The Real Deal New York

Realogy’s IPO

What will going public mean for the company's local brokerages?

August 01, 2012
By Adam Pincus

Realogy could soon be traded on the public markets.

Realogy — the largest residential brokerage franchisor in the world and the owner of Manhattan-based firms Corcoran Group and Citi Habitats — filed documents in June announcing that it planned to raise as much as $1 billion through an initial public offering.

Now, as the IPO looms, many in the industry are wondering what the stock sale will mean for the company’s New York City brands.

According to the prospectus that Realogy filed with the U.S. Securities and Exchange Commission in preparation for the IPO, the deal would reduce the company’s debt loads by some $3 billion and cut interest payments by an anticipated $350 million per year. That could free up money to plow back into the brokerages — or to provide returns for stockholders.

Some say Realogy’s decision to spend money in New York or other areas will be driven by where it expects to get the most bang for its buck.

The big question now: Where is that?

“In a risk-reward perspective, it is market-by-market,” said Philip Martin, director of REIT strategy at investment research firm Morningstar. “[They] are looking in their portfolio at the markets with exposure and looking where best to invest their dollars.”

Realogy, which is based in Parsippany, N.J., said it could not discuss any aspects of the pending IPO — which does not have a date set — per SEC rules.

In addition to Corcoran and Citi Habitats, Realogy owns some Sotheby’s International Realty, ERA and Coldwell Banker offices through its NRT division.

Meanwhile, another division of Realogy also franchises Coldwell Banker, Coldwell Banker Commercial, Better Homes and Gardens Real Estate, Sotheby’s, Century 21 and ERA offices.

In total, the company owns 156 offices in the New York metro area out of the 725 it owns nationally — plus its many franchises. Through the offices it owns and franchises, it has more than 241,000 sales associates in 13,800 offices in 103 countries, the firm’s website says.

While the IPO generated headlines the day it was announced, there has been very little discussion about how life could change for agents and brokers if Realogy actually goes public. In fact, some agents contacted by TRD were only vaguely aware that Realogy had proposed the IPO.

Peter Sabesan, principal at Coldwell Banker Commercial Hunter Phoenix, a Manhattan franchisee, said officials at Realogy had not reached out to him to discuss it. But he expected the public offering would be a positive.

“I think it will make Coldwell Banker a stronger company, and it will probably have a parent with deeper pockets, which will filter down,” he said, adding that going public could mean better hires and improved technology for franchisees. As TRD reported last month, many have questioned the timing of Realogy’s latest IPO because of the weak stock market. And, indeed, the company could still back out.

In 1999, NRT filed to go public, but bowed out because the stock market was soft during that period.

Adding pressure to the situation now is that Realogy has lost money every year since 2008. Still, some say it could be a good move.

Andrew Heiberger — who founded Citi Habitats in the 1990s and sold that brokerage to NRT in 2004 for a reported $49.6 million — said he thinks the IPO will have an impact on the market.

“Realogy is the most experienced player in the field. Its knowledgeable management team surely has considered the potential consequences of being public versus private,” said Heiberger, who founded the brokerage Town Residential in 2010. “The company has the potential to share in the fruits of a rising housing market on a local level here in Manhattan — and on a national level.”

From left: Realogy CEO Richard Smith, Citi Habitats head Gary Malin, Corcoran head Pamela Liebman

Potential impact

Although the name Realogy is relatively new, its predecessor has been around since the 1990s, and for much of the time it’s been operated as a public company under CEO Richard Smith.

Smith took over as chief executive of the real estate services division of the public company Cendant (then known as HFS, Inc.) in 1996, the year it acquired Coldwell Banker for $640 million. The following year, Cendant and Apollo created NRT as a joint venture to own the Coldwell Banker offices.

Then in 2001, Smith led the way as the company began a buying spree.

That year, NRT acquired Corcoran for an estimated $70 million, and soon after Cendant bought out Apollo. A few years later, in 2004, NRT purchased Citi Habitats for a reported $49.6 million and bought Sotheby’s, which has offices outside of New York, for $100 million.

But as the company grew bigger and broader, Wall Street investors wanted to see structural changes. So in 2005 and 2006, Cendant broke itself into four separate public companies: the Avis Budget Group, Wyndham Worldwide, Travelport and Realogy.
Several months later, in April 2007, Midtown-based private equity firm Apollo Global Management (through its Domus Holdings) bought Realogy and took it private for a deal worth about $9 billion, a record in the industry.

Given the company’s long history as a public company, the decision to consider an IPO doesn’t come as a complete surprise.

But while many in the New York brokerage community expect it to have tangible impacts on the local brands, insiders differ on exactly what kind of constraints firms here will see.

One New York City brokerage owner, who asked to remain anonymous discussing another firm, said a public owner would be more aggressive in cutting costs. In fact, the executive said Citi Habitats has already started trimming to prepare for the stock sale.

“They are squeezing the shit out of the companies, and it is causing some dislocation,” the source said. “They are preparing [for the IPO] to drive the bottom-line revenue.”
Yet the source added that the “cost savings have not done real harm.”

That source viewed Citi Habitats’ announcement last month to close two offices on Park Avenue South as evidence that the company was already belt-tightening in anticipation of the offering.

Citi Habitats declined to comment for this story, but company president Gary Malin told The Real Deal last month that the closures were part of a rebranding campaign, and added that the firm would actually be expanding in Tribeca and Soho.

“At the moment, we’re over-represented in certain parts of the city and under-represented in others,” he said.

Meanwhile, a top broker at Prudential Douglas Elliman, who asked to remain anonymous, speculated that Realogy might be less generous with ad budgets or perks such as car service once it goes public.

“Some brokers would not be entirely comfortable [working] under a public company,” the source said.

In addition, some say the strength of the New York–centered firms — which are being buoyed by the relatively stable market in the city — may actually hurt their chances of seeing money trickle down from Realogy through the IPO.

Martin, the Morningstar analyst, expected Realogy would look at each market, perhaps each zip code, with an eye to where it could grow the most. He said the company would likely allocate money to those locations that were ripe for the most growth — for example, regions that were crushed in the downturn, like Arizona or California.

Not everyone agreed with that assessment, however. Some say the IPO could provide resources for NRT to buy companies in the New York area at discounted prices.

“[NRT] would be happy to acquire additional firms if it could get them [for the right price],” said Neil Binder, cofounder and principal with residential brokerage Bellmarc Realty.

Corcoran, which brokered $12.7 billion in sales in 2011, more than any other firm (according to a survey by research company Real Trends), declined to comment.

Challenges in New York

Realogy is a dominant player nationally and is a force in Manhattan, but its top franchise brands — like Coldwell Banker, Century 21 and ERA — have not been able to gain traction here.

In fact, franchisees using two of Realogy’s successful national brands flopped in recent years in Manhattan.

Coldwell Banker Hunt Kennedy closed in 2009, while Century 21 NY Metro shuttered in November 2010. While both were victims of the downturn, their failures underscore that the national names could not keep them afloat.

Binder and others pointed to the extremely competitive market here, which makes paying a 5 or 6 percent franchise fee a burden that is often not worth the national brand recognition. (Prudential Douglas Elliman is a Prudential franchise, but it is expected to drop its affiliation with the company when its contract expires.)

Furthermore, brands like Coldwell Banker and Century 21 are often viewed as suburban brands in the Manhattan market — even though they’ve proven successful in urban markets like Chicago and Miami.

“The challenge for any franchise system coming into Manhattan is that there are a couple of very well established big companies, and that makes it a challenge to get a foothold,” said Joseph Rand, the managing partner at Better Homes and Gardens Rand Realty, a Realogy franchisee based in Rockland County, N.Y.

But Coldwell Banker still has a toe in Manhattan. In January 2010, Sabesan and his partners launched a franchise called Coldwell Banker Commercial Hunter Phoenix.
In addition to the obstacles to its franchises, there are other challenges for Realogy as a public company.

Paul Purcell, partner and cofounder at Rutenberg Realty, spoke from experience to this point. Purcell was president of Douglas Elliman, first while it was a private company, and then for three years after it went public in 1999.

He said the biggest change that took place when the company went public was the way the brokers looked at management. Once Douglas Elliman went public, brokers viewed all cutbacks or changes — even changes that would have occurred when the company was private — as the “big corporation” making life more difficult for them.

“Perception is reality. If [brokers] think they are being disenfranchised, if the perception is that somehow [they] are not getting something because we are a public company, if I can’t keep them happy … they can leave,” he said.

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