Anywhere Real Estate Inc. (04M.DU) Earnings Call Transcript
November 19, 2020
Earnings Call Speaker Segments
Great. Well, good afternoon, everybody, and welcome to the fireside chat with Realogy. My name is Tony Paolone. And along with my colleague, Arjun Chandar, we're pleased to have management team here. We have Ryan Schneider, who is the CEO of Realogy. And we have Charlotte Simonelli, who is Chief Financial Officer. This session, as the other ones have been today, is about 30 minutes. And so given the limited amount of time, I think we just jump right into things here.
So I think the first item we'd love to talk about is just start from a bigger picture point of view on the housing side. So I'll throw it out to you, Ryan. Perfect day to do this, 6.85 million existing home sale print this morning. What's behind the demand? Who's behind this demand right now?
Well, look, we love the number. Thank you for having us here today. 6.85 million, I know that's an annualized number, so don't take all of it to the bake yet. But the fact that, that number starts to 6 is incredibly powerful. U.S. housing has been stuck around 5 million resale transactions for most of the last decade. And if you go back in history, it's often been above that. With household formation, population growth, GDP growth, it definitely should be a bigger number, and it's great to see that it is. The reality is, I've been asked the question for years of what will unlock more housing growth, and the thing that has been unlocking it is the combination of low mortgage rates right now, historically low, and the fact that they're going to continue for a while, combined with the social shifts that we're seeing with COVID. We are just seeing people move from rural -- excuse me, from urban to suburban environments. We're seeing people pick and move among different suburban houses to better fit their needs, especially among the work-from-home population. And then the already existing flight of people to attractive tax and weather destinations has accelerated recently, both for first and second home purchases. And all of those trends we saw over the summer. Thought there might be some pent-up demand there, but they have not only continued through the summer, but then very strong here in the fall. And even in October, we told the world how our October preliminary numbers were about 55% up on volume, more than half of that units compared to the year before. And that's very consistent with the kind of industry numbers that NAR printed today, again, on an annualized basis.
Yes. Thanks. I may want to go back to that 55% number that you all talked about, I think, you did on your third quarter call, and it was a great number. So maybe I can go back to that. In the meantime, one of the narratives you brought up was just some of the changes in moving to suburbs and the things we're seeing there. How do you think about just the legs that, that trend might have?
Well, look, if we've learned anything is 2020 is a tough year to make too many predictions, but we saw that trend over the summer, and there were hypothesis that it was kind of a onetime bubble. And if you were going to do it, you did it then. But it's continued, right? And it's rolled into those October numbers that we just talked about for us where, again, the fact that it's more units than price shows there is more actual people moving. We're seeing it in the local transaction data, all the trends that I just talked about. And this conference probably isn't the perfect focus group to do. But literally, throughout this day, I've had multiple people interacting with us who have either said they're moved out of New York and they're renting, looking to buy or they already have plans to move out in 2021 and be a buyer down there. And so I hear it anecdotally from all agents and brokers, but there's more of it to come. And then I see it in the data. I think the school situation is also, frankly, contributing to people making some different choices around lifestyle and location. And we'll see how long it runs. But at the minimum, we're going to have a strong end of the year, and I think, enter the year quite -- enter '21 quite strong with these trends. And that, combined with low rates, could last for longer and would be a healthier housing market if we have 6-plus million transactions happening, plus the real exciting news that builders are building more.
Yes. That's interesting because I was going to get to inventory. That is something that I think is part of just the broader housing narrative comes up as an item that might be a limiting factor. How are you thinking about inventory and keeping this all moving ahead?
Yes. I look at it differently. I think there's a lot of confusion out there in the world between inventory and supply. Sometimes, they're the same thing, but sometimes they're not. And right at the moment, they're actually different. Inventory has been historically low for really the last 2 or 3 years, and it's historically low right now. But as you can see from the actual unit transaction numbers that NAR is publishing nationally and that we're printing here in the third quarter and the fourth quarter, units are clearly going up. So there is actually a lot more supply coming on in the market, but it's moving quickly, right? It's just -- it's not sitting around in inventory for 3 or 6 months or something like that, and some of the supply coming to market is never getting captured in the inventory measurements because it's coming out of the market and then selling within 30 days. So I think, look, more inventory is typically a better thing for housing, nothing but good in that. It's why I like the fact that builders building more now will help for the future. But the reality is the market is showing us that there is more supply right now, and again, that's the velocity of transactions is faster. So I wish inventory was higher, so there were more choices, but the fact that supply is actually up is what is happening in the market, and we're really excited by that. Especially, again, whether it's our data or industry data, the fact that most of the recent volume increase is not coming from price, it's coming from units. That's the sign of a healthier housing market than if we were getting all the growth on the price side.
Great. Maybe shift us a little bit more to Realogy specifically. And as we think about the competition for agents and how that's playing out in this market, can you give us an update on the state of play there? And then what is happening out in the field?
Sure. Yes. Look, the competition for agents out there in the market is intense, and we're part of that intensity, and we like our results. Our agent count has kind of grown every quarter for, I think, the last 6 quarters, and our agent retention has improved every quarter for the last 4 quarters. And we think both of those things are part of the reason we actually gained some share in Q3 after fighting some secure headwinds for multiple quarters. And this is a competitive industry by definition. There was some increasingly intense competition in '18 and early -- and most of 2019. That has gone down a little bit kind of post the WeWork thing about a year ago and has kind of held steady since then, but steady at an intense level. So it's not easy. It's a fight every single day. And whether it's the value proposition we're offering with some of our new products, technologies, marketing, things, et cetera, newer lead generation programs or frankly just having to sometimes be economically step up a little bit as you can see in our agent split costs, all those go into the competition. But we like our results in the market, while intense, is better on that dimension than it was 1 or 2 years ago. And we obviously are ready for that to continue.
Right. Maybe I'll just dig a little bit into that further. So because you have been pretty successful in the past year or so, it's really moving the agent count up. What do you think, in the changes you made or the initiatives you took on, that had the greatest impact in the market and either retaining folks or bringing in new people into the system?
Yes. Well, I think over the last 5 years, Realogy had been on a journey to kind of get its economics a little more at market in some places, and you've seen that in some of our economic headwinds on that stuff. But more importantly, recently, I think it's been a combination of 2 things. One is that menu of different offerings, whether it's RealSure, RealVitalize, Social Ad Engine, conversion views, kind of a spectrum of either technology or product or marketing tools that are helping agents be more successful. They care about their bottom line. We want them taking share, gaining share. And we think we saw again a little bit of that in the third quarter. The other thing we like that's happening is our growth on the franchise side, right? Not just growth in the business, but the success of launching our core print franchise, very iconic, kind of upscale leisure brand, well-known in Long Island and New York City and Palm Beach. But it's now gone to a lot of cities nationally. It continues to expand. Our first franchisee has now crossed over 1,000 agents, and we like the fact that we're investing for growth in the franchise business also and with some orthogonal things to the core brands that we remain excited about their growth. But putting those kind of things together, a lot came together in the third quarter, the good housing market but also the series of our initiatives on agent growth, agent retention, franchise growth. And you saw what happened on the results side, as well as the title and mortgage results, which is another strategic area that we're very excited about making a difference in the future.
Yes. I want to get back to title because I think some of the things you've done in that business are [indiscernible] addressing. But just to round out some of the competitive landscape and your own initiatives, do you think -- since splits have been such a pressure point, do you think there's a point at which the tech initiatives, the ability to make your agents more productive, that, that could turn that tide and that everyone can come away stronger with perhaps maybe splits going the other way, you all making more money, agents being more productive?
I think our real goal on that bluntly is to create stability. And I think those things, whether it's technology, lead generation and marketing, because, again, people care about their bottom line, not the inputs. So if we can help agents drive a better bottom line, we'd like to get to more stability on that. It's been hard in this industry to have agent commission costs go down if you look back 50 years. But because that is the headwind that it is in this industry, Charlotte and I have to be relentlessly focused on 2 things. One is every other piece of the cost structure, right? And I really like the -- both '20 and 21 actions and plans that Charlotte has laid out and then helped us deliver as a company on the non-agent costs, which is an important thing when you get a little bit of margin headwind in the agent side. But the second thing is growth. And forget third quarter, go back to the first quarter, right, where we actually demonstrated, hey, we can drive growth in the market for us that can actually overwhelm the agent commission costs given the fixed versus variable nature of the business. So whether we're growing by hopefully taking some more share, whether we're growing because the market's growing, whether we're growing because of franchise expansion, if we can drive growth and we can continue to stay really focused on the other cost things, those alone really help vis-à-vis whatever pressure there is on the agent commission thing. We're not giving up on getting that to a more stable place, but that one is the one that has the most exposure to market forces. Those other two, we got to drive and control and succeed on as a management team. And I like our 2020 progress on both of those, and I think it's showing up in our results.
Great. Shifting away from the traditional transaction. You've been very successful this year on the guaranteed rate mortgage joint venture. Can you talk about how you're thinking about that in the future?
Yes. Look, with whatever -- with the margin pressure and challenges you were just talking about in the agent commission side and the core brokerage business, it is absolutely critical to grab margin and expand margin in other parts of the value chain, and that includes capturing more title and mortgage. And when you look at us versus many of our competitors, we have an incredibly advantageous position in both title with our national title footprint and mortgage with our new joint venture. And what we've really liked in 2020 is how some of the strategic initiatives we've been investing in have actually come to fruition and shown up in our economics. So on the mortgage side, we started a whole new mortgage JV 2 years ago. We lost money in '18. I had to eat a lot of dirt over it. And -- but we kept investing. We kept recruiting loan officers and getting better penetration and building the relationships. And so this year, we got the benefit of a strong mortgage market, but we've also got the benefits to the 2 years of strategic investment and the expansion that we did, so we are well positioned to capture it. We really like that, and we think there's more strategic room in the future. On the title and actually in mortgage, we've made investments in digital technology for virtual closings, which bluntly up until April of this year didn't get a lot of traction, and the title stuff wasn't even legal in like 35 states. But we really benefited from those strategic investments, so that in the last 6 months, we've been able to offer our kind of virtual title closing and our flash closed product for mortgage that lets people get these deals done with no human interaction, and it's really helped accelerate the business. In title, we're much more strategically set up for success, but we're still doing some geographic expansion, probably not as much opportunity as the mortgage strategy option in front of it, but we like what we've set up for both. We got some benefit here from the digitization acceleration of the world, and both need to be important parts of the future to really help preserve/grow margin given that the core business has had margin headwind for the last 5 to 10 years.
Yes. Are there other parts of the real estate transaction that you feel that you could play a role in to also add to that picture?
There are. They're smaller. I mean title and mortgage are the big dogs. But we have an insurance brokerage effectively, and we can help people get home insurance as part of their transaction. And we do some of that today. We actually just changed the brand of it from something you would never identify with us to the Realogy Insurance Agency. We can and do a few things around warranty and other things that relate to the time of the home transactions. They tend to be smaller, but they are out there. And we probably haven't invested as much in those as we have in the core title and mortgage thing, but you see how it can pay off, and so you probably will see us looking at some other avenues. But we get more to go in both title and mortgage, and so those will be most of the focus. But there are a couple of others out there, and we're excited that.
Great. Well, I mean I want to bring Charlotte more into this conversation. Maybe I'll kick it over to you, Arjun. Maybe start talking a bit about the balance sheet, and then I think we can get some Q&A and probably get back to some of the other items as well.
Sounds good. Yes. Thank you, guys, again, for your attendance. You made tremendous strides on the balance sheet over the course of the year. I wanted to dig in a little bit more with regards to the revolver. So you paid down the balance of your revolver by the end of October. And as we head into the seasonally slower part of your calendar, how do you anticipate revolver needs over the next 6 months as you think about the terrific operating environment that we currently are in?
It's a great question. As you pointed out, Q1 is a seasonally slower quarter for us. We'll see what happens with volumes. But it's highly likely that we will draw down on the revolver for some piece of Q1, as we normally would. There's a lot of other timing on expenses that happened in Q1 as well, but we feel really good about the extra cash flow that we're generating in Q3, Q4, et cetera. And so if you think about it from that lens, while we still likely will draw down in Q1, likely to be less than in the past and certainly, if the trends continue, we'll likely be able to get out of that sooner than we had in previous years.
And then given your expected free cash generation for fiscal '20, as you get closer to the 4x dividend stopper in your 2027 notes, how do you think about capital allocation as senior net leverage drops potentially below 4x by the end of this year?
Yes. So our total net leverage was down to 4.2x in the quarter. Senior secured leverage ratio was 2.29x, which we feel great about. The 4 measure that you're referring to, we were pretty darn close to it in the third quarter and certainly looking to go below 4. So we've been pretty clear, at least on the earnings call, we reiterated, our priorities definitely remain investing in the business, which we've been doing, as you can hear from some of the things that Ryan has highlighted. But we're definitely still in debt paydown load as well. So the priorities are same now. And when they change in the future, we'll definitely let you know.
Great. And we do have a question from an investor in the audience, so I'm going to pass that along as well. While the current crisis has caused a number of changes to or maybe accelerations of consumer home buying behavior partially or completely online, how much of these behaviors do you think will persist? Or do you anticipate new behaviors that will emerge that you guys as a company must adjust to?
It's a great question. I definitely think some of the behaviors will change. If you think about them, while there's been a little bit of talk about it, almost nobody buys their home kind of site unseen, right? It's always happened in life, and it happened some and never too, but the biggest change has been how people have gone through the process. For example, we put out a virtual tour product, for example, and a lot of people used it not to make a home buying decision but to actually widen the funnel of houses they were going to look at and effectively go do more tours than you would have done if you were in person doing them on a Saturday kind of thing. Similarly, our virtual open house product has helped get more people into virtual open houses so that sellers could only bring in the few serious buyers, especially at the time of health and safety kind of concerns through the process. And so I think some of these things where people are getting more comfortably using virtual tours will continue. I think people like the virtual closings for the convenience factor, frankly, and that will continue. And so I think the whole world has got this digital acceleration in the last 6 months. Nothing will be different about our industry. We will be subject to that like every other industry. And a lot of our focus and investment early in the pandemic was to move quickly to make sure we were able to operate in a more virtual environment. As I mentioned on the title and mortgage side, and even the brokerage side, we benefited from a bunch of technology stuff we'd invested in, people hadn't used very much. We had a virtual staging product for Sotheby's that was really awesome, I thought, that didn't get a lot of use. And then the pandemic hit and boom, like it's phenomenally popular kind of thing. So we like kind of how we were positioned. It actually helped accelerate tech adoption for a lot of stuff we've been doing, and we think that's more and more of the future. And we like our position in the industry to help customers and agents on that.
That's great. I just want to take 1 minute to remind those in the audience, if you have any questions, go ahead and put those in the chat. We'll try to get to as many of those as we can. One thing I want to jump in and then we'll see if there's some other questions with, is going back, you talked about, I think, on your call, you had great volume in October. I think it was 35% was the number. And then you talked about opens being up about 55%. That's the number that's a little bit tougher for us to get maybe our arms around. We get a lot of questions on that sometimes. Like what do we do? Like how do we translate that number into what volume is going to look like on a forward basis?
Yes. So look, the 35% closed volume preliminary early, whatever it was, October 20, whatever, when we cut it off before doing the earnings call, love the number. We like that number because it was both -- it was kind of equally mixed between units and price. The other thing that happened in October that it was equally mixed between our owned and franchised business, which was it changed because our owned business has been carrying around the New York City kind of challenge and had been lagging the franchise business in this. So we're really excited about that. The 55% growth in open volume preliminary for October, those are the new contracts that got signed up until October 20, whatever that date was, and the volume compared to the year before. We really like what that signals for the future. And those contracts will turn into closings anywhere from one day after they got signed to 6 months after they got signed. The average, around 50 days on average, but it's a distribution, and it's a pretty wide distribution. And any of you who've gone through house closings know whether they can go quick or they can go fast, depending on both side of the circumstances. But open volume helps us predict what's happening from there, and that's why in -- when we spoke to the world in August, we gave them our July open volume, which was looking pretty good, and then that came to fruition mostly in the third quarter. That October open volume will mostly come to fruition in November, December, January and some into February. And then we'll have our November open volume that will have the same kind of lag on it. But the 35% closed volume in the month was -- that's in the books. And the fact that the open volume is stronger than the close is always a nice kind of future signal. So we were pretty excited about it, and it's a lot of the social trends I talked about, frankly, continuing to play out in there.
Great. That's great color. Arjun, anything else coming in the queue?
Yes. We got one more question from the audience. Does high velocity selling like in this market create pressures on agent value, small but growing portion of the home sales? And this gentleman's area sold without a broker, while MLS listed were buyer to seller direct exchanges. So just a question I just thought of.
I actually have been saying the opposite because agents have been, frankly, kicking ass during this time, and 2 examples I'll give you. One is a bunch of models that don't have agents involved had to shut down during this pandemic and aren't even fully restarted today. Whereas agents, even in the midst of April, May, June, July got a lot of deals done for a lot of customers very safely. And I'll bet when the data is hold, we'll see agents being involved in even more transactions going forward. Second, there's always been a few kind of off-market deals of the type you talk about. I have not seen any data in either in our ecosystem or anecdotal that says it's new or different. But what I have seen is a lot of our agents doing what you talked about and actually getting both sides of the transaction because they're -- frankly, they're doing deals before they come to the market. They're actually making marriages. They're helping family A and B either swap houses or do trades on houses when their needs are pretty different in this work-from-home thing. And so it will emerge on the phenomenon you're talking about that will be different. But overall, we've seen agents have a really good run here. And that agents, I think, are the ones driving the high-velocity selling on pre-market, on things that aren't listed. I think there's almost always an agent -- we see a ton of agents who are involved in those getting both sides of the transaction and full disclosure. I -- when I moved to Realogy, I got my house because to call all the anchor agents connected before the house came on in the market. And if you move quickly and your agents are motivated for you, a lot of deals get done that way. Those deals get done without agents is usually a much rare bird, and I haven't seen anything to change my view on that, but we'll obviously be looking at the data as the whole year gets behind us on that.
Okay. I'd like to jump in on a couple of the geographic distinctions. I know New York City has been a challenged market in all of this, and you have a big exposure here. What do you think the outlook is for this metro? And when you might see that, that starts to be a bigger positive contributor?
Yes. Well, look, New York City was down about 80% in volume in Q2. I think that's our number, but again it's also probably about the market numbers that seen from some private reports. It was better in Q3 but also down. California, especially Northern California, was down in Q2. It was better in Q3 but not as good as the rest of the country. So those are a little bit of headwinds, especially the New York one. On the flip side, we are incredibly well positioned to capture the places that are on fire, right? We're a very large player in Long Island, New Jersey, Westchester, Connecticut. We're capturing the other side of the New York thing. Florida is just phenomenally doing well, especially as kind of the acceleration of people wanting to live there happens, and that's our third biggest area. And then Texas is another one. And then on the franchise side, we're seeing a ton of growth in places like Colorado, Utah, Oregon, Arizona as there is a bit of a California access. Idaho is also having that happen. So we really like our results, but our results do exist with a New York City market that is tough. And a New York City market, that's a big piece of our business. So we think there's -- we're betters on New York City, like it's -- we bet on it as a company right after 9/11. We're betting on it again for the future. But we're excited to be able to achieve what we're achieving even with one of our big market is having a tough time but getting better every month, but definitely not anywhere near back to the kind of contribution we're getting in the other markets in the business.
Great. And with some of the COVID cases spiking and some of the restrictions emerging again, do you think that poses as much risk this go around and stopping deal volume?
Yes, probably a little bit less because I think all of us actually now figure out how to handle things. And some of the things like I talked about title, right? Remote notarization wasn't legal in more than 15 states in March. It's legal in a ton of states now because of a lot of emergency orders that have actually enabled that, so you don't have to go through that change period. And I think agents, in particular, and brokers did a very nice job of taking care of clients safely and have shown they can do that. So real estate will be subject to some of these macro forces, of course. But we've seen what it looks like in the depths. And even then, there were hundreds of thousands of transactions getting done. And then when we've seen some of the local spikes in non-New York City areas in the last 3 or 4 months, that hasn't slowed things down very much, as you can see from our data. So I don't think anybody in the business community is excited about that, but we think we have a pretty good handle on how to do business. And again, we'll see it might slow down to closings in the short term, but it might also accelerate to social trends that the first wave, I think, did kind of kick off of.
Great.
Just real quick before we wrap up. One last question for Charlotte on the balance sheet. So as you look at your next few maturities, you have the 2023 bullet bonds and the term loan A and B. As you prioritize those instruments in debt reduction strategies, how do you think about the bullet nature of the bonds versus the prepayability of the term loan?
Yes. It's a great question. And I'm certainly mindful of all of it whether it's expiring in 2023 or beyond, so I'm an active dialogue with the banks every single quarter. And what I've learned since I've been here is that the maturities are what they are, but what's what the right thing to do in the market may be -- it may be volatile quarter versus quarter. So having a plan against all of those is important, which I do. But it's not just one plan, it's multiple plans depending on sort of market circumstances. So I feel good about the cash flow generation. That's certainly going to help a piece of it, but don't discount the fact that we're always in dialogue with our banks about how to think about the term loan A and the revolver coming due in 2023.
Well, team, I think we're up on time here. I want to thank you, Ryan, and Charlotte, for joining us this afternoon. Appreciate the time. And of course, thank you, everybody, that joined in on the call with Arjun and I to present the fireside chat. So have a good rest of the day, everybody.
Thank you for having us.
Thank you.
Thank you.
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