The Real Deal New York

Why Realogy’s slow-burning stock is down 40% over the last year

High commission payouts and macro housing trends are to blame, analysts say
By E.B. Solomont | October 09, 2018 11:45AM

Realogy’s Ryan Schneider (Credit: iStock)

It’s not the greatest time to be a Realogy shareholder.

Thanks to a convergence of factors — from the slowing U.S. housing market to heightened brokerage competition — shares of the company’s stock closed at $19.73 on Oct. 5. That’s down 41.2 percent year-over-year, even as the S&P 500 rose 13.39 percent during the same time.

Put another way: The New Jersey behemoth that operates the Corcoran Group and Coldwell Banker has lost more than $2 billion in market value in the last 12 months.

“It’s been a perfect storm for Realogy, honestly,” said John Campbell, an analyst at Stephens Inc. “The way the stock is acting is that it’s essentially what Blockbuster was to Netflix and RadioShack to Apple… People view it as the dinosaur.”

Realogy executives aren’t taking things lightly. During an Aug. 3 earnings call, the word “change” was uttered more than 30 times — with regard to right-sizing its office footprint and curtailing agent payouts.

“We’re focused on moving quickly,” CEO Ryan Schneider said. “I know shareholders expect better results.”

Below are four headwinds Schneider and his lieutenants are facing.

1. Housing slowdown

The U.S. housing market propped up Realogy for several years, but rising interest rates, higher sale prices and fewer new homes have been a drag on its performance. “Unit sales have slowed,” said Jason Deleeuw of Piper Jaffray & Co. The company is more vulnerable than its peers, he said, because its NRT division — which operates Corcoran, Citi Habitats and Sotheby’s International Realty — is so concentrated in high-end markets like California, New York and Florida.

2. Commission payouts

In order to retain top agents, Realogy (like other traditional brokerage firms) has been steadily offering agents higher splits. Realogy’s splits aren’t out of line with what everyone else is paying, but rising payouts have eaten into the bottom line. Three years ago, for example, the average split was 68 percent, according to Campbell’s research. Today, it’s close to 73 percent. (Last year, Realogy shelled out $53 million in commissions during a single quarter.)

“People are questioning, when does that stop,” Campbell said. He believes Realogy will generate $749 million in EBITDA (earnings before interest, taxes, depreciation and amortization) this year; but he said the number would be $250 million to $300 million higher if splits were at 2015 levels.

3. Too many offices

Thanks to online portals and mobile technology, agents can close deals from the road, their car or even Starbucks. But Realogy’s balance sheet is still weighed down with office leases. In its most recent annual report, the company said it has 1,021 leases nationwide totaling 4.9 million square feet. (Rent was $192 million in 2017, up from $186 million in 2016, according to company financials.)

During the Aug. 3 earnings call, CFO Tony Hull said Realogy averages 66 agents per office, up from 63 agents a year ago. But Campbell estimated that if the offices were 80 percent occupied, Realogy would see another $130 million in EBIDTA. “It’s a big number,” he said.

4. Pressure on traditional brokerage model

From 30,000 feet, investors see Realogy as a proxy for the traditional brokerage model — which is under fire.

Anthony Paolone of JPMorgan Chase cited the “enormous” amount of private capital being thrown at new brokerage concepts like Compass. “Astute competitors have that capital behind them [and] are competing for the long-term,” Paolone said.

Some investors think Realogy underestimated Compass early on; the company is now valued at $4.4 billion, after a $400 million round last month led by SoftBank and Qatar Investment Authority. Campbell put it this way: “People are fearful that a competitor that’s been a thorn in the side of Realogy is getting larger and more dangerous.”