ANYWHERE REAL ESTATE INC. The following discussion and analysis should be read in conjunction with our Condensed Consolidated Financial Statements and accompanying notes thereto included elsewhere herein and with our Consolidated Financial Statements and accompanying notes included in the 2021 Form 10-K. Unless otherwise noted, all dollar amounts in tables are in millions. NeitherRealogy Holdings , the indirect parent ofRealogy Group , norRealogy Intermediate , the direct parent company ofRealogy Group , conducts any operations other than with respect to its respective direct or indirect ownership ofRealogy Group . As a result, the condensed consolidated financial positions, results of operations and cash flows ofRealogy Holdings ,Realogy Intermediate andRealogy Group are the same. This Management's Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, contains forward-looking statements. See "Forward-Looking Statements" in this Quarterly Report as well as our 2021 Form 10-K for a discussion of the uncertainties, risks and assumptions associated with these statements. Actual results may differ materially from those contained in any forward-looking statements. OVERVIEW
We, through our subsidiaries, are a global provider of residential real estate services and report our operations in the following three business segments:
•Realogy Franchise Group-franchises the Century 21®, Coldwell Banker®, Coldwell Banker Commercial®, Corcoran®, ERA®, Sotheby's International Realty® andBetter Homes and Gardens® Real Estate brand names. As ofMarch 31, 2022 , our real estate franchise systems and proprietary brands had approximately 332,600 independent sales agents worldwide, including approximately 196,200 independent sales agents operating in theU.S. (which included approximately 56,800 company owned brokerage independent sales agents). As ofMarch 31, 2022 , our real estate franchise systems and proprietary brands had approximately 21,000 offices worldwide in 119 countries and territories, including approximately 5,800 brokerage offices in theU.S. (which included approximately 680 company owned brokerage offices). This segment also includes our lead generation activities throughRealogy Leads Group and global relocation services operation through Cartus Relocation Services. •Realogy Brokerage Group-operates a full-service real estate brokerage business with approximately 680 owned and operated brokerage offices with approximately 56,800 independent sales agents principally under the Coldwell Banker®, Corcoran® and Sotheby's International Realty® brand names in many of the largest metropolitan areas in theU.S. This segment also includes our share of equity earnings or losses from our RealSure and Real Estate Auction minority-owned joint ventures. •Realogy Title Group-provides full-service title, escrow and settlement services to consumers, real estate companies, corporations and financial institutions primarily in support of residential real estate transactions. OnMarch 29, 2022 , we closed the sale of our Title Underwriter which provides title underwriting services relating to the closing of home purchases and refinancing of home loans (see "Recent Developments" below). This segment also includes the Company's share of equity earnings or losses for Guaranteed Rate Affinity, our minority-owned mortgage origination joint venture withGuaranteed Rate, Inc.
Our technology and data organization is dedicated to providing innovative
technology products and solutions that support the productivity and success of
RECENT DEVELOPMENTS
Title Insurance Underwriter (Sale and Joint Venture)
OnMarch 29, 2022 , we closed the transactions contemplated by our previously announced strategic agreement withCenterbridge Partners, L.P. ("Centerbridge"). Under the strategic agreement, we sold the Title Underwriter to an affiliate of Centerbridge for$210 million (prior to expenses and tax) and a 30% equity stake in the form of common units in a Title Insurance Underwriter Joint Venture that owns the Title Underwriter. The Company's joint venture partners own the remaining equity stake in the joint venture in the form of preferred units that carry liquidation preference rights. Our share of equity earnings and losses for our minority interest in the Title Insurance Underwriter Joint Venture are reported inRealogy Title Group .
See Note 1, "Basis of Presentation", and Note 5, "Equity Method Investments", to the Condensed Consolidated Financial Statements for additional information.
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5.25% Senior Notes Issuance and Redemption of 9.375% Senior Notes and 7.625% Senior Secured Second Lien Notes
OnJanuary 10, 2022 , we issued$1,000 million aggregate principal amount of 5.25% Senior Notes due 2030. OnFebruary 4, 2022 , we used the net proceeds from the issuance, together with cash on hand, to redeem in full both the$550 million aggregate principal amount of 9.375% Senior Notes and the$550 million aggregate principal amount of 7.625% Senior Secured Second Lien Notes, each at a redemption price of 100% plus the applicable "make whole" premium, together with accrued interest to the redemption date on both such notes.
See Note 4, "Short and Long-Term Debt", to the Condensed Consolidated Financial Statements for additional information.
CURRENT BUSINESS AND INDUSTRY TRENDS
Homesale transaction volume on a combined basis for Realogy Franchise and Brokerage Groups increased 4% during the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 . Homesale transaction volume atRealogy Brokerage Group increased 10% during such period, primarily as a result of a 16% increase in average homesale price, partially offset by a 5% decrease in existing homesale transactions. Homesale transaction volume atRealogy Franchise Group increased 1% during such period, primarily as a result of a 14% increase in average homesale price, partially offset by a 11% decrease in existing homesale transactions.
According to NAR, during the first quarter of 2022 as compared to the first quarter of 2021, homesale transaction volume increased 4% primarily due to a 9% increase in average homesale price, partially offset by a 5% decrease in homesale transactions.
We believe sustained high levels of demand in the residential real estate market have been supported by the continuation of certain beneficial consumer trends such as home buyer preferences for certain geographies (including attractive tax and weather destinations) and demand in the high-end market, an increase in the prevalence of remote work arrangements, and home buying trends among millennials. Continued high demand and low inventory levels have driven increases in average homesale prices throughout the recovery and, starting in the third quarter of 2021, we believe limited inventory contributed to the decline in existing homesale transactions. InMarch 2022 , theFederal Reserve Board raised interest rates for the first time since 2018 and released economic projections that showed officials expect to raise interest rates six more times in 2022 in order to help control inflation. For the week endingApril 28, 2022 , mortgage rates on a 30-year fixed-rate mortgage averaged 5.10% (after crossing a 5.00% average two weeks prior for the first time in a decade), an increase of nearly 210 basis points over the prior year and more than 130 basis points over the 10-year average, according to Freddie Mac. We believe that the rising mortgage rate environment impactedRealogy Title Group results in the first quarter of 2022, with refinancing title and closing units declining 59% and equity in earnings from Guaranteed Rate Affinity declining$38 million , in each case as compared to the prior period. The prolonged favorable mortgage rate environment had been a key contributor to the strength of market demand during the industry's recovery from the COVID-19 crisis. Given the cyclical nature of the industry, there remain significant uncertainties regarding whether the strong demand and other beneficial consumer trends discussed above will be maintained at the same strength or at all, and whether such trends will continue to have a positive effect on our financial results, as well as significant uncertainties related to the COVID-19 crisis, including the impact of vaccines and virus mutations on the severity, duration and extent of the pandemic. The residential housing market is seasonal, with a higher level of homesale transactions typically occurring in the second and third quarter of each year. Industry seasonality experienced volatility in 2020 and 2021 in connection with the COVID-19 crisis, which was marked by a strong recovery in the residential real estate market beginning late in the second quarter of 2020, following a period of sharp decline in homesale transactions that started in the final weeks of the first quarter of 2020 due to the COVID-19 crisis. We believe that in the first quarter of 2022, the industry began to realign with historical seasonality patterns. We expect that the industry will continue to return to historical seasonality patterns throughout 2022. 31
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Existing Homesales
For the quarter endedMarch 31, 2022 compared to the same period in 2021, NAR existing homesale transactions decreased to 1.2 million homes or down 5%. For the quarter endedMarch 31, 2022 , homesale transactions on a combined basis for Realogy Franchise and Brokerage Groups decreased 10% compared to the same period in 2021 due primarily to constrained inventory, with the largest decreases in homes with average sales prices below$500,000 , particularly in the Northeast and West regions, driven byCalifornia . The quarterly and annual year-over-year trends in homesale transactions are as follows: [[Image Removed: rlgy-20220331_g1.jpg]] [[Image Removed: rlgy-20220331_g2.jpg]] _______________
(a)Q1 existing homesale data is as of the most recent NAR press release, which is subject to sampling error.
(b)Forecasted existing homesale data, on a seasonally adjusted basis, is as of the most recent NAR forecast.
(c)Forecasted existing homesale data, on a seasonally adjusted basis, is as of the most recent Fannie Mae press release.
As of their most recent releases, NAR is forecasting existing homesale transactions to decrease 1% in 2023 while Fannie Mae is forecasting existing homesale transactions to decrease 10% for the same period.
Existing Homesale Price
For the quarter endedMarch 31, 2022 compared to the same period in 2021, NAR existing homesale average price increased 9%. For the quarter endedMarch 31, 2022 , average homesale price on a combined basis for Realogy Franchise and Brokerage Groups increased 15% compared to the same period in 2021 which consisted of a 16% increase in average homesale price forRealogy Brokerage Group and a 14% increase in average homesale price forRealogy Franchise Group . 32
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Strong demand in the overall housing market benefited bothRealogy Franchise Group andRealogy Brokerage Group . Low inventory strongly contributed to higher average homesale price, with bothRealogy Franchise Group andRealogy Brokerage Group also benefiting from strength at the high-end of the housing market.Realogy Brokerage Group also benefited from its concentrated geographic footprint in certain major metropolitan markets, includingNew York City . The quarterly and annual year-over-year trends in the price of homes are as follows:
[[Image Removed: rlgy-20220331_g3.jpg]]
[[Image Removed: rlgy-20220331_g4.jpg]]_______________
(a)Q1 homesale price data is for existing homesale average price and is as of the most recent NAR press release.
(b)Forecasted homesale price data is for median price and is as of the most recent NAR forecast.
(c)Existing homesale price data is for median price and is as of the most recent Fannie Mae press release.
As of their most recent releases, NAR and Fannie Mae are both forecasting median existing homesale price to increase 4% in 2023.
Realogy Title Group , including Mortgage Origination Joint Venture. Our financial results are typically favorably impacted by a low interest rate environment as a decline in mortgage rates generally drives increased refinancing activity as well as homesale transactions that in turn drives increased title services and mortgage origination activity.
If the pace of existing homesale transactions slows (due to increases in
mortgage rates, constraints in inventory, declines in affordability, or
otherwise), we would also expect decreased title services and mortgage
origination activity. For example, the number of purchase title and closing
units declined 5% in the first quarter of 2022 compared to the prior period, as
the number of homesale transactions at
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While refinancing volumes are highly correlated with (and particularly sensitive
to) increases in mortgage rates, they are also inherently cyclical. Refinancing
volumes were strong throughout 2020 and into the first quarter of 2021 but began
to soften during the second and third quarters of 2021. In the first quarter of
2022, refinancing title and closing units at Realogy Title Group declined 59%
compared to the prior period.
Realogy Title Group also includes our 51% majority interest in REALtech Title
LLC ("REALtech"), a joint venture with an affiliate of Home Partners of America
that provides title and settlement services to various buyers and sellers in
real estate purchase transactions.
Equity in earnings at Guaranteed Rate Affinity declined from earnings of $30
million in the first quarter of 2021 to losses of $8 million in the first
quarter of 2022, primarily driven by significant gain-on-sale margin compression
due to the highly competitive mortgage industry, lower refinancing volume and
increased headcount to grow the business and its market share. Operating margins
are expected to continue to be compressed due to competitive factors related to
decreased demand and the significant increase in mortgage rates, resulting in a
material decline in equity in earnings year-over-year from this joint venture.
Mortgage Rates. A wide variety of factors can contribute to mortgage rates,
including Treasury note yields, federal interest rates, inflation, demand,
consumer income, unemployment levels and foreclosure rates. Yields on the
10-year Treasury note hit all-time lows during the COVID-19 crisis, but as of
March 31, 2022 were 2.32% as compared to 1.74% as of March 31, 2021 . Fiscal and
monetary policies of the federal government and its agencies can also adversely
impact mortgage rates.
According to Freddie Mac, mortgage rates on commitments for a 30-year,
conventional, fixed-rate first mortgage increased to an average of 3.79% for the
first quarter of 2022 compared to 2.88% for the first quarter of 2021. On
March 31, 2022 , mortgage rates on a 30-year fixed-rate mortgage were 4.17%, or
approximately 110 basis points higher than on December 31, 2021 and
approximately 40 basis points higher than the 10-year average of 3.79% on a
30-year fixed-rate mortgage, according to Freddie Mac. Mortgage rates have
continued to increase in April with rates for the week ending April 28, 2022
increasing to an average rate of 5.10% on a 30-year fixed-rate mortgage
according to Freddie Mac.
In March 2022 , the Federal Reserve Board increased interest rates and released
economic projections that show officials expect to raise interest rates six more
times in 2022. The Federal Reserve also ended its purchases of mortgage-backed
securities in March 2022 and the minutes from its first quarter 2022 meeting
show that it plans to reduce its balance sheet by allowing some of its
government-backed bond holdings to expire, starting as soon as May 2022 .
A rising interest rate environment may negatively impact multiple aspects of our
business, as increases in mortgage rates generally have an adverse impact on
mortgage unit, closing and refinancing volumes, housing affordability and
homesale transaction volume. For example, a rise in mortgage rates could result
in decreased homesale transaction volume if potential home sellers choose to
stay with their lower mortgage rate rather than sell their home and pay a higher
mortgage rate with the purchase of another home or if potential home buyers
choose to rent rather than pay higher mortgage rates.
Banks may tighten mortgage standards, which could limit the availability of
mortgage financing. In addition, many federal and/or state monetary or fiscal
programs meant to assist individuals and businesses in the navigation of
COVID-related financial challenges (including mortgage forbearance programs)
have ended or are expected to end in the near term, which could have a negative
impact on consumer financial health.
Inflation.
Inventory. Insufficient inventory levels generally have a negative impact on
homesale transaction growth and we believe this factor has contributed to a
decline in homesale transactions since the second half of 2021. We have also
seen an intensified pace of inventory supply turnover since the second half of
2020. For example, at our company owned Coldwell Banker brokerages, the speed at
which a home that was listed for sale went under contract decreased to a median
of 13 days on the market in the first quarter of 2022 from a median of 15 days
on the market in the first quarter of 2021 and 31 days on the market in the
first quarter of 2020. Continued or accelerated declines in inventory have and
may continue to result in insufficient supply to meet increased demand.
Additional inventory pressure arises from periods of slow or decelerated new
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housing construction, real estate models that purchase homes for rental use (rather than resale), and alternative competitors, such as traditional iBuying models.
Low housing inventory levels have been a persistent industry-wide concern for years, in particular in certain highly sought-after geographies and at lower price points. According to NAR, the inventory of existing homes for sale in theU.S. decreased approximately 10% from 1.1 million as ofMarch 2021 to 1.0 million as ofMarch 2022 . As a result, inventory has decreased from 2.1 months of supply inMarch 2021 to 2.0 months as ofMarch 2022 . These levels continue to be significantly below the 10-year average of 4.2 months, the 15-year average of 5.8 months and the 25-year average of 5.5 months. Affordability. The fixed housing affordability index, as reported by NAR, decreased from 170 forFebruary 2021 to 135 forFebruary 2022 which is the lowest it has been since 2018. A housing affordability index above 100 signifies that a family earning the median income has sufficient income to purchase a median-priced home, assuming a 20 percent down payment and ability to qualify for a mortgage. Housing affordability may be further impacted in future periods by inflationary pressures, increases in mortgage rates and average homesale price, further or accelerated declines in inventory, or a rise in unemployment, declining or stagnant wages, or other economic challenges. Recruitment and Retention of Independent Sales Agents; Commission Income. Recruitment and retention of independent sales agents and independent sales agent teams are critical to the business and financial results of a brokerage, including our company owned brokerages and those operated by our affiliated franchisees. In the first quarter of 2022, agents affiliated with our company owned brokerages grew 6% and, based on information from such franchisees, agents affiliated with ourU.S. franchisees increased 1%, in each case as compared toMarch 31, 2021 . Aggressive competition for the affiliation of independent sales agents in this industry continues to make recruitment and retention efforts at bothRealogy Franchise and Brokerage Groups challenging, in particular with respect to more productive sales agents, and has had in the past and may again in the future have a negative impact on our market share. These competitive market factors along with other trends (such as changes in the spending patterns of independent sales agents, as more agents purchase services from third parties outside of their affiliated broker) are expected to continue to put upward pressure on the average share of commissions earned by independent sales agents. If independent sales agents affiliated with our company owned brokerages are paid a higher proportion of the commissions earned on a homesale transaction or the level of commission income we receive from a homesale transaction is otherwise reduced, the operating margins of our company owned residential brokerages could continue to be adversely affected. Similarly, franchisees have and may continue to seek reduced royalty fee arrangements or other incentives from us to offset the continued business pressures on such franchisees, which would result in a reduction in royalty fees paid to us.
Other Trends. For information on additional industry trends impacting our
business, see "Part II-Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" in our 2021 Form 10-K under Current
Business and Industry Trends, subheadings "
For a discussion of the current legal and regulatory environment and how such environment could potentially impact us, see "Part I., Item 1.-Business-Government and Other Regulations" in our 2021 Form 10-K.
* * *While data provided by NAR and Fannie Mae are two indicators of the direction of the residential housing market, we believe that homesale statistics will continue to vary between us and NAR and Fannie Mae because:
•they use survey data and estimates in their historical reports and forecasting models, which are subject to sampling error, whereas we use data based on actual reported results; •there are geographical differences and concentrations in the markets in which we operate versus the national market. For example, many of our company owned brokerage offices are geographically located where average homesale prices are generally higher than the national average and therefore NAR survey data will not correlate withRealogy Brokerage Group's results;
•NAR's forecasts utilize seasonally adjusted annualized rates and median price;
•NAR historical data is subject to periodic review and revision and these revisions have been material in the past, and could be material in the future; and
•NAR and Fannie Mae generally update their forecasts on a monthly basis and a
subsequent forecast may change materially from a forecast that was previously
issued.
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While we believe that the industry data presented herein is derived from the most widely recognized sources for reportingU.S. residential housing market statistical data, we do not endorse or suggest reliance on this data alone. We also note that forecasts are inherently uncertain or speculative in nature and actual results for any period could materially differ.
KEY DRIVERS OF OUR BUSINESSES
Within Realogy Franchise and Brokerage Groups, we measure operating performance using the following key operating metrics: (i) closed homesale sides, which represents either the "buy" side or the "sell" side of a homesale transaction, (ii) average homesale price, which represents the average selling price of closed homesale transactions, and (iii) average homesale broker commission rate, which represents the average commission rate earned on either the "buy" side or "sell" side of a homesale transaction. ForRealogy Franchise Group , we also use net royalty per side, which represents the royalty payment toRealogy Franchise Group for each homesale transaction side taking into account royalty rates, homesale price, average broker commission rates, volume incentives achieved and other incentives. We utilize net royalty per side as it includes the impact of changes in average homesale price as well as all incentives and represents the royalty revenue impact of each incremental side. ForRealogy Brokerage Group , we also use gross commission income per side, which represents gross commission income divided by closed homesale sides. Gross commission income includes commissions earned in homesale transactions and certain other activities, primarily leasing transactions.Realogy Brokerage Group , as a franchisee ofRealogy Franchise Group , pays a royalty fee of approximately 6% per transaction toRealogy Franchise Group from the commission earned on a real estate transaction. The remainder of gross commission income is split between the broker (Realogy Brokerage Group ) and the independent sales agent in accordance with their applicable independent contractor agreement (which specifies the portion of the broker commission to be paid to the agent), which varies by agent agreement. ForRealogy Title Group , operating performance is evaluated using the following key metrics: (i) purchase title and closing units, which represent the number of title and closing units we process as a result of home purchases, (ii) refinance title and closing units, which represent the number of title and closing units we process as a result of homeowners refinancing their home loans, and (iii) average fee per closing unit, which represents the average fee we earn on purchase title and refinancing title sides.
The following table presents our drivers for the three months ended
Three Months Ended March 31,
2022 2021 % Change
Realogy Franchise Group (a)
Closed homesale sides 217,764 244,698 (11) %
Average homesale price $ 449,250 $ 394,000 14 %
Average homesale broker commission rate 2.43 % 2.47 % (4) bps
Net royalty per side $ 413 $ 382 8 %
Realogy Brokerage Group
Closed homesale sides 71,371 74,993 (5) %
Average homesale price $ 706,282 $ 608,960 16 %
Average homesale broker commission rate 2.39 % 2.43 % (4) bps
Gross commission income per side $ 17,475 $ 15,393 14 %
Realogy Title Group
Purchase title and closing units (b) 30,867 32,502 (5) %
Refinance title and closing units (c) 8,068 19,806 (59) %
Average fee per closing unit (d) $ 3,033 $ 2,348 29 %
_______________
(a)Includes all franchisees except for
(b)Purchase title and closing units for the three months endedMarch 31, 2021 were revised to reflect a decrease of 1,326 units. The change was for the number of units only and did not impact revenue. 36
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(c)Refinance title and closing units for the three months endedMarch 31, 2021 were revised to reflect a decrease of 661 units. The change was for the number of units only and did not impact revenue. (d)With the change in units noted above, Average fee per closing unit for the three months endedMarch 31, 2021 was updated to reflect an increase of$86 per closing unit. A decline in the number of homesale transactions and/or decline in homesale prices could adversely affect our results of operations by: (i) reducing the royalties we receive from our franchisees, (ii) reducing the commissions our company owned brokerage operations earn, (iii) reducing the demand for services offered throughRealogy Title Group , including title, escrow and settlement services or the services of our mortgage origination or other joint ventures, and (iv) increasing the risk of franchisee default due to lower homesale volume. Our results could also be negatively affected by a decline in commission rates charged by brokers, greater commission payments to independent sales agents, lower royalty rates from franchisees or an increase in other incentives paid to franchisees, among other factors. We attribute the 4 basis point decline in average homesale broker commission rate in the first quarter of 2022 over the prior period to price and geographic mix. Over the past 10 years, we have experienced an average of approximately one basis point decline in the average homesale broker commission rate each year, which we believe has been largely attributable to increases in average homesale prices (as higher priced homes tend to have a lower broker commission) and, to a lesser extent, competitors providing fewer or similar services for a reduced fee. Royalty fees are charged to all franchisees pursuant to the terms of the relevant franchise agreements and are included in each of the real estate brands' franchise disclosure documents. Other incentives may also be used as consideration to attract new franchisees, grow franchisees (including through independent sales agent recruitment) or extend existing franchise agreements, although in contrast to volume incentives, the majority of other incentives are not homesale transaction based. See "Part I-Item 1.-Business-Realogy Franchise Group-Operations-Franchising" in our 2021 Form 10-K for additional information. Transaction volume growth has generally exceeded royalty revenue growth due primarily to the growth in gross commission income generated by our top 250 franchisees and our increased use of other sales incentives, both of which directly impact royalty revenue. Over the past several years, our top 250 franchisees have grown faster than our other franchisees through organic growth and market consolidation. If the amount of gross commission income generated by our top 250 franchisees continues to grow at a quicker pace relative to our other franchisees, we would expect our royalty revenue to continue to increase, but at a slower pace than homesale transaction volume, due to franchisee achievement of progressive volume incentives and favorable franchisee agreement terms. Likewise, our royalty revenue would continue to increase, but at a slower pace than homesale transaction volume, if the gross commission income generated by all of our franchisees grows faster than the applicable annual volume incentive table increase or if we increase our use of standard volume or other incentives. However, in the event that the gross commission income generated by our franchisees increases as a result of increased transaction volume, we would expect to recognize an increase in overall royalty payments to us. We face significant competition from other national real estate brokerage brand franchisors for franchisees and we expect that the trend of increasing incentives will continue in the future in order to attract, retain, and help grow certain franchisees. Taking into account competitive factors, we may, from time to time, introduce pilot programs or restructure or revise the model used at one or more franchised brands, including with respect to fee structures, minimum production requirements or other terms. We expect to experience pressures on net royalty per side, largely due to the impact of competitive market factors noted above and continued concentration among our top 250 franchisees; however, these pressures were more than offset by increases in homesale prices during 2020 and 2021 as well as in the three-month period endedMarch 31, 2022 .Realogy Brokerage Group has a significant concentration of real estate brokerage offices and transactions in geographic regions where home prices are at the higher end of theU.S. real estate market, particularly the east and west coasts, whileRealogy Franchise Group has franchised offices that are more widely dispersed acrossthe United States . Accordingly, operating results and homesale statistics may differ betweenRealogy Brokerage Group andRealogy Franchise Group based upon geographic presence and the corresponding homesale activity in each geographic region. In addition, the share of commissions earned by independent sales agents directly impacts the margin earned byRealogy Brokerage Group . Such share of commissions earned by independent sales agents varies by region and commission schedules are generally progressive to incentivize sales agents to achieve higher levels of production. 37
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RESULTS OF OPERATIONS
Discussed below are our condensed consolidated results of operations and the results of operations for each of our reportable segments. The reportable segments presented below represent our segments for which separate financial information is available and which is utilized on a regular basis by our chief operating decision maker to assess performance and to allocate resources. In identifying our reportable segments, we also consider the nature of services provided by our segments. Management evaluates the operating results of each of our reportable segments based upon revenue and Operating EBITDA. Operating EBITDA is defined by us as net income (loss) before depreciation and amortization, interest expense, net (other than relocation services interest for securitization assets and securitization obligations), income taxes, and other items that are not core to the operating activities of the Company such as restructuring charges, former parent legacy items, gains or losses on the early extinguishment of debt, impairments, gains or losses on discontinued operations and gains or losses on the sale of investments or other assets. Our presentation of Operating EBITDA may not be comparable to similarly titled measures used by other companies.
Our results of operations should be read in conjunction with our other disclosures in this Item 2. including under the heading Current Business and Industry Trends.
Three Months Ended
Our consolidated results comprised the following:
Three Months Ended March 31,
2022 2021 Change
Net revenues $ 1,635 $ 1,547 $ 88
Total expenses 1,590 1,527 63Income before income taxes, equity in losses (earnings) and noncontrolling interests
45 20 25
Income tax expense 12 17 (5)
Equity in losses (earnings) of unconsolidated entities 10 (31) 41
Net income 23 34 (11)
Less: Net income attributable to noncontrolling interests - (1) 1
Net income attributable to
Net revenues increased$88 million or 6% for the three months endedMarch 31, 2022 compared with the three months endedMarch 31, 2021 driven by higher homesale transaction volume at Realogy Franchise and Brokerage Groups primarily due to continued strong demand and higher prices in the residential real estate market in the first quarter of 2022, which we attribute to certain beneficial consumer trends and low inventory strongly contributing to higher average homesale price.
Total expenses increased
•a$103 million increase in commission and other sales agent-related costs primarily due to an increase in homesale transaction volume, as well as a result of higher agent commission costs primarily driven by the impact of recruitment and retention efforts; •a$92 million loss on the early extinguishment of debt as a result of the refinancing transactions during the first quarter of 2022 which includes approximately$80 million related to make-whole premiums paid in connection with the early redemption of the 7.625% Senior Secured Second Lien Notes and 9.375% Senior Notes, compared to a$17 million loss on the early extinguishment of debt as a result of the refinancing transactions during the first quarter of 2021; •a$30 million increase in operating and general and administrative expenses primarily due to an increase in employee headcount, higher travel costs, an increase in costs related to brand conferences and franchisee events and other business expenses, all of which relate, in part, to "catch-up" business activities that had been curtailed over the prior 18-months in connection with the COVID-19 crisis; and
•a
partially offset by:
•$131 million in other income due to the gain recorded atRealogy Title Group for the sale of the Title Underwriter during the first quarter of 2022 compared to$2 million of other income during the first quarter of 2021; and 38
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•a$20 million net decrease in interest expense primarily due to a$13 million decrease in expense related to mark-to-market adjustments for interest rate swaps that resulted in$26 million of gains during the first quarter of 2022 compared to$13 million of gains during the first quarter of 2021 and a decrease in interest expense due to a reduction in total outstanding indebtedness and lower interest rates during the first quarter of 2022 compared to the first quarter of 2021. Equity in losses were$10 million during the first quarter of 2022 compared to earnings of$31 million during the first quarter of 2021. Equity in losses primarily related to Guaranteed Rate Affinity which were$8 million in the first quarter of 2022 decreasing by$38 million from earnings of$30 million in the first quarter of 2021. The decrease was primarily driven by significant gain-on-sale margin compression due to the highly competitive mortgage industry, lower refinancing volume and increased headcount to grow the business and its market share. During the first quarter of 2022, we incurred$4 million of restructuring costs compared to$5 million during the first quarter of 2021 related to the Company's restructuring program focused on office consolidation and instituting operational efficiencies to drive profitability. The Company expects the estimated total cost of the program to be approximately$171 million , with$133 million incurred to date and$38 million remaining primarily related to future expenses as a result of reducing the leased-office footprints. The Company's provision for income taxes in interim periods is computed by applying its estimated annual effective tax rate against the income or loss before income taxes for the period. In addition, non-recurring or discrete items are recorded in the period in which they occur. The provision for income taxes was an expense of$12 million for the three months endedMarch 31, 2022 compared to$17 million for the three months endedMarch 31, 2021 . Our effective tax rate was 34% and 33% for the three months endedMarch 31, 2022 andMarch 31, 2021 , respectively. The effective tax rate for the three months endedMarch 31, 2022 was primarily impacted by the sale of the Title Underwriter and non-deductible executive compensation.
The following table reflects the results of each of our reportable segments
during the three months ended
Revenues (a) % Operating EBITDA % Operating EBITDA Margin
2022 2021 $ Change Change 2022 2021 $ Change Change 2022 2021 Change
Realogy Franchise Group $ 267 $ 254 13 5 $ 138 $ 141 (3) (2) 52 % 56 % (4)
Realogy Brokerage Group 1,264 1,171 93 8 (40) (5) (35) (700) (3) - (3)
Realogy Title Group 190 201 (11) (5) (3) 61 (64) (105) (2) 30 (32)
Corporate and Other (86) (79) (7) (a) (26) (35) 9 26
Total Company $ 1,635 $ 1,547 88 6 $ 69 $ 162 (93) (57) 4 % 10 % (6)
Less: Depreciation and amortization 51 51
Interest expense, net 18 38
Income tax expense 12 17
Restructuring costs, net (b) 4 5
Impairments (c) - 1
Loss on the early extinguishment of debt (d) 92 17
Gain on the sale of business, net (e) (131) -
Net income attributable to Realogy Holdings and Realogy Group $ 23 $ 33
_______________
(a)Revenues include the elimination of transactions between segments, which
consists of intercompany royalties and marketing fees paid by Realogy Brokerage
Group of $86 million and $79 million during the three months ended March 31,
2022 and 2021, respectively, and are eliminated through the Corporate and Other
line.
(b)Restructuring charges incurred for the three months ended March 31, 2022
include $1 million at Realogy Franchise Group , $2 million at Realogy Brokerage
Group and $1 million at Corporate and Other. Restructuring charges incurred for
the three months ended March 31, 2021 include $2 million at Realogy Franchise
Group , $2 million at Realogy Brokerage Group and $1 million at Corporate and
Other.
(c)Non-cash impairments for the three months ended
(d)Loss on the early extinguishment of debt is recorded in Corporate and Other.
(e)Gain on the sale of business, net is recorded in
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As described in the aforementioned table, Operating EBITDA margin for "Total Company " expressed as a percentage of revenues decreased 6 percentage points to 4% from 10% for the three months endedMarch 31, 2022 compared to 2021.Realogy Franchise Group's margin decreased 4 percentage points to 52% from 56% primarily due to an increase in employee-related and other operating costs and an increase in marketing expense, both of which relate, in part, to "catch-up" business activities that had been curtailed over the prior 18-months in connection with the COVID-19 crisis, partially offset by an increase in revenue from the relocation and lead generation operations driven by higher volume.Realogy Brokerage Group's margin decreased 3 percentage points to negative 3% from zero primarily due to higher agent commission costs driven by the impact of recruiting and retention efforts and an increase in employee-related and other operating costs which relate, in part, to "catch-up" business activities that had been curtailed over the prior 18-months in connection with the COVID-19 crisis.Realogy Title Group's margin decreased 32 percentage points to negative 2% from 30% primarily due to a decrease in equity in earnings of Guaranteed Rate Affinity driven by significant gain-on-sale margin compression due to the highly competitive mortgage industry, lower refinancing volume and increased headcount to grow the business and its market share.Realogy Title Group's margin, excluding equity in earnings of Guaranteed Rate Affinity, decreased 12 percentage points to 3% from 15% largely the result of a decline in refinance revenue due to a decrease in activity as mortgage rates increased, as well as an increase in employee-related and other operating costs primarily due to higher headcount in the latter half of 2021.
Corporate and Other Operating EBITDA for the three months ended
Revenues increased$13 million to$267 million and Operating EBITDA decreased$3 million to$138 million for the three months endedMarch 31, 2022 compared with the same period in 2021. Revenues increased$13 million primarily as a result of an$8 million net increase in revenue from our relocation operations driven principally by higher volume and a$5 million increase in intercompany royalties received fromRealogy Brokerage Group . In addition, brand marketing fund revenue increased$3 million and related expense increased$4 million primarily due to higher advertising costs as compared to the first quarter of 2021. The revenue increases were partially offset by a$4 million decrease in third-party domestic franchisee royalty revenue primarily due to an 11% decrease in existing homesale transactions atRealogy Franchise Group and a decline in the average homesale broker commission rate, partially offset by a 14% increase in average homesale price.Realogy Franchise Group revenue includes intercompany royalties received fromRealogy Brokerage Group of$81 million and$76 million during the first quarter of 2022 and 2021, respectively, which are eliminated in consolidation against the expense reflected inRealogy Brokerage Group's results. The$3 million decrease in Operating EBITDA was primarily due to a$9 million increase in employee-related and other operating costs, as a result of higher employee headcount and higher travel expenses, and a$3 million increase due to the return to in-person brand conferences and franchisee events in 2022, both of which relate, in part, to "catch-up" business activities that had been curtailed over the prior 18-months in connection with the COVID-19 crisis. In addition, there was a$4 million increase in brand marketing fund related expense as discussed above. These expense increases were partially offset by the$13 million increase in revenues discussed above.
Revenues increased$93 million to$1,264 million and Operating EBITDA decreased$35 million to a loss of$40 million for the three months endedMarch 31, 2022 compared with the same period in 2021. The revenue increase of$93 million was driven by a 10% increase in homesale transaction volume atRealogy Brokerage Group which consisted of a 16% increase in average homesale price, partially offset by a 5% decrease in existing homesale transactions.Realogy Brokerage Group saw continued strong demand and higher prices in the residential real estate market in the first quarter of 2022, which we attribute to certain beneficial consumer trends and low inventory strongly contributing to higher average homesale price.
Operating EBITDA decreased
•a$103 million increase in commission expenses paid to independent sales agents from$885 million for the first quarter of 2021 to$988 million in the first quarter of 2022. Commission expense increased primarily as a result of 40
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the impact of higher homesale transaction volume as discussed above, as well as higher agent commission costs primarily driven by the impact of recruiting and retention efforts; •a$14 million increase in employee-related and other operating costs primarily due to an increase in employee headcount as a result of acquisitions and higher travel expenses relate, in part, to "catch-up" business activities that had been curtailed over the prior 18-months in connection with the COVID-19 crisis; •a$5 million increase in royalties paid toRealogy Franchise Group from$76 million during the first quarter of 2021 to$81 million during the first quarter of 2022 associated with the homesale transaction volume increase described above;
•a
•$3 million of equity in losses related to the RealSure joint venture,
partially offset by a
Realogy Franchise and Brokerage Groups on a Combined Basis
The following table reflects Realogy Franchise and Brokerage Groups' results
before intercompany royalties and marketing fees as well as on a combined basis
to show the Operating EBITDA contribution of these business segments to the
overall Operating EBITDA of the Company. The Operating EBITDA margin for the
combined segments decreased 3 percentage points from 10% to 7% primarily due to
higher employee-related and other operating costs relate, in part, to "catch-up"
business activities that had been curtailed over the prior 18-months in
connection with the COVID-19 crisis, partially offset by the higher homesale
transaction volume during the first quarter of 2022 compared to the first
quarter of 2021:
Revenues % Operating EBITDA % Operating EBITDA Margin
2022 2021 $ Change Change 2022 2021 $ Change Change 2022 2021 Change
Realogy Franchise Group
(a) $ 181 $ 175 6 3 $ 52 $ 62 (10) (16) 29 % 35 % (6)
Realogy Brokerage Group
(a) 1,264 1,171 93 8 46 74 (28) (38) 4 6 (2)
Realogy Franchise and
Brokerage Groups Combined $ 1,445 $ 1,346 99 7 $ 98 $ 136 (38) (28) 7 % 10 % (3)
_______________
(a)The segment numbers noted above do not reflect the impact of intercompany
royalties and marketing fees paid by Realogy Brokerage Group to Realogy
Franchise Group of $86 million and $79 million during the three months ended
March 31, 2022 and 2021, respectively.
Revenues decreased$11 million to$190 million and Operating EBITDA decreased$64 million to a loss of$3 million for the three months endedMarch 31, 2022 compared with the same period in 2021. Revenues decreased$11 million primarily as a result of a$13 million decrease in refinance revenue due to a decrease in activity as average mortgage rates in the first quarter of 2022 increased approximately 90 basis points over the prior period. In addition, underwriter revenue decreased$4 million during the first quarter of 2022 compared to the first quarter of 2021 due to the absence of three days of revenue as a result of the sale of the Title Underwriter onMarch 29, 2022 . The revenue decreases were partially offset by an$8 million increase in resale revenue due to an increase in the average fee per closing unit partially offset by a decrease in transactions. Equity earnings or losses related to our minority interest in Guaranteed Rate Affinity are included in the financial results ofRealogy Title Group , but are not reported as revenue toRealogy Title Group . Operating EBITDA decreased$64 million primarily as a result of a$38 million decrease in equity earnings from$31 million in earnings during the first quarter of 2021 to$7 million in losses during the first quarter of 2022 primarily related to Guaranteed Rate Affinity. The decline in equity in earnings from Guaranteed Rate Affinity was mostly driven by significant gain-on-sale margin compression due to the highly competitive mortgage industry, lower refinancing volume and increased headcount to grow the business and its market share. In addition, employee-related and other operating costs increased$9 million atRealogy Title Group primarily due to higher headcount in the latter half of 2021, which also includes incremental headcount supporting our REALtech joint venture. Operating EBITDA was also down due to the$11 million decrease in revenues discussed above and the absence of a$6 million unrealized gain on an investment recognized during the first quarter of 2021. 41
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FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Financial Condition
March 31, 2022 December 31, 2021 Change
Total assets $ 6,857 $ 7,210 $ (353)
Total liabilities 4,700 5,018 (318)
Total equity 2,157 2,192 (35)
For the three months ended
•a
•$220 million of net cash consideration used for the redemption of both the 9.375% Senior Notes and the 7.625% Senior Secured Second Lien Notes and the debt issuance costs for the 5.25% Senior Notes,
•the payment of employee incentive compensation in the first quarter of 2022, and
•the absence of
partially offset by:
•$208 million of cash received from the sale of the Title Underwriter;
•a
•a
partially offset by:
•a$99 million increase in other current and non-current assets primarily due to our 30% equity investment in the Title Insurance Underwriter Joint Venture which had an investment balance of$90 million at the closing of the transaction and was subsequently reduced by$12 million to reflect the dividend received from the Title Insurance Underwriter Joint Venture resulting in a$78 million investment balance atMarch 31, 2022 ; and
•a
Total liabilities decreased
•a$149 million decrease in accrued expenses and other current liabilities primarily due to payment of employee-related liabilities in the first quarter of 2022 which were fully accrued as ofDecember 31, 2021 ;
•a
•a$39 million net decrease in corporate debt primarily related to$100 million net decrease due to the issuance of$1,000 million aggregate principal amount of 5.25% Senior Notes inJanuary 2022 and repayment of$550 million aggregate principal amount of 7.625% Senior Secured Second Lien Notes and$550 million aggregate principal amount of 9.375% Senior Notes inFebruary 2022 , partially offset by a$65 million increase to the 0.25% Exchangeable Senior Notes liability due to the adoption of ASU 2020-06 which resulted in the reversal of the unamortized debt discount and related equity component;
•a
•a
•an
Total equity decreased
•a
partially offset by:
•net income of
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•a$5 million reduction to accumulated deficit related to the reversal of cumulative interest expense recognized for the amortization of the debt discount on the Exchangeable Senior Notes since issuance as a result of the adoption of ASU 2020-06.
See Note 1, "Basis of Presentation-Recently Adopted Accounting Pronouncements", to the Condensed Consolidated Financial Statements for further discussion related to the adoption of ASU 2020-06.
Liquidity and Capital Resources
Cash flows from operations and distributions from our unconsolidated joint ventures, supplemented by funds available under our Revolving Credit Facility and securitization facilities, are our primary sources of liquidity.
Our primary uses of liquidity include working capital, business investment and capital expenditures, as well as debt service. We may also use future cash flows to acquire stock under our share repurchase program. Business investments may include investments in strategic initiatives, including our existing or future joint ventures, products and services that are designed to simplify the home sale and purchase transaction, independent sales agent recruitment and retention, franchisee system growth and acquisitions. Debt service includes contractual amortization and interest payments on our long-term debt. We intend to repay or refinance our 4.875% Senior Notes due 2023 at or prior to maturity. In addition, we may, from time to time, seek to repay or refinance certain of our other debt. In the first quarter of 2022, we issued$1,000 million aggregate principal amount of 5.25% Senior Notes due in 2030. We used the net proceeds from the issuance, together with cash on hand, to redeem in full both the$550 million aggregate principal amount of 9.375% Senior Notes and the$550 million aggregate principal amount of 7.625% Senior Secured Second Lien Notes, each at a redemption price of 100% plus the applicable "make whole" premium, together with accrued interest to the redemption date on both such notes. Aggregate consideration paid for the redemption of the 9.375% Senior Notes and the 7.625% Senior Secured Second Lien Notes, together with debt issuance costs associated with the 5.25% Senior Notes, totaled$1,220 million . See Note 4, "Short and Long-Term Debt", to the Condensed Consolidated Financial Statements for additional information. OnFebruary 16, 2022 , our Board of Directors authorized a share repurchase program of up to$300 million of our common stock. Repurchases under the program may be made at management's discretion from time to time on the open market or through privately negotiated transactions. The actual timing, number and value of shares repurchased will be determined by us and may fluctuate based on a number of factors, including, but not limited to, our priorities for the use of cash, price, market and economic conditions, and legal and contractual requirements (including compliance with the terms of our debt agreements). The repurchase program has no time limit and may be suspended or discontinued at any time. In addition, we may seek to repurchase our outstanding debt from time to time through, as applicable, tender offers, open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on similar factors, including prevailing market conditions, our liquidity requirements, and contractual restrictions, among other factors. Our material cash requirements from known contractual and other obligations as ofMarch 31, 2022 have not changed materially from the amounts reported in our 2021 Form 10-K, which included the Company's debt transactions on a pro forma basis that occurred during the first quarter of 2022, as described in Note 4, "Short and Long-Term Debt", to the Condensed Consolidated Financial Statements. As described in this MD&A under Recent Developments, onMarch 29 2022 , upon closing of the sale of the Title Underwriter, we received cash proceeds of$208 million (prior to expenses and taxes) and a 30% non-controlling equity interest in the Title Insurance Underwriter Joint Venture. Cash held as statutory reserves by the Title Underwriter of$152 million at closing is no longer included in our Condensed Consolidated Balance Sheets as cash and cash equivalents. Historically, operating results and revenues for all of our businesses have been strongest in the second and third quarters of the calendar year. Although industry seasonality experienced volatility in 2020 and 2021, we believe that in the first quarter of 2022, the industry began to realign with historical seasonality patterns and expect that the industry will continue to return to historical seasonality patterns throughout 2022. A significant portion of the expenses we incur in our real estate brokerage operations are related to marketing activities and commissions and therefore, are variable. However, many of our other expenses, such as interest payments, facilities costs and certain personnel-related costs, are fixed and cannot be reduced during the seasonal fluctuations in the business. Consequently, our need to borrow under the Revolving Credit 43
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Facility and corresponding debt balances are generally at their highest levels at or around the end of the first quarter of every year.
If the residential real estate market were to materially slow or otherwise weaken or the economy as a whole does not improve or weakens, our business, financial condition and liquidity may be materially adversely affected, including our ability to access capital, grow our business and return capital to stockholders.
We believe that we will continue to meet our cash flow needs during the next twelve months, through the sources outlined above. Additionally, we may seek additional financing to fund future growth or refinance our existing indebtedness through the debt capital markets, but we cannot be assured that such financing will be available on favorable terms, or at all. Over the longer-term, to the extent these sources of liquidity are insufficient to meet our needs, we may also conduct additional private or public offerings of debt or our common stock or dispose of certain assets.
Cash Flows
AtMarch 31, 2022 , we had$309 million of cash, cash equivalents and restricted cash, a decrease of$434 million compared to the balance of$743 million atDecember 31, 2021 . The following table summarizes our cash flows for the three months endedMarch 31, 2022 and 2021:
Three Months Ended
2022 2021 Change
Cash provided by (used in):
Operating activities $ (233) $ (37) $ (196)
Investing activities 36 (32) 68
Financing activities (237) (45) (192)Effects of change in exchange rates on cash, cash equivalents and restricted cash
- - -
Net change in cash, cash equivalents and restricted cash
For the three months ended
•$58 million more cash used in operating results;
•$55 million more cash used for accounts payable, accrued expenses and other liabilities;
•$30 million less cash provided by the net change in relocation and trade receivables;
•$30 million less cash from dividends received primarily from the absence of Guaranteed Rate Affinity dividends; and
•$23 million more cash used for other assets primarily due independent sales agent recruitment and retention and franchise system growth incentives.
For the three months ended
•$56 million of more cash proceeds from the sale of business primarily related to the sale of the Title Underwriter in the first quarter of 2022; and
•$20 million more cash from other investing activities primarily related to the dividend received from the Title Insurance Underwriter Joint Venture,
partially offset by
For the three months endedMarch 31, 2022 ,$237 million of cash was used in financing activities compared to$45 million of cash used during the same period in 2021. For the three months endedMarch 31, 2022 ,$237 million of cash was used in financing activities as follows: •$198 million of cash paid as a result of the issuance of 5.25% Senior Notes and redemption of both the 9.375% Senior Notes and 7.625% Senior Secured Second Lien Notes in the first quarter of 2022;
•$16 million of tax payments related to net share settlement for stock-based compensation;
•$13 million net decrease in securitization borrowings; and
•$9 million of other financing payments primarily related to finance leases.
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For the three months ended
•$19 million of cash paid as a result of the refinancing transactions in the first quarter of 2021;
•$8 million of tax payments related to net share settlement for stock-based compensation;
•$8 million of other financing payments primarily related to finance leases;
•$7 million net decrease in securitization borrowings; and
•$3 million of quarterly amortization payments on the term loan facilities.
Financial Obligations
See Note 4, "Short and Long-Term Debt", to the Condensed Consolidated Financial
Statements, for information on the Company's indebtedness as of
LIBOR Transition
LIBOR is the subject of recent national, international and other regulatory guidance and proposals for reform. As a result of concerns about the accuracy of the calculation of LIBOR, a number ofBritish Bankers' Association member banks entered into settlements with certain regulators and law enforcement agencies with respect to the alleged manipulation of LIBOR, and LIBOR and other "benchmark" rates are subject to ongoing national and international regulatory scrutiny and reform. The cessation date for submission and publication of rates for certain tenors of LIBOR has since been extended by theICE Benchmark Administration until mid-2023. In response to concerns regarding the future of LIBOR, the United States Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of largeU.S. financial institutions, is considering replacing LIBOR with a new index calculated by short-term repurchase agreements, backed byU.S. Treasury securities: the Secured Overnight Financing Rate, or "SOFR." We are unable to predict whether SOFR will attain market traction as a LIBOR replacement or the impact of other reforms, whether currently enacted or enacted in the future. Any new benchmark rate, including SOFR, will likely not replicate LIBOR exactly and if future rates based upon a successor rate are higher than LIBOR rates as currently determined, it could result in an increase in the cost of our variable rate indebtedness and may have a material adverse effect on our financial condition and results of operations. Our primary interest rate exposure is interest rate fluctuations, specifically with respect to LIBOR, due to its impact on our variable rate borrowings under the Senior Secured Credit Facility (for our Revolving Credit Facility) and the Term Loan A Facility. As ofMarch 31, 2022 , we had interest rate swaps based on LIBOR with a notional value of$1,000 million to manage a portion of our exposure to changes in interest rates associated with our variable rate borrowings.
Covenants under the Senior Secured Credit Facility, Term Loan A Facility and Indentures
The Senior Secured Credit Agreement, Term Loan A Agreement, and the indentures governing the Unsecured Notes contain various covenants that limit (subject to certain exceptions)Realogy Group's ability to, among other things:
•incur or guarantee additional debt or issue disqualified stock or preferred stock;
•pay dividends or make distributions to
•repurchase or redeem capital stock;
•make loans, investments or acquisitions;
•incur restrictions on the ability of certain of
•enter into transactions with affiliates;
•create liens;
•merge or consolidate with other companies or transfer all or substantially all
of
•transfer or sell assets, including capital stock of subsidiaries; and
•prepay, redeem or repurchase subordinated indebtedness.
As a result of the covenants to which we remain subject, we are limited in the
manner in which we conduct our business and we may be unable to engage in
favorable business activities or finance future operations or capital needs. In
addition, the Senior Secured Credit Agreement and Term Loan A Agreement require
us to maintain a senior secured leverage ratio.
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Senior Secured Leverage Ratio applicable to our Senior Secured Credit Facility and Term Loan A Facility
The senior secured leverage ratio is tested quarterly and may not exceed 4.75 to 1.00. The senior secured leverage ratio is measured by dividingRealogy Group's total senior secured net debt by the trailing four quarters EBITDA calculated on a Pro Forma Basis, as those terms are defined in the Senior Secured Credit Agreement. Total senior secured net debt does not include our unsecured indebtedness, including the Unsecured Notes and Exchangeable Senior Notes, or the securitization obligations. EBITDA calculated on a Pro Forma Basis, as defined in the Senior Secured Credit Agreement, includes adjustments to EBITDA for restructuring, retention and disposition costs, former parent legacy cost (benefit) items, net, loss (gain) on the early extinguishment of debt, non-cash charges and incremental securitization interest costs, as well as pro forma cost savings for restructuring initiatives, the pro forma effect of business optimization initiatives and the pro forma effect of acquisitions and new franchisees, in each case calculated as of the beginning of the trailing four-quarter period. The Company was in compliance with the senior secured leverage ratio covenant atMarch 31, 2022 .
Non-GAAP Financial Measures
TheSEC has adopted rules to regulate the use in filings with theSEC and in public disclosures of "non-GAAP financial measures," such as Operating EBITDA. These measures are derived on the basis of methodologies other than in accordance with GAAP. Operating EBITDA is defined by us as net income (loss) before depreciation and amortization, interest expense, net (other than relocation services interest for securitization assets and securitization obligations), income taxes, and other items that are not core to the operating activities of the Company such as restructuring charges, former parent legacy items, gains or losses on the early extinguishment of debt, impairments, gains or losses on discontinued operations and gains or losses on the sale of investments or other assets. Operating EBITDA is our primary non-GAAP measure. We present Operating EBITDA because we believe it is useful as a supplemental measure in evaluating the performance of our operating businesses and provides greater transparency into our results of operations. Our management, including our chief operating decision maker, uses Operating EBITDA as a factor in evaluating the performance of our business. Operating EBITDA should not be considered in isolation or as a substitute for net income or other statement of operations data prepared in accordance with GAAP. We believe Operating EBITDA facilitates company-to-company operating performance comparisons by backing out potential differences caused by variations in capital structures (affecting net interest expense), taxation, the age and book depreciation of facilities (affecting relative depreciation expense) and the amortization of intangibles, as well as other items that are not core to the operating activities of the Company such as restructuring charges, gains or losses on the early extinguishment of debt, former parent legacy items, impairments, gains or losses on discontinued operations and gains or losses on the sale of investments or other assets, which may vary for different companies for reasons unrelated to operating performance. We further believe that Operating EBITDA is frequently used by securities analysts, investors and other interested parties in their evaluation of companies, many of which present an Operating EBITDA measure when reporting their results.
Operating EBITDA has limitations as an analytical tool, and you should not consider Operating EBITDA either in isolation or as a substitute for analyzing our results as reported under GAAP. Some of these limitations are:
•this measure does not reflect changes in, or cash required for, our working capital needs;
•this measure does not reflect our interest expense (except for interest related to our securitization obligations), or the cash requirements necessary to service interest or principal payments on our debt;
•this measure does not reflect our income tax expense or the cash requirements to pay our taxes;
•this measure does not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments;
•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often require replacement in the future, and this measure does not reflect any cash requirements for such replacements; and
•other companies may calculate this measure differently so they may not be comparable.
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Critical Accounting Estimates
In presenting our financial statements in conformity with generally accepted accounting principles, we are required to make estimates and assumptions that affect the amounts reported therein. Several of the estimates and assumptions we are required to make relate to matters that are inherently uncertain as they pertain to future events. However, events that are outside of our control cannot be predicted and, as such, they cannot be contemplated in evaluating such estimates and assumptions. If there is a significant unfavorable change to current conditions, it could result in a material adverse impact to our combined results of operations, financial position and liquidity. We believe that the estimates and assumptions we used when preparing our financial statements were the most appropriate at that time. These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements included in the Annual Report on Form 10-K for the year endedDecember 31, 2021 , which includes a description of our critical accounting policies that involve subjective and complex judgments that could potentially affect reported results.
Impairment of goodwill and other indefinite-lived intangible assets
Goodwill and other indefinite-lived intangible assets are subject to an impairment assessment annually as ofOctober 1 , or whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. The impairment assessment is performed at the reporting unit level which includesRealogy Brokerage Group , franchise services (reported within theRealogy Franchise Group reportable segment),Realogy Title Group andRealogy Leads Group (includes lead generation and Cartus Relocation Services and reported within theRealogy Franchise Group reportable segment). This assessment compares the carrying value of each reporting unit and the carrying value of each other indefinite lived intangible asset to their respective fair values and, when appropriate, the carrying value is reduced to fair value and an impairment charge is recorded on a separate line in the Consolidated Statements of Operations for the excess. In testing goodwill, the fair value of each reporting unit is estimated using the income approach, a discounted cash flow method. For the other indefinite lived intangible assets, fair value is estimated using the relief from royalty method. Management utilizes long-term cash flow forecasts and the Company's annual operating plans adjusted for terminal value assumptions. The fair value of the Company's reporting units and other indefinite lived intangible assets are determined utilizing the best estimate of future revenues, operating expenses, including commission expense, market and general economic conditions, trends in the industry, as well as assumptions that management believes marketplace participants would utilize. These assumptions include discount rates based on the Company's best estimate of the weighted average cost of capital, long-term growth rates based on the Company's best estimate of terminal growth rates, and trademark royalty rates which are determined by reviewing similar trademark agreements with third parties. Although management believes that assumptions are reasonable, actual results may vary significantly. These impairment assessments involve the use of accounting estimates and assumptions, changes in which could materially impact our financial condition or operating performance if actual results differ from such estimates and assumptions. Furthermore, significant negative industry or economic trends, disruptions to our business, unexpected significant changes or planned changes in use of the assets, a decrease in our business results, growth rates that fall below our assumptions, divestitures, and a sustained decline in our stock price and market capitalization may have a negative effect on the fair values and key valuation assumptions. Such changes could result in changes to our estimates of our fair value and a material impairment of goodwill or other indefinite-lived intangible assets. To address this uncertainty, a sensitivity analysis is performed on key estimates and assumptions.
Recently Issued Accounting Pronouncements
See Note 1, "Basis of Presentation", to the Condensed Consolidated Financial Statements for a discussion of recently issued FASB accounting pronouncements.
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