The 2015 buzzword in real estate might have been “disruption” — but based on the 2015 earnings report from Realogy Holdings Corp., one of the nation’s largest real estate franchisors, traditional models are still doing just fine.
Realogy’s business units include Better Homes & Gardens Real Estate, Century 21, Coldwell Banker, The Corcoran Group, ERA, ZipRealty, Sotheby’s, NRT LLC and Title Resource Group.
The numbers
The company reported in its full-year 2015 earnings results today that its home sale transaction volume last year was adversely affected by the implementation of the Consumer Financial Protection Bureau’s (CFPB’s) TRID (TILA-RESPA Integrated Disclosures) regulations in October — but volume was still good enough to boost the company’s revenues 7 percent year-over-year to $5.7 billion.
Realogy’s net income was $184 million, a 29-percent increase from 2014, and basic earnings per share was $1.26, up from 98 cents in the previous year.
Adjusted net income for the year was $219 million, and adjusted basic earnings per share was $1.49, increases of 27 percent and 26 percent, respectively, compared to 2014.
Adjusted EBITDA (earnings before interest, taxes, deductions and amortizations) was $845 million, compared to $779 million in 2014, an 8-percent year-over-year increase over 2014’s adjusted EBITDA of $66 million.
Realogy generated $437 million of free cash flow in full-year 2015, a 19-percent increase over 2014’s free cash flow of $367 million during 2014.
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The company ended 2015 with cash and cash equivalents of $415 million and $200 million of outstanding borrowings under its revolving credit facility. The ratio of total corporate debt, net of cash and cash equivalents, to adjusted EBITDA for FY 2015 was 3.9 times, reflecting $3,337 million in net debt as of Dec. 31.
“2015 was a solid year for Realogy. We are well-positioned to build on the robust free cash flow we generated last year, regardless of how transaction volume transpires, given our strong market position, our focus on costs and reduced interest expense,” Tony Hull, Realogy’s executive vice president, chief financial officer and treasurer, told investors in the Feb. 24 earnings call.
“We intend to drive shareholder value by thoughtfully utilizing our free cash flow to deploy capital and a combination of prudent acquisitions to deleveraging of our balance sheet and share repurchases.”
Business unit performance
Although an average five-day delay in mortgage closing transactions post-TRID delayed closings into 2016 and impacted Realogy’s revenue and adjusted EBITDA in the fourth quarter, the company said that closing times have stabilized since the end of last year, and transaction delays did not dampen contract cancellations or buyer demand.
Realogy’s franchise (RFG) and company-owned (NRT) business segments achieved a combined home sale transaction volume of approximately $456 billion in 2015, an 8-percent increase compared to 2014.
RFG reported a home sale transaction increase of 3 percent and an average homes sale price increase of 5 percent.
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Meanwhile, NRT reported a transaction increase of 9 percent and an average price decrease of 2 percent. The company attributed NRT’s increase in transaction sides to its April 2015 acquisition of the Coldwell Banker United brokerage operations in Texas, the Carolinas and Florida, which had a lower average sales price relative to the remainder of NRT’s markets.
What about tech?
Deployment of the Zap platform, a customer relationship and transaction management system that Realogy acquired through its buy of ZipRealty last year, exceeded the company’s expectations of enrolling 300 RFG franchisees in 2015. Currently, more than 550 franchisees across the Better Homes & Gardens Real Estate, Century 21, Coldwell Banker and ERA brands are Zap-operational. By the end of 2016, Realogy expects half of its 2,700 franchisees to be on the platform, Hull said.
“We believe Zap will increase our value proposition to our franchisees, independent sales associates and their customers,” he said. “Our industry-leading Zap initiative has brought cutting-edge technology to our franchise base and has the potential to meaningfully drive the growth and profitability of our business.”
Gross commission income for 2015 was $4,288 million, a small increase over 2014’s $4,028 in gross commission. RFG added new franchisees and sales production with $378 million in franchisee gross commission income in 2015, a 24-percent increase over the prior year. These results “further demonstrate the continued desirability of our world-class brands in a highly competitive marketplace,” Hull said.
New share buy-back program and the road ahead
“One of our 2016 company-wide initiatives is the ongoing enhancement of our value proposition and our service levels to customers, franchisees and affiliated sales associates, while fully leveraging our size, scale and infrastructure to maximize company profits. We have a seasoned leadership team across all of our business units, and have great confidence in their ability to deliver on this continuous improvement goal,” Hull said.
To that end, Realogy announced during the investor call that its board of directors has authorized a share repurchase program of up to $275 million of the company’s common stock. The purchases will occur as market conditions permit.
Repurchases may be made at management’s discretion on the open market or through privately negotiated transactions. The size and timing of these repurchases will depend on price, market and economic conditions, legal and contractual requirements and other factors. The repurchase program has no time limit and may be suspended or discontinued at any time. As of Dec. 31, 2015, Realogy had nearly 147 million shares of common stock outstanding.
“We’re pleased that our strong pre-cash flow generation enables us to return value to our shareholders through stock repurchases, while maintaining the flexibility to invest in the growth of our company through acquisitions, market expansion and innovative technologies,” said Richard A. Smith, Realogy’s chairman, CEO and president. “This repurchase program clearly demonstrates our confidence in the strength of our business model and our long-term prospects for continued growth and value creation.”
Realogy is “well ahead of schedule” in terms of its financial goals, free cash flow, deleveraged balance sheet and returning capital to shareholders, Smith added.
“We remain confident in the strength of our business model as the preeminent and most integrated provider of residential real estate services in the United States, and in our ability to deliver on our strategic objectives,” he said.
Although the National Association of Realtors (NAR) and other industry analysts have forecasted a 6- to 7-percent increase in transaction volume, Smith noted that these forecasts don’t yet reflect the recent volatility in the equity markets or any other macroeconomic concerns.
“It is still very early in the year,” Smith said. “We anticipate that the housing industry will continue its recovery, as mortgage rates remain very attractive, household formation continues to strengthen, employment levels rise and credit availability improves.”
“We expect to have a clearer picture of the residential real estate market next quarter,” Hull added.
Declining to comment directly on the looming threat of a class-action RESPA lawsuit in California federal court or other ongoing regulatory and legal matters, Smith said any impact those matters may have on Realogy will be discussed in future regulatory filings.
But Hull added, “We strongly believe the case is without merit, and we will aggressively defend the company against these claims.” The company’s recent motion to dismiss the case “speaks for itself,” he said.
