Quantcast

The Real Deal Los Angeles

A title giant is quietly developing a big stake in California’s brokerage business

Fidelity has stakes in Pacific Union, John Aaroe, Mark & Company and more
By Katherine Clarke and E.B. Solomont | February 10, 2017 03:30PM

John Aaroe, William Patrick Foley (John Aaroe Group/Kobrand Corp.)

A big kahuna in the title insurance industry is taking a more aggressive crack at the brokerage business, and industry sources say its push could have far-reaching impacts.

Fidelity National Financial is actively looking at acquiring more real estate brokerages on the West Coast in a bid to better control every part of real estate transactions. It’s a move that could put the title company, which is effectively a real estate services provider, in competition with some of its largest brokerage customers.

“It is an area of focus,” William Patrick Foley, Fidelity’s CEO, said this week in a fourth quarter earnings call. “We’ve focused on the West Coast because we have a pretty good operation in the Bay Area and we’ve recently expanded that into Southern California.”

Fidelity has already been quietly building a brokerage component to its business, though its name has rarely been publicly attached to those efforts.

In late 2014, Fidelity bought a controlling 66 percent stake in San Francisco-based Pacific Union, the ninth-largest brokerage in the country. Through its stake in Pacific, it has acquired a piece of L.A. companies such as John Aaroe Group and the Mark Company. Pacific and John Aaroe completed a merger in late 2016, bringing their total holdings to 1,100 agents working in 38 offices across California. In 2015, their combined production reached $10.5 billion, the firms said.

Fidelity reported $183 million in revenue from Pacific Union in 2014, according to public disclosures — a number that will be significantly boosted by the Aaroe acquisition.

Separately, Fidelity also owns a stake in L.A. luxury brokerage Gibson International and is the sole owner of J. Rockcliff Realtors in San Francisco’s East Bay. It’s been involved with the latter firm since its inception in 2008, according to a spokesperson for J. Rockcliff.

Fidelity’s push has been spurred in part by brokerages’ own thinning bottom lines, as increased competition for agents drives down margins, some industry insiders told The Real Deal. Cash-rich title companies can be the get-out-of-jail-free cards for brokerages struggling in an increasingly crowded marketplace.

“Title insurance companies are like wood pulp manufacturers selling to paper companies,” said one title agent, who spoke on the condition of anonymity. “What’s happening right now is that paper companies are very weak, so these wood pulp manufacturers are coming in and buying them slowly.”

But Mark McLaughlin, CEO of Pacific Union, said its relationship with Fidelity does not mean that all title deals go through the company. “You don’t buy coffee from Starbucks because you like the shareholders,” he said.

A spokesperson for Fidelity was not immediately available, but sources told TRD that its designs on the brokerage business could have a far-reaching impact.

“They’re saying, ‘We want to be your full body shop from cradle to grave,’” said Jeff Hyland of Hilton & Hyland, a luxury brokerage in Beverly Hills. “It’ll put some mom and pops out of business and create more mergers,”

John Campbell, an analyst from Stephens Inc. who has studied Fidelity, said the move into the brokerage business was a “natural extension” for the title company, though its competitors such as First American Title do not appear to have followed suit.

“Title companies have generated so much scale, they have lots of excess cash and are looking for what to do with it,” he said. “They’re geared towards expanding their operations — it’s an offensive play rather than defensive.”

“Some brokers will be very happy because they’ll get a payday,” he continued. “Others will find that they’re putting money in their competitors’ pockets.”

The relationship between brokerages and title companies has been growing increasingly fuzzy. But thus far, brokerage firms have mostly expanded into the title business, rather than the other way around. Brokerages that offer insurance to their agents’ clients see title as an easy way to generate a few extra dollars.

Realogy — the parent company of Coldwell Banker, Sotheby’s International Realty and Century — generated $487 million in revenue in 2015 from its title division, which did 169,000 transactions nationwide, according to the company’s most recent annual report.