Business Description
Anywhere Real Estate [NYSE:HOUS], formerly named Realogy, is a Madison, New Jersey based residential real estate services company. Its operations include franchise, brokerage, relocation, and title and settlement businesses. As of 31 December 2022, the company had approximately 337,000 sales agents.
Summary
Anywhere Real Estate’s 2Q23 transaction volumes were in line with prior guidance, as the company recorded revenue of USD 1.67bn, which was a 22% decrease YoY.
Since the end of 2Q23, HOUS has pursued exchanges of approximately USD 823m of its senior unsecured notes, as the company looks to deleverage without incurring significant additional interest expense.
On a valuation basis, using NTM EBITDA of USD 329m, and enterprise value (EV)/EBITDA multiples 9x-11x, HOUS’ debt is fully covered and the stock is valued at USD 5.70, compared to its current price of USD 6.31.
Recent Events
On 25 July 2023, the company entered into an exchange agreement with Angelo Gordon, who agreed to exchange USD 273m of the 5.75% senior notes that it holds, for approximately USD 218m in new 7% second lien senior secured notes due 2030 at an exchange price of 80. The new 2030 senior secured notes are to be secured on a second lien basis. Angelo Gordon holds a 8% equity position in HOUS. Following the announcement of the exchange, the share price rose 5% to USD 9.04, before gradually declining to the current level of USD 6.31.
On 8 August 2023, the company announced the early exchange results of an offer to exchange up to an aggregate of USD 527m of the 5.75% senior notes due 2029, and the 5.25% senior notes due 2030, for up to USD 422m of aggregate principal amount of new 7% second lien senior secured notes, at an exchange price of 80. The company received tender offers for USD 255m with respect to the 5.75% 2029 notes, and USD 295m with respect to the 5.25% 2030 notes.
On 15 August 2023, S&P downgraded Anywhere Real Estate to “B-“ from “B”. Its new 7% second lien 2030 notes were assigned a rating of “B+”. S&P did not view the exchange as distressed, but opportunistic, due to the long-dated maturities of the notes as well as the company having significant liquidity with free cash flow (FCF) expected over the NTM.
Debt, Liquidity, & Cash Flow
Estimated net debt on 8 August 2023 was USD 2.66bn with net leverage of 22.6x, compared to USD 3bn with net leverage of 14.8x on 31 March 2023. The company was able to reduce total debt by approximately USD 205m through the exchange transactions.
The company is required to maintain a senior secured leverage ratio of 4.75x. Senior secured leverage ratio on 30 June 2023 was 1.04x, which is calculated using HOUS’ credit agreement defined EBITDA. This calculation adds back USD 491m in impairments over the LTM, of which USD 480m was accounted for in 4Q22. Using our EBITDA forecast and assuming no additional debt repayments, we estimate senior secured leverage at FY23 to be 4.45x. The new 7% 2030 notes increase HOUS’ secured debt burden, potentially putting strain on the covenant in the future.
Besides the Apple Ridge Funding facility that is regularly extended, the company’s next significant maturity is its Term Loan which matures in February 2025. This debt will become current in 1Q24, which will likely trigger significantly increased interest expense.
Liquidity as of 8 August 2023 was USD 969m, compared to USD 869m on 31 March 2023, and USD 1.38bn on 30 June 2023.
FCF in 2Q23 was USD 85m, compared to negative USD 94m in 1Q23, and USD 33m in 2Q22. Estimated FCF over the NTM is USD 86m, in comparison to negative USD 96m over the LTM.
Financial Summary
Revenue for 2Q23 fell 22% YoY to USD 1.67bn, which was in line with the YoY decline in volumes, which fell 23% YoY. HOUS is expecting quarterly transaction volumes to improve in comparison to FY22, but expects overall FY23 transaction volumes to be down approximately 15%-20% YoY. Fanni Mae is forecasting a decrease of 16% YoY to 4.2 million annual unit transactions for FY23, which would be the lowest level in a decade, as inventory remains low in the current macroeconomic environment. CEO Ryan Schneider believes that it would take mortgage rates in the 5-5.5% range to see a return to normal levels of listings. As of 17 August 2023, the average 30-year mortgage rate was 7.09%, according to Freddie Mac.
Adjusted EBITDA for 2Q23 was USD 126m (7.5% margin), compared to USD 202m (9.4% margin) in 2Q22. The decline is due to volume declines, although this was partly offset by USD 50m of cost savings in the quarter. The company remains on track to deliver USD 200m of cost savings in FY23, of which 65% are to come in the Owned Brokerage segment. Roughly two thirds of the reductions are permanent, with 70% of savings coming in the form of headcount and real estate footprint, which is expected to be down 10% for FY23. HOUS is targeting the integration of its national brokerage and title support operations, as well as growth in its franchise business, which operates at high margins. However, expected cost savings are likely to be offset by legal accruals in relation to various litigation matters, although the size and timing of these accruals is not clear.
Commission splits were better than expected for the company, with splits only up 32 basis points YoY. This was driven by an improved competitive environment. Overall commission splits for FY23 are expected to be 50-75 basis points above FY22. HOUS indicated that luxury splits have been coming down in 2Q23. The company has a strong presence in the luxury market, which accounts for a large portion of its biggest geographies; California and New York. However, average prices in those states have been down mid-single digits this year, compared to prices slightly increasing across two thirds of the US. HOUS has also struggled recently with recruitment and retention of sales agents, which has started to eat into its market share. If this trend continues, it could but upward pressure on agent commission splits, and subsequently affect the company’s margins.
Segment Results
Franchise Group (16% of LTM sales) – Revenue fell 16% YoY to USD 284m, while adjusted EBITDA was USD 164m (58% margin) compared to USD 204m (60% margin) in 2Q22. The decrease was due to volume reductions, which was partly offset by marketing and operating cost cuts. The segment has remained resilient despite recent challenges in the industry, with LTM EBITDA of USD 589m (57% margin).
Owned Brokerage Group (78% of LTM sales) – Revenue fell 22% YoY to USD 1.38bn, while adjusted EBITDA was negative USD 10m (-1% margin) compared to USD 11m (1% margin) in 2Q22. The drop in EBITDA was due to lower volumes and slightly higher agent commission costs, partially offset by cost cutting measures. LTM EBITDA for the segment is negative USD 142m (-3% margin).
Title Group (6% of LTM sales) – Revenue fell 31% YoY to USD 100m, while adjusted EBITDA was USD 10m (10% margin) compared to USD 21m (15% margin) in 2Q22. Despite a USD 3m improvement in the company’s minority owned mortgage origination joint venture, EBITDA for the segment declined due to lower purchase and refinancing volumes. LTM EBITDA for the segment is negative USD 16m (-4% margin).
Guidance
- 3Q23E transaction volume – down 10% YoY
- FY23E transaction volume – down 15-20% YoY
- FY23E EBITDA – below FY22 (USD 449m)
- FY23E commission splits – increase 50-75 basis points YoY
- FY23E cost savings – USD 200m
Valuation
For our valuation, we use NTM EBITDA of USD 329m and EV/EBITDA multiples of 9x-11x. We find that HOUS’ debt is fully covered. Furthermore, at EV/EBITDA of 10x and base EBITDA of USD 329m, the stock is valued at USD 5.70, which a 10% discount on the current share price of USD 6.31.
