Realogy’s stock is trading at an all time low, and with a market cap of just under $600 million — about 10 percent of its high of $6 billion six years ago. There must be sheer panic at its Madison, New Jersey, headquarters.
Although there are plenty of reasons the company should fear its long-term sustainability, Realogy’s current stock price doesn’t represent its true value.
Reason to panic
It’s a bad time to own a brokerage, and Realogy not only holds contracts for thousands of franchise owners, it also owns and operates NRT, one of the the largest real estate brokerages by total sales volume in the nation.
There was a time when most listings were taken with a 6 percent fee, and brokers retained 50 percent of each side of the transaction that they represented (with the other 50 percent going to the agent who worked the deal).
Fierce competition changed that equation. Not only has a challenging market caused brokerages to often times take listings at significantly less than 6 percent, but a model that has been built on recruiting has encouraged brokerages to offer growing portions of the commission to their agents (it is not uncommon to see agent splits as high as 90 percent).
With less money coming in the door due to downward pressure on commissions, more money going out the door with upward pressure on agent splits, and fixed costs staying the same (offices, advertising, association fees, technology, manager/administrative salaries), it’s easy to see why brokers are struggling to keep their doors open.
However, this is just part of the problem. Third party companies such as Zillow and realtor.com are siphoning billions of dollars of revenue out of the total pool, without adding anything to the actual market size.
Throw into the mix some very interesting non-traditional models such as Redfin and Opendoor, it is only a matter of time before the brokerage model that existed for so many years evolves into something completely unrecognizable.
Sure, brokerages have survived down markets and headwinds in the past, but those were temporary market dynamics that always recovered at some point. This is not market dynamics.
This is a fundamental change to how business is conducted.
Realogy’s franchise business is particularly concerning because when franchisees run into cash flow issues, the first bill that they often stop paying is the franchise fee.
Franchisors then need to make the tough decision of allowing the franchisee to continue to operate under their brand with the hopes that cash flow will improve or terminate their franchise agreement, which almost guarantees that they will never see a dime (all while permanently damaging their brand image in that market).
Valuation
The challenges that Realogy is facing are unprecedented, with no hope in sight, but the valuation only makes sense if Realogy is viewed in its current structure.
When Realogy is viewed through the lens of its individual parts, the company is significantly undervalued. While it is important to point out that Realogy is carrying a significant amount of debt that can not be ignored and must be dealt with, it is Realogy’s individual assets that hold the key to unlocking its true value.
NRT
NRT closed $176 billion in sales volume in 2018. Compare that to Compass, the venture capital darling valued at $4.4 billion, whose closed sales volume during the same period was $45 billion.
Both NRT and Compass have nearly identical business models. NRT is in a unique position in that there are two brokerages in the market that not only have the financial resources to pull off acquisitions of their size, but also have an appetite for massive acquisitions in their quest to dominate market share — these companies being Warren Buffett’s Berkshire Hathaway and Compass.
It is also not completely out of the question for a well-funded company with a different model to acquire NRT. That includes Zillow, Opendoor or Redfin.
A bidding war for the biggest fish in the pond could easily drive the acquisition price for the NRT north of $1 billion — and potentially significantly higher.
RFG
The Realogy Franchise Group (RFG) is comprised of the powerhouse brands of Better Homes and Gardens Realty, Century 21, Coldwell Banker and its commercial counterpart, ERA and Sotheby’s International Realty.
Each one of these brands can fetch significant value on the open market. The key to unlocking the value of these brands, one by one, it by persuading acquirers outside of the real estate industry to consider a unique strategy.
The brokerage industry will never return to where is once was, but if you can identify a buyer who would use the brokerage business as a loss-leader, their true value can be unlocked. These buyers include Amazon, Walmart, Target and others in their category.
Take a brand like Century 21, for example, which closed nearly 400,000 real estate transactions last year.
If Amazon had access to these clients right when they are moving into their new homes, the amount of revenue that they can generate through the sales of the essentials needed for a new homebuyer (furniture, electronics, appliances, decor …), would dwarf the amount of revenue generated by any commission or royalty fee.
Multiply this by Realogy’s stable of brands, breaking up and selling each brand individually can generate purchase prices significantly higher than if the purchaser was just another franchise operator.
Cartus
Cartus is the division of Realogy that handles corporate relocations, and it is by far the largest corporate reallocation player in the country representing many of the largest companies in the world.
Whether the eventual acquirer was a traditional competitor like Berkshire Hathaway or an outsider who uses the access to these huge corporate clients that Cartus has secured exclusive contracts with, a bidding war for this asset would almost definitely add a huge premium to the acquisition price further unlocking value for current Realogy shareholders.
The last division of Realogy is the Title Resource Group (TRG), which is a big player in the settlement services arena. With the brokerage world being decimated, one of the few ways that a real estate company can offset shrinking revenue and profits is to offer ancillary services such as title, mortgage and insurance.
Whether a pure play real estate company wanted to expand into the settlement service business or an existing title company wanted to expand its market share, it is not often that a company the size of TRG hits the block.
There are enough potential acquirers out there who would view the chance of buying TRG as a once in a generation opportunity to gobble up an industry titan, that this division would also garner a huge premium.
When you look at Realogy as a sum of its parts, the future is bleak. When you look at Realogy as a collection of individual assets, the stock is massively undervalued.
However, with every passing day, the value of Realogy will continue to slide, as will the other brokerages in the country.
Realogy has suffered in part due to fierce competition, but it is this competition that now holds the key to providing a return to their investors which far exceeds the current value of its stock.
Glenn Felson is the Chief Sales Officer at Breather. Connect with Glenn on LinkedIn.
