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 inpaid-in capital in Realogy Group's equity.
The Company may repurchase shares of its common stock under authorizations from its Board of Directors. Shares repurchased are retired and not displayed separately as treasury stock on the consolidated financial statements. The par value of the shares repurchased and retired is deducted from common stock and the excess of the purchase price over par value is first charged against any available additional paid-in capital with the balance charged to retained earnings. Direct costs incurred to repurchase the shares are included in the total cost of the shares.
The Company's Board of Directors authorized a share repurchase program of up to $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. As of March 31, 2019, the Company had repurchased and retired 35.5 million shares of common stock for an aggregate of $896 million at a total weighted average market price of $25.22 per share. As of March 31, 2019,2020, $204 million remained available for repurchase under the share repurchase programs. In May 2020, the Company's Board of Directors terminated its outstanding share repurchase programs.
Basic earnings (loss) per share is computed based on net income (loss) attributable to Realogy Holdings stockholders divided by the basic weighted-average shares outstanding during the period. Dilutive earnings per share is computed consistently with the basic computation while giving effect to all dilutive potential common shares and common share equivalents that were outstanding during the period. Realogy Holdings uses the treasury stock method to reflect the potential dilutive effect of unvested stock awards and unexercised options.
The 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:
sales agents and seeks to certify a class that could potentially include all agents of both Century 21 M&M and Century 21 in California. The plaintiff alleges that Century 21 M&M misclassified all of its independent real estate agents, salespeople, sales professionals, broker associates and other similar positions as independent contractors, failed to pay minimum wages, failed to provide meal and rest breaks, failed to pay timely wages, failed to keep proper records, failed to provide appropriate wage statements, made unlawful deductions from wages, and failed to reimburse plaintiff and the putative class for business related expenses, resulting in violations of the California Labor Code. The complaint also asserts an unfair business practice claim based on the alleged violations described above.
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.
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.
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.
Management evaluates the operating results of each of its reportable segments based upon revenue and Operating EBITDA. Operating EBITDA is defined by us as net income (loss) before depreciation and amortization, interest expense, net, (other than relocation services interest for securitization assets and securitization
11. SUBSEQUENT EVENTS
Update to Planned Sale of Cartus Relocation Services
The Company entered into a Purchase and Sale Agreement on November 6, 2019 (the "Purchase Agreement"), for the acquisition of Cartus Relocation Services, the Company's global employee relocation business, by North American Van Lines, Inc. (as assignee of SIRVA) for $375 million in cash at closing, subject to certain adjustments set forth in the Purchase Agreement, and a $25 million deferred payment after the closing of the transaction. SIRVA is a portfolio company of Madison Dearborn Partners, LLC ("MDP").
The Company strongly believes that all conditions to SIRVA’s obligations to effect the closing have been and continue to be satisfied. On April 24, 2020, the Company delivered notice to SIRVA that it had satisfied all such conditions under the Purchase Agreement and was committed to closing the transaction on April 29, 2020. On April 25, 2020, SIRVA notified the Company that it did not believe that all conditions to closing have been or will be satisfied by the April 30, 2020 termination date under the Purchase Agreement.
On April 27, 2020, the Company filed a lawsuit against affiliates of MDP and SIRVA to enforce SIRVA’s obligations under the Purchase Agreement. SIRVA has since delivered notices to the Company purportedly terminating the Purchase Agreement, the validity of which the Company disputes. The Company strongly disagrees with SIRVA’s position and will pursue all legal remedies to enforce SIRVA’s obligations under the Purchase Agreement.
As of March 31, 2020, the assets and liabilities of Cartus Relocation Services are classified as held for sale in the Condensed Consolidated Balance Sheets and the results are reported in this Quarterly Report as discontinued operations. "Net loss from discontinued operations" is reflected on the Condensed Consolidated Statements of Operations for all periods presented. Based upon developments in this litigation, the Company will reassess held for sale and discontinued operations accounting treatment in future periods.
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 20182019 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, or 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 20182019 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 and launched franchise sales of the Corcoran® brand in January 2019. As of March 31, 2019,•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 March 31, 2020, our real estate franchise systems and proprietary brands had approximately 301,900 independent sales agents worldwide, including approximately 190,800 independent sales agents operating in the U.S. (which included approximately 50,200 company owned brokerage independent sales agents). As of March 31, 2019, our real estate franchise systems and proprietary brands had approximately 16,600 offices worldwide in 113 countries and territories, including approximately 6,000 brokerage offices in the U.S. (which included approximately 750 company owned brokerage offices). |
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• | Company Owned Real Estate Brokerage Services (known as NRT)—operates a full-service real estate brokerage business with approximately 750 owned and operated brokerage offices with approximately 50,200 independent sales agents principally under the Coldwell Banker®, Corcoran®, Sotheby’s International Realty®, ZipRealty®, Citi HabitatsSM and Climb Real Estate® brand names in many of the largest metropolitan areas in the U.S. This segment also included the Company's share of earnings for our PHH Home Loans venture, which was sold to PHH in the first quarter of 2018 and we transitioned to our new mortgage origination joint venture, Guaranteed Rate Affinity, which is included in the financial results of the Title and Settlement Services segment.
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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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• | 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 and losses for our Guaranteed Rate Affinity mortgage origination joint venture.
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We pursue technology-enabled solutions for the real estate brokeragesfranchise systems and proprietary brands had approximately 311,300 independent sales agents worldwide, including approximately 188,900 independent sales agents operating in the U.S. (which included approximately 52,200 company owned brokerage independent sales agents). As of March 31, 2020, our real estate franchise systemsystems and proprietary brands had approximately 18,300 offices worldwide in 114 countries and territories, including approximately 5,900 brokerage offices in the U.S. (which included approximately 700 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).
•Realogy Brokerage Group—operates a full-service real estate brokerage business with approximately 700 owned and operated brokerage offices with approximately 52,200 independent sales agents principally under the Coldwell Banker®, Corcoran® and Sotheby’s International Realty® brand names in many of the largest metropolitan areas in the U.S.
•Realogy Title Group—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 business. This segment also includes the Company's share of equity earnings and losses for our Guaranteed Rate Affinity mortgage origination joint venture.
Our technology and data group pursues technology-enabled solutions to support our business segments and franchisees as well as independent sales agents affiliated with Realogy Brokerage and Franchise Groups and their customers, including through ZapLabs LLC, our wholly-owned subsidiary and developer of our proprietary technology platform.
customers.
RECENT DEVELOPMENTS
LiquidityCOVID-19
The COVID-19 pandemic is having a profound effect on the global economy and Capital Resources Updatefinancial markets. This unprecedented situation has created considerable risks and uncertainties for almost all sectors, including the U.S. real estate services industry, as well as for the Company and its affiliated franchisees, including those arising from the adverse effects on the economy as well as risks related to employees, independent sales agents, franchisees, and consumers.
In the United States, federal, state and local governments continue to react to this evolving public health crisis by, among other actions, recommending or requiring the avoidance of gatherings of people or significantly or entirely curtailing activities categorized as non-essential. The first statewide "shelter in place" order in the U.S. was issued by the State of California on March 2019,19, 2020 and as of April 30, 2020, the Companyvast majority of all Americans were subject to restrictions on their activities due to the public health crisis, although the level and duration of such restrictions vary by state and local mandates. Our near-term priority has been, and continues to be, the protection of the health and safety of our employees,
affiliated agents and franchisees and customers. Substantially all of our employees have been working remotely since mid-March 2020 and in early March 2020, we moved quickly to transform several near-term brand events to a virtual-only format.
Federal guidance from the U.S. Department of Homeland Security issued $550 millionon March 28, 2020 included residential real estate services (including settlement services) on the list of 9.375% Senior Notesessential services that are deemed critical to public health and safety as well as economic and national security. However, the definition of real estate services and whether the provision of real estate services is deemed to constitute an essential business varies by state and can also differ between counties and cities. Furthermore, even if such services are categorized as essential in any particular geography, local or state regulations may preclude or strictly limit traditional methods of marketing homes, such as open houses or in-person showings of property and may not include all aspects of home selling, such as home inspections and home repairs.
The ability of company owned and franchised brokerages to provide such services may also be limited by brokerage policies and procedures designed to protect the health and safety of independent sales agents and consumers. Residential real estate transactions may be additionally restricted due to each consumer's preferences, including with respect to health, financial and other matters, including, but not limited to, whether the home buyer or seller is affected by the heightened economic uncertainties resulting from the pandemic, including significant declines in the value of stock (and stock market volatility), declining wages and increasing unemployment.
We are taking actions to leverage technology for virtual showings, alternative processes for contract negotiation and execution, and recent legislative and procedural changes related to items such as remote appraisals and remote notarization. However, it is currently not clear whether, and how quickly and widespread, these alternatives may be adopted by independent sales agents and consumers. In addition, remote notarization and other closing procedures are not legally permitted in all states.
We experienced positive growth in closed homesale sides and strong year-over-year increases in homesale transaction volume and homesale transaction price during January and February. Homesale transaction volume was up 13% in January and 11% in February compared to the prior year. However, commencing around mid-March 2020, we began to see declines in new contracts to buy or sell a home (commonly referred to as "open homesale contracts"), which steepened during the last week of the quarter, when we also began to see declines in closed homesale transactions. As a result, homesale transaction volume was up 3% in March compared to March 2019. Declines in open homesale contracts and closed transactions during March 2020 were particularly pronounced in densely populated areas, such as California and the New York metropolitan area (geographies which also have an average sales price much higher than the U.S. average). This trend is continuing, with sustained declines in open homesale contracts and closed transactions in April 2027. We used $540 million2020, as well as declines in average sale price due to geography mix and lower inventory in the high-end markets. In addition, these trends may continue or may worsen for so long as the COVID-19 crisis continues to have a material impact on the industry, consumers and the overall economy.
Accordingly, we anticipate that our revenue for the second quarter of 2020 will be materially lower than during the comparable period in 2019, primarily due to lower homesale transaction volume.
In mid-March 2020, we began taking a series of proactive measures intended to increase liquidity to support our operations, identify and implement cost-saving measures, and to work to provide liquidity to affiliated franchisees in light of the net proceeds to repay a portionemerging COVID-19 crisis. These measures are assessed by management on an ongoing basis and may be extended and/or expanded as the situation evolves. Specifically:
•To supplement available cash on hand, we borrowed an additional $400 million under our Revolving Credit Facility in March 2020 resulting in $755 million of outstanding borrowings under our Revolving Credit Facility. In February 2019, the Company used borrowings under its Revolving Credit Facility at March 31, 2020 and $628 million of cash and cash equivalents as of March 31, 2020.
•To preserve capital, we implemented a series of cost saving initiatives, which we expect to result in cost savings of $80 to $100 million for each full quarter for so long as such measures remain in place. Depending on hand to fundmanagement’s ongoing assessments, we may expand or contract the redemptionmix and scope of these cost saving initiatives (which may have an impact on quarterly savings). Current initiatives include:
◦employee-related cost-savings actions covering the vast majority of our employee base, which we expect will result in cost-savings of approximately $60 million for each full quarter for so long as such measures remain in place, including:
▪temporary salary reductions for all of its outstanding $450 million 4.50% Senior Notes,our exempt employees, including our executive leadership, and temporary work-week reductions for certain non-exempt employees, each effective April 4, 2020;
▪temporary employment furloughs of certain employees, although we have continued to cover the
employee-portion of health insurance premiums for such employees;
▪reductions in workforce of certain non-exempt employees;
▪freezing new hires; and
▪elimination of our employee 401(k) match effective April 4, 2020;
◦other cost saving actions including reductions in marketing expense, incremental office optimization activities, delaying events and conferences as well as other actions focused on reducing operating expenses and delaying investments in certain initiatives.
•To provide enhanced liquidity to affiliated franchisees we took the following actions, which werewe believe are meaningful to franchisees, but are not expected to have a material impact on our financial results for the second quarter of 2020:
◦accelerated April payment of franchisee rebates by two weeks;
◦waived all domestic U.S. brand marketing fund fees (which we generally apply on a dollar-for-dollar basis to marketing expenses), including monthly minimums, if applicable, for all homesale transactions closing in the second quarter of 2020;
◦waived applicable domestic U.S. monthly minimum royalty fees due in April 2019.the second quarter of 2020; and
The Company expects◦agreed to prioritize investing in its businessretain franchisee rebate tiers at 2019 levels for the duration of 2020.
In addition, we have proactively shared information with affiliated franchisees and reducing indebtedness over otherindependent sales agents regarding the potential uses of cash until it is ablebenefits which are available to reduce its consolidated leverage ratio (as definedsole proprietors and independent contractors under the "Coronavirus Aid, Relief, and Economic Security Act," or CARES Act, provision aimed at assisting small businesses during the crisis.
Material revenue declines relating to this crisis, including in the indenture governingsecond quarter of 2020, are expected to have a material negative impact on our earnings and may also adversely impact our liquidity, notwithstanding the 9.375% Senior Notes)mitigation actions we have initiated and expect to below 4.00 to 1.00, although the Company currently anticipates continuing its quarterly cash dividend. Accordingly,continue during this period,crisis and, given the Company will not repurchase common stock pursuantsignificant uncertainties created by the COVID-19 crisis and related economic downturn, may continue to its existing share repurchase programs.have such an effect in future periods.
There can be no assurances asWe are currently in compliance with our senior secured leverage ratio; however, a material decline in our ability to the length of time that will be necessary for the Company to achieve this reduction in its consolidated leverage ratio or whether it will be successful in reducing and maintaining its consolidated leverage ratio below 4.00 to 1.00. Moreover, there can be no assurances as to the timing, frequency or amounts of any dividends or share repurchases in the future and such determinations will be subject to the discretion of the Company's Board of Directors and will dependgenerate EBITDA calculated on a variety of factors, including the Company’s financial condition and results of operations, contractual restrictions, including restrictive covenants containedPro Forma Basis, as defined in the Senior Secured Credit Agreement governing the Senior Secured Credit Facility and Term Loan A Facility, andcould result in our failure to comply with the indentures governingsenior secured leverage ratio covenant in future periods. In addition, prior to making new borrowings under the Unsecured Notes, capital requirements and other factorsRevolving Credit Facility, we are required to certify that the Boardrepresentations and warranties in the Senior Secured Credit Agreement remain true and correct in all material respects as of Directors deems relevant.the date of any borrowing (except to the extent such representations and warranties relate to an earlier date), including the absence of any material adverse effect on our business, property, operations or condition.
FacilitySee Financial Condition, Liquidity and Operational Efficiencies Program
During 2019, we planCapital Resources in this Item 2. for additional information on our near-term liquidity. See Note 5, "Short and Long-Term Debt", to acceleratethe Condensed Consolidated Financial Statements for additional information on our office consolidation to reduceshort- and long-term debt. For important risks regarding our storefront costs,indebtedness, see Part II, Item 1A, "Risk Factors", of this Form 10-Q as well as institute other operational efficienciesthe risk factors that appear under the header Risks Related to drive profitability. In addition, beginningOur Indebtedness in Part I, Item 1A, "Risk Factors" of the 2019 Form 10-K.
Update to the Planned Sale of Cartus Relocation Services
As previously disclosed, the Company entered into a Purchase and Sale Agreement on November 6, 2019 (the "Purchase Agreement"), for the acquisition of Cartus Relocation Services, the Company's global employee relocation business, by North American Van Lines, Inc. (as assignee of SIRVA Worldwide, Inc., or "SIRVA") for $375 million in cash at closing, subject to certain adjustments set forth in the Purchase Agreement, and a $25 million deferred payment after the closing of the transaction. SIRVA is a portfolio company of affiliates of Madison Dearborn Partners, LLC ("MDP").
The Company strongly believes that all conditions to SIRVA’s obligations to effect the closing have been and continue to be satisfied. On April 24, 2020, the Company delivered notice to SIRVA that it had satisfied all such conditions under the Purchase Agreement and was committed to closing the transaction on April 29, 2020. On April 25, 2020, SIRVA notified the Company that it did not believe that all conditions to closing have been or will be satisfied by the April 30, 2020 termination date under the Purchase Agreement.
On April 27, 2020, the Company filed a lawsuit against affiliates of MDP and SIRVA to enforce SIRVA’s obligations under the Purchase Agreement. SIRVA has since delivered notices to the Company purportedly terminating the Purchase
Agreement, the validity of which the Company disputes. The Company strongly disagrees with SIRVA’s position and will pursue all legal remedies to enforce SIRVA’s obligations under the Purchase Agreement.
As of March 31, 2020, the assets and liabilities of Cartus Relocation Services are classified as held for sale in the Condensed Consolidated Balance Sheets and the results are reported in this Quarterly Report as discontinued operations. "Net loss from discontinued operations" is reflected on the Condensed Consolidated Statements of Operations for all periods presented.
Impairment of Goodwill and Other Indefinite-lived Intangible Assets
During the first quarter of 2019,2020, we commenceddetermined that the impact on future earnings related to the COVID-19 pandemic qualified as a plan to transform and centralize certain aspectstriggering event for all of our operational supportreporting units and drive changes in howaccordingly, we serve our affiliated independent sales agents from a marketingperformed an impairment assessment of goodwill and technology perspective to help such agents be more productive and enable them to make their businesses more profitable.
Total restructuring costs of approximately $53 million are currently anticipated to be incurred through the end of 2019. Asindefinite-lived intangible assets as of March 31, 2019,2020. This assessment resulted in the recognition of an impairment of Realogy Franchise Group trademarks of $30 million and a goodwill impairment of $413 million for Realogy Brokerage Group offset by an income tax benefit of $99 million resulting in a net reduction to Realogy Brokerage Group's carrying value of $314 million. The primary drivers to the impairments were a significant increase in the weighted average cost savingsof capital due to the volatility in the capital and debt markets due to COVID-19 and the related lower projected financial results for 2020. The impairment charges are recorded on a separate line in the accompanying Condensed Consolidated Statements of Operations and are non-cash in nature.
Impairment analyses are highly complex and involve many subjective assumptions, estimates and judgments made by management.Suchassumptions, estimates and judgments may change in the near term due to multiple factors, including continued business and economic disruptions related to these restructuring activities were estimatedthe ongoing COVID-19 crisis. If business conditions deteriorate further than we have modeled or if changes in key assumptions and estimates differ significantly from management’s expectations, it may be necessary to record additional impairment charges in the future, which may be approximately $50 million on an annual run rate basis, with approximately $25 million of those cost savings expected to be realized in 2019. In additionmaterial. See Note 3, "Goodwill and Intangible Assets", to the $25 million of cost savings from restructuring activities, there are approximately $45 million ofCondensed Consolidated Financial Statements for additional cost savings initiatives being implemented and expectedinformation related to be realized in 2019. These costs savings are designed to partially offset inflation and other costs.
The following table reflects the total amount of restructuring costs for the Company's Facility and Operational Efficiencies program by reportable segment:
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| Total amount expected to be incurred | | Amount incurred to date | | Total amount remaining to be incurred |
Real Estate Franchise Services | $ | — |
| | $ | — |
| | $ | — |
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Company Owned Real Estate Brokerage Services | 45 |
| | 3 |
| | 42 |
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Relocation Services | 4 |
| | 3 |
| | 1 |
|
Title and Settlement Services | 2 |
| | 1 |
| | 1 |
|
Corporate and Other | 2 |
| | 2 |
| | — |
|
Total | $ | 53 |
| | $ | 9 |
| | $ | 44 |
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CURRENT BUSINESS AND INDUSTRY TRENDS
According to the National Association of Realtors ("NAR"), during the first quarter of 2019,2020, homesale transaction volume decreased 4%volume increased 13% due to a 6% increase in the average homesale price and a 7% decreaseincrease in the number of homesale transactions, partially offset by a 2% increase in the average homesale price.transactions.
We believe that the challenging housing market conditions during 2018, which intensified in severity during the last four months of the year, continued to negatively impact the first quarter of 2019. Specifically, we believe reduced affordability as a result of continued constrained inventory, higher average homesale prices and the impact of mortgage rate volatility in the second half of 2018, as well as a number of other factors, such as personal income tax reform, contributed to the decline. We are unable to extrapolate the relative impact that each of these factors may have had on regional and local housing markets.
RFG and NRT homesaleHomesale transaction volume on a combined basis decreased 9%for Realogy Franchise and Brokerage Groups increased 8% during the three months ended March 31, 20192020 compared to the three months ended March 31, 2018. NRT's2019. Homesale transaction volume decreased 11%at Realogy Brokerage Group increased 8%, primarily as a result of a 9% decrease4% increase in average homesale price and a 3% increase in existing homesale transactions and a 2% decrease in the average homesale price. RFG's transaction volume decreasedat Realogy Franchise Group increased 8%, as a result of a 10% decrease in existing homesale transactions, partially offset by a 2%an 8% increase in average homesale price.price while existing homesale transactions remained flat.
We believe that while theincremental improvement in certain industry fundamentals, described above drove a significant portionin particular declines in average mortgage rates, contributed to improvement in market conditions in the second half of our decline in homesale transaction volume in2019 and continued to positively impact the majority of the first quarter of 2019,2020. We believe that our first quarter 2020 results reflect these general market conditions; however, in addition to the impact of the COVID-19 crisis which began around mid-March 2020, we were also negatively impacted by our geographic concentration as well as the intensifying competitive environment. Specifically, our transaction volume was negatively impacted by our footprint in California, which experienced a larger homesale transaction volume decline induring the first quarter of 2019 than the national average.
In addition, the growing intensity of competition for the affiliation of independent sales agents negatively impacted recruitment and retention efforts in certain geographies and contributed to the decline in homesale transaction volume at both NRT and RFG. We believe that certain of our competitors have investors that appear to be supportive of a model that pursues 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 received2020 by the agent.
Ashighly competitive environment in 2019 which is reflected in our year over year comparison of their most recent release on April 30, 2019, NAR is forecasting existing homesale transaction volume to increase 2% for the full year 2019 compared to 2018. NAR's full year 2019 forecast includes a homesale transaction volume decrease in the first quarter, of 2019 offset by expected volume growth duringas well as our geographic concentration, in particular for our brokerage operations in California and the rest of 2019. NAR's quarterly year-over-year forecasts for homesale transaction volume for 2019 compared to 2018 are as follows:New York metropolitan area.
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(a) | Q1 homesale transaction volume is calculated using existing homesale transactions and average price as of the most recent NAR press release on April 22, 2019. |
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(b) | Forecasted homesale transaction volume is calculated using seasonally adjusted homesale transactions and median price as of the most recent NAR forecast release on April 30, 2019. |
Inventory. Although inventory levels have recently shown some signs of improvement,We expect that for so long as the COVID-19 crisis continues, affected geographies will experience dramatic declines in inventory. Even before the COVID-19 crisis, low housing inventory levels continue to behad 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. was 1.64decreased from 1.67 million as of March 2018 and has increased2019 to 1.681.50 million at the endas of March 2019.2020. As a result, inventory has increased from 3.6decreased from 3.8 months of supply in March 20182019 to 3.93.4 months as of March 2019. However, these2020. These levels continue to be significantly below the 10-year average of 5.85.4 months, the 15-year average of 6.1 months and the 25-year average of 5.85.7 months.
Unemployment. More than 30 million Americans have applied for unemployment benefits since March 15, 2020 through April 25, 2020 and since the onset of the pandemic, many companies have announced reductions in work weeks and salaries. If the COVID-19 pandemic continues to curtail employment levels and economic activity for a substantial period,
it is likely to lead to an increase in loan defaults and foreclosure activity and 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. In response to the growing economic effects of the COVID-19 crisis, the Federal Reserve Board has 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 averaged 3.51% for the first quarter of 2020 compared to 4.37% for the first quarter of 2019 compared to 4.27% for the first quarter of 2018. While2019. On March 31, 2020, mortgage rates reached as high as 4.87% in November 2018, rates have recently moderated, and on March 31, 2019 were 4.27%3.45%, according to Freddie Mac. A decline in mortgage rates generally drives increased refinancing activity, however, the demand for mortgages to purchase homes will generally decrease with declining homesale transaction activity. Due to the economic effects of the COVID-19 crisis, mortgage standards may tighten, even as rates declines, which could limit the availability of mortgage financing. Increases in mortgage rates adversely impact housing affordability and we have been and could continue toagain be negatively impacted by a rising interest rate environment. For example, a rise in mortgage rates could result in decreased homesale transaction volume if potential home sellers choose to stay with their lower mortgage rate rather than sell their home and pay a higher mortgage rate with the purchase of another home or, similarly, if potential home buyers choose to rent rather than pay higher mortgage rates. However, we believe that over the medium to long-term, rising wages, the availability of alternative mortgage arrangements and increasing rent prices for the mainstream housing market may help offset the impact of rising mortgage rates to some degree.
Affordability. The compositefixed housing affordability index, as reported by NAR, decreasedincreased from 162 for February 2018 to 157158 for February 2019 to 170 for February 2020, which is still above the 25-year average of 143. The affordability index hit the lowest point since 2008 in June 2018 at 138. As noted above, we believe the affordability decline is a result ofhas been primarily attributable to lower inventory levels, which have continued to put upward pressure on home prices with additional pressure from higher mortgage rates along with other factors.rates. A housing affordability index above 100 signifies that a family earning the median income has sufficient income to purchase a median-priced home, assuming a 20 percent down payment and ability to qualify for a mortgage. We expect housing affordability to be significantly impacted by the unprecedented rise in unemployment as a result of the COVID-19 crisis, but are unable to estimate the extent or duration of such decrease due to the uncertainties regarding the duration and severity of the COVID-19 crisis and its related impact on the global 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. CompetitionAggressive competition for the affiliation of independent sales agents in our industry, including within our franchise system, is high,has negatively impacted recruitment and retention efforts at both Realogy Franchise and Brokerage Groups, in particular with respect to more productive sales agents. agents, and drove a loss in our market share for 2019 compared to 2018. This loss of market share contributed to the decline in homesale transaction volume at both Realogy Franchise and Brokerage Groups and is expected to continue to adversely impact results.
We believe that a variety of factors in recent years have negatively impacted thedriven intensifying recruitment and retention oftactics for independent sales agents in the industry and has increasingly impacted theour 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 third-parties outside of their affiliated broker) and the growth in independent sales agent teams. The
In addition, industry competition for independent sales agents has been and is expected to continue to be further complicated by competitive models that do not prioritize traditional business objectives. For example, we believe that certain owned-brokerage competitors have investors that have historically allowed the pursuit of increases in market share over profitability, which not only exacerbates competition for independent sales agents, but places additional pressure on the share of commission income received by the agent.
This competitive environment has continued competitiondespite general business disruption due to the COVID-19 crisis. Competition for productive agents couldis expected to continue to have a negative impact on our homesale transaction volume and could continuemarket share and to put upward pressure on the average share of commissions earned by independent sales agents. 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.
NRTA growing number of companies are competing in non-traditional ways for a portion of the gross commission income generated by homesale transactions. For example, although most iBuying models paused home-buying activity in late March due to the COVID-19 pandemic (including our own version of such model), these models could restart as conditions
improve. Many iBuying business models seek to disintermediate real estate brokers and RFG have launched strategic initiatives focusedindependent sales agents from buyers and sellers of homes by reducing brokerage commissions that may be earned on addressingthose transactions. In addition, the concentration and market power of the top listing aggregators allow them to monetize their platforms by a variety of actions, including expanding into the brokerage business, charging significant referral fees, charging listing and display fees, diluting the relationship between agents and brokers (and between agents and the consumer), tying referrals to use of their products, consolidating and leveraging data, and engaging in preferential or exclusionary practices to favor or disfavor other industry participants. These actions divert and reduce the earnings of other industry participants, including our company owned and franchised brokerages. Aggregators could intensify their current market dynamics by expandingbusiness tactics or introduce new programs that could be materially disadvantageous to our basebusiness and other brokerage participants in the industry and such tactics could further increase pressures on the profitability of our company owned and franchised brokerages and affiliated independent sales agents, reduce our franchisor service revenue and dilute our relationships with our franchisees and our and our franchisees' relationships with affiliated independent sales agents and buyers and sellers of homes.
As previously disclosed, we currently receive meaningful listing fees for our provision of real estate listings under agreements scheduled to expire in March 2022. Due to disputes between the parties, which heightened during the COVID-19 crisis, there is an increased risk that performance and payments under these agreements may be suspended or terminated. The suspension or termination of these agreements would have a negative impact on our revenues and earnings but would eliminate various obligations and could result in certain reduced spend. We will continue to focus efforts on lead generation and other programs designed to benefit affiliated agents and franchisees.
For example, NRT continuesNew Development. Realogy Brokerage Group has relationships with developers, primarily in major cities, in particular New York City, to expand the useprovide 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 commission plans other than the traditional graduated commission model,our control, including plans that charge agents for certain activities. Separately, we recently introduced a collection of marketing tools aimed at increasing independent agent success, including Listing Concierge—a full service solution for the design, creationlong cycle times and distribution of automated customized property listings—as well as products designed to facilitate agent branding and customer prospecting. We intend to further advance these marketing initiatives throughout 2019.
In late 2018, in collaboration with Home Partners of America, we also launched the cataLIST Program—a quick-cash sale program that keeps the independent sales agent at the center of the transaction. The program is currently available in select markets (Atlanta, Greater Dallas and Tampa) and expansion to additional markets is planned in 2019, as well as the launch of complementary build-on offerings.
irregular project completion timing. In addition, RFG is implementing strategic initiatives intendedthe new development industry has also experienced significant disruption related to add new franchiseesthe COVID-19 crisis. Accordingly, earnings attributable to this business can fluctuate meaningfully from year to year, impacting both homesale transaction volume and expand the baseshare of independent sales agents, including through the expansion of RFG’s historical scope of potential franchisee candidates as well as through new pricing model structures and new franchise brands.
Existing Homesales
For the quarter ended March 31, 20192020 compared to the same period in 2018,2019, NAR existing homesale transactions decreasedtransactions increased to 1.0 million1.1 homes or downup 7%. For the quarter ended March 31, 2019, RFG and NRT2020, homesale transactions on a combined basis decreased 9%for Realogy Franchise and Brokerage Groups increased 1% compared to the same period in 20182019 due primarily to challenging market fundamentals, geographic concentration (in particular at NRT in California) andthe impact, starting around mid-March 2020, of the COVID-19 crisis, the impact of competition (including on recruitmentour market share), the loss of certain franchisees and retention efforts at NRT.
the geographic concentration of Realogy Brokerage Group. The quarterly and annual year-over-year trends in homesale transactions are as follows:
_______________
| |
(a) | Q1 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 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 isand Fannie Mae are both forecasting existing homesale transactions to increase 4%15% in 2020 while Fannie Mae is forecasting existing homesale transactions to increase 2% for the same period.
2021.
Existing Homesale Price
For the quarter ended March 31, 20192020 compared to the same period in 2018,2019, NAR existing homesale average price increased 2%6%. For the quarter ended March 31, 2019, RFG and NRT's2020, average homesale price on a combined basis for Realogy Franchise and Brokerage Groups increased 1%7% compared to the same period in 20182019. However, as noted above, beginning in April 2020, our company owned brokerages have experienced declines in average sale price due to geography mix and consisted of RFG's average homesale price increase of 2%, partially offset by NRT's average homesale price decrease of 2%. NRT'slower inventory in the high-end markets. Realogy Brokerage Group's geographic concentration in California and exposure to the high-end of the market plus the associated competitive pressures drove the year-over-year decline in homesale price compared to the overall industry. The quarterly and annual year-over-year trends in the price of homes are as follows:
_______________
| |
(a) | Q1 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. |
40
_______________
(a)Q1 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 is forecasting an increase in median existing homesale price of 3% in 2020to increase 2% while Fannie Mae is forecasting a 4%median existing homesale price to increase 1% in 2020.2021.
* * *
We believe that long-term demand for housing and the growth of our industry are primarily driven by the affordability of housing, the economic health of the U.S. economy, demographic trends such as generational transitions, increases in U.S. household formation, mortgage rate levels and mortgage availability, certain tax benefits, job growth, increases in renters that qualify as homebuyers, the inherent attributes of homeownership versus renting and the 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, certain of these factors are trending favorably, such as mortgage rate levels and household formation, although the COVID-19 pandemic continues to materially impact the entire industry and job growth.the global economy. Factors that may negatively affect growth in the housing industry include:
•the severity, length and spread of the COVID-19 pandemic and the speed of the U.S. and global economic recoveries;
•increased levels of unemployment and/or stagnant wage growth in the U.S.;
•economic stagnation or contraction in the U.S. economy;
•decreasing consumer confidence in the economy and/or the residential real estate market;
•an increase in potential homebuyers with low credit ratings or inability to afford down payments;
•reduced availability of mortgage financing or increasing down payment requirements or other mortgage challenges due to disrupted earnings;
•weak credit markets and/or instability of financial institutions;
•renewed high levels of foreclosure activity;
•a reduction in the affordability of homes;
•continued insufficient inventory levels or stagnant and/or declining home prices;
further reduction in the affordability of homes;•geopolitical and economic instability;
higher mortgage rates due to increases in long-term interest rates and increasing down payment requirements as well as reduced availability of mortgage financing;
•certain provisions of the 2017 Tax Act that directly impact traditional incentives associated with home ownership and may reduce the financial distinction between renting and owning a home, including those that reduce the
amount that certain taxpayers would be allowed to deduct for home mortgage interest or state, local and property taxes;taxes as well as certain state or local tax reform, such as the "mansion tax" in New York City;
•decelerated or lack of building of new housing for homesales, increased building of new rental properties, or irregular timing of new development closings leading to lower unit sales at NRT,Realogy Brokerage Group, which has relationships with developers, primarily in major cities, to provide marketing and brokerage services in new developments;
•homeowners retaining their homes for longer periods of time;
•changing attitudes towards home ownership;ownership, particularly among potential first-time homebuyers who may delay, or decide not to, purchase a home, as well as changing preferences to rent versus purchase a home;
decreasing consumer confidence in the economy and/or the residential real estate market;
an increase in potential homebuyers with low credit ratings or inability to afford down payments;
•the impact of limited or negative equity of current homeowners, as well as the lack of available inventory may limit their proclivity to purchase an alternative home;
economic stagnation or contraction in the U.S. economy;
weak credit markets and/or instability of financial institutions;
increased levels of unemployment and/or stagnant wage growth in the U.S.;
•a decline in home ownership levels in the U.S.;
•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;
•higher mortgage rates due to increases in long-term interest rates; 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;reform (including, for example, the proposed "pied-a-terre tax" in New York City).
renewed high levels of foreclosure activity;
natural disasters, such as hurricanes, earthquakes, wildfires, mudslides and other events that disrupt local or regional real estate markets; and
geopolitical and economic instability.
Many of the trends impacting our businesses that derive revenue from homesales also impact Cartus whichRelocation Services is the leading provider of global relocation services. In addition toimpacted by these general residential housing trends key drivers of Cartus areas well as global corporate spending on relocation services which(which continue to shift to lower cost relocation benefits as corporate clients engage in cost reduction initiatives and/or restructuring programs as well asprograms) and changes in employment relocation trends. Cartus is subject to a competitive pricing environment and lower average revenue per relocation as a result 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 diminished due to NAR’s utilization of seasonally adjusted annualized rates whereas we report actual period-over-period changes and their use of median price for their forecasts compared to our average price;
•NAR historical data is subject to periodic review and revision and these revisions have been material in the past, and could be material in the future; and
•NAR and Fannie Mae generally update their forecasts on a monthly basis and a subsequent forecast may change materially from a forecast that was previously issued.
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 metrics: (i) closed homesale sides, which represents either the "buy" side or the "sell" side of a homesale transaction, (ii) average homesale price, which represents the average selling price of closed homesale transactions, and (iii) average homesale broker commission rate, which represents the average commission rate earned on either the "buy" side or "sell" side of a homesale transaction.
For RFG,Realogy Franchise Group, we also use net royalty per side, which represents the royalty payment to RFGRealogy Franchise Group for each homesale transaction side taking into account royalty rates, average broker commission rates, volume incentives achieved and non-standardother incentives. We utilize net royalty revenue per transactionside as it reflectsincludes the impact of changes in average homesale price as well as all incentives and represents the royalty revenue impact of each incremental side.
Within Cartus,For Realogy Brokerage Group, we measure operating performance usingalso use gross commission income per side, which represents gross commission income divided by closed homesale sides. Gross commission income includes commissions earned in homesale transactions and certain other activities, primarily leasing and property management transactions. Realogy Brokerage Group, as a franchisee of Realogy Franchise Group, pays a royalty fee of approximately 6% per transaction to Realogy Franchise Group from the following key operating statistics: (i) initiations, which representcommission earned on a real estate transaction. The remainder of gross commission income is split between the total number of new transfereesbroker (Realogy Brokerage Group) and the total numberindependent sales agent in accordance with their applicable independent contractor agreement (which specifies the portion of real estate closings for affinity members and (ii) referrals,the broker commission to be paid to the agent), which represent the number of referrals fromvaries by agent agreement, 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. An increase or decrease in homesale transactions will impact the financial results of TRG;Realogy Title Group; however, the financial results are not significantly impacted by a change in homesale price. We believe that further increases in mortgage rates
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 into Realogy Franchise Group during the first quarter of 2020.
During the first quarter of 2020, Cartus Relocation Services had 25,049 initiations as compared to 27,334 initiations during the first quarter of 2019. Cartus Relocation Services earned referral fee revenue from approximately 2,651 referrals in the future will most likely havefirst quarter of 2020 as compared to 2,741 referrals in the first quarter of 2019. Beginning in the second half of March 2020, Cartus experienced a negative impact on refinancing titledecline in new initiations believed to be attributable to the COVID-19 pandemic and closing units.expects this trend to continue in the second quarter of 2020 and potentially beyond.
The following table presents our drivers for the three months ended March 31, 20192020 and 2018.2019. See "Results of Operations" below for a discussion as to how these drivers affected our business for the periods presented.
|
| | | | | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 | | % Change |
RFG (a) | | | | | |
Closed homesale sides | 202,662 |
| | 223,990 |
| | (10 | %) |
Average homesale price | $ | 298,361 |
| | $ | 292,580 |
| | 2 | % |
Average homesale broker commission rate | 2.48 | % | | 2.50 | % | | (2 | ) bps |
Net royalty per side | $ | 303 |
| | $ | 310 |
| | (2 | %) |
NRT | | | | | |
Closed homesale sides | 60,442 |
| | 66,097 |
| | (9 | %) |
Average homesale price | $ | 511,922 |
| | $ | 525,020 |
| | (2 | %) |
Average homesale broker commission rate | 2.41 | % | | 2.45 | % | | (4 | ) bps |
Gross commission income per side | $ | 13,212 |
| | $ | 13,666 |
| | (3 | %) |
Cartus | | | | | |
Initiations | 38,484 |
| | 37,953 |
| | 1 | % |
Referrals | 14,879 |
| | 15,526 |
| | (4 | %) |
TRG | | | | | |
Purchase title and closing units | 28,044 |
| | 31,741 |
| | (12 | %) |
Refinance title and closing units | 4,011 |
| | 5,410 |
| | (26 | %) |
Average fee per closing unit | $ | 2,267 |
| | $ | 2,161 |
| | 5 | % |
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | |
| 2020 | | 2019 | | % Change |
Realogy Franchise Group (a) | | | | | |
Closed homesale sides | 203,188 | | | 202,662 | | | — | % |
Average homesale price | $ | 322,465 | | | $ | 298,361 | | | 8 | % |
Average homesale broker commission rate | 2.47 | % | | 2.48 | % | | (1) | bps |
Net royalty per side | $ | 316 | | | $ | 303 | | | 4 | % |
Realogy Brokerage Group | | | | | |
Closed homesale sides | 62,541 | | | 60,442 | | | 3 | % |
Average homesale price | $ | 533,813 | | | $ | 511,922 | | | 4 | % |
Average homesale broker commission rate | 2.41 | % | | 2.41 | % | | — | bps |
Gross commission income per side | $ | 13,597 | | | $ | 13,212 | | | 3 | % |
Realogy Title Group | | | | | |
Purchase title and closing units | 28,724 | | | 28,044 | | | 2 | % |
Refinance title and closing units | 8,899 | | | 4,011 | | | 122 | % |
Average fee per closing unit | $ | 2,269 | | | $ | 2,267 | | | — | % |
_______________
| |
(a) | Includes all franchisees except for NRT. |
(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 agents.agents or by an increase in volume or other incentives paid to franchisees.
Since 2014, we have experienced approximately a one basis point decline in the average homesale broker commission rate each year, which we believe has been largely attributable to increases in average homesale prices (as higher priced homes tend to have a lower broker commission) and, to a lesser extent, competitors providing fewer or similar services for a reduced fee.
Royalty fees are charged to all franchisees pursuant to the terms of the relevant franchise agreements and are included in each of the real estate brands' franchise disclosure documents. Most of our third-party franchisees are subject to a 6% royalty rate and entitled to volume incentives, although a royalty fee generally equal to 5% of franchisee commission (capped at a set amount per independent sales agent per year) is applicable to franchisees operating under the "capped fee model" that was launched for our Better Homes and Gardens® Real Estate franchise business in January 2019. Volume incentives are calculated as a progressive percentage of the applicable franchisee's eligible annual gross commission income and generally result in a net or effective royalty rate ranging from 6% to 3% for the franchisee.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 larger franchiseeslargest franchisees) have a flat royalty rate of less than 6% and are not eligible for volume incentives.
Non-standardOther incentives may also be used as consideration to attract new franchisees, grow franchisees (including through independent sales agent recruitment) or extend existing franchiseefranchise agreements, although such incentives are generally not available to most franchisees, and, in contrast to volume incentives, the majority of other incentives are not homesale transaction based. We expect that the trend of increasing non-standard incentives will continue in the future in order to attract, retain, and help grow certain franchisees.
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 non-standardother sales incentives, both of which directly impact royalty revenue. Over the past several years, our top 250 franchisees have grown faster than our other franchisees through organic growth and market consolidation. If the amount of gross commission income generated by our top 250 franchisees continuecontinues to grow at a quicker pace relative to our other franchisees, we would expect our royalty revenue to continue to increase, but at a slower pace than homesale transaction volume. Likewise, our royalty revenue would continue to increase, but at a slower pace than homesale transaction volume, if the gross commission income generated by all of our franchisees grows faster than the applicable annual volume incentive table increase or if we increase our use of standard volume or non-standardother incentives. However, we expectin the event that any such increases inthe gross commission income willgenerated by our franchisees increases as a result of increased transaction volume, we would expect to recognize an increase in increased overall royalty payments to us.
NRTWe face significant competition from other national real estate brokerage brand franchisors for franchisees and we expect that the trend of increasing incentives will continue in the future in order to attract, retain, and help grow certain franchisees. We expect to experience downward pressures on net royalty per side during 2020, largely due to the impact of competitive market factors noted above, continued concentration among our top 250 franchisees, and the impact of affiliated franchisees of our Better Homes and Gardens® Real Estate brand moving to the "capped fee model" we adopted in 2019.
Realogy Brokerage Group has a significant concentration of real estate brokerage offices and transactions in geographic regions where home prices are at the higher end of the U.S. real estate market, particularly the east and west coasts, while RFGRealogy Franchise Group has franchised offices that are more widely dispersed across the United States. Accordingly, operating results and homesale statistics may differ between NRTRealogy Brokerage Group and RFGRealogy Franchise Group based upon geographic presence and the corresponding homesale activity in each geographic region. In addition, the share of commissions earned by independent sales agents directly impacts the margin earned by NRT.Realogy Brokerage Group. Such share of commissions earned by independent sales agents varies by region and commission schedules are generally progressive to incentivize sales agents to achieve higher levels of production. Commission share has been and we expect will continue to be subject to upward pressure in favor of the independent sales agent for a variety of factors, including more aggressive recruitment and retention activities taken by us and our competitors as well as growth in independent sales agent teams.
RESULTS OF OPERATIONS
Discussed below are our 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 expense, net, (other than relocation services interest for securitization assets and securitization obligations), income taxes, and other items that are not core to the operating activities of the Company such as restructuring charges, former parent legacy items, gains or losses on the early extinguishment of debt, asset impairments, gains or losses on discontinued operations and gains or losses on the sale of investments or other assets. Our presentation of Operating EBITDA may not be comparable to similarly titled measures used by other companies.
Our results of operations should be read in conjunction with our other disclosures in this Item 2. including under the headings Recent Developments—COVID-19 and Current Business and Industry Trends.
Three Months Ended March 31, 20192020 vs. Three Months EndedMarch 31, 20182019
Our consolidated results comprised the following:
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | |
| 2020 | | 2019 | | Change |
Net revenues | $ | 1,116 | | | $ | 1,054 | | | $ | 62 | |
Total expenses | 1,692 | | | 1,172 | | | 520 | |
Loss from continuing operations before income taxes, equity in earnings and noncontrolling interests | (576) | | | (118) | | | (458) | |
Income tax benefit | (132) | | | (32) | | | (100) | |
Equity in earnings of unconsolidated entities | (9) | | | (1) | | | (8) | |
Net loss from continuing operations | (435) | | | (85) | | | (350) | |
Net loss from discontinued operations | (27) | | | (14) | | | (13) | |
Net loss | (462) | | | (99) | | | (363) | |
Less: Net income attributable to noncontrolling interests | — | | | — | | | — | |
Net loss attributable to Realogy Holdings and Realogy Group | $ | (462) | | | $ | (99) | | | $ | (363) | |
|
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 | | Change |
Net revenues | $ | 1,114 |
| | $ | 1,229 |
| | $ | (115 | ) |
Total expenses | 1,249 |
| | 1,311 |
| | (62 | ) |
Loss before income taxes, equity in (earnings) losses and noncontrolling interests | (135 | ) | | (82 | ) | | (53 | ) |
Income tax benefit | (35 | ) | | (19 | ) | | (16 | ) |
Equity in (earnings) losses of unconsolidated entities | (1 | ) | | 4 |
| | (5 | ) |
Net loss | (99 | ) | | (67 | ) | | (32 | ) |
Less: Net income attributable to noncontrolling interests | — |
| | — |
| | — |
|
Net loss attributable to Realogy Holdings and Realogy Group | $ | (99 | ) | | $ | (67 | ) | | $ | (32 | ) |
Net revenues decreased $115increased $62 million or 9%6% for the three months ended March 31, 20192020 compared with the three months ended March 31, 20182019 primarily driven by lowerhigher homesale transaction volume at NRT.both RealogyFranchise and Brokerage Groups.
Total expenses for the first quarter of 2019 decreased $622020 increased $520 million or 5% compared to the first quarter of 20182019 primarily due to:
•impairments of $447 million including a $70goodwill impairment charge of $413 million decreasewhich 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 (see Note 3, "Goodwill and Intangible Assets", to the Condensed Consolidated Financial Statements for additional information) and $4 million related to lease asset impairments;
•a $55 million increase in commission and other sales agent-related costs primarily as a result of the impact of lowerhigher homesale transaction volume partially offset by higher agent commission costs relatedat Realogy Brokerage Group and a shift in mix to initiatives focused on growingmore productive agents; and retaining our productive independent sales agent base; and
an $18 million decrease in restructuring costs as there was $12 million of restructuring costs incurred for the Company's restructuring program focused on office and operational efficiencies during the first quarter of 2019 compared to $30 million of restructuring costs incurred for the same period in 2018 for leadership realignment and other restructuring activities.
The expense decreases were partially offset by •a $30$38 million net increase in interest expense primarily due to a $26$37 million net expense related to our mark-to-market adjustments for our interest rate swaps that resulted in losses of $51 million during the first quarter of 2020 compared to losses of $14 million during the first quarter of 20192019;
partially offset by;
•an $11 million decrease in operating and general and administrative expenses primarily due to lower employee-related, occupancy and other operating costs as a result of cost savings initiatives; and
•a $9 million decrease in marketing expense primarily due to the timing of meetings and conferences held during the first quarter of 2020 compared to gainsthe first quarter of $122019 as a result of the RGX event held in 2019 and lower advertising costs due to the beginning of the COVID-19 pandemic.
Equity in earnings were $9 million during the first quarter of 2018. In addition, there was a $4 million increase in interest expense due2020 compared to LIBOR rates increases and additional borrowings on our Revolving Credit Facility.
Earnings from equity investments wereearnings of $1 million during the first quarter of 2019 comparedprimarily due to lossesan improvement in earnings of $4 million during the first quarter of 2018.Guaranteed Rate Affinity.
During the first quarter of 2019,2020, we incurred $12$11 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 the estimated total cost of the plan which began in the first quarter of 2019 to be approximately $53 million.$73 million, with $49 million incurred through March 31, 2020. 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 a benefit of $35 million for the three months ended
March 31, 2019 compared to a benefit of $19$132 million for the three months ended March 31, 2018. Our federal and state blended statutory rate is estimated2020 compared to be 27% for 2019 and our full year effective tax rate is estimated to be 34%. Our effective tax rate was 26% and 22%a benefit of $32 million for the three months ended March 31, 20192019. Our effective tax rate was 23% and 27% for the three months ended March 31, 2020 and March 31, 2018,2019, respectively. The effective tax rate for the three months ended March 31, 2019 and March 31, 20182020 was primarily impacted by a discrete itemitems in the quarter 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 three months ended March 31, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenues (a) | | | | $ Change | | % Change | | Operating EBITDA | | | | $ Change | | % Change | | Operating EBITDA Margin | | | | Change |
| 2020 | | 2019 | | | | | | 2020 | | 2019 | | | | | | 2020 | | 2019 | | |
Realogy Franchise Group | $ | 168 | | | $ | 179 | | | $ | (11) | | | (6) | % | | $ | 101 | | | $ | 98 | | | $ | 3 | | | 3 | % | | 60 | % | | 55 | % | | 5 | |
Realogy Brokerage Group | 869 | | | 816 | | | 53 | | | 6 | | | (51) | | | (62) | | | 11 | | | 18 | | | (6) | | | (8) | | | 2 | |
Realogy Title Group | 137 | | | 114 | | | 23 | | | 20 | | | 12 | | | (9) | | | 21 | | | 233 | | 9 | | | (8) | | | 17 | |
Corporate and Other | (58) | | | (55) | | | (3) | | | * | | (25) | | | (25) | | | — | | | * | | | | | | |
Total continuing operations | $ | 1,116 | | | $ | 1,054 | | | $ | 62 | | | 6 | % | | $ | 37 | | | $ | 2 | | | $ | 35 | | | 1,750 | % | | 3 | % | | — | % | | 3 | |
| | | | | | | | | | | | | | | | | | | | | |
Less: Depreciation and amortization | | | | | | | | | 45 | | | 41 | | | | | | | | | | | |
Interest expense, net | | | | | | | | | 101 | | | 63 | | | | | | | | | | | |
Income tax benefit | | | | | | | | | (132) | | | (32) | | | | | | | | | | | |
Restructuring costs, net (b) | | | | | | | | | 11 | | | 9 | | | | | | | | | | | |
Impairments (c) | | | | | | | | | 447 | | | 1 | | | | | | | | | | | |
Loss on the early extinguishment of debt (d) | | | | | | | | | — | | | 5 | | | | | | | | | | | |
Net loss from continuing operations | | | | | | | | | (435) | | | (85) | | | | | | | | | | | |
Net loss from discontinued operations | | | | | | | | | (27) | | | (14) | | | | | | | | | | | |
Net loss attributable to Realogy Holdings and Realogy Group | | | | | | | | | $ | (462) | | | $ | (99) | | | | | | | | | | | |
_______________
* not meaningful
(a)Includes the elimination of transactions between segments, which consists of intercompany royalties and marketing fees paid by Realogy Brokerage Group of $58 million and $55 million during the three months ended March 31, 2020 and 2019, respectively.
(b)Restructuring charges incurred for the three months ended March 31, 2020 include $1 million at Realogy Franchise Group, $9 million at Realogy Brokerage Group and $1 million at Realogy Title Group. Restructuring charges incurred for the three months ended March 31, 2019 include $4 million at Realogy Brokerage Group, $1 million at Realogy Title Group and 2018:$4 million at Corporate and Other.
(c)Impairments for the three months ended March 31, 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 $4 million related to lease asset impairments. Impairments for the three months ended March 31, 2019 include $1 million of impairment charges related to lease asset impairments. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenues (a) | | $ Change | | % Change | | Operating EBITDA | | $ Change | | % Change | | Operating EBITDA Margin | | Change |
| 2019 | | 2018 | | | | 2019 | | 2018 | | | | 2019 | | 2018 | |
RFG | $ | 163 |
| | $ | 176 |
| | $ | (13 | ) | | (7 | )% | | $ | 90 |
| | $ | 105 |
| | $ | (15 | ) | | (14 | )% | | 55 | % | | 60 | % | | (5 | ) |
NRT | 816 |
| | 917 |
| | (101 | ) | | (11 | ) | | (62 | ) | | (45 | ) | | (17 | ) | | (38 | ) | | (8 | ) | | (5 | ) | | (3 | ) |
Cartus | 76 |
| | 79 |
| | (3 | ) | | (4 | ) | | 2 |
| | (1 | ) | | 3 |
| | 300 | | 3 |
| | (1 | ) | | 4 |
|
TRG | 114 |
| | 120 |
| | (6 | ) | | (5 | ) | | (9 | ) | | (6 | ) | | (3 | ) | | (50) | | (8 | ) | | (5 | ) | | (3 | ) |
Corporate and Other | (55 | ) | | (63 | ) | | 8 |
| | * | | (25 | ) | | (19 | ) | | (6 | ) | | * | | | | | | |
Total Company | $ | 1,114 |
| | $ | 1,229 |
| | $ | (115 | ) | | (9 | )% | | $ | (4 | ) | | $ | 34 |
| | $ | (38 | ) | | (112 | %) | | — | % | | 3 | % | | (3 | ) |
Less: Depreciation and amortization (b) | | 49 |
| | 50 |
| | | | | | | | | | |
Interest expense, net | | 63 |
| | 33 |
| | | | | | | | | | |
Income tax benefit | | (35 | ) | | (19 | ) | | | | | | | | | | |
Restructuring costs, net (c) | | 12 |
| | 30 |
| | | | | | | | | | |
Lease asset impairment | | 1 |
| | — |
| | | | | | | | | | |
Loss on the early extinguishment of debt (d) | | 5 |
| | 7 |
| | | | | | | | | | |
Net loss attributable to Realogy Holdings and Realogy Group | | $ | (99 | ) | | $ | (67 | ) | | | | | | | | | | |
(d)Loss on the early extinguishment of debt is recorded in Corporate and Other._______________
| |
(a) | Includes the elimination of transactions between segments, which consists of intercompany royalties and marketing fees paid by NRT of $55 million and $63 million during the three months ended March 31, 2019 and 2018, respectively. |
| |
(b) | Depreciation and amortization for the three months ended March 31, 2018 includes $2 million of amortization expense related to Guaranteed Rate Affinity's purchase accounting included in the "Equity in (earnings) losses of unconsolidated entities" line on the Condensed Consolidated Statement of Operations. |
| |
(c) | Restructuring charges incurred for the three months ended March 31, 2019 include $4 million at NRT, $3 million at Cartus, $1 million at TRG and $4 million at Corporate and Other. Restructuring charges incurred for the three months ended March 31, 2018 include $2 million at RFG, $17 million at NRT, $8 million at Cartus, $1 million at TRG and $2 million at Corporate and Other. |
| |
(d) | Loss on the early extinguishment of debt is recorded in the Corporate and Other segment. |
As described in the aforementioned table, Operating EBITDA margin for "Total Company"continuing operations" expressed as a percentage of revenues decreasedincreased 3 percentage points to zero3% from 3%zero for the three months ended March 31, 20192020 compared to the same period in 2018.2019. On a segment basis, RFG'sRealogy Franchise Group's margin decreasedincreased 5 percentage points to 55%60% from 60%55% primarily due to a decrease in royalty revenueemployee and the netother operating costs for meetings and conferences held during the first quarter of 2019 compared to the first quarter of 2018 primarily due to the RGX event. NRT's margin decreased 3 percentage points to negative 8% from negative 5% primarily due to lower transaction volume and higher sales commission percentages paid to its independent sales agents during the first quarter of 2019 compared to the same period in 2018. Cartus' margin increased 4 percentage points to 3% from negative 1% primarily due to a decrease in costs as a result of cost savings initiatives and the net positive impact from foreign currency exchange rates on expenses. TRG'sinitiatives. Realogy Brokerage Group's margin decreased 3increased 2 percentage points from negative 8% to negative 8%6% primarily due to lower operating expenses primarily due to cost savings initiatives. Realogy Title Group's margin increased 17 percentage points to
9% from negative 5%8% primarily as a result of a decreasean increase in revenue due to a decreaseequity in resale units.
Corporate and Other Operating EBITDA for the three months ended March 31, 2019 declined $6 million to negative $25 millionearnings primarily due to a $4 millionan improvement in earnings of Guaranteed Rate Affinity and an increase in employee-related costsresale and $2 million of other costs.refinancing revenue.
RFGRealogy Franchise and NRTBrokerage Groups on a Combined Basis
The following table reflects RFGRealogy Franchise and NRTBrokerage Group's results before the intercompany royalties and marketing fees as well as on a combined basis to show the Operating EBITDA contribution of these business unitssegments to the overall Operating EBITDA of the Company. The Operating EBITDA margin for the combined segments decreased 3increased 1 percentage pointspoint from 6%4% to 3%5% primarily due to lowerhigher transaction volume and the net costs for meetings and conferences held during the first quarter of 20192020 compared to the first quarter of 2018 primarily due to the RGX event:2019:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenues | | $ Change | | % Change | | Operating EBITDA | | $ Change | | % Change | | Operating EBITDA Margin | | Change |
| 2019 | | 2018 | | | | 2019 | | 2018 | | | | 2019 | | 2018 | |
RFG (a) | $ | 108 |
| | $ | 113 |
| | (5 | ) | | (4 | )% | | $ | 35 |
| | $ | 42 |
| | (7 | ) | | (17 | )% | | 32 | % | | 37 | % | | (5 | ) |
NRT (a) | 816 |
| | 917 |
| | (101 | ) | | (11 | ) | | (7 | ) | | 18 |
| | (25 | ) | | (139 | ) | | (1 | ) | | 2 |
| | (3 | ) |
RFG and NRT Combined | $ | 924 |
| | $ | 1,030 |
| | (106 | ) | | (10 | )% | | $ | 28 |
| | $ | 60 |
| | (32 | ) | | (53 | )% | | 3 | % | | 6 | % | | (3 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenues | | | | $ Change | | % Change | | Operating EBITDA | | | | $ Change | | % Change | | Operating EBITDA Margin | | | | Change |
| 2020 | | 2019 | | | | | | 2020 | | 2019 | | | | | | 2020 | | 2019 | | |
Realogy Franchise Group (a) | $ | 110 | | | $ | 124 | | | (14) | | | (11) | | | $ | 43 | | | $ | 43 | | | — | | | — | | | 39 | % | | 35 | % | | 4 | |
Realogy Brokerage Group (a) | 869 | | | 816 | | | 53 | | | 6 | | | 7 | | | (7) | | | 14 | | | 200 | | | 1 | | | (1) | | | 2 | |
Realogy Franchise and Brokerage Groups Combined | $ | 979 | | | $ | 940 | | | 39 | | | 4 | | | $ | 50 | | | $ | 36 | | | 14 | | | 39 | | | 5 | % | | 4 | % | | 1 | |
_______________
| |
(a) | The RFG and NRT segment numbers noted above do not reflect the impact of intercompany royalties and marketing fees paid by NRT to RFG of $55 million and $63 million during the three months ended March 31, 2019 and 2018, respectively. |
(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 $58 million and $55 million during the three months ended March 31, 2020 and 2019, respectively. Real Estate
Realogy Franchise Services (RFG)Group
Revenues decreased $13$11 million to $163$168 million and Operating EBITDA decreased $15increased $3 million to $90$101 million for the three months ended March 31, 20192020 compared with the same period in 2018.2019.
Revenues decreased $13$11 million primarily as a result of a $7the $11 million decrease in third-party domestic franchisee royaltyregistration revenue primarily due to an 8% decrease in transaction volume at RFG and brand marketing fund revenue, which has a $7 million decrease in intercompany royalties received from NRT.
RFG revenue includes intercompany royalties received from NRT of $53 million and $60 million during the first quarter of 2019 and 2018, respectively, which are eliminated in consolidation against the expense reflected in NRT's segment results.
The $15 million decrease in Operating EBITDA was principally due to the $13 million decrease in revenues discussed above and a $2$1 million net decreasepositive impact on Operating EBITDA due to the scoperelated expense decrease of $12 million, due to the level and timing of meetings and conferences held during the first quarter of 20192020 compared to the first quarter of 20182019 as a result of the RGX event held in 2019 and lower advertising costs due to the COVID-19 pandemic.
In addition, there was a $3 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. The revenue decrease was offset by a $3 million increase in intercompany royalties received from Realogy Brokerage Group.
Realogy Franchise Group revenue includes intercompany royalties received from Realogy Brokerage Group of $56 million and $53 million during the first quarter of 2020 and 2019, respectively, which are eliminated in consolidation against the expense reflected in Realogy Brokerage Group's results.
The $3 million increase in Operating EBITDA was primarily due to a $5 million decrease in employee and other operating costs principally due to cost savings initiatives and the RGX event.discontinuation of the USAA affinity program, partially offset by $2 million of higher expense for bad debt and notes reserves.
Company Owned Real EstateRealogy Brokerage Services (NRT)Group
Revenues decreased $101increased $53 million to $816$869 million and Operating EBITDA decreased $17increased $11 million to negative $62$51 million for the three months ended March 31, 20192020 compared with the same period in 2018.2019.
TheAlthough there was a transaction volume decrease in the final weeks of the quarter due to the COVID-19 pandemic, revenue decreasein the first quarter of $1012020 increased $53 million was primarilymainly driven by an 11% decrease8% increase in homesale transaction volume at NRT which primarily consisted of a 9% decrease in the number of homesale transactions and a 2% decrease4% increase in average homesale price. NRT saw lower transaction volume largely due to weaknessprice and a 3% increase in California where NRT is highly concentrated as well as intense competition for independent sales agents.existing homesale transactions at our Realogy Brokerage Group.
Operating EBITDA decreased $17increased $11 million primarily due to:
•a $53 million increase in revenues discussed above;
•a $12 million decrease in employee-related, occupancy costs and other operating costs due to the $101cost savings initiatives; and
•a $4 million decrease in revenues discussed abovemarketing expense due to lower advertising costs due to the COVID-19 pandemic.
These increases were partially offset by:
•a $70$55 million decreaseincrease in commission expenses paid to independent sales agents from $645 million in the first quarter of 2018 to $575 million in the first quarter of 2019.2019 to $630 million in the first quarter of 2020. Commission expense decreasedincreased primarily as a result of the impact of lowerhigher homesale transaction volume as discussed above partially offset by higher agent commission costs relatedand a shift in mix to the impact of initiatives focused on growingmore productive agents; and retaining our productive independent sales agent base;
•a $7$3 million decreaseincrease in royalties paid to RFGRealogy Franchise Group from $60 million in the first quarter of 2018 to $53 million in the first quarter of 2019;2019 to $56 million in the first quarter of 2020.
a $4 million decrease in occupancy costs; and
a $4 million decrease in other operating costs.
Relocation Services (Cartus)Realogy Title Group
Revenues decreased $3increased $23 million to $76$137 million and Operating EBITDA increased $3$21 million to $2$12 million for the three months ended March 31, 20192020 compared with the same period in 2018.2019.
Revenues decreased $3increased $23 million primarily as a result of a $10 million increase in underwriter revenue with unaffiliated agents, which has a $2 million decreasenet positive impact on Operating EBITDA due to the related expense increase of $8 million. In addition, there was a $6 million increase in referralresale revenue due to lower volume.increases in purchase transactions and a $5 million increase in refinance revenue due to an increase in activity in the refinance market.
Operating EBITDA increased $3$21 million primarily as a result of a $3the $11 million decreaseincrease in employeeresale and refinance revenues discussed above, an $8 million increase in equity in earnings primarily related costs primarily due to cost savings initiatives, a $1Guaranteed Rate Affinity and the $2 million net positive impact from foreign currency exchange rates on expenses, and a decrease in other expenses, partially offset by the $3 million decrease in revenues discussedof underwriter transactions with unaffiliated agents noted above.
Title and Settlement Services (TRG)Discontinued Operations
Revenues for Cartus Relocation Services decreased $6$8 million to $114$52 million from $60 million and Operating EBITDA decreased $3improved $1 million to negative $9$5 million from negative $6 million for the three months ended March 31, 20192020 compared with the same period in 2018.2019.
Revenues decreased $6$8 million primarily as a result of a $7$5 million decrease in resaleinternational revenue due to lost business and a $3 million decrease in other revenue primarily driven by lower volume. Beginning in the second half of March 2020, Cartus experienced a decline in new initiations believed to be attributable to the COVID-19 pandemic and expects this trend to continue in the second quarter of 2020 and potentially beyond.
Operating EBITDA improved $1 million due to a decrease in resale units, as well as a $1 million decrease in refinancing revenue due to an overall decrease in activity in the refinance market, partially offset by a $3 million increase in underwriter revenue due to an increase of underwriter premiums as a result of a shift in mix to unaffiliated agents.
Operating EBITDA decreased $3 million as a result of the $6 million decrease in revenues discussed aboveemployee and an increase of $2 million inother operating costs primarily due to an increase in underwriter revenue with unaffiliated agents wherecost savings initiatives, mostly offset by the revenue and expense is recorded on a gross basis. The decreases were partially offset by a $3 million increase in earnings from the equity investments related to Guaranteed Rate Affinity and a $1 million decrease in other operating expenses.discussed above.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Financial Condition
| | | | | | | | | | | | | | | | | |
| March 31, 2020 | | December 31, 2019 | | Change |
Total assets | $ | 7,461 | | | $ | 7,543 | | | $ | (82) | |
Total liabilities | 5,827 | | | 5,447 | | | 380 | |
Total equity | 1,634 | | | 2,096 | | | (462) | |
|
| | | | | | | | | | | |
| March 31, 2019 | | December 31, 2018 | | Change |
Total assets | $ | 7,811 |
| | $ | 7,290 |
| | $ | 521 |
|
Total liabilities | 5,622 |
| | 4,975 |
| | 647 |
|
Total equity | 2,189 |
| | 2,315 |
| | (126 | ) |
For the three months ended March 31, 2019,2020, total assets increased $521decreased $82 million primarily due to the addition of $544:
•a $413 million of operating lease assets to the balance sheetdecrease in goodwill as a result of the adoptionimpairment at Realogy Brokerage Group during the first quarter of 2020;
•a $67 million decrease in assets held for sale;
•a $30 million decrease in trademarks as a result of the new leasing standard and impairment of trademarks at Realogy Franchise Group during the first quarter of 2020;
•an $18 million increase in cash and cash equivalents. Total asset increases were partially offset by a $25 million net decrease in franchise agreements and other amortizable intangible assets primarily due to amortization; and
•a $10$14 million net decrease of operating lease assets,
partially offset by:
•a $393 million increase in restricted cash and cash equivalents due to additional borrowings under the Revolving Credit Facility;
•a $6$48 million decreaseincrease in other current assets.and non-current assets primarily related to strategic investments and prepaid incentives; and
•a $23 million increase in trade receivables primarily due to timing and seasonal volume.
Total liabilities increased $647$380 million primarily due to the addition of $603 million of operating lease liabilities to the balance sheet as to:
•a result of the adoption of the new leasing standard, a $227$558 million increase in corporate debt primarily due to the issuance of $550$565 million of 9.375% Senior Notes and additionalincrease in borrowings under the Revolving Credit Facility, partially offset by the redemption of all of the Company's outstanding $450Facility; and
•a $44 million 4.50% Senior Notes, and a $7 million increase in accounts payable. Total liability increases were partially offset by a $55 million decrease in accrued expenses and other current liabilities primarily due to the payment of annual bonuses in the first quarter of 2019, a $54 million decrease in other non-current liabilities primarily due to mark-to-market adjustments on the reclassification of deferred rent liabilities which were credited against operating lease assets on transition as Company's interest rate swaps,
partially offset by:
•a result of the adoption of the new leasing standard, a $44 million decrease in securitization obligations and a $37$137 million decrease in deferred tax liabilities.liabilities primarily due to the recognition of an income tax benefit of $99 million related to the goodwill impairment charge;
•a $61 million decrease in liabilities held for sale;
•a $14 million decrease in accounts payable; and
•a $13 million decrease in operating lease liabilities.
Total equity decreased $126$462 million primarily due to a net loss of $99$462 million for the three months ended March 31, 2019 and a $282020. The loss was primarily due to impairments of $447 million decrease in additional paid in capital, related to the Company's repurchasefirst quarter of $20 million of common stock and $10 million of dividend payments partially offset by stock-based compensation activity of $2 million.2020.
Liquidity and Capital Resources
Our primary liquidity needs have been to service our debt, finance our working capital and capital expenditures and pay dividends and acquire stock under our share repurchase program, which weWe have historically satisfied our liquidity needs with cash flows from operations and funds available under our Revolving Credit Facility and securitization facilities. The Company expects
Our primary liquidity needs have been to service our debt and finance our working capital and capital expenditures. We currently expect to prioritize investing in itsour business and reducing indebtedness over other potential uses of cash until it is able to reduce its consolidated leverage ratio (as defined in the indenture governing the 9.375% Senior Notes) to below 4.00 to 1.00, although the Company currently anticipates continuing its quarterly cash dividend.indebtedness. Accordingly, during this period, the Company will not repurchase commonwe discontinued acquiring stock pursuant to its existingunder our share repurchase programs.
Historically, operating results and revenues for all of our businesses have been strongestprograms in the second and third quarters of the calendar year. A significant portion of the expenses we incur in our real estate brokerage operations are related to marketing activities and commissions and therefore, are variable. However, many of our other expenses, such as interest payments, facilities costs and certain personnel-related costs, are fixed and cannot be reduced during the seasonal fluctuations in the business. Consequently, our debt balances are generally at their highest levels at or around the end of the first quarter of every year.2019 and discontinued our quarterly dividend in the fourth quarter of 2019.
We are significantly encumbered by our debt obligations. As of March 31, 2020, our total debt, excluding our securitization obligations, was $4,003 million. Our liquidity position continueshas been and is expected to continue to be negatively impacted by ourthe interest expense and wouldon our debt obligations, which could be adversely impactedintensified by continued worsening or stagnation of the residential real estate market or a significant increase in LIBOR (or any replacement rate) or ABR.
Our Senior Secured Credit Facility and Term Loan A Facility require us to maintain a senior secured leverage ratio, which may not exceed 4.75 to 1.00. For the trailing four quarters ended March 31, 2020, we were in compliance with the senior secured leverage ratio covenant with a ratio of 3.06 to 1.0 with total senior secured debt (net of unrestricted cash and cash equivalents) of $2,031 million and trailing four quarters EBITDA calculated on a Pro Forma Basis (as those terms are defined in the credit agreement governing the Senior Secured Credit Facility) of $663 million.
In order to comply with the senior secured leverage ratio for the four-quarter periods ending June 30, September 30 and December 31, 2020 and March 2019,31, 2021 (or to avoid an event of default thereof), we will need to achieve a certain amount of trailing four quarters EBITDA calculated on a Pro Forma Basis and/or reduced levels of total senior secured first lien net debt. The factors that will impact the Company issued $550 millionforegoing include: (a) slowing decreases, stabilization or increases in sales volume and/or the price of 9.375% Senior Notes due in April 2027. We used $540 millionexisting homesales, (b) continuing to effect cost savings and business optimization initiatives, (c) increasing new franchise sales, independent sales agent recruitment and retention, or (d) a combination thereof. These factors may be insufficient to overcome macroeconomic conditions affecting us and the duration and severity of the net proceedsCOVID-19 crisis is expected to repaydirectly impact all of these factors. In addition, if we deem it advisable, we could seek to obtain additional junior lien or unsecured debt or equity financing from third party sources.
We believe that we will continue to be in compliance with, or be able to avoid an event of default under, the senior secured leverage ratio and meet our cash flow needs during the next twelve months based upon our current financial modeling, which incorporates factors (a) through (d) above and takes into account the level of open homesale contracts and closed homesale transaction activity we have observed since mid-March, our assumptions regarding the impact of the COVID-19 crisis and related economic downturn (which are subject to significant ongoing uncertainties), industry homesale transaction volume forecasts from multiple sources, and certain cost-savings actions, including those taken to date.
We have the right to avoid an event of default of the senior secured leverage ratio in three of any of the four consecutive quarters through the issuance of additional Realogy Holdings equity for cash, which would be infused as capital into the Company. The effect of such infusion would be to increase EBITDA calculated on a portionPro Forma Basis for purposes of outstanding borrowingscalculating the senior secured leverage ratio for the applicable four-quarter period.
If we are unable to maintain compliance with the senior secured leverage ratio and we fail to remedy a default through an equity cure permitted thereunder, there would be an “event of default” under our Revolving Credit Facility. In February 2019, the Company had used borrowings under its Revolving Credit Facility and cashTerm Loan A Facility, which may be waived by the lenders holding the majority of commitments under the Revolving Credit Facility or the lenders holding the majority of loans under the Term Loan A Facility, as applicable. Other events of default under the Revolving Credit Facility and Term Loan A Facility include, without limitation, nonpayment, material misrepresentations, insolvency, bankruptcy, certain judgments, change of control and cross-events of default on handmaterial indebtedness.
If an event of default occurs under the Revolving Credit Facility and Term Loan A Facility and we fail to fundobtain a waiver from the redemptionapplicable lenders, our financial condition, results of operations and business would be materially adversely affected. Upon the occurrence of an event of default under the Revolving Credit Facility and Term Loan A Facility, the lenders:
•would not be required to lend any additional amounts to us;
•could elect to declare all borrowings outstanding, together with accrued and unpaid interest and fees, to be due and payable; or
•could prevent us from making certain payments on the Unsecured Notes (other than payments of its outstanding $450 million 4.50%regularly scheduled interest or principal at maturity).
If we were unable to repay those amounts, the lenders under the Senior Notes. The covenants inSecured Credit Facility and Term Loan A Facility could proceed against the indenturecollateral granted to them to secure that indebtedness. We have pledged a significant portion of our assets as collateral to secure such indebtedness. If the lenders under our Senior Secured Credit Facility or Term Loan A Facility accelerate the repayment of borrowings, we may not have sufficient assets to repay the Senior Secured Credit Facility and Term Loan A Facility and our other indebtedness or be able to borrow sufficient funds to refinance such indebtedness. Upon the occurrence of an event of default under the indentures governing the 9.375%our Senior Notes, are substantially similarthe trustee or holders of 25% of the outstanding applicable notes could elect to declare the covenants inprincipal of, premium, if any, and accrued but unpaid interest on such notes to be due and payable. In addition, if an event of default is continuing under our Senior Secured Credit Facility, Term Loan A Facility, the indentures governing the 5.250% SeniorUnsecured Notes and the 4.785% Senior Notes, with certain exceptions, including changes relating to the Company’sor our other material indebtedness, such event could cause a termination of our ability to make restricted payments, including its ability to repurchase sharesobtain future advances under, and make dividend payments in excessamortization of, $45 million per calendar year until the Company's consolidated leverage ratio is below 4.00 to 1.00.our
In addition, we are required to pay quarterly amortization payments for the Term Loan B and Term Loan A facilities. Remaining payments for 2019 total $14 million and $8 million for the Term Loan A and Term Loan B facilities, respectively and we expect payments for 2020 to total $33 million and $11 million for the Term Loan A and Term Loan B facilities, respectively.
Beginning in August 2016, we initiated and paid a quarterly cash dividend50
In February 2019, the Company's Board of Directors authorized a new share repurchase program of up to $175 millionApple Ridge Funding LLC securitization program. Any of the Company’s common stock which was incremental to the remaining capacity authorized under the February 2018 share repurchase program. Repurchases under these programs may be made at management's discretion from time to timeforegoing would have a material adverse affect 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, including the restrictions contained in the indenture governing the 9.375% Senior Notes, which prohibit such repurchases until the consolidated leverage ratio falls below 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 the indenture governing the 9.375% Senior Notes. The repurchase programs have no time limit and may be suspended or discontinued at any time.
As of March 31, 2019, the Company has repurchased and retired 35.5 million shares of common stock for an aggregate of $896 million under the share repurchase programs at a weighted average market price of $25.22 per share. Included in the 35.5 million shares of common stock repurchased to date, the Company repurchased 1.2 million shares of common stock for $20 million at a weighted average market price of $17.21 per share during the first quarter of 2019. As of March 31, 2019, $204 million remained available for repurchase under the share repurchase programs.
We have not repurchased any shares under the share repurchase programs since February 2019.
The timing, frequency or amounts of any dividends or share repurchases in the future will be subject to the discretion of the Company's Board of Directors and will depend on a variety of factors, including the Company’sour business, financial condition and results of operations, contractual restrictions, including restrictive covenants containedoperations.
In addition, prior to making new borrowings under the Revolving Credit Facility, we are required to certify that the representations and warranties in the Senior Secured Credit Agreement remain true and correct in all material respects as of the date of any borrowing (except to the extent such representations and warranties relate to an earlier date), including the absence of any material adverse effect on our business, property, operations or condition. If we were unable to certify to such representations and warranties as of the date of a proposed borrowing, we would not be able to incur the additional borrowing under our Revolving Credit Facility. An inability to access our Revolving Credit Facility for additional borrowings could have a material adverse effect on our liquidity and financial position.
For additional information, see below under the header "Financial Obligations—Covenants under the Senior Secured Credit Facility, Term Loan A Agreement,Facility and the indentures governing the Unsecured Notes, capital requirements and other factors that the Board of Directors deems relevant.Indentures".
We may also from time to time seek to repurchase our outstanding Unsecured Notes through tender offers, open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.
We will continue to evaluate potential refinancing and financing transactions.transactions, 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.
We may from time to time seek to repurchase our outstanding Unsecured Notes through tender offers, open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.
The covenants in the indenture governing the 9.375% Senior Notes restrict our ability to make dividend payments or repurchase shares in any amount until the Company's consolidated leverage ratio 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 B and Term Loan A facilities. Remaining payments for 2020 total $28 million and $8 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 residential real estate market or the economy as a whole does not improve or continues to weaken, our business, financial condition and liquidity may be materially adversely affected, including our ability to access capital, grow our business and return capital to stockholders.
Cash Flows
At March 31, 2019,2020, we had $246$628 million of cash, cash equivalents and restricted cash, an increase of $8$393 million compared to the balance of $238$235 million at December 31, 2018.2019. The following table summarizes our cash flows from continuing operations for the three months ended March 31, 20192020 and 2018:2019:
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | |
| 2020 | | 2019 | | Change |
Cash provided by (used in) activities from continuing operations: | | | | | |
Operating activities | $ | (87) | | | $ | (93) | | | $ | 6 | |
Investing activities | (34) | | | (21) | | | (13) | |
Financing activities | 546 | | | 177 | | | 369 | |
For the three months ended March 31, 2020, $6 millionless cash was used in operating activities from continuing operations compared to the same period in 2019. The change was principally due to $28 million more cash provided by operating results offset by:
•$8 million less cash provided by the net change in trade receivables;
|
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 | | Change |
Cash provided by (used in): | | | | | |
Operating activities | $ | (103 | ) | | $ | (130 | ) | | $ | 27 |
|
Investing activities | (23 | ) | | (9 | ) | | (14 | ) |
Financing activities | 134 |
| | 93 |
| | 41 |
|
Effects of change in exchange rates on cash, cash equivalents and restricted cash | — |
| | — |
| | — |
|
Net change in cash, cash equivalents and restricted cash | $ | 8 |
| | $ | (46 | ) | | $ | 54 |
|
•$8 million more cash used for other assets;•$3 million more cash used for accounts payable, accrued expenses and other liabilities; and
•$3 million more cash used for other operating activities.
For the three months ended March 31, 2020, we used $13 million more cash for investing activities from continuing operations compared to the same period in 2019 primarily due to:
•$11 million more cash used for other investing activities; and
•$2 million more cash used for property and equipment additions.
For the three months ended March 31, 2020, $546 million of cash was provided by financing activities from continuing operations compared to $177 million of cash provided during the same period in 2019. For the three months ended March 31, 2020, $546 million of cash provided by financing activities from continuing operations related to $565 million of additional borrowings under the Revolving Credit Facility partially offset by:
•$8 million of other financing payments primarily related to finance leases;
•$7 million of quarterly amortization payments on the term loan facilities; and
•$4 million of tax payments related to net share settlement for stock-based compensation.
For the three months ended March 31, 2019, $27 million less cash was used in operating activities compared to the same period in 2018. The change was principally due to $34 million more cash provided by the net change in relocation and trade receivables, $11 million less cash used for accounts payable, accrued expenses and other liabilities and $6 million less cash used for other assets, partially offset by $26 million more cash used in operating results.
For the three months ended March 31, 2019, we used $14 million more cash for investing activities compared to the same period in 2018 primarily due to the absence in 2019 of $19$177 million of net cash proceeds received from the dissolution of our interest in PHH Home Loans which occurred in 2018.
For the three months ended March 31, 2019, $134 million of cash was provided by financing activities compared to $93 million of cash provided during the same period in 2018. For the three months ended March 31, 2019, $134 million of cash was provided by:from continuing operations related to:
•$140 million of additional borrowings under the Revolving Credit Facility; and
•$9389 million of cash received as a result of the refinancing transactions in the first quarter of 2019, related to $550 million of proceeds received from issuance of 9.375% Senior Notes, partially offset by $450 million cash used for the redemption of 4.50% Senior Notes and $7 million of debt issuance costs;
partially offset by,
a $45 million net decrease in securitization borrowings;
•$20 million for the repurchase of our common stock;
•$10 million of dividend payments;
•$7 million of quarterly amortization payments on the term loan facilities;
•$7 million of other financing payments primarily related to finance leases; and
•$6 million of tax payments related to net share settlement for stock-based compensation; andcompensation.
$5 million of other financing payments primarily related to finance leases.
For the three months ended March 31, 2018, $93 million of cash was provided by additional borrowings under the Revolving Credit Facility of $232 million, partially offset by:
$94 million for the repurchase of our common stock;
$12 million of dividend payments;
an $11 million net decrease in securitization borrowings;
$9 million of tax payments related to net share settlement for stock-based compensation;
$7 million of other financing payments primarily related to capital leases;
$3 million for cash paid as a result of the refinancing transactions in February 2018 related to $16 million of debt issuance costs and $4 million repayment of borrowings under the Term Loan B Facility, partially offset by $17 million of proceeds received under the Term Loan A Facility; and
$3 million of quarterly amortization payments on the term loan facilities.
Financial Obligations
See Note 5, "Short and Long-Term Debt", to the Condensed Consolidated Financial Statements, for information on the Company's indebtedness as of March 31, 2019.
Issuance of $550 million of 9.375% Senior Notes, Redemption of $450 million of 4.50% Senior Notes and Increase in Borrowing Capacity under the Revolving Credit Facility
In March 2019, the Company issued $550 million of 9.375% Senior Notes due in April 2027. We used $540 million of the net proceeds to repay a portion of the outstanding borrowings under our Revolving Credit Facility. In February 2019, the Company used borrowings under its Revolving Credit Facility and cash on hand to fund the redemption of all of its outstanding $450 million 4.50% Senior Notes.
In March 2019, the Company entered into an amendment to the Senior Secured Credit Agreement that provided for an incremental revolving facility commitment of $25 million increasing the borrowing capacity under the Revolving Credit Facility to $1,425 million.2020.
LIBOR Transition
In July 2017, the Financial Conduct Authority, the UK regulator responsible for the oversight of LIBOR,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.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 March 31, 2020, we had interest rate swaps based on LIBOR with a notional value of $1,600 million to manage a portion of our exposure to changes in interest rates associated with our variable rate borrowings.
At this time, it is not possible to predict the effect of any changes to LIBOR, any phase out of LIBOR or any establishment of alternative benchmark rates. LIBOR may disappear entirely or perform differently than in the past. Any new benchmark rate will likely not replicate LIBOR exactly and if future rates based upon a successor rate (or a new method of calculating LIBOR) are higher than LIBOR rates as currently determined, it could result in an increase in the cost of our variable rate indebtedness and may have a material adverse effect on our financial condition and results of operations.
Covenants under the Senior Secured Credit Facility, Term Loan A Facility and Indentures
The Senior Secured Credit Agreement, Term Loan A Agreement, the Unsecured Letter of Credit Facility and the indentures governing the Unsecured Notes contain various covenants that limit (subject to certain exceptions) Realogy Group’s ability to, among other things:
•incur or guarantee additional debt or issue disqualified stock or preferred stock;
•pay dividends or make distributions to Realogy Group’s stockholders, including Realogy Holdings;
•repurchase or redeem capital stock;
•make loans, investments or acquisitions;
•incur restrictions on the ability of certain of Realogy Group's subsidiaries to pay dividends or to make other payments to Realogy Group;
•enter into transactions with affiliates;
•create liens;
•merge or consolidate with other companies or transfer all or substantially all of Realogy Group's and its material subsidiaries' assets;
•transfer or sell assets, including capital stock of subsidiaries; and
•prepay, redeem or repurchase subordinated indebtedness.
As a result of the covenants to which we remain subject, we are limited in the manner in which we conduct our business and we may be unable to engage in favorable business activities or finance future operations or capital needs. In addition,
the Senior Secured Credit Agreement and Term Loan A Agreement require us to maintain a senior secured leverage ratio. We are further restricted under the indenture governing the 9.375% Senior Notes from making restricted payments, including repurchasing shares of our common stock or issuingability to issue dividends in excess of $45 million per calendar year or our ability to repurchase shares in any amount for so long as our consolidated leverage ratio is equal to or greater than 4.0 to 1.0 and then (unless that ratio falls below 3:00 to 1:00) only to the extent of available cumulative credit, as defined under the indenture governing the 9.375% Senior Notes.
Senior Secured Leverage Ratio applicable to our Senior Secured Credit Facility and Term Loan A Facility
The senior secured leverage ratio is tested quarterly and may not exceed 4.75 to 1.00. The senior secured leverage ratio is measured by dividing Realogy Group's total senior secured net debt by the trailing four quarters EBITDA calculated on a Pro Forma Basis, as those terms are defined in the Senior Secured Credit Agreement. Total senior secured net debt does not include unsecured indebtedness, including the Unsecured Notes, or the securitization obligations. EBITDA calculated on a Pro Forma Basis, as defined in the Senior Secured Credit Agreement, includes adjustments to EBITDA for restructuring 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 trailing four-quarter period. The Company was in compliance with the senior secured leverage ratio covenant at March 31, 2019.2020.
A reconciliation of net income (loss)loss attributable to Realogy Group to Operating EBITDA including discontinued operations 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 March 31, 20192020 is set forth in the following table:
| | | | | | | | | | | | | | Less | | Equals | | Plus | | Equals |
| | | Less | | Equals | | Plus | | Equals | | Year Ended | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Twelve Months Ended |
| Year Ended | | Three Months Ended | | Nine Months Ended | | Three Months Ended | | Twelve Months Ended | | December 31, 2019 | | March 31, 2019 | | December 31, 2019 | | March 31, 2020 | | March 31, 2020 |
| December 31, 2018 | | March 31, 2018 | | December 31, 2018 | | March 31, 2019 | | March 31, 2019 | |
Net income (loss) attributable to Realogy Group (a) | $ | 137 |
| | $ | (67 | ) | | $ | 204 |
| | $ | (99 | ) | | $ | 105 |
| |
Income tax expense (benefit) | 65 |
| | (19 | ) | | 84 |
| | (35 | ) | | 49 |
| |
Income (loss) before income taxes | 202 |
| | (86 | ) | | 288 |
| | (134 | ) | | 154 |
| |
Depreciation and amortization (b) | 197 |
| | 50 |
| | 147 |
| | 49 |
| | 196 |
| |
Net loss attributable to Realogy Group (a) | | Net loss attributable to Realogy Group (a) | $ | (188) | | | $ | (99) | | | $ | (89) | | | $ | (462) | | | $ | (551) | |
Income tax (benefit) expense | | Income tax (benefit) expense | (22) | | | (32) | | | 10 | | | (132) | | | (122) | |
Loss before income taxes | | Loss before income taxes | (210) | | | (131) | | | (79) | | | (594) | | | (673) | |
Depreciation and amortization | | Depreciation and amortization | 169 | | | 41 | | | 128 | | | 45 | | | 173 | |
Interest expense, net | 190 |
| | 33 |
| | 157 |
| | 63 |
| | 220 |
| Interest expense, net | 249 | | | 63 | | | 186 | | | 101 | | | 287 | |
Restructuring costs, net | 58 |
| | 30 |
| | 28 |
| | 12 |
| | 40 |
| Restructuring costs, net | 42 | | | 9 | | | 33 | | | 11 | | | 44 | |
Lease asset impairment | — |
| | — |
| | — |
| | 1 |
| | 1 |
| |
Impairments | | Impairments | 249 | | | 1 | | | 248 | | | 447 | | | 695 | |
Former parent legacy cost, net | 4 |
| | — |
| | 4 |
| | — |
| | 4 |
| Former parent legacy cost, net | 1 | | | — | | | 1 | | | — | | | 1 | |
Loss on the early extinguishment of debt | 7 |
| | 7 |
| | — |
| | 5 |
| | 5 |
| |
Operating EBITDA (c) | 658 |
| | 34 |
| | 624 |
| | (4 | ) | | 620 |
| |
(Gain) loss on the early extinguishment of debt | | (Gain) loss on the early extinguishment of debt | (5) | | | 5 | | | (10) | | | — | | | (10) | |
Income statement impact of discontinued operations | | Income statement impact of discontinued operations | 95 | | | 8 | | | 87 | | | 22 | | | 109 | |
Operating EBITDA including discontinued operations (b) | | Operating EBITDA including discontinued operations (b) | 590 | | | (4) | | | 594 | | | 32 | | | 626 | |
Bank covenant adjustments: | Bank covenant adjustments: | | | Bank covenant adjustments: | | |
Operating EBITDA for discontinued operations (c) | | Operating EBITDA for discontinued operations (c) | | | (29) | |
Pro forma effect of business optimization initiatives (d) | Pro forma effect of business optimization initiatives (d) | | 23 |
| Pro forma effect of business optimization initiatives (d) | | | 30 | |
Non-cash charges (e) | Non-cash charges (e) | | 40 |
| Non-cash charges (e) | | | 32 | |
Pro forma effect of acquisitions and new franchisees (f) | Pro forma effect of acquisitions and new franchisees (f) | | 4 |
| Pro forma effect of acquisitions and new franchisees (f) | | | 4 | |
Incremental securitization interest costs (g) | | 3 |
| |
EBITDA as defined by the Senior Secured Credit Agreement | EBITDA as defined by the Senior Secured Credit Agreement | | $ | 690 |
| EBITDA as defined by the Senior Secured Credit Agreement | | | $ | 663 | |
Total senior secured net debt (h)(g) | Total senior secured net debt (h)(g) | | $ | 2,096 |
| Total senior secured net debt (h)(g) | | | $ | 2,031 | |
Senior secured leverage ratio | Senior secured leverage ratio | | 3.04 | x | Senior secured leverage ratio | | | 3.06 | x |
_______________
| |
(a) | Net income (loss) attributable to Realogy consists of: (i) income of $123 million for the second quarter of 2018, (ii) income of $103 million for the third quarter of 2018, (iii) loss of $22 million for the fourth quarter of 2018 and (iv) a loss of $99 million for the first quarter of 2019. |
| |
(b) | Depreciation and amortization for the year ended December 31, 2018 and the first quarter of 2018 includes $2 million of amortization expense related to Guaranteed Rate Affinity's purchase accounting included in the "Equity in (earnings) losses of unconsolidated entities" line on the Condensed Consolidated Statements of Operations during those periods. |
| |
(c) | Operating EBITDA consists of: (i) $276 million the second quarter of 2018, (ii) $242 million for the third quarter of 2018, (iii) $106 million for the fourth quarter of 2018 and (iv) negative $4 million for the first quarter of 2019. |
| |
(d) | Represents the four-quarter pro forma effect of business optimization initiatives. |
(a)Net loss attributable to Realogy consists of: (i) income of $69 million for the second quarter of 2019, (ii) loss of $113 million for the third quarter of 2019, (iii) loss of $45 million for the fourth quarter of 2019 and (iv) loss of $462 million for the first quarter of 2020.
(b)Consists of Operating EBITDA including discontinued operations of: (i) $245 million for the second quarter of 2019, (ii) $223 million for the third quarter of 2019, (iii) $126 million for the fourth quarter of 2019 and (iv) $32 million for the first quarter of 2020.
(c)Represents the Operating EBITDA for Cartus Relocation. If the Operating EBITDA of Cartus Relocation were to be included in EBITDA as defined by the Senior Secured Credit Agreement, the Senior Secured Leverage Ratio would improve to 2.93x from 3.06x.
(d)Represents the four-quarter pro forma effect of business optimization initiatives.
(e)Represents the elimination of non-cash expenses including $27 million of stock-based compensation expense and$5 million for the change in the allowance for doubtful accounts and notes reserves for the four-quarter period ended March 31, 2020.
(f)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 April 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 April 1, 2019.
(g)Represents total borrowings under the senior secured credit facilities and borrowings secured by a first priority lien on our assets of $2,523 million plus $36 million of finance lease obligations less $528 million of readily available cash as of March 31, 2020. Pursuant to the terms of our senior secured credit facilities, total senior secured net debt does not include our securitization obligations or unsecured indebtedness, including the Unsecured Notes.
| |
(e) | Represents the elimination of non-cash expenses including $39 million of stock-based compensation expense and $1 million of other items for the four-quarter period ended March 31, 2019. |
| |
(f) | 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 April 1, 2018. 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 April 1, 2018. |
| |
(g) | Incremental borrowing costs incurred as a result of the securitization facilities refinancing for the four-quarter period ended March 31, 2019. |
| |
(h) | Represents total borrowings under the senior secured credit facilities and borrowings secured by a first priority lien on our assets of $2,208 million plus $32 million of finance lease obligations less $144 million of readily available cash as of March 31, 2019. Pursuant to the terms of our senior secured credit facilities, total senior secured net debt does not include our securitization obligations or unsecured indebtedness, including the Unsecured Notes. |
Consolidated Leverage Ratio applicable to our 9.375% Senior Notes
The consolidated leverage ratio is measured by dividing Realogy Group's total net debt by the trailing four quarter EBITDA. EBITDA, as defined in the indenture governing the 9.375% Senior Notes, is substantially similar to EBITDA calculated on a Pro Forma Basis, as those terms are defined in the Senior Secured Credit Agreement. Net debt under the indenture is Realogy Group's total indebtedness (excluding securitizations) less (i) its cash and cash equivalents in excess of restricted cash and (ii) a $200 million seasonality adjustment permitted when measuring the ratio on a date during the period of March 1 to May 31.
The consolidated leverage ratio under the indenture governing the 9.375% Senior Notes for the four-quarter period ended March 31, 20192020 is set forth in the following table:
|
| | | | |
| | As of March 31, 2019 |
Revolver | | $ | 410 |
|
Term Loan A | | 731 |
|
Term Loan B | | 1,067 |
|
5.25% Senior Notes | | 550 |
|
4.875% Senior Notes | | 500 |
|
9.375% Senior Notes | | 550 |
|
Finance lease obligations | | 32 |
|
Corporate Debt (excluding securitizations) | | 3,840 |
|
Less: Cash and cash equivalents | | 243 |
|
Net Corporate Debt (excluding securitizations) | | 3,597 |
|
Less: Seasonality adjustment (a) | | 200 |
|
Net debt under the indenture governing the 9.375% Senior Notes due 2027 | | $ | 3,397 |
|
| | |
EBITDA as defined under the indenture governing the 9.375% Senior Notes due 2027 (b) | | $ | 690 |
|
| | |
Consolidated leverage ratio under the indenture governing the 9.375% Senior Notes due 2027 | | 4.9 | x |
_______________
| | | | | | | | |
(a) | The | As of March 31, 2020 |
Revolver | | $ | 755 | |
Term Loan A | | 712 | |
Term Loan B | | 1,056 | |
5.25% Senior Notes | | 550 | |
4.875% Senior Notes | | 407 | |
9.375% Senior Notes | | 550 | |
Finance lease obligations | | 36 | |
Corporate Debt (excluding securitizations) | | 4,066 | |
Less: Cash and cash equivalents | | 628 | |
Net Corporate Debt (excluding securitizations) | | 3,438 | |
Less: Seasonality adjustment (a) | | 200 | |
Net debt under the indenture governing the 9.375% Senior Notes provides for a $200 million seasonality adjustment permitted when measuring the ratio on a date during the period of March 1 to May 31. Without this seasonality adjustment, the ratio would have been 5.2x for the quarter ended March 31, 2019.due 2027 | | $ | 3,238 | |
| | |
(b) | As set forth in the immediately preceding table, for the four-quarter period ended March 31, 2019, EBITDA as defined under the indenture governing the 9.375% Senior Notes wasdue 2027 (b) | | $ | 663 | |
| | |
Consolidated leverage ratio under the same as EBITDA calculated on a Pro Forma Basis, as those terms are defined inindenture governing the 9.375% Senior Secured Credit Agreement.Notes due 2027 | | 4.9 | x |
See Note 5, "Short and Long-Term Debt—Senior Secured Credit Facility", "—Term Loan A Facility" and "—Unsecured Notes", to the Condensed Consolidated Financial Statements for additional information.
The SEC has adopted rules to regulate the use in filings with the SEC and in public disclosures of "non-GAAP financial measures," such as Operating EBITDA. These measures are derived on the basis of methodologies other than in accordance with GAAP.
Operating EBITDA is defined by us as net income (loss) before depreciation and amortization, interest expense, net, (other than relocation services interest for securitization assets and securitization obligations), income taxes, and other items that are not core to the operating activities of the Company such as restructuring charges, former parent legacy items, gains or losses on the early extinguishment of debt, asset impairments, gains or losses on discontinued operations and gains or losses on the sale of investments or other assets. Operating EBITDA is our primary non-GAAP measure.
We present Operating EBITDA because we believe it is useful as a supplemental measure in evaluating the performance of our operating businesses and provides greater transparency into our results of operations. Our management, including our chief operating decision maker, uses Operating EBITDA as a factor in evaluating the performance of our business. Operating EBITDA should not be considered in isolation or as a substitute for net income or other statement of operations data prepared in accordance with GAAP.
We believe Operating EBITDA facilitates company-to-company operating performance comparisons by backing out potential differences caused by variations in capital structures (affecting net interest expense), taxation, the age and book depreciation of facilities (affecting relative depreciation expense) and the amortization of intangibles, as well as other items that are not core to the operating activities of the Company such as restructuring charges, gains or losses on the early extinguishment of debt, former parent legacy items, asset impairments, gains or losses on discontinued operations and gains or losses on the sale of investments or other assets, which may vary for different companies for reasons unrelated to operating performance. We further believe that Operating EBITDA is frequently used by securities analysts, investors and other interested parties in their evaluation of companies, many of which present an Operating EBITDA measure when reporting their results.
Operating EBITDA has limitations as an analytical tool, and you should not consider Operating EBITDA either in isolation or as a substitute for analyzing our results as reported under GAAP. Some of these limitations are:
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.