Realogy Now on Endangered List

Posted by urbandigs

Wed Nov 19th, 2008 09:15 AM

A: Realogy was taken private by Apollo Management in a $6.6Bln LBO, from NRT last year. Talk about ill timing. Realogy owns prized real estate brokerage brands Century 21, Coldwell Banker & Corcoran. This will be one of the side effects of the credit crisis / severe economic slowdown on both the country and our local Manhattan real estate marketplace. As sales volume falls, and stays low for the foreseeable future as the 'real' effect of the crisis starts to hit home in Manhattan via job losses, budget deficits, and bankrupt retail stores, expect the commission based real estate model to contribute to a significant portion of agents 'dying out'.

180px-Dilophosaurus.jpgAccording to Crain's "Seven area firms make endangered list":

"The most vulnerable, according to S&P, include Realogy, the Parsippany, N.J.-based owner of such brands as Century 21 and Corcoran Group. The firm, which was taken private last year by Apollo Management in an $8.8 billion leveraged-buyout, has struggled mightily amid the housing crisis. Last week, the firm warned that it’s at risk of violating the terms of its bank loans and is trying to swap $1.1 billion of bonds for new debt at a discount.

A default does not necessarily mean the end of a company. Traditionally, many companies in default have been able to negotiate new debt terms with their creditors. But with so many defaults looming, experts warn that fewer companies will be able to restructure their debt. As a result more of troubled firms could wind up in bankruptcy court and being liquidated."
Bloomberg chimes in:
Parsippany, New Jersey-based Realogy, purchased for $6.6 billion in April 2007, is trying to reduce debt by almost $600 million. Standard & Poor's slashed Realogy's corporate credit rating to CC from CCC last week. A CC rating means a company is "highly vulnerable" to missing a payment.
Realogy's bonds are tumbling, as the company reported about $200Mil in losses over the past 3 quarters. The company is now trying to exchange around $1.1Bln in existing bonds at a discount for new notes, to stave off a potential default. If they are not successful, they could be in violation of the loan's covenants under the senior secured credit facility.

I discussed the LBO Buyout Boom as a Reason To Worry way back in June of 2007, as cov-lite (great for borrower, bad/riskier for the lender) deals were being done as LBO deals started to dry up after an unsustainable buyout boom:
"My Point - Forward thinking. I am by no means an expert of leveraged buyouts, credit risk, derivative products, cdo/abx markets, etc.. However, it doesn't take an expert to see how the industry adapts to continue to be able to lend to support such massive buyouts in the private equity sector. I'll repeat this again --> Right now you are seeing an environment that is a result of years of ultra cheap money and tons of liquidity. What is yet to be seen is the effect of globally rising interest rates to levels we see today; that will take 1-2 years. For the near future, I don't think the end result will be that bad, in fact I think the environment will remain bullish for some time. However, red flags are waving for the years to come when we will be able to look back at how many of these massive buyouts were successful, and how many caused major problems to banks and other lenders"
The brokerage model in Manhattan is mostly commission based, with agents earning their $$$ at the closing of a deal. When that check is given to the agent, it is made out to the employing brokerage firm; i.e. Halstead, or Corcoran, or Elliman. The employing brokerage firm then takes their portion (usually between 50%-70% based on production), and then cuts the agent the remainder about a week later. A real but dirty way to look at this model from the employing brokerage standpoint is that you have 'X' number of rats running around the city, bringing cheese (the deal) back to the home base! Yes, that means I called myself a rat! I told you it was a dirty way of looking at it!

The analogy is accurate though. The more agents you have running around bringing cheese back to the home base, the more potential profits the firm can make. A firm with 1,000 agents will likely earn more than a firm with 200 agents; some firms base their model on quality, and not quantity and that is what I found from the private firm of Halstead, whose sister company is BrownHarrisStevens. Ideally, you try to hire the most 'connected', 'educated', and 'networked' agents possible that can generate deals quickly and continuously; but of course this does not always happen in a low barrier to entry business.

In a market with declining sales volume and prices, this model becomes VERY pressured. I expect the # of agents who work solely on commission as their full time job to shrink drastically over the next few years. The strong will survive, the weak will die out and look for new jobs. It's an inevitable side effect to a market experiencing less total sales volume and declining prices. Which begs the question, will a new model emerge? I brainstorm this potential daily.

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