Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with our Condensed Consolidated Financial Statements and accompanying notes thereto included elsewhere herein and with our Consolidated Financial Statements and accompanying notes included in the 2019 Form 10-K. Unless otherwise noted, all dollar amounts in tables are in millions. Neither Realogy Holdings, the indirect parent of Realogy Group, nor Realogy Intermediate, the direct parent company of Realogy Group, conducts any operations other than with respect to its respective direct or indirect ownership of Realogy Group. As a result, the condensed consolidated financial positions, results of operations and cash flows of Realogy Holdings, Realogy Intermediate and Realogy Group are the same. This Management's Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, contains forward-looking statements. See "Forward-Looking Statements" and "Risk Factors" in this Quarterly Report as well as our 2019 Form 10-K for a discussion of the uncertainties, risks and assumptions associated with these statements. Actual results may differ materially from those contained in any forward-looking statements.
OVERVIEW
We are a global provider of real estate services and report our operations in the following three business segments:
•Realogy Franchise Group—franchises the Century 21®, Coldwell Banker®, Coldwell Banker Commercial®, Corcoran®, ERA®, Sotheby's International Realty® and Better Homes and Gardens® Real Estate brand names. As of September 30, 2020, our real estate franchise systems and proprietary brands had approximately 318,000 independent sales agents worldwide, including approximately 189,000 independent sales agents operating in the U.S. (which included approximately 52,400 company owned brokerage independent sales agents). As of September 30, 2020, our real estate franchise systems and proprietary brands had approximately 19,500 offices worldwide in 115 countries and territories, including approximately 5,800 brokerage offices in the U.S. (which included approximately 680 company owned brokerage offices). Realogy Leads Group, which consists of Company- and client- directed affinity programs, broker-to-broker referrals and the Realogy Advantage Broker Network (previously referred to as the Cartus Broker Network) was consolidated in Realogy Franchise Group beginning in the first quarter of 2020 (see Note 10, "Segment Information", to the Condensed Consolidated Financial Statements for additional information).
•Realogy Brokerage Group—operates a full-service real estate brokerage business with approximately 680 owned and operated brokerage offices with approximately 52,400 independent sales agents principally under the Coldwell Banker®, Corcoran® and Sotheby’s International Realty® brand names in many of the largest metropolitan areas in the U.S.
•Realogy Title Group—provides full-service title and settlement services to real estate companies, affinity groups, corporations and financial institutions with many of these services provided in connection with the Company's real estate brokerage business. This segment also includes the Company's share of equity earnings and losses for our Guaranteed Rate Affinity mortgage origination joint venture.
Our technology and data group pursues technology-enabled solutions to support our business segments and franchisees as well as independent sales agents affiliated with Realogy Brokerage and Franchise Groups and their customers.
CURRENT BUSINESS AND INDUSTRY TRENDS
According to the National Association of Realtors ("NAR"), during the three months ended September 30, 2020, homesale transaction volume increased 23% primarily due to a 13% increase in the homesale transactions and a 9% increase in the average homesale price. During the nine months ended September 30, 2020, according to NAR, homesale transaction volume increased 6% due to a 6% increase in the average homesale price and flat homesale transactions.
Homesale transaction volume on a combined basis for Realogy Franchise and Brokerage Groups increased 28% during the three months ended September 30, 2020 compared to the three months ended September 30, 2019. Homesale transaction volume at Realogy Franchise Group increased 31% during such period, primarily as a result of a 17% increase in average homesale price and a 12% increase in existing homesale transactions. Homesale transaction volume at Realogy Brokerage Group increased 22% during such period, primarily as a result of an 11% increase in average homesale price and a 10% increase in existing homesale transactions.
Homesale transaction volume on a combined basis for Realogy Franchise and Brokerage Groups increased 3% during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. Homesale transaction volume at Realogy Franchise Group increased 6% during such period, as a result of a 9% increase in average homesale price, partially offset by a 3% decrease in existing homesale transactions. Homesale transaction volume at Realogy Brokerage Group decreased 2% during such period, as a result of a 5% decrease in existing homesale transactions, partially offset by a 3% increase in average homesale price.
The table below shows the trend of homesale transaction volume from January to September 2020 compared to the prior year and reflects the negative impact of COVID-19 starting in the final weeks of the first quarter of 2020 and recovery late in the second quarter of 2020.
COVID-19 Crisis. A strong recovery in the residential real estate market began late in the second quarter of 2020, following a period of sharp decline in homesale transactions starting in the final weeks of the first quarter of 2020. We attribute the recovery to date to a favorable mortgage rate environment, low inventory contributing to higher average homesale price, and increased demand as the quarantine restrictions in place in many states have begun to be relaxed. In addition, we have observed growing strength in certain trends that we believe are largely driven by behavioral changes related to the COVID-19 crisis, including home buyer preferences for certain geographies, including suburban locations and attractive tax and weather destinations and second home purchases.
During the second quarter of 2020, our company owned brokerages were negatively impacted by steeper declines in closed transactions in densely populated areas, such as California and the New York metropolitan area (geographies which also have an average sales price much higher than the U.S. average), as well as from lower inventory in the high-end markets, resulting in lower homesale transaction volume for company owned brokerages compared to franchised brokerages due to geographic and high-end market concentration. These geographies showed positive growth in September 2020; however, throughout the third quarter, the recovery trajectory in the New York metropolitan area continued to meaningfully lag the general residential real estate market, which continued to impact homesale transaction volume at our company-owned brokerages as compared to franchised brokerages. Although inventory across all price points continues to be constrained, limited inventory in the high-end did not materially impact results at our company owned brokerages in the third quarter of 2020. We believe that the increase in average homesale price at Realogy Franchise Group as compared to the broader market during the 2020 third quarter was primarily driven by particularly strong performance in the high-end of the market by one of our franchised brands.
In mid-March 2020, we began taking a series of proactive cost-saving measures in reaction to the evolving COVID-19 crisis, including salary reductions, furloughs and reductions in marketing and other spending which resulted in substantial cost-savings in the second quarter of 2020 to partially offset the decline in revenues. While these temporary cost-saving measures resulted in cost savings in the second and third quarters of 2020, almost all of such measures were reversed during the third quarter of 2020 based upon the significant improvement in the volume of homesale transactions and ongoing business needs.
There remain significant uncertainties regarding the COVID-19 crisis, including the severity, duration and extent of the pandemic. Our business could be negatively impacted if the crisis, including adverse economic consequences of the crisis, worsen, if directives and mandates requiring businesses to again curtail or cease normal operations are reinstated, if mortgage rates rise, or if housing inventory constraints, across geographies and price point, limit homesale transaction growth. These negative impacts may be more pronounced in future periods and could have a material adverse effect on our results of operations and liquidity.
Inventory. Continued or accelerated declines in inventory, whether attributable to the COVID-19 crisis or otherwise, may result in insufficient supply to meet any increased demand driven by the lower interest rate environment. Even before the COVID-19 crisis, low housing inventory levels had been an industry-wide concern, in particular in certain highly sought-after geographies and at lower price points. According to NAR, the inventory of existing homes for sale in the U.S. decreased approximately 19% from 1.82 million as of September 2019 to 1.47 million as of September 2020. As a result, inventory has decreased from 4.0 months of supply in September 2019 to 2.7 months as of September 2020. These levels continue to be significantly below the 10-year average of 5.4 months, the 15-year average of 6.1 months and the 25-year average of 5.7 months. While insufficient inventory levels generally have a negative impact on homesale transaction growth, during the three months ended September 30, 2020, Realogy Franchise and Brokerage Groups saw a 12% increase in homesale transactions on a combined basis compared to September 30, 2019. We believe that during the third quarter of 2020, the intensified pace of inventory supply turnover contributed to the reported low levels of inventory, without a correlating decrease in homesale transactions. For example, at our company owned Coldwell Banker brokerages, the speed at which a home that was listed for sale went under contract reduced to a median of 19 days on the market in the third quarter of 2020 from a median of 31 days on the market in the third quarter of 2019. There is significant uncertainty as to whether the pattern seen in the third quarter of 2020 of low inventory, but increased homesale transactions driven by supply turnover will continue as constraints in home inventory levels have typically had and may continue to have an adverse impact on the number of homesale transactions closed by Realogy Franchise and Brokerage Groups.
Unemployment. Following the onset of the pandemic, many companies announced reductions in work weeks and salaries, although many people have recently returned to the labor market following weeks or months of COVID-19 induced restrictions. According to the U.S. Bureau of Labor Statistics, while the U.S. unemployment rate declined to 7.9% in September 2020, easing from a high of 14.7% reached in April 2020, this jobless rate still represents a 4.4% increase compared to February 2020. If the COVID-19 pandemic continues to impact employment levels and economic activity for a substantial period, or if jobs recovery continues to slow or worsens, it could lead to an increase in loan defaults and foreclosure activity and may make it more difficult for potential home buyers to arrange financing.
Mortgage Rates. A wide variety of factors can contribute to mortgage rates, including federal interest rates, demand, consumer income, unemployment levels and foreclosure rates. Yields on the 10-year Treasury note hit all-time lows during the COVID-19 crisis and as of September 30, 2020 were 0.69% as compared to 1.68% as of September 30, 2019. In addition, the Federal Reserve Board cut the interest rate two times, dropping its benchmark interest rate to a range of 0% to 0.25% on March 15, 2020. According to Freddie Mac, mortgage rates on commitments for a 30-year, conventional, fixed-rate first mortgage lowered to an average of 2.95% for the third quarter of 2020 compared to 3.67% for the third quarter of 2019. On September 30, 2020, mortgage rates were 2.89%, according to Freddie Mac.
Our financial results are favorably impacted by a low interest rate environment as a decline in mortgage rates generally drives increased refinancing activity and homesale transactions. For example, the Company recorded equity earnings from our mortgage origination joint venture, Guaranteed Rate Affinity, of $95 million and $12 million for the nine months ended September 30, 2020 and 2019 which represented approximately 18% of the Company's Operating EBITDA for the nine months ended September 30, 2020 (as compared to 3% of the Company's Operating EBITDA for the nine months ended September 30, 2019). Realogy Title Group also experienced a 159% increase in the number of title and closing units processed as a result of homeowners refinancing their home loans for the nine months ended September 30, 2020 as compared to the prior year period. The refinancing volume of these businesses are inherently cyclical and this level of volume may not be maintained or may meaningfully decrease with fluctuations in market conditions such as mortgage rates.
Due to the economic effects of the COVID-19 crisis, banks may tighten mortgage standards, even as rates decline, which could limit the availability of mortgage financing. In addition, many individuals and businesses have benefited and may be continuing to benefit from one or more federal and/or state monetary or fiscal programs meant to assist in the navigation of COVID-related financial challenges, and the termination or substantial curtailment of, or failure to extend, such programs could have a negative impact on their financial health. Increases in mortgage rates adversely impact housing affordability and we have been and could again be negatively impacted by a rising interest rate environment.
Affordability. The fixed housing affordability index, as reported by NAR, was consistent year-over-year at 160 for August 2019 and 159 for August 2020. A housing affordability index above 100 signifies that a family earning the median income has sufficient income to purchase a median-priced home, assuming a 20 percent down payment and ability to qualify for a mortgage. Housing affordability may be impacted in future periods by increases in average homesale price and the low inventory environment as well as the rise in unemployment and economic challenges as a result of the COVID-19 crisis, but we are unable to estimate the extent due to the uncertainties of the COVID-19 crisis and its related impact on the U.S. economy.
Recruitment and Retention of Independent Sales Agents; Commission Income. Recruitment and retention of independent sales agents and independent sales agent teams are critical to the business and financial results of a brokerage, including our company owned brokerages and those operated by our affiliated franchisees. Aggressive competition for the affiliation of independent sales agents has negatively impacted recruitment and retention efforts at both Realogy Franchise and Brokerage Groups, in particular with respect to more productive sales agents, and drove a loss in our market share for 2019 compared to 2018. This competitive environment has continued despite general business disruption due to the COVID-19 crisis.
We believe that a variety of factors in recent years have driven intensifying recruitment and retention tactics for independent sales agents in the industry and has increasingly impacted our recruitment and retention of top producing agents. Such factors include increasing competition, increasing levels of commissions paid to agents (including up-front payments and equity), changes in the spending patterns of independent sales agents (as more independent sales agents purchase services from third-parties outside of their affiliated broker), a heightening focus on leads or business opportunities generated for the independent sales agent from the brokerage, differentiation in the bundling of agent services or industry offerings (including non-traditional offerings), and the growth in independent sales agent teams.
In addition, industry competition for independent sales agents has been and is expected to continue to be further complicated by competitive models that do not prioritize traditional business objectives. For example, we believe that certain owned-brokerage competitors have investors that have historically allowed the pursuit of increases in market share over profitability, which not only exacerbates competition for independent sales agents, but places additional pressure on the share of commission income received by the agent.
Competition for productive agents is expected to continue to have a negative impact on our homesale transaction volume and to put upward pressure on the average share of commissions earned by independent sales agents and may have a negative impact on our market share. These competitive market factors also impact our franchisees and such franchisees have and may continue to seek reduced royalty fee arrangements or other incentives from us to offset the continued business pressures on such franchisees, which would result in a reduction in royalty fees paid to us.
Non-Traditional Market Participants. While real estate brokers using historical real estate brokerage models typically compete for business primarily on the basis of services offered, brokerage commission, reputation, utilization of technology and personal contacts, participants pursuing non-traditional methods of marketing real estate may compete in other ways, including companies that employ technologies intended to disrupt historical real estate brokerage models or minimize or eliminate the role traditional brokers and sales agents perform in the homesale transaction process.
A growing number of companies are competing in non-traditional ways for a portion of the gross commission income generated by homesale transactions. For example, many iBuying business models seek to disintermediate real estate brokers and independent sales agents from buyers and sellers of homes by reducing or eliminating brokerage commissions that may be earned on those transactions. In October 2020, we continued to evolve our agent-focused iBuying offerings through the launch of a joint venture with Home Partners of America intended to expand the geographic reach of our RealSure program, which has been available in pilot form in 10 U.S. markets. Under the RealSure Sell program, sellers with qualifying properties receive a cash offer valid for 45 days immediately upon listing, and during this time frame have the opportunity to pursue a better price by marketing their property with an affiliated independent sales agent. Sellers who are enrolled in
RealSure Sell can utilize RealSure Buy to make a more competitive offer on their next home before their current home is sold by leveraging their RealSure Sell cash offer.
In addition, the concentration and market power of the top listing aggregators allow them to monetize their platforms by a variety of actions, including expanding into the brokerage business, charging significant referral fees, charging listing and display fees, diluting the relationship between agents and brokers (and between agents and the consumer), tying referrals to use of their products, consolidating and leveraging data, and engaging in preferential or exclusionary practices to favor or disfavor other industry participants. These actions divert and reduce the earnings of other industry participants, including our company owned and franchised brokerages. Aggregators could intensify their current business tactics or introduce new programs that could be materially disadvantageous to our business and other brokerage participants in the industry and such tactics could further increase pressures on the profitability of our company owned and franchised brokerages and affiliated independent sales agents, reduce our franchisor service revenue and dilute our relationships with our franchisees and our and our franchisees' relationships with affiliated independent sales agents and buyers and sellers of homes. For example, one dominant listing aggregator recently announced its intention to launch a brokerage with employee sales agents in several locations to support its iBuying offering. It also announced that it expects to join local multiple listing services, known as MLSs, as a participating broker to gain electronic access directly to real estate listings rather than relying on disparate electronic feeds from other brokers participating in the MLSs or MLS syndication feeds.
New Development. Realogy Brokerage Group has relationships with developers, primarily in major cities, in particular New York City, to provide marketing and brokerage services in new developments. New development closings can vary significantly from year to year due to timing matters that are outside of our control, including long cycle times and irregular project completion timing. In addition, the new development industry has also experienced significant disruption due to the COVID-19 crisis. Accordingly, earnings attributable to this business can fluctuate meaningfully from year to year, impacting both homesale transaction volume and the share of gross commission income we realize on such transactions.
Existing Homesales
For the nine months ended September 30, 2020 compared to the same period in 2019, NAR existing homesale transactions remained flat at 4 million homes. For the nine months ended September 30, 2020, homesale transactions on a combined basis for Realogy Franchise and Brokerage Groups decreased 4% compared to the same period in 2019 due primarily to the impact of the COVID-19 crisis on second quarter homesale transaction volume, the impact of competition (including on our market share), the loss of certain franchisees and the geographic concentration of Realogy Brokerage Group.
During the three months ended September 30, 2020, NAR's existing homesale transactions increased 13% as compared to an increase in homesale transactions of 12% at Realogy Franchise Group and 10% at Realogy Brokerage Group (for an increase of 12% on a combined basis). The quarterly and annual year-over-year trends in homesale transactions are as follows:
_______________
(a)Q1, Q2 and Q3 existing homesale data is as of the most recent NAR press release, which is subject to sampling error.
(b)Forecasted existing homesale data, on a seasonally adjusted basis, is as of the most recent NAR forecast.
(c)Forecasted existing homesale data, on a seasonally adjusted basis, is as of the most recent Fannie Mae press release.
As of their most recent releases, NAR is forecasting existing homesale transactions to increase 9% in 2021 while Fannie Mae is forecasting existing homesale transactions to increase 1% for the same period.
Existing Homesale Price
For the nine months ended September 30, 2020 compared to the same period in 2019, NAR existing homesale average price increased 6%. For the nine months ended September 30, 2020, average homesale price on a combined basis for Realogy Franchise and Brokerage Groups increased 7% compared to the same period in 2019.
During the three months ended September 30, 2020, NAR's existing homesale average price increased 9% as compared to an average homesale price increase of 17% at Realogy Franchise Group and 11% at Realogy Brokerage Group (for an increase of 14% on a combined basis). We believe that the delta between Realogy Brokerage Group and Realogy Franchise Group in the 2020 third quarter was primarily driven by Realogy Brokerage Group's geographic concentration in the New York metropolitan area. We believe that the delta between Realogy Franchise Group and NAR in the 2020 third quarter was primarily driven by particularly strong performance by one of Realogy Franchise Group's brands in the high-end of the market. The quarterly and annual year-over-year trends in the price of homes are as follows:
_______________
(a)Q1, Q2 and Q3 homesale price data is for existing homesale average price and is as of the most recent NAR press release.
(b)Forecasted homesale price data is for median price and is as of the most recent NAR forecast.
(c)Existing homesale price data is for median price and is as of the most recent Fannie Mae press release.
As of their most recent releases, NAR and Fannie Mae are both forecasting median existing homesale price to increase 4% in 2021.
* * *
We believe that long-term demand for housing and the growth of our industry are primarily driven by the affordability of housing, the economic health of the U.S. economy, demographic trends such as generational transitions, increases in U.S. household formation, mortgage rate levels and mortgage availability, certain tax benefits, job growth, increases in renters that qualify as homebuyers, the inherent attributes of homeownership versus renting and the availability of inventory in the consumer's desired location and within the consumer's price range. At this time, certain of these factors are trending favorably, such as mortgage rate levels and household formation, although the COVID-19 pandemic continues to materially impact the entire industry and the global economy. Factors that may negatively affect growth in the housing industry include:
•the extent, duration and severity of the COVID-19 pandemic and the economic consequences stemming from the COVID-19 crisis, including continued economic contraction or the failure of a recovery to be sustained as well as related risks such as governmental regulation (including those that preclude or strictly limit showings of properties), changes in patterns of commerce or consumer activities and changes in consumer attitudes;
•intensifying or continuing economic contraction in the U.S. economy including the impact of recessions, slow economic growth, or a deterioration in other economic factors (including potential consumer, business or governmental defaults or delinquencies due to the COVID-19 crisis or otherwise);
•continued low or accelerated declines in home inventory levels or stagnant and/or declining home prices;
•continued high levels of unemployment and/or declining wages or stagnant wage growth in the U.S.;
•the termination or substantial curtailment of, or failure to extend, one or more federal and/or state monetary or fiscal programs meant to assist businesses and individuals navigate COVID-19 related financial challenges;
•decreasing consumer confidence in the economy and/or the residential real estate market;
•an increase in potential homebuyers with low credit ratings or inability to afford down payments;
•reduced availability of mortgage financing or increasing down payment requirements or other mortgage challenges due to disrupted earnings;
•weak capital, credit and financial markets and/or the instability of financial institutions;
•an increase in foreclosure activity;
•a reduction in the affordability of homes, including in connection with rising home prices;
•increases in mortgage rates;
•certain provisions of the 2017 Tax Act that directly impact traditional incentives associated with home ownership and may reduce the financial distinction between renting and owning a home, including those that reduce the amount that certain taxpayers would be allowed to deduct for home mortgage interest or state, local and property taxes;
•state or local tax reform, such as the "mansion tax" in New York City;
•decelerated or lack of building of new housing for homesales, increased building of new rental properties, or irregular timing of new development closings leading to lower home sales at Realogy Brokerage Group, which has relationships with developers, primarily in major cities, to provide marketing and brokerage services in new developments;
•geopolitical and economic instability, including uncertainty around the 2020 U.S. election;
•homeowners retaining their homes for longer periods of time;
•a decline in home ownership levels in the U.S., including as a result of changing attitudes towards home ownership, particularly among potential first-time homebuyers who may delay, or decide not to, purchase a home, limits on the proclivity of home owners to purchase an alternative home due to constrained inventory, or changes in preferences to rent versus purchase a home;
•natural disasters, such as hurricanes, earthquakes, wildfires, mudslides and other events that disrupt local or regional real estate markets, including public health crises, such as pandemics and epidemics; and
•other legislative or regulatory reforms, including but not limited to reform that adversely impacts the financing of the U.S. housing market, changes relating to RESPA, potential reform of Fannie Mae and Freddie Mac, immigration reform, and further potential federal, state or local tax code reform (including, for example, the proposed "pied-a-terre tax" in New York City).
Cartus Relocation Services is impacted by these general residential housing trends as well as global corporate spending on relocation services (which continue to shift to lower cost relocation benefits as corporate clients engage in cost reduction initiatives and/or restructuring programs) and changes in employment relocation trends.
* * *
While data provided by NAR and Fannie Mae are two indicators of the direction of the residential housing market, we believe that homesale statistics will continue to vary between us and NAR and Fannie Mae because:
•they use survey data and estimates in their historical reports and forecasting models, which are subject to sampling error, whereas we use data based on actual reported results;
•there are geographical differences and concentrations in the markets in which we operate versus the national market. For example, many of our company owned brokerage offices are geographically located where average homesale prices are generally higher than the national average and therefore NAR survey data will not correlate with Realogy Brokerage Group's results;
•comparability is also diminished due to NAR’s utilization of seasonally adjusted annualized rates whereas we report actual period-over-period changes and their use of median price for their forecasts compared to our average price;
•NAR historical data is subject to periodic review and revision and these revisions have been material in the past, and could be material in the future; and
•NAR and Fannie Mae generally update their forecasts on a monthly basis and a subsequent forecast may change materially from a forecast that was previously issued.
While we believe that the industry data presented herein is derived from the most widely recognized sources for reporting U.S. residential housing market statistical data, we do not endorse or suggest reliance on this data alone. We also note that forecasts are inherently uncertain or speculative in nature and actual results for any period could materially differ.
KEY DRIVERS OF OUR BUSINESSES
Within Realogy Franchise and Brokerage Groups, we measure operating performance using the following key operating metrics: (i) closed homesale sides, which represents either the "buy" side or the "sell" side of a homesale transaction, (ii) average homesale price, which represents the average selling price of closed homesale transactions, and (iii) average homesale broker commission rate, which represents the average commission rate earned on either the "buy" side or "sell" side of a homesale transaction.
For Realogy Franchise Group, we also use net royalty per side, which represents the royalty payment to Realogy Franchise Group for each homesale transaction side taking into account royalty rates, average broker commission rates, volume incentives achieved and other incentives. We utilize net royalty per side as it includes the impact of changes in average homesale price as well as all incentives and represents the royalty revenue impact of each incremental side.
For Realogy Brokerage Group, we also use gross commission income per side, which represents gross commission income divided by closed homesale sides. Gross commission income includes commissions earned in homesale transactions and certain other activities, primarily leasing transactions. Realogy Brokerage Group, as a franchisee of Realogy Franchise Group, pays a royalty fee of approximately 6% per transaction to Realogy Franchise Group from the commission earned on a real estate transaction. The remainder of gross commission income is split between the broker (Realogy Brokerage Group) and the independent sales agent in accordance with their applicable independent contractor agreement (which specifies the portion of the broker commission to be paid to the agent), which varies by agent agreement, which varies by agent.
In Realogy Title Group, operating performance is evaluated using the following key metrics: (i) purchase title and closing units, which represent the number of title and closing units we process as a result of home purchases, (ii) refinance title and closing units, which represent the number of title and closing units we process as a result of homeowners refinancing their home loans, and (iii) average fee per closing unit, which represents the average fee we earn on purchase title and refinancing title sides. Results are favorably impacted by the low mortgage rate environment. An increase or decrease in homesale transactions will impact the financial results of Realogy Title Group; however, their financial results are not significantly impacted by a change in homesale price.
Realogy Leads Group, which consists of Company- and client- directed affinity programs, broker-to-broker referrals and the Realogy Advantage Broker Network (previously referred to as the Cartus Broker Network) was consolidated into Realogy Franchise Group during the first quarter of 2020.
For the three months ended September 30, 2020, Cartus Relocation Services had 15,097 initiations as compared to 21,020 initiations during the same period in 2019. Cartus Relocation Services earned referral fee revenue from approximately 3,417 referrals for the three months ended September 30, 2020 as compared to 4,698 referrals during the same period of 2019. For the nine months ended September 30, 2020, Cartus Relocation Services had 60,713 initiations as compared to 80,331 initiations during the same period of 2019. Cartus Relocation Services earned referral fee revenue from approximately 9,005 referrals for the nine months ended September 30, 2020 as compared to 11,808 referrals during the same period of 2019. Cartus Relocation Services experienced a decline in new initiations attributable to the COVID-19 pandemic in the second and third quarters of 2020 and this trend is expected to continue.
The following table presents our drivers for the three and nine months ended September 30, 2020 and 2019. See "Results of Operations" below for a discussion as to how these drivers affected our business for the periods presented.
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Three Months Ended September 30,
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Nine Months Ended September 30,
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2020
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2019
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% Change
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2020
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2019
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% Change
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Realogy Franchise Group (a)
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Closed homesale sides
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336,737
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299,937
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12
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%
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778,010
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803,976
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(3)
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%
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Average homesale price
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$
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367,095
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$
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314,984
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17
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%
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$
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341,427
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$
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312,224
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9
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%
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Average homesale broker commission rate
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2.48
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%
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2.47
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%
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1
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bps
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2.48
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%
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2.47
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%
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1
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bps
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Net royalty per side
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$
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367
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$
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329
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12
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%
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$
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341
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$
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323
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6
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%
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Realogy Brokerage Group
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Closed homesale sides
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101,890
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92,399
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10
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%
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235,806
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248,092
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(5)
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%
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Average homesale price
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$
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563,513
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$
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509,425
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11
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%
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$
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537,602
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$
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522,050
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3
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%
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Average homesale broker commission rate
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2.44
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%
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2.41
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%
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3
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bps
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2.43
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%
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2.41
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%
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2
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bps
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Gross commission income per side
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$
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14,315
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$
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13,000
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10
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%
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$
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13,685
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$
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13,343
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3
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%
|
|
Realogy Title Group
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase title and closing units
|
45,788
|
|
|
41,619
|
|
|
10
|
%
|
|
106,540
|
|
|
111,865
|
|
|
(5)
|
%
|
|
Refinance title and closing units
|
18,387
|
|
|
8,014
|
|
|
129
|
%
|
|
44,834
|
|
|
17,295
|
|
|
159
|
%
|
|
Average fee per closing unit
|
$
|
2,239
|
|
|
$
|
2,288
|
|
|
(2)
|
%
|
|
$
|
2,189
|
|
|
$
|
2,308
|
|
|
(5)
|
%
|
_______________
(a)Includes all franchisees except for Realogy Brokerage Group.
A decline in the number of homesale transactions and/or decline in homesale prices could adversely affect our results of operations by: (i) reducing the royalties we receive from our franchisees, (ii) reducing the commissions our company owned brokerage operations earn, (iii) reducing the demand for our title and settlement services, (iv) reducing the referral fees we earn from affinity, broker-to-broker and the Realogy Advantage Leads Network, and (v) increasing the risk of franchisee default due to lower homesale volume. Our results could also be negatively affected by a decline in commission rates charged by brokers or greater commission payments to sales agents or by an increase in volume or other incentives paid to franchisees.
Since 2014, we have experienced approximately a one basis point decline in the average homesale broker commission rate each year, which we believe has been largely attributable to increases in average homesale prices (as higher priced homes tend to have a lower broker commission) and, to a lesser extent, competitors providing fewer or similar services for a reduced fee.
Royalty fees are charged to all franchisees pursuant to the terms of the relevant franchise agreements and are included in each of the real estate brands' franchise disclosure documents. Most of our third-party franchisees are subject to a 6% royalty rate and entitled to volume incentives, although a royalty fee generally equal to 5% of franchisee commission (capped at a set amount per independent sales agent per year) is applicable to franchisees operating under the "capped fee model" that was launched for our Better Homes and Gardens® Real Estate franchise business in January 2019. Volume incentives are calculated as a progressive percentage of the applicable franchisee's eligible annual gross commission income
and generally result in a net or effective royalty rate ranging from 6% to 3% for the franchisee (prior to taking into account other incentives that may be applicable to the franchisee). Volume incentives increase or decrease as the franchisee's gross commission income generated increases or decreases, respectively. We have the right to adjust the annual volume incentive tables on an annual basis in response to changing market conditions. In addition, certain of our franchisees (including some of our largest franchisees) have a flat royalty rate of less than 6% and are not eligible for volume incentives.
Other incentives may also be used as consideration to attract new franchisees, grow franchisees (including through independent sales agent recruitment) or extend existing franchise agreements, although in contrast to volume incentives, the majority of other incentives are not homesale transaction based.
Transaction volume growth has exceeded royalty revenue growth due primarily to the growth in gross commission income generated by our top 250 franchisees and our increased use of other sales incentives, both of which directly impact royalty revenue. Over the past several years, our top 250 franchisees have grown faster than our other franchisees through organic growth and market consolidation. If the amount of gross commission income generated by our top 250 franchisees continues to grow at a quicker pace relative to our other franchisees, we would expect our royalty revenue to continue to increase, but at a slower pace than homesale transaction volume. Likewise, our royalty revenue would continue to increase, but at a slower pace than homesale transaction volume, if the gross commission income generated by all of our franchisees grows faster than the applicable annual volume incentive table increase or if we increase our use of standard volume or other incentives. However, in the event that the gross commission income generated by our franchisees increases as a result of increased transaction volume, we would expect to recognize an increase in overall royalty payments to us.
We face significant competition from other national real estate brokerage brand franchisors for franchisees and we expect that the trend of increasing incentives will continue in the future in order to attract, retain, and help grow certain franchisees. We expect to experience pressures on net royalty per side, largely due to the impact of competitive market factors noted above, continued concentration among our top 250 franchisees, and the impact of affiliated franchisees of our Better Homes and Gardens® Real Estate brand moving to the "capped fee model" we adopted in 2019; however, these pressures were offset by increases in homesale prices in the three and nine-month periods ended September 30, 2020.
Realogy Brokerage Group has a significant concentration of real estate brokerage offices and transactions in geographic regions where home prices are at the higher end of the U.S. real estate market, particularly the east and west coasts, while Realogy Franchise Group has franchised offices that are more widely dispersed across the United States. Accordingly, operating results and homesale statistics may differ between Realogy Brokerage Group and Realogy Franchise Group based upon geographic presence and the corresponding homesale activity in each geographic region. In addition, the share of commissions earned by independent sales agents directly impacts the margin earned by Realogy Brokerage Group. Such share of commissions earned by independent sales agents varies by region and commission schedules are generally progressive to incentivize sales agents to achieve higher levels of production. Commission share has been and we expect will continue to be subject to upward pressure in favor of the independent sales agent for a variety of factors, including more aggressive recruitment and retention activities taken by us and our competitors as well as growth in independent sales agent teams.
RESULTS OF OPERATIONS
Discussed below are our condensed consolidated results of operations and the results of operations for each of our reportable segments. The reportable segments presented below represent our segments for which separate financial information is available and which is utilized on a regular basis by our chief operating decision maker to assess performance and to allocate resources. In identifying our reportable segments, we also consider the nature of services provided by our segments. Management evaluates the operating results of each of our reportable segments based upon revenue and Operating EBITDA. Operating EBITDA is defined by us as net income (loss) before depreciation and amortization, interest expense, net, income taxes, and other items that are not core to the operating activities of the Company such as restructuring charges, former parent legacy items, gains or losses on the early extinguishment of debt, impairments, gains or losses on discontinued operations and gains or losses on the sale of investments or other assets. Our presentation of Operating EBITDA may not be comparable to similarly titled measures used by other companies.
Our results of operations should be read in conjunction with our other disclosures in this Item 2. including under the heading Current Business and Industry Trends.
Three Months Ended September 30, 2020 vs. Three Months Ended September 30, 2019
Our consolidated results comprised the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
2020
|
|
2019
|
|
Change
|
|
Net revenues
|
$
|
1,857
|
|
|
$
|
1,550
|
|
|
$
|
307
|
|
|
Total expenses
|
1,711
|
|
|
1,700
|
|
|
11
|
|
|
Income (loss) from continuing operations before income taxes, equity in earnings and noncontrolling interests
|
146
|
|
|
(150)
|
|
|
296
|
|
|
Income tax expense (benefit)
|
54
|
|
|
(23)
|
|
|
77
|
|
|
Equity in earnings of unconsolidated entities
|
(53)
|
|
|
(7)
|
|
|
(46)
|
|
|
Net income (loss) from continuing operations
|
145
|
|
|
(120)
|
|
|
265
|
|
|
Net (loss) income from discontinued operations
|
(46)
|
|
|
8
|
|
|
(54)
|
|
|
Net income (loss)
|
99
|
|
|
(112)
|
|
|
211
|
|
|
Less: Net income attributable to noncontrolling interests
|
(1)
|
|
|
(1)
|
|
|
—
|
|
|
Net income (loss) attributable to Realogy Holdings and Realogy Group
|
$
|
98
|
|
|
$
|
(113)
|
|
|
$
|
211
|
|
Net revenues increased $307 million or 20% for the three months ended September 30, 2020 compared with the three months ended September 30, 2019 driven by higher homesale transaction volume at both Realogy Franchise and Brokerage Groups primarily due to a strong recovery in the residential real estate market which began late in the second quarter of 2020 following a period of sharp decline in homesale transactions starting in the final weeks of the first quarter of 2020.
Total expenses increased $11 million or 1% for the third quarter of 2020 compared to the third quarter of 2019 primarily due to:
•a $230 million increase in commission and other sales agent-related costs primarily as a result of the impact of higher homesale transaction volume at Realogy Brokerage Group and higher agent commission costs primarily driven by a shift in mix to more productive, higher compensated agents, the impact of retention efforts, and business and geographic mix;
•a $27 million increase in operating and general and administrative expenses primarily due to higher employee incentive accruals, partially offset by lower employee-related, occupancy and other operating costs as a result of temporary COVID-19 related cost savings initiatives; and
•the absence of a $10 million gain on the early extinguishment of debt as a result of the repurchase of Senior Notes completed in the third quarter of 2019,
partially offset by:
•lease asset impairments of $6 million during the third quarter of 2020 compared to impairments of $240 million during the third quarter of 2019 which included a goodwill impairment charge of $237 million (reducing the net carrying value of Realogy Brokerage Group by $180 million after accounting for the related income tax benefit of $57 million) and $3 million related to lease asset impairments;
•an $18 million net decrease in interest expense primarily due to a $12 million decline in expense related to mark-to-market adjustments for our interest rate swaps that resulted in no gains or losses during the third quarter of 2020 compared to losses of $12 million during the third quarter of 2019 and a decrease in interest expense due to LIBOR rate decreases; and
•a $7 million decrease in marketing expense primarily due to not holding in person meetings and conferences and lower advertising costs due to the COVID-19 pandemic.
Equity in earnings were $53 million during the third quarter of 2020 compared to earnings of $7 million during the third quarter of 2019 primarily due to an improvement in earnings of Guaranteed Rate Affinity at Realogy Title Group. Equity in earnings for Guaranteed Rate Affinity represented approximately 17% of the Company's Operating EBITDA for the third quarter of 2020, increasing by $46 million from $5 million in the third quarter of 2019 to $51 million in the third quarter of 2020 as a result of the low mortgage rate environment and improved margins in the venture. Equity in earnings for Realogy Title Group's other equity method investments remained flat at $2 million during the third quarter of 2020 and 2019.
During the third quarter of 2020, we incurred $13 million of restructuring costs primarily related to the Company's restructuring program focused on office consolidation and instituting operational efficiencies to drive profitability. The Company expects the estimated total cost to be approximately $108 million, with $74 million incurred to date. See Note 6, "Restructuring Costs", to the Condensed Consolidated Financial Statements for additional information.
The provision for income taxes was an expense of $54 million for the three months ended September 30, 2020 compared to a benefit of $23 million for the three months ended September 30, 2019. Our effective tax rate was 27% and 16% for the three months ended September 30, 2020 and September 30, 2019, respectively.
The following table reflects the results of each of our reportable segments during the three months ended September 30, 2020 and 2019:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues (a)
|
|
$ Change
|
|
%
Change
|
|
Operating EBITDA
|
|
$ Change
|
|
%
Change
|
|
Operating EBITDA Margin
|
|
Change
|
|
|
2020
|
|
2019
|
|
|
|
2020
|
|
2019
|
|
|
|
2020
|
|
2019
|
|
|
Realogy Franchise Group
|
$
|
262
|
|
|
$
|
240
|
|
|
$
|
22
|
|
|
9
|
%
|
|
$
|
196
|
|
|
$
|
170
|
|
|
$
|
26
|
|
|
15
|
%
|
|
75
|
%
|
|
71
|
%
|
|
4
|
|
|
Realogy Brokerage Group
|
1,479
|
|
|
1,222
|
|
|
257
|
|
|
21
|
|
|
61
|
|
|
31
|
|
|
30
|
|
|
97
|
|
|
4
|
|
|
3
|
|
|
1
|
|
|
Realogy Title Group
|
213
|
|
|
170
|
|
|
43
|
|
|
25
|
|
|
95
|
|
|
31
|
|
|
64
|
|
|
206
|
|
45
|
|
|
18
|
|
|
27
|
|
|
Corporate and Other
|
(97)
|
|
|
(82)
|
|
|
(15)
|
|
|
*
|
|
(43)
|
|
|
(26)
|
|
|
(17)
|
|
|
*
|
|
|
|
|
|
|
|
Total continuing operations
|
$
|
1,857
|
|
|
$
|
1,550
|
|
|
$
|
307
|
|
|
20
|
%
|
|
$
|
309
|
|
|
$
|
206
|
|
|
$
|
103
|
|
|
50
|
%
|
|
17
|
%
|
|
13
|
%
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Depreciation and amortization
|
|
43
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
48
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
54
|
|
|
(23)
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring costs, net (b)
|
|
13
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairments (c)
|
|
6
|
|
|
240
|
|
|
|
|
|
|
|
|
|
|
|
|
Former parent legacy cost, net (d)
|
|
1
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on the early extinguishment of debt (d)
|
|
—
|
|
|
(10)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations attributable to Realogy Holdings and Realogy Group
|
|
144
|
|
|
(121)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from discontinued operations
|
|
(46)
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Realogy Holdings and Realogy Group
|
|
$
|
98
|
|
|
$
|
(113)
|
|
|
|
|
|
|
|
|
|
|
|
_______________
* not meaningful
(a)Includes the elimination of transactions between segments, which consists of intercompany royalties and marketing fees paid by Realogy Brokerage Group of $97 million and $82 million during the three months ended September 30, 2020 and 2019, respectively.
(b)Restructuring charges incurred for the three months ended September 30, 2020 include $11 million at Realogy Brokerage Group and $2 million at Corporate and Other. Restructuring charges incurred for the three months ended September 30, 2019 include $2 million at Realogy Franchise Group, $8 million at Realogy Brokerage Group and $1 million at Corporate and Other.
(c)Impairments for the three months ended September 30, 2020 relate to lease asset impairments. Impairments for the three months ended September 30, 2019 include a goodwill impairment charge of $237 million (which reduced the net carrying value of Realogy
Brokerage Group by $180 million after accounting for the related income tax benefit of $57 million) and $3 million related to lease asset impairments.
(d)Former parent legacy items and Gain on the early extinguishment of debt are recorded in Corporate and Other. During the third quarter of 2019, the Company repurchased $93 million of its 4.875% Senior Notes through open market purchases resulting in a gain on the early extinguishment of debt of $10 million.
As described in the aforementioned table, Operating EBITDA margin for "Total continuing operations" expressed as a percentage of revenues increased 4 percentage points to 17% for the three months ended September 30, 2020 compared to 13% for the same period in 2019. On a segment basis, Realogy Franchise Group's margin increased 4 percentage points to 75% from 71% primarily due to an increase in royalty revenues. Realogy Brokerage Group's margin increased 1 percentage point to 4% from 3% primarily due to lower operating and employee expenses primarily due to temporary COVID-19 related cost savings initiatives, partially offset by higher agent commission costs primarily driven by a shift in mix to more productive, higher compensated agents, the impact of retention efforts, and business and geographic mix. Realogy Title Group's margin increased 27 percentage points to 45% from 18% primarily as a result of an increase in equity in earnings of Guaranteed Rate Affinity as a result of the low mortgage rate environment and improved margins in the venture.
The Corporate and Other segment Operating EBITDA for the three months ended September 30, 2020 decreased $17 million to negative $43 million primarily due to higher employee incentive accruals.
Realogy Franchise and Brokerage Groups on a Combined Basis
The following table reflects Realogy Franchise and Brokerage Group's results before the intercompany royalties and marketing fees as well as on a combined basis to show the Operating EBITDA contribution of these business segments to the overall Operating EBITDA of the Company. The Operating EBITDA margin for the combined segments increased 1 percentage point from 15% to 16% primarily due to lower operating and employee expenses primarily due to temporary COVID-19 related cost savings initiatives and an increase in royalty revenues at Realogy Franchise Group, partially offset by higher agent commission costs at Realogy Brokerage Group during the third quarter of 2020 compared to the third quarter of 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ Change
|
|
%
Change
|
|
Operating EBITDA
|
|
$ Change
|
|
%
Change
|
|
Operating EBITDA Margin
|
|
Change
|
|
|
2020
|
|
2019
|
|
|
|
2020
|
|
2019
|
|
|
|
2020
|
|
2019
|
|
|
Realogy Franchise Group (a)
|
$
|
165
|
|
|
$
|
158
|
|
|
7
|
|
|
4
|
|
|
$
|
99
|
|
|
$
|
88
|
|
|
11
|
|
|
13
|
|
|
60
|
%
|
|
56
|
%
|
|
4
|
|
|
Realogy Brokerage Group (a)
|
1,479
|
|
|
1,222
|
|
|
257
|
|
|
21
|
|
|
158
|
|
|
113
|
|
|
45
|
|
|
40
|
|
|
11
|
|
|
9
|
|
|
2
|
|
|
Realogy Franchise and Brokerage Groups Combined
|
$
|
1,644
|
|
|
$
|
1,380
|
|
|
264
|
|
|
19
|
|
|
$
|
257
|
|
|
$
|
201
|
|
|
56
|
|
|
28
|
|
|
16
|
%
|
|
15
|
%
|
|
1
|
|
_______________
(a)The segment numbers noted above do not reflect the impact of intercompany royalties and marketing fees paid by Realogy Brokerage Group to Realogy Franchise Group of $97 million and $82 million during the three months ended September 30, 2020 and 2019, respectively.
Realogy Franchise Group
Revenues increased $22 million to $262 million and Operating EBITDA increased $26 million to $196 million for the three months ended September 30, 2020 compared with the same period in 2019.
Revenues increased $22 million primarily as a result of:
•a $24 million increase in third-party domestic franchisee royalty revenue primarily due to a 31% increase in homesale transaction volume at Realogy Franchise Group which consisted of a 17% increase in average homesale price and a 12% increase in existing homesale transactions; and
•a $16 million increase in intercompany royalties received from Realogy Brokerage Group,
partially offset by:
•a $10 million decrease in lead referral revenues driven by lower volume and referral transactions primarily driven by the discontinuation of the USAA affinity program which ceased new enrollments in the third quarter of 2019;
•a $5 million decrease in revenue related to the early termination of third party listing fee agreements; and
•a $2 million decrease in registration and brand marketing fund revenue, which had a related expense decrease of $5 million resulting in a $3 million net positive impact on Operating EBITDA, due to not holding in person meetings
and conferences and lower advertising costs due to the COVID-19 pandemic in the third quarter of 2020 compared to the third quarter of 2019.
Realogy Franchise Group revenue includes intercompany royalties received from Realogy Brokerage Group of $94 million and $78 million during the third quarter of 2020 and 2019, respectively, which are eliminated in consolidation against the expense reflected in Realogy Brokerage Group's results.
The $26 million increase in Operating EBITDA was primarily due to the $22 million increase in revenues and the $5 million decrease in marketing expense discussed above, partially offset by higher employee incentive accruals.
Realogy Brokerage Group
Revenues increased $257 million to $1,479 million and Operating EBITDA increased $30 million to $61 million for the three months ended September 30, 2020 compared with the same period in 2019.
The revenue increase of $257 million was primarily driven by a 22% increase in homesale transaction volume at Realogy Brokerage Group which primarily consisted of an 11% increase in average homesale price and a 10% increase in existing homesale transactions due to a strong recovery in the residential real estate market which began in the late second quarter of 2020 following a period of sharp decline in homesale transactions starting in the final weeks of the first quarter of 2020.
Operating EBITDA increased $30 million primarily due to:
•a $257 million increase in revenues discussed above;
•a $15 million decrease in employee-related, occupancy costs and other operating costs due primarily to temporary COVID-19 related cost savings initiatives, partially offset by higher employee incentive accruals; and
•a $4 million decrease in marketing expense due to lower advertising costs as a result of the COVID-19 pandemic,
partially offset by:
•a $230 million increase in commission expenses paid to independent sales agents from $875 million in the third quarter of 2019 to $1,105 million in the third quarter of 2020. Commission expense increased primarily as a result of the impact of higher homesale transaction volume as discussed above, as well as higher agent commission costs primarily driven by a shift in mix to more productive, higher compensated agents, the impact of retention efforts, and business and geographic mix; and
•a $16 million increase in royalties paid to Realogy Franchise Group from $78 million in the third quarter of 2019 to $94 million in the third quarter of 2020 associated with the homesale transaction volume increase as described above.
Realogy Title Group
Revenues increased $43 million to $213 million and Operating EBITDA increased $64 million to $95 million for the three months ended September 30, 2020 compared with the same period in 2019.
Revenues increased $43 million primarily as a result of a $17 million increase in resale revenue due to an increase in purchase transactions, a $12 million increase in underwriter revenue with unaffiliated agents, which had a $2 million net positive impact on Operating EBITDA due to the related expense increase of $10 million, and an $11 million increase in refinance revenue due to an increase in activity in the refinance market.
Operating EBITDA increased $64 million primarily as a result of a $46 million increase in equity in earnings related to Guaranteed Rate Affinity due to the favorable mortgage rate environment and improved margins in the venture, a $17 million increase in resale revenue, an $11 million increase in refinance revenue and the $2 million net positive impact in underwriter transactions with unaffiliated agents discussed above, partially offset by a $15 million increase in employee and other operating costs due to an increase in variable costs due to higher volume and higher employee incentive accruals.
Discontinued Operations - Cartus Relocation
Revenues for Cartus Relocation Services decreased $27 million to $52 million and Operating EBITDA decreased $13 million to $4 million for the three months ended September 30, 2020 compared with the same period in 2019.
Revenues decreased $27 million primarily as a result of a $10 million decrease in international revenue, a $10 million decrease in other relocation revenue and a $7 million decrease in referral revenue, which were primarily driven by lower volume largely related to the COVID-19 pandemic. Cartus Relocation Services experienced a decline in new initiations due to the COVID-19 pandemic in the second and third quarters of 2020 and this trend is expected to continue.
Operating EBITDA decreased $13 million due to the revenue decrease discussed above, partially offset by a decrease in employee and other operating costs as a result of cost savings initiatives.
Nine Months Ended September 30, 2020 vs. Nine Months Ended September 30, 2019
Our consolidated results comprised the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2020
|
|
2019
|
|
Change
|
|
Net revenues
|
$
|
4,180
|
|
|
$
|
4,268
|
|
|
$
|
(88)
|
|
|
Total expenses
|
4,607
|
|
|
4,441
|
|
|
166
|
|
|
Loss from continuing operations before income taxes, equity in earnings and noncontrolling interests
|
(427)
|
|
|
(173)
|
|
|
(254)
|
|
|
Income tax benefit
|
(67)
|
|
|
(22)
|
|
|
(45)
|
|
|
Equity in earnings of unconsolidated entities
|
(98)
|
|
|
(15)
|
|
|
(83)
|
|
|
Net loss from continuing operations
|
(262)
|
|
|
(136)
|
|
|
(126)
|
|
|
Net loss from discontinued operations
|
(114)
|
|
|
(5)
|
|
|
(109)
|
|
|
Net loss
|
(376)
|
|
|
(141)
|
|
|
(235)
|
|
|
Less: Net income attributable to noncontrolling interests
|
(2)
|
|
|
(2)
|
|
|
—
|
|
|
Net loss attributable to Realogy Holdings and Realogy Group
|
$
|
(378)
|
|
|
$
|
(143)
|
|
|
$
|
(235)
|
|
Net revenues decreased $88 million or 2% for the nine months ended September 30, 2020 compared with the nine months ended September 30, 2019 driven by lower homesale transaction volume at Realogy Brokerage Group primarily due to the COVID-19 pandemic, which resulted in a sharp decline in homesale transactions starting in the final weeks of the first quarter of 2020 followed by a strong recovery in the residential real estate market beginning late in the second quarter of 2020.
Total expenses increased $166 million or 4% for the nine months ended September 30, 2020 compared to the same period of 2019 primarily due to:
•impairments of $460 million during the nine months ended September 30, 2020 compared to impairments of $243 million during the nine months ended September 30, 2019. The nine months ended September 30, 2020 include a goodwill impairment charge of $413 million (which reduced the net carrying value of Realogy Brokerage Group by $314 million after accounting for the related income tax benefit of $99 million), an impairment charge of $30 million (which reduced the carrying value of trademarks at Realogy Franchise Group) and $17 million related to lease asset impairments. The nine months ended September 30, 2019 include a goodwill impairment charge of $237 million (which reduced the net carrying value of Realogy Brokerage Group by $180 million after accounting for the related income tax benefit of $57 million) and $6 million related to lease asset impairments;
•a $15 million increase in commission and other sales agent-related costs primarily as a result of higher agent commission costs primarily driven by a shift in mix to more productive, higher compensated agents, the impact of retention efforts, and business and geographic mix;
•an $8 million loss on the early extinguishment of debt during the nine months ended September 30, 2020 as a result of the refinancing transactions in June 2020 compared to a $5 million net gain on the early extinguishment of debt during the nine months ended September 30, 2019 primarily due to the repurchase of Senior Notes during the third quarter of 2019; and
•a $9 million increase in restructuring costs,
partially offset by:
•a $50 million decrease in operating and general and administrative expenses primarily due to lower employee-related, occupancy and other operating costs as a result of temporary COVID-19 related cost savings initiatives, partially offset by higher employee incentive accruals; and
•a $45 million decrease in marketing expense primarily due to not holding in person meetings and conferences and lower advertising costs due to the COVID-19 pandemic during the first nine months of 2020 compared to the same period in 2019.
Interest expense was $208 million for the nine months ended September 30, 2020 and remained relatively flat compared to the same period in 2019 due to a $9 million net expense related to mark-to-market adjustments for our interest rate swaps that resulted in losses of $59 million for the nine months ended September 30, 2020 compared to losses of $50 million during the same period of 2019, offset by a decrease in interest expense due to LIBOR rate decreases.
Equity in earnings were $98 million for the nine months ended September 30, 2020 compared to earnings of $15 million during the same period of 2019 primarily due to an improvement in earnings of Guaranteed Rate Affinity at Realogy Title Group. Equity in earnings for Guaranteed Rate Affinity represented approximately 18% of the Company's Operating EBITDA for the nine months ended September 30, 2020, increasing by $83 million from $12 million during the nine months ended September 30, 2019 to $95 million during the same period of 2020 as a result of the low mortgage rate environment and improved margins in the venture. Equity in earnings for Realogy Title Group's other equity method investments remained flat at $3 million during both the nine months ended September 30, 2020 and 2019.
During the nine months ended September 30, 2020, we incurred $38 million of restructuring costs primarily related to the Company's restructuring program focused on office consolidation and instituting operational efficiencies to drive profitability. The Company expects the estimated total cost to be approximately $108 million, with $74 million incurred to date. See Note 6, "Restructuring Costs", to the Condensed Consolidated Financial Statements for additional information.
The provision for income taxes was a benefit of $67 million for the nine months ended September 30, 2020 compared to a benefit of $22 million for the nine months ended September 30, 2019. Our effective tax rate was 20% and 14% for the nine months ended September 30, 2020 and September 30, 2019, respectively. The effective tax rate for the nine months ended September 30, 2020 was primarily impacted by items related to the goodwill impairment charge and equity awards for which the market value at vesting was lower than at the date of grant.
The following table reflects the results of each of our reportable segments during the nine months ended September 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues (a)
|
|
$ Change
|
|
%
Change
|
|
Operating EBITDA
|
|
$ Change
|
|
%
Change
|
|
Operating EBITDA Margin
|
|
Change
|
|
|
2020
|
|
2019
|
|
|
|
2020
|
|
2019
|
|
|
|
2020
|
|
2019
|
|
|
Realogy Franchise Group
|
$
|
609
|
|
|
$
|
679
|
|
|
$
|
(70)
|
|
|
(10)
|
%
|
|
$
|
419
|
|
|
$
|
448
|
|
|
$
|
(29)
|
|
|
(6)
|
%
|
|
69
|
%
|
|
66
|
%
|
|
3
|
|
|
Realogy Brokerage Group
|
3,281
|
|
|
3,369
|
|
|
(88)
|
|
|
(3)
|
|
|
25
|
|
|
16
|
|
|
9
|
|
|
56
|
|
|
1
|
|
|
—
|
|
|
1
|
|
|
Realogy Title Group
|
510
|
|
|
444
|
|
|
66
|
|
|
15
|
|
|
168
|
|
|
54
|
|
|
114
|
|
|
211
|
|
33
|
|
|
12
|
|
|
21
|
|
|
Corporate and Other
|
(220)
|
|
|
(224)
|
|
|
4
|
|
|
*
|
|
(94)
|
|
|
(75)
|
|
|
(19)
|
|
|
*
|
|
|
|
|
|
|
|
Total continuing operations
|
$
|
4,180
|
|
|
$
|
4,268
|
|
|
$
|
(88)
|
|
|
(2)
|
%
|
|
$
|
518
|
|
|
$
|
443
|
|
|
$
|
75
|
|
|
17
|
%
|
|
12
|
%
|
|
10
|
%
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Depreciation and amortization
|
|
134
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
208
|
|
|
209
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
(67)
|
|
|
(22)
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring costs, net (b)
|
|
38
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairments (c)
|
|
460
|
|
|
243
|
|
|
|
|
|
|
|
|
|
|
|
|
Former parent legacy cost, net (d)
|
|
1
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss (gain) on the early extinguishment of debt (d)
|
|
8
|
|
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations attributable to Realogy Holdings and Realogy Group
|
|
(264)
|
|
|
(138)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued operations
|
|
(114)
|
|
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Realogy Holdings and Realogy Group
|
|
$
|
(378)
|
|
|
$
|
(143)
|
|
|
|
|
|
|
|
|
|
|
|
_______________
* not meaningful
(a)Includes the elimination of transactions between segments, which consists of intercompany royalties and marketing fees paid by Realogy Brokerage Group of $220 million and $224 million during the nine months ended September 30, 2020 and 2019, respectively.
(b)Restructuring charges incurred for the nine months ended September 30, 2020 include $1 million at Realogy Franchise Group, $32 million at Realogy Brokerage Group, $3 million at Realogy Title Group and $2 million at Corporate and Other. Restructuring charges incurred for the nine months ended September 30, 2019 include $3 million at Realogy Franchise Group, $18 million at Realogy Brokerage Group, $2 million at Realogy Title Group and $6 million at Corporate and Other.
(c)Impairments for the nine months ended September 30, 2020 include a goodwill impairment charge of $413 million (which reduced the net carrying value of Realogy Brokerage Group by $314 million after accounting for the related income tax benefit of $99 million), an impairment charge of $30 million (which reduced the carrying value of trademarks at Realogy Franchise Group) and $17 million related to lease asset impairments. Impairments for the nine months ended September 30, 2019 include a goodwill impairment charge of $237 million (which reduced the net carrying value of Realogy Brokerage Group by $180 million after accounting for the related income tax benefit of $57 million) and $6 million related to lease asset impairments.
(d)Former parent legacy items and Loss (gain) on the early extinguishment of debt are recorded in Corporate and Other. During the nine months ended September 30, 2019, the Company recorded a net gain on the early extinguishment of debt of $5 million which consisted of a $10 million gain as a result of the repurchase of Senior Notes completed in the third quarter of 2019, partially offset by a $5 million loss as a result of the refinancing transactions in the first quarter of 2019.
As described in the aforementioned table, Operating EBITDA margin for "Total continuing operations" expressed as a percentage of revenues increased 2 percentage points to 12% for the nine months ended September 30, 2020 compared to 10% for the same period in 2019. On a segment basis, Realogy Franchise Group's margin increased 3 percentage points to 69% from 66% primarily due to a decrease in employee and other operating costs primarily as a result of temporary COVID-19 related cost savings initiatives, partially offset by a decrease in revenue related to the early termination of third party listing fee agreements. Realogy Brokerage Group's margin increased 1 percentage point from zero to 1% primarily due to lower operating expenses primarily due to temporary COVID-19 related cost savings initiatives, partially offset by higher agent commission costs primarily driven by a shift in mix to more productive, higher compensated agents, the impact of retention efforts, and business and geographic mix. Realogy Title Group's margin increased 21 percentage points to 33% from 12% primarily as a result of an increase in equity in earnings due to an improvement in earnings of Guaranteed Rate Affinity as a result of the low mortgage rate environment and improved margins in the venture.
The Corporate and Other segment Operating EBITDA for the nine months ended September 30, 2020 decreased $19 million to negative $94 million primarily due to higher employee incentive accruals.
Realogy Franchise and Brokerage Groups on a Combined Basis
The following table reflects Realogy Franchise and Brokerage Group's results before the intercompany royalties and marketing fees as well as on a combined basis to show the Operating EBITDA contribution of these business segments to the overall Operating EBITDA of the Company. The Operating EBITDA margin for the combined segments remained flat at 12% during both the nine months ended September 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ Change
|
|
%
Change
|
|
Operating EBITDA
|
|
$ Change
|
|
%
Change
|
|
Operating EBITDA Margin
|
|
Change
|
|
|
2020
|
|
2019
|
|
|
|
2020
|
|
2019
|
|
|
|
2020
|
|
2019
|
|
|
Realogy Franchise Group (a)
|
$
|
389
|
|
|
$
|
455
|
|
|
(66)
|
|
|
(15)
|
|
|
$
|
199
|
|
|
$
|
224
|
|
|
(25)
|
|
|
(11)
|
|
|
51
|
%
|
|
49
|
%
|
|
2
|
|
|
Realogy Brokerage Group (a)
|
3,281
|
|
|
3,369
|
|
|
(88)
|
|
|
(3)
|
|
|
245
|
|
|
240
|
|
|
5
|
|
|
2
|
|
|
7
|
|
|
7
|
|
|
—
|
|
|
Realogy Franchise and Brokerage Groups Combined
|
$
|
3,670
|
|
|
$
|
3,824
|
|
|
(154)
|
|
|
(4)
|
|
|
$
|
444
|
|
|
$
|
464
|
|
|
(20)
|
|
|
(4)
|
|
|
12
|
%
|
|
12
|
%
|
|
—
|
|
_______________
(a)The segment numbers noted above do not reflect the impact of intercompany royalties and marketing fees paid by Realogy Brokerage Group to Realogy Franchise Group of $220 million and $224 million during the nine months ended September 30, 2020 and 2019, respectively.
Realogy Franchise Group
Revenues decreased $70 million to $609 million and Operating EBITDA decreased $29 million to $419 million for the nine months ended September 30, 2020 compared with the same period in 2019.
Revenues decreased $70 million primarily as a result of:
•a $28 million decrease in registration revenue and brand marketing fund revenue (associated with the waiver of marketing fees from affiliates in response to the COVID-19 pandemic), which had a related expense decrease of $35 million resulting in a net $7 million net positive impact on Operating EBITDA, due to not holding in person meetings and conferences and lower advertising costs due to the COVID-19 pandemic;
•a $25 million decrease in leads referral revenues driven by lower volume and referral transactions primarily driven by the discontinuation of the USAA affinity program which ceased new enrollments in the third quarter of 2019;
•an $11 million decrease in revenue related to the early termination of third party listing fee agreements; and
•a $6 million decrease in other revenue.
Realogy Franchise Group revenue includes intercompany royalties received from Realogy Brokerage Group of $213 million and $215 million during the nine months ended September 30, 2020 and 2019, respectively, which are eliminated in consolidation against the expense reflected in Realogy Brokerage Group's results.
The $29 million decrease in Operating EBITDA was primarily due to the $70 million decrease in revenues discussed above and $9 million of higher expense for bad debt primarily due to the early termination of third party listing fee agreements. These Operating EBITDA decreases were partially offset by the $35 million decrease in marketing expense discussed above and a $15 million decrease in employee and other operating costs principally due to temporary COVID-19 related cost savings initiatives and the discontinuation of the USAA affinity program, partially offset by higher employee incentive accruals.
Realogy Brokerage Group
Revenues decreased $88 million to $3,281 million and Operating EBITDA increased $9 million to $25 million for the nine months ended September 30, 2020 compared with the same period in 2019.
The revenue decrease of $88 million was primarily driven by a 2% decrease in homesale transaction volume at Realogy Brokerage Group primarily due to lower transaction volume in the second quarter of 2020 due to the COVID-19 pandemic and consisted of a 5% decrease in existing homesale transactions, partially offset by a 3% increase in average homesale price. There was a strong recovery in the residential real estate market which began late in the second quarter of 2020, following a period of sharp decline in homesale transactions starting in the final weeks of the first quarter of 2020.
Operating EBITDA increased $9 million primarily due to:
•an $85 million decrease in employee-related, occupancy costs and other operating costs due to temporary COVID-19 related cost savings initiatives, partially offset by higher employee incentive accruals;
•a $25 million decrease in marketing expense due to lower advertising costs as a result of the COVID-19 pandemic; and
•a $2 million decrease in royalties paid to Realogy Franchise Group from $215 million for the nine months ended September 30, 2019 to $213 million in the same period of 2020 associated with the volume decline as described above,
partially offset by:
•the $88 million decrease in revenues discussed above; and
•a $15 million increase in commission expenses paid to independent sales agents from $2,405 million for the nine months ended September 30, 2019 to $2,420 million for the nine months ended September 30, 2020. Commission expense increased primarily as a result of higher agent commission costs primarily driven by a shift in mix to more productive, higher compensated agents, the impact of retention efforts, and business and geographic mix, partially offset by the impact of lower homesale transaction volume as discussed above.
Realogy Title Group
Revenues increased $66 million to $510 million and Operating EBITDA increased $114 million to $168 million for the nine months ended September 30, 2020 compared with the same period in 2019.
Revenues increased $66 million primarily as a result of a $35 million increase in refinance revenue due to an increase in activity in the refinance market and a $32 million increase in underwriter revenue with unaffiliated agents, which had a $5 million net positive impact on Operating EBITDA due to the related expense increase of $27 million. These revenue increases were partially offset by a $4 million decrease in resale revenue due to a decline in purchase transactions as result of the COVID-19 pandemic.
Operating EBITDA increased $114 million primarily as a result of an $83 million increase in equity in earnings primarily related to Guaranteed Rate Affinity due to the favorable mortgage rate environment and improved margins in the venture, a $35 million increase in refinance revenue, the $5 million net positive impact of underwriter transactions with
unaffiliated agents discussed above, partially offset by a $9 million increase in employee and other operating costs due to an increase in variable costs due to higher volume and higher employee incentive accruals, partially offset by temporary COVID-19 related cost savings initiatives.
Discontinued Operations - Cartus Relocation
Revenues for Cartus Relocation Services decreased $58 million to $152 million and Operating EBITDA decreased $19 million to $2 million for the nine months ended September 30, 2020 compared with the same period in 2019.
Revenues decreased $58 million primarily as a result of a $25 million decrease in international revenue, a $17 million decrease in other relocation revenue and a $15 million decrease in referral revenue, which were primarily driven by lower volume largely related to the COVID-19 pandemic. Cartus Relocation Services experienced a decline in new initiations due to the COVID-19 pandemic in the second and third quarters of 2020 and this trend is expected to continue.
Operating EBITDA decreased $19 million due to the revenue decrease discussed above, partially offset by a decrease in employee and other operating costs due to cost savings initiatives, including temporary COVID-19 related savings.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Financial Condition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
Change
|
|
Total assets
|
$
|
7,048
|
|
|
$
|
7,543
|
|
|
$
|
(495)
|
|
|
Total liabilities
|
5,315
|
|
|
5,447
|
|
|
(132)
|
|
|
Total equity
|
1,733
|
|
|
2,096
|
|
|
(363)
|
|
For the nine months ended September 30, 2020, total assets decreased $495 million primarily due to:
•a $413 million decrease in goodwill as a result of the impairment at Realogy Brokerage Group during the first quarter of 2020;
•a $167 million decrease in assets held for sale;
•a $55 million net decrease in franchise agreements and other amortizable intangible assets primarily due to amortization;
•a $38 million net decrease in operating lease assets;
•a $30 million decrease in trademarks as a result of the impairment of trademarks at Realogy Franchise Group during the first quarter of 2020; and
•a $20 million decrease in property and equipment,
partially offset by:
•a $145 million increase in cash and cash equivalents;
•a $52 million increase in other current and non-current assets primarily related to an increase in our investment in Guaranteed Rate Affinity due to an increase in equity in earnings partially offset by dividends received, an increase in prepaid incentives and an increase in marketable securities due to the reinvestment of certificates of deposit at Realogy Title Group; and
•a $30 million increase in trade receivables primarily due to increases in volume.
Total liabilities decreased $132 million primarily due to:
•a $111 million decrease in deferred tax liabilities primarily due to the recognition of an income tax benefit of $99 million related to the goodwill impairment charge during the first quarter of 2020;
•an $88 million decrease in corporate debt primarily due to lower borrowings under the Revolving Credit Facility and quarterly amortization payments on the term loan facilities;
•a $59 million decrease in liabilities held for sale; and
•a $23 million decrease in operating lease liabilities,
partially offset by:
•an $89 million increase in accrued expenses and other current liabilities primarily due to higher employee-related accruals and accrued interest; and
•a $57 million increase in other non-current liabilities primarily due to mark-to-market adjustments on the Company's interest rate swaps.
Total equity decreased $363 million primarily due to a net loss of $378 million, primarily due to impairments of $460 million during the nine months ended September 30, 2020, partially offset by a $14 million increase in additional paid in capital related to the Company's stock-based compensation activity for the nine months ended September 30, 2020.
Liquidity and Capital Resources
We have historically satisfied our liquidity needs with cash flows from operations and funds available under our Revolving Credit Facility and securitization facilities. Our primary liquidity needs have been to service our debt and finance our working capital and capital expenditures. We currently expect to prioritize investing in our business and reducing indebtedness. Accordingly, as of November 3, 2020, we had no outstanding borrowings under our Revolving Credit Facility, representing a reduction of $190 million as compared to the amount drawn on December 31, 2019. Additionally, we discontinued acquiring stock under our share repurchase programs in the first quarter of 2019 and discontinued our quarterly dividend in the fourth quarter of 2019.
We are significantly encumbered by our debt obligations. As of September 30, 2020, our total debt, excluding our securitization obligations, was $3,391 million compared to $3,472 million as of December 31, 2019. Our liquidity position has been and is expected to continue to be negatively impacted by the interest expense on our debt obligations, which could be intensified by a significant increase in LIBOR (or any replacement rate) or ABR.
Our nearest debt maturity is not until early 2023 (other than amortization payments under our Term Loan B and Term Loan A Facilities) as we redeemed all of our outstanding 5.25% Senior Notes in June 2020 using the proceeds from our 7.625% Senior Secured Second Lien Notes, together with cash on hand.
In July 2020, Realogy Group entered into amendments to the Senior Secured Credit Agreement and Term Loan A Agreement (referred to collectively herein as the “Amendments”), pursuant to which the senior secured leverage ratio (the financial covenant under such agreements) has been temporarily eased and certain other covenants have been temporarily tightened during the covenant period. See Note 5, "Short and Long-Term Debt", to the Condensed Consolidated Financial Statements for additional information.
At September 30, 2020, we were in compliance with the financial covenant in each of the Senior Secured Credit Agreement and the Term Loan A Agreement with a senior secured leverage of 2.29 to 1.00 (as compared to the maximum ratio permitted of 6.50 to 1.00) with secured debt (net of readily available cash) of $1,654 million and trailing four quarters EBITDA calculated on a Pro Forma Basis (as those terms are defined in the Senior Secured Credit Agreement) of $721 million.
We believe that we will continue to be in compliance with the senior secured leverage ratio and meet our cash flow needs during the next twelve months.
For additional information, see below under the header "Financial Obligations—Covenants under the Senior Secured Credit Facility, Term Loan A Facility and Indentures".
We will continue to evaluate potential refinancing and financing transactions, subject to the Amendments during the covenant period, including refinancing certain tranches of our indebtedness and extending maturities, among other potential alternatives, such public or private placements of our common stock or preferred stock (either of which could, among other things, dilute our current stockholders and materially and adversely affect the market price of our common stock). There can be no assurance as to which, if any, of these alternatives we may pursue as the choice of any alternative will depend upon numerous factors such as market conditions, our financial performance and the limitations applicable to such transactions under our existing financing agreements and the consents we may need to obtain under the relevant documents. Financing may not be available to us on commercially reasonable terms, on terms that are acceptable to us, or at all. Any future indebtedness may impose various additional restrictions and covenants on us which could limit our ability to respond to market conditions, to make capital investments or to take advantage of business opportunities.
Subject to the restrictions against voluntary payments of junior debt that apply to us during the covenant period under the Amendments, we may from time to time seek to repurchase our outstanding Unsecured Notes or 7.625% Senior Secured Second Lien Notes through tender offers, open market purchases, privately negotiated transactions or otherwise. Such
repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.
Under the Amendments, we are restricted from making certain restricted payments, including dividend payments or share repurchases during the covenant period. The covenants in the indentures governing the 9.375% Senior Notes and 7.625% Senior Secured Second Lien Notes further restrict our ability to make dividend payments or repurchase shares in any amount until the Company's consolidated leverage ratio is below 4.00 to 1.00. See Note 5, "Short and Long-Term Debt", to the Condensed Consolidated Financial Statements for additional information.
In addition, we are required to pay quarterly amortization payments for the Term Loan A and Term Loan B facilities. Remaining payments for 2020 total $9 million and $3 million for the Term Loan A and Term Loan B facilities, respectively, and we expect payments for 2021 to total $51 million and $11 million for the Term Loan A and Term Loan B facilities, respectively.
If the recovery of the residential real estate market were to materially slow or reverse itself, if the economy as a whole does not improve or continues to weaken or if the broader real estate industry (including REITs, commercial and rental markets) were to experience a significant downtown, our business, financial condition and liquidity may be materially adversely affected, including our ability to access capital, grow our business and return capital to stockholders.
Cash Flows
At September 30, 2020, we had $380 million of cash, cash equivalents and restricted cash, an increase of $145 million compared to the balance of $235 million at December 31, 2019. The following table summarizes our cash flows from continuing operations for the nine months ended September 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2020
|
|
2019
|
|
Change
|
|
Cash provided by (used in) activities from continuing operations:
|
|
|
|
|
|
|
Operating activities
|
$
|
398
|
|
|
$
|
250
|
|
|
$
|
148
|
|
|
Investing activities
|
(75)
|
|
|
(79)
|
|
|
4
|
|
|
Financing activities
|
(130)
|
|
|
(102)
|
|
|
(28)
|
|
For the nine months ended September 30, 2020, $148 million more cash was provided by operating activities from continuing operations compared to the same period in 2019 principally due to:
•$101 million less cash used for accounts payable, accrued expenses and other liabilities;
•$57 million more cash dividends received primarily from Guaranteed Rate Affinity; and
•$19 million less cash used for other assets,
partially offset by:
•$13 million less cash provided by the net change in trade receivables; and
•$13 million more cash used for other operating activities; and
•$3 million less cash provided by operating results.
For the nine months ended September 30, 2020, we used $4 million less cash for investing activities from continuing operations compared to the same period in 2019 primarily due to:
•$11 million less cash used for property and equipment additions; and
•$8 million less cash used for investments in unconsolidated entities,
partially offset by $15 million more cash used for other investing activities primarily due to the reinvestment of certificates of deposit.
For the nine months ended September 30, 2020, $130 million of cash was used in financing activities from continuing operations compared to $102 million of cash used during the same period in 2019. For the nine months ended September 30, 2020, $130 million of cash was used as follows:
•$50 million repayment of borrowings under the Revolving Credit Facility;
•$31 million of quarterly amortization payments on the term loan facilities;
•$22 million of other financing payments primarily related to finance leases;
•$21 million of cash paid primarily as a result of the refinancing transactions in the second quarter of 2020; and
•$5 million of tax payments related to net share settlement for stock-based compensation.
For the nine months ended September 30, 2019, $102 million of cash was used in financing activities from continuing operations related to:
•$31 million of dividend payments;
•$22 million of quarterly amortization payments on the term loan facilities;
•$20 million for the repurchase of our common stock;
•$18 million of other financing payments primarily related to finance leases;
•$6 million of tax payments related to net share settlement for stock-based compensation; and
•$5 million repayment of borrowings under the Revolving Credit Facility,
partially offset by $3 million of net cash received as a result of the refinancing transactions in 2019.
Financial Obligations
See Note 5, "Short and Long-Term Debt", to the Condensed Consolidated Financial Statements, for information on the Company's indebtedness as of September 30, 2020.
LIBOR Transition
In July 2017, the Financial Conduct Authority, the UK regulator responsible for the oversight of the London Interbank Offering Rate ("LIBOR"), announced that it would no longer require banks to participate in the LIBOR submission process and would cease oversight over the rate after the end of 2021. Various industry groups continue to discuss replacement benchmark rates, the process for amending existing LIBOR-based contracts, and the potential economic impacts of different alternatives. For example, in the U.S., a proposed replacement benchmark rate is the Secured Overnight Funding Rate (SOFR), which is an overnight rate based on secured financing, although uncertainty exists as to the transition process and broad acceptance of SOFR as the primary alternative to LIBOR.
Our primary interest rate exposure is interest rate fluctuations, specifically with respect to LIBOR, due to its impact on our variable rate borrowings under the Senior Secured Credit Facility (for our Revolving Credit Facility and Term Loan B) and the Term Loan A Facility (for our Term Loan A). As of September 30, 2020, we had interest rate swaps based on LIBOR with a notional value of $1.0 billion to manage a portion of our exposure to changes in interest rates associated with our variable rate borrowings.
At this time, it is not possible to predict the effect of any changes to LIBOR, any phase out of LIBOR or any establishment of alternative benchmark rates. LIBOR may disappear entirely or perform differently than in the past. Any new benchmark rate will likely not replicate LIBOR exactly and if future rates based upon a successor rate (or a new method of calculating LIBOR) are higher than LIBOR rates as currently determined, it could result in an increase in the cost of our variable rate indebtedness and may have a material adverse effect on our financial condition and results of operations.
Covenants under the Senior Secured Credit Facility, Term Loan A Facility and Indentures
The Senior Secured Credit Agreement, Term Loan A Agreement, and the indentures governing the Unsecured Notes and 7.625% Senior Secured Second Lien Notes contain various covenants that limit (subject to certain exceptions) Realogy Group’s ability to, among other things:
•incur or guarantee additional debt or issue disqualified stock or preferred stock;
•pay dividends or make distributions to Realogy Group’s stockholders, including Realogy Holdings;
•repurchase or redeem capital stock;
•make loans, investments or acquisitions;
•incur restrictions on the ability of certain of Realogy Group's subsidiaries to pay dividends or to make other payments to Realogy Group;
•enter into transactions with affiliates;
•create liens;
•merge or consolidate with other companies or transfer all or substantially all of Realogy Group's and its material subsidiaries' assets;
•transfer or sell assets, including capital stock of subsidiaries; and
•prepay, redeem or repurchase subordinated indebtedness.
Pursuant to the Amendments to the Senior Secured Credit Agreement and Term Loan A Agreement, certain of these restrictions were tightened, including reducing (or eliminating) the amount available for certain types of additional indebtedness, liens, restricted payments (including dividends and stock repurchases), investments (including acquisitions and joint ventures), and voluntary junior debt repayments. Under the Amendments, we are permitted during the covenant period to obtain up to $50 million of additional credit facilities on a combined basis (less any amounts previously incurred under this provision) from lenders reasonably satisfactory to the administrative agent and us, without the consent of the existing lenders under the Senior Secured Credit Agreement or Term Loan A Agreement. In addition, during the covenant period under the Amendments, our ability to issue senior secured or unsecured notes is limited to the use of financings junior to our first lien debt to refinance the Unsecured Notes or 7.625% Senior Secured Second Lien Notes.
As a result of the covenants to which we remain subject, we are limited in the manner in which we conduct our business and we may be unable to engage in favorable business activities or finance future operations or capital needs. In addition, the Senior Secured Credit Agreement and Term Loan A Agreement require us to maintain a senior secured leverage ratio. We are further restricted under the indentures governing the 9.375% Senior Notes and 7.625% Senior Secured Second Lien Notes from making restricted payments, including our ability to issue dividends in excess of $45 million per calendar year or our ability to repurchase shares in any amount for so long as our consolidated leverage ratio is equal to or greater than 4.00 to 1.00 and then (unless that ratio falls below 3.00 to 1.00) only to the extent of available cumulative credit, as defined under those indentures.
Senior Secured Leverage Ratio applicable to our Senior Secured Credit Facility and Term Loan A Facility
The senior secured leverage ratio is tested quarterly. Prior to the Amendments, the senior secured leverage ratio could not exceed 4.75 to 1.00. Pursuant to the Amendments, the financial covenant contained in each of the Senior Secured Credit Agreement and Term Loan A Agreement has been amended to require that Realogy Group maintain a senior secured leverage ratio not to exceed 6.50 to 1.00 commencing with the third quarter of 2020 through and including the second quarter of 2021 and thereafter will step down on a quarterly basis to 4.75 to 1.00 (which was the applicable level prior to the effectiveness of the Amendments) on and after the second quarter of 2022.
The senior secured leverage ratio is measured by dividing Realogy Group's total senior secured net debt by the trailing four quarters EBITDA calculated on a Pro Forma Basis, as those terms are defined in the Senior Secured Credit Agreement. Total senior secured net debt does not include the 7.625% Senior Secured Second Lien Notes, our unsecured indebtedness, including the Unsecured Notes, or the securitization obligations. EBITDA calculated on a Pro Forma Basis, as defined in the Senior Secured Credit Agreement, includes adjustments to EBITDA for restructuring, retention and disposition costs, former parent legacy cost (benefit) items, net, loss (gain) on the early extinguishment of debt, non-cash charges and incremental securitization interest costs, as well as pro forma cost savings for restructuring initiatives, the pro forma effect of business optimization initiatives and the pro forma effect of acquisitions and new franchisees, in each case calculated as of the beginning of the trailing four-quarter period. The Company was in compliance with the senior secured leverage ratio covenant at September 30, 2020.
A reconciliation of net loss attributable to Realogy Group to Operating EBITDA including discontinued operations, Operating EBITDA and EBITDA calculated on a Pro Forma Basis, as those terms are defined in the Senior Secured Credit Agreement, for the four-quarter period ended September 30, 2020 is set forth in the following table:
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Less
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Equals
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Plus
|
|
Equals
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Year Ended
|
|
Nine Months Ended
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
Twelve Months
Ended
|
|
|
December 31,
2019
|
|
September 30,
2019
|
|
December 31,
2019
|
|
September 30,
2020
|
|
September 30,
2020
|
|
Net loss attributable to Realogy Group (a)
|
$
|
(188)
|
|
|
$
|
(143)
|
|
|
$
|
(45)
|
|
|
$
|
(378)
|
|
|
$
|
(423)
|
|
|
Income tax benefit
|
(22)
|
|
|
(22)
|
|
|
—
|
|
|
(67)
|
|
|
(67)
|
|
|
Loss before income taxes
|
(210)
|
|
|
(165)
|
|
|
(45)
|
|
|
(445)
|
|
|
(490)
|
|
|
Depreciation and amortization
|
169
|
|
|
126
|
|
|
43
|
|
|
134
|
|
|
177
|
|
|
Interest expense, net
|
249
|
|
|
209
|
|
|
40
|
|
|
208
|
|
|
248
|
|
|
Restructuring costs, net
|
42
|
|
|
29
|
|
|
13
|
|
|
38
|
|
|
51
|
|
|
Impairments
|
249
|
|
|
243
|
|
|
6
|
|
|
460
|
|
|
466
|
|
|
Former parent legacy cost, net
|
1
|
|
|
1
|
|
|
—
|
|
|
1
|
|
|
1
|
|
|
(Gain) loss on the early extinguishment of debt
|
(5)
|
|
|
(5)
|
|
|
—
|
|
|
8
|
|
|
8
|
|
|
Adjustments attributable to discontinued operations (b)
|
95
|
|
|
26
|
|
|
69
|
|
|
116
|
|
|
185
|
|
|
Operating EBITDA including discontinued operations (c)
|
590
|
|
|
464
|
|
|
126
|
|
|
520
|
|
|
646
|
|
|
Less: Contribution to Operating EBITDA from discontinued operations (d)
|
|
9
|
|
|
Operating EBITDA
|
|
637
|
|
Bank covenant adjustments:
|
|
|
|
Pro forma effect of business optimization initiatives (e)
|
|
49
|
|
|
Non-cash charges (f)
|
|
29
|
|
|
Pro forma effect of acquisitions and new franchisees (g)
|
|
6
|
|
|
EBITDA as defined by the Senior Secured Credit Agreement
|
|
$
|
721
|
|
|
Total senior secured net debt (h)
|
|
$
|
1,654
|
|
|
Senior secured leverage ratio
|
|
2.29
|
x
|
_______________
(a)Net loss attributable to Realogy consists of: (i) loss of $45 million for the fourth quarter of 2019, (ii) loss of $462 million for the first quarter of 2020, (iii) loss of $14 million for the second quarter of 2020 and (iv) income of $98 million for the third quarter of 2020.
(b)Includes depreciation and amortization, interest expense, income tax and restructuring charges related to discontinued operations. In addition, includes the adjustment to record assets and liabilities held for sale at the lower of carrying value or fair value less any costs to sell based on a market price that is reasonable in relation to fair value.
(c)Consists of Operating EBITDA including discontinued operations of: (i) $126 million for the fourth quarter of 2019, (ii) $32 million for the first quarter of 2020, (iii) $175 million for the second quarter of 2020 and (iv) $313 million for the third quarter of 2020.
(d)Pursuant to the Amendments, the definition of "Consolidated Net Income" (as defined in the Senior Secured Credit Agreement) should be adjusted for discontinued operations (pending divestiture) solely for purposes of calculating compliance with the senior secured leverage ratio. Such adjustment is not reflected in the calculation above for consistency with the presentation of Consolidated Leverage Ratio in the "Consolidated Leverage Ratio applicable to our 9.375% Senior Notes and 7.625% Senior Secured Second Lien Notes" on the next page. Had discontinued operations been included for the four-quarter period ended September 30, 2020, the senior secured leverage ratio for the four-quarter period ended September 30, 2020 would have been 2.24x.
(e)Represents the four-quarter pro forma effect of business optimization initiatives.
(f)Represents the elimination of non-cash expenses including $24 million of stock-based compensation expense, $4 million for the change in the allowance for doubtful accounts and notes reserves and $1 million of other items for the four-quarter period ended September 30, 2020.
(g)Represents the estimated impact of acquisitions and franchise sales activity, net of brokerages that exited our franchise system as if these changes had occurred on October 1, 2019. Franchisee sales activity is comprised of new franchise agreements as well as growth through acquisitions and independent sales agent recruitment by existing franchisees with our assistance. We have made a number of assumptions in calculating such estimates and there can be no assurance that we would have generated the projected levels of Operating EBITDA had we owned the acquired entities or entered into the franchise contracts as of October 1, 2019.
(h)Represents total borrowings under the Senior Secured Credit Facility (including the Revolving Credit Facility and Term Loan B Facility) and Term Loan A Facility and borrowings secured by a first priority lien on our assets of $1,884 million plus $33 million of finance lease obligations less $263 million of readily available cash as of September 30, 2020. Pursuant to the terms of our senior secured credit facilities, total senior secured net debt does not include our securitization obligations, 7.625% Senior Secured Second Lien Notes or unsecured indebtedness, including the Unsecured Notes.
Consolidated Leverage Ratio applicable to our 9.375% Senior Notes and 7.625% Senior Secured Second Lien Notes
The consolidated leverage ratio is measured by dividing Realogy Group's total net debt by the trailing four quarter EBITDA. EBITDA, as defined in the indentures governing the 9.375% Senior Notes and 7.625% Senior Secured Second Lien Notes, is substantially similar to EBITDA calculated on a Pro Forma Basis, as those terms are defined in the Senior Secured Credit Agreement; however, the indentures do not allow for the adjustment to Consolidated Net Income (as defined in the indentures) described in footnote (d) to the table set forth above under "Senior Secured Leverage Ratio applicable to our Senior Secured Credit Facility and Term Loan A Facility." Net debt under the indentures is Realogy Group's total indebtedness (excluding securitizations) less (i) its cash and cash equivalents in excess of restricted cash and (ii) a $200 million seasonality adjustment permitted when measuring the ratio on a date during the period of March 1 to May 31.
The consolidated leverage ratio under the indentures governing the 9.375% Senior Notes and 7.625% Senior Secured Second Lien Notes for the four-quarter period ended September 30, 2020 is set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2020
|
|
Revolver
|
|
$
|
140
|
|
|
Term Loan A
|
|
694
|
|
|
Term Loan B
|
|
1,050
|
|
|
7.625% Senior Secured Second Lien Notes
|
|
550
|
|
|
4.875% Senior Notes
|
|
407
|
|
|
9.375% Senior Notes
|
|
550
|
|
|
Finance lease obligations
|
|
33
|
|
|
Corporate Debt (excluding securitizations)
|
|
3,424
|
|
|
Less: Cash and cash equivalents
|
|
379
|
|
|
Net debt under the indentures governing the 9.375% Senior Notes and 7.625% Senior Secured Second Lien Notes
|
|
$
|
3,045
|
|
|
EBITDA as defined under the indentures governing the 9.375% Senior Notes and 7.625% Senior Secured Second Lien Notes (a)
|
|
$
|
721
|
|
|
Consolidated leverage ratio under the indentures governing the 9.375% Senior Notes and 7.625% Senior Secured Second Lien Notes
|
|
4.2
|
x
|
_______________
(a)As set forth in the immediately preceding table, for the four-quarter period ended September 30, 2020, EBITDA, as defined under the indentures governing the 9.375% Senior Notes and 7.625% Senior Secured Second Lien Notes, was the same as EBITDA calculated on a Pro Forma Basis, as those terms are defined in the Senior Secured Credit Agreement.
See Note 5, "Short and Long-Term Debt—Senior Secured Credit Facility and Term Loan A Facility" and "—Unsecured Notes" and "— Senior Secured Second Lien Notes", to the Condensed Consolidated Financial Statements for additional information.
At September 30, 2020 the amount of the Company's cumulative credit under the 9.375% Senior Notes and 7.625% Senior Secured Second Lien Notes was approximately $172 million. Under the terms of the indentures governing the 9.375% Senior Notes and 7.625% Senior Secured Second Lien Notes, the Company may utilize its cumulative credit to make restricted payments when the Company's consolidated leverage ratio is less than 4.00 to 1.00, provided that any such restricted payments will reduce the amount of cumulative credit available for future restricted payments. The Company made approximately $21 million in dividend payments in 2019 after the issuance of the 9.375% Senior Notes (but prior to the issuance of the 7.625% Senior Secured Second Lien Notes) and accordingly at September 30, 2020, the cumulative credit basket available for restricted payments was approximately $151 million under the indenture governing the 9.375% Senior Notes and approximately $172 million under the indenture governing 7.625% Senior Secured Second Lien Notes. However, neither of these baskets may generally be utilized until the Company's consolidated leverage ratio is less than 4.0 to 1.0. In any event, during the covenant period under the Amendments to the Senior Secured Credit Facility and Term Loan A Facility, the Company is generally restricted from making restricted payments.
Non-GAAP Financial Measures
The SEC has adopted rules to regulate the use in filings with the SEC and in public disclosures of "non-GAAP financial measures," such as Operating EBITDA. These measures are derived on the basis of methodologies other than in accordance with GAAP.
Operating EBITDA is defined by us as net income (loss) before depreciation and amortization, interest expense, net, income taxes, and other items that are not core to the operating activities of the Company such as restructuring charges, former parent legacy items, gains or losses on the early extinguishment of debt, impairments, gains or losses on discontinued operations and gains or losses on the sale of investments or other assets. Operating EBITDA is our primary non-GAAP measure.
We present Operating EBITDA because we believe it is useful as a supplemental measure in evaluating the performance of our operating businesses and provides greater transparency into our results of operations. Our management, including our chief operating decision maker, uses Operating EBITDA as a factor in evaluating the performance of our business. Operating EBITDA should not be considered in isolation or as a substitute for net income or other statement of operations data prepared in accordance with GAAP.
We believe Operating EBITDA facilitates company-to-company operating performance comparisons by backing out potential differences caused by variations in capital structures (affecting net interest expense), taxation, the age and book depreciation of facilities (affecting relative depreciation expense) and the amortization of intangibles, as well as other items that are not core to the operating activities of the Company such as restructuring charges, gains or losses on the early extinguishment of debt, former parent legacy items, impairments, gains or losses on discontinued operations and gains or losses on the sale of investments or other assets, which may vary for different companies for reasons unrelated to operating performance. We further believe that Operating EBITDA is frequently used by securities analysts, investors and other interested parties in their evaluation of companies, many of which present an Operating EBITDA measure when reporting their results.
Operating EBITDA has limitations as an analytical tool, and you should not consider Operating EBITDA either in isolation or as a substitute for analyzing our results as reported under GAAP. Some of these limitations are:
•this measure does not reflect changes in, or cash required for, our working capital needs;
•this measure does not reflect our interest expense (except for interest related to our securitization obligations), or the cash requirements necessary to service interest or principal payments on our debt;
•this measure does not reflect our income tax expense or the cash requirements to pay our taxes;
•this measure does not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments;
•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often require replacement in the future, and this measure does not reflect any cash requirements for such replacements; and
•other companies may calculate this measure differently so they may not be comparable.
Operating EBITDA including discontinued operations includes Operating EBITDA, as defined above plus the Operating EBITDA contribution from discontinued operations on the same basis.
Contractual Obligations
Other than the Company's debt transactions which occurred during the second quarter of 2020, resulting in the issuance of $550 million of 7.625% Senior Secured Second Lien Notes due 2025 and the redemption of $550 million of 5.25% Senior Notes due 2021 as described in Note 5, "Short and Long-Term Debt", included elsewhere in this Quarterly Report, the Company's future contractual obligations as of September 30, 2020 have not changed materially from the amounts reported in our 2019 Form 10-K.
Critical Accounting Policies
In presenting our financial statements in conformity with generally accepted accounting principles, we are required to make estimates and assumptions that affect the amounts reported therein. Several of the estimates and assumptions we are required to make relate to matters that are inherently uncertain as they pertain to future events. However, events that are outside of our control cannot be predicted and, as such, they cannot be contemplated in evaluating such estimates and assumptions. If there is a significant unfavorable change to current conditions, it could result in a material adverse impact to our combined results of operations, financial position and liquidity. We believe that the estimates and assumptions we used when preparing our financial statements were the most appropriate at that time.
These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2019, which includes a description of our critical accounting policies that involve subjective and complex judgments that could potentially affect reported results.
Impairment of goodwill and other indefinite-lived intangible assets
See Note 3, "Goodwill and Intangible Assets", to the Condensed Consolidated Financial Statements for a discussion on impairment of goodwill and other indefinite-lived intangible assets.
Recently Issued Accounting Pronouncements
The SEC issued its final rule on the Modernization of Regulation S-K Items 101, 103, and 105 which is intended to improve readability of disclosure documents, as well as discourage repetition and disclosure of information that is not material. The new rule amends disclosure requirements relating to the description of a company's business, legal proceedings and risk factors made in applicable registration statements and reports filed on and after November 9, 2020, including the Company's Annual Report on Form 10-K for the year ended December 31, 2020.
See Note 1, "Basis of Presentation", to the Condensed Consolidated Financial Statements for a discussion of recently issued FASB accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosures about Market Risks.
We are exposed to market risk from changes in interest rates primarily through our senior secured debt. At September 30, 2020, our primary interest rate exposure was to interest rate fluctuations, specifically LIBOR, due to its impact on our variable rate borrowings of our Revolving Credit Facility and Term Loan B under the Senior Secured Credit Facility and the Term Loan A Facility. Given that our borrowings under the Senior Secured Credit Facility and Term Loan A Facility are generally based upon LIBOR, this rate (or any replacement rate) will be the Company's primary market risk exposure for the foreseeable future. We do not have significant exposure to foreign currency risk nor do we expect to have significant exposure to foreign currency risk in the foreseeable future.
We assess our market risk based on changes in interest rates utilizing a sensitivity analysis. The sensitivity analysis measures the potential impact on earnings, fair values and cash flows based on a hypothetical change (increase and decrease) in interest rates.
At September 30, 2020, we had variable interest rate long-term debt outstanding under our Senior Secured Credit Facility and Term Loan A Facility of $1.9 billion. The weighted average interest rate on the outstanding amounts under our Senior Secured Credit Facility and Term Loan A Facility at September 30, 2020 was 2.62%. The interest rate with respect to the Term Loan B is based on adjusted LIBOR plus 2.25% (with a LIBOR floor of 0.75%). The interest rates with respect to the Revolving Credit Facility and term loans under the Term Loan A Facility are based on adjusted LIBOR plus an additional margin subject to adjustment based on the current senior secured leverage ratio. Based on the September 30, 2020 senior secured leverage ratio, the LIBOR margin was 2.00%. At September 30, 2020, the one-month LIBOR rate was 0.15%; therefore, we have estimated that a 0.25% increase in LIBOR would have a $2 million impact on our annual interest expense.
As of September 30, 2020, we had interest rate swaps with a notional value of $1.0 billion to manage a portion of our exposure to changes in interest rates associated with our $1.9 billion of variable rate borrowings. Interest rates swaps with a notional value of $600 million expired on August 7, 2020. Our interest rate swaps were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Value (in millions)
|
|
Commencement Date
|
|
Expiration Date
|
|
|
$450
|
|
November 2017
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November 2022
|
|
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$400
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|
August 2020
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August 2025
|
|
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$150
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November 2022
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November 2027
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The swaps help protect our outstanding variable rate borrowings from future interest rate volatility. The fixed interest rates on the swaps range from 2.07% to 3.11%. The Company had a liability of $94 million for the fair value of the interest rate swaps at September 30, 2020. The fair value of these interest rate swaps is subject to movements in LIBOR and will fluctuate in future periods. We have estimated that a 0.25% increase in the LIBOR yield curve would increase the fair value of our interest rate swaps by $9 million and would decrease interest expense. While these results may be used as a benchmark, they should not be viewed as a forecast of future results.
Item 4. Controls and Procedures.
Controls and Procedures for Realogy Holdings Corp.
(a)Realogy Holdings Corp. ("Realogy Holdings") maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its filings under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to its management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Realogy Holdings' management, including the Chief Executive Officer and the Chief Financial Officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
(b)As of the end of the period covered by this quarterly report on Form 10-Q, Realogy Holdings has carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that Realogy Holdings' disclosure controls and procedures are effective at the "reasonable assurance" level.
(c)There has not been any change in Realogy Holdings' internal control over financial reporting during the period covered by this quarterly report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.
Controls and Procedures for Realogy Group LLC
(a)Realogy Group LLC ("Realogy Group") maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its filings under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to its management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Realogy Group's management, including the Chief Executive Officer and the Chief Financial Officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
(b)As of the end of the period covered by this quarterly report on Form 10-Q, Realogy Group has carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that Realogy Group's disclosure controls and procedures are effective at the "reasonable assurance" level.
(c)There has not been any change in Realogy Group's internal control over financial reporting during the period covered by this quarterly report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.
Other Financial Information
The Condensed Consolidated Financial Statements as of September 30, 2020 and for the three and nine-month periods ended September 30, 2020 and 2019 have been reviewed by PricewaterhouseCoopers LLP, an independent registered public accounting firm. Their reports, dated November 5, 2020, are included on pages 4 and 5. The reports of PricewaterhouseCoopers LLP state that they did not audit and they do not express an opinion on that unaudited financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 (the "Act") for their report on the unaudited financial information because that report is not a "report" or a "part" of the registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act.