Anywhere(HOUS) - 2020 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements, management's discussion and analysis, market risk disclosures, and controls and procedures for Realogy Holdings Corp Item 1. Financial Statements (Unaudited) Presents unaudited condensed consolidated financial statements for Realogy Holdings Corp. and Realogy Group LLC, including detailed notes and auditor review Condensed Consolidated Statements of Operations Highlights | Metric | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net revenues | $1,857 million | $1,550 million | $4,180 million | $4,268 million | | Total expenses | $1,711 million | $1,700 million | $4,607 million | $4,441 million | | Net income (loss) | $99 million | $(112) million | $(376) million | $(141) million | | Diluted earnings (loss) per share | $0.84 | $(0.99) | $(3.28) | $(1.25) | Condensed Consolidated Balance Sheets Highlights | Metric | September 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Cash, cash equivalents and restricted cash | $380 million | $235 million | | Goodwill | $2,887 million | $3,300 million | | Total assets | $7,048 million | $7,543 million | | Long-term debt | $3,159 million | $3,211 million | | Total liabilities | $5,315 million | $5,447 million | | Total equity | $1,733 million | $2,096 million | Condensed Consolidated Statements of Cash Flows Highlights (Nine Months Ended) | Activity | September 30, 2020 | September 30, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $418 million | $230 million | | Net cash used in investing activities | $(84) million | $(86) million | | Net cash used in financing activities | $(203) million | $(104) million | | Net increase in cash | $131 million | $40 million | Note 1. Basis of Presentation Details the basis of preparation for condensed consolidated financial statements, highlighting COVID-19 impact, Q3 2020 market recovery, and accounting policies - The residential real estate market saw a strong recovery starting late in Q2 2020, driven by a favorable mortgage rate environment, low inventory, and increased demand as quarantine restrictions eased. The company reversed most temporary cost-saving measures during Q3 2020 due to the business improvement[50][51] - The company's investment in Guaranteed Rate Affinity generated significant equity earnings of $95 million for the nine months ended Sep 30, 2020, a substantial increase from $12 million in the prior-year period, driven by cash dividends of $56 million[61] - As of September 30, 2020, the company held interest rate swaps with a notional value of $1.0 billion to manage exposure on its variable-rate debt. These swaps are not designated for hedge accounting, and changes in fair value are recorded in earnings[64] Note 2. Discontinued Operations Explains the accounting for Cartus Relocation Services as discontinued operations held for sale, following a terminated agreement and settlement - The company's global employee relocation business, Cartus Relocation Services, is classified as discontinued operations held for sale. A settlement was reached in August 2020 to dismiss all claims related to the terminated sale agreement with SIRVA[77] Discontinued Operations Financial Summary | Metric | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Net revenues | $52 million | $152 million | | (Loss) income from discontinued operations | $(5) million | $(24) million | | Estimated loss on the sale | $(59) million | $(133) million | | Net (loss) income from discontinued operations | $(46) million | $(114) million | Assets and Liabilities Held for Sale | Category | September 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total assets classified as held for sale | $583 million | $750 million | | Total liabilities classified as held for sale | $297 million | $356 million | Note 3. Goodwill and Intangible Assets Details goodwill and intangible asset accounting, including a $413 million goodwill impairment and $30 million trademark impairment in Q1 2020 due to COVID-19 - In Q1 2020, the COVID-19 pandemic was deemed a triggering event, leading to an impairment assessment. This resulted in a $413 million goodwill impairment for Realogy Brokerage Group and a $30 million trademark impairment for Realogy Franchise Group[91] - The impairments were primarily driven by a significant increase in the weighted average cost of capital (WACC) and lower projected financial results for 2020. For example, the WACC for the Realogy Brokerage Group increased from 9.0% in Q4 2019 to 11.0% in Q1 2020[91][93] Goodwill by Reporting Unit (in millions) | Reporting Unit | Balance at Dec 31, 2019 | Impairment Loss | Balance at Sep 30, 2020 | | :--- | :--- | :--- | :--- | | Realogy Franchise Group | $2,476 | $0 | $2,476 | | Realogy Brokerage Group | $669 | $(413) | $256 | | Realogy Title Group | $155 | $0 | $155 | | Total Company | $3,300 | $(413) | $2,887 | Note 5. Short and Long-Term Debt Provides an overview of short and long-term debt, including the $550 million Senior Secured Second Lien Notes issuance and temporary easing of the senior secured leverage ratio covenant Total Indebtedness (in millions) | Debt Category | September 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Senior Secured Credit Facility | $1,179 | $1,235 | | Term Loan A Facility | $690 | $714 | | 7.625% Senior Secured Second Lien Notes | $540 | $0 | | 5.25% Senior Notes | $0 | $548 | | Other Senior Notes | $948 | $948 | | Total Short-Term & Long-Term Debt | $3,357 | $3,445 | - In June 2020, the company issued $550 million of 7.625% Senior Secured Second Lien Notes due 2025 and used the proceeds to redeem all outstanding 5.25% Senior Notes due 2021, resulting in an $8 million loss on early extinguishment of debt[118][121][127] - In July 2020, the company amended its credit agreements, temporarily increasing the maximum senior secured leverage ratio to 6.50 to 1.00 through Q2 2021, while tightening other covenants related to debt, liens, and restricted payments[113][114] Note 6. Restructuring Costs Outlines restructuring activities under the Facility and Operational Efficiencies Program, with $38 million incurred in 9M 2020 and $108 million total expected costs Restructuring Charges (in millions) | Period | Personnel-related costs | Facility-related costs | Total | | :--- | :--- | :--- | :--- | | Three Months Ended Sep 30, 2020 | $3 | $10 | $13 | | Nine Months Ended Sep 30, 2020 | $10 | $28 | $38 | - The company's Facility and Operational Efficiencies Program, which began in 2019, is expected to incur total costs of approximately $108 million. As of September 30, 2020, $74 million has been incurred, with $34 million remaining[133] - The Realogy Brokerage Group is expected to bear the largest portion of the restructuring costs, with a total expected amount of $84 million, of which $55 million has been incurred to date[135] Note 9. Commitments and Contingencies Describes various legal proceedings, including worker classification, real estate antitrust, and securities litigation, with potential material adverse effects - The company is a defendant in multiple putative class action lawsuits (Moehrl et al. and Sitzer et al.) alleging that NAR's rules regarding buyer broker compensation violate antitrust laws. The courts have denied motions to dismiss in these cases[155][156] - A putative class action securities lawsuit (Tanaskovic v. Realogy) alleges false and misleading statements about the company's business between February 2017 and May 2019. The company's motion to dismiss is pending[158] - The company is involved in worker classification litigation (Whitlach v. Premier Valley, Inc.) where a franchisee's independent sales agents are alleged to be employees, with the company named as a potential joint employer[151][152] Note 10. Segment Information Provides financial information for the Realogy Franchise, Brokerage, and Title segments, including revenues and Operating EBITDA Segment Revenues (in millions) | Segment | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Realogy Franchise Group | $262 | $609 | | Realogy Brokerage Group | $1,479 | $3,281 | | Realogy Title Group | $213 | $510 | | Total Company | $1,857 | $4,180 | Segment Operating EBITDA (in millions) | Segment | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Realogy Franchise Group | $196 | $419 | | Realogy Brokerage Group | $61 | $25 | | Realogy Title Group | $95 | $168 | | Corporate and Other | $(43) | $(94) | | Total continuing operations | $309 | $518 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Provides management's perspective on financial condition and results, discussing Q3 2020 market recovery, industry trends, segment drivers, liquidity, and debt covenants Overview & Business Segments Describes the company's three primary real estate service segments: Realogy Franchise Group, Realogy Brokerage Group, and Realogy Title Group - The company's operations are structured into three primary business segments: - Realogy Franchise Group: Franchises seven real estate brands with approximately 318,000 agents worldwide - Realogy Brokerage Group: Operates approximately 680 company-owned brokerage offices with 52,400 agents - Realogy Title Group: Provides title, settlement, and mortgage origination joint venture services[183][185] Current Business and Industry Trends Details the Q2 2020 residential real estate market recovery driven by low mortgage rates and demand, alongside challenges like low inventory and intense agent competition - A strong recovery in the residential real estate market began late in Q2 2020, with combined homesale transaction volume for Realogy's Franchise and Brokerage groups increasing 28% in Q3 2020 YoY[185][188] - Housing inventory remains a concern, with U.S. supply decreasing to 2.7 months in September 2020 from 4.0 months a year prior. However, an intensified pace of inventory turnover contributed to increased homesale transactions in Q3[192] - Low mortgage rates have favorably impacted results, particularly at Realogy Title Group. Equity earnings from the Guaranteed Rate Affinity JV were $95 million for the first nine months of 2020, up from $12 million in 2019, and refinance title units increased 159%[195] - The company faces intense competition for productive sales agents, which puts upward pressure on commission splits and may negatively impact market share. Non-traditional business models, such as iBuyers and listing aggregators expanding into brokerage, also pose a competitive threat[198][201][205] Key Drivers of Our Businesses Identifies key operating metrics for segments, including homesale sides, average price, and title units, noting expected pressure on net royalty and commission splits Key Operating Metrics (% Change YoY) | Metric | Q3 2020 vs Q3 2019 | YTD 2020 vs YTD 2019 | | :--- | :--- | :--- | | Realogy Franchise Group | | | | Closed homesale sides | +12% | -3% | | Average homesale price | +17% | +9% | | Realogy Brokerage Group | | | | Closed homesale sides | +10% | -5% | | Average homesale price | +11% | +3% | | Realogy Title Group | | | | Purchase title and closing units | +10% | -5% | | Refinance title and closing units | +129% | +159% | - The company expects continued pressure on net royalty per side due to competitive factors, concentration among top franchisees, and the impact of the Better Homes and Gardens Real Estate "capped fee model"[232] Results of Operations (Q3 2020 vs Q3 2019) Q3 2020 consolidated net revenues increased 20% to $1.9 billion, with net income of $98 million and Operating EBITDA up 50% to $309 million Consolidated Results - Q3 2020 vs Q3 2019 | Metric | Q3 2020 | Q3 2019 | Change | | :--- | :--- | :--- | :--- | | Net revenues | $1,857 million | $1,550 million | +$307 million | | Net income (loss) attributable to Realogy | $98 million | $(113) million | +$211 million | | Operating EBITDA | $309 million | $206 million | +$103 million | - The increase in net income was primarily due to higher revenue and the absence of a $237 million goodwill impairment charge recorded in Q3 2019[237] - Realogy Title Group's Operating EBITDA surged 206% to $95 million, largely due to a $46 million increase in equity earnings from its mortgage JV, Guaranteed Rate Affinity[241][254] - Realogy Brokerage Group's Operating EBITDA increased 97% to $61 million, driven by higher revenue, partially offset by a $230 million increase in commission expenses[241][252] Results of Operations (YTD 2020 vs YTD 2019) YTD 2020 consolidated net revenues decreased 2% to $4.2 billion, with a net loss of $378 million due to a $460 million impairment, while Operating EBITDA increased 17% to $518 million Consolidated Results - YTD 2020 vs YTD 2019 | Metric | YTD 2020 | YTD 2019 | Change | | :--- | :--- | :--- | :--- | | Net revenues | $4,180 million | $4,268 million | -$88 million | | Net loss attributable to Realogy | $(378) million | $(143) million | -$235 million | | Operating EBITDA | $518 million | $443 million | +$75 million | - The net loss for the first nine months of 2020 was driven by a $460 million impairment charge ($413 million goodwill, $30 million trademarks, $17 million lease assets), compared to a $243 million impairment in the same period of 2019[259] - Operating EBITDA increased by $75 million, aided by a $45 million decrease in marketing expenses and a $50 million decrease in operating and G&A expenses due to cost-saving initiatives[259][260] - Equity in earnings from unconsolidated entities increased by $83 million to $98 million, almost entirely from the Guaranteed Rate Affinity mortgage JV[261] Financial Condition, Liquidity and Capital Resources Total assets decreased by $495 million due to impairments, while liquidity improved with a $145 million cash increase, and the company remained compliant with debt covenants - Total assets decreased by $495 million since year-end 2019, mainly due to a $413 million goodwill impairment and a $30 million trademark impairment[285] - Cash flow from continuing operations for the nine months ended Sep 30, 2020 was $398 million, a $148 million increase from the prior year, driven by better working capital management and higher dividends from the mortgage JV[299] - The company was in compliance with its senior secured leverage ratio covenant with a ratio of 2.29x, significantly below the maximum permitted ratio of 6.50x[291][314] - The consolidated leverage ratio under the indentures governing its 9.375% and 7.625% Senior Notes was 4.2x. The company is restricted from making most restricted payments (e.g., dividends, share repurchases) until this ratio is below 4.0x[320][322] Item 3. Quantitative and Qualitative Disclosures about Market Risks Outlines market risk exposure from $1.9 billion variable-rate debt, managed by $1.0 billion interest rate swaps, with a 0.25% LIBOR increase impacting annual interest by $2 million - The company's primary market risk is interest rate fluctuation, specifically LIBOR, on its $1.9 billion of variable-rate debt under the Senior Secured Credit Facility and Term Loan A Facility[334][336] - As of September 30, 2020, the company had interest rate swaps with a total notional value of $1.0 billion to hedge a portion of its variable rate debt exposure[337] - A hypothetical 0.25% increase in LIBOR would result in an estimated $2 million increase in annual interest expense[336] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective at a "reasonable assurance" level, with no material changes to internal control over financial reporting - Management, including the CEO and CFO, concluded that the disclosure controls and procedures for both Realogy Holdings Corp. and Realogy Group LLC are effective at the "reasonable assurance" level[340] - There were no changes in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, internal controls[340] PART II - OTHER INFORMATION This section covers legal proceedings, risk factors, and other information, including executive compensation details Item 1. Legal Proceedings Refers to Note 9 for legal proceedings details, noting that unpredictable litigation outcomes could materially exceed accruals and adversely affect financial results - The company is subject to various legal proceedings, with details provided in Note 9 of the financial statements[344] - Management acknowledges that litigation is unpredictable and unfavorable resolutions could have a material adverse effect on the company's financial condition, results of operations, or cash flows[345] Item 1A. Risk Factors States no material changes to risk factors since prior disclosures in the Q2 2020 Form 10-Q and 2019 Form 10-K - There were no material changes to the risk factors previously disclosed in the Q2 2020 Form 10-Q and the 2019 Form 10-K[347] Item 5. Other Information Discloses a cash-based performance and retention award granted to the CEO on November 3, 2020, tied to market share growth and continued employment - On November 3, 2020, the CEO was granted a cash-based performance and retention award[348] - The performance component includes two tranches of $1.5 million each, contingent on market share growth targets for periods ending in September 2022 and September 2023[349] - A retention component of $1.0 million will be paid if the CEO remains employed through September 30, 2021[352]