Anywhere Real Estate Inc (HOUS) 2011 Q1 法說會逐字稿

Good morning, and welcome to the Realogy Corporation first quarter 2011 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 later today.

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, Reology's Senior Vice President of Financial Planning.

Please go ahead, Alicia.

Thank you, Robin.

Good morning and welcome to Reology's first quarter 2011 earnings conference call.

On the call with me today are Reology'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 results press release and our Form 10-Q for the quarter ended March 31st, 2011, which we have filed with the Securities and Exchange Commission.

Both documents are available on the Investor information section of our website, as well as a copy of today's webcast slide.

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

For those who listen to the rebroadcast of this presentation we remind you that the remarks made herein are as of today, May 4th, and have not been updated subsequent to the initial earnings call.

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 heading forward-looking statements, risk factors, and Management discussion and analysis of financial condition and results of operations in our Annual Report on Form 10-K for the year ended December 31st, 2010, and our quarterly report on Form 10-Q for the quarter ended March 31st, 2011, and in other periodic reports.

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.

In terms of industry data we use the National Association of Realtors, NRA, and Fannie Mae as benchmarks of the direction of the residential housing market.

We believe changes in Reology's home sale statistics will continue to vary from those reported by NAR and Fannie Mae because they use survey data as the basis of their historical reports and forecasting models, whereas we use data based on actual reported results.

In addition to the differences in calculation methodologies.

there are geographical differences and concentrations in the markets in which we operate versus the national market.

NRA historical data is subject to periodic review and revision.

NRA is currently engaged in the review of its sampling of methodology processes with respect to existing home sale data.

While we believe this industry data 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.

Let me briefly review the headlines from our release issued today regarding Reology's first quarter 2011 results.

Specifically for the quarter ended March 31st, 2011 we reported revenue of $831 million, EBITDA before restructuring and other items of $25 million, which excludes the $36 million loss on early extinguishment of debt, and net loss attributable to Reology of $237 million, which includes $179 million of interest expense and $46 million of depreciation and amortization.

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

Thank you, Alicia.

Good morning, and thank you for joining our webcast.

It's been about two months since we last hosted a call to discuss our full year 2010 financial highlights, so our summary for the first quarter of this year will be brief.

As I'm sure you will recall from prior reports, given the seasonality of our industry the first quarter of any year is historically the weakest, and Reology is no exception to that rule.

A variety of macroeconomic pressures made for very difficult year-over-year comparisons this past quarter, including an increased proportion of distressed property sales, weather related issues in the northeast and upper Midwest in the first quarter of this year, and the impact of the homebuyer tax credit in the first quarter of last year.

Keeping those headwinds in mind, we are pleased to note that Reology's net revenue was $831 million in the first quarter of this year, a 1% increase over the same period of last year, and EBITDA before restructuring and other items was $25 million in the first quarter, which is a 14% year-over-year increase from the first quarter of 2010.

The improved year-over-year results for the first quarter of this year were largely the result of long-term growth initiatives at Cartus and the Title Resource Group, our Relocation, Title and Settlement Services segments, respectively, both of which are beginning to bear fruit in the form of a higher transaction volume and increased revenues.

In the first quarter of this year both the Reology Franchise Group, RFG, and NRT, our Company-owned brokerage business, experienced modest year-over-year decreases in closed unit sales.

RFG units were down 4%, while its average home sale price in the first quarter increased by 3% year-over-year.

At NRT units decreased by 3% in the first quarter, while its average home sale price was down 1%.

By comparison, the National Association of Realtors reported that actual units were down 2% nationally in the first quarter and average sales price was down 3% nationally in the first quarter.

NAR, National Association of Realtors, reported that distressed sales increased from an average of 36% of all sales in the first quarter of 2010, to 39% in the first quarter of this year, which contributed to the price decline they reported.

Cartus and TRG favorably impacted our first quarter, and sales volume of our franchise and Company-owned real estate segments outperformed the National Association of Realtors first quarter reported results.

We believe that the year is performing much as we expected, with very difficult comparisons in the first half, culminating in April and May, that should be followed by more favorable comparisons in the second half of this year.

In terms of domestic franchise sales, the Reology Franchise Group reported new franchise sales representing a 23% year-over-year increase based upon new franchisee gross commission income, and given the headwinds that's a solid Franchise sales quarter.

Our global expansion continued with the addition of two new Sotheby's International Realty direct franchise agreements in Spain, and one in Taiwan.

NRT, our Company-owned brokerage, was recently ranked as the number one brokerage firm in the nation for the 14th consecutive year by Real Trends 500 industry research report.

In 2010 NRT had approximately $113 billion in pro forma closed sales volume and more than 259,000 transaction sides.

NRT's 2010 year-over-year sales volume increased by $5.8 billion, the largest increase among all companies in the ranking.

We believe NRT's organic growth strategies are producing results.

During the last 12 months the Company recruited new sales associates who collectively generated more than $50 million in annual gross commission income.

In keeping with its historical norms, NRT retained over 93% of the production from its first and second quartile sales associates, the top producing segments of its 43,000 independent sales associate group.

Over the past 12 months NRT took advantage of compelling opportunities in today's market and closed 12 acquisitions, which resulted in incremental GCI, gross commission income, of more than $63 million.

In the first quarter of this year Cartus initiations increased 8% from the prior year, and its broker referrals were up 6% year-over-year.

In addition to increased domestic and international transaction volume Cartus successfully won the business of 29 new clients, representing an increase of about $4 million in annualized revenue, and expanded services with 118 of its existing clients.

In our Settlement Services segment, Title Resource Group's refinance, title, and closing units were up 41% in the first quarter.

This increase reflects an increased volume of transactions and an expanded client base.

The increase in refinance transactions more than offset the 5% decline in purchase, title, and closing units.

And as we have previously stated TRG's purchased title units generally track NRT unit sales and both unit sales and purchase volume followed the national downward trend for the quarter.

On a combined basis TRG's purchase and refinanced units reflected a 12% increase over the first quarter of last year, and TRG's overall sales volume was helped by a 2% increase in its average price per closing unit.

TRG's underwriter, Title Resource Guarantee Company, reported its fourth consecutive quarter of revenue growth.

Net premiums during the first quarter increased by 21% over the previous year, in part attributable to market expansion and gains in the number of title agents.

TRG's underwriting claims experience for the quarter was less than 1%, with annual claims of less than 2%.

TRG's underwriter continues to substantially outperform the industry average loss ratio of 6%.

Now, let's look at the current operating environment.

As we have previously stated, industry observers have correctly forecasted a comparatively weak first half due to a variety of macroeconomic pressures, including an increased proportion of distressed property sales and the weather related issues we saw in the northeast and the upper Midwest in the first quarter of this year, and of course the impact of the homebuyer tax credit last year.

We expect the weakness in the first quarter to continue into the second quarter.

Almost all related to the strength of last year's homebuyer tax credit.

In the second quarter of this year we expect units to be down on a comparative basis and priced to increase over the second quarter of last year.

Currently the National Association of Realtors and Fannie Mae are forecasting a second quarter seasonally adjusted annualized rate, or SAR, home sale unit decline of 6% and 7%, respectively, versus second quarter 2010 and a modest decrease in median sales price.

In the second half we expect year-over-year comparisons to improve.

On a full year basis the National Association of Realtors is forecasting an 8% increase in existing home sales in 2011 compared to 2010, and a 6% increase in 2012.

Fannie Mae is forecasting a 6% annual increase in existing home sales this year, and a 7% increase in 2012.

With respect to home sale prices, the National Association of Realtors is forecasting a median sale price increase to be down in the 2% range, and 2011 -- I'm sorry, they're forecasting median sale price to be down 2% in 2011 and to increase by 4% in 2012.

Fannie Mae's most recent April forecast is a 5% decrease in the median home sale price in 2011, followed by a 1% year-over-year increase in 2012.

As we have stated in prior earnings calls, the housing recovery depends largely on macroeconomic issues, most notably employment.

As of the U.S.

Department of Labor's latest report in March the unemployment rate has declined for the fourth consecutive month.

The Conference Board's consumer confidence index, which has declined sharply in March, rose slightly in April despite rising fuel and commodity prices.

These positive employment and consumer confidence reports are encouraging, along with the National Association of Realtors home affordability index, which is at its highest levels in 40 years.

National Association of Realtors reported in April that the housing, total housing inventory through the end of March rose 1.5% to 3.55 million existing homes for sale, which represents an 8.4 month supply at the current sales pace, and that's down from an 8.5 month supply in February.

The current housing supply remains higher than the historical average, and could increase due to the release of foreclosed or distressed properties by financial institutions.

And that's often referred to as the shadow inventory.

The 8.4 month supply of homes does not include that inventory.

The shadow inventory could continue to add downward pressure on the price of existing home sales, especially in certain markets, particularly if banks and other mortgage servicers accelerate the liquidation of their foreclosed properties.

Other factors that could impede the potential recovery in the housing market are the move of buyers who have limited or negative equity in their homes and the reluctance of first time homebuyers to purchase a home in an uncertain economic environment.

The supply of homes for sale remains higher than the historical averages and could increase subject to the disposition of lender-owned foreclosures and other distressed sales.

We believe that lenders will follow a gradual and orderly process in putting their foreclosed properties on the market, which we continue to believe will be sold on a relatively prompt basis, principally to investors and first time buyers.

On the regulatory and legislative front we continue to be active in matters that have broad industry implications -- GSE reform and the Dodd-Frank Act being the most time consuming.

We believe that GSE reform, which as you know pertains to Fannie Mae and Freddie Mac, is the single most important national housing policy issue to be undertaken by Congress in more than 50 years.

Congress and the Administration continue to struggle with this very controversial subject, and in spite of the Treasury Department's constructive whitepaper which essentially framed the debate, we do not see a firm strategy emerging this year.

Dodd-Frank, all 850 pages, is equally challenging.

Most aspects of the law were left to the regulators to address, not Congress, and there are more than 300 rules that must be written by regulators, many if not all without Congressional oversight.

A number of them pertain to the mortgage industry and could have a material impact on the mortgage industry and thus housing.

In particular, we believe that recently proposed definition of a qualified residential mortgage, which among other things includes a down payment requirement of 20% for homebuyers is a definition that penalizes homebuyers in higher priced markets, and we believe will hurt low to moderate income buyers, as well, and will ultimately be harmful to consumers, the mortgage finance industry, and the housing market.

Combined with the fact that the maximum conforming loan limits are scheduled to be dramatically lowered at the end of September of this year, varying from 729 and 750 in certain markets down to a potential cap at the general national level of 417,000.

We believe the current regulatory environment is headed in a direction that will likely result in the unintended consequences of further dampening the housing market at a time when it is fragile and essential to a general economic recovery.

Now, we are working closely with the National Association of Realtors, other trade groups, Congress, and the Administration in hopes of positively impacting the new rules as they are being written.

As in the past, the National Association of Realtors lobbying groups and their efforts are particularly effective, and we are encouraged by their efforts.

In closing, we will continue to make our voices heard regarding legislative and regulatory matters that pose challenges to our housing policy and thus our Company.

And, once again, permit me to recognize the Senior Management Team and all of our employees for their effectiveness, dedication, and commitment.

The Team effort has truly been outstanding.

And, with that, I'll turn this call over to Tony.

Tony?

Thank you, Richard.

In discussing the financial results I will be referring to the webcast slides.

Let me begin with some comments and financial highlights for Reology in the first quarter 2011, shown on slide nine.

As reflected in our filing, Q1 2011 revenues totaled $831 million, an increase of 1% year-over-year.

EBITDA before restructuring and other items was $25 million, an increase of 14% versus 2010 Q1 results.

The increase in first quarter EBITDA before restructuring and other items was due to Cartus and TRGs' strong results which more than made-up for RFG and NRT declines due to lower home sale volume.

Based on our trailing 12-month adjusted EBITDA Reology senior secured leverage ratio was 3.83 to 1 at March 31st.

Looking at slide 10, the breakdown by category of the first quarter, $831 million of total net revenue, was as follows.

Gross commission income totaled $575 million to NRT, a decrease of 2% from 2010.

Service revenues principally from Cartus and Title Resource Group increased to $164 million, up 21% from Q1 2010.

Reology Franchise Group's third-party domestic franchise fees decreased $4 million to $51 million for the quarter.

On slide 11 we compare expenses during the first quarter of 2011 to 2010.

Total commission and other related costs of $374 million decreased $3 million year-over-year, in line with gross commission income decreases.

Operating expenses of $318 million increased $18 million or 6% year-over-year primarily due to volume increases at TRG and a full quarter of primacy expenses.

Marketing costs decreased by $3 million.

And, finally, general and administrative costs declined $7 million to $71 million compared to 2010.

Next I would like to discuss our key business drivers shown on slide 12.

For the first quarter 2011 RFG home sale sides decreased 4%, while average home sale price increased 3% compared to 2010.

The year-over-year decline in home sale sides was due to the reasons discussed earlier.

However, RFG's average sales price actually increased 3% largely due to the 24% increase in home sale sides and average sales price increased 11% from our Sotheby's International Realty Franchisees.

At NRT home sale sides decreased 3% in the first quarter compared to 2010.

Average home sale price also decreased but by only 1%.

Volume of sales of homes over $750,000 increased to 46% from 44% of our overall volume in the first quarter of 2010, and that was driven by average sale price increases of 4%.

However, the average sales price in the below $750,000 category declined 3% and that was what caused the overall NRT price decline in the first quarter.

Looking at regional performance in the first quarter, NRT generally continues to see strength in select high end markets, such as New York City, the San Francisco Peninsula, and Silicon Valley.

Regionally NRT's northern California operations performed the best comparatively in the first quarter of 2011, with home sale sides increases of 11% and average sales price increases of 2% compared to the first quarter of 2010.

NRT's Sotheby's International Realty owned offices had home sale side and price increases of 5% and 6%, respectively.

And [Corcoran] resale business in New York City also performed well in the first quarter with home sale sides and price increases of 3% and 4%, respectively.

NRT's operations in Florida reported a 4% increase in closed sides and a 1% increase in average sales price.

Weaker areas include NRT's southern California operations, which reported a 13% decrease in home sale sides, offset by a 4% increase in average home price.

In the Midwest NRT reported 10% declines in sides and flat average sales prices.

NRT's tristate area outside of New York City reported a 7% decrease in home sale sides and also had flat average home sale prices.

Looking at what we are seeing in the second quarter, as we expected April home sales combined for RFG and NRT decreased approximately 17% while average price increased 4% versus 2010.

We expect that the second quarter will produce the worst year-over-year unit comparisons because the impact of the homebuyer tax credit peaked in the second quarter of 2010.

Looking beyond the second quarter if SAR levels hold at approximately 5 million units in national sales in the third quarter, then home sale side improvements in the third quarter could be up approximately 20% year-over-year.

Average broker commission rates in the quarter increased 2 basis points at NRT from 2.48% in 2010 to 2.50% in the first quarter of 2011, while RFG average broker commission rate declined 1 basis point from 2.55% to 2.54% in 2011.

Also, the Reology Franchise Group's net effective royalty rate declined 17 basis points to 4.87% as our larger affiliates are achieving higher volume levels and Sotheby's International Realty's increased volume contributed at a lower net effective rate.

The net effective royalty rate has been declining over the past three years.

We would expect that over the near future the net effective royalty rate will continue to modestly decline due to an increased concentration of business in our larger franchisees, which are in higher volume rebates, and a shift in volume across our brands.

Cartus relocation initiations in the first quarter increased 8%, and referrals increased 6% for the period.

Primacy contributed 95% of the initiation and 36% of the referral increases in the first quarter.

At TRG first quarter 2011 refinanced unit volume increased 41%.

This strong gain was due to low mortgage rates and increased volume from clients we are servicing.

The Company's purchase, title, and closed units decreased 5% in the quarter, which was consistent with NRT unit sales, and average price per closing, average fee for closing unit increased by 2% from 2010.

Now let's review revenue and EBITDA before restructuring and other items, by business unit for the first quarter ended March 31st, 2011 and 2010, shown on slide 13.

Total revenue at RFG was $118 million in the first quarter of 2011 compared to $122 million in 2010.

The 3% revenue decrease was due to the decrease in home sale sides, lower NRT royalties, and a decrease in the net effective royalty rate.

This was partially offset by a 3% increase in average sales price.

EBITDA before restructuring and other items at RFG was $62 million in the first quarter of 2011 compared with $65 million in 2010.

Revenue decreases along with higher operating expenses due to brand conferences held this year but not last year were partially offset by lower legal and marketing expenses.

NRT EBITDA before restructuring and other items in the first quarter of 2011 was negative $35 million.

This was $4 million below 2010, and that decrease was driven by a $14 million decrease in revenue due to lower home sale volume.

The revenue declines were mostly offset by lower commission and operating expenses.

Historically NRT has experienced seasonal operating losses in the first quarter, the industry's weakest quarter.

Fixed costs of the business are spread evenly throughout the year, and the first quarter normally has the lowest transaction volume, which makes these expenses difficult to offset.

As in previous years we forecasted NRT's profit will be strongest in the second and third quarters.

At Cartus EBITDA before restructuring and other items was $10 million in 2011, up from $6 million last year.

Revenue increases of $11 million were largely driven by a full quarter of primacy results rather than the two months of contribution last year, together with strong global and referral fee revenue, all due to higher volume.

EBITDA before restructuring and other items increased $4 million due to these revenue increases.

At TRG revenue increased 28% as a result of higher underwriting and refinance volume.

TRG's underwriter achieved record levels of quarterly net premiums in the first quarter as a result of an increased agent-based and its expansion into California.

EBITDA before restructuring and other items increased $6 million as a result of revenue increases, partially offset by an increase in operating costs.

Turning to the balance sheet on slide 14, we ended the quarter with a cash balance of $93 million, which includes $72 million of readily available cash, and $21 million of statutory cash required for our title business.

We had a $30 million balance on our revolving credit facility at March 31st, 2011.

We currently have $325 million borrowed under the revolver, under our senior secured credit agreement.

The use of cash since March 31st has been primarily for our semiannual interest payments.

We expect approximately half of the revolver balance to be repaid by the end of June.

On slide 15, we continued to reduce our due to former parent balance from $104 million at the end of 2010 to $98 million at the end of March 2011.

Accordingly, in the next few weeks we will seek to reduce the synthetic letter of credit supporting this liability.

Accrued expenses and other current liabilities increased from $525 million to $631 million, and this was due to greater accrued interest expense because of the April semiannual interest payments.

Total long-term debt excluding securitizations increased from $6.9 billion at December 31st, 2010 to $7 billion on March 31st, 2011.

The increase was primarily the result of $98 million of revolver capacity that converted to term loans in the refinancing transactions, and the $30 million revolver drawer at March 31st, and offsetting this was the repayment of about $63 million of letter of credit backed borrowings during the quarter.

Our senior secured leverage ratio calculation has a maximum allowable ratio of 4.75 to 1.

At March 31st, 2011 the numerator total senior secured net debt, as defined in our credit agreement, totaled $2.4 billion.

That divided by adjusted EBITDA, as defined in our credit agreement, of $634 million for the 12 months ended March 31st resulted in a senior secured net debt to adjusted EBITDA ratio of 3.83 to 1, maintaining compliance with our credit agreement.

Let me provide you with expectations for certain cash flow items for the year, full year 2011.

Corporate cash interest is expected to be approximately $585 million to $595 million for the year, and that includes the October 2011 interest payment on the senior toggle notes which will be made in cash.

Capital expenditures are expected to be approximately $50 million for the full year.

Working capital inclusive of cash restructuring costs is forecasted to be a use of cash of between $30 million and $40 million.

And net funding of legacy issues is expected to total between $15 million and $25 million for the year.

In conclusion, let me remind you that the second quarter is going to underperform the second quarter of 2010 due to the activity spike created by the homebuyer tax credit last year.

However, the direction of the unit activity on a national basis has continued to improve every month.

Through March NAR's reported monthly SAR has increased 4% sequentially on average since July of 2010 when the homebuyer tax credit program effectively ended.

Based on both our closed and open sales data from our Franchise networks and our Company-owned real estate brokerage operations we believe that the seasonally adjusted annual rate of U.S.

existing home sales to be reported by NAR will hold steady at a rate of 5 million to 5.1 million units in the second quarter.

Our open and closed sales data is also indicating a modest improvement in average sales price in the second quarter.

Despite the poor year-over-year comparisons in terms of relative sales figures that will be reported for April and May we continue to be encouraged that the existing home market is following a course of modest but steady improvement on a monthly sequential basis.

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 and the webcast slides will be available on the Investor information section of the realogy.com website later today.

Second, we anticipate announcing our second quarter 2011 results in August, 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 August.

Thank you.