Despite the soft real estate market, Realogy Holdings posted an uptick in sales and revenue in the second quarter, but the poor performance of its NRT LLC division rained on its parade, the company said in its Q2 earnings call today.
Realogy — whose brokerage brands include Better Homes and Gardens Real Estate, Century 21 Real Estate, Coldwell Banker, ERA, NRT, Sotheby’s International Realty and ZapLabs LLC, in addition to title and settlement services provider Title Resource Group (TRG), reported “mixed” results for the second quarter, said Richard A. Smith, the company’s chairman, CEO and president.
“The continued growth of RFG and TRG was offset by weakness at NRT, which put our overall transaction volume growth at the low end of our guidance range,” Smith said.
Financial results highlights
Despite the soft market, RFG fared pretty well in the second quarter. The company reported $1.66 billion in revenue for Q2, a modest 1-percent increase over Q2 last year.
Adjusted net income was $108 million, a 15-percent increase over the same period last year. The company said the gains were driven by a 3-percent year-over-year increase in home sale transaction volume.
Net income was $92 million, a slight decline over Q2 2015’s net income of $97 million.
Operating earnings before interest, taxes, depreciation and amortization (EBITDA) was $275 million, a 4-percent boost over $264 million in the second quarter of 2015.
Realogy generated $208 million in free cash flow, a decrease of $65 million compared to Q2 last year — the result of net borrowing under the company’s securitization program and working capital movements.
The company ended the quarter with cash and cash equivalents of $423 million. Total long-term corporate debt, including the short-term portion, net of cash and cash equivalents, totaled $3.4 billion. Year-to-date, the ratio of total corporate debt, net of cash and cash equivalents, to adjusted EBITDA was 3.8 times.
Realogy’s combined home sale transaction volume rose 3 percent year over year; RFG home sides increased 4 percent, and average sale price rose 3 percent.
“Despite a challenging quarter, our business continues to generate significant cash flow,” said Tony Hull, Realogy’s executive vice president, chief financial officer and treasurer. “We will continue to be thoughtful about its deployment. We remain focused on positioning the company for success in any market environment.”
NRT hit by high-end market softness, agent competition issues
Despite those positive results, NRT — which owns and operates the Corcoran Group, Sotheby’s International Realty and Citi Habitats — struggled, posting a 3-percent drop in transaction volume and a 2-percent drop in average sales price compared to the second quarter of last year.
NRT’s revenue for the quarter dropped $21 million year over year to $1.268 billion, primarily due to sluggish sales of high-value property sales. Sales of homes priced at $2.5 million or more represented 16 percent of NRT’s total volume, falling from the 19 percent it saw in Q2 2015.
Smith attributed NRT’s disappointing results to high-end softness in the unit’s major markets of California, Florida and New York. Stiff competition among the nation’s top brokerages and agent poaching are also a challenge, he said.
“Our agents are some of the top talent in the industry, and as such, historically have been targeted by the competition. This trend has recently become more pronounced as new entrants to the industry as well as assorted, established firms use short-term economic incentives to build market share. Our experience tells us that economic incentives need to be complemented by a strong level of support to the agent, which we uniquely provide,” he said.
Although Realogy consistently retains about 90 percent of its top-two quartile sales associates and recruits “a significant number of new agents” every year, Smith said, “still, we recognize the need to keep pace with a more competitive market for agents.”
While Realogy can’t do anything about the soft market, it has plans in place to guard NRT from further slumps, Smith said, starting with a “multi-point plan” that features a stronger focus on agent retention and agent and agent team recruiting.
“The benefits of our plan will be realized over the next 12 to 18 months,” Smith said. “While we expect near-term and moderate costs from these initiatives, the expected increase in revenue should more than offset the costs, producing improved financial results for NRT and the Realogy business units that benefit from NRT’s volume gains.”
NRT will also continue to invest in company-generated relocation and consumer website leads, in addition to expanding the Zip Realty brokerage, efforts that together comprised 10 percent of NRT’s closed business last year. These efforts tend to attract home sale closings with higher margin characteristics and agent-generated business, Smith said.
Realogy will also redouble its efforts to improve NRT’s operation margins by examining the segment’s cost structure, Smith said. NRT currently spends about $970 million on 800 leased offices that support 47,000 sales associates in 50 metropolitan areas.
“Our initiatives are focused on streamlining our business and improving responsiveness to the needs of our agents, buyers and sellers,” Smith said. “Specifically, we are centralizing systems and processes in order to more efficiently deploy our field support management and services, so they can focus on their most important job: Making our agents more productive.”
Realogy will increase its total annual company run rate costs savings from $40 million to $60 million by mid-2017 — all of which is related to NRT, Smith said.
Finally, Realogy will also pursue tuck-in acquisitions of both core and adjacent businesses for NRT and TRG, and expects to spend about $100 million on acquisitions this year, Smith said.
New quarterly dividend
Realogy also announced that its board of directors has approved the initiation of a quarterly cash dividend policy on its common stock. On Aug. 31, stockholders of record as of Aug. 17 will be given a dividend of 9 cents per share. The dividend complements the $275-million share repurchase program the company announced in February and represents a 36-cent annualized dividend and a dividend yield of 1.18 percent.
In addition, during the second quarter, Realogy repurchased about 1 million shares of its common stock in the open market at a weighted average market price of $31.50 per share, for a total of $34 million. Year-to-date, Realogy has repurchased $67 million, or approximately 2 million shares, of common stock in the open market.
“We believe that the combination of a quarterly cash dividend and our existing share repurchase program is an efficient and sustainable way for us to deliver on our commitment to return capital to shareholders,” Hull said. “We have strong financial flexibility and remain committed to achieving our goal of three times net debt to EBITDA.”
Q3 and beyond
Looking ahead to the third quarter, Realogy said it expects the disparity in transaction volume between RFG and NRT to continue, predicting a 4-percent to 6-percent increase for RFG and a 1-percent to 3-percent decrease for NRT. However, based on how closed and open sales fared in July, the company said it expects to see overall home sale transaction gains of between 1 percent to 4 percent in Q3.
For the full year, Realogy said it expects to deliver adjusted EBITDA of $845 million, with about a 15-percent margin. The company also said it anticipates converting about 60 percent of its forecasted operating EBITDA, expected to be between $760 million and $800 million, into free cash flow ranging from $450 million to $500 million.
“We will continue to execute on our process improvement efficiencies, office footprint optimization, technology and media spending, centralized procurement and organizational design,” Hull said. “At the same time, we are progressing ahead of schedule on returning capital to shareholders while balancing investments in the growth of the business and opportunistic acquisitions.”
Realogy opened today trading at $28.11, and that price fell to $26.65 by noon today. Its 52-week high is $44.90, and its 52-week low is $27.43.
“We continue to believe our stock price is trading below its intrinsic value,” Smith said. “We are executing on our initiatives to reduce expenses and improve services.”
Stephens research analyst John Campbell called the new cash divided a “bigger-picture positive” that somewhat offset the company’s mixed results.
“While NRT pressure remains, we do note that Realogy’s particular high-exposure geographies will ebb and flow over time,” Campbell said. “We think the time to buy the stock could be in times when these markets are cooling/investor expectation remains low. To go along with the attractive valuation, we continue to like the emerging capital returns story as evidenced by recent company actions.”
Stephens reiterated its Overweight rating and said it is reviewing its $37 price target and estimates.
