Anywhere Real Estate Inc (HOUS) 2009 Q3 法說會逐字稿

Good afternoon and welcome to the Realogy Corporation third quarter 2009 earnings conference call via webcast.

Today's call is being recorded and a written transcript will be made available in the Investor Information section of the Company's website tomorrow morning.

A webcast replay will also be made available on the Company's website.

At this time, I would like to turn the conference over to Alicia Swift, Senior Vice President of Financial Planning.

Please go ahead, Alicia.

Thank you, Tamara.

Good afternoon and welcome to Realogy's third quarter 2009 earnings conference call.

On the call with me today are Realogy's President and CEO Richard Smith, and Chief Financial Officer Tony Hull.

I would like to call your attention to three items.

First you should have all reviewed a copy of our financial results press release issued earlier today, November 10, 2009, and our third quarter 2009 Form 10-Q filed today with the Securities and Exchange Commission.

Second, the Company will be making statements about its future results and other forward-looking statements during this call.

Statements about future results made during this call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements are based on current expectations in the current economic environment.

Forward-looking statements are inherently subject to significant economic, competitive, and other uncertainties and contingencies, many of which are beyond the control of management.

The Company cautions that these statements are not guarantees of future performance.

Actual results may differ materially from those expressed or implied in the forward-looking statements.

Important assumptions and other important factors that could cause actual results to differ materially from those in the forward-looking statements and projections are set forth under the headings Forward-looking Statements and Risk Factors in our annual report on Form 10-K for the year-ended December 31, 2008, and forward-looking statements in our Form 10-Q for the quarter ended September 30, 2009.

Third, we will be referring to certain non-GAAP financial measures during the call.

Today's press release, which is posted on the Investor Information section of our website, contains definitions of these terms, a reconciliation of these terms to their most comparable GAAP measure, and a discussion of why we believe these non-GAAP financial measures are useful to our investors.

We will be referring to EBITDA before restructuring and other items on this call.

These restructuring and other items which refer to merger, separation, impairment, gain on debt extinguishment, and legacy items are detailed by business unit in the press release on tables 4A and 4B, and on a consolidated basis on Table 6.

Now I'd like to turn the call over to Realogy's President and CEO, Richard Smith.

Thank you, Alicia.

Good afternoon and thank you for joining our webcast.

As is our practice, I'll review the business and operating environment followed by Tony's review of our financial results.

Compared to the second quarter, we experienced a more favorable operating environment in the third quarter 2009, which resulted in an improvement in our results.

This positive momentum was due in large part to the impact of the first time home buyer tax credit along with the seasonal strength of home sales in the third quarter.

The residential real estate market also has been helped by low mortgage interest rates, declining home sale prices, declining inventory levels, and near record high homeowner affordability levels.

By contrast, the US economy remains challenged by high unemployment and weak GDP and consumer confidence.

The net effect of these macroeconomic factors is that the housing market, although improving, remains fragile.

Thus Realogy management has spent a great deal of time in Washington DC, where we have focused our efforts on educating key legislators and policy makers about how best to improve the housing market in order to achieve the ultimate goal of accelerating a general economic recovery.

Our focus has been on the first time home buyer tax credit, which was set to expire December 1 of this year.

Just last week, the US Senate and House of Representatives both voted to pass the Unemployment Compensation Extension Act, which included an amendment to extend and expand the home buyer tax credit.

The bill, which was signed into law by the President on November 6, provides for the extension of the $8,000 tax credit for first time home buyers and the expansion of the tax credit to a large portion of move up buyers with a $6,500 credit.

To qualify, both categories of home buyers have until April 30th of 2010 to be under binding contract and then they must close on the purchase or sale no later than June 30 of 2010.

Income limits were increased to $125,000 for a single filer and $225,000 for married couples filing jointly, and there was a purchase price limit on the home of $800,000.

In addition to the requirement that all qualifying purchases must be for primary residents, not investment properties, all move up buyers must have lived in their current home for the past five years in order to be eligible for the credit.

This measure is intended to ensure that speculators do not benefit from the incentive.

We commend Congress and the Administration for acting swiftly on this very important legislation.

Looking back at our third quarter 2009 results, Realogy reported net revenue of $1.2 billion and EBITDA of $253 million and net income of $58 million.

For the record, let me note that these results were all stronger than the anticipated ranges that we disclosed in our September 24 regulatory filing.

As of September 30, the Company had $161 million of readily available cash and no outstanding balance on our $750 million revolver.

We are very pleased that we completed a $650 million second lien incremental term loan facility, which Tony will describe in detail during his comments.

We're also pleased to note Apollo's increased investment in our Company through purchases of Realogy's bonds with a total face value of $970 million aggregate principal amount that have a market value in excess of $600 million.

We view Apollo's continued investment in Realogy as a substantial vote of confidence in our business and our prospects.

The third quarter is traditionally one of the industry's strongest.

Our year-over-year revenue declines of $172 million reflect the continued difficulties facing the industry and the economy.

Despite the revenue declines, our third quarter EBITDA before restructuring and other items increased by $9 million compared to the third quarter of last year.

This is a significant accomplishment, given the enormous macroeconomic challenges of the past year, and is a direct result of senior management's focus on overhead.

In the first three quarters of 2009, we've reduced our costs by more than $94 million, bringing our total operating cost reductions to more than $470 million over the past four years.

As I've discussed previously, our cost cutting measures such as office consolidations and reductions in our workforce have helped us manage through what has been an extraordinarily challenging operating environment.

Prospectively, we believe a high percentage of our cost reductions will survive the housing recovery.

In the third quarter on a year-over-year basis, RFG and NRT saw transaction sides remain flat and increase by 1% respectively.

This is consistent with the data from the National Association of Realtors, NAR, whose reported sides were up 5% nationally in the third quarter of 2009.

Recall that RFG and NRT had transaction site declines of 11% and 10% respectively in the first half of 2009, so being flat year-over-year for the quarter is quite an improvement.

Although our home sale units were flat to positive in the third quarter of 2009 compared to the third quarter of last year, the majority of this past quarter sales occurred within the lower price points.

This reflects the impact of the first time buyer tax credit in concert with the high volume of REOs and short sales and their impact on the market.

REOs are real estate owned or foreclosed properties owned by lenders or servicers, and a short sale is typically the sale of a home where the mortgage on the property exceeds the home value.

As we have previously stated, REO and short sales tend to magnify unit volumes and significantly decrease average sales prices, especially in the most affected markets.

Distressed property sales, a weak move up market, and weakness at the high end continued to affect our mix of business and negatively impacted our year-over-year average home sale price, but to a much lesser extent than earlier in the year.

At NRT, our Company owned real estate brokerage business, the rate of price decline slowed to 14% in the third quarter compared to a 27% year-over-year decrease in the first half.

NRT's average sales price went from approximately $370,000 in the first half of 2009 to $407,000 in the third quarter of 2009.

The Realogy Franchise Group or RFG experienced average home sale price declines of 10% in the third quarter, dropping from approximately $216,000 to $195,000.

Again, this is relatively favorable compared to a 15% decline in the prior quarter.

Looking at some regional color, NRT's operations along the East Coast from Florida to Massachusetts have improved.

Improvements are attributable primarily to increased units, which have more than offset average sales price declines.

NRT's operations in Florida had a 29% increase in closed size in the quarter, which essentially offset the 30% decline in average sales price.

By contrast, NRT is weak in year-over-year comparison in Northern California.

This is primarily because of a lack of REO inventory, which in Northern California is where the great buyer demand is right now.

Likewise, Northern California has not experienced the increase in higher end home sales that is evident in our East Coast markets.

Specifically, NRT's close sides in Northern California were down 5% and price was down 10% in the third quarter.

In Southern California, our Company owned operations had a 5% increase in closed sides, but an 11% drop in average sales price.

Within the Realogy Franchise Group segment, the Northeast and West had positive home sale transactions of 4% and 7% respectively.

However, the West still had double digit price declines of 17%, while the other three regions only experienced single digit price declines.

Let me spend a few minutes on business unit operating highlights followed by a summary of our October open contracts, and we'll talk a little bit about the 2010 forecast.

And then I'll turn this over to Tony.

In August, three of our Realogy Franchise Group brand networks -- Century 21, Coldwell Banker, and ERA -- were named to the World Franchising Network's 2009 list of Top 100 Franchises.

They were the only real estate brands on the list, which was based on a rigorous analysis of factors including historical performance, brand identification, franchisee satisfaction, training, ongoing support, and financial stability.

In September, Coldwell Banker was ranked number one in customer satisfaction among home sellers surveyed by JDPower & Associates.

And on the international front, Century 21 continued its global expansion with a signing of a new master franchise in Bermuda.

The brand's presence now includes 15 countries and territories in the Caribbean region and 67 countries worldwide.

In July, Sotheby's International Realty signed a 25 year exclusive master franchise agreement to expand its luxury real estate franchise brand into Rome, Italy, and in just five years, Sotheby's International Realty has affiliate brokers in 40 countries.

Better Homes and Gardens Real Estate announced its brand recognition among consumers jumped nearly 20%.

According to the Wall Street Journal residential real estate survey released in August, two out of every three journal subscribers surveyed said they are aware of the brand today, which is remarkable given its brief, brief operating history.

Also with respect to that Wall Street Journal consumer survey, Century 21 and Coldwell Banker finished number one and two among real estate companies, with brand awareness scores of 99.3% and 98.6% respectively.

NRT, our Company owned brokerage segment, continued to strategically reduce its facility costs.

In the third quarter, NRT reduced its net office count by 22, which brings its net office count reduction to 68 in the first three quarters of this year.

NRT now has approximately 770 brokerage office locations throughout more than 30 major metropolitan markets.

NRT management also has continued its success in attracting and retaining its top producing agents.

During the third quarter NRT retained 92% of the gross commission income or GCI from its first and second quartile sales associates.

At Cartus, our relocation company, we added a total of 13 new domestic and international clients during the third quarter of this year.

Our asset recovery business is progressing well.

We are processing about 1,500 short sell files for one servicer and are pursuing relationships with about a dozen other lenders and servicers.

TRG, our title and settlement services company, continued to have success in the lender channel segment of its business.

The combination of a favorable rate environment and growing volume from its lender clients helped refinance closing units in the third quarter this year, exceeding prior year by about 90%.

That's an increase from about 7,600 units to 14,500 units.

For the first nine months of the year, refinance title and closing units are up 94%.

TRG's underwriter, Title Resources Guarantee Company, which has expanded its footprint to 21 states, recorded its highest net premiums in the 25 year history of the Company in the third quarter of this year, and TRG's claims/loss ratio is about 1.5%, which is significantly below the industry average of 9%.

And that's a quick look across our operations.

As to 2010, forecasting continues to be a very difficult exercise given the macroeconomic issues.

Consequently, we continue to look to Fannie Mae for its macro view of housing.

As of its latest report, Fannie forecasts existing home sales to be flat, with 4.9 million units for the full year 2009 and increased by 11% in 2010 to 5.47 million units.

Regarding price, Fannie Mae estimates the median price of homes will decrease by 11% for this year, most of which is behind us, and decrease another 2% in 2010.

The National Association of Realtors or NAR is forecasting 5 million home sales in 2009 and 5.43 million home sales in 2010, which would be an increase of 9%.

NAR's forecast on median price is $179,000 in 2010, a year-over-year increase of 4% from its projection of $173,000 this year.

With regard to the NAR and Fannie home sale forecasts for 2010, it is important to know that both of their forecasts were made prior to the new tax credit law and implicitly assumed the positive impact of an extension of the existing first time home buyer tax credit through June of next year.

We suspect that one or both will increase their forecast now that the housing tax credit extension and expansion has been signed into law.

NAR's most recent pending home sale index of 110.1 was released on November 2nd and showed an increase of 6.1% on contracts signed in September of this year compared to a 103.8 index in August.

This is the eighth consecutive month of improvement for pending home sales.

The pending home sale index is up 21% year-over-year and is at the highest level since December of 2006, when it was 112.8.

Other market positives are that inventory levels are at 7.8 months, down from 10 months in April of this year, and home prices -- although still falling -- seem to be stabilizing.

Housing affordability also continues to be positive, with the latest affordability index reaching 162.7 for September.

The one caution we would add to the inventory numbers is the large number of foreclosed homes that are not counted in that figure.

Economists estimate that between 1 million and 3 million foreclosed homes, particularly located in the western states of California, Nevada, and Arizona, have not been released for resell.

As some point, these homes will be released into the market as REO properties.

This should put pressure on average sales price and increase unit volume.

The good news is that REO properties are selling at a very rapid pace.

Looking at more recent activity indicators, NRT's open contracts were up 30% in open gross profit, of which 26% was attributable to units and 5% was due to higher average sales price.

We believe this increase is a direct result of both a weak October 2008 and first time buyers rushing to beat the November 30 closing deadline to receive the $8,000 tax credit, which bodes well for close transaction revenue in the fourth quarter of this year.

It should also be noted that we're starting to see an increase in activity at the higher end of the market, particularly in several of our traditional high end NRT markets.

In summary, we believe the housing market is at a tipping point.

In particular, the positives are the extension and expansion of the home buyer tax credit, historically low mortgage rates, very strong affordability, much reduced inventory levels of both new and existing homes, and improving stock market and pent-up demand.

The negatives are the likelihood of a significant increase in REO inventories, continued weak consumer confidence, high unemployment, whether higher conforming loan limits will continue, the status of FHA lending, and the Federal Reserve's level of support of low mortgage rates in 2010.

Accordingly, the housing market recovery remains fragile.

That said, for the first time in more than four years, we're optimistic as to the prospects for a sustainable recovery in housing.

Let me conclude by saying that our managers and employees have performed at extraordinary levels, and our franchisees and agents have demonstrated their resourcefulness and resiliency, the product of which we believe is a Company that has performed well under very difficult circumstances.

With that, I'll turn the call over to Tony.

Tony?

Thanks, Richard.

Let me begin with some financial highlights for Realogy in the quarter before my detailed review.

First, third quarter 2009 net revenue totaled $1.2 billion and reported EBITDA was $253 million.

EBITDA was positively affected by $75 million gain on debt extinguishment and negatively affected by $20 million of legacy and restructuring charges.

For the first time in 15 quarters, EBITDA before restructuring and other items showed a year-over-year increase.

The Company closed on $650 million of second lien financing.

We received $515 million of gross proceeds on September 29th and the remaining $135 million on October 9th.

The proceeds were used to reduce total net senior secured debt as defined under our credit leverage covenant by $490 million, and we used $150 million to facilitate a debt exchange that reduced our unsecured debt level by $221 million or 7%.

The financing also allowed the Company to [come to] maturity on approximately 10% of total debt from 2013 to 2017 and to reduce our pay in kind make whole interest payment also known as a [HETO] payment by approximately $70 million that would be due in 2012, and that was about a 34% reduction in that potential obligation.

Realogy ended the quarter with strong liquidity.

We had $161 million of readily available cash on September 30th, which grew to $296 million on October 9th when we closed the delayed draw portion of our second lien financing.

Much of this cash balance was utilized to pay interest and other obligations in October.

In addition, at September 30th, we did not have any outstanding balance on our $750 million revolving credit facility, nor do we have any balance today.

Finally we were in compliance with our debt covenant under the credit agreement with the senior secured leverage ratio of 4.94 to 1.

In discussing the detail of our third quarter 2009 results, I will be referring to the tables in the press release as well as several pages of the 10-Q.

Looking at Table 1 of the press release, as mentioned, total net revenue was $1.2 billion in the third quarter of 2009.

The breakdown by category of revenue is as follows -- gross commission income totaled $878 million in NRT; service revenues totaled $174 million -- that's primarily from Cartus activities; and the remainder is TRG revenue relating to purchase and refinance closing activity as well as title underwriting revenue.

Third party franchise fees totaled $79 million, which consists of both upfront and ongoing RFG domestic and international franchise fees, and other revenue was $38 million and includes marketing fees that RFG collects from its franchisees and management fee revenue from NRT's REO business.

In terms of expense reductions, comparing third quarter 2009 results to 2008, total commission expense of $567 million decreased 14% or $89 million year-over-year, as one would expect due to lower transaction volume.

Operating, marketing, and general and administrative expenses of $410 million declined $97 million or 19% year-over-year as we realized the concrete benefits of store front and other proactive cost reduction initiatives that management executed throughout last year and in 2009.

Looking at the right hand columns of Table 1, year-to-date net revenue in 2009 was $2.9 billion.

The breakdown by revenue category is as follows -- gross commission income totaled $2.1 billion at NRT, service revenues totaled $469 million, third party franchise fees totaled $201 million, and other revenue was $118 million.

Comparing year-to-date expense reductions through September 30, 2009 to the prior year, total commission expense of $1.3 billion decreased to $491 million or 27% year-over-year.

Gross profit margins improved approximately 160 basis points from 34.6% to 36.3%.

Operating, marketing, and general and administrative expenses of $1.25 billion declined 21% year-over-year.

This nine month decline in expenses of $338 million is double the $170 million of 2008 and 2009 annualized cost savings and business optimization initiatives that were identified in prior covenant calculations.

Next I would like to discuss our key business drivers for the third quarter, from Table 3 of the press release.

Year-over-year RFG home sale sides were flat and NRT home sale sides increased 1% in the third quarter of 2009.

On the price side, RFG average sale price decreased to 10% and NRT average price decreased 14%.

While RFG's average price decline was in line with figures reported by NAR, NRT's average price was down more significantly because of mix of business.

To provide more detail on this, it is helpful to look at activity levels at various home price ranges.

In 2009, the unit volume of homes with the sales price of over $750,000 made up 10% of NRT's total sides.

In Q3 of 2008, these homes accounted for 13% of NRT's unit volume.

That 3% shift in mix caused half of the 14% price decline we saw at NRT in Q3.

The shift in mix continued the trend reported in our first half results, but the resulting year-over-year price decline of 14% in Q3 was considerably less than the 27% year-over-year decline in the prior period.

For the third quarter at Cartus, we experienced a 16% decrease in initiations due to lower domestic relocation activity.

At TRG, purchase, title, and closing units were flat, consistent with unit activity experienced at NRT, but lower margin refinance unit volume increased 90% compared to the third quarter of 2008.

I will now review revenue and EBITDA before restructuring and other items by business unit for the quarter ended September 30, 2008 and 2009 shown on Tables 4A and 4B of the press release.

On a consolidated basis EBITDA in 2009 was $198 million, excluding the highlighted adjustments of $55 million shown on Table 4A.

Despite a $172 million decrease in revenue, EBITDA before restructuring and other items in the third quarter increased $9 million over 2008 due to realization of cost efficiencies put in place over time.

Total revenue at RFG was $151 million in the third quarter of this year compared to $172 million last year.

The 12% revenue reduction was due to the decline in average sales price shown on the driver table along with lower intercompany royalties from NRT.

Domestic royalties from our third party affiliates were aided by a 1 basis point increase in average broker commission rate charged by our franchisees to their customers and a 5 basis point improvement in the net effective royalty rate.

As indicated in Footnote B on the table, EBITDA at RFG before restructuring and other items was $108 million in the third quarter of 2009 compared to $99 million in the third quarter of 2008, as expense reductions more than offset revenue declines.

Expenses were lower by $30 million due to a decrease in bad debt expense as collection activity improved, and reduced marketing and operating expenses also contributed to the lower expense levels.

At NRT, 2009 third quarter EBITDA was $61 million before restructuring and other items, up $14 million compared to 2008.

Revenue declines of $130 million due to lower price levels at NRT were offset by lower commissions and royalties and improved gross margins, reduced marketing and operating expenses, and an increase of $4 million in PHH home loans results.

EBITDA before restructuring and other items at Cartus was $34 million, down from $41 million in 2008.

While revenue declined $37 million, primarily from our exit from the government at risk relocation activity and lower referral volume, EBITDA was positively impacted by $12 million in lower costs related to the exit and $13 million of lower operating expenses positively impacting the quarter.

At TRG, revenue increased 8% as a result of higher unit volume, but EBITDA remained flat before restructuring and other items.

The increase in revenue was offset by the absence of a $5 million gain on the sale of joint venture arrangements in the third quarter 2008.

Corporate expense before restructuring and other items increased $7 million due to costs associated with Q3 recapitalization efforts of $4 million negatively impacting the quarter, along with the absence of insurance proceeds received in the third quarter of 2008 of $5 million.

Turning to the balance sheet on page five of the 10-Q, we ended the quarter with a cash balance of $192 million which includes $161 million of available cash and $31 million of statutory cash required for our title business.

We had no outstanding balance on our revolver at September 30th.

Looking at relocation receivables at September 30th, these assets dropped nearly in half since year-end, and consequently the securitization obligations have also declined from $703 million at December 31 to $379 million at September 30th of this year.

As you can see from the balance sheet, the relocation properties held for sale line is at zero, as all the government at risk assets have been liquidated.

Finally in October, we elected to reduce the available capacity on our UK relocation receivable securitization by half to GBP50 million, and the term of the program was shortened one year, so it now expires in April of 2011.

With the closing of the $650 million second lien facility, Realogy repaid its revolving credit facility balance and reduced senior PIK toggle notes outstanding by $221 million.

Realogy entered into a private transaction that exchanged these title notes for $150 million of second lien financing.

This exchange also resulted in an approximately $70 million reduction in the HETO payment that will be due in April 2012.

Also on the balance sheet, the $502 million balance due to former parent fell by $52 million compared to the December 2008 balance.

The decline was mostly due to the resolution of the credentials litigation, legacy litigation this past summer.

This balance may be affected in 2010 to the extent that we have further resolution of the IRS examination of taxable years 2003 to 2006.

Turning to cash flow on Page 6 of the 10-Q, in the first nine months of 2009, Realogy generated $304 million of cash from operating activities compared with $44 million in the first nine months of 2008.

The majority of increase in cash from operations was generated by the reduction of relocation receivables.

Capital expenditures year-to-date were $23 million versus $36 million in the nine months last year.

Let me update you on certain cash flow item expectations for the year.

Corporate cash interest will total about $470 million this year.

Capital Expenditures are expected to be approximately $40 million for the full year; working capital and restructuring costs are forecasted, cash costs are forecasted to be between $30 million to $40 million; reductions in relocation assets net of changes in securitization borrowings are expected to generate between $15 million to $25 million of cash; and net funding of legacy issues is expected to total about $25 million to $35 million for the full year.

On Page 60 of the 10-Q, we present the senior secured leverage ratio calculation.

Adjusted EBITDA is calculated based on reported EBITDA for the last 12 months ended September 30, 2009.

At September 30, 2009, total senior secured debt as defined in our credit agreement totaled $2.95 billion.

That, divided by the adjusted EBITDA of $597 million for the 12 months ended September 30, results in the senior secured net debt to adjusted EBITDA ratio of 4.94 to 1, maintaining compliance with our credit agreement.

With that, I'll turn it over to Alicia for some concluding remarks.

Thank you, Richard and Tony.

Two quick points of information before we conclude today's call.

First, the transcript of this call will be available on the Investor Information section of the Realogy.com website tomorrow morning, November 11.

Second, we anticipate announcing our full year 2009 results in late February with the exact date still to be determined.

We thank you for taking the time to join us on the call and we look forward to speaking with you in February.

Thank you.