Realogy Holdings Corp., a global leader in real estate franchising, has reported results for the third quarter ended September 30, 2012. Realogy’s net revenue for the quarter was $1.3 billion, an increase of 11 percent compared to 2011. Realogy’s EBITDA was $213 million, a year-over-year increase of $26 million, or 14 percent. These improvements were due largely to an increase in sales volume (homesale transaction sides times average sale price) at both the franchised and company-owned real estate services segments. For the quarter, Realogy recorded a net loss attributable to the Company of $34 million, which was after $187 million of interest expense and $42 million of depreciation and amortization.
“Our revenue and EBITDA were strong in the third quarter, with revenue up 11 percent compared to the same period in 2011 and EBITDA increasing 14 percent,” says Richard A. Smith, chairman, chief executive officer and president of Realogy. “The early-stage housing market recovery that we spoke of in the first two quarters of the year continued in the third quarter of 2012. Once again, we experienced strong year-over-year gains in homesale units and average home sale price as the housing market continued its recovery.”
For the nine months ended September 30, 2012, net revenue totaled $3.5 billion, an increase of 9 percent compared to the first nine months of 2011, and EBITDA was $446 million, a year-over-year increase of 23 percent. Realogy’s Adjusted EBITDA for the nine month period was $502 million, an increase of 10 percent compared to 2011. Year-to-date through September 30, 2012, Realogy had a net loss attributable to the Company of $251 million, which was after $533 million of interest expense and $131 million of depreciation and amortization. These results do not incorporate any reductions to the Company’s leverage as a result of the IPO and related transactions.
“Our IPO and related transactions are enabling us to substantially reduce our debt,” continues Smith. “After giving effect to the anticipated use of IPO proceeds, our overall indebtedness will be reduced by approximately 40 percent and our annualized interest expense will decrease by approximately 50 percent. Going forward, we will use free cash flow primarily to further reduce our debt.”
New Independent Director Appointed to Company’s Board
Realogy also announced the appointment of Michael J. Williams to its Board of Directors. Most recently, Williams was president and chief executive officer of Fannie Mae from April 2009 to June 2012, managing the company during the period of conservatorship as it dealt with the many challenges presented by the worst housing market downturn in U.S. history. “We are pleased to welcome Mike to our Board as an independent director,” says Smith. “Mike’s more than 21 years in the housing industry, expert knowledge of the mortgage finance industry and practical regulatory experience will add substantial value to our Board.”
Business Driver Discussion
Realogy’s core business drivers improved in the third quarter. During the third quarter of 2012, Realogy’s company-wide homesale transaction volume (average homesale price times the number of homesale transaction sides) increased 14 percent compared to the third quarter of 2011. The Company’s performance is in line with the National Association of Realtors (NAR), which reported that third quarter national existing homesale transaction volume increased 16 percent on a national basis compared to third quarter 2011.
Realogy Franchise Group (RFG) had a year-over-year 5 percent increase in homesale transaction sides, while NRT, the company-owned brokerage unit, had a 12 percent year-over-year increase. In comparison, NAR, which utilizes survey data, reported that existing home sales increased by 8 percent compared to third quarter 2011. RFG’s average homesale price increased 9 percent in the third quarter, which was consistent with NAR’s 7 percent reported increase in national average sales price. NRT’s average homesale price, which is generally twice the national average, increased 2 percent compared to third quarter 2011, due to its mix of business that shifted to more lower-priced homes. In our relocation business, Cartus experienced a 3 percent year-over-year increase in initiations compared to third quarter 2011 and an 8 percent increase in broker referrals. As for our title and settlement services segment, Title Resource Group experienced an 11 percent increase in purchase title and closing units compared to third quarter 2011 and a 70 percent increase in refinance title and closing units. Those significant gains more than offset a 5 percent decrease in the average fee per closing unit compared to third quarter 2011 due to the increase in refinance volume. For the nine months ended September 30, 2012, RFG and NRT closed homesale volume was up 13 percent and 12 percent, respectively.
“Our closed homesale transaction volume drivers continued to perform well in the third quarter,” says Anthony E. Hull, Realogy’s executive vice president, chief financial officer and treasurer. “In the third quarter, Realogy lost one business day compared to the third quarter of 2011. The gain or loss of one business day in a quarter can increase or reduce homesale transaction sides by approximately two percentage points. Accordingly, on a same business day-adjusted basis assuming all else remains equal, the combined transaction volume (homesale sides times average sales price) would have been up approximately 16 percent rather than the reported 14 percent increase for the quarter compared to 2011. Although it is too early to know the impact Hurricane Sandy will have on the fourth quarter, we expect that most of the impact will be delaying the timing of closing of transactions from October to November. Historically, significant storms have had an immaterial impact on our financial results.”
Hull continues: “Based on the visibility we have into the coming months, we anticipate our fourth quarter, which includes an additional business day compared to 2011, will outperform the revenue driver trends we saw in the first nine months of 2012 at RFG, NRT and TRG, even with any impact from Hurricane Sandy. Specifically at RFG and NRT, based on our open, or pending, contracts in September and October at those two business units combined, we expect to see approximately a 9 percent to 10 percent increase in transaction sides year-over-year in the fourth quarter and average sale price increase of approximately 6 percent to 7 percent year-over-year, also on a combined basis, which would equate to a 16 percent to 18 percent volume increase.”
Significant Debt Reduction
In October, Realogy utilized proceeds from the IPO to prepay the $650 million of the Second Lien Loans that had an annual interest rate of 13.50 percent and $50 million of other indebtedness supported by a letter of credit issued under the Realogy Group LLC senior secured credit facility. Realogy Group also issued notices to redeem $64 million of 10.5 percent Senior Notes due 2014 and $41 million of 11.00 percent /11.75 percent Senior Toggle Notes due 2014, on November 16, 2012.
As previously disclosed, at the closing of the IPO, holders of approximately $1.9 billion (the “Significant Holders”) of the $2.1 billion of the 11.00 percent Convertible Notes converted all of their notes into common stock of the Company. A redemption notice was also issued to holders of the remaining $209 million of Convertible Notes to redeem such notes at 90 percent of their principal amount on November 16, 2012, to the extent they have not been converted into common stock of the Company. As of October 31, 2012, holders of approximately $93 million of the remaining $209 million Convertible Notes have converted their holdings into common stock. If all of the remaining Convertible Notes are converted into common stock prior to the November 16th redemption date, the Company would have approximately 144.8 million shares of common stock outstanding.
By year-end 2012, Realogy will have reduced its overall indebtedness by approximately $2.9 billion, a 40 percent reduction from September 30, 2012 levels. Also as a result of the overall debt reduction, Realogy’s annualized interest expense will decline by approximately $338 million, which includes the elimination of $232 million of annualized interest expense relating to the conversion or redemption of the $2.1 billion of Convertible Notes. In aggregate, this represents an immediate elimination of approximately half of the Company’s interest expense. Looking forward, in the second quarter of 2013 we plan to use IPO proceeds to redeem $200 million of subordinated notes (both 12 3/8 percent and 13 3/8 percent).
As described in the pro forma financial section of the Company’s IPO prospectus, Realogy will incur certain non-recurring IPO-related costs that will be reflected in its fourth quarter 2012 results, which include:
• The fee of $105 million paid to the Significant Holders at the IPO closing in lieu of the fully accrued and unpaid interest such holders would have otherwise received on October 15, 2012 will be an expense in the fourth quarter on the statement of operations and not included in interest expense.
• The statement of operations in the fourth quarter will also reflect a non-cash charge of between $250 to $280 million (which will vary based on the stock price on the day the holders convert) due to the issuance of the additional 0.125 shares for each share of common stock of the Company issued, or issuable, upon conversion of Convertible Notes held by the Significant Holders and holders of an additional approximately $130 million aggregate principal amount of Convertible Notes. This was in return for agreeing to lock-up the shares issued upon conversion as well as the additional shares for a period of 180 days following the October 10th effective date of the IPO (or through April 8, 2013, subject to extension under certain circumstances). The issuance of these additional shares and the related charge will have no impact to shareholders’ equity. The additional shares issued are included in the total shares outstanding noted above, which assumes all of the remaining holders of Convertible Notes convert their holdings into common stock prior to the November 16th redemption date.
• The termination of the Apollo management agreement upon consummation of the IPO will result in a $40 million expense to be reflected in the fourth quarter statement of operations. The termination payment will be made in January 2013, of which $15 million will be paid in cash and $25 million in common stock of the Company. The termination agreement also waived the $15 million Apollo management fee for 2012. Accordingly, $11 million accrued in the first nine months of 2012 for such management fee will be reversed in the fourth quarter and there will be no accrual for the remainder of the 2012 annual fee in the fourth quarter.
For more information, visit www.realogy.com.