RLGY - Realogy

[ander]

Has anyone followed RLGY?

New CEO (Ryan Schneider) who did a great job running Capital One's Card business took over December '17. Double-digit FCF yield. Company is going to be focused on organic growth going forward versus the historic acquisition driven growth.

 

It's a business that Buffett likes, though they're not involved in the higher-priced NRT market as much.

 

Also, saw an idea posted on VIC which does a good job of highlighting the bull-case.

https://www.valueinvestorsclub.com/idea/REALOGY_HOLDINGS_CORP/7000725242

[Spekulatius]

This is one of those companies that had a buyback mania at what turned out to be high valuations and now needs to fix their balance sheet. The business model is certainly changing slowly and I also believe thet based on my personal experience over the years, the total transaction costs are slowly moving down. 4.3x EV/EBITDA is Ok when your cash flows are very secure, but it’s too high, if your cash flows are highly variable, IMO and your business model needs to be reinvested somewhat. I amd also looking at RDFN as a platform company and RMAX (direct RLGY competition, perhaps better managed) in this space.

[ander]

Thanks. Why do you think the cash flows are highly variable? They look to be relatively stable. Revenues are driven by existing home sales (which have been between ~4 mil and ~7 mil units) -- tends to trend up. Right now, ~5 mil units. The commission splits have gone up and are more in-line with industry now. I agreed that transaction pricing slowly moving down but not by much, but that's been small bps changes. It seems like previous CEO and exiting CFO were poor allocators. Looks like new CEO seems to be moving in the right direction.

[Spekulatius]

Thanks. Why do you think the cash flows are highly variable? They look to be relatively stable. Revenues are driven by existing home sales (which have been between ~4 mil and ~7 mil units) -- tends to trend up. Right now, ~5 mil units. The commission splits have gone up and are more in-line with industry now. I agreed that transaction pricing slowly moving down but not by much, but that's been small bps changes. It seems like previous CEO and exiting CFO were poor allocators. Looks like new CEO seems to be moving in the right direction.

 

Cash flows scale with both home prices and the number of Second home Sales. Second home sales have  fluctuated as much ss 50% peak to valley (~7M in 2005 to 3.5 M in 2010 and then you have a correlated movement in home prices. Seems like plenty of volatility to me. Older charts show similar changes in the past (1980-1982). I think higher interest rates and lower demand could take the home sales down quite a bit. That said, the business is very cash generative in good times and I suspect that’s by Berkshire is in it too. The new management team might sway my opinion as I wasn’t impressed by the former team. I don’t think they should have racked up as much debt.

[Casey]

This keeps going lower.

 

Complaint filed against Compass realty yesterday (pdf): https://webassets.inman.com/wp-content/uploads/2019/07/NY_Realogy-Holdings-Corp_Complaint1-formatted.pdf

 

Seems like if Compass is willing to pay significantly more they and the agents will find ways to keep poaching...

[ander]

They have the double whammy (market and compass) that almost 50% of their sales (ny, ca, fl) are in the worst environment since the Great Recession. And compass is suffering to but they have SoftBank backing to keep losing money from now. The Compass CEO sells a story and there have been many inconsistencies but does not matter for now. Realogy CEO needs to make case for EBITDA growth and has never tried to do that - though in fairness he’s been on the job for about 18 mos during which time the market has fallen off a cliff in the 50% they’re exposed to and Compass raised almost all of their capital.

[Casey]

https://www.prnewswire.com/news-releases/realogy-launches-turnkey-in-collaboration-with-amazon-300888956.html

 

Partnering with Amazon and up 20% pre-market on that. Nice to make a return faster than you expected.

[ander]

The fine print says Realogy is paying for it. Maybe they’re paying a discounted rate but if we assume they are paying full price then they are paying 50 bps of transaction value. However, this is on closed sales so it’s better than marketing $’s where you don’t know the return. Should mean that realogy gets to increase market share if the program is popular. Would be a win for realogy and Amazon. Stock so beaten up and shorted that a small amount of news is causing a re-rating.

[glorysk87]

Failing to see why this is worth +25% for RLGY. They're accepting a permanent structural margin hit in order to attempt to drive add'l volume. But it doesn't solve the secular problem they face, namely that other providers (both the RDFN model as well as the iBuyer model) are able to execute transactions at a lower cost to the consumer than RLGY will ever be able to. So RLGY may generate a bit of incremental volume, but at structurally lower margins and without solving the existential threat. I don't own the name so maybe I'm missing something, but my sense is ppl should be selling this pop.

[ander]

Not sure on 1 day price moves, but also think that the current price level is an over-reaction. The AMZN deal is a win if they get to reduce the marketing cost they pay for lead for final closed transaction -- and they grow in market share. Very well possible. Similar to how Cartus referrals help (close to 90K transactions).

The 3 main areas of concerns are 1) Compass, 2) housing market weakness, and 3) other market disruptors such as RDFN, ibuyer.

1)Compass has morphed itself several times and pitches itself to be something different, but basically is a brokerage business that has private backing to acquire share aggressively unprofitably - if you believe the lawsuit that RLGY filed, in it Compass is now trying to become profitable by colluding to reduce how much it pays agents going forward.

2) the housing market weakness in NY, CA, FL is 50% of their business. The SALT tax law change may be a component but either way there is substantial news about how the markets there are bad and Compass is feeling the pain as well. You can find real estate news articles and even WSJ re: the topic.

3) For the most part RDFN and ibuyers seem to be affecting the FSBO market. They have not yet affected the 90%+. Data shows that sellers seem to lose several $K doing it for convenience and that may be worth it for a segment of the market but seems to be small.

[Spekulatius]

Not sure on 1 day price moves, but also think that the current price level is an over-reaction. The AMZN deal is a win if they get to reduce the marketing cost they pay for lead for final closed transaction -- and they grow in market share. Very well possible. Similar to how Cartus referrals help (close to 90K transactions).

The 3 main areas of concerns are 1) Compass, 2) housing market weakness, and 3) other market disruptors such as RDFN, ibuyer.

1)Compass has morphed itself several times and pitches itself to be something different, but basically is a brokerage business that has private backing to acquire share aggressively unprofitably - if you believe the lawsuit that RLGY filed, in it Compass is now trying to become profitable by colluding to reduce how much it pays agents going forward.

2) the housing market weakness in NY, CA, FL is 50% of their business. The SALT tax law change may be a component but either way there is substantial news about how the markets there are bad and Compass is feeling the pain as well. You can find real estate news articles and even WSJ re: the topic.

3) For the most part RDFN and ibuyers seem to be affecting the FSBO market. They have not yet affected the 90%+. Data shows that sellers seem to lose several $K doing it for convenience and that may be worth it for a segment of the market but seems to be small.

 

Overall commissions are trending down. From my experience, it is pretty easy to negotiate 4.5% full service commission down from about 5% a few years ago. Since the agents now do much of their own marketing (Zillow etc)  it is likely they the agent gets a larger share of the total commission. Both combined mean a smaller take for the back office organization.

[ander]

https://www.wsj.com/articles/do-most-people-need-a-broker-when-selling-their-home-11552874400

 

This article does a good job addressing some misconceptions. Agreed the rate is coming down but very slowly - at the same time percentage of people using brokers is increasing.