Realogy Holdings Corp.
Q2 2021 Earnings Call Transcript

Published: 29 Jul 2021

[Operator:]

Good morning, and welcome to the Realogy Holdings Corp. Second Quarter 2021 Earnings Conference Call via webcast. Today’s call is being recorded, and a written transcript will be made available in the Investor Information section of the company’s website tomorrow. 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.

[Alicia Swift:]

Thank you, Lisa. Good morning, and welcome to Realogy’s second quarter 2021 earnings conference call. On the call with me today are Realogy’s CEO and President, Ryan Schneider; and Chief Financial Officer, Charlotte Simonelli. As shown on Slide 3 of the presentation, the company will be making statements about its future results and other forward-looking statements during this call. These statements are based on current expectations and the current economic environment.

[Ryan Schneider:]

Thank you, Alicia. Good morning, everyone. Realogy delivered an outstanding second quarter. The unmatched combination of our strategic progress, innovation through technology and commanding position in the luxury market grew powerful financial results, including significant market share gains. We continue to invest substantially to drive future growth and are making great progress strengthening our balance sheet. Overall, Realogy is leading the industry, delivering powerful results today and positioning our business for continued success in the future. Let me start by sharing our outstanding Q2 results.

[Charlotte Simonelli:]

Thank you, Ryan. Good morning, everyone. Realogy is firing on all cylinders. We kicked off 2021 with impressive Q1 results, and this momentum has continued into Q2. We executed well on our winning value proposition, delivered $310 million in operating EBITDA, and once again, drove market share gains. We continue to improve our balance sheet with compelling free cash flow generation of $243 million, and we achieved our lowest net leverage at 2.5 times. We capitalized on our strong momentum and favorable market conditions to raise capital at a significantly lower cost with our exchangeable bond offering. So let’s touch more on these great Q2 results.

[Operator:]

Your first question comes from the line of Tommy McJoynt with KBW.

[Tommy McJoynt:]

Hey, guys. Good morning. Thanks for taking my question. So when you guys parse out the existing home sale data by price point, we see the stronger trends really at the higher end of the price buckets. So how sustainable do you think that is in the luxury spectrum? And then do you sense that any of that is either kind of delayed transactions from prior periods or any pull forward from future periods?

[Ryan Schneider:]

It’s a great question. Look, we haven’t – we don’t really think there’s much in the pull forward or delayed transactions bucket. We’ve been seeing the trend you’re talking about now for basically a year. A year ago, there was probably a little bit of kind of one-time stuff with the vacation home surge, but we don’t see that happening. Now, look, we’ve got leadership in the luxury market, like I talked about. So we obviously – that’s one of the reasons we’re benefiting here and we’re really excited about it. We don’t see the trend for that segment, can be in different than the rest of the market. And frankly, I do expect it to continue to outperform a bit because if you think about some of the things that are driving the higher consumer demand, one of the bigger ones is obviously the more remote work kind of thing, and bluntly that skews to the higher end of the labor market. And so a lot more of the folks who are potential luxury buyers are going through the potential for change here in the market based off things like remote work and even some of their rotation into the suburbs from the cities. So it’s been a pretty consistent trend now for a year. And I think it’s got some legs to it, and obviously we’re very well positioned with our luxury leadership to benefit from it as you saw in our results.

[Tommy McJoynt:]

Great. Thanks for that. And switching over, we’ve seen some of your competitors announced partnerships or JVs with mortgage lenders, suggesting that this kind of adjacent revenue opportunity is a focal point of the market. Can you just talk about the GRA JV? And what you can do to kind of drive attachment rates of growth and ultimately earnings contribution?

[Ryan Schneider:]

Well, look, I mean, Tommy, the $126 million we made last year, I think kind of speaks for itself. So why don’t we just start with that. And look, we’ve been talking to you for about three years about our efforts to build a mortgage business. And everybody in this industry either has or should have a mortgage business. It’s clearly an important thing. And we built a business in three years with over 500 loan officers covering our brokerages offering. I’ve talked about our flash close technology that our JV uses, that helps accelerate the growth in the business. It helped us capture more of those economics. And so – but for us, by the way, you should know, and this is where we differ from most of the competition. It’s not just mortgage, right? We’re integrating with title and driving disproportionate results, both in 2020 and 2021. We integrate with relocation and the lead generation side there. And we’re even starting to get some traction and integrating with our insurance business. And so kind of the whole for us it’s kind of greater than the sum of the parts. So, look, we don’t spend a lot of time on what others are doing because everybody in the business has a mortgage. We spend our time building a great mortgage business. And again, I think the financials speak for themselves. So I’ll be more interested in your question when there’s other people making $100 plus million in mortgage.

[Tommy McJoynt:]

Makes sense. Thanks, Ryan.

[Operator:]

Your next question comes from the line of John Campbell with Stephens.

[James Hawley:]

Hey, good morning. This is James Hawley stepping in for John Campbell.

[Ryan Schneider:]

Hey, James.

[James Hawley:]

So I just wanted to touch on a couple of things here. I was hoping that you could touch more on the housing outlook and tie-in some more of the drivers from your strong luxury performance. Over 2Q, you’ve had a record price appreciation. And now in July, the moratorium is coming to an end, which could put some inflow of inventory into the market. Just wondering if you could talk more about the outlook there and what housing looks like from here as well as drivers for the luxury market.

[Ryan Schneider:]

Well, let me start with the most important thing your question didn’t talk about, which is in Q2, we had more unit growth gains than we had price appreciation. And we have this in our numbers and our tables, so you can look it up, but we literally had more unit growth than price appreciation. And obviously, we made money on both, but, wow, like the unit growth thing is a very powerful thing for Q2. So when you talk about a lot of price appreciation in Q2, please don’t miss the unit growth. And that was a big reason that we outperformed NAR, not just on price, but on units and gain a bunch of market shares. So we were pretty excited about that. And then, look, I literally gave you our numbers up to like last Friday, right? We’re kind of up 20% versus last year, and I think 30% versus 2019. So we think there’s some good stuff in the pipeline here. And, again, I’ve had a belief that that the demand we’re seeing out there for housing is real, like people are rotating into the suburbs, people are moving to the Texas and Floridas, and Arizonas of the world in greater ways. Remote work is changing kind of where people live. And then, look, structurally, you’ve got the millennial generation hitting their prime years and bluntly rates are low, incredibly low. And so it looks to us like housing demand is still there. And as I mentioned on the last question, some of these trends like remote work helps the higher end of the market the most, and we’re well positioned to benefit there. So we like what we’re seeing. We’re seeing New York city come back into positive kind of territory. That’s a big market for us. So we’re pretty optimistic, and I think the numbers speak for themselves. The one thing I did call out in the script to your question is that because of how big units grew last year in July, most of what we’re seeing so far in July is price increase, but we still liked the really high unit levels in July that we’re seeing. And to be even a little above last year’s volume, it feels pretty good. So that’s kind of what we’re seeing and really the latest numbers we got, I mean, they’re literally as of six days ago.

[James Hawley:]

Got you. Thank you. That’s helpful. And then if I can squeeze one more in here quick.

[Ryan Schneider:]

Sure.

[James Hawley:]

There’s been a lot of noise on the legal side, possibly on a regulatory side as well. Some of the people are questioning right now, agent commission rates. How do you frame up agent value add right now and the level of commissions paid? Are they justified today versus a decade ago?

[Ryan Schneider:]

Well, look, we talked – we’re always watching agent commission rates. The value of agents we think is quite high. And look, we think it gets approved in the market. More people have used agents in the last 12 months than in the year previous, right? Customers are voting with their feet. And the prices that people negotiate with their agents, and if you’ve sold the house, you know, it’s a negotiation. So the prices that people sell their house at with agents have stayed basically about flat. And I think agents deliver real value. And you can see that in whether it was some of the health and safety stuff over the past year, whether it’s in helping people buy a house in one of the pretty tight market in some parts of the country or just getting the best price for their house. And so, I’m old enough to remember when it was predicted in the 90s that the internet would put agents out of business, but I think agents deliver real value and they improve it with their customer relationships. And so we’re excited to do what we can to help agents add even more value to customers, including some of the stuff we’re doing to make the transaction easier for people with some of our technology and some of our virtual tools that are helping ease the transaction for everybody, especially in kind of health and safety times.

[James Hawley:]

Got you. Thank you for the color. Appreciate it.

[Operator:]

Your next question comes from the line of Matthew Bouley with Barclays.

[Matthew Bouley:]

Good morning, everyone. Congrats on the results. Thanks for taking the questions. It looks like your agent count is continuing to rise. I’m curious if you could speak to maybe how much of that kind of matches with sort of broader market-wide agent growth, simply more people becoming real estate agents. And I guess maybe the way to answer that is kind of focusing on the recruitment and retention of the high-performing agents. Obviously, that’s what I’m getting at sort of amidst the strong market backdrop. Thank you.

[Ryan Schneider:]

Sure. I’ll take that one, I guess. Let me take that one. So, look, our retention is in a nice spot. Our retention kind of rose pretty consistently for over a year and is now for a couple of quarters have been hanging out pretty near some of our historical high points. And so we like that and that feels good and that speaks to our value proposition. It speaks to the opportunities. And again, when we talk about gaining market share, it’s our agents gaining market share, and that’s – there’s power to be with our brands especially on the luxury end that I talked about earlier in the call. So the retention feels good. And then on the recruiting side, I think we’re – I don’t think it’s just the growth of the market at all. I think we’ve kind of been showing a consistent increase in an agent count, kind of pretty steady, kind of 2%, 3%, 4% kind of every single quarter. And we recruit across the spectrum of agents. We have a lot of success recruiting people kind of in the middle of the pack and making them into top quartile agents across our brands. So we like our results. We think that kind of 4% is consistent with kind of low-single digits steady growth that we’ve been doing. And we’re always shooting for more, but it’s kind of a consistent thing that’s been happening here and we like it. And there’s obviously part of why we’re having the growth results we have that are above the market.

[Matthew Bouley:]

Got it. Really helpful color. Thank you for that, Ryan. Second one on commission splits. I think you mentioned a couple mix issues that impacted that number in the quarter. Just curious if you could put any numbers around that, number one. And number two, really just thinking about kind of the direction of commission splits in the second half sort of in this market backdrop that you mentioned where housing volumes might be decelerating a little bit. Just kind of broader thoughts on commission splits and that type of environment. Thank you.

[Charlotte Simonelli:]

Sure. So what we’re seeing as we have been seeing is the agent mix. So the higher producing agents, which have higher splits normally are doing more of the transactions. This has been going on for about a year now. And so you marry that up with significantly high volume, and you’re going to get this increase in splits. There’s a slight impact from geography. If you think of the markets that are really outperforming like Florida and California, there’s a bit of geographic mix as well. And so that’s not different than what we have been seeing. As far as it relates to the back half of the year, we begin to start lapping this though. So that’s what’s going to benefit us. So we do expect there will still continue to be pressure on splits, but as we start to lap some of the periods from last year where we’re already seeing the agent mix and the high volumes, it should abate a bit. So that’s probably the most I can share with you at this point.

[Matthew Bouley:]

Very helpful. Well, thank you, Charlotte, and thank you, Ryan.

[Charlotte Simonelli:]

Thank you.

[Operator:]

Your next question comes from the line of Ryan McKeveny with Zelman & Associates.

[Ryan McKeveny:]

Hey, good morning, Ryan and Charlotte. Great job on the quarter, and thanks for taking the questions. First question, a bit of a two-parter. So to the prior question you were asked about the agent count continuing to rise, obviously good to see. I guess I’m just curious if you could speak a bit more about the competitive environment. We’ve all kind of seen some movements over time between always being very competitive, but at times it goes from very competitive to extremely competitive back to very competitive. So I guess the first part of my question is just any recent changes you’re seeing around the competitive dynamics that are playing into the agent recruitment retention, somewhat relative to how you’ve spoken about those dynamics in the past.

[Ryan Schneider:]

No, I wouldn’t say there’s been any changes. I think it was kind of the pre-rework, I would say it was more than that extremely competitive. And then post-rework, it’s been a little more just very competitive, but we’re a big part of that competition. We’re aggressive, we like that we’re growing our agents, we like that we’re taking share. And – but it’s tough out there and I don’t think that it’s always been tough in this industry. To your point, there have been times when it’s wrapped up either ratcheted it up even more, but it’s pretty tough. But it’s been about the same right now as it has been for the last kind of 12, 18 months kind of thing I would say. And we keep having our steady growth. We’ve grown market share four quarters in a row. We think some of that’s the real success of our strategic initiatives. Some of that’s the leading position we have in luxury. So we like it, but we watch the competitive stuff incredibly closely, but again, we’re a big part of that. And Charlotte talked about some of the investments we’re making in that area. We like it, even in the case if it places – it helps – it contributes to our higher commission costs, we liked the investments, we liked the financial returns, and we look at a quarter like this, hopefully it’s pretty clear that everybody likes the financial returns.

[Ryan McKeveny:]

Absolutely. Makes sense. Thank you, Ryan. So just digging in a little on the volume trends that you cited. So for the open volume in June and July, up 20% and up 4% year-over-year I believe, are you able to specify? I know it kind of qualitatively sounds like your suggesting units are down, which should be expected given the year ago comps and prices, ASP is still up. But can you – are you able to specify the magnitude of kind of the unit declines that you’re seeing relative to ASP increases?

[Ryan Schneider:]

Yes. So, I mean, look, what I would say is June was units and price up. And as I said, in Q2, our units were up more than price. So you can kind of apply that rough heuristic onto the June numbers for the opens. For July, look, I think for the July, all the growth is price, period. Like for July month-to-date, what we’ve seen is all the growth is price. Now units went up so much in 2020. Remember, we were running it like the low $5 million kind of units as a housing market. And in the last 12 months, units have been more like $6 million plus kind of thing. So what we’re seeing in July is the kind of unit type is – in the same zip code at least of the unit kind of strength that we’ve been seeing. And then we’re seeing some price appreciation, but what we don’t have is the unit growth that we’ve been having as the whole sector transition from $5-plus million to $6-plus million unit sales. So really you should think of July’s volume increases that we’ve seen so far is basically all price versus 2020, right? Versus 2019, the 42% that I gave you for July 2019, that’s a strong mix of unit and price. But so far in July, what we’ve seen is, and to repeat myself, units being similar, or maybe even a little down in places to last July, but we have been getting price appreciation and that is a change. And I thought it was important enough to just bring it up and talk about it.

[Ryan McKeveny:]

Yes, thanks.

[Ryan Schneider:]

But again, there was a pretty strong surge in July of 2020. So if we could run at the July 2020 unit level, like that feels pretty good.

[Ryan McKeveny:]

Absolutely. Makes sense. And if I can squeeze one more in just a high level one.

[Ryan Schneider:]

Sure.

[Ryan McKeveny:]

So on the relocation business, I guess I’m just curious, because you have somebody’s unique view into this and I’m not really even asking for your business specific, but more of an industry dynamics. So I guess, do you see anything high level around like corporate decisions around work-from-home or returning to the office, within the relocation business? Because I guess there’s a lot of debate around just how exactly is the world of work going forward? Is there going to be this ongoing shift to work-from-home? Or now that vaccines are more widespread, do people come back to the office? So I’m just kind of curious of your high-level view on what you might be seeing given the relocation business you have and the relationships with many corporations?

[Ryan Schneider:]

Yes. No, look, so first off, a lot of the Realogy stuff we do is global, which does not lend itself to work-from-home the same way choosing between living in New Jersey and Florida it does, but we are seeing things. And when we talked about the reload business last with our Board, the number one kind of long-term headwind for that industry is what you said, right, which is the – how much of, at least the domestic part of that business goes away because of more work-from-home and we are seeing it. And part of the reason I sit here and tell you, I think work-from-home is more here to stay thing maybe than the average person would say is because of some of what we hear from our clients there. Now we’re seeing green shoots in that business in other ways, especially the international side, where doing work-from-home, if your job is around the world, doesn’t really work the same way or you can’t really stay in the U.S. if your job is in Asia or something. But – and so we’re seeing some green shoots on that side of the business. But the headwind on that business in the U.S. from work-from-home is part of the reason, I think the work-from-home thing has maybe more legs than the average person thinks. So I am using that insight to form that point of view, Ryan. But again, in general, that’s a positive for Realogy overall because that really enables or pushes people to live either in different houses or in different geographies. And obviously, we benefit when that happens as we’ve been doing.

[Ryan McKeveny:]

Absolutely helpful as always. Thank you, Ryan.

[Ryan Schneider:]

Thank you, Ryan.

[Operator:]

Your next question comes from the line of Justin Ages with Berenberg.

[Justin Ages:]

Thanks for taking the question. I was just hoping to dig in a little bit on what your efforts have been around kind of boosting the attach rates for the Title Group, and then a quick follow on after that, please.

[Ryan Schneider:]

Sure. Look, one of the things we’ve been talking about – and Justin, by the way, welcome to coverage of the company.

[Justin Ages:]

Thank you.

[Ryan Schneider:]

One of the things, if you go back and read is, we’ve really focused a lot on doing something that’s not at all new for real estate, which is to capture more of the transaction economics from title, from mortgage, from insurance, et cetera. And you can see it in our financials, right? And some of that, in mortgage, for example, it was just the market being hot, but some of it is trying to do more in the efforts that you’re talking about. And so we’ve got a variety of efforts going on, some of them in the industry has been using for 20-plus years. But the biggest place we’ve been different Justin is really focusing on digital tools to make the transaction easier. And I told this story before, but, for example, in 2018, we invested in a remote notarization company. I think we were an anchor investor and we’re like their anchor client. And we – and nobody used the thing and it wasn’t even legal in most of the U.S. in terms of how the laws are written. And then the pandemic hits, and everybody changes their laws and everybody starts using it for health and safety. And then all of our agents and customers realize, hey, this is a better experience. This is a much more seamless, virtual experience we can do. And we start capturing more business and making more money as you can see in our P&L. So we’re pretty focused on this stuff. And even as I said in the call, we and Home Partners of America just set up and I’ve been running this our own kind of title business together called REALtech to support the broader business we’re doing together, because we think it’s just a really important thing to kind of capture as much of that as we can. And so we’re excited about what we’ve done and we’re going to stay very strategically focused on it. And even in last quarter’s call, I called that out as one of the places we are making strategic investments. We haven’t changed those investments, but there was less new news about it this quarter, so I didn’t put it on my investment list to share with you this quarter.

[Justin Ages:]

Sure. Thanks. I appreciate the color. And then kind of related to that, can you talk about what you’re seeing and why the average fee per closing unit in the group jumped up? I mean, I could have expected a little bit of growth, but getting to $2,600 seems pretty outsized to me.

[Charlotte Simonelli:]

It’s the balance between purchase and refinance. So the vast majority of our units are purchase units and we have stronger economics on the purchase units. So I think there’s more disclosure in our presentation around that. If you want, we can follow up later too.

[Justin Ages:]

All right. I appreciate that. Thank you.

[Operator:]

Your next question comes from the line of Matt Gaudioso with Compass Point.

[Matt Gaudioso:]

Hey, good morning. Congrats on a strong quarter.

[Ryan Schneider:]

Thanks, Matt.

[Matt Gaudioso:]

Maybe one thing, Charlotte, just wondering, so looking at capital allocation, I know you reiterated your priorities there. You closed the corner at over $150 million in cash on the balance sheet. I was wondering if you can just maybe give a little bit more detail about some of the strategic investments and maybe help out with the magnitude of some of the strategic investments that you’re making in the business, whether that’s on the real short side or I know you’ve flagged investments on the luxury brokerage side as well. Thank you.

[Charlotte Simonelli:]

Sure. So first off, we consistently have been investing in the business and we spend a lot both in CapEx and OpEx. And so there’s a base level of investment, which you could say is anywhere between $100 million to $200 million a year. So that’s just an ongoing thing, which is stuff that we’ve been doing, which is helping to drive the results that we’re seeing. And then separately, Ryan had mentioned, these specific growth vectors. And so those are – you could consider some of those to be incremental to what we had been doing in the past. I wouldn’t say that they would absorb all of the cash that we have on the balance sheet, which is why I tried to mention the debt pay down that we will continue to focus on and you’ll expect to see more from us there. But – so think of the stuff that Ryan has talked about is incremental to the baseline that we’ve seen in the business, if that’s helpful.

[Matt Gaudioso:]

Yes, that is helpful. Thanks very much.

[Operator:]

At this time, there are no further questions. This does conclude today’s conference. Thank you for your participation. You may now disconnect.