Anywhere Real Estate Inc (HOUS) 2012 Q2 法說會逐字稿

Good morning and welcome to the Realogy Corporation's second-quarter 2012 earnings webcast.

Today's webcast 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 Realogy's Senior Vice President, Alicia Swift.

Please go ahead, Alicia.

Thank you, Keisha.

Good morning and welcome to the Realogy second-quarter 2012 earnings conference call.

On the call with me today are Realogy's Chairman 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 Forms 10-Q for the quarter ended June 30, 2012, 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 slides.

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 the 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 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, August 8 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's Discussion and Analysis of the financial conditions and results of operations in our Annual Report on Form 10-K for the year ended December 31, 2011 and our quarterly reports on Form 10-Q for the quarters ended March 31, 2012 and June 30, 2012 and in other periodic reports filed time to time.

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

Our 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 and Fannie Mae as benchmarks for the direction of the residential housing market.

We believe changes in Realogy's home sales statistics will continue to vary from those reported by NAR because they use survey data as the basis of their historical reports, whereas we use data based on our actual reported results.

Let me briefly review the headlines from our release issued yesterday afternoon regarding Realogy's second-quarter 2012 results.

Specifically for the second quarter ended June 30, 2012, we reported revenue of $1.3 billion, an 11% year-over-year increase; EBITDA of $203 million, a 9% increase from the second quarter of 2011.

We maintained covenant compliance with a ratio of 4.08 to 1 within the required allowable limit and net loss attributable to Realogy of $25 million, which is largely due to $176 million of interest expense and $44 million of depreciation and amortization.

For the six months ended June 30, we reported revenue of $2.2 billion, a 9% year-over-year increase; EBITDA of $233 million, a 32% increase from 2011; adjusted EBITDA of $274 million, a $34 million increase from 2011; a net loss attributable to Realogy of $217 million.

Now I would like to turn the call over to our Chairman, Richard Smith.

Thank you, Alicia.

Good morning and thank you for joining our webcast as we report on our performance for the second quarter, as well as the first half of this year.

During our first-quarter call, we said that we expected to see favorable home sale unit gains continue through the second quarter and that the average sales price was slowly recovering with price increases in most major markets being heavily influenced by reduced inventory.

Those expectations are evident in our second-quarter results.

The early-stage recovery that we reported in the first quarter of this year in our view continued into the second quarter.

During the second quarter of this year, Realogy's Companywide volume of completed home sales, that is average home sale price times the number of home sale transactions, increased 15% compared to the second quarter of last year.

According to the National Association of Realtors, herein after referred to as NAR, second-quarter existing home sale transaction volume increased 15% on a national basis compared to second quarter of last year and that is in line with our performance.

[NRT], our Company-owned brokerage operations, recorded a 13% gain in home sale units in the second quarter while Realogy [franchise] group, herein after referred to as RFG, reported a 9% year-over-year increase in home sale units.

In comparison, NAR reported that existing home sale transactions increased by 9% compared to the second quarter of last year.

RFG's average home sale price was up 6% year over year as compared to NAR's 5% increase for the same period.

NRT's home sale price was flat compared to the second quarter of last year, principally due to its mix of business.

In our view, our reported Companywide 4% increase in average sales price is attributable to low inventory levels and an overall increase in demand.

In addition to these home sale metrics, the business drivers for our Relocation and Title Services business segments were strong in the second quarter, which we will discuss later in this report.

Now let's review the operating highlights for Realogy and each of our businesses.

During the second quarter of this year, RFG more than doubled franchise sales compared to the same period last year.

RFG's new annualized franchisee gross commission income, or what we refer to as GCI, was $76 million in the second quarter, bringing its total new annualized franchisee GCI through the first six months of this year to approximately $124 million, which represents a year-over-year increase of about 3%.

Our reported franchise sales are defined as new franchise agreements, as well as GCI acquired by our existing franchisees with our guidance and assistance.

The highlight of second-quarter franchise sales was the conversion of a major Houston, Texas brokerage to Better Homes & Gardens real estate.

The Company, which reported $1.6 billion in 2011 closed sales volume, ranks among the top 60 brokerage firms in the United States.

In terms of international franchise sales growth in the second quarter, ERA real estate sold a new master franchise for Turkey.

Coldwell Banker launched operations in Bolivia and Sotheby's International Realty expanded its presence into Spain and the resort and Mediterranean island of Ibiza.

In June, the 2012 Wall Street Journal Real Trends Top 1000 Report was released and real estate sales professionals affiliated with Realogy brand franchises and Company-owned offices occupy 40% of the total number of spots in this annual rankings report.

Coldwell Banker has had the most agents ranked in this report in each of the past seven years among all national brands.

On the technology front, our franchise brands continue to deliver innovative solutions to their franchisees and consumers alike and that is highlighted by a couple of the following comments that happened in the second quarter of this year.

Coldwell Banker unveiled a new [previews] international website and marketing campaign, which is focused entirely on the luxury market.

ERA launched a new brand website with an integrated property search solution across web, mobile and tablet platforms and simultaneously, ERA delivered approximately 700 custom local websites to its franchisees using the same format, features and branding as the national franchisor-sponsored ERA website.

Sotheby's International Realty introduced a luxury farm and ranch website, the first of a planned series of branded websites for specialty markets.

The Sotheby International Realty network currently represents over $6 billion of property listings worldwide in this niche market and has plans to add other specialty market sites over the next 12 months.

In May, NRT was ranked by Real Trends as the leading residential real estate broker in the United States.

NRT ranked number one in closed sales transactions with 255,410 sites on a pro forma basis in 2011, which surpassed the aggregate total of the next five competitors on the list.

This is the 15th consecutive year in which NRT was ranked number one in both sales volume and transaction sides by Real Trends.

In addition, the Wall Street Journal Real Trends report ranked NRT-affiliated sales associates in 44% of its top spots of the 250 agents by sales volume category.

In the aggregate, NRT accounted for approximately 20% of the total 1000 agents and teams in the overall rankings.

NRT management continues to focus on its organic growth strategies evidenced by its agent-recruiting success and the retention of its top agents.

During the last 12 months, the Company recruited new sales associates who collectively generated more than $65 million in annualized gross commission income and retained approximately 94% of the production from its first and second quartile sales associates, the top-producing segments of its 41,500 independent sales agents.

In the second quarter, Cartus, our employee relocation company, initiations increased 5% over the prior year and its broker referrals were up 9% year over year.

In addition to increase domestic and international transaction volume, Cartus signed 32 new clients representing an estimated 1 million in annualized revenue and expanded services with 104 of its existing clients.

In our Settlement Services segment, title [resources] group refinanced title and closing units were up 64% during the second quarter bolstered by the low rate environment and government refinance programs.

Purchased title and closing units were up 14%, which tracks the increase in NRT home sale units for the quarter.

TRG's increase in purchase and refinanced units more than offset the 5% decrease in its average fee per closing unit for the second quarter.

On average, TRG's fees on refinanced units is approximately half that of a purchased unit.

TRG's underwriter, Title Resources [Guarantee] Company, reported a 28% increase in net premiums as compared to the second quarter of last year.

TRGC's underwriting claims experience for the second quarter was less than 1% and continues to substantially outperform the current industry loss ratio of approximately 6%.

Now let's look at some market conditions.

NAR reported in July that the inventory of existing homes for sale through the end of June was 2.4 million homes, which has trended down from a record 4 million homes in July of 2007 and is 24% below last year's June inventory level.

The June 2012 inventory represents a 6.6 month supply at the current sales pace.

That is up 3% from 6.4 months reported in May of this year.

In our view, inventory levels will increase over time as average sales price rebounds.

While we continue to monitor the impact of shadow inventory on prices, we do not believe that it will have a significant impact on our business as the size of the shadow inventory has declined to 2008 levels.

The majority of which is concentrated in select markets.

Also the price effect of shadow inventory on nearby homes is minimal, a position supported by a recently published research report from the economist at the Federal Reserve Bank of Atlanta.

Shadow inventory is a phrase used by the industry to identify homes in some state of default, but not yet available to the market as listed inventory.

However, should the shadow inventory be released more quickly than we believe, we believe the potential increase in unit sales activity should offset in whole or in part any potential adverse impact on home prices in those regions.

According to NAR, the percentage of distressed properties has declined from 30% of sales in June of last year to 25% of sales in June of this year and leading institutions holding distressed mortgages have increasingly migrated from foreclosures to short sales, which is a less disruptive process to the marketplace.

On a combined sales volume basis, transaction sides times median price, NAR is forecasting a 13% increase in 2012 followed by a further 13% increase in 2013.

The breakdowns are as follows.

On a full-year basis in 2012, NAR anticipates a 9% year-over-year increase in existing home sale units and a 4% increase in average home sale price.

The NAR 2013 forecast calls for a 7% increase in existing home sales to 5 million units compared to 2012.

Although it noted in its May 2012 release the number of homes sales could rise to as many as 5.3 million units, or a 15% increase compared to 2012 with a return to more normal mortgage underwriting standards.

NAR's 2013 forecast also calls for a 5% increase in median existing home price.

And we are not alone in our belief that the housing market is in an early stage recovery.

Among other examples, the Joint Center for Housing Studies at Harvard University issued its recent annual State of the Nation's Housing Report under the headline and I quote, signs of a turnaround in the US housing market, unquote and reported that we are in the early innings of the housing recovery.

Likewise, the S&P Case-Shiller home price indices reported a continuing trend of rising home prices for the spring with a 2% increase in its 20 City Index for May 2012.

Fannie Mae's July 2012 National Housing Survey showed that housing market confidence among Americans continues to trend in a positive direction despite declining optimism about the economy and personal finances.

On average, respondents expect home prices to increase by approximately 2% in the next year.

50% of consumers surveyed by Fannie Mae believe that home prices will stay the same in the next year and 35% of respondents believe home prices will increase.

Only 11% of Americans believe that home prices will drop in the next year, which is down from a high of 27% in August of last year.

In addition, 16% of consumers say it is a good time to sell, the highest level since the survey's inception in June 2010, while the percentage of those who say it is a good time to buy was 73%, which was consistent with the prior month's survey.

Other positive market trends include Freddie Mac's Primary Mortgage Market Survey, which showed mortgage rates hitting new all-time record lows as of August 2. Currently, at 3.55%, the average 30-year fixed mortgage rate has been below 4% for all but one week in 2012 and is a full percentage point lower than a year ago.

The average 15-year fixed mortgage averaged 2.83% and has been below 3% for 10 consecutive weeks.

NAR's monthly Housing Affordability Index recently reported at 179 for June of this year and has remained at or above 178 for the past 12 months.

This means that the average family has 179% of the median income necessary to purchase a home at a median sales price of $190,100 with a 20% down payment.

CoreLogic, one of several third parties that track residential housing data, reported in June that, as of April 2012, shadow inventory is down about 15% year over year.

That is from 1.8 million units to 1.5 million units.

On August 7, CoreLogic also released its Home Price Index in which it reported that home prices nationwide rose 2.5% in June of this year compared to June of last year.

This marks the fourth consecutive increase in home prices nationally on both a year-over-year and month-over-month basis.

Excluding distressed sales, home prices nationwide increased on a year-over-year basis by 3.2%.

In addition, CoreLogic's Pending Home Price Index indicates that July home prices are poised to rise 4.3% year over year, excluding distressed sales and by 2% year over year overall.

The Homebuilders Confidence Index for the next six months rose for the third month in a row.

The six-point gain in July was the largest one-month gain reported by the index in nearly a decade and brought the index to its highest reading in the past five years.

For these and many other reasons, we believe that in spite of 8.3% unemployment and 1.5% GDP growth, the data is increasingly clear.

The housing market is in the early stages of recovery.

With that, I will turn the call over to Tony.

Thank you, Richard.

Before I discuss the results for the first half of 2012 in detail, I have a few brief comments.

Our year-to-date EBITDA was $233 million, a $57 million or 32% increase from the first-half 2011 results and that was primarily due to volume gains at NRT.

Breaking down the $57 million EBITDA increase, our sides and price increased 11% on a combined basis.

This is consistent with our sensitivity of 1 percentage point change in sides or price equaling $11 million of EBITDA on a full-year basis, or $5.5 million on a six-month basis.

That would equate -- the 11% increase for the first six months would equate to a $61 million year-over-year EBITDA improvement attributable to the sides and price increase, if all else remains constant.

One factor that did not remain constant was compensation expense.

Compensation expense recorded in the first half of 2012 increased by $30 million.

The incremental expense in the period was due to the impact of recording both the previously instituted retention plan, as well as the 2012 normal bonus plan.

Realogy did not have an annual bonus plan in 2011, but implemented a retention plan in November 2010, which will be expensed through September of 2012.

The last payment under the plan is scheduled for the beginning of October.

In the first half of 2012, the retention plan charge was $20 million.

Also in the first half of the year, RFG incurred expenses of $13 million relating to litigation defense costs and a reserve to settle our last significant litigation matter.

Excluding these two items, Realogy's EBITDA for the first half of 2012 would have been $266 million, an increase of $90 million compared to the first half of 2011 or a 51% improvement.

For the nine-month period ended September 30, 2012, there will be approximately $26 million of retention expense, which we do not expect to recur in 2013.

Based on our trailing 12-month adjusted EBITDA, Realogy's senior secured leverage ratio was 4.08 to 1 at June 30.

Year-to-date adjusted EBITDA was $274 million, a $34 million increase from $240 million in the first six months of 2011.

The 2012 figure is after the $13 million of expenses incurred to defend and settle litigation referred to earlier.

Slide 10 shows revenue for the first half of 2012.

The breakdown by category of the $2.2 billion of total net revenue was as follows.

Overall first-half revenue was up 9% from 2011.

Gross commission income totaled $1.6 billion at NRT, an increase of 10% from the first half of 2011.

Service revenues, principally from Cartus and Title Resource Group, increased to $380 million, up 7% from the first half of 2011 and the Realogy Franchise Group's third-party franchise fees increased $9 million to $130 million for the first six months of this year.

On slide 11, we compare expenses during the first six months of 2012 versus 2011.

Total commission and other related costs of $1.1 billion increased $113 million, or 12% year over year.

Operating expenses of $643 million increased 1% year over year.

Marketing costs increased by $6 million and general and administrative costs increased $29 million primarily due to the incremental compensation expense discussed above.

Next, I will discuss our key revenue drivers from slide 12.

In the first half of 2012, RFG home sale sides increased 8% year over year and average home sale price increased 4% to approximately $206,000.

RFG's overall volume increase was largely a result of more unit sales across all price points.

At the high end of the market, however, the Sotheby's International Realty brand had a 30% increase in transaction sides in the first six months compared to the same period last year.

NRT home sale sides increased 11% year over year in the first half compared to 2011 and average home sale price decreased by 1% to approximately $429,300.

Again, we believe that the combined Realogy average sales price increase was driven by lower levels of home inventory in many markets, greater overall demand than we saw last year and fewer distressed sales.

The percentage of distressed sales decreased from approximately 35% in the first half of 2011 to 29% in the first half of 2012 according to NAR data.

Moving from an overall perspective, here is a look at select regional NRT performance data for the first six months of 2012.

NRT's best-performing region was the Midwest, which had a 22% increase in home sale sides offset by an average sales price decrease of 2% in the first half of 2012 compared to the same period in 2011.

In particular, Chicago performed well and had a 27% increase in home sale sides offset by an average sales price decrease of 8%.

The Northeast experienced an 11% increase in sides offset by a 3% reduction in average sales price.

Florida was flat in terms of sides, but was up 6% on price.

This result is indicative of the impact of a tight inventory situation in Florida.

NRT's Southern California operations strengthened compared to last year and reported an 8% year-over-year increase in home sale sides offset by a 2% decrease in average sales price while Northern California enjoyed a 14% increase in sides along with a 2% increase in average sales price.

Looking ahead at what we are seeing for the third quarter of 2012, preliminary closed home sale sides combined for RFG and NRT increased approximately 10% in July 2012 versus 2011.

This was impacted by an extra business day in July 2012 compared to July 2011.

Average sales price increased 7%.

Based on our open or pending contracts in June and July, we expect to see high single-digit increases in transaction sides year over year in the third quarter and average sale price increases in the mid-single digits.

Moving on, average broker commission rates for the first half of 2012 increased 1 basis point at NRT to 2.50% year over year while RFG's average broker commission rate was flat at 2.55%.

Also, the Realogy Franchise Group's net effective royalty rate declined 17 basis points to 4.68% compared to the first half of 2011 as its larger affiliates continue to achieve incentives for higher volume levels.

RFG's top 250 companies represented 56% of total franchisee GCI in the first half of 2012 versus 53% in the first half of 2011.

Cartus relocation initiations for the first half increased 6% and referrals increased 10%.

The increase in initiations and referrals is driven primarily by an increase in our affinity business and new corporate clients signed in late 2011.

At TRG, year-to-date 2012 purchase unit volume increased 12%, which was consistent with the NRT unit gains.

TRG's refinanced title and closing units increased 44% in the first half of 2012 compared to 2011.

TRG's average fee for closing decreased by 7% in the first half due to the increase in refinance volume and the overall mix business.

Now let's look at revenue and EBITDA by business unit year to date 2012 as shown on slide 13.

Total revenue at RFG was $229 million in the first six months of 2012 compared to $278 million in 2011.

The 8% revenue increase was due to the 8% increase in home sale sides and 4% increase in average home sale price partially offset by the decrease in the net effect of royalty rate discussed earlier.

Marketing revenue and the related marketing expenses increased $4 million and $5 million respectively primarily due to timing of advertising spend compared to the first half of 2011.

EBITDA at RFG was $160 million in the first six months of 2012 compared with $159 million in 2011.

The $1 million increase in EBITDA was due to the $17 million increase in royalty revenues and a $3 million decrease in operating expenses offset by a $13 million increase in legal expenses primarily due to the settlement of litigation and an increase of $5 million in employee-related costs due to the compensation accruals mentioned above.

Revenue at NRT increased $140 million, or 10%, due to an 11% increase in home sale transaction sides that was partially offset by the 1% decline in the average sales price.

NRT EBITDA in the first six months of 2012 was $61 million.

That was $50 million better than in 2011.

The EBITDA improvement was due to the $140 million revenue increase, along with the $22 million increase in PHH home loans [venture] earnings and a $21 million decrease in operating expenses.

These improvements were partially offset by $113 million of higher commissions as a result of higher revenues, an increase of $8 million in intercompany royalties paid to RFG and a $10 million increase in employee-related costs primarily due to the compensation accruals mentioned above.

At Cartus, EBITDA was $34 million in the first six months of 2012, down from the $42 million in the first six months of 2011.

Revenue was flat for the six months, which consisted of a $5 million increase in referral revenue offset by a $5 million reduction in at-risk revenue due to the expected lower volume.

There was $6 million in higher expenses due to an increase in initiations in the first half that will convert to revenue later in the year, along with $6 million in higher employee-related costs due to the compensation accruals mentioned above.

These increases were partially offset by a $4 million reduction in costs for the at-risk transactions because of the lower volume.

At TRG, revenue increased 12% or $21 million as a result of a $10 million increase in resale volume, a $6 million increase in underwriter revenue and a $4 million increase in refinancing volume.

EBITDA increased $2 million due to the revenue increases partially offset by a $13 million increase in variable operating costs from increased volume, $2 million of increased expenses due to the expansion of the lender channel and $3 million of higher employee compensation expenses due to the compensation accruals mentioned above.

Turning to the balance sheet on slide 14, we ended the quarter with a cash balance of $138 million, which includes $89 million of readily available cash and $49 million of statutory cash required for our title business.

Turning to the liability slide of our balance sheet, slide 15, at June 30, 2012, the amount borrowed under our [Apple] Ridge facility together with amounts borrowed under our UK securitization was $267 million, which is supported exclusively by Relocation assets of $393 million.

The current portion of debt on the balance sheet was $214 million at June 30.

This consisted of $109 million of borrowing on our revolving credit facility and $105 million of other debt borrowings that are supported by letters of credit.

On August 6, our revolver balance was $150 million.

We expect that we will reduce the revolver borrowings to approximately $50 million by the end of September.

Accrued expenses and other liabilities increased to $583 million at June 30, 2012 from $520 million at year-end 2011, mostly due to accrued interest on the new first lien and 1.5 lien notes issued in February, along with accrued employee-related costs relating to retention and bonus expense.

We were in compliance with our senior secured leverage ratio at quarter-end.

Our senior secured net debt to adjusted EBITDA ratio was 4.08 to 1, which is within the required 4.75 to 1 allowable limit.

We expect to remain in compliance with our covenant for the next 12 months.

Let me provide you on slide 16 with certain cash flow items for the full-year 2012.

Corporate cash interest is expected to be $640 million to $650 million for the year assuming no change to our current capital structure.

Capital expenditures are expected to be $50 million to $55 million for the year.

Securitization working capital is expected to be $10 million to $20 million use for the full year.

Corporate working capital, inclusive of cash restructuring costs and the [AHYDO] payment we made of $11 million in April, is forecast to be a use of cash between $35 million and $45 million and net funding of legacy issues is expected to total approximately $5 million for the full year.

In conclusion, Realogy's year-to-date earnings and drivers continue to show improving trends in the second quarter as a result of an overall improvement in the residential real estate market.

Given our visibility into the next several months, we expect third-quarter home sale sides to improve in the high single digits and average price to increase in the mid-single digits.

Average sales price will continue to be supported by low inventory levels in many of our markets.

As for the remainder of 2012, NAR has continued to increase its forecast for 2012 on both units and price.

We are encouraged with our year-to-date results and the industry outlook for the remainder of 2012 and 2013.

With that, I will 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 website later today.

Second, we anticipate announcing our third-quarter 2012 results at the beginning of November 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 November.

Thank you.