A couple of days ago, Realogy (my old employer) released its Q1/2011 report. Quite a few people emailed and messaged me suggesting that Realogy was staring ruin in the face, since I have defended Realogy in the past. Not surprising, really, considering how the media reported the numbers. For example, Inman News had this headline for the story:
Realogy posts $237M Q1 loss, operating income rises 14%
Most people only saw the “$237M loss” and overlooked the 14% rise in operating income. If you actually look at their numbers, however, there are a couple of other interesting nuggets that were missed.
My take? Realogy is looking pretty good after years of restructuring and cost-cutting. Who knows what the future holds, but on what I saw from Q1/2011, I wouldn’t be planning on the demise of Realogy anytime soon.
The Most Important Number
Since the single biggest issue facing Realogy is its debt — remember that Apollo took Realogy private in a leveraged buyout back in 2006 — the most important number since that day has been the debt-to-income ratio in its loan covenants. The magic number is 5:1 — go over that, and creditors can immediately call the loans, which bankrupts the company overnight.
In Q3 of 2009, Realogy came very close, posting a 4.94 debt-to-income ratio. They restructured their loans at the last minute to get under the 5:1 ceiling, and dodged a bullet.
The Q1/2011 report has this to say about the loan covenant ratio:
As of March 31, 2011, the Company’s senior secured leverage ratio (SSLR) was 3.83 to 1, which is below the 4.75 to 1 maximum ratio required to be in compliance with its senior secured credit agreement. The SSLR is determined by dividing Realogy’s senior secured net debt of $2.4 billion at March 31, 2011 by the Company’s Adjusted EBITDA of $634 million for the 12 months ended March 31, 2011.
I guess that the SSLR has moved from 5 to 1 to 4.75 to 1, but Realogy still came in very comfortably under that number at 3.83 to 1. From last minute reprieve to comfortable margins — that’s quite a feat in two years or so.
And Wall Street is nodding approvingly at Realogy. Not surprising, really. But then…
More Interesting Nuggets
There are a few other interesting nuggets in the Q1 report. Some are positive, while others suggest that Realogy is not out of the woods just yet.
There is a line in the EBITDA calculations that talks about “loss on the early extinguishment of debt” to the tune of $36M — $34M by Corporate and $2M by the NRT (the “Company-Owned” operations). What’s this about then? I couldn’t find more on this, but it sounds a whole lot like Realogy is making some extra payments towards the principal.
If that’s true, does that sound like a company struggling to make ends meet? So much so that it is paying down debt faster than it has to?
The whole EBITDA calculations are interesting. What it shows is that NRT continues to be a drag on the overall company. From the footnotes:
EBITDA by segment before restructuring and other items detailed above for the three months ended March 31, 2011 was: RFG $62 million, NRT ($35) million, Cartus $10 million, TRG $2 million and Corporate ($14) million.
Unless I’m reading this wrong, what this says is that before all the interest payments, restructuring charges, and the like, the Realogy Franchises generated $62M in earnings, while NRT lost $35M. Think of it another way, the country’s largest brokerage company lost $35M in one quarter, while the Franchise group under assault from companies like Keller Williams (which just overtook Century 21 in size) threw out $62M in profits.
Makes me wonder if NRT could be had at a discount, if say Warren Buffet wanted to expand the footprint of Home Services of America.
Also, the income statement makes it clear that both GCI and Royalties income are down for the quarter. All of the revenue gains in Q1/2011 are from the Relocation and Title segments. The higher average sale price, net effective commission rate and all of that strike me as window dressing to these core numbers. The housing market is still bad, and it’s getting worse. What remains to be seen is whether Realogy can continue to generate higher Service Revenues if GCI and Franchise Fees continue to slide.
Relatedly (?), I’m curious about the increase in Operating Expenses from $300M to $318M; almost $6M per month. Almost every other line item has been cut in Q1, except for this line. What constitutes Operating Expenses? Why did they go up so much?
Finally, Apollo waived its $15M management fee. I haven’t looked at past reports for this post, but I assume they’ve been waiving that fee for some time now. Combined with the early repayment of debt, it suggests to me that Realogy is on the right path but far from being out of the woods. When Apollo starts taking that management fee out of the company again, I’ll believe things are looking very rosy indeed.
Glass Half Full
I still regard this as an overall positive report, primarily because (a) the debt covenant ratio was covered so easily, and (b) Realogy is making extra payments towards the debt. There are some areas of concern — particularly the weakness in the NRT — but those are things that, presumably, Realogy can fix if it really, really wanted to do so.
Don’t write epitaphs for Realogy just yet.