UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________
FORM 10-Q
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20172018
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File No. 001-35674
REALOGY HOLDINGS CORP.
(Exact name of registrant as specified in its charter)
20-8050955
(I.R.S. Employer Identification Number)
Commission File No. 333-148153
REALOGY GROUP LLC
(Exact name of registrant as specified in its charter)
20-4381990
(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)
___________________________
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 registrant was required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.
Realogy Holdings Corp. Yes þ No ¨ Realogy Group LLC Yes ¨ No þ
Indicate by check mark whether the Registrants have submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrants were required to submit and post such files).
Realogy Holdings Corp. Yes þ No ¨ Realogy 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.
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| | | | | | | | | |
| | Large accelerated filer | | Accelerated filer | | Non-accelerated filer (Do not check if a smaller reporting company) | | Smaller reporting company | | Emerging growth company |
| Realogy Holdings Corp. | þ | | ¨ | | ¨ | | ¨ | | ¨ |
| Realogy Group LLC | ¨ | | ¨ | | þ | | ¨ | | ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the Registrants are a shell company (as defined in Rule 12b-2 of the Exchange Act).
Realogy Holdings Corp. Yes ¨ No þ Realogy Group LLC Yes ¨ No þ
There were 134,616,566124,021,855 shares of Common Stock, $0.01 par value, of Realogy Holdings Corp. outstanding as of NovemberAugust 1, 2017.2018.
TABLE OF CONTENTS
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| PART I | FINANCIAL INFORMATION | |
| Item 1. | | |
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| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
| PART II | | |
| Item 1. | | |
| Item 1A. | | |
| Item 2. | | |
Item 5. | | |
Item 6. | | |
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INTRODUCTORY NOTE
Except as otherwise indicated or unless the context otherwise requires, the terms "we," "us," "our," "our company," "Realogy," "Realogy Holdings" and the "Company" refer to Realogy Holdings Corp., a Delaware corporation, and its consolidated subsidiaries, including Realogy Intermediate Holdings LLC, a Delaware limited liability company ("Realogy Intermediate"), and Realogy Group LLC, a Delaware limited liability company ("Realogy Group"). Neither Realogy Holdings, the indirect parent of Realogy Group, nor Realogy Intermediate, the direct parent company of Realogy Group, conducts any operations other than with respect to its respective direct or indirect ownership of Realogy Group. As a result, the consolidated financial positions, results of operations and cash flows of Realogy Holdings, Realogy Intermediate and Realogy Group are the same.
Realogy Holdings is not a party to the SeniorAmended and Restated Credit Agreement dated as of March 5, 2013, as amended from time to time (the "Senior Secured Credit FacilityFacility") and the Term Loan A FacilityAgreement dated as of October 23, 2015, as amended from time to time (the "Term Loan A Facility") and certain references in this report to our consolidated indebtedness exclude Realogy Holdings with respect to indebtedness under the Senior Secured Credit Facility and Term Loan A Facility. In addition, while Realogy Holdings is a guarantor of Realogy Group's obligations under its unsecured notes, Realogy Holdings is not subject to the restrictive covenants in the indentures governing such indebtedness.
As used in this Quarterly Report on Form 10-Q, the terms "4.50% Senior Notes," "5.25% Senior Notes" and "4.875% Senior Notes" refer to our 4.50% Senior Notes due 2019, our 5.25% Senior Notes due 2021 and our 4.875% Senior Notes due 2023, respectively, and are referred to collectively as the "Unsecured Notes."
FORWARD-LOOKING STATEMENTS
Forward-lookingThis Quarterly Report on Form 10-Q includes forward-looking statements included in this reportwithin the meaning of Section 27A of the Securities Act of 1933 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.Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). Forward-looking statements include all statements that do not relate solely to historical or current facts, and can generally be identified by the information concerning our future financial performance, business strategy, projected plans and objectives,use of words such 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,"believe," "expects,"expect," "anticipates,"anticipate," "intends,"intend," "projects,"project," "estimates,"estimate," "plans,"plan," 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
In particular, information appearing under "Management's Discussion and Analysis of Financial Condition and Results of Operations" includes forward-looking statements. Forward-looking statements inherently involve many risks and uncertainties that could cause actual results to differ materially from those projected in these statements. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, it is based on management's current plans and expectations, expressed in good faith and believed to have a reasonable basis. However, we can give no assurance that any such expectation or belief will result or will be achieved or accomplished.
The following include some, but not all, of the following important factors that could affect our future results and cause actual results to differ materially from those expressed in the forward-looking statements:
risks related toadverse developments or the absence of sustained improvement in general business, economic employment and political conditions andor the U.S. residential real estate markets, either regionally or nationally, including but not limited to:
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| ◦ | a lack of improvement or a decline in the number of homesales, homesales; |
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| ◦ | stagnant or declining home prices and/or a deteriorationreduction in other economic factors that particularly impact the residential real estate market and the business segments in which we operate;affordability of housing; |
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| ◦ | increasing mortgage rates and/or constraints on the availability of mortgage financing; |
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| ◦ | insufficient or excessive home inventory levels by market and price point; |
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| ◦ | a decreaselack of improvement or deceleration in consumer confidence;the building of new housing and/or irregular timing or volume of new development closings; |
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| ◦ | the potential negative impact of recessions, slow economic growth, disruptions in the U.S. government or banking system, disruptions in a major geoeconomic region, or equity or commodity markets and high levels of unemployment in the U.S. and abroad, which may impact all or a portioncertain provisions of the housing marketsTax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) (i) on home values over time in which westates with high property, sales and our franchisees operate; |
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◦ | 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 Maestate and Freddie Mac, immigration reform,local income taxes and potential tax code reform (including reforms related to the deductibility of home mortgage interest (ii) on homeownership rates; and/or state, local and property taxes); |
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| ◦ | a decreasedeterioration in housing affordability due to higher mortgage ratesother economic factors that particularly impact the residential real estate market and increasesthe business segments in average homesale prices; |
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◦ | high levels of foreclosure activity; |
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◦ | changing attitudes towards home ownership, particularly among potential first-time homebuyers who may delay,which we operate whether broadly or decide not to, purchase a home, as well as the potential impact of decisions to rent versus purchase a home;by geography and price segments; |
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◦ | the inability or unwillingness of current homeowners to purchase their next home due to various factors, including limited or negative equity in their current home, difficult mortgage underwriting standards, attractive rates on existing mortgages and the lack of available inventory in their market; |
increased competition in the industry and for independent sales agents whether through traditional competitors, other industry participants or competitors with alternative business models (such as flat fee, capped fee or desk fee models) including companies employing technologies intended to disrupt the traditional brokerage model, as well as eliminating brokers or agents from, or minimizing the role they play in, the homesale transaction, such as reducing brokerage commissions, and companiesother industry participants otherwise competing for a portion of gross commission income;
competition for more productive sales associates, sales associate teams, and manager talent will continue to impact the ability of our company owned brokerage business and our affiliated franchisees to attract and retain independent sales associates, either individually or as members of a team, and will result in continuing pressure on the share of gross commission split ratesincome paid by our company owned brokerages and our affiliated franchisees;franchisees to their independent affiliated sales agents;
our geographic and high-end market concentration, particularly with respect to our company owned brokerage operations;concentration;
our inability to enter into franchise agreements with new franchisees at current net effective royalty rates, or to realize royalty revenue growth from them;
our inability to renew existing franchise agreements at current net effectivecontractual royalty rates or without increasing the amount and prevalence of non-standard incentives, or to maintain or enhance our value proposition to franchisees;sales incentives;
the lack of revenue growth or declining profitability of our franchisees and company owned brokerage operations, including the impact of lower average broker commission rates;operations;
disputeschanges in corporate relocation practices resulting in fewer employee relocations, reduced relocation benefits, increasing competition in corporate relocation or issues with entities that license us their tradenames for use in our business or events that negatively impact their brands that could impede our franchising of those brands;
actions by our franchisees that could harm our business or reputation, non-performance of our franchisees, controversies with our franchisees or actions against us by their independent sales associates or employees or third parties with which our franchisees have business relationships;
loss, attrition or changes among our senior executives, other key employees or our inability to recruit top talent;
our inability to achieve or maintain cost savings and other benefits from our restructuring activities;
our inability to realize the benefits from acquisitions due to the loss of key personnelone or productive agentsmore significant affinity clients;
an increase in the experienced claims losses of the acquired companies, as well as the possibility that expected benefits and synergies of the transactions may not be achieved in a timely manner or at all;our title underwriter;
our failure or alleged failure to comply with laws, regulations and regulatory interpretations and any changes in laws and regulations or stricter interpretations of regulatory requirements,any of the foregoing, including but not limited to (1) state or federal employment laws or regulations that would require reclassification of independent contractor sales associatesagents to employee status, (2) privacy or data security laws and regulations and (3) RESPA or federal or state consumer protection or similar laws and (3) privacy or data security laws and regulations;laws;
any adverse resolution of litigation, governmental or regulatory proceedings or arbitration awards as well as any adverse impact of decisionsrisks relating to voluntarily modify business arrangements or enter into settlement agreementsour ability to avoid the risk of protracted and costly litigation or other proceedings;
return capital to stockholders pursuant to our inability to obtain new technologies and systems, to replace or introduce new technologies and systems as quickly as our competitors and in a cost-effective manner or to achieve the benefits anticipated from new technologies or systems;stock repurchase program;
risks and growing costs related to cybersecurity threats to our data and customer, franchisee, employee and independent sales associate data, including but not limited to:
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◦ | the failure or significant disruption of our operations from various causes, including human error, computer malware, ransomware, insecure software, zero day threats, or other events related to our critical information technologiesagent data; and systems; |
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◦ | the increasing level and sophistication of cybersecurity attacks, including distributed denial of service attacks, data exfiltration, fraud or malicious acts on the part of trusted insiders, social engineering, or other unlawful tactics aimed at compromising the systems and data of our officers, employees and franchisee and company owned brokerage sales associates and their customers (including via systems not directly controlled by us); and |
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◦ | the reputational or 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 associates), the transmission of computer malware, or the diversion of homesale transaction closing funds; |
risks related to our international operations, including compliance with the Foreign Corrupt Practices Act and similar anti-corruption laws as well as risks relating to the master franchisor model that we deploy internationally;
risks associated with our substantial indebtedness and interest obligations and restrictions contained in our debt agreements, including risks relating to having to dedicate a significant portion of our cash flows from operations to service our debt;debt.
risks relating to our ability to refinance or repay our indebtedness, incur additional indebtedness or return capital to stockholders;
changes in corporate relocation practices resulting in fewer employee relocations, reduced relocation benefits or the loss of one or more significant affinity clients;
an increase in the claims rate of our title underwriter and an increase in mortgage rates could adversely impact the revenue of our title and settlement services segment;
our inability to securitize certain assets of our relocation business, which would require us to find an alternative source of liquidity that may not be available, or if available, may not beMore information on favorable terms;
risksfactors that could cause actual results or events to differ materially adversely impact our equity investmentfrom those anticipated is included from time to time in our mortgage origination joint venture, including increases in mortgage rates,reports filed with the impact of joint venture operational or liquidity risks, the impact of a transition from our current joint venture to our new joint venture, regulatory changes, litigation, investigationsSecurities and inquiries or any termination of the venture;
risks relating to the unfavorable impact on homesale activity due to severe weather events or natural disasters;
any remaining resolutions or outcomes with respect to contingent liabilities of our former parent, Cendant CorporationExchange Commission ("Cendant"SEC"), under the Separation and Distribution Agreement and the Tax Sharing Agreement (each as described inincluding our Annual Report on Form 10-K for the year ended December 31, 2016, the "20162017 (the "2017 Form 10-K"), including any adverse impact on our future cash flows; and
new types of taxes or increases in state, local or federal taxes that could diminish profitability or liquidity.
Other factors not identified above, including those describedparticularly under the headingscaptions "Forward-Looking Statements," "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 2016 Form 10-K, filed with the Securities and Exchange Commission ("SEC"), may also cause actual results to differ materially from those described in our forward-looking statements. Most of these factors are difficult to anticipate and are generally beyond our control.Operations." You should consider these factors in connection with any forward-looking statements that may be made by us and our businesses generally.
All forward-looking statements herein speak only as of the date of this report and are expressly qualified in their entirety by the cautionary statements included in or incorporated by reference into this report. Except for our ongoing obligations to disclose material information under the federal securities laws,as is required by law, we undertake noexpressly disclaim any obligation to publicly release publicly any revisions to any forward-looking statements to reportreflect events or to reportafter the occurrencedate of unanticipated events unless we are required to do so by law.this report. For any forward-looking statement contained in this Report,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.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Realogy Holdings Corp.:
Results of Review of Financial Statements
We have reviewed the accompanying condensed consolidated balance sheet of Realogy Holdings Corp. and its subsidiaries as of SeptemberJune 30, 2017,2018, and the related condensed consolidated statements of operations and comprehensive income for the three-month and nine-monthsix-month periods ended SeptemberJune 30, 20172018 and 20162017 and the condensed consolidated statementstatements of cash flows for the nine-monthsix-month periods ended SeptemberJune 30, 2018 and2017, and 2016. Theseincluding the related notes (collectively referred to as the “interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial statements arefor them to be in conformity with accounting principles generally accepted in the responsibilityUnited States of the Company's management.America.
We conducted our reviewhave previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)., the consolidated balance sheet of the Company as of December 31, 2017, and the related consolidated statements of operations, comprehensive income, equity, and of cash flows for the year then ended (not presented herein), and in our report dated February 27, 2018, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheetinformation as of December 31, 2017, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
These interim financial statements are the responsibility of the Company’s management.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 reviews in accordance with the standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States),PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
/s/ PricewaterhouseCoopers LLP
Florham Park, New Jersey
August 3, 2018
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholder of Realogy Group LLC
Results of Review of Financial Statements
We have reviewed the accompanying condensed consolidated balance sheet of Realogy Group LLC and its subsidiaries as of June 30, 2018, and the related condensed consolidated statements of operations and comprehensive income for the three-month and six-month periods ended June 30, 2018 and 2017 and the condensed consolidated statements of cash flows for the six-month periods ended June 30, 2018 and 2017, including the related notes (collectively referred to as the "interim financial statements"). Based on our review,reviews, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial informationstatements for itthem to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), and in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of the Company as of December 31, 2016,2017, and the related consolidated statements of operations, comprehensive income, equity, and of cash flows for the year then ended (not presented herein), and in our report dated February 24, 2017,27, 2018, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet information as of December 31, 2016,2017, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
/s/ PricewaterhouseCoopers LLP
Florham Park, NJ
November 3, 2017
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholder of Realogy Group LLC:
We have reviewed the accompanying condensed consolidated balance sheet of Realogy Group LLC and its subsidiaries as of September 30, 2017, and the related condensed consolidated statements of operations and comprehensive income for the three-month and nine-month periods ended September 30, 2017 and 2016 and the condensed consolidated statement of cash flows for the nine-month periods ended September 30, 2017 and 2016. These interim financial statements are the responsibility of the Company's management.
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 reviewreviews in accordance with the standards of the Public Company Accounting Oversight Board (United States)PCAOB and in accordance with auditing standards generally accepted in the United States of America applicable to reviews of interim financial information. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States)PCAOB or in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.
We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) and in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, 2016, and the related consolidated statements of operations, comprehensive income, equity, and of cash flows for the year then ended (not presented herein), and in our report dated February 24, 2017, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet information as of December 31, 2016, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
Florham Park, NJNew Jersey
NovemberAugust 3, 20172018
REALOGY HOLDINGS CORP. AND REALOGY GROUP LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
(Unaudited)
| | | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Six Months Ended |
| | September 30, | | September 30, | June 30, | | June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| Revenues | | | | | | | | | | | | | | |
| Gross commission income | $ | 1,250 |
| | $ | 1,211 |
| | $ | 3,505 |
| | $ | 3,288 |
| $ | 1,388 |
| | $ | 1,374 |
| | $ | 2,290 |
| | $ | 2,255 |
|
| Service revenue | 261 |
| | 273 |
| | 710 |
| | 715 |
| 263 |
| | 255 |
| | 460 |
| | 449 |
|
| Franchise fees | 111 |
| | 107 |
| | 296 |
| | 280 |
| 114 |
| | 110 |
| | 193 |
| | 185 |
|
| Other | 52 |
| | 53 |
| | 159 |
| | 157 |
| 55 |
| | 54 |
| | 106 |
| | 107 |
|
| Net revenues | 1,674 |
| | 1,644 |
| | 4,670 |
| | 4,440 |
| 1,820 |
| | 1,793 |
| | 3,049 |
| | 2,996 |
|
| Expenses | | | | | | | | | | | | | | |
| Commission and other agent-related costs | 887 |
| | 834 |
| | 2,462 |
| | 2,256 |
| 1,009 |
| | 970 |
| | 1,654 |
| | 1,575 |
|
| Operating | 394 |
| | 400 |
| | 1,162 |
| | 1,158 |
| 392 |
| | 385 |
| | 784 |
| | 768 |
|
| Marketing | 63 |
| | 58 |
| | 195 |
| | 181 |
| 69 |
| | 70 |
| | 136 |
| | 132 |
|
| General and administrative | 82 |
| | 78 |
| | 269 |
| | 234 |
| 75 |
| | 98 |
| | 164 |
| | 187 |
|
| Former parent legacy cost (benefit), net | 1 |
| | — |
| | (10 | ) | | 1 |
| |
| Restructuring costs | 2 |
| | 9 |
| | 9 |
| | 30 |
| |
| Former parent legacy benefit, net | | — |
| | (11 | ) | | — |
| | (11 | ) |
| Restructuring costs, net | | 6 |
| | 2 |
| | 36 |
| | 7 |
|
| Depreciation and amortization | 50 |
| | 53 |
| | 149 |
| | 149 |
| 49 |
| | 49 |
| | 97 |
| | 99 |
|
| Interest expense, net | 41 |
| | 37 |
| | 127 |
| | 169 |
| 46 |
| | 47 |
| | 79 |
| | 86 |
|
| Loss on the early extinguishment of debt | 1 |
| | — |
| | 5 |
| | — |
| — |
| | — |
| | 7 |
| | 4 |
|
| Other income, net | — |
| | (1 | ) | | — |
| | (1 | ) | |
| Total expenses | 1,521 |
| | 1,468 |
| | 4,368 |
| | 4,177 |
| 1,646 |
| | 1,610 |
| | 2,957 |
| | 2,847 |
|
| Income before income taxes, equity in earnings and noncontrolling interests | 153 |
| | 176 |
| | 302 |
| | 263 |
| |
| Income before income taxes, equity in (earnings) losses and noncontrolling interests | | 174 |
| | 183 |
| | 92 |
| | 149 |
|
| Income tax expense | 67 |
| | 74 |
| | 131 |
| | 114 |
| 52 |
| | 73 |
| | 33 |
| | 64 |
|
| Equity in earnings of unconsolidated entities | (10 | ) | | (5 | ) | | (7 | ) | | (10 | ) | |
| Equity in (earnings) losses of unconsolidated entities | | (2 | ) | | — |
| | 2 |
| | 3 |
|
| Net income | 96 |
| | 107 |
| | 178 |
| | 159 |
| 124 |
| | 110 |
| | 57 |
| | 82 |
|
| Less: Net income attributable to noncontrolling interests | (1 | ) | | (1 | ) | | (2 | ) | | (3 | ) | (1 | ) | | (1 | ) | | (1 | ) | | (1 | ) |
| Net income attributable to Realogy Holdings and Realogy Group | $ | 95 |
| | $ | 106 |
| | $ | 176 |
| | $ | 156 |
| $ | 123 |
| | $ | 109 |
| | $ | 56 |
| | $ | 81 |
|
| | | | | | | | | | | | | | | |
| Earnings per share attributable to Realogy Holdings: | | | | | | | | | | | | | | |
| Basic earnings per share | $ | 0.70 |
| | $ | 0.74 |
| | $ | 1.28 |
| | $ | 1.07 |
| $ | 0.97 |
| | $ | 0.79 |
| | $ | 0.44 |
| | $ | 0.58 |
|
| Diluted earnings per share | $ | 0.69 |
| | $ | 0.73 |
| | $ | 1.26 |
| | $ | 1.06 |
| $ | 0.96 |
| | $ | 0.78 |
| | $ | 0.43 |
| | $ | 0.58 |
|
Weighted average common and common equivalent shares of Realogy Holdings outstanding: | | Basic | 136.1 |
| | 144.0 |
| | 137.8 |
| | 145.4 |
| 126.5 |
| | 137.6 |
| | 128.4 |
| | 138.6 |
|
| Diluted | 138.1 |
| | 145.1 |
| | 139.4 |
| | 146.6 |
| 127.6 |
| | 138.9 |
| | 129.7 |
| | 139.9 |
|
| | | | | | | | | | | | | | | |
| Cash dividends declared per share (beginning in August 2016) | $ | 0.09 |
| | $ | 0.09 |
| | $ | 0.27 |
| | $ | 0.09 |
| |
| Cash dividends declared per share | | $ | 0.09 |
| | $ | 0.09 |
| | $ | 0.18 |
| | $ | 0.18 |
|
See Notes to Condensed Consolidated Financial Statements.
5
REALOGY HOLDINGS CORP. AND REALOGY GROUP LLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| Net income | $ | 124 |
| | $ | 110 |
| | $ | 57 |
| | $ | 82 |
|
| Currency translation adjustment | (3 | ) | | 1 |
| | (2 | ) | | 2 |
|
| Defined benefit pension plan - amortization of actuarial loss to periodic pension cost | — |
| | — |
| | 1 |
| | — |
|
| Other comprehensive income (loss), before tax | (3 | ) | | 1 |
| | (1 | ) | | 2 |
|
| Income tax expense related to items of other comprehensive income amounts | — |
| | — |
| | — |
| | — |
|
| Other comprehensive income (loss), net of tax | (3 | ) | | 1 |
| | (1 | ) | | 2 |
|
| Comprehensive income | 121 |
| | 111 |
| | 56 |
| | 84 |
|
| Less: comprehensive income attributable to noncontrolling interests | (1 | ) | | (1 | ) | | (1 | ) | | (1 | ) |
| Comprehensive income attributable to Realogy Holdings and Realogy Group | $ | 120 |
| | $ | 110 |
| | $ | 55 |
| | $ | 83 |
|
See Notes to Condensed Consolidated Financial Statements.
6
REALOGY HOLDINGS CORP. AND REALOGY GROUP LLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMEBALANCE SHEETS
(In millions)millions, except share data)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Net income | $ | 96 |
| | $ | 107 |
| | $ | 178 |
| | $ | 159 |
|
| Currency translation adjustment | 1 |
| | — |
| | 3 |
| | (3 | ) |
| Defined benefit pension plan - amortization of actuarial loss to periodic pension cost | 1 |
| | — |
| | 1 |
| | 1 |
|
| Other comprehensive income (loss), before tax | 2 |
| | — |
| | 4 |
| | (2 | ) |
| Income tax expense related to items of other comprehensive income | 1 |
| | 1 |
| | 1 |
| | 1 |
|
| Other comprehensive income (loss), net of tax | 1 |
| | (1 | ) | | 3 |
| | (3 | ) |
| Comprehensive income | 97 |
| | 106 |
| | 181 |
| | 156 |
|
| Less: comprehensive income attributable to noncontrolling interests | (1 | ) | | (1 | ) | | (2 | ) | | (3 | ) |
| Comprehensive income attributable to Realogy Holdings and Realogy Group | $ | 96 |
| | $ | 105 |
| | $ | 179 |
| | $ | 153 |
|
|
| | | | | | | |
| | June 30,
2018 | | December 31,
2017 |
| | |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 230 |
| | $ | 227 |
|
| Restricted cash | 9 |
| | 7 |
|
| Trade receivables (net of allowance for doubtful accounts of $9 and $11) | 198 |
| | 153 |
|
| Relocation receivables | 336 |
| | 223 |
|
| Other current assets | 156 |
| | 179 |
|
| Total current assets | 929 |
| | 789 |
|
| Property and equipment, net | 283 |
| | 289 |
|
| Goodwill | 3,711 |
| | 3,710 |
|
| Trademarks | 749 |
| | 749 |
|
| Franchise agreements, net | 1,260 |
| | 1,294 |
|
| Other intangibles, net | 269 |
| | 284 |
|
| Other non-current assets | 290 |
| | 222 |
|
| Total assets | $ | 7,491 |
| | $ | 7,337 |
|
| LIABILITIES AND EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 178 |
| | $ | 156 |
|
| Securitization obligations | 261 |
| | 194 |
|
| Current portion of long-term debt | 788 |
| | 127 |
|
| Accrued expenses and other current liabilities | 413 |
| | 478 |
|
| Total current liabilities | 1,640 |
| | 955 |
|
| Long-term debt | 2,812 |
| | 3,221 |
|
| Deferred income taxes | 341 |
| | 327 |
|
| Other non-current liabilities | 256 |
| | 212 |
|
| Total liabilities | 5,049 |
| | 4,715 |
|
| Commitments and contingencies (Note 8) | | | |
| Equity: | | | |
| Realogy Holdings preferred stock: $.01 par value; 50,000,000 shares authorized, none issued and outstanding at June 30, 2018 and December 31, 2017 | — |
| | — |
|
| Realogy Holdings common stock: $.01 par value; 400,000,000 shares authorized, 124,647,343 shares issued and outstanding at June 30, 2018 and 131,636,870 shares issued and outstanding at December 31, 2017 | 1 |
| | 1 |
|
| Additional paid-in capital | 5,073 |
| | 5,285 |
|
| Accumulated deficit | (2,588 | ) | | (2,631 | ) |
| Accumulated other comprehensive loss | (47 | ) | | (37 | ) |
| Total stockholders' equity | 2,439 |
| | 2,618 |
|
| Noncontrolling interests | 3 |
| | 4 |
|
| Total equity | 2,442 |
| | 2,622 |
|
| Total liabilities and equity | $ | 7,491 |
| | $ | 7,337 |
|
See Notes to Condensed Consolidated Financial Statements.
7
REALOGY HOLDINGS CORP. AND REALOGY GROUP LLC
CONDENSED CONSOLIDATED BALANCE SHEETSSTATEMENTS OF CASH FLOWS
(In millions, except share data)millions)
(Unaudited)
|
| | | | | | | |
| | September 30,
2017 | | December 31,
2016 |
| | |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 348 |
| | $ | 274 |
|
| Trade receivables (net of allowance for doubtful accounts of $10 and $13) | 166 |
| | 152 |
|
| Relocation receivables | 275 |
| | 244 |
|
| Other current assets | 153 |
| | 148 |
|
| Total current assets | 942 |
| | 818 |
|
| Property and equipment, net | 272 |
| | 267 |
|
| Goodwill | 3,704 |
| | 3,690 |
|
| Trademarks | 748 |
| | 748 |
|
| Franchise agreements, net | 1,311 |
| | 1,361 |
|
| Other intangibles, net | 291 |
| | 313 |
|
| Other non-current assets | 253 |
| | 224 |
|
| Total assets | $ | 7,521 |
| | $ | 7,421 |
|
| LIABILITIES AND EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 152 |
| | $ | 140 |
|
| Securitization obligations | 234 |
| | 205 |
|
| Due to former parent | 18 |
| | 28 |
|
| Current portion of long-term debt | 242 |
| | 242 |
|
| Accrued expenses and other current liabilities | 442 |
| | 435 |
|
| Total current liabilities | 1,088 |
| | 1,050 |
|
| Long-term debt | 3,234 |
| | 3,265 |
|
| Deferred income taxes | 518 |
| | 389 |
|
| Other non-current liabilities | 216 |
| | 248 |
|
| Total liabilities | 5,056 |
| | 4,952 |
|
| Commitments and contingencies (Note 9) | | | |
| Equity: | | | |
| Realogy Holdings preferred stock: $.01 par value; 50,000,000 shares authorized, none issued and outstanding at September 30, 2017 and December 31, 2016 | — |
| | — |
|
| Realogy Holdings common stock: $.01 par value; 400,000,000 shares authorized, 135,180,292 shares issued and outstanding at September 30, 2017 and 140,227,692 shares issued and outstanding at December 31, 2016 | 1 |
| | 1 |
|
| Additional paid-in capital | 5,383 |
| | 5,565 |
|
| Accumulated deficit | (2,886 | ) | | (3,062 | ) |
| Accumulated other comprehensive loss | (37 | ) | | (40 | ) |
| Total stockholders' equity | 2,461 |
| | 2,464 |
|
| Noncontrolling interests | 4 |
| | 5 |
|
| Total equity | 2,465 |
| | 2,469 |
|
| Total liabilities and equity | $ | 7,521 |
| | $ | 7,421 |
|
|
| | | | | | | |
| | Six Months Ended
June 30, |
| | 2018 | | 2017 |
| Operating Activities | | | |
| Net income | $ | 57 |
| | $ | 82 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| Depreciation and amortization | 97 |
| | 99 |
|
| Deferred income taxes | 22 |
| | 57 |
|
| Amortization of deferred financing costs and discount | 7 |
| | 8 |
|
| Loss on the early extinguishment of debt | 7 |
| | 4 |
|
| Equity in losses of unconsolidated entities | 2 |
| | 3 |
|
| Stock-based compensation | 21 |
| | 25 |
|
| Mark-to-market adjustments on derivatives | (13 | ) | | 5 |
|
| Other adjustments to net income | 1 |
| | (1 | ) |
| Net change in assets and liabilities, excluding the impact of acquisitions and dispositions: | | | |
| Trade receivables | (44 | ) | | (26 | ) |
| Relocation receivables | (114 | ) | | (47 | ) |
| Other assets | (18 | ) | | (29 | ) |
| Accounts payable, accrued expenses and other liabilities | (13 | ) | | 11 |
|
| Dividends received from unconsolidated entities | 1 |
| | 2 |
|
| Other, net | (4 | ) | | (7 | ) |
| Net cash provided by operating activities | 9 |
| | 186 |
|
| Investing Activities | | | |
| Property and equipment additions | (49 | ) | | (48 | ) |
| Payments for acquisitions, net of cash acquired | (1 | ) | | (4 | ) |
| Investment in unconsolidated entities | (15 | ) | | (3 | ) |
| Proceeds from investments in unconsolidated entities | 19 |
| | — |
|
| Other, net | 1 |
| | (1 | ) |
| Net cash used in investing activities | (45 | ) | | (56 | ) |
| Financing Activities | | | |
| Net change in revolving credit facility | 242 |
| | (10 | ) |
| Payments for refinancing of Term Loan B | (4 | ) | | — |
|
| Proceeds from refinancing of Term Loan A & A-1 | 17 |
| | — |
|
| Amortization payments on term loan facilities | (10 | ) | | (21 | ) |
| Net change in securitization obligations | 67 |
| | 18 |
|
| Debt issuance costs | (16 | ) | | (6 | ) |
| Repurchase of common stock | (200 | ) | | (121 | ) |
| Dividends paid on common stock | (23 | ) | | (25 | ) |
| Proceeds from exercise of stock options | — |
| | 3 |
|
| Taxes paid related to net share settlement for stock-based compensation | (10 | ) | | (10 | ) |
| Payments of contingent consideration related to acquisitions | (4 | ) | | (4 | ) |
| Other, net | (17 | ) | | (10 | ) |
| Net cash provided by (used in) financing activities | 42 |
| | (186 | ) |
| Effect of changes in exchange rates on cash, cash equivalents and restricted cash | (1 | ) | | 1 |
|
| Net increase (decrease) in cash, cash equivalents and restricted cash | 5 |
| | (55 | ) |
| Cash, cash equivalents and restricted cash, beginning of period | 234 |
| | 281 |
|
| Cash, cash equivalents and restricted cash, end of period | $ | 239 |
| | $ | 226 |
|
| Supplemental Disclosure of Cash Flow Information | | | |
| Interest payments (including securitization interest of $4 and $3 for the periods presented) | $ | 87 |
| | $ | 86 |
|
| Income tax payments, net | 8 |
| | 8 |
|
See Notes to Condensed Consolidated Financial Statements.
8
REALOGY HOLDINGS CORP. AND REALOGY GROUP LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
|
| | | | | | | |
| | Nine Months Ended
September 30, |
| | 2017 | | 2016 |
| Operating Activities | | | |
| Net income | $ | 178 |
| | $ | 159 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| Depreciation and amortization | 149 |
| | 149 |
|
| Deferred income taxes | 129 |
| | 98 |
|
| Amortization of deferred financing costs and discount | 12 |
| | 12 |
|
| Noncash portion of loss on early extinguishment of debt | 4 |
| | — |
|
| Equity in earnings of unconsolidated entities | (7 | ) | | (10 | ) |
| Stock-based compensation | 38 |
| | 39 |
|
| Mark-to-market adjustments on derivatives | 6 |
| | 39 |
|
| Other adjustments to net income | (2 | ) | | (4 | ) |
| Net change in assets and liabilities, excluding the impact of acquisitions and dispositions: | | | |
| Trade receivables | (13 | ) | | (29 | ) |
| Relocation receivables | (30 | ) | | (14 | ) |
| Other assets | (33 | ) | | (20 | ) |
| Accounts payable, accrued expenses and other liabilities | 10 |
| | (5 | ) |
| Due to former parent | (10 | ) | | 1 |
|
| Dividends received from unconsolidated entities | 24 |
| | 5 |
|
| Other, net | (11 | ) | | (9 | ) |
| Net cash provided by operating activities | 444 |
| | 411 |
|
| Investing Activities | | | |
| Property and equipment additions | (69 | ) | | (61 | ) |
| Payments for acquisitions, net of cash acquired | (13 | ) | | (95 | ) |
| Investment in unconsolidated entities | (34 | ) | | — |
|
| Change in restricted cash | 3 |
| | (2 | ) |
| Other, net | 17 |
| | (5 | ) |
| Net cash used in investing activities | (96 | ) | | (163 | ) |
| Financing Activities | | | |
| Net change in revolving credit facility | (10 | ) | | (45 | ) |
| Proceeds from issuance of Term Loan A-1 | — |
| | 355 |
|
| Repayment of amended Term Loan B facility | — |
| | (758 | ) |
| Amortization payments on term loan facilities | (31 | ) | | (31 | ) |
| Proceeds from issuance of Senior Notes | — |
| | 750 |
|
| Redemption of Senior Notes | — |
| | (500 | ) |
| Net change in securitization obligations | 29 |
| | 9 |
|
| Debt issuance costs | (6 | ) | | (15 | ) |
| Repurchase of common stock | (180 | ) | | (134 | ) |
| Dividends paid on common stock | (37 | ) | | (13 | ) |
| Proceeds from exercise of stock options | 7 |
| | 1 |
|
| Taxes paid related to net share settlement for stock-based compensation | (11 | ) | | (6 | ) |
| Payments of contingent consideration related to acquisitions | (18 | ) | | (23 | ) |
| Other, net | (19 | ) | | (28 | ) |
| Net cash used in financing activities | (276 | ) | | (438 | ) |
| Effect of changes in exchange rates on cash and cash equivalents | 2 |
| | (1 | ) |
| Net increase (decrease) in cash and cash equivalents | 74 |
| | (191 | ) |
| Cash and cash equivalents, beginning of period | 274 |
| | 415 |
|
| Cash and cash equivalents, end of period | $ | 348 |
| | $ | 224 |
|
| Supplemental Disclosure of Cash Flow Information | | | |
| Interest payments (including securitization interest of $5 for both periods presented) | $ | 111 |
| | $ | 117 |
|
| Income tax payments, net | 10 |
| | 13 |
|
See Notes to Condensed Consolidated Financial Statements.
9
REALOGY HOLDINGS CORP. AND REALOGY GROUP LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise noted, all amounts are in millions)
(Unaudited)
Realogy Holdings Corp. ("Realogy Holdings", "Realogy" or the "Company") is a holding company for its consolidated subsidiaries including Realogy Intermediate Holdings LLC ("Realogy Intermediate") and Realogy Group LLC ("Realogy Group") and its consolidated subsidiaries. Realogy, through its subsidiaries, is a global provider of residential real estate services. Neither Realogy Holdings, the indirect parent of Realogy Group, nor Realogy Intermediate, the direct parent company of Realogy Group, conducts any operations other than with respect to its respective direct or indirect ownership of Realogy Group. As a result, the consolidated financial positions, results of operations, comprehensive income and cash flows of Realogy Holdings, Realogy Intermediate and Realogy Group are the same.
The accompanying Condensed Consolidated Financial Statements include the financial statements of Realogy Holdings and Realogy Group. Realogy Holdings' only asset is its investment in the common stock of Realogy Intermediate, and Realogy Intermediate's only asset is its investment in Realogy Group. Realogy Holdings' only obligations are its guarantees of certain borrowings and certain franchise obligations of Realogy Group. All expenses incurred by Realogy Holdings and Realogy Intermediate are for the benefit of Realogy Group and have been reflected in Realogy Group's Condensed Consolidated Financial Statements.
The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America and with Article 10 of Regulation S-X. Interim results may not be indicative of full year performance because of seasonal and short-term variations. The Company has eliminated all material intercompany transactions and balances between entities consolidated in these financial statements. In presenting the Condensed Consolidated Financial Statements, management makes estimates and assumptions that affect the amounts reported and the related disclosures. Estimates, by their nature, are based on judgment and available information. Accordingly, actual results could differ materially from those estimates. Certain reclassifications have been made to prior period amounts to conform to the current period presentation.
In management's opinion, the accompanying unaudited Condensed Consolidated Financial Statements reflect all normal and recurring adjustments necessary for a fair statement of Realogy Holdings and Realogy Group's financial position as of SeptemberJune 30, 20172018 and the results of operations and comprehensive income for the three and ninesix months ended SeptemberJune 30, 20172018 and 20162017 and cash flows for the ninesix months ended SeptemberJune 30, 20172018 and 2016.2017. The Consolidated Balance Sheet at December 31, 20162017 was derived from audited annual financial statements but does not contain all of the footnote disclosures from the annual financial statements. The Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 20162017.
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 SeptemberJune 30, 20172018 for assets and liabilities measured at fair value on a recurring basis:
|
| | | | | | | | | | | | | | | |
| | Level I | | Level II | | Level III | | Total |
| Interest rate swaps (included in other current and non-current liabilities) | $ | — |
| | $ | 24 |
| | $ | — |
| | $ | 24 |
|
| Deferred compensation plan assets (included in other non-current assets) | 3 |
| | — |
| | — |
| | 3 |
|
| Contingent consideration for acquisitions (included in accrued expenses and other current liabilities and non-current liabilities) | — |
| | — |
| | 33 |
| | 33 |
|
|
| | | | | | | | | | | | | | | |
| | Level I | | Level II | | Level III | | Total |
| Deferred compensation plan assets (included in other non-current assets) | $ | 3 |
| | $ | — |
| | $ | — |
| | $ | 3 |
|
| Interest rate swaps (included in other non-current assets) | — |
| | 12 |
| | — |
| | 12 |
|
| Interest rate swaps (included in other non-current liabilities) | — |
| | 7 |
| | — |
| | 7 |
|
| Contingent consideration for acquisitions (included in accrued expenses and other current liabilities and other non-current liabilities) | — |
| | — |
| | 29 |
| | 29 |
|
The following table summarizes fair value measurements by level at December 31, 20162017 for assets and liabilities measured at fair value on a recurring basis:
|
| | | | | | | | | | | | | | | |
| | Level I | | Level II | | Level III | | Total |
| Interest rate swaps (included in other non-current liabilities) | $ | — |
| | $ | 33 |
| | $ | — |
| | $ | 33 |
|
| Deferred compensation plan assets (included in other non-current assets) | 3 |
| | — |
| | — |
| | 3 |
|
| Contingent consideration for acquisitions (included in accrued expenses and other current liabilities and non-current liabilities) | — |
| | — |
| | 50 |
| | 50 |
|
|
| | | | | | | | | | | | | | | |
| | Level I | | Level II | | Level III | | Total |
| Deferred compensation plan assets (included in other non-current assets) | $ | 3 |
| | $ | — |
| | $ | — |
| | $ | 3 |
|
| Interest rate swaps (included in other current and non-current liabilities) | — |
| | 13 |
| | — |
| | 13 |
|
| Contingent consideration for acquisitions (included in accrued expenses and other current liabilities and other non-current liabilities) | — |
| | — |
| | 34 |
| | 34 |
|
The fair value of the Company’s contingent consideration for acquisitions is measured using a probability weighted-average discount rate to estimate future cash flows based upon the likelihood of achieving future operating results for individual acquisitions. These assumptions are deemed to be unobservable inputs and as such the Company’s contingent consideration is classified within Level III of the valuation hierarchy. The Company reassesses the fair value of the contingent consideration liabilities on a quarterly basis.
The following table presents changes in Level III financial liabilities measured at fair value on a recurring basis:
|
| | | | |
| | | Level III |
| Fair value of contingent consideration at December 31, 2016 | | $ | 50 |
|
| Additions: contingent consideration related to acquisitions completed during the period | | 3 |
|
| Reductions: payments of contingent consideration (reflected in the financing section of the Consolidated Statement of Cash Flows) | | (18 | ) |
| Changes in fair value (reflected in the Consolidated Statement of Operations) | | (2 | ) |
| Fair value of contingent consideration at September 30, 2017 | | $ | 33 |
|
|
| | | | |
| | | Level III |
| Fair value of contingent consideration at December 31, 2017 | | $ | 34 |
|
| Additions: contingent consideration related to acquisitions completed during the period | | — |
|
| Reductions: payments of contingent consideration | | (4 | ) |
| Changes in fair value (reflected in the Consolidated Statement of Operations) | | (1 | ) |
| Fair value of contingent consideration at June 30, 2018 | | $ | 29 |
|
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:
| | | | September 30, 2017 | | December 31, 2016 | June 30, 2018 | | December 31, 2017 |
| Debt | Principal Amount | | Estimated
Fair Value (a) | | Principal Amount | | Estimated
Fair Value (a) | Principal Amount | | Estimated
Fair Value (a) | | Principal Amount | | Estimated
Fair Value (a) |
| Senior Secured Credit Facility: | | | | | | | | | | | | | | |
| Revolving Credit Facility | $ | 190 |
| | $ | 190 |
| | $ | 200 |
| | $ | 200 |
| $ | 312 |
| | $ | 312 |
| | $ | 70 |
| | $ | 70 |
|
| Term Loan B | 1,086 |
| | 1,092 |
| | 1,094 |
| | 1,100 |
| 1,075 |
| | 1,071 |
| | 1,083 |
| | 1,085 |
|
| Term Loan A Facility: | | | | | | | | | | | | | | |
| Term Loan A | 397 |
| | 398 |
| | 413 |
| | 414 |
| 745 |
| | 745 |
| | 391 |
| | 393 |
|
| Term Loan A-1 | 344 |
| | 345 |
| | 351 |
| | 351 |
| — |
| | — |
| | 342 |
| | 343 |
|
| 4.50% Senior Notes | 450 |
| | 462 |
| | 450 |
| | 461 |
| 450 |
| | 450 |
| | 450 |
| | 457 |
|
| 5.25% Senior Notes | 550 |
| | 573 |
| | 550 |
| | 562 |
| 550 |
| | 549 |
| | 550 |
| | 569 |
|
| 4.875% Senior Notes | 500 |
| | 514 |
| | 500 |
| | 483 |
| 500 |
| | 470 |
| | 500 |
| | 495 |
|
| Securitization obligations | 234 |
| | 234 |
| | 205 |
| | 205 |
| 261 |
| | 261 |
| | 194 |
| | 194 |
|
_______________
| |
| (a) | The fair value of the Company's indebtedness is categorized as Level II. |
Investment in Mortgage Origination VenturesEquity Method Investments
At June 30, 2018 and December 31, 2017, the Company had various equity method investments aggregating $56 million and $74 million, respectively, which are recorded within other non-current assets on the accompanying Condensed Consolidated Balance Sheets. The Company owns 49.9% of PHH Home Loans, a mortgage origination venture formed in 2005 created$56 million investment balance at June 30, 2018 included $48 million for the purpose of originating and selling mortgage loans primarily sourced through the Company’s real estate brokerage and relocation businesses. PHH Corporation ("PHH") owns the remaining percentage. On February 15, 2017, Realogy announced that it and Guaranteed Rate, Inc. (“Guaranteed Rate”) agreed to form a new mortgage origination venture,Company's investment in Guaranteed Rate Affinity, LLC ("Guaranteed Rate Affinity"), which began doing business. The Company's interest in August 2017. Guaranteed Rate ownsPHH Home Loans, LLC ("PHH Home Loans") was sold to a controlling 50.1% stakesubsidiary of PHH Corporation in the first quarter of 2018. The $74 million investment balance at December 31, 2017 included $48 million for the Company's investment in Guaranteed Rate Affinity while Realogy owns 49.9%. Guaranteed Rate has responsibilityand $19 million for the oversight of the officers and senior employees of Guaranteed Rate Affinity who are designated to manage Guaranteed Rate Affinity.
In accordance with the asset purchase agreement, Guaranteed Rate Affinity is acquiring certain assets of the mortgage operations ofCompany's remaining investment in PHH Home Loans, including its four regional centers and employees acrossLoans. The Company received net cash proceeds of $19 million reducing the United States, but not its mortgage assets. The asset purchase agreement and the movement of employees from the existing joint ventureinvestment balance to the new joint venture is expected to be completed in a series of five phases. The first two phases were completedzero in the thirdfirst quarter of 2017 and in October2018.
For the third phase was completed. The remaining two phases are expected to be completed inthree months ended June 30, 2018, the fourth quarter of 2017. While theCompany recorded equity earnings related to PHH Home Loans are included in the financial results of the Company Owned Real Estate Brokerage Services segment, the equity earnings related to Guaranteed Rate Affinity are included in the financial results of$2 million at the Title and Settlement Services segment.
At September 30, 2017 and December 31, 2016, the Company had various equity method investments aggregating $85 million and $66 million, respectively. The Company's investment in PHH Home Loans was $46 million at September 30, 2017 and $59 million at December 31, 2016. The Company's investment in Guaranteed Rate Affinity was $31 million at September 30, 2017.
For the third quarter of 2017,six months ended June 30, 2018, the Company recorded equity earningslosses of $10 million which consisted of $14 million of earnings from the sale of the first two phases of PHH Home Loans' assets to Guaranteed Rate Affinity, partially offset by $2 million of exit costs. In addition, there was a $2 million loss from equity method investments at the Title and Settlement Services segment primarily related to costs associated with the startramp up of operations of Guaranteed Rate Affinity including $1 million of amortization of intangible assets recorded in purchase accounting. Forduring the thirdfirst quarter of 2016, the2018. The Company recorded equityno earnings of $5 million of which $4 million related to its investmentequity investments for the three months ended June 30, 2017 and $3 million in losses primarily related to the recognition of certain exit costs at PHH Home Loans.
ForLoans for the ninesix months ended SeptemberJune 30, 2017, the2017.
The Company recorded equity earnings of $7 million which consisted of $14 million of earnings from the sale of the first two phases of PHH Home Loans' assets to Guaranteed Rate Affinity, partially offset by $5 million of exit costs and losses ofreceived $1 million from the continuing operations results of PHH Home Loans. In addition, there was a $1and $2 million lossin cash dividends from equity method investments atduring the Title and Settlement Services segment primarily related to costs associated with the start up of operations of Guaranteed Rate Affinity, including $1 million of
amortization of intangible assets recorded in purchase accounting. For the ninesix months ended SeptemberJune 30, 2016, the Company recorded equity earnings of $10 million of which $7 million related to its investment in PHH Home Loans.
The Company received $24 million2018 and $5 million in cash dividends, primarily from PHH Home Loans, during the nine months ended September 30, 2017, and 2016, respectively. The Company invested $34$4 million into Guaranteed Rate Affinity during the nine months ended September 30, 2017.first quarter of 2018.
Income Taxes
The Company's provision for income taxes in interim periods is computed by applying its estimated annual effective tax rate against the income before income taxes for the period. In addition, non-recurring or discrete items are recorded in the period in which they occur. The provision for income taxes was an expense of $67$52 million and $74$73 million for the three months ended SeptemberJune 30, 20172018 and 2016,2017, respectively, and an expense of $131$33 million and $114$64 million for the ninesix months ended SeptemberJune 30, 2018 and 2017, and 2016, respectively. There were no changes to the net benefit recorded during the year ended December 31, 2017 relating to the 2017 Tax Act which was a provisional amount that reflected the Company’s reasonable estimate at the time.
Derivative Instruments
The Company records derivatives and hedging activities on the balance sheet at their respective fair values. The Company uses foreign currency forward contracts largely to manage its exposure to changes in foreign currency exchange rates associated with its foreign currency denominated receivables and payables. The Company primarily manages its foreign currency exposure to the Euro, British Pound, Swiss Franc and Canadian Dollar. The Company has not elected to utilize hedge accounting for these forward contracts; therefore, any change in fair value is recorded in the Condensed
Consolidated Statements of Operations. However, the fluctuations in the value of these forward contracts generally offset the impact of changes in the value of the underlying risk that they are intended to economically hedge. As of SeptemberJune 30, 2017, the Company had outstanding foreign currency forward contracts in an asset position with a fair value of less than $1 million and a notional value of $32 million. As of December 31, 2016,2018, the Company had outstanding foreign currency forward contracts in a liability position with a fair value of $2$1 million and a notional value of $29$23 million. As of December 31, 2017, the Company had outstanding foreign currency forward contracts in a liability position with a fair value of less than $1 million and a notional value of $25 million.
The Company also enters into interest rate swaps to manage its exposure to changes in interest rates associated with its variable rate borrowings. TheInterest rate swaps with a notional value of $425 million expired February 10, 2018. As of June 30, 2018, the Company hashad interest rate swaps with an aggregate notional value of $1,475$1,600 million to offset the variability in cash flows resulting from the term loan facilities as follows:
|
| | | | |
| Notional Value (in millions) | | Commencement Date | | Expiration Date |
$225600 | July 2012 | February 2018 |
$200 | January 2013 | February 2018 |
$600 | August 2015 | | August 2020 |
| $450 | | November 2017 | | November 2022 |
| $400 | (a) | August 2020 | | August 2025 |
| $150 | (a) | November 2022 | | November 2027 |
_______________
| |
| (a) | During the second quarter of 2018, the Company entered into four new forward starting interest rate swaps, two with a notional value of $125 million and two with a notional value of $150 million. |
The swaps help to protect our outstanding variable rate borrowings from future interest rate volatility. The Company has not elected to utilize hedge accounting for these interest rate swaps; therefore, any change in fair value is recorded in the Condensed Consolidated Statements of Operations.
The fair value of derivative instruments was as follows:
| | | Liability Derivatives | | Fair Value | |
| Not Designated as Hedging Instruments | | Balance Sheet Location | | September 30, 2017 | | December 31, 2016 | | Balance Sheet Location | | June 30, 2018 | | December 31, 2017 |
| Interest rate swap contracts | | Other current and non-current liabilities | | $ | 24 |
| | $ | 33 |
| | Other non-current assets | | $ | 12 |
| | $ | — |
|
| Interest rate swap contracts | | | Other current and non-current liabilities | | 7 |
| | 13 |
|
The effect of derivative instruments on earnings was as follows:
| | | Derivative Instruments Not Designated as Hedging Instruments | | Location of (Gain) or Loss Recognized for Derivative Instruments | | (Gain) or Loss Recognized on Derivatives | | Location of (Gain) or Loss Recognized for Derivative Instruments | | (Gain) or Loss Recognized on Derivatives |
| Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
| Interest rate swap contracts | | Interest expense | | $ | — |
| | $ | (5 | ) | | $ | 4 |
| | $ | 40 |
| | Interest expense | | $ | — |
| | $ | 5 |
| | $ | (12 | ) | | $ | 4 |
|
| Foreign exchange contracts | | Operating expense | | 1 |
| | (1 | ) | | 2 |
| | (1 | ) | | Operating expense | | $ | (1 | ) | | $ | 1 |
| | $ | (1 | ) | | $ | 1 |
|
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$9 million and $7 million at
September June 30, 20172018 and December 31, 2016, respectively, and are primarily included within other current assets on the Company’s Condensed Consolidated Balance Sheets.2017, respectively.
Supplemental Cash Flow Information
Significant non-cash transactions during both the ninesix months ended SeptemberJune 30, 20172018 and 20162017 included capital lease additions of $13$8 million, and $10 million, respectively, which resulted in non-cash additions to property and equipment, net and other non-current liabilities.
Stock-Based Compensation
During the first quarter of 2018, the Company granted 0.4 million shares of non-qualified stock options for a weighted exercise price of $25.35 and 1.1 million shares of restricted stock units ("RSUs") at a weighted average grant date fair value of $25.45.
Effective March 1, 2018, the Board approved, subject to stockholder approval at the 2018 Annual Meeting, the Realogy Holdings Corp. 2018 Long-Term Incentive Plan, as amended (the "2018 LTIP"). Options and RSUs included in the 2018 LTIP were granted on March 1, 2018. In addition to these awards, RSUs and PSUs aggregating 0.8 million shares were also awarded on March 1, 2018, but the grant was subject to approval of the 2018 LTIP at the 2018 Annual Meeting of
Stockholders held on May 2, 2018. The stockholders approved the 2018 LTIP at the May 2, 2018 Annual Meeting and the Company accordingly treated May 2, 2018 as the grant date for these awards and will expense these awards, which had a weighted average grant date fair value of $25.04, from that date over the balance of the vesting or performance period.
Stock Repurchases
The Company may repurchase shares of its common stock under authorizations made from its Board of Directors. Shares repurchased are retired and not displayed separately as treasury stock on the consolidated financial statements. The par value of the shares repurchased and retired is deducted from common stock and the excess of the purchase price over par value is first charged against any available additional paid-in capital with the balance charged to retained earnings. Direct costs incurred to repurchase the shares are included in the total cost of the shares.
In February 2016, theThe Company's Board of Directors authorized a share repurchase program of up to $275 million, of the Company's common stock. In February 2017, the Company's Board of Directors authorized a new share repurchase program of up to an additional $300 million and $350 million of the Company's common stock.stock in February 2016, 2017 and 2018, respectively.
As of SeptemberJune 30, 2017,2018, the Company had repurchased and retired 1324.3 million shares of common stock for an aggregate of $275$674 million under the February 2016 share repurchase program and $102 million under the February 2017 share repurchase program at a total weighted average market price of $29.07$27.80 per share, including 1.84.1 million shares of common stock repurchased during the thirdsecond quarter of 20172018 for $58$101 million at a weighted average market price of $33.83$24.94 per share. As of SeptemberJune 30, 2017, approximately $1982018, $251 million of authorization remainsremained available for the repurchase of shares under the February 20172018 share repurchase program.
Dividend Policy
In August 2016, the Company’s Board of Directors approved the initiation of a quarterly cash dividend policy of $0.09 per share on its common stock. The Board declared and paid a quarterly cash dividend of $0.09 per share of the Company’s common stock during each ofboth the first second and thirdsecond quarters of 2017.2018.
The declaration and payment of any future dividend will be subject to the discretion of the Board of Directors and will depend on a variety of factors, including the Company’s financial condition and results of operations, contractual restrictions, including restrictive covenants contained in the Company’s credit agreements, and the indentures governing the Company’s outstanding debt securities, capital requirements and other factors that the Board of Directors deems relevant.
Pursuant to the Company’s policy, the dividends payable in cash are treated as a reduction of additional paid-in capital since the Company is currently in a retained deficit position.
Recently Adopted Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (Topic 606) "Revenue from Contracts with Customers" (the "new revenue standard"). The objective of the new revenue standard is to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability within industries, across industries, and across capital markets. After a review of the Company's revenue streams, the Company determined that the new revenue standard did not have a material impact on financial results as the majority of the Company's revenue is recognized at the completion of a homesale transaction which did not result in a change in the timing of recognition of revenue transactions under the new revenue standard. The Company adopted the new revenue standard on January 1, 2018 using the modified retrospective transition method in which the cumulative effect of applying the new revenue standard was recognized as an adjustment to the opening balance of retained earnings. See Note 2, "Revenue Recognition" for further details.
In February 2018, the FASB issued a new standard which permits companies to reclassify certain income tax effects resulting from the 2017 Tax Act, called "stranded tax effects", from accumulated other comprehensive income ("AOCI") to retained earnings. According to the new guidance, the reclassification amount should include the effect of the change in the U.S. federal corporate income tax rate on the gross deferred tax amounts and related valuation allowances, if any, at the date of enactment of the 2017 Tax Act related to items remaining in AOCI. The guidance is effective for all companies for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption is permitted. The Company early adopted this standard in the first quarter of 2018 which resulted in a debit to Accumulated other comprehensive loss and a credit to Accumulated deficit for $9 million. The Company’s accounting policy for releasing income tax effects from AOCI is to release those effects when our entire portfolio of the type of item is liquidated.
In June 2018, the FASB issued a new standard related to non-employee share-based payment accounting. The new guidance eliminates specific accounting for non-employee share-based payments and aligns the treatment for awards issued to employees and non-employees reducing the complexity of measurement of non-employee awards and creating a single
accounting model. The new standard is applied to all new awards granted after the date of adoption. In addition, all liability-classified awards that have not been settled and equity-classified awards for which a measurement date has not been established by the adoption date should be remeasured at fair value as of the adoption date with a cumulative effect adjustment to opening retained earnings in the fiscal year of adoption. If early adoption of the new guidance is chosen in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company elected to early adopt this guidance during the second quarter of 2018. There was an immaterial impact upon adoption.
Recently Issued Accounting Pronouncements
The Company considers the applicability and impact of all Accounting Standards Updates.Updates ("ASUs"). ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial position or results of operations.
In August 2016, the FASB issued a new standard on classification of cash receipts and payments on the statement of cash flows intending to reduce diversity in practice on how certain transactions are classified. In addition, in November 2016, the FASB issued a new standard requiring that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The new standards are effective for annual periods beginning after December 15, 2017 and will require a retrospective application at the beginning of the earliest comparative period presented in the year of adoption. The Company plans to early adopt the new standard in the fourth quarter of 2017. The Company expects there to be reclassifications between cash flow categories, but no net cash impact to its Condensed Consolidated Statement of Cash Flows.
In February 2016, the FASB issued its new standard on leases which requires virtually all leases to be recognized on the balance sheet. Lessees will recognize a right-of-use asset and a lease liability for all leases (other than leases that meet the definition of a short-term lease). The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. For income statement purposes, the FASB retained a dual model, requiring leases towill be classified as either operating or finance leases. Operating leases will result in straight-line expense, similar to current operating leases, while finance leases will result in a front-loaded expense pattern, similar to current capital leases. Classification will be based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines. The new standard is effective for annual periods beginning after December 15, 2018. Early2018, with early adoption is permitted. The new leasing standard requirespermitted, requiring a modified retrospective transition which requires applicationapproach. In July 2018, the FASB issued an ASU that allows entities to apply the provisions of the new guidance at the beginning ofeffective date (e.g., January 1, 2019), as opposed to the earliest comparative period presented inunder the year of adoption. The Company is currently evaluating the impact of the standard on its consolidated financial statements and is in the process of implementing a new lease management system.
In May 2014, the FASB issued a standard on revenue recognition that will impact most companies to some extent. The objective of the revenue standard is to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability within industries, across industries, and across capital markets. The revenue standard contains principles that an entity will apply to determine the measurement of revenue and the timing of revenue recognition. The new standard permits for two alternative implementation methods, the use of either (1) full retrospective application to each prior reporting period presented or (2) modified retrospective application in which the cumulative effect of initially applying the revenue standard is recognized as antransition approach (January 1, 2017), and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company plans to adoptis still evaluating the newimpact of the standard on its consolidated financial statements. Future lease obligations are disclosed in Note 13. "Commitments and Contingencies" of the Annual Report on Form 10-K for the year ended December 31, 2017. The Company is in the first quarterprocess of 2018 using the modified retrospective transition method. The Company has made progress on redraftingevaluating its revenue recognition accounting policies affected by the standard, assessing the redesign ofand internal controls as well as evaluatingimplementing a new lease management system which will be utilized to account for leases under the expanded disclosure requirements. After a reviewnew guidance once adopted.
Adoption of the Company's revenue streams,New Revenue Standard
Effective January 1, 2018, the Company does not expectadopted the new revenue standard using the modified retrospective method. Results for reporting periods beginning after January 1, 2018 are presented under the new revenue standard; however, the comparative prior period amounts have not been restated and continue to have a material impact on financial results as thebe reported in accordance with historic accounting under ASC Topic 605. The majority of the Company's revenue iscontinues to be recognized at the completion of a homesale transaction which will not result in a change in the timing of recognition of revenue transactions under the new revenue standard, however as a result of the adoption the Company recognized additional contract liabilities and deferred assets associated with certain other revenue streams. As of January 1, 2018, the Company recorded a net debit to its opening Accumulated deficit of $22 million, net of tax, due to the cumulative impact of adopting the new revenue standard, with the impact primarily related to the recognition of additional contract liabilities for initial area development fees and deferred assets for prepaid commissions.
Contract Liabilities for Initial Area Development Fees ("ADF"):
Contract liabilities are recorded when cash payments are received or due in advance of the Company's performance. The Company records these as deferred revenues and are classified as current or non-current liabilities in the Condensed Consolidated Balance Sheets based on the expected timing of revenue recognition.
The Real Estate Franchise Services segment collects an initial ADF for international territory transactions, which are recorded as deferred revenue when received and recognized into revenue over the term of the agreement, typically 25 years, 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. ADFs were recognized as revenue upfront when received under historical guidance.
Prepaid Commissions:
The incremental direct costs of obtaining a contract, which primarily consist of franchise sales commissions, are deferred and amortized generally over the estimated life of the customer relationship for domestic and international contracts. The Company classifies prepaid commissions as current or non-current assets in the Condensed Consolidated Balance Sheets based on the expected timing of recognizing expense.
The Real Estate Franchise Services segment recognizes a deferred asset for commissions paid to Realogy franchise sales employees upon the sale of a new franchise. The amount of commissions is calculated as a percentage of the anticipated gross commission income of the new franchisee or the amount of the ADF and is amortized on a straight-line basis over the estimated life of franchise customer relationships, 30 years for domestic franchise agreements, or the agreement term for international franchise agreements which is generally 25 years. Franchise sales commissions were expensed upfront when paid under historical guidance.
Practical Expedients and Exemptions:
The Company elected to apply the practical expedient that only requires the Company to apply the revenue standard to contracts that were open as of the beginning of the earliest period presented which impacted the amount of prepaid commissions capitalized.
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.
The cumulative effect of the changes made to the Condensed Consolidated Balance Sheets for the adoption of the new revenue standard were as follows:
|
| | | | | | | | | | | |
| | Balance Sheet accounts prior to the new revenue standard adoption adjustments | | Adjustments due to the adoption of the new revenue standard | | Balance Sheet accounts after the new revenue standard adoption adjustments |
| ASSETS | | | | | |
| Current assets: | | | | | |
| Trade receivables | $ | 153 |
| | $ | 1 |
| | $ | 154 |
|
| Other current assets | 179 |
| | 2 |
| | 181 |
|
| Total current assets | 789 |
| | 3 |
| | 792 |
|
| Other non-current assets | 222 |
| | 23 |
| | 245 |
|
| Total assets | $ | 7,337 |
| | $ | 26 |
| | $ | 7,363 |
|
| | | | | | |
| LIABILITIES AND EQUITY | | | | | |
| Current liabilities: | | | | | |
| Accrued expenses and other current liabilities | $ | 478 |
| | $ | 2 |
| | $ | 480 |
|
| Total current liabilities | 955 |
| | 2 |
| | 957 |
|
| Deferred income taxes | 327 |
| | (8 | ) | | 319 |
|
| Other non-current liabilities | 212 |
| | 54 |
| | 266 |
|
| Total liabilities | 4,715 |
| | 48 |
| | 4,763 |
|
| Equity: | | | | | |
| Accumulated deficit (a) | (2,622 | ) | | (22 | ) | | (2,644 | ) |
| Accumulated other comprehensive loss (a) | (46 | ) | | — |
| | (46 | ) |
| Total stockholders' equity | 2,618 |
| | (22 | ) | | 2,596 |
|
| Total equity | 2,622 |
| | (22 | ) | | 2,600 |
|
| Total liabilities and equity | $ | 7,337 |
| | $ | 26 |
| | $ | 7,363 |
|
_______________
| |
2.(a) | ACQUISITIONSBeginning balances have been adjusted 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. See Note 1, "Basis of Presentation" in the "Recently Adopted Accounting Pronouncements" section for additional information. |
2017 Acquisitions
During the nine months ended September 30, 2017, the Company acquired eleven real estate brokerage operations through its wholly owned subsidiary, NRT, for aggregate cash consideration of $6 million and established $1 million of contingent consideration. These acquisitions resulted in goodwill of $5 million, pendings and listings of $1 million and other intangibles of $1 million.
During the nine months ended September 30, 2017, the Company acquired one title and settlement operation through its wholly owned subsidiary, TRG, for cash consideration of $7 million and established $2 million of contingent consideration. This acquisition resulted in goodwill of $8 million and pendings of $1 million.
None of the 2017 acquisitions were significant to the Company’s results of operations, financial position or cash flows individually or in the aggregate.
2016 Acquisitions
During the year ended December 31, 2016, the Company acquired eleven real estate brokerage and property management operations through its wholly owned subsidiary, NRT, for aggregate cash consideration of $74 million and established $9 million of contingent consideration. These acquisitions resulted in goodwill of $52 million, customer relationships of $20 million, pendings and listings of $6 million, other intangible assets of $3 million, other assets of $5 million and other liabilities of $3 million.
During the year ended December 31, 2016, the Company acquired one title and settlement operation through its wholly owned subsidiary, TRG, for cash consideration of $24 million and established $10 million of contingent consideration. This acquisition resulted in goodwill of $20 million, title plant of $7 million, pendings of $5 million, trademarks of $3 million, other intangible assets of $2 million, other assets of $6 million and other liabilities of $9 million.
NoneThe impact of adopting the new revenue standard, as compared to historic guidance under ASC Topic 605, was immaterial to the Company's Condensed Consolidated Financial Statements as of and for the six months ended June 30, 2018.
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 new revenue standard. The Company's revenue is disaggregated by major revenue categories on our Condensed Consolidated Statements of Operations and further disaggregated by business segment as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2018 vs June 30, 2017 (e) |
| | Real Estate
Franchise
Services | | Company
Owned
Brokerage
Services | | Relocation
Services | | Title and
Settlement
Services | | Corporate and Other | | Total
Company |
| | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 |
| Gross commission income (a) | $ | — |
| | $ | — |
| | $ | 1,388 |
| | $ | 1,374 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,388 |
| | $ | 1,374 |
|
| Service revenue (b) | — |
| | — |
| | 2 |
| | 3 |
| | 104 |
| | 101 |
| | 157 |
| | 151 |
| | — |
| | — |
| | 263 |
| | 255 |
|
| Franchise fees (c) | 203 |
| | 199 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (89 | ) | | (89 | ) | | 114 |
| | 110 |
|
| Other (d) | 34 |
| | 38 |
| | 18 |
| | 15 |
| | 1 |
| | 1 |
| | 5 |
| | 6 |
| | (3 | ) | | (6 | ) | | 55 |
| | 54 |
|
| Net revenues | $ | 237 |
| | $ | 237 |
| | $ | 1,408 |
| | $ | 1,392 |
| | $ | 105 |
| | $ | 102 |
| | $ | 162 |
| | $ | 157 |
| | $ | (92 | ) | | $ | (95 | ) | | $ | 1,820 |
| | $ | 1,793 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2018 vs June 30, 2017 (e) |
| | Real Estate
Franchise
Services | | Company
Owned
Brokerage
Services | | Relocation
Services | | Title and
Settlement
Services | | Corporate and Other | | Total
Company |
| | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 |
| Gross commission income (a) | $ | — |
| | $ | — |
| | $ | 2,290 |
| | $ | 2,255 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 2,290 |
| | $ | 2,255 |
|
| Service revenue (b) | — |
| | — |
| | 4 |
| | 5 |
| | 182 |
| | 177 |
| | 274 |
| | 267 |
| | — |
| | — |
| | 460 |
| | 449 |
|
| Franchise fees (c) | 342 |
| | 333 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (149 | ) | | (148 | ) | | 193 |
| | 185 |
|
| Other (d) | 71 |
| | 74 |
| | 31 |
| | 29 |
| | 2 |
| | 2 |
| | 8 |
| | 10 |
| | (6 | ) | | (8 | ) | | 106 |
| | 107 |
|
| Net revenues | $ | 413 |
| | $ | 407 |
| | $ | 2,325 |
| | $ | 2,289 |
| | $ | 184 |
| | $ | 179 |
| | $ | 282 |
| | $ | 277 |
| | $ | (155 | ) | | $ | (156 | ) | | $ | 3,049 |
| | $ | 2,996 |
|
_______________
| |
| (a) | Approximately 75% of the Company's total net revenues related to gross commission income at the Company Owned Brokerage Services segment, which is recognized at a point in time at the closing of a homesale transaction. |
| |
| (b) | Approximately 15% of the Company's total net revenues related to service fees primarily consisting of title and escrow fees at the Title and Settlement Services segment, which are recognized at a point in time at the closing of a homesale transaction, and relocation fees at the Relocation Services segment, which are recognized as revenue when or as the related performance obligation is satisfied, which is dependent on the type of service performed. Relocation fees at the Relocation Services segment primarily include: (i) referral fees which are recognized at a point in time of the closing of a homesale transaction, (ii) outsourcing fees, which are management fees charged to clients frequently related to a bundle of relocation services performed and are recognized over the average time period to complete a move, and (iii) referral commissions from third party suppliers which are recognized at the time of the completion of the related service. |
| |
| (c) | Approximately 5% of the Company's total net revenues related to franchise fees at the Real Estate Franchise Services segment, 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) | Approximately 5% of the Company's total net revenues related to other revenue, which comprised of brand marketing funds received at the Real Estate Franchise Services segment from franchisees and other miscellaneous revenues across all of the business segments. |
| |
| (e) | Prior period amounts have not been adjusted under the modified retrospective method. |
The Company's revenue streams are discussed further below by business segment:
Real Estate Franchise Services
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 percentage (generally 6%) of the 2016 acquisitions were significant to the Company’s results of operations, financial position or cash flows individually or in the aggregate.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. Non-standard sales incentives are 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 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 decreased from $13 million at January 1, 2018 to $7 million at June 30, 2018 primarily due to amounts recognized into revenue matching expenses for marketing activities partially offset by additional fees received from franchisees during the first half of 2018.
The Company collects initial ADFs for international territory transactions, which are recorded as deferred revenue when received and recognized into 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. The balance for deferred ADFs decreased from $58 million at January 1, 2018 to $57 million at June 30, 2018 due to revenues of $2 million recognized during the first half of 2018 that were included in the deferred revenue balance at the beginning of the period, partially offset by $1 million of additional area development fees received during the six months ended June 30, 2018.
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 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 $25 million at June 30, 2018 and $24 million at January 1, 2018.
Company Owned Real Estate Brokerage Services
As an owner-operator of real estate brokerages, the Company assists home buyers and sellers in listing, marketing, selling and finding homes. Real estate commissions earned by the Company’s real estate brokerage business are recorded as revenue 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 Condensed 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 was a liability of $10 million at both January 1, 2018 and June 30, 2018. During the six months ended June 30, 2018, the balance increased $3 million related to additional commissions received for new developments offset by a $3 million decrease due to revenues recognized on units closed.
Relocation Services
The Company provides relocation services to corporate and government clients for the transfer of their employees ("transferees"). Such services include homesale assistance including the purchasing and/or selling of a transferee’s home and providing home equity advances to transferees (generally guaranteed by the individual's employer), arranging household goods moving services, and other relocation services such as expense processing, relocation policy counseling, relocation-related accounting, coordinating visa and immigration support, intercultural and language training and destination services. In the majority of relocation transactions, the gain or loss on the sale of a transferee’s home is generally borne by the individual's employer. Clients may pay an outsourcing management fee that can cover several of the relocation services listed above, according to the clients' specific needs. In addition, 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 transferees and Affinity members, which is recognized at a point in time when the underlying property closes, and revenues from other third-party service providers where the Company earns a referral commission, which is recognized at the point in time at the completion of services. Furthermore, the Company generally earns interest income on the funds it advances on behalf of the transferring employee, which is recorded within other revenue (as is the corresponding interest expense on the securitization obligations) in the accompanying Condensed Consolidated Statements of Operations.
The Company earns revenues from outsourcing management fees charged to clients for the performance and facilitation of relocation services. 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 outsourcing management fees increased from $5 million on January 1, 2018 to $8 million on June 30, 2018. The increase was primarily due to additions of $33 million during the first half of 2018 primarily related to new management fees billed on new relocation files in advance of the Company satisfying its performance obligation, partially offset by a $30 million decrease as a result of revenues recognized during the first half of 2018 as the performance obligations were satisfied.
The Relocation Services segment manages the Cartus Broker Network, which is a network of real estate brokers consisting of our company owned brokerage operations, select franchisees and independent real estate brokers who have been approved to become members. Network fees are billed in the fourth quarter of the previous year for the following year's membership and recognized into revenue on a straight-line basis each month during the membership period. The balance for Cartus Broker Membership decreased from $8 million at January 1, 2018 to $4 million at June 30, 2018 primarily due to $5 million of revenues recognized during the first half of 2018 that were included in the deferred revenue balance at the beginning of the period, partially offset by a $1 million increase related to new network fees.
Title and Settlement Services
The Company provides title and closing services, which include title search procedures for title insurance policies, homesale escrow and other closing services. Title revenues, which are recorded net of amounts remitted to third-party insurance underwriters, and title and closing service fees are recorded at 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 independent title agents, the underwriter recognizes policy premium revenue on a gross basis (before deduction of agent commission) upon notice of policy issuance from the agent. For affiliated title agents, the underwriter recognizes the incremental policy premium revenue upon the effective date of the title policy as the agent commission revenue is already recognized by the affiliated title agent.
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:
|
| | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2018 |
| | Beginning Balance at January 1, 2018 | | Additions during the period | | Recognized as Revenue during the period | | Ending Balance at June 30, 2018 |
| Real Estate Franchise Services (a) | $ | 79 |
| | $ | 59 |
| | $ | (65 | ) | | $ | 73 |
|
| Company Owned Real Estate Brokerage Services | 17 |
| | 6 |
| | (8 | ) | | 15 |
|
| Relocation Services | 18 |
| | 45 |
| | (45 | ) | | 18 |
|
| Total | $ | 114 |
| | $ | 110 |
| | $ | (118 | ) | | $ | 106 |
|
_______________
| |
| (a) | Revenues recognized include intercompany marketing fees paid by the Company Owned Real Estate Brokerage Services segment. |
Goodwill by segment and changes in the carrying amount are as follows:
|
| | | | | | | | | | | | | | | | | | | |
| | Real Estate Franchise Services | | Company Owned Brokerage Services | | Relocation Services | | Title and Settlement Services | | Total Company |
| Gross goodwill as of December 31, 2016 | $ | 3,315 |
| | $ | 1,051 |
| | $ | 641 |
| | $ | 469 |
| | $ | 5,476 |
|
| Accumulated impairment losses | (1,023 | ) | | (158 | ) | | (281 | ) | | (324 | ) | | (1,786 | ) |
| Balance at December 31, 2016 | 2,292 |
| | 893 |
| | 360 |
| | 145 |
| | 3,690 |
|
| Goodwill acquired | — |
| | 6 |
| | — |
| | 8 |
| | 14 |
|
| Balance at September 30, 2017 | $ | 2,292 |
| | $ | 899 |
| | $ | 360 |
| | $ | 153 |
| | $ | 3,704 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Real Estate Franchise Services | | Company Owned Brokerage Services | | Relocation Services | | Title and Settlement Services | | Total Company |
| Gross goodwill as of December 31, 2017 | $ | 3,315 |
| | $ | 1,062 |
| | $ | 641 |
| | $ | 478 |
| | $ | 5,496 |
|
| Accumulated impairment losses | (1,023 | ) | | (158 | ) | | (281 | ) | | (324 | ) | | (1,786 | ) |
| Balance at December 31, 2017 | 2,292 |
| | 904 |
| | 360 |
| | 154 |
| | 3,710 |
|
| Goodwill acquired (a) | — |
| | 1 |
| | — |
| | — |
| | 1 |
|
| Balance at June 30, 2018 | $ | 2,292 |
| | $ | 905 |
| | $ | 360 |
| | $ | 154 |
| | $ | 3,711 |
|
_______________
| |
| (a) | Goodwill acquired during the six months ended June 30, 2018 relates to the acquisition of two real estate brokerage operations. |
Intangible assets are as follows:
| | | | As of September 30, 2017 | | As of December 31, 2016 | As of June 30, 2018 | | As of December 31, 2017 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Amortizable—Franchise agreements (a) | $ | 2,019 |
| | $ | 708 |
| | $ | 1,311 |
| | $ | 2,019 |
| | $ | 658 |
| | $ | 1,361 |
| $ | 2,019 |
| | $ | 759 |
| | $ | 1,260 |
| | $ | 2,019 |
| | $ | 725 |
| | $ | 1,294 |
|
| Indefinite life—Trademarks (b) | $ | 748 |
| | | | $ | 748 |
| | $ | 748 |
| | | | $ | 748 |
| $ | 749 |
| | | | $ | 749 |
| | $ | 749 |
| | | | $ | 749 |
|
| Other Intangibles | | | | | | | | | | | | | | | | | | | | | | |
| Amortizable—License agreements (c) | $ | 45 |
| | $ | 10 |
| | $ | 35 |
| | $ | 45 |
| | $ | 9 |
| | $ | 36 |
| $ | 45 |
| | $ | 10 |
| | $ | 35 |
| | $ | 45 |
| | $ | 10 |
| | $ | 35 |
|
| Amortizable—Customer relationships (d) | 550 |
| | 330 |
| | 220 |
| | 550 |
| | 312 |
| | 238 |
| 549 |
| | 347 |
| | 202 |
| | 549 |
| | 335 |
| | 214 |
|
| Indefinite life—Title plant shares (e) | 18 |
| | | | 18 |
| | 18 |
| | | | 18 |
| 18 |
| | | | 18 |
| | 18 |
| | | | 18 |
|
| Amortizable—Pendings and listings (f) | 2 |
| | 1 |
| | 1 |
| | 6 |
| | 5 |
| | 1 |
| — |
| | — |
| | — |
| | 2 |
| | 1 |
| | 1 |
|
| Amortizable—Other (g) | 33 |
| | 16 |
| | 17 |
| | 33 |
| | 13 |
| | 20 |
| 33 |
| | 19 |
| | 14 |
| | 33 |
| | 17 |
| | 16 |
|
| Total Other Intangibles | $ | 648 |
| | $ | 357 |
| | $ | 291 |
| | $ | 652 |
| | $ | 339 |
| | $ | 313 |
| $ | 645 |
| | $ | 376 |
| | $ | 269 |
| | $ | 647 |
| | $ | 363 |
| | $ | 284 |
|
_______________
(a) Generally amortized over a period of 30 years.
| |
| (a) | Generally amortized over a period of 30 years. |
| |
| (b) | Primarily relates to the Century 21®, Coldwell Banker®, ERA®, Corcoran®, Coldwell Banker Commercial® and Cartus tradenames, which are expected to generate future cash flows for an indefinite period of time. |
| |
| (c) | Relates to the Sotheby’s International Realty® and Better Homes and Gardens® Real Estate agreements which are being amortized over 50 years (the contractual term of the license agreements). |
| |
| (d) | Relates to the customer relationships at the Relocation Services segment, the Title and Settlement Services segment the Real Estate Franchise Services segment and our Company Owned Real Estate Brokerage Services segment. These relationships are being amortized over a period of 2 to 20 years. |
| |
| (e) | Ownership in a title plant is required to transact title insurance in certain states. The Company expects to generate future cash flows for an indefinite period of time. |
| |
| (f) | Generally amortized over a period of 5 months. |
| |
| (g) | Consists of covenants not to compete which are amortized over their contract lives and other intangibles which are generally amortized over periods ranging from 5 to 10 years. |
Intangible asset amortization expense is as follows:
| | | | Three Months Ended
September 30, | | Nine Months Ended
September 30, | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| Franchise agreements | $ | 16 |
| | $ | 16 |
| | $ | 50 |
| | $ | 50 |
| $ | 17 |
| | $ | 17 |
| | $ | 34 |
| | $ | 34 |
|
| License agreements | 1 |
| | — |
| | 1 |
| | 1 |
| — |
| | — |
| | — |
| | — |
|
| Customer relationships | 5 |
| | 7 |
| | 18 |
| | 20 |
| 6 |
| | 7 |
| | 12 |
| | 13 |
|
| Pendings and listings | 2 |
| | 7 |
| | 3 |
| | 9 |
| — |
| | — |
| | 1 |
| | 1 |
|
| Other | 1 |
| | 1 |
| | 4 |
| | 4 |
| 1 |
| | 1 |
| | 2 |
| | 3 |
|
| Total | $ | 25 |
| | $ | 31 |
| | $ | 76 |
| | $ | 84 |
| $ | 24 |
| | $ | 25 |
| | $ | 49 |
| | $ | 51 |
|
Based on the Company’s amortizable intangible assets as of SeptemberJune 30, 2017,2018, the Company expects related amortization expense for the remainder of 2017,2018, the four succeeding years and thereafter to be approximately $25$49 million,, $97 $97 million,, $97 $95 million,, $95 $93 million,, $92 $92 million and $1,178$1,085 million,, respectively.
| |
| 4. | ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES |
Accrued expenses and other current liabilities consisted of:
| | | | September 30, 2017 | | December 31, 2016 | June 30, 2018 | | December 31, 2017 |
| Accrued payroll and related employee costs | $ | 123 |
| | $ | 138 |
| $ | 111 |
| | $ | 140 |
|
| Accrued volume incentives | 38 |
| | 40 |
| 26 |
| | 41 |
|
| Accrued commissions | 41 |
| | 31 |
| 40 |
| | 38 |
|
| Restructuring accruals | 7 |
| | 14 |
| 10 |
| | 5 |
|
| Deferred income | 60 |
| | 69 |
| 62 |
| | 68 |
|
| Accrued interest | 31 |
| | 13 |
| 18 |
| | 13 |
|
| Contingent consideration for acquisitions | 23 |
| | 24 |
| 21 |
| | 26 |
|
| Due to former parent | | 18 |
| | 18 |
|
| Other | 119 |
| | 106 |
| 107 |
| | 129 |
|
| Total accrued expenses and other current liabilities | $ | 442 |
| | $ | 435 |
| $ | 413 |
| | $ | 478 |
|
5. SHORT AND LONG-TERM DEBT
Total indebtedness is as follows:
| | | | September 30, 2017 | | December 31, 2016 | June 30, 2018 | | December 31, 2017 |
| Senior Secured Credit Facility: | | | | | | |
| Revolving Credit Facility | $ | 190 |
| | $ | 200 |
| $ | 312 |
| | $ | 70 |
|
| Term Loan B | 1,065 |
| | 1,069 |
| 1,058 |
| | 1,063 |
|
| Term Loan A Facility: | | | | | | |
| Term Loan A | 395 |
| | 411 |
| 740 |
| | 390 |
|
| Term Loan A-1 | 341 |
| | 347 |
| — |
| | 339 |
|
| 4.50% Senior Notes | 443 |
| | 439 |
| 446 |
| | 444 |
|
| 5.25% Senior Notes | 546 |
| | 545 |
| 547 |
| | 546 |
|
| 4.875% Senior Notes | 496 |
| | 496 |
| 497 |
| | 496 |
|
| Total Short-Term & Long-Term Debt | $ | 3,476 |
| | $ | 3,507 |
| $ | 3,600 |
| | $ | 3,348 |
|
| Securitization obligations: | | | | |
| Securitization Obligations: | | | | |
| Apple Ridge Funding LLC | $ | 223 |
| | $ | 192 |
| $ | 247 |
| | $ | 181 |
|
| Cartus Financing Limited | 11 |
| | 13 |
| 14 |
| | 13 |
|
| Total securitization obligations | $ | 234 |
| | $ | 205 |
| |
| Total Securitization Obligations | | $ | 261 |
| | $ | 194 |
|
Indebtedness Table
As of SeptemberJune 30, 2017,2018, the Company’s borrowing arrangements were as follows:
| | | | Interest
Rate | | Expiration
Date | | Principal Amount | | Unamortized Discount and Debt Issuance Costs | | Net Amount | Interest
Rate | | Expiration
Date | | Principal Amount | | Unamortized Discount and Debt Issuance Costs | | Net Amount |
| Senior Secured Credit Facility: | | | | | | | | | | | | | | | | | | |
| Revolving Credit Facility (1) | (2) | | October 2020 | | $ | 190 |
| | $ * |
| | $ | 190 |
| (2) | | February 2023 | | $ | 312 |
| | $ * |
| | $ | 312 |
|
| Term Loan B | (3) | | July 2022 | | 1,086 |
| | 21 |
| | 1,065 |
| (3) | | February 2025 | | 1,075 |
| | 17 |
| | 1,058 |
|
| Term Loan A Facility: | | | | | | | | | | | | |
| Term Loan A | (4) | | October 2020 | | 397 |
| | 2 |
| | 395 |
| (4) | | February 2023 | | 745 |
| | 5 |
| | 740 |
|
| Term Loan A-1 | (5) | | July 2021 | | 344 |
| | 3 |
| | 341 |
| |
| Senior Notes | 4.50% | | April 2019 | | 450 |
| | 7 |
| | 443 |
| 4.50% | | April 2019 | | 450 |
| | 4 |
| | 446 |
|
| Senior Notes | 5.25% | | December 2021 | | 550 |
| | 4 |
| | 546 |
| 5.25% | | December 2021 | | 550 |
| | 3 |
| | 547 |
|
| Senior Notes | 4.875% | | June 2023 | | 500 |
| | 4 |
| | 496 |
| 4.875% | | June 2023 | | 500 |
| | 3 |
| | 497 |
|
| Securitization obligations: (6) | | | | | | | |
| Apple Ridge Funding LLC (7) | | June 2018 | | 223 |
| | * |
| | 223 |
| |
| Cartus Financing Limited (8) | | August 2018 | | 11 |
| | * |
| | 11 |
| |
| Total (9) | $ | 3,751 |
| | $ | 41 |
| | $ | 3,710 |
| |
| Securitization obligations: (5) | | | | | | | |
| Apple Ridge Funding LLC (6) | | | June 2019 | | 247 |
| | * |
| | 247 |
|
| Cartus Financing Limited (7) | | | August 2018 | | 14 |
| | * |
| | 14 |
|
| Total (8) | | Total (8) | $ | 3,893 |
| | $ | 32 |
| | $ | 3,861 |
|
_______________
| |
| * | 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 SeptemberJune 30, 2017,2018, the Company had $1,050$1,400 million of borrowing capacity under its Revolving Credit Facility, leaving $860$1,088 million of available capacity. The revolving credit facilityRevolving Credit Facility expires in October 2020,February 2023, but is classified on the balance sheet as current due to the revolving nature of the facility. On NovemberAugust 1, 2017,2018, the Company had $70$270 million in outstanding borrowings under the Revolving Credit Facility, leaving $980$1,130 million of available capacity. |
| |
| (2) | Interest rates with respect to revolving loans under the Senior Secured Credit Facility at SeptemberJune 30, 2017 are2018 were based on, at the Company's option, (a) adjusted LIBORLondon Interbank Offering Rate ("LIBOR") plus an additional margin or (b) ABRJP Morgan Chase Bank, N.A.'s prime rate ("ABR") plus an additional margin, in each case subject to adjustment based on the then current senior secured leverage ratio. Based on the previous quarter senior secured leverage ratio, the LIBOR margin was 2.00%2.25% and the ABR margin was 1.00%1.25% for the three months ended SeptemberJune 30, 2017.2018. |
| |
| (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) JPMorgan Chase Bank, N.A.’s prime rate ("ABR") plus 1.25% (with an ABR floor of 1.75%). |
| |
| (4) | The Term Loan A provides for quarterly amortization payments, which commenced March 31, 2016,commence on June 30, 2018, totaling per annum 5%2.5%, 5%2.5%, 5.0%, 7.5%, and 10.0% and 12.5% of the original principal amount of the Term Loan A, in 2016, 2017, 2018, 2019 and 2020, respectively.with the last amortization payment to be made on February 8, 2023. The interest rates with respect to term loans under the Term Loan A are based on, at the Company's option, (a) adjusted LIBOR plus an additional margin or (b) ABR plus an additional margin, in each case subject to adjustment based on the then current senior secured leverage ratio. Based on the previous quarter senior secured leverage ratio, the LIBOR margin was 2.00%2.25% and the ABR margin was 1.00%1.25% for the three months ended SeptemberJune 30, 2017.2018. |
| |
| (5) | The Term Loan A-1 provides for quarterly amortization payments, which commenced on September 30, 2016, totaling per annum 2.5%, 2.5%, 5%, 7.5% and 10.0% of the original principal amount of the Term Loan A-1, with the last amortization payment made on June 30, 2021. The interest rates with respect to term loans under the Term Loan A-1 are based on, at the Company's option, (a) adjusted LIBOR plus an additional margin or (b) ABR plus an additional margin, in each case subject to adjustment based on the then current senior secured leverage ratio. Based on the previous quarter senior secured leverage ratio, the LIBOR margin was 2.00% and the ABR margin was 1.00% for the three months ended September 30, 2017. |
| |
(6) | Available capacity is subject to maintaining sufficient relocation related assets to collateralize these securitization obligations. |
| |
(7)(6) | In June 2017,2018, Realogy Group extended the existing Apple Ridge Funding LLC securitization program utilized by Cartus until June 2018.2019. As of SeptemberJune 30, 2017,2018, the Company had $325$250 million of borrowing capacity under the Apple Ridge Funding LLC securitization program leaving $102$3 million of available capacity. |
| |
(8)(7) | Consists of a £10 million revolving loan facility and a £5 million working capital facility. As of SeptemberJune 30, 2017,2018, the Company had $20 million of borrowing capacity under the Cartus Financing Limited securitization program leaving $9$6 million of available capacity. In September 2017, Realogy Group extended the existing Cartus Financing Limited securitization program to August 2018. |
| |
(9)(8) | Not included in this table is the Company's Unsecured Letter of Credit Facility which had a capacity of $74 million with $71$65 million utilized at a weighted average rate of 3.24% at SeptemberJune 30, 2017.2018. |
Maturities Table
As of SeptemberJune 30, 2017,2018, the combined aggregate amount of maturities for long-term borrowings, excluding securitization obligations, for the remainder of 20172018 and each of the next four years is as follows:
| | | Year | | Amount | | Amount |
| Remaining 2017 (a) | | $ | 200 |
| |
| 2018 | | 57 |
| |
| Remaining 2018 (a) | | | $ | 326 |
|
| 2019 | | 527 |
| | 480 |
|
| 2020 | | 357 |
| | 44 |
|
| 2021 | | 837 |
| | 613 |
|
| 2022 | | | 81 |
|
_______________
| |
| (a) | The current portion of long-term debt consists of remaining 2017Remaining 2018 includes amortization payments totaling $5 million, $2$9 million and $3$5 million for the Term Loan A Term Loan A-1 and Term Loan B facilities, respectively, as well as $190$312 million of revolver borrowings under the revolving credit facilityRevolving Credit Facility which expires in October 2020,February 2023, but areis classified on the balance sheet as current due to the revolving nature of the facility. The current portion of long term debt of $788 million shown on the condensed consolidated balance sheet consists of $446 million of 4.50% Senior Notes due April 2019, four quarters of amortization payments totaling $19 million and $11 million for the Term Loan A and Term Loan B facilities, respectively, and $312 million of revolver borrowings under the Revolving Credit Facility. The Company is evaluating different alternatives to repay the 4.50% Senior Notes due in April 2019 including refinancing or using existing available liquidity. |
Senior Secured Credit Facility
In July 2016,February 2018, the Company entered into a third amendment (the “Third Amendment”)fifth and sixth amendments to the Amended and Restated Senior Secured Credit Agreement dated as of March 5, 2013 as amended. The Third Amendment(as amended, amended and restated, modified or supplemented from time to time, the "Senior Secured Credit Agreement") that respectively (i) replaced the $1,858 million Term Loan B due March 2020 with a newapproximately $1,100 million Term Loan B due July 20, 2022. In January 2017, the Company entered into2022 with a fourth amendment (the “Fourth Amendment” to the Amended and Restated Credit Agreement, as so amended, the "Senior Secured Credit Agreement") that repriced thenew $1,080 million Term Loan B through a refinancing of the existing term loan with a new Term Loan B. The Fourth Amendment reduced the interest rate by 75 basis points but did not change the maturity date for the Term Loan B. The Company also entered into an Incremental Assumption Agreement to the Senior Secured Credit Agreement pursuant to which the Companydue February 2025 and (ii) increased the borrowing capacity under its Revolving Credit Facility to $1,050$1,400 million from the existing $815 million.prior $1,050 million and extended the maturity date to February 2023 from October 2020.
The Senior Secured Credit Agreement provides for:
| |
| (a) | athe Term Loan B issued in the original aggregate principal amount of $1,100$1,080 million with a maturity date of July 2022.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 $1,050$1,400 million Revolving Credit Facility with a maturity date of October 23, 2020,February 2023, which includes (i) a $125 million letter of credit subfacility and (ii) a swingline loan subfacility. The interest rate with respect to revolving loans under the Revolving Credit Facility is based on, at Realogy Group's option, adjusted LIBOR or ABR plus an additional margin subject to the following adjustments based on the Company’s then current senior secured leverage ratio: |
| | | Senior Secured Leverage Ratio | | Applicable LIBOR Margin | | Applicable ABR Margin | | Applicable LIBOR Margin | | Applicable ABR Margin |
| Greater than 3.50 to 1.00 | | 2.50% | | 1.50% | | 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% | | 2.25% | | 1.25% |
| Less than 2.50 to 1.00 | | 2.00% | | 1.00% | |
| 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 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 us to issue senior secured or unsecured notes in lieu of any incremental facility.
The obligations under the Senior Secured Credit Agreement are secured to the extent legally permissible by substantially all of the assets of Realogy Group, Realogy Intermediate and all of their domestic subsidiaries, other than certain excluded subsidiaries.
Realogy Group’s Senior Secured Credit Agreement contains financial, affirmative and negative covenants and requires Realogy Group to maintain (so long as the Revolving Credit Facility is outstanding) a senior secured leverage ratio, not to exceed 4.75 to 1.00. The leverage ratio is tested quarterly regardless of the amount of borrowings outstanding and letters of credit issued under the revolver at the testing date. Total senior secured net debt does not include unsecured indebtedness, including the Unsecured Notes as well as the securitization obligations. At SeptemberJune 30, 2017,2018, Realogy Group was in compliance with the senior secured leverage ratio covenant.
Term Loan A Facility
In October 2015,February 2018, Realogy Group entered into a second amendment to the Term Loan A senior secured credit agreement which provides for a five-year,agreement. Under the amendment, the Company aggregated the existing $435 million loan issued at par withTerm Loan A and $355 million Term Loan A-1 tranches due October 2020 and July 2021, respectively, into a maturity datenew single tranche of October 23, 2020 (the “Term$750 million Term Loan A”) and has terms substantially similar to the Senior Secured Credit Agreement.A due February 2023. The Term Loan A provides for quarterly amortization payments which commenced March 31, 2016, totaling the amount per annum equal to the following percentages2.5%, 2.5%, 5.0%, 7.5% and 10.0% of the original principal amount of the Term Loan A: 5%, 5%, 7.5%, 10.0%A, which commence on June 30, 2018 and 12.5% for amortizations payable in 2016, 2017, 2018, 2019 and 2020, with the balance payable upon the final maturity date.continue through February 8, 2023. The interest rates with respect to term loans under the Term Loan A are based on, at our option, adjusted LIBOR or ABR plus an additional margin subject to the following adjustments based on the Company’s then current senior secured leverage ratio:
|
| | | | |
| Senior Secured Leverage Ratio | | Applicable LIBOR Margin | | Applicable ABR Margin |
| Greater than 3.50 to 1.00 | | 2.50% | | 1.50% |
| Less than or equal to 3.50 to 1.00 but greater than or equal to 2.50 to 1.00 | | 2.25% | | 1.25% |
| Less than 2.50 to 1.00 | | 2.00% | | 1.00% |
In July 2016, Realogy Group entered into a first amendment to the Term Loan A senior secured credit agreement. Under the amendment, the Company issued the Term Loan A-1 in the amount of $355 million with a maturity date in July 2021 under its existing Term Loan A Facility and on terms substantially similar to its existing Term Loan A. The Term Loan A-1 provides for quarterly amortization payments totaling per annum 2.5%, 2.5%, 5%, 7.5% and 10.0% of the original principal amount of the Term Loan A-1, which commenced September 30, 2016 continuing through June 30, 2021.
The interest rates with respect to term loans under the Term Loan A-1 are based on, at our option, adjusted LIBOR or ABR plus an additional margin subject to the following adjustments based on the Company’s then current senior secured leverage ratio:
|
| | | | |
| Senior Secured Leverage Ratio | | Applicable LIBOR Margin | | Applicable ABR Margin |
| Greater than 3.50 to 1.00 | | 2.50% | | 1.50% |
| Less than or equal to 3.50 to 1.00 but greater than or equal to 2.50 to 1.00 | | 2.25% | | 1.25% |
| Less than 2.50 to 1.00 but greater than or equal to 2.00 to 1.00 | | 2.00% | | 1.00% |
| Less than 2.00 to 1.00 | | 1.75% | | 0.75% |
Consistent with the Senior Secured Credit Agreement, the Term Loan A Facility permits the Company to obtain up to $500 million of additional credit facilities from lenders reasonably satisfactory to the administrative agent and the company,Company, without the consent of the existing lenders under the Term Loan A, plus an unlimited amount if the Company's senior secured leverage ratio is less than 3.50 to 1.00 on a pro forma basis. Subject to certain restrictions, the Term Loan A Facility also permits us to issue senior secured or unsecured notes in lieu of any incremental facility.
Unsecured Notes
The 4.50% Senior Notes, 5.25% Senior Notes and 4.875% Senior Notes (each as defined below, collectively(collectively the "Unsecured Notes") are unsecured senior obligations of Realogy Group that mature on April 15, 2019, December 1, 2021 and June 1, 2023, respectively. Interest on the Unsecured Notes is payable each year semiannually on April 15 and October 15 for the 4.50% Senior Notes and June 1 and December 1 for both the 5.25% Senior Notes and 4.875% Senior Notes.
The Unsecured Notes are guaranteed on an unsecured senior basis by each domestic subsidiary of Realogy Group that is a guarantor under the Senior Secured Credit Facility and Realogy Group's outstanding debt securities and are guaranteed by Realogy Holdings on an unsecured senior subordinated basis. The indentures governing the Unsecured Notes contain affirmative and negative covenants of Realogy Group and the subsidiary guarantors.
Other Debt Facilities
The Company has an Unsecured Letter of Credit Facility to provide for the issuance of letters of credit required for general corporate purposes by the Company. At SeptemberJune 30, 2018, the capacity of the facility was $74 million with $65 million being utilized and at December 31, 2017, the capacity of the facility was $74 million with $71$69 million being utilized and at December 31, 2016, the capacity of the facility was $131 million with $127 million being utilized. In August 2017, the standby irrevocable letter of credit, which was utilized to support the Company’s payment obligations with respect to its share of Cendant contingent and other corporate liabilities, was terminated as a result of the resolution of a Cendant legacy tax matter, reducing the capacity and outstanding letters of credit under the Unsecured Letter of Credit Facility. The facility's expiration dates are as follows:
|
| |
| Capacity (in millions) | Expiration Date |
| $8 | September 2018 |
| $66 | December 2019 |
The fixed pricing to the Company is based on a spread above the credit default swap rate for senior unsecured debt obligations of the Company over the applicable letter of credit period. Realogy Group's obligations under the Unsecured Letter of Credit Facility are guaranteed on an unsecured senior basis by each domestic subsidiary of Realogy Group that is a guarantor under the Senior Secured Credit Facility and Realogy Group's outstanding debt securities.
Securitization Obligations
Realogy Group has secured obligations through Apple Ridge Funding LLC under a securitization program. In June 2017,2018, Realogy Group extended the program until June 2018.2019. The program has a capacity of $325$250 million. At SeptemberJune 30, 2017,2018, Realogy Group had $223$247 million of outstanding borrowings under the facility.
Realogy Group, through a special purpose entity known as Cartus Financing Limited, has agreements providing for a £10 million revolving loan facility and a £5 million working capital facility. In September 2017, Realogy Group extended the existing Cartus Financing Limited securitization program tofacility, both of which expire in August 2018. There were $11$14 million of outstanding borrowings on the facilities at SeptemberJune 30, 2017.2018. These Cartus Financing Limited facilities are secured by the relocation assets of a U.K. government contract in this special purpose entity and are therefore classified as permitted securitization financings as defined in Realogy Group’s Senior Secured Credit Facility and the indentures governing the Unsecured Notes.
The Apple Ridge entities and the Cartus Financing Limited entity are consolidated special purpose entities that are utilized to securitize relocation receivables and related assets. These assets are generated from advancing funds on behalf of clients of Realogy Group’s relocation business in order to facilitate the relocation of their employees. Assets of these special purpose entities are not available to pay Realogy Group’s general obligations. Under the Apple Ridge program, provided no termination or amortization event has occurred, any new receivables generated under the designated relocation management
agreements are sold into the securitization program and as new eligible relocation management agreements are entered into, the new agreements are designated to the program. The Apple Ridge program has restrictive covenants and trigger events, including performance triggers linked to the age and quality of the underlying assets, foreign obligor limits, multicurrency limits, financial reporting requirements, restrictions on mergers and change of control, any uncured breach of Realogy Group’s senior secured leverage ratio under Realogy Group’s Senior Secured Credit Facility, and cross-defaults to Realogy Group’s material indebtedness. The occurrence of a trigger event under the Apple Ridge securitization facility could restrict our ability to access new or existing funding under this facility or result in termination of the facility, either of which would adversely affect the operation of our relocation business.
Certain of the funds that Realogy Group receives from relocation receivables and related assets must be utilized to repay securitization obligations. These obligations were collateralized by $259$333 million and $238218 million of underlying relocation receivables and other related relocation assets at SeptemberJune 30, 20172018 and December 31, 20162017, respectively. Substantially all relocation related assets are realized in less than twelve months from the transaction date. Accordingly, all of Realogy Group’s securitization obligations are classified as current in the accompanying Condensed Consolidated Balance Sheets.
Interest incurred in connection with borrowings under these facilities amounted to $2 million for both the three months ended SeptemberJune 30, 2018 and 2017, and 2016$4 million and $5$3 million for the ninesix months ended SeptemberJune 30, 2018 and 2017, and 2016.respectively. This interest is recorded within net revenues in the accompanying Condensed Consolidated Statements of Operations as related borrowings are utilized to fund Realogy Group's relocation business where interest is generally earned on such assets. These securitization obligations represent floating rate debt for which the average weighted interest rate was 3.3%3.7% and 3.4% for the six months ended June 30, 2018 and 2.5% for the nine months ended September 30, 2017 and 2016, respectively.
Loss on the Early Extinguishment of Debt and Write-Off of Financing Costs
As a result of the refinancing transactiontransactions in January of 2017 and reduction of the Unsecured Letter of Credit Facility in September of 2017,February 2018, the Company recorded lossesa loss on the early extinguishment of debt of $5$7 million and wrote off financing costs of $2 million to interest expense during the first half of 2018.
As a result of a refinancing transaction completed in January 2017, the Company recorded a loss on the early extinguishment of debt of $4 million during the nine months ended September 30,first half of 2017.
Restructuring charges were $2$6 million and $9$36 million for the three and ninesix months ended SeptemberJune 30, 2017,2018, respectively, and $9$2 million and $30$7 million for the three and ninesix months ended SeptemberJune 30, 2016,2017, respectively. The components of the restructuring charges for the three and ninesix months ended SeptemberJune 30, 20172018 and 20162017 were as follows:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Personnel-related costs (1) | $ | 1 |
| | $ | 6 |
| | $ | 7 |
| | $ | 17 |
|
| Facility-related costs (2) | — |
| | 2 |
| | 1 |
| | 7 |
|
| Accelerated depreciation on asset disposals | — |
| | 1 |
| | — |
| | 1 |
|
| Other restructuring costs (3) | 1 |
| | — |
| | 1 |
| | 5 |
|
| Total restructuring charges | $ | 2 |
| | $ | 9 |
| | $ | 9 |
| | $ | 30 |
|
|
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| Personnel-related costs (1) | $ | 3 |
| | $ | 1 |
| | $ | 17 |
| | $ | 6 |
|
| Facility-related costs (2) | 3 |
| | 1 |
| | 12 |
| | 1 |
|
| Internal use software impairment (3) | — |
| | — |
| | 7 |
| | — |
|
| Total restructuring charges (4) | $ | 6 |
| | $ | 2 |
| | $ | 36 |
| | $ | 7 |
|
_______________
| |
| (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, lease payments, net of applicable sublease income, 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) | Other restructuringInternal use software impairment relates to development costs consistcapitalized for a project that was determined to not meet the Company's strategic goals when analyzed by the Company's new leadership team. |
| |
| (4) | The three and six months ended June 30, 2018 includes $5 million and $34 million, respectively, of costsexpense related to professional fees, consulting fees and other costs associated with restructuring activities which are primarily included in the CorporateLeadership Realignment and Other business segment.Restructuring Activities program and $1 million and $2 million, respectively, of expense related to the Business Optimization Initiative program. |
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 include senior leadership realignment, an enhanced focus on technology and talent, as well as further attention on office footprint and other operational efficiencies, including the consolidation of certain support services provided to the Company Owned Real Estate Brokerage Services and Real Estate Franchise Services segments.
The following is a reconciliation of the beginning and ending reserve balances for the restructuring program related to Leadership Realignment and Other Restructuring Activities:
|
| | | | | | | | | | | | | | | |
| | Personnel-related costs | | Facility-related costs | | Internal use software impairment | | Total |
| Balance at December 31, 2017 | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Restructuring charges | 17 |
| | 10 |
| | 7 |
| | 34 |
|
| Costs paid or otherwise settled | (13 | ) | | (3 | ) | | (7 | ) | | (23 | ) |
| Balance at June 30, 2018 | $ | 4 |
| | $ | 7 |
| | $ | — |
| | $ | 11 |
|
The following table shows the total costs currently expected to be incurred by type of cost the restructuring program related to Leadership Realignment and Other Restructuring Activities:
|
| | | | | | | | | | | |
| | Total amount expected to be incurred | | Amount incurred to date | | Total amount remaining to be incurred |
| Personnel-related costs | $ | 23 |
| | $ | 17 |
| | $ | 6 |
|
| Facility-related costs | 18 |
| | 10 |
| | 8 |
|
| Internal use software impairment | 7 |
| | 7 |
| | — |
|
| Total | $ | 48 |
| | $ | 34 |
| | $ | 14 |
|
The following table shows the total costs currently expected to be incurred by reportable segment for the restructuring program related to Leadership Realignment and Other Restructuring Activities: |
| | | | | | | | | | | |
| | Total amount expected to be incurred | | Amount incurred to date | | Total amount remaining to be incurred |
| Real Estate Franchise Services | $ | 2 |
| | $ | 2 |
| | $ | — |
|
| Company Owned Real Estate Brokerage Services | 29 |
| | 20 |
| | 9 |
|
| Relocation Services | 9 |
| | 9 |
| | — |
|
| Title and Settlement Services | 1 |
| | 1 |
| | — |
|
| Corporate and Other | 7 |
| | 2 |
| | 5 |
|
| Total | $ | 48 |
| | $ | 34 |
| | $ | 14 |
|
Business Optimization Initiative
During the fourth quarter of 2015, the Company began a business optimization initiative that focused on maximizing the efficiency and effectiveness of the cost structure of each of the Company's business units. The action was designed to improve client service levels across each of the business units while enhancing the Company's profitability and incremental margins. The plan focused on several key areas of opportunity which include process improvement efficiencies, office footprint optimization, leveraging technology and media spend, centralized procurement, outsourcing administrative services and organizational design. The expected costs of activities undertaken in connection with the restructuring plan are largely complete.
The following is At December 31, 2017, the remaining liability was $7 million. During the six months ended June 30, 2018, the Company incurred facility-related costs of $2 million and paid or settled costs of $5 million, resulting in a reconciliationremaining accrual of the beginning and ending restructuring reserve balances for the Business Optimization Initiative:
|
| | | | | | | | | | | | | | | | | | | |
| | Personnel-related costs | | Facility-related costs | | Accelerated depreciation on asset disposal | | Other restructuring costs | | Total |
| Balance at December 31, 2016 | $ | 9 |
| | $ | 7 |
| | $ | — |
| | $ | — |
| | $ | 16 |
|
| Restructuring charges | 7 |
| | 1 |
| | — |
| | 1 |
| | 9 |
|
| Costs paid or otherwise settled | (12 | ) | | (5 | ) | | — |
| | (1 | ) | | (18 | ) |
| Balance at September 30, 2017 | $ | 4 |
| | $ | 3 |
| | $ | — |
| | $ | — |
| | $ | 7 |
|
The following table shows the total restructuring costs expected to be incurred by type of cost for the Business Optimization Initiative:
|
| | | | | | | | | | | |
| | Total amount expected to be incurred | | Amount incurred to date | | Total amount remaining to be incurred |
| Personnel-related costs | $ | 32 |
| | $ | 32 |
| | $ | — |
|
| Facility-related costs | 16 |
| | 14 |
| | 2 |
|
| Accelerated depreciation related to asset disposals | 2 |
| | 1 |
| | 1 |
|
| Other restructuring costs | 12 |
| | 11 |
| | 1 |
|
| Total | $ | 62 |
| | $ | 58 |
| | $ | 4 |
|
The following table shows the total restructuring costs expected to be incurred by reportable segment for the Business Optimization Initiative:
|
| | | | | | | | | | | |
| | Total amount expected to be incurred | | Amount incurred to date | | Total amount remaining to be incurred |
| Real Estate Franchise Services | $ | 5 |
| | $ | 5 |
| | $ | — |
|
| Company Owned Real Estate Brokerage Services | 37 |
| | 35 |
| | 2 |
|
| Relocation Services | 5 |
| | 5 |
| | — |
|
| Title and Settlement Services | 1 |
| | 1 |
| | — |
|
| Corporate and Other | 14 |
| | 12 |
| | 2 |
|
| Total | $ | 62 |
| | $ | 58 |
| | $ | 4 |
|
| |
| 7. | STOCK-BASED COMPENSATION |
The Company has stock-based compensation plans (the 2007 Stock Incentive Plan and the 2012 Long-Term Incentive Plan) under which incentive equity awards such as non-qualified stock options, rights to purchase shares of common stock, restricted stock, restricted stock units ("RSUs"), performance restricted stock units and performance share units ("PSUs") may be issued to employees, consultants and directors of Realogy. The Company's stockholders approved the Amended and Restated 2012 Long-Term Incentive Plan at the 2016 Annual Meeting of Stockholders held on May 4, 2016 (the "Amended and Restated 2012 LTIP"). The Amended and Restated 2012 LTIP increases the number of shares authorized for issuance under that plan by 9.8 million shares. The total number of shares authorized for issuance under the plans is 19.4 million shares.
Awards granted under the Amended and Restated 2012 LTIP utilizing the additional 9.8 million share reserve, except options and stock appreciation rights, must be counted against the foregoing share limit on a 2.22 share to one basis for each share actually granted in connection with such award. As of September 30, 2017, the total number of shares available for future grants under the Amended and Restated 2012 LTIP was approximately 3 million shares. The Company does not expect to issue any additional awards under the 2007 Stock Incentive Plan.
Consistent with the 2016 long-term incentive equity awards, the 2017 awards include a mix of PSUs, RSUs (performance restricted stock units for the CEO and direct reports) and options. The 2017 PSUs are incentives that reward grantees based upon the Company's financial performance over a three-year performance period ending December 31, 2019. There are two PSU awards: one is based upon the total stockholder return of Realogy's common stock relative to the total stockholder return of the SPDR S&P Homebuilders Index ("XHB") (the "RTSR award"), and the other is based upon the achievement of cumulative free cash flow goals. The number of shares that may be issued under the PSU is variable and based upon the extent to which the performance goals are achieved over the performance period (with a range of payout from 0% to 175% of target for the RTSR award and 0% to 200% of target for the achievement of cumulative free cash flow award). The shares earned will be distributed in early 2020. The RSUs vest over three years, with 33.33% vesting on each anniversary of the grant date. Time-vesting of the 2017 performance RSUs for the CEO and direct reports is subject to achievement of a minimum EBITDA performance goal for 2017. The stock options have a maximum term of ten years and vest over four years, with 25% vesting on each anniversary date of the grant date. The options have an exercise price equal to the closing sale price of the Company's common stock on the date of grant.
In August 2016, the Company’s Board of Directors approved the initiation of a quarterly cash dividend policy on its common stock. The Board declared a cash dividend of $0.09 per share of the Company’s common stock per quarter. When payment of cash dividends occurs, the Company issues dividend equivalent units ("DEUs") to eligible holders of
outstanding RSUs and PSUs. The number of DEUs granted for each RSU or PSU is calculated by dividing the amount of the cash dividend on the number of shares covered by the RSU or PSU at the time of the related dividend record date by the closing price of the Company's stock on the related dividend payment date. The DEUs are subject to the same vesting requirements, settlement provisions, and other terms and conditions as the original award to which they relate. The issuance of DEUs have an immaterial impact on the Company's stock-based compensation activity.
The fair value of RSUs and PSUs without a market condition is equal to the closing sale price of the Company's common stock on the date of grant. The fair value of the RTSR PSU award was estimated on the date of grant using the Monte Carlo Simulation method utilizing the following assumptions. Expected volatility was based on historical volatilities of the Company and select comparable companies.
|
| | | |
| | 2017 RTSR PSU |
| Weighted average grant date fair value | $ | 27.98 |
|
| Weighted average expected volatility | 29.0 | % |
| Weighted average volatility of XHB | 18.4 | % |
| Weighted average correlation coefficient | 0.53 |
|
| Weighted average risk-free interest rate | 1.5 | % |
| Weighted average dividend yield | — |
|
A summary of RSU activity for the nine months ended September 30, 2017 is presented below (number of shares in millions):
|
| | | | | | |
| | Restricted
Stock Units | | Weighted Average Grant Date Fair Value |
| Unvested at January 1, 2017 | 1.4 |
| | $ | 37.53 |
|
| Granted | 1.1 |
| | 28.22 |
|
| Vested (a) | (0.6 | ) | | 39.56 |
|
| Forfeited | (0.1 | ) | | 30.82 |
|
| Unvested at September 30, 2017 | 1.8 |
| | $ | 31.34 |
|
______________ | |
(a) | The total fair value of RSUs which vested during the nine months ended September 30, 2017 was $26 million. |
A summary of PSU activity for the nine months ended September 30, 2017 is presented below (number of shares in millions):
|
| | | | | | |
| | Performance Share Units (a) | | Weighted Average Grant Date Fair Value |
| Unvested at January 1, 2017 | 1.0 |
| | $ | 36.66 |
|
| Granted | 0.7 |
| | 27.70 |
|
| Vested | — |
| | — |
|
| Forfeited | — |
| | — |
|
| Unvested at September 30, 2017 | 1.7 |
| | $ | 32.71 |
|
______________
| |
(a) | The PSU amounts in the table are shown at the target amount of the award. |
The fair value of the options was estimated on the date of grant using the Black-Scholes option-pricing model. Expected volatility was based on historical volatilities of the Company and select comparable companies. 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. 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.
|
| | | |
| | 2017 Options |
| Weighted average grant date fair value | $ | 8.00 |
|
| Weighted average expected volatility | 30.7 | % |
| Weighted average expected term (years) | 6.25 |
|
| Weighted average risk-free interest rate | 2.1 | % |
| Weighted average dividend yield | 1.3 | % |
A summary of stock option unit activity for the nine months ended September 30, 2017 is presented below (number of shares in millions):
|
| | | | | | |
| | Options | | Weighted Average Exercise Price |
| Outstanding at January 1, 2017 | 3.3 |
| | $ | 31.69 |
|
| Granted | 0.4 |
| | 27.56 |
|
| Exercised (a) (b) | (0.3 | ) | | 23.77 |
|
| Forfeited/Expired | — |
| | — |
|
| Outstanding at September 30, 2017 (c) | 3.4 |
| | $ | 31.52 |
|
______________
| |
(a) | The intrinsic value of options exercised during the nine months ended September 30, 2017 was $2 million. |
| |
(b) | Cash received from options exercised during the nine months ended September 30, 2017 was $7 million. |
| |
(c) | Options outstanding at September 30, 2017 have an intrinsic value of $6 million and have a weighted average remaining contractual life of 5.8 years. |
Stock-Based Compensation Expense
As of September 30, 2017, based on current performance achievement expectations, there was $45 million of unrecognized compensation cost related to incentive equity awards under the plans which will be recorded in future periods as compensation expense over a remaining weighted average period of approximately 1.2 years. The Company recorded stock-based compensation expense related to the incentive equity awards of $12 million and $38 million for the three and nine months ended September 30, 2017, respectively, and $14 million and $39 million for the three and nine months ended September 30, 2016, respectively.
8. EARNINGS PER SHARE
Earnings per share attributable to Realogy Holdings
Basic earnings per share is computed based on net income 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.
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| (in millions, except per share data) | 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| Net income attributable to Realogy Holdings shareholders | $ | 95 |
| | $ | 106 |
| | $ | 176 |
| | $ | 156 |
| $ | 123 |
| | $ | 109 |
| | $ | 56 |
| | $ | 81 |
|
| Basic weighted average shares | 136.1 |
| | 144.0 |
| | 137.8 |
| | 145.4 |
| 126.5 |
| | 137.6 |
| | 128.4 |
| | 138.6 |
|
| Stock options, restricted stock units and performance share units (a) | 2.0 |
| | 1.1 |
| | 1.6 |
| | 1.2 |
| 1.1 |
| | 1.3 |
| | 1.3 |
| | 1.3 |
|
| Weighted average diluted shares | 138.1 |
| | 145.1 |
| | 139.4 |
| | 146.6 |
| 127.6 |
| | 138.9 |
| | 129.7 |
| | 139.9 |
|
| Earnings Per Share: | | | | | | | | | | | | | | |
| Basic | $ | 0.70 |
| | $ | 0.74 |
| | $ | 1.28 |
| | $ | 1.07 |
| $ | 0.97 |
| | $ | 0.79 |
| | $ | 0.44 |
| | $ | 0.58 |
|
| Diluted | $ | 0.69 |
| | $ | 0.73 |
| | $ | 1.26 |
| | $ | 1.06 |
| $ | 0.96 |
| | $ | 0.78 |
| | $ | 0.43 |
| | $ | 0.58 |
|
_______________
| |
| (a) | The three and ninesix months ended SeptemberJune 30, 20172018 respectively exclude 4.97.3 million and 5.37.1 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. The three and ninesix months ended SeptemberJune 30, 2016 respectively2017 both exclude 5.2 million and 5.15.8 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. |
In the thirdsecond quarter of 2017,2018, the Company repurchased and retired 1.84.1 million shares of common stock for $58$101 million at a weighted average market price of $33.83$24.94 per share. ForIn the nine months ended September 30, 2017,first half of 2018, the Company repurchased and retired 5.97.8 million shares of common stock for $178$200 million at a weighted average market price of $30.40$25.73 per share. The shares repurchased include 77,900 shares for which the trade date occurred in late September 2017 while settlement occurred in October 2017. The purchase of shares under this plan reduces the weighted-average number of shares outstanding in the basic earnings per share calculation.
| |
9.8. | COMMITMENTS AND CONTINGENCIES |
Litigation
The Company is involved in claims, legal proceedings, alternative dispute resolution and governmental inquiries related to alleged contract disputes, business practices, intellectual property and other commercial, employment, regulatory and tax matters. Examples of such matters include but are not limited to allegations:
that the Company is vicariously liable for the acts of franchisees under theories of actual or apparent agency;
by current or former franchisees that franchise agreements were breached including improper terminations;
concerning claims for alleged RESPA or state real estate law violations including but not limited to claims challenging the validity of sales associates indemnification, and administrative fees;
that residential real estate sales associatesagents engaged by NRT—under certain state or federal laws—are potentially employees instead of independent contractors, and they or regulators therefore may bring claims against NRT 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;
concerning other employment law matters, including wage and hour claims;
that the Company is vicariously liable for the acts of franchisees under theories of actual or apparent agency;
by current or former franchisees that franchise agreements were breached including improper terminations;
concerning claims for alleged RESPA or state real estate law violations;
concerning claims generally against the company owned brokerage operations for negligence, misrepresentation or breach of fiduciary duty in connection with the performance of real estate brokerage or other professional services as well as other brokerage claims associated with listing information and property history;
related to copyright law, including infringement actions alleging improper use of copyrighted photographs on websites or in marketing materials without consent of the copyright holder;
concerning claims generally against the title company contending that, as the escrow company, the company knew or should have known that a transaction was fraudulent or concerning other title defects or settlement errors; and
concerning information security and cyber crime.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;
concerning anti-trust and anti-competition matters; and
those related to general fraud claims.
Real Estate Business Litigation
Dodge, et al. v. PHH Corporation, et al., formerly captioned Strader, et al. and Hall v. PHH Corporation, et al. (U.S. District Court for the Central District of California). This is a purported class action brought by four California residents against 15 defendants, including Realogy and certain of its subsidiaries, PHH Corporation and PHH Home Loans, LLC (a joint venture between Realogy and PHH), alleging violations of Section 8(a) of RESPA. Plaintiffs seek to represent two subclasses comprised of all persons in the United States who, since January 31, 2005, (1) obtained a RESPA-covered mortgage loan from either (a) PHH Home Loans, LLC or one of its subsidiaries, or (b) one of the mortgage services managed by PHH Corporation for other lenders, and (2) paid a fee for title insurance or settlement services to TRG or one of its subsidiaries. Plaintiffs allege, among other things, that PHH Home Loans, LLC operates in violation of RESPA and that the other defendants violate RESPA by referring business to one another under agreements or arrangements. Plaintiffs seek treble damages and an award of attorneys’ fees, costs and disbursements. On May 19, 2017, the parties held a mediation session, at which they agreed in principle to a settlement of the action, pursuant to which the Company would pay approximately $8 million (or one-half of the settlement). In settling the matter, the Company specifically denied any wrongdoing with respect to the claims asserted in the case. As a result of the settlement, the Company accrued $8 million in the second quarter of 2017 and the liability is included in accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheets. On July 31, 2017,January 29, 2018, the fourth amended complaint was filed changing the named plaintiffs. At a hearing on the plaintiffs' motion forCourt issued an order granting preliminary approval of the settlement, held October 19, 2017,directed class notices to be sent by February 2018 and set the Court indicated that if certain modest revisions are made tohearing on final approval of the settlement agreement and an amended motion for preliminary approval is filed by no later than November 3, 2017, the Court will grant preliminary approval to the settlement; however, there can be no assurance that the parties will reach a definitive settlement or that the Court will approve it.August 16, 2018. Class notices were sent in February 2018.
The Company is involved in certain other claims and legal actions arising in the ordinary course of our business. Such litigation, regulatory actions and other proceedings may include, but are not limited to, actions relating to intellectual property, commercial arrangements, franchising arrangements, the fiduciary duties of brokers, actions against our title company alleging it knew or should have known that others were committing mortgage fraud, standard brokerage disputes like the failure to disclose accurate square footage or hidden defects in the property such as mold, vicarious liability based upon conduct of individuals or entities outside of our control, including franchisees and independent sales associates,agents, antitrust and anti-competition claims, general fraud claims (including wire fraud associated with third-party diversion of funds from a brokerage transaction), employment law claims, including claims challenging the classification of our sales associatesagents as independent contractors, wage and hour classification claims and claims alleging violations of RESPA or state consumer fraud statutes. While the results of such claims and legal actions cannot be predicted with certainty, we do not believe based on information currently available to us that the final outcome of current proceedings against the Company will have a material adverse effect on our consolidated financial position, results of operations or cash flows. In addition, with the increasing requirements resulting from government laws and regulations concerning data breach notifications and data privacy and protection obligations, claims associated with these laws may become more common.
* * *
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.
Cendant Corporate LitigationLiabilities and Guarantees to Cendant and Affiliates
Realogy Group (then Realogy Corporation) separated from Cendant on July 31, 2006 (the "Separation"), pursuant to a plan by Cendant (now known as Avis Budget Group, Inc.) to separate into four independent companies—one for each of Cendant's business units—real estate services (Realogy Group), travel distribution services ("Travelport"), hospitality services, including timeshare resorts ("Wyndham Worldwide"), and vehicle rental ("Avis Budget Group"). Pursuant to the Separation and Distribution Agreement dated as of July 27, 2006 among Cendant, Realogy Group, Wyndham Worldwide and Travelport (the "Separation and Distribution Agreement"), each of Realogy Group, Wyndham Worldwide and Travelport
have assumed certain contingent and other corporate liabilities (and related costs and expenses), which are primarily related to each of their respective businesses. In addition, Realogy Group has assumed 62.5% and Wyndham Worldwide has assumed 37.5% of certain contingent and other corporate liabilities (and related costs and expenses) of Cendant or its subsidiaries, which are not primarily related to any of the respective businesses of Realogy Group, Wyndham Worldwide, Travelport and/or Cendant’s vehicle rental operations, in each case incurred or allegedly incurred on or prior to the date of the separation of Travelport from Cendant.
* * *
The Company believes that it has adequately accrued for legal matters as appropriate. The Company records litigation accruals for legal matters which are both probable and estimable.
Litigation and other disputes are inherently unpredictable and subject to substantial uncertainties and unfavorable resolutions could occur. In addition, class action lawsuits can be costly to defend and, depending on the class size and claims, could be costly to settle. As such, the Company could incur judgments or enter into settlements of claims with
liability that are materially in excess of amounts accrued and these settlements could have a material adverse effect on the Company’s financial condition, results of operations or cash flows in any particular period.
Transfer of Cendant Corporate Liabilities, Issuance of Guarantees to Cendant and Affiliates and Contingent Liability Letter of Credit
Realogy Group has certain guarantee commitments with Cendant (pursuant to the assumption of certain liabilities and the obligation to indemnify Cendant, Wyndham Worldwide and Travelport for such liabilities). These guarantee arrangements primarily relate to certain contingent litigation liabilities, contingent tax liabilities, and other corporate liabilities, of which Realogy Group assumed and is generally responsible for 62.5%. Upon separation from Cendant, the liabilities assumed by Realogy Group were comprised of certain Cendant corporate liabilities which were recorded on the historical books of Cendant as well as additional liabilities which were established for guarantees issued at the date of Separation related to certain unresolved contingent matters that could arise during the guarantee period. Regarding the guarantees, if any of the companies responsible for all or a portion of such liabilities were to default in its payment of costs or expenses related to any such liability, Realogy Group would be responsible for a portion of the defaulting party or parties’ obligation. To the extent such recorded liabilities are in excess or are not adequate to cover the ultimate payment amounts, such excess or deficiency will be reflected in the results of operations in future periods.
In April 2007, the Company established a standby irrevocable letter of credit for the benefit of Avis Budget Group in accordance with the Separation and Distribution Agreement. The letter of credit was utilized to support the Company’s payment obligations with respect to its share of Cendant contingent and other corporate liabilities. The stated amount of the standby irrevocable letter of credit was subject to periodic adjustment to reflect the then current estimate of Cendant contingent and other liabilities. The standby irrevocable letter of credit terminates if (i) the Company’s senior unsecured credit rating is raised to BB by Standard and Poor’s or Ba2 by Moody’s or (ii) the aggregate value of the former parent contingent liabilities falls below $30 million.
The letter of credit was $53 million at December 31, 2016. With the resolution of a Cendant legacy tax matter in the third quarter of 2017, the aggregate value of the former parent contingent liabilities fell below $30 million to $18 million and therefore the standby irrevocable letter of credit was terminated in accordance with the agreement.
The due to former parent balance was $18 million and $28 million at Septemberboth June 30, 20172018 and December 31, 2016,2017, respectively. The due to former parent balance was comprised of the Company’s portion of the following: (i) Cendant’s remaining state and foreign contingent tax liabilities, (ii) accrued interest on contingent tax liabilities, (iii) potential liabilities related to Cendant’s terminated or divested businesses, and (iv) potential liabilities related to the residual portion of accruals for Cendant operations.
Tax Matters
The Company is subject to income taxes in the United States and several foreign jurisdictions. Significant judgment is required in determining the worldwide provision for income taxes and recording related assets and liabilities. In the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is uncertain. The Company is regularly under audit by tax authorities whereby the outcome of the audits is uncertain. The Company believes there is appropriate support for positions taken on its tax returns. The liabilities that have been recorded represent the best estimates of the probable loss on certain positions and are adequate for all open years based on an assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter. However, the outcomes of tax audits are inherently uncertain.
Under the Tax Sharing Agreement with Cendant, Wyndham Worldwide and Travelport, the Company is generally responsible for 62.5% of payments made to settle claims with respect to tax periods ending on or prior to December 31, 2006 that relate to income taxes imposed on Cendant and certain of its subsidiaries, the operations (or former operations) of which were determined by Cendant not to relate specifically to the respective businesses of Realogy, Wyndham Worldwide, Avis Budget or Travelport.
With respect to any remaining legacy Cendant tax liabilities, the Company and its former parent believe there is appropriate support for the positions taken on Cendant’s tax returns. However, tax audits and any related litigation, including disputes or litigation on the allocation of tax liabilities between parties under the Tax Sharing Agreement, could result in outcomes for the Company that are different from those reflected in the Company’s historical financial statements.
Escrow and Trust Deposits
As a service to its customers, the Company administers escrow and trust deposits which represent undisbursed amounts received for the settlement of real estate transactions. Deposits at FDIC-insured institutions are insured up to $250 thousand. These escrow and trust deposits totaled $472$656 million at SeptemberJune 30, 20172018 and $415$469 million at December 31, 20162017. These escrow and trust deposits are not assets of the Company and, therefore, are excluded from the accompanying Condensed Consolidated Balance Sheets. However, the Company remains contingently liable for the disposition of these deposits.
The reportable segments presented below represent the Company’s operating segments for which separate financial information is available and which is utilized on a regular basis by its chief operating decision maker to assess performance and to allocate resources. In identifying its reportable segments, the Company also considers the nature of services provided by its operating segments. Management evaluates the operating results of each of its reportable segments based upon revenue and Operating EBITDA. Operating EBITDA which is defined by us as net income (loss) before depreciation and amortization, interest (income) expense, net (other than Relocation Servicesrelocation services interest for relocation receivablessecuritization assets and securitization obligations) and, income taxes, eachand other items that are not core to the operating activities of which is presented in the Company’s Condensed Consolidated StatementsCompany such as restructuring charges, former parent legacy items, losses on the early extinguishment of Operations.debt, asset impairments, gains or losses on discontinued operations and gains or losses on the sale of investments or other assets. The Company’s presentation of Operating EBITDA may not be comparable to similar measures used by other companies.
|
| | | | | | | | | | | | | | | |
| | Revenues (a) (b) |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Real Estate Franchise Services | $ | 224 |
| | $ | 215 |
| | $ | 631 |
| | $ | 593 |
|
| Company Owned Real Estate Brokerage Services | 1,267 |
| | 1,231 |
| | 3,556 |
| | 3,340 |
|
| Relocation Services | 111 |
| | 116 |
| | 290 |
| | 308 |
|
| Title and Settlement Services | 154 |
| | 164 |
| | 431 |
| | 424 |
|
| Corporate and Other (c) | (82 | ) | | (82 | ) | | (238 | ) | | (225 | ) |
| Total Company | $ | 1,674 |
| | $ | 1,644 |
| | $ | 4,670 |
| | $ | 4,440 |
|
|
| | | | | | | | | | | | | | | |
| | Revenues (a) (b) |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
| Real Estate Franchise Services | $ | 237 |
| | $ | 237 |
| | $ | 413 |
| | $ | 407 |
|
| Company Owned Real Estate Brokerage Services | 1,408 |
| | 1,392 |
| | 2,325 |
| | 2,289 |
|
| Relocation Services | 105 |
| | 102 |
| | 184 |
| | 179 |
|
| Title and Settlement Services | 162 |
| | 157 |
| | 282 |
| | 277 |
|
| Corporate and Other (c) | (92 | ) | | (95 | ) | | (155 | ) | | (156 | ) |
| Total Company | $ | 1,820 |
| | $ | 1,793 |
| | $ | 3,049 |
| | $ | 2,996 |
|
_______________
| |
| (a) | Transactions between segments are eliminated in consolidation. Revenues for the Real Estate Franchise Services segment include intercompany royalties and marketing fees paid by the Company Owned Real Estate Brokerage Services segment of $82$92 million and $238$155 million for the three and ninesix months ended SeptemberJune 30, 2017,2018, respectively, and $82$95 million and $225$156 million for the three and ninesix months ended SeptemberJune 30, 2016,2017, respectively. Such amounts are eliminated through the Corporate and Other line. |
| |
| (b) | Revenues for the Relocation Services segment include intercompany referral commissions paid by the Company Owned Real Estate Brokerage Services segment of $11$12 million and $31$20 million for both the three and ninesix months ended SeptemberJune 30, 2017, respectively,2018 and $12 million and $33 million for the three and nine months ended September 30, 2016, respectively.2017. Such amounts are recorded as contra-revenues by the Company Owned Real Estate Brokerage Services segment. There are no other material intersegment transactions. |
| |
| (c) | Includes the elimination of transactions between segments. |
| | | | EBITDA | Operating EBITDA |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2017 (a) | | 2016 (b) | | 2017 (c) | | 2016 (d) | 2018 | | 2017 (a) | | 2018 | | 2017 (a) |
| Real Estate Franchise Services | $ | 159 |
| | $ | 153 |
| | $ | 427 |
| | $ | 394 |
| $ | 173 |
| | $ | 167 |
| | $ | 278 |
| | $ | 269 |
|
| Company Owned Real Estate Brokerage Services | 62 |
| | 74 |
| | 113 |
| | 131 |
| 61 |
| | 78 |
| | 16 |
| | 57 |
|
| Relocation Services | 37 |
| | 40 |
| | 65 |
| | 74 |
| 34 |
| | 27 |
| | 33 |
| | 28 |
|
| Title and Settlement Services | 21 |
| | 23 |
| | 49 |
| | 49 |
| 31 |
| | 26 |
| | 25 |
| | 28 |
|
Corporate and Other (e)(b) | (25 | ) | | (20 | ) | | (70 | ) | | (60 | ) | (23 | ) | | (29 | ) | | (42 | ) | | (52 | ) |
| Total Company | $ | 254 |
| | $ | 270 |
| | $ | 584 |
| | $ | 588 |
| $ | 276 |
| | $ | 269 |
| | $ | 310 |
| | $ | 330 |
|
| Less: | | | | | | | | |
| Depreciation and amortization (f) | $ | 51 |
| | $ | 53 |
| | $ | 150 |
| | $ | 149 |
| |
| Less: Depreciation and amortization (c) | | $ | 49 |
| | $ | 49 |
| | $ | 99 |
| | $ | 99 |
|
| Interest expense, net | 41 |
| | 37 |
| | 127 |
| | 169 |
| 46 |
| | 47 |
| | 79 |
| | 86 |
|
| Income tax expense | 67 |
| | 74 |
| | 131 |
| | 114 |
| 52 |
| | 73 |
| | 33 |
| | 64 |
|
| Restructuring costs, net (d) | | 6 |
| | 2 |
| | 36 |
| | 7 |
|
| Former parent legacy benefit (e) | | — |
| | (11 | ) | | — |
| | (11 | ) |
| Loss on the early extinguishment of debt (e) | | — |
| | — |
| | 7 |
| | 4 |
|
| Net income attributable to Realogy Holdings and Realogy Group | $ | 95 |
| | $ | 106 |
| | $ | 176 |
| | $ | 156 |
| $ | 123 |
| | $ | 109 |
| | $ | 56 |
| | $ | 81 |
|
_______________
| |
| (a) | The three months ended September 30, 2017 includes a net cost of $1Includes an $8 million of former parent legacy items and $1 millionexpense related to the loss onsettlement of the early extinguishment of debtStrader legal matter in Corporate and Other, and restructuring charges of $2 million in the Company Owned Real Estate Brokerage Services segment.Other. |
| |
| (b) | Includes the elimination of transactions between segments. |
| |
| (c) | Depreciation and amortization for the six months ended June 30, 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 Condensed Consolidated Statement of Operations. |
| |
| (d) | The three months ended SeptemberJune 30, 20162018 includes $9 million of restructuring charges as follows: $1 million in the Real Estate Franchise Services segment, $6of $4 million in the Company Owned Real Estate Brokerage Services segment, $1 million in the Relocation Services segment and $1 million in theat Title and Settlement Services segment. |
The three months ended June 30, 2017 includes restructuring charges of $1 millionin the Real Estate Franchise Services segment and $1 million in the Company Owned Real Estate Brokerage Services segment.
The six months ended June 30, 2018 includes restructuring charges of $2 million in the Real Estate Franchise Services segment, $21 million in the Company Owned Real Estate Brokerage Services segment, $9 million in the Relocation Services segment, $2 million at Title and Settlement Services segment and $2 million in the Corporate and Other segment.
The six months ended June 30, 2017 includes restructuring charges of $1 millionin the Real Estate Franchise Services segment and $6 million in the Company Owned Real Estate Brokerage Services segment.
| |
(c)(e) | The nine months ended September 30, 2017 includes an $8 million expense related to the settlement of the Strader legal matterFormer parent legacy items and $5 million related to the lossesloss on the early extinguishment of debt partially offset by a net benefit of $10 million of former parent legacy itemsare recorded in the Corporate and Other and $9 million of restructuring charges as follows: $8 million in the Company Owned Real Estate Brokerage Services segment and $1 million in the Real Estate Franchise Services segment. |
| |
(d) | The nine months ended September 30, 2016 includes $30 million of restructuring charges as follows: $4 million in the Real Estate Franchise Services segment, $15 million in the Company Owned Real Estate Brokerage Services segment, $4 million in the Relocation Services segment, $1 million in the Title and Settlement Services segment and $6 million in Corporate and Other, and a net cost of $1 million of former parent legacy items included in Corporate and Other. |
| |
(e) | Includes the elimination of transactions between segments. |
| |
(f) | Depreciation and amortization for both the three and nine months ended September 30, 2017 includes $1 million of amortization expense related to Guaranteed Rate Affinity's purchase accounting included in the "Equity in earnings of unconsolidated entities" line on the Condensed Consolidated Statement of Operations. |
On October 23, 2017, the Company announced that Ryan Schneider has been elected as President and Chief Operating Officer of the Company and appointed as a member of the Company’s Board of Directors. In accordance with the succession plan developed by the Board, Mr. Schneider is expected to be named Chief Executive Officer (the “CEO”) by December 31, 2017.
Upon the appointment of Mr. Schneider as CEO on or before December 31, 2017, Richard Smith, the Company’s Chairman and Chief Executive Officer, will retire from the Company and resign from the Board. The Company anticipates that Michael Williams, the Company’s Lead Independent Director, will be named Chairman of the Board upon the appointment of Mr. Schneider as CEO.
On October 23, 2017, the Company amended the employment agreement dated March 13, 2017 with Mr. Smith (the “Amended CEO Employment Agreement”). Under the Amended CEO Employment Agreement, Mr. Smith continues as the Company's CEO and Chairman of the Board until the earlier of (a) the Board appoints a new Chairman of the Board or a new CEO to assume these roles from Mr. Smith and (b) December 31, 2017 (the “Transition Date”). Upon the Transition Date, Mr. Smith’s employment with the Company will terminate and he will resign as an officer and director of the Company, which will be considered a termination by Mr. Smith with good reason under the terms of the Amended CEO Employment Agreement. As previously agreed under Mr. Smith's employment agreement, upon such a termination, subject to his continued compliance with his restrictive covenants and the execution and non-revocation of a release of claims, the Company will provide Mr. Smith with severance payments and benefits, including an amount equal to 2.4 times the sum of his annual base salary and target annual bonus, payable in 24 equal monthly installments (or $6 million).
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with our Condensed Consolidated Financial Statements and accompanying notes thereto included elsewhere herein and with our Consolidated Financial Statements and accompanying notes included in the 20162017 Form 10-K. Unless otherwise noted, all dollar amounts in tables are in millions. 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 condensed consolidated financial positions, results of operations and cash flows of Realogy Holdings, Realogy Intermediate and Realogy Group are the same. This Management's Discussion and Analysis of Financial Condition and Results of Operations containcontains forward-looking statements. See "Forward-Looking Statements" in this report and "Forward-Looking Statements" and "Risk Factors" in our 20162017 Form 10-K 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.
OVERVIEW
We are a global provider of real estate and relocation services and report our operations in the following four segments:
| |
| • | Real Estate Franchise Services (known as Realogy Franchise Group or RFG)—franchises the Century 21®, Coldwell Banker®, Coldwell Banker Commercial®, ERA®, Sotheby's International Realty® and Better Homes and Gardens® Real Estate brand names. As of SeptemberJune 30, 2017,2018, our real estate franchise systems had approximately 14,450 franchised and company owned offices and approximately 286,500 independent sales associates operating under our franchise and proprietary brands had approximately 294,000 independent sales agents worldwide (which included approximately 50,100 company owned brokerage independent sales agents), including approximately 192,000 independent sales agents operating in the U.S. As of June 30, 2018, our real estate franchise systems and proprietary brands had approximately 15,600 offices (which included approximately 770 company owned brokerage offices) worldwide in 115 countries and territories, including approximately 6,000 brokerage offices in the U.S. and 113 other countries and territories around the world, which included more than 780 of our company owned and operated brokerage offices with more than 50,000 independent sales associates. |
Our wholly-owned subsidiary, ZapLabs LLC (which changed its name from ZipRealty LLC in 2016), is the developer of our proprietary technology platform for the real estate brokerages and independent sales associates in our franchise system as well as their customers. We believe the Zap technology platform will increase the value proposition to franchisees, independent sales associates and customers as well as improve the productivity of independent sales associates.
| |
| • | Company Owned Real Estate Brokerage Services (known as NRT)—operates a full-service real estate brokerage business with more than 780approximately 770 owned and operated brokerage offices with more than 50,000approximately 50,100 independent sales associatesagents principally under the Coldwell Banker®, Corcoran®, Sotheby’s International Realty®, ZipRealty®and Citi HabitatsSM and Climb Real Estate® brand names in more than 50 of the 100 largest metropolitan areas in the U.S. This segment also includesincluded the Company's share of earnings for our PHH Home Loans venture, which iswas sold to PHH in the processfirst quarter of winding down as2018 and we transitiontransitioned to our new mortgage origination joint venture with Guaranteed Rate Affinity.Affinity, which is included in the financial results of the Title and Settlement Services segment. |
| |
| • | Relocation Services (known as Cartus®)—primarily offers clients employee relocation services such as homesale assistance, providing home equity advances to transferees (generally guaranteed by the individual's employer), home finding and other destination services, expense processing, relocation policy counseling and consulting services, arranging household goods moving services, coordinating visa and immigration support, intercultural and language training and group move management services. In addition, we provide home buying and selling assistance to members of affinity clients. |
Title and Settlement Services (known as Title Resource Group or TRG)—provides full-service title and settlement services to real estate companies, affinity groups, corporations and financial institutions with many of these services provided in connection with the Company's real estate brokerage and relocation services business. This segment also includes the Company's share of earnings, including start-up costs, for our Guaranteed Rate Affinity joint venture.
RECENT DEVELOPMENTS
Leadership Succession Plan
On October 23, 2017,We pursue technology-enabled solutions for the Company announced that Ryan Schneider has been named Presidentreal estate brokerages and Chief Operating Officerindependent sales agents in our franchise system as well as their customers, including through ZapLabs LLC, our wholly-owned subsidiary and developer of the Company and appointed to the Board of Directors. Mr. Schneider is expected to be named Chief Executive Officer of the Company by December 31, 2017. Upon the appointment of Mr. Schneider as CEO on or before December 31, 2017, Richard Smith, the Company’s Chairman and Chief Executive Officer, will retire from the Company. The Company anticipates that Michael Williams, the Company’s Lead Independent Director, will be named Chairman of the Board upon the appointment of Mr. Schneider as CEO.our proprietary technology platform.
RECENT DEVELOPMENTS
Key Strategic InitiativesImperatives
OurThe core of our integrated business strategy is aimed at 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. This strategy seeks to capitalize on the addressable market of commission revenues, which was an estimated $70 billion in 2017, and which we believe will continue to expand over the coming years due to strong demographic tailwinds.
NRT remains focused on the recruitment, retention and development of productive independent sales agents, which we anticipate will be strengthened by our increasing utilization of advanced data analytics. We believe our adoption of a more data-driven strategy, together with strong product and services offerings, will further sharpen our productivity, recruitment and retention objectives. This is intended to allow us to provide more competitive and consistent products, services and pricing to existing and newly recruited independent sales agents, including through the expanded use of service and compensation models other than the traditional model.
In addition, RFG is in the initial stages of implementing strategic initiatives are focused on affiliatedintended to add new franchisees, thereby expanding the base of independent sales associates, including targeted recruiting strategies, best-in-class retention practices,agents affiliated with our franchisees. These initiatives are expected to build on our current technology offerings and organizational changes with new centersinclude greater differentiation of excellenceRFG’s brands. We also expect to enhance support for services such as marketing and education for affiliated independent sales associates. expand RFG’s historical scope of potential franchisee candidates.
We believe that this refined strategic plan will manifest itselfthe successful execution of these strategies and the associated increase in a variety of ways, including improved lead generation, education and performance coaching and strengthened technology and marketing services, all of which are designed to increase the productivity of our existingproductive independent sales associatesagents and attract new independent sales associates.homesale transaction volume will generate Operating EBITDA growth over time.
Consistent withLeadership Realignment and Other Restructuring Activities
Beginning in the first quarter of 2018, the Company commenced the implementation of a plan to drive our business forward and enhance stockholder value. The key aspects of this strategy, NRT has been placing, and will continue to place, an even greater focus on the quality of our services, including the development of tools to increase sales associate productivity, and the use of financial incentives to strengthen our recruiting and retention of independent sales associates and teams. These actionsplan include a focused strategy to recruit and retain high performing sales associates. In addition, there issenior leadership realignment, an enhanced focus on technology and talent, as well as further attention on office footprint and other operational efficiencies, including the value proposition offeredconsolidation of certain support services provided to independent sales associate teams. This strategic emphasis on recruitmentNRT and retention is driven by our overall goalRFG.
Total expected restructuring costs of approximately $48 million are currently anticipated to sustain or grow market share in various markets and ultimately improvebe incurred through the Company's overall profitability. While we have seen revenue improvements directly related to these initiatives, we have experienced and expect to continue to experience pressure on costs and margin from these initiatives.
Impactend of Natural Disasters
In the third quarter2018. As of 2017, Hurricanes Harvey and Irma caused damage to residential and commercial property and infrastructure in Texas and Florida, which delayed the closing of homesale transactions. The hurricanes had an unfavorable impact on homesale transaction volume, title closing units and broker-to-broker referral fees during the third quarter of 2017 in the affected areas and are expected to have a similar unfavorable impact in the fourth quarter of 2017.
In October 2017, several catastrophic wildfires occurred in Northern California. We are assessing the impact of these wildfires, which we currently do not expect will have a material impact on our results of operations in the fourth quarter of 2017.
Although our segments operate in the affected regions as noted above, we did not incur significant damage to our office locationsJune 30, 2018, cost savings related to the hurricanes and have not incurred any significant damagerestructuring activities were estimated to our office locations as a resultbe approximately $50 million on an annual run rate basis.
The following table reflects the total amount of the wildfires and we believe we have adequate insurance coverage to protect our property losses.
New Mortgage Origination Joint Venture
On February 15, 2017, Realogy announced that it and Guaranteed Rate, Inc. (“Guaranteed Rate”) agreed to form a new mortgage origination joint venture, Guaranteed Rate Affinity, LLC ("Guaranteed Rate Affinity"), which began doing business in August 2017. In accordance with the asset purchase agreement, Guaranteed Rate Affinity is acquiring certain assets of the mortgage operations of PHH Home Loans, the existing joint venture between Realogy and PHH Mortgage Corporation, including its four regional centers and employees across the United States, but not its mortgage assets.
Following completion of the transactions under the asset purchase agreement, Guaranteed Rate Affinity will originate and market its mortgage lending services to Realogy’s real estate brokerage and relocation subsidiaries as well as other real estate brokerage and relocation companies across the country. Guaranteed Rate owns a controlling 50.1% stake of Guaranteed Rate Affinity and Realogy owns 49.9%. Guaranteed Rate will have responsibilityrestructuring costs for the oversight of the officers and senior employees of Guaranteed Rate Affinity who are designated to manage Guaranteed Rate Affinity.
The asset purchase agreement and the movement of employees from the existing joint venture to the new joint venture is being completed in a series of five phases. The first two phases were completed in the third quarter of 2017 and in October the third phase was completed. The remaining two phases are expected to be completed in the fourth quarter of 2017. After giving effect to the establishment of Guaranteed Rate Affinity and the liquidation of Realogy's interest in PHH Home Loans in early 2018, the Company expects to realize net cash proceeds of approximately $20 million. There can be no assurance that all of the transactions contemplated by the asset purchase agreement will be consummated in a timely manner or at all or that the Company will receive the cash it expects from the wind down of the existing joint venture and the establishment of the new joint venture. The equity earningsCompany's restructuring program related to Guaranteed Rate Affinity will be included in the financial results of our Titleleadership realignment and Settlement Services segment.other restructuring activities by reportable segment:
|
| | | | | | | | | | | |
| | Total amount expected to be incurred | | Amount incurred to date | | Total amount remaining to be incurred |
| RFG | $ | 2 |
| | $ | 2 |
| | $ | — |
|
| NRT | 29 |
| | 20 |
| | 9 |
|
| Cartus | 9 |
| | 9 |
| | — |
|
| TRG | 1 |
| | 1 |
| | — |
|
| Corporate and Other | 7 |
| | 2 |
| | 5 |
|
| Total | $ | 48 |
| | $ | 34 |
| | $ | 14 |
|
Return of Capital to Stockholders
During the third quarter of 2017, the Company repurchased and retired 1.8 million shares of common stock for $58 million at a weighted average market price of $33.83 per share. Since beginning the repurchase of the Company's common stock in February 2016, the Company has repurchased a total of 13 million shares at a weighted average market price of $29.07 per share through September 30, 2017. As of September 30, 2017, approximately $198 million of authorization remains available for the repurchase of shares under the February 2017 share repurchase program.
Repurchases under these programs may be made at management's discretion from time to time on the open market, pursuant to Rule 10b5-1 trading plans or privately negotiated transactions. The size and timing of these repurchases will depend on price, market and economic conditions, legal and contractual requirements and other factors. The repurchase programs have no time limit and may be suspended or discontinued at any time.
Refer to "Part II—Other Information, Item 2. Unregistered Sales of Equity Securities and Use of Proceeds" for additional information on the Company's share repurchase programs.
During the third quarter of 2017, the Board declared and paid a quarterly cash dividend of $0.09 per share of the Company’s common stock.
CURRENT INDUSTRY TRENDS
According to the National Association of Realtors ("NAR"), during the first nine monthshalf of 2017,2018, homesale transaction volume increased 6%1% due to a 5%4% increase in the average homesale price andoffset by a 1% increase2% decrease in the number of homesale transactions. The higherWe believe the increase in the average homesale price relative to the increase in homesale transactions is primarily a function of high demand against a limited supply of homes for sale. RFG and NRT homesale transaction volume on a combined basis increased 7%Low housing inventory levels continue to be an industry-wide concern. According to NAR, the inventory of existing homes for sale in the first nineU.S. was 2.0 million and 1.9 million at the end of June 2018 and June 2017, respectively. The June 2018 inventory represents a national average supply of 4.3 months at the current homesales pace which is significantly below the 5.9 month 25-year average as of December 31, 2017. NRT experienced a 2% increase in existing homesale transactions and a 6% increase in average homesale price while RFG experienced a 1% increase in existing homesale transactions and a 6% increase in average homesale price.
Recruitment and retention of independent sales associates and independent sales associate teams are critical to the business and financial results of a brokerage, including our company owned brokerages and those operated by our affiliated franchisees. Competition for independent sales associates in our industry, including within our franchise system, is high, in particular with respect to more productive sales associates. Most of a brokerage's real estate listings are sourced through the sphere of influence of their independent sales associates, notwithstanding the growing influence of internet-generated leads. Competition for independent sales associates is generally subject to numerous factors, including remuneration (such as sales commission percentage and other financial incentives paid to independent sales associates), other expenses of independent sales associates, leads or business opportunities generated for the independent sales associate from the brokerage, independent sales associates' perception of the value of the broker's brand affiliation, marketing and advertising efforts by the brokerage, the office manager, staff and fellow independent sales associates with whom they collaborate daily and technology, continuing professional education, and other services provided by the brokerage. We believe that the influence of independent sales associates and independent sales associate teams has increased during the past five years and, together with the increasing competition from other brokerages, has negatively impacted the recruitment and retention of independent sales associates and put pressure on commission rate splits. These factors may also put pressure on RFG's net effective royalty rate as the economics for agents and agent teams change. At NRT, we continue to focus on our growth initiatives, specifically our recruiting programs and the focus on strengthening the sales agent value proposition. The new targeted recruiting initiatives that we introduced in late 2016 have enabled us to mitigate prior declines in market share through the addition of high performing NRT independent sales associates. While these recruiting and retention initiatives have increased our commission expense, we expect these initiatives will improve our operating results over the longer term and will continue to positively impact our market share trend.
As reported by NAR, the composite housing affordability index has continueddecreased to be at historically favorable141 for May 2018 from 157 for May 2017, which puts it slightly below the 25-year average of 142. We believe the year-over-year decline is a result of lower inventory levels, despite the increases in the average homesale price over the past several years.which puts upward pressure on home prices, and higher mortgage rates, partially offset by increasing wages. An index above 100 signifies that a family earning the median income has sufficient income to purchase a median-priced home, assuming a 20 percent down payment and ability to qualify for a mortgage. The composite housing affordability index was 150 for August 2017 and 165 for 2016. The housing affordability index remains significantly higher than the average of 127 for the period from 1970 through 2016.
According to Freddie Mac, mortgage rates on commitments for a 30-year, conventional, fixed-rate first mortgagesmortgage averaged 3.7%3.99% for 20162017 and the rate at SeptemberJune 30, 20172018 was 3.8%4.57%. Although mortgage rates have increased 30approximately 70 basis points to 3.8%4.57% as of SeptemberJune 30, 20172018 from 3.5%3.90% as of September 2016,June 2017, they continue to be at low levels by historical
standards.5.95%. While this increase in mortgage rates adversely impacts housing affordability, we believe that rising wages, improving consumer confidencethe potential availability of alternative mortgage arrangements, increasing rent prices and a continuation of low inventory levels for the mainstream housing market willmay offset, in whole or in part, rising mortgage rates and home prices and may result in continued favorable demand conditions and existing homesale volume growth. To the extent thatconditions. Nevertheless, we could be negatively impacted by any rising interest rate environment. For example, a rise in mortgage rates increase, consumers continuecould result in decreased homesale transaction volume if potential home sellers choose to have financing alternatives such as adjustable rate mortgages or shorter term mortgages which can be utilized to obtain astay with their lower mortgage rate rather than sell their home and pay a 30-year fixed-rate mortgage.higher mortgage rate with the purchase of another home or, similarly, if potential home buyers choose to rent rather than pay higher mortgage rates.
Partially offsettingWe believe that the positive impactmain reason for the decline in homesale transactions in the first half of historically favorable2018 compared to 2017 was constrained inventory. A number of other factors may have also contributed to the decline, including reduced affordability due to higher average sales price and mortgage rates, are low housing inventory levels, which have been in decline over the past several years. According to NAR, the inventory of existing homes for saleas well as personal income tax reform, stock market volatility and inclement weather in the U.S. was 1.9 millionNortheast and 2.0 million atMidwest in the endfirst quarter of September 20172018, however, we are unable to extrapolate the relative impact that each of these factors may have had on regional and September 2016, respectively. The September 2017 inventory represents a national average supply of 4.2 months atlocal markets in the current homesales pace which is significantly below the 6.1 month 25-year average as of December 31, 2016. The national average supply at the then-current homesales pace for September 2016, 2015United States.
RFG and 2014 was 4.5 months, 4.8 months and 5.4 months, respectively.
Additional offsetting factors include the ongoing rise in home prices, conservative mortgage underwriting standards and certain homeowners having limited or negative equity in homes. Mortgage credit conditions tightened significantly during the recent housing downturn, with banks limiting credit availability to more creditworthy borrowers and requiring larger down payments, stricter appraisal standards, and more extensive mortgage documentation. Although mortgage credit conditions appear to be easing, mortgages remain less available to some borrowers and it frequently takes longer to close aNRT homesale transaction due to current mortgage and underwriting requirements.
Existing Homesales
According to NAR, existing homesale transactions for 2016 increased to 5.5 million homes, or up 4%, compared to 2015, while homesale transactions increased 2%volume on a combined basis increased 4% in the first half of 2018 compared to the first half of 2017. NRT's transaction volume increased 2%, as a result of a 2% increase in average homesale price and flat existing homesale transactions. RFG's transaction volume increased 5% as a result of a 7% increase in average homesale price, partially offset by a 2% decrease in existing homesale transactions.
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.
Competition for independent sales agents in our industry, including within our franchise system, is high, in particular with respect to more productive sales agents. Most of a brokerage's real estate listings are sourced through the sphere of influence of their independent sales agents, notwithstanding the growing influence of internet-generated leads. Competition for independent sales agents is generally subject to numerous factors, including:
remuneration (such as sales commission percentage and other financial incentives paid to independent sales agents);
other expenses borne by independent sales agents;
leads or business opportunities generated for the independent sales agent from the brokerage;
independent sales agents' perception of the value of the broker's brand affiliation;
marketing and advertising efforts by the brokerage or franchisor;
the office manager, staff and fellow independent sales agents with whom they collaborate daily; and
technology, continuing professional education, and other services provided by the brokerage or franchisor.
We believe that the influence of independent sales agents and independent sales agent teams has increased in recent years and, together with the increasing competition from other brokerages, has negatively impacted the recruitment and retention of independent sales agents and put upward pressure on the average share of commissions earned by affiliated independent sales agents.
Currently, there are several different compensation models being utilized by real estate brokerages to compensate their independent sales agents. One of the most common models has been the "traditional model", also called a graduated commission plan, 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 models include a desk rental or 100% plan model, a fixed transaction fee model, and a capped commission model. A capped commission model generally blends aspects of the traditional model with the 100% plan model. Increasingly, independent sales agents have affiliated with brokerages that offer a different mix of services to the independent sales agents, allowing the independent sales agent to select the services that they believe allow them to retain a greater percentage of the commission. However, independent sales agents will generally then need to purchase desired marketing, technology and professional education products and services on an à la carte basis.
In addition, outside capital has continued to invest in competitors that seek to access a portion of the significant addressable market of commission revenues, including competitors that utilize the models described above as well as those that employ arrangements meant to disrupt these models and those that seek to otherwise capture a share of the gross commission income generated by homesale transactions.
As discussed under the caption "Key Strategic Imperatives" above, NRT and RFG have launched strategic initiatives intended to address these current market dynamics by expanding our base of affiliated independent sales agents and NRT.affiliated franchisees. This includes initiatives at NRT that are expected to include the expanded use of service and compensation models other than the traditional model and initiatives at RFG that are expected to build on our current technology offerings and include greater differentiation of RFG’s brands.
NRT 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. During 2017, NRT experienced stronger growth in its new development business with a significant increase in the number of closed transactions from 2016. This growth was largely due to the timing of closings of several major developments during the year. During the first half of 2018, there was a decrease in revenue related to our new development business as a result of lower closing volume due to long cycle times with irregular project completion timing. Our current new development pipeline remains robust and we expect a significantly lower year over year decrease in the new development business in the second half of 2018.
Existing Homesales
For the quarters ended March 31,
2017,2018 and June 30,
2017 and September 30, 2017,2018, compared to the same periods in
2016,2017, NAR existing homesale transactions
weredecreased 2% for both periods and was at 1.1 million
and 1.6 million
and 1.5 million homes,
or up 5%, up 2% and down 2%, respectively. For the
periods above,quarters ended March 31, 2018 and June 30, 2018, RFG and NRT homesale transactions on a combined basis
increased 3%, increaseddecreased 1% and
decreased 1%2%, respectively, compared to the same periods in
2016. During the first nine months of the year, the number of homesale transactions for RFG and NRT has continued to be challenged by inventory constraints, however for NRT there has been a shift from stabilization to growth in the high end of the housing market.2017. The annual and quarterly year-over-year trends in homesale transactions are as follows:
|
| | | | | | | | | | | | | | | | | | |
| | | | 2017 vs. 2016 | |
| Number of Existing Homesales | Full Year
2016 vs.
2015 | | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter
Forecast | | Full Year
Forecast
2017 vs. 2016 | |
| Industry | | | | | | | | | | | | |
| NAR | 4 | % | (a) | 5 | % | (a) | 2 | % | (a) | (2 | %) | (a) | (4 | %) | (b) | — | % | (b) |
| Fannie Mae (c) | 4 | % | | 5 | % | | 2 | % | | (2 | %) | | (5 | %) | | — | % | |
| Realogy | | | | | | | | | | | | |
| RFG and NRT Combined | 2 | % | | 3 | % | | 1 | % | | (1 | %) | | | | | |
| RFG | 3 | % | | 3 | % | | 1 | % | | (1 | %) | | | | | |
| NRT | — | % | | 4 | % | | 3 | % | | — | % | | | | | |
_______________ | |
| (a) | Historical existing homesale data is as of the most recent NAR press release, which is subject to sampling error. |
| |
| (b) | Forecasted existing homesale data, on a seasonally adjusted basis, is as of the most recent NAR forecast. |
| |
| (c) | Forecasted 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 homesales to increase 7%2% in 20182019 while Fannie Mae is forecasting an increase in existing homesale transactions of 2%1% in 2018.
Existing Homesale Price
In 2016, NAR existing homesale average price increased 4% compared to the same period in 2015, while average homesale price increased 2% on a combined basis for RFG and NRT.2019.
Existing Homesale Price
For the quarters ended March 31, 2017,2018 and June 30, 2017 and September 30, 2017,2018, compared to the same periods in 2016,2017, NAR existing homesale average price increased 5%, 5%4% and 4%3%, respectively. For both the periods above,quarters ended March 31, 2018 and June 30, 2018, RFG and NRT average homesale price on a combined basis increased 5%, 7%, and 6%, respectively, compared to the same periods in 2016.2017. For the quarters ended March 31, 2018 and June 30, 2018, RFG's average homesale price increased 6% and 7%, respectively, while NRT's average homesale price increased 3% and 2%, respectively. The combineddifference between the average homesale price increase wasfor RFG compared to NRT is due to lower closing volume in NRT's new development business which is typically at a higher price point as well as lower transaction volume in the increase in homesale transactions at the high end of the markets served by NRT and RFG. Both RFG and NRT homesale price also improved as a result of increased demand due to the continuation of constrained inventory levels.New York metropolitan market. The annual and quarterly year-over-year trends in the price of homes are as follows:
|
| | | | | | | | | | | | | | | | | | |
| | | | 2017 vs. 2016 | |
| Price of Existing Homes | Full Year
2016 vs.
2015 | | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter
Forecast | | Full Year
Forecast
2017 vs. 2016 | |
| Industry | | | | | | | | | | | | |
| NAR | 4 | % | (a) | 5 | % | (a) | 5 | % | (a) | 4 | % | (a) | 5 | % | (b) | 6 | % | (b) |
| Fannie Mae (c) | 5 | % | | 7 | % | | 6 | % | | 6 | % | | 6 | % | | 6 | % | |
| Realogy | | | | | | | | | | | | |
| RFG and NRT Combined | 2 | % | | 5 | % | | 7 | % | | 6 | % | | | | | |
| RFG | 3 | % | | 6 | % | | 6 | % | | 6 | % | | | | | |
| NRT | — | % | | 3 | % | | 9 | % | | 4 | % | | | | | |
_______________ | |
| (a) | Historical homesale price data is for existing homesale average price and is as of the most recent NAR press release. |
| |
| (b) | Forecasted homesale price data is for median price and is as of the most recent NAR forecast. |
| |
| (c) | 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 and Fannie Mae are bothis forecasting an increase in median existing homesale price of 4% in 2019 while Fannie Mae is forecasting a 5% increase in 2018 compared to 2017.2019.
* * *
We believe that long-term demand for housing and the growth of our industry are primarily driven by the affordability of housing, the economic health of the U.S. economy, demographic trends such as population growth, the increase in household formation, mortgage rate levels and mortgage availability, certain tax benefits, job growth, the inherent attributes of homeownership versus renting and the influence of local housing dynamics of supply versus demand. At this time, most of these factors are generally trending favorably. Factors that may negatively affect continued growth in the housing industry include:
continued insufficient inventory levels;
higher mortgage rates due to increases in long-term interest rates as well as reduced availability of mortgage financing;
continued insufficient inventory levelsfurther reduction in the affordability of homes;
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;
lack of building of new housing or irregular timing of new development closings leading to lower unit sales;sales at NRT, which has relationships with developers, primarily in major cities, to provide marketing and brokerage services in new developments;
changing attitudes towards home ownership, particularly among potential first-time homebuyers who may delay, or decide not to, purchase homes;ownership;
an increase in potential homebuyers with a low credit ratingratings or inability to afford down payments;
the impact of limited or negative equity of current homeowners, as well as the lack of available inventory may limit their proclivity to purchase an alternative home;
reduced affordability of homes;
economic stagnation or contraction in the U.S. economy;
increased levels of unemployment in the U.S.;
a decline in home ownership levels in the U.S.;
geopolitical and economic instability; and
other legislative or regulatory reform,reforms, including but not limited to reform that adversely impacts the financing of the U.S. housing market or amends the Internal Revenue Code in a manner that negatively impacts home ownership such as reform that reduces the amount that certain taxpayers would be allowed to deduct for home mortgage interest or state, localmarket; and property taxes.
geopolitical and economic instability.
Many of the trends impacting our businesses that derive revenue from homesales also impact Cartus, which is a global provider of outsourced employee relocation services. In addition to general residential housing trends, key drivers of Cartus are global corporate spending on relocation services, which has not returnedcontinue to levels that existed priorshift to the most recent recession andlower cost relocation benefits as corporate clients engage in cost reduction initiatives and/or restructuring programs as well as changes in employment relocation trends. Cartus is subject to a competitive pricing environment and lower average revenue per relocation as a result of a shift in the mix of services and number of services being delivered per move. These factors have and may continue to put pressure on the growth and profitability of this segment. Moreover, the 2017 Tax Act suspends the deductibility of certain home moving expenses, which may result in fewer instances of specific relocation services.
* * *
While data provided by NAR and Fannie Mae are two indicators of the direction of the residential housing market, we believe that homesale statistics will continue to vary between us and NAR and Fannie Mae because:
they use survey data and estimates in their historical reports and forecasting models, which are subject to sampling error, whereas we use data based on actual reported results;
there are geographical differences and concentrations in the markets in which we operate versus the national market. For example, many of our company owned brokerage offices are geographically located where average homesale prices are generally higher than the national average and therefore NAR survey data will not correlate with NRT's results;
comparability is also impaireddiminished due to NAR’s utilization of seasonally adjusted annualized rates whereas we report actual period-over-period changes and their use of median price for their forecasts compared to our average price;
NAR historical data is subject to periodic review and revision and these revisions have been material in the past, and could be material in the future; and
NAR and Fannie Mae generally update their forecasts on a monthly basis and a subsequent forecast may change materially from a forecast that was previously issued.
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. We also note that forecasts are inherently uncertain or speculative in nature and actual results for any period could materially differ.
KEY DRIVERS OF OUR BUSINESSES
Within RFG and NRT, we measure operating performance using the following key operating statistics:metrics: (i) closed homesale sides, which represents either the "buy" side or the "sell" side of a homesale transaction, (ii) average homesale price, which represents the average selling price of closed homesale transactions, and (iii) average homesale broker commission rate, which represents the average commission rate earned on either the "buy" side or "sell" side of a homesale transaction. For RFG, we also use net effective royalty rateper side, which represents the average percentage of our franchisees’ commission revenues payableroyalty payment to RFG net offor each homesale transaction side taking into account royalty rates, volume incentives achieved.
Since 2014 we have experienced approximately a one basis point decline inachieved and non-standard incentives. We utilize net royalty revenue per transaction as it reflects the average broker commission rate each year and we expect that over the long term the average brokerage commission rates will continue to modestly decline as a resultimpact of increaseschanges in average homesale pricesprice and to a lesser extent, competitors providing fewer services for a reduced fee. Continuing growth inrepresents the housing market should result in an increase in our revenues, although such increases could be offset by modestly declining brokerage commission rates and competitive pressures.
In general, most of our third-party franchisees are entitled to volume incentives, which are calculated for each franchisee as a progressive percentageroyalty revenue impact of each franchisee's annual gross income. These incentives decrease during times of declining homesale transaction volumes and increase when there is a corresponding increase in homesale transaction volume. In addition, several of our larger franchisees have a flat royalty rate. If our top franchisees, who earn higher volume incentives or have a flat royalty rate, continue to grow faster than the majority of our other franchisees, the Company's net effective royalty rate will continue to modestly decline.
Royalty fees are charged to all franchisees pursuant to the terms of the relevant franchise agreements and are included in each of the real estate brands' franchise disclosure documents. Non-standard incentives may be used as consideration for new or renewing franchisees. Most of our franchisees do not receive these non-standard incentives and in contrast to royalties and volume incentives, they are not homesale transaction based. We have accordingly excluded the non-standard incentives from the calculation of the net effective royalty rate. Had these non-standard incentives been included, the net effective royalty rate would be lower by approximately 23 and 21 basis points for the years ended December 31, 2016 and
2015, respectively. We expect that the trend of increasing non-standard incentives by approximately 3 to 4 basis points a year will continue in the future in order to attract and retain certain large franchisees.
NRT has a significant concentration of real estate brokerage offices and transactions in geographic regions where home prices are at the higher end of the U.S. real estate market, particularly the east and west coasts, while RFG has franchised offices that are more widely dispersed across the United States. Accordingly, operating results and homesale statistics may differ between NRT and RFG based upon geographic presence and the corresponding homesale activity in each geographic region. In addition, the share of commissions earned by sales associates directly impacts the margin earned by NRT. Such share of commissions earned by sales associates varies by region and commission schedules are generally progressive to incentivize sales associates to achieve higher levels of production. We expect that they will continue to be subject to upward pressure because of the increased bargaining power of independent sales associates and teams as well as more aggressive recruitment activities taken by our competitors.
As described above under "Current Industry Trends," competition for independent sales associates in our industry has intensified and we expect this competition will continue particularly with respect to more productive independent sales associates which has impacted NRT's market share and results of operations, as well as RFG to a lesser extent. Currently, there are several different compensation models being utilized by real estate brokerages to compensate their independent sales associates. The most common models are as follows: (1) a graduated commission plan, sometimes referred to as the "traditional model" where the independent sales associate receives a percentage of the brokerage commission that increases as the independent sales associate increases his or her volume of homesale transactions and the brokerage frequently provides independent sales associates with a broad set of support offerings and promotion of properties, (2) a desk rental or 100% plan, where the independent sales associate is entitled to all or nearly all of the broker commission and pays the broker on both a monthly and transaction basis for office space, tools, technology and support while also being responsible for the promotion of properties and other items, (3) a capped model, which generally blends aspects of the first two models described herein, and (4) a fixed transaction fee model where the sales associate is entitled to all of the broker commission and pays a fixed fee per homesale transaction and often receives very limited support from the brokerage. Most brokerages focus primarily on one compensation model though some may offer one or more of these models to their sales associates. Increasingly, independent sales associates have affiliated with brokerages that offer fewer services to the independent sales associates, allowing the independent sales associate to retain a greater percentage of the commission. However, there are long-term trade-offs in the level of support independent sales associates receive in areas such as marketing, technology and professional education.
While NRT has historically compensated its independent sales associates using a traditional model, utilizing elements of other models depending upon the geographic market, we are placing an even greater focus on the quality of our services and use of financial incentives to strengthen our recruiting and retention of independent sales associates and teams. These actions include a more aggressive strategy to recruit and retain high performing sales associates. In addition, there is an enhanced focus on the value proposition offered to independent sales associate teams. This strategic emphasis on recruitment and retention is driven by our overall goal to sustain or grow market share in various markets and ultimately improve the Company's overall profitability. While we have seen revenue improvements directly related to these initiatives, we have experienced and expect to continue to experience pressure on costs and margin from these initiatives.incremental side.
Within Cartus, we measure operating performance using the following key operating statistics: (i) initiations, which represent the total number of new transferees and the total number of real estate closings for affinity members and (ii) referrals, which represent the number of referrals from which we earn revenue from real estate brokers.
In TRG, operating performance is evaluated using the following key metrics: (i) purchase title and closing units, which represent the number of title and closing units we process as a result of home purchases, (ii) refinance title and closing units, which represent the number of title and closing units we process as a result of homeowners refinancing their home loans, and (iii) average fee per closing unit, which represents the average fee we earn on purchase title and refinancing title sides. An increase or decrease in homesale transactions will impact the financial results of TRG; however, the financial results are not significantly impacted by a change in homesale price. In addition, the average mortgage rate increased in the fourth quarter of 2016 and refinancing transactions have decreased as a result. We believe that a further increaseincreases in mortgage rates in the future will most likely have a negative impact on refinancing title and closing units.
The following table presents our drivers for the three and six months ended June 30, 2018 and 2017. See "Results of Operations" below for a discussion as to how these drivers affected our business for the periods presented.
|
| | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2018 | | 2017 | | % Change | | 2018 | | 2017 | | % Change |
| RFG (a) | | | | | | | | | | | |
| Closed homesale sides | 313,278 |
| | 322,745 |
| | (3 | %) | | 537,268 |
| | 547,995 |
| | (2 | %) |
| Average homesale price | $ | 312,087 |
| | $ | 291,355 |
| | 7 | % | | $ | 303,955 |
| | $ | 284,973 |
| | 7 | % |
| Average homesale broker commission rate | 2.48 | % | | 2.50 | % | | (2 | ) bps | | 2.49 | % | | 2.50 | % | | (1 | ) bps |
| Net royalty per side (b) | $ | 336 |
| | $ | 316 |
| | 6 | % | | $ | 325 |
| | $ | 309 |
| | 5 | % |
| NRT | | | | | | | | | | | |
| Closed homesale sides | 100,745 |
| | 101,043 |
| | — | % | | 166,842 |
| | 167,613 |
| | — | % |
| Average homesale price | $ | 537,748 |
| | $ | 528,518 |
| | 2 | % | | $ | 532,706 |
| | $ | 520,844 |
| | 2 | % |
| Average homesale broker commission rate | 2.43 | % | | 2.44 | % | | (1 | ) bps | | 2.44 | % | | 2.45 | % | | (1 | ) bps |
| Gross commission income per side | $ | 13,804 |
| | $ | 13,625 |
| | 1 | % | | $ | 13,750 |
| | $ | 13,480 |
| | 2 | % |
| Cartus | | | | | | | | | | | |
| Initiations | 53,230 |
| | 50,798 |
| | 5 | % | | 91,183 |
| | 87,313 |
| | 4 | % |
| Referrals | 26,662 |
| | 25,284 |
| | 5 | % | | 42,693 |
| | 40,487 |
| | 5 | % |
| TRG | | | | | | | | | | | |
| Purchase title and closing units | 46,189 |
| | 47,008 |
| | (2 | %) | | 77,930 |
| | 78,305 |
| | — | % |
| Refinance title and closing units | 4,782 |
| | 6,324 |
| | (24 | %) | | 10,192 |
| | 14,857 |
| | (31 | %) |
| Average fee per closing unit | $ | 2,282 |
| | $ | 2,139 |
| | 7 | % | | $ | 2,231 |
| | $ | 2,080 |
| | 7 | % |
_______________
| |
| (a) | Includes all franchisees except for NRT. |
| |
| (b) | Net royalty per side amounts include the effect of volume incentives and non-standard incentives granted to franchisees. For the three and six months ended June 30, 2018 the net royalty per side increased 6% and 5%, respectively, while average homesale price increased 7% for both the three and six months ended June 30, 2018. The differential between growth in net royalty per side and |
average homesale price was due to an increase in sales incentives, a decrease in the average broker commission rate and a shift in mix to our top 250 franchisees.
A decline in the number of homesale transactions and decline in homesale prices could adversely affect our results of operations by: (i) reducing the royalties we receive from our franchisees, (ii) reducing the commissions our company owned brokerage operations earn, (iii) reducing the demand for our title and settlement services, (iv) reducing the referral fees we earn in our relocation services business, and (v) increasing the risk of franchisee default due to lower homesale
volume. Our results could also be negatively affected by a decline in commission rates charged by brokers or greater commission payments to sales associates.agents.
The following table presentsSince 2014, we have experienced approximately a one basis point decline in the average broker commission rate each year and we expect that over the long term the average brokerage commission rates will continue to modestly decline as a result of increases in average homesale prices and, to a lesser extent, competitors providing fewer or similar services for a reduced fee.
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 driversthird-party franchisees are subject to a 6% royalty rate and entitled to volume incentives. Volume incentives are calculated as a progressive percentage of the applicable franchisee's eligible annual gross income and generally result in a net royalty rate ranging from 6% to 3% for the threefranchisee. 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, some of our larger franchisees have a flat royalty rate of less than 6% and nine months ended September 30, 2017are not eligible for volume incentives.
Transaction volume growth has exceeded royalty revenue growth due primarily to the growth in gross commission income generated by our top 250 franchisees and 2016. See "Resultsour increased use of Operations" below fornon-standard sales incentives, both of which directly impact royalty revenue. Over the past several years, our top 250 franchisees have grown faster than our other franchisees through organic growth and market consolidation. If the amount of gross commission income generated by our top 250 franchisees continue to grow at a discussionquicker pace relative to our other franchisees, we would expect our royalty revenue to continue to increase, but at a slower pace than homesale transaction volume. Likewise, our royalty revenue would continue to increase, but at a slower pace than homesale transaction volume, if the gross commission income generated by all of our franchisees grows faster than the applicable annual volume incentive table increase or if we increase our use of standard volume or non-standard incentives. However, we expect that any such increases in gross commission income will result in increased overall royalty payments to us.
Non-standard incentives may also be used as consideration to howattract, retain and help grow certain franchisees. Most of our franchisees do not receive these drivers affectednon-standard incentives and in contrast to volume incentives, the majority are not homesale transaction based. We expect that the trend of increasing non-standard incentives will continue in the future in order to attract, retain, and help grow certain franchisees. This may result in slower growth in our business fornet royalty per side as compared to homesale transaction volume.
NRT has a significant concentration of real estate brokerage offices and transactions in geographic regions where home prices are at the periods presented.higher end of the U.S. real estate market, particularly the east and west coasts, while RFG has franchised offices that are more widely dispersed across the United States. Accordingly, operating results and homesale statistics may differ between NRT and RFG based upon geographic presence and the corresponding homesale activity in each geographic region. In addition, the share of commissions earned by independent sales agents directly impacts the margin earned by NRT. Such share of commissions earned by independent sales agents varies by region and commission schedules are generally progressive to incentivize sales agents to achieve higher levels of production. We expect that commission share will continue to be subject to upward pressure in favor of the independent sales agent because of the increased bargaining power of independent sales agents and teams as well as more aggressive recruitment and retention activities taken by us and our competitors.
|
| | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change |
| RFG (a) | | | | | | | | | | | |
| Closed homesale sides | 318,961 |
| | 323,176 |
| | (1 | %) | | 866,956 |
| | 861,254 |
| | 1 | % |
| Average homesale price | $ | 292,000 |
| | $ | 275,325 |
| | 6 | % | | $ | 287,558 |
| | $ | 270,669 |
| | 6 | % |
| Average homesale broker commission rate | 2.49 | % | | 2.50 | % | | (1 | ) bps | | 2.50 | % | | 2.51 | % | | (1 | ) bps |
| Net effective royalty rate | 4.42 | % | | 4.50 | % | | (8 | ) bps | | 4.42 | % | | 4.50 | % | | (8 | ) bps |
| Royalty per side | $ | 334 |
| | $ | 322 |
| | 4 | % | | $ | 331 |
| | $ | 318 |
| | 4 | % |
| NRT | | | | | | | | | | | |
| Closed homesale sides | 95,236 |
| | 95,605 |
| | — | % | | 262,849 |
| | 258,163 |
| | 2 | % |
| Average homesale price | $ | 506,418 |
| | $ | 486,343 |
| | 4 | % | | $ | 515,617 |
| | $ | 487,781 |
| | 6 | % |
| Average homesale broker commission rate | 2.45 | % | | 2.46 | % | | (1 | ) bps | | 2.45 | % | | 2.47 | % | | (2 | ) bps |
| Gross commission income per side | $ | 13,142 |
| | $ | 12,681 |
| | 4 | % | | $ | 13,358 |
| | $ | 12,750 |
| | 5 | % |
| Cartus | | | | | | | | | | | |
| Initiations | 39,608 |
| | 40,556 |
| | (2 | %) | | 126,921 |
| | 129,290 |
| | (2 | %) |
| Referrals | 23,905 |
| | 25,495 |
| | (6 | %) | | 64,392 |
| | 68,526 |
| | (6 | %) |
| TRG | | | | | | | | | | | |
| Purchase title and closing units (b) | 43,764 |
| | 42,932 |
| | 2 | % | | 122,069 |
| | 116,082 |
| | 5 | % |
| Refinance title and closing units (c) | 6,513 |
| | 15,170 |
| | (57 | %) | | 21,370 |
| | 36,100 |
| | (41 | %) |
| Average fee per closing unit | $ | 2,115 |
| | $ | 1,824 |
| | 16 | % | | $ | 2,092 |
| | $ | 1,865 |
| | 12 | % |
_______________
| |
(a) | Includes all franchisees except for NRT. |
| |
(b) | The amounts presented for the three and nine months ended September 30, 2017 include 3,325 and 8,351 purchase units, respectively, as a result of the acquisitions completed prior to the third quarter of 2017.
|
| |
(c) | The amounts presented for the three and nine months ended September 30, 2017 include 725 and 1,858 refinance units, respectively, as a result of the acquisitions completed prior to the third quarter of 2017.
|
RESULTS OF OPERATIONS
Discussed below are our condensed consolidated results of operations and the results of operations for each of our reportable segments. The reportable segments presented below represent our operating segments for which separate financial information is available and which is utilized on a regular basis by our chief operating decision maker to assess performance and to allocate resources. In identifying our reportable segments, we also consider the nature of services provided by our operating segments. Management evaluates the operating results of each of our reportable segments based upon revenue and Operating EBITDA. Operating EBITDA is defined by us as net income (loss) before depreciation and amortization, interest (income) expense, net (other than Relocation Servicesrelocation services interest for securitization assets and securitization obligations) and, income taxes, eachand other items that are not core to the operating activities of which is presentedthe Company such as restructuring charges, former parent legacy items, losses on our Condensed Consolidated Statementsthe early extinguishment of Operations.debt, asset impairments, gains or losses on discontinued operations and gains or losses on the sale of investments or other assets. Our presentation of Operating EBITDA may not be comparable to similarly titled measures used by other companies.
Three Months Ended SeptemberJune 30, 20172018 vs. Three Months Ended SeptemberJune 30, 20162017
Our consolidated results comprised the following:
| | | | Three Months Ended September 30, | Three Months Ended June 30, |
| | 2017 | | 2016 | | Change | 2018 | | 2017 | | Change |
| Net revenues | $ | 1,674 |
| | $ | 1,644 |
| | $ | 30 |
| $ | 1,820 |
| | $ | 1,793 |
| | $ | 27 |
|
| Total expenses (1) | 1,521 |
| | 1,468 |
| | 53 |
| 1,646 |
| | 1,610 |
| | 36 |
|
| Income before income taxes, equity in earnings and noncontrolling interests | 153 |
| | 176 |
| | (23 | ) | 174 |
| | 183 |
| | (9 | ) |
| Income tax expense | 67 |
| | 74 |
| | (7 | ) | 52 |
| | 73 |
| | (21 | ) |
| Equity in earnings of unconsolidated entities | (10 | ) | | (5 | ) | | (5 | ) | (2 | ) | | — |
| | (2 | ) |
| Net income | 96 |
| | 107 |
| | (11 | ) | 124 |
| | 110 |
| | 14 |
|
| Less: Net income attributable to noncontrolling interests | (1 | ) | | (1 | ) | | — |
| (1 | ) | | (1 | ) | | — |
|
| Net income attributable to Realogy Holdings and Realogy Group | $ | 95 |
| | $ | 106 |
| | $ | (11 | ) | $ | 123 |
| | $ | 109 |
| | $ | 14 |
|
_______________
| |
| (1) | Total expenses for the three months ended SeptemberJune 30, 20172018 includes $2$6 million of restructuring charges, $1 million related to loss on the early extinguishment of debt and a net cost of $1 million of former parent legacy items.charges. Total expenses for the three months ended SeptemberJune 30, 20162017 includes $9an $8 million expense related to the settlement of restructuring charges partially offset bythe Strader legal matter, $5 million of gainslosses related to mark-to-market adjustments for our interest rate swaps.swaps and $2 million of restructuring charges, partially offset by a net benefit of $11 million of former parent legacy items. |
Net revenues increased $30$27 million or 2% for the three months ended SeptemberJune 30, 20172018 compared with the three months ended SeptemberJune 30, 2016,2017, principally due to increases in gross commission income and franchise fees as a result of higher homesale transaction volume of 4%3% on a combined basis for NRT and RFG.RFG and an increase in underwriter and resale revenues at TRG.
Total expenses increased $53$36 million or 4%2% primarily due to:
a $53$39 million increase in commission and other sales associate-relatedagent-related costs due to the impact of initiatives focused on growing and retaining our productive independent sales agent base and higher homesale transaction volume, including 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, as well as an increase in homesale transaction volume at NRTcommission expense related to acquisitions;
the absence of former parent legacy benefits of $11 million related to the settlement of a Cendant legacy tax matter during the three months ended June 30, 2017; and higher sales commissions paid
$6 million of restructuring costs primarily for the Company's restructuring program related to its independent sales associates;leadership realignment and other restructuring activities during the second quarter of 2018 compared to $2 million of restructuring costs incurred for the same period in 2017 related to the Company's business optimization plan;
The increases were partially offset by:
•a $16 million decrease in operating expenses and general and administrative expenses primarily driven by:
| |
| ◦ | an $18 million decrease in employee related costs primarily due to lower incentive accruals and cost savings initiatives; and |
| |
| ◦ | the absence of an $8 million expense related to the settlement of the Strader legal matter during the second quarter of 2017; |
partially offset by:
| |
| ◦ | a $6 million increase in costs at TRG primarily due to an increase in underwriter revenue. |
a $5 million increase in marketing expenses; and
a $4$1 million net increasedecrease in interest expense to $41$46 million in the thirdsecond quarter of 2018 from $47 million in the second quarter of 2017 from $37 million in the third quarter of 2016primarily due to the absence of mark-to-market adjustments for our interest rate swaps that resulted in gainsno gain or loss during the second quarter of 2018 compared to $5 million in losses during the second quarter of 2017, partially offset by an increase in interest expense due to LIBOR rates increases.
Earnings from equity investments were $2 million during the thirdsecond quarter of 2016 less a $12018 compared to no earnings during the second quarter of 2017.
During the second quarter of 2018, we incurred $6 million decrease as a result of a reductionrestructuring costs primarily related to the Company's restructuring program related to leadership realignment and other restructuring activities which began in total outstanding indebtedness and a lower weighted average interest rate.
The expense increases were partially offset by:
a $7the first quarter of 2018 compared to $2 million decrease in restructuringof costs related to the Company's business optimization plan; and
a $2 million decreaseinitiatives in operating and general and administrative expenses primarily driven by:
| |
◦ | a $10 million increase in other expenses including professional fees and occupancy costs; and |
| |
◦ | a $1 million increase in employee-related costs primarily related to acquisitions; |
partially offset by:
| |
◦ | a $10 million decrease in variable operating costs at TRG primarily due to lower refinance and underwriter volume. |
Earnings from equity investments were $10 million during the thirdsecond quarter of 2017 compared to $5 million during the third quarter of 2016. The $5 million increase is equity earnings is primarily due to:
an $8 million increase in equity earnings at NRT as a result of $14 million of earnings from the sale of the first two phases of PHH Home Loans' assets to Guaranteed Rate Affinity, partially offset by $2 million of exit costs. In addition, there was a $4 million decrease in earnings due to lower operating results as a result of lower origination volume, compressed industry margins and lower results due to the level of organizational change associated with the transition to the operations of Guaranteed Rate Affinity.
The increase in equity earnings was partially offset by:
a $3 million decrease in equity earnings at TRG primarily related to costs associated with the start up of operations of Guaranteed Rate Affinity, including $1 million of amortization of intangible assets recorded in purchase accounting.
As part of the business optimization initiative the Company began in the fourth quarter of 2015, we incurred $2 million of restructuring costs in the third quarter of 2017 compared to $9 million of costs in the third quarter of 2016.2017. The Company expects to incur an additional $4$14 million related to initiatives still in progressthe current restructuring plan bringing the estimated total cost of the initiativeplan to be $62$48 million. See Note 6, "Restructuring Costs", in the Condensed Consolidated Financial Statements for additional information.
The Company's provision for income taxes in interim periods is computed by applying its estimated annual effective tax rate against the income or loss before income taxes for the period. In addition, non-recurring or discrete items are recorded in the period in which they occur. The provision for income taxes was $67$52 million for the three months ended SeptemberJune 30, 20172018 compared to $74$73 million for the three months ended SeptemberJune 30, 2016.2017. Our federal and state blended statutory rate is estimated to be 40%27% for 20172018 and our full year effective tax rate is estimated to be 41%30%. Our effective tax rate was 41%30% and 40% for both the three months ended SeptemberJune 30, 2018 and June 30, 2017, and September 30, 2016.respectively. There were no changes to the net benefit recorded during the year ended December 31, 2017 relating to the 2017 Tax Act which was a provisional amount that reflected the Company’s reasonable estimate at the time.
The following table reflects the results of each of our reportable segments during the three months ended SeptemberJune 30, 20172018 and 2016:2017:
| | | | Revenues (a) | | % Change | | EBITDA (b) | | % Change | | EBITDA Margin | | Change | Revenues (a) | | $ Change | | % Change | | Operating EBITDA (b) | | $ Change | | % Change | | Operating EBITDA Margin | | Change |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 | |
| RFG | $ | 224 |
| | $ | 215 |
| | 4 | % | | $ | 159 |
| | $ | 153 |
| | 4 | % | | 71 | % | | 71 | % | | — |
| $ | 237 |
| | $ | 237 |
| | $ | — |
| | — | % | | $ | 173 |
| | $ | 167 |
| | $ | 6 |
| | 4 | % | | 73 | % | | 70 | % | | 3 |
|
| NRT | 1,267 |
| | 1,231 |
| | 3 |
| | 62 |
| | 74 |
| | (16 | ) | | 5 |
| | 6 |
| | (1 | ) | 1,408 |
| | 1,392 |
| | 16 |
| | 1 |
| | 61 |
| | 78 |
| | (17 | ) | | (22 | ) | | 4 |
| | 6 |
| | (2 | ) |
| Cartus | 111 |
| | 116 |
| | (4 | ) | | 37 |
| | 40 |
| | (8 | ) | | 33 |
| | 34 |
| | (1 | ) | 105 |
| | 102 |
| | 3 |
| | 3 |
| | 34 |
| | 27 |
| | 7 |
| | 26 | | 32 |
| | 26 |
| | 6 |
|
| TRG | 154 |
| | 164 |
| | (6 | ) | | 21 |
| | 23 |
| | (9 | ) | | 14 |
| | 14 |
| | — |
| 162 |
| | 157 |
| | 5 |
| | 3 |
| | 31 |
| | 26 |
| | 5 |
| | 19 | | 19 |
| | 17 |
| | 2 |
|
| Corporate and Other | (82 | ) | | (82 | ) | | * |
| | (25 | ) | | (20 | ) | | * |
| | | | | | | (92 | ) | | (95 | ) | | 3 |
| | * | | (23 | ) | | (29 | ) | | 6 |
| | * | | | | | | |
| Total Company | $ | 1,674 |
| | $ | 1,644 |
| | 2 | % | | $ | 254 |
| | $ | 270 |
| | (6 | %) | | 15 | % | | 16 | % | | (1 | ) | $ | 1,820 |
| | $ | 1,793 |
| | $ | 27 |
| | 2 | % | | $ | 276 |
| | $ | 269 |
| | $ | 7 |
| | 3 | % | | 15 | % | | 15 | % | | — |
|
Less: Depreciation and amortization (c) | Less: Depreciation and amortization (c) | | 51 |
| | 53 |
| | | | | | | | | Less: Depreciation and amortization (c) | | 49 |
| | 49 |
| | | | | | | | | | |
| Interest expense, net | Interest expense, net | | 41 |
| | 37 |
| | | | | | | | | Interest expense, net | | 46 |
| | 47 |
| | | | | | | | | | |
| Income tax expense | Income tax expense | | 67 |
| | 74 |
| | | | | | | | | Income tax expense | | 52 |
| | 73 |
| | | | | | | | | | |
| Restructuring costs, net (c) | | Restructuring costs, net (c) | | 6 |
| | 2 |
| | | | | | | | | | |
| Former parent legacy benefit, net (d) | | Former parent legacy benefit, net (d) | | — |
| | (11 | ) | | | | | | | | | | |
| Net income attributable to Realogy Holdings and Realogy Group | Net income attributable to Realogy Holdings and Realogy Group | | $ | 95 |
| | $ | 106 |
| | | | | | | | | Net income attributable to Realogy Holdings and Realogy Group | | $ | 123 |
| | $ | 109 |
| | | | | | | | | | |
_______________
| |
| (a) | Includes the elimination of transactions between segments, which consists of intercompany royalties and marketing fees paid by NRT of $82$92 million and $95 million during both the three months ended SeptemberJune 30, 2018 and 2017, and September 30, 2016.respectively. |
| |
| (b) | EBITDAIncludes an $8 million expense related to the settlement of the Strader legal matter in the Corporate and Other segment for the three months ended SeptemberJune 30, 2017 includes $1 million related to loss on the early extinguishment of debt and a net cost of $1 million of former parent legacy items in Corporate and Other and $2 million of restructuring charges in NRT.2017. |
EBITDA for the three months ended September 30, 2016 includes $9 million of restructuring charges reflected above as follows: $6 million in NRT, $1 million in RFG, $1 million in Cartus and $1 million in TRG.
| |
| (c) | Depreciation and amortizationRestructuring charges incurred for the three months ended SeptemberJune 30, 2018 include $4 million at NRT, $1 million at Cartus and $1 million at TRG. Restructuring charges incurred for the three months ended June 30, 2017 includesinclude $1 million of amortization expense related to Guaranteed Rate Affinity's purchase accounting includedat RFG and $1 million at NRT. |
| |
| (d) | Former parent legacy items are recorded in the "Equity in earnings of unconsolidated entities" line on the Condensed Consolidated Statement of Operations.Corporate and Other segment. |
As described in the aforementioned table, Operating EBITDA margin for "Total Company" expressed as a percentage of revenues decreased 1 percentage point toremained flat at 15% from 16% for the three months ended SeptemberJune 30, 20172018 compared to the same period in 2016.2017. On a segment basis, RFG's margin remained flat at 71%.increased 3 percentage points to 73% from 70% primarily due to an increase in third-party domestic franchisee royalty revenue and a decrease in employee related costs. NRT's margin decreased 12 percentage pointpoints to 5%4% from 6% primarily due to higher sales commission percentages paid to its independent sales associates offset byagents during the second quarter of 2018 compared to the same period in 2017 and the impact of lower restructuringclosing volume in our new development business, which typically has higher margins. Cartus' margin increased 6 percentage points to 32% from 26% primarily due to an increase in affinity revenue and a decrease in employee related costs as a result of cost savings initiatives. TRG's margin increased 2 percentage points to 19% from 17% primarily due to a decrease in employee-related costs and an increase in earnings related to its equity investment in PHH Home Loans during the third quarter of 2017 compared to the same period in 2016. Cartus' margin decreased 1 percentage point to 33% from 34% primarily due
to lower international revenues. TRG's margin remained flat at 14% due to losses from equity investments during the thirdsecond quarter of 20172018 compared to earnings from equity investments during the thirdsecond quarter of 2016 primarily due to costs associated with the start up of operations of Guaranteed Rate Affinity, offset by the reversal of a legal reserve.2017.
Corporate and Other Operating EBITDA for the three months ended SeptemberJune 30, 2017 declined $52018 improved $6 million to negative $25$23 million primarily due to a $2the absence of an $8 million increase in employee costs due to higher employee incentive accruals and investments in technology development, a $3 million increase in professional fees supporting strategic initiatives, $1 millionexpense related to loss on the early extinguishment of debt as a resultsettlement of the reduction in the Unsecured Letter of Credit Facility and a net cost of $1 million of former parent legacy itemsStrader legal matter during the thirdsecond quarter of 2017 compared to the third quarter of 2016.2017.
EBITDA before restructuring charges was $256 million for the three months ended September 30, 2017 compared to $279 million for the three months ended September 30, 2016. EBITDA before restructuring charges by reportable segment for the three months ended September 30, 2017 was as follows:
|
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | |
| | 2017 | | 2016 | | |
| | EBITDA | | Restructuring Charges | | EBITDA Before Restructuring | | EBITDA Before Restructuring | | %
Change |
| RFG | $ | 159 |
| | $ | — |
| | $ | 159 |
| | $ | 154 |
| | 3 | % |
| NRT | 62 |
| | 2 |
| | 64 |
| | 80 |
| | (20 | ) |
| Cartus | 37 |
| | — |
| | 37 |
| | 41 |
| | (10 | ) |
| TRG | 21 |
| | — |
| | 21 |
| | 24 |
| | (13 | ) |
| Corporate and Other | (25 | ) | | — |
| | (25 | ) | | (20 | ) | | * |
|
| Total Company | $ | 254 |
| | $ | 2 |
| | $ | 256 |
| | $ | 279 |
| | (8 | %) |
_______________
The following table reflects RFG and NRT results on a combined basis for the third quarter of 2017 compared to the third quarter of 2016. The EBITDA before restructuring margin for the combined segments decreased 1 percentage point from 17% to 16% due primarily to higher sales commission percentages paid to NRT's independent sales associates:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Revenues (a) | | % Change | | EBITDA Before Restructuring (b) | | % Change | | Margin | | Change |
| | 2017 | | 2016 | | | 2017 | | 2016 | | | 2017 | | 2016 | |
| RFG and NRT Combined | $ | 1,409 |
| | $ | 1,364 |
| | 3 | % | | $ | 223 |
| | $ | 234 |
| | (5 | %) | | 16 | % | | 17 | % | | (1 | ) |
_______________ | |
(a) | Excludes transactions between segments, which consists of intercompany royalties and marketing fees paid by NRT to RFG of $82 million during both the three months ended September 30, 2017 and 2016. |
| |
(b) | EBITDA for the combined RFG and NRT segments excludes $2 million and $7 million of restructuring charges for the three months ended September 30, 2017 and 2016, respectively. |
Real Estate Franchise Services (RFG)
Revenues increased $9remained flat at $237 million to $224 million and Operating EBITDA increased $6 million to $159$173 million for the three months ended SeptemberJune 30, 20172018 compared with the same period in 2016.2017.
The increase in revenue was driven byRevenues remained flat as a $2result of a $3 million increase in third-party domestic franchisee royalty revenue primarily due to a 6%4% increase in the average homesale price, partiallytransaction volume, offset by a 1%$3 million decrease in the number of homesale transactions including the negative impact attributable to regional market disruption due to hurricanes in the third quarter of 2017, and a lower net effective royalty rate. Revenue also increased due to a $2 million increase in royalties received from NRT as a result of volume increases at NRT, a $3 million increase in otherbrand marketing fund revenue, primarily due to the lower level of advertising spend during the second quarter of 2018 compared with 2017. The $3 million decrease in brand conferences and franchisee events andmarketing fund revenue was offset by a $2$3 million increasedecrease in international revenues.brand marketing fund expense.
TheRFG revenue includes intercompany royalties received from NRT of $81 million and $79$89 million during both the thirdsecond quarter of 2018 and 2017 and 2016, respectively,which are eliminated in consolidation to avoidagainst the revenue from being double countedexpense reflected in NRT and RFG. See "Company Owned Real Estate Brokerage Services" for a discussion of the drivers related to intercompany royalties paid to RFG.
NRT's segment results.
The $6 million increase in Operating EBITDA was principally due to the $9$3 million increase in revenuesthird-party domestic franchisee royalty revenue discussed above and the absence of $1 million of restructuring charges incurred in the third quarter of 2016, partially offset byas well as a $2 million increasedecrease in expensesemployee related to the brand conferences and franchisee events.costs.
Company Owned Real Estate Brokerage Services (NRT)
Revenues increased $36$16 million to $1,267$1,408 million and Operating EBITDA decreased $12$17 million to $62$61 million for the three months ended SeptemberJune 30, 20172018 compared with the same period in 2016.2017.
The revenue increase of $36$16 million was comprised of a $19$7 million increase in commission income earned on homesale transactions by our existing brokerage operations, despite a decrease in revenue from our new development business, and a $17$9 million increase in commission income earned from acquisitions. The increase in commission income earned on homesale transactions was primarily driven by a 4%1% increase in thehomesale transaction volume due to NRT's average homesale price increase of 2%. This was due to lower inventory of homes for sale and NRT’s strategic recruiting efforts. The increase in price was partially offset by a 1 basis point decreaselower closing volume in NRT's new development business and lower transaction volume in the average broker commission rate. The numberNew York metropolitan market, each of homesale transactions remained flat in spite of the negative impact on homesale transaction volume attributable to the market disruption in Texas and Florida due to the hurricanes during the third quarter of 2017. We believe our positive revenue growth is attributable to the recruiting and organic growth focus by NRT management as well as stabilization in the high end of the housing market. The stabilizationwhich are generally at the high end of the housing market had an adverse impact on the average homesale broker commission rate. In addition, homesalea higher price is continuing to increase due to continued constrained inventory levels across the lower and mid price points in the markets served by NRT.point.
Operating EBITDA decreased $12$17 million primarily due to:
a $53$39 million increase in commission expenses paid to independent sales associatesagents from $834$970 million in the thirdsecond quarter of 20162017 to $887$1,009 million in the thirdsecond quarter of 2017.2018. The $53$39 million increase is comprised of a $41$33 million increase in commission expense due to our existing brokerage operations and was driven byas a result of the impact of initiatives focused on growing and retaining our productive independent sales associateagent base and higher homesale transaction volume, including 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, as well as a $12$6 million increase in commission expense related to acquisitions. The $53 million increase in commission expense was significantly impacted by the mix of business as approximately 70% of the increase was due to higher homesale transaction volume in the west region where we pay a greater proportion of commissions to independent sales associates;acquisitions; and
a $7$3 million increase in other costs including occupancy costs;
a $2$1 million increase in marketing expenses including the effect of acquisitions; and
a $2 million increase in royalties paid to RFG from $79 million in the third quarter of 2016 to $81 million in the third quarter of 2017.occupancy costs.
These Operating EBITDA decreases were partially offset by:
the $36$16 million increase in revenues discussed above; and
an $8 million increase in earnings for our equity method investment in PHH Home Loans for the third quarter of 2017 compared to the third quarter 2016 as a result of $14 million of earnings from the sale of the first two phases of PHH Home Loans' assets to Guaranteed Rate Affinity partially offset by $2 million of exit costs. In addition, there was a $4$7 million decrease in earningsemployee related costs primarily due to lower operatingincentive accruals.
RFG and NRT on a Combined Basis
The following table reflects RFG and NRT results before the intercompany royalties and marketing fees as well as on a resultcombined 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 16% to 15% primarily due to higher sales commission percentages paid to independent sales agents affiliated with NRT and the impact of lower originationclosing volume compressed industry margins and lower results due to the level of organizational change associated with the transition of the operations to Guaranteed Rate Affinity;in NRT's new development business, which typically has higher margins:
a $4 million decrease in restructuring costs related to the Company's business optimization plan from $6 million in the third quarter of 2016 to $2 million in the third quarter of 2017; and |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Revenues | | Change | | % Change | | Operating EBITDA | | Change | | % Change | | Operating EBITDA Margin | | Change |
| | 2018 | | 2017 | | | | 2018 | | 2017 | | | | 2018 | | 2017 | |
| RFG (a) | $ | 145 |
| | $ | 142 |
| | $ | 3 |
| | 2 | % | | $ | 81 |
| | $ | 72 |
| | $ | 9 |
| | 13 | % | | 56 | % | | 51 | % | | 5 |
|
| NRT (a) | 1,408 |
| | 1,392 |
| | 16 |
| | 1 |
| | 153 |
| | 173 |
| | (20 | ) | | (12 | ) | | 11 |
| | 12 |
| | (1 | ) |
| RFG and NRT Combined | $ | 1,553 |
| | $ | 1,534 |
| | $ | 19 |
| | 1 | % | | $ | 234 |
| | $ | 245 |
| | $ | (11 | ) | | (4 | %) | | 15 | % | | 16 | % | | (1 | ) |
a $3 million decrease in employee-related costs due to a $5 million decrease primarily related to expense reduction initiatives offset by a $2 million increase in costs attributable to acquisitions._______________
| |
| (a) | The RFG and NRT segment numbers noted above do not reflect the impact of intercompany royalties and marketing fees paid by NRT to RFG of $92 million and $95 million during the three months ended June 30, 2018 and June 30, 2017, respectively. |
Relocation Services (Cartus)
Revenues decreased $5 million to $111 million and EBITDA decreasedincreased $3 million to $37$105 million and Operating EBITDA increased $7 million to $34 million for the three months ended SeptemberJune 30, 20172018 compared with the same period in 2016.2017.
Revenues decreased $5increased $3 million primarily as a result of a $3 million decreaseincrease in otheraffinity revenue and a $2 million increase in international revenue both primarily due to lowerhigher volume, andpartially offset by a $2 million decrease in international revenue as a result of an increasingly higher percentage of clients reducing their global relocation activity.other referral revenue.
Operating EBITDA decreased $3increased $7 million primarily as a result of the $5$3 million decreaseincrease in revenues discussed above partially offset byand a $1$5 million decrease in employee related costs and the absence of $1 million of restructuring costs incurred during the third quarter of 2016.primarily due to cost savings initiatives.
Title and Settlement Services (TRG)
Revenues decreased $10increased $5 million to $154$162 million and Operating EBITDA decreased $2increased $5 million to $21$31 million for the three months ended SeptemberJune 30, 20172018 compared with the same period in 2016.2017.
The decrease in revenues wasRevenues increased as a result of a $6$4 million increase in underwriter revenue due to an increase of underwriter premiums, as well as a $2 million increase in resale revenue due to an increase in average fees, partially offset by a $1 million decrease in refinancing revenue which was the primary driver of an $8 million decrease of underwriter revenue, partially offset by a $7 million increase in resale revenue related to acquisitions. The overall decline in revenue was due to aan overall decrease in activity in the refinance market and the negative impact attributable to regional market disruption due to hurricanes in the third quarter of 2017.market.
Operating EBITDA decreased $2increased $5 million as a result of the $10$5 million decreaseincrease in revenues discussed above, an increase of $2a $3 million decrease in employee-related costs primarily relateddue to acquisitionstiming and a $2 million decreaseincrease in earnings from equity investments, related to costs associated with the start up of operations of Guaranteed Rate Affinity during the third quarter of 2017. These decreases were mostlypartially offset by a $10an increase of $6 million decrease in variable operating costs primarily due to lower refinancing andan increase in underwriter volume and $2 million related to the reversal of a legal reserve.revenue.
Six Months Ended SeptemberJune 30, 20172018 vs. NineSix Months Ended SeptemberJune 30, 20162017
Our consolidated results comprised the following:
| | | | Nine Months Ended September 30, | Six Months Ended June 30, |
| | 2017 | | 2016 | | Change | 2018 | | 2017 | | Change |
| Net revenues | $ | 4,670 |
| | $ | 4,440 |
| | $ | 230 |
| $ | 3,049 |
| | $ | 2,996 |
| | $ | 53 |
|
| Total expenses (1) | 4,368 |
| | 4,177 |
| | 191 |
| 2,957 |
| | 2,847 |
| | 110 |
|
| Income before income taxes, equity in earnings and noncontrolling interests | 302 |
| | 263 |
| | 39 |
| |
| Income before income taxes, equity in losses and noncontrolling interests | | 92 |
| | 149 |
| | (57 | ) |
| Income tax expense | 131 |
| | 114 |
| | 17 |
| 33 |
| | 64 |
| | (31 | ) |
| Equity in earnings of unconsolidated entities | (7 | ) | | (10 | ) | | 3 |
| |
| Equity in losses of unconsolidated entities | | 2 |
| | 3 |
| | (1 | ) |
| Net income | 178 |
| | 159 |
| | 19 |
| 57 |
| | 82 |
| | (25 | ) |
| Less: Net income attributable to noncontrolling interests | (2 | ) | | (3 | ) | | 1 |
| (1 | ) | | (1 | ) | | — |
|
| Net income attributable to Realogy Holdings and Realogy Group | $ | 176 |
| | $ | 156 |
| | $ | 20 |
| $ | 56 |
| | $ | 81 |
| | $ | (25 | ) |
_______________
| |
| (1) | Total expenses for the ninesix months ended SeptemberJune 30, 20172018 includes $9$36 million of restructuring charges and $7 million related to loss on the early extinguishment of debt as a result of the debt transactions in the first quarter of 2018, partially offset by $12 million of gains related to mark-to-market adjustments for our interest rate swaps. Total expenses for the six months ended June 30, 2017 includes an $8 million expense related to the settlement of the Strader legal matter, $5$7 million related to losses on the early extinguishment of debt andrestructuring charges, $4 million of losses related to mark-to-market adjustments for our interest rate swaps and $4 million related to loss on the early extinguishment of debt, partially offset by a net benefit of $10 million of former parent legacy items. Total expenses for the nine months ended September 30, 2016 includes $40 million of losses related to mark-to-market adjustments for our interest rate swaps, $30 million of restructuring charges and a net cost of $1$11 million of former parent legacy items. |
Net revenues increased $230$53 million or 5%2% for the ninesix months ended SeptemberJune 30, 20172018 compared with the same period in 2016,2017, principally due to increases in gross commission income and franchise fees as a result of ahigher homesale transaction volume increase of 7%4% on a combined basis for NRT and RFG.
Total expenses increased $191$110 million or 5%4% primarily due to:
a $206$79 million increase in commission and other sales associate-relatedagent-related costs due to the impact of initiatives focused on growing and retaining our productive independent sales agent base and higher homesale transaction volume including 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, as well as an increase in homesale transaction volume at NRTcommission expense related to acquisitions;
$36 million of restructuring costs primarily for the Company's restructuring program related to leadership realignment and higher sales commissions paidother restructuring activities for the six months ended June 30, 2018 compared to its independent sales associates;$7 million of restructuring costs incurred for the same period in 2017 related to the Company's business optimization plan;
the absence of former parent legacy benefits of $11 million related to the settlement of a Cendant legacy tax matter during the six months ended June 30, 2017; and
a $39$4 million increase in marketing expenses.
The increases were partially offset by:
a $7 million decrease in operating and general and administrative expenses primarily driven by:
| |
| ◦ | $24a $17 million of additional employee-relateddecrease in employee related costs associated with acquisitions; |
| |
◦ | a $24 million increase in other expenses including professional feesprimarily due to lower incentive accruals and occupancy costs;cost savings initiatives; and |
| |
| ◦ | the absence of an $8 million expense related to the settlement of the Strader legal matter induring the second quarter of 2017; |
partially offset by:by,
| |
| ◦ | a $7$10 million decreaseincrease in variable operatingother costs at NRT including a $3 million increase in occupancy costs, a $3 million increase in outsourcing costs and a $2 million increase in earn-out costs; and |
| |
| ◦ | an $8 million increase in costs at TRG primarily due to lower refinance andan increase in underwriter volume;revenue; |
a $14$7 million net decrease in interest expense to $79 million for the six months ended June 30, 2018 from $86 million for the six months ended June 30, 2017 primarily due to mark-to-market adjustments for our interest rate swaps that resulted in gains of $12 million for the six months ended June 30, 2018 compared to losses of $4 million for the same period in 2017, partially offset by an increase in marketing expenses;interest expense due to LIBOR rates increases and
$5 a $2 million relatedwrite off of financing costs to the losses on the early extinguishment of debt primarilyinterest expense as a result of the refinancing transaction completed during the first quartertransactions in February of 2017.
The expense increases were partially offset by:2018.
a $42Losses from equity investments were $2 million net decrease in interest expenseduring the first half of 2018 primarily related to $127 million forcosts associated with the nine months ended September 30, 2017 from $169 million for the nine months ended September 30, 2016. Mark-to-market adjustments for our interest rate swaps resulted in lossesramp up of $4 million for the nine months ended September 30, 2017operations of Guaranteed Rate Affinity compared to losses from equity investments of $40$3 million during the first half of 2017 primarily related to the recognition of certain exit costs at PHH Home Loans.
During the first half of 2018, we incurred $36 million of restructuring costs primarily related to the Company's restructuring program related to leadership realignment and other restructuring activities, which began in the same periodfirst quarter of 2016. Before the mark-to-market adjustments for our interest rate swaps, interest expense decreased $62018, compared to $7 million to $123 million for the nine months ended September 30, 2017 from $129 million for the nine months ended September 30, 2016 as a result of a reduction in total outstanding indebtedness and a lower weighted average interest rate;
a $21 million decrease in restructuring costs related to the Company's business optimization initiatives in the first half of 2017. The Company expects to incur an additional $14 million related to the current restructuring plan (seebringing the estimated total cost of the plan to $48 million. See Note 6, "Restructuring Costs", in the Condensed Consolidated Financial Statements for additional information); and
an $11 million increase in the net benefit of former parent legacy items primarily as a result of the settlement of a Cendant legacy tax matter.
Earnings from equity investments were $7 million for the nine months ended September 30, 2017 compared to $10 million for the nine months ended September 30, 2016. The $3 million decrease in earnings is primarily due to:
a $4 million decrease in equity earnings at TRG primarily related to costs associated with the start up of operations of Guaranteed Rate Affinity, including $1 million of amortization of intangible assets recorded in purchase accounting.
The decrease in equity earnings was partially offset by:
a $1 million increase in equity earnings at NRT as a result of $14 million of earnings from the first two phases of the sale of PHH Home Loans' assets to Guaranteed Rate Affinity, partially offset by $5 million of exit costs. In addition, there was a $8 million decrease in earnings due to lower operating results as a result of lower origination volume, compressed industry margins and lower results due to the level of organizational change associated with the transition of the operations to Guaranteed Rate Affinity.information.
The Company's provision for income taxes in interim periods is computed by applying its estimated annual effective tax rate against the income or loss before income taxes for the period. In addition, non-recurring or discrete items are recorded in the period in which they occur. The provision for income taxes was $131$33 million for the ninesix months ended SeptemberJune 30, 20172018 compared to $114$64 million for the ninesix months ended SeptemberJune 30, 2016.2017. Our federal and state blended statutory rate is estimated to be 40%27% for 20172018 and our full year effective tax rate is estimated to be 41%30%. Our effective tax rate was 42%37% and 44% for both the ninesix months ended SeptemberJune 30, 2018 and June 30, 2017, and September 30, 2016.respectively. The effective tax rate in each reporting period was primarily impacted by a discrete item related to equity awards for which the market value at vesting was lower than at the date of grant. There were no changes to the net benefit recorded during the year ended December 31, 2017 relating to the 2017 Tax Act which was a provisional amount that reflected the Company’s reasonable estimate at the time.
The following table reflects the results of each of our reportable segments during the ninesix months ended SeptemberJune 30, 20172018 and 2016:2017:
| | | | Revenues (a) | | % Change | | EBITDA (b) | | % Change | | EBITDA Margin | | Change | Revenues (a) | | $ Change | | % Change | | Operating EBITDA (b) | | $ Change | | % Change | | Operating EBITDA Margin | | Change |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 | |
| RFG | $ | 631 |
| | $ | 593 |
| | 6 | % | | $ | 427 |
| | $ | 394 |
| | 8 | % | | 68 | % | | 66 | % | | 2 |
| $ | 413 |
| | $ | 407 |
| | $ | 6 |
| | 1 | % | | $ | 278 |
| | $ | 269 |
| | $ | 9 |
| | 3 | % | | 67 | % | | 66 | % | | 1 |
|
| NRT | 3,556 |
| | 3,340 |
| | 6 |
| | 113 |
| | 131 |
| | (14 | ) | | 3 |
| | 4 |
| | (1 | ) | 2,325 |
| | 2,289 |
| | 36 |
| | 2 |
| | 16 |
| | 57 |
| | (41 | ) | | (72 | ) | | 1 |
| | 2 |
| | (1 | ) |
| Cartus | 290 |
| | 308 |
| | (6 | ) | | 65 |
| | 74 |
| | (12 | ) | | 22 |
| | 24 |
| | (2 | ) | 184 |
| | 179 |
| | 5 |
| | 3 |
| | 33 |
| | 28 |
| | 5 |
| | 18 | | 18 |
| | 16 |
| | 2 |
|
| TRG | 431 |
| | 424 |
| | 2 |
| | 49 |
| | 49 |
| | — |
| | 11 |
| | 12 |
| | (1 | ) | 282 |
| | 277 |
| | 5 |
| | 2 |
| | 25 |
| | 28 |
| | (3 | ) | | (11) | | 9 |
| | 10 |
| | (1 | ) |
| Corporate and Other | (238 | ) | | (225 | ) | | * |
| | (70 | ) | | (60 | ) | | * |
| | | | | | | (155 | ) | | (156 | ) | | 1 |
| | * | | (42 | ) | | (52 | ) | | 10 |
| | * | | | | | | |
| Total Company | $ | 4,670 |
| | $ | 4,440 |
| | 5 | % | | $ | 584 |
| | $ | 588 |
| | (1 | )% | | 13 | % | | 13 | % | | — |
| $ | 3,049 |
| | $ | 2,996 |
| | $ | 53 |
| | 2 | % | | $ | 310 |
| | $ | 330 |
| | $ | (20 | ) | | (6 | %) | | 10 | % | | 11 | % | | (1 | ) |
| Less: Depreciation and amortization (c) | Less: Depreciation and amortization (c) | | 150 |
| | 149 |
| | | | | | | | | Less: Depreciation and amortization (c) | | 99 |
| | 99 |
| | | | | | | | | | |
| Interest expense, net | Interest expense, net | | 127 |
| | 169 |
| | | | | | | | | Interest expense, net | | 79 |
| | 86 |
| | | | | | | | | | |
| Income tax expense | Income tax expense | | 131 |
| | 114 |
| | | | | | | | | Income tax expense | | 33 |
| | 64 |
| | | | | | | | | | |
| Restructuring costs, net (d) | | Restructuring costs, net (d) | | 36 |
| | 7 |
| | | | | | | | | | |
| Former parent legacy benefit, net (e) | | Former parent legacy benefit, net (e) | | — |
| | (11 | ) | | | | | | | | | | |
| Loss on the early extinguishment of debt (e) | | Loss on the early extinguishment of debt (e) | | 7 |
| | 4 |
| | | | | | | | | | |
| Net income attributable to Realogy Holdings and Realogy Group | Net income attributable to Realogy Holdings and Realogy Group | | $ | 176 |
| | $ | 156 |
| | | | | | | | | Net income attributable to Realogy Holdings and Realogy Group | | $ | 56 |
| | $ | 81 |
| | | | | | | | | | |
_______________
| |
| (a) | Includes the elimination of transactions between segments, which consists of intercompany royalties and marketing fees paid by NRT of $238$155 million and $225$156 million during the ninesix months ended SeptemberJune 30, 20172018 and September 30, 2016,2017, respectively. |
| |
| (b) | EBITDA for the nine months ended September 30, 2017 includesIncludes an $8 million expense related to the settlement of the Strader legal matter and $5 million related to losses onin the early extinguishment of debt, partially offset by a net benefit of $10 million of former parent legacy items in Corporate and Other and $9 million of restructuring charges discussed further below.segment for the six months ended June 30, 2017. |
EBITDA for the nine months ended September 30, 2016 includes $30 million of restructuring charges reflected above as follows: $15 million in NRT, $6 million in Corporate and Other, $4 million in Cartus and $4 million in RFG, and a net cost of $1 million of former parent legacy items included in Corporate and Other.
| |
| (c) | Depreciation and amortization for the ninesix months ended SeptemberJune 30, 20172018 includes $1$2 million of amortization expense related to Guaranteed Rate Affinity's purchase accounting included in the "Equity in earnings(earnings) losses of unconsolidated entities" line on the Condensed Consolidated Statement of Operations. |
| |
| (d) | Restructuring charges incurred for the six months ended June 30, 2018 include $2 million at RFG, $21 million at NRT, $9 million at Cartus, $2 million at TRG and $2 million at Corporate and Other. Restructuring charges incurred for the six months ended June 30, 2017 include $1 million at RFG and $6 million at NRT. |
| |
| (e) | Former parent legacy items and loss on the early extinguishment of debt are recorded in the Corporate and Other segment. |
As described in the aforementioned table, Operating EBITDA margin for "Total Company" expressed as a percentage of revenues remained flat at 13%decreased 1 percentage point to 10% from 11% for the ninesix months ended SeptemberJune 30, 20172018 compared to the same
period in 2016.2017. On a segment basis, RFG's margin increased 21 percentage pointspoint to 68%67% from 66% primarily due to an increase in homesale transaction volumethird-party domestic franchisee royalty revenue and lower restructuringa decrease in employee related costs. NRT's margin decreased 1 percentage point to 3%1% from 4%2% primarily due to higher sales commission percentages paid to its independent sales associates offset by lower restructuring costs foragents during the nine months ended September 30, 2017first half of 2018 compared to the same period in 2016.2017 and the impact of lower closing volume in our new development business, which typically has higher margins. Cartus' margin decreasedincreased 2 percentage points to 22%18% from 24%16% primarily due to lower internationalan increase in affinity revenue and lower foreign currency exchange rate gains, partially offset by lowera decrease in employee related costs during nine months ended the September 30, 2017 compared to the same period in 2016 and the absenceas a result of restructuring costs incurred during the nine months ended September 30, 2016.cost savings initiatives. TRG's margin decreased 1 percentage point to 11%9% from 12% for the nine months ended September 30, 2017 compared to the same period10% primarily as a result of an increase in 2016personnel and operating costs, which were primarily due to a decreasean increase in earnings from equity investments primarily related to costs associated with the transitionunderwriter revenue and start up of operations of Guaranteed Rate Affinity, partially offset by the reversal of a legal reserve.market expansion.
Corporate and Other Operating EBITDA for the ninesix months ended SeptemberJune 30, 2017 declined2018 improved $10 million to negative $70$42 million primarily due to the absence of an $8 million expense related to the settlement of the Strader legal matter $5during the second quarter of 2017.
Real Estate Franchise Services (RFG)
Revenues increased $6 million relatedto $413 million and Operating EBITDA increased $9 million to $278 million for the six months ended June 30, 2018 compared with the same period in 2017.
The increase in revenue was driven by a $6 million increase in third-party domestic franchisee royalty revenue primarily due to a 5% increase in homesale transaction volume and a $3 million increase in international revenues. These increases were partially offset by a $2 million increase in non-standard incentives.
RFG revenue includes intercompany royalties received from NRT of $149 million and $148 million during the six months ended June 30, 2018 and 2017, respectively, which are eliminated in consolidation against the expense reflected in NRT's segment results.
The $9 million increase in Operating EBITDA was principally due to the losses$6 million increase in revenues discussed above and a $3 million decrease in employee related costs.
Company Owned Real Estate Brokerage Services (NRT)
Revenues increased $36 million to $2,325 million and Operating EBITDA decreased $41 million to $16 million for the six months ended June 30, 2018 compared with the same period in 2017.
The revenue increase of $36 million was comprised of a $21 million increase in commission income earned on homesale transactions by our existing brokerage operations, despite a decrease in revenue from our new development business, and a $15 million increase in commission income earned from acquisitions. The increase was primarily driven by a 2% increase in homesale transaction volume due to NRT's average homesale price increase of 2%. This is due to lower inventory of homes for sale and NRT’s strategic recruiting efforts. The increase in price was partially offset by lower closing volume in NRT's new development business and lower transaction volume in the early extinguishmentNew York metropolitan market, each of debtwhich are generally at a higher price point.
Operating EBITDA decreased $41 million primarily due to:
a $79 million increase in commission expenses paid to independent sales agents from $1,575 million for the six months ended June 30, 2017 to $1,654 million for the six months ended June 30, 2018. The $79 million increase is comprised of a $69 million increase in commission expense due to our existing brokerage operations as a result of the refinancingimpact of initiatives focused on growing and retaining our productive independent sales agent base and higher homesale transaction duringvolume including a shift in mix in 2018 to lower closing volume in the first quarter of 2017, new development business, which typically has lower commission expense compared to traditional brokerage operations, as well as a $10 million increase in commission expense related to acquisitions; and
a $10 million increase in other costs due to professional fees supporting strategic initiatives andincluding a $3 million increase in occupancy costs, a $3 million increase in outsourcing costs and a $6$2 million increase in employee costs due to higher employee incentive accruals and investments in technology development. earn-out costs.
These expensesOperating EBITDA decreases were partially offset by an $11by:
the $36 million increase in the net benefit of former parent legacy itemsrevenues discussed above;
a $10 million decrease in employee related costs primarily as a result of the settlement of a Cendant legacy tax matterdue to lower incentive accruals; and
the absence of $6$4 million in restructuring charges incurred duringlosses from our equity method investment in PHH Home Loans for the ninesix months ended SeptemberJune 30, 2016.2017.
EBITDA before restructuring charges was $593 million for the nine months ended September 30, 2017 compared to $618 million for the nine months ended September 30, 2016. EBITDA before restructuring charges by reportable segment for the nine months ended September 30, 2017 was as follows:
|
| | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | |
| | 2017 | | 2016 | | |
| | EBITDA | | Restructuring Charges | | EBITDA Before Restructuring | | EBITDA Before Restructuring | | %
Change |
| RFG | $ | 427 |
| | $ | 1 |
| | $ | 428 |
| | $ | 398 |
| | 8 | % |
| NRT | 113 |
| | 8 |
| | 121 |
| | 146 |
| | (17 | ) |
| Cartus | 65 |
| | — |
| | 65 |
| | 78 |
| | (17 | ) |
| TRG | 49 |
| | — |
| | 49 |
| | 50 |
| | (2 | ) |
| Corporate and Other | (70 | ) | | — |
| | (70 | ) | | (54 | ) | | * |
|
| Total Company | $ | 584 |
| | $ | 9 |
| | $ | 593 |
| | $ | 618 |
| | (4 | %) |
_______________
The following table reflects RFG and NRT results on a combined basis for the nine months ended September 30, 2017 and 2016. The EBITDA before restructuring margin for the combined segments decreased 1 percentage point to 14% from 15% due primarily to higher sales commission percentages paid to NRT's independent sales associates:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Revenues (a) | | % Change | | EBITDA Before Restructuring (b) | | % Change | | Margin | | Change |
| | 2017 | | 2016 | | | 2017 | | 2016 | | | 2017 | | 2016 | |
| RFG and NRT Combined | $ | 3,949 |
| | $ | 3,708 |
| | 6 | % | | $ | 549 |
| | $ | 544 |
| | 1 | % | | 14 | % | | 15 | % | | (1 | ) |
_______________ | |
(a) | Excludes transactions between segments, which consists of intercompany royalties and marketing fees paid by NRT to RFG of $238 million and $225 million during the nine months ended September 30, 2017 and 2016, respectively. |
| |
(b) | EBITDA for the combined RFG and NRT segments excludes $9 million and $19 million of restructuring charges for the nine months ended September 30, 2017 and 2016, respectively.
|
Real Estate FranchiseRFG and NRT on a Combined Basis
The following table reflects RFG and NRT 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 2 percentage points from 13% to 11% primarily due to higher sales commission percentages paid to independent sales agents affiliated with NRT and the impact of lower closing volume in NRT's 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 | |
| RFG (a) | $ | 258 |
| | $ | 251 |
| | $ | 7 |
| | 3 | % | | $ | 123 |
| | $ | 113 |
| | $ | 10 |
| | 9 | % | | 48 | % | | 45 | % | | 3 |
|
| NRT (a) (b) | 2,325 |
| | 2,289 |
| | 36 |
| | 2 |
| | 171 |
| | 213 |
| | (42 | ) | | (20 | ) | | 7 |
| | 9 |
| | (2 | ) |
| RFG and NRT Combined | $ | 2,583 |
| | $ | 2,540 |
| | $ | 43 |
| | 2 | % | | $ | 294 |
| | $ | 326 |
| | $ | (32 | ) | | (10 | %) | | 11 | % | | 13 | % | | (2 | ) |
| |
| (a) | The RFG and NRT segment numbers noted above do not reflect the impact of intercompany royalties and marketing fees paid by NRT to RFG of $155 million and $156 million during the six months ended June 30, 2018 and June 30, 2017, respectively. |
| |
| (b) | NRT Operating EBITDA includes $4 million of equity losses from PHH Home Loans for the six months ended June 30, 2017. |
Relocation Services (RFG)(Cartus)
Revenues increased $38$5 million to $631$184 million and Operating EBITDA increased $33$5 million to $427$33 million for the ninesix months ended SeptemberJune 30, 20172018 compared with the same period in 2016.2017.
The increase in revenue was driven by a $12Revenues increased $5 million increase in third-party domestic franchisee royalty revenue due to a 6% increase in the average homesale price and a 1% increase in the number of homesale transactions, partially offset by a lower net effective royalty rate. Revenue also increased due to a $12 million increase in royalties received from NRTprimarily as a result of volume increases at NRT, a $4 million increase in otheraffinity revenue primarily due to other marketing related activities and brand conferences and franchisee events anda $3 million increase in international revenues. Brand marketingother revenue and related expense both increased $6 million primarily due to the level of advertising spending during the nine months ended September 30, 2017 compared to the same periodhigher volume, partially offset by a $2 million decrease in 2016.other referral revenue.
The intercompany royalties received from NRT of $229Operating EBITDA increased $5 million and $217 million during the nine months ended September 30, 2017 and September 30, 2016, respectively, are eliminated in consolidation to avoid the revenue from being double counted in NRT and RFG. See "Company Owned Real Estate Brokerage Services" forprimarily as a discussionresult of the drivers related to intercompany royalties paid to RFG.
The $33 million increase in EBITDA was principally due to the $38$5 million increase in revenues discussed above and a $3$5 million decrease in restructuringemployee related costs incurred in the first nine months of 2017 comparedprimarily due to the same period in 2016,cost savings initiatives, partially offset by a $6 million increase in brand marketing expense discussed above and a $1 million increase in expenses related to the brand conferences and franchisee events.
Company Owned Real Estate Brokerage Services (NRT)
Revenues increased $216 million to $3,556 million and EBITDA declined $18 million to $113 million for the nine months ended September 30, 2017 compared with the same period in 2016.
The revenue increase of $216 million was comprised of a $151 million increase in commission income earned on homesale transactions by our existing brokerage operations and a $65 million increase in commission income earned from acquisitions. The revenue increase was driven by a 2% increase in the number of homesale transactions and a 6% increase in the average price of homes, partially offset by a 2 basis points decrease in the average broker commission rate as well as a negative impact on homesale transaction volume attributable to the market disruption in Texas and Florida due to hurricanes during the third quarter of 2017. We believe our positive revenue growth is attributable to the recruiting and organic growth focus by NRT management as well as a shift from stabilization to sustained growth in the high end of the housing market. The improvement in the high end of the housing market had an adverse impact on the average homesale broker commission rate. In addition, homesale price is continuing to increase due to continued constrained inventory levels across the lower and mid price points in the markets served by NRT.
EBITDA decreased $18 million primarily due to:
a $206 million increase in commission expenses paid to independent sales associates from $2,256 million for the nine months ended September 30, 2016 to $2,462 million for the nine months ended September 30, 2017. The increase in commission expense is due to an increase of $166 million by our existing brokerage operations due to the impact of initiatives focused on growing and retaining our productive independent sales associate base and higher homesale transaction volume, as well as a $40 million increase related to acquisitions. The $206 million increase in commission expense was impacted by the mix of business as approximately 46% of the increase was due to higher homesale transaction volume in the west region where we pay a greater proportion of commissions to independent sales associates;
a $14 million increase in other costs including occupancy costs of which $6 million related to acquisitions;
a $12 million increase in royalties paid to RFG from $217 million for the nine months ended September 30, 2016 to $229 million for the nine months ended September 30, 2017;
a $6 million increase in employee-related costs due to a $12 million increase attributable to acquisitions offset by a $6 million decrease due to expense reduction initiatives; and
a $6 million increase in marketing expenses of which $3 million related to acquisitions.
These EBITDA decreases were partially offset by:
a $216 million increase in revenues discussed above;
a $7 million decrease in restructuring costs incurred during the nine months ended September 30, 2017 compared to the same period in 2016; and
a $1 million increase in earnings for our equity method investment in PHH Home Loans for the nine months ended September 30, 2017 compared to the same period in 2016 as a result of $14 million of earnings from the first two phases of the sale of PHH Home Loans' assets to Guaranteed Rate Affinity partially offset by $5 million of exit costs. In addition, there was a $8 million decrease in earnings due to lower operating results as a result of lower origination volume, compressed industry margins and lower results due to the level of organizational change associated with the transition of the operations to Guaranteed Rate Affinity.
Relocation Services (Cartus)
Revenues decreased $18 million to $290 million and EBITDA decreased $9 million to $65 million for the nine months ended September 30, 2017 compared with the same period in 2016.
Revenues decreased $18 million primarily as a result of an $10 million decrease in international revenue as a result of an increasingly higher percentage of clients reducing their global relocation activity, as well as an $8 million decrease in other revenue due to lower volume.
EBITDA decreased $9 million primarily as a result of the $18 million decrease in revenues discussed above and a $3 million net negative impact from foreign currency exchange rates partially offset by a $5 million decrease in employee related costs, the absence of $4 million of restructuring costs incurred during the nine months ended September 30, 2016 and a $2 million decrease in other operating expenses as a result of lower volume.on expenses.
Title and Settlement Services (TRG)
Revenues increased $7$5 million to $431$282 million and Operating EBITDA remained flat at $49decreased $3 million to $25 million for the ninesix months ended SeptemberJune 30, 20172018 compared with the same period in 2016.2017.
The increase in revenues was driven byRevenues increased as a $24result of an $8 million increase in resale revenue due to an increase in averages fees, as well as a $5 million increase in underwriter revenue due to an increase of which $16 million was related to acquisitions,underwriter premiums, partially offset by a $9$7 million decrease in refinancing revenue and a $5 million decrease of underwriter revenue due to an overall decrease in activity in the refinance market in the third quarter of 2017.market.
Operating EBITDA remained flatdecreased $3 million as a result of an increase of $11$8 million in employee-related costs primarily relateddue to acquisitions,an increase in underwriter revenue and a $3$1 million decrease in earnings from equity investments primarily related to costs associated with the startramp up of operations of Guaranteed Rate Affinity and a $2 million increase in other costs during the nine months ended September 30, 2017 compared with the same period in 2016. The decreases werefirst quarter of 2018, partially offset by the $7$5 million increase in revenues discussed above, a $7 million decrease in variable operating costs primarily due to lower refinancing and underwriter volume and $2 million related to the reversalabove.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Financial Condition
| | | | September 30, 2017 | | December 31, 2016 | | Change | June 30, 2018 | | December 31, 2017 | | Change |
| Total assets | $ | 7,521 |
| | $ | 7,421 |
| | $ | 100 |
| $ | 7,491 |
| | $ | 7,337 |
| | $ | 154 |
|
| Total liabilities | 5,056 |
| | 4,952 |
| | 104 |
| 5,049 |
| | 4,715 |
| | 334 |
|
| Total equity | 2,465 |
| | 2,469 |
| | (4 | ) | 2,442 |
| | 2,622 |
| | (180 | ) |
For the ninesix months ended SeptemberJune 30, 2017,2018, total assets increased $100$154 million primarily due to a $74 million increase in cash and cash equivalents, a $45$158 million increase in trade and relocation receivables due to seasonal increases in volume and a $29$68 million increase in other non-current assets primarily due to higherthe adjustment to prepaid expenses andas a result of the adoption of the new revenue standard related to commissions paid to Realogy franchise sales employees, an increase in interest rate swaps, an increase in long-term investments and a $14 millionan increase in goodwill from acquisitions.deferred financing costs related to the debt transactions that occurred during the first quarter of 2018. These increases were partially offset by a $72$49 million net decrease in franchise agreements and other amortizable intangible assets primarily due to amortization.amortization, a $23 million decrease in other current assets and a $6 million decrease in property and equipment.
Total liabilities increased $104$334 million due to a $129$252 million increase in deferred tax liabilities,corporate debt primarily due to additional borrowings under the Revolving Credit Facility, a $29$67 million increase in securitization obligations, a $12$44 million increase in other non-current liabilities primarily due to deferred income for area development fees for international transactions as a result of the adoption of the new revenue standard, a $22 million increase in accounts payable and a $7$14 million increase in deferred tax liabilities. These increases were partially offset by a $65 million decrease in accrued expenses and other current liabilities partially offset by a $32 million decrease in other non-current liabilities due to interest rate swaps and liabilities related to contingent consideration from acquisitions, a $31 million decrease in corporate debt primarily due to amortization payments on the term loan facilities and a $10 million decrease in the due to former parent liability primarily as a resultpayment of the resolution of a Cendant legacy tax matter.
annual bonuses.
Total equity decreased $4$180 million primarily due to a $182$212 million decrease in additional paid in capital, primarily related to the Company's repurchase of $180$200 million of common stock and $37$23 million of dividend payments, partially offset by stock-based compensation activity of $34$11 million. The decrease in additional paid in capitaltotal equity was mostlypartially offset by a $43 million increase which consists of net income of $176$56 million for the ninesix months ended SeptemberJune 30, 2017.2018 partially offset by $13 million due to the cumulative impact of adopting new accounting standards.
Liquidity and Capital Resources
Our primary liquidity needs have been to service our debt and finance our working capital and capital expenditures, which we have historically satisfied with cash flows from operations and funds available under our revolving credit facilitiesRevolving Credit Facility and securitization facilities. In January 2017,February 2018, the Company increased the borrowing capacity under its Revolving Credit Facility from $815$1,050 million to $1,050 million.$1,400 million and extended the maturities of the Revolving Credit Facility, Term Loan A and Term Loan B.
We intend to use future cash flow primarily to acquire stock under our share repurchase program, pay dividends, fund acquisitions, enter into strategic relationships and reduce indebtedness. In February 2016,2018, the Company's Board of Directors authorized a share repurchase program of up to $275 million of the Company’s common stock. In February 2017, our Board authorized a new share repurchase program of up to an additional $300$350 million of the Company'sCompany’s common stock.stock which was incremental to the remaining authorization under the share repurchase program authorized in 2017. Repurchases under these programs may be made at management's discretion from time to time on the open market, pursuant to Rule 10b5-1 trading plans or privately negotiated transactions. The size and timing of these repurchases will depend on price, market and economic conditions, legal and contractual requirements and other factors. The repurchase programs have no time limit and may be suspended or discontinued at any time.
As of SeptemberJune 30, 2017,2018, the Company hadhas repurchased and retired 1324.3 million shares of common stock for an aggregate of $275$674 million under the February 2016 share repurchase program and $102 million under the February 2017 share repurchase programprograms at a total weighted average market price of $29.07$27.80 per share.
Included in the 1324.3 million shares of common stock repurchased to date, the Company repurchased 5.94.1 million shares of common stock for $178$101 million at a weighted average market price of $30.40$24.94 per share during the first nine monthssecond quarter of 2017.2018. As of SeptemberJune 30, 2017, approximately $1982018, $251 million of authorization remainsremained available for the repurchase of shares under the February 20172018 share repurchase program.
During the period OctoberJuly 1, 20172018 through NovemberAugust 1, 2017,2018, we repurchased an additional 0.50.9 million shares at a weighted average market price of $33.11.$23.24 per share. Giving effect to these repurchases, we had approximately $181$231 million of remaining capacity authorized under the February 20172018 share repurchase program as of NovemberAugust 1, 2017.2018.
In April 2007, the Company established a standby irrevocable letter
Beginning in accordance with the Separation and Distribution Agreement. The letter of credit was utilized to support the Company’s payment obligations with respect to its share of Cendant contingent and other corporate liabilities. In September 2017, the standby irrevocable letter of credit was terminated pursuant to the governing agreement as the aggregate value of the Cendant contingent and other liabilities fell below $30 million with the resolution of a Cendant legacy tax matter in the third quarter of 2017, reducing the capacity and outstanding letters of credit under the Unsecured Letter of Credit Facility. At September 30, 2017, the aggregate value of the former parent contingent liabilities was $18 million.
We alsoAugust 2016, we initiated and paid a quarterly cash dividend of $0.09 per share in August 2016 and paid $0.09 per share cash dividends in every subsequent quarter. During the first nine monthshalf of 2017,2018, we returned $37$23 million to stockholders through the payment of cash dividends.dividend payments. The declaration and payment of any future dividend will be subject to the discretion of the Board of Directors and will depend on a variety of factors, including the Company’s financial condition and results of operations, contractual restrictions including(including restrictive covenants contained in the Company’s credit agreement,agreements, and the indentureindentures governing the Company’s outstanding debt securities,securities), capital requirements and other factors that the Board of Directors deems relevant.
We may also from time to time seek to repurchase our outstanding notes through tender offers, open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.
We are currently experiencing growth in the residential real estate market; however, ifIf the residential real estate market or the economy as a whole does not continue to improve or weakens, our business, financial condition and liquidity may be materially adversely affected, including our ability to access capital and grow our business.
Historically, operating results and revenues for all of our businesses have been strongest in the second and third quarters of the calendar year. A significant portion of the expenses we incur in our real estate brokerage operations are related to
marketing activities and commissions and therefore, are variable. However, many of our other expenses, such as interest payments, facilities costs and certain personnel-related costs, are fixed and cannot be reduced during athe seasonal slowdown.fluctuations in the business. Consequently, our debt balances are generally at their highest levels at or around the end of the first quarter of every year.
Our liquidity position has significantly improved but continues to be impacted by our remaining interest expense and would be adversely impacted by: (i)by stagnation or a downturn of the residential real estate market (ii)or a significant increase in LIBOR or ABR, or (iii) our inability to access our relocation securitization programs.ABR.
We will continue to evaluate potential refinancing and financing transactions. 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. There can be no assurance that financing will be available to us on acceptable terms or at all.
Cash Flows
At SeptemberJune 30, 2017,2018, we had $348$239 million of cash, and cash equivalents and restricted cash, an increase of $74$5 million compared to the balance of $274$234 million at December 31, 2016.2017. The following table summarizes our cash flows for the ninesix months ended SeptemberJune 30, 20172018 and 2016:2017:
| | | | Nine Months Ended September 30, | Six Months Ended June 30, |
| | 2017 | | 2016 | | Change | 2018 | | 2017 | | Change |
| Cash provided by (used in): | | | | | | | | | | |
| Operating activities | $ | 444 |
| | $ | 411 |
| | $ | 33 |
| $ | 9 |
| | $ | 186 |
| | $ | (177 | ) |
| Investing activities | (96 | ) | | (163 | ) | | 67 |
| (45 | ) | | (56 | ) | | 11 |
|
| Financing activities | (276 | ) | | (438 | ) | | 162 |
| 42 |
| | (186 | ) | | 228 |
|
| Effects of change in exchange rates on cash and cash equivalents | 2 |
| | (1 | ) | | 3 |
| |
| Net change in cash and cash equivalents | $ | 74 |
| | $ | (191 | ) | | $ | 265 |
| |
| Effects of change in exchange rates on cash, cash equivalents and restricted cash | | (1 | ) | | 1 |
| | (2 | ) |
| Net change in cash, cash equivalents and restricted cash | | $ | 5 |
| | $ | (55 | ) | | $ | 60 |
|
For the ninesix months ended SeptemberJune 30, 2017, $332018, $177 million moreless cash was provided by operating activities compared to the same period in 2016.2017. The change was principally due to $14$85 million of additionalless cash provided by the net change in relocation and trade receivables, $81 million less cash provided by operating results $15and $24 million lessmore cash used for accounts payable, accrued expenses and other liabilities, and $19 million more cash received as dividends from unconsolidated entities primarily from PHH Home Loans, partially offset by $13$11 million moreless cash used due to an increase infor other assets.
For the ninesix months ended SeptemberJune 30, 2017,2018, we used $67$11 million less cash for investing activities compared to the same period in 20162017 primarily due to $82$19 million of net cash proceeds received from the dissolution of our interest in PHH Home Loans, LLC and $3 million less cash used for acquisition related payments, and $22 million more cash provided by other investing activities, partially offset by $34 million of cash used for our investment in Guaranteed Rate Affinity and $8$12 million more cash used for property and equipment additions.investment in unconsolidated entities.
For the ninesix months ended SeptemberJune 30, 2017, $2762018, $42 million of cash was used forprovided by financing activities compared to $438$186 million of cash used during the same period in 2016.2017. For the ninesix months ended SeptemberJune 30, 2017, $2762018, $42 million of cash was used for:provided by:
$180242 million of additional borrowings under the Revolving Credit Facility; and
$67 million net increase in securitization borrowings;
partially offset by,
$200 million for the repurchase of our common stock;
$3723 million of dividend payments;
$3117 million of other financing payments primarily related to capital leases;
$10 million of tax payments related to net share settlement for stock-based compensation;
$10 million of quarterly amortization payments on the term loan facilities;
$194 million for payments of contingent consideration; 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.
For the six months ended June 30, 2017, $186 million of cash was used for:
$121 million for the repurchase of our common stock;
$25 million of dividend payments;
$21 million of quarterly amortization payments on the term loan facilities;
$10 million repayment of borrowings under the Revolving Credit Facility;
$10 million of tax payments related to net share settlement for stock-based compensation;
$10 million of other financing payments primarily related to capital leases and interest rate swaps;
$186 million of debt issuance costs; and
$4 million for payments of contingent consideration;
$11 million of tax payments related to net share settlement for stock-based compensation;
$10 million repayment of borrowings under the Revolving Credit Facility; and
$6 million of debt issuance costs;
partially offset by
a $29 million net decrease in securitization borrowings; and
•$7 million proceeds from exercise of stock options.
For the nine months ended September 30, 2016, $438 million of cash was used for financing activities as a result of:
the repayment of $758 million to reduce the Term Loan B facility;
the repayment of $500 million to retire the 3.375% Senior Notes at maturity;
the net repayment of $45 million of borrowings under the Revolving Credit Facility;
$134 million for the purchase of our common stock;
$31 million of amortization payments on the term loan facilities;
$23 million for payments of contingent consideration; and
$28 million of other financing payments partially related to capital leases and interest rate swaps;
$15 million of debt issuance costs;
$13 million of dividend payments; and
$6 million of tax payments related to net share settlement for stock-based compensation;
partially offset by,
$750 million of proceeds from the issuance of $250 million of 5.25% Senior Notes and $500 million of 4.875% Senior Notes;
$355 million of proceeds from issuance of the Term Loan A-1 facility; and
a $9 an $18 million net increase in securitization borrowings.
Financial Obligations
Indebtedness Table
As of SeptemberJune 30, 2017,2018, the Company’s borrowing arrangements were as follows:
| | | | Interest
Rate | | Expiration
Date | | Principal Amount | | Unamortized Discount and Debt Issuance Costs | | Net Amount | Interest
Rate | | Expiration
Date | | Principal Amount | | Unamortized Discount and Debt Issuance Costs | | Net Amount |
| Senior Secured Credit Facility: | | | | | | | | | | | | | | | | | | |
| Revolving Credit Facility (1) | (2) | | October 2020 | | $ | 190 |
| | $ * |
| | $ | 190 |
| (2) | | February 2023 | | $ | 312 |
| | $ * |
| | $ | 312 |
|
| Term Loan B | (3) | | July 2022 | | 1,086 |
| | 21 |
| | 1,065 |
| (3) | | February 2025 | | 1,075 |
| | 17 |
| | 1,058 |
|
| Term Loan A Facility: | | | | | | | | | | | | |
| Term Loan A | (4) | | October 2020 | | 397 |
| | 2 |
| | 395 |
| (4) | | February 2023 | | 745 |
| | 5 |
| | 740 |
|
| Term Loan A-1 | (5) | | July 2021 | | 344 |
| | 3 |
| | 341 |
| |
| Senior Notes | 4.50% | | April 2019 | | 450 |
| | 7 |
| | 443 |
| 4.50% | | April 2019 | | 450 |
| | 4 |
| | 446 |
|
| Senior Notes | 5.25% | | December 2021 | | 550 |
| | 4 |
| | 546 |
| 5.25% | | December 2021 | | 550 |
| | 3 |
| | 547 |
|
| Senior Notes | 4.875% | | June 2023 | | 500 |
| | 4 |
| | 496 |
| 4.875% | | June 2023 | | 500 |
| | 3 |
| | 497 |
|
| Securitization obligations: (6) | | | | | | | |
| Apple Ridge Funding LLC (7) | | June 2018 | | 223 |
| | * |
| | 223 |
| |
| Cartus Financing Limited (8) | | August 2018 | | 11 |
| | * |
| | 11 |
| |
| Total (9) | $ | 3,751 |
| | $ | 41 |
| | $ | 3,710 |
| |
| Securitization obligations: (5) | | | | | | | |
| Apple Ridge Funding LLC (6) | | | June 2019 | | 247 |
| | * |
| | 247 |
|
| Cartus Financing Limited (7) | | | August 2018 | | 14 |
| | * |
| | 14 |
|
| Total (8) | | Total (8) | $ | 3,893 |
| | $ | 32 |
| | $ | 3,861 |
|
_______________
| |
| * | 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 SeptemberJune 30, 2017,2018, the Company had $1,050$1,400 million of borrowing capacity under its Revolving Credit Facility leaving $860$1,088 million of available capacity. The revolving credit facilityRevolving Credit Facility expires in October 2020,February 2023, but is classified on the balance sheet as current due to the revolving nature of the facility. On NovemberAugust 1, 2017,2018, the Company had $70$270 million in outstanding borrowings under the Revolving Credit Facility, leaving $980$1,130 million of available capacity. |
| |
| (2) | Interest rates with respect to revolving loans under the Senior Secured Credit Facility at SeptemberJune 30, 20172018 were based on, at the Company's option, (a) adjusted London Interbank Offering Rate ("LIBOR") plus an additional margin or (b) JP Morgan Chase Bank, N.A.'s prime rate ("ABR") plus an additional margin, in each case subject to adjustment based on the then current senior secured leverage ratio. Based on the previous quarter senior secured leverage ratio, the LIBOR margin was 2.25% and the ABR margin was 1.25% for the three months ended June 30, 2018. |
| |
| (3) | The Term Loan B provides for quarterly amortization payments totaling 1% per annum of the original principal amount. The interest rate with respect to term loans under the Term Loan B is based on, at the Company’s option, (a) adjusted LIBOR plus 2.25% (with a LIBOR floor of 0.75%) or (b) ABR plus 1.25% (with an ABR floor of 1.75%). |
| |
| (4) | The Term Loan A provides for quarterly amortization payments, which commence on June 30, 2018, totaling per annum 2.5%, 2.5%, 5.0%, 7.5% and 10.0% of the original principal amount of the Term Loan A, with the last amortization payment to be made on February 8, 2023. The interest rates with respect to term loans under the Term Loan A are based on, at the Company's option, (a) adjusted LIBOR plus an additional margin or (b) ABR plus an additional margin, in each case subject to adjustment based on the then current senior secured leverage ratio. Based on the previous quarter senior secured leverage ratio, the LIBOR margin was 2.00%2.25% and the ABR margin was 1.00%1.25% for the three months ended SeptemberJune 30, 2017.2018. |
| |
(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) JPMorgan Chase Bank, N.A.’s prime rate ("ABR") plus 1.25% (with an ABR floor of 1.75%).
|
| |
(4) | The Term Loan A provides for quarterly amortization payments, which commenced March 31, 2016, totaling per annum 5%, 5%, 7.5%, 10.0% and 12.5% of the original principal amount of the Term Loan A in 2016, 2017, 2018, 2019 and 2020, respectively. The |
interest rates with respect to term loans under the Term Loan A are based on, at the Company's option, (a) adjusted LIBOR plus an additional margin or (b) ABR plus an additional margin, in each case subject to adjustment based on the then current senior secured leverage ratio. Based on the previous quarter senior secured leverage ratio, the LIBOR margin was 2.00% and the ABR margin was 1.00% for the three months ended September 30, 2017.
| |
| (5) | The Term Loan A-1 provides for quarterly amortization payments, which commenced on September 30, 2016, totaling per annum 2.5%, 2.5%, 5%, 7.5% and 10.0% of the original principal amount of the Term Loan A-1, with the last amortization payment made on June 30, 2021. The interest rates with respect to term loans under the Term Loan A-1 are based on, at the Company's option, (a) adjusted LIBOR plus an additional margin or (b) ABR plus an additional margin, in each case subject to adjustment based on the then current senior secured leverage ratio. Based on the previous quarter senior secured leverage ratio, the LIBOR margin was 2.00% and the ABR margin was 1.00% for the three months ended September 30, 2017. |
| |
(6) | Available capacity is subject to maintaining sufficient relocation related assets to collateralize these securitization obligations. |
| |
(7)(6) | In June 2017,2018, Realogy Group extended the existing Apple Ridge Funding LLC securitization program utilized by Cartus until June 2018.2019. As of SeptemberJune 30, 2017,2018, the Company had $325$250 million of borrowing capacity under the Apple Ridge Funding LLC securitization program leaving $102$3 million of available capacity. |
| |
(8)(7) | Consists of a £10 million revolving loan facility and a £5 million working capital facility. As of SeptemberJune 30, 2017,2018, the Company had $20 million of borrowing capacity under the Cartus Financing Limited securitization program leaving $9$6 million of available capacity. In September 2017, Realogy Group extended the existing Cartus Financing Limited securitization program to August 2018. |
| |
(9)(8) | Not included in this table is the Company's Unsecured Letter of Credit Facility which had a capacity of $74 million with $71$65 million utilized at a weighted average rate of 3.24% at SeptemberJune 30, 2017.2018. |
See Note 5, "Short and Long-Term Debt", to the Condensed Consolidated Financial Statements for additional information on the Company's indebtedness.
Covenants under the Senior Secured Credit Facility, Term Loan A Facility and Indentures
The Senior Secured Credit Facility, Term Loan A Facility, the Unsecured Letter of Credit Facility and the indentures governing the Unsecured Notes contain various covenants that limit (subject to certain exceptions) Realogy Group’s ability to, among other things:
incur or guarantee additional debt or issue disqualified stock or preferred stock;
pay dividends or make distributions to Realogy Group’s stockholders, including Realogy Holdings;
repurchase or redeem capital stock;
make loans, investments or acquisitions;
incur restrictions on the ability of certain of Realogy Group's subsidiaries to pay dividends or to make other payments to Realogy Group;
enter into transactions with affiliates;
create liens;
merge or consolidate with other companies or transfer all or substantially all of Realogy Group's and its material subsidiaries' assets;
transfer or sell assets, including capital stock of subsidiaries; and
prepay, redeem or repurchase subordinated indebtedness.
As a result of the covenants to which we remain subject, we are limited in the manner in which we conduct our business and we may be unable to engage in favorable business activities or finance future operations or capital needs. In addition, the Senior Secured Credit Facility and Term Loan A Facility require us to maintain a senior secured leverage ratio.
The senior secured leverage ratio is tested quarterly and may not exceed 4.75 to 1.00. The senior secured leverage ratio is measured by dividing Realogy's GroupRealogy Group's total senior secured net debt by the trailing twelve month EBITDA calculated on a Pro Forma Basis, as those terms are defined in the senior secured credit facilities. Total senior secured net debt does not include unsecured indebtedness, including the Unsecured Notes, or the securitization obligations. EBITDA calculated on a Pro Forma Basis, as defined in the senior secured credit facilities, includes adjustments to EBITDA for restructuring costs, former parent legacy cost (benefit) items, net, loss 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 SeptemberJune 30, 2017.
2018.
See Note 5, "Short and Long-Term Debt—Senior Secured Credit Facility" and "Short and Long-Term Debt—Term Loan A Facility" to the Condensed Consolidated Financial Statements for additional information.
Non-GAAP Financial Measures
The SEC has adopted rules to regulate the use in filings with the SEC and in public disclosures of "non-GAAP financial measures," such as EBITDA and Operating EBITDA. These measures are derived on the basis of methodologies other than in accordance with GAAP.
Operating EBITDA is defined by us as net income (loss) before depreciation and amortization, interest expense, net (other than relocation services interest for securitization assets and securitization obligations) and, income taxes, and is our primary non-GAAP measure. Operating EBITDA is defined by usother items that are not core to the operating activities of the Company such as EBITDA before restructuring losscharges, former parent legacy items, losses on the early extinguishment of debt, asset impairments, gains or losses on discontinued operations and former parent legacy items andgains or losses on the sale of investments or other assets. Operating EBITDA is used as a supplementary financialour primary non-GAAP measure.
We present EBITDA and Operating EBITDA because we believe they areit is useful as a supplemental measuresmeasure in evaluating the performance of our operating businesses and provideprovides greater transparency into our results of operations. Our management, including our chief operating decision maker, uses Operating EBITDA as a factor in evaluating the performance of our business. EBITDA and Operating EBITDA should not be considered in isolation or as a substitute for net income or other statement of operations data prepared in accordance with GAAP.
We believe Operating EBITDA facilitates company-to-company operating performance comparisons by backing out potential differences caused by variations in capital structures (affecting net interest expense), taxation, the age and book depreciation of facilities (affecting relative depreciation expense) and the amortization of intangibles, as well as other items that are not core to the operating activities of the Company such as restructuring charges, losses on the early extinguishment of debt, former parent legacy items, asset impairments, gains or losses on discontinued operations and gains or losses on the sale of investments or other assets, which may vary for different companies for reasons unrelated to operating performance. We further believe that Operating EBITDA is frequently used by securities analysts, investors and other interested parties in their evaluation of companies, many of which present an Operating EBITDA measure when reporting their results.
EBITDA and Operating EBITDA havehas limitations as an analytical tools,tool, and you should not consider EBITDA and Operating EBITDA either in isolation or as substitutesa substitute for analyzing our results as reported under GAAP. Some of these limitations are:
these measures dothis measure does not reflect changes in, or cash required for, our working capital needs;
these measures dothis measure does not reflect our interest expense (except for interest related to our securitization obligations), or the cash requirements necessary to service interest or principal payments on our debt;
these measures dothis measure does not reflect our income tax expense or the cash requirements to pay our taxes;
these measures dothis measure does not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments;
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often require replacement in the future, and these measures dothis measure does not reflect any cash requirements for such replacements; and
other companies may calculate these measuresthis measure differently so they may not be comparable.
Set forth in the table below is a reconciliation of net income attributable to Realogy to EBITDA and Operating EBITDA for the three-month periods ended September 30, 2017 and 2016:
|
| | | | | | | |
| | Three Months Ended |
| | September 30, 2017 | | September 30, 2016 |
| Net income attributable to Realogy | $ | 95 |
| | $ | 106 |
|
| Income tax expense | 67 |
| | 74 |
|
| Income before income taxes | 162 |
| | 180 |
|
| Interest expense, net | 41 |
| | 37 |
|
| Depreciation and amortization (a) | 51 |
| | 53 |
|
| EBITDA | 254 |
| | 270 |
|
| EBITDA adjustments: | | | |
| Restructuring costs | 2 |
| | 9 |
|
| Former parent legacy cost, net | 1 |
| | — |
|
| Loss on the early extinguishment of debt | 1 |
| | — |
|
| Operating EBITDA | $ | 258 |
| | $ | 279 |
|
| |
(a) | Depreciation and amortization for the three months ended September 30, 2017 includes $1 million of amortization expense related to Guaranteed Rate Affinity's purchase accounting included in the "Equity in earnings of unconsolidated entities" line on the Condensed Consolidated Statement of Operations. |
Contractual Obligations
See Note 5, "Short and Long-Term Debt—Senior Secured Credit Facility" and "Short and Long-Term Debt—Term Loan A Facility", to the Condensed Consolidated Financial Statements included elsewhere in this Report for a description of the Company's debt transactions which occurred during the first quarter of 2018. All other future contractual obligations as of SeptemberJune 30, 20172018 have not changed materially from the amounts reported in our 20162017 Form 10-K.
Critical Accounting Policies
In presenting our financial statements in conformity with generally accepted accounting principles, we are required to make estimates and assumptions that affect the amounts reported therein. Several of the estimates and assumptions we are required to make relate to matters that are inherently uncertain as they pertain to future events. However, events that are outside of our control cannot be predicted and, as such, they cannot be contemplated in evaluating such estimates and assumptions. If there is a significant unfavorable change to current conditions, it could result in a material adverse impact to our combined results of operations, financial position and liquidity. We believe that the estimates and assumptions we used when preparing our financial statements were the most appropriate at that time.
These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 20162017, which includes a description of our critical accounting policies that involve subjective and complex judgments that could potentially affect reported results.
Recently Issued Accounting Pronouncements
See Note 1, "Basis of Presentation", to the Condensed Consolidated Financial Statements for a discussion of recently issued accounting pronouncements.
Item 3. 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 SeptemberJune 30, 2017,2018, 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 AgreementFacility and the Term Loan A Facility. Given that our borrowings under the Senior Secured Credit AgreementFacility and Term Loan A Facility are generally based upon LIBOR, this rate will be the Company's primary market risk exposure for the foreseeable future. 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 SeptemberJune 30, 2017,2018, we had variable interest rate long-term debt fromoutstanding under our outstanding term loansSenior Secured Credit Facility and revolverTerm Loan A Facility of $2,017$2,132 million, which excludes $234$261 million of securitization obligations. The weighted average interest rate on the outstanding term loansamounts under our Senior Secured Credit Facility and revolverTerm Loan A Facility at SeptemberJune 30, 20172018 was 3.36%4.34%. The interest rate with respect to the Term Loan B is based on adjusted LIBOR plus 2.25% (with a LIBOR floor of 0.75%). The interest rates with respect to the Revolving Credit Facility and term loans under the Term Loan A Facility are based on adjusted LIBOR plus an additional margin subject to adjustment based on the current senior secured leverage ratio. Based on the SeptemberJune 30, 20172018 senior secured leverage ratio, the LIBOR margin was 2.00%2.25%. At SeptemberJune 30, 2017,2018, the one-month LIBOR rate was 1.23%2.09%; therefore, we have estimated that a 0.25% increase in LIBOR would have a $5 million impact on our annual interest expense.
We have entered into
As of June 30, 2018, we had interest rate swaps with a notional value of $1,475$1,600 million to manage a portion of our exposure to changes in interest rates associated with our $2,017$2,132 million of variable rate borrowings. Interest rates swaps with a notional value of $425 million expired on February 10, 2018. Our remaining interest rate swaps are as follows:
|
| | | |
| Notional Value (in millions) | | Commencement Date | Expiration Date |
$225600 | July 2012 | February 2018 |
$200 | January 2013 | February 2018 |
$600 | August 2015 | August 2020 |
| $450 | | November 2017 | November 2022 |
| $400 | (a) | August 2020 | August 2025 |
| $150 | (a) | November 2022 | November 2027 |
_______________
| |
| (a) | During the second quarter of 2018, the Company entered into four new forward starting interest rate swaps, two with a notional value of $125 million and two with a notional value of $150 million. |
The swaps help protect our outstanding variable rate borrowings from future interest rate volatility. The fixed interest rates on the swaps range from 2.07% to 2.89%3.11%. The Company had an asset of $12 million and a liability of $7 million for the fair value of the interest rate swaps of$24 million at SeptemberJune 30, 2017.2018. 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$14 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 4. Controls and Procedures.
Controls and Procedures for Realogy Holdings Corp.
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| (a) | Realogy Holdings Corp. ("Realogy Holdings") maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its filings under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to its management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Realogy Holdings' management, including the Chief Executive Officer and the Chief Financial Officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. |
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| (b) | As of the end of the period covered by this quarterly report on Form 10-Q, Realogy Holdings has carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that Realogy Holdings' disclosure controls and procedures are effective at the "reasonable assurance" level. |
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| (c) | There has not been any change in Realogy Holdings' internal control over financial reporting during the period covered by this quarterly report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting. |
Controls and Procedures for Realogy Group LLC
| |
| (a) | Realogy Group LLC ("Realogy Group") maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its filings under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to its management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Realogy Group's management, including the Chief Executive Officer and the Chief Financial Officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. |
forms of the Securities and Exchange Commission. Such information is accumulated and communicated to its management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Realogy Group's management, including the Chief Executive Officer and the Chief Financial Officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
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| (b) | As of the end of the period covered by this quarterly report on Form 10-Q, Realogy Group has carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that Realogy Group's disclosure controls and procedures are effective at the "reasonable assurance" level. |
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| (c) | There has not been any change in Realogy Group's internal control over financial reporting during the period covered by this quarterly report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting. |
Other Financial Information
The Condensed Consolidated Financial Statements as of SeptemberJune 30, 20172018 and for the three and nine-monthsix-month periods ended SeptemberJune 30, 20172018 and 20162017 have been reviewed by PricewaterhouseCoopers LLP, an independent registered public accounting firm. Their reports, dated NovemberAugust 3, 2017,2018, are included on pages 43 and 5.4. The reports of PricewaterhouseCoopers LLP state that they did not audit and they do not express an opinion on that unaudited financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 (the "Act") for their report on the unaudited financial information because that report is not a "report" or a "part" of the registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 9,8, "Commitments and Contingencies—Litigation", to the Condensed Consolidated Financial Statements included elsewhere in this Report for additional information on the Company's legal proceedings, including a description of the Dodge, et al. v. PHH Corporation, et al. litigation, formerly captioned Strader, et al. and Hall v. PHH Corporation, et al. and which we refer to as the Strader legal matter.
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 or regulatory proceedings challenging practices that have broad impact can be costly to defend and, depending on the class size and claims, could be costly to settle. As such, the Company could incur judgments or enter into settlements of claims with liability that are materially in excess of amounts accrued and these settlements could have a material adverse effect on the Company’s financial condition, results of operations or cash flows in any particular period.
Litigation and claims against other participants in the residential real estate 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. One such case is PHH Corp. vs. Consumer Financial Protection Bureau, No. 15-1177. On October 11, 2016, a three-judge panel of the United States Court of Appeals for the D.C. Circuit issued a decision in that case addressing the constitutionality of the CFPB's structure as a single-Director independent agency where the CFPB Director can only be removed by the President of the U.S. for "cause" as well as various important RESPA issues, including that: (1) Section 8(c)(2) of RESPA (which permits “bona fide” payments for goods and services actually performed), remains a viable exception under RESPA and does not constitute a payment for a referral in violation of RESPA where the amount paid does not exceed the reasonable market value of the goods or services; (2) new CFPB interpretations of RESPA cannot be enforced on a retroactive basis where there is reliance on prior regulatory interpretations; and (3) the CFPB is bound by the three-year statute of limitations for government enforcement of RESPA. On February 16, 2017, the full D.C. Circuit Court of Appeals agreed to hear an appeal of the October 11, 2016 decision and vacated that decision pending the appeal. Oral arguments were held on May 24, 2017. A decision from the full D.C. Circuit Court is pending.
The Company also may be impacted by litigation and other claims against companies in other industries. Rulings on matters such as the enforcement of arbitration and class waiver agreements andrelated to worker classification may adversely affect the Company and other residential real estate industry participants as a result of the classification of sales associatesagents as independent contractors, irrespective of the fact that the parties subject to the rulings are in a different industry. Toindustry and involve different facts and circumstances. For example, a recent decision by the extentCalifornia Supreme Court involving delivery workers adopts a significantly more restrictive classification test than the defendantstest historically used by the California courts in wage and hour cases. Under the new test, an individual is considered an employee unless the hiring entity satisfies three specific criteria that focus on control of the performance of the work and whether the nature of the work involves a separate trade that is outside the usual course of the hiring entity’s business. Notwithstanding the new test, California and 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 unsuccessfulcurrently unable to estimate, what impact, if any, this would have on our operations or financial results.
Changes in current legislation, regulations or interpretations that are applicable to the residential real estate service industry may also impact the Company. In June 2018, the Federal Trade Commission (“FTC”) and Department of Justice (“DOJ”) 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. The Company submitted comments and participated in the workshop.
Item 1A. Risk Factors.
Our significant business risks are described in Part I, Item 1A. in our 2017 Form 10-K. You should be aware that these typesrisk factors may not describe every risk and uncertainty facing our Company. Set forth below is an update to one of litigation matters,our risk factors relating to worker classification previously disclosed in our 2017 Form 10-K.
There may be adverse financial and we or our franchisees cannot distinguish our or their practices (or our industry’s practices), weoperational consequences to us and our franchisees if independent sales agents are reclassified as employees.
The legal relationship between residential real estate brokers and licensed sales agents throughout the industry historically has been that of independent contractor. Although we believe our classification practices are proper and consistent with the legal framework for such classification, our company owned brokerage operations could face significant liabilitysubstantial 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 could be requiredentitled to modify certain business relationships, eitherunpaid minimum wage, overtime, benefits, expense reimbursement and other employment obligations.
Federal agencies and adversely impact our financial conditioneach state have their own rules and resultstests for classification of operations.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 have evolved based on state case law decisions, regulations and legislative changes. There also are changing employment-related regulatory interpretations at bothis active worker classification litigation in numerous jurisdictions against a variety of industries where the plaintiffs seek to reclassify independent contractors as employees or to challenge the use of federal and state levelsminimum wage and overtime exemptions.
Certain jurisdictions, including California where NRT generated approximately 27% of its revenue in 2017, have adopted standards that are significantly more restrictive than those historically used in wage and hour cases. Under the newer test, an individual is considered an employee unless the hiring entity satisfies three specific criteria that focus on control of the performance of the work and whether the nature of the work involves a separate trade that is outside the usual course of the hiring entity’s business.
Notwithstanding the newer test, California and a number of other states have separate statutory structures and existing case law that articulate different, less stringent standards for real estate agents operating as independent contractors. How these differing tests will be reconciled is presently unclear, and given the evolving nature of this issue, we are currently unable to estimate, what impact, if any, this would have on our operations or financial results.
Significant sales agent reclassification determinations in the absence of available exemptions from minimum wage or overtime laws, including damages and penalties for prior periods (if assessed), could createbe 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. Franchisees affiliated with one of the Company’s brands face the same risks around historic practices and that could require changes in business practices, both for us and our franchisees.with respect to their affiliated independent sales agents.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
| |
| (c) | The following table sets forth information relating to repurchase of shares of our common stock during the quarter ended SeptemberJune 30, 2017:2018: |
|
| | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of a Publicly Announced Programs (1) | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs (1) |
| July 1 - 31, 2017 | | 452,691 |
| | $33.14 | | 452,691 |
| | $ | 241,402,984 |
|
| August 1 - 31, 2017 | | 516,900 |
| | $34.33 | | 516,900 |
| | $ | 223,657,807 |
|
September 1 - 30, 2017 (2) | | 759,600 |
| | $33.91 | | 759,600 |
| | $ | 197,899,771 |
|
|
| | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of a Publicly Announced Programs (1) | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs (1) |
| April 1 - 30, 2018 | | 1,269,633 |
| | $26.25 | | 1,269,633 |
| | $ | 317,349,327 |
|
| May 1 - 31, 2018 | | 1,528,244 |
| | $24.54 | | 1,528,244 |
| | $ | 279,846,219 |
|
| June 1 - 30, 2018 | | 1,211,910 |
| | $24.07 | | 1,211,910 |
| | $ | 250,675,545 |
|
_______________
| |
| (1) | In February 2016,2018, the Company's Board of Directors authorized a new share repurchase program of up to $275$350 million of the |
Company’s common stock. As of April 30, 2017, all of the capacity under this program had been utilized. In February 2017, our Board authorized a new share repurchase program of up to an additional $300 million of the Company's common stock. Repurchases under these programs may be made at management's discretion from time to time on the open market, pursuant to Rule 10b5-1 trading plans or privately negotiated transactions. The size and timing of these repurchases will depend on price, market and economic conditions, legal and contractual requirements and other factors. The repurchase programs have Company's common stock, which was in addition to the remaining authorization available under the February 2017 share repurchase program. Repurchases under each program may be made at management's discretion from time to time on the open market, pursuant to Rule 10b5-1 trading plans or through privately negotiated transactions. The size and timing of these repurchases will depend on price, market and economic conditions, legal and contractual requirements and other factors, and each share repurchase program has no time limit and may be suspended or discontinued at any time. All of the repurchased common stock has been retired.
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(2) | Includes 77,900 of shares purchased for which the trade date occurred in late September 2017 while settlement occurred in October 2017. |
During the period OctoberJuly 1, 20172018 through NovemberAugust 1, 2017,2018, we repurchased an additional 0.50.9 million shares at a weighted average market price of $33.11.$23.24 per share. Giving effect to these repurchases, we had approximately $181$231 million of remaining capacity authorized under the February 20172018 share repurchase program as of NovemberAugust 1, 2017.2018.
Item 5. Other Information.
On November 2, 2017, the Board of Directors of Realogy Holdings Corp. (the “Board”) approved the Fourth Amended and Restated Bylaws of the Company (the “Bylaws”), which include amendments to:
•remove certain provisions that are inapplicable following the Company’s de-classification of the Board;
add the positions of Chairman of the Board and Lead Independent Director to Article III (Board of Directors) of the Bylaws and make related ancillary changes; and
align statutory officer positions in Article IV (Officers) with Company practice, including the elimination of the statutory officer roles of Treasurer and Chief Accounting Officer, and make related ancillary changes.
The foregoing description of the amendments to the Bylaws is qualified in its entirety by reference to the Bylaws, which are attached to this Quarterly Report on Form 10-Q as Exhibit 3.1 and are incorporated herein by reference.
On November 2, 2017, the Board approved Amendment Number 1 (the "Plan Amendment") to the Realogy Holdings Corp. Amended and Restated 2012 Long-Term Incentive Plan (the "Amended and Restated 2012 LTIP") to allow for the elimination of fractional shares by rounding up or down in the discretion of plan administrator (which is generally the Compensation Committee of the Board). On November 2, 2017, the Compensation Committee amended outstanding performance restricted stock unit, performance share unit and restricted stock unit awards (the "Amended Awards") granted to employees, including executive officers, prior to the date of the Plan Amendment, to provide for the rounding up of fractional shares upon the final vesting of the Amended Awards.
The foregoing description of the Plan Amendment is qualified in its entirety by reference to the Plan Amendment, which is attached to this Quarterly Report on Form 10-Q as Exhibit 10.1 and is incorporated herein by reference.
Item 6. Exhibits.
See Exhibit Index.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
REALOGY HOLDINGS CORP.
and
REALOGY GROUP LLC
(Registrants)
Date: NovemberAugust 3, 20172018
/S/ ANTHONY E. HULL
Anthony E. Hull
Executive Vice President and
Chief Financial Officer
Date: NovemberAugust 3, 20172018
/S/ TIMOTHY B. GUSTAVSON
Timothy B. Gustavson
Senior Vice President,
Chief Accounting Officer and
Controller
EXHIBIT INDEX
Exhibit Description
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| 10.1 | EmploymentEleventh 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 October 17, 2017 between Realogy Holdings Corp.December 14, 2011, as amended, and Ryan M. SchneiderCrédit Agricole Corporate and Investment Bank (Incorporated by reference to Exhibit 10.1 to the Registrants' Current Report on Form 8-K filed on October 23, 2017)June 11, 2018). |
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| 101.INS ^ | XBRL Instance Document. |
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| 101.SCH ^ | XBRL Taxonomy Extension Schema Document. |
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| 101.CAL^ | XBRL Taxonomy Extension Calculation Linkbase Document. |
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| 101.DEF ^ | XBRL Taxonomy Extension Definition Linkbase Document. |
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| 101.LAB ^ | XBRL Taxonomy Extension Label Linkbase Document. |
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| 101.PRE ^ | XBRL Taxonomy Extension Presentation Linkbase Document. |
______________
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| ^ | Furnished electronically with this report. |