Anywhere Real Estate Inc (HOUS) 2010 Q3 法說會逐字稿

Good afternoon, and welcome to the Realogy Corporation third quarter 2010 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 web site tomorrow morning.

A webcast replay will also be made available at the Company's web site.

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

Please go ahead, Alicia.

Thank you, Jennifer.

Good afternoon, and welcome to Realogy's third quarter 2010 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 access to a copy of our financial result press release and Form 10-Q for the quarter ended September 30, 2010, both of which were issued earlier today, November 9, 2010, on the Investor Information section on our web site, and filed 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 the call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

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

Forward-looking statements and projections 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, 2009, and Forward-Looking Statements in our Form 10-Q for the quarter ended September 30, 2010, and in other periodic reports we file from time to time.

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

Today's press release 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.

Let me briefly review the headlines from our release issued today regarding Realogy's third quarter 2010 results.

Specifically for the quarter ended September 30, 2010, we reported revenue of $1.1 billion, EBITDA of $177 million, which is after $2 million in restructuring costs and a $6 million benefit -- net benefit of former parent legacy items, and net loss attributed to Realogy of $33 million which includes $151 million of interest expense, and $49 million of depreciation and amortization.

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

Thank you, Alicia.

Good afternoon and thank you for joining our, webcast.

During the first half of last -- of this year, the housing market showed signs of stabilization.

When we communicated our strong second quarter results to you in August, we stated that we did not expect second half of this year to compare favorably either to the second half of last year, or even the first half of this year.

While it was our expectation that the third quarter would prove challenging, the post-home buyer tax credit decline in sales proved to be even greater than industry forecasters had anticipated.

Reviewing our key revenue drivers in the third quarter of this year, the Realogy Franchise Group, RFG, and NRT, our Company owned brokerage segment, both reported significant decreases in closed transaction sides, down 19% and 25% respectively, generally in line with the national results reported by the National Association of Realtors, or NAR.

By contrast, Realogy's franchise and owned brokerage units both significantly outperformed NAR on terms of average sales price in the third quarter, with respective 4% and 12% year-over-year improvements .

Despite the 15% net decrease in NRT and RFG transaction volume, our net revenue only decreased 10% from the third quarter of 2009, primarily the result of increased revenues at Cartus.

Now let's review some regional performance data.

NRT's New York City operations, which include the Hamptons, performed comparatively well during the third quarter, with home sales side decreases of 3% offset by average sales price increases of 9% compared to the third quarter of last year.

In the suburban New York and New England markets, NRT's operations reported year-over-year home sales side decreases of 24%, and price increases of 12%.

In the Midwest, NRT reported 29% declines in transaction sides, and an average sales price increase of 9%.

NRT's operations in Florida reported 17% declines in closed sides in the quarter, but a 9% increase in the average sales price.

NRT's closed sides in California decreased 19% while the average sales price was up 9%.

Regionally, within the real estate -- the Realogy Franchise Group segment, the northeast saw closed transactions decrease by 23%, but it also had the largest price increase of 8%.

The south showed the lowest closed side decrease of 14%.

The average sales price increased between 2% and 8% in all RFG regions during the third quarter of 2010.

Our operational and strategic emphasis in this -- in 2010 this year has been to look beyond the current state of the housing market and focus on prudent growth opportunities.

Each of our business units have found ways to capitalize on such opportunities.

The Realogy Franchise Group, which has approximately 14,700 offices, and 267,000 sales associates throughout it's worldwide franchise networks, added new franchisees and sales associates for the third quarter with $142 million in gross commission income, or GCI.

Year-to-date, we have added new franchisees and sales associates with $264 million in GCI.

In late September, our Better Homes and Gardens real estate brand announced the largest new franchise affiliation in the history of our Company.

Mason-McDuffie real estate, a California company originally founded in 1887, entered into a twenty year franchise agreement with Better Homes and Gardens Real Estate.

The firm has approximately 1900 agents and thirty-five sales offices servicing the northern California and western Nevada markets.

Last year, Mason-McDuffie Real Estate reported closed sales volume of $2.8 billion, was number one in sales in the San Francisco East Bay market, and ranked among the top twenty real estate brokerages nationally according to Real Trends.

The conversion by such a renowned firm from a competitor is a significant validation of our Better Homes and Gardens Real Estate and Realogy Franchise Group offerings.

In October, the Realogy Franchise Group formally announced an initiative to help its franchisees accelerate their revenue growth through mergers and acquisitions.

Our multi-brand offerings uniquely position us to provide solutions that a single-brand competitor simply cannot offer.

To the first nine months of this year, the Realogy Franchise Group has helped independently owned franchisees complete about seventy-five growth related transactions.

The Realogy Franchise Group has continued its global expansion and now operates through master franchisees and 100 unique countries and territories.

The third quarter of 2010 was highlighted by several announcements by Sotheby's International Realty, which signed new masters franchise agreements in Sweden and Turkey, and its newest master franchisee officially opened for business in Hong King.

NRT, again, our own brokerage company, announced in October the acquisition of Coldwell Banker Preferred, a leading real estate firm based in Philadelphia, the nation's fifth largest metropolitan market.

The strategic acquisition added eight offices and 500 sales associates to the NRT family of companies.

The acquired firm reported nearly $850 million in total sales volume in 2009.

With this announcement, NRT now operates 742 offices in thirty-five major markets including twenty-one of the nation's top twenty-five metropolitan statisticle areas.

As you would expect, NRT management has been very focused on organic growth.

Over the last twelve months, the Company recruited new sales associates who collectively generated more than $60 million in gross commission income during that period.

And in keeping with historical standards, NRT retained approximately 93% of the production from its first and second quartile sales associates, the top producing segments of its more than 44,000 sales associates.

In our relocation services segment, Cartus' integration of Primacy Relocation continues to go according to plan.

The strategic acquisition, which took place at the beginning of this year, enabled Cartus to re-enter the US government relocation business and expand its domestic and global offerings and capabilities.

The Primacy name officially will be retired effective January 1, 2011, and going forward, the combined companies will do business solely under the Cartus name.

In early October, Cartus received the distinction of being named the Relocation Management Company of the Year by the Forum for Expatriate Management.

The award is made in part based on a company's commitment to innovation and service excellence, which are hallmarks of Cartus's more than 50 years in the business.

In our settlement services segment, Title Resource Group, or TRG, has benefited from the expansion of its client bases in both the lender channel and title underwriting.

With the addition of two large lenders in the past twelve months, refinance -- refinance activity at TRG has increased to record levels.

TRG's underwriter, Title Resources Guarantee Company, reported another high level of net premiums during the third quarter, and it's underwriting claims experience of 1.2% continues to substantially outperform the industry average loss ratio of 6%.

Now, let's review the current operating environment.

As we look ahead to the fourth quarter, and into 2011, there remains substantial uncertainty with respect to the timing and scope of a housing recovery.

Entering the sixth year of this housing downturn, the road to recovery is taking longer than most experts anticipated.

Although historically low mortgage interest rates and high housing affordability levels have been strong positives, the recovery has been plagued by high unemployment, lackluster consumer confidence, increasingly difficult mortgage underwriting, and generally poor overall economic conditions.

The foreclosure moratoriums and delays announced by various lenders, and the actions taken by the state attorneys general and various government regulators, had little if any impact on our third quarter results, and thus far have not materially impacted our October results.

That said, we do expect the moratoriums to negatively impact our fourth quarter and perhaps the first quarter of next year.

We only expect timing issues as we fully expect the moratoriums to be lifted and the foreclosure sales to continue.

As we have reported in the past, our sales of real estate owned, or foreclosed homes, reflect a very strong appetite for such inventory by both small and medium investors, and first time home buyers.

The major foreclosure markets continue to be Nevada, Florida, Arizona, and California.

Aside from the foreclosure issue, the influence of the housing tax credits and uncertainty as to income tax rates in 2011 and beyond make it difficult to forecast near term market trends.

We expect to see wide year-over-year variances in reported home sale transactions throughout the remainder of this year, and in all likelihood throughout next year.

For at least the next twelve months, we believe the sequential seasonally adjusted annualized rate, or SAR, home sale unit data will be the best gauge of the health of the housing market on a comparative basis.

As indicated earlier, there is simply too much noise in the year-over-year unit sales data.

The seasonally adjusted annualized rate of existing home sales has increased in each of the past two months after three prior months of declines.

The SAR dropped 27% from 5.26 million units in June to 3.84 million units in July 2010, as a direct result of the conclusion of the 2010 federal home buyer tax credit.

Since that has precipitous drop, the seasonally adjusted annualized rate of home sales increased by 7% from July to 4.12 million units in August, and increased by another 10% in September to an annualized rate of 4.53 million units.

Based on the open contract activity we saw in October, at both RFG and NRT, we would expect to see a continuation of these sequential gains in November and December, although at a slower pace than reported for August and September.

As of November of this year, NAR is forecasting the market will reach a level of 4.8 million homes sold in 2010.

That would be a 6% reduction from the 5.1 million homes sold number that we were forecasting at the time of our last call, and reflects the weak activity we have experienced post-tax credit.

For 2011, NAR is forecasting a 6% increase in home sale activity to 5.1 million units.

Sequential SAR growth of approximately 1.5% per month starting in January would get us to that figure for the full year, 2011.

On a quarterly basis, NAR is forecasting the fourth quarter of this year to be down 25% year-over-year, but on a sequential basis, up 8% from the third quarter of this year to the fourth quarter of this year.

This is followed by improving sequential rates in the first and second quarters of 2011 of 7% and 8% respectively.

For the third quarter of next year, NAR is forecasting a 1% improvement over the second quarter of next year.

Although the year-over-year improvement by that time will be about 26% comparing the SAR of the third quarter of '10 to the third quarter of '11.

The bottom line is that, based on NAR's forecast, year-over-year comparisons will look weak in the first half of next year, and much improved in the back half.

All based on an annualized improvement in units of about 6%.

Fannie Mae is forecasting a 2% recovery in 2011.

Now, there are two significant legislative issues of concern for us that may come up during the current lame duck legislative session in Washington DC, income taxes and the mortgage interest deduction.

We continue to urge Congressional leaders to delay all of the income tax increases that are scheduled to take effect on January 1, 2011.

We believe that unless they are delayed for an extended period of time, the pending income tax increases will likely delay any potential for a recovery in housing.

In particular, the scheduled increase on those incomes above $200,000 will discourage the move-up buyer, and history has conclusively proven that the move-up buyer is critical to a sustained housing recovery.

The National Commission on Fiscal Responsibility and Reform, otherwise known as the Deficit Commission, was formed in April of this year, essentially to recommend policy changes intended to reduce costs and raise tax revenues.

The Deficit Commissions reported consideration of eliminating some or all of the mortgage interest deduction is our second issue of concern.

The elimination of the mortgage It would be the equivalent of a unprecedented incremental tax increase on every current and prospective homeowner.

Such a move would have material negative consequences for the housing market as well as the US economy in general.

According to NAR economists, homeowners already pay 80% to 90% of the income tax in our country, and among those who claim the mortgage interest reduction, almost 0.67 are middle income earners.

The government it would be asking the middle income wage earns of America to shoulder an additional tax burden, and also to brace for a prospective 15% drop in home values, which is NAR's estimate of the resulting impact on home values.

Now, you're going to hear a lot of noise about this in the media, and we will monitor this very closely.

That said, we believe there is little, if any, support for such a proposal in Congress or the Administration.

In losing, Realogy has and will continue to weather this challenging economic environment, which is a tribute to the dedication of our employees and franchisees, the resiliency of our business model, and the solid execution of our strategic growth plans.

To paraphrase an old sailor's saying, we can't charge the direction of the wind, but we can adjust our sails to reach our destination.

Let me conclude by saying that we are adjusting our sails our sails each day based on the current wind conditions, just as we have for the past five years.

That said, we remain focused on our strategic plan, solid execution, all in preparation for the inevitable recovery and the return to solid ground.

With that, I'll turn the call over to

Thanks, Richard.

In discussing the financial results, I will be referring to the tables in the press release.

Let me begin with some comments and financial highlights for Realogy in the third quarter.

As reflected in our filing, Q32010 revenue totaled $1.1 billion, a decrease of $117 million year-over-year.

EBITDA before restructuring and other items in the third quarter was $173 million, a decrease of $25 million from 2009 Q3 results.

For the nine months ended September 30, 2010, EBITDA before restructuring and other items totaled $429 million.

The third quarter 2010 net loss was $33 million, including depreciation of $49 million, and interest expense of $151 million in the quarter.

Realogy ended the quarter with $206 million of readily available cash and no borrowing under its $750 million revolving credit facility.

After paying approximately $200 million in cash interest in October, the outstanding revolver balance as of November 5, 2010, was $120 million, which we expect will be substantially repaid by year-end.

Due to the settlement on the legacy IRS audit and other legacy items in Q2 and Q3 of this year, our synthetic letter of credit was permanently reduced from $507 million at June 30, 2010, to $257 million.

Of which, $133 million now relates to potential remaking legacy liabilities.

Based on our twelve month adjusted EBITDA -- our, our trailing twelve month adjusted EBITDA -- Realogy's senior secured leverage ratio was 4.57 to 1 at September 30, 2010.

Looking at table one of the press release, the breakdown by category of year-to-date net revenue of $3.1 billion was as follows.

Gross commission income totaled $2.3 billion at NRT, an increase of 9% from the first three quarters of 2009.

Service revenues at Cartus and Title Resources Group increased to $518 million, or 10% from the first three quarters of 2009.

The Realogy Franchise Group's third party franchise fees increased $2 million to $203 million for the first three quarters of the year.

Looking at expenses during the first three quarters of 2010 results compared to 2009, total commission expense of $1.5 billion increased 11%, or $143 million year-over-year, in line with gross commission income increases.

Operating expenses of $925 million declined $25 million, or 3% year-over-year, as we continue to realize the benefits of store front and other proactive cost reduction initiatives.

Marketing costs increased by $14 million.

This increase relates to marketing fees collected from and expended on behalf of our franchisees.

Marketing costs related to our own brokerage operations were actually down $4 million in the period compared to last year.

General and Administrative costs were relatively flat at $180 million.

Next I would like to discuss our key business drivers for the third quarter of 2010, shown on table 3 of the press release.

In the third quarter, RFG and NRT home sale sides decreased 19% and 25% respectively compared to 2009.

These year-over-year declines were due to the pull forward of sales from the 2010 housing tax credit into the second quarter, as well as continued weak housing market trends and high unemployment.

The unit decline at RFG and NRT were in line with the results reported by NAR, which indicated third quarter home sale unit declines of 21%.

For Realogy, higher average home sale price offset much of the revenue decline attributed to lower home sales sides experienced in the quarter.

Our mix of business positively affected the average sales price at both NRT and RFG, although it was more significant at NRT than with our affiliates.

NRT's average sales price climbed to $458,000 in the third quarter, up from $407,000 in the third quarter of last year.

NRT average price increased 12% as sales of homes over $750,000 represented 46% of NRT volume this year, versus 40% last year.

In addition, NRT saw a decrease in REO sales.

In the third quarter of 2009, REO represented 11% of NRT sides.

In the third quarter of 2010, REO represented 9% of sales.

Realogy Franchise Group, which manages our five residential franchise brands reported a 4% average sales price increase to $202,000 in the third quarter of 2010, which was largely the result of a greater percentage of higher priced home sales recorded by all of our brands, but most notably at Sotheby's International Realty.

In comparison to NRG and RFG, the median sales price reported by NAR in the third party -- in the third quarter was down 1% compared to that period in 2009.

Average broker commission rates in the quarter decreased at NRT from 2.49% in Q3 of last year, to 2.47% this past quarter.

The reduction in REO sales impacted that rate.

Also the Realogy Franchise Group's net effective royalty rate declined 16 basis points to 4.95% as our larger affiliates are achieving higher volume levels.

As we mentioned this past August, we expected that our first half of the year would need to carry us through a challenging second half of 2010.

So far that is holding true.

Through the first nine months of 2010, the Realogy Franchise Group reported a 3% combined year-over-year volume increase, which was realized through a 4% increase in sales price and a 1% decline in transaction sides.

For the same nine month period, NRT reported a 10% increase on a combined volume basis, which is reflected by it's 12% growth in average sales price, and it's 2% decline in transaction sides compared to the same period in 2009.

Cartus had a strong quarter with much of its unit growth attributable to the Primacy acquisition.

Cartus' initiations increased 30% year-over-year to approximately 37,000 in the third quarter, while referrals were down 3% for the period.

Excluding the impact of Primacy, third quarter relocation authorizations at Cartus increased 7%.

This is a further continuation of a positive trend in corporate relocation business that we have seen throughout the year.

Through the first nine months of 2010, Cartus initiations are up 30% and referrals have increased 11% over the comparable period in 2009.

At TRG, Q3 purchase title and closing units decreased 25% compared to 2009, which was consistent with the NRT unit sales changes, but refinance unit volume increased 21% from a combination of extremely favorable mortgage rates and new clients we are servicing.

For the first nine months of the year, TRG's purchase title and closing units are down 6% from 2009 levels, while the Company's year-to-date average price per closing units has increased by 9% year-over-year.

I will now review revenue and EBITDA before restructuring and other items by business unit for the third quarter ended September 30, 2009 and 2010, shown on tables 5A and 5B of the press release.

Total revenue at RFG was $138 million in 2010, compared to $151 until in 2009.

The 9% revenue decline was due to the decrease in transactions shown on the driver table along with lower inter-company royalties from NRT.

Domestic royalties from our third quarter affiliates were also impacted by the decrease in net effective royalty rate.

EBITDA before restructuring and other items at RFG was $90 million in Q3 2010, compared with $108 million in 2009, due to the $13 million increase in revenue, along with higher expenses.

The increased expenses relate to a $3 million increase in bad debt and notes reserve expense, as there was minimal bad debt expense in Q3 of 2009.

NRT EBITDA, before restructuring and other items in the third quarter decreased to $33 million.

This was a $28 million decline compared to the third quarter of 2009 driven by a $134 million decrease in revenue due to lower home sales sides.

The revenue decline was partially offset by an $85 million decrease in commission royalty expense due to lower volume.

Looking at NRT's gross margin, it decreased approximately 65 basis points due to a shift in revenue mix from REO's to higher end sales.

EBITDA also benefited $8 million as a result of an increase in earnings related to our investment in PHH Home Loans.

EBITDA before restructuring and other items at Cartus was $51 million in the third quarter, up from $34 million in 2009.

Although revenue increases of $30 million were largely driven by the impact of the Primacy acquisition, EBITDA before restructuring and other items increased $17 million due to a combination of the acquisition and higher international activity.

At TRG, revenue decreased 8% as a result of lower resale volume, and EBITDA before restructuring and other items decreased $2 million.

Corporate expense before restructuring and other items in the third quarter declined to $9 million in 2010, from $15 million in 2009, primarily due to the reversal of 2010 employee compensation accruals in the quarter.

Turning to the balance sheet on table 2 of the press release, we ended the quarter with a cash balance of $235 million, which includes $206 million of readily available cash, and $29 million of statutory cash required for our title business.

We had no outstanding balance on our $750 million revolver at September 30, 2010.

Also on the balance sheet, the Due to Former Parent line item decreased from $505 million at December 31, 2009 to $117 million at September 30, 2010 to the tax settlement with the IRS, and the adjustment of other certain contingent liabilities from our former parent, Cendant.

In relation to the reduction, we reduced our outstanding letter of credit held by Avis budget to $133 million from $446 million.

Also of note, during the third quarter, Cartus replaced its UK securitization program with new financing arrangements with Lloyd's Bank.

These multi-year facilities provide Cartus UK operations with $40 million British Pounds and the new credit facilities are secured by the relocation assets of, and a guarantee from, a UK government agency.

The increase in the Revolving Credit Facility and Current Portion of Long-Term Debt line item from $32 million at December 31, 2009 to $170 million at September 30, 2009 was due to a letter -- due to letter of credit backed borrowings of $130 million in the first half of the year, and $8 million in the third quarter.

Last week we increased these borrowings by another $25 million to $163.

Let me provide you with expectations for certain cash flow items for the full year 2010.

Corporate cash interest is expected to be approximately $540 million for the year.

Capital expenditures are expected to be approximately $45 million to $50 million in 2010.

Increases in relocation assets net of changes in securitization borrowings are expected to use between $10 million and $20 million of cash.

Working capital, inclusive of cash restructuring costs, is forecasted to be a use of cash of between $15 million and $25 million, and net funding of legacy issues is expected to total about $85 million for the full year.

Approximately $80 million of this total has been paid as of September 30, 2010, and that includes the $58 million settlement of legacy IRS tax matters.

On table 6 of the press release, we present our senior secured leverage ratio calculation for which the maximum allowable ratio can be 5 to 1 times.

As September 30, 2010, the numerator, total senior secured net debt as defined in our credit agreement, totalled $2.87 billion.

That, divided by adjusted EBITDA of $628 million for the twelve months ended September 30, 2009, the results in senior secured net debt to adjusted EBITDA ratio of 4.57 to 1, maintaining compliance with our credit agreement.

In conclusion, let me leave you with a few closing remarks.

As expected, the third quarter was weak as a result of the pull forward of sales into the second quarter because of the housing tax credit, as well as continued weak housing market trends and high unemployment.

Although Realogy has not realized any significant impact from uncertainty in the foreclosure market, any disruption in that market would be a negative to housing and the timing of its recovery.

While volume comparisons for the fourth quarter of 2010 are expected to be unfavorable to 2009, as the latter was bolstered by last year's housing tax credit, we are seeing improving signs of sequential closed sales as reported by NAR.

If continued into 2011, this could result in an improved housing market, particularly in the second half of 2011.

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

Thank you Richard and Tony.

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

First, a transcript of this webcast will be available on the Investor Information section of the Realogy.com web site tomorrow morning, November 10, 2010.

Second, we anticipate announcing our full year 2010 results in March, 2011, with the exact date still to be determined.

We thank you for take the time to join us on the call and we look forward to speaking with you in March 2011.

Thank you.