Existing Homesale Price
For the six months ended June 30, 20192020 compared to the same period in 2018,2019, NAR existing homesale average price increased 3%4%. For the six months ended June 30, 2019, RFG and NRT's2020, average homesale price on a combined basis for Realogy Franchise and Brokerage Groups increased 1% 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 1%. 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 and Q2 homesale price data is for existing homesale average price and is as of the most recent NAR press release. |
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(b) | Forecasted homesale price data is for median price and is as of the most recent NAR forecast. |
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(c) | Existing homesale price data is for median price and is as of the most recent Fannie Mae press release. |
(a)Q1 and Q2 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 median existing homesale price to increase 3% in 20202021 while Fannie Mae is forecasting median existing homesale price to increase 4% in 2020.
1% for the same period.
* * *
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 influence of local housing dynamicsavailability of inventory supply versus demand.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 extent, duration and severity of the economic consequences stemming from the COVID-19 crisis (including continued insufficienteconomic contraction), including with respect to governmental regulation, changes in patterns of commerce or consumer activities and changes in consumer attitudes;
•intensifying economic contraction in the U.S. economy including the impact of recessions, slow economic growth, or a deterioration in other economic factors (including potential consumer, business or governmental defaults or delinquencies due to the COVID-19 crisis or otherwise);
•continued low or accelerated declines in home inventory levels or stagnant and/or declining home prices;
•continued high levels of unemployment and/or declining wages or stagnant wage growth in the U.S.;
•the potential termination or substantial curtailment of one or more federal and/or state programs meant to assist businesses and individuals navigate COVID-19 related financial challenges;
•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 capital, credit and financial markets and/or the instability of financial institutions;
•an increase in foreclosure activity;
•a reduction in the affordability of homes;
higher mortgage rates due to increases in long-term interest rates and increasing down payment requirements as well as reduced availability of mortgage financing;
•certain provisions of the 2017 Tax Act that directly impact traditional incentives associated with home ownership and may reduce the financial distinction between renting and owning a home, including those that reduce the amount that certain taxpayers would be allowed to deduct for home mortgage interest or state, local and property taxes;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;
•geopolitical and economic instability;
•homeowners retaining their homes for longer periods of time;
•changing attitudes towards home ownership, particularly among potential first-time homebuyers who may delay, or decide not to, purchase a home, as well as changing preferences to rent versus purchase a home;
decreasing consumer confidence in the economy and/or the residential real estate market;
an increase in potential homebuyers with low credit ratings or inability to afford down payments;
the impact of limited or negative equity of current homeowners, as well as •the lack of available inventory may limit theirthe proclivity of home owners 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; 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 other incentives. We utilize net royalty per side as it includes the impact of changes in average homesale price as well as all incentives and represents the royalty revenue impact of each incremental side.
For NRT,Realogy Brokerage Group, we also use gross commission income per side, which represents gross commission income divided by closed homesale sides. Gross commission income includes commissions earned in homesale transactions and certain other activities, primarily leasing and property management transactions. NRT,Realogy Brokerage Group, as a franchisee of RFG,Realogy Franchise Group, pays a royalty fee of approximately 6% per transaction to RFGRealogy Franchise Group from the commission earned on a real estate transaction. The remainder of gross commission income is split between the broker (NRT)(Realogy Brokerage Group) and the independent sales agent.
Within Cartus, we measure operating performance usingagent in accordance with their applicable independent contractor agreement (which specifies the following key operating statistics: (i) initiations,portion of the broker commission to be paid to the agent), which represent the total number of new transferees and the total number of real estate closings for affinity members and (ii) referrals,varies by agent agreement, which represent the number of referrals from which we earn revenue from real estate brokers.varies by agent.
In TRG,Realogy Title Group, operating performance is evaluated using the following key metrics: (i) purchase title and closing units, which represent the number of title and closing units we process as a result of home purchases, (ii) refinance title and closing units, which represent the number of title and closing units we process as a result of homeowners refinancing their home loans, and (iii) average fee per closing unit, which represents the average fee we earn on purchase title and refinancing title sides. Results are favorably impacted by the low mortgage rate environment. An increase or decrease in homesale transactions will impact the financial results of TRG;Realogy Title Group; however, the financial results are not significantly impacted by a change in homesale price. Although
Realogy Leads Group, which consists of Company- and client- directed affinity programs, broker-to-broker referrals and the average mortgage rate declined in 2019Realogy Advantage Broker Network (previously referred to as the Cartus Broker Network) was consolidated into Realogy Franchise Group during the first quarter of 2020.
For the three months ended June 30, 2020, Cartus Relocation Services had 20,567 initiations as compared to 2018, we believe that increases31,977 initiations during the same period in mortgage rates2019. Cartus Relocation Services earned referral fee revenue from approximately 2,937 referrals for the three months ended June 30, 2020 as compared to 4,369 referrals during the second quarter of 2019.
For the six months ended June 30, 2020, Cartus Relocation Services had 45,616 initiations as compared to 59,311 initiations during the same period of 2019. Cartus Relocation Services earned referral fee revenue from approximately 5,588 referrals for the six months ended June 30, 2020 as compared to 7,110 referrals during the first half of 2019. Cartus Relocation Services experienced a decline in new initiations attributable to the COVID-19 pandemic in the future will most likely havesecond quarter of 2020 and this trend is expected to continue in the third quarter of 2020, and potentially beyond but to a negative impact on refinancing title and closing units.
lesser extent than what we experienced in the second quarter.
The following table presents our drivers for the three and six months ended June 30, 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 June 30, | | | Six Months Ended June 30, | |
| Three Months Ended June 30, | | Six Months Ended June 30, | | 2020 | | 2019 | | % Change | | 2020 | | 2019 | | % Change |
| 2019 | | 2018 | | % Change | | 2019 | | 2018 | | % Change | |
RFG (a) | | | | | | | | | | | | |
Realogy Franchise Group (a) | | Realogy Franchise Group (a) | | | | | | | | | | | |
Closed homesale sides | 301,377 |
| | 313,278 |
| | (4 | %) | | 504,039 |
| | 537,268 |
| | (6 | %) | Closed homesale sides | 238,085 | | | 301,377 | | | (21) | % | | 441,273 | | | 504,039 | | | (12) | % |
Average homesale price | $ | 318,799 |
| | $ | 312,087 |
| | 2 | % | | $ | 310,581 |
| | $ | 303,955 |
| | 2 | % | Average homesale price | $ | 321,308 | | | $ | 318,799 | | | 1 | % | | $ | 321,841 | | | $ | 310,581 | | | 4 | % |
Average homesale broker commission rate | 2.47 | % | | 2.48 | % | | (1 | ) bps | | 2.47 | % | | 2.49 | % | | (2 | ) bps | Average homesale broker commission rate | 2.49 | % | | 2.47 | % | | 2 | bps | | 2.48 | % | | 2.47 | % | | 1 | bps |
Net royalty per side (b) | $ | 331 |
| | $ | 336 |
| | (1 | %) | | $ | 320 |
| | $ | 325 |
| | (2 | %) | |
NRT | | | | | | | | | | | | |
Net royalty per side | | Net royalty per side | $ | 324 | | | $ | 331 | | | (2) | % | | $ | 321 | | | $ | 320 | | | — | % |
Realogy Brokerage Group | | Realogy Brokerage Group | |
Closed homesale sides | 95,251 |
| | 100,745 |
| | (5 | %) | | 155,693 |
| | 166,842 |
| | (7 | %) | Closed homesale sides | 71,375 | | | 95,251 | | | (25) | % | | 133,916 | | | 155,693 | | | (14) | % |
Average homesale price | $ | 540,725 |
| | $ | 537,748 |
| | 1 | % | | $ | 529,543 |
| | $ | 532,706 |
| | (1 | %) | Average homesale price | $ | 503,935 | | | $ | 540,725 | | | (7) | % | | $ | 517,888 | | | $ | 529,543 | | | (2) | % |
Average homesale broker commission rate | 2.41 | % | | 2.43 | % | | (2 | ) bps | | 2.41 | % | | 2.44 | % | | (3 | ) bps | Average homesale broker commission rate | 2.43 | % | | 2.41 | % | | 2 | bps | | 2.42 | % | | 2.41 | % | | 1 | bps |
Gross commission income per side | $ | 13,758 |
| | $ | 13,804 |
| | — | % | | $ | 13,546 |
| | $ | 13,750 |
| | (1 | %) | Gross commission income per side | $ | 12,863 | | | $ | 13,758 | | | (7) | % | | $ | 13,206 | | | $ | 13,546 | | | (3) | % |
Cartus | | | | | | | | | | | | |
Initiations | 50,586 |
| | 53,230 |
| | (5 | %) | | 89,070 |
| | 91,183 |
| | (2 | %) | |
Referrals | 24,141 |
| | 25,562 |
| | (6 | %) | | 39,020 |
| | 41,088 |
| | (5 | %) | |
TRG | | | | | | | | | | | | |
Realogy Title Group | | Realogy Title Group | |
Purchase title and closing units | 42,202 |
| | 46,189 |
| | (9 | %) | | 70,246 |
| | 77,930 |
| | (10 | %) | Purchase title and closing units | 32,028 | | | 42,202 | | | (24) | % | | 60,752 | | | 70,246 | | | (14) | % |
Refinance title and closing units | 5,270 |
| | 4,782 |
| | 10 | % | | 9,281 |
| | 10,192 |
| | (9 | %) | Refinance title and closing units | 17,548 | | | 5,270 | | | 233 | % | | 26,447 | | | 9,281 | | | 185 | % |
Average fee per closing unit | $ | 2,356 |
| | $ | 2,282 |
| | 3 | % | | $ | 2,320 |
| | $ | 2,231 |
| | 4 | % | Average fee per closing unit | $ | 2,062 | | | $ | 2,356 | | | (12) | % | | $ | 2,151 | | | $ | 2,320 | | | (7) | % |
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.
Other incentives may also be used as consideration to attract new franchisees, grow franchisees (including through independent sales agent recruitment) or extend existing franchise agreements, although 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 face significant competition from other national real estate brokerage brand franchisors for franchisees and we expect that
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.
The following table reflects the results of each of our reportable segments during the three months ended June 30, 2020 and 2019:
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenues (a) | | $ Change | | % Change | | Operating EBITDA | | $ Change | | % Change | | Operating EBITDA Margin | | Change |
| 2019 | | 2018 | | | | 2019 | | 2018 | | | | 2019 | | 2018 | |
RFG | $ | 234 |
| | $ | 237 |
| | $ | (3 | ) | | (1 | )% | | $ | 163 |
| | $ | 173 |
| | $ | (10 | ) | | (6 | )% | | 70 | % | | 73 | % | | (3 | ) |
NRT | 1,331 |
| | 1,408 |
| | (77 | ) | | (5 | ) | | 47 |
| | 61 |
| | (14 | ) | | (23 | ) | | 4 |
| | 4 |
| | — |
|
Cartus | 97 |
| | 105 |
| | (8 | ) | | (8 | ) | | 27 |
| | 34 |
| | (7 | ) | | (21) | | 28 |
| | 32 |
| | (4 | ) |
TRG | 160 |
| | 162 |
| | (2 | ) | | (1 | ) | | 32 |
| | 31 |
| | 1 |
| | 3 | | 20 |
| | 19 |
| | 1 |
|
Corporate and Other | (87 | ) | | (92 | ) | | 5 |
| | * | | (24 | ) | | (23 | ) | | (1 | ) | | * | | | | | | |
Total Company | $ | 1,735 |
| | $ | 1,820 |
| | $ | (85 | ) | | (5 | )% | | $ | 245 |
| | $ | 276 |
| | $ | (31 | ) | | (11 | %) | | 14 | % | | 15 | % | | (1 | ) |
Less: Depreciation and amortization | | 50 |
| | 49 |
| | | | | | | | | | |
Interest expense, net | | 81 |
| | 46 |
| | | | | | | | | | |
Income tax expense | | 34 |
| | 52 |
| | | | | | | | | | |
Restructuring costs, net (b) | | 9 |
| | 6 |
| | | | | | | | | | |
Impairment | | 2 |
| | — |
| | | | | | | | | | |
Net income attributable to Realogy Holdings and Realogy Group | | $ | 69 |
| | $ | 123 |
| | | | | | | | | | |
_______________
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(a) | Includes the elimination of transactions between segments, which consists of intercompany royalties and marketing fees paid by NRT of $87 million and $92 million during the three months ended June 30, 2019 and 2018, respectively. |
| |
(b) | Restructuring charges incurred for the three months ended June 30, 2019 include $6 million at NRT, $1 million at Cartus, $1 million at TRG and $1 million at Corporate and Other. Restructuring charges incurred for the three months ended June 30, 2018 include $4 million at NRT, $1 million at Cartus and $1 million at TRG. |
As described in the aforementioned table, Operating EBITDA margin for "Total Company"continuing operations" expressed as a percentage of revenues decreased 1 percentage point toremained flat at 14% from 15% for the three months ended June 30, 20192020 compared to the same period in 2018.2019. On a segment basis, RFG'sRealogy Franchise Group's margin decreased 3 percentage points to 70% from 73% primarily due to a decrease in royalty revenue. NRT's margin remained flat at 4%. Cartus' margin decreased 4 percentage points to 28% from 32% primarily due to a decrease in international and referral revenues. TRG's margin increased 1 percentage point to 20%68% from 19%69% primarily due a decrease in revenue and higher bad debt expense related to the early termination of third party listing fee agreements, partially offset by a decrease in employee and other operating costs primarily as a result of COVID-19 related cost savings initiatives. Realogy Brokerage Group's margin decreased 2 percentage points from 4% to 2% primarily due to higher agent commission costs primarily driven by retention efforts and a shift in mix as more productive, higher compensated agents completed a higher percentage of homesale transactions, partially offset by lower operating and employee expenses primarily due to COVID-19 related cost savings initiatives. Realogy Title Group's margin increased 18 percentage points to 38% from 20% primarily as a result of an increase in equity in earnings from equity investmentsof Guaranteed Rate Affinity as a result of the low mortgage rate environment and a reductionimproved margins in a reserve for contingent consideration, partially offset by a decrease in resale revenue.the venture.
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 12 percentage pointpoints from 15% to 14%13% primarily due to lower transaction volume during the second quarter of 20192020 compared to the second quarter of 2018:2019:
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenues | | $ Change | | % Change | | Operating EBITDA | | $ Change | | % Change | | Operating EBITDA Margin | | Change |
| 2019 | | 2018 | | | | 2019 | | 2018 | | | | 2019 | | 2018 | |
RFG (a) | $ | 147 |
| | $ | 145 |
| | 2 |
| | 1 | % | | $ | 76 |
| | $ | 81 |
| | (5 | ) | | (6 | )% | | 52 | % | | 56 | % | | (4 | ) |
NRT (a) | 1,331 |
| | 1,408 |
| | (77 | ) | | (5 | )% | | 134 |
| | 153 |
| | (19 | ) | | (12 | )% | | 10 | % | | 11 | % | | (1 | ) |
RFG and NRT Combined | $ | 1,478 |
| | $ | 1,553 |
| | (75 | ) | | (5 | )% | | $ | 210 |
| | $ | 234 |
| | (24 | ) | | (10 | )% | | 14 | % | | 15 | % | | (1 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenues | | | | $ Change | | % Change | | Operating EBITDA | | | | $ Change | | % Change | | Operating EBITDA Margin | | | | Change |
| 2020 | | 2019 | | | | | | 2020 | | 2019 | | | | | | 2020 | | 2019 | | |
Realogy Franchise Group (a) | $ | 114 | | | $ | 173 | | | (59) | | | (34) | | | $ | 57 | | | $ | 93 | | | (36) | | | (39) | | | 50 | % | | 54 | % | | (4) | |
Realogy Brokerage Group (a) | 933 | | | 1,331 | | | (398) | | | (30) | | | 80 | | | 134 | | | (54) | | | (40) | | | 9 | | | 10 | | | (1) | |
Realogy Franchise and Brokerage Groups Combined | $ | 1,047 | | | $ | 1,504 | | | (457) | | | (30) | | | $ | 137 | | | $ | 227 | | | (90) | | | (40) | | | 13 | % | | 15 | % | | (2) | |
_______________
| |
(a) | The RFG and NRT segment numbers noted above do not reflect the impact of intercompany royalties and marketing fees paid by NRT to RFG of $87 million and $92 million during the three months ended June 30, 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 $65 million and $87 million during the three months ended June 30, 2020 and 2019, respectively. Real Estate
Realogy Franchise Services (RFG)Group
Revenues decreased $3$81 million to $234$179 million and Operating EBITDA decreased $10$58 million to $163$122 million for the three months ended June 30, 20192020 compared with the same period in 2018.2019.
Revenues decreased $3$81 million primarily as a result of of:
•a $5$23 million decrease in third-party domestic franchisee royalty revenue primarily due to a 2%20% decrease in homesale transaction volume at RFG andRealogy Franchise Group which consisted of a $521% decrease in existing homesale transactions, partially offset by a 1% increase in average homesale price;
•a $21 million decrease in intercompany royalties received from NRT, partially offset by Realogy Brokerage Group;
•a $2$15 million increasedecrease in international area development fee revenue as a result of contract terminations. Registration revenueregistration and other brand marketing fund revenue increased $4 million and(associated with the waiver of marketing fees from affiliates in the quarter), which had a related expense increased $4decrease of $18 million primarilyresulting in a $3 million net positive impact on Operating EBITDA, due to not holding in person meetings and conferences and lower advertising costs due to the level and timing of advertising spending and conferences duringCOVID-19 pandemic in the second quarter of 20192020 compared to the same period in 2018.2019;
RFG•a $12 million decrease in lead referral revenues driven by lower volume and referral transactions primarily driven by the discontinuation of the USAA affinity program which ceased new enrollments in the third quarter of 2019;
•a $6 million decrease in revenue related to the early termination of third party listing fee agreements; and
•a $4 million decrease in other revenue.
Realogy Franchise Group revenue includes intercompany royalties received from NRTRealogy Brokerage Group of $84$63 million and $89$84 million during the second quarter of 20192020 and 2018,2019, respectively, which are eliminated in consolidation against the expense reflected in NRT's segmentRealogy Brokerage Group's results.
The $10$58 million decrease in Operating EBITDA was primarily due to the $81 million decrease in revenues discussed above and $8 million of higher bad debt expense primarily related to the early termination of third party listing fee agreements. These Operating EBITDA decreases were partially offset by the $18 million decrease in registration and brand marketing fund expense discussed above and a $13 million decrease in employee and other operating costs principally due to COVID-19 related cost savings initiatives and the $10 million decrease in royalty revenues discussed above.discontinuation of the USAA affinity program.
Company Owned Real EstateRealogy Brokerage Services (NRT)Group
Revenues decreased $77$398 million to $1,331$933 million and Operating EBITDA decreased $14$32 million to $47$15 million for the three months ended June 30, 20192020 compared with the same period in 2018.2019.
The revenue decrease of $77$398 million was primarily driven by a 5%30% decrease in homesale transaction volume at NRT. NRT saw lower transaction volume primarily driven byour Realogy Brokerage Group due to the competitive environment as well as our geographic concentration.COVID-19 pandemic which consisted of a 25% decrease in existing homesale transactions and a 7% decrease in average homesale price.
Operating EBITDA decreased $14$32 million primarily due to the $77a $398 million decrease in revenues discussed above, partially offset by:
•a $54$270 million decrease in commission expenses paid to independent sales agents from $1,009 million in the second quarter of 2018 to $955 million in the second quarter of 2019.2019 to $685 million in the second quarter of 2020. Commission expense decreased primarily as a result of the impact of lower homesale transaction volume as discussed above;above, partially offset by higher agent commission costs primarily driven by retention efforts and a shift in mix as more productive, higher compensated agents completed a higher percentage of homesale transactions;
•a $5$58 million decrease in employee-related, occupancy costs and other operating costs due primarily to COVID-19 related cost savings initiatives;
•a $21 million decrease in royalties paid to RFGRealogy Franchise Group from $89 million in the second quarter of 2018 to $84 million in the second quarter of 2019 to $63 million in the second quarter of 2020 associated with the homesale transaction volume decline as described above; and
•a $17 million decrease in marketing expense due to lower advertising costs as a result of the COVID-19 pandemic.
Realogy Title Group
Revenues remained flat at $160 million and Operating EBITDA increased $29 million to $61 million for the three months ended June 30, 2020 compared with the same period in 2019.
Revenues remained flat primarily as a result of a $19 million increase in refinance revenue due to an increase in activity in the refinance market and a $10 million increase in underwriter revenue with unaffiliated agents, which had a $1 million net positive impact on Operating EBITDA due to the related expense increase of $9 million. The revenue increases were offset by a $27 million decrease in resale revenue due to a decline in purchase transactions as a result of the COVID-19 pandemic. Operating EBITDA increased $29 million primarily as a result of an increase in equity in earnings related to Guaranteed Rate Affinity due to the favorable mortgage rate environment and improved margins in the venture. The $9 million increase in underwriter expense with unaffiliated agents discussed above was offset by a decrease in employee and other operating costs due to COVID-19 related costs savings initiatives.
Discontinued Operations - Cartus Relocation
Revenues for Cartus Relocation Services (Cartus)
Revenues decreased $8$23 million to $97$48 million from $71 million and Operating EBITDA decreased $7 million to $27$3 million from $10 million for the three months ended June 30, 20192020 compared with the same period in 2018.
2019.
Revenues decreased $8$23 million primarily as a result of a $5$10 million decrease in international revenue due to lower volume and lost business as well as a $3$7 million decrease in referral revenue due to lower volumeand a $7 million decrease in other revenue, both of which were primarily driven by lower volume. Beginning in the absencesecond half of March 2020, Cartus Relocation Services experienced a large group movedecline in new initiations due to the COVID-19 pandemic which occurredcontinued through the second quarter of 2020 and this trend is expected to continue in 2018.the third quarter of 2020 and potentially beyond but to a lesser extent than what we experienced in the second quarter.
Operating EBITDA decreased $7 million primarily as a result ofdue to the $8 millionrevenue decrease in revenue discussed above, partially offset by a net $1 million decrease in employee and other operating expenses.
Title and Settlement Services (TRG)
Revenues decreased $2 million to $160 million and Operating EBITDA increased $1 million to $32 million for the three months ended June 30, 2019 compared with the same period in 2018.
Revenues decreased $2 million primarily as a result of a $6 million decrease in resale revenue due to a decline in units, partially offset by a $2 million increase in underwriter revenue and a $1 million increase in refinancing revenue due to an increase in activity in the refinance market.
Operating EBITDA increased $1 million as a result of a $5 million increase in earnings from equity investments primarily related to Guaranteed Rate Affinity during the second quarter of 2019 compared to the second quarter of 2018 and a $2 million reduction in a reserve for contingent consideration. The increases were partially offset by the $2 million decrease in revenues discussed above and a $4 million increase in other costs primarily due to employee-related costs partially offset by a decrease in variable operating costs as a result of the decline in resale revenue.COVID-19 related cost savings initiatives.
Six Months Ended June 30, 20192020 vs. Six Months Ended June 30, 20182019
Our consolidated results comprised the following:
| | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | |
| 2020 | | 2019 | | Change |
Net revenues | $ | 2,323 | | | $ | 2,718 | | | $ | (395) | |
Total expenses | 2,896 | | | 2,741 | | | 155 | |
Loss from continuing operations before income taxes, equity in earnings and noncontrolling interests | (573) | | | (23) | | | (550) | |
Income tax (benefit) expense | (121) | | | 1 | | | (122) | |
Equity in earnings of unconsolidated entities | (45) | | | (8) | | | (37) | |
Net loss from continuing operations | (407) | | | (16) | | | (391) | |
Net loss from discontinued operations | (68) | | | (13) | | | (55) | |
Net loss | (475) | | | (29) | | | (446) | |
Less: Net income attributable to noncontrolling interests | (1) | | | (1) | | | — | |
Net loss attributable to Realogy Holdings and Realogy Group | $ | (476) | | | $ | (30) | | | $ | (446) | |
|
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2019 | | 2018 | | Change |
Net revenues | $ | 2,849 |
| | $ | 3,049 |
| | $ | (200 | ) |
Total expenses | 2,887 |
| | 2,957 |
| | (70 | ) |
(Loss) income before income taxes, equity in earnings and noncontrolling interests | (38 | ) | | 92 |
| | (130 | ) |
Income tax (benefit) expense | (1 | ) | | 33 |
| | (34 | ) |
Equity in (earnings) losses of unconsolidated entities | (8 | ) | | 2 |
| | (10 | ) |
Net (loss) income | (29 | ) | | 57 |
| | (86 | ) |
Less: Net income attributable to noncontrolling interests | (1 | ) | | (1 | ) | | — |
|
Net (loss) income attributable to Realogy Holdings and Realogy Group | $ | (30 | ) | | $ | 56 |
| | $ | (86 | ) |
Net revenues decreased $200$395 million or 7%15% for the six months ended June 30, 20192020 compared with the six months ended June 30, 2018 primarily2019 driven bylower homesale transaction volume at NRT.both RealogyFranchise and Brokerage Groups primarily due to the COVID-19 pandemic.
Total expenses decreased $70increased $155 million or 2%6% for the first half of 2020 compared to the first half of 20182019 primarily due to:
•impairments of $454 million including a $124goodwill 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 (see Note 3, "Goodwill and Intangible Assets", to the Condensed Consolidated Financial Statements for additional information) and $11 million related to lease asset impairments;
•a $17 million net increase in interest expense primarily due to a $21 million net expense related to our mark-to-market adjustments for our interest rate swaps that resulted in losses of $59 million for the six months ended June 30, 2020 compared to losses of $38 million during the same period of 2019, partially offset by a decrease in interest expense due to LIBOR rate decreases; and
•a $7 million increase in restructuring costs,
partially offset by;
•a $215 million decrease in commission and other sales agent-related costs primarily as a result of the impact of lower homesale transaction volume at NRT;Realogy Brokerage Group due to the COVID-19 pandemic, partially offset by higher agent commission costs primarily driven by retention efforts and a shift in mix as more productive, higher compensated agents completed a higher percentage of homesale transactions;
•a $15$77 million decrease in restructuring costs.operating and general and administrative expenses primarily due to lower employee-related, occupancy and other operating costs as a result of COVID-19 related cost savings initiatives; and
The expense decreases were partially offset by •a $65$38 million net increasedecrease in interestmarketing expense primarily due to a $50 million net expense relatednot holding in person meetings and conferences and lower advertising costs due to our mark-to-market adjustments for our interest rate swaps that resultedthe COVID-19 pandemic in losses of $38 million during the first half of 20192020 compared to gains of $12 million during the same period of 2018, and a $15 million increase in interest expense primarily due to the refinancing of Senior Notes in the first quarterhalf of 2019.
Earnings from equity investmentsEquity in earnings were $8$45 million for the six months ended June 30, 20192020 compared to lossesearnings of $2$8 million during the same period of 20182019 primarily due to an improvement in earnings of Guaranteed Rate Affinity.
DuringAffinity at Realogy Title Group. Equity in earnings for Guaranteed Rate Affinity increased by $37 million from $7 million in the first half of 2019 to $44 million in the first half of 2020 as a result of the low mortgage rate environment and improved margins in the venture. Equity in earnings for Realogy Title Group's other equity method investments remained flat at $1 million during the first half of 2020 and 2019.
During the six months ended June 30, 2020, we incurred $21$25 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 $54 million.$81 million, with $61 million incurred to date. See Note 6, "Restructuring Costs", into the Condensed Consolidated Financial Statements for additional information.
The Company's provision for income taxes in interim periods is computed by applying its estimated annual effective tax rate against the income or loss before income taxes for the period. In addition, non-recurring or discrete items are recorded in the period in which they occur. The provision for income taxes was a benefit of $121 million for the six months ended June 30, 2020 compared to an expense of $1 million for the six months ended June 30, 2019 compared to expense of $33 million2019. Our effective tax rate was 23% and negative 7% for the six months ended June 30, 2018.2020 and June 30, 2019, respectively. The effective tax rate for the six months ended June 30, 20192020 was primarily impacted by a discrete itemitems in the first half of 2020 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 six months ended June 30, 2020 and 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenues (a) | | | | $ Change | | % Change | | Operating EBITDA | | | | $ Change | | % Change | | Operating EBITDA Margin | | | | Change |
| 2020 | | 2019 | | | | | | 2020 | | 2019 | | | | | | 2020 | | 2019 | | |
Realogy Franchise Group | $ | 347 | | | $ | 439 | | | $ | (92) | | | (21) | % | | $ | 223 | | | $ | 278 | | | $ | (55) | | | (20) | % | | 64 | % | | 63 | % | | 1 | |
Realogy Brokerage Group | 1,802 | | | 2,147 | | | (345) | | | (16) | | | (36) | | | (15) | | | (21) | | | (140) | | | (2) | | | (1) | | | (1) | |
Realogy Title Group | 297 | | | 274 | | | 23 | | | 8 | | | 73 | | | 23 | | | 50 | | | 217 | | 25 | | | 8 | | | 17 | |
Corporate and Other | (123) | | | (142) | | | 19 | | | * | | (51) | | | (49) | | | (2) | | | * | | | | | | |
Total continuing operations | $ | 2,323 | | | $ | 2,718 | | | $ | (395) | | | (15) | % | | $ | 209 | | | $ | 237 | | | $ | (28) | | | (12) | % | | 9 | % | | 9 | % | | — | |
| | | | | | | | | | | | | | | | | | | | | |
Less: Depreciation and amortization | | | | | | | | | 91 | | | 84 | | | | | | | | | | | |
Interest expense, net | | | | | | | | | 160 | | | 143 | | | | | | | | | | | |
Income tax (benefit) expense | | | | | | | | | (121) | | | 1 | | | | | | | | | | | |
Restructuring costs, net (b) | | | | | | | | | 25 | | | 18 | | | | | | | | | | | |
Impairments (c) | | | | | | | | | 454 | | | 3 | | | | | | | | | | | |
Loss on the early extinguishment of debt (d) | | | | | | | | | 8 | | | 5 | | | | | | | | | | | |
Net loss from continuing operations attributable to Realogy Holdings and Realogy Group | | | | | | | | | (408) | | | (17) | | | | | | | | | | | |
Net loss from discontinued operations | | | | | | | | | (68) | | | (13) | | | | | | | | | | | |
Net loss attributable to Realogy Holdings and Realogy Group | | | | | | | | | $ | (476) | | | $ | (30) | | | | | | | | | | | |
_______________
* not meaningful
(a)Includes the elimination of transactions between segments, which consists of intercompany royalties and marketing fees paid by Realogy Brokerage Group of $123 million and $142 million during the six months ended June 30, 2020 and 2019, respectively.
(b)Restructuring charges incurred for the six months ended June 30, 2020 include $1 millionat Realogy Franchise Group, $21 million at Realogy Brokerage Group and$3 million at Realogy Title Group. Restructuring charges incurred for the six months ended June 30, 2019 include $1 million at Realogy Franchise Group, $10 million at Realogy Brokerage Group, $2 million at Realogy Title Group and 2018:$5 million at Corporate and Other.
(c)Impairments for the six months ended June 30, 2020 include a goodwill impairment charge of $413 million which reduced the net carrying value of Realogy Brokerage Group by $314 million after accounting for the related income tax benefit of $99 million, an impairment charge of $30 million which reduced the carrying value of trademarks at Realogy Franchise Group and $11 million related to lease asset impairments. Impairments for the six months ended June 30, 2019 relate to lease asset impairments. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenues (a) | | $ Change | | % Change | | Operating EBITDA | | $ Change | | % Change | | Operating EBITDA Margin | | Change |
| 2019 | | 2018 | | | | 2019 | | 2018 | | | | 2019 | | 2018 | |
RFG | $ | 397 |
| | $ | 413 |
| | $ | (16 | ) | | (4 | )% | | $ | 253 |
| | $ | 278 |
| | $ | (25 | ) | | (9 | )% | | 64 | % | | 67 | % | | (3 | ) |
NRT | 2,147 |
| | 2,325 |
| | (178 | ) | | (8 | ) | | (15 | ) | | 16 |
| | (31 | ) | | (194 | ) | | (1 | ) | | 1 |
| | (2 | ) |
Cartus | 173 |
| | 184 |
| | (11 | ) | | (6 | ) | | 29 |
| | 33 |
| | (4 | ) | | (12) | | 17 |
| | 18 |
| | (1 | ) |
TRG | 274 |
| | 282 |
| | (8 | ) | | (3 | ) | | 23 |
| | 25 |
| | (2 | ) | | (8) | | 8 |
| | 9 |
| | (1 | ) |
Corporate and Other | (142 | ) | | (155 | ) | | 13 |
| | * | | (49 | ) | | (42 | ) | | (7 | ) | | * | | | | | | |
Total Company | $ | 2,849 |
| | $ | 3,049 |
| | $ | (200 | ) | | (7 | )% | | $ | 241 |
| | $ | 310 |
| | $ | (69 | ) | | (22 | %) | | 8 | % | | 10 | % | | (2 | ) |
Less: Depreciation and amortization (b) | | 99 |
| | 99 |
| | | | | | | | | | |
Interest expense, net | | 144 |
| | 79 |
| | | | | | | | | | |
Income tax (benefit) expense | | (1 | ) | | 33 |
| | | | | | | | | | |
Restructuring costs, net (c) | | 21 |
| | 36 |
| | | | | | | | | | |
Impairment | | 3 |
| | — |
| | | | | | | | | | |
Loss on the early extinguishment of debt (d) | | 5 |
| | 7 |
| | | | | | | | | | |
Net (loss) income attributable to Realogy Holdings and Realogy Group | | $ | (30 | ) | | $ | 56 |
| | | | | | | | | | |
(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 $142 million and $155 million during the six months ended June 30, 2019 and 2018, respectively. |
| |
(b) | Depreciation and amortization for the six months ended June 30, 2018 includes $2 million of amortization expense related to Guaranteed Rate Affinity's purchase accounting included in the "Equity in (earnings) losses of unconsolidated entities" line on the Condensed Consolidated Statement of Operations. |
| |
(c) | Restructuring charges incurred for the six months ended June 30, 2019 include $10 million at NRT, $4 million at Cartus, $2 million at TRG and $5 million at Corporate and Other. Restructuring charges incurred for the six months ended June 30, 2018 include $2 million at RFG, $21 million at NRT, $9 million at Cartus, $2 million at TRG and $2 million at Corporate and Other. |
| |
(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 decreased 2 percentage points to 8% from 10%remained flat at 9% for the six months ended June 30, 20192020 compared to the same period in 2018.2019. On a segment basis, RFG'sRealogy Franchise Group's margin decreased 3increased 1 percentage pointspoint to 64% from 67%63% primarily due to a decrease in royalty revenues. NRT's margin decreased 2 percentage pointsemployee and other operating costs primarily as a result of COVID-19 related cost savings initiatives, partially offset by a decrease in revenue related to negative 1% from 1% primarily due to lower transaction volume. Cartus'the early termination of third party listing fee agreements. Realogy Brokerage Group's margin decreased 1 percentage point from negative 1% to 17% from 18%negative 2% primarily due to higher agent commission costs primarily driven by retention efforts and a decreaseshift in international and referral revenues. TRG'smix as more productive, higher compensated agents completed a higher percentage of homesale transactions, partially offset by lower operating expenses primarily due to COVID-19 related cost savings initiatives. Realogy Title Group's margin decreased 1increased 17 percentage pointpoints to 8%25% from 9%8% primarily as a result of a decrease in resale revenue, partially offset by an increase in earnings from equity investments and a reduction in a reserve for contingent consideration.
Corporate and Other Operating EBITDA for the six months ended June 30, 2019 decreased $7 million to negative $49 million primarilyearnings due to an improvement in earnings of Guaranteed Rate Affinity as a $6 million increaseresult of the low mortgage rate environment and improved margins in employee-related and other costs.
the venture.
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 12 percentage pointpoints from 11% to 10%9% primarily due to lower transaction volume during the first half of 20192020 compared to the first half of 2018:2019:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenues | | $ Change | | % Change | | Operating EBITDA | | $ Change | | % Change | | Operating EBITDA Margin | | Change |
| 2019 | | 2018 | | | | 2019 | | 2018 | | | | 2019 | | 2018 | |
RFG (a) | $ | 255 |
| | $ | 258 |
| | (3 | ) | | (1 | )% | | $ | 111 |
| | $ | 123 |
| | (12 | ) | | (10 | )% | | 44 | % | | 48 | % | | (4 | ) |
NRT (a) | 2,147 |
| | 2,325 |
| | (178 | ) | | (8 | )% | | 127 |
| | 171 |
| | (44 | ) | | (26 | )% | | 6 | % | | 7 | % | | (1 | ) |
RFG and NRT Combined | $ | 2,402 |
| | $ | 2,583 |
| | (181 | ) | | (7 | )% | | $ | 238 |
| | $ | 294 |
| | (56 | ) | | (19 | )% | | 10 | % | | 11 | % | | (1 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenues | | | | $ Change | | % Change | | Operating EBITDA | | | | $ Change | | % Change | | Operating EBITDA Margin | | | | Change |
| 2020 | | 2019 | | | | | | 2020 | | 2019 | | | | | | 2020 | | 2019 | | |
Realogy Franchise Group (a) | $ | 224 | | | $ | 297 | | | (73) | | | (25) | | | $ | 100 | | | $ | 136 | | | (36) | | | (26) | | | 45 | % | | 46 | % | | (1) | |
Realogy Brokerage Group (a) | 1,802 | | | 2,147 | | | (345) | | | (16) | | | 87 | | | 127 | | | (40) | | | (31) | | | 5 | | | 6 | | | (1) | |
Realogy Franchise and Brokerage Groups Combined | $ | 2,026 | | | $ | 2,444 | | | (418) | | | (17) | | | $ | 187 | | | $ | 263 | | | (76) | | | (29) | | | 9 | % | | 11 | % | | (2) | |
_______________
| |
(a) | The RFG and NRT segment numbers noted above do not reflect the impact of intercompany royalties and marketing fees paid by NRT to RFG of $142 million and $155 million during the six months ended June 30, 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 $123 million and $142 million during the six months ended June 30, 2020 and 2019, respectively. Real Estate
Realogy Franchise Services (RFG)Group
Revenues decreased $16$92 million to $397$347 million and Operating EBITDA decreased $25$55 million to $253$223 million for the six months ended June 30, 20192020 compared with the same period in 2018.2019.
Revenues decreased $16$92 million primarily as a result of:
•a $26 million decrease in registration revenue and brand marketing fund revenue (associated with the waiver of marketing fees from affiliates in the second quarter of 2020), which had a $12related expense decrease of $30 million resulting in a net $4 million net positive impact on Operating EBITDA, due to not holding in person meetings and conferences and lower advertising costs due to the COVID-19 pandemic in the first half of 2020 compared to the first half of 2019;
•a $22 million decrease in third-party domestic franchisee royalty revenue primarily due to a 4%9% decrease in homesale transaction volume at RFG,Realogy Franchise Group which consisted of a $1212% decrease in existing homesale transactions, partially offset by a 4% increase in average homesale price;
•an $18 million decrease in intercompany royalties received from NRT and Realogy Brokerage Group;
•a $2$15 million decrease in international royalties, partially offsetleads referral revenues driven by lower volume and referral transactions primarily driven by the discontinuation of the USAA affinity program which ceased new enrollments in the third quarter of 2019;
•a $3$6 million increasedecrease in international area development fee revenue as a result of contract terminations. Registration revenue and other brand marketing fund revenue increased $8 million and related expense increased $9 million, primarily due to the levelearly termination of third party listing fee agreements; and timing of advertising spending and conferences including the RGX event during the first half of 2019 compared to the same period
•a $5 million decrease in 2018.other revenue.
RFGRealogy Franchise Group revenue includes intercompany royalties received from NRTRealogy Brokerage Group of $137$119 million and $149$137 million during the first half of2020 and 2019, and 2018, respectively, which are eliminated in consolidation against the expense reflected in NRT's segmentRealogy Brokerage Group's results.
The $25$55 million decrease in Operating EBITDA was primarily due to the $92 million decrease in revenues discussed above and $10 million of higher expense for bad debt primarily due to the early termination of third party listing fee agreements. These Operating EBITDA decreases were partially offset by the $30 million decrease in registration and brand marketing fund expense discussed above and a $17 million decrease in employee and other operating costs principally due to the $26 million decrease in royalty revenues discussed above.COVID-19 related cost savings initiatives and the discontinuation of the USAA affinity program.
Company Owned Real Estate53
Realogy Brokerage Services (NRT)Group
Revenues decreased $178$345 million to $2,147$1,802 million and Operating EBITDA decreased $31$21 million to negative $15$36 million for the six months ended June 30, 20192020 compared with the same period in 2018.2019.
The revenue decrease of $178$345 million was primarily driven by a 7%16% decrease in homesale transaction volume at NRT. NRT saw lower transaction volume primarily driven byRealogy Brokerage Group which started in the competitive environment as well as our geographic concentration.final weeks of the first quarter due to the COVID-19 pandemic and consisted of a 14% decrease in existing homesale transactions and a 2% decrease in average homesale price.
Operating EBITDA decreased $31$21 million primarily due to the $178a $345 million decrease in revenues discussed above, partially offset by:
•a $124$215 million decrease in commission expenses paid to independent sales agents from $1,654$1,530 million in the first half of 20182019 to $1,530$1,315 million in the same periodfirst half of 2019.2020. Commission expense decreased primarily as a result of the impact of lower homesale transaction volume as discussed above;above, partially offset by higher agent commission costs primarily driven by retention efforts and a shift in mix as more productive, higher compensated agents completed a higher percentage of homesale transactions;
•a $12$70 million decrease in employee-related, occupancy costs and other operating costs due to COVID-19 related cost savings initiatives;
•a $21 million decrease in marketing expense due to lower advertising costs as a result of the COVID-19 pandemic; and
•an $18 million decrease in royalties paid to RFGRealogy Franchise Group from $149$137 million in the first half of 20182019 to $137$119 million in the same period of 2019; and2020 associated with the volume decline as described above.
a $10 million decrease in other costs including occupancy costs, employee-related costs and other operating costs.
Relocation Services (Cartus)Realogy Title Group
Revenues decreased $11increased $23 million to $173$297 million and Operating EBITDA decreased $4increased $50 million to $29$73 million for the six months ended June 30, 20192020 compared with the same period in 2018.
2019.
Revenues decreased $11increased $23 million primarily as a result of a $24 million increase in refinance revenue due to an increase in activity in the refinance market and a $20 million increase in underwriter revenue with unaffiliated agents, which had a $3 million net positive impact on Operating EBITDA due to the related expense increase of $17 million. These revenue increases were partially offset by a $21 million decrease in resale revenue due to a decline in purchase transactions as result of the COVID-19 pandemic.
Operating EBITDA increased $50 million primarily as a result of a $37 million increase in equity in earnings primarily related to Guaranteed Rate Affinity due to the favorable mortgage rate environment and improved margins in the venture, the $3 million net positive impact of underwriter transactions with unaffiliated agents discussed above and a $7 million decrease in employee and other operating costs due to COVID-19 related cost savings initiatives.
Discontinued Operations - Cartus Relocation
Revenues for Cartus Relocation Services decreased $31 million to $100 million from $131 million and Operating EBITDA decreased $6 million to negative $2 million from $4 million for the six months ended June 30, 2020 compared with the same period in 2019.
Revenues decreased $31 million primarily as a result of a $15 million decrease in international revenue due to lower volume and lost business, as well as a $5$9 million decrease in referral revenue and an $8 million decrease in other revenue, both of which were primarily driven by lower volume. Beginning in the second half of March 2020, Cartus Relocation Services experienced a decline in new initiations due to lower volume largely driven by the absenceCOVID-19 pandemic which continued through the second quarter of 2020 and this trend is expected to continue in the third quarter of 2020 and potentially beyond but to a large group move which occurredlesser extent than what we experienced in 2018.the second quarter.
Operating EBITDA decreased $4$6 million primarily as a result ofdue to the $11 millionrevenue decrease in revenues discussed above, partially offset by lower operating expenses driven primarily by a $5 million decrease in net employee-relatedemployee and other operating costs primarily due to COVID-19 related cost savings initiatives and a $2 million net positive impact from foreign currency exchange rates on expenses.initiatives.
Title and Settlement Services (TRG)
Revenues decreased $8 million to $274 million and Operating EBITDA decreased $2 million to $23 million for the six months ended June 30, 2019 compared with the same period in 2018.
Revenues decreased $8 million primarily as a result54
Operating EBITDA decreased $2 million primarily as a result of the $8 million decrease in revenues discussed above and an increase of $4 million in costs primarily due to an increase in underwriter revenue with unaffiliated agents where the revenue and expense is recorded on a gross basis. The decreases were partially offset by an $8 million increase in earnings from equity investments primarily related to Guaranteed Rate Affinity during the first half of 2019 compared to 2018 and a $2 million reduction in a reserve for contingent consideration.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Financial Condition
| | | | | | | | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 | | Change |
Total assets | $ | 7,433 | | | $ | 7,543 | | | $ | (110) | |
Total liabilities | 5,808 | | | 5,447 | | | 361 | |
Total equity | 1,625 | | | 2,096 | | | (471) | |
|
| | | | | | | | | | | |
| June 30, 2019 | | December 31, 2018 | | Change |
Total assets | $ | 7,954 |
| | $ | 7,290 |
| | $ | 664 |
|
Total liabilities | 5,701 |
| | 4,975 |
| | 726 |
|
Total equity | 2,253 |
| | 2,315 |
| | (62 | ) |
For the six months ended June 30, 2019,2020, total assets increased $664decreased $110 million primarily due to the addition of $536:
•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 $119 million decrease in assets held for sale;
•a $30 million decrease in trademarks as a result of the new leasing standard, impairment of trademarks at Realogy Franchise Group during the first quarter of 2020;
•a $98 million increase in trade and relocation receivables due to seasonal increases in volume, a $45 million increase in cash and cash equivalents and a $27 million increase in other non-current assets primarily related to strategic investments and prepaid assets. Total asset increases were partially offset by a $49$36 million net decrease in franchise agreements and other amortizable intangible assets primarily due to amortization.amortization;
•a $24 million net decrease in operating lease assets; and
•a $15 million decrease in property and equipment,
partially offset by:
•a $451 million increase in cash and cash equivalents due to additional borrowings under the Revolving Credit Facility;
•a $63 million increase in other current and non-current assets primarily related to an increase in our investment in Guaranteed Rate Affinity due to an increase in equity in earnings partially offset by dividends received, an increase in prepaid incentives and an increase in marketable securities due to the reinvestment of certificates of deposit at Realogy Title Group; and
•a $13 million increase in trade receivables primarily due to timing and seasonal volume.
Total liabilities increased $726$361 million primarily due to the addition of $596 million of operating lease liabilities to the balance sheet as to:
•a result of the adoption of the new leasing standard, a $141$598 million increase in corporate debt primarily due to a $625 million increase in borrowings under the Revolving Credit Facility which included an additional $400 million borrowed in 2020 due to COVID-19 uncertainties and the issuance of $550 million of 9.375%7.625% Senior Secured Second Lien Notes, and additional borrowings under the Revolving Credit Facility, partially offset by the redemption of all of the Company's outstanding $450$550 million 4.50%5.25% Senior Notes,Notes; and
•a $51$58 million increase in accounts payableother non-current liabilities primarily due to seasonal increases. Total liability increases were mark-to-market adjustments on the Company's interest rate swaps,
partially offset by by:
•a $27$141 million decrease in securitization obligations, deferred tax liabilities primarily due to the recognition of an income tax benefit of $99 million related to the goodwill impairment charge during the first quarter of 2020;
•a $125 million decrease in liabilities held for sale;
•an $18 million decrease in accrued expenses and other current liabilitiesliabilities; and
•a $13 million decrease in other non-current liabilities primarily due to the reclassification of deferred rent liabilities which were credited against operating lease assets as a result of the adoption of the new leasing standard, partially offset by increased mark-to-market liabilities for the Company's interest rate swaps.liabilities.
Total equity decreased $62$471 million primarily due to a net loss of $30$476 million for the six months ended June 30, 2019 and a $322020. The loss was primarily due to impairments of $454 million decrease in additional paid in capital, related to the Company's repurchase of $20 million of common stock during the first quarter of 2019 and $21 million of dividend payments during the first half of 2019 partially offset by stock-based compensation activity of $9 million for the six months ended June 30, 2019.2020.
Liquidity and Capital Resources
We have historically satisfied our liquidity needs with cash flows from operations and funds available under our Revolving Credit Facility and securitization facilities. Our primary liquidity needs have been to service our debt and finance our working capital and capital expenditures and, since August 2016, pay dividends. While we previously also acquired
stock under share repurchase programs (from February 2016 to February 2019), we announced in March 2019 that weexpenditures. We currently expect to prioritize investing in our business and reducing indebtedness untilindebtedness. Accordingly, we are able to reducediscontinued acquiring stock under our consolidated leverage ratio (as definedshare repurchase programs in the indenture governing the 9.375% Senior Notes) to below 4.00 to 1.00.
Historically, operating results and revenues for all of our businesses have been strongest in the second and third quarters of the calendar year. A significant portion of the expenses we incur in our real estate brokerage operations are related to marketing activities and commissions and therefore, are variable. However, many of our other expenses, such as interest payments, facilities costs and certain personnel-related costs, are fixed and cannot be reduced during the seasonal fluctuations in the business. Consequently, our 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 June 30, 2020, our total debt, excluding our securitization obligations, was $4,043 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 worsening of the residential real estate market or a significant increase in LIBOR (or any replacement rate) or ABR.
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 outstanding borrowingsAs noted under Liquidity and Capital Resources Update, our Revolving Credit Facility. In February 2019, the Company had 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. The covenants in the indenture governing the 9.375% Senior Notes are substantially similar to the covenants in the indentures governing the 5.250% Senior Notes and the 4.785% Senior Notes, with certain exceptions, including changes relating to the Company’s ability to make restricted payments, including its ability to repurchase shares and make dividend payments in excess of $45 million per calendar yearnearest debt maturity is not until the Company's consolidated leverage ratio is below 4.00 to 1.00.
In addition, we are required to pay quarterlyearly 2023 (other than amortization payments for theunder our Term Loan B and Term Loan A facilities. Remaining payments for 2019 total $9 million and $5 million forFacilities) as we redeemed all of our outstanding 5.25% Senior Notes in June 2020 using 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.proceeds from our 7.625% Senior Secured Second Lien Notes, together with cash on hand.
Beginning in August 2016, we initiated and paid a quarterly cash dividend of $0.09 per share and paid $0.09 per share cash dividends in every subsequent quarter. During the first half of 2019, we returned $21 million to stockholders through dividend payments.
Although we have not repurchased any shares under the share repurchase programs since February 2019, as of At June 30, 2019,2020, we had repurchased and retired 35.5 million shareswere in compliance with the financial covenant in each of common stock for an aggregate of $896 million under share repurchase programs at a weighted average market price of $25.22 per share. See Part II, Item 2. ("Unregistered Sales of Equity Securities and Use of Proceeds") in this Quarterly Report for additional information concerning the share repurchase programs. As noted above, we do not intend to repurchase common stock pursuant to our share repurchase programs until we reduce our consolidated leverage ratio.
The timing, frequency or amounts of any dividends 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’s financial condition and results of operations, contractual restrictions, including restrictive covenants contained in the Senior Secured Credit Agreement and the Term Loan A Agreement with a senior secured leverage of 3.29 to 1.00 (as compared to the maximum ratio then permitted of 4.75 to 1.00) with secured debt (net of readily available cash) of $2,026 million and trailing four quarters EBITDA calculated on a Pro Forma Basis (as those terms are defined in the indenturescredit agreement governing the Unsecured Notes, capital requirements, capital allocation strategySenior Secured Credit Facility) of $616 million.
Following our entry into the Amendments on July 24, 2020, the financial covenant contained in each of the Senior Secured Credit Agreement and Term Loan A Agreement has been eased to require that Realogy Group maintain a senior secured leverage ratio not to exceed 6.50 to 1.00 commencing with the third quarter of 2020 through and including the second quarter of 2021 and thereafter will step down on a quarterly basis to 4.75 to 1.00 (which was the applicable level prior to the effectiveness of the Amendments) on and after the second quarter of 2022.
The Amendments do not change either the commitments or pricing applicable to our Senior Secured Credit Facility (which includes our Revolving Credit Facility) or Term Loan A Facility.
The Amendments tighten certain other covenants during the period commencing on July 24, 2020 until we issue our financial results for the third quarter of 2021 and concurrently deliver an officer’s certificate to our lenders showing compliance with the quarterly financial covenant, subject to earlier termination (the “covenant period”). If Realogy Group’s senior secured leverage ratio does not exceed 5.50 to 1.00 for the fiscal quarter ending June 30, 2021, the covenant period will end at the time we deliver the compliance certificate to the lenders for such period; however, in either instance, the gradual step down in the senior secured leverage ratio, as described above, will continue to apply.The covenants revised during the covenant period include the reduction or elimination of the amount available for certain types of additional indebtedness, liens, restricted payments (including other potential uses of cash)dividends and other factors that the Board of Directors deems relevant.stock repurchases), investments (including acquisitions and joint ventures), and voluntary junior debt repayments.
We also may also fromelect to end the covenant period at any time, provided the senior secured leverage ratio does not exceed 4.75 to time seek1.00 as of the most recently ended quarter for which financial statements have been delivered. In such event, the leverage ratio will reset to repurchasethe pre-Amendment level of 4.75 to 1.00 thereafter.
We believe that we will continue to be in compliance with the senior secured leverage ratio and meet 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 restrictionscash flow needs during the next twelve months.
For additional information, see below under the header "Financial Obligations—Covenants under the Senior Secured Credit Facility, Term Loan A Facility and other factors.Indentures".
We will continue to evaluate potential refinancing and financing transactions.transactions, subject to the Amendments during the covenant period, including refinancing certain tranches of our indebtedness and extending maturities, among other potential alternatives, such public or private placements of our common stock or preferred stock (either of which could, among other things, dilute our current stockholders and materially and adversely affect the market price of our common stock). There can be no assurance as to which, if any, of these alternatives we may pursue as the choice of any alternative will depend upon numerous factors such as market conditions, our financial performance and the limitations applicable to such transactions under our existing financing agreements and the consents we may need to obtain under the relevant documents. There can be no assurance that financing willFinancing may not be available to us on commercially reasonable terms, on terms that are acceptable termsto us, or at all. Any future indebtedness may impose various additional restrictions and covenants on us which could limit our ability to respond to market conditions, to make capital investments or to take advantage of business opportunities.
Subject to the restrictions against voluntary payments of junior debt that apply to us during the covenant period under the Amendments, we may from time to time seek to repurchase our outstanding Unsecured Notes or 7.625% Senior Secured Second Lien Notes through tender offers, open market purchases, privately negotiated transactions or otherwise. Such
repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.
Under the Amendments, we are restricted from making certain restricted payments, including dividend payments or share repurchases during the covenant period. The covenants in the indentures governing the 9.375% Senior Notes and 7.625% Senior Secured Second Lien Notes further 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 A and Term Loan B facilities. Remaining payments for 2020 total $19 million and $5 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 June 30, 2019,2020, we had $278$686 million of cash, cash equivalents and restricted cash, an increase of $40$451 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 six months ended June 30, 2020 and 2019:
| | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | |
| 2020 | | 2019 | | Change |
Cash provided by (used in) activities from continuing operations: | | | | | |
Operating activities | $ | 35 | | | $ | 113 | | | $ | (78) | |
Investing activities | (55) | | | (58) | | | 3 | |
Financing activities | 571 | | | 70 | | | 501 | |
For the six months ended June 30, 2020, $78 millionless cash was provided by operating activities from continuing operations compared to the same period in 2019 principally due to:
•$63 million more cash used for accounts payable, accrued expenses and 2018:other liabilities;
•$63 million less cash provided by operating results; and
•$7 million more cash used for other operating activities,
partially offset by:
•$30 million more cash provided by the net change in trade receivables;
•$21 million more cash dividends received primarily from Guaranteed Rate Affinity; and
•$4 million less cash used for other assets.
For the six months ended June 30, 2020, we used $3 million less cash for investing activities from continuing operations compared to the same period in 2019 primarily due to:
•$9 million less cash used for property and equipment additions; and
•$8 million less cash used for investments in unconsolidated entities,
partially offset by $14 million more cash used for other investing activities primarily due to the reinvestment of certificates of deposit.
For the six months ended June 30, 2020, $571 million of cash wasprovided by financing activities from continuing operations compared to $70 million of cash provided during the same period in 2019.
For the six months ended June 30, 2020, $571 million of cash provided by financing activities from continuing operations related to $625 million of additional borrowings under the Revolving Credit Facility, partially offset by:
•$19 million of quarterly amortization payments on the term loan facilities;
•$15 million of cash paid as a result of the refinancing transactions in the second quarter of 2020;
|
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2019 | | 2018 | | Change |
Cash provided by (used in): | | | | | |
Operating activities | $ | 56 |
| | $ | 9 |
| | $ | 47 |
|
Investing activities | (62 | ) | | (45 | ) | | (17 | ) |
Financing activities | 46 |
| | 42 |
| | 4 |
|
Effects of change in exchange rates on cash, cash equivalents and restricted cash | — |
| | (1 | ) | | 1 |
|
Net change in cash, cash equivalents and restricted cash | $ | 40 |
| | $ | 5 |
| | $ | 35 |
|
•$15 million of other financing payments primarily related to finance leases; and•$5 million of tax payments related to net share settlement for stock-based compensation.
For the six months ended June 30, 2019, $47 million more cash was provided by operating activities compared to the same period in 2018. The change was principally due to $61 million more cash provided by the net change in relocation and trade receivables, $54 million less cash used for accounts payable, accrued expenses and other liabilities and $9 million less cash used for other assets, partially offset by $82 million less cash provided by operating results.
For the six months ended June 30, 2019, we used $17 million more cash for investing activities compared to the same period in 2018 primarily due to the absence in 2019 of $19$70 million of net cash proceeds received from the dissolution of our interest in PHH Home Loans which occurred in 2018.
For the six months ended June 30, 2019, $46 million of cash was provided by financing activities compared to $42 million of cash provided during the same period in 2018. For the six months ended June 30, 2019, $46 million of cash was provided by the following:from continuing operations related to:
•$9187 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 Notes2019; and $9 million of debt issuance costs; and
•$60 million of additional borrowings under the Revolving Credit Facility;Facility,
partially offset by,by:
a $27 million net decrease in securitization borrowings;
•$21 million of dividend payments;
•$20 million for the repurchase of our common stock;
•$15 million of quarterly amortization payments on the term loan facilities;
•$1013 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.
For the six months ended June 30, 2018, $42 million of cash was provided by the following:
$242 million of additional borrowings under the Revolving Credit Facility; and
$67 million net increase in securitization borrowings;
partially offset by,
$200 million for the repurchase of our common stock;
$23 million of dividend payments;
$17 million of other financing payments primarily related to capital leases;
$10 million of tax payments related to net share settlement for stock-based compensation;
$10 million of quarterly amortization payments on the term loan facilities;
$4 million for payments of contingent consideration; and
$3 million for cash paid as a result of the refinancing transactions in February 2018 related to $16 million of debt issuance costs and $4 million repayment of borrowings under the Term Loan B Facility, partially offset by $17 million of proceeds received under the Term Loan A Facility.
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 June 30, 2019.2020.
Issuance of $550 million of 7.625% Senior Secured Second Lien Notes and Redemption of $550 million of 5.25% Senior Notes
In June 2020, we issued $550 million 7.625% Senior Secured Second Lien Notes due in June 2025. We used the entire net proceeds from the offering, together with cash on hand, to fund the redemption of all of our outstanding 5.25% Senior Notes due 2021, and to pay related interest, premium, fees, and expenses.
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 June 30, 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 and 7.625% Senior Secured Second Lien Notes contain various covenants that limit (subject to certain exceptions) Realogy Group’s ability to, among other things:
•incur or guarantee additional debt or issue disqualified stock or preferred stock;
•pay dividends or make distributions to Realogy Group’s stockholders, including Realogy Holdings;
•repurchase or redeem capital stock;
•make loans, investments or acquisitions;
•incur restrictions on the ability of certain of Realogy Group's subsidiaries to pay dividends or to make other payments to Realogy Group;
•enter into transactions with affiliates;
•create liens;
•merge or consolidate with other companies or transfer all or substantially all of Realogy Group's and its material subsidiaries' assets;
•transfer or sell assets, including capital stock of subsidiaries; and
•prepay, redeem or repurchase subordinated indebtedness.
Pursuant to the Amendments to the Senior Secured Credit Agreement and Term Loan A Agreement, certain of these restrictions were tightened, including reducing (or eliminating) the amount available for certain types of additional indebtedness, liens, restricted payments (including dividends and stock repurchases), investments (including acquisitions and joint ventures), and voluntary junior debt repayments. Under the Amendments, we are permitted during the covenant period to obtain up to $50 million of additional credit facilities on a combined basis (less any amounts previously incurred under this provision) from lenders reasonably satisfactory to the administrative agent and us, without the consent of the existing lenders under the Senior Secured Credit Agreement or Term Loan A Agreement. In addition, during the covenant period under the Amendments, our ability to issue senior secured or unsecured notes is limited to the use of financings junior to our first lien debt to refinance the Unsecured Notes or 7.625% Senior Secured Second Lien Notes.
As a result of the covenants to which we remain subject, we are limited in the manner in which we conduct our business and we may be unable to engage in favorable business activities or finance future operations or capital needs. In addition, the Senior Secured Credit Agreement and Term Loan A Agreement require us to maintain a senior secured leverage ratio. We are further restricted under the indentureindentures governing the 9.375% Senior Notes and 7.625% Senior Secured Second Lien 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 4.04.00 to 1.01.00 and then (unless that ratio falls below 3:003.00 to 1:00)1.00) only to the extent of available cumulative credit, as defined under the indenture governing the 9.375% Senior Notes.those indentures.
Senior Secured Leverage Ratio applicable to our Senior Secured Credit Facility and Term Loan A Facility
The senior secured leverage ratio is tested quarterly and mayquarterly. Prior to the Amendments (including at June 30, 2020), the senior secured leverage ratio could not exceed 4.75 to 1.00. Pursuant to the Amendments, the financial covenant contained in each of the Senior Secured Credit Agreement and Term Loan A Agreement has been amended to require that Realogy Group maintain a senior secured leverage ratio not to exceed 6.50 to 1.00 commencing with the third quarter of 2020 through and including the second quarter of 2021 and thereafter will step down on a quarterly basis to 4.75 to 1.00 (which was the applicable level prior to the effectiveness of the Amendments) on and after the second quarter of 2022.
The senior secured leverage ratio is measured by dividing Realogy 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 the 7.625% Senior Secured Second Lien Notes, our unsecured indebtedness, including the Unsecured Notes, or the securitization obligations. EBITDA calculated on a Pro Forma Basis, as defined in the Senior Secured Credit Agreement, includes adjustments to EBITDA for restructuring, retention and disposition costs, former parent legacy cost (benefit) items, net, loss (gain) on the early extinguishment of debt, non-cash charges and incremental securitization interest costs, as well as pro forma cost savings for restructuring initiatives, the pro forma effect of business optimization initiatives and the pro forma effect of acquisitions and new franchisees, in each case calculated as of the beginning of the trailing four-quarter period. The Company was in compliance with the senior secured leverage ratio covenant at June 30, 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 June 30, 20192020 is set forth in the following table:
| | | | | | | | | | | | | | Less | | Equals | | Plus | | Equals |
| | | Less | | Equals | | Plus | | Equals | | Year Ended | | Six Months Ended | | Six Months Ended | | Six Months Ended | | Twelve Months Ended |
| Year Ended | | Six Months Ended | | Six Months Ended | | Six Months Ended | | Twelve Months Ended | | December 31, 2019 | | June 30, 2019 | | December 31, 2019 | | June 30, 2020 | | June 30, 2020 |
| December 31, 2018 | | June 30, 2018 | | December 31, 2018 | | June 30, 2019 | | June 30, 2019 | |
Net income (loss) attributable to Realogy Group (a) | $ | 137 |
| | $ | 56 |
| | $ | 81 |
| | $ | (30 | ) | | $ | 51 |
| |
Income tax expense (benefit) | 65 |
| | 33 |
| | 32 |
| | (1 | ) | | 31 |
| |
Income (loss) before income taxes | 202 |
| | 89 |
| | 113 |
| | (31 | ) | | 82 |
| |
Depreciation and amortization (b) | 197 |
| | 99 |
| | 98 |
| | 99 |
| | 197 |
| |
Net loss attributable to Realogy Group (a) | | Net loss attributable to Realogy Group (a) | $ | (188) | | | $ | (30) | | | $ | (158) | | | $ | (476) | | | $ | (634) | |
Income tax (benefit) expense | | Income tax (benefit) expense | (22) | | | 1 | | | (23) | | | (121) | | | (144) | |
Loss before income taxes | | Loss before income taxes | (210) | | | (29) | | | (181) | | | (597) | | | (778) | |
Depreciation and amortization | | Depreciation and amortization | 169 | | | 84 | | | 85 | | | 91 | | | 176 | |
Interest expense, net | 190 |
| | 79 |
| | 111 |
| | 144 |
| | 255 |
| Interest expense, net | 249 | | | 143 | | | 106 | | | 160 | | | 266 | |
Restructuring costs, net | 58 |
| | 36 |
| | 22 |
| | 21 |
| | 43 |
| Restructuring costs, net | 42 | | | 18 | | | 24 | | | 25 | | | 49 | |
Impairment | — |
| | — |
| | — |
| | 3 |
| | 3 |
| |
Impairments | | Impairments | 249 | | | 3 | | | 246 | | | 454 | | | 700 | |
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 |
| | 310 |
| | 348 |
| | 241 |
| | 589 |
| |
(Gain) loss on the early extinguishment of debt | | (Gain) loss on the early extinguishment of debt | (5) | | | 5 | | | (10) | | | 8 | | | (2) | |
Income statement impact of discontinued operations | | Income statement impact of discontinued operations | 95 | | | 17 | | | 78 | | | 66 | | | 144 | |
Operating EBITDA including discontinued operations (b) | | Operating EBITDA including discontinued operations (b) | 590 | | | 241 | | | 349 | | | 207 | | | 556 | |
Bank covenant adjustments: | Bank covenant adjustments: | | | Bank covenant adjustments: | | |
Operating EBITDA for discontinued operations (c) | | Operating EBITDA for discontinued operations (c) | | | (22) | |
Pro forma effect of business optimization initiatives (d) | Pro forma effect of business optimization initiatives (d) | | 28 |
| Pro forma effect of business optimization initiatives (d) | | | 44 | |
Non-cash charges (e) | Non-cash charges (e) | | 33 |
| Non-cash charges (e) | | | 29 | |
Pro forma effect of acquisitions and new franchisees (f) | Pro forma effect of acquisitions and new franchisees (f) | | 3 |
| Pro forma effect of acquisitions and new franchisees (f) | | | 6 | |
Incremental securitization interest costs (g) | | 3 |
| |
Costs expensed related to the disposition | | Costs expensed related to the disposition | | | 3 | |
EBITDA as defined by the Senior Secured Credit Agreement | EBITDA as defined by the Senior Secured Credit Agreement | | $ | 656 |
| EBITDA as defined by the Senior Secured Credit Agreement | | | $ | 616 | |
Total senior secured net debt (h) | | $ | 1,991 |
| |
Total senior secured net debt (g) | | Total senior secured net debt (g) | | | $ | 2,026 | |
Senior secured leverage ratio | Senior secured leverage ratio | | 3.04 | x | Senior secured leverage ratio | | | 3.29 | x |
_______________
| |
(a) | Net income (loss) attributable to Realogy consists of: (i) income of $103 million for the third quarter of 2018, (ii) loss of $22 million for the fourth quarter of 2018, (iii) a loss of $99 million for the first quarter of 2019 and (iv) income of $69 million for the second 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) $242 million for the third quarter of 2018, (ii) $106 million for the fourth quarter of 2018, (iii) negative $4 million for the first quarter of 2019 and (iv) $245 million for the second quarter of 2019. |
| |
(d) | Represents the four-quarter pro forma effect of business optimization initiatives. |
| |
(e) | Represents the elimination of non-cash expenses including $34 million of stock-based compensation expense partially offset by $1 million of other items for the four-quarter period ended June 30, 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 July 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 July 1, 2018. |
| |
(g) | Incremental borrowing costs incurred as a result of the securitization facilities refinancing for the four-quarter period ended June 30, 2019. |
| |
(h) | Represents total borrowings under the senior secured credit facilities and borrowings secured by a first priority lien on our assets of $2,121 million plus $33 million of finance lease obligations less $163 million of readily available cash as of June 30, 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. |
(a)Net loss attributable to Realogy consists of: (i) loss of $113 million for the third quarter of 2019, (ii) loss of $45 million for the fourth quarter of 2019, (iii) loss of $462 million for the first quarter of 2020 and (iv) loss of $14 million for the second quarter of 2020.
(b)Consists of Operating EBITDA including discontinued operations of: (i) $223 million for the third quarter of 2019, (ii) $126 million for the fourth quarter of 2019, (iii) $32 million for the first quarter of 2020 and (iv) $175 million for the second 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 3.18x from 3.29x.
(d)Represents the four-quarter pro forma effect of business optimization initiatives.
(e)Represents the elimination of non-cash expenses including $24 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 June 30, 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 July 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 July 1, 2019.
(g)Represents total borrowings under the Senior Secured Credit Facility (including the Revolving Credit Facility and Term Loan B Facility) and Term Loan A Facility and borrowings secured by a first priority lien on our assets of $2,571 million plus $34 million of finance lease obligations less $579 million of readily available cash as of June 30, 2020. Pursuant to the terms of our senior secured credit facilities, total senior secured net debt does not include our securitization obligations, 7.625% Senior Secured Second Lien Notes or unsecured indebtedness, including the Unsecured Notes.
Consolidated Leverage Ratio applicable to our 9.375% Senior Notes and 7.625% Senior Secured Second Lien Notes
The consolidated leverage ratio is measured by dividing Realogy Group's total net debt by the trailing four quarter EBITDA. EBITDA, as defined in the indentureindentures governing the 9.375% Senior Notes and 7.625% Senior Secured Second Lien Notes, is substantially similar to EBITDA calculated on a Pro Forma Basis, as those terms are defined in the Senior Secured Credit Agreement. 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 indentureindentures governing the 9.375% Senior Notes and 7.625% Senior Secured Second Lien Notes for the four-quarter period ended June 30, 20192020 is set forth in the following table:
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| | | | |
| | As of June 30, 2019 |
Revolver | | $ | 330 |
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Term Loan A | | 727 |
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Term Loan B | | 1,064 |
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5.25% Senior Notes | | 550 |
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4.875% Senior Notes | | 500 |
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9.375% Senior Notes | | 550 |
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Finance lease obligations | | 33 |
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Corporate Debt (excluding securitizations) | | 3,754 |
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Less: Cash and cash equivalents | | 270 |
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Net debt under the indenture governing the 9.375% Senior Notes due 2027 | | $ | 3,484 |
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| | |
EBITDA as defined under the indenture governing the 9.375% Senior Notes due 2027 (a) | | $ | 656 |
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| | |
Consolidated leverage ratio under the indenture governing the 9.375% Senior Notes due 2027 | | 5.3 | x |
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(a) | | As set forth in the immediately preceding table, for the four-quarter period endedof June 30, 2019, 2020 |
Revolver | | $ | 815 | |
Term Loan A | | 703 | |
Term Loan B | | 1,053 | |
7.625% Senior Secured Second Lien Notes | | 550 | |
4.875% Senior Notes | | 407 | |
9.375% Senior Notes | | 550 | |
Finance lease obligations | | 34 | |
Corporate Debt (excluding securitizations) | | 4,112 | |
Less: Cash and cash equivalents | | 686 | |
Net debt under the indenture governing the 9.375% Senior Notes and 7.625% Senior Secured Second Lien Notes | | $ | 3,426 | |
| | |
EBITDA as defined under the indenture governing the 9.375% Senior Notes was the same as EBITDA calculated on a Pro Forma Basis, as those terms are defined in theand 7.625% Senior Secured Credit Agreement.Second Lien Notes (a) | | $ | 616 | |
| | |
Consolidated leverage ratio under the indenture governing the 9.375% Senior Notes and 7.625% Senior Secured Second Lien Notes | | 5.6 | x |
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(a)As set forth in the immediately preceding table, for the four-quarter period ended June 30, 2020, EBITDA, as defined under the indentures governing the 9.375% Senior Notes and 7.625% Senior Secured Second Lien Notes, was the same as EBITDA calculated on a Pro Forma Basis, as those terms are defined in the Senior Secured Credit Agreement.
See Note 5, "Short and Long-Term Debt—Senior Secured Credit Facility", "—Term Loan A Facility", "—Unsecured Notes" and "—Unsecured Notes"Senior Secured Second Lien Notes", to the Condensed Consolidated Financial Statements for additional information.
At June 30, 2019,2020 the amount of the Company's cumulative credit under the 9.375% Senior Notes and 7.625% Senior Secured Second Lien Notes was approximately $23$129 million. DuringUnder the second quarterterms of 2019, the indentures governing the 9.375% Senior Notes and 7.625% Senior Secured Second Lien Notes, the Company may utilize its cumulative credit to make restricted payments when the Company's consolidated leverage ratio is less than 4.00 to 1.00, provided that any such restricted payments will reduce the amount of cumulative credit available for future restricted payments. The Company made approximately $11$21 million in dividend payments which applied againstin 2019 after the issuance of the 9.375% Senior Notes (but prior to the issuance of the 7.625% Senior Secured Second Lien Notes) and accordingly at June 30, 2020, the cumulative credit basket available for restricted payments was approximately $108 million under the indenture governing the 9.375% Senior Notes would result inand approximately $12$129 million remaining under that basket for restricted payments. This basket cannotthe indenture governing 7.625% Senior Secured Second Lien Notes. However, neither of these baskets may generally be utilized until the Company's consolidated leverage ratio is less than 4.0 to 1.0. In any event, during the covenant period under the Amendments to the Senior Secured Credit Facility and Term Loan A Facility, the Company is generally restricted from making restricted payments.
Non-GAAP Financial Measures
The SEC has adopted rules to regulate the use in filings with the SEC and in public disclosures of "non-GAAP financial measures," such as 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:
•this measure does not reflect changes in, or cash required for, our working capital needs;
•this measure does not reflect our interest expense (except for interest related to our securitization obligations), or the cash requirements necessary to service interest or principal payments on our debt;
•this measure does not reflect our income tax expense or the cash requirements to pay our taxes;
•this measure does not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments;
•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often require replacement in the future, and this measure does not reflect any cash requirements for such replacements; and
•other companies may calculate this measure differently so they may not be comparable.
Operating EBITDA including discontinued operations includes Operating EBITDA, as defined above plus the Operating EBITDA contribution from discontinued operations on the same basis. Contractual Obligations
See Note 5, "Short and Long-Term Debt—Senior Secured Credit Facility" and "—Unsecured Notes", to the Condensed Consolidated Financial Statements included elsewhere in this Report for a description ofOther than the Company's debt transactions which occurred during the second quarter of 2020, resulting in the issuance of $550 million of 7.625% Senior Secured Second Lien Notes due 2025 and the redemption of $550 million of 5.25% Senior Notes due 2021, and the Company's draw on the Revolving Credit Facility during the first quarter of 2019. Other than the Company's debt transactions2020 as described in Note 5, "Short and Long-Term Debt", included elsewhere in this Quarterly Report, the Company's future contractual obligations as of June 30, 20192020 have not changed materially from the amounts reported in our 20182019 Form 10-K.
Critical Accounting Policies
In presenting our financial statements in conformity with generally accepted accounting principles, we are required to make estimates and assumptions that affect the amounts reported therein. Several of the estimates and assumptions we are required to make relate to matters that are inherently uncertain as they pertain to future events. However, events that are outside of our control cannot be predicted and, as such, they cannot be contemplated in evaluating such estimates and assumptions. If there is a significant unfavorable change to current conditions, it could result in a material adverse impact to our combined results of operations, financial position and liquidity. We believe that the estimates and assumptions we used when preparing our financial statements were the most appropriate at that time.
These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2018,2019, which includes a
description of our critical accounting policies that involve subjective and complex judgments that could potentially affect reported results.
Impairment of goodwill and other indefinite-lived intangible assets
Goodwill representsSee Note 3, "Goodwill and Intangible Assets", to the excessCondensed Consolidated Financial Statements for a discussion on impairment of acquisition costs over the fair value of the net tangible assets and identifiable intangible assets acquired in a business combination. Indefinite-lived intangible assets primarily consist of trademarks acquired in business combinations. Goodwill and indefinite-lived assets are not amortized, but are subject to impairment testing. The aggregate carrying values of our goodwill and other indefinite-lived intangible assets were $3,712 million and $768 million, respectively, at June 30, 2019 and are subject to impairment testing annually as of October 1, or whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. This testing compares carrying values to fair values and, when appropriate, the carrying value is reduced to fair value. In testing goodwill, the fair value of our reporting units is estimated using a discounted cash flow approach utilizing long-term cash flow forecasts and our annual operating plans adjusted for terminal value assumptions.
We determine the fair value of our reporting units utilizing our best estimate of future revenues, operating expenses including commission expense, cash flows, market and general economic conditions as well as assumptions that we believe marketplace participants would utilize including discount rates, cost of capital, trademark royalty rates, and long-term growth rates. The trademark royalty rate was determined by reviewing similar trademark agreements with third parties. Although we believe our assumptions are reasonable, actual results may vary significantly. These impairment tests involve the use of accounting estimates and assumptions, changes in which could materially impact our financial condition or
operating performance if actual results differ from such estimates and assumptions. To address this uncertainty, we perform a sensitivity analysis on key estimates and assumptions.
Based upon the impairment analysis performed in the fourth quarter of 2018, there was no impairment of goodwill or other indefinite-lived intangible assets for 2018. Management evaluated the effect of lowering the estimated fair value for each of the reporting units by 10% and determined that no impairment of goodwill or other indefinite-lived intangible assets would have been recognized under this evaluation.
Significant negative industry or economic trends, disruptions to our business, unexpected significant changes or planned changes in use of the assets, a decrease in our business results, growth rates that fall below our assumptions, divestitures, and a sustained decline in our stock price and market capitalization may have a negative effect on the fair values and key valuation assumptions, and such changes could result in changes to our estimates of our fair value and a material impairment of goodwill or other indefinite-lived intangible assets. Management considered these factors and does not believe that it was more likely than not that the fair value of a reporting unit is less than its carrying amount.
Recently Issued Accounting Pronouncements
See Note 1, "Basis of Presentation", to the Condensed Consolidated Financial Statements for a discussion of recently issued accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosures about Market Risks.
We are exposed to market risk from changes in interest rates primarily through our senior secured debt. At June 30, 2019,2020, our primary interest rate exposure was to interest rate fluctuations, specifically LIBOR, due to its impact on our variable rate borrowings of our Revolving Credit Facility and Term Loan B under the Senior Secured Credit Facility and the Term Loan A Facility. Given that our borrowings under the Senior Secured Credit Facility and Term Loan A Facility are generally based upon LIBOR, this rate (or any replacement rate) will be the Company's primary market risk exposure for the foreseeable future. We do not have significant exposure to foreign currency risk nor do we expect to have significant exposure to foreign currency risk in the foreseeable future.
We assess our market risk based on changes in interest rates utilizing a sensitivity analysis. The sensitivity analysis measures the potential impact on earnings, fair values and cash flows based on a hypothetical change (increase and decrease) in interest rates. We exclude the fair values of relocation receivables and advances and securitization borrowings from our sensitivity analysis because we believe the interest rate risk on these assets and liabilities is mitigated as the rate we earn on relocation receivables and advances and the rate we incur on our securitization borrowings are based on similar variable indices.
At June 30, 2019,2020, we had variable interest rate long-term debt outstanding under our Senior Secured Credit Facility and Term Loan A Facility of $2,121 million, which excludes $204 million of securitization obligations.$2,571 million. The weighted average interest rate on the outstanding amounts under our Senior Secured Credit Facility and Term Loan A Facility at June 30, 20192020 was 4.65%2.65%. The interest rate with respect to the Term Loan B is based on adjusted LIBOR plus 2.25% (with a LIBOR floor of 0.75%). The interest rates with respect to the Revolving Credit Facility and term loans under the Term Loan A Facility are based on adjusted LIBOR plus an additional margin subject to adjustment based on the current senior secured leverage ratio. Based on the June 30, 20192020 senior secured leverage ratio, the LIBOR margin was 2.25%. At June 30, 2019,2020, the one-month LIBOR rate was 2.40%0.16%; therefore, we have estimated that a 0.25% increase in LIBOR would have a $5$4 million impact on our annual interest expense.
As of June 30, 2019,2020, we had interest rate swaps with a notional value of $1,600 million to manage a portion of our exposure to changes in interest rates associated with our $2,121$2,571 million of variable rate borrowings. Our interest rate swaps were as follows:
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| | | | | | | | | | | | | | | | |
Notional Value (in millions) | | Commencement Date | | Expiration Date | |
$600 | | August 2015 | | August 2020 | (a) |
$450 | | November 2017 | | November 2022 | |
$400 | | August 2020 | (a) | August 2025 | |
$150 | | November 2022 | | November 2027 | |
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(a)Interest rate swaps with a notional value of $600 million expire on August 7, 2020, and interest rate swaps with a notional value of $400 million commence on August 14, 2020.
The swaps help protect our outstanding variable rate borrowings from future interest rate volatility. The fixed interest rates on the swaps range from 2.07% to 3.11%. The Company had a liability of $48$99 million for the fair value of the interest
rate swaps at June 30, 2019.2020. The fair value of these interest rate swaps is subject to movements in LIBOR and will fluctuate in future periods. We have estimated that a 0.25% increase in the LIBOR yield curve would increase the fair value of our interest rate swaps by $12$10 million and would decrease interest expense. While these results may be used as a benchmark, they should not be viewed as a forecast of future results.
Item 4. Controls and Procedures.
Controls and Procedures for Realogy Holdings Corp.
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(a) | Realogy Holdings Corp. ("Realogy Holdings") maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its filings under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to its management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Realogy Holdings' management, including the Chief Executive Officer and the Chief Financial Officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. |
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(b) | As of the end of the period covered by this quarterly report on Form 10-Q, Realogy Holdings has carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that Realogy Holdings' disclosure controls and procedures are effective at the "reasonable assurance" level. |
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(c) | There has not been any change in Realogy Holdings' internal control over financial reporting during the period covered by this quarterly report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting. |
(a)Realogy Holdings Corp. ("Realogy Holdings") maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its filings under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to its management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Realogy Holdings' management, including the Chief Executive Officer and the Chief Financial Officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
(b)As of the end of the period covered by this quarterly report on Form 10-Q, Realogy Holdings has carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that Realogy Holdings' disclosure controls and procedures are effective at the "reasonable assurance" level.
(c)There has not been any change in Realogy Holdings' internal control over financial reporting during the period covered by this quarterly report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.
Controls and Procedures for Realogy Group LLC
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(a) | Realogy Group LLC ("Realogy Group") maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its filings under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to its management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Realogy Group's management, including the Chief Executive Officer and the Chief Financial Officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. |
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(b) | As of the end of the period covered by this quarterly report on Form 10-Q, Realogy Group has carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that Realogy Group's disclosure controls and procedures are effective at the "reasonable assurance" level. |
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(c) | There has not been any change in Realogy Group's internal control over financial reporting during the period covered by this quarterly report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting. |
(a)Realogy Group LLC ("Realogy Group") maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its filings under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to its management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Realogy Group's management, including the Chief Executive Officer and the Chief Financial Officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
(b)As of the end of the period covered by this quarterly report on Form 10-Q, Realogy Group has carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that Realogy Group's disclosure controls and procedures are effective at the "reasonable assurance" level.
(c)There has not been any change in Realogy Group's internal control over financial reporting during the period covered by this quarterly report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.
Other Financial Information
The Condensed Consolidated Financial Statements as of June 30, 20192020 and for the three-monththree and six-month periods ended June 30, 20192020 and 20182019 have been reviewed by PricewaterhouseCoopers LLP, an independent registered public accounting firm. Their reports, dated August 8, 2019,6, 2020, are included on pages 34 and 4.5. The reports of PricewaterhouseCoopers LLP state that they did not audit and they do not express an opinion on that unaudited financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 (the "Act") for their report on the unaudited financial information because that report is not a "report" or a "part" of the registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 9, "Commitments and Contingencies—Litigation", to the Condensed Consolidated Financial Statements included elsewhere in this quarterly report on Form 10-Q for additional information on the Company's legal proceedings.
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 and even cases brought by us can involve counterclaims asserted against us. In addition, litigation and other legal matters, including class action lawsuits orand regulatory proceedings challenging practices that have broad impact can be costly to defend and, depending on the class size and claims, could be costly to settle. As such, the Company could incur judgments or enter into settlements of claims with liability that are materially in excess of amounts accrued and these settlements could have a material adverse effect on the Company’s financial condition, results of operations or cash flows in any particular period.
* * *
Litigation, investigations and claims against other participants in the residential real estate industry may impact the Company and its affiliated franchisees when the rulings or settlements in those cases cover practices common to the broader industry. Examples may include claims associated with RESPA compliance, broker fiduciary duties, multiple listing service practices, and sales agent classification.classification and federal and state fair housing laws. The Company also may be impacted by litigation and other claims against companies in other industries. Changes in current legislation, regulations or interpretations that are applicable to the residential real estate service industry may also impact the Company.
For example, there is active worker classification litigation in numerousseveral jurisdictions against a variety of industries—now including residential real estate brokerages in multiple states, including California and New Jersey—where the plaintiffs seek to reclassify independent contractors as employees or to challenge the use of federal and state minimum wage and overtime exemptions. This type of litigation has been particularly prolific in California since the California Supreme Court adopted a worker classification test in the second quarter of 2018 that is significantly more restrictive than those historically used in wage and hour cases. TheIn September 2019, this judicial worker classification test was codified into California State Legislature is currently considering legislation that, if adopted, would codify the judicial test adopted by the California Supreme Court into statutory law, but wouldthe adopted legislation also codifyprovides an alternate worker classification test provisions applicable to certain classes of workers (including real estate professionals)professionals that if applicable, may beis less restrictive than the judicial test. There can be no assurances
Since the enactment, there have been several challenges to the constitutionality and enforceability of this law as it applies to whetherother industries, which may ultimately impact the California State Legislature will ultimately adopt such legislation in the current form, or at all, or if adopted, that such legislation would include alternateless restrictive test provisions for some or all independentcurrently applicable to real estate sales agents or that the Company would be able to satisfy any such alternative worker classification tests established by the California courts or legislature applicable to such independent real estate sales agents.
professionals. For a summary of certain legal proceedings initiated in California againstinvolving the Company allegingthat allege worker misclassification, see Note 9, "Commitments and Contingencies—Litigation", to the Condensed Consolidated Financial Statements in this report.Quarterly Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.1A. Risk Factors
Other than as described below, there were no material changes to the risk factors reported in Part 1, "Item 1A. Risk Factors" in our 2019 Form 10-K.
The COVID-19 crisis has resulted in homesale transaction declines in the residential real estate industry and our business and continuation of the crisis could have a material adverse effect on our profitability, financial condition and results of operations.
The COVID-19 pandemic is having a profound effect on the global economy and financial markets. This unprecedented situation has created considerable risks and uncertainties for the U.S. real estate services industry in general and for the Company did not repurchase common stock duringand its affiliated franchisees in particular, including those arising from the quarteradverse effects on the economy as well as risks related to employees, independent sales agents, franchisees, and consumers.
Net revenues decreased $457 million or 27% for the three months ended June 30, 2019.2020 compared with the three months ended June 30, 2019 driven bylower homesale transaction volume at both RealogyFranchise and Brokerage Groups primarily due to the impact of the COVID-19 pandemic. Material revenue declines relating to this crisis may have a material adverse effect on our profitability, financial condition and results of operations, notwithstanding the mitigation
actions we have taken to date or may take in the future. In addition, we may determine that additional cost-saving initiatives, which may be material, are required and such additional mitigation actions may negatively impact our operations.
The duration and severity of the impact of the pandemic (and the corresponding economic and other consequences stemming from the pandemic) on our business and financial results will depend largely on future developments, which we are unable to accurately predict, including the extent and duration of the spread of the COVID-19 outbreak; the extent of related governmental regulation; the extent of related government financial support, including for franchisees, independent sales agents and corporations; evolving societal reactions to the pandemic; the duration and severity of the negative impact on the U.S. economy (including continued economic contraction) as well as capital, credit and financial markets (including with respect to increasing down payment requirements from mortgage lenders or other tighter mortgage standards or a reduction in the availability of mortgage financing as well as with respect to consumer, business and governmental credit defaults); the materiality of increases in mortgage delinquencies or foreclosure rates; the magnitude and duration of unemployment rates and adverse impact to wage growth; the related impact on consumer confidence and spending; and the magnitude of the financial and operational consequences to our franchisees, all of which are highly uncertain.
Our ability to advance our business strategy may continue to be impaired during the COVID-19 crisis.
Due to the extraordinary disruptions to us, the real estate services industry, society and the economy, and our significant debt leverage, we expect to face additional challenges to our ability to execute our growth strategy including our ability to recruit and retain independent sales agents and franchisees, provide and develop compelling data and technology programs to such agents and franchisees, and deleverage. An inability to execute our business strategy may have a material adverse effect on our profitability, financial condition and results of operations.
The COVID-19 crisis may amplify risks related to our franchise business.
Realogy Franchise Group is dependent upon the operational and financial success of current franchisees and our ability to grow our base of franchisees (without reducing contractual royalty rates or increasing the amount and prevalence of sales incentives). Affiliated franchisees have experienced, and are expected to continue to experience, similar adverse financial effects from the COVID-19 crisis as those affecting the Company and may seek reduced contractual royalty rates, increased sales incentives or other concessions at an increased level. During the crisis, eligible franchisees and independent sales agents may have benefited from certain federal and/or state programs meant to assist businesses and individuals navigate COVID-related financial challenges. Any termination or substantial curtailment of benefits under such programs could adversely effect their businesses. Our royalty revenues and profitability will decline if the financial results of our franchisees continue to worsen, if our franchisees become unable or unwilling to pay franchise fees, or we experience a material decline in our ability to enter into franchise agreements with new franchisees. In addition, the COVID-19 crisis could contribute to an acceleration in the consolidation of our top 250 franchisees, which could result in increased volume incentives and other incentives earned by such franchisees, both of which directly impact our royalty revenue. Any of the foregoing could have a material adverse effect on our revenues and profitability. Further, we may have to increase our bad debt and note reserves and terminate franchisees due to non-payment.
The COVID-19 crisis has amplified and is expected to continue to amplify risks related to our geographic and high-end market concentration.
Our company owned brokerage operations have experienced and may continue to experience even greater adverse financial consequences due to the ongoing COVID-19 crisis as a result of the significant concentration for this business in transactions at the higher end of the market and in certain geographies, including California, the New York metropolitan area and Florida, which could materially adversely affect our revenues and profitability.
A decrease in homesale transaction volume will also have an adverse impact on Realogy Title Group and our mortgage joint venture and such impact may be intensified by pronounced regional declines in the areas in which our company owned brokerages are located, given the significant geographic overlap of these businesses.
Cartus Relocation Services is subject to risks related to global relocation services, including trends in global corporate spending on relocation services, which have been and are expected to be amplified by the COVID-19 crisis.
Relocation service providers, including Cartus Relocation Services, are impacted by many of the general residential housing trends that impact our residential real estate services business, including those trends emerging in connection with the COVID-19 crisis.In addition, Cartus Relocation Services operates worldwide, which elevates risks related to the international aspects of this business. The risks involved in our international operations and relationships that could result in
losses against which we are not insured and therefore affect our profitability include, but are not limited to, heightened exposure to local economic conditions and local laws and regulations (including those related to employees), fluctuations in foreign currency exchange rates, and potential adverse changes in the political stability of foreign countries or in their diplomatic relations with the U.S.
The financial results of Cartus Relocation Services are also directly impacted by global corporate spending on relocation services, which have for several years continued to shift to lower cost relocation benefits as corporate clients engage in cost reduction initiatives and/or restructuring programs, as well as changes in employment relocation trends. As a result of a shift in the mix of services and number of services being delivered per move, Cartus Relocation Services has been increasingly subject to a competitive pricing environment and lower average revenue per relocation. Competition is expected to continue to intensify as an increasingly higher percentage of relocation clients reduce their global relocation benefits and related spend. Lower volume, in particular with respect to global relocation activity, has also impacted the operating results of Cartus Relocation Services.
The COVID-19 crisis has amplified and is expected to continue to amplify the foregoing risks and factors, which may continue to have an adverse effect on the growth and profitability of Cartus Relocation Services.
If multiple significant relocation clients cease or reduce volume under their contracts with Cartus Relocation Services, our revenues and profitability could be materially adversely affected.
Substantially all of our contracts with relocation clients of Cartus Relocation Services are terminable at any time at the option of the client, do not require such client to maintain any level of business with us and are non-exclusive. If multiple significant relocation clients cease or reduce volume under their contracts with Cartus Relocation Services, our revenues (including downstream revenue derived from relocation referrals) and profitability could be materially adversely affected.
We recognized significant non-cash impairment charges, including as related to management’s estimates with respect to the potential impact of the COVID-19 crisis on our business, and we may be required to take additional such charges in the future, which may be material.
During the first quarter of 2020, we performed an impairment assessment of goodwill and indefinite-lived intangible assets as of March 31, 2020, resulting in the recognition of a non-cash impairment of the Realogy Franchise Group trademarks and a non-cash goodwill impairment for Realogy Brokerage Group. The primary drivers to these impairments were a significant increase in the weighted average cost of capital due to the volatility in the capital and debt markets due to COVID-19 and lower projected financial results in 2020.
Given the increase in the discount rate and lower projected 2020 financial results in the first quarter of 2020 impairment analysis, the estimated excess fair value over carrying value for Realogy Franchise Group and Realogy Title Group was reduced to 7% and 5%, respectively. As a result, there is additional risk of an impairment.
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 the 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 material.
The COVID-19 crisis has amplified and may continue to amplify risks related to our significant indebtedness and could have a material adverse effect on our liquidity and financial position.
Under the Senior Secured Credit and Term Loan A Agreements, we are required to comply with financial, affirmative and negative covenants, including compliance with a senior secured leverage ratio, as defined in such agreements. A material decline in our ability to generate EBITDA calculated on a Pro Forma Basis, as defined in the Senior Secured Credit Agreement governing the Senior Secured Credit Facility, as a result of the ongoing COVID-19 crisis or otherwise, could result in our failure to comply with the senior secured leverage ratio covenant under our Senior Secured Credit Facility (including the Revolving Credit Facility) and Term Loan A Facility, which would result in an event of default if we fail to remedy or avoid a default as permitted under the applicable debt arrangement.
Upon the occurrence of an event of default under the indentures governing our Senior Notes, the trustee or holders of 25% of the outstanding applicable notes could elect to declare the principal of, premium, if any, and accrued but unpaid interest on such notes to be due and payable. If an event of default is continuing under our Senior Secured Credit Facility,
Term Loan A Facility, the indentures governing the Unsecured Notes or our other material indebtedness, such event could cause a termination of our ability to obtain future advances under, and amortization of, our Apple Ridge Funding LLC securitization program. Any of the foregoing would have a material adverse effect on our business, financial condition and results of operations.
As discussed elsewhere in this Quarterly Report, in July 2020, we entered into the Amendments to the Senior Secured Credit and Term Loan A Agreements, which will temporarily ease the required senior secured leverage ratio, but also tighten certain other covenants during the covenant period, including reducing (or eliminating) the amount available for certain types of additional indebtedness, liens, restricted payments (including dividends and stock repurchases), investments (including acquisitions and joint ventures), and voluntary junior debt repayments. As a result, during the covenant period, we are further limited in the manner in which we conduct our business and we may be unable to engage in certain favorable business activities or finance future operations or capital needs, which could have an adverse effect on our business, financial condition and results of operations.
We may be unable to continue to securitize certain of the relocation assets of Cartus Relocation Services, which may adversely impact our liquidity.
At June 30, 2020, $113 million of securitization obligations were outstanding through special purpose entities monetizing certain assets of Cartus Relocation Services under two lending facilities. We have provided a performance guaranty which guarantees the obligations of our Cartus subsidiary and its subsidiaries, as originator and servicer under the Apple Ridge securitization program. Our significant debt obligations may limit our ability to incur additional borrowings under our existing securitization facilities and disruptions in the securitization markets, including in connection with the COVID-19 crisis, may have the effect of increasing our cost of funding or reducing our access to these markets in the future.
In February 2019,addition, the Company'sApple Ridge securitization facility contains terms which if triggered may result in a termination or limitation of new or existing funding under the facility and/or may result in a requirement that all collections on the assets be used to pay down the amounts outstanding under such facility. The triggering events include but are not limited to: (1) those tied to the age and quality of the underlying assets; (2) a change of control; (3) a breach of our senior secured leverage ratio covenant under our Senior Secured Credit Facility if uncured; and (4) the acceleration of indebtedness under our Senior Secured Credit Facility, Unsecured Notes or other material indebtedness. The occurrence of a trigger event under the Apple Ridge securitization facility could restrict our ability to access new or existing funding under this facility or result in termination of the facility. If securitization financing is not available to us for any reason, we could be required to borrow under the Revolving Credit Facility, which would adversely impact our liquidity, or we may be required to find additional sources of funding which may be on less favorable terms or may not be available at all.
Item 5. Other Information.
On August 5, 2020, Realogy Group, an indirect subsidiary of Realogy Holdings, and certain of its subsidiaries amended and extended the existing Apple Ridge Funding LLC securitization program utilized by Realogy Group's relocation services subsidiary, Cartus Corporation (“Cartus”). The amendment and extension was effected pursuant to the Fifteenth Omnibus Amendment dated as of August 5, 2020, by and among Cartus, Cartus Financial Corporation, Apple Ridge Services Corporation, Apple Ridge Funding LLC (the “Issuer”), Realogy Group, U.S. Bank National Association, as indenture trustee, paying agent, authentication agent, and transfer agent and registrar, the managing agents party to the Note Purchase Agreement (as defined below) and Crédit Agricole Corporate and Investment Bank (“CA-CIB”), as administrative agent (the “Omnibus Amendment”). The managing agents that are parties to the Note Purchase Agreement and the Omnibus Amendment are CA-CIB, The Bank of Nova Scotia, and Barclays Bank PLC.
The Omnibus Amendment, among other things, amends the Note Purchase Agreement dated as of December 14, 2011, as amended (the “Note Purchase Agreement”), by and among the Issuer, Cartus, the managing agents, committed purchasers and conduit purchasers named therein, and CA-CIB, as administrative agent, to extend the securitization program until June 4, 2021, subject to extension for an additional period of 364 days.
The parties to the Omnibus Amendment and their respective affiliates have performed and may in the future perform, various commercial banking, investment banking and other financial advisory services for Realogy Holdings and its subsidiaries for which they have received, and will receive, customary fees and expenses.
* * *
On August 4, 2020, the Compensation Committee of the Board of Directors authorized a new share repurchase program of up to $175 million(the “Committee”) of the Company took the following actions intended to drive performance and motivate and retain our senior leadership team, which we call our Executive Committee, including Ms. Simonelli, Mr. Peyton, Ms. Helmkamp and Ms. Wasser. No new cash-based awards were granted to Mr. Schneider, our President and Chief Executive Officer.
In making its determinations, the Committee took into account the 71% to 66% decline in aggregate realizable value of outstanding performance share unit awards held by the Company’s common stock which was incrementalnamed executive officers who are members of the Executive Committee as compared 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 timeoriginal grant date fair value of those awards, based 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 only to the extent of available cumulative credit,Company’s payout expectations 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 June 30, 2020 and our stock price on August 4, 2020.
Amendment to 2019 $204 million remained available for repurchaseand 2020 Performance Share Units. The Committee approved amendments to certain awards tied to a cumulative free cash flow metric, including performance share unit awards granted to its executive officers in 2019 and 2020 (the “CFCF PSUs”). The amendments seek to mitigate the business disruptions and related impacts of COVID-19 by eliminating fiscal year 2020 as well as the impact of CARES Act-related deferrals from the performance level required to be achieved in order to earn a portion of the award.
Based on the Company’s expectations as of June 30, 2020, no payout was expected under the 2019 CFCF PSUs and below target payout was expected under the 2020 CFCF PSUs prior to amendment. We estimate that under the revised terms of the grants and the Company’s expectations as of June 30, 2020, the 2019 CFCF PSU awards would pay out below the target level, but above the threshold level, and the 2020 CFCF PSU awards would pay out at the target level.
No change was made to the 2018 CFCF PSU award or any of the outstanding performance share repurchase programs.unit awards that are tied to relative total stockholder return (“RTSR PSUs”), all of which were tracking to result in no payout based on the Company’s expectations through June 30, 2020 (other than the 2020 RSTR PSUs, which were tracking to payout below target level).
Performance and Retention Award (Excluding the CEO). The Committee granted a cash-based performance incentive and retention award (the “Performance Award”) under the Company’s 2018 Long-Term Incentive Plan to Executive Committee members, other than Mr. Schneider. In granting the award, the Committee took into consideration the significant decreases in realizable value to our executives, including the impact of the COVID-19 crisis on compensation and the voluntary temporary salary reductions agreed to at the onset of the crisis, as well as the competitive landscape for executive talent and the potential business disruption likely to be caused by unplanned attrition.
The performance component of the Performance Award will be earned if our market share (as measured by our transaction volume for existing home sale transactions) as of September 30, 2022 exceeds market share as of September 30, 2020 (the “Performance Period”) and would be equal to the executive officer’s base salary, without taking into consideration any voluntary temporary reductions agreed to in connection with the COVID-19 crisis (“Base Salary”). No amounts will be earned if the performance metric is not satisfied.
Each participant generally must remain employed with the Company throughout the Performance Period in order to be eligible to receive a payout of the performance component of the Performance Award. If a participant’s employment is terminated without cause or due to his or her death, disability, or retirement during the Performance Period, such participant will be eligible to receive a pro-rata amount of the performance portion of his or her Performance Award based on actual performance.
In order to be eligible to receive a payout of the retention portion of the Performance Award, equal to the participant’s Base Salary, a participant must remain employed with the Company from September 30, 2020 through September 30, 2021, unless terminated in connection with a change in control, in which case the participant would be entitled to a pro-rata payment. Any retention portion payable to a participant will be reduced by any other cash retention payments made to that participant in the same calendar year.
Our Clawback Policy will apply to both the performance and retention portions of the Performance Award, which will allow our Board of Directors to recoup incentive compensation in the event of a material restatement or adjustment of our financial statements, misconduct, or breach of the participant’s restrictive covenants with the Company, including those related to non-competition and non-solicitation.
The description of the Performance Award set forth above is qualified in its entirety by reference to the form of Performance Award filed as Exhibit 10.9 to this Quarterly Report and incorporated by reference herein.
The Company expects to prioritize investing in its business and reducing indebtedness 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. Accordingly, the Company will not repurchase common stock pursuant to its existing share repurchase programs until its consolidated leverage ratio is equal to or below 4.00 to 1.00. See "Item 2.—Management's Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition, Liquidity and Capital Resources" for additional information.
Item 6. Exhibits.
See Exhibit Index.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
REALOGY HOLDINGS CORP.
and
REALOGY GROUP LLC
(Registrants)
Date: August 8, 2019
Date: August 6, 2020
/S/ CHARLOTTE C. SIMONELLI
Charlotte C. Simonelli
Executive Vice President and
Chief Financial Officer
Date: August 8, 2019
Date: August 6, 2020
/S/ TIMOTHY B. GUSTAVSON
Timothy B. Gustavson
Senior Vice President,
Chief Accounting Officer and
Controller
EXHIBIT INDEX
Exhibit Description
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3.1 | Fourth Amended and Restated Certificate of Incorporation of Realogy Holdings Corp. (Incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed on May 2, 2019).4.1 Indenture, dated as of June 16, 2020, among Realogy Group LLC, as Issuer, Realogy Co-Issuer Corp., as Co-Issuer, Realogy Intermediate Holdings LLC, Realogy Holdings Corp., the Note Guarantors (as defined therein) and The Bank of New York Mellon Trust Company, N.A., as Trustee and Collateral Agent, governing the 7.625% Senior Secured Second Lien Notes due 2025 (incorporated by reference to Exhibit 4.1 to Registrants' Current Report on Form 8-K filed on June 17, 2020).10.1 First Lien / Second Lien Intercreditor Agreement, dated as of June 16, 2020, among Realogy Group LLC, the other Grantors (as defined therein) party thereto, JPMorgan Chase Bank, N.A., as the Initial First Lien Priority Representative (as defined therein), The Bank of New York, Mellon Trust Company, N.A., as the Initial Second Lien Priority Representative (as defined therein), and the additional authorized representatives from time to time party thereto (incorporated by reference to Exhibit 10.1 to Registrants' Current Report on Form 8-K filed on June 17, 2020). 10.5 Fourteenth Omnibus Amendment and Payoff and Reallocation Agreement, dated as of June 4, 2020, among Cartus Corporation, Cartus Financial Corporation, Apple Ridge Services Corporation, Apple Ridge Funding LLC, Realogy Group LLC, U.S. Bank National Association, the managing agents party to the Note Purchase Agreement dated December 14, 2011, as amended, Crédit Agricole Corporate and Investment Bank and the committed and conduit purchasers named therein (incorporated by reference to Exhibit 10.1 to Registrants' Current Report on Form 8-K filed on June 5, 2020). 10.6* Fifteenth Omnibus Amendment, dated as of August 5, 2020, among Cartus Corporation, Cartus Financial Corporation, Apple Ridge Services Corporation, Apple Ridge Funding LLC, Realogy Group LLC, U.S. Bank National Association, the managing agents party to the Note Purchase Agreement dated December 14, 2011, as amended, and Crédit Agricole Corporate and Investment Bank. 10.7 Ninth Amendment, dated as of July 24, 2020, to the Amended and Restated Credit Agreement, datedas of March 5, 2013, as amended, among Realogy Intermediate Holdings LLC, Realogy Group LLC, theseveral lenders parties thereto from time to time and JPMorgan Chase Bank, N.A., as administrative agentfor the lenders (Incorporated by reference to Exhibit 10.1 to theRegistrants' Current Report on Form 8-K filed on July 30, 2020). 10.8 Third Amendment, dated as of July 24, 2020, to the Term Loan A Agreement, dated as of October 23,2015, among Realogy Intermediate Holdings LLC, Realogy Group LLC, the lenders party thereto fromtime to time and JPMorgan Chase Bank, N.A., as administrative agent for the lenders (Incorporated byreference to Exhibit 10.2 to Registrants' Current Report on Form 8-K filed on July 30, 2020).
101 The following financial information from Realogy's Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 formatted in iXBRL (Inline eXtensible Business Reporting Language) includes: (i) the Condensed Consolidated Statements of Operations, (ii) the Condensed Consolidated Statements of Comprehensive Loss, (iii) the Condensed Consolidated Balance Sheets, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) Notes to the Condensed Consolidated Financial Statements. 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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10.1 | Twelfth Omnibus Amendment, dated as of June 7, 2019, among Cartus Corporation, Cartus Financial Corporation, Apple Ridge Services Corporation, Apple Ridge Funding LLC, Realogy Group LLC, U.S. Bank National Association, the managing agents party to the Note Purchase Agreement dated December 14, 2011, as amended, and Crédit Agricole Corporate and Investment Bank (Incorporated by reference to Exhibit 10.1 to the Registrants' Current Report on Form 8-K filed on June 7, 2019). |
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10.2* | Eighth Amendment, dated as of August 2, 2019, to the Amended and Restated Credit Agreement, dated as of March 5, 2013, as amended, among Realogy Intermediate Holdings LLC, Realogy Group LLC, the several lenders parties thereto from time to time, JPMorgan Chase Bank, N.A., as administrative agent for the lenders, and the other agents parties thereto. |
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101.INS | Inline XBRL Instance Document - the instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. |
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101.SCH | Inline XBRL Taxonomy Extension Schema Document. |
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101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
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101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
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101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. |
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101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. |
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