Realogy Holdings (RLGY)

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October 27, 2021

We like Realogy Holdings (“Realogy” or “RLGY””). Realogy is the parent company of Coldwell Banker and Century 21. We believe the Coldwell Banker name has significant brand value among residential real estate owners. Realogy trades at only 4.4x EBITDA. We think stock market investors are overly concerned about disruption of residential real estate brokerage.

1. Street estimates are too conservative – We believe Wall Street estimates for Realogy in the next 2 years are too conservative because they assume that Q2 2021 was the peak dollar volume period for housing We believe the housing market will remain strong in 2022 and 2023 as prices continue to increase and the number of housing transactions stays stable or increases marginally.
2. Pandemic beneficiary – Realogy has benefited from the current pandemic-induced housing As the professional class has re-evaluated how they work and how often they commute to the office, many decided to change their living situations. Some have moved to the suburbs in search of more space. Others have moved to remote locations to work from home in low-cost areas or in vacation spots. Realogy has another firm specific benefit.

In the previous 5 years, Realogy’s brokerages had lagged due to a concentration to New York city and the suburbs where home prices and activity had lagged. Since the Great Financial Crisis (“GFC”) until the pandemic, homes prices in the New York suburbs had been stagnant. The main reason for the stagnation was the decline in high-paying Wall Street jobs. Wall Street was not creating a new generation that could move to Darian, CT or Summit, NJ to buy over-priced homes from the previous generation of Wall Streeters. With the pandemic prompting people to move to the suburbs, Realogy has benefitted from the resurgence of activity.

3. Demographic beneficiary – The Millennial Generation is in their peak home-buying years. This generation was delayed in their household formation due to the However, biology waits for no one, and the current crop of 35-40 year-olds are buying homes.
4. Compelling valuation – Realogy trades at 4x on a current Enterprise Value-to-EBITDA. If the company traded at 8x EV/EBITDA, then the stock price would be $49 or 175% higher than the current price. Given the company’s leading position as a residential real estate broker, we do not believe 8x EBITDA is too optimistic. In early 2014, Realogy traded at 12x EBITDA.
5. Deleveraged – Realogy’s management has focused on paying down its debt. This has made the balance sheet as strong as it has been since it became Realogy’s current debt-to-EBITDA ratio is 2.3x, which was down from greater than 5x in 2019. We believe Realogy is close to redirecting cash flows from debt paydown to stock repurchases. We believe this change in capital allocation will be a catalyst for the stock.
6. Debt refinancing in 2022 – Realogy can refinance $1.1 billion of debt during 2022 and save $30 million or $0.26 per share
7. Potential acquisition target by private equity – We would note that Realogy was previously owned by private equity firm We believe that a private equity firm could purchase Realogy again if the company’s valuation remains at this compelling level.

Other stock market investors don’t love Realogy for a couple of reasons:

1. 6% Real estate commissions aren’t sustainable – Many investors have a short thesis that real estate commissions are at We’ve all paid 6% brokerage commissions when selling a house and have been frustrated by this high level. These investors point to new real estate brokers with business models that reduce commissions to consumers. We point to brokers retaining market share even in ultra-hot housing markets like the Fall of 2020 as reason that real estate broker commissions are more sticky than consensus.

2. Competitive intensity among real estate brokers for agents – Other investors point to competition among real estate brokerages for agents will lead to agents capturing a higher percentage of the We’ve seen this recently in Realogy’s results, but we think there is a limit to how much brokers are willing to pay out to their agents. One large competitor is Berkshire Hathaway Home Services (“BHHS”). Although BHHS is backed by Warren Buffett’s Berkshire Hathaway, we like them as a competitor. Buffett has a long history of not competing on price and tends to run his subsidiaries for cash flow with limited appetite for reinvestment. Plus, his ownership of a traditional real estate brokerage validates the attractiveness of the business. Second, Realogy competes with a relatively new traditional brokerage, Compass. Compass was founded about 15 years ago, received venture funding from Softbank, and completed its IPO earlier in 2021. Compass has a market capitalization of $5.3B compared to Realogy’s $2.1B. Compared to Compass (“COMP”), Realogy trades at 1/3 the Price-to-Sales ratio with operating margins of 12% compared to Compass’ -5% margins. Our contacts in the business have told us that Compass has pulled back on its pricing.

We think owning Realogy’s stock at its low valuation of 4.4x EBITDA is very attractive. We believe there are several potential catalysts that will help the stock re-rate to a higher valuation. First, Realogy has two high coupon debt issues that are callable in 2022. Second, after refinancing these two debt issues, we expect Realogy’s management will start to repurchase common shares during 2022. Finally, we expect Realogy will continue to report strong earnings due to the strong housing market.

Disclaimer: The discussion of any security is meant solely as an illustration of our investment and thought process and should NOT be considered as a recommendation or suggestion to buy or sell any securities. Before you make any investment, do your own research and talk to your own financial adviser. Information in this report is received from external sources. Therefore, we can make no guarantee as to the completeness or accuracy of the information provided.