WASHINGTON, D.C. 20549
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.
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.
Indicate by check mark whether the Registrants are a shell company (as defined in Rule 12b-2 of the Exchange Act).
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.
Item 1. Financial Statements.
To the Board of Directors and Stockholders of Realogy Holdings Corp.:
REALOGY HOLDINGS CORP. AND REALOGY GROUP LLC
REALOGY HOLDINGS CORP. AND REALOGY GROUP LLC
REALOGY HOLDINGS CORP. AND REALOGY GROUP LLC
REALOGY HOLDINGS CORP. AND REALOGY GROUP LLC
REALOGY HOLDINGS CORP. AND REALOGY GROUP LLC
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.
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.
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 September 30, 20172020 for assets and liabilities measured at fair value on a recurring basis:
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:
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:
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 September 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, the Company had outstanding foreign currency forward contracts in a liability position with a fair value of $2 million and a notional value of $29 million.
The 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.
Realogy Group has secured obligations through Apple Ridge Funding LLC under a securitization program. In June 2017,2020, Realogy Group reduced the maximum borrowing capacity under the Apple Ridge Funding LLC securitization program from $250 million to $200 million and, in August 2020, extended the program untilfacility to June 2018. The program has a capacity2021. As of $325 million. At September 30, 2017, Realogy Group2020, the Company had $223$200 million of outstanding borrowingsborrowing capacity under the facility.Apple Ridge Funding LLC securitization program with $137 million being utilized leaving $63 million of available capacity subject to maintaining sufficient relocation related assets to collateralize the securitization obligation.
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,August 2020, Realogy Group extended the existing Cartus Financing Limited securitization program to August 2018. There2021. As of September 30, 2020, there were $11$6 million of outstanding borrowings onunder the facilities at September 30, 2017.leaving $13 million of available capacity subject to maintaining sufficient relocation related assets to collateralize the securitization obligation. 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 FacilityAgreement and the indentures governing the Unsecured Notes and 7.625% Senior Secured Second Lien 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.Cartus Relocation Services and the Company.
|
| | | | | | | | | | | |
| 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 |
|
26
The following table shows the total restructuring costs currently expected to be incurred by reportable segment forrelated to the Business Optimization Initiative:Facility and Operational Efficiencies Program:
| | | | | | | | | | | | | | | | | |
| Total amount expected to be incurred | | Amount incurred to date | | Total amount remaining to be incurred |
Realogy Franchise Group | $ | 5 | | | $ | 5 | | | $ | 0 | |
Realogy Brokerage Group | 84 | | | 55 | | | 29 | |
Realogy Title Group | 5 | | | 5 | | | 0 | |
Corporate and Other | 14 | | | 9 | | | 5 | |
Total | $ | 108 | | | $ | 74 | | | $ | 34 | |
|
| | | | | | | | | | | |
| 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 |
|
Leadership Realignment and Other Restructuring Activities | |
7. | STOCK-BASED COMPENSATION |
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 Company has stock-based compensation plans (the 2007 Stock Incentive Plankey aspects of this plan included senior leadership realignment, an enhanced focus on technology and the 2012 Long-Term Incentive Plan) under which incentive equity awards suchtalent, as non-qualified stock options, rightswell as further attention to purchase shares of common stock, restricted stock, restricted stock units ("RSUs"), performance restricted stock unitsoffice footprint and performance share units ("PSUs") may be issued to employees, consultants and directors of Realogy.other operational efficiencies. 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 grantedactivities undertaken 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 PSUsrestructuring plan are incentives that reward grantees based upon the Company's financial performance over a three-year performance period endingcomplete. At December 31, 2019. There are two PSU awards: one is based upon2019, 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 awardremaining liability 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$5 million. During the nine months ended September 30, 2017 is presented below (number2020, the Company incurred facility-related costs of shares$2 million and paid or settled costs of $4 million resulting in millions):a remaining accrual of $3 million.
7. EQUITY
Condensed Consolidated Statement of Changes in Equity for Realogy Holdings
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2020 |
| Common Stock | | Additional Paid-In Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Non- controlling Interests | | Total Equity |
|
|
| Shares | | Amount | |
Balance at June 30, 2020 | 115.4 | | | $ | 1 | | | $ | 4,847 | | | $ | (3,171) | | | $ | (56) | | | $ | 4 | | | $ | 1,625 | |
Net income | — | | | — | | | — | | | 98 | | | — | | | 1 | | | 99 | |
Other comprehensive income | — | | | — | | | — | | | — | | | 1 | | | — | | | 1 | |
Stock-based compensation | — | | | — | | | 9 | | | — | | | — | | | — | | | 9 | |
Issuance of shares for vesting of equity awards | 0.1 | | | 0 | | | — | | | — | | | — | | | — | | | 0 | |
Shares withheld for taxes on equity awards | (0.1) | | | 0 | | | 0 | | | — | | | — | | | — | | | 0 | |
Dividends | — | | | — | | | — | | | — | | | — | | | (1) | | | (1) | |
Balance at September 30, 2020 | 115.4 | | | $ | 1 | | | $ | 4,856 | | | $ | (3,073) | | | $ | (55) | | | $ | 4 | | | $ | 1,733 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2019 |
| Common Stock | | Additional Paid-In Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Non- controlling Interests | | Total Equity |
|
|
| Shares | | Amount | |
Balance at June 30, 2019 | 114.3 | | | $ | 1 | | | $ | 4,837 | | | $ | (2,537) | | | $ | (51) | | | $ | 3 | | | $ | 2,253 | |
Net (loss) income | — | | | — | | | — | | | (113) | | | — | | | 1 | | | (112) | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (1) | | | — | | | (1) | |
Stock-based compensation | — | | | — | | | 10 | | | — | | | — | | | — | | | 10 | |
Dividends declared ($0.09 per share) | — | | | — | | | (10) | | | — | | | — | | | 0 | | | (10) | |
Balance at September 30, 2019 | 114.3 | | | $ | 1 | | | $ | 4,837 | | | $ | (2,650) | | | $ | (52) | | | $ | 4 | | | $ | 2,140 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2020 |
| Common Stock | | Additional Paid-In Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Non- controlling Interests | | Total Equity |
|
|
| Shares | | Amount | |
Balance at December 31, 2019 | 114.4 | | | $ | 1 | | | $ | 4,842 | | | $ | (2,695) | | | $ | (56) | | | $ | 4 | | | $ | 2,096 | |
Net (loss) income | — | | | — | | | — | | | (378) | | | — | | | 2 | | | (376) | |
Other comprehensive income | — | | | — | | | — | | | — | | | 1 | | | — | | | 1 | |
Stock-based compensation | — | | | — | | | 19 | | | — | | | — | | | — | | | 19 | |
Issuance of shares for vesting of equity awards | 1.6 | | | 0 | | | — | | | — | | | — | | | — | | | 0 | |
Shares withheld for taxes on equity awards | (0.6) | | | 0 | | | (5) | | | — | | | — | | | — | | | (5) | |
Dividends | — | | | — | | | 0 | | | — | | | — | | | (2) | | | (2) | |
Balance at September 30, 2020 | 115.4 | | | $ | 1 | | | $ | 4,856 | | | $ | (3,073) | | | $ | (55) | | | $ | 4 | | | $ | 1,733 | |
|
| | | | | | |
| 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. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2019 |
| Common Stock | | Additional Paid-In Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Non- controlling Interests | | Total Equity |
|
|
| Shares | | Amount | |
Balance at December 31, 2018 | 114.6 | | | $ | 1 | | | $ | 4,869 | | | $ | (2,507) | | | $ | (52) | | | $ | 4 | | | $ | 2,315 | |
Net (loss) income | — | | | — | | | — | | | (143) | | | — | | | 2 | | | (141) | |
Repurchase of common stock | (1.2) | | | 0 | | | (20) | | | — | | | — | | | — | | | (20) | |
Stock-based compensation | — | | | — | | | 25 | | | — | | | — | | | — | | | 25 | |
Issuance of shares for vesting of equity awards | 1.3 | | | 0 | | | — | | | — | | | — | | | — | | | 0 | |
Shares withheld for taxes on equity awards | (0.4) | | | 0 | | | (6) | | | — | | | — | | | — | | | (6) | |
Dividends declared ($0.27 per share) | — | | | — | | | (31) | | | — | | | — | | | (2) | | | (33) | |
Balance at September 30, 2019 | 114.3 | | | $ | 1 | | | $ | 4,837 | | | $ | (2,650) | | | $ | (52) | | | $ | 4 | | | $ | 2,140 | |
Condensed Consolidated Statement of Changes in Equity for Realogy Group
The Company has not included a statement of changes in equity for Realogy Group as the operating results of Group are consistent with the operating results of Realogy Holdings as all revenue and expenses of Realogy Group flow up to Realogy Holdings and there are no incremental activities at the Realogy Holdings level. The only difference between Realogy Group and Realogy Holdings is that the $1 million in par value of common stock in Realogy Holdings' equity is included in additional paid-in capital in Realogy Group's equity.
Stock Repurchases
Shares of Company common stock that have been repurchased pursuant to prior authorizations from the Company's Board of Directors have been retired and are not displayed separately as treasury stock on the consolidated financial statements. The par value of the shares repurchased and retired is deducted from common stock and the excess of the purchase price over par value is first charged against any available additional paid-in capital with the balance charged to retained earnings. Direct costs incurred to repurchase the shares are included in the total cost of the shares.
The Company's Board of Directors authorized a share repurchase program of up to $275 million, $300 million, $350 million and $175 million of the Company's common stock in February 2016, 2017, 2018 and 2019, respectively.
In the first quarter of 2019, the Company repurchased and retired 1.2 million shares of common stock for $20 million at a weighted average market price of $17.21 per share. The Company has not repurchased any shares under the share repurchase programs since 2019, and in May 2020, the Company's Board of Directors terminated its outstanding share repurchase programs.
The Company is restricted from repurchasing shares during the covenant period under the Amendments to the Senior Secured Credit Agreement and Term Loan A Agreement as well as pursuant to the restrictive covenants in the indentures governing the Unsecured Notes and 7.625% Senior Secured Second Lien Notes. See Note 5. "Short and Long-Term Debt—Senior Secured Credit Agreement and Term Loan A Agreement"and"—Unsecured Notes", to the Condensed Consolidated Financial Statements for additional information.
Stock-Based Compensation
During the first quarter of 2020, the Company granted restricted stock units related to 0.7 million shares with a weighted average grant date fair value of $9.70 and performance stock units related to 0.9 million shares with a weighted average grant date fair value of $9.23. The Company granted all time-based equity awards in the options was estimated onform of restricted stock units which are subject to ratable vesting over a three-year period.
During the datefirst quarter of grant using2020, instead of issuing stock-based compensation to certain employees, the Black-Scholes option-pricing model. Expected volatility wasCompany issued $18 million of time-vested cash awards which vest annually over a three-year vesting period, $6 million of cash-settled long-term performance awards which are tied to cumulative free cash flow goals that will vest at the end of the three-year performance cycle based on historical volatilitiesachievement of the Companyperformance metric and select comparable companies. The expected term$3 million of the options granted represents the period of time that options are expected to be outstanding and iscash-settled awards based on the simplified method. The risk-free interest rate was based on the U.S. Treasury yield curvechange in effectRealogy stock price that will vest at the timeend of the grant, which corresponds to the expected termthree-year performance cycle.
|
| | | |
| 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 (LOSS) PER SHARE
Earnings (loss) per share attributable to Realogy Holdings
Basic earnings (loss) per share is computed based on net income (loss) attributable to Realogy Holdings stockholders divided by the basic weighted-average shares outstanding during the period. Dilutive earnings (loss) per share is computed consistently with the basic computation while giving effect to all dilutive potential common shares and common share equivalents that were outstanding during the period. Realogy Holdings uses the treasury stock method to reflect the potential dilutive effect of unvested stock awards and unexercised options.The following table sets forth the computation of basic and diluted earnings (loss) per share:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions, except per share data) | 2020 | | 2019 | | 2020 | | 2019 |
Numerator: | | | | | | | |
Numerator for earnings (loss) per share—continuing operations | | | | | | | |
Net income (loss) from continuing operations | $ | 145 | | | $ | (120) | | | $ | (262) | | | $ | (136) | |
Less: Net income attributable to noncontrolling interests | (1) | | | (1) | | | (2) | | | (2) | |
Net income (loss) from continuing operations attributable to Realogy Holdings | $ | 144 | | | $ | (121) | | | $ | (264) | | | $ | (138) | |
Numerator for earnings (loss) per share—discontinued operations | | | | | | | |
Net (loss) income from discontinued operations | $ | (46) | | | $ | 8 | | | $ | (114) | | | $ | (5) | |
Net income (loss) attributable to Realogy Holdings shareholders | $ | 98 | | | $ | (113) | | | $ | (378) | | | $ | (143) | |
Denominator: | | | | | | | |
Weighted average common shares outstanding (denominator for basic earnings (loss) per share calculation) | 115.4 | | | 114.3 | | | 115.2 | | | 114.2 | |
Dilutive effect of stock-based compensation (a)(b) | 1.3 | | | 0 | | | 0 | | | 0 | |
Weighted average common shares outstanding (denominator for diluted earnings (loss) per share calculation) | 116.7 | | | 114.3 | | | 115.2 | | | 114.2 | |
Basic earnings (loss) per share attributable to Realogy Holdings shareholders: |
Basic earnings (loss) per share from continuing operations | $ | 1.25 | | | $ | (1.06) | | | $ | (2.29) | | | $ | (1.21) | |
Basic (loss) earnings per share from discontinued operations | (0.40) | | | 0.07 | | | (0.99) | | | (0.04) | |
Basic earnings (loss) per share | $ | 0.85 | | | $ | (0.99) | | | $ | (3.28) | | | $ | (1.25) | |
Diluted earnings (loss) per share attributable to Realogy Holdings shareholders: |
Diluted earnings (loss) per share from continuing operations | $ | 1.23 | | | $ | (1.06) | | | $ | (2.29) | | | $ | (1.21) | |
Diluted (loss) earnings per share from discontinued operations | (0.39) | | | 0.07 | | | (0.99) | | | (0.04) | |
Diluted earnings (loss) per share | $ | 0.84 | | | $ | (0.99) | | | $ | (3.28) | | | $ | (1.25) | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in millions, except per share data) | 2017 | | 2016 | | 2017 | | 2016 |
Net income attributable to Realogy Holdings shareholders | $ | 95 |
| | $ | 106 |
| | $ | 176 |
| | $ | 156 |
|
Basic weighted average shares | 136.1 |
| | 144.0 |
| | 137.8 |
| | 145.4 |
|
Stock options, restricted stock units and performance share units (a) | 2.0 |
| | 1.1 |
| | 1.6 |
| | 1.2 |
|
Weighted average diluted shares | 138.1 |
| | 145.1 |
| | 139.4 |
| | 146.6 |
|
Earnings Per Share: | | | | | | | |
Basic | $ | 0.70 |
| | $ | 0.74 |
| | $ | 1.28 |
| | $ | 1.07 |
|
Diluted | $ | 0.69 |
| | $ | 0.73 |
| | $ | 1.26 |
| | $ | 1.06 |
|
______________________________
| |
(a) | The three and nine months ended September 30, 2017 respectively exclude 4.9(a)The three months ended September 30, 2020 exclude 8.3 million and 5.3 million shares of common stock issuable for incentive equity awards, which includes performance share units based on the achievement of target amounts, that are anti-dilutive to the diluted earnings per share computation. The three and nine months ended September 30, 2016 respectively exclude 5.2 million and 5.1 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. |
In the third quarter of 2017, the Company repurchased and retired 1.8 million shares of common stock issuable for $58 million atincentive 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.
(b)The Company had a weighted average market price of $33.83 per share. Fornet loss from continuing operations for the nine months ended September 30, 2017,2020 and three and nine months ended September 30, 2019 and therefore the Company repurchased and retired 5.9 million sharesimpact of common stock for $178 million at a weighted average market priceincentive equity awards were excluded from the computation of $30.40 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 earningsdilutive loss per share calculation.as the inclusion of such amounts would be anti-dilutive.
| |
9. | COMMITMENTS AND CONTINGENCIES |
9. 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;
thatindependent residential real estate sales associatesagents engaged by NRT—Realogy Brokerage Group or by affiliated franchisees—under certain state or federal laws—are potentially employees instead of independent contractors, and
they or regulators therefore may bring claims against NRTRealogy Brokerage Group for breach of contract, wage and hour classification claims, wrongful discharge, unemployment and workers' compensation and could seek benefits, back wages, overtime, indemnification, penalties related to classification practices and expense reimbursement available to employees;employees or similar claims against Realogy Franchise Group as an alleged joint employer of an affiliated franchisee’s independent sales agents;
•concerning other employment law matters, including other types of worker classification claims as well as wage and hour claims and retaliation claims;
•concerning anti-trust and anti-competition matters;
•that the Company is vicariously liable for the acts of franchisees under theories of actual or apparent agency;
•by current or former franchisees that franchise agreements were breached including improper terminations;
•concerning alleged RESPA or state real estate law violations;
•concerning claims related to the Telephone Consumer Protection Act, including autodialer claims;
•concerning claims generally against the company owned brokerage operations for negligence, misrepresentation or breach of fiduciary duty in connection with the performance of real estate brokerage or other professional services as well as other brokerage claims associated with listing information and property history;
•related to copyright law, including infringement actions alleging improper use of copyrighted photographs on websites or in marketing materials without consent of the copyright holder;
•concerning breach of obligations to make websites and other services accessible for consumers with disabilities;
•concerning claims generally against the title companyagent contending that as the escrow company, the companyagent knew or should have known that a transaction was fraudulent or concerning otherthat the agent was negligent in addressing title defects or settlement errors; andconducting the settlement;
•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; and
•those related to general fraud claims.
Worker Classification Litigation
Whitlach v. Premier Valley, Inc. d/b/a Century 21 M&M and Century 21 Real Estate LLC (Superior Court of California, Stanislaus County). This was filed as a putative class action complaint on December 20, 2018 by plaintiff James Whitlach against Premier Valley Inc., a Century 21 Real Estate independently-owned franchisee doing business as Century 21 M&M (“Century 21 M&M”). The complaint also names Century 21 Real Estate LLC, a wholly-owned subsidiary of the Company and the franchisor of Century 21 Real Estate (“Century 21”), as an alleged joint employer of the franchisee’s independent sales agents and seeks to certify a class that could potentially include all agents of both Century 21 M&M and Century 21 in California. In February 2019, the plaintiff amended his complaint to assert claims pursuant to the California Private Attorneys General Act (“PAGA”). Following the Court's dismissal of the plaintiff's non-PAGA claims without prejudice in June 2019, the plaintiff continues to pursue his PAGA claims as a representative of purported "aggrieved employees" as defined by PAGA. As such representative, the plaintiff seeks all non-individualized relief available to the purported aggrieved employees under PAGA, as well as attorneys’ fees. Under California law, PAGA claims are generally not subject to arbitration and may result in exposure in the form of additional penalties.
Following the Court's grant of the defendants' demurrer to the plaintiff's amended complaint (with leave to replead), the plaintiff filed a second amended complaint asserting one cause of action for alleged civil penalties under PAGA in June 2020. In the second amended complaint, the plaintiff continues to allege that Century 21 M&M misclassified all of its independent real estate agents, salespeople, sales professionals, broker associates and other similar positions as independent contractors, failed to pay minimum wages, failed to provide meal and rest breaks, failed to pay timely wages, failed to keep proper records, failed to provide appropriate wage statements, made unlawful deductions from wages, and failed to reimburse plaintiff and the putative class for business related expenses, resulting in violations of the California Labor Code. Century 21 M&M filed its demurrer to the amended complaint, to which Century 21 filed a joinder (and, in the alternative, a motion to strike certain portions of the amended complaint), on August 3, 2020. This case raises various previously unlitigated claims and the PAGA claim adds additional litigation, financial and operating uncertainties.
Real Estate BusinessIndustry Litigation
Dodge, et al.Moehrl, Cole, Darnell, Nager, Ramey, Sawbill Strategic, Inc., Umpa and Ruh v. PHH Corporation, et al.The National Association of Realtors, Realogy Holdings Corp., formerly captioned Strader, et al.Homeservices of America, Inc., BHH Affiliates, LLC, The Long & Foster Companies, Inc., RE/
MAX LLC, and HallKeller Williams Realty, Inc. (U.S. District Court for the Northern District of Illinois). This amended putative class action complaint (the "amended Moehrl complaint"), filed on June 14, 2019, (i) consolidates the Moehrl and Sawbill litigation reported in our Form 10-Q for the period ended March 31, 2019, (ii) adds certain plaintiffs and defendants, and (iii) serves as a response to the separate motions to dismiss filed on May 17, 2019 in the prior Moehrl litigation by each of NAR and the Company (along with the other defendants named in the prior Moehrl complaint).
In the amended Moehrl complaint, the plaintiffs allege that the defendants engaged in a continuing contract, combination, or conspiracy to unreasonably restrain trade and commerce in violation of Section 1 of the Sherman Act because defendant NAR allegedly established mandatory anticompetitive policies for the multiple listing services and its member brokers that require brokers to make an offer of buyer broker compensation when listing a property. The plaintiffs further allege that commission sharing, which provides for the broker representing the seller sharing or paying a portion of its commission to the broker representing the buyer, is anticompetitive and violates the Sherman Act, and that the defendant franchisors conspired with NAR by requiring their respective franchisees to comply with NAR’s policies and Code of Ethics. The plaintiffs seek a permanent injunction enjoining the defendants from requiring home sellers to pay buyer broker commissions or to otherwise restrict competition among buyer brokers, an award of damages and/or restitution, attorneys fees and costs of suit. In October 2019, the Department of Justice filed a statement of interest for this matter, in their words “to correct the inaccurate portrayal, by defendant The National Association of Realtors (‘NAR’), of a 2008 consent decree between the United States and NAR.” A motion to appoint lead counsel in the case was granted on an interim basis by the Court on May 30, 2020. On October 2, 2020, the Court denied the separate motions to dismiss filed in August 2019 by each of NAR and the Company (together with the other defendants named in the amended Moehrl complaint).
Sitzer and Winger v. PHH Corporation, et al.The National Association of Realtors, Realogy Holdings Corp., Homeservices of America, Inc., RE/MAX Holdings, Inc., and Keller Williams Realty, Inc. (U.S. District Court for the CentralWestern District of California)Missouri). This is a purportedputative class action broughtcomplaint filed on April 29, 2019 and amended on June 21, 2019 by four California residentsplaintiffs Joshua Sitzer and Amy Winger against 15NAR, the Company, Homeservices of America, Inc., RE/MAX Holdings, Inc., and Keller Williams Realty, Inc. The complaint contains substantially similar allegations, and seeks the same relief under the Sherman Act, as the Moehrl litigation. The Sitzer litigation is limited both in allegations and relief sought to the State of Missouri and includes an additional cause of action for alleged violation of the Missouri Merchandising Practices Act, or MMPA. On August 22, 2019, the Court denied defendants' motions to transfer the Sitzer matter to the U.S. District Court for the Northern District of Illinois and on October 16, 2019, denied the motions to dismiss this litigation filed respectively by NAR and the Company (together with the other named brokerage/franchisor defendants). In September 2019, the Department of Justice filed a statement of interest and appearances for this matter for the same purpose stated in the Moehrl matter and in July 2020 requested we provide them with all materials produced for Sitzer. Discovery between the plaintiffs and defendants includingis ongoing.
Rubenstein, Nolan v. The National Association of Realtors, Realogy Holdings Corp., Coldwell Banker, Sotheby’s Investment Realty, and Homeservices of America, Inc. (U.S. District Court for the District of Connecticut). In this action, the plaintiffs take issue with the same NAR policies related to buyer broker compensation at issue in the Moehrl and Sitzer matters, but claim the alleged conspiracy has harmed buyers (instead of sellers) and is a federal racketeering violation (instead of a violation of federal antitrust law). On October 29, 2020, the plaintiffs filed a statement with the Court outlining the alleged racketeering violations.
Securities Litigation
Tanaskovic v. Realogy Holdings Corp., et. al. (U.S. District Court for the District of New Jersey). This is a putative class action complaint filed on July 11, 2019 by plaintiff Sasa Tanaskovic against the Company and certain of its current and former executive officers. The lawsuit alleges violations of Sections 10(b), 20(a) and Rule 10b-5 of the Exchange Act in connection with allegedly false and misleading statements made by the Company about its business, operations, and prospects. The plaintiffs seek, among other things, compensatory damages for purchasers of the Company’s common stock between February 24, 2017 through May 22, 2019, as well as attorneys’ fees and costs. Locals 302 and 612 of the International Union of Operating Engineers-Employers Construction Industry Retirement Trust (the “Retirement Trust”), was appointed lead plaintiff on November 7, 2019. Lead plaintiff filed its amended complaint on March 6, 2020. The Company filed its motion to dismiss the amended complaint on August 3, 2020, the plaintiffs filed their opposition to such motion on September 17, 2020, and the Company filed its reply on November 2, 2020.
Fried v. Realogy Holdings Corp., et al. (U.S. District Court for the District of New Jersey). This is a putative derivative action filed on October 23, 2019 by plaintiff Adam Fried against the Company (as nominal defendant) and certain of its current and former executive officers and members of its Board of Directors (as defendants). The lawsuit alleges violations
of Section 14(a) of the Exchange Act and breach of fiduciary duties for, among other things, allegedly false and misleading statements made by the Company about its business, operations and prospects as well as unjust enrichment claims. The plaintiff seeks, among other things, compensatory damages, disgorgement of improper compensation, certain reforms to the Company’s corporate governance and internal procedures and attorneys’ fees and costs. On December 23, 2019, the Court approved a motion staying this case pending further action in the Tanaskovic matter.
The Company disputes the allegations in each of the captioned matters described above and will vigorously defend these actions. Given the early stages of each of these cases, we cannot estimate a range of reasonably possible losses for this litigation.
The Company believes that it has adequately accrued for legal matters as appropriate. The Company records litigation accruals for legal matters which are both probable and estimable.
Litigation and other disputes are inherently unpredictable and subject to substantial uncertainties and unfavorable resolutions could occur. In addition, class action lawsuits can be costly to defend and, depending on the class size and claims, could be costly to settle. As such, the Company could incur judgments or enter into settlements of claims with liability that are materially in excess of amounts accrued and these settlements could have a material adverse effect on the Company’s financial condition, results of operations or cash flows in any particular period.
* * *
Company-Initiated Litigation
Realogy Holdings Corp. v. SIRVA Worldwide, Inc., North American Van Lines, Inc., Madison Dearborn Capital Partners VII-A, L.P., Madison Dearborn Capital Partners VII-C, L.P., and Madison Dearborn Capital Partners VII Executive-A, L.P. (Court of Chancery of the State of Delaware). On August 8, 2020, the Company entered into a confidential settlement agreement with SIRVA, Inc., SIRVA Worldwide, Inc. (“SIRVA Worldwide”) and affiliates of Madison Dearborn Partners, LLC to mutually dismiss and release all claims related to the termination of the Purchase and Sale Agreement dated November 6, 2019 with North American Van Lines, Inc. (as assignee of SIRVA Worldwide) for the sale of the Company’s employee relocation services business, Cartus Corporation.
Realogy Holdings Corp., NRT New York LLC (d/b/a The Corcoran Group), Sotheby’s International Realty, Inc., Coldwell Banker Residential Brokerage Company, Coldwell Banker Residential Real Estate LLC, NRT West, Inc., Martha Turner Properties, L.P. And Better Homes and Gardens Real Estate LLC v. Urban Compass, Inc., and Compass, Inc. (Supreme Court New York, New York County). On July 10, 2019, the Company and certain of its subsidiaries PHH Corporationfiled a complaint against Urban Compass, Inc. and PHH Home Loans, LLC (a joint venture between RealogyCompass, Inc. (together, "Compass") alleging misappropriation of trade secrets; tortious interference with contract; intentional and PHH), allegingtortious interference with prospective economic advantage; unfair competition under New York common law; violations of the California Unfair Competition Law, Business and Professional Code Section 8(a)17200 et. seq. (unfair competition); violations of RESPA. Plaintiffs seek to represent two subclasses comprisedNew York General Business Law Section 349 (deceptive acts or practices); violations of all persons in the United States who, since January 31, 2005, (1) obtained a RESPA-covered mortgage loan from either (a) PHH Home Loans, LLC or oneNew York General Business Law Sections 350 and 350-a (false advertising); conversion; and aiding and abetting breach of its subsidiaries, or (b) one of the mortgage services managed by PHH Corporation for other lenders, and (2) paid a fee for title insurance or settlement services to TRG or one of its subsidiaries. Plaintiffs allege,contract. The Company seeks, among other things, that PHH Home Loans, LLC operates in violation of RESPAactual and that the other defendants violate RESPA by referring business to one another under agreements or arrangements. Plaintiffs seek treblecompensatory damages, injunctive relief, and an award of attorneys’ fees costs and disbursements. On May 19, 2017,costs. The Company subsequently amended its complaint (which, among other things, withdrew the parties heldcount for aiding and abetting breach of contract and added a mediation session, at which they agreedcount for defamation). Beginning in principle toSeptember 2019, Compass filed a settlementseries of the action, pursuant tomotions, which the Company would pay approximately $8 million (or one-halfopposed, including a motion to dismiss and a motion to compel arbitration with respect to certain claims involving Corcoran. In June 2020, having previously denied certain portions of Compass’ motion to dismiss, the Court denied the balance of the settlement). As a result,motion to dismiss, and denied as moot Compass’ motion to compel arbitration, granting the Company accrued $8 millionleave to amend the allegations in its complaint that relate to Corcoran’s exclusive listings in order to clarify the claims and damages sought 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, the fourthaction. The Company filed its amended complaint wasin July 2020. On September 24, 2020, Compass filed changinga motion to compel arbitration with respect to certain claims in the named plaintiffs. At a hearing on the plaintiffs' motion for preliminary approval of the settlement held October 19, 2017, the Court indicated that if certain modest revisions are madeCompany's amended complaint concerning or purportedly related to the settlement agreementCorcoran 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.Sotheby’s International Realty, Inc.
* * *
The Company is involved in certain other claims and legal actions arising in the ordinary course of our business. Such litigation, regulatory actions and other proceedings may include, but are not limited to, actions relating to intellectual property, commercial arrangements, franchising arrangements, actions against our title company alleging it knew or should have known that others were committing mortgage fraud,the fiduciary duties of brokers, standard brokerage disputes like the failure to disclose accurate square footage or hidden defects in the property such as mold, vicarious liability based upon conduct of individuals or entities outside of our control, including franchisees and independent sales 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 ourindependent sales associatesagents as independent contractors, wage and hour classificationrelated claims, and claims related to business actions responsive to the COVID-19 outbreak and governmental and regulatory directives thereto, and claims alleging violations of RESPA, or state consumer fraud statutes or federal consumer protection statutes. While the results of such claims and legal actions cannot be predicted with certainty, we do not believe based on information currently available to us that the final outcome of current proceedings against the Company will have a material adverse effect on our consolidated financial position, results of operations or cash flows. In addition, with the increasing requirements resulting from government laws and regulations concerning data breach notifications and data privacy and protection obligations, claims associated with these laws may become more common. While most litigation involves claims against the Company, from time to time the Company commences litigation, including litigation against former employees, franchisees and competitors when it alleges that such persons or entities have breached agreements or engaged in other wrongful conduct.
* * *
Cendant Corporate LitigationLiabilities and Guarantees to Cendant and Affiliates
Realogy Group (then Realogy Corporation) separated from Cendant on July 31, 2006 (the "Separation"), pursuant to a plan by Cendant (now known as Avis Budget Group, Inc.) to separate into four4 independent companies—one1 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$19 million at September 30, 20172020 and $18 million at December 31, 2016,2019, 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)(iii) potential liabilities related to the residual portion of accruals for Cendant operations.
Tax Matters
The Company is subject to income taxes in the United States and several foreign jurisdictions. Significant judgment is required in determining the worldwide provision for income taxes and recording related assets and liabilities. In the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is uncertain. The Company is regularly under audit by tax authorities whereby the outcome of the audits is uncertain. The Company believes there is appropriate support for positions taken on its tax returns. The liabilities that have been recorded represent the best estimates of the probable loss on certain positions and are adequate for all open years based on an assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter. However, the outcomes of tax audits are inherently uncertain.
Under the Tax Sharing Agreement with Cendant, Wyndham Worldwide and Travelport, the Company is generally responsible for 62.5% of payments made to settle claims with respect to tax periods ending on or prior to December 31, 2006 that relate to income taxes imposed on Cendant and certain of its subsidiaries, the operations (or former operations) of which were determined by Cendant not to relate specifically to the respective businesses of Realogy, Wyndham Worldwide, Avis Budget or Travelport.
With respect to any remaining legacy Cendant tax liabilities, the Company and its former parent believe there is appropriate support for the positions taken on Cendant’s tax returns. However, tax audits and any related litigation, including disputes or litigation on the allocation of tax liabilities between parties under the Tax Sharing Agreement, could result in outcomes for the Company that are different from those reflected in the Company’s historical financial statements.
Escrow and Trust Deposits
As a service to its customers, the Company administers escrow and trust deposits which represent undisbursed amounts received for the settlement of real estate transactions. Deposits at FDIC-insured institutions are insured up to $250 thousand.$250 thousand. These escrow and trust deposits totaled $472$943 million at September 30, 20172020 and $415$475 million at December 31, 2016.2019. 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.
10. SEGMENT INFORMATION
The reportable segments presented below represent the Company’s operating segments for which separate financial information is available and which is utilized on a regular basis by its chief operating decision maker to assess performance and to allocate resources. In identifying its reportable segments, the Company also considers the nature of services provided by its operating segments. During the first quarter of 2020, Realogy Leads Group was consolidated into Realogy Franchise Group and the segment change is reflected for all periods presented. Realogy Leads Group, which previously was part of Cartus, consists of the Company's affinity and broker-to-broker business, as well as the broker network made up of agents and brokers from Realogy’s residential real estate brands and certain independent real estate brokers (which is referred to as the Realogy Advantage Broker Network).
Management evaluates the operating results of each of its reportable segments based upon revenue and Operating EBITDA. Operating EBITDA which is defined by us as net income (loss) before depreciation and amortization, interest (income) expense, net, (other than Relocation Services interest for relocation receivables and securitization obligations) and income taxes, eachand other items that are not core to the operating activities of which is presented in the Company’s Condensed Consolidated StatementsCompany such as restructuring charges, former parent legacy items, gains or losses on the early extinguishment of Operations.debt, impairments, gains or losses on discontinued operations and gains or losses on the sale of investments or other assets. The Company’s presentation of Operating EBITDA may not be comparable to similar measures used by other companies.
|
| | | | | | | | | | | | | | | |
| Revenues (a) (b) |
| 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 September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Realogy Franchise Group | $ | 262 | | | $ | 240 | | | $ | 609 | | | $ | 679 | |
Realogy Brokerage Group | 1,479 | | | 1,222 | | | 3,281 | | | 3,369 | |
Realogy Title Group | 213 | | | 170 | | | 510 | | | 444 | |
Corporate and Other (c) | (97) | | | (82) | | | (220) | | | (224) | |
Total Company | $ | 1,857 | | | $ | 1,550 | | | $ | 4,180 | | | $ | 4,268 | |
_______________
| |
(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 million and $238 million for the three and nine months ended September 30, 2017, respectively, and $82 million and $225 million for the three and nine months ended September 30, 2016, 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 million and $31 million for the three and nine months ended September 30, 2017, respectively, and $12 million and $33 million for the three and nine months ended September 30, 2016, respectively. Such amounts are recorded as contra-revenues by the Company Owned Real Estate Brokerage Services segment. There are no other material intersegment transactions. |
| |
(c) | Includes the elimination of transactions between segments. |
(a)Transactions between segments are eliminated in consolidation. Revenues for the Realogy Franchise Group include intercompany royalties and marketing fees paid by Realogy Brokerage Group of $97 million and $220 million for the three and nine months ended September 30, 2020, respectively, and $82 million and $224 million for the three and nine months ended September 30, 2019, respectively. Such amounts are eliminated through the Corporate and Other line. |
| | | | | | | | | | | | | | | |
| EBITDA |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 (a) | | 2016 (b) | | 2017 (c) | | 2016 (d) |
Real Estate Franchise Services | $ | 159 |
| | $ | 153 |
| | $ | 427 |
| | $ | 394 |
|
Company Owned Real Estate Brokerage Services | 62 |
| | 74 |
| | 113 |
| | 131 |
|
Relocation Services | 37 |
| | 40 |
| | 65 |
| | 74 |
|
Title and Settlement Services | 21 |
| | 23 |
| | 49 |
| | 49 |
|
Corporate and Other (e) | (25 | ) | | (20 | ) | | (70 | ) | | (60 | ) |
Total Company | $ | 254 |
| | $ | 270 |
| | $ | 584 |
| | $ | 588 |
|
Less: | | | | | | | |
Depreciation and amortization (f) | $ | 51 |
| | $ | 53 |
| | $ | 150 |
| | $ | 149 |
|
Interest expense, net | 41 |
| | 37 |
| | 127 |
| | 169 |
|
Income tax expense | 67 |
| | 74 |
| | 131 |
| | 114 |
|
Net income attributable to Realogy Holdings and Realogy Group | $ | 95 |
| | $ | 106 |
| | $ | 176 |
| | $ | 156 |
|
(b)Revenues for Realogy Franchise Group include intercompany referral commissions related to Realogy Advantage Broker Network paid by Realogy Brokerage Group of $3 million and $8 million for the three and nine months ended September 30, 2020, respectively, and $6 million and $14 million for the three and nine months ended September 30, 2019, respectively. Such amounts are recorded as contra-revenues by Realogy Brokerage Group. There are no other material intersegment transactions._______________
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(a) | The three months ended September 30, 2017 includes a net cost of $1 million of former parent legacy items and $1 million related to the loss on the early extinguishment of debt in Corporate and Other, and restructuring charges of $2 million in the Company Owned Real Estate Brokerage Services segment. |
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(b) | The three months ended September 30, 2016 includes $9 million of restructuring charges as follows: $1 million in the Real Estate Franchise Services segment, $6 million in the Company Owned Real Estate Brokerage Services segment, $1 million in the Relocation Services segment and $1 million in the Title and Settlement Services segment. |
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(c) | The nine months ended September 30, 2017 includes an $8 million expense related to the settlement of the Strader legal matter and $5 million related to the losses on 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 as follows: $8 million in the Company Owned Real Estate Brokerage Services segment and $1 million in the Real Estate Franchise Services segment. |
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(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. |
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(e) | Includes the elimination of transactions between segments. |
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(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. |
(c)Includes the elimination of transactions between segments.
| | | | | | | | | | | | | | | | | | | | | | | |
| Operating EBITDA |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Realogy Franchise Group | $ | 196 | | | $ | 170 | | | $ | 419 | | | $ | 448 | |
Realogy Brokerage Group | 61 | | | 31 | | | 25 | | | 16 | |
Realogy Title Group | 95 | | | 31 | | | 168 | | | 54 | |
Corporate and Other (a) | (43) | | | (26) | | | (94) | | | (75) | |
Total continuing operations | 309 | | | 206 | | | 518 | | | 443 | |
| | | | | | | |
Less: Depreciation and amortization | 43 | | | 42 | | | 134 | | | 126 | |
Interest expense, net | 48 | | | 66 | | | 208 | | | 209 | |
Income tax expense (benefit) | 54 | | | (23) | | | (67) | | | (22) | |
Restructuring costs, net (b) | 13 | | | 11 | | | 38 | | | 29 | |
Impairments (c) | 6 | | | 240 | | | 460 | | | 243 | |
Former parent legacy cost (d) | 1 | | | 1 | | | 1 | | | 1 | |
(Gain) loss on the early extinguishment of debt (d) | 0 | | | (10) | | | 8 | | | (5) | |
Net income (loss) from continuing operations attributable to Realogy Holdings and Realogy Group | 144 | | | (121) | | | (264) | | | (138) | |
Net (loss) income from discontinued operations (e) | (46) | | | 8 | | | (114) | | | (5) | |
Net income (loss) attributable to Realogy Holdings and Realogy Group | $ | 98 | | | $ | (113) | | | $ | (378) | | | $ | (143) | |
On October 23, 2017,_______________
(a)Includes the Company announced that Ryan Schneider has been elected as Presidentelimination of transactions between segments.
(b)The three months ended September 30, 2020 includes restructuring charges of $11 million at Realogy Brokerage Group and Chief Operating Officer$2 million at Corporate and Other.
The three months ended September 30, 2019 includes restructuring charges of $2 million at Realogy Franchise Group, $8 million at Realogy Brokerage Group and $1 million at Corporate and Other.
The nine months ended September 30, 2020 includes restructuring charges of $1 million at Realogy Franchise Group, $32 million at Realogy Brokerage Group, $3 million at Realogy Title Group and $2 million at Corporate and Other.
The nine months ended September 30, 2019 includes restructuring charges of $3 million at Realogy Franchise Group, $18 million at Realogy Brokerage Group, $2 million at Realogy Title Group and $6 million at Corporate and Other.
(c)Impairments for the Companythree months ended September 30, 2020 relate to lease asset impairments. Impairments for the nine months ended September 30, 2020 include a goodwill impairment charge of $413 million (which reduced the net carrying value of Realogy Brokerage Group by $314 million after accounting for the related income tax benefit of $99 million), an impairment charge of $30 million (which reduced the carrying value of trademarks at Realogy Franchise Group) and appointed as$17 million related to lease asset impairments.
Impairments for the three and nine months ended September 30, 2019 include a membergoodwill impairment charge of $237 million (which reduced the Company’s Boardnet carrying value of Directors.Realogy Brokerage Group by $180 million after accounting for the related income tax benefit of $57 million). In accordance withaddition, the succession plan developed bythree and nine months ended September 30, 2019 include other impairment charges primarily related to lease asset impairments of $3 million and $6 million, respectively.
(d)Former parent legacy items and (Gain) loss on the Board, Mr. Schneider is expected to be named Chief Executive Officer (the “CEO”) by December 31, 2017.early extinguishment of debt are recorded in Corporate and Other.
Upon(e)Includes estimated loss on the appointmentsale of Mr. Schneider as CEO on or before December 31, 2017, Richard Smith,discontinued operations, net of tax of $43 million and $97 million for the Company’s Chairmanthree 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).
nine months ended September 30, 2020, respectively.
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 20162019 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, containor MD&A, contains forward-looking statements. See "Forward-Looking Statements" in this report and "Forward-Looking Statements" and "Risk Factors" in this Quarterly Report as well as our 20162019 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 fourthree business segments:
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• | 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 September 30, 2017,•Realogy Franchise Group—franchises the Century 21®, Coldwell Banker®, Coldwell Banker Commercial®, Corcoran®, ERA®, Sotheby's International Realty® and Better Homes and Gardens® Real Estate brand names. As of September 30, 2020, our 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 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 brokeragesfranchise systems and proprietary brands had approximately 318,000 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,agents worldwide, including approximately 189,000 independent sales associates and customers as well as improveagents operating in the productivity ofU.S. (which included approximately 52,400 company owned brokerage independent sales associates.agents). As of September 30, 2020, our real estate franchise systems and proprietary brands had approximately 19,500 offices worldwide in 115 countries and territories, including approximately 5,800 brokerage offices in the U.S. (which included approximately 680 company owned brokerage offices). Realogy Leads Group, which consists of Company- and client- directed affinity programs, broker-to-broker referrals and the Realogy Advantage Broker Network (previously referred to as the Cartus Broker Network) was consolidated in Realogy Franchise Group beginning in the first quarter of 2020 (see Note 10, "Segment Information", to the Condensed Consolidated Financial Statements for additional information).
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• | Company Owned Real Estate Brokerage Services (known as NRT)—operates a full-service real estate brokerage business with more than 780 owned and operated brokerage offices with more than 50,000 independent sales associates principally under the Coldwell Banker®, Corcoran®, Sotheby’s International Realty®, ZipRealty® and Citi HabitatsSM brand names in more than 50 of the 100 largest metropolitan areas in the U.S. This segment also includes the Company's share of earnings for our PHH Home Loans venture, which is in the process of winding down as we transition to our new mortgage origination joint venture with Guaranteed Rate Affinity.
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• | 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.
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•Realogy Brokerage Group—operates a full-service real estate brokerage business with approximately 680 owned and operated brokerage offices with approximately 52,400 independent sales agents principally under the Coldwell Banker®, Corcoran® and Sotheby’s International Realty® brand names in many of the largest metropolitan areas in the U.S.
•Realogy Title 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 equity earnings including start-up costs,and losses for our Guaranteed Rate Affinity venture.
RECENT DEVELOPMENTS
Leadership Succession Plan
On October 23, 2017, the Company announced that Ryan Schneider has been named President and Chief Operating Officer 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.
Strategic Initiatives
Our strategic initiatives are focused on affiliated independent sales associates, including targeted recruiting strategies, best-in-class retention practices, and organizational changes with new centers of excellence to enhance support for services such as marketing and education for affiliated independent sales associates. We believe that this refined strategic plan will manifest itself 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 existing independent sales associates and attract new independent sales associates.
Consistent with 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 actions include a focused 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.
Impact of Natural Disasters
In the third quarter 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 locations related to the hurricanes and have not incurred any significant damage to our office locations as a result 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 doingventure.
Our technology and data group pursues technology-enabled solutions to support our 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 Realogysegments 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 subsidiariesfranchisees as well as other real estate brokerageindependent sales agents affiliated with Realogy Brokerage and relocation companies across the country. Guaranteed Rate owns a controlling 50.1% stake of Guaranteed Rate AffinityFranchise Groups and Realogy owns 49.9%. Guaranteed Rate will have responsibility 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 earnings related to Guaranteed Rate Affinity will be included in the financial results of our Title and Settlement Services segment.
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.their customers.
CURRENT BUSINESS AND INDUSTRY TRENDS
According to the National Association of Realtors ("NAR"), during the firstthree months ended September 30, 2020, homesale transaction volume increased 23% primarily due to a 13% increase in the homesale transactions and a 9% increase in the average homesale price. During the nine months of 2017,ended September 30, 2020, according to NAR, homesale transaction volume increased 6% due to a 5%6% increase in the average homesale price and a 1% increase in the number offlat homesale transactions. The higher increase in the average homesale price relative to the increase in homesale transactions is a function of high demand against a limited supply of homes for sale. RFG and NRT homesale
Homesale transaction volume on a combined basis for Realogy Franchise and Brokerage Groups increased 7% in28% during the first ninethree months ended September 30, 2020 compared to the three months ended September 30, 2019. Homesale transaction volume at Realogy Franchise Group increased 31% during such period, primarily as a result of 2017. NRT experienced a 2% increase in existing homesale transactions and a 6%17% increase in average homesale price while RFG experiencedand a 1%12% increase in existing homesale transactionstransactions. Homesale transaction volume at Realogy Brokerage Group increased 22% during such period, primarily as a result of an 11% increase in average homesale price and a 10% increase in existing homesale transactions.
Homesale transaction volume on a combined basis for Realogy Franchise and Brokerage Groups increased 3% during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. Homesale transaction volume at Realogy Franchise Group increased 6% during such period, as a result of a 9% increase in average homesale price, partially offset by a 3% decrease in existing homesale transactions. Homesale transaction volume at Realogy Brokerage Group decreased 2% during such period, as a result of a 5% decrease in existing homesale transactions, partially offset by a 3% increase in average homesale price.
Recruitment and retentionThe table below shows the trend of independent sales associates and independent sales associate teams are criticalhomesale transaction volume from January to September 2020 compared to the businessprior year and financial resultsreflects the negative impact of COVID-19 starting in the final weeks of the first quarter of 2020 and recovery late in the second quarter of 2020.
COVID-19 Crisis. A strong recovery in the residential real estate market began late in the second quarter of 2020, following a brokerage,period of sharp decline in homesale transactions starting in the final weeks of the first quarter of 2020. We attribute the recovery to date to a favorable mortgage rate environment, low inventory contributing to higher average homesale price, and increased demand as the quarantine restrictions in place in many states have begun to be relaxed. In addition, we have observed growing strength in certain trends that we believe are largely driven by behavioral changes related to the COVID-19 crisis, including home buyer preferences for certain geographies, including suburban locations and attractive tax and weather destinations and second home purchases.
During the second quarter of 2020, our company owned brokerages were negatively impacted by steeper declines in closed transactions in densely populated areas, such as California and those operated by our affiliated franchisees. Competitionthe New York metropolitan area (geographies which also have an average sales price much higher than the U.S. average), as well as from lower inventory in the high-end markets, resulting in lower homesale transaction volume for independent sales associatescompany owned brokerages compared to franchised brokerages due to geographic and high-end market concentration. These geographies showed positive growth in our industry, including within our franchise system, is high,September 2020; however, throughout the third quarter, the recovery trajectory in particular with respectthe New York metropolitan area continued to more productive sales associates. Most of a brokerage'smeaningfully lag the general residential real estate listings are sourced throughmarket, which continued to impact homesale transaction volume at our company-owned brokerages as compared to franchised brokerages. Although inventory across all price points continues to be constrained, limited inventory in the spherehigh-end did not materially impact results at our company owned brokerages in the third quarter 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.2020. We believe that the influence of independent sales associates and independent sales associate teams has increasedincrease in average homesale price at Realogy Franchise Group as compared to the broader market during the past five years2020 third quarter was primarily driven by particularly strong performance in the high-end of the market by one of our franchised brands.
In mid-March 2020, we began taking a series of proactive cost-saving measures in reaction to the evolving COVID-19 crisis, including salary reductions, furloughs and together withreductions in marketing and other spending which resulted in substantial cost-savings in the increasing competition from other brokerages, hassecond quarter of 2020 to partially offset the decline in revenues. While these temporary cost-saving measures resulted in cost savings in the second and third quarters of 2020, almost all of such measures were reversed during the third quarter of 2020 based upon the significant improvement in the volume of homesale transactions and ongoing business needs.
There remain significant uncertainties regarding the COVID-19 crisis, including the severity, duration and extent of the pandemic. Our business could be negatively impacted if the recruitmentcrisis, including adverse economic consequences of the crisis, worsen, if directives and retentionmandates requiring businesses to again curtail or cease normal operations are reinstated, if mortgage rates rise, or if housing inventory constraints, across geographies and price point, limit homesale transaction growth. These negative impacts may be more pronounced in future periods and could have a material adverse effect on our results of independent sales associatesoperations and put pressure on commissionliquidity.
Inventory. Continued or accelerated declines in inventory, whether attributable to the COVID-19 crisis or otherwise, may result in insufficient supply to meet any increased demand driven by the lower interest rate splits.environment. Even before the COVID-19 crisis, low housing inventory levels had been an industry-wide concern, in particular in certain highly sought-after geographies and at lower price points. According to NAR, the inventory of existing homes for sale in the U.S. decreased approximately 19% from 1.82 million as of September 2019 to 1.47 million as of September 2020. As a result, inventory has decreased from 4.0 months of supply in September 2019 to 2.7 months as of September 2020. These factors may also put pressure on RFG's net effective royalty rate as the economics for agents and agent teams change. At NRT, welevels continue to focus on our growth initiatives, specifically our recruiting programsbe significantly below the 10-year average of 5.4 months, the 15-year average of 6.1 months and the focus25-year average of 5.7 months. While insufficient inventory levels generally have a negative impact on strengtheninghomesale transaction growth, during the sales agent value proposition.three months ended September 30, 2020, Realogy Franchise and Brokerage Groups saw a 12% increase in homesale transactions on a combined basis compared to September 30, 2019. We believe that during the third quarter of 2020, the intensified pace of inventory supply turnover contributed to the reported low levels of inventory, without a correlating decrease in homesale transactions. For example, at our company owned Coldwell Banker brokerages, the speed at which a home that was listed for sale went under contract reduced to a median of 19 days on the market in the third quarter of 2020 from a median of 31 days on the market in the third quarter of 2019. There is significant uncertainty as to whether the pattern seen in the third quarter of 2020 of low inventory, but increased homesale transactions driven by supply turnover will continue as constraints in home inventory levels have typically had and may continue to have an adverse impact on the number of homesale transactions closed by Realogy Franchise and Brokerage Groups.
Unemployment. Following the onset of the pandemic, many companies announced reductions in work weeks and salaries, although many people have recently returned to the labor market following weeks or months of COVID-19 induced restrictions. According to the U.S. Bureau of Labor Statistics, while the U.S. unemployment rate declined to 7.9% in September 2020, easing from a high of 14.7% reached in April 2020, this jobless rate still represents a 4.4% increase compared to February 2020. If the COVID-19 pandemic continues to impact employment levels and economic activity for a substantial period, or if jobs recovery continues to slow or worsens, it could lead to an increase in loan defaults and foreclosure activity and may make it more difficult for potential home buyers to arrange financing.
Mortgage Rates. A wide variety of factors can contribute to mortgage rates, including federal interest rates, demand, consumer income, unemployment levels and foreclosure rates. Yields on the 10-year Treasury note hit all-time lows during the COVID-19 crisis and as of September 30, 2020 were 0.69% as compared to 1.68% as of September 30, 2019. In addition, the Federal Reserve Board cut the interest rate two times, dropping its benchmark interest rate to a range of 0% to 0.25% on March 15, 2020. According to Freddie Mac, mortgage rates on commitments for a 30-year, conventional, fixed-rate first mortgage lowered to an average of 2.95% for the third quarter of 2020 compared to 3.67% for the third quarter of 2019. On September 30, 2020, mortgage rates were 2.89%, according to Freddie Mac.
Our financial results are favorably impacted by a low interest rate environment as a decline in mortgage rates generally drives increased refinancing activity and homesale transactions. For example, the Company recorded equity earnings from our mortgage origination joint venture, Guaranteed Rate Affinity, of $95 million and $12 million for the nine months ended September 30, 2020 and 2019 which represented approximately 18% of the Company's Operating EBITDA for the nine months ended September 30, 2020 (as compared to 3% of the Company's Operating EBITDA for the nine months ended September 30, 2019). Realogy Title Group also experienced a 159% increase in the number of title and closing units processed as a result of homeowners refinancing their home loans for the nine months ended September 30, 2020 as compared to the prior year period. The new targeted recruiting initiatives that we introduced in late 2016 have enabled us to mitigate prior declinesrefinancing volume of these businesses are inherently cyclical and this level of volume may not be maintained or may meaningfully decrease with fluctuations in market share throughconditions such as mortgage rates.
Due to the economic effects of the COVID-19 crisis, banks may tighten mortgage standards, even as rates decline, which could limit the availability of mortgage financing. In addition, many individuals and businesses have benefited and may be continuing to benefit from one or more federal and/or state monetary or fiscal programs meant to assist in the navigation of high performing NRT independent sales associates. While these recruitingCOVID-related financial challenges, and retention initiativesthe termination or substantial curtailment of, or failure to extend, such programs could have increased our commission expense,a negative impact on their financial health. Increases in mortgage rates adversely impact housing affordability and we expect these initiatives will improve our operating results over the longer termhave been and will continue to positively impact our market share trend.could again be negatively impacted by a rising interest rate environment.
AsAffordability. The fixed housing affordability index, as reported by NAR, thewas consistent year-over-year at 160 for August 2019 and 159 for August 2020. A housing affordability index has continued to be at historically favorable levels, despite the increases in the average homesale price over the past several years. An index above 100 signifies that a family earning the median income has sufficient income to purchase a median-priced home, assuming a 20 percent down payment and ability to qualify for a mortgage. The composite housingHousing affordability index was 150 for August 2017may be impacted in future periods by increases in average homesale price and 165 for 2016. The housing affordability index remains significantly higher than the averagelow inventory environment as well as the rise in unemployment and economic challenges as a result of 127the COVID-19 crisis, but we are unable to estimate the extent due to the uncertainties of the COVID-19 crisis and its related impact on the U.S. economy.
Recruitment and Retention of Independent Sales Agents; Commission Income. Recruitment and retention of independent sales agents and independent sales agent teams are critical to the business and financial results of a brokerage, including our company owned brokerages and those operated by our affiliated franchisees. Aggressive competition for the periodaffiliation of independent sales agents has negatively impacted recruitment and retention efforts at both Realogy Franchise and Brokerage Groups, in particular with respect to more productive sales agents, and drove a loss in our market share for 2019 compared to 2018. This competitive environment has continued despite general business disruption due to the COVID-19 crisis.
We believe that a variety of factors in recent years have driven intensifying recruitment and retention tactics for independent sales agents in the industry and has increasingly impacted our recruitment and retention of top producing agents. Such factors include increasing competition, increasing levels of commissions paid to agents (including up-front payments and equity), changes in the spending patterns of independent sales agents (as more independent sales agents purchase services from 1970 through 2016.
According to Freddie Mac, mortgage ratesthird-parties outside of their affiliated broker), a heightening focus on commitmentsleads or business opportunities generated for a 30-year, conventional, fixed-rate first mortgages averaged 3.7% for 2016the independent sales agent from the brokerage, differentiation in the bundling of agent services or industry offerings (including non-traditional offerings), and the rate at September 30, 2017 was 3.8%. Although mortgage rates have increased 30 basis pointsgrowth in independent sales agent teams.
In addition, industry competition for independent sales agents has been and is expected to 3.8% as of September 30, 2017 from 3.5% as of September 2016, they continue to be at low levelsfurther complicated by historicalcompetitive models that do not prioritize traditional business objectives. For example, we believe that certain owned-brokerage competitors have investors that have historically allowed the pursuit of increases in market share over profitability, which not only exacerbates competition for independent sales agents, but places additional pressure on the share of commission income received by the agent.
Competition for productive agents is expected to continue to have a negative impact on our homesale transaction volume and to put upward pressure on the average share of commissions earned by independent sales agents and may have a negative impact on our market share. These competitive market factors also impact our franchisees and such franchisees have and may continue to seek reduced royalty fee arrangements or other incentives from us to offset the continued business pressures on such franchisees, which would result in a reduction in royalty fees paid to us.
Non-Traditional Market Participants. While real estate brokers using historical real estate brokerage models typically compete for business primarily on the basis of services offered, brokerage commission, reputation, utilization of technology and personal contacts, participants pursuing non-traditional methods of marketing real estate may compete in other ways, including companies that employ technologies intended to disrupt historical real estate brokerage models or minimize or eliminate the role traditional brokers and sales agents perform in the homesale transaction process.
A growing number of companies are competing in non-traditional ways for a portion of the gross commission income generated by homesale transactions. For example, many iBuying business models seek to disintermediate real estate brokers and independent sales agents from buyers and sellers of homes by reducing or eliminating brokerage commissions that may be earned on those transactions. In October 2020, we continued to evolve our agent-focused iBuying offerings through the launch of a joint venture with Home Partners of America intended to expand the geographic reach of our RealSure program, which has been available in pilot form in 10 U.S. markets. Under the RealSure Sell program, sellers with qualifying properties receive a cash offer valid for 45 days immediately upon listing, and during this time frame have the opportunity to pursue a better price by marketing their property with an affiliated independent sales agent. Sellers who are enrolled in
RealSure Sell can utilize RealSure Buy to make a more competitive offer on their next home before their current home is sold by leveraging their RealSure Sell cash offer.
standards. While this increase adversely impacts housing affordability, we believeIn addition, the concentration and market power of the top listing aggregators allow them to monetize their platforms by a variety of actions, including expanding into the brokerage business, charging significant referral fees, charging listing and display fees, diluting the relationship between agents and brokers (and between agents and the consumer), tying referrals to use of their products, consolidating and leveraging data, and engaging in preferential or exclusionary practices to favor or disfavor other industry participants. These actions divert and reduce the earnings of other industry participants, including our company owned and franchised brokerages. Aggregators could intensify their current business tactics or introduce new programs that rising wages, improving consumer confidencecould be materially disadvantageous to our business and a continuation of low inventory levels for the mainstream housing market will result in continued favorable demand conditions and existing homesale volume growth. To the extent that mortgage rates increase, consumers continue to have financing alternatives such as adjustable rate mortgages or shorter term mortgages which can be utilized to obtain a lower mortgage rate than a 30-year fixed-rate mortgage.
Partially offsetting the positive impact of historically favorable affordability 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 saleother brokerage participants in the U.S. was 1.9 millionindustry and 2.0 million atsuch tactics could further increase pressures on the endprofitability of September 2017our company owned and September 2016, respectively. The September 2017 inventory representsfranchised brokerages and affiliated independent sales agents, reduce our franchisor service revenue and dilute our relationships with our franchisees and our and our franchisees' relationships with affiliated independent sales agents and buyers and sellers of homes. For example, one dominant listing aggregator recently announced its intention to launch a national average supplybrokerage with employee sales agents in several locations to support its iBuying offering. It also announced that it expects to join local multiple listing services, known as MLSs, as a participating broker to gain electronic access directly to real estate listings rather than relying on disparate electronic feeds from other brokers participating in the MLSs or MLS syndication feeds.
New Development. Realogy Brokerage Group has relationships with developers, primarily in major cities, in particular New York City, to provide marketing and brokerage services in new developments. New development closings can vary significantly from year to year due to timing matters that are outside of 4.2 months atour control, including long cycle times and irregular project completion timing. In addition, the current homesales pace which is significantly belownew development industry has also experienced significant disruption due to 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, 2015 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 availabilityCOVID-19 crisis. Accordingly, earnings attributable to more creditworthy borrowers and requiring larger down payments, stricter appraisal standards, and more extensive mortgage documentation. Although mortgage credit conditions appearthis business can fluctuate meaningfully from year to be easing, mortgages remain less available to some borrowers and it frequently takes longer to close ayear, impacting both homesale transaction due to current mortgagevolume and underwriting requirements.the share of gross commission income we realize on such transactions.
Existing Homesales
AccordingFor the nine months ended September 30, 2020 compared to the same period in 2019, NAR existing homesale transactions for 2016 increased to 5.5remained flat at 4 million homes, or up 4%, compared to 2015, while homesale transactions increased 2% on a combined basis for RFG and NRT.
homes. For the quartersnine months ended March 31, 2017, June 30, 2017 and September 30, 2017, compared to the same periods in 2016, NAR existing homesale transactions were 1.1 million, 1.6 million and 1.5 million homes, or up 5%, up 2% and down 2%, respectively. For the periods above, RFG and NRT2020, homesale transactions on a combined basis increased 3%, increased 1%for Realogy Franchise and Brokerage Groups decreased 1%, respectively,4% compared to the same periodsperiod in 2016. 2019 due primarily to the impact of the COVID-19 crisis on second quarter homesale transaction volume, the impact of competition (including on our market share), the loss of certain franchisees and the geographic concentration of Realogy Brokerage Group.
During the
first ninethree months
of the year, the number ofended September 30, 2020, NAR's existing homesale transactions
for RFGincreased 13% as compared to an increase in homesale transactions of 12% at Realogy Franchise Group and
NRT has continued to be challenged by inventory constraints, however for NRT there has been10% at Realogy Brokerage Group (for an increase of 12% on a
shift from stabilization to growth in the high end of the housing market.combined basis). The
annualquarterly and
quarterlyannual 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. |
(a)Q1, Q2 and Q3 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 homesaleshomesale transactions to increase 7%9% in 20182021 while Fannie Mae is forecasting an increase in existing homesale transactions to increase 1% for the same period.
Existing Homesale Price
In 2016,For the nine months ended September 30, 2020 compared to the same period in 2019, 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.
6%. For the quartersnine months ended March 31, 2017, June 30, 2017 and September 30, 2017, compared to the same periods in 2016, NAR existing homesale average price increased 5%, 5% and 4%, respectively. For the periods above, RFG and NRT2020, average homesale price on a combined basis for Realogy Franchise and Brokerage Groups increased 5%, 7%, and 6%, respectively, compared to the same periodsperiod in 2016. The combined2019.
During the three months ended September 30, 2020, NAR's existing homesale average price increased 9% as compared to an average homesale price increase of 17% at Realogy Franchise Group and 11% at Realogy Brokerage Group (for an increase of 14% on a combined basis). We believe that the delta between Realogy Brokerage Group and Realogy Franchise Group in the 2020 third quarter was due toprimarily driven by Realogy Brokerage Group's geographic concentration in the increaseNew York metropolitan area. We believe that the delta between Realogy Franchise Group and NAR in homesale transactions at the high end2020 third quarter was primarily driven by particularly strong performance by one of Realogy Franchise Group's brands in the high-end of the markets served by NRTmarket. The quarterly and RFG. Both RFG and NRT homesale price also improved as a result of increased demand due to the continuation of constrained inventory levels. 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. |
(a)Q1, Q2 and Q3 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 both forecasting an increase in median existing homesale price to increase 4% in 2021.
* * *
We believe that long-term demand for housing and the growth of our industry are primarily driven by the affordability of housing, the economic health of the U.S. economy, demographic trends such as population growth, the increasegenerational transitions, increases in U.S. household formation, mortgage rate levels and mortgage availability, certain tax benefits, job growth, increases in renters that qualify as homebuyers, the inherent attributes of homeownership versus renting and the influenceavailability of local housing dynamics of supply versus demand.inventory in the consumer's desired location and within the consumer's price range. At this time, mostcertain of these factors are generally trending favorably.favorably, such as mortgage rate levels and household formation, although the COVID-19 pandemic continues to materially impact the entire industry and the global economy. Factors that may negatively affect continued growth in the housing industry include:
higher mortgage rates due•the extent, duration and severity of the COVID-19 pandemic and the economic consequences stemming from the COVID-19 crisis, including continued economic contraction or the failure of a recovery to increases in long-term interest ratesbe sustained as well as reduced availabilityrelated risks such as governmental regulation (including those that preclude or strictly limit showings of mortgage financing;properties), changes in patterns of commerce or consumer activities and changes in consumer attitudes;
•intensifying or continuing economic contraction in the U.S. economy including the impact of recessions, slow economic growth, or a deterioration in other economic factors (including potential consumer, business or governmental defaults or delinquencies due to the COVID-19 crisis or otherwise);
•continued insufficientlow or accelerated declines in home inventory levels or stagnant and/or declining home prices;
•continued high levels of unemployment and/or declining wages or stagnant wage growth in the U.S.;
•the termination or substantial curtailment of, or failure to extend, one or more federal and/or state monetary or fiscal programs meant to assist businesses and lack of building of new housing leading to lower unit sales;individuals navigate COVID-19 related financial challenges;
changing attitudes towards home ownership, particularly among potential first-time homebuyers who may delay, •decreasing consumer confidence in the economy and/or decide not to, purchase homes;the residential real estate market;
•an increase in potential homebuyers with a low credit ratingratings or inability to afford down payments;
•reduced availability of mortgage financing or increasing down payment requirements or other mortgage challenges due to disrupted earnings;
•weak capital, credit and financial markets and/or the impactinstability of limited or negative equity of current homeowners, as well asfinancial institutions;
•an increase in foreclosure activity;
•a reduction in the lack of available inventory may limit their proclivity to purchase an alternative home;
reduced affordability of homes;homes, including in connection with rising home prices;
economic stagnation or contraction•increases in mortgage rates;
•certain provisions of the U.S. economy;
a decline in2017 Tax Act that directly impact traditional incentives associated with home ownership levels inand may reduce the U.S.;
geopoliticalfinancial distinction between renting and economic instability; and
legislative or regulatory reform,owning a home, including but not limited to reformthose 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 reducesreduce the amount that certain taxpayers would be allowed to deduct for home mortgage interest or state, local and property taxes.taxes;
•state or local tax reform, such as the "mansion tax" in New York City;
•decelerated or lack of building of new housing for homesales, increased building of new rental properties, or irregular timing of new development closings leading to lower home sales at Realogy Brokerage Group, which has relationships with developers, primarily in major cities, to provide marketing and brokerage services in new developments;
•geopolitical and economic instability, including uncertainty around the 2020 U.S. election;
•homeowners retaining their homes for longer periods of time;
•a decline in home ownership levels in the U.S., including as a result of changing attitudes towards home ownership, particularly among potential first-time homebuyers who may delay, or decide not to, purchase a home, limits on the proclivity of home owners to purchase an alternative home due to constrained inventory, or changes in preferences to rent versus purchase a home;
•natural disasters, such as hurricanes, earthquakes, wildfires, mudslides and other events that disrupt local or regional real estate markets, including public health crises, such as pandemics and epidemics; and
•other legislative or regulatory reforms, including but not limited to reform that adversely impacts the financing of the U.S. housing market, changes relating to RESPA, potential reform of Fannie Mae and Freddie Mac, immigration reform, and further potential federal, state or local tax code reform (including, for example, the proposed "pied-a-terre tax" in New York City).
Many of the trends impacting our businesses that derive revenue from homesales also impact Cartus whichRelocation Services is a global provider of outsourced employee relocation services. In addition toimpacted by these general residential housing trends key drivers of Cartus areas well as global corporate spending on relocation services which has not returned(which continue to levels that existed priorshift to the most recent recessionlower cost relocation benefits as corporate clients engage in cost reduction initiatives and/or restructuring programs) and 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.
* * *
While data provided by NAR and Fannie Mae are two indicators of the direction of the residential housing market, we believe that homesale statistics will continue to vary between us and NAR and Fannie Mae because:
•they use survey data and estimates in their historical reports and forecasting models, which are subject to sampling error, whereas we use data based on actual reported results;
•there are geographical differences and concentrations in the markets in which we operate versus the national market. For example, many of our company owned brokerage offices are geographically located where average homesale prices are generally higher than the national average and therefore NAR survey data will not correlate with NRT'sRealogy Brokerage Group's results;
•comparability is also impaireddiminished due to NAR’s utilization of seasonally adjusted annualized rates whereas we report actual period-over-period changes and their use of median price for their forecasts compared to our average price;
•NAR historical data is subject to periodic review and revision and these revisions have been material in the past, and could be material in the future; and
•NAR and Fannie Mae generally update their forecasts on a monthly basis and a subsequent forecast may change materially from a forecast that was previously issued.
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 RFGRealogy Franchise and NRT,Brokerage Groups, 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,Realogy Franchise Group, we also use net effective royalty rateper side, which represents the average percentage of our franchisees’ commission revenues payableroyalty payment to RFG, net of volume incentives achieved.
Since 2014 we have experienced approximately a one basis point decline in theRealogy Franchise Group for each homesale transaction side taking into account royalty rates, average broker commission rate each yearrates, volume incentives achieved and we expect that overother incentives. We utilize net royalty per side as it includes the long term the average brokerage commission rates will continue to modestly decline as a resultimpact of increaseschanges in average homesale prices and, to a lesser extent, competitors providing fewer services for a reduced fee. Continuing growth in the housing market should result in an increase in our revenues, although such increases could be offset by modestly declining brokerage commission rates 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 percentage 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 teamsprice as well as more aggressive recruitmentall incentives and represents the royalty revenue impact of each incremental side.
For Realogy Brokerage Group, we also use gross commission income per side, which represents gross commission income divided by closed homesale sides. Gross commission income includes commissions earned in homesale transactions and certain other activities, 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 respectprimarily leasing transactions. Realogy Brokerage Group, as a franchisee of Realogy Franchise Group, pays a royalty fee of approximately 6% per transaction to more productive independent sales associates which has impacted NRT's market share and results of operations, as well as RFG toRealogy Franchise Group from the commission earned on a lesser extent. Currently, there are several different compensation models being utilized by real estate brokerages to compensate their independent sales associates.transaction. The most common models are as follows: (1) a graduatedremainder of gross commission plan, sometimes referred to asincome is split between the "traditional model" wherebroker (Realogy Brokerage Group) and the independent sales associate receives a percentage ofagent in accordance with their applicable independent contractor agreement (which specifies 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 allportion of the broker commission and pays the broker on both a monthly and transaction basis for office space, tools, technology and support while also being 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 servicesbe paid 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 drivenagent), which varies by our overall goal to sustain or grow market share in various markets and ultimately improve the Company's overall profitability. While we have seen revenue improvements directly related to these initiatives, we have experienced and expect to continue to experience pressure on costs and margin from these initiatives.
Within Cartus, we measure operating performance using the following key operating statistics: (i) initiations,agent agreement, 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.varies by agent.
In TRG,Realogy Title Group, operating performance is evaluated using the following key metrics: (i) purchase title and closing units, which represent the number of title and closing units we process as a result of home purchases, (ii) refinance title and closing units, which represent the number of title and closing units we process as a result of homeowners refinancing their home loans, and (iii) average fee per closing unit, which represents the average fee we earn on purchase title and refinancing title sides. Results are favorably impacted by the low mortgage rate environment. An increase or decrease in homesale transactions will impact the financial results of TRG;Realogy Title Group; however, thetheir financial results are not significantly impacted by a change in homesale price. In addition,
Realogy Leads Group, which consists of Company- and client- directed affinity programs, broker-to-broker referrals and the average mortgage rate increasedRealogy Advantage Broker Network (previously referred to as the Cartus Broker Network) was consolidated into Realogy Franchise Group during the first quarter of 2020.
For the three months ended September 30, 2020, Cartus Relocation Services had 15,097 initiations as compared to 21,020 initiations during the same period in 2019. Cartus Relocation Services earned referral fee revenue from approximately 3,417 referrals for the three months ended September 30, 2020 as compared to 4,698 referrals during the same period of 2019. For the nine months ended September 30, 2020, Cartus Relocation Services had 60,713 initiations as compared to 80,331 initiations during the same period of 2019. Cartus Relocation Services earned referral fee revenue from approximately 9,005 referrals for the nine months ended September 30, 2020 as compared to 11,808 referrals during the same period of 2019. Cartus Relocation Services experienced a decline in new initiations attributable to the COVID-19 pandemic in the fourth quartersecond and third quarters of 20162020 and refinancing transactions have decreasedthis trend is expected to continue.
The following table presents our drivers for the three and nine months ended September 30, 2020 and 2019. See "Results of Operations" below for a discussion as a result. We believe that a further increase in mortgage rates into how these drivers affected our business for the future will most likely have a negative impact on refinancing title and closing units.periods presented.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | % Change | | 2020 | | 2019 | | % Change |
Realogy Franchise Group (a) | | | | | | | | | | | |
Closed homesale sides | 336,737 | | | 299,937 | | | 12 | % | | 778,010 | | | 803,976 | | | (3) | % |
Average homesale price | $ | 367,095 | | | $ | 314,984 | | | 17 | % | | $ | 341,427 | | | $ | 312,224 | | | 9 | % |
Average homesale broker commission rate | 2.48 | % | | 2.47 | % | | 1 | bps | | 2.48 | % | | 2.47 | % | | 1 | bps |
Net royalty per side | $ | 367 | | | $ | 329 | | | 12 | % | | $ | 341 | | | $ | 323 | | | 6 | % |
Realogy Brokerage Group | | | | | | | | | | | |
Closed homesale sides | 101,890 | | | 92,399 | | | 10 | % | | 235,806 | | | 248,092 | | | (5) | % |
Average homesale price | $ | 563,513 | | | $ | 509,425 | | | 11 | % | | $ | 537,602 | | | $ | 522,050 | | | 3 | % |
Average homesale broker commission rate | 2.44 | % | | 2.41 | % | | 3 | bps | | 2.43 | % | | 2.41 | % | | 2 | bps |
Gross commission income per side | $ | 14,315 | | | $ | 13,000 | | | 10 | % | | $ | 13,685 | | | $ | 13,343 | | | 3 | % |
Realogy Title Group | | | | | | | | | | | |
Purchase title and closing units | 45,788 | | | 41,619 | | | 10 | % | | 106,540 | | | 111,865 | | | (5) | % |
Refinance title and closing units | 18,387 | | | 8,014 | | | 129 | % | | 44,834 | | | 17,295 | | | 159 | % |
Average fee per closing unit | $ | 2,239 | | | $ | 2,288 | | | (2) | % | | $ | 2,189 | | | $ | 2,308 | | | (5) | % |
_______________
(a)Includes all franchisees except for Realogy Brokerage Group.
A decline in the number of homesale transactions andand/or decline in homesale prices could adversely affect our results of operations by: (i) reducing the royalties we receive from our franchisees, (ii) reducing the commissions our company owned brokerage operations earn, (iii) reducing the demand for our title and settlement services, (iv) reducing the referral fees we earn in our relocation services business,from affinity, broker-to-broker and the Realogy Advantage Leads Network, 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 or by an increase in volume or other incentives paid to franchisees.
The followingSince 2014, we have experienced approximately a one basis point decline in the average homesale broker commission rate each year, which we believe has been largely attributable to increases in average homesale prices (as higher priced homes tend to have a lower broker commission) and, to a lesser extent, competitors providing fewer or similar services for a reduced fee.
Royalty fees are charged to all franchisees pursuant to the terms of the relevant franchise agreements and are included in each of the real estate brands' franchise disclosure documents. Most of our third-party franchisees are subject to a 6% royalty rate and entitled to volume incentives, although a royalty fee generally equal to 5% of franchisee commission (capped at a set amount per independent sales agent per year) is applicable to franchisees operating under the "capped fee model" that was launched for our Better Homes and Gardens® Real Estate franchise business in January 2019. Volume incentives are calculated as a progressive percentage of the applicable franchisee's eligible annual gross commission income
and generally result in a net or effective royalty rate ranging from 6% to 3% for the franchisee (prior to taking into account other incentives that may be applicable to the franchisee). Volume incentives increase or decrease as the franchisee's gross commission income generated increases or decreases, respectively. We have the right to adjust the annual volume incentive tables on an annual basis in response to changing market conditions. In addition, certain of our franchisees (including some of our largest franchisees) have a flat royalty rate of less than 6% and are not eligible for volume incentives.
Other incentives may also be used as consideration to attract new franchisees, grow franchisees (including through independent sales agent recruitment) or extend existing franchise agreements, although in contrast to volume incentives, the majority of other incentives are not homesale transaction based.
Transaction volume growth has exceeded royalty revenue growth due primarily to the growth in gross commission income generated by our top 250 franchisees and our increased use of other sales incentives, both of which directly impact royalty revenue. Over the past several years, our top 250 franchisees have grown faster than our other franchisees through organic growth and market consolidation. If the amount of gross commission income generated by our top 250 franchisees continues to grow at a quicker pace relative to our other franchisees, we would expect our royalty revenue to continue to increase, but at a slower pace than homesale transaction volume. Likewise, our royalty revenue would continue to increase, but at a slower pace than homesale transaction volume, if the gross commission income generated by all of our franchisees grows faster than the applicable annual volume incentive table presentsincrease or if we increase our driversuse of standard volume or other incentives. However, in the event that the gross commission income generated by our franchisees increases as a result of increased transaction volume, we would expect to recognize an increase in overall royalty payments to us.
We face significant competition from other national real estate brokerage brand franchisors for franchisees and we expect that the trend of increasing incentives will continue in the future in order to attract, retain, and help grow certain franchisees. We expect to experience pressures on net royalty per side, largely due to the impact of competitive market factors noted above, continued concentration among our top 250 franchisees, and the impact of affiliated franchisees of our Better Homes and Gardens® Real Estate brand moving to the "capped fee model" we adopted in 2019; however, these pressures were offset by increases in homesale prices in the three and nine monthsnine-month periods ended September 30, 20172020.
Realogy Brokerage Group has a significant concentration of real estate brokerage offices and 2016. See "Resultstransactions in geographic regions where home prices are at the higher end of Operations" belowthe U.S. real estate market, particularly the east and west coasts, while Realogy Franchise Group has franchised offices that are more widely dispersed across the United States. Accordingly, operating results and homesale statistics may differ between Realogy Brokerage Group and Realogy Franchise Group based upon geographic presence and the corresponding homesale activity in each geographic region. In addition, the share of commissions earned by independent sales agents directly impacts the margin earned by Realogy Brokerage Group. Such share of commissions earned by independent sales agents varies by region and commission schedules are generally progressive to incentivize sales agents to achieve higher levels of production. Commission share has been and we expect will continue to be subject to upward pressure in favor of the independent sales agent for a discussionvariety of factors, including more aggressive recruitment and retention activities taken by us and our competitors as to how these drivers affected our business for the periods presented.well as growth in independent sales agent teams.
|
| | | | | | | | | | | | | | | | | | | | | |
| 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 Services interest for securitization assets and securitization obligations) and income taxes, eachand other items that are not core to the operating activities of which is presentedthe Company such as restructuring charges, former parent legacy items, gains or losses on our Condensed Consolidated Statementsthe early extinguishment of Operations.debt, impairments, gains or losses on discontinued operations and gains or losses on the sale of investments or other assets. Our presentation of Operating EBITDA may not be comparable to similarly titled measures used by other companies.
Our results of operations should be read in conjunction with our other disclosures in this Item 2. including under the heading Current Business and Industry Trends. Three Months Ended September 30, 20172020 vs. Three Months EndedSeptember 30, 20162019
Our consolidated results comprised the following:
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2020 | | 2019 | | Change |
Net revenues | $ | 1,857 | | | $ | 1,550 | | | $ | 307 | |
Total expenses | 1,711 | | | 1,700 | | | 11 | |
Income (loss) from continuing operations before income taxes, equity in earnings and noncontrolling interests | 146 | | | (150) | | | 296 | |
Income tax expense (benefit) | 54 | | | (23) | | | 77 | |
Equity in earnings of unconsolidated entities | (53) | | | (7) | | | (46) | |
Net income (loss) from continuing operations | 145 | | | (120) | | | 265 | |
Net (loss) income from discontinued operations | (46) | | | 8 | | | (54) | |
Net income (loss) | 99 | | | (112) | | | 211 | |
Less: Net income attributable to noncontrolling interests | (1) | | | (1) | | | — | |
Net income (loss) attributable to Realogy Holdings and Realogy Group | $ | 98 | | | $ | (113) | | | $ | 211 | |
|
| | | | | | | | | | | |
| Three Months Ended September 30, |
| 2017 | | 2016 | | Change |
Net revenues | $ | 1,674 |
| | $ | 1,644 |
| | $ | 30 |
|
Total expenses (1) | 1,521 |
| | 1,468 |
| | 53 |
|
Income before income taxes, equity in earnings and noncontrolling interests | 153 |
| | 176 |
| | (23 | ) |
Income tax expense | 67 |
| | 74 |
| | (7 | ) |
Equity in earnings of unconsolidated entities | (10 | ) | | (5 | ) | | (5 | ) |
Net income | 96 |
| | 107 |
| | (11 | ) |
Less: Net income attributable to noncontrolling interests | (1 | ) | | (1 | ) | | — |
|
Net income attributable to Realogy Holdings and Realogy Group | $ | 95 |
| | $ | 106 |
| | $ | (11 | ) |
_______________
| |
(1) | Total expenses for the three months ended September 30, 2017 includes $2 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. Total expenses for the three months ended September 30, 2016 includes $9 million of restructuring charges partially offset by $5 million of gains related to mark-to-market adjustments for our interest rate swaps. |
Net revenues increased $30$307 million or 2%20% for the three months ended September 30, 20172020 compared with the three months ended September 30, 2016, principally due to increases in gross commission income and franchise fees as a result of2019 driven by higher homesale transaction volume at both Realogy Franchise and Brokerage Groups primarily due to a strong recovery in the residential real estate market which began late in the second quarter of 4% on2020 following a combined basis for NRT and RFG.period of sharp decline in homesale transactions starting in the final weeks of the first quarter of 2020.
Total expenses increased $53$11 million or 4%1% for the third quarter of 2020 compared to the third quarter of 2019 primarily due to:
•a $53$230 million increase in commission and other sales associate-relatedagent-related costs due to an increase inprimarily as a result of the impact of higher homesale transaction volume at NRTRealogy Brokerage Group and higher sales commissions paidagent commission costs primarily driven by a shift in mix to its independent sales associates;more productive, higher compensated agents, the impact of retention efforts, and business and geographic mix;
•a $5$27 million increase in marketing expenses;operating and general and administrative expenses primarily due to higher employee incentive accruals, partially offset by lower employee-related, occupancy and other operating costs as a result of temporary COVID-19 related cost savings initiatives; and
•the absence of a $4$10 million net increase in interest expense to $41 milliongain on the early extinguishment of debt as a result of the repurchase of Senior Notes completed in the third quarter of 2017 from $372019,
partially offset by:
•lease asset impairments of $6 million induring the third quarter of 20162020 compared to impairments of $240 million during the third quarter of 2019 which included a goodwill impairment charge of $237 million (reducing the net carrying value of Realogy Brokerage Group by $180 million after accounting for the related income tax benefit of $57 million) and $3 million related to lease asset impairments;
•an $18 million net decrease in interest expense primarily due to the absence ofa $12 million decline in expense related to mark-to-market adjustments for our interest rate swaps that resulted in no gains or losses during the third quarter of $52020 compared to losses of $12 million during the third quarter of 2016 less a $1 million decrease as a result of a reduction in total outstanding indebtedness2019 and a lower weighted averagedecrease in interest rate.expense due to LIBOR rate decreases; and
The expense increases were partially offset by:
•a $7 million decrease in restructuringmarketing expense primarily due to not holding in person meetings and conferences and lower advertising costs relateddue to the Company's business optimization plan; andCOVID-19 pandemic.
a $2 million decreaseEquity 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 investmentsearnings were $10$53 million during the third quarter of 20172020 compared to $5earnings of $7 million during the third quarter of 2016. The $5 million increase is equity earnings is2019 primarily due to:
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 decreaseimprovement 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 recordedat Realogy Title Group. Equity in purchase accounting.
As partearnings for Guaranteed Rate Affinity represented approximately 17% of the business optimization initiativeCompany's Operating EBITDA for the Company began in the fourththird quarter of 2015, we incurred $22020, increasing by $46 million of restructuring costsfrom $5 million in the third quarter of 2017 compared2019 to $9$51 million of costs in the third quarter of 2016.2020 as a result of the low mortgage rate environment and improved margins in the venture. Equity in earnings for Realogy Title Group's other equity method investments remained flat at $2 million during the third quarter of 2020 and 2019.
During the third quarter of 2020, we incurred $13 million of restructuring costs primarily related to the Company's restructuring program focused on office consolidation and instituting operational efficiencies to drive profitability. The Company expects to incur an additional $4 million related to initiatives still in progress bringing the estimated total cost of the initiative to be $62 million.approximately $108 million, with $74 million incurred to date. See Note 6, "Restructuring Costs", into 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 $67an expense of $54 million for the three months ended September 30, 20172020 compared to $74a benefit of $23 million for the three months ended September 30, 2016. Our federal and state blended statutory rate is estimated to be 40% for 2017 and our full year effective tax rate is estimated to be 41%.2019. Our effective tax rate was 41%27% and 16% for both the three months ended September 30, 20172020 and September 30, 2016.2019, respectively.
The following table reflects the results of each of our reportable segments during the three months ended September 30, 20172020 and 2016:2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenues (a) | | $ Change | | % Change | | Operating EBITDA | | $ Change | | % Change | | Operating EBITDA Margin | | Change |
| 2020 | | 2019 | | | | 2020 | | 2019 | | | | 2020 | | 2019 | |
Realogy Franchise Group | $ | 262 | | | $ | 240 | | | $ | 22 | | | 9 | % | | $ | 196 | | | $ | 170 | | | $ | 26 | | | 15 | % | | 75 | % | | 71 | % | | 4 | |
Realogy Brokerage Group | 1,479 | | | 1,222 | | | 257 | | | 21 | | | 61 | | | 31 | | | 30 | | | 97 | | | 4 | | | 3 | | | 1 | |
Realogy Title Group | 213 | | | 170 | | | 43 | | | 25 | | | 95 | | | 31 | | | 64 | | | 206 | | 45 | | | 18 | | | 27 | |
Corporate and Other | (97) | | | (82) | | | (15) | | | * | | (43) | | | (26) | | | (17) | | | * | | | | | | |
Total continuing operations | $ | 1,857 | | | $ | 1,550 | | | $ | 307 | | | 20 | % | | $ | 309 | | | $ | 206 | | | $ | 103 | | | 50 | % | | 17 | % | | 13 | % | | 4 | |
| | | | | | | | | | | | | | | | | | | | | |
Less: Depreciation and amortization | | 43 | | | 42 | | | | | | | | | | | |
Interest expense, net | | 48 | | | 66 | | | | | | | | | | | |
Income tax expense (benefit) | | 54 | | | (23) | | | | | | | | | | | |
Restructuring costs, net (b) | | 13 | | | 11 | | | | | | | | | | | |
Impairments (c) | | 6 | | | 240 | | | | | | | | | | | |
Former parent legacy cost, net (d) | | 1 | | | 1 | | | | | | | | | | | |
Gain on the early extinguishment of debt (d) | | — | | | (10) | | | | | | | | | | | |
Net income (loss) from continuing operations attributable to Realogy Holdings and Realogy Group | | 144 | | | (121) | | | | | | | | | | | |
Net (loss) income from discontinued operations | | (46) | | | 8 | | | | | | | | | | | |
Net income (loss) attributable to Realogy Holdings and Realogy Group | | $ | 98 | | | $ | (113) | | | | | | | | | | | |
_______________
* not meaningful
(a)Includes the elimination of transactions between segments, which consists of intercompany royalties and marketing fees paid by Realogy Brokerage Group of $97 million and $82 million during the three months ended September 30, 2020 and 2019, respectively.
(b)Restructuring charges incurred for the three months ended September 30, 2020 include $11 million at Realogy Brokerage Group and $2 million at Corporate and Other. Restructuring charges incurred for the three months ended September 30, 2019 include $2 million at Realogy Franchise Group, $8 million at Realogy Brokerage Group and $1 million at Corporate and Other.
(c)Impairments for the three months ended September 30, 2020 relate to lease asset impairments. Impairments for the three months ended September 30, 2019 include a goodwill impairment charge of $237 million (which reduced the net carrying value of Realogy
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenues (a) | | % Change | | EBITDA (b) | | % Change | | EBITDA Margin | | Change |
| 2017 | | 2016 | | | 2017 | | 2016 | | | 2017 | | 2016 | |
RFG | $ | 224 |
| | $ | 215 |
| | 4 | % | | $ | 159 |
| | $ | 153 |
| | 4 | % | | 71 | % | | 71 | % | | — |
|
NRT | 1,267 |
| | 1,231 |
| | 3 |
| | 62 |
| | 74 |
| | (16 | ) | | 5 |
| | 6 |
| | (1 | ) |
Cartus | 111 |
| | 116 |
| | (4 | ) | | 37 |
| | 40 |
| | (8 | ) | | 33 |
| | 34 |
| | (1 | ) |
TRG | 154 |
| | 164 |
| | (6 | ) | | 21 |
| | 23 |
| | (9 | ) | | 14 |
| | 14 |
| | — |
|
Corporate and Other | (82 | ) | | (82 | ) | | * |
| | (25 | ) | | (20 | ) | | * |
| | | | | | |
Total Company | $ | 1,674 |
| | $ | 1,644 |
| | 2 | % | | $ | 254 |
| | $ | 270 |
| | (6 | %) | | 15 | % | | 16 | % | | (1 | ) |
Less: Depreciation and amortization (c) | | 51 |
| | 53 |
| | | | | | | | |
Interest expense, net | | 41 |
| | 37 |
| | | | | | | | |
Income tax expense | | 67 |
| | 74 |
| | | | | | | | |
Net income attributable to Realogy Holdings and Realogy Group | | $ | 95 |
| | $ | 106 |
| | | | | | | | |
Brokerage Group by $180 million after accounting for the related income tax benefit of $57 million) and $3 million related to lease asset impairments._______________(d)Former parent legacy items and Gain on the early extinguishment of debt are recorded in Corporate and Other. During the third quarter of 2019, the Company repurchased $93 million of its 4.875% Senior Notes through open market purchases resulting in a gain on the early extinguishment of debt of $10 million.
As described in the aforementioned table, Operating EBITDA margin for "Total continuing operations" expressed as a percentage of revenues increased 4 percentage points to 17% for the three months ended September 30, 2020 compared to 13% for the same period in 2019. On a segment basis, Realogy Franchise Group's margin increased 4 percentage points to 75% from 71% primarily due to an increase in royalty revenues. Realogy Brokerage Group's margin increased 1 percentage point to 4% from 3% primarily due to lower operating and employee expenses primarily due to temporary COVID-19 related cost savings initiatives, partially offset by higher agent commission costs primarily driven by a shift in mix to more productive, higher compensated agents, the impact of retention efforts, and business and geographic mix. Realogy Title Group's margin increased 27 percentage points to 45% from 18% primarily as a result of an increase in equity in earnings of Guaranteed Rate Affinity as a result of the low mortgage rate environment and improved margins in the venture.
| |
(a) | Includes the elimination of transactions between segments, which consists of intercompany royalties and marketing fees paid by NRT of $82 million during both the three months ended September 30, 2017 and September 30, 2016. |
| |
(b) | EBITDA for the three months ended September 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. |
The Corporate and Other segment Operating EBITDA for the three months ended September 30, 2016 includes $92020 decreased $17 million to negative $43 million primarily due to higher employee incentive accruals.
Realogy Franchise and Brokerage Groups on a Combined Basis
The following table reflects Realogy Franchise and Brokerage Group's results before the intercompany royalties and marketing fees as well as on a combined basis to show the Operating EBITDA contribution 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 amortization for the three months ended September 30, 2017 includes $1 million of amortization expense relatedthese business segments to Guaranteed Rate Affinity's purchase accounting included in the "Equity in earnings of unconsolidated entities" line on the Condensed Consolidated Statement of Operations. |
As described in the aforementioned table,overall Operating EBITDA of the Company. The Operating EBITDA margin for "Total Company" expressed as a percentage of revenues decreasedthe combined segments increased 1 percentage point from 15% to 15% from 16% forprimarily due to lower operating and employee expenses primarily due to temporary COVID-19 related cost savings initiatives and an increase in royalty revenues at Realogy Franchise Group, partially offset by higher agent commission costs at Realogy Brokerage Group during the third quarter of 2020 compared to the third quarter of 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenues | | $ Change | | % Change | | Operating EBITDA | | $ Change | | % Change | | Operating EBITDA Margin | | Change |
| 2020 | | 2019 | | | | 2020 | | 2019 | | | | 2020 | | 2019 | |
Realogy Franchise Group (a) | $ | 165 | | | $ | 158 | | | 7 | | | 4 | | | $ | 99 | | | $ | 88 | | | 11 | | | 13 | | | 60 | % | | 56 | % | | 4 | |
Realogy Brokerage Group (a) | 1,479 | | | 1,222 | | | 257 | | | 21 | | | 158 | | | 113 | | | 45 | | | 40 | | | 11 | | | 9 | | | 2 | |
Realogy Franchise and Brokerage Groups Combined | $ | 1,644 | | | $ | 1,380 | | | 264 | | | 19 | | | $ | 257 | | | $ | 201 | | | 56 | | | 28 | | | 16 | % | | 15 | % | | 1 | |
_______________
(a)The segment numbers noted above do not reflect the impact of intercompany royalties and marketing fees paid by Realogy Brokerage Group to Realogy Franchise Group of $97 million and $82 million during the three months ended September 30, 2017 compared to the same period in 2016. On a segment basis, RFG's margin remained flat at 71%. NRT's margin decreased 1 percentage point to 5% from 6% primarily due to higher sales commission percentages paid to its independent sales associates offset by lower restructuring costs2020 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 due2019, respectively.
Realogy Franchise Group
40
to lower international revenues. TRG's margin remained flat at 14% due to losses from equity investments during the third quarter of 2017 compared to earnings from equity investments during the third 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.
Corporate and Other EBITDA for the three months ended September 30, 2017 declined $5Revenues increased $22 million to negative $25$262 million primarily dueand Operating EBITDA increased $26 million to a $2 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 million related to loss on the early extinguishment of debt as a result of the reduction in the Unsecured Letter of Credit Facility and a net cost of $1 million of former parent legacy items during the third quarter of 2017 compared to the third quarter of 2016.
EBITDA before restructuring charges was $256$196 million for the three months ended September 30, 20172020 compared with the same period in 2019.
Revenues increased $22 million primarily as a result of:
•a $24 million increase in third-party domestic franchisee royalty revenue primarily due to a 31% increase in homesale transaction volume at Realogy Franchise Group which consisted of a 17% increase in average homesale price and a 12% increase in existing homesale transactions; and
•a $16 million increase in intercompany royalties received from Realogy Brokerage Group,
partially offset by:
•a $10 million decrease in lead referral revenues driven by lower volume and referral transactions primarily driven by the discontinuation of the USAA affinity program which ceased new enrollments in the third quarter of 2019;
•a $5 million decrease in revenue related to the early termination of third party listing fee agreements; and
•a $2 million decrease in registration and brand marketing fund revenue, which had a related expense decrease of $5 million resulting in a $3 million net positive impact on Operating EBITDA, due to not holding in person meetings
and conferences and lower advertising costs due to the COVID-19 pandemic in the third quarter of 2020 compared to $279the third quarter of 2019.
Realogy Franchise Group revenue includes intercompany royalties received from Realogy Brokerage Group of $94 million and $78 million during the third quarter of 2020 and 2019, respectively, which are eliminated in consolidation against the expense reflected in Realogy Brokerage Group's results.
The $26 million increase in Operating EBITDA was primarily due to the $22 million increase in revenues and the $5 million decrease in marketing expense discussed above, partially offset by higher employee incentive accruals.
Realogy Brokerage Group
Revenues increased $257 million to $1,479 million and Operating EBITDA increased $30 million to $61 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 $9 million to $224 million and EBITDA increased $6 million to $159 million for the three months ended September 30, 20172020 compared with the same period in 2016.2019.
The revenue increase in revenueof $257 million was primarily driven by a $2 million22% increase in third-party domestic franchisee royalty revenuehomesale transaction volume at Realogy Brokerage Group which primarily consisted of an 11% increase in average homesale price and a 10% increase in existing homesale transactions due to a 6% increasestrong recovery in the average homesale price, partially offset by a 1% decreaseresidential real estate market which began in the numberlate second quarter of 2020 following a period of sharp decline in homesale transactions including the negative impact attributable to regional market disruption due to hurricanesstarting in the thirdfinal weeks of the first quarter of 2017, and a lower net effective royalty rate. Revenue also2020.
Operating EBITDA increased due to a $2$30 million increase in royalties received from NRT as a result of volume increases at NRT, a $3 million increase in other revenue primarily due to brand conferences and franchisee events and to:
•a $2 million increase in international revenues.
The intercompany royalties received from NRT of $81 million and $79 million during the third quarter of 2017 and 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" for a discussion of the drivers related to intercompany royalties paid to RFG.
The $6 million increase in EBITDA was principally due to the $9$257 million increase in revenues discussed aboveabove;
•a $15 million decrease in employee-related, occupancy costs and the absence of $1 million of restructuring charges incurred in the third quarter of 2016,other operating costs due primarily to temporary COVID-19 related cost savings initiatives, partially offset by higher employee incentive accruals; and
•a $2$4 million increasedecrease in expenses relatedmarketing expense due to lower advertising costs as a result of the brand conferences and franchisee events.COVID-19 pandemic,
Company Owned Real Estate Brokerage Services (NRT)
Revenues increased $36 million to $1,267 million and EBITDA decreased $12 million to $62 million for the three months ended September 30, 2017 compared with the same period in 2016.
The revenue increase of $36 million was comprised of a $19 million increase in commission income earned on homesale transactions by our existing brokerage operations and a $17 million increase in commission income earned from acquisitions. The increase was driven by a 4% increase in the average price of homes, partially offset by by:
•a 1 basis point decrease in the average broker commission rate. The number 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 stabilization at 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 $12 million primarily due to:
a $53$230 million increase in commission expenses paid to independent sales associatesagents from $834$875 million in the third quarter of 20162019 to $887$1,105 million in the third quarter of 2017. The $53 million increase is comprised2020. Commission expense increased primarily as a result of a $41 million increase in commission expense due to our existing brokerage operations and was driven by the impact of initiatives focused on growing and retaining our productive independent sales associate base and higher homesale transaction volume as discussed above, as well as higher agent commission costs primarily driven by a $12 million increaseshift in commission expense relatedmix to acquisitions. The $53 million increase in commission expense was significantly impacted bymore productive, higher compensated agents, the miximpact of retention efforts, and business as approximately 70% of the increase was due to higher homesale transaction volume in the west region where we pay and geographic mix; and
•a greater proportion of commissions to independent sales associates;
a $7 million increase in other costs including occupancy costs;
a $2 million increase in marketing expenses including the effect of acquisitions; and
a $2$16 million increase in royalties paid to RFGRealogy Franchise Group from $79$78 million in the third quarter of 20162019 to $81$94 million in the third quarter of 2017.
These EBITDA decreases were partially offset by:
the $36 million increase in revenues discussed above;
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 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 change2020 associated with the transition of the operations to Guaranteed Rate Affinity;homesale transaction volume increase as described above.
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
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.
Relocation Services (Cartus)Realogy Title Group
Revenues decreased $5increased $43 million to $111$213 million and Operating EBITDA decreased $3increased $64 million to $37$95 million for the three months ended September 30, 20172020 compared with the same period in 2016.2019.
Revenues decreased $5increased $43 million primarily as a result of a $3$17 million decreaseincrease in otherresale revenue due to lower volume andan increase in purchase transactions, a $12 million increase in underwriter revenue with unaffiliated agents, which had a $2 million decreasenet positive impact on Operating EBITDA due to the related expense increase of $10 million, and an $11 million increase in internationalrefinance revenue due to an increase in activity in the refinance market.
Operating EBITDA increased $64 million primarily as a result of a $46 million increase in equity in earnings related to Guaranteed Rate Affinity due to the favorable mortgage rate environment and improved margins in the venture, a $17 million increase in resale revenue, an increasingly higher percentage of clients reducing their global relocation activity.
EBITDA decreased $3$11 million as a result ofincrease in refinance revenue and the $5$2 million decreasenet positive impact in revenuesunderwriter transactions with unaffiliated agents discussed above, partially offset by a $1$15 million decreaseincrease in employee relatedand other operating costs due to an increase in variable costs due to higher volume and the absence of $1 million of restructuring costs incurred during the third quarter of 2016.higher employee incentive accruals.
Title and Settlement Services (TRG)Discontinued Operations - Cartus Relocation
Revenues for Cartus Relocation Services decreased $10$27 million to $154$52 million and Operating EBITDA decreased $2$13 million to $21$4 million for the three months ended September 30, 20172020 compared with the same period in 2016.2019.
The decrease in revenues was
Revenues decreased $27 million primarily as a result of a $6 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 a 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.
EBITDA decreased $2 million as a result of the $10 million decrease in revenues discussed above, an increase of $2 million in employee-related costs primarily related to acquisitions and a $2 million decrease 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 mostly offset byinternational revenue, a $10 million decrease in variable operating costsother relocation revenue and a $7 million decrease in referral revenue, which were primarily due todriven by lower refinancing and underwriter volume and $2 millionlargely related to the reversalCOVID-19 pandemic. Cartus Relocation Services experienced a decline in new initiations due to the COVID-19 pandemic in the second and third quarters of 2020 and this trend is expected to continue.
Operating EBITDA decreased $13 million due to the revenue decrease discussed above, partially offset by a legal reserve.decrease in employee and other operating costs as a result of cost savings initiatives.
Nine Months Ended September 30, 20172020 vs. Nine Months Ended September 30, 20162019
Our consolidated results comprised the following:
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2020 | | 2019 | | Change |
Net revenues | $ | 4,180 | | | $ | 4,268 | | | $ | (88) | |
Total expenses | 4,607 | | | 4,441 | | | 166 | |
Loss from continuing operations before income taxes, equity in earnings and noncontrolling interests | (427) | | | (173) | | | (254) | |
Income tax benefit | (67) | | | (22) | | | (45) | |
Equity in earnings of unconsolidated entities | (98) | | | (15) | | | (83) | |
Net loss from continuing operations | (262) | | | (136) | | | (126) | |
Net loss from discontinued operations | (114) | | | (5) | | | (109) | |
Net loss | (376) | | | (141) | | | (235) | |
Less: Net income attributable to noncontrolling interests | (2) | | | (2) | | | — | |
Net loss attributable to Realogy Holdings and Realogy Group | $ | (378) | | | $ | (143) | | | $ | (235) | |
|
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2017 | | 2016 | | Change |
Net revenues | $ | 4,670 |
| | $ | 4,440 |
| | $ | 230 |
|
Total expenses (1) | 4,368 |
| | 4,177 |
| | 191 |
|
Income before income taxes, equity in earnings and noncontrolling interests | 302 |
| | 263 |
| | 39 |
|
Income tax expense | 131 |
| | 114 |
| | 17 |
|
Equity in earnings of unconsolidated entities | (7 | ) | | (10 | ) | | 3 |
|
Net income | 178 |
| | 159 |
| | 19 |
|
Less: Net income attributable to noncontrolling interests | (2 | ) | | (3 | ) | | 1 |
|
Net income attributable to Realogy Holdings and Realogy Group | $ | 176 |
| | $ | 156 |
| | $ | 20 |
|
_______________
| |
(1) | Total expenses for the nine months ended September 30, 2017 includes $9 million of restructuring charges, an $8 million expense related to the settlement of the Strader legal matter, $5 million related to losses on the early extinguishment of debt and $4 million of losses related to mark-to-market adjustments for our interest rate swaps, 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 million of former parent legacy items. |
Net revenues increased $230decreased $88 million or 5%2% for the nine months ended September 30, 20172020 compared with the same period in 2016, principally due to increases in gross commission income and franchise fees as a result of anine months ended September 30, 2019 driven by lower homesale transaction volume increaseat Realogy Brokerage Group primarily due to the COVID-19 pandemic, which resulted in a sharp decline in homesale transactions starting in the final weeks of 7% onthe first quarter of 2020 followed by a combined basis for NRT and RFG.strong recovery in the residential real estate market beginning late in the second quarter of 2020.
Total expenses increased $191$166 million or 5%4% for the nine months ended September 30, 2020 compared to the same period of 2019 primarily due to:
•impairments of $460 million during the nine months ended September 30, 2020 compared to impairments of $243 million during the nine months ended September 30, 2019. The nine months ended September 30, 2020 include a $206goodwill impairment charge of $413 million (which reduced the net carrying value of Realogy Brokerage Group by $314 million after accounting for the related income tax benefit of $99 million), an impairment charge of $30 million (which reduced the carrying value of trademarks at Realogy Franchise Group) and $17 million related to lease asset impairments. The nine months ended September 30, 2019 include a goodwill impairment charge of $237 million (which reduced the net carrying value of Realogy Brokerage Group by $180 million after accounting for the related income tax benefit of $57 million) and $6 million related to lease asset impairments;
•a $15 million increase in commission and other sales associate-relatedagent-related costs primarily as a result of higher agent commission costs primarily driven by a shift in mix to more productive, higher compensated agents, the impact of retention efforts, and business and geographic mix;
•an $8 million loss on the early extinguishment of debt during the nine months ended September 30, 2020 as a result of the refinancing transactions in June 2020 compared to a $5 million net gain on the early extinguishment of debt during the nine months ended September 30, 2019 primarily due to anthe repurchase of Senior Notes during the third quarter of 2019; and
•a $9 million increase in homesale transaction volume at NRT and higher sales commissions paid to its independent sales associates;restructuring costs,
partially offset by:
•a $39$50 million increasedecrease in operating and general and administrative expenses primarily driven by:
| |
◦ | $24 million of additional employee-related costs associated with acquisitions; |
| |
◦ | a $24 million increase indue to lower employee-related, occupancy and other expenses including professional fees and occupancy costs; and |
| |
◦ | an $8 million expense related to the settlement of the Strader legal matter in the second quarter of 2017; |
partially offset by:
| |
◦ | a $7 million decrease in variable operating costs at TRG primarily due to lower refinance and underwriter volume; |
a $14 million increase in marketing expenses; and
$5 million related to the losses on the early extinguishment of debt primarily as a result of temporary COVID-19 related cost savings initiatives, partially offset by higher employee incentive accruals; and
•a $45 million decrease in marketing expense primarily due to not holding in person meetings and conferences and lower advertising costs due to the refinancing transaction completedCOVID-19 pandemic during the first quarternine months of 2017.2020 compared to the same period in 2019.
TheInterest expense increases were partially offset by:
a $42 million net decrease in interest expense to $127was $208 million for the nine months ended September 30, 2017 from $1692020 and remained relatively flat compared to the same period in 2019 due to a $9 million net expense related to mark-to-market adjustments for our interest rate swaps that resulted in losses of $59 million for the nine months ended September 30, 2016. Mark-to-market adjustments for our interest rate swaps resulted in2020 compared to losses of $4$50 million during the same period of 2019, offset by a decrease in interest expense due to LIBOR rate decreases.
Equity in earnings were $98 million for the nine months ended September 30, 20172020 compared to lossesearnings of $40$15 million induring the same period of 2016. Before2019 primarily due to an improvement in earnings of Guaranteed Rate Affinity at Realogy Title Group. Equity in earnings for Guaranteed Rate Affinity represented approximately 18% of the mark-to-market adjustmentsCompany's Operating EBITDA for our interestthe nine months ended September 30, 2020, increasing by $83 million from $12 million during the nine months ended September 30, 2019 to $95 million during the same period of 2020 as a result of the low mortgage rate swaps, interest expense decreased $6environment and improved margins in the venture. Equity in earnings for Realogy Title Group's other equity method investments remained flat at $3 million during both the nine months ended September 30, 2020 and 2019.
During the nine months ended September 30, 2020, we incurred $38 million of restructuring costs primarily related to $123the Company's restructuring program focused on office consolidation and instituting operational efficiencies to drive profitability. The Company expects the estimated total cost to be approximately $108 million, with $74 million incurred to date. See Note 6, "Restructuring Costs", to the Condensed Consolidated Financial Statements for additional information.
The provision for income taxes was a benefit of $67 million for the nine months ended September 30, 2017 from $1292020 compared to a benefit of $22 million for the nine months ended September 30, 2016 as a result of a reduction in total outstanding indebtedness2019. Our effective tax rate was 20% and a lower weighted average interest rate;
a $21 million decrease in restructuring costs related to the Company's business optimization plan (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 million14% for the nine months ended September 30, 2017 compared to $10 million2020 and September 30, 2019, respectively. The effective tax rate 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.
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 million for the nine months ended September 30, 2017 compared to $114 million for the nine months ended September 30, 2016. Our federal and state blended statutory rate is estimated to be 40% for 2017 and our full year effective tax rate is estimated to be 41%. Our effective tax rate was 42% for both the nine months ended September 30, 2017 and September 30, 2016. The effective tax rate in each reporting period2020 was primarily impacted by a discrete itemitems related to the goodwill impairment charge and equity awards for which the market value at vesting was lower than at the date of grant.
The following table reflects the results of each of our reportable segments during the nine months ended September 30, 20172020 and 2016:2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenues (a) | | $ Change | | % Change | | Operating EBITDA | | $ Change | | % Change | | Operating EBITDA Margin | | Change |
| 2020 | | 2019 | | | | 2020 | | 2019 | | | | 2020 | | 2019 | |
Realogy Franchise Group | $ | 609 | | | $ | 679 | | | $ | (70) | | | (10) | % | | $ | 419 | | | $ | 448 | | | $ | (29) | | | (6) | % | | 69 | % | | 66 | % | | 3 | |
Realogy Brokerage Group | 3,281 | | | 3,369 | | | (88) | | | (3) | | | 25 | | | 16 | | | 9 | | | 56 | | | 1 | | | — | | | 1 | |
Realogy Title Group | 510 | | | 444 | | | 66 | | | 15 | | | 168 | | | 54 | | | 114 | | | 211 | | 33 | | | 12 | | | 21 | |
Corporate and Other | (220) | | | (224) | | | 4 | | | * | | (94) | | | (75) | | | (19) | | | * | | | | | | |
Total continuing operations | $ | 4,180 | | | $ | 4,268 | | | $ | (88) | | | (2) | % | | $ | 518 | | | $ | 443 | | | $ | 75 | | | 17 | % | | 12 | % | | 10 | % | | 2 | |
| | | | | | | | | | | | | | | | | | | | | |
Less: Depreciation and amortization | | 134 | | | 126 | | | | | | | | | | | |
Interest expense, net | | 208 | | | 209 | | | | | | | | | | | |
Income tax benefit | | (67) | | | (22) | | | | | | | | | | | |
Restructuring costs, net (b) | | 38 | | | 29 | | | | | | | | | | | |
Impairments (c) | | 460 | | | 243 | | | | | | | | | | | |
Former parent legacy cost, net (d) | | 1 | | | 1 | | | | | | | | | | | |
Loss (gain) on the early extinguishment of debt (d) | | 8 | | | (5) | | | | | | | | | | | |
Net loss from continuing operations attributable to Realogy Holdings and Realogy Group | | (264) | | | (138) | | | | | | | | | | | |
Net loss from discontinued operations | | (114) | | | (5) | | | | | | | | | | | |
Net loss attributable to Realogy Holdings and Realogy Group | | $ | (378) | | | $ | (143) | | | | | | | | | | | |
_______________
* not meaningful
(a)Includes the elimination of transactions between segments, which consists of intercompany royalties and marketing fees paid by Realogy Brokerage Group of $220 million and $224 million during the nine months ended September 30, 2020 and 2019, respectively.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenues (a) | | % Change | | EBITDA (b) | | % Change | | EBITDA Margin | | Change |
| 2017 | | 2016 | | | 2017 | | 2016 | | | 2017 | | 2016 | |
RFG | $ | 631 |
| | $ | 593 |
| | 6 | % | | $ | 427 |
| | $ | 394 |
| | 8 | % | | 68 | % | | 66 | % | | 2 |
|
NRT | 3,556 |
| | 3,340 |
| | 6 |
| | 113 |
| | 131 |
| | (14 | ) | | 3 |
| | 4 |
| | (1 | ) |
Cartus | 290 |
| | 308 |
| | (6 | ) | | 65 |
| | 74 |
| | (12 | ) | | 22 |
| | 24 |
| | (2 | ) |
TRG | 431 |
| | 424 |
| | 2 |
| | 49 |
| | 49 |
| | — |
| | 11 |
| | 12 |
| | (1 | ) |
Corporate and Other | (238 | ) | | (225 | ) | | * |
| | (70 | ) | | (60 | ) | | * |
| | | | | | |
Total Company | $ | 4,670 |
| | $ | 4,440 |
| | 5 | % | | $ | 584 |
| | $ | 588 |
| | (1 | )% | | 13 | % | | 13 | % | | — |
|
Less: Depreciation and amortization (c) | | 150 |
| | 149 |
| | | | | | | | |
Interest expense, net | | 127 |
| | 169 |
| | | | | | | | |
Income tax expense | | 131 |
| | 114 |
| | | | | | | | |
Net income attributable to Realogy Holdings and Realogy Group | | $ | 176 |
| | $ | 156 |
| | | | | | | | |
(b)Restructuring charges incurred for the nine months ended September 30, 2020 include $1 million at Realogy Franchise Group, $32 million at Realogy Brokerage Group, $3 million at Realogy Title Group and $2 million at Corporate and Other. Restructuring charges incurred for the nine months ended September 30, 2019 include $3 million at Realogy Franchise Group, $18 million at Realogy Brokerage Group, $2 million at Realogy Title Group and $6 million at Corporate and Other._______________(c)Impairments for the nine months ended September 30, 2020 include a goodwill impairment charge of $413 million (which reduced the net carrying value of Realogy Brokerage Group by $314 million after accounting for the related income tax benefit of $99 million), an impairment charge of $30 million (which reduced the carrying value of trademarks at Realogy Franchise Group) and $17 million related to lease asset impairments. Impairments for the nine months ended September 30, 2019 include a goodwill impairment charge of $237 million (which reduced the net carrying value of Realogy Brokerage Group by $180 million after accounting for the related income tax benefit of $57 million) and $6 million related to lease asset impairments.
(d)Former parent legacy items and Loss (gain) on the early extinguishment of debt are recorded in Corporate and Other. During the nine months ended September 30, 2019, the Company recorded a net gain on the early extinguishment of debt of $5 million which consisted of a $10 million gain as a result of the repurchase of Senior Notes completed in the third quarter of 2019, partially offset by a $5 million loss as a result of the refinancing transactions in the first quarter of 2019.
As described in the aforementioned table, Operating EBITDA margin for "Total continuing operations" expressed as a percentage of revenues increased 2 percentage points to 12% for the nine months ended September 30, 2020 compared to 10% for the same period in 2019. On a segment basis, Realogy Franchise Group's margin increased 3 percentage points to 69% from 66% primarily due to a decrease in employee and other operating costs primarily as a result of temporary COVID-19 related cost savings initiatives, partially offset by a decrease in revenue related to the early termination of third party listing fee agreements. Realogy Brokerage Group's margin increased 1 percentage point from zero to 1% primarily due to lower operating expenses primarily due to temporary COVID-19 related cost savings initiatives, partially offset by higher agent commission costs primarily driven by a shift in mix to more productive, higher compensated agents, the impact of retention efforts, and business and geographic mix. Realogy Title Group's margin increased 21 percentage points to 33% from 12% primarily as a result of an increase in equity in earnings due to an improvement in earnings of Guaranteed Rate Affinity as a result of the low mortgage rate environment and improved margins in the venture.
| |
(a) | Includes the elimination of transactions between segments, which consists of intercompany royalties and marketing fees paid by NRT of $238 million and $225 million during the nine months ended September 30, 2017 and September 30, 2016, respectively. |
| |
(b) | EBITDA for the nine months ended September 30, 2017 includes an $8 million expense related to the settlement of the Strader legal matter and $5 million related to losses on the early extinguishment of debt, partially offset by a net benefit of $10 million of former parent legacy items in Corporate and Other, and $9 million of restructuring charges discussed further below. |
The Corporate and Other segment Operating EBITDA for the nine months ended September 30, 2016 includes $302020 decreased $19 million to negative $94 million primarily due to higher employee incentive accruals.
Realogy Franchise and Brokerage Groups on a Combined Basis
The following table reflects Realogy Franchise and Brokerage Group's results before the intercompany royalties and marketing fees as well as on a combined basis to show the Operating EBITDA contribution 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 costthese business segments to the overall Operating EBITDA of $1 million of former parent legacy items included in Corporate and Other.
| |
(c) | Depreciation and amortization for the 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. |
As described in the aforementioned table,Company. The Operating EBITDA margin for "Total Company" expressed as a percentage of revenuesthe combined segments remained flat at 13% for12% during both the nine months ended September 30, 2017 compared2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenues | | $ Change | | % Change | | Operating EBITDA | | $ Change | | % Change | | Operating EBITDA Margin | | Change |
| 2020 | | 2019 | | | | 2020 | | 2019 | | | | 2020 | | 2019 | |
Realogy Franchise Group (a) | $ | 389 | | | $ | 455 | | | (66) | | | (15) | | | $ | 199 | | | $ | 224 | | | (25) | | | (11) | | | 51 | % | | 49 | % | | 2 | |
Realogy Brokerage Group (a) | 3,281 | | | 3,369 | | | (88) | | | (3) | | | 245 | | | 240 | | | 5 | | | 2 | | | 7 | | | 7 | | | — | |
Realogy Franchise and Brokerage Groups Combined | $ | 3,670 | | | $ | 3,824 | | | (154) | | | (4) | | | $ | 444 | | | $ | 464 | | | (20) | | | (4) | | | 12 | % | | 12 | % | | — | |
_______________
(a)The segment numbers noted above do not reflect the impact of intercompany royalties and marketing fees paid by Realogy Brokerage Group to the same period in 2016. On a segment basis, RFG's margin increased 2 percentage points to 68% from 66% due to an increase in homesale transaction volumeRealogy Franchise Group of $220 million and lower restructuring costs. NRT's margin decreased 1 percentage point to 3% from 4% primarily due to higher sales commission percentages paid to its independent sales associates offset by lower restructuring costs for the nine months ended September 30, 2017 compared to the same period in 2016. Cartus' margin decreased 2 percentage points to 22% from 24% primarily due to lower international revenue and lower foreign currency exchange rate gains, partially offset by lower employee related costs during nine months ended the September 30, 2017 compared to the same period in 2016 and the absence of restructuring costs incurred$224 million during the nine months ended September 30, 2016. TRG's margin2020 and 2019, respectively.
Realogy Franchise Group
Revenues decreased 1 percentage point to 11% from 12% for the nine months ended September 30, 2017 compared to the same period in 2016 due to a decrease in earnings from equity investments primarily related to costs associated with the transition and start up of operations of Guaranteed Rate Affinity, partially offset by the reversal of a legal reserve.
Corporate and Other EBITDA for the nine months ended September 30, 2017 declined $10$70 million to negative $70$609 million primarily dueand Operating EBITDA decreased $29 million to an $8 million expense related to the settlement of the Strader legal matter, $5 million related to the losses on the early extinguishment of debt primarily as a result of the refinancing transaction during the first quarter of 2017, a $10 million increase in other costs due to professional fees supporting strategic initiatives and occupancy costs and a $6 million increase in employee costs due to higher employee incentive accruals and investments in technology development. These expenses were partially offset by 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 and the absence of $6 million in restructuring charges incurred during the nine months ended September 30, 2016.
EBITDA before restructuring charges was $593$419 million for the nine months ended September 30, 20172020 compared with the same period in 2019.
Revenues decreased $70 million primarily as a result of:
•a $28 million decrease in registration revenue and brand marketing fund revenue (associated with the waiver of marketing fees from affiliates in response to $618the COVID-19 pandemic), which had a related expense decrease of $35 million resulting in a net $7 million net positive impact on Operating EBITDA, due to not holding in person meetings and conferences and lower advertising costs due to the COVID-19 pandemic;
•a $25 million decrease in leads referral revenues driven by lower volume and referral transactions primarily driven by the discontinuation of the USAA affinity program which ceased new enrollments in the third quarter of 2019;
•an $11 million decrease in revenue related to the early termination of third party listing fee agreements; and
•a $6 million decrease in other revenue.
Realogy Franchise Group revenue includes intercompany royalties received from Realogy Brokerage Group of $213 million and $215 million during the nine months ended September 30, 2020 and 2019, respectively, which are eliminated in consolidation against the expense reflected in Realogy Brokerage Group's results.
The $29 million decrease in Operating EBITDA was primarily due to the $70 million decrease in revenues discussed above and $9 million of higher expense for bad debt primarily due to the early termination of third party listing fee agreements. These Operating EBITDA decreases were partially offset by the $35 million decrease in marketing expense discussed above and a $15 million decrease in employee and other operating costs principally due to temporary COVID-19 related cost savings initiatives and the discontinuation of the USAA affinity program, partially offset by higher employee incentive accruals.
Realogy Brokerage Group
Revenues decreased $88 million to $3,281 million and Operating EBITDA increased $9 million to $25 million for the nine months ended September 30, 2016.2020 compared with the same period in 2019.
The revenue decrease of $88 million was primarily driven by a 2% decrease in homesale transaction volume at Realogy Brokerage Group primarily due to lower transaction volume in the second quarter of 2020 due to the COVID-19 pandemic and consisted of a 5% decrease in existing homesale transactions, partially offset by a 3% increase in average homesale price. There was a strong recovery in the residential real estate market which began late in the second quarter of 2020, following a period of sharp decline in homesale transactions starting in the final weeks of the first quarter of 2020.
Operating EBITDA before restructuring chargesincreased $9 million primarily due to:
•an $85 million decrease in employee-related, occupancy costs and other operating costs due to temporary COVID-19 related cost savings initiatives, partially offset by reportable segment forhigher employee incentive accruals;
•a $25 million decrease in marketing expense due to lower advertising costs as a result of the nine months ended September 30, 2017 was as follows:COVID-19 pandemic; and
|
| | | | | | | | | | | | | | | | | | |
| 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$2 million decrease in royalties 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 EstateRealogy Franchise Services (RFG)
Revenues increased $38 million to $631 million and EBITDA increased $33 million to $427Group from $215 million for the nine months ended September 30, 2017 compared with2019 to $213 million in the same period in 2016.of 2020 associated with the volume decline as described above,
The increase in revenue was driven by a $12 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 $12by:
•the $88 million increase in royalties received from NRT as a result of volume increases at NRT, a $4 million increase in other revenue primarily due to other marketing related activities and brand conferences and franchisee events and $3 million increase in international revenues. Brand marketing 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 period in 2016.
The intercompany royalties received from NRT of $229 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" for a discussion of the drivers related to intercompany royalties paid to RFG.
The $33 million increase in EBITDA was principally due to the $38 million increasedecrease in revenues discussed aboveabove; and
•a $3 million decrease in restructuring costs incurred in the first nine months of 2017 compared to the same period in 2016, 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$15 million increase in commission expenses paid to independent sales associatesagents from $2,256$2,405 million for the nine months ended September 30, 20162019 to $2,462$2,420 million for the nine months ended September 30, 2017. The increase2020. Commission expense increased primarily as a result of higher agent commission costs primarily driven by a shift in commission expense is duemix to an increase of $166 million by our existing brokerage operations due tomore productive, higher compensated agents, the impact of initiatives focused on growingretention efforts, and retaining our productive independent sales associate basebusiness and highergeographic mix, partially offset by the impact of lower homesale transaction volume as well as a $40discussed above.
Realogy Title Group
Revenues increased $66 million increase related to acquisitions. The $206$510 million increase in commission expense was impacted by the mix of business as approximately 46% of the increase was dueand Operating EBITDA increased $114 million 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$168 million for the nine months ended September 30, 20162020 compared with the same period in 2019.
Revenues increased $66 million primarily as a result of a $35 million increase in refinance revenue due to $229an increase in activity in the refinance market and a $32 million increase in underwriter revenue with unaffiliated agents, which had a $5 million net positive impact on Operating EBITDA due to the related expense increase of $27 million. These revenue increases were partially offset by a $4 million decrease in resale revenue due to a decline in purchase transactions as result of the COVID-19 pandemic.
Operating EBITDA increased $114 million primarily as a result of an $83 million increase in equity in earnings primarily related to Guaranteed Rate Affinity due to the favorable mortgage rate environment and improved margins in the venture, a $35 million increase in refinance revenue, the $5 million net positive impact of underwriter transactions with
unaffiliated agents discussed above, partially offset by a $9 million increase in employee and other operating costs due to an increase in variable costs due to higher volume and higher employee incentive accruals, partially offset by temporary COVID-19 related cost savings initiatives.
Discontinued Operations - Cartus Relocation
Revenues for Cartus Relocation Services decreased $58 million to $152 million and Operating EBITDA decreased $19 million to $2 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, 20172020 compared with the same period in 2016.2019.
Revenues decreased $18$58 million primarily as a result of an $10a $25 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$17 million decrease in other relocation revenue due to lower volume.
EBITDA decreased $9 million primarily asand a result of the $18$15 million decrease in revenuesreferral revenue, which were primarily driven by lower volume largely related to the COVID-19 pandemic. Cartus Relocation Services experienced a decline in new initiations due to the COVID-19 pandemic in the second and third quarters of 2020 and this trend is expected to continue.
Operating EBITDA decreased $19 million due to the revenue decrease 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.
Title and Settlement Services (TRG)
Revenues increased $7 million to $431 million and EBITDA remained flat at $49 million for the nine months ended September 30, 2017 compared with the same period in 2016.
The increase in revenues was driven by a $24 million increase in resale revenue of which $16 million was related to acquisitions, partially offset by a $9 million decrease in refinancing revenue and a $5 million decrease of underwriter revenuecosts due to an overall decrease in activity in the refinance market in the third quarter of 2017.cost savings initiatives, including temporary COVID-19 related savings.
EBITDA remained flat as a result of an increase of $11 million in employee-related costs primarily related to acquisitions, a $3 million decrease earnings from equity investments primarily related to costs associated with the start 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 were offset by the $7 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 reversal of a legal reserve.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Financial Condition
| | | | | | | | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 | | Change |
Total assets | $ | 7,048 | | | $ | 7,543 | | | $ | (495) | |
Total liabilities | 5,315 | | | 5,447 | | | (132) | |
Total equity | 1,733 | | | 2,096 | | | (363) | |
|
| | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 | | Change |
Total assets | $ | 7,521 |
| | $ | 7,421 |
| | $ | 100 |
|
Total liabilities | 5,056 |
| | 4,952 |
| | 104 |
|
Total equity | 2,465 |
| | 2,469 |
| | (4 | ) |
For the nine months ended September 30, 2017,2020, total assets increased $100assets decreased $495 million primarily due to to:
•a $74$413 million increase in cash and cash equivalents, a $45 million increase in trade and relocation receivables due to seasonal increases in volume, a $29 million increase in other non-current assets primarily due to higher prepaid expenses and investments and a $14 million increasedecrease in goodwill from acquisitions. These increases were partially offset byas a $72result of the impairment at Realogy Brokerage Group during the first quarter of 2020;
•a $167 million decrease in assets held for sale;
•a $55 million net decrease in franchise agreements and other amortizable intangible assets primarily due to amortization.amortization;
•a $38 million net decrease in operating lease assets;
•a $30 million decrease in trademarks as a result of the impairment of trademarks at Realogy Franchise Group during the first quarter of 2020; and
•a $20 million decrease in property and equipment,
partially offset by:
•a $145 million increase in cash and cash equivalents;
•a $52 million increase in other current and non-current assets primarily related to an increase in our investment in Guaranteed Rate Affinity due to an increase in equity in earnings partially offset by dividends received, an increase in prepaid incentives and an increase in marketable securities due to the reinvestment of certificates of deposit at Realogy Title Group; and
•a $30 million increase in trade receivables primarily due to increases in volume.
Total liabilities increased $104decreased $132 million primarily due to to:
•a $129$111 million increasedecrease in deferred tax liabilities primarily due to the recognition of an income tax benefit of $99 million related to the goodwill impairment charge during the first quarter of 2020;
•an $88 million decrease in corporate debt primarily due to lower borrowings under the Revolving Credit Facility and quarterly amortization payments on the term loan facilities;
•a $29$59 million increasedecrease in securitization obligations, liabilities held for sale; and
•a $12$23 million increasedecrease in accounts payable and a $7operating lease liabilities,
partially offset by:
•an $89 million increase in accrued expenses and other current liabilities partially offset by primarily due to higher employee-related accruals and accrued interest; and
•a $32$57 million decreaseincrease 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 paymentsmark-to-market adjustments on the term loan facilities and a $10 million decrease in the due to former parent liability primarily as a result of the resolution of a Cendant legacy tax matter.Company's interest rate swaps.
Total equity decreased $4$363 million primarily due to a $182net loss of $378 million, decreaseprimarily due to impairments of $460 million during the nine months ended September 30, 2020, partially offset by a $14 million increase in additional paid in capital primarily related to the Company's repurchase of $180 million of common stock and $37 million of dividend payments partially offset by stock-based compensation activity of $34 million. The decrease in additional paid in capital was mostly offset by net income of $176 million for the nine months ended September 30, 2017.2020.
Liquidity and Capital Resources
We have historically satisfied our liquidity needs with cash flows from operations and funds available under our Revolving Credit Facility and securitization facilities. Our primary liquidity needs have been to service our debt and finance our working capital and capital expenditures, whichexpenditures. We currently expect to prioritize investing in our business and reducing indebtedness. Accordingly, as of November 3, 2020, we have historically satisfied with cash flows from operations and funds availablehad no outstanding borrowings under our revolving credit facilities and securitization facilities. In January 2017, the Company increased the borrowing capacity under its Revolving Credit Facility, from $815representing a reduction of $190 million as compared to $1,050 million.
We intend to use future cash flow primarily to acquirethe amount drawn on December 31, 2019. Additionally, we discontinued acquiring stock under our share repurchase program, pay dividends, fund acquisitions, enter into strategic relationshipsprograms in the first quarter of 2019 and reduce indebtedness. In February 2016,discontinued our quarterly dividend in the Company's Boardfourth quarter of Directors authorized a share repurchase program of up to $275 million of the Company’s common stock. In February 2017,2019.
We are significantly encumbered by 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 no time limit and may be suspended or discontinued at any time.debt obligations. As of September 30, 2017, the Company had repurchased and retired 132020, our total debt, excluding our securitization obligations, was $3,391 million shares of common stock for an aggregate of $275compared to $3,472 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 per share.
Included in the 13 million shares of common stock repurchased to date, the Company repurchased 5.9 million shares of common stock for $178 million at a weighted average market price of $30.40 per share during the first nine months of 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.
During the period October 1, 2017 through November 1, 2017, we repurchased an additional 0.5 million shares at a weighted average market price of $33.11. Giving effect to these repurchases, we had approximately $181 million of remaining capacity authorized under the February 2017 share repurchase program as of November 1, 2017.
In April 2007, the Company established a standby irrevocable letter of credit for the benefit of Avis Budget Group in accordance with the Separation and Distribution Agreement. The letter of credit was utilized to support the Company’s payment obligations with respect to its share of Cendant contingent and other corporate liabilities. In September 2017, the standby irrevocable letter of credit was terminated pursuant to the governing 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 also 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 months of 2017, we returned $37 million to stockholders through the payment of cash dividends. 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 agreement, and the indenture governing the Company’s outstanding debt 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, if the residential real estate market or the economy as a whole does not continue to improve or weakens, our business, financial condition and liquidity may be materially adversely affected, 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 a seasonal slowdown. Consequently, our debt balances are generally at their highest levels at or around the end of the first quarter of every year.
December 31, 2019. Our liquidity position has significantly improved but continuesbeen and is expected to continue to be negatively impacted by our remainingthe interest expense and wouldon our debt obligations, which could be adversely impacted by: (i) stagnation or a downturn of the residential real estate market, (ii)intensified by a significant increase in LIBOR (or any replacement rate) or ABR, or (iii)ABR.
Our nearest debt maturity is not until early 2023 (other than amortization payments under our inabilityTerm Loan B and Term Loan A Facilities) as we redeemed all of our outstanding 5.25% Senior Notes in June 2020 using the proceeds from our 7.625% Senior Secured Second Lien Notes, together with cash on hand.
In July 2020, Realogy Group entered into amendments to access the Senior Secured Credit Agreement and Term Loan A Agreement (referred to collectively herein as the “Amendments”), pursuant to which the senior secured leverage ratio (the financial covenant under such agreements) has been temporarily eased and certain other covenants have been temporarily tightened during the covenant period. See Note 5, "Short and Long-Term Debt", to the Condensed Consolidated Financial Statements for additional information.
At September 30, 2020, we were in compliance with the financial covenant in each of the Senior Secured Credit Agreement and the Term Loan A Agreement with a senior secured leverage of 2.29 to 1.00 (as compared to the maximum ratio permitted of 6.50 to 1.00) with secured debt (net of readily available cash) of $1,654 million and trailing four relocation securitization programs.quarters EBITDA calculated on a Pro Forma Basis (as those terms are defined in the Senior Secured Credit Agreement) of $721 million.
We believe that we will continue to be in compliance with the senior secured leverage ratio and meet our cash flow needs during the next twelve months.
For additional information, see below under the header "Financial Obligations—Covenants under the Senior Secured Credit Facility, Term Loan A Facility and Indentures".
We will continue to evaluate potential refinancing and financing transactions.transactions, subject to the Amendments during the covenant period, including refinancing certain tranches of our indebtedness and extending maturities, among other potential alternatives, such public or private placements of our common stock or preferred stock (either of which could, among other things, dilute our current stockholders and materially and adversely affect the market price of our common stock). 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 willFinancing may not be available to us on commercially reasonable terms, on terms that are acceptable termsto us, or at all. Any future indebtedness may impose various additional restrictions and covenants on us which could limit our ability to respond to market conditions, to make capital investments or to take advantage of business opportunities.
Cash Flows
At September 30, 2017, we had $348 million of cash and cash equivalents, an increase of $74 million comparedSubject to the balancerestrictions against voluntary payments of $274 million at December 31, 2016. The following table summarizes our cash flows for the nine months ended September 30, 2017 and 2016:
|
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2017 | | 2016 | | Change |
Cash provided by (used in): | | | | | |
Operating activities | $ | 444 |
| | $ | 411 |
| | $ | 33 |
|
Investing activities | (96 | ) | | (163 | ) | | 67 |
|
Financing activities | (276 | ) | | (438 | ) | | 162 |
|
Effects of change in exchange rates on cash and cash equivalents | 2 |
| | (1 | ) | | 3 |
|
Net change in cash and cash equivalents | $ | 74 |
| | $ | (191 | ) | | $ | 265 |
|
For the nine months ended September 30, 2017, $33 million more cash was provided by operating activities comparedjunior debt that apply to the same period in 2016. The change was principally due to $14 million of additional cash provided by operating results, $15 million less 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 million more cash used due to an increase in other assets.
For the nine months ended September 30, 2017, we used $67 million less cash for investing activities compared to the same period in 2016 primarily due to $82 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 million more cash used for property and equipment additions.
For the nine months ended September 30, 2017, $276 million of cash was used for financing activities compared to $438 million of cash usedus during the samecovenant period in 2016. For the nine months ended September 30, 2017, $276 million of cash was used for:
$180 million for the repurchase of our common stock;
$37 million of dividend payments;
$31 million of quarterly amortization payments on the term loan facilities;
$19 million of other financing payments primarily related to capital leases and interest rate swaps;
$18 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 proceedsAmendments, we may 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:
time to time seek to repurchase our outstanding Unsecured Notes or 7.625% Senior Secured Second Lien 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.
Under the repayment of $758 million to reduceAmendments, we are restricted from making certain restricted payments, including dividend payments or share repurchases during the Term Loan B facility;
covenant period. The covenants in the repayment of $500 million to retireindentures governing 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%9.375% Senior Notes and $500 million of 4.875%7.625% Senior Notes;
$355 million of proceeds from issuance of the Term Loan A-1 facility; and
a $9 million net increaseSecured Second Lien Notes further restrict our ability to make dividend payments or repurchase shares in securitization borrowings.
Financial Obligations
Indebtedness Table
As of September 30, 2017, the Company’s borrowing arrangements were as follows:
|
| | | | | | | | | | | | | | | |
| Interest Rate | | Expiration Date | | Principal Amount | | Unamortized Discount and Debt Issuance Costs | | Net Amount |
Senior Secured Credit Facility: | | | | | | | | | |
Revolving Credit Facility (1) | (2) | | October 2020 | | $ | 190 |
| | $ * |
| | $ | 190 |
|
Term Loan B | (3) | | July 2022 | | 1,086 |
| | 21 |
| | 1,065 |
|
Term Loan A Facility: | | | | | | | | | |
Term Loan A | (4) | | October 2020 | | 397 |
| | 2 |
| | 395 |
|
Term Loan A-1 | (5) | | July 2021 | | 344 |
| | 3 |
| | 341 |
|
Senior Notes | 4.50% | | April 2019 | | 450 |
| | 7 |
| | 443 |
|
Senior Notes | 5.25% | | December 2021 | | 550 |
| | 4 |
| | 546 |
|
Senior Notes | 4.875% | | June 2023 | | 500 |
| | 4 |
| | 496 |
|
Securitization obligations: (6) | | | | | | | | | |
Apple Ridge Funding LLC (7) | | | June 2018 | | 223 |
| | * |
| | 223 |
|
Cartus Financing Limited (8) | | | August 2018 | | 11 |
| | * |
| | 11 |
|
Total (9) | $ | 3,751 |
| | $ | 41 |
| | $ | 3,710 |
|
_______________
| |
* | 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 September 30, 2017, the Company had $1,050 million of borrowing capacity under its Revolving Credit Facility leaving $860 million of available capacity. The revolving credit facility expires in October 2020, but is classified on the balance sheet as current due to the revolving nature of the facility. On November 1, 2017, the Company had $70 million in outstanding borrowings under the Revolving Credit Facility, leaving $980 million of available capacity. |
| |
(2) | Interest rates with respect to revolving loans under the Senior Secured Credit Facility at September 30, 2017 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. |
| |
(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, atany amount until 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 securedconsolidated leverage ratio the LIBOR margin was 2.00% and the ABR margin was 1.00% for the three months ended September 30, 2017.
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(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. |
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(6) | Available capacity is subject to maintaining sufficient relocation related assets to collateralize these securitization obligations. |
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(7) | In June 2017, Realogy Group extended the existing Apple Ridge Funding LLC securitization program utilized by Cartus until June 2018. As of September 30, 2017, the Company had $325 million of borrowing capacity under the Apple Ridge Funding LLC securitization program leaving $102 million of available capacity. |
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(8) | Consists of a £10 million revolving loan facility and a £5 million working capital facility. As of September 30, 2017, the Company had $20 million of borrowing capacity under the Cartus Financing Limited securitization program leaving $9 million of available capacity. In September 2017, Realogy Group extended the existing Cartus Financing Limited securitization program to August 2018. |
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(9) | Not included in this table, is the Company's Unsecured Letter of Credit Facility which had a capacity of $74 million with $71 million utilized at a weighted average rate of 3.24% at September 30, 2017. |
is below 4.00 to 1.00. See Note 5, "Short and Long-Term Debt", to the Condensed Consolidated Financial Statements for additional information.
In addition, we are required to pay quarterly amortization payments for the Term Loan A and Term Loan B facilities. Remaining payments for 2020 total $9 million and $3 million for the Term Loan A and Term Loan B facilities, respectively, and we expect payments for 2021 to total $51 million and $11 million for the Term Loan A and Term Loan B facilities, respectively.
If the recovery of the residential real estate market were to materially slow or reverse itself, if the economy as a whole does not improve or continues to weaken or if the broader real estate industry (including REITs, commercial and rental markets) were to experience a significant downtown, our business, financial condition and liquidity may be materially adversely affected, including our ability to access capital, grow our business and return capital to stockholders.
Cash Flows
At September 30, 2020, we had $380 million of cash, cash equivalents and restricted cash, an increase of $145 million compared to the balance of $235 million at December 31, 2019. The following table summarizes our cash flows from continuing operations for the nine months ended September 30, 2020 and 2019:
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2020 | | 2019 | | Change |
Cash provided by (used in) activities from continuing operations: | | | | | |
Operating activities | $ | 398 | | | $ | 250 | | | $ | 148 | |
Investing activities | (75) | | | (79) | | | 4 | |
Financing activities | (130) | | | (102) | | | (28) | |
For the nine months ended September 30, 2020, $148 million more cash was provided by operating activities from continuing operations compared to the same period in 2019 principally due to:
•$101 million less cash used for accounts payable, accrued expenses and other liabilities;
•$57 million more cash dividends received primarily from Guaranteed Rate Affinity; and
•$19 million less cash used for other assets,
partially offset by:
•$13 million less cash provided by the net change in trade receivables; and
•$13 million more cash used for other operating activities; and
•$3 million less cash provided by operating results.
For the nine months ended September 30, 2020, we used $4 million less cash for investing activities from continuing operations compared to the same period in 2019 primarily due to:
•$11 million less cash used for property and equipment additions; and
•$8 million less cash used for investments in unconsolidated entities,
partially offset by $15 million more cash used for other investing activities primarily due to the reinvestment of certificates of deposit.
For the nine months ended September 30, 2020, $130 million of cash was used in financing activities from continuing operations compared to $102 million of cash used during the same period in 2019. For the nine months ended September 30, 2020, $130 million of cash was used as follows:
•$50 million repayment of borrowings under the Revolving Credit Facility;
•$31 million of quarterly amortization payments on the term loan facilities;
•$22 million of other financing payments primarily related to finance leases;
•$21 million of cash paid primarily as a result of the refinancing transactions in the second quarter of 2020; and
•$5 million of tax payments related to net share settlement for stock-based compensation.
For the nine months ended September 30, 2019, $102 million of cash was used in financing activities from continuing operations related to:
•$31 million of dividend payments;
•$22 million of quarterly amortization payments on the term loan facilities;
•$20 million for the repurchase of our common stock;
•$18 million of other financing payments primarily related to finance leases;
•$6 million of tax payments related to net share settlement for stock-based compensation; and
•$5 million repayment of borrowings under the Revolving Credit Facility,
partially offset by $3 million of net cash received as a result of the refinancing transactions in 2019.
Financial Obligations
See Note 5, "Short and Long-Term Debt", to the Condensed Consolidated Financial Statements, for information on the Company's indebtedness.indebtedness as of September 30, 2020.
In July 2017, the Financial Conduct Authority, the UK regulator responsible for the oversight of the London Interbank Offering Rate ("LIBOR"), announced that it would no longer require banks to participate in the LIBOR submission process and would cease oversight over the rate after the end of 2021. Various industry groups continue to discuss replacement benchmark rates, the process for amending existing LIBOR-based contracts, and the potential economic impacts of different alternatives. For example, in the U.S., a proposed replacement benchmark rate is the Secured Overnight Funding Rate (SOFR), which is an overnight rate based on secured financing, although uncertainty exists as to the transition process and broad acceptance of SOFR as the primary alternative to LIBOR.
Our primary interest rate exposure is interest rate fluctuations, specifically with respect to LIBOR, due to its impact on our variable rate borrowings under the Senior Secured Credit Facility (for our Revolving Credit Facility and Term Loan B) and the Term Loan A Facility (for our Term Loan A). As of September 30, 2020, we had interest rate swaps based on LIBOR with a notional value of $1.0 billion to manage a portion of our exposure to changes in interest rates associated with our variable rate borrowings.
At this time, it is not possible to predict the effect of any changes to LIBOR, any phase out of LIBOR or any establishment of alternative benchmark rates. LIBOR may disappear entirely or perform differently than in the past. Any new benchmark rate will likely not replicate LIBOR exactly and if future rates based upon a successor rate (or a new method of calculating LIBOR) are higher than LIBOR rates as currently determined, it could result in an increase in the cost of our variable rate indebtedness and may have a material adverse effect on our financial condition and results of operations.
Covenants under the Senior Secured Credit Facility, Term Loan A Facility and Indentures
The Senior Secured Credit Facility,Agreement, Term Loan A Facility, the Unsecured Letter of Credit FacilityAgreement, and the indentures governing the Unsecured Notes and 7.625% Senior Secured Second Lien 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.
Pursuant to the Amendments to the Senior Secured Credit Agreement and Term Loan A Agreement, certain of these restrictions were tightened, including reducing (or eliminating) the amount available for certain types of additional indebtedness, liens, restricted payments (including dividends and stock repurchases), investments (including acquisitions and joint ventures), and voluntary junior debt repayments. Under the Amendments, we are permitted during the covenant period to obtain up to $50 million of additional credit facilities on a combined basis (less any amounts previously incurred under this provision) from lenders reasonably satisfactory to the administrative agent and us, without the consent of the existing lenders under the Senior Secured Credit Agreement or Term Loan A Agreement. In addition, during the covenant period under the Amendments, our ability to issue senior secured or unsecured notes is limited to the use of financings junior to our first lien debt to refinance the Unsecured Notes or 7.625% Senior Secured Second Lien Notes.
As a result of the covenants to which we remain subject, we are limited in the manner in which we conduct our business and we may be unable to engage in favorable business activities or finance future operations or capital needs. In addition, the Senior Secured Credit FacilityAgreement and Term Loan A FacilityAgreement require us to maintain a senior secured leverage ratio. We are further restricted under the indentures governing the 9.375% Senior Notes and 7.625% Senior Secured Second Lien Notes from making restricted payments, including our ability to issue dividends in excess of $45 million per calendar year or our ability to repurchase shares in any amount for so long as our consolidated leverage ratio is equal to or greater than 4.00 to 1.00 and then (unless that ratio falls below 3.00 to 1.00) only to the extent of available cumulative credit, as defined under those indentures.
Senior Secured Leverage Ratio applicable to our Senior Secured Credit Facility and Term Loan A Facility
The senior secured leverage ratio is tested quarterly and mayquarterly. Prior to the Amendments, the senior secured leverage ratio could not exceed 4.75 to 1.00. Pursuant to the Amendments, the financial covenant contained in each of the Senior Secured Credit Agreement and Term Loan A Agreement has been amended to require that Realogy Group maintain a senior secured leverage ratio not to exceed 6.50 to 1.00 commencing with the third quarter of 2020 through and including the second quarter of 2021 and thereafter will step down on a quarterly basis to 4.75 to 1.00 (which was the applicable level prior to the effectiveness of the Amendments) on and after the second quarter of 2022.
The senior secured leverage ratio is measured by dividing Realogy's GroupRealogy Group's total senior secured net debt by the trailing twelve monthfour quarters EBITDA calculated on a Pro Forma Basis, as those terms are defined in the senior secured credit facilities.Senior Secured Credit Agreement. Total senior secured net debt does not include the 7.625% Senior Secured Second Lien Notes, our unsecured indebtedness, including the Unsecured Notes, or the securitization obligations. EBITDA calculated on a Pro Forma Basis, as defined in the senior secured credit facilities,Senior Secured Credit Agreement, includes adjustments to EBITDA for restructuring, retention and disposition costs, former parent legacy cost (benefit) items, net, loss (gain) on the early extinguishment of debt, non-cash charges and incremental securitization interest costs, as well as pro forma cost savings for restructuring initiatives, the pro forma effect of business optimization initiatives and the pro forma effect of acquisitions and new franchisees, in each case calculated as of the beginning of the twelve-monthtrailing four-quarter period. The Company was in compliance with the senior secured leverage ratio covenant at September 30, 2017.
2020.
A reconciliation of net loss attributable to Realogy Group to Operating EBITDA including discontinued operations, Operating EBITDA and EBITDA calculated on a Pro Forma Basis, as those terms are defined in the Senior Secured Credit Agreement, for the four-quarter period ended September 30, 2020 is set forth in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Less | | Equals | | Plus | | Equals |
| Year Ended | | Nine Months Ended | | Three Months Ended | | Nine Months Ended | | Twelve Months Ended |
| December 31, 2019 | | September 30, 2019 | | December 31, 2019 | | September 30, 2020 | | September 30, 2020 |
Net loss attributable to Realogy Group (a) | $ | (188) | | | $ | (143) | | | $ | (45) | | | $ | (378) | | | $ | (423) | |
Income tax benefit | (22) | | | (22) | | | — | | | (67) | | | (67) | |
Loss before income taxes | (210) | | | (165) | | | (45) | | | (445) | | | (490) | |
Depreciation and amortization | 169 | | | 126 | | | 43 | | | 134 | | | 177 | |
Interest expense, net | 249 | | | 209 | | | 40 | | | 208 | | | 248 | |
Restructuring costs, net | 42 | | | 29 | | | 13 | | | 38 | | | 51 | |
Impairments | 249 | | | 243 | | | 6 | | | 460 | | | 466 | |
Former parent legacy cost, net | 1 | | | 1 | | | — | | | 1 | | | 1 | |
(Gain) loss on the early extinguishment of debt | (5) | | | (5) | | | — | | | 8 | | | 8 | |
Adjustments attributable to discontinued operations (b) | 95 | | | 26 | | | 69 | | | 116 | | | 185 | |
Operating EBITDA including discontinued operations (c) | 590 | | | 464 | | | 126 | | | 520 | | | 646 | |
Less: Contribution to Operating EBITDA from discontinued operations (d) | | 9 | |
Operating EBITDA | | 637 |
Bank covenant adjustments: | | |
Pro forma effect of business optimization initiatives (e) | | 49 | |
Non-cash charges (f) | | 29 | |
Pro forma effect of acquisitions and new franchisees (g) | | 6 | |
EBITDA as defined by the Senior Secured Credit Agreement | | $ | 721 | |
Total senior secured net debt (h) | | $ | 1,654 | |
Senior secured leverage ratio | | 2.29 | x |
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(a)Net loss attributable to Realogy consists of: (i) loss of $45 million for the fourth quarter of 2019, (ii) loss of $462 million for the first quarter of 2020, (iii) loss of $14 million for the second quarter of 2020 and (iv) income of $98 million for the third quarter of 2020.
(b)Includes depreciation and amortization, interest expense, income tax and restructuring charges related to discontinued operations. In addition, includes the adjustment to record assets and liabilities held for sale at the lower of carrying value or fair value less any costs to sell based on a market price that is reasonable in relation to fair value.
(c)Consists of Operating EBITDA including discontinued operations of: (i) $126 million for the fourth quarter of 2019, (ii) $32 million for the first quarter of 2020, (iii) $175 million for the second quarter of 2020 and (iv) $313 million for the third quarter of 2020.
(d)Pursuant to the Amendments, the definition of "Consolidated Net Income" (as defined in the Senior Secured Credit Agreement) should be adjusted for discontinued operations (pending divestiture) solely for purposes of calculating compliance with the senior secured leverage ratio. Such adjustment is not reflected in the calculation above for consistency with the presentation of Consolidated Leverage Ratio in the "Consolidated Leverage Ratio applicable to our 9.375% Senior Notes and 7.625% Senior Secured Second Lien Notes" on the next page. Had discontinued operations been included for the four-quarter period ended September 30, 2020, the senior secured leverage ratio for the four-quarter period ended September 30, 2020 would have been 2.24x.
(e)Represents the four-quarter pro forma effect of business optimization initiatives.
(f)Represents the elimination of non-cash expenses including $24 million of stock-based compensation expense, $4 million for the change in the allowance for doubtful accounts and notes reserves and $1 million of other items for the four-quarter period ended September 30, 2020.
(g)Represents the estimated impact of acquisitions and franchise sales activity, net of brokerages that exited our franchise system as if these changes had occurred on October 1, 2019. Franchisee sales activity is comprised of new franchise agreements as well as growth through acquisitions and independent sales agent recruitment by existing franchisees with our assistance. We have made a number of assumptions in calculating such estimates and there can be no assurance that we would have generated the projected levels of Operating EBITDA had we owned the acquired entities or entered into the franchise contracts as of October 1, 2019.
(h)Represents total borrowings under the Senior Secured Credit Facility (including the Revolving Credit Facility and Term Loan B Facility) and Term Loan A Facility and borrowings secured by a first priority lien on our assets of $1,884 million plus $33 million of finance lease obligations less $263 million of readily available cash as of September 30, 2020. Pursuant to the terms of our senior secured credit facilities, total senior secured net debt does not include our securitization obligations, 7.625% Senior Secured Second Lien Notes or unsecured indebtedness, including the Unsecured Notes.
Consolidated Leverage Ratio applicable to our 9.375% Senior Notes and 7.625% Senior Secured Second Lien Notes
The consolidated leverage ratio is measured by dividing Realogy Group's total net debt by the trailing four quarter EBITDA. EBITDA, as defined in the indentures governing the 9.375% Senior Notes and 7.625% Senior Secured Second Lien Notes, is substantially similar to EBITDA calculated on a Pro Forma Basis, as those terms are defined in the Senior Secured Credit Agreement; however, the indentures do not allow for the adjustment to Consolidated Net Income (as defined in the indentures) described in footnote (d) to the table set forth above under "Senior Secured Leverage Ratio applicable to our Senior Secured Credit Facility and Term Loan A Facility." Net debt under the indentures is Realogy Group's total indebtedness (excluding securitizations) less (i) its cash and cash equivalents in excess of restricted cash and (ii) a $200 million seasonality adjustment permitted when measuring the ratio on a date during the period of March 1 to May 31.
The consolidated leverage ratio under the indentures governing the 9.375% Senior Notes and 7.625% Senior Secured Second Lien Notes for the four-quarter period ended September 30, 2020 is set forth in the following table:
| | | | | | | | |
| | As of September 30, 2020 |
Revolver | | $ | 140 | |
Term Loan A | | 694 | |
Term Loan B | | 1,050 | |
7.625% Senior Secured Second Lien Notes | | 550 | |
4.875% Senior Notes | | 407 | |
9.375% Senior Notes | | 550 | |
Finance lease obligations | | 33 | |
Corporate Debt (excluding securitizations) | | 3,424 | |
Less: Cash and cash equivalents | | 379 | |
Net debt under the indentures governing the 9.375% Senior Notes and 7.625% Senior Secured Second Lien Notes | | $ | 3,045 | |
EBITDA as defined under the indentures governing the 9.375% Senior Notes and 7.625% Senior Secured Second Lien Notes (a) | | $ | 721 | |
Consolidated leverage ratio under the indentures governing the 9.375% Senior Notes and 7.625% Senior Secured Second Lien Notes | | 4.2 | x |
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(a)As set forth in the immediately preceding table, for the four-quarter period ended September 30, 2020, EBITDA, as defined under the indentures governing the 9.375% Senior Notes and 7.625% Senior Secured Second Lien Notes, was the same as EBITDA calculated on a Pro Forma Basis, as those terms are defined in the Senior Secured Credit Agreement.
See Note 5, "Short and Long-Term Debt—Senior Secured Credit Facility"Facility and "Short and Long-Term Debt—Term Loan A Facility" and "—Unsecured Notes" and "—Senior Secured Second Lien Notes", to the Condensed Consolidated Financial Statements for additional information.
At September 30, 2020 the amount of the Company's cumulative credit under the 9.375% Senior Notes and 7.625% Senior Secured Second Lien Notes was approximately $172 million. Under the terms of the indentures governing the 9.375% Senior Notes and 7.625% Senior Secured Second Lien Notes, the Company may utilize its cumulative credit to make restricted payments when the Company's consolidated leverage ratio is less than 4.00 to 1.00, provided that any such restricted payments will reduce the amount of cumulative credit available for future restricted payments. The Company made approximately $21 million in dividend payments in 2019 after the issuance of the 9.375% Senior Notes (but prior to the issuance of the 7.625% Senior Secured Second Lien Notes) and accordingly at September 30, 2020, the cumulative credit basket available for restricted payments was approximately $151 million under the indenture governing the 9.375% Senior Notes and approximately $172 million under the indenture governing 7.625% Senior Secured Second Lien Notes. However, neither of these baskets may generally be utilized until the Company's consolidated leverage ratio is less than 4.0 to 1.0. In any event, during the covenant period under the Amendments to the Senior Secured Credit Facility and Term Loan A Facility, the Company is generally restricted from making restricted payments.
Non-GAAP Financial Measures
The SEC has adopted rules to regulate the use in filings with the SEC and in public disclosures of "non-GAAP financial measures," such as EBITDA and Operating EBITDA. These measures are derived on the basis of methodologies other than in accordance with GAAP.
Operating EBITDA is defined by us as net income (loss) before depreciation and amortization, interest expense, net, (other than relocation services interest for securitization assets and securitization obligations) and income taxes, and is our primary non-GAAP measure. Operating EBITDA is defined by usother items that are not core to the operating activities of the Company such as EBITDA before restructuring losscharges, former parent legacy items, gains or losses on the early extinguishment of debt, impairments, gains or losses on discontinued operations and former parent legacy items andgains or losses on the sale of investments or other assets. Operating EBITDA is used as a supplementary financialour primary non-GAAP measure.
We present EBITDA and Operating EBITDA because we believe they areit is useful as a supplemental measuresmeasure in evaluating the performance of our operating businesses and provideprovides greater transparency into our results of operations. Our management, including our chief operating decision maker, uses Operating EBITDA as a factor in evaluating the performance of our business. EBITDA and Operating EBITDA should not be considered in isolation or as a substitute for net income or other statement of operations data prepared in accordance with GAAP.
We believe Operating EBITDA facilitates company-to-company operating performance comparisons by backing out potential differences caused by variations in capital structures (affecting net interest expense), taxation, the age and book depreciation of facilities (affecting relative depreciation expense) and the amortization of intangibles, as well as other items that are not core to the operating activities of the Company such as restructuring charges, gains or losses on the early extinguishment of debt, former parent legacy items, impairments, gains or losses on discontinued operations and gains or losses on the sale of investments or other assets, which may vary for different companies for reasons unrelated to operating performance. We further believe that Operating EBITDA is frequently used by securities analysts, investors and other interested parties in their evaluation of companies, many of which present an Operating EBITDA measure when reporting their results.
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 do•this measure does not reflect changes in, or cash required for, our working capital needs;
these measures do•this measure does not reflect our interest expense (except for interest related to our securitization obligations), or the cash requirements necessary to service interest or principal payments on our debt;
these measures do•this measure does not reflect our income tax expense or the cash requirements to pay our taxes;
these measures do•this measure does not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments;
•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often require replacement in the future, and these measures dothis measure does not reflect any cash requirements for such replacements; and
•other companies may calculate these measuresthis measure differently so they may not be comparable.
Set forth in the table below is a reconciliation of net income attributable to Realogy to EBITDA and Operating EBITDA forincluding discontinued operations includes Operating EBITDA, as defined above plus the three-month periods ended September 30, 2017 and 2016:Operating EBITDA contribution from discontinued operations on the same basis.
|
| | | | | | | |
| 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 |
|
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(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
AllOther than the Company's debt transactions which occurred during the second quarter of 2020, resulting in the issuance of $550 million of 7.625% Senior Secured Second Lien Notes due 2025 and the redemption of $550 million of 5.25% Senior Notes due 2021 as described in Note 5, "Short and Long-Term Debt", included elsewhere in this Quarterly Report, the Company's future contractual obligations as of September 30, 20172020 have not changed materially from the amounts reported in our 20162019 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, 2016,2019, which includes a description of our critical accounting policies that involve subjective and complex judgments that could potentially affect reported results.
Impairment of goodwill and other indefinite-lived intangible assets
See Note 3, "Goodwill and Intangible Assets", to the Condensed Consolidated Financial Statements for a discussion on impairment of goodwill and other indefinite-lived intangible assets.
Recently Issued Accounting Pronouncements
The SEC issued its final rule on the Modernization of Regulation S-K Items 101, 103, and 105 which is intended to improve readability of disclosure documents, as well as discourage repetition and disclosure of information that is not material. The new rule amends disclosure requirements relating to the description of a company's business, legal proceedings and risk factors made in applicable registration statements and reports filed on and after November 9, 2020, including the Company's Annual Report on Form 10-K for the year ended December 31, 2020.
See Note 1, "Basis of Presentation", to the Condensed Consolidated Financial Statements for a discussion of recently issued FASB 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 September 30, 2017,2020, 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 (or any replacement 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 September 30, 2017,2020, 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 million, which excludes $234 million of securitization obligations.$1.9 billion. The weighted average interest rate on the outstanding term loansamounts under our Senior Secured Credit Facility and revolverTerm Loan A Facility at September 30, 20172020 was 3.36%2.62%. 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 September 30, 20172020 senior secured leverage ratio, the LIBOR margin was 2.00%. At September 30, 2017,2020, the one-month LIBOR rate was 1.23%0.15%; therefore, we have estimated that a 0.25% increase in LIBOR would have a $5$2 million impact on our annual interest expense.
As of September 30, 2020, we had interest rate swaps with a notional value of $1,475 million$1.0 billion to manage a portion of our exposure to changes in interest rates associated with our $2,017 million$1.9 billion of variable rate borrowings. Interest rates swaps with a notional value of $600 million expired on August 7, 2020. Our interest rate swaps arewere as follows:
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| | | | | | | | | | | | | | | | |
Notional Value (in millions) | | Commencement Date | | Expiration Date | |
$225450 | July 2012 | February 2018November 2017 | | November 2022 | |
$200400 | January 2013 | February 2018August 2020 | | August 2025 | |
$600150 | August 2015 | August 2020 |
$450 | November 2017 | November 2022 | | November 2027 | |
The swaps help protect our outstanding variable rate borrowings from future interest rate volatility. The fixed interest rates on the swaps range from 2.07% to 2.89%3.11%. The Company had a liability of $94 million for the fair value of the interest rate swaps of$24 million at September 30, 2017.2020. 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$9 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. |
(a)Realogy Holdings Corp. ("Realogy Holdings") maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its filings under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to its management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Realogy Holdings' management, including the Chief Executive Officer and the Chief Financial Officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
(b)As of the end of the period covered by this 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.
(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
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(a) | (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 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. SuchCommission and that such information is accumulated and communicated to its management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Realogy Group's management, including the Chief Executive Officer and the Chief Financial Officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
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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. |
(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.
(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 September 30, 20172020 and for the three and nine-month periods ended September 30, 20172020 and 20162019 have been reviewed by PricewaterhouseCoopers LLP, an independent registered public accounting firm. Their reports, dated November 3, 2017,5, 2020, are included on pages 4 and 5. 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, "Commitments and Contingencies—Litigation", to the Condensed Consolidated Financial Statements included elsewhere in this Reportquarterly report on Form 10-Q for additional information on the Company's legal proceedings including a description of the Dodge, et al. v. PHH Corporation, et al. litigation, 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.occur and even cases brought by us can involve counterclaims asserted against us. In addition, litigation and other legal matters, including class action lawsuits orand regulatory proceedings challenging practices that have broad impact can be costly to defend and, depending on the class size and claims, could be costly to settle. As such, the Company could incur judgments or enter into settlements of claims with liability that are materially in excess of amounts accrued and these settlements could have a material adverse effect on the Company’s financial condition, results of operations or cash flows in any particular period.
Litigation, investigations and claims against other participants in the residential real estate industry may impact the Company and its affiliated franchisees when the rulings or settlements in those cases cover practices common to the broader industry.industry and which may generate litigation for the Company. Examples may include claims associated with RESPA compliance (including, but not limited to, those related to the broker-to-broker exception, marketing agreements or consumer rebates), broker fiduciary duties, andmultiple listing service practices, sales agent classification. One such caseclassification and federal and state fair housing laws. For example, there is PHH Corp. vs. Consumer Financial Protection Bureau, No. 15-1177. On October 11, 2016,active worker classification litigation in New Jersey against 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 agencycompeting residential real estate brokerage where the CFPB Director can onlyplaintiff seeks to reclassify independent sales agents as employees, from which the Company could 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 whereimpacted if 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.
adverse ruling. The Company also may be impacted by litigation and other claims against companies in other industries. Rulings on matters such asFor example, there have been several challenges to the enforcementconstitutionality and enforceability of arbitration and class waiver agreements anda California worker classification may adversely affectstatute adopted in 2019 as it applies to other industries, which could potentially result in the Companystatute being found unconstitutional and otherof no force - which could have the effect of eliminating that statute's less restrictive test applicable to real estate professionals in that state. Changes in current legislation, regulations or interpretations that are applicable to the residential real estate service industry participants as a resultmay also impact the Company.
Item 1A. Risk Factors
Other than the risk factors disclosed in Part II, "Item 1A. Risk Factors" of our Quarterly Report on Form 10-Q for the classificationquarter ended June 30, 2020, which is hereby incorporated by reference into this Part II, "Item 1A. Risk Factors" of sales associates as independent contractors, irrespective of the fact that the parties subjectthis Form 10-Q, there were no material changes to the rulings arerisk factors reported in a different industry. To the extent the defendants are unsuccessfulPart 1, "Item 1A. Risk Factors" in these types of litigation matters, and we or our franchisees cannot distinguish our or their practices (or our industry’s practices), we and our franchisees could face significant liability and could be required to modify certain business relationships, either of which could materially and adversely impact our financial condition and results of operations. There also are changing employment-related regulatory interpretations at both the federal and state levels that could create risks around historic practices and that could require changes in business practices, both for us and our franchisees.2019 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
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(c) | The following table sets forth information relating to repurchase of shares of our common stock during the quarter ended September 30, 2017: |
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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 |
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August 1 - 31, 2017 | | 516,900 |
| | $34.33 | | 516,900 |
| | $ | 223,657,807 |
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September 1 - 30, 2017 (2) | | 759,600 |
| | $33.91 | | 759,600 |
| | $ | 197,899,771 |
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(1) | In February 2016, the Company's Board of Directors authorized a share repurchase program of up to $275 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 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 October 1, 2017 through November 1, 2017, we repurchased an additional 0.5 million shares at a weighted average market price of $33.11. Giving effect to these repurchases, we had approximately $181 million of remaining capacity authorized under the February 2017 share repurchase program as of November 1, 2017.
Item 5. Other Information.
On November 2, 2017,3, 2020, the Compensation Committee of the Board of Directors of Realogy Holdings Corp. (the “Board”“Committee”) approved the Fourth Amended and Restated Bylaws of the Company granted a cash-based performance incentive and retention award (the “Bylaws”“Performance Award”), which include amendments to:
•remove certain provisions that are inapplicable following under the Company’s de-classification2018 Long-Term Incentive Plan to the Company’s Chief Executive Officer & President (the “CEO”). Performance conditions apply to 75% of the Board;award, with the remaining portion time-based vesting. In granting the award, the Committee considered multiple factors, including Mr. Schneider’s executive management and leadership expertise, the broad scope of Mr. Schneider’s responsibilities and the critical role he plays in setting and executing the Company’s business strategy, his outstanding performance with the challenges presented during 2020, and the potential business disruption likely to be caused by a loss of his services.
add the positions of ChairmanThe performance component of the BoardPerformance Award has two tranches, each based on market share growth (as measured by our transaction volume for existing home sale transactions). The first tranche will be earned if our market share as of September 30, 2022 exceeds market share as of September 30, 2020 and Lead Independent Directorthe second tranche will be earned if our market share as of September 30, 2023 exceeds market share as of September 30, 2022 (each, a “Performance Period”), with each tranche equal to Article III (Board of Directors)$1.5 million. No amount will be earned under a tranche if the performance metric for the applicable Performance Period is not satisfied, except as stated herein.
The CEO generally must remain employed with the Company throughout the applicable Performance Period in order to be eligible to receive a payout of the Bylaws and make related ancillary changes; and
align statutory officer positions in Article IV (Officers) with Company practice, including the eliminationperformance component of the statutory officer rolesapplicable Performance Award tranche. If the CEO’s
employment is terminated without cause or due to his death or disability during the applicable Performance Period, he will be eligible to receive a pro-rata amount of the performance portion of his Performance Award based on actual performance.
In order to be eligible to receive a payout of the retention portion of the Performance Award in the amount of $1.0 million, the CEO generally must remain employed with the Company from the date of grant through September 30, 2021. If terminated in connection with a change in control, he would be entitled to full payout of any outstanding retention or performance component of the Performance Award.
Our Clawback Policy will apply to both the performance and Chief Accounting Officer,retention portions of the Performance Award, which will allow our Board of Directors to recoup incentive compensation in the event of a material restatement or adjustment of our financial statements, misconduct, or breach of the CEO’s restrictive covenants with the Company, including those related to non-competition and make related ancillary changes.non-solicitation.
The foregoing description of the amendments to the BylawsPerformance Award set forth above is qualified in its entirety by reference to the Bylaws, which are attachedPerformance Award filed as Exhibit 10.6 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.herein.
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: November 3, 20175, 2020
/S/ ANTHONY E. HULL CHARLOTTE C. SIMONELLI
Anthony E. HullCharlotte C. Simonelli
Executive Vice President and
Chief Financial Officer
Date: November 3, 20175, 2020
/S/ TIMOTHY B. GUSTAVSON
Timothy B. Gustavson
Senior Vice President,
Chief Accounting Officer and
Controller
EXHIBIT INDEX
Exhibit Description
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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. |