I guess because of the recent story on US News.com, there’s been quite a lot of speculation about Realogy going bankrupt. My original post back in November of last year on why I thought Realogy made for a particularly poor bankruptcy candidate is getting rather large amount of traffic, and the comments have been illuminating as well.
Well, I have some followup. Again, keep in mind that I no longer work at Realogy, and while they are a client of my employer, Onboard Informatics, I have no special access to any inside information.
I do, however, have friends in the RE.net and realestistas who send me interesting information, and the latest salvo is something Realogy sent out to various franchisees and agents who work for Realogy franchisees. I debated whether I should post it or not, but looking at the information in the email, I see nothing confidential, and a whole lot of information that is missing in the commentariat.
The email, from Alex Perriello, CEO of the Realogy Franchise Group, is full of confidence:
Earlier today we saw a business writer’s blog post get picked up as a “news” report pertaining to the financial condition of a number of companies, including our parent company, Realogy. This coverage generally focused on the long-term debt and viability of these companies.
Although Realogy is currently in a quiet period and we cannot release certain financial information in advance of our fourth quarter 2008 earnings call in March, we certainly could have addressed the fundamentals had this reporter taken the time to attempt to carry out his due diligence by contacting Realogy for the facts.
I want to point out a number of “silver linings” for Realogy that clearly have not been taken into consideration by either the media or the financial ratings agencies:
- During the past several years Realogy has moved aggressively to mitigate the impact of the economy on our company. We have successfully reduced our overhead by more than $350 million and continue to focus on maximizing the effectiveness of our cost structure.
- As we have focused on costs we have been equally focused on growth. In spite of the woes of the housing market we have made great progress in advancing our company. From new franchise sales to the retention of franchisees and their sales associates to signing new clients at Cartus and Title Resource Group, we continue to be forward thinking, highly focused on the future of our company and the industry.
- In 2009, we expect to benefit from considerably lower interest rates since a significant portion of our bank debt is tied to LIBOR;
- None of our corporate debt is due until at least 2013; and
- Unlike many companies in today’s economy, we have the support and commitment of one of the best financed private equity firms in the country, Apollo Management.
Please also remember that private equity funds managed by Apollo Management and co-investors originally invested $2 billion in our company. Apollo has a substantial ongoing interest in the success of Realogy. Our senior management team is highly confident of Apollo’s commitment to Realogy. If there is any question as to Apollo’s overall financial strength, one need only look to Apollo’s success in raising approximately $15 billion in capital last month for its newest investment fund.
That does not sound like a company that is preparing a bankruptcy filing, nor one that really needs to.
I can personally attest to the cost-saving measures that Realogy has undertaken being a multi-year effort that goes back long before the actual “bursting” of the housing bubble. I was working on cost-cutting back in middle of 2007. We saw the storm coming long before it actually hit. Could more have been done? Perhaps. Does more need to be done? Undoubtedly. But it isn’t as if Realogy got caught with its pants down when the market downturn hit, wholly unprepared for what was to come.
The fact that Realogy’s debt is tied to LIBOR is significant — and Alex is absolutely right to point out that they’ll have an easier time making debt service in 2009. How much easier? Who can say — but certainly, low interest rates help Realogy on two fronts.
First, low interest rates helps buyers enter the market (assuming they can get credit), which helps Realogy’s core business of buying and selling real estate. Second, it lowers their debt service burden.
The fact that Realogy’s corporate debt is not due until 2013 is significant — it really makes me wonder just how much pressure there could be given that Realogy has four years to turn things around before they really have to worry.
Unless I missed some major story, Realogy has yet to miss an interest payment on its debt. It has renegotiated a bunch of loans, but in this economy, who wouldn’t at least try to do the same?
Seems to me that the confidence is not entirely misplaced here.
Why Realogy did not release this to the wide public, to the entire RE.net, is puzzling to me. There’s nothing in here that is confidential, and the letter went to a large group of individuals: brokers, agents, and staff of Realogy franchisees. I think Alex is right to excoriate the original “reporter” Rick Newman. He simply didn’t do his homework. But he should have also gotten his communications people to start engaging the RE.net on getting the word out.
(Plus, a bit of an aside but… seeing as how Mr. Newman’s books are about 9/11 at the Pentagon, and Vietnam-era bomber pilots, why is he writing a column on business and economics? Shouldn’t he be writing about the War on Terror, and Iranian nukes, and leave business reporting to, y’know, people who write about businesses?)
So, I guess I’m back to reiterating points from the first post, but with new info:
- Realogy makes for a very unattractive candidate for bankruptcy;
- Realogy keeps making debt service payments, and hasn’t missed one yet;
- Chapter 11 Reorganization is possible as a corporate takeover play by bondholders seeking to extinguish Apollo’s equity in Realogy; but
- It doesn’t look like Realogy really needs to file bankruptcy; they seem awfully confident.
And I can’t say their confidence is entirely misplaced. Seems pretty spot-on actually.
-rsh
13 thoughts on “Realogy Sure Sounds Confident”
Nice balance, Rob. Particularly the gentle to the reporter.
Nice balance, Rob. Particularly the gentle to the reporter.
Great post, Rob. I run a Realogy-owned title company. I too have seen first hand the cost-cutting that has been in process for a while. While hardly painless, actions taken over a year ago — before the RE market really slowed down — have helped position us for the market we are in now.
For what it’s worth, Realogy did issue a post to Mr. Newman who posted its contents on his blog: http://www.usnews.com/blogs/flowchart/2009/02/10/reaolgy-insists-it-will-survive-2009.html.
Again, thanks for your insight.
Great post, Rob. I run a Realogy-owned title company. I too have seen first hand the cost-cutting that has been in process for a while. While hardly painless, actions taken over a year ago — before the RE market really slowed down — have helped position us for the market we are in now.
For what it’s worth, Realogy did issue a post to Mr. Newman who posted its contents on his blog: http://www.usnews.com/blogs/flowchart/2009/02/10/reaolgy-insists-it-will-survive-2009.html.
Again, thanks for your insight.
Thanks Derek –
As I responded on that US News thread, some of the naysayers are… I don’t know…
Q3 results for Realogy shows that they had a Net Loss of $50M. But that was after interest expense of $152M. Isn’t that debt service?
If I’m a bondholder, and my bonds aren’t due until 2013, but I’m getting interest payments during the worst housing downturn in a few generations… why am I unhappy?
I just don’t get it.
And some of the other commenters are just bonkers.
-rsh
Thanks Derek –
As I responded on that US News thread, some of the naysayers are… I don’t know…
Q3 results for Realogy shows that they had a Net Loss of $50M. But that was after interest expense of $152M. Isn’t that debt service?
If I’m a bondholder, and my bonds aren’t due until 2013, but I’m getting interest payments during the worst housing downturn in a few generations… why am I unhappy?
I just don’t get it.
And some of the other commenters are just bonkers.
-rsh
Rob,
Thank you for your comments. We are all in this together, and if all of that energy was spent helping one another instead of speculating the worst, we would all be in a better place.
Rob,
Thank you for your comments. We are all in this together, and if all of that energy was spent helping one another instead of speculating the worst, we would all be in a better place.
Rob-
I agree with many of your basic observation. Problem is, lenders make illogical decisions every day- like, say, lending $6.6 billion to a company with no real assets while it’s market was declining!
But bottom line, Realogy has little to no cash reserves, is running out of credit and their revenue isn’t covering interest payments AFTER making $350 million in operational cuts.
Sure it’s a profitable company without that debt hanging over their heads, and kudos to their managers for that, but that debt IS there and it isn’t going to just go away- so looking at revenue before the interest is quite frankly irrelevant. Spin it anyway you or Realogy wants, THEY ARE OPERATING IN THE RED.
To survive, they either have to make more cuts that don’t hurt revenue, increase revenue, find a lender to extend them more credit until the market gets better or get their lenders to restructure debt and/or wave interest payments.
After $350 million in operational cuts I question how they could make further cuts that wouldn’t impact revenue. The company’s customers aren’t people buying homes, rather it’s the agents and franchise brokers they service. At some point in time if services are cut too drastically, franchises will leave and agents, who are independent contractors, will find other brokers to work for.
With the market and economy as they are and all the negative media starting to swell around their company I doubt they can drastically increase revenue. That would mean recruiting successful agents away from other companies at a time when ever competitor is waving that US News report in front of the agents they already do have.
Moody’s has pretty much guaranteed they won’t find someone willing to extend them more credit- unless it’s Apollo who hasn’t made a practice of doing it. And thanks to Carl Icahn, the easy restructuring is now off the table.
That means Realogy’s survival basically hangs on the charity of lenders who, at some point in time in the near future, will more than likely have to wave interest payments in order to allow the company to make payroll. Problem is, Carl Icahn, their largest lender, isn’t exactly known for his charity and other lenders have their back so far against the wall right now that you can’t be sure they will always do the logical thing.
More important, if you’re a lender in this situation, it’s pretty hard to forfeit the interest you are owed when equity holder Apollo has mighty deep pockets.
Rob-
I agree with many of your basic observation. Problem is, lenders make illogical decisions every day- like, say, lending $6.6 billion to a company with no real assets while it’s market was declining!
But bottom line, Realogy has little to no cash reserves, is running out of credit and their revenue isn’t covering interest payments AFTER making $350 million in operational cuts.
Sure it’s a profitable company without that debt hanging over their heads, and kudos to their managers for that, but that debt IS there and it isn’t going to just go away- so looking at revenue before the interest is quite frankly irrelevant. Spin it anyway you or Realogy wants, THEY ARE OPERATING IN THE RED.
To survive, they either have to make more cuts that don’t hurt revenue, increase revenue, find a lender to extend them more credit until the market gets better or get their lenders to restructure debt and/or wave interest payments.
After $350 million in operational cuts I question how they could make further cuts that wouldn’t impact revenue. The company’s customers aren’t people buying homes, rather it’s the agents and franchise brokers they service. At some point in time if services are cut too drastically, franchises will leave and agents, who are independent contractors, will find other brokers to work for.
With the market and economy as they are and all the negative media starting to swell around their company I doubt they can drastically increase revenue. That would mean recruiting successful agents away from other companies at a time when ever competitor is waving that US News report in front of the agents they already do have.
Moody’s has pretty much guaranteed they won’t find someone willing to extend them more credit- unless it’s Apollo who hasn’t made a practice of doing it. And thanks to Carl Icahn, the easy restructuring is now off the table.
That means Realogy’s survival basically hangs on the charity of lenders who, at some point in time in the near future, will more than likely have to wave interest payments in order to allow the company to make payroll. Problem is, Carl Icahn, their largest lender, isn’t exactly known for his charity and other lenders have their back so far against the wall right now that you can’t be sure they will always do the logical thing.
More important, if you’re a lender in this situation, it’s pretty hard to forfeit the interest you are owed when equity holder Apollo has mighty deep pockets.
SDA –
I’ve posted a full blog response to your many excellent points.
Thanks again for your comment.
-rsh
SDA –
I’ve posted a full blog response to your many excellent points.
Thanks again for your comment.
-rsh
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