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Realogy: Little Upside For Investors

Dec. 07, 2018 5:53 AM ETAnywhere Real Estate Inc. (HOUS)6 Comments
Scott Perry profile picture
Scott Perry


  • Realogy is struggling to deal with competition from new brokerages.
  • Direct home buying startups are threatening to disrupt the traditional independent agent model.
  • The company's debt load could become an issue if its business deteriorates further.

Realogy Holdings (RLGY) is a dominant player in the real estate brokerage business with almost 200 thousand in independent sales agents in the United States, along with over 100 thousand agents internationally.

Its Coldwell Banker franchise is the dominant brokerage in the US. Despite this, the stock has been in a major slump for years. The stock price traded over $50 per share in 2013 and is now below $20 a share.

Brokerages make money by taking a percentage of each real estate transaction. As new competitors have emerged, that percentage has come under incredible pressure. Startup brokerages like Compass and eXp Realty (EXPI) are putting incredible pressure on traditional brokerages.

Compass, in particular, has been aggressively poaching agents with attractive offers Realogy can't profitably match. It's hard to compete with a startup funded by SoftBank (OTCPK:SFTBY). This has led to consolidation in the industry as smaller brokerages struggle to stay competitive.

Realogy hasn't been able to benefit from this consolidation, as new startups have emerged, threatening to disrupt the real estate industry. The company is in a desperate race to retain its industry position, as explained in its conference call:

Second, in our own brokerage business, we continue to move quickly on new commission pricing designed to attract faster growing and higher-producing agents... This initiative is all about growth. We are leveraging these new plans to attract more agents quickly, while allowing our existing agents to continue on their existing plans or explore the new plans where appropriate.

Translation, the company will be pocketing a lower percentage of real estate commissions so Realogy can retain agents. New competitor eXp Realty offers a cloud-based brokerage and takes a very low cut.

eXp can do this because it doesn't have expensive office leases and on location staff. Agent growth is exponential currently

This article was written by

Scott Perry profile picture

Analyst’s Disclosure: I am/we are long EXPI, RDFN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I'm an independent sales agent in California with Compass.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (6)

Absolutely, who wouldn't? The problem with determining what will happen in the short-term is that everything is more random or has a higher variance in the short-term. Flip a coin 10 times versus 100 times and see which is closer to a 50/50 split. After the fact, if one has the means and the business has not fundamentally changed, the correct thing to do is take advantage of the discount. The move had more to do with where we are in the business cycle and RLGY's debt load than the earnings miss. The earnings miss is trivial (~$9mm), but the debt load at a 4.6x multiple and likely going up above 5x next quarter, is clearly the market's concern. I was pleased to hear that they will be focusing on buying back debt over the next two quarters.
@Dinesh Sarda , in the short-term anything can happen. If you listen to the call you'll see the stock is reacting to the housing market and its near-term outlook. Let's revisit in a few years. Have a look at the company's fcf generation and then you tell me whether or not the equity is cheap.
I agree short term move is not everything..But if you can buy same share by waiting to go long at 30% less price , i will prefer that
@Scott Perry , You might be thinking this a little too hard. Home sales across the US are down ~ 20% since the end of last year. Realogy's sales are up about a little over 1% over the same time period. To me, that sounds like they are gaining market share. Secondly, since 2013, the company has purchased about 15% of its shares outstanding and has reduced long-term debt by ~ 50%. Thirdly, historically, EV/EBIT ratios for this sector have averaged north of ~15x, as has the market's (Note: at 15x EV/EBIT, RLGY's equity valuation would be ~ $44/sh). Private equity has been paying ~11x EV/EBITDA for all companies this year, which is rich, but it's a data point. As this type of company has small capex relative to other companies, EV/EBITDA might be the easiest way to get a valuation. At 9x EV/EBITDA, which is Private Equity's long-term average for buying companies (especially for an established, brand name, money-making brokerage like Realogy), you get an equity valuation of ~31.50 assuming no growth. What would you pay for growth ~ 1x? At 10x, you get an equity valuation of ~ $38/sh. I'm not a genius, but a double from current share price is a fairly large margin of safety. And ~10x, IMO, for a brand-name, money making company with a long history of cash flow generation is cheap.
Anecdotally, I don't know your history in the sector or how many houses you've bought and sold, but unfortunately it's very difficult to get around real estate brokers as they do add a lot of value to the process. Another anecdotal observation is Berkshire's foray into the sector. Why would he do that if RLGY's part of the sector is dying?
Btw, RLGY's operating margins have been extraordinarily stable and have improved over the last year.
total agree with your comment. RLGY is way undervalued. When it comes to Value this author dont know what he is talking about. Wouldn't be surprised if private equity came in offer $35 a share
@Scott Perry

Great call from Author.
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