Don’t Let The Loss Fool You; Realogy Is Getting Healthy

Last year, I wrote that Realogy’s numbers looked pretty good to me, despite the fact that Realogy had lost $237m in Q1 of 2011. I figured I might as well dip back into that water since I’m interested in my old corporate home (I started my real estate career at Coldwell Banker Commercial), and well… I guess I’m kinda strange in enjoying looking at financial statements.

So Realogy lost $192m in Q1 of 2012. Sounds bad, right? Well, I know a lot of folks like to point to the big loss number and claim that Realogy is screwed, but… after these results, saying such a thing just exposes you as someone who doesn’t actually read financial reports.

Let’s take a look at a few signs of health that I find very interesting. I did read through the 10-Q, but I think this presentation for the investor call contains enough detail.

Revenues Up, Earnings Up

Very interesting chart here:

First, realize that Realogy posted a 5% increase Y-O-Y in topline revenues from $831m in Q1 of 2011 to $875m in Q1 of 2012. That increase was primarily due to increased revenues from the real estate brokerage operations, rather than from relocation or title. You can see the the Franchise Group pulled 9% more than year before, and the NRT division pulled 5% more.

Second, even though Realogy’s bottomline loss was $237m, recognize that EBITDA (Earnings before interest, taxes, depreciation and amortization) before restructuring charges and some other stuff was up a robust 44% Y-O-Y. The presentation says $36m in EBITDA, although the 10-Q says $30m (maybe a typo?). I also find interesting that the EBITDA for the NRT division was significantly improved, going from a $37m loss in 2011 to a $17m loss in 2012. For a 3 month period, that’s not a bad deal at all.

Okay, yeah, sure, this first quarter’s been red hot for a whole lot of real estate brokers and agents, and maybe everyone else was seeing 25% increase in revenues and 200% increase in EBITDA Y-O-Y, but I don’t have any of that information. But there’s no way that 5% increase in revenues and 44% increase in core operating earnings are bad things, is there?

The Y-O-Y loss number is certainly down from $237m to $192m. And 170m of the 192m loss is because of debt service. Without that, the “loss” is a paltry $22m, and Realogy is booking $45m in depreciation (i.e., that cash never left the building). It’s all looking pretty rosy.

Speaking of debt, Realogy says they’re well within the loan covenant ratio of 4.75:1 at 4.01:1. Recall that in Q3 of 2009, Realogy came very very close to violating that ratio (it was 4.94 debt-to-income when the covenant was 5 to 1). I also noted that Realogy spent $6m in Q1 of 2012 retiring debt. That doesn’t sound all that bad to me.

A Little More Detail

This isn’t gonna be long, since the results seem pretty straightforward to me. But there were a couple more interesting points made during the conference call.

As we have previously discussed, NRT management’s focus on organic growth through sales associate recruiting has been very effective and the trend continued in the first quarter. During the last 12 months, NRT has recruited new sales associates who collectively generated approximately $53 million in annualized gross commission income. More traditional mergers and acquisitions over the same period added about $26 million of GCI. Thus between organic and non-organic growth, NRT added approximately $79 million of GCI to its revenue base during the last 12 months.

The retention of top-performing sales associates is a priority, and NRT management has been highly effective in that regard. In the past two-plus years, NRT has consistently retained over 93% of the production from its first- and second-quartile sales associates, the top-producing segments of its sales force.

At a minimum, that suggests to me that the meme in certain parts of the industry that Realogy brokerages — and in particular the NRT/Coldwell Banker — are embattled, losing top agents, and so on might be overblown a tad. $53 million in GCI from recruiting doesn’t sound like a company fighting for its survival. And again, retaining 93% of the top producers also isn’t bad.

Finally, at least for Realogy, all this wonderful financial news is leavened by the fact that while transaction sides are up, prices are down:

As we saw in the fourth quarter of 2011, an influx in homebuyers at lower price levels continued to be seen in the first quarter’s closed transactions. NRT’s Midwestern operations, which in the fourth quarter of last year saw a 13% increase in homesale sides offset by an average sale price decrease of 8%, had a 21% increase in homesale sides that was offset by an average yearover-year sale price decrease of 7% this past quarter. NRT’s Southern California operations continued to be relatively weak and reported a 1% increase in homesale sides along with a 5% decrease in average sale price compared to Q1 of 2011. Northern California enjoyed a 12% increase in sides and only a 2% decrease in average sale price. The Northeast experienced sides increases of 9% offset by average sale price declines of 4%. The comparisons for the Northeast were somewhat impacted by improved weather, but we believe that pent-up demand at lower price points was the more prominent reason for the increase, which is supported by the decline in average price in the region. As we’ve remarked before, Florida is starting to see overall market inventories return to more normal levels — and at lower price levels, below-normal inventories. That region experienced a 4% decline in units more than offset by a 7% increase in average sale price.

Now, this doesn’t necessarily jive with the idea that the housing market has bottomed, since prices kept falling throughout Q1 (again, at least for Realogy). We’ll see where Q2 comes in at, but the overall financial results for Realogy suggests to me that NAR and Realogy and everyone else in the brokerage business should be eager to see prices keep falling, as the increase in transaction sides will more than offset the decline in price for the actual GCI revenues for brokerages. I mean, crikey, look at the Midwest: 7% decline in price meant 21% increase in sides? Who wouldn’t take that deal?

Fun Fact Nuggets

Let’s end with a couple of fun facts from the report.

• Remember Century21’s SuperBowl ad? Well, we now know what that cost approximately: $8m. Maybe not all of the $8m was the SuperBowl ad, but management mentioned that specifically, so I’m guessing most of it was.
• What C21 got for that spend was 85% bump in site traffic in February, and a 35% increase in traffic for March, as I imagine the Q1 report cuts off in March. Was it worth it? Who knows — only the CMO of Century21 can say for sure. But it does suggest that old-fashioned advertising isn’t as worthless as some might think for some things.
• Realogy also booked $11m in “retention plan expense” for the quarter. I’m not entirely sure what that is, but it sure does sound a whole lot like bonus plans for Realogy executives to keep them around. Given the financial performance as indicated so far, seems like the senior management and the equity holders (Apollo) are feeling more comfortable about how their people are performing. So if you get a job offer from Realogy Corporate… consider taking it. They might have turned that ship around.
• Realogy’s cash-on-hand increased by $5m from Q4/2011 to Q1/2012, from $143m to $148m. For a company that is heavily indebted, but making all of its debt service payments, perhaps that little fact says more about relative health than any other measure.

I’m sure there’s more in the earnings report that professional analysts can tease out. But I’m just a wee little blogger with a bit of an interest in Realogy. And I say, good job, boys and girls at One Campus! Looking very solid indeed.

-rsh