1.00 but greater than or equal to 2.50 to 1.00 | | 2.25% | | 1.25% |
| Less than 2.50 to 1.00 but greater than or equal to 2.00 to 1.00 | | 2.00% | | 1.00% |
| Less than 2.00 to 1.00 | | 1.75% | | 0.75% |
Based on the previous quarter's senior secured leverage ratio, the SOFR margin was 1.75% and the ABR margin was 0.75% for the three months ended December 31, 2022.
The obligations under the Senior Secured Credit Agreement are secured to the extent legally permissible by substantially all of the assets of Anywhere Group, Anywhere Intermediate and all of their domestic subsidiaries, other than certain excluded subsidiaries and subject to certain exceptions.
The Senior Secured Credit Agreement contains financial, affirmative and negative covenants as well as a financial covenant that Anywhere Group maintain (so long as commitments under the Revolving Credit Facility are outstanding) a maximum permitted senior secured leverage ratio, not to exceed 4.75 to 1.00. The leverage ratio is tested quarterly regardless of the amount of borrowings outstanding and letters of credit issued under the Revolving Credit Facility at the testing date. Total senior secured net debt does not include the Apple Ridge securitization obligations or our unsecured indebtedness, including the Unsecured Notes and the Exchangeable Senior Notes. At December 31, 2022, Anywhere Group was in compliance with the senior secured leverage ratio covenant.
Term Loan A Facility
The Term Loan A Facility includes the outstanding loans under the Term Loan A Facility (the "Extended Term Loan A") due February 2025. Until its repayment in full in September 2021, the Term Loan A Facility also included the Non-extended Term Loan A due February 2023. The Extended Term Loan A provides for quarterly amortization based on a percentage of the original principal amount of $237 million, which commenced on June 30, 2021, as follows: 0.625% per quarter from June 30, 2021 to March 31, 2022; 1.25% per quarter from June 30, 2022 to March 31, 2023; 1.875% per quarter from June 30, 2023 to March 31, 2024; and 2.50% per quarter for periods ending on or after June 30, 2024, with the balance of the Extended Term Loan A due at maturity on February 8, 2025.
The interest rate with respect to the Term Loan A Facility is based on, at Anywhere Group's option, adjusted LIBOR or ABR, plus (in each casecase) an additional margin subject to adjustment based on the Company’s then current senior secured leverage ratio. ratio:
| | | | | | | | | | | | | | |
| Senior Secured Leverage Ratio | | Applicable LIBOR Margin | | Applicable ABR Margin |
| Greater than 3.50 to 1.00 | | 2.50% | | 1.50% |
| Less than or equal to 3.50 to 1.00 but greater than or equal to 2.50 to 1.00 | | 2.25% | | 1.25% |
| Less than 2.50 to 1.00 but greater than or equal to 2.00 to 1.00 | | 2.00% | | 1.00% |
| Less than 2.00 to 1.00 | | 1.75% | | 0.75% |
Based on the previous quarter's senior secured leverage ratio, the LIBOR margin was 2.25%1.75% and the ABR margin was 1.25%0.75% for the three months ended December 31, 2019.2022.
(3)The Term Loan B provides for quarterly amortization payments totaling 1% per annum of the original principal amount. The interest rate with respect to term loans under the Term Loan B is based on, at the Company’s option, (a) adjusted LIBOR plus 2.25% (with a LIBOR floor of 0.75%) or (b) ABR plus 1.25% (with an ABR floor of 1.75%).
(4)The Term Loan A provides for quarterly amortization payments,Agreement contains covenants that are substantially similar to those in the Senior Secured Credit Agreement.
Repurchase and Redemption of 4.875% Senior Notes
During the second and third quarters of 2022, the Company used cash on hand to repurchase $67 million in principal amount of its 4.875% Senior Notes in open market purchases approximately at par value plus accrued interest to the repurchase date. In the fourth quarter of 2022, the Company redeemed all of its outstanding $340 million 4.875% Senior Notes utilizing borrowings under its Revolving Credit Facility, together with cash on hand. The 4.875% Senior Notes were paid at a redemption price of 100% plus the applicable "make whole" premium (as determined pursuant to the indenture governing the 4.875% Senior Notes), together with accrued interest to the redemption date. The 4.875% Senior Notes were scheduled to mature on June 1, 2023 and interest was payable semiannually on June 1 and December 1 of each year.
5.25% Senior Notes Issuance and Redemption of 9.375% Senior Notes and 7.625% Senior Secured Second Lien Notes
In the first quarter of 2022, the Company redeemed in full the outstanding 7.625% Senior Secured Second Lien Notes and 9.375% Senior Notes using net proceeds, together with cash on hand, from its issuance of 5.25% Senior Notes. The 7.625% Senior Secured Second Lien Notes and 9.375% Senior Notes were each paid at a redemption price of 100% plus the applicable "make whole" premium (as determined pursuant to the indenture governing the 7.625% Senior Secured Second Lien Notes or 9.375% Senior Notes, as applicable), together with accrued interest to the redemption date. The 7.625% Senior Secured Second Lien Notes were scheduled to mature on June 15, 2025 and interest was payable semiannually on
June 15 and December 15 of each year. The 9.375% Senior Notes were scheduled to mature on April 1, 2027 and interest was payable semi-annually on April 1 and October 1 of each year.
Unsecured Notes
The 5.75% Senior Notes and 5.25% Senior Notes (collectively the "Unsecured Notes") are unsecured senior obligations of Anywhere Group. The 5.75% Senior Notes mature on January 15, 2029 with interest on such notes payable each year semiannually on January 15 and July 15. The 5.25% Senior Notes mature on April 15, 2030 with interest on such notes payable each year semiannually on April 15 and October 15 which commenced April 15, 2022.
The Company may redeem all or a portion of the 5.75% Senior Notes or 5.25% Senior Notes, as applicable, at the redemption price set forth in the applicable indenture governing such notes, commencing on January 15, 2024 and April 15, 2025, respectively. Prior to those dates, the Company may redeem the applicable notes at its option, in whole or in part, at a redemption price equal to 100% of the principal amount of such notes redeemed plus a "make-whole" premium as set forth in the applicable indenture governing such notes. In addition, prior to the dates noted above, the Company may redeem up to 40% of the notes from the proceeds of certain equity offerings as set forth in the applicable indenture governing such notes.
The Unsecured Notes are guaranteed on an unsecured senior basis by each domestic subsidiary of Anywhere Group that is a guarantor under the Senior Secured Credit Facility, Term Loan A Facility and Anywhere Group's outstanding debt securities and are guaranteed by Anywhere Holdings on an unsecured senior subordinated basis.
The indentures governing the Unsecured Notes contain various negative covenants that limit Anywhere Group's and its restricted subsidiaries' ability to take certain actions, which covenants are subject to a number of important exceptions and qualifications. These covenants include limitations on Anywhere Group's and its restricted subsidiaries' ability to (a) incur or guarantee additional indebtedness, or issue disqualified stock or preferred stock, (b) pay dividends or make distributions to their stockholders, (c) repurchase or redeem capital stock, (d) make investments or acquisitions, (e) incur restrictions on the ability of certain of their subsidiaries to pay dividends or to make other payments to Anywhere Group, (f) enter into transactions with affiliates, (g) create liens, (h) merge or consolidate with other companies or transfer all or substantially all of their assets, (i) transfer or sell assets, including capital stock of subsidiaries and (j) prepay, redeem or repurchase debt that is subordinated in right of payment to the Unsecured Notes.
In particular, under the Unsecured Notes:
•the cumulative credit basket is not available to repurchase shares to the extent the consolidated leverage ratio is equal to or greater than 4.0 to 1.0 on a pro forma basis giving effect to such repurchase;
•the consolidated leverage ratio must be less than 3.0 to 1.0 to use the unlimited general restricted payment basket; and
•a restricted payment basket is available for up to $45 million of dividends per calendar year (with any actual dividends deducted from the available cumulative credit basket).
The consolidated leverage ratio is measured by dividing Anywhere Group's total net debt (excluding securitizations) by the trailing twelve-month EBITDA. EBITDA, as defined in the applicable indentures governing the Unsecured Notes, is substantially similar to EBITDA calculated on a Pro Forma Basis, as those terms are defined in the Senior Secured Credit Agreement. Net debt under the indenture governing the Unsecured Notes is Anywhere Group's total indebtedness (excluding securitizations) less (i) its cash and cash equivalents in excess of restricted cash and (ii) a $200 million seasonality adjustment permitted when measuring the ratio on a date during the period of March 1 to May 31.
Exchangeable Senior Notes
In June 2021, Anywhere Group issued an aggregate principal amount of $403 million of 0.25% Exchangeable Senior Notes due 2026. The Company used a portion of the net proceeds from this offering to pay the cost of the exchangeable note hedge transactions described below (with such cost partially offset by the proceeds to the Company from the sale of the warrants pursuant to the warrant transactions described below).
The Exchangeable Senior Notes are unsecured senior obligations of Anywhere Group that mature on June 30, 2018, totaling per annum 2.5%, 2.5%, 5.0%, 7.5%15, 2026. Interest on the Exchangeable Senior Notes is payable each year semiannually on June 15 and 10.0%December 15.
The Exchangeable Senior Notes are guaranteed on an unsecured senior basis by each domestic subsidiary of Anywhere Group that is a guarantor under the Senior Secured Credit Facility, Term Loan A Facility and Anywhere Group's outstanding debt securities and are guaranteed by Anywhere on an unsecured senior subordinated basis.
Before March 15, 2026, noteholders will have the right to exchange their Exchangeable Senior Notes upon the occurrence of certain events described in the indenture governing the notes. On or after March 15, 2026, noteholders may exchange their Exchangeable Senior Notes at any time at their election until the close of business on the second scheduled trading day immediately before the maturity date of the originalnotes.
Upon exchange, Anywhere Group will pay cash up to the aggregate principal amount of the Term Loan A, withExchangeable Senior Notes to be exchanged and pay or deliver, as the balancecase may be, cash, shares of the Term Loan A dueCompany’s common stock or a combination of cash and shares of the Company’s common stock, at Anywhere Group's election, in respect of the remainder, if any, of its exchange obligation in excess of the aggregate principal amount of the Exchangeable Senior Notes being exchanged.
The initial exchange rate for Exchangeable Senior Notes is 40.8397 shares of the Company’s common stock per $1,000 principal amount of notes (which represents an initial exchange price of approximately $24.49 per share of the Company’s common stock). The exchange rate and exchange price of the Exchangeable Senior Notes are subject to customary adjustments upon the occurrence of certain events. In addition, if a “Make-Whole Fundamental Change” (as defined in the indenture governing the Exchangeable Senior Notes) occurs, then the exchange rate of the Exchangeable Senior Notes will, in certain circumstances, be increased for a specified period of time. Initially, a maximum of approximately 23,013,139 shares of the Company’s common stock may be issued upon the exchange of the Exchangeable Senior Notes, based on the initial maximum exchange rate of 57.1755 shares of the Company’s common stock per $1,000 principal amount of notes, which is subject to customary anti-dilution adjustment provisions.
The Exchangeable Senior Notes will be redeemable, in whole or in part (subject to a partial redemption limitation described in the indenture governing the notes), at Anywhere Group's option at any time, and from time to time, on or after June 20, 2024 and on or before the 30th scheduled trading day immediately before the maturity date, at a cash redemption price equal to the principal amount of the Exchangeable Senior Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, but only if the last reported sale price per share of the Company’s common stock exceeds 130% of the exchange price on February 8, 2023.(1) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date it sends the related redemption notice; and (2) the trading day immediately before the date it sends such notice. In addition, calling any Exchangeable Senior Notes for redemption will constitute a Make-Whole Fundamental Change with respect to that note, in which case the exchange rate applicable to the exchange of that note will be increased in certain circumstances if it is exchanged with an exchange date occurring during the period from, and including, the date Anywhere Group sends the redemption notice to, and including, the second business day immediately before the related redemption date.
If certain corporate events that constitute a "Fundamental Change" (as defined in the indenture governing the Exchangeable Senior Notes) of the Company occur, then noteholders may require Anywhere Group to repurchase their Exchangeable Senior Notes at a cash repurchase price equal to the principal amount of the notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date. The interest ratesdefinition of Fundamental Change includes, among other things, certain business combination transactions involving the Company and certain de-listing events with respect to the Term Loan A are basedCompany’s common stock.
The indenture governing the Exchangeable Senior Notes also provides for events of default which, if any of them occurs, would permit or require the principal of and accrued interest on the Exchangeable Senior Notes to become or to be declared due and payable.
Under the accounting standards applicable at the Company's option, (a) adjusted LIBOR plus an additional margin or (b) ABR plus an additional margin,time of issuance, exchangeable debt instruments that may be settled in each case subjectcash were required to adjustmentbe separated into liability and equity components. The allocation to the liability component was based on the then current senior secured leverage ratio.fair value of a similar instrument that does not contain an equity conversion option. Based on this debt-to-equity ratio, debt issuance costs are then allocated to the previous quarter's senior secured leverage ratio,liability and equity components in a similar manner. Accordingly, at issuance on June 2, 2021, the LIBOR margin was 2.25%Company allocated $319 million to the debt liability and $53 million to additional paid in capital. The difference between the principal amount of the Exchangeable Senior Notes and the ABR marginliability component, inclusive of issuance costs, represented the debt discount, which the Company amortized to interest expense over the term of the Exchangeable Senior Notes using an effective interest rate of 4.375%. As a result, the Company recognized non-cash interest expense of $8 million related to the Exchangeable Senior Notes during 2021.
Upon the adoption of ASU 2020-06 on January 1, 2022, the Company was 1.25%required to account for its Exchangeable Senior Notes as a single liability resulting in the recombination of the debt liability and equity components. As a result, the Company derecognized the unamortized debt discount and related equity component associated with its Exchangeable Senior Notes resulting in an increase to Long-term debt of $65 million, a reduction to Additional paid-in capital of
$53 million, net of taxes, and a reduction to Deferred tax liabilities of $17 million. The Company recorded a cumulative effect of adoption adjustment of $5 million, net of taxes, as a reduction to Accumulated deficit on January 1, 2022 related to the reversal of cumulative interest expense recognized for the three months ended December 31, 2019.amortization of the debt discount on its Exchangeable Senior Notes since issuance. See Note 2, "Summary of Significant Accounting Policies—Recently Adopted Accounting Pronouncements," for additional information.
Exchangeable Note Hedge and Warrant Transactions
In connection with the pricing of the Exchangeable Senior Notes (and with the exercise by the initial purchasers of the notes to purchase additional notes), Anywhere Group entered into exchangeable note hedge transactions with certain counterparties (the "Option Counterparties"). The exchangeable note hedge transactions cover, subject to anti-dilution adjustments substantially similar to those applicable to the Exchangeable Senior Notes, the number of shares of the Company’s common stock underlying the Notes. The total cost of such exchangeable note hedge transactions was $67 million.
Concurrently with Anywhere Group entering into the exchangeable note hedge transactions, the Company entered into warrant transactions with the Option Counterparties whereby the Company sold to the Option Counterparties warrants to purchase, subject to customary adjustments, up to the same number of shares of the Company’s common stock. The initial strike price of the warrant transactions is $30.6075 per share. The Company received $46 million in cash proceeds from the sale of these warrant transactions.
Taken together, the purchase of such exchangeable note hedges and the sale of such warrants are intended to offset (in whole or in part) any potential dilution and/or cash payments upon the exchange of the Exchangeable Senior Notes, and to effectively increase the overall exchange price from $24.49 to $30.6075 per share.
At issuance, the Company recorded a deferred tax liability of $20 million related to the Exchangeable Senior Notes debt discount and a deferred tax asset of $18 million related to the exchangeable note hedge transactions. The deferred tax liability and deferred tax asset were recorded net within deferred income taxes in the Consolidated Balance Sheets upon issuance. The deferred tax liability related to the Exchangeable Senior Notes debt discount was reversed on January 1, 2022 upon the adoption of ASU 2020-06 as discussed above.
Maturities Table
As of December 31, 2019,2022, the combined aggregate amount of maturities for long-term borrowings for each of the next five years is as follows:
| | | | | | | | |
| Year | | Amount | |
| 2020 (a) | | $ | 234 | |
| 2021 | | 612 | |
| 2022 | | 81 | |
| 2023 | | 981 | |
| 2024 | | 11 | |
| | | | | | | | |
| Year | | Amount |
| 2023 (a) | | $ | 366 | |
| 2024 | | 22 | |
| 2025 | | 184 | |
| 2026 | | 403 | |
| 2027 | | — | |
_______________
(a)The current portion of long termlong-term debt of $366 million shown on the Consolidated Balance Sheets consists of four quarters of 2020 amortization payments totaling $33$350 million and $11 million for the Term Loan A and Term Loan B facilities, respectively, as well as $190 million of revolveroutstanding borrowings under the Revolving Credit Facility which expires in Februaryas of December 31, 2022 and four quarters of 2023 but isamortization payments totaling $16 million for the Extended Term Loan A. Outstanding borrowings under the Revolving Credit Facility are classified on the balance sheet as current due to the revolving nature and terms and conditions of the facility.facilities.
Senior Secured Credit Agreement and Term Loan A Agreement
The Company’s Amended and Restated Credit Agreement dated as of March 5, 2013 (as amended, amended and restated, modified or supplemented from time to time, the "Senior Secured Credit Agreement") governs its senior secured revolving credit facility (the "Revolving Credit Facility") and, until its repayment in full in September 2021, its term loan B facility (the "Term Loan B Facility", and collectively with the Revolving Credit Facility, the "Senior Secured Credit Facility") and the Company's Term Loan A Agreement dated as of October 23, 2015 (as amended, amended and restated, modified or supplemented from time to time, the "Term Loan A Agreement") governs its senior secured term loan A credit facility (the "Term Loan A Facility").
In July 2022, Anywhere Group entered into an amendment to the Senior Secured Credit Agreement that terminated the revolving credit commitments due February 2023, replaced LIBOR with a Term SOFR-based rate as the applicable benchmark for the Revolving Credit Facility, and extended the maturity of the Revolving Credit Facility to July 2027, subject to certain earlier springing maturity dates. The maturity date of the Revolving Credit Facility may spring forward to an earlier date as follows: (i) if on or before March 16, 2026, the 0.25% Exchangeable Senior Notes have not been extended, refinanced or replaced to have a maturity date after October 26, 2027 (or are not otherwise discharged, defeased or repaid by March 16, 2026), the maturity date of the Revolving Credit Facility will be March 16, 2026 and (ii) if on or before February 8, 2025, the "term A loans" under the Term Loan A Agreement have not been extended, refinanced or replaced to have a maturity date after October 26, 2027 (or are not otherwise repaid by February 8, 2025), the maturity date of the Revolving Credit Facility will be February 8, 2025.
Senior Secured Credit Facility
The Senior Secured Credit Facility includes a $1,100 million Revolving Credit Facility which includes a $150 million letter of credit sub-facility.
The interest rate with respect to revolving loans under the Revolving Credit Facility is based on, at Anywhere Group's option, a term SOFR-based rate including a 10 basis point credit spread adjustment or JP Morgan Chase Bank, N.A.'s prime rate ("ABR") plus (in each case) an additional margin subject to the following adjustments based on the Company’s then current senior secured leverage ratio:
| | | | | | | | | | | | | | |
| Senior Secured Leverage Ratio | | Applicable SOFR Margin | | Applicable ABR Margin |
| Greater than 3.50 to 1.00 | | 2.50% | | 1.50% |
| Less than or equal to 3.50 to 1.00 but greater than or equal to 2.50 to 1.00 | | 2.25% | | 1.25% |
| Less than 2.50 to 1.00 but greater than or equal to 2.00 to 1.00 | | 2.00% | | 1.00% |
| Less than 2.00 to 1.00 | | 1.75% | | 0.75% |
Based on the previous quarter's senior secured leverage ratio, the SOFR margin was 1.75% and the ABR margin was 0.75% for the three months ended December 31, 2022.
Senior Secured Credit Facility
In February 2018, Realogy Group entered into a fifth amendment (the "Fifth Amendment") to the Amended and Restated Senior Secured Credit Agreement (as amended, amended and restated, modified or supplemented from time to time, the "Senior Secured Credit Agreement") that replaced the Term Loan B due July 2022 with a new $1,080 million Term Loan B due February 2025.
In February 2018, Realogy Group entered into the sixth amendment (the "Sixth Amendment") to the Amended and Restated Senior Secured Credit Agreement which increased the borrowing capacity under its Revolving Credit Facility to $1,400 million from the prior $1,050 million and extended the maturity date to February 2023. In March 2019, Realogy Group entered into an incremental assumption agreement to the Senior Secured Credit Agreement that provided for an incremental revolving facility commitment of $25 million, increasing the borrowing capacity under the Revolving Credit Facility to $1,425 million.
The Senior Secured Credit Agreement provides for:
(a)
the Term Loan B issued in the original aggregate principal amount of $1,080 million with a maturity date of February 2025. The Term Loan B has quarterly amortization payments totaling 1% per annum of the initial aggregate principal amount. The interest rate with respect to term loans under the Term Loan B is based on, at Realogy Group's option, adjusted LIBOR plus 2.25% (with a LIBOR floor of 0.75%) or ABR plus 1.25% (with an ABR floor of 1.75%); and
(b)a $1,425 million Revolving Credit Facility with a maturity date of February 2023, which includes a $125 million letter of credit subfacility. The interest rate with respect to revolving loans under the Revolving Credit Facility is based on, at Realogy Group's option, adjusted LIBOR or ABR plus an additional margin subject to the following adjustments based on the Company’s then current senior secured leverage ratio:
| | | | | | | | | | | | | | |
| Senior Secured Leverage Ratio | | Applicable LIBOR Margin | | Applicable ABR Margin |
| Greater than 3.50 to 1.00 | | 2.50% | | | 1.50% | |
| Less than or equal to 3.50 to 1.00 but greater than or equal to 2.50 to 1.00 | | 2.25% | | | 1.25% | |
| Less than 2.50 to 1.00 but greater than or equal to 2.00 to 1.00 | | 2.00% | | | 1.00% | |
| Less than 2.00 to 1.00 | | 1.75% | | | 0.75% | |
The Senior Secured Credit Agreement permits the Company to obtain up to $500 million of additional credit facilities on a combined basis with the Term Loan A Agreement (less any amounts previously incurred under this provision) from lenders reasonably satisfactory to the administrative agent and us, without the consent of the existing lenders under the new senior secured credit facility, plus an unlimited amount if Realogy Group's senior secured leverage ratio is less than 3.50 to 1.00 on a pro forma basis. Subject to certain restrictions, the Senior Secured Credit Agreement also permits the Company to issue senior secured or unsecured notes in lieu of any incremental facility.
The obligations under the Senior Secured Credit Agreement are secured to the extent legally permissible by substantially all of the assets of RealogyAnywhere Group, RealogyAnywhere Intermediate and all of their domestic subsidiaries, other than certain excluded subsidiaries.subsidiaries and subject to certain exceptions.
Realogy Group’sThe Senior Secured Credit Agreement contains financial, affirmative and negative covenants and requires Realogyas well as a financial covenant that Anywhere Group to maintain (so long as commitments under the Revolving Credit Facility isare outstanding) a maximum permitted senior secured leverage ratio, not to exceed 4.75 to 1.00. The leverage ratio is tested quarterly regardless of the amount of borrowings outstanding and letters of credit issued under the Revolving Credit Facility at the testing date. Total senior secured net debt does not include the Apple Ridge securitization obligations or our unsecured indebtedness, including the Unsecured Notes and the Exchangeable Senior Notes. At December 31, 2019, Realogy2022, Anywhere Group was in compliance with the senior secured leverage ratio covenant.
Term Loan A Facility
In February 2018, Realogy Group entered into a second amendment toThe Term Loan A Facility includes the outstanding loans under the Term Loan A Agreement. UnderFacility (the "Extended Term Loan A") due February 2025. Until its repayment in full in September 2021, the amendment, the Company aggregated the existing $435 million Term Loan A and $355 million Term Loan A-1 tranches due October 2020 and July 2021, respectively, into a new single tranche of $750 millionFacility also included the Non-extended Term Loan A due February 2023. The Extended Term Loan A provides for quarterly amortization payments totaling per annum 2.5%, 2.5%, 5.0%, 7.5% and 10.0%based on a percentage of the original principal amount of the Term Loan A,$237 million, which commenced on June 30, 20182021, as follows: 0.625% per quarter from June 30, 2021 to March 31, 2022; 1.25% per quarter from June 30, 2022 to March 31, 2023; 1.875% per quarter from June 30, 2023 to March 31, 2024; and continue through2.50% per quarter for periods ending on or after June 30, 2024, with the balance of the Extended Term Loan A due at maturity on February 8, 2025.
The interest rate with respect to the Term Loan A Facility is based on, at Anywhere Group's option, adjusted LIBOR or ABR, plus (in each case) an additional margin subject to adjustment based on the Company’s then current senior secured leverage ratio:
| | | | | | | | | | | | | | |
| Senior Secured Leverage Ratio | | Applicable LIBOR Margin | | Applicable ABR Margin |
| Greater than 3.50 to 1.00 | | 2.50% | | 1.50% |
| Less than or equal to 3.50 to 1.00 but greater than or equal to 2.50 to 1.00 | | 2.25% | | 1.25% |
| Less than 2.50 to 1.00 but greater than or equal to 2.00 to 1.00 | | 2.00% | | 1.00% |
| Less than 2.00 to 1.00 | | 1.75% | | 0.75% |
Based on the previous quarter's senior secured leverage ratio, the LIBOR margin was 1.75% and the ABR margin was 0.75% for the three months ended December 31, 2022.
The Term Loan A Agreement contains covenants that are substantially similar to those in the Senior Secured Credit Agreement.
Repurchase and Redemption of 4.875% Senior Notes
During the second and third quarters of 2022, the Company used cash on hand to repurchase $67 million in principal amount of its 4.875% Senior Notes in open market purchases approximately at par value plus accrued interest to the repurchase date. In the fourth quarter of 2022, the Company redeemed all of its outstanding $340 million 4.875% Senior Notes utilizing borrowings under its Revolving Credit Facility, together with cash on hand. The 4.875% Senior Notes were paid at a redemption price of 100% plus the applicable "make whole" premium (as determined pursuant to the indenture governing the 4.875% Senior Notes), together with accrued interest to the redemption date. The 4.875% Senior Notes were scheduled to mature on June 1, 2023 and interest was payable semiannually on June 1 and December 1 of each year.
5.25% Senior Notes Issuance and Redemption of 9.375% Senior Notes and 7.625% Senior Secured Second Lien Notes
In the first quarter of 2022, the Company redeemed in full the outstanding 7.625% Senior Secured Second Lien Notes and 9.375% Senior Notes using net proceeds, together with cash on hand, from its issuance of 5.25% Senior Notes. The 7.625% Senior Secured Second Lien Notes and 9.375% Senior Notes were each paid at a redemption price of 100% plus the applicable "make whole" premium (as determined pursuant to the indenture governing the 7.625% Senior Secured Second Lien Notes or 9.375% Senior Notes, as applicable), together with accrued interest to the redemption date. The 7.625% Senior Secured Second Lien Notes were scheduled to mature on June 15, 2025 and interest was payable semiannually on
2023.June 15 and December 15 of each year. The 9.375% Senior Notes were scheduled to mature on April 1, 2027 and interest rates with respect to the Term Loan A are basedwas payable semi-annually on at our option, adjusted LIBOR or ABR plus an additional margin subject to the following adjustments based on the Company’s then current senior secured leverage ratio:
| | | | | | | | | | | | | | |
| Senior Secured Leverage Ratio | | Applicable LIBOR Margin | | Applicable ABR Margin |
| Greater than 3.50 to 1.00 | | 2.50% | | | 1.50% | |
| Less than or equal to 3.50 to 1.00 but greater than or equal to 2.50 to 1.00 | | 2.25% | | | 1.25% | |
| Less than 2.50 to 1.00 but greater than or equal to 2.00 to 1.00 | | 2.00% | | | 1.00% | |
| Less than 2.00 to 1.00 | | 1.75% | | | 0.75% | |
Consistent with the Senior Secured Credit Agreement, the Term Loan A Agreement permits the Company to obtain up to $500 millionApril 1 and October 1 of additional credit facilities on a combined basis with the Senior Secured Credit Agreement (less any amounts previously incurred under this provision) from lenders reasonably satisfactory to the administrative agent and the Company, without the consent of the existing lenders under the Term Loan A, plus an unlimited amount if the Company's senior secured leverage ratio is less than 3.50 to 1.00 on a pro forma basis. Subject to certain restrictions, the Term Loan A Facility also permits the Company to issue senior secured or unsecured notes in lieu of any incremental facility. The Term Loan A Agreement contains negative covenants consistent with those included in the Senior Secured Credit Agreement.each year.
Unsecured Notes
In February 2019, the Company used borrowings under its Revolving Credit Facility and cash on hand to fund the redemption of all of its outstanding $450 million 4.50% Senior Notes. In March 2019, the Company issued $550 million of 9.375% Senior Notes due in April 2027. The Company used $540 million of the net proceeds to repay a portion of outstanding borrowings under its Revolving Credit Facility.
During the third quarter of 2019, Realogy Group used cash on hand to repurchase $93 million of its 4.875% Senior Notes in open market purchases at an aggregate purchase price of $83 million, plus accrued interest to the repurchase date. In conjunction with the repurchase, the Company recorded a gain on the early extinguishment of debt of $10 million.
The 5.25% Senior Notes, 4.875%5.75% Senior Notes and the 9.375%5.25% Senior Notes (collectively the "Unsecured Notes") are unsecured senior obligations of Realogy Group thatAnywhere Group. The 5.75% Senior Notes mature on December 1, 2021, June 1, 2023 and April 1, 2027, respectively. InterestJanuary 15, 2029 with interest on the Unsecured Notes issuch notes payable each year semiannually on June 1January 15 and December 1 for both theJuly 15. The 5.25% Senior Notes mature on April 15, 2030 with interest on such notes payable each year semiannually on April 15 and 4.875%October 15 which commenced April 15, 2022.
The Company may redeem all or a portion of the 5.75% Senior Notes or 5.25% Senior Notes, as applicable, at the redemption price set forth in the applicable indenture governing such notes, commencing on January 15, 2024 and on April 1 and October 1 for15, 2025, respectively. Prior to those dates, the 9.375% Senior Notes.Company may redeem the applicable notes at its option, in whole or in part, at a redemption price equal to 100% of the principal amount of such notes redeemed plus a "make-whole" premium as set forth in the applicable indenture governing such notes. In addition, prior to the dates noted above, the Company may redeem up to 40% of the notes from the proceeds of certain equity offerings as set forth in the applicable indenture governing such notes.
The Unsecured Notes are guaranteed on an unsecured senior basis by each domestic subsidiary of RealogyAnywhere Group that is a guarantor under the Senior Secured Credit Facility, Term Loan A Facility and RealogyAnywhere Group's outstanding debt securities and are guaranteed by RealogyAnywhere Holdings on an unsecured senior subordinated basis.
The indentures governing the Unsecured Notes contain various negative covenants that limit RealogyAnywhere Group's and its restricted subsidiaries’subsidiaries' ability to take certain actions, which covenants are subject to a number of important exceptions and qualifications. These covenants include limitations on RealogyAnywhere Group's and its restricted subsidiaries’subsidiaries' ability to (a) incur or guarantee additional indebtedness, or issue disqualified stock or preferred stock, (b) pay dividends or make distributions to their stockholders, (c) repurchase or redeem capital stock, (d) make investments or acquisitions, (e) incur restrictions on the ability of certain of their subsidiaries to pay dividends or to make other payments to RealogyAnywhere Group, (f) enter into transactions with affiliates, (g) create liens, (h) merge or consolidate with other companies or transfer all or substantially all of their assets, (i) transfer or sell assets, including capital stock of subsidiaries and (j) prepay, redeem or repurchase debt that is subordinated in right of payment to the Unsecured Notes.
The covenants inIn particular, under the indenture governing the 9.375% Senior Notes are substantially similar to the covenants in the indentures governing the other Unsecured Notes, with certain exceptions, including several changes relating to Realogy Group’s ability to make restricted payments, and, in particular, its ability to repurchase shares and pay dividends. Specifically, (a) Notes:
•the cumulative credit basket for restricted payments (i) was resetis not available to 0 and builds from January 1, 2019, (ii) builds at 25% of Consolidated Net Income (as defined inrepurchase shares to the indenture governing the 9.375% Senior Notes) when the consolidated leverage ratio (as defined below) is equal to or greater than 4.0 to 1.0 (and 50% of Consolidated Net Income when it is less than 4.0 to 1.0) and, consistent with the indentures governing the other Unsecured Notes, is reduced by 100% of the deficit when Consolidated Net Income is a deficit and (iii) may not be used whenextent the consolidated leverage ratio is equal to or greater than 4.0 to 1.0; (b) the $100 million general restricted payment basket may be used only for Restricted Investments (as defined in the indenture governing the 9.375% Senior Notes); (c) the indenture governing the 9.375%
Senior Notes requires the consolidated leverage ratio tomust be less than 3.0 to 1.0 to use the unlimited general restricted payment basket (which payments will reduce the cumulative credit basket, but not below zero);basket; and (d) the indenture governing the 9.375% Senior Notes contains
•a new restricted payment basket that may be usedis available for up to $45 million of dividends per calendar year.year (with any actual dividends deducted from the available cumulative credit basket).
The consolidated leverage ratio is measured by dividing RealogyAnywhere Group's total net debt (excluding securitizations) by the trailing twelve-month EBITDA. EBITDA, as defined in the indentureapplicable indentures governing the 9.375% SeniorUnsecured Notes, is substantially similar to EBITDA calculated on a Pro Forma Basis, as those terms are defined in the Senior Secured Credit Agreement. Net debt under the indenture governing the Unsecured Notes is RealogyAnywhere Group's total indebtedness (excluding securitizations) less (i) its cash and cash equivalents in excess of restricted cash and (ii) a $200 million seasonality adjustment permitted when measuring the ratio on a date during the period of March 1 to May 31.
Other Debt FacilitiesExchangeable Senior Notes
In June 2021, Anywhere Group issued an aggregate principal amount of $403 million of 0.25% Exchangeable Senior Notes due 2026. The Company used a portion of the net proceeds from this offering to pay the cost of the exchangeable note hedge transactions described below (with such cost partially offset by the proceeds to the Company from the sale of the warrants pursuant to the warrant transactions described below).
The Company hadExchangeable Senior Notes are unsecured senior obligations of Anywhere Group that mature on June 15, 2026. Interest on the Exchangeable Senior Notes is payable each year semiannually on June 15 and December 15.
The Exchangeable Senior Notes are guaranteed on an Unsecured Letterunsecured senior basis by each domestic subsidiary of Anywhere Group that is a guarantor under the Senior Secured Credit Facility, Term Loan A Facility and Anywhere Group's outstanding debt securities and are guaranteed by Anywhere on an unsecured senior subordinated basis.
Before March 15, 2026, noteholders will have the right to provideexchange their Exchangeable Senior Notes upon the occurrence of certain events described in the indenture governing the notes. On or after March 15, 2026, noteholders may exchange their Exchangeable Senior Notes at any time at their election until the close of business on the second scheduled trading day immediately before the maturity date of the notes.
Upon exchange, Anywhere Group will pay cash up to the aggregate principal amount of the Exchangeable Senior Notes to be exchanged and pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at Anywhere Group's election, in respect of the remainder, if any, of its exchange obligation in excess of the aggregate principal amount of the Exchangeable Senior Notes being exchanged.
The initial exchange rate for Exchangeable Senior Notes is 40.8397 shares of the Company’s common stock per $1,000 principal amount of notes (which represents an initial exchange price of approximately $24.49 per share of the Company’s common stock). The exchange rate and exchange price of the Exchangeable Senior Notes are subject to customary adjustments upon the occurrence of certain events. In addition, if a “Make-Whole Fundamental Change” (as defined in the indenture governing the Exchangeable Senior Notes) occurs, then the exchange rate of the Exchangeable Senior Notes will, in certain circumstances, be increased for a specified period of time. Initially, a maximum of approximately 23,013,139 shares of the Company’s common stock may be issued upon the exchange of the Exchangeable Senior Notes, based on the initial maximum exchange rate of 57.1755 shares of the Company’s common stock per $1,000 principal amount of notes, which is subject to customary anti-dilution adjustment provisions.
The Exchangeable Senior Notes will be redeemable, in whole or in part (subject to a partial redemption limitation described in the indenture governing the notes), at Anywhere Group's option at any time, and from time to time, on or after June 20, 2024 and on or before the 30th scheduled trading day immediately before the maturity date, at a cash redemption price equal to the principal amount of the Exchangeable Senior Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date, but only if the last reported sale price per share of the Company’s common stock exceeds 130% of the exchange price on (1) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date it sends the related redemption notice; and (2) the trading day immediately before the date it sends such notice. In addition, calling any Exchangeable Senior Notes for redemption will constitute a Make-Whole Fundamental Change with respect to that note, in which case the exchange rate applicable to the exchange of that note will be increased in certain circumstances if it is exchanged with an exchange date occurring during the period from, and including, the date Anywhere Group sends the redemption notice to, and including, the second business day immediately before the related redemption date.
If certain corporate events that constitute a "Fundamental Change" (as defined in the indenture governing the Exchangeable Senior Notes) of the Company occur, then noteholders may require Anywhere Group to repurchase their Exchangeable Senior Notes at a cash repurchase price equal to the principal amount of the notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date. The definition of Fundamental Change includes, among other things, certain business combination transactions involving the Company and certain de-listing events with respect to the Company’s common stock.
The indenture governing the Exchangeable Senior Notes also provides for events of default which, if any of them occurs, would permit or require the principal of and accrued interest on the Exchangeable Senior Notes to become or to be declared due and payable.
Under the accounting standards applicable at the time of issuance, exchangeable debt instruments that may be settled in cash were required to be separated into liability and equity components. The allocation to the liability component was based on the fair value of a similar instrument that does not contain an equity conversion option. Based on this debt-to-equity ratio, debt issuance costs are then allocated to the liability and equity components in a similar manner. Accordingly, at issuance on June 2, 2021, the Company allocated $319 million to the debt liability and $53 million to additional paid in capital. The difference between the principal amount of the Exchangeable Senior Notes and the liability component, inclusive of issuance costs, represented the debt discount, which the Company amortized to interest expense over the term of the Exchangeable Senior Notes using an effective interest rate of 4.375%. As a result, the Company recognized non-cash interest expense of $8 million related to the Exchangeable Senior Notes during 2021.
Upon the adoption of ASU 2020-06 on January 1, 2022, the Company was required to account for its Exchangeable Senior Notes as a single liability resulting in the recombination of the debt liability and equity components. As a result, the Company derecognized the unamortized debt discount and related equity component associated with its Exchangeable Senior Notes resulting in an increase to Long-term debt of $65 million, a reduction to Additional paid-in capital of
$53 million, net of taxes, and a reduction to Deferred tax liabilities of $17 million. The Company recorded a cumulative effect of adoption adjustment of $5 million, net of taxes, as a reduction to Accumulated deficit on January 1, 2022 related to the reversal of cumulative interest expense recognized for the amortization of the debt discount on its Exchangeable Senior Notes since issuance. See Note 2, "Summary of Significant Accounting Policies—Recently Adopted Accounting Pronouncements," for additional information.
Exchangeable Note Hedge and Warrant Transactions
In connection with the pricing of the Exchangeable Senior Notes (and with the exercise by the initial purchasers of the notes to purchase additional notes), Anywhere Group entered into exchangeable note hedge transactions with certain counterparties (the "Option Counterparties"). The exchangeable note hedge transactions cover, subject to anti-dilution adjustments substantially similar to those applicable to the Exchangeable Senior Notes, the number of shares of the Company’s common stock underlying the Notes. The total cost of such exchangeable note hedge transactions was $67 million.
Concurrently with Anywhere Group entering into the exchangeable note hedge transactions, the Company entered into warrant transactions with the Option Counterparties whereby the Company sold to the Option Counterparties warrants to purchase, subject to customary adjustments, up to the same number of shares of the Company’s common stock. The initial strike price of the warrant transactions is $30.6075 per share. The Company received $46 million in cash proceeds from the sale of these warrant transactions.
Taken together, the purchase of such exchangeable note hedges and the sale of such warrants are intended to offset (in whole or in part) any potential dilution and/or cash payments upon the exchange of the Exchangeable Senior Notes, and to effectively increase the overall exchange price from $24.49 to $30.6075 per share.
At issuance, the Company recorded a deferred tax liability of letters$20 million related to the Exchangeable Senior Notes debt discount and a deferred tax asset of credit required for general corporate purposes. At December 31, 2018,$18 million related to the capacityexchangeable note hedge transactions. The deferred tax liability and deferred tax asset were recorded net within deferred income taxes in the Consolidated Balance Sheets upon issuance. The deferred tax liability related to the Exchangeable Senior Notes debt discount was $66 million, with $63 million being utilized. The Facility expiredreversed on January 1, 2022 upon the adoption of ASU 2020-06 as discussed above.
Securitization Obligations
Anywhere Group has secured obligations through Apple Ridge Funding LLC under a securitization program which expires in December 2019 and was not renewed. All outstanding letters of credit are currently under the Company's Revolving Credit Facility asJune 2023. As of December 31, 2019.2022, the Company had $200 million of borrowing capacity under the Apple Ridge Funding LLC securitization program with $163 million being utilized leaving $37 million of available capacity subject to maintaining sufficient relocation related assets to collateralize the securitization obligation.
Gain/Anywhere Group, through a special purpose entity known as Cartus Financing Limited, also had securitization agreements providing for a revolving loan facility and a working capital facility that expired on September 30, 2022.
The Apple Ridge entities are consolidated special purpose entities that are utilized to securitize relocation receivables and related assets. These assets are generated from advancing funds on behalf of clients of Anywhere Group’s relocation operations in order to facilitate the relocation of their employees. Assets of these special purpose entities are not available to pay Anywhere Group’s general obligations. Under the Apple Ridge program, provided no termination or amortization event has occurred, any new receivables generated under the designated relocation management agreements are sold into the securitization program and as new eligible relocation management agreements are entered into, the new agreements are designated to the program.
The Apple Ridge program has restrictive covenants and trigger events, the occurrence of which could restrict our ability to access new or existing funding under this facility or result in termination of the facility, either of which would adversely affect the operation of the Company's relocation services.
Certain of the funds that Anywhere Group receives from relocation receivables and related assets are required to be utilized to repay securitization obligations. These obligations are collateralized by $206 million and $132 million of underlying relocation receivables and other related relocation assets at December 31, 2022 and 2021, respectively. Substantially all relocation related assets are realized in less than twelve months from the transaction date. Accordingly, all of Anywhere Group's securitization obligations are classified as current in the accompanying Consolidated Balance Sheets.
Interest incurred in connection with borrowings under these facilities amounted to $7 million and $4 million for the years ended December 31, 2022 and 2021, respectively. This interest is recorded within net revenues in the accompanying Consolidated Statements of Operations as related borrowings are utilized to fund Anywhere Group's relocation operations where interest is generally earned on such assets. These securitization obligations represent floating rate debt for which the average weighted interest rate was 4.2% and 3.1% for the years ended December 31, 2022 and 2021, respectively.
Loss on the Early Extinguishment of Debt and Write-Off of Financing Costs
During the year ended December 31, 2019, the Company recorded a gain on the early extinguishment of debt of $5 million which consisted of a $10 million gain as a result of the repurchase of $93 million of its 4.875% Senior Notes during the third quarter of 2019, partially offset by a $5 million loss as a result of the refinancing transactions in the first quarter of 2019.
As a result of the refinancing transactions in February 2018,2022, the Company recorded a loss on the early extinguishment of debt of $7$96 million, as a result of the refinancing transactions during 2022, which includes $80 million related to the make-whole premiums paid in connection with the early redemption of the 7.625% Senior Secured Second Lien Notes and wrote off financing costs of $2 million to interest expense during the year ended December 31, 2018.9.375% Senior Notes.
As a result of the refinancing transactiontransactions in January 2017 and a reductionFebruary 2021, the pay down of $150 million of outstanding borrowings under the Term Loan B Facility in April 2021 and the pay downs of the Unsecured Letter of CreditNon-extended Term Loan A and the Term Loan B Facility in September of 2017,2021, the Company recorded losses on the early extinguishment of debt of $5$21 million and wrote off certain financing costs of $1 million to interest expense, during the year ended December 31, 2017.2021.
During the year ended December 31, 2020, the Company recorded a loss on the early extinguishment of debt of $8 million as a result of the refinancing transactions in June 2020.
10. FRANCHISING AND MARKETING ACTIVITIES
Domestic franchisee agreements generally require the franchisee to pay the Company an initial franchise fee for the franchisee's principal office plus a royalty fee that is a percentage of gross commission income, if any, earned by the franchisee. Franchisee fees can be structured in numerous ways. The Company utilizes multiple franchise fee models, including: (i) volume-based incentive (under which royalty fee rate is subject to reduction based on volume incentives); (ii) flat percentage royalty fee (under which the franchisee pays a fixed percentage of their commission income); (iii) capped fee (under which the franchisee pays a royalty fee capped at a set amount per independent sales agents per year); and (iv) tiered royalty fee (under which the franchisee pays a percentage of their gross commission income as a royalty fee). The volume incentives currently in effect vary for each eligible franchisee for which the Company provides a detailed table that describes the gross revenue thresholds required to achieve a volume incentive and the corresponding incentive amounts and are subject to change.
Domestic initial franchise fees and international area development fees were $4 million, $5 million and $7 million for each of the years ended December 31, 2022, 2021 and 2020, respectively. Franchise royalty revenue is recorded net of annual volume incentives provided to real estate franchisees of $61 million, $87 million and $63 million for the years ended December 31, 2022, 2021 and 2020, respectively.
The Company’s wholly-owned real estate brokerage services segment, Owned Brokerage Group, pays royalties to the Company’s franchise business; however, such amounts are eliminated in consolidation. Owned Brokerage Group paid royalties to Franchise Group of $358 million, $393 million and $306 million for the years ended December 31, 2022, 2021 and 2020, respectively.
Marketing fees are generally paid by the Company’s real estate franchisees and are generally calculated based on a specified percentage of gross closed commissions earned on real estate transactions, and may be subject to certain minimum and maximum payments. Brand marketing fund revenue was $89 million, $92 million and $69 million for the years ended December 31, 2022, 2021 and 2020, respectively, which included marketing fees paid to Franchise Group from Owned Brokerage Group of $15 million, $14 million and $10 million for the years ended December 31, 2022, 2021 and 2020, respectively. As provided for in the franchise agreements and generally at the Company’s discretion, all of these fees are to be expended for marketing purposes.
The number of franchised and company owned offices in operation are as follows:
| | | | | | | | | | | | | | | | | |
| | (Unaudited) As of December 31, |
| | 2022 | | 2021 | | 2020 |
| Franchised (domestic and international): | | | | | |
Century 21® | 13,611 | | | 14,246 | | | 13,222 | |
ERA® | 2,407 | | | 2,355 | | | 2,318 | |
Coldwell Banker® | 2,100 | | | 2,071 | | | 2,263 | |
Coldwell Banker Commercial® | 171 | | | 164 | | | 168 | |
Sotheby’s International Realty® | 1,035 | | | 986 | | | 952 | |
Better Homes and Gardens® Real Estate | 418 | | | 411 | | | 389 | |
Corcoran® | 82 | | | 122 | | | 74 | |
| Total Franchised | 19,824 | | | 20,355 | | | 19,386 | |
| Company owned: | | | | | |
Coldwell Banker® | 606 | | | 605 | | | 605 | |
Sotheby’s International Realty® | 44 | | | 41 | | | 39 | |
Corcoran® | 29 | | | 29 | | | 29 | |
| Total Company Owned | 679 | | | 675 | | | 673 | |
The number of franchised and company owned offices (in the aggregate) changed as follows:
| | | | | | | | | | | | | | | | | |
| | (Unaudited) For the Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Franchised (domestic and international): | | | | | |
| Beginning balance | 20,355 | | | 19,386 | | | 17,776 | |
| Additions | 548 | | | 1,583 | | | 2,109 | |
| Terminations | (1,079) | | | (614) | | | (499) | |
| Ending balance | 19,824 | | | 20,355 | | | 19,386 | |
| Company owned: | | | | | |
| Beginning balance | 675 | | | 673 | | | 713 | |
| Additions | 46 | | | 25 | | | 5 | |
| Closures | (42) | | | (23) | | | (45) | |
| Ending balance | 679 | | | 675 | | | 673 | |
As of December 31, 2022, there were an insignificant number of franchise agreements that were executed for which offices are not yet operating. Additionally, as of December 31, 2022, there were an insignificant number of franchise agreements pending termination.
In order to assist franchisees in converting to one of the Company’s brands or as an incentive to renew their franchise agreement, the Company may at its discretion, provide incentives, primarily in the form of conversion notes or other note-backed funding. Provided the franchisee meets certain minimum annual revenue thresholds during the term of the notes and is in compliance with the terms of the franchise agreement, the amount of the note is forgiven annually in equal ratable amounts generally over the life of the franchise agreement. If the revenue performance thresholds are not met or the franchise agreement terminates, franchisees may be required to repay a portion of the outstanding notes. The amount of such franchisee conversion notes or other note-backed funding was $182 million and $164 million at December 31, 2022 and 2021, respectively. These notes are principally classified within other non-current assets in the Company’s Consolidated Balance Sheets. The Company recorded a contra-revenue in the statement of operations related to the forgiveness and impairment of these notes and other sales incentives of $45 million for the year ended December 31, 2022 and $32 million for each of the years ended December 31, 2021 and 2020, respectively.
11. EMPLOYEE BENEFIT PLANS
DEFINED BENEFIT PENSION PLAN
The Company’s defined benefit pension plan was closed to new entrants as of July 1, 1997 and existing participants do not accrue any additional benefits. The net periodic pension costbenefit for 20192022 was $2 million and was comprised of interest cost of approximately $5 million and the amortization of the actuarial net loss of $2 million, offset by a benefit of $5 million for the expected return on assets. The net periodic pension cost for 2018 was less than $1 million and was comprised of interest cost of approximately $5$4 million and the amortization of the actuarial net loss of $2 million, offset by a benefit of $7 million for the expected return on assets. The net periodic pension cost for 2021 was zero and was comprised of interest cost of approximately $3 million and the amortization of the actuarial net loss of $3 million, offset by a benefit of $6 million for the expected return on assets.
At December 31, 20192022 and 2018,2021, the accumulated benefit obligation of this plan was $143$107 million and $128$137 million, respectively, and the fair value of the plan assets were $100$90 million and $90$116 million, respectively, resulting in an unfunded accumulated benefit obligation of $43$17 million and $38$21 million, respectively, which is recorded in Other current and non-current liabilities in the Consolidated Balance Sheets.
Estimated future benefit payments from the plan as of December 31, 20192022 are as follows:
| | | | | | | | |
| Year | | Amount |
| 2020 | | $ | 9 | |
| 2021 | | 9 | |
| 2022 | | 9 | |
| 2023 | | 9 | |
| 2024 | | 9 | |
| 2025 through 2029 | | 45 | |
| | | | | | | | |
| Year | | Amount |
| 2023 | | $ | 9 | |
| 2024 | | 9 | |
| 2025 | | 9 | |
| 2026 | | 9 | |
| 2027 | | 9 | |
| 2028 through 2032 | | 42 | |
The minimum funding required during 20202023 is estimated to be $8$1 million.
The following table presents the fair values of plan assets by category as of December 31, 2019:2022:
| | Asset Category | Asset Category | | Quoted Price in Active Market for Identical Assets
(Level I) | | Significant Other Observable Inputs
(Level II) | | Significant Unobservable Inputs
(Level III) | | Total | Asset Category | | Quoted Price in Active Market for Identical Assets
(Level I) | | Significant Other Observable Inputs
(Level II) | | Significant Unobservable Inputs
(Level III) | | Total |
| Cash and cash equivalents | Cash and cash equivalents | | $ | 1 | | | $ | — | | | $ | — | | | $ | 1 | | Cash and cash equivalents | | $ | 1 | | | $ | — | | | $ | — | | | $ | 1 | |
| Equity securities | Equity securities | | — | | | 51 | | | — | | | 51 | | Equity securities | | — | | | 50 | | | — | | | 50 | |
| Fixed income securities | Fixed income securities | | — | | | 48 | | | — | | | 48 | | Fixed income securities | | — | | | 39 | | | — | | | 39 | |
| Total | Total | | $ | 1 | | | $ | 99 | | | $ | — | | | $ | 100 | | Total | | $ | 1 | | | $ | 89 | | | $ | — | | | $ | 90 | |
The following table presents the fair values of plan assets by category as of December 31, 2018:2021:
| | Asset Category | Asset Category | | Quoted Price in Active Market for Identical Assets
(Level I) | | Significant Other Observable Inputs
(Level II) | | Significant Unobservable Inputs
(Level III) | | Total | Asset Category | | Quoted Price in Active Market for Identical Assets
(Level I) | | Significant Other Observable Inputs
(Level II) | | Significant Unobservable Inputs
(Level III) | | Total |
| Cash and cash equivalents | Cash and cash equivalents | | $ | 3 | | | $ | — | | | $ | — | | | $ | 3 | | Cash and cash equivalents | | $ | 3 | | | $ | — | | | $ | — | | | $ | 3 | |
| Equity securities | Equity securities | | — | | | 43 | | | — | | | 43 | | Equity securities | | — | | | 64 | | | — | | | 64 | |
| Fixed income securities | Fixed income securities | | — | | | 44 | | | — | | | 44 | | Fixed income securities | | — | | | 49 | | | — | | | 49 | |
| Total | Total | | $ | 3 | | | $ | 87 | | | $ | — | | | $ | 90 | | Total | | $ | 3 | | | $ | 113 | | | $ | — | | | $ | 116 | |
OTHER EMPLOYEE BENEFIT PLANS
The Company also maintains post-retirement health and welfare plans for certain subsidiaries and a non-qualified pension plan for certain individuals. At December 31, 2019 and 2018, theThe related projected benefit obligation for these plans accrued on the Company’s Consolidated Balance Sheets (primarily within other non-current liabilities) was $5$3 million for both periods.and $4 million at December 31, 2022 and 2021, respectively.
DEFINED CONTRIBUTION SAVINGS PLAN
The Company sponsors a defined contribution savings plan that provides certain of its eligible employees an opportunity to accumulate funds for retirement and has a Company match for a portion of the contributions made by participating employees. The Company’s cost for contributions to this plan was $17$22 million, $16$20 million and $16$10 million for the years ended December 31, 2019, 20182022, 2021 and 2017,2020, respectively.
12. INCOME TAXES
The components of pretax income for domestic and foreign operations consisted of the following:
| | | | Year Ended December 31, | | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 | | 2022 | | 2021 | | 2020 |
| Domestic | Domestic | $ | (140) | | | $ | 213 | | | $ | 362 | | Domestic | $ | (368) | | | $ | 486 | | | $ | (449) | |
| Foreign | Foreign | — | | | — | | | — | | Foreign | 17 | | | (3) | | | (11) | |
| Pretax (loss) income | Pretax (loss) income | $ | (140) | | | $ | 213 | | | $ | 362 | | Pretax (loss) income | $ | (351) | | | $ | 483 | | | $ | (460) | |
The components of income tax (benefit) expense (benefit) consisted of the following:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | |
| | 2019 | | 2018 | | 2017 |
| Current: | | | | | |
| Federal | $ | 3 | | | $ | (11) | | | $ | (8) | |
| State | 7 | | | 5 | | | 4 | |
| Foreign | 2 | | | 2 | | | 2 | |
| Total current | 12 | | | (4) | | | (2) | |
| Deferred: | | | | | |
| Federal | (25) | | | 61 | | | (73) | |
| State | (9) | | | 10 | | | 9 | |
| Foreign | — | | | — | | | — | |
| Total deferred | (34) | | | 71 | | | (64) | |
| Income tax (benefit) expense | $ | (22) | | | $ | 67 | | | $ | (66) | |
The Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”), which became law on December 22, 2017, reduced the U.S. Federal corporate tax rate from 35% to 21% for tax years beginning in 2018. The $66 million income tax benefit in 2017 included a tax benefit of approximately $184 million due to the re-measurement of the Company’s net deferred tax liabilities associated with the 2017 Tax Act and a $32 million reduction in the Company's reserve for uncertain tax positions, partially offset by current operating results. | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Current: | | | | | |
| Federal | $ | 24 | | | $ | 29 | | | $ | (5) | |
| State | — | | | 30 | | | 13 | |
| Foreign | 4 | | | 2 | | | 2 | |
| Total current | 28 | | | 61 | | | 10 | |
| Deferred: | | | | | |
| Federal | (78) | | | 70 | | | (66) | |
| State | (18) | | | 2 | | | (48) | |
| Foreign | — | | | — | | | — | |
| Total deferred | (96) | | | 72 | | | (114) | |
| Income tax (benefit) expense | $ | (68) | | | $ | 133 | | | $ | (104) | |
A reconciliation of the Company’s effective income tax rate at the U.S. federal statutory rate of 21% to the actual expense was as follows:
| | | | Year Ended December 31, | | | Year Ended December 31, |
| | | 2019 | | 2018 | | 2017 | | 2022 | | 2021 | | 2020 |
| Federal statutory rate | Federal statutory rate | 21 | % | | 21 | % | | 35 | % | Federal statutory rate | 21 | % | | 21 | % | | 21 | % |
| State and local income taxes, net of federal tax benefits | State and local income taxes, net of federal tax benefits | 6 | | | 5 | | | 4 | | State and local income taxes, net of federal tax benefits | 3 | | | 6 | | | 3 | |
| Impact of the 2017 Tax Act | — | | | — | | | (50) | | |
| Discontinued operations—establishment/reversal of deferred tax liability (a) | | Discontinued operations—establishment/reversal of deferred tax liability (a) | — | | | — | | | 10 | |
| Non-deductible equity compensation | Non-deductible equity compensation | (4) | | | 2 | | | — | | Non-deductible equity compensation | — | | | 1 | | | (2) | |
| Non-deductible executive compensation | Non-deductible executive compensation | (1) | | | 1 | | | — | | Non-deductible executive compensation | (1) | | | 1 | | | (1) | |
| Goodwill impairment | Goodwill impairment | (3) | | | — | | | — | | Goodwill impairment | (8) | | | — | | | (7) | |
| Meals & entertainment | (2) | | | — | | | — | | |
| | Uncertain tax positions | | Uncertain tax positions | (1) | | | — | | | — | |
| Tax credits (b) | | Tax credits (b) | 7 | | | — | | | — | |
| Net change in valuation allowance | | Net change in valuation allowance | — | | | — | | | (1) | |
| Other permanent differences | Other permanent differences | (1) | | | 1 | | | — | | Other permanent differences | (2) | | | (1) | | | — | |
| Uncertain tax positions | — | | | (1) | | | (9) | | |
| Net change in valuation allowance | — | | | 2 | | | 1 | | |
| Other | — | | | — | | | 1 | | |
| Effective tax rate | Effective tax rate | 16 | % | | 31 | % | | (18) | % | Effective tax rate | 19 | % | | 28 | % | | 23 | % |
_______________
(a)This item reflects the tax impact from the 2019 recognition of gain on the pending sale of Cartus (previously recorded in discontinued operations) and the 2020 de-recognition of that gain.
(b)This item includes a benefit related to the completion of a research tax credit study for tax years 2016 through 2022.
Deferred income taxes result from temporary differences between the amount of assets and liabilities recognized for financial reporting and tax purposes. The components of the deferred income tax assets and liabilities as of December 31, are as follows:
| | | | | | | | | | | | | December 31, |
| | 2019 | | 2018 | | 2022 | | 2021 |
| Deferred income tax assets: | Deferred income tax assets: | | | | Deferred income tax assets: | | | |
| Net operating loss carryforwards | Net operating loss carryforwards | $ | 173 | | | $ | 236 | | Net operating loss carryforwards | $ | 39 | | | $ | 45 | |
| Tax credit carryforwards | Tax credit carryforwards | 29 | | | 24 | | Tax credit carryforwards | 27 | | | 27 | |
| Accrued liabilities and deferred income | Accrued liabilities and deferred income | 77 | | | 92 | | Accrued liabilities and deferred income | 86 | | | 91 | |
| Interest expense limitation carryforward | | Interest expense limitation carryforward | 41 | | | — | |
| Operating leases | Operating leases | 169 | | | — | | Operating leases | 133 | | | 147 | |
| Minimum pension obligations | Minimum pension obligations | 18 | | | 16 | | Minimum pension obligations | 14 | | | 15 | |
| Provision for doubtful accounts | Provision for doubtful accounts | 7 | | | 7 | | Provision for doubtful accounts | 9 | | | 9 | |
| Liability for unrecognized tax benefits | Liability for unrecognized tax benefits | 1 | | | 1 | | Liability for unrecognized tax benefits | 1 | | | 1 | |
| Interest rate swaps | Interest rate swaps | 12 | | | 5 | | Interest rate swaps | — | | | 12 | |
| Other | | Other | 1 | | | 2 | |
| Total deferred tax assets | Total deferred tax assets | 486 | | | 381 | | Total deferred tax assets | 351 | | | 349 | |
| Less: valuation allowance | Less: valuation allowance | (14) | | | (14) | | Less: valuation allowance | (20) | | | (20) | |
| Total deferred income tax assets after valuation allowance | Total deferred income tax assets after valuation allowance | 472 | | | 367 | | Total deferred income tax assets after valuation allowance | 331 | | | 329 | |
| Deferred income tax liabilities: | Deferred income tax liabilities: | | Deferred income tax liabilities: | |
| Depreciation and amortization | Depreciation and amortization | 704 | | | 747 | | Depreciation and amortization | 433 | | | 546 | |
| Operating leases | Operating leases | 146 | | | — | | Operating leases | 111 | | | 119 | |
| Prepaid expenses | Prepaid expenses | 8 | | | 8 | | Prepaid expenses | 9 | | | 9 | |
| Basis difference in investment in joint ventures | Basis difference in investment in joint ventures | 2 | | | 1 | | Basis difference in investment in joint ventures | 17 | | | 7 | |
| Other | Other | 2 | | | — | | Other | — | | | 1 | |
| Total deferred tax liabilities | Total deferred tax liabilities | 862 | | | 756 | | Total deferred tax liabilities | 570 | | | 682 | |
| Net deferred income tax liabilities | Net deferred income tax liabilities | $ | (390) | | | $ | (389) | | Net deferred income tax liabilities | $ | (239) | | | $ | (353) | |
As of December 31, 2019,2022, the Company had gross federal andCompany’s deferred tax asset for net operating loss carryforwards is primarily related to certain state net operating loss carryforwards of $588 million. The federal net operating loss carryforwardswhich expire between 20302025 and 20332034. The Company’s deferred tax asset for tax credits carryforwards is primarily related to foreign tax credits and thecertain state net operating loss carryforwardsR&D credits which expire between 20202024 and 2033. The Company's interest expense limitation carryforward never expires.
Accounting for Uncertainty in Income Taxes
The Company utilizes the FASB guidance for accounting for uncertainty in income taxes, which prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. The Company reflects changes in its liability for unrecognized tax benefits as income tax expense in the Consolidated Statements of Operations. As of December 31, 2019,2022, the Company’s gross liability for unrecognized tax benefits was $20 million, of which $17$18 million would affect the Company’s effective tax rate, if recognized. The Company does not expect that its unrecognized tax benefits will significantly change over the next twelve months.
The Company files U.S., state and foreign income tax returns in jurisdictions with varying statutes of limitations. Tax returns for the 2006 through 20192022 tax years remain subject to examination by federal and certain state tax authorities. In significant foreign jurisdictions, tax returns for the 20152017 through 20192022 tax years generally remain subject to examination by their respective tax authorities. The Company believes that it is reasonably possible that the total amount of its unrecognized tax benefits could decrease by $1 million in certain taxing jurisdictions where the statute of limitations is set to expire within the next twelve months.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in interest expense and operating expenses, respectively. The Company did not recognize a change of interest expense for the year ended December 31, 2019. Additionally, the Company recognized a reductionan increase of interest expense of $1 million for the year ended December 31, 20182022 and a reductionno change of interest expense of $2 million for the yearyears ended December 31, 2017.2021 and 2020.
The rollforward of unrecognized tax benefits are summarized in the table below:
| | | | | |
Unrecognized tax benefits—January 1, 20172020 | $ | 7520 | |
Gross decreases—tax positions in prior periods | (54) | |
| Reduction due to lapse of statute of limitations | (1) | |
Unrecognized tax benefits—December 31, 20172020 | 2019 | |
| Settlements | (1) | |
| Reduction due to lapse of statute of limitations | (1) | |
Unrecognized tax benefits—December 31, 20182021 | 1917 | |
Gross increases—increases - tax positions in prior periods | 3 | |
| Gross decreases - tax positions in prior periods | (1) | |
| Gross increases - tax positions in current period | 1 | |
| |
| |
Unrecognized tax benefits—December 31, 20192022 | $ | 20 | |
The Company is subject to income taxes in the United States and several foreign jurisdictions. Significant judgment is required in determining the worldwide provision for income taxes and recording related assets and liabilities. In the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is uncertain. The Company is regularly under audit by tax authorities whereby the outcome of the audits is uncertain. The Company believes there is appropriate support for positions taken on its tax returns. The liabilities that have been recorded represent the best estimates of the probable loss on certain positions and are adequate for all open years based on an assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter. However, the outcomes of tax audits are inherently uncertain.
Tax Sharing Agreement
Under the Tax Sharing Agreement with Cendant, Wyndham Worldwide and Travelport, the Company is generally responsible for 62.5% of payments made to settle claims with respect to tax periods ending on or prior to December 31, 2006 that relate to income taxes imposed on Cendant and certain of its subsidiaries, the operations (or former operations) of which were determined by Cendant not to relate specifically to the respective businesses of Realogy,Anywhere, Wyndham Worldwide, Avis Budget or Travelport. With respect to any remaining residual legacy Cendant tax liabilities, the Company and its former parent believe there is appropriate support for the positions taken on Cendant’s tax returns. However, tax audits and any related litigation, including disputes or litigation on the allocation of tax liabilities between parties under the Tax Sharing Agreement, could result in outcomes for the Company that are different from those reflected in the Company’s historical financial statements.
13. RESTRUCTURING COSTS
Restructuring charges for the years ended December 31, 2019, 2018 and 2017 were $42 million, $47 million and $12 million, respectively. The components of the restructuring charges for the years ended December 31, 2019, 2018 and 2017 were as follows:
| | | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | | | |
| 2019 | | 2018 | | 2017 |
| Personnel-related costs (1) | $ | 24 | | | $ | 17 | | | $ | 7 | |
| Facility-related costs (2) | 17 | | | 20 | | | | 4 | |
| Internal use software impairment (3) | — | | | 10 | | | — | |
| Other restructuring costs (4) | 1 | | | — | | | 1 | |
| Total restructuring charges (5) | $ | 42 | | | $ | 47 | | | $ | 12 | |
_______________
(1)Personnel-related costs consist of severance costs provided to employees who have been terminated and duplicate payroll costs during transition.
(2)Facility-related costs consist of costs associated with planned facility closures such as contract termination costs, amortization of lease assets that will continue to be incurred under the contract for its remaining term without economic benefit to the Company, accelerated depreciation on asset disposals and other facility and employee relocation related costs.
(3)Internal use software impairment relates to development costs capitalized for a project that was determined to not meet the Company's strategic goals when analyzed by the Company's new leadership team.
(4)Other restructuring costs consist of costs related to professional fees, consulting fees and other costs associated with restructuring activities which are primarily included in the Corporate and Other business segment.
(5)The year ended December 31, 2019 includes $38 million of expense related to the Facility and Operational Efficiencies Program and $4 million of expense related to prior restructuring programs. The years ended December 31, 2018 and December 31, 2017 relate to prior restructuring programs.
Facility and Operational Efficiencies Program
Beginning in the first quarter of 2019, the Company commenced the implementation of a plan to accelerate its office consolidation to reduce storefront costs, as well as institute other operational efficiencies to drive profitability. In addition, the Company commenced a plan to transform and centralize certain aspects of the operational support and drive changes in how it serves its affiliated independent sales agents from a marketing and technology perspective to help such agents be more productive and enable them to make their businesses more profitable. In the fourth quarter of 2019, the Company expanded its operational efficiencies program to focus on workforce optimization. This workforce optimization initiative is focused on consolidating similar or overlapping roles, reducing the number of hierarchical layers and streamlining work and decision making. Separately, the Company also reduced headcount in the third quarter in connection with the wind down of a former affinity program. Furthermore, at the end of 2019 the Company identified other strategic initiatives which are expected to result in additional operational and facility related efficiencies in 2020.
The following is a reconciliation of the beginning and ending reserve balances related to the Facility and Operational Efficiencies Program:
| | | | | | | | | | | | | | | | | | | | | | | |
| Personnel-related costs | | | Facility-related costs (1) | | | Other restructuring costs | | Total |
| Balance at December 31, 2018 | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Restructuring charges | 21 | | | 16 | | | 1 | | | 38 | |
| Costs paid or otherwise settled | (15) | | | (11) | | | (1) | | | (27) | |
| Balance at December 31, 2019 | $ | 6 | | | $ | 5 | | | $ | — | | | $ | 11 | |
_______________
(1)In addition, the Company incurred an additional $12 million related to lease asset impairments in connection with the Facility and Operational Efficiencies Program during the year ended December 31, 2019.
The following table shows the total costs currently expected to be incurred by type of cost related to the Facility and Operational Efficiencies Program:
| | | | | | | | | | | | | | | | | |
| Total amount expected to be incurred | | Amount incurred
through
December 31, 2019 | | Total amount remaining to be incurred |
| Personnel-related costs | $ | 24 | | | $ | 21 | | | $ | 3 | |
| Facility-related costs (1) | 46 | | | 16 | | | 30 | |
| Other restructuring costs | 1 | | | 1 | | | — | |
| Total | $ | 71 | | | $ | 38 | | | $ | 33 | |
_______________
(1)Facility-related costs includes lease asset impairments expected to be incurred under the Facility and Operational Efficiencies Program.
The following table shows the total costs currently expected to be incurred by reportable segment related to the Facility and Operational Efficiencies Program:
| | | | | | | | | | | | | | | | | |
| Total amount expected to be incurred | | Amount incurred
through
December 31, 2019 | | Total amount remaining to be incurred |
| Realogy Franchise Group | $ | 3 | | | $ | 2 | | | $ | 1 | |
| Realogy Brokerage Group | 54 | | | 25 | | | 29 | |
| Realogy Title Group | 2 | | | 2 | | | — | |
| Realogy Leads Group | 2 | | | 2 | | | — | |
| Corporate and Other | 10 | | | 7 | | | 3 | |
| Total | $ | 71 | | | $ | 38 | | | $ | 33 | |
Leadership Realignment and Other Restructuring Activities
Beginning in the first quarter of 2018, the Company commenced the implementation of a plan to drive its business forward and enhance stockholder value. The key aspects of this plan included senior leadership realignment, an enhanced focus on technology and talent, as well as further attention to office footprint and other operational efficiencies. The activities undertaken in connection with the restructuring plan are complete. At December 31, 2018, the remaining liability was $17 million. During the year ended December 31, 2019, the Company incurred personnel-related costs of $3 million, paid or settled costs of $12 million and reclassified $3 million to offset related lease assets upon adoption of the new leasing standard, resulting in a remaining accrual of $5 million related to personnel and facility related liabilities.
14. STOCK-BASED COMPENSATION
The Company grants stock-based compensation awards to certain senior management members, employees and directors including non-qualified stock options, restricted stock units ("RSUs"), performance restricted stock units ("PRSUs") and performance share units ("PSUs").
The Company's stockholders approved the Amended and Restated 2018 Long-Term Incentive Plan (the "2018 Plan") at the 20182021 Annual Meeting of Stockholders held on May 2, 2018. Upon approval of the 2018 Plan, the 2012 Amended and Restated Long-Term Incentive Plan, as amended (the "2012 Plan") was terminated, no future awards were permitted to be granted under the 2012 Plan, and any shares available for future issuance under the 2012 Plan were canceled.5, 2021. Under the 2018 Plan, 6a total of 9 million shares were authorized for issuance plus any shares that expire or are forfeited under the 2012 Plan after March 1, 2018. Asand as of December 31, 2019,2022, there are approximately 0.63.4 million shares available for future grants.
EachThe form of the 2012 and 2018 Planequity award agreements includes a retirement provision for equity grants which provide for continued vesting of awards once an employee has attained the age of 65 years, or 55 years of age or older plus at least ten years of tenure with the Company, provided they have been employed or provided services to the Company for one year following the date of grant or start of the performance period.
A summary of activity for the year ended December 31, 2019 is presented below (number of shares in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Restricted Stock Units | | Weighted Average Grant Date Fair Value | | Performance Share Units (a) | | Weighted Average Grant Date Fair Value | | Options (e) | | Weighted Average Exercise Price |
| Outstanding at January 1, 2019 | 2.2 | | | $ | 27.37 | | | 1.7 | | | $ | 28.10 | | | 3.7 | | | $ | 30.98 | |
| Granted | 2.5 | | | 13.41 | | | 0.9 | | | 11.06 | | | 0.8 | | | 13.44 | |
| Distributed/Exercised | (1.0) | | (b) | | 28.17 | | | (0.2) | | (c) | | 32.66 | | | — | | | — | |
| Forfeited/Expired | (0.3) | | | 18.81 | | | (0.1) | | | 19.35 | | | (0.4) | | | 28.74 | |
| Outstanding at December 31, 2019 | 3.4 | | | $ | 17.89 | | | 2.3 | | | $ | 19.16 | | | 4.1 | | (d) | | $ | 27.50 | |
_______________
(a)The PSU amounts in the table are shown at the target amount of the award.
(b)The total fair value of RSUs which were distributed during the year ended December 31, 2019 was $27 million.
(c)The total fair value of PSUs which were distributed during the year ended December 31, 2019 was $8 million.
(d)Options outstanding at December 31, 2019 have an intrinsic value of 0 and have a weighted average remaining contractual life of 5.7 years.
(e)As of December 31, 2019, 2.5 million of the 4.1 million outstanding stock options were exercisable with a weighted average exercise price of $32.19, an intrinsic value of 0 and a weighted average remaining contractual life of 3.9 years.
AwardsHistorically, equity awards granted annually includegenerally included a mix of RSUs, (PRSUs forPSUs and options. However in 2020, the CEOCompany shifted away from granting options, limited equity awards to a small group of executives and direct reports in 2017), options and PSUs.granted other key employees cash-based awards, including cash-based RSUs.
The RSUs and PRSUsgranted vest over three years, with 33.33% vesting on each anniversary of the grant date. The fair value of RSUs and PRSUs areis equal to the closing sale price of the Company's common stock on the date of grant. Time-vestingDuring 2022, the Company granted restricted stock unit awards related to 1 million shares with a weighted average grant date fair value of the PRSUs$17.00 which
includes shares granted to the CEOcertain executives in March 2022 and direct reportsdirectors in 2017 was subject to achievementMay 2022. There were 1.9 million shares underlying share-settled RSUs outstanding at December 31, 2022 with a weighted average grant date fair value of a minimum EBITDA performance goal during the year that the award was granted.$15.40.
The PSUs are incentives that reward grantees based upon the Company's financial performance over a three-year performance period which begins January 1st of the grant year and ends on December 31st of the third year following the grant year. ThereThese awards are 2 PSU awards: 1measured according to two metrics: one is based upon the total stockholder return of Realogy'sAnywhere's common stock relative to the total stockholder return of the SPDR S&P Homebuilders Index ("XHB") or the S&P MidCap 400 index (the "RTSR award"), and the other is based upon the achievement of cumulative free cash flow goals. The number of shares that may be issuedpayout under each PSU award is variable and based upon the extent to which the performance goals are achieved over the performance period (with a range of payout from 0% to 175% of target for the RTSR award and 0% to 200% of target for the achievement of cumulative free cash flow award). The shares earned and will be distributed during the first quarter after the end of the performance period. The fair value of PSUsPSU awards without a market condition is equal to the closing sale price of the Company's common stock on the date of grant. Thegrant and the fair value of the PSU RTSR awards wasis estimated on the date of grant using the Monte Carlo Simulation method utilizing the following assumptions:
| | | | | | | | | | | | | | | | | |
| 2019 RTSR PSU | | 2018 RTSR PSU | | 2017 RTSR PSU |
| Weighted average grant date fair value | $ | 7.82 | | | $ | 25.45 | | | $ | 27.98 | |
| Weighted average expected volatility (a) | 34.8 | % | | 29.8 | % | | 29.0 | % |
| Weighted average volatility of S&P 400 | 13.5 | % | | | | | | |
| Weighted average volatility of XHB | | | | 17.9 | % | | 18.4 | % |
| Weighted average correlation coefficient | 0.42 | | | 0.44 | | | 0.53 | |
| Weighted average risk-free interest rate | 2.5 | % | | 2.6 | % | | 1.5 | % |
| Weighted average dividend yield | — | | | — | | | — | |
_______________
(a)Expected volatility is based on historical volatilities ofmethod. In March 2022, the Company and select comparable companies.
The stockStock options have a maximum term of ten years and vest over four years, with 25% vesting on each anniversary date of the grant date. The options have an exercise price equal to the closing sale price of the Company's common stock on the date of grant. The fair value of the options wasis estimated on the date of grant using the Black-Scholes option-pricing model utilizingmodel. There were 2.2 million options outstanding at December 31, 2022 with a weighted average exercise price of $25.42, including 2 million exercisable stock options, which have an intrinsic value of zero and a weighted average remaining contractual life of 3.8 years. The Company has not granted options since 2019 and forfeiture and exercise activity was immaterial for the following assumptions:year ended December 31, 2022.
| | | | | | | | | | | | | | | | | |
| 2019 Options | | 2018 Options | | 2017 Options |
| Weighted average grant date fair value | $ | 3.40 | | | $ | 7.12 | | | $ | 8.61 | |
| Weighted average expected volatility (a) | 31.4 | % | | 28.5 | % | | 30.7 | % |
| Weighted average expected term (years) (b) | 6.25 | | 6.25 | | 6.25 |
| Weighted average risk-free interest rate (c) | 2.5 | % | | 2.7 | % | | 2.0 | % |
| Weighted average dividend yield | 2.7 | % | | 1.4 | % | | 1.2 | % |
_______________
(a)Expected volatility was based on historical volatilities of the Company and select comparable companies.
(b)The expected term of the options granted represents the period of time that options are expected to be outstanding and is based on the simplified method.
(c)The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the time of the grant, which corresponds to the expected term of the options.
Stock-Based Compensation Expense
As of December 31, 2019,2022, based on current performance achievement expectations, there was $35$19 million of unrecognized compensation cost related to incentive equity awards under the plans which would be recorded in future periods as compensation expense over a remaining weighted average period of approximately 1.91.7 years. The Company recorded stock-based compensation expense related to the incentive equity awards of $28$22 million, $37$29 million and $47$39 million for the years ended December 31, 2019, 20182022, 2021 and 2017,2020, respectively.
14. RESTRUCTURING COSTS
Restructuring charges for the years ended December 31, 2022, 2021 and 2020 were $32 million, $17 million and $67 million, respectively. The components of the restructuring charges for the years ended December 31, 2022, 2021 and 2020 were as follows: | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Personnel-related costs (1) | $ | 16 | | | $ | 6 | | | $ | 20 | |
| Facility-related costs (2) | 16 | | | 11 | | | 47 | |
| Total restructuring charges (3) | $ | 32 | | | $ | 17 | | | $ | 67 | |
_______________ (1)Personnel-related costs consist of severance costs provided to employees who have been terminated.
(2)Facility-related costs consist of costs associated with planned facility closures such as contract termination costs, amortization of lease assets that will continue to be incurred under the contract for its remaining term without economic benefit to the Company, accelerated depreciation on asset disposals and other facility and employee relocation related costs.
(3)Restructuring charges for the year ended December 31, 2022 include $20 million of expense related to the Operational Efficiencies Plan and $12 million of expense related to prior restructuring plans. Restructuring charges for the years ended December 31, 2021 and December 31, 2020 related to prior restructuring plans.
Operational Efficiencies Plan
Beginning in the third quarter of 2022, the Company commenced the implementation of a plan ("the Plan") to reduce its office footprint costs, centralize certain aspects of its operational support structure and drive changes in how it serves its affiliated independent sales agents as well as consumers from a marketing and technology perspective. Furthermore, in
January 2023, the Company executed a meaningful workforce reduction driven by worsening trends in the housing market. These actions build on the multiple other cost reduction and spending reprioritization initiatives such as simplified and more integrated and digitized offerings, systems and support. Delivering the Company’s business model more digitally is an increasing part of improving the consumer experience and the Company's ongoing cost focus. The Company expects to continue to prioritize investments in efforts to support its independent sales agents, franchisees and consumers which includes investments in technology and innovative products, lead generation and franchisee support.
The following is a reconciliation of the beginning and ending reserve balances related to the Plan: | | | | | | | | | | | | | | | | | |
| Personnel-related costs | | Facility-related costs | | Total |
| Balance at December 31, 2021 | $ | — | | | $ | — | | | $ | — | |
| Restructuring charges (1) | 14 | | | 6 | | | 20 | |
| Costs paid or otherwise settled | (4) | | | (4) | | | (8) | |
| Balance at December 31, 2022 | $ | 10 | | | $ | 2 | | | 12 | |
_______________ (1)In addition, the Company incurred an additional $5 million of facility-related costs for lease asset impairments in connection with the Plan during the year ended December 31, 2022.
The following table shows the total costs currently expected to be incurred by type of cost related to the Plan: | | | | | | | | | | | | | | | | | |
| Total amount expected to be incurred | | Amount incurred
to date | | Total amount remaining to be incurred |
| Personnel-related costs | $ | 23 | | | $ | 14 | | | $ | 9 | |
| Facility-related costs | 12 | | | 6 | | | 6 | |
| Total | $ | 35 | | | $ | 20 | | | $ | 15 | |
The following table shows the total costs currently expected to be incurred by reportable segment related to the Plan:
| | | | | | | | | | | | | | | | | |
| Total amount expected to be incurred | | Amount incurred
to date | | Total amount remaining to be incurred |
| Franchise Group | $ | 2 | | | $ | 2 | | | $ | — | |
| Owned Brokerage Group | 26 | | | 14 | | | 12 | |
| Title Group | — | | | — | | | — | |
| Corporate and Other | 7 | | | 4 | | | 3 | |
| Total | $ | 35 | | | $ | 20 | | | $ | 15 | |
Prior Restructuring Plans
During 2019, the Company took various strategic initiatives to reduce costs and institute operational and facility related efficiencies to drive profitability. During 2020, as a result of the COVID-19 pandemic, the Company transitioned substantially all of its employees to a remote-work environment which allowed the Company to reevaluate its office space needs. As a result, additional facility and operational efficiencies were identified and implemented which included the transformation of its corporate headquarters in Madison, New Jersey to an open-plan innovation hub. At December 31, 2021, the remaining liability related to these initiatives was $18 million. During the year ended December 31, 2022, the Company incurred $12 million of costs and paid or settled $18 million of costs resulting in a remaining accrual of $12 million at December 31, 2022. The remaining accrual of $12 million and total amount remaining to be incurred of $24 million primarily relate to the transformation of the Company's corporate headquarters.
15. COMMITMENTS AND CONTINGENCIES
Litigation
The Company is involved in claims, legal proceedings, alternative dispute resolution and governmental inquiries or regulatory actions related to alleged contract disputes, business practices, intellectual property and other commercial, employment, regulatory and tax matters. Examplesmatters, including the matters described below.
The Company believes that it has adequately accrued for legal matters as appropriate. The Company records litigation accruals for legal matters when it is both probable that a liability will be incurred, and the amount of such matters include but are not limited to allegations:
•that independent residential real estate sales agents engaged by Realogy Brokerage Group or by affiliated franchisees—under certain state or federal laws—are potentially employees insteadthe loss can be reasonably estimated. Where the reasonable estimate of independent contractors, and they or regulators therefore may bring claims against Realogy Brokerage Group for breach of contract, wage and hour classification claims, wrongful discharge, unemployment and workers' compensation and could seek benefits, back wages, overtime, indemnification, penalties related to classification practices and expense reimbursement available to employees or similar claims against Realogy Franchise Groupthe probable loss is a range, the Company records as an alleged joint employeraccrual in its financial statements the most likely estimate of an affiliated franchisee’s independent sales agents;
•concerningthe loss, or the low end of the range if there is no one best estimate. For other employment law matters, including other types of worker classification claims as well as wage and hour claims and retaliation claims;
•concerning anti-trust and anti-competition matters;
•thatlitigation for which a loss is reasonably possible, the Company is vicariously liableunable to estimate a range of reasonably possible losses.
Litigation and other disputes are inherently unpredictable and subject to substantial uncertainties and unfavorable developments and resolutions could occur and even cases brought by us can involve counterclaims asserted against us. In addition, litigation and other legal matters, including class action lawsuits and 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. Insurance coverage may be unavailable for the actscertain types of franchisees under theories of actual or apparent agency;
•by current or former franchisees that franchise agreements were breached including improper terminations;
•concerning alleged RESPA or state real estate law violations;
•concerning claims related to the(including antitrust and Telephone Consumer Protection Act ("TCPA") litigation) and even where available, insurance carriers may dispute coverage for various reasons, including autodialer claims;the cost of defense, there is a deductible for each such case, and such insurance may not be sufficient to cover the losses the Company incurs.
•concerning claims generally againstFrom time to time, even if the company owned brokerage operations for negligence, misrepresentation or breachCompany believes it has substantial defenses, it may consider litigation settlements based on a variety of fiduciary duty in connection withcircumstances.
Due to the performance of real estate brokerage or other professional servicesforegoing factors as well as other brokeragethe factors set forth below, the Company could incur charges or judgments or enter into settlements of claims, associatedbased upon future events or developments, with listing informationliabilities that are materially in excess of amounts accrued and property history;these judgments or settlements could have a material adverse effect on the Company’s financial condition, results of operations or cash flows in any particular period. As such, an increase in accruals for one or more of these matters in any reporting period may have a material adverse effect on the Company's results of operations and cash flows for that period.
The below captioned matters address certain current litigation involving the Company, including antitrust litigation, litigation related to the TCPA, and worker classification litigation. The captioned matters described herein involve evolving, complex litigation and the Company assesses its accruals on an ongoing basis taking into account the procedural stage and developments in the litigation. One of the antitrust class action matters (the Burnett litigation) is scheduled to go to trial in October 2023 and the TCPA class action case is scheduled to go to trial in May 2023.
The Company disputes the allegations against it in each of these matters, believes it has substantial defenses against plaintiffs' claims and is vigorously defending these actions.
All of these matters are presented as currently captioned, but as noted elsewhere in this Annual Report, Realogy Holdings Corp. has been renamed Anywhere Real Estate Inc.
Antitrust Litigation
The cases included under this header, Antitrust Litigation, are class actions that challenge residential real estate industry rules and practices for payment of buyer broker commissions. The issues raised by these cases have not been previously adjudicated, and the cases are pending in multiple jurisdictions, are at various stages of litigation, claim to cover lengthy periods, involve different assertions with respect to liability and damages, include federal and certain state law claims, involve numerous and differing parties, and—given that antitrust laws generally provide for joint and several liability and treble damages—could result in a broad range of outcomes, making it difficult to predict possible damages or how legal, factual and damages issues will be resolved.
These factors also complicate the potential for achieving settlement in individual cases or any global multi-party settlement although the Company believes, given the industry-wide impacts of the issues being litigated, potential resolution options should be considered.
The Company believes that additional antitrust litigation may be possible depending on decisions in pending litigation or regulatory developments affecting the industry.
In each of these cases, plaintiffs claim damages for all or a meaningful portion of the buyer brokers’ commission paid in each transaction irrespective of the fact that the Company retained relatively little of those commissions (as the vast majority of the commission remained with the independent sales agent and/or franchisee, as applicable).
Burnett, Hendrickson, Breit, Trupiano, and Keel v. The National Association of Realtors, Realogy Holdings Corp., Homeservices of America, Inc., BHH Affiliates LLC, HSF Affiliates, LLC, RE/MAX LLC, and Keller Williams Realty, Inc. (U.S. District Court for the Western District of Missouri). This is a now-certified class action complaint, which was filed on April 29, 2019 and amended on June 21, 2019, June 30, 2021 and May 6, 2022 (formerly captioned as Sitzer).
The plaintiffs allege that the defendants engaged in a continuing contract, combination, or conspiracy to unreasonably restrain trade and commerce in violation of Section 1 of the Sherman Act because defendant NAR allegedly established mandatory anticompetitive policies and rules for the multiple listing services and its member brokers that require listing brokers to make an offer of buyer broker compensation when listing a property. The plaintiffs' experts argue that “but for” the challenged NAR policies and rules, these offers of buyer broker compensation would not be made and plaintiffs seek the recovery of any commissions paid to buyers’ brokers as to both brokerage and franchised operations in the relevant geographic area.
The plaintiffs further allege that commission sharing, which provides for the broker representing the seller sharing or paying a portion of its commission to the broker representing the buyer, is anticompetitive and violates the Sherman Act, and that the brokerage/franchisor defendants conspired with NAR by requiring their respective brokerages/franchisees to comply with NAR’s policies, rules, and Code of Ethics, and engaged in other allegedly anticompetitive conduct including, but not limited to, steering and agent education that allegedly promotes the practice of paying buyer broker compensation and discourages commission negotiation. Plaintiffs’ experts dispute defendants’ contention that the practice of offering and paying buyer broker compensation is based on natural and legitimate economic incentives and benefits that exist irrespective of the challenged NAR policies and rules and also contend that international practices are comparable benchmarks.
The antitrust claims in the Burnett litigation are limited both in allegations and relief sought to home sellers who from April 29, 2015, to the present used a listing broker affiliated with one of the brokerage/franchisor defendants in four MLSs that primarily serve the State of Missouri, purportedly in violation of federal and Missouri antitrust laws. The plaintiffs seek a permanent injunction enjoining the defendants from requiring home sellers to pay buyer broker commissions or from otherwise restricting competition among brokers, an award of damages and/or restitution for the class period, attorneys' fees and costs of suit. Plaintiffs allege joint and several liability and seek treble damages.
In addition, the plaintiffs include a cause of action for alleged violations of the Missouri Merchandising Practices Act, or MMPA, on behalf of Missouri residents only, with a class period that commences April 29, 2014. The plaintiffs seek a permanent injunction enjoining the defendants from engaging in conduct in violation of the MMPA, an award of damages and/or restitution for the class period, punitive damages, attorneys' fees, and costs of suit.
On August 22, 2019, the Court denied defendants’ motions to transfer the litigation to the U.S. District Court for the Northern District of Illinois, and on October 16, 2019, the Court denied the motions to dismiss this litigation filed respectively by NAR and the Company (together with the other named brokerage/franchisor defendants). In September 2019, the Department of Justice (“DOJ”) filed a statement of interest and appearances for this matter and, in July 2020 and July 2021, requested the Company provide it with all materials produced in this matter.
The Court granted class certification on April 22, 2022. The Company's petition for an interlocutory appeal of the class certification decision was denied by the United States Court of Appeals for the Eighth Circuit on June 2, 2022. The class the Court has certified includes, according to plaintiffs, over 310,000 transactions for which the plaintiffs are seeking a full refund of the buyer brokers’ commissions. On December 16, 2022, the Court issued a decision denying the defendants’ motions for summary judgment in this matter. The Court’s summary-judgment decision holds that plaintiffs have adduced evidence to support their contention that the challenged rules constitute per se violations of the Sherman Act. Because other courts considering similar antitrust challenges to MLS rules have held that such rules cannot be treated as per se violations, the defendants filed a motion asking the Court to certify the issue for a discretionary interlocutory appeal to the U.S. Court of Appeals for the Eighth Circuit, but the motion was denied by the Court on January 27, 2023.
On December 29, 2022 the court also entered an order directing the parties to conduct a mediation no later than March 15, 2023. On February 6, the court was advised that the parties had participated in the court-ordered mediation. This case had been scheduled to go to trial in February 2023. The court has now continued the trial until October 2023.
The Company disputes the allegations against it in this case, believes it has substantial defenses to both plaintiffs’ claims and damage assertions, and is vigorously defending this litigation.
Moehrl, Cole, Darnell, Ramey, Umpa and Ruh v. The National Association of Realtors, Realogy Holdings Corp., Homeservices of America, Inc., BHH Affiliates, LLC, The Long & Foster Companies, Inc., RE/MAX LLC, and Keller Williams Realty, Inc. (U.S. District Court for the Northern District of Illinois). The Moehrl complaint contains substantially similar allegations, and seeks the same relief under the Sherman Act, as the Burnett litigation. The Moehrl complaint, however, is brought on behalf of home sellers in 20 MLSs in various parts of the country that do not overlap with the Burnett MLSs and purports to cover transactions beginning from March 6, 2015 through December 31, 2020.
In contrast to the Burnett plaintiffs, the Moehrl plaintiffs acknowledge that there are economic reasons why a seller would offer buyer compensation (and accordingly, do not seek recovery of all commissions paid to buyers’ brokers), although plaintiffs allege that buyer brokers are overpaid due to the mandatory nature of the applicable NAR policies and rules.
In October 2019, the DOJ filed a statement of interest for this matter. A motion to appoint lead counsel in the case was granted on an interim basis by the Court in May 2020. In October 2020, the Court denied the separate motions to dismiss filed in August 2019 by each of NAR and the Company (together with the other defendants named in the amended Moehrl complaint). Plaintiffs filed their motion for class certification on February 23, 2022. The Company’s opposition to the plaintiffs' class certification motion was filed on May 31, 2022 (together with the other defendants named in the complaint) and plaintiffs’ reply in further support of their motion was filed on August 22, 2022; plaintiffs’ motion for class certification remains pending. Discovery in the case is ongoing.
The Company disputes the allegations against it in this case, believes it has substantial defenses to both plaintiffs’ claims and damage assertions, and is vigorously defending this litigation.
Batton, Bolton, Brace, Kim, James, Mullis, Bisbicos and Parsons v. The National Association of Realtors, Realogy Holdings Corp., Homeservices of America, Inc., BHH Affiliates, LLC, HSF Affiliates, LLC, The Long & Foster Companies, Inc., RE/MAX LLC, and Keller Williams Realty, Inc. (U.S. District Court for the Northern District of Illinois Eastern Division). In this putative nationwide class action filed on January 25, 2021 (formerly captioned as Leeder), the plaintiffs take issue with certain NAR policies, including those related to copyright law, including infringement actions alleging improper usebuyer broker compensation at issue in the Moehrl and Burnett matters, as well as those at issue in the 2020 settlement between the DOJ and NAR, but claim the alleged conspiracy has harmed buyers (instead of copyrighted photographs on websites orsellers). The plaintiffs allege that the defendants made agreements and engaged in marketing materials without consenta conspiracy in restraint of trade in violation of the copyright holder;Sherman Act and were unjustly enriched, and seek a permanent injunction enjoining NAR from establishing in the future the same or similar rules, policies, or practices as those challenged in the action as well as an award of damages and/or restitution, interest, and reasonable attorneys’ fees and expenses.
•On May 2, 2022, the Court granted the motion to dismiss filed by the Company (together with the other companies named in the complaint) without prejudice. On July 6, 2022, plaintiffs filed an amended complaint substituting in eight new named plaintiffs and no longer naming Leeder as named plaintiff, that may consequently be referred to as concerning breachBatton v. The National Association of obligationsRealtors, et al. The amended complaint is substantially similar to make websitesthe original complaint but, in addition to the federal Sherman Act and unjust enrichment claims, plaintiffs have added two claims based on certain state antitrust statutes and consumer protection statutes. The Company (together with the other services accessiblecompanies named in the complaint) filed a motion to dismiss the amended complaint on September 7, 2022. Plaintiffs’ opposition to the motion was filed October 21, 2022, and defendants’ reply was filed on November 22, 2022; that fully briefed motion to dismiss remains pending. Discovery has not commenced.
The Company disputes the allegations against it in this case, believes it has substantial defenses to plaintiffs’ claims, and is vigorously defending this litigation.
Nosalek, Hirschorn and Hirschorn v. MLS Property Information Network, Inc., Realogy Holdings Corp., Homeservices of America, Inc., BHH Affiliates, LLC, HSF Affiliates, LLC, RE/MAX LLC, and Keller Williams Realty, Inc. (U.S. District Court for consumersthe District of Massachusetts). This is a putative class action filed on December 17, 2020 (formerly captioned as Bauman), wherein the plaintiffs take issue with disabilities;policies and rules similar to those at issue in the Moehrl and Burnett matters, but rather than objecting to the national policies and rules published by NAR, this lawsuit specifically objects to the alleged
•policies and rules of a multiple listing service (MLS Property Information Network, Incconcerning claims generally against.) that is owned by realtors, including in part by one of the title agent contendingCompany's company-owned brokerages. The plaintiffs allege that the agent knew or should have known thatdefendants made agreements and engaged in a transaction was fraudulent or thatconspiracy in restraint of trade in violation of the agent was negligent in addressing title defects or conductingSherman Act and seek a permanent injunction, enjoining the settlement;
•concerning information security and cyber-crime, including claims under new and emerging data privacy laws relateddefendants from continuing conduct determined to the protection of customer, employee or third-party information,be unlawful, as well as those relatedan award of damages and/or restitution, interest, and reasonable attorneys’ fees and expenses. On December 10, 2021, the Court denied the motion to dismiss filed in March 2021 by the Company (together with the other defendants named in the complaint). On March 1, 2022, plaintiffs filed an amended complaint substituting in two new named plaintiffs and no longer naming the Baumans as named plaintiffs, that may consequently be referred to as Nosalek v. MLS Property Information Network, Inc. On January 9, 2023, the plaintiffs filed a second amended complaint which, among other things, added certain entities as defendants, including certain Anywhere wholly-owned franchisor subsidiaries, removed the Count II state law claims that the plaintiffs had previously voluntarily dismissed, and redefined the covered area as limited to home sales in Massachusetts (removing New Hampshire and Rhode Island). The lawsuit seeks to represent a class of sellers who paid a broker commission in connection with the sale of a property listed in the MLS Property Information Network, Inc. On January 23, 2023, MLS Property Information Network, Inc., HomeServices of America, Inc., BHH Affiliates, LLC, HSF Affiliates, LLC, RE/MAX LLC, and Keller Williams Realty, Inc. filed their answer to the diversionsecond amended complaint. The Anywhere defendants filed their answer to the second amended complaint on February 21, 2023. Discovery in the case has commenced.
The Company disputes the allegations against it in this case, believes it has substantial defenses to plaintiffs’ claims, and is vigorously defending this litigation.
Telephone Consumer Protection Act Litigation
Bumpus, et al. v. Realogy Holdings Corp., et al. (U.S. District Court for the Northern District of homesale transaction closing funds;California, San Francisco Division). In this class action filed on June 11, 2019, against Anywhere Real Estate Inc. (f/k/a Realogy Holdings Corp.), Anywhere Intermediate Holdings LLC (f/k/a Realogy Intermediate Holdings LLC), Anywhere Real Estate Group LLC (f/k/a Realogy Group LLC ), Anywhere Real Estate Services Group LLC (f/k/a Realogy Services Group LLC), and Anywhere Advisors LLC (f/k/a Realogy Brokerage Group LLC and NRT LLC), and Mojo Dialing Solutions, LLC, plaintiffs allege that independent sales agents affiliated with Anywhere Advisors LLC violated the Telephone Consumer Protection Act of 1991 (TCPA) using dialers provided by Mojo and others. Plaintiffs seek relief on behalf of a National Do Not Call Registry class, an Internal Do Not Call class, and an Artificial or Prerecorded Message class.
•those relatedIn March 2022, the Court granted plaintiffs’ motion for class certification for the foregoing classes as to general fraud claims.the Anywhere defendants but not as to co-defendant Mojo and dismissed Mojo from the case. Plaintiffs and the Anywhere defendants’ cross-motions for summary judgment were denied without prejudice on May 11, 2022. The Company's petition for permission to appeal the class certification filed with the 9th Circuit Court of Appeals was denied and the plaintiffs’ class notice plan was approved on May 26, 2022.
On January 18, 2023, the Court set a trial date of May 15, 2023. A mediation between the parties in August 2022 did not result in resolution of this matter. While the Company may pursue further attempts at mediation, it can provide no assurance as to whether any such mediation would be successful.
Plaintiffs claim that there were over 1.2 million calls that qualify for inclusion in the classes. The Company disputes the allegations against it in this case, believes it has substantial defenses to both plaintiffs’ liability claims and damage assertions, and is vigorously defending this action.
Worker Classification Litigation
Whitlach v. Premier Valley, Inc. d/b/a Century 21 M&M and Century 21 Real Estate LLC (Superior Court of California, Stanislaus County). This was filed as a putative class action complaint on December 20, 2018 by plaintiff James Whitlach against Premier Valley Inc., a Century 21 Real Estate independently-owned franchisee doing business as Century 21 M&M (“Century 21 M&M”). The complaint also names Century 21 Real Estate LLC, a wholly-owned subsidiary of the Company and the franchisor of Century 21 Real Estate (“Century 21”), as an alleged joint employer of the franchisee’s independent sales agents and seeks to certify a class that could potentially include all agents of both Century 21 M&M and Century 21 in California. TheIn February 2019, the plaintiff allegesamended his complaint to assert claims pursuant to the California Private Attorneys General Act (“PAGA”). Following the Court's dismissal of the plaintiff's non-PAGA claims without prejudice in June 2019, the plaintiff filed a second amended complaint asserting one cause of action for alleged civil penalties under PAGA in June 2020 and continued to pursue his PAGA claims as a representative of purported "aggrieved employees" as defined by PAGA. As such representative, the plaintiff seeks all non-individualized relief available to the purported aggrieved employees under PAGA, as well as attorneys’ fees. Under California law, PAGA claims are generally not subject to arbitration and may result in exposure in the form of additional penalties.
In the second amended complaint, the plaintiff continues to allege that Century 21 M&M misclassified all of its independent real estate agents, salespeople, sales professionals, broker associates and other similar positions as independent contractors, failed to pay minimum wages, failed to provide meal and rest breaks, failed to pay timely wages, failed to keep proper records, failed to provide appropriate wage statements, made unlawful deductions from wages, and failed to reimburse plaintiff and the putative class for business related expenses, resulting in violations of the California Labor Code. The demurrer filed by Century 21 M&M (and joined by Century 21) on August 3, 2020 to the plaintiff's amended complaint, also asserts an unfair business practice claim basedwas granted by the Court on November 10, 2020, dismissing the alleged violations described above.
On February 15, 2019,case without leave to replead. In January 2021, the plaintiff amended his complaint to assert claims pursuant to the California Private Attorneys General Act (“PAGA”). The PAGA claims included in the amended complaint are substantively similar to those asserted in the original complaint. Under California law, PAGA claims are generally not subject to arbitration and may result in exposure in the formfiled a notice of additional penalties. In April 2019, the defendants filed motions to compel arbitrationappeal of the non-PAGA claimsCourt’s order granting the demurrer and to stay the PAGA claims pending resolutionfiled its brief in support of the arbitrable claims. Onappeal in June 5, 2019, the court dismissed the2021. In October 2021, Century 21 and Century 21 M&M filed their appellate brief in opposition to plaintiff’s non-PAGA claims without prejudiceappeal and withdrew the defendants’ motion to compel arbitration by stipulationin January 2022, plaintiff filed its reply brief in support of the parties. The plaintiff continues to pursue his PAGA claims as a representative of purported "aggrieved employees" as defined by PAGA. The plaintiff currently seeks, as the representative of all purported aggrieved employees, all non-individualized relief available to the purported aggrieved employees under PAGA, as well as attorneys’ fees. On November 15, 2019,appeal. In September 2022, Century 21 and Century 21 M&M filed a demurrer tomotion with the complaint, seekingAppellate Court to dismiss the remaining claimappeal in favor of arbitration in response to a recent change in the action,law, which the plaintiff opposed. On November 18, 2022, the Appellate Court issued an opinion affirming the trial court’s grant of the demurrer to which Century 21 M&M and Century 21 (and, therefore, found the motion requesting arbitration to be moot). Plaintiff's petition for rehearing filed with the Appellate Court was denied on December 5, 2022 and, on January 26, 2023, plaintiff filed a joinder, and on February 12, 2020 a brief in opposition was filed bypetition for review of the plaintiff.
Fenley v. Realogy Franchise Group LLC, Sotheby’s International Realty, Inc., Wish Properties, Inc. and DOES 1-100 (SuperiorAppellate Court’s ruling with the Supreme Court of California, Kern County).the State of California. This is a putative class action complaint filed on April 25, 2019 by plaintiff Elizabeth Fenley against Wish Properties, Inc, a Sotheby’s International Realty independently-owned franchisee doing business as Wish Sotheby’s International Realty (“Wish SIR”). The complaint also names Realogy Franchise Group LLC and Sotheby’s International Realty, Inc., wholly-owned subsidiaries of the Company, as alleged joint employers of the franchisee’s independent sales agents and seeks to certify a class that could potentially include all agents in California affiliated with any Realogy Franchise Group brand. The plaintiff alleges that all defendants are jointly responsible for misclassifying Wish SIR’s agents as independent contractors and failed to reimburse for business expenses, provide accurate wage statements and pay wages timely, all in violation of the California Labor Code. The complaint also asserts an unfair business practice claim based on the violations previously described. The plaintiff seeks reimbursement of allegedly necessary expenses, liquidated damages, waiting time penalties, civil penalties, pre- and post-judgment interest, restitution, injunctive relief, and attorneys’ fees and costs. On September 17, 2019, the Court denied the defendants’ motions to compel arbitration. In February 2020, the matter was settled on an individual basis.
These cases raisecase raises various previously unlitigated claims and the PAGA claims in the Whitlach matter addclaim adds additional litigation, financial and operating uncertainties. There
Other
Examples of other legal matters involving the Company may include, but are similar classification cases pending against several other brokerages in the state of Californianot limited to:
•antitrust and developments in one or more of those cases could impact progress in these cases.anti-competition claims;
Real Estate Industry Litigation•TCPA claims;
Moehrl, Cole, Darnell, Nager, Ramey, Sawbill Strategic, Inc., Umpa•claims alleging violations of RESPA, state consumer fraud statutes, federal consumer protection statutes or other state real estate law violations;
•employment law claims, including claims that independent residential real estate sales agents engaged by our company owned brokerages or by affiliated franchisees—under certain state or federal laws—are potentially employees instead of independent contractors, and Ruh v. The National Associationthey or regulators therefore may bring claims against our Owned Brokerage Group for breach of Realtors, Realogy Holdings Corp., Homeservicescontract, wage and hour classification claims, wrongful discharge, unemployment and workers' compensation and could seek benefits, back wages, overtime, indemnification, penalties related to classification practices and expense reimbursement available to employees or make similar claims against Franchise Group as an alleged joint employer of America, Inc., BHH Affiliates, LLC, The Long & Foster Companies, Inc., RE/MAX LLC,an affiliated franchisee’s independent sales agents;
•other employment law matters, including other types of worker classification claims as well as wage and Keller Williams Realty, Inc.hour claims and retaliation claims;
• (U.S. District Courtinformation security claims, including claims under new and emerging data privacy laws related to the protection of customer, employee or third-party information;
•cyber-crime claims, including claims related to the diversion of homesale transaction closing funds;
•vicarious or joint liability claims 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 by current or former franchisees that franchise agreements were breached, including improper terminations;
•claims generally against the company owned brokerage operations for negligence, misrepresentation or breach of fiduciary duty in connection with the Northern Districtperformance of Illinois). This amended putative class action complaint (the "amended real estate brokerage or other professional services as well as other brokerage claims associated with listing information and property history;
•Moehlerclaims 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;
• complaint"), filed on June 14, 2019, (i) consolidatesclaims concerning breach of obligations to make websites and other services accessible for consumers with disabilities;
•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 the settlement;
•Moehrlclaims related to disclosure or securities law violations as well as derivative suits; and
• and Sawbillfraud, defalcation or misconduct claims.
litigation reported in our Form 10-Q for the period ended March 31, 2019, (ii) adds certain plaintiffs and defendants, and (iii) serves as a response to the separate motions to dismiss filed on May 17, 2019 in the prior Moehrl litigation by each of NAR and the Company (along with the other defendants named in the prior Moehrl complaint).
In the amended Moehrl complaint, the plaintiffs allege that the defendants engaged in a continuing contract, combination, or conspiracy to unreasonably restrain trade and commerce in violation of Section 1 of the Sherman Act because defendant NAR allegedly established mandatory anticompetitive policies for the multiple listing services and its member brokers that require brokers to make an offer of buyer broker compensation when listing a property. The plaintiffs further allege that commission sharing, which provides for the broker representing the seller sharing or paying a portion of its commission to the broker representing the buyer, is anticompetitive and violates the Sherman Act, and that the defendant franchisors conspired with NAR by requiring their respective franchisees to comply with NAR’s policies and Code of Ethics. The plaintiffs seek a permanent injunction enjoining the defendants from requiring home sellers to pay buyer broker commissions or to otherwise restrict competition among buyer brokers, an award of damages and/or restitution, attorneys fees and costs of suit. Plaintiffs' counsel has filed a motion to appoint lead counsel in the case, which has yet to be decided by the court. On August 9, 2019, NAR and the Company (together with the other defendants named in the amended Moehler complaint) each filed separate motions to dismiss this litigation. The plaintiffs filed their opposition to the motions to dismiss on September 13, 2019, and the defendants filed their replies in support of the motions on October 18, 2019.
Sitzer and Winger v. The National Association of Realtors, Realogy Holdings Corp., Homeservices of America, Inc., RE/MAX Holdings, Inc., and Keller Williams Realty, Inc. (U.S. District Court for the Western District of Missouri). This is a putative class action complaint filed on April 29, 2019 and amended on June 21, 2019 by plaintiffs Joshua Sitzer and Amy Winger against NAR, the Company, Homeservices of America, Inc., RE/MAX Holdings, Inc., and Keller Williams Realty, Inc. The complaint contains substantially similar allegations, and seeks the same relief under the Sherman Act, as the Moehrl litigation. The Sitzer litigation is limited both in allegations and relief sought to the State of Missouri and includes an additional cause of action for alleged violation of the Missouri Merchandising Practices Act, or MMPA. On August 22, 2019, the Court denied defendants' motions to transfer the Sitzer matter to the U.S. District Court for the Northern District of Illinois and on October 16, 2019, denied the motions to dismiss this litigation filed respectively by NAR and the Company (together with the other named brokerage/franchisor defendants).
Securities Litigation
Tanaskovic v. Realogy Holdings Corp., et. al. (U.S. District Court for the District of New Jersey). This is a putative class action complaint filed on July 11, 2019 by plaintiff Sasa Tanaskovic against the Company and certain of its current and former executive officers. The lawsuit alleges violations of Sections 10(b), 20(a) and Rule 10b-5 of the Exchange Act in connection with allegedly false and misleading statements made by the Company about its business, operations, and prospects. The plaintiffs seek, among other things, compensatory damages for purchasers of the Company’s common stock between February 24, 2017 through May 22, 2019, as well as attorneys’ fees and costs. Locals 302 and 612 of the International Union of Operating Engineers-Employers Construction Industry Retirement Trust (the “Retirement Trust”), was appointed lead plaintiff on November 7, 2019. Lead plaintiff has until March 6, 2020 to file its amended complaint per the stipulation of the parties entered by the Court on January 8, 2020.
Fried v. Realogy Holdings Corp., et al. (U.S. District Court for the District of New Jersey). This is a putative derivative action filed on October 23, 2019 by plaintiff Adam Fried against the Company (as nominal defendant) and certain of its current and former executive officers and members of its Board of Directors (as defendants). The lawsuit alleges violations of Section 14(a) of the Exchange Act and breach of fiduciary duties for, among other things, allegedly false and misleading statements made by the Company about its business, operations and prospects as well as unjust enrichment claims. The plaintiff seeks, among other things, compensatory damages, disgorgement of improper compensation, certain reforms to the Company’s corporate governance and internal procedures and attorneys’ fees and costs. On December 23, 2019, the Court approved a motion staying this case pending further action in the Tanaskovic matter.
The Company disputes the allegations in each of the captioned matters described above and will vigorously defend these actions. Given the early stages of each of these cases, we cannot estimate a range of reasonably possible losses for this litigation.
The Company believes that it has adequately accrued for legal matters as appropriate. The Company records litigation accruals for legal matters which are both probable and estimable.
Litigation and other disputes are inherently unpredictable and subject to substantial uncertainties and unfavorable resolutions could occur. In addition, class action lawsuits can be costly to defend and, depending on the class size and
claims, could be costly to settle. As such, the Company could incur judgments or enter into settlements of claims with liability that are materially in excess of amounts accrued and these settlements could have a material adverse effect on the Company’s financial condition, results of operations or cash flows in any particular period.
* * *
Company-Initiated Litigation
Realogy Holdings Corp., NRT New York LLC (d/b/a The Corcoran Group), Sotheby’s International Realty, Inc., Coldwell Banker Residential Brokerage Company, Coldwell Banker Residential Real Estate LLC, NRT West, Inc., Martha Turner Properties, L.P. And Better Homes and Gardens Real Estate LLC v. Urban Compass, Inc., and Compass, Inc. (Supreme Court New York, New York County). On July 10, 2019, the Company and certain of its subsidiaries, filed a complaint against Urban Compass, Inc. and Compass, Inc. (together, "Compass") alleging misappropriation of trade secrets; tortious interference with contract; intentional and tortious interference with prospective economic advantage; unfair competition under New York common law; violations of the California Unfair Competition Law, Business and Professional Code Section 17200 et. seq. (unfair competition); violations of New York General Business Law Section 349 (deceptive acts or practices); violations of New York General Business Law Sections 350 and 350-a (false advertising); conversion; and aiding and abetting breach of contract. The Company seeks, among other things, actual and compensatory damages, injunctive relief, and attorneys’ fees and costs. On September 6, 2019, Compass filed a motion to dismiss this litigation. On September 26, 2019, the Company filed an amended complaint, which adds certain factual allegations in support of the Company’s claims, withdraws the count for aiding and abetting breach of contract and adds a count for defamation. On November 25, 2019, Compass filed a motion to compel arbitration of the claims asserted by The Corcoran Group as well as a separate motion to dismiss this litigation. On January 14, 2020, the Company opposed both motions and on February 10, 2020 Compass filed reply briefs on both motions.
* * *
The Company is involved in certain other claims and legal actions arising in theOther ordinary course of our business. Such litigation, regulatory actions and otherlegal proceedings that may arise from time to time include but are not limitedthose related to actions relating to intellectual property, 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, vicarious liability based upon conduct of individuals or entities outside of our control, including franchiseesclaims under the False Claims Act (or similar state laws), consumer lending and independent sales agents, antitrust and anti-competition claims, general fraud claims (including wire fraud associated with third-party diversion of funds from a brokerage transaction), employmentdebt collection law claims, including claims challenging the classification of our sales agents as independent contractors, wagestate auction law, and hour classification claims and claims alleging violations of RESPA or state consumer fraud statutes or federal consumer protection statutes. Whilesimilar laws in countries where we operate around the resultsworld with respect to any of such claims and legal actions cannot be predicted with certainty, we do not believe based on information currently available to us that the final outcome of current proceedings against the Company will have a material adverse effect on our consolidated financial position, results of operations or cash flows.foregoing. In addition, with the increasing requirements resulting from government laws and regulations concerning data breach notifications and data privacy and protection obligations, claims associated with these laws may become more common. While most litigation involves claims against the Company, from time to time the Company commences litigation, including litigation against former employees, franchisees and competitors when it alleges that such persons or entities have breached agreements or engaged in other wrongful conduct.
* * *
Cendant Corporate Liabilities and Guarantees to Cendant and Affiliates
RealogyAnywhere Group (then Realogy Corporation) separated from Cendant on July 31, 2006 (the "Separation"), pursuant to a plan by Cendant (now known as Avis Budget Group, Inc.) to separate into four independent companies—one for each of Cendant's business units-realunits—real estate services (Realogy(Anywhere Group, formerly referred to as Realogy Group), travel distribution services ("Travelport"), hospitality services, including timeshare resorts ("Wyndham Worldwide"), and vehicle rental ("Avis Budget Group"). Pursuant to the Separation and Distribution Agreement dated as of July 27, 2006 among Cendant, RealogyAnywhere Group, Wyndham Worldwide and Travelport (the "Separation and Distribution Agreement"), each of RealogyAnywhere Group, Wyndham Worldwide and Travelport have assumed certain contingent and other corporate liabilities (and related costs and expenses), which are primarily related to each of their respective businesses. In addition, RealogyAnywhere Group has assumed 62.5% and Wyndham Worldwide has assumed 37.5% of certain contingent and other corporate liabilities (and related costs and expenses) of Cendant.
The due to former parent balance was $18$20 million and $21$19 million at December 31, 20192022 and 2018,2021, respectively. The due to former parent balance was comprised of the Company’s portion of the following: (i) Cendant’s remaining contingent tax liabilities, (ii) accrued interest on contingent tax liabilities, (iii) potential liabilities related to Cendant’s terminated or divested businesses, and (iv)(iii) potential liabilities related to the residual portion of accruals for Cendant operations.
Tax Matters
The Company is subject to income taxes in the United States and several foreign jurisdictions. Significant judgment is required in determining the worldwide provision for income taxes and recording related assets and liabilities. In the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is uncertain. The Company is regularly under audit by tax authorities whereby the outcome of the audits is uncertain. The Company believes there is appropriate support for positions taken on its tax returns. The liabilities that have been recorded represent the best estimates of the probable loss on certain positions and are adequate for all open years based on an assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter. However, the outcomes of tax audits are inherently uncertain.
Escrow and Trust Deposits
As a service to its customers, the Company administers escrow and trust deposits which represent undisbursed amounts received for the settlement of real estate transactions. Deposits at FDIC-insured institutions are insured up to $250 thousand. These escrow and trust deposits totaled $475 million and $426approximately $794 million at December 31, 2019 and 2018, respectively. These escrow and trust2022. While these deposits are not assets of the Company and,(and, therefore, are excluded from the accompanying Consolidated Balance Sheets. However,Sheets), the Company remains contingently liable for the disposition of these deposits.
Purchase Commitments and Minimum Licensing Fees
In the normal course of business, the Company makes various commitments to purchase goods or services from specific suppliers, including those related to capital expenditures. The purchase commitments made by the Company as of December 31, 20192022 are approximately $73$116 million.
The Company is required to pay a minimum licensing fee to Sotheby’s which began in 2009 and continues through 2054. The annual minimum licensing fee is approximately $2 million per year. The Company is also required to pay a minimum licensing fee to Meredith Operations Corporation from 2009 through 2058 for the licensing of the Better Homes
and Gardens® Real Estate brand. The annual minimum licensing fee began in 2009 at $0.5 million and increased towas approximately $4 million in 2014, where it2022 and will generally remain through 2058.the same thereafter.
Future minimum payments for these purchase commitments and minimum licensing fees as of December 31, 20192022 are as follows:
| | | | | | | | |
| Year | | Amount | |
| 2020 | | $ | 44 | |
| 2021 | | 24 | |
| 2022 | | 11 | |
| 2023 | | 9 | |
| 2024 | | 8 | |
| Thereafter | | 217 | |
| Total | | $ | 313 | |
| | | | | | | | |
| Year | | Amount |
| 2023 | | $ | 63 | |
| 2024 | | 39 | |
| 2025 | | 24 | |
| 2026 | | 10 | |
| 2027 | | 9 | |
| Thereafter | | 192 | |
| Total | | $ | 337 | |
Standard Guarantees/Indemnifications
In the ordinary course of business, the Company enters into numerous agreements that contain standard guarantees and indemnities whereby the Company indemnifies another party for breaches of representations and warranties. In addition, many of these parties are also indemnified against any third-party claim resulting from the transaction that is contemplated in the underlying agreement. Such guarantees or indemnifications are granted under various agreements, including those governing: (i) purchases, sales or outsourcing of assets or businesses, (ii) leases and sales of real estate, (iii) licensing of trademarks, (iv) use of derivatives, and (v) issuances of debt securities. The guarantees or indemnifications issued are for the benefit of the: (i) buyers in sale agreements and sellers in purchase agreements, (ii) landlords in lease contracts, (iii) franchisees in licensing agreements, (iv) financial institutions in derivative contracts, and (v) underwriters in issuances
of securities. While some of these guarantees extend only for the duration of the underlying agreement, many survive the expiration of the term of the agreement or extend into perpetuity (unless subject to a legal statute of limitations). There are no specific limitations on the maximum potential amount of future payments that the Company could be required to make under these guarantees, nor is the Company able to develop an estimate of the maximum potential amount of future payments to be made under these guarantees as the triggering events are not subject to predictability. With respect to certain of the aforementioned guarantees, such as indemnifications of landlords against third-party claims for the use of real estate property leased by the Company, the Company maintains insurance coverage that mitigates any potential payments to be made.
Other Guarantees/Indemnifications
In the normal course of business, the Company coordinates numerous events for its franchisees and thus reserves a number of venues with certain minimum guarantees, such as room rentals at hotels local to the conference center. However, such room rentals are paid by each individual franchisee. If the franchisees do not meet the minimum guarantees, the Company is obligated to fulfill the minimum guaranteed fees. The maximum potential amount of future payments that the Company would be required to make under such guarantees is approximately $10 million. The Company would only be required to pay this maximum amount if none of the franchisees conducted theirattended the planned events at the reserved venues. Historically, the Company has not been required to make material payments under these guarantees.
Insurance and Self-Insurance
At December 31, 2019 and 2018, theThe Consolidated Balance Sheets include approximately $25 million and $24 million, respectively, of liabilities relating to: (i) self-insured risks for errors and omissions and other legal matters incurred in the ordinary course of business within RealogyOwned Brokerage Group and (ii) premium and claim reserves for the Company’s title underwriting business. The Company may also be subject to legal claims arising from the handling of escrow transactions and closings. RealogyOwned Brokerage Group carries errors and omissions insurance for errors made during the real estate settlement process of $15 million in the aggregate, subject to a deductible of $1$1.5 million per occurrence. In addition, the Company carries an additional errors and omissions insurance policy for Realogy Holdings Corp.Anywhere Real Estate Inc. and its subsidiaries for errors made for real estate related services up to $45 million in the aggregate, subject to a deductible of $2.5 million per occurrence. This policy also provides excess coverage to RealogyOwned Brokerage Group creating an aggregate limit of $60 million, subject to RealogyOwned Brokerage Group's deductible of $1$1.5 million per occurrence.
The Company, issuesthrough its appropriately licensed subsidiaries within Title Group, acts as a title insurance policies whichagent in real estate transactions and helps to provide coverage for real property to mortgage lenders and buyers of real property. When a
subsidiary within Title Group is acting as a title agent issuing a policy on behalf of an underwriter, assuming no negligence on the part of the title agent, the Companysuch subsidiary is not liable for losses under those policies but rather the title insurer is typically liable for such losses. The title underwriter which the Company acquired in January 2006 typically underwrites title insurance policies of up to $1.5 million. For policies in excess of $1.5 million, the Company typically obtains a reinsurance policy from a national underwriter to reinsure the excess amount. The Company, as an underwriter, manages our claims losses through strict agent vetting, clear underwriting guidelines, training and frequent communications with our agents.
Fraud, defalcation and misconduct by employees are also risks inherent in the business. The Company is the custodian of cash deposited by customers with specific instructions as to its disbursement from escrow, trust and account servicing files. The Company maintains Fidelityfidelity insurance covering the loss or theft of funds of up to $30 million per occurrence, subject to a deductible of $750 thousand$1 million per occurrence.
The Company also maintains self-insurance arrangements relating to health and welfare, workers’ compensation, auto and general liability in addition to other benefits provided to the Company’s employees. The accruals for these self-insurance arrangements totaled approximately $15$13 million for both December 31, 20192022 and 2018.2021.
16. EQUITY
Changes in Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive losses are as follows:
| | | Currency Translation Adjustments (1) | | Minimum Pension Liability Adjustment | | Accumulated Other Comprehensive Loss (2) | | Currency Translation Adjustments (1) | | Minimum Pension Liability Adjustment | | Accumulated Other Comprehensive Loss (2) |
| Balance at January 1, 2017 | $ | (6) | | | $ | (34) | | | $ | (40) | | |
| Other comprehensive income (loss) before reclassifications | 3 | | | (1) | | | 2 | | |
| Amounts reclassified from accumulated other comprehensive loss | — | | | 2 | | (3) | | 2 | | |
| Income tax expense | (1) | | | — | | | (1) | | |
| Current period change | 2 | | | 1 | | | 3 | | |
| Balance at December 31, 2017 | (4) | | | (33) | | | (37) | | |
| Adoption of a new accounting pronouncement | (1) | | (4) | | (8) | | (4) | | (9) | | |
| Balance at January 1, 2020 | | Balance at January 1, 2020 | $ | (8) | | | $ | (48) | | | $ | (56) | |
| Other comprehensive loss before reclassifications | Other comprehensive loss before reclassifications | (3) | | | (6) | | | (9) | | Other comprehensive loss before reclassifications | — | | | (6) | | | (6) | |
| Amounts reclassified from accumulated other comprehensive loss | Amounts reclassified from accumulated other comprehensive loss | — | | | 2 | | (3) | | 2 | | Amounts reclassified from accumulated other comprehensive loss | — | | | 2 | | (3) | 2 | |
| Income tax benefit | Income tax benefit | — | | | 1 | | | 1 | | Income tax benefit | — | | | 1 | | | 1 | |
| Current period change | Current period change | (4) | | | (11) | | | (15) | | Current period change | — | | | (3) | | | (3) | |
| Balance at December 31, 2018 | (8) | | | (44) | | | (52) | | |
| Other comprehensive loss before reclassifications | — | | | (8) | | | | (8) | | |
| Balance at December 31, 2020 | | Balance at December 31, 2020 | (8) | | | (51) | | | (59) | |
| Other comprehensive (loss) income before reclassifications | | Other comprehensive (loss) income before reclassifications | (1) | | | 10 | | | 9 | |
| Amounts reclassified from accumulated other comprehensive loss | Amounts reclassified from accumulated other comprehensive loss | — | | | 2 | | (3) | | 2 | | Amounts reclassified from accumulated other comprehensive loss | — | | | 3 | | (3) | 3 | |
| Income tax benefit | — | | | 2 | | | 2 | | |
| Income tax expense | | Income tax expense | — | | | (3) | | | (3) | |
| Current period change | Current period change | — | | | (4) | | | (4) | | Current period change | (1) | | | 10 | | | 9 | |
| Balance at December 31, 2019 | $ | (8) | | | $ | (48) | | | $ | (56) | | |
| Balance at December 31, 2021 | | Balance at December 31, 2021 | (9) | | | (41) | | | (50) | |
| Other comprehensive income before reclassifications | | Other comprehensive income before reclassifications | — | | | 1 | | | 1 | |
| Amounts reclassified from accumulated other comprehensive loss | | Amounts reclassified from accumulated other comprehensive loss | — | | | 2 | | (3) | 2 | |
| Income tax expense | | Income tax expense | — | | | (1) | | | (1) | |
| Current period change | | Current period change | — | | | 2 | | | 2 | |
| Balance at December 31, 2022 | | Balance at December 31, 2022 | $ | (9) | | | $ | (39) | | | $ | (48) | |
_______________
(1)Assets and liabilities of foreign subsidiaries having non-U.S. dollar functional currencies are translated at exchange rates at the balance sheet dates and equity accounts are translated at historical spot rates. Revenues and expenses are translated at average exchange rates during the periods presented. The gains or losses resulting from translating foreign currency financial statements into U.S. dollars are included in accumulated other comprehensive income (loss). Gains or losses resulting from foreign currency transactions are included in the Consolidated Statements of Operations and primarily relate to discontinued operations.Operations.
(2)As of December 31, 2019,2022, the Company does not have any after-tax components of accumulated other comprehensive loss attributable to noncontrolling interests.
(3)These amounts represent the amortization of actuarial lossgain (loss) to periodic pension cost and were reclassified from accumulated other comprehensive income to the general and administrative expenses line on the statement of operations.
(4)These amounts represent adjustments for the adoption of the accounting standard update on stranded tax effects related to the 2017 Tax Act which resulted in a debit to Accumulated other comprehensive loss and a credit to Accumulated deficit of $9 million during the first quarter of 2018.
Dividend Policy
The Board declared and paid quarterly cash dividends of $0.09 per share of the Company's common stock since August 2016. In early November 2019, the Company's Board of Directors determined that, effective immediately, it will no longer pay a dividend. The Company returned a total of $31 million, $45 million and $49 million to stockholders in cash dividends during the years ended December 31, 2019, 2018 and 2017, respectively.
Pursuant to the Company’s policy, dividends payable in cash are treated as a reduction of additional paid-in capital since the Company is currently in an accumulated deficit position.
RealogyAnywhere Group Statements of Equity for the years ended December 31, 2019, 20182022, 2021 and 20172020
Total equity for RealogyAnywhere Group equals that of Realogy Holdings,Anywhere, but the components, common stock and additional paid-in capital are different. The table below presents information regarding the balances and changes in common stock and additional paid-in capital of RealogyAnywhere Group for each of the three years ended December 31, 2019, 20182022, 2021 and 2017.2020.
| | | | Realogy Group Stockholder’s Equity | | | | | | | Anywhere Group Stockholder’s Equity | | | | |
| | Common Stock | | | Additional
Paid-In
Capital | | Accumulated
Deficit | | Accumulated Other Comprehensive Loss | | Non-
controlling
Interests | | Total
Equity | | Common Stock | | Additional
Paid-In
Capital | | Accumulated
Deficit | | Accumulated Other Comprehensive Loss | | Non-
controlling
Interests | | Total
Equity |
| | Shares | | Amount | | | Accumulated
Deficit | | Accumulated Other Comprehensive Loss | | Non-
controlling
Interests | | Total
Equity |
| Balance at January 1, 2017 | — | | | $ | — | | | $ | 5,566 | | | $ | (3,062) | | | $ | (40) | | | $ | 5 | | | $ | 2,469 | | |
| Balance at January 1, 2020 | | Balance at January 1, 2020 | — | | | $ | — | | | $ | 4,843 | | | $ | (2,695) | | | $ | (56) | | | $ | 4 | | | $ | 2,096 | |
| Net (loss) income | | Net (loss) income | — | | | — | | | — | | | (360) | | | — | | | 4 | | | (356) | |
| Other comprehensive loss | | Other comprehensive loss | — | | | — | | | — | | | — | | | (3) | | | — | | | (3) | |
| Stock-based compensation | | Stock-based compensation | — | | | — | | | 34 | | | — | | | — | | | — | | | 34 | |
| Dividends | | Dividends | — | | | — | | | — | | | — | | | — | | | (4) | | | (4) | |
| Balance at December 31, 2020 | | Balance at December 31, 2020 | — | | | $ | — | | | $ | 4,877 | | | $ | (3,055) | | | $ | (59) | | | $ | 4 | | | $ | 1,767 | |
| Net income | Net income | — | | | — | | | — | | | 431 | | | — | | | 3 | | | 434 | | Net income | — | | | — | | | — | | | 343 | | | — | | | 7 | | | 350 | |
| Other comprehensive income | Other comprehensive income | — | | | — | | | — | | | — | | | 3 | | | — | | | 3 | | Other comprehensive income | — | | | — | | | — | | | — | | | 9 | | | — | | | 9 | |
| Repurchase of Common Stock | — | | | — | | | (280) | | | — | | | — | | | — | | | (280) | | |
| Contributions from Realogy Holdings | — | | | — | | | 8 | | | — | | | — | | | — | | | 8 | | |
| Contributions from Anywhere | | Contributions from Anywhere | — | | | — | | | 51 | | | — | | | — | | | — | | | 51 | |
| Stock-based compensation | Stock-based compensation | — | | | — | | | 41 | | | — | | | — | | | — | | | 41 | | Stock-based compensation | — | | | — | | | 20 | | | — | | | — | | | — | | | 20 | |
| Dividends | Dividends | — | | | — | | | (49) | | | — | | | — | | | (4) | | | (53) | | Dividends | — | | | — | | | — | | | — | | | — | | | (5) | | | (5) | |
| Balance at December 31, 2017 | — | | | $ | — | | | $ | 5,286 | | | $ | (2,631) | | | $ | (37) | | | $ | 4 | | | $ | 2,622 | | |
| Cumulative effect of adoption of new accounting pronouncements | — | | | — | | | — | | | (13) | | | (9) | | | — | | | (22) | | |
| Net income | — | | | — | | | — | | | 137 | | | — | | | 3 | | | 140 | | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | (6) | | | — | | | (6) | | |
| Repurchase of Common Stock | — | | | — | | | (402) | | | — | | | — | | | — | | | (402) | | |
| Contributions from Realogy Holdings | — | | | — | | | 1 | | | — | | | — | | | — | | | 1 | | |
| Balance at December 31, 2021 | | Balance at December 31, 2021 | — | | | $ | — | | | $ | 4,948 | | | $ | (2,712) | | | $ | (50) | | | $ | 6 | | | $ | 2,192 | |
| Cumulative effect adjustment due to the adoption of ASU 2020-06 | | Cumulative effect adjustment due to the adoption of ASU 2020-06 | — | | | — | | | (53) | | | 5 | | | — | | | — | | | (48) | |
| Net loss (income) | | Net loss (income) | — | | | — | | | — | | | (287) | | | — | | | 4 | | | (283) | |
| Other comprehensive income | | Other comprehensive income | — | | | — | | | — | | | — | | | 2 | | | — | | | 2 | |
| Repurchase of common stock | | Repurchase of common stock | — | | | — | | | (97) | | | — | | | — | | | — | | | (97) | |
| Contributions from Anywhere | | Contributions from Anywhere | — | | | — | | | 2 | | | — | | | — | | | — | | | 2 | |
| Stock-based compensation | Stock-based compensation | — | | | — | | | 30 | | | — | | | — | | | — | | | 30 | | Stock-based compensation | — | | | — | | | 6 | | | — | | | — | | | — | | | 6 | |
| Dividends | Dividends | — | | | — | | | (45) | | | — | | | — | | | (3) | | | (48) | | Dividends | — | | | — | | | — | | | — | | | — | | | (8) | | | (8) | |
| Balance at December 31, 2018 | — | | | $ | — | | | $ | 4,870 | | | $ | (2,507) | | | $ | (52) | | | $ | 4 | | | $ | 2,315 | | |
| Net (loss) income | — | | | — | | | — | | | (188) | | | — | | | 3 | | | (185) | | |
| Other comprehensive income | — | | | — | | | — | | | — | | | (4) | | | — | | | (4) | | |
| Repurchase of Common Stock | — | | | — | | | (20) | | | — | | | — | | | — | | | (20) | | |
| Stock-based compensation | — | | | — | | | 24 | | | — | | | — | | | — | | | 24 | | |
| Dividends | — | | | — | | | (31) | | | — | | | — | | | (3) | | | (34) | | |
| Balance at December 31, 2019 | — | | | $ | — | | | $ | 4,843 | | | $ | (2,695) | | | $ | (56) | | | $ | 4 | | | $ | 2,096 | | |
| Contributions from non-controlling interests | | Contributions from non-controlling interests | — | | | — | | | — | | | — | | | — | | | 1 | | | 1 | |
| Balance at December 31, 2022 | | Balance at December 31, 2022 | — | | | $ | — | | | $ | 4,806 | | | $ | (2,994) | | | $ | (48) | | | $ | 3 | | | $ | 1,767 | |
17. EARNINGS (LOSS) PER SHARE
Earnings (loss) per share attributable to Anywhere
Basic earnings (loss) per common share is computed based on net income (loss) attributable to Anywhere stockholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per common share is computed consistently with the basic computation plus the effect of dilutive potential common shares outstanding during the period. Dilutive potential common shares include shares that the Company could be obligated to issue from its Exchangeable Senior Notes and warrants if dilutive (see Note 9, "Short and Long-Term Debt", for further discussion) and outstanding stock-based compensation awards (see Note 13, "Stock-Based Compensation", for further discussion). For purposes of computing diluted earnings (loss) per common share, weighted average common shares do not include potentially dilutive common shares if their effect is anti-dilutive. As such, the shares that the Company could be obligated to issue from its stock options, warrants and Exchangeable Senior Notes are excluded from the earnings (loss) per share calculation if the exercise or exchangeable price exceeds the average market price of common shares.
The Company uses the treasury stock method to calculate the dilutive effect of outstanding stock-based compensation. If dilutive, the Company uses the if converted method to calculate the dilutive effect of its Exchangeable Senior Notes. These notes will have a dilutive impact when the average market price of the Company’s common stock exceeds the initial
17. EARNINGS (LOSS) PER SHAREexchange price of $24.49 per share. The Exchangeable Senior Notes were not dilutive as of December 31, 2022 as the closing price of the Company's common stock as of December 31, 2022 was less than the initial exchange price.
Earnings (loss) per share attributable to Realogy Holdings
Basic earnings (loss) per share is computed based on net income (loss) attributable to Realogy Holdings stockholders divided by the basic weighted-average shares outstanding during the period. Dilutive earnings per share is computed consistently with the basic computation while giving effect to all dilutive potential common shares and common share equivalents that were outstanding during the period. Realogy Holdings uses the treasury stock method to reflect the potential dilutive effect of unvested stock awards and unexercised options. The following table sets forth the computation of basic and diluted (loss) earnings (loss) per share:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
| (in millions, except per share data) | 2019 | | 2018 | | 2017 |
| Numerator: | | | | | |
| Numerator for earnings per share—continuing operations | | | | | |
| Net income (loss) from continuing operations | $ | (118) | | | $ | 146 | | | $ | 428 | |
| Less: Net income attributable to noncontrolling interests | (3) | | | (3) | | | (3) | |
| Net (loss) income from continuing operations attributable to Realogy Holdings | $ | (121) | | | $ | 143 | | | $ | 425 | |
| | | | | |
| Numerator for earnings per share—discontinued operations | | | | | |
| Net (loss) income from discontinued operations | $ | (67) | | | $ | (6) | | | $ | 6 | |
| | | | | |
| Net (loss) income attributable to Realogy Holdings shareholders | $ | (188) | | | $ | 137 | | | $ | 431 | |
| | | | | |
| Denominator: | | | | | |
| Weighted average common shares outstanding (denominator for basic (loss) earnings per share calculation) | 114.2 | | | 124.0 | | | 136.7 | |
| Dilutive effect of stock-based compensation (a) (b) | — | | | 1.3 | | | 1.7 | |
| Weighted average common shares outstanding (denominator for diluted (loss) earnings per share calculation) | 114.2 | | | 125.3 | | | 138.4 | |
| | | | | |
| Basic (loss) earnings per share attributable to Realogy Holdings shareholders: | | | | | |
| Basic (loss) earnings per share from continuing operations | $ | (1.06) | | | $ | 1.15 | | | $ | 3.11 | |
| Basic (loss) earnings per share from discontinued operations | (0.59) | | | (0.05) | | | 0.04 | |
| Basic (loss) earnings per share | $ | (1.65) | | | $ | 1.10 | | | $ | 3.15 | |
| | | | | |
| Diluted (loss) earnings per share attributable to Realogy Holdings shareholders: | | | | | |
| Diluted (loss) earnings per share from continuing operations | $ | (1.06) | | | $ | 1.14 | | | $ | 3.07 | |
| Diluted (loss) earnings per share from discontinued operations | (0.59) | | | (0.05) | | | 0.04 | |
| Diluted (loss) earnings per share | $ | (1.65) | | | $ | 1.09 | | | $ | 3.11 | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| (in millions, except per share data) | 2022 | | 2021 | | 2020 |
| Numerator: | | | | | |
| Net (loss) income attributable to Anywhere shareholders | $ | (287) | | | $ | 343 | | | $ | (360) | |
| Denominator: | | | | | |
| Weighted average common shares outstanding (denominator for basic (loss) earnings per share calculation) | 113.8 | | | 116.4 | | | 115.2 | |
| Dilutive effect of stock-based compensation awards (a) | — | | | 3.8 | | | — | |
| Dilutive effect of Exchangeable Senior Notes and warrants (b) | — | | | — | | | |
| Weighted average common shares outstanding (denominator for diluted (loss) earnings per share calculation) | 113.8 | | | 120.2 | | | 115.2 | |
| (Loss) earnings per share attributable to Anywhere shareholders: | | | | | |
| Basic (loss) earnings per share | $ | (2.52) | | | $ | 2.95 | | | $ | (3.13) | |
| Diluted (loss) earnings per share | $ | (2.52) | | | $ | 2.85 | | | $ | (3.13) | |
_______________
(a)The Company was in a net loss position for the yearyears ended December 31, 20192022 and 2020, and therefore the impact of incentive equity awards were excluded from the computation of dilutive loss per share as the inclusion of such amounts would be anti-dilutive (see Note 14, "Stock-Based Compensation", for outstanding equity awards as of December 31, 2019).
(b)anti-dilutive. The yearsyear ended December 31, 2018 and 2017, respectively, exclude 6.9 million and 5.32021 excludes 3.7 million shares of common stock issuable for incentive equity awards which includes performance share units based on the achievement of target amounts, that are anti-dilutive to the diluted earnings per share computation.
Under(b)Shares to be provided to the 2017, 2018Company from the exchangeable note hedge transactions purchased concurrently with its issuance of Exchangeable Senior Notes in June 2021 are anti-dilutive and 2019 sharetherefore they are not treated as a reduction to its diluted shares.
The Company may repurchase programs,shares of its common stock under authorizations 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.
The Company's Board of Directors authorized a share repurchase program of up to $825$300 million of the Company’sCompany's common stock. Instock in February 2022. From the first quarterdate of 2019,authorization through December 31, 2022, the Company repurchased and retired 1.28.8 million shares of common stock for $20$97 million. As of December 31, 2022, $203 million at a weighted average market price of $17.21 per share. The Company did notremained available for repurchase any shares under the share repurchase programs during the second, third and fourth quarters of 2019. For the year ended December 31, 2018, the Company repurchased and retired 17.9 million shares of common stock for $402 million at a weighted average market price of $22.47 per share. For the year ended December 31, 2017, the Company repurchased and retired 9.4 million shares of common stock for $276 million at a weighted average market price of $29.38 per share.program. The purchase of shares under these plans reducethis plan reduces the weighted-average number of shares outstanding in the basic earnings per share calculation.
18. RISK MANAGEMENT AND FAIR VALUE OF FINANCIAL INSTRUMENTS
RISK MANAGEMENT
The following is a description of the Company’s risk management policies.
Interest Rate Risk
The Company is exposed to market risk from changes in interest rates primarily through senior secured debt. At December 31, 2019,2022, the Company's primary interest rate exposure was to interest rate fluctuations, specifically LIBOR, due to its impact on variable rate borrowings ofunder the Term Loan A Facility, and SOFR, due to its impact on our borrowings under the Revolving Credit Facility and Term Loan B underFacility. In connection with the July 2022 Amendment to the Senior Secured Credit Agreement and Term Loan AFacility, LIBOR was replaced with a SOFR-based rate plus a 10 basis point SOFR credit spread adjustment as the applicable benchmark for the Revolving Credit Facility. At
As of December 31, 2019,2022, the Company had variable interest rate long-term debt from outstanding amounts under the Term Loan A Facility of $222 million, which was based on LIBOR, from theand outstanding term loans and revolveramounts under its Senior Securedour Revolving Credit Facility and Term Loan A Facility of $1,965 million.$350 million, which was based on term SOFR, excluding $163 million of securitization obligations.
The Company hashistorically used interest rate swaps with an aggregate notional value of $1,600 million to manage a portion of the Company's exposure to changes in interest rate associated with variable rate borrowings. The fixed interest rates on the swaps range from 2.07% to 3.11%. AlthoughDuring September 2022, the Company has entered into theseterminated $550 million of its interest rate swaps involvingwhich had expiration dates of August 2025 and November 2027 and the exchange of floating for fixed rate interest payments, suchCompany's remaining interest rate swaps, do not eliminate interest rate volatility for all of the Company's variable rate indebtedness at December 31, 2019. In addition, the fairwhich had a value of the interest rate swaps is also subject to movements$450 million, expired in LIBOR and will fluctuate in future periods. The Company has recognized a liability of $47 million for the fair value of the interest rate swaps at December 31, 2019. Therefore, an increase in the LIBOR yield curve could increase the fair value of the interest rate swaps and decrease interest expense.November 2022.
Credit Risk and Exposure
The Company is exposed to counterparty credit risk in the event of nonperformance by counterparties to various agreements and sales transactions. The Company manages such risk by evaluating the financial position and creditworthiness of such counterparties and by requiring collateral in instances in which financing is provided. The Company mitigates counterparty credit risk associated with its derivative contracts by monitoring the amounts at risk with each counterparty to such contracts, periodically evaluating counterparty creditworthiness and financial position, and where possible, dispersing its risk among multiple counterparties.
As of December 31, 2019,2022, there were no significant concentrations of credit risk with any individual counterparty or a group of counterparties. The Company actively monitors the credit risk associated with the Company’s receivables.
Market Risk Exposure
RealogyOwned Brokerage Group ownsoperates real estate brokerage offices located in and around large metropolitan areas in the U.S. RealogyOwned Brokerage Group has more offices and realizes more of its revenues in California, Florida and the New York metropolitan area than any other regions of the country. For the year ended December 31, 2019, Realogy2022, Owned Brokerage Group generated approximately 23% of its revenues from California, 21% from the New York metropolitan area and 13% from Florida. For the year ended December 31, 2021, Owned Brokerage Group generated approximately 25% of its revenues from California, 22%21% from the New York metropolitan area and 10%13% from Florida. For the year ended December 31, 2018, Realogy2020, Owned Brokerage Group generated approximately 27%24% of its revenues from California, 20% from the New York metropolitan area and 9% from Florida. For the year ended December 31, 2017, Realogy Brokerage Group generated approximately 27% of its revenues from California, 22% from the New York metropolitan area and 9%11% from Florida.
Derivative Instruments
The Company records derivatives and hedging activities on the balance sheet at their respective fair values. TheDuring September 2022, the Company enters intoterminated $550 million of its interest rate swaps to manage its exposure to changeswhich had expiration dates of August 2025 and November 2027 and the Company's remaining interest rate swaps, which had a value of $450 million, expired in interest rates associated with its variable rate borrowings.November 2022. As of December 31, 2019,2022, the Company had no interest rate swaps with an aggregate notional value of $1,600 million to offset the variability in cash flows resulting from the term loan facilities as follows:
| | | | | | | | |
Notional Value (in millions) | Commencement Date | Expiration Date |
$600 | August 2015 | August 2020 |
$450 | November 2017 | November 2022 |
$400 | August 2020 | August 2025 |
$150 | November 2022 | November 2027 |
The swaps helphelped to protect ourthe Company's outstanding variable rate borrowings from future interest rate volatility. The Company hashad not elected to utilize hedge accounting for these interest rate swaps; therefore, any change in fair value iswas recorded in the Consolidated Statements of Operations.
The fair value of derivative instruments was as follows:
| | | | | | | | | | | | | | | | | | | | |
| Not Designated as Hedging Instruments | | Balance Sheet Location | | December 31, 2019 | | December 31, 2018 |
| Interest rate swap contracts | | Other non-current assets | | $ | — | | | $ | 6 | |
| | Other current and non-current liabilities | | 47 | | | 16 | |
| | | | | | | | | | | | | | | | | | | | |
| Not Designated as Hedging Instruments | | Balance Sheet Location | | December 31, 2022 | | December 31, 2021 |
| Interest rate swap contracts | | Other current and non-current liabilities | | — | | | 46 | |
The effect of derivative instruments on earnings was as follows:
| Derivative Instruments Not
Designated as Hedging Instruments | Derivative Instruments Not
Designated as Hedging Instruments | | Location of (Gain) or Loss Recognized for Derivative Instruments | | (Gain) or Loss Recognized on Derivatives | | Derivative Instruments Not
Designated as Hedging Instruments | | Location of (Gain) or Loss Recognized for Derivative Instruments | | (Gain) or Loss Recognized on Derivatives |
| Year Ended December 31, | | Derivative Instruments Not
Designated as Hedging Instruments | | Location of (Gain) or Loss Recognized for Derivative Instruments | | Year Ended December 31, |
| 2019 | | 2018 | | 2017 | 2022 | 2020 |
| Interest rate swap contracts | Interest rate swap contracts | | Interest expense | | $ | 39 | | | $ | 4 | | | $ | (4) | | Interest rate swap contracts | | Interest expense | | $ | (40) | | | $ | (14) | | | $ |
Fair Value Measurements
The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value.
| | | | | | | | |
| Level Input: | | Input Definitions: |
| Level I | | Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date. |
| | |
| Level II | | Inputs other than quoted prices included in Level I that are observable for the asset or liability through corroboration with market data at the measurement date. |
| | |
| Level III | | Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. |
The availability of observable inputs can vary from asset to asset and is affected by a wide variety of factors including, for example, the type of asset, whether the asset is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level III. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
The fair value of financial instruments is generally determined by reference to quoted market values. In cases where quoted market prices are not available, fair value is based on estimates using present value or other valuation techniques, as appropriate. The fair value of interest rate swaps is determined based upon a discounted cash flow approach.
The Company measures financial instruments at fair value on a recurring basis and recognizes transfers within the fair value hierarchy at the end of the fiscal quarter in which the change in circumstances that caused the transfer occurred.
The following table summarizes fair value measurements by level at December 31, 20192022 for assets and liabilities measured at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | |
| Level I | | Level II | | Level III | | Total |
| Deferred compensation plan assets (included in other non-current assets) | $ | 2 | | | $ | — | | | $ | — | | | $ | 2 | |
| Interest rate swaps (included in other current and non-current liabilities) | — | | | 47 | | | — | | | 47 | |
| Contingent consideration for acquisitions (included in accrued expenses and other current liabilities and other non-current liabilities) | — | | | — | | | 4 | | | 4 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Level I | | Level II | | Level III | | Total |
| Deferred compensation plan assets (included in other non-current assets) | $ | 1 | | | $ | — | | | $ | — | | | $ | 1 | |
| Contingent consideration for acquisitions (included in accrued expenses and other current liabilities and other non-current liabilities) | — | | | — | | | 12 | | | 12 | |
The following table summarizes fair value measurements by level at December 31, 20182021 for assets and liabilities measured at fair value on a recurring basis:
| | | Level I | | Level II | | Level III | | Total | | Level I | | Level II | | Level III | | Total |
| Deferred compensation plan assets (included in other non-current assets) | Deferred compensation plan assets (included in other non-current assets) | $ | 2 | | | $ | — | | | $ | — | | | $ | 2 | | Deferred compensation plan assets (included in other non-current assets) | $ | 1 | | | $ | — | | | $ | — | | | $ | 1 | |
| Interest rate swaps (included in other non-current assets) | — | | | 6 | | | — | | | 6 | | |
| Interest rate swaps (included in other non-current liabilities) | — | | | 16 | | | — | | | 16 | | |
| Interest rate swaps (included in other current and non-current liabilities) | | Interest rate swaps (included in other current and non-current liabilities) | — | | | 46 | | | — | | | 46 | |
| Contingent consideration for acquisitions (included in accrued expenses and other current liabilities and other non-current liabilities) | Contingent consideration for acquisitions (included in accrued expenses and other current liabilities and other non-current liabilities) | — | | | — | | | 10 | | | 10 | | Contingent consideration for acquisitions (included in accrued expenses and other current liabilities and other non-current liabilities) | — | | | — | | | 9 | | | 9 | |
The fair value of the Company’s contingent consideration for acquisitions is measured using a probability weighted-average discount rate to estimate future cash flows based upon the likelihood of achieving future operating results for individual acquisitions. These assumptions are deemed to be unobservable inputs and as such the Company’s contingent consideration is classified within Level III of the valuation hierarchy. The Company reassesses the fair value of the contingent consideration liabilities on a quarterly basis.
The following table presents changes in Level III financial liabilities measured at fair value on a recurring basis:
| | | | | | | | |
| | Level III |
Fair value of contingent consideration at December 31, 20182021 | | $ | 109 | |
| Additions: contingent consideration related to acquisitions completed during the period | | —13 | |
| Reductions: payments of contingent consideration | | (4) | |
| Changes in fair value (reflected in general and administrative expenses) | | (2)(6) | |
Fair value of contingent consideration at December 31, 20192022 | | $ | 412 | |
The following table summarizes the principal amount of the Company’s indebtedness compared to the estimated fair value, primarily determined by quoted market values, at:
| | | | December 31, 2019 | | | December 31, 2018 | | | December 31, 2022 | | December 31, 2021 |
| Debt | Debt | Principal Amount | | Estimated
Fair Value (a) | | Principal Amount | | Estimated
Fair Value (a) | Debt | Principal Amount | | Estimated
Fair Value (a) | | Principal Amount | | Estimated
Fair Value (a) |
| Senior Secured Credit Facility: | | | | | | | | |
| Revolving Credit Facility | Revolving Credit Facility | $ | 190 | | | $ | 190 | | | $ | 270 | | | $ | 270 | | Revolving Credit Facility | $ | 350 | | | $ | 350 | | | $ | — | | | $ | — | |
| Term Loan B | 1,058 | | | 1,048 | | | 1,069 | | | 1,010 | | |
| Term Loan A Facility: | | |
| Term Loan A | 717 | | | 705 | | | 736 | | | 707 | | |
| 4.50% Senior Notes | — | | | — | | | 450 | | | 447 | | |
| 5.25% Senior Notes | 550 | | | 557 | | | 550 | | | 524 | | |
| Extended Term Loan A | | Extended Term Loan A | 222 | | | 216 | | | 232 | | | 231 | |
| 7.625% Senior Secured Second Lien Notes | | 7.625% Senior Secured Second Lien Notes | — | | | — | | | 550 | | | 583 | |
| 4.875% Senior Notes | 4.875% Senior Notes | 407 | | | 401 | | | 500 | | | 434 | | 4.875% Senior Notes | — | | | — | | | 407 | | | 418 | |
| 9.375% Senior Notes | 9.375% Senior Notes | 550 | | | 572 | | | — | | | — | | 9.375% Senior Notes | — | | | — | | | 550 | | | 596 | |
| 5.75% Senior Notes | | 5.75% Senior Notes | 900 | | | 680 | | | 900 | | | 923 | |
| 5.25% Senior Notes | | 5.25% Senior Notes | 1,000 | | | 729 | | | — | | | — | |
| 0.25% Exchangeable Senior Notes | | 0.25% Exchangeable Senior Notes | 403 | | | 280 | | | 403 | | | 399 | |
_______________
(a)The fair value of the Company's indebtedness is categorized as Level II.
19. SEGMENT INFORMATION
The reportable segments presented below represent the Company’s segments for which separate financial information is available and which is utilized on a regular basis by its chief operating decision maker to assess performance and to allocate resources. In identifying its reportable segments, the Company also considers the nature of services provided by its segments.
Management evaluates the operating results of each of its 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, impairments, gains or losses on discontinued operations and gains or losses on the sale of businesses, investments or other assets. The Company’s presentation of Operating EBITDA may not be comparable to similar measures used by other companies.
| | | | | | | | | | | | | | | | | |
| | Revenues (a) (b) | | | | |
| | Year Ended December 31, | | | | |
| | 2019 | | 2018 | | 2017 |
| Realogy Franchise Group | $ | 803 | | | $ | 820 | | | $ | 830 | |
| Realogy Brokerage Group | 4,409 | | | 4,607 | | | 4,643 | |
| Realogy Title Group | 596 | | | 580 | | | 570 | |
| Realogy Leads Group | 83 | | | 81 | | | 78 | |
| Corporate and Other (c) | (293) | | | (306) | | | (311) | |
| Total Company | $ | 5,598 | | | $ | 5,782 | | | $ | 5,810 | |
_______________
(a)Transactions between segments are eliminated in consolidation. Revenues for Realogy Franchise Group include intercompany royalties and marketing fees paid by RealogyIn October 2022, the Company initiated a plan to integrate Owned Brokerage Group of $293 million, $306 million and $311 million for the years ended December 31, 2019, 2018Title Group. However, based upon industry and 2017, respectively. Such amounts are eliminated through the Corporate and Other line.
(b)Revenues for Realogy Leads Group include intercompany referral commissions paid by Realogy Brokerage Group of $18 million for each of the years ended December 31, 2019, 2018 and 2017. Such amounts are recorded as contra-revenues by Realogy Brokerage Group. There are no other material intersegment transactions.
(c)Includes the elimination of transactions between segments.
Set forth in the tables below is a reconciliation of Net (loss) income to Operating EBITDA and Operating EBITDA presented by reportable segment for the years ended December 31, 2019, 2018 and 2017:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | |
| | 2019 | | 2018 | | 2017 |
| Net (loss) income attributable to Realogy Holdings and Realogy Group | $ | (188) | | | $ | 137 | | | $ | 431 | |
| Less: Net (loss) income from discontinued operations | (67) | | | (6) | | | 6 | |
| Add: Income tax (benefit) expense from continuing operations (a) | (22) | | | 67 | | | (66) | |
| (Loss) income from continuing operations before income taxes | (143) | | | 210 | | | 359 | |
| Add: Depreciation and amortization (b) | 169 | | | 166 | | | 169 | |
| Interest expense, net | 249 | | | 189 | | | 157 | |
| Restructuring costs, net (c) | 42 | | | 47 | | | 12 | |
| Impairments (d) | 249 | | | — | | | — | |
| Former parent legacy cost (benefit) (e) | 1 | | | 4 | | | (10) | |
| (Gain) loss on the early extinguishment of debt (e) | (5) | | | 7 | | | 5 | |
| Operating EBITDA | $ | 562 | | | $ | 623 | | | $ | 692 | |
| | | | | | | | | | | | | | | | | |
| | Operating EBITDA | | | | |
| | Year Ended December 31, | | | | |
| | 2019 | | 2018 | | 2017 |
| Realogy Franchise Group | $ | 535 | | | $ | 564 | | | $ | 560 | |
| Realogy Brokerage Group (f) | 4 | | | 44 | | | 135 | |
| Realogy Title Group | 68 | | | 49 | | | 59 | |
| Realogy Leads Group | 53 | | | 51 | | | 45 | |
| Corporate and Other (e)(g) | (98) | | | (85) | | | (107) | |
| Total | $ | 562 | | | $ | 623 | | | $ | 692 | |
______________
(a)Income tax benefit for the year ended December 31, 2017 reflects the impact of the 2017 Tax Act.
(b)Depreciation and amortization for the years ended December 31, 2018 and 2017 includes $2 million and $3 million, respectively, of amortization expense related to Guaranteed Rate Affinity's purchase accounting included in the "Equity in (earnings) losses of unconsolidated entities" line on the Consolidated Statement of Operations.
(c)The year ended December 31, 2019 includes restructuring charges of $2 million at Realogy Franchise Group, $25 million at Realogy Brokerage Group, $3 million at Realogy Title Group, $2 million at Realogy Leads Group and $10 million at Corporate and Other.
The year ended December 31, 2018 includes restructuring charges of $3 million at Realogy Franchise Group, $37 million at Realogy Brokerage Group, $4 million at Realogy Title Group and $3 million at Corporate and Other.
The year ended December 31, 2017 includes restructuring charges of $1 million at Realogy Franchise Group, $9 million at Realogy Brokerage Group, $1 million at Realogy Title Group and $1 million at Corporate and Other.
(d)Impairments for the year ended December 31, 2019 includes a goodwill impairment charge of $237 million at Realogy Brokerage Group. The impairment charge of $237 million was offset by an income tax benefit of $57 million resulting in a net reduction in the carrying value of Realogy Brokerage Group of $180 million (see Note 2, "Summary of Significant Accounting Policies", for additional information). In addition, other impairment charges, primarily related to lease asset impairments, of $12 million were incurred for the year ended December 31, 2019.
(e)Former parent legacy items and (Gain) loss on the early extinguishment of debt are recorded in Corporate and Other.
(f)Includes $22 million of equity earnings from PHH Home Loans for the year ended December 31, 2017.
(g)Includes the elimination of transactions between segments.
Depreciation and Amortization
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | |
| | 2019 | | 2018 | | 2017 |
| Realogy Franchise Group | $ | 77 | | | $ | 77 | | | $ | 79 | |
| Realogy Brokerage Group | 54 | | | 51 | | | 50 | |
| Realogy Title Group | 13 | | | 13 | | | 16 | |
| Realogy Leads Group | 1 | | | 2 | | | 1 | |
| Corporate and Other | 24 | | | 21 | | | 20 | |
| Total Company | $ | 169 | | | $ | 164 | | | $ | 166 | |
Segment Assets
| | | | | | | | | | | |
| | As of December 31, | | |
| | 2019 | | 2018 |
| Realogy Franchise Group | $ | 4,317 | | | $ | 4,388 | |
| Realogy Brokerage Group | 1,448 | | | 1,228 | |
| Realogy Title Group | 576 | | | 492 | |
| Realogy Leads Group | 192 | | | 193 | |
| Corporate and Other | 260 | | | 190 | |
| Assets - held for sale | 750 | | | 799 | |
| Total Company | $ | 7,543 | | | $ | 7,290 | |
Capital Expenditures
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | |
| | 2019 | | 2018 | | 2017 |
| Realogy Franchise Group | $ | 19 | | | $ | 10 | | | $ | 9 | |
| Realogy Brokerage Group | 56 | | | 44 | | | 44 | |
| Realogy Title Group | 10 | | | 11 | | | 13 | |
| Realogy Leads Group | 2 | | | — | | | 2 | |
| Corporate and Other | 21 | | | 27 | | | 22 | |
| Total Company | $ | 108 | | | $ | 92 | | | $ | 90 | |
20. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Revision of Third Quarter 2019 Financial Statements
The Company performed an interim impairment analysis of goodwill and indefinite-lived intangible assets as of September 1, 2019 and early adopted the new goodwill guidance in connection with this assessment. The new standard has a new requirement that calls for the impairment charge and deferred tax effect to be adjusted using the "simultaneous equation method" which effectively grosses up the goodwill impairment charge to account for the related income tax benefit so that the resulting carrying value does not exceed the calculated fair value. When the Company recorded the impairment charge of $180 million for the Realogy Brokerage Group in the third quarter it did not apply the simultaneous equation method, which resulted in an understatement of the non-cash impairment charge for the quarter ended September 30, 2019. The Company evaluated the impact of the revision in accordance with SEC Staff Accounting Bulletin (SAB) No. 99, "Materiality" and concluded that it was not material to the third quarter 2019 reporting period. As such, the revision is reflected below and will be included in the third quarter 2020 Form 10-Q containing such financial information.
As a result of the pending sale of Cartus Relocation Services, the Company met the held for sale requirements under ASC 360 and the discontinued operations criteria under ASC 205 inbusiness developments during the fourth quarter of 2019. Therefore, amounts reported in2022, the Company's Form 10-Q for the third quarter of 2019 were not adjusted for discontinued operations. The table below includes the "revised" numbers for the third quarter of 2019 as presented in the third quarter as well as "revised and adjusted for discontinued operations" to reflect the impact of discontinued operations as presented in the 10-K for the year endedCompany has determined that its reportable segments will remain consistent at December 31, 2019.2022 with prior periods.
The impact of the revision to the Condensed Consolidated Statements of Operations as filed in the Company's Form 10-Q for the three and nine months ended September 30, 2019, as well as for the three and nine months ended September 30, 2019 as a result of the revision are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2019 | | | | | | |
| | As Previously Reported | | Adjustment | | Revised | | Revised and adjusted for discontinued operations |
| Expenses | | | | | | | |
| Impairments | $ | 183 | | | $ | 57 | | | $ | 240 | | | $ | 240 | |
| Total expenses | 1,713 | | | 57 | | | 1,770 | | | 1,700 | |
| Loss from continuing operations before income taxes, equity in earnings and noncontrolling interests | (84) | | | (57) | | | (141) | | | (150) | |
| Income tax benefit from continuing operations | (8) | | | (14) | | | (22) | | | (23) | |
| Net loss | (69) | | | (43) | | | (112) | | | (112) | |
| Net loss attributable to Realogy Holdings and Realogy Group | $ | (70) | | | $ | (43) | | | $ | (113) | | | $ | (113) | |
| Loss per share attributable to Realogy Holdings shareholders: | | | | | | | |
| Basic loss per share | $ | (0.61) | | | $ | (0.38) | | | $ | (0.99) | | | $ | (0.99) | |
| Diluted loss per share | $ | (0.61) | | | $ | (0.38) | | | $ | (0.99) | | | $ | (0.99) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2019 | | | | | | |
| | As Previously Reported | | Adjustment | | Revised | | Revised and adjusted for discontinued operations |
| Expenses | | | | | | | |
| Impairments | $ | 186 | | | $ | 57 | | | $ | 243 | | | $ | 243 | |
| Total expenses | 4,600 | | | 57 | | | 4,657 | | | 4,441 | |
| Loss from continuing operations before income taxes, equity in earnings and noncontrolling interests | (122) | | | (57) | | | (179) | | | (173) | |
| Income tax benefit from continuing operations | (9) | | | (14) | | | (23) | | | (22) | |
| Net loss | (98) | | | (43) | | | (141) | | | (141) | |
| Net loss attributable to Realogy Holdings and Realogy Group | $ | (100) | | | $ | (43) | | | $ | (143) | | | $ | (143) | |
| Loss per share attributable to Realogy Holdings shareholders: | | | | | | | |
| Basic loss per share | $ | (0.88) | | | $ | (0.37) | | | $ | (1.25) | | | $ | (1.25) | |
| Diluted loss per share | $ | (0.88) | | | $ | (0.37) | | | $ | (1.25) | | | $ | (1.25) | |
The impact of the change to the Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2019 as a result of the revision is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2019 | | | | | | |
| | As Previously Reported | | Adjustment | | Revised | | Revised and adjusted for discontinued operations |
| Net loss | $ | (69) | | | $ | (43) | | | $ | (112) | | | $ | (112) | |
| Comprehensive loss | (70) | | | (43) | | | (113) | | | (113) | |
| Comprehensive loss attributable to Realogy Holdings and Realogy Group | $ | (71) | | | $ | (43) | | | $ | (114) | | | $ | (114) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2019 | | | | | | |
| | As Previously Reported | | Adjustment | | Revised | | Revised and adjusted for discontinued operations |
| Net loss | $ | (98) | | | $ | (43) | | | $ | (141) | | | $ | (141) | |
| Comprehensive loss | (98) | | | (43) | | | (141) | | | (141) | |
| Comprehensive loss attributable to Realogy Holdings and Realogy Group | $ | (100) | | | $ | (43) | | | $ | (143) | | | $ | (143) | |
The impact of the change to the Condensed Consolidated Balance Sheets as of September 30, 2019 as a result of the revision is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| As of September 30, 2019 | | | | | | |
| | As Previously Reported | | Adjustment | | Revised | | Revised and adjusted for discontinued operations |
| ASSETS | | | | | | | |
| Goodwill | $ | 3,532 | | | $ | (57) | | | $ | 3,475 | | | $ | 3,300 | |
| Total assets | 7,717 | | | (57) | | | 7,660 | | | 7,660 | |
| LIABILITIES AND EQUITY | | | | | | | |
| Deferred income taxes | 374 | | | (14) | | | 360 | | | 360 | |
| Total liabilities | 5,534 | | | (14) | | | 5,520 | | | 5,520 | |
| Accumulated deficit | (2,607) | | | (43) | | | (2,650) | | | (2,650) | |
| Total stockholders' equity | 2,179 | | | (43) | | | 2,136 | | | 2,136 | |
| Total equity | 2,183 | | | (43) | | | 2,140 | | | 2,140 | |
| Total liabilities and equity | $ | 7,717 | | | $ | (57) | | | $ | 7,660 | | | $ | 7,660 | |
The impact of the change to the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 as a result of the revision is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2019 | | | | | | |
| | As Previously Reported | | Adjustment | | Revised | | Revised and adjusted for discontinued operations |
| Operating Activities | | | | | | | |
| Net loss from continuing operations | $ | (98) | | | $ | (43) | | | $ | (141) | | | $ | (136) | |
| Adjustments to reconcile net loss from continuing operations to net cash provided by operating activities: | | | | | | | | | | |
| Deferred income taxes | (16) | | | (14) | | | (30) | | | (29) | |
| Impairments | 186 | | | 57 | | | 243 | | | 243 | |
| Net cash provided by operating activities | $ | 230 | | | $ | — | | | $ | 230 | | | $ | 230 | |
| | | | | | | | | | | | | | | | | |
| | Revenues (a) |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Franchise Group | $ | 1,145 | | | $ | 1,249 | | | $ | 1,059 | |
| Owned Brokerage Group | 5,606 | | | 6,189 | | | 4,742 | |
| Title Group | 530 | | | 952 | | | 736 | |
| Corporate and Other (b) | (373) | | | (407) | | | (316) | |
| Total Company | $ | 6,908 | | | $ | 7,983 | | | $ | 6,221 | |
Selected Quarterly Financial Data
Provided below is selected unaudited quarterly financial data for 2019 and 2018.
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2019 | | | | | | |
| | First (d) | | Second (d) | | Third (d) | | Fourth |
| Net revenues | | | | | | | |
| Realogy Franchise Group | $ | 163 | | | $ | 234 | | | $ | 216 | | | $ | 190 | |
| Realogy Brokerage Group | 816 | | | 1,331 | | | 1,222 | | | 1,040 | |
| Realogy Title Group | 114 | | | 160 | | | 170 | | | 152 | |
| Realogy Leads Group | 16 | | | 26 | | | 24 | | | 17 | |
| Corporate and Other (a) | (55) | | | (87) | | | (82) | | | (69) | |
| Total Company | $ | 1,054 | | | $ | 1,664 | | | $ | 1,550 | | | $ | 1,330 | |
(Loss) income from continuing operations before income taxes, equity in earnings and noncontrolling interests (b) | | | | | | | |
| Realogy Franchise Group | $ | 71 | | | $ | 142 | | | $ | 134 | | | $ | 108 | |
| Realogy Brokerage Group | (80) | | | 25 | | | (231) | | | (38) | |
| Realogy Title Group | (13) | | | 22 | | | 21 | | | 7 | |
| Realogy Leads Group | 8 | | | 16 | | | 16 | | | 11 | |
| Corporate and Other | (104) | | | (110) | | | (90) | | | (73) | |
| Total Company | $ | (118) | | | $ | 95 | | | $ | (150) | | | $ | 15 | |
| | | | | | | |
| Net (loss) income from continuing operations attributable to Realogy Holdings shareholders | $ | (85) | | | $ | 68 | | | $ | (121) | | | $ | 17 | |
| Net (loss) income from discontinued operations attributable to Realogy Holdings shareholders | (14) | | | 1 | | | 8 | | | (62) | |
| Net (loss) income attributable to Realogy Holdings and Realogy Group | $ | (99) | | | $ | 69 | | | $ | (113) | | | $ | (45) | |
| | | | | | | |
(Loss) earnings per share attributable to Realogy Holdings (c): | | | | | | | |
| Basic (loss) earnings per share from continuing operations | $ | (0.75) | | | $ | 0.59 | | | $ | (1.06) | | | $ | 0.15 | |
| Basic (loss) earnings per share from discontinued operations | (0.12) | | | 0.01 | | | 0.07 | | | (0.54) | |
| Basic (loss) earnings per share | (0.87) | | | 0.60 | | | (0.99) | | | (0.39) | |
| Diluted (loss) earnings per share from continuing operations | (0.75) | | | 0.59 | | | (1.06) | | | 0.15 | |
| Diluted (loss) earnings per share from discontinued operations | (0.12) | | | 0.01 | | | 0.07 | | | (0.54) | |
| Diluted (loss) earnings per share | $ | (0.87) | | | $ | 0.60 | | | $ | (0.99) | | | $ | (0.39) | |
_______________
(a)RepresentsTransactions between segments are eliminated in consolidation. Revenues for Franchise Group include intercompany royalties and marketing fees paid by Owned Brokerage Group of $373 million, $407 million and $316 million for the years ended December 31, 2022, 2021 and 2020, respectively. Such amounts are eliminated through the Corporate and Other line.
(b)Includes the elimination of transactions primarily between Realogy Franchisesegments.
Set forth in the table below is Operating EBITDA presented by reportable segment and a reconciliation to Net (loss) income attributable to Anywhere and Anywhere Group for the years ended December 31, 2022, 2021 and Realogy Brokerage Group.2020:
| | | | | | | | | | | | | | | | | |
| | Operating EBITDA |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Franchise Group | $ | 670 | | | $ | 751 | | | $ | 594 | |
| Owned Brokerage Group | (86) | | | 109 | | | 48 | |
| Title Group | 9 | | | 200 | | | 226 | |
| Corporate and Other (a)(d) | (144) | | | (158) | | | (142) | |
| Total Company | 449 | | | 902 | | | 726 | |
| Less: Depreciation and amortization | 214 | | | 204 | | | 186 | |
| Interest expense, net | 113 | | | 190 | | | 246 | |
| Income tax (benefit) expense | (68) | | | 133 | | | (104) | |
| Restructuring costs, net (b) | 32 | | | 17 | | | 67 | |
| Impairments (c) | 483 | | | 4 | | | 682 | |
| Former parent legacy cost, net (d) | 1 | | | 1 | | | 1 | |
| Loss on the early extinguishment of debt (d) | 96 | | | 21 | | | 8 | |
| Gain on the sale of businesses, investments or other assets, net (e) | (135) | | | (11) | | | — | |
| Net (loss) income attributable to Anywhere and Anywhere Group | $ | (287) | | | $ | 343 | | | $ | (360) | |
______________
(a)Includes the elimination of transactions between segments.
(b)The quarterly resultsyear ended December 31, 2022 includes restructuring charges of $1 million at Franchise Group, $19 million at Owned Brokerage Group and $12 million at Corporate and Other.
The year ended December 31, 2021 includes restructuring charges of $5 million at Franchise Group, $7 million at Owned Brokerage Group and $5 million at Corporate and Other.
The year ended December 31, 2020 includes restructuring charges of $15 million at Franchise Group, $37 million at Owned Brokerage Group, $4 million at Title Group and $11 million at Corporate and Other.
(c)Non-cash impairments for the year ended December 31, 2022 include an impairment of goodwill at the following:Owned Brokerage Group reporting unit of $280 million, an impairment of goodwill at the Franchise Group segment of $114 million related to the Cartus/Leads Group reporting unit, an impairment of franchise trademarks of $76 million and $13 million of other impairment charges related to lease asset, investment and software impairments.
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 Owned Brokerage Group;
•restructuringan impairment charge of $30 million related to Franchise Group's trademarks;
•$133 million of impairment charges of $9 million, $9 million, $11 million and $13 million induring the first, second, third and fourth quarters, respectively;nine months ended September 30, 2020 (while Cartus was held for sale) to reduce the net assets to the estimated proceeds;
•a goodwill impairment charge of $237$22 million in the third quarter which reduced the net carrying valuerelated to Cartus;
•an impairment charge of Realogy Brokerage Group by $180$34 million after accounting for the related income tax benefitto Cartus' trademarks; and
•other asset impairments of $57$50 million and $1 million, $2 million, $3 million and $6 million of other impairment charges primarily related to lease asset impairments incurred in the first, second, third and fourth quarters, respectively;impairments.
•(d)formerFormer parent legacy net cost of$1 million in the third quarter;items and
•a loss Loss on the early extinguishment of debt are recorded in Corporate and Other.
(e)Gain on the sale of $5 millionbusinesses, investments or other assets, net for the year ended December 31, 2022 is recorded in Title Group and related to the sale of the Title Underwriter during the first quarter of 2022 and the sale of a gainportion of the Company's ownership in the Title Insurance Underwriter Joint Venture during the second quarter of 2022. Gain on the early extinguishmentsale of debt of $10 million in the third quarter.
(c)Basic and diluted EPS amounts in each quarter are computed using the weighted-average number of shares outstanding during that quarter, while basic and diluted EPSbusinesses, investments or other assets, net for the full year ended December 31, 2021 is computed using the weighted-average number of shares outstanding during the year. Therefore, the sum of the four quarters’ basic or diluted EPS may not equal the full year basic or diluted EPS (see Note 17 "Earnings (Loss) Per Share" for further information).
(d)As a result of the pending sale of Cartus Relocation Services, the Company met held for sale requirements under ASC 360 and discontinued operations under ASC 205primarily recorded in the fourth quarter of 2019. Therefore, amounts presented in the Company's Form 10-Qs for the periods prior to the fourth quarter of 2019 did not reflect discontinued operations, but have been adjusted to reflect discontinued operations in the tables above.Owned Brokerage Group.
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2018 | | | | | | |
| | First (d) | | Second (d) | | Third (d) | | Fourth (d) |
| Net revenues | | | | | | | |
| Realogy Franchise Group | $ | 176 | | | $ | 237 | | | $ | 221 | | | $ | 186 | |
| Realogy Brokerage Group | 917 | | | 1,408 | | | 1,268 | | | 1,014 | |
| Realogy Title Group | 120 | | | 162 | | | 162 | | | 136 | |
| Realogy Leads Group | 16 | | | 25 | | | 23 | | | 17 | |
| Corporate and Other (a) | (63) | | | (92) | | | (83) | | | (68) | |
| Total Company | $ | 1,166 | | | $ | 1,740 | | | $ | 1,591 | | | $ | 1,285 | |
(Loss) income from continuing operations before income taxes, equity in earnings and noncontrolling interests (b) | | | | | | | |
| Realogy Franchise Group | $ | 85 | | | $ | 152 | | | $ | 141 | | | $ | 107 | |
| Realogy Brokerage Group | (76) | | | 45 | | | 22 | | | (37) | |
| Realogy Title Group | (8) | | | 26 | | | 18 | | | 1 | |
| Realogy Leads Group | 7 | | | 17 | | | 16 | | | 9 | |
| Corporate and Other | (66) | | | (73) | | | (67) | | | (102) | |
| Total Company | $ | (58) | | | $ | 167 | | | $ | 130 | | | $ | (22) | |
| | | | | | | | | | | |
| Net (loss) income from continuing operations attributable to Realogy Holdings shareholders | $ | (49) | | | $ | 118 | | | $ | 93 | | | $ | (19) | |
| Net (loss) income from discontinued operations attributable to Realogy Holdings shareholders | (18) | | | 5 | | | 10 | | | (3) | |
| Net (loss) income attributable to Realogy Holdings and Realogy Group | $ | (67) | | | $ | 123 | | | $ | 103 | | | $ | (22) | |
| | | | | | | |
| (Loss) earnings per share attributable to Realogy Holdings (c): | | | | | | | |
| Basic (loss) earnings per share from continuing operations | $ | (0.38) | | | $ | 0.93 | | | $ | 0.76 | | | $ | (0.16) | |
| Basic (loss) earnings per share from discontinued operations | (0.13) | | | 0.04 | | | 0.08 | | | (0.03) | |
| Basic (loss) earnings per share | (0.51) | | | 0.97 | | | 0.84 | | | (0.19) | |
| Diluted (loss) earnings per share from continuing operations | (0.38) | | | 0.92 | | | 0.75 | | | (0.16) | |
| Diluted (loss) earnings per share from discontinued operations | (0.13) | | | 0.04 | | | 0.08 | | | (0.03) | |
| Diluted (loss) earnings per share | $ | (0.51) | | | $ | 0.96 | | | $ | 0.83 | | | $ | (0.19) | |
_______________
Depreciation and Amortization | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Franchise Group | $ | 119 | | | $ | 112 | | | $ | 87 | |
| Owned Brokerage Group | 63 | | | 56 | | | 59 | |
| Title Group | 11 | | | 11 | | | 11 | |
| Corporate and Other | 21 | | | 25 | | | 29 | |
| Total Company | $ | 214 | | | $ | 204 | | | $ | 186 | |
(a)Segment AssetsRepresents the elimination of transactions primarily between Realogy Franchise Group and Realogy Brokerage Group. | | | | | | | | | | | |
| | As of December 31, |
| | 2022 | | 2021 |
| Franchise Group | $ | 4,730 | | | $ | 4,821 | |
| Owned Brokerage Group | 741 | | | 1,021 | |
| Title Group | 562 | | | 724 | |
| Corporate and Other | 350 | | | 644 | |
| Total Company | $ | 6,383 | | | $ | 7,210 | |
(b)Capital Expenditures | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Franchise Group | $ | 42 | | | $ | 29 | | | $ | 27 | |
| Owned Brokerage Group | 40 | | | 43 | | | 39 | |
| Title Group | 11 | | | 13 | | | 9 | |
| Corporate and Other | 16 | | | 16 | | | 20 | |
| Total Company | $ | 109 | | | $ | 101 | | | $ | 95 | |
The quarterly results include the following:
•restructuring charges of $22 million, $5 million, $9 million and $11 million in the first, second, third and fourth quarters, respectively;
•former parent legacy net cost of $4 million in the fourth quarter; and
•a lossgeographic segment information provided below is classified based on the early extinguishment of debt of $7 million in the first quarter.
(c)Basic and diluted EPS amounts in each quarter are computed using the weighted-average number of shares outstanding during that quarter, while basic and diluted EPS for the full year is computed using the weighted-average number of shares outstanding during the year. Therefore, the sumgeographic location of the four quarters’ basic or diluted EPS may not equal the full year basic or diluted EPS.Company’s subsidiaries.
(d)As a result of the pending sale of Cartus Relocation Services, the Company met held for sale requirements under ASC 360 and discontinued operations under ASC 205 in the fourth quarter of 2019. Therefore, amounts presented in the Company's Form 10-Qs for the periods prior to the fourth quarter of 2019 did not reflect discontinued operations, but have been adjusted to reflect discontinued operations in the tables above.
| | | | | | | | | | | | | | | | | |
| United
States | | All Other
Countries | | Total |
| On or for the year ended December 31, 2022 | | | | | |
| Net revenues | $ | 6,829 | | | $ | 79 | | | $ | 6,908 | |
| Total assets | 6,309 | | | 74 | | | 6,383 | |
| Net property and equipment | 316 | | | 1 | | | 317 | |
| On or for the year ended December 31, 2021 | | | | | |
| Net revenues | $ | 7,919 | | | $ | 64 | | | $ | 7,983 | |
| Total assets | 7,157 | | | 53 | | | 7,210 | |
| Net property and equipment | 309 | | | 1 | | | 310 | |
| On or for the year ended December 31, 2020 | | | | | |
| Net revenues | $ | 6,145 | | | $ | 76 | | | $ | 6,221 | |
| Total assets | 6,878 | | | 56 | | | 6,934 | |
| Net property and equipment | 316 | | | 1 | | | 317 | |
EXHIBIT INDEX
Exhibit Description
4.1 Indenture, dated as of November 21, 2014,January 11, 2021, among Anywhere Real Estate Group LLC (f/k/a Realogy Group LLC), as Issuer, Anywhere Co-Issuer Corp. (f/k/a Realogy Co-Issuer Corp.), as Co-Issuer, Anywhere Real Estate Inc. (f/k/a Realogy Holdings Corp.),the Note Guarantors (as defined therein) and The Bank of New York Mellon Trust Company, N.A., as Trustee, governing the 5.75% Senior Notes due 2029 (the "5.75% Senior Note Indenture") (incorporated by reference to Exhibit 4.1 to Registrants' Current Report on Form 8-K filed on January 11, 2021). 4.5 Indenture, dated as of June 2, 2021, among Anywhere Real Estate Group LLC (f/k/a Realogy Group LLC), as Issuer, Anywhere Co-Issuer Corp. (f/k/a Realogy Co-Issuer Corp.), as Co-Issuer, the Guarantors (as defined therein) and The Bank of New York Mellon Trust Company, N.A., as Trustee, governing the 0.25% Exchangeable Senior Notes due 2026 (the "0.25%Exchangeable Senior Notes Indenture") (Incorporated by reference to Exhibit 4.1 to Registrants' Current Report on Form 8-K filed on June 3, 2021). 4.8 Indenture, dated as of January 10, 2022, among Anywhere Real Estate Group LLC (f/k/a Realogy Group LLC), as Issuer, Anywhere Co-Issuer Corp. (f/k/a Realogy Co-Issuer Corp.), as Co-Issuer, Anywhere Real Estate Inc. (f/k/a Realogy Holdings Corp.), the Note Guarantors (as defined therein), and Thethe Bank of New York Mellon Trust Company, N.A., as Trustee, governing the 5.250% Senior Notes due 20212030 (the "5.250% Senior Note Indenture") (Incorporated by reference to Exhibit 4.27 to Registrants' Form 10-K for the year ended December 31, 2014). 4.10 Indenture, dated as of June 1, 2016, among Realogy Group LLC, as Issuer, Realogy Co-Issuer Corp., as Co-Issuer, Realogy Holdings Corp., the Note Guarantors (as defined therein), and The Bank of New York Mellon Trust Company, N.A., as Trustee, governing the 4.875% Senior Notes due 2023 (the "4.875% Senior Note Indenture") (Incorporated by reference to Exhibit 4.1 to Registrants' Current Report on Form 8-K filed on June 3, 2016)January 10, 2022).
4.16 Indenture, dated as of March 29, 2019, among Realogy Group LLC, as Issuer, Realogy Co-Issuer Corp., as Co-Issuer, Realogy Holdings Corp., the Note Guarantors (as defined therein) and The Bank of New York Mellon Trust Company, N.A., as Trustee, governing the 9.375% Senior Notes due 2027 (Incorporated by reference to Exhibit 4.1 to the Registrants' Current Report on Form 8-K filed on March 29, 2019).10.3 Amended and Restated Credit Agreement, dated as of March 5, 2013, among Anywhere Intermediate Holdings LLC (f/k/a Realogy Intermediate Holdings LLC), Anywhere Real Estate Group LLC (f/k/a Realogy Group LLC), the lenders party thereto from time to time, JPMorgan Chase Bank, N.A., as administrative agent for the lenders, and the other financial institutions parties thereto (Incorporated(the "Amended and Restated Credit Agreement") (Incorporated by reference to Exhibit 10.4 to Registrants' Form 10-Q for the three monthsperiod ended March 31, 2013). 10.4 First Amendment, dated as of March 10, 2014, to the Amended and Restated Credit Agreement dated as of March 5, 2013, among Realogy Intermediate Holdings LLC, Realogy Group LLC, the lenders from time to time party thereto, JPMorgan Chase Bank, N.A., as administrative agent, and the other agents parties thereto (Incorporated(Incorporated by reference to Exhibit 10.1 to Registrants' Current Report on Form 8-K filed on March 10, 2014). 10.5 Second Amendment, dated as of October 23, 2015, to the Amended and Restated Credit Agreement dated as of March 5, 2013, as amended, among Realogy Intermediate Holdings LLC, Realogy Group LLC, the several lenders parties thereto from time to time, JPMorgan Chase Bank, N.A., as administrative agent for the lenders, and the other agents parties thereto (Incorporated by reference to Exhibit 10.1 to Registrants' Current Report on Form 8-K filed on October 28, 2015). 10.6 Third Amendment, dated as of July 20, 2016, to the Amended and Restated Credit Agreement dated as of March 5, 2013, as amended, among Realogy Intermediate Holdings LLC, Realogy Group LLC, the several lenders parties thereto from time to time, JPMorgan Chase Bank, N.A., as administrative agent for the lenders, and the other agents parties thereto (Incorporated by reference to Exhibit 10.2 to Registrants' Current Report on Form 8-K filed on July 22, 2016). 10.7 Fourth Amendment, dated as of January 23, 2017, to the Amended and Restated Credit Agreement dated as of March 5, 2013, as amended, among Realogy Intermediate Holdings LLC, Realogy Group LLC, the several lenders parties thereto from time to time, JPMorgan Chase Bank, N.A., as administrative agent for the lenders, and the other agents parties thereto (Incorporated by reference to Exhibit 10.1 to Registrants' Current Report on Form 8-K filed on January 23, 2017). 10.8 Fifth Amendment, dated as of February 8, 2018, to the Amended and Restated Credit Agreement, dated as of March 5, 2013, as amended, among Realogy Intermediate Holdings LLC, Realogy Group LLC, the several lenders parties thereto from time to time, JPMorgan Chase Bank, N.A., as administrative agent for the lenders, and the other agents parties theretoAgreement (Incorporated by reference to Exhibit 10.1 to Registrants' Current Report on Form 8-K filed on February 8, 2018).
10.9 Sixth Amendment, dated as of February 8, 2018, to the Amended and Restated Credit Agreement dated as of March 5, 2013, as amended, among Realogy Intermediate Holdings LLC, Realogy Group LLC, the several lenders parties thereto from time to time, JPMorgan Chase Bank, N.A., as administrative agent for the lenders, and the other agents parties thereto (Incorporated by reference to Exhibit 10.2 to Registrants' Current Report on Form 8-K filed on February 8, 2018). 10.10 Eighth Amendment, dated as of August 2, 2019, to the Amended and Restated Credit Agreement, dated as of March 5, 2013, as amended, among Realogy Intermediate Holdings LLC, Realogy Group LLC, the several lenders parties thereto from time to time, JPMorgan Chase Bank, N.A., as administrative agent for the lenders, and the other agents parties theretoAgreement (Incorporated by reference to Exhibit 10.2 to the Registrants' Quarterly Report on Form 10-Q for the three month period ended June 30, 2019).
10.18 First Amendment, dated as of July 20, 2016, to the Term Loan A Agreement dated as of October 23, 2015, among Realogy Intermediate Holdings LLC, Realogy Group LLC, the lenders party thereto from time to time and JPMorgan Chase Bank, N.A., as administrative agent for the lenders (Incorporated by reference to Exhibit 10.1to Registrants' Current Report on Form 8-K filed on July 22, 2016). 10.1610.19 Second Amendment, dated as of February 8, 2018, to the Term Loan A Agreement dated as of October 23, 2015, among Realogy Intermediate Holdings LLC, Realogy Group LLC, the lenders party thereto from time to time and JPMorgan Chase Bank, N.A., as administrative agent for the lenders (Incorporated by reference to Exhibit 10.3 to Registrants' Current Report on Form 8-K filed on February 8, 2018). Note: The10.1810.23 First Priority Intercreditor Agreement, dated as of February 2, 2012, among RealogyAnywhere Real Estate Group LLC (f/(f/k/a Realogy Corporation), the other Grantors (as defined therein) from time to time party hereto, JPMorgan Chase Bank, N.A., as collateral agent for the Credit Agreement Secured Parties (as defined therein) and as Authorized Representative for the Credit Agreement Secured Parties, The Bank of New York, Mellon Trust Company, N.A., as the collateral agent and Authorized Representative for the Initial Additional First Lien Priority Note Secured Parties (as defined therein) (Incorporated by reference as Exhibit 10.13 to Registrants' Form 10-K for the year ended December 31, 2011).10.20**10.25 EmploymentFirst Lien / Second Lien Intercreditor Agreement, dated as of October 17, 2017, between June 16, 2020, among Anywhere Real Estate Group LLC (f/k/a Realogy Holdings Corp.Group LLC), the other Grantors (as defined therein) party thereto, JPMorgan Chase Bank, N.A., as the Initial First Lien Priority Representative (as defined therein), The Bank of New York, Mellon Trust Company, N.A., as the Initial Second Lien Priority Representative (as defined therein), and Ryan M. Schneider (Incorporatedthe additional authorized representatives from time to time party thereto (the "First Lien / Second Lien Intercreditor Agreement")(incorporated by reference to Exhibit 10.1 to Registrants' Current Report on Form 8-K filed on October 23, 2017).
10.4810.36 Note PurchaseForm of Indemnification Agreement (Secured Variable Funding Notes, Series 2011-1) dated as of December 14, 2011, among Apple Ridge Funding LLC, Cartus Corporation, the commercial paper conduit purchasers party thereto, the financial institutions party thereto, the managing agents party thereto, and committed purchases and managing agents party thereto and Crédit Agricole Corporate and Investment Bank, as administrative and lead arranger (Incorporated by reference to Exhibit 10.6010.79 to Registrants'Anywhere Real Estate Inc.'s (f/k/a Realogy Holdings Corp.) Registration Statement on Form 10-K for the year ended December 31, 2011)S-1 (File No. 333-181988).10.4910.37 Amendment dated June 13, 2014 to theForm of Note Purchase Agreement dated as of December 14, 2011, by and among Apple Ridge Funding LLC, Cartus Corporation, Realogy Group LLC, the managing agents, committed purchasers and conduit purchasers named therein, and Crédit Agricole Corporate and Investment Bank, as administrative agent (Incorporated by reference to Exhibit 10.1 to the Registrants' Form 10-Q for the three months ended June 30, 2014).10.50 Amendment dated November 10, 2014 to the Note Purchase Agreement dated as of December 14, 2011, by and among Apple Ridge Funding LLC, Cartus Corporation, Realogy Group LLC, the managing agents, committed purchasers and conduit purchasers named therein, and Crédit Agricole Corporate and Investment Bank, as administrative agent (Incorporated by reference to Exhibit 10.49 to Registrants' Form 10-K for the year ended December 31, 2014).10.51 Amendment to Note Purchase Agreement, dated as of June 1, 2016, among Apple Ridge Funding LLC, Cartus Corporation, Realogy Group LLC, the Managing Agents, Committed Purchasers and Conduit Purchasers, and Crédit Agricole Corporate and Investment Bank, as Administrative Agent (Incorporated by reference to Exhibit 10.1 to Registrants' Current Report on Form 8-K filed with the Securities and Exchange Commission on June 3, 2016).
10.52 Series 2011-1 Indenture Supplement, dated as of December 16, 2011, between Apple Ridge Funding LLC and U.S. Bank National Association, as indenture trustee, paying agent, authentication agent, transfer agent and registrar, which modifies the Master Indenture, dated as of April 25, 2000, among Apple Ridge Funding LLC and U.S. Bank National Association, as indenture trustee, paying agent, authentication agent, transfer agent and registrar (Incorporated by reference to Exhibit 10.61 to Registrants' Form 10-K for the year ended December 31, 2011).10.53 Eighth Omnibus Amendment, dated as of September 11, 2013, among Cartus Corporation, Cartus Financial Corporation, Apple Ridge Services Corporation, Apple Ridge Funding LLC, Realogy Group LLC, U.S. Bank National Association, the managing agents party to the Note Purchase Agreement dated December 14, 2011 and Crédit Agricole Corporate and Investment Bank (IncorporatedHedge Confirmation (incorporated by reference to Exhibit 10.1 to Registrants' Current Report on Form 8-K filed on September 13, 2013)June 3, 2021).10.5410.38 Ninth Omnibus Amendment, dated asForm of June 11, 2015, among Cartus Corporation, Cartus Financial Corporation, Apple Ridge Services Corporation, Apple Ridge Funding LLC, Realogy Group LLC, U.S. Bank National Association, the managing agents party to the Note Purchase Agreement dated December 14, 2011 and Crédit Agricole Corporate and Investment Bank. (IncorporatedWarrant Confirmation (incorporated by reference to Exhibit 10.110.2 to the Registrants' Current Report on Form 8-K filed on June 12, 2015).3, 202110.55 Tenth Omnibus Amendment, dated as of June 9, 2017, among Cartus Corporation, Cartus Financial Corporation, Apple Ridge Services Corporation, Apple Ridge Funding LLC, Realogy Group LLC, U.S. Bank National Association, the managing agents party to the Note Purchase Agreement dated December 14, 2011 and Crédit Agricole Corporate and Investment Bank. (Incorporated by reference to Exhibit 10.1 to the Registrants' Current Report on Form 8-K filed on June 13, 2017).10.56 Eleventh Omnibus Amendment, dated as of June 8, 2018, among Cartus Corporation, Cartus Financial Corporation, Apple Ridge Services Corporation, Apple Ridge Funding LLC, Realogy Group LLC, U.S. Bank National Association, the managing agents party to the Note Purchase Agreement dated December 14, 2011 and Crédit Agricole Corporate and Investment Bank. (Incorporated by reference to Exhibit 10.1 to the Registrants' Current Report on Form 8-K filed on June 11, 2018).10.57 Twelfth Omnibus Amendment, dated as of June 7, 2019, among Cartus Corporation, Cartus Financial Corporation, Apple Ridge Services Corporation, Apple Ridge Funding LLC, Realogy Group LLC, U.S. Bank National Association, the managing agents party to the Note Purchase Agreement dated December 14, 2011, as amended, and Crédit Agricole Corporate and Investment Bank (Incorporated by reference to Exhibit 10.1 to the Registrants' Current Report on Form 8-K filed on June 7, 2019).10.58* Thirteenth Omnibus Amendment, dated as of December 6, 2019, among Cartus Corporation, Cartus Financial Corporation, Apple Ridge Services Corporation, Apple Ridge Funding LLC, Realogy Group LLC, U.S. Bank National Association, the managing agents party to the Note Purchase Agreement dated December 14, 2011, as amended, and Crédit Agricole Corporate and Investment Bank.
101 The following information from Realogy'sAnywhere's Annual Report on Form 10-K for the fiscal year ended December 31, 2019,2022, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) the Consolidated Balance Sheets as of December 31, 20192022 and 2018;2021; (ii) the Consolidated Statements of Operations for the years ended December 31, 2019, 20182022, 2021 and 2017;2020; (iii) the Consolidated Statements of Comprehensive (Loss) Income for the years ended December 31, 2019, 20182022, 2021 and 2017;2020; (iv) the Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2019, 20182022, 2021 and 2017;2020; (v) the Consolidated Statements of Cash Flows for the years ended December 31, 2019, 20182022, 2021 and 2017;2020; and (vi) the Notes to the Consolidated Financial Statements.
104 Cover Page Interactive Data File (formatted in iXBRL and contained in Exhibit 101).
_______________
* Filed herewith.
** Compensatory plan or arrangement.
