Attached files

file filename
EX-31.4 - CERTIFICATION OF THE CHIEF FINANCIAL OFFICER OF REALOGY GROUP LLC. - REALOGY HOLDINGS CORP.ex31-4.htm
EX-15.1 - LETTER REGARDING UNAUDITED INTERIM FINANCIAL STATEMENTS - REALOGY HOLDINGS CORP.ex15-1.htm
EX-31.3 - CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER OF REALOGY GROUP LLC. - REALOGY HOLDINGS CORP.ex31-3.htm
EX-31.1 - CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER OF REALOGY HOLDINGS CORP. - REALOGY HOLDINGS CORP.ex31-1.htm
EX-10.1 - AMENDED AND RESTSTED AMENDMENT NO. 2 TO THE STRATEGIC RELATIONSHIP AGREEMENT - REALOGY HOLDINGS CORP.ex10-1.htm
EX-31.2 - CERTIFICATION OF THE CHIEF FINANCIAL OFFICER OF REALOGY HOLDINGS CORP. - REALOGY HOLDINGS CORP.ex31-2.htm
EX-32.2 - CERTIFICATION OF REALOGY GROUP LLC - REALOGY HOLDINGS CORP.ex32-2.htm
EX-32.1 - CERTIFICATION OF REALOGY HOLDINGS CORP. - REALOGY HOLDINGS CORP.ex32-1.htm

______________________________________________________________________________________________________________________________________________________________________

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________ 
FORM 10-Q
þ     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
OR
¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File No. 001-35674
REALOGY HOLDINGS CORP.
(Exact name of registrant as specified in its charter)
20-8050955
(I.R.S. Employer Identification Number)
Commission File No. 333-148153
REALOGY GROUP LLC
(Exact name of registrant as specified in its charter)
20-4381990
(I.R.S. Employer Identification Number)
Delaware
(State or other jurisdiction of incorporation or organization)
175 Park Avenue
Madison, NJ 07940
(Address of principal executive offices) (Zip Code)
(973) 407-2000
(Registrants' telephone number, including area code)
___________________________ 
Indicate by check mark whether the Registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.  
Realogy Holdings Corp. Yes þ  No ¨ Realogy Group LLC Yes ¨  No þ
Indicate by check mark whether the Registrants have submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrants were required to submit and post such files). 
Realogy Holdings Corp. Yes þ  No ¨ Realogy Group LLC Yes þ  No ¨
Indicate by check mark whether the Registrants are large accelerated filers, accelerated filers, non-accelerated filers, or smaller reporting companies. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated
filer
 
Accelerated
filer
 
Non-accelerated
filer
 
Smaller reporting
company
 
 
 
 
(Do not check if a smaller reporting company)
 
Realogy Holdings Corp.
þ
 
¨
 
¨
 
¨
Realogy Group LLC
¨
 
¨
 
þ
 
¨
Indicate by check mark whether the Registrants are a shell company (as defined in Rule 12b-2 of the Exchange Act).  
Realogy Holdings Corp. Yes ¨  No þ Realogy Group LLC Yes ¨  No þ
There were 146,705,506 shares of Common Stock, $0.01 par value, of Realogy Holdings Corp. outstanding as of November 3, 2015.
______________________________________________________________________________________________________________________________________________________________________



TABLE OF CONTENTS
 
Page
 
 
 
PART I
FINANCIAL INFORMATION
 
Item 1.
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II
Item 1.
Item 6.





INTRODUCTORY NOTE
Except as otherwise indicated or unless the context otherwise requires, the terms "we," "us," "our," "our company," "Realogy," "Realogy Holdings" and the "Company" refer to Realogy Holdings Corp., a Delaware corporation, and its consolidated subsidiaries, including Realogy Intermediate Holdings LLC, a Delaware limited liability company ("Realogy Intermediate"), and Realogy Group LLC, a Delaware limited liability company ("Realogy Group"). Neither Realogy Holdings, the indirect parent of Realogy Group, nor Realogy Intermediate, the direct parent company of Realogy Group, conducts any operations other than with respect to its respective direct or indirect ownership of Realogy Group. As a result, the consolidated financial positions, results of operations and cash flows of Realogy Holdings, Realogy Intermediate and Realogy Group are the same.
Realogy Holdings is not a party to the Senior Secured Credit Facility and certain references in this report to our consolidated indebtedness exclude Realogy Holdings with respect to indebtedness under the Senior Secured Credit Facility. In addition, while Realogy Holdings is a guarantor of Realogy Group's obligations under its secured and unsecured notes, Realogy Holdings is not subject to the restrictive covenants in the indentures governing such indebtedness.
FORWARD-LOOKING STATEMENTS
Forward-looking statements included in this report and our other public filings or other public statements that we make from time to time are based on various facts and derived utilizing numerous important assumptions and are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements include the information concerning our future financial performance, business strategy, projected plans and objectives, as well as projections of macroeconomic and industry trends, which are inherently unreliable due to the multiple factors that impact economic trends, and any such variations may be material. Statements preceded by, followed by or that otherwise include the words "believes," "expects," "anticipates," "intends," "projects," "estimates," "plans," and similar expressions or future or conditional verbs such as "will," "should," "would," "may" and "could" are generally forward-looking in nature and not historical facts. You should understand that the following important factors could affect our future results and cause actual results to differ materially from those expressed in the forward-looking statements:
risks related to general business, economic, employment and political conditions and the U.S. residential real estate markets, either regionally or nationally, including but not limited to:
a lack of improvement or a decline in the number of homesales, stagnant or declining home prices and/or a deterioration in other economic factors that particularly impact the residential real estate market and the business segments in which we operate;
a decrease in consumer confidence;
the impact of recessions, slow economic growth, disruptions in the U.S. government or banking system and high levels of unemployment in the U.S. and abroad, which may impact all or some portion of the housing markets in which we and our franchisees operate;
increasing mortgage rates and/or constraints on the availability of mortgage financing;
legislative, tax or regulatory changes that would adversely impact the residential real estate market, including potential reforms of Fannie Mae and Freddie Mac, and potential tax code reform, which could reduce or eliminate the amount that taxpayers would be allowed to deduct for home mortgage interest;
delayed homesale transaction closings that impact us or other industry participants resulting from the introduction of the Consumer Financial Protection Bureau's new rule relating to integrated mortgage disclosure forms, effective for new loan applications beginning October 3, 2015;
a decrease in housing affordability;
high levels of foreclosure activity;
insufficient or excessive home inventory levels by market;
changing attitudes towards home ownership, particularly among potential first-time homebuyers who may delay, or decide not to, purchase a home; and
the inability or unwillingness of current homeowners to purchase their next home due to various factors, including limited or negative equity in their current home, difficult mortgage underwriting standards, attractive rates on existing mortgages and the lack of available inventory in their market;


1


our geographic and high-end market concentration, particularly with respect to our company owned brokerage operations;
our inability to enter into franchise agreements with new franchisees at current royalty rates, or to realize royalty revenue growth from them;
our inability to renew existing franchise agreements at current royalty rates, or to maintain or enhance our value proposition to franchisees, including but not limited to our ability to successfully develop, license and scale our ZAPTM technology to our franchisees;
the lack of revenue growth or declining profitability of our franchisees;
disputes or issues with entities that license us their tradenames for use in our business that could impede our franchising of those brands;
our inability to realize the benefits from acquisitions due to the loss of key personnel of the acquired companies, as well as the possibility that expected benefits and synergies of the transactions may not be achieved in a timely manner or at all;
actions by our franchisees that could harm our business or reputation, non-performance of our franchisees, controversies with our franchisees or actions against us by third parties with which our franchisees have business relationships;
competition whether through traditional competitors, competitors with alternative business models, as well as competition for our independent sales associates;
loss or attrition among our senior executives or other key employees could adversely affect our financial performance;
our failure or alleged failure to comply with laws, regulations and regulatory interpretations and any changes in laws and regulations or stricter interpretations of regulatory requirements, including but not limited to (1) state or federal employment laws or regulations that would require reclassification of independent contractor sales associates to employee status; and (2) the Real Estate Settlement Procedures Act ("RESPA") or state consumer protection or similar laws;
any adverse resolution of litigation, governmental or regulatory proceedings or arbitration awards as well as any adverse impact of decisions to voluntary modify business arrangements or enter into settlement agreements to avoid the risk of protracted and costly litigation or other proceedings;
the general impact of emerging technologies on our business;
our inability to obtain new technologies and systems, to replace or introduce new technologies and systems as quickly as our competitors and in a cost-effective manner or to achieve the benefits anticipated from new technologies or systems;
the failure or significant disruption of our operations from various causes related to our critical information technologies and systems including cybersecurity threats to our data and customer/franchisee data as well as reputational or financial risks associated with a loss of any such data;
risks related to our international operations, including compliance with the Foreign Corrupt Practices Act and similar anti-corruption laws as well as risks relating to the master franchisor model that we deploy internationally;
risks associated with our substantial indebtedness and interest obligations and restrictions contained in our debt agreements, including risks relating to having to dedicate a significant portion of our cash flows from operations to service our debt;
risks relating to our ability to refinance our indebtedness or incur additional debt;
changes in corporate relocation practices resulting in fewer employee relocations, reduced relocation benefits or the loss of a significant Affinity client;
an increase in the claims rate of our title underwriter and an increase in mortgage rates could adversely impact the revenue of our title and settlement services segment;
our inability to securitize certain assets of our relocation business, which would require us to find an alternative source of liquidity that may not be available, or if available, may not be on favorable terms;
risks that could materially adversely impact our equity investment in PHH Home Loans LLC, our joint venture with PHH Corporation ("PHH");


2


any remaining resolutions or outcomes with respect to contingent liabilities of our former parent, Cendant Corporation ("Cendant"), under the Separation and Distribution Agreement and the Tax Sharing Agreement (each as defined in our Annual Report on Form 10-K for the year ended December 31, 2014), including any adverse impact on our future cash flows; and
new types of taxes or increases in state, local or federal taxes that could diminish profitability or liquidity.
Other factors not identified above, including those described under the headings "Forward-Looking Statements," "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2014 (the "2014 Form 10-K"), filed with the Securities and Exchange Commission ("SEC"), may also cause actual results to differ materially from those described in our forward-looking statements. Most of these factors are difficult to anticipate and are generally beyond our control. You should consider these factors in connection with considering any forward-looking statements that may be made by us and our businesses generally.
Except for our ongoing obligations to disclose material information under the federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events unless we are required to do so by law. For any forward-looking statement contained in our public filings or other public statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.


3


PART I - FINANCIAL INFORMATION
Item 1.    Financial Statements.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Realogy Holdings Corp.:
We have reviewed the accompanying condensed consolidated balance sheet of Realogy Holdings Corp. and its subsidiaries as of September 30, 2015, and the related condensed consolidated statements of operations and comprehensive income for the three and nine-month periods ended September 30, 2015 and September 30, 2014 and the condensed consolidated statements of cash flows for the nine-month periods ended September 30, 2015 and September 30, 2014. These interim financial statements are the responsibility of the Company's management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2014, and the related consolidated statements of operations, comprehensive income (loss), equity (deficit), and cash flows for the year then ended (not presented herein), and in our report dated February 26, 2015, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet information as of December 31, 2014, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.


/s/ PricewaterhouseCoopers LLP
Florham Park, New Jersey
November 5, 2015





4


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholder of Realogy Group LLC:
We have reviewed the accompanying condensed consolidated balance sheet of Realogy Group LLC and its subsidiaries as of September 30, 2015, and the related condensed consolidated statements of operations and comprehensive income for the three and nine-month periods ended September 30, 2015 and September 30, 2014 and the condensed consolidated statements of cash flows for the nine-month periods ended September 30, 2015 and September 30, 2014. These interim financial statements are the responsibility of the Company's management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2014, and the related consolidated statements of operations, comprehensive income (loss), equity (deficit), and cash flows for the year then ended (not presented herein), and in our report dated February 26, 2015, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet information as of December 31, 2014, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.


/s/ PricewaterhouseCoopers LLP
Florham Park, New Jersey
November 5, 2015



5


REALOGY HOLDINGS CORP. AND REALOGY GROUP LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Revenues
 
 
 
 
 
 
 
Gross commission income
$
1,251

 
$
1,162

 
$
3,310

 
$
3,070

Service revenue
265

 
231

 
664

 
607

Franchise fees
103

 
96

 
269

 
251

Other
49

 
42

 
138

 
122

Net revenues
1,668

 
1,531

 
4,381

 
4,050

Expenses
 
 
 
 
 
 
 
Commission and other agent-related costs
855

 
795

 
2,262

 
2,099

Operating
381

 
340

 
1,089

 
1,016

Marketing
56

 
52

 
171

 
155

General and administrative
85

 
79

 
255

 
214

Former parent legacy benefit, net
(14
)
 
(2
)
 
(15
)
 
(1
)
Restructuring costs, net

 
(1
)
 

 
(1
)
Depreciation and amortization
55

 
48

 
153

 
140

Interest expense, net
70

 
54

 
188

 
197

Loss on the early extinguishment of debt

 

 

 
27

Other (income)/expense, net
(2
)
 
(1
)
 
(3
)
 
(2
)
Total expenses
1,486

 
1,364

 
4,100

 
3,844

Income before income taxes, equity in earnings and noncontrolling interests
182

 
167

 
281

 
206

Income tax expense
74

 
71

 
116

 
88

Equity in earnings of unconsolidated entities
(4
)
 
(6
)
 
(13
)
 
(7
)
Net income
112

 
102

 
178

 
125

Less: Net income attributable to noncontrolling interests
(2
)
 
(2
)
 
(3
)
 
(3
)
Net income attributable to Realogy Holdings and Realogy Group
$
110

 
$
100

 
$
175

 
$
122

 
 
 
 
 
 
 
 
Earnings per share attributable to Realogy Holdings:
 
 
 
 
 
 
 
Basic earnings per share
$
0.75

 
$
0.68

 
$
1.19

 
$
0.84

Diluted earnings per share
$
0.74

 
$
0.68

 
$
1.18

 
$
0.83

Weighted average common and common equivalent shares of Realogy Holdings outstanding:
Basic
146.6

 
146.0

 
146.5

 
145.9

Diluted
148.1

 
147.0

 
148.0

 
147.0




See Notes to Condensed Consolidated Financial Statements.
6


REALOGY HOLDINGS CORP. AND REALOGY GROUP LLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
112

 
$
102

 
$
178

 
$
125

Currency translation adjustment
(3
)
 
(3
)
 
(3
)
 
(1
)
Defined benefit pension plan - amortization of actuarial loss to periodic pension cost
1

 

 
1

 

Other comprehensive loss, before tax
(2
)
 
(3
)
 
(2
)
 
(1
)
Income tax expense related to items of other comprehensive income amounts
1

 

 
1

 

Other comprehensive loss, net of tax
(3
)
 
(3
)
 
(3
)
 
(1
)
Comprehensive income
109

 
99

 
175

 
124

Less: comprehensive income attributable to noncontrolling interests
(2
)
 
(2
)
 
(3
)
 
(3
)
Comprehensive income attributable to Realogy Holdings and Realogy Group
$
107

 
$
97

 
$
172

 
$
121





See Notes to Condensed Consolidated Financial Statements.
7


REALOGY HOLDINGS CORP. AND REALOGY GROUP LLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
(Unaudited)
 
September 30,
2015
 
December 31,
2014
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
567

 
$
313

Trade receivables (net of allowance for doubtful accounts of $20 and $27)
171

 
116

Relocation receivables
351

 
297

Deferred income taxes
208

 
180

Other current assets
134

 
120

Total current assets
1,431

 
1,026

Property and equipment, net
240

 
233

Goodwill
3,603

 
3,477

Trademarks
745

 
736

Franchise agreements, net
1,445

 
1,495

Other intangibles, net
322

 
341

Other non-current assets
243

 
230

Total assets
$
8,029

 
$
7,538

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
147

 
$
128

Securitization obligations
335

 
269

Due to former parent
32

 
51

Current portion of long-term debt
519

 
19

Accrued expenses and other current liabilities
460

 
411

Total current liabilities
1,493

 
878

Long-term debt
3,378

 
3,891

Deferred income taxes
479

 
350

Other non-current liabilities
286

 
236

Total liabilities
5,636

 
5,355

Commitments and contingencies (Notes 7 and 9)


 


Equity:
 
 
 
Realogy Holdings preferred stock: $.01 par value; 50,000,000 shares authorized, none issued and outstanding at September 30, 2015 and December 31, 2014

 

Realogy Holdings common stock: $.01 par value; 400,000,000 shares authorized 146,723,561 shares outstanding at September 30, 2015 and 146,382,923 shares outstanding at December 31, 2014
1

 
1

Additional paid-in capital
5,715

 
5,677

Accumulated deficit
(3,289
)
 
(3,464
)
Accumulated other comprehensive loss
(38
)
 
(35
)
Total stockholders' equity
2,389

 
2,179

Noncontrolling interests
4

 
4

Total equity
2,393

 
2,183

Total liabilities and equity
$
8,029

 
$
7,538



See Notes to Condensed Consolidated Financial Statements.
8


REALOGY HOLDINGS CORP. AND REALOGY GROUP LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
Nine Months Ended
September 30,
 
2015
 
2014
Operating Activities
 
 
 
Net income
$
178

 
$
125

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
153

 
140

Deferred income taxes
100

 
78

Amortization of deferred financing costs and discount
13

 
13

Non-cash portion of the loss on the early extinguishment of debt

 
21

Equity in earnings of unconsolidated entities
(13
)
 
(7
)
Stock-based compensation
40

 
32

Mark-to-market adjustments on derivatives
26

 
17

Other adjustments to net income
(3
)
 
1

Net change in assets and liabilities, excluding the impact of acquisitions and dispositions:
 
 
 
Trade receivables
(56
)
 
(53
)
Relocation receivables
(54
)
 
(86
)
Other assets
(24
)
 
(1
)
Accounts payable, accrued expenses and other liabilities
52

 
(4
)
Due to former parent
(19
)
 
(3
)
Dividends received from unconsolidated entities
7

 
1

Taxes paid related to net share settlement for stock-based compensation
(5
)
 
(4
)
Other, net

 
1

Net cash provided by operating activities
395

 
271

Investing Activities
 
 
 
Property and equipment additions
(60
)
 
(49
)
Payments for acquisitions, net of cash acquired
(111
)
 
(203
)
Change in restricted cash
1

 

Other, net
(1
)
 
(1
)
Net cash used in investing activities
(171
)
 
(253
)
Financing Activities
 
 
 
Repayments of term loan facility
(14
)
 
(14
)
Repurchases of First and a Half Lien Notes

 
(397
)
Proceeds from issuance of Senior Notes

 
450

Net change in securitization obligations
67

 
29

Debt transaction costs
(1
)
 
(41
)
Proceeds from exercise of stock options
3

 
2

Other, net
(23
)
 
(14
)
Net cash provided by financing activities
32

 
15

Effect of changes in exchange rates on cash and cash equivalents
(2
)
 
(1
)
Net increase in cash and cash equivalents
254

 
32

Cash and cash equivalents, beginning of period
313

 
236

Cash and cash equivalents, end of period
$
567

 
$
268

Supplemental Disclosure of Cash Flow Information
 
 
 
Interest payments (including securitization interest of $4 for both periods presented)
$
165

 
$
197

Income tax payments, net
10

 
7



See Notes to Condensed Consolidated Financial Statements.
9


REALOGY HOLDINGS CORP. AND REALOGY GROUP LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise noted, all amounts are in millions)
(Unaudited)
1.
BASIS OF PRESENTATION
Realogy Holdings Corp. ("Realogy Holdings", "Realogy" or the "Company") is a holding company for its consolidated subsidiaries including Realogy Intermediate Holdings LLC ("Realogy Intermediate") and Realogy Group LLC ("Realogy Group") and its consolidated subsidiaries. Realogy through its subsidiaries is a global provider of residential real estate services. Neither Realogy Holdings, the indirect parent of Realogy Group, nor Realogy Intermediate, the direct parent company of Realogy Group, conducts any operations other than with respect to its respective direct or indirect ownership of Realogy Group. As a result, the consolidated financial positions, results of operations, comprehensive income and cash flows of Realogy Holdings, Realogy Intermediate and Realogy Group are the same.
The accompanying Condensed Consolidated Financial Statements include the financial statements of Realogy Holdings and Realogy Group. Realogy Holdings' only asset is its investment in the common stock of Realogy Intermediate, and Realogy Intermediate's only asset is its investment in Realogy Group. Realogy Holdings' only obligations are its guarantees of certain borrowings and certain franchise obligations of Realogy Group. All expenses incurred by Realogy Holdings and Realogy Intermediate are for the benefit of Realogy Group and have been reflected in Realogy Group's Condensed Consolidated Financial Statements.
The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America and with Article 10 of Regulation S-X. Interim results may not be indicative of full year performance because of seasonal and short-term variations. The Company has eliminated all material intercompany transactions and balances between entities consolidated in these financial statements. In presenting the Condensed Consolidated Financial Statements, management makes estimates and assumptions that affect the amounts reported and the related disclosures. Estimates, by their nature, are based on judgment and available information. Accordingly, actual results could differ materially from those estimates.
In management's opinion, the accompanying Condensed Consolidated Financial Statements reflect all normal and recurring adjustments necessary to present fairly Realogy Holdings and Realogy Group's financial position as of September 30, 2015 and the results of operations and comprehensive income for the three and nine months ended September 30, 2015 and 2014 and cash flows for the nine months ended September 30, 2015 and 2014. As the interim Condensed Consolidated Financial Statements are prepared using the same accounting principles and policies used to prepare the annual consolidated financial statements, they should be read in conjunction with the Consolidated Financial Statements for the year ended December 31, 2014 included in the Annual Report on Form 10-K for the year ended December 31, 2014.
The Condensed Consolidated Financial Statements as of September 30, 2015 and for the three and nine month periods ended September 30, 2015 and 2014 have been reviewed by PricewaterhouseCoopers LLP, an independent registered public accounting firm.  Their reports, dated November 5, 2015, are included on pages 4 and 5.  The reports of PricewaterhouseCoopers LLP state that they did not audit and they do not express an opinion on that unaudited financial information.  Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied.  PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 for their report on the unaudited financial information because that report is not a "report" or a "part" of the registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act.
Financial Instruments
The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value.


10


Level Input:
 
Input Definitions:
 
 
 
Level I
 
Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the
measurement date.
 
 
Level II
 
Inputs other than quoted prices included in Level I that are observable for the asset or liability through
corroboration with market data at the measurement date.
 
 
Level III
 
Unobservable inputs that reflect management’s best estimate of what market participants would use in
pricing the asset or liability at the measurement date.
The availability of observable inputs can vary from asset to asset and is affected by a wide variety of factors, including, for example, the type of asset, whether the asset is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level III. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy.  In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
The fair value of financial instruments is generally determined by reference to quoted market values. In cases where quoted market prices are not available, fair value is based on estimates using present value or other valuation techniques, as appropriate. The fair value of interest rate swaps is determined based upon a discounted cash flow approach.
The following table summarizes fair value measurements by level at September 30, 2015 for assets and liabilities measured at fair value on a recurring basis:
 
Level I
 
Level II
 
Level III
 
Total
Interest rate swaps (included in other non-current liabilities)
$

 
$
59

 
$

 
$
59

Deferred compensation plan assets
(included in other non-current assets)
2

 

 

 
2

The following table summarizes fair value measurements by level at December 31, 2014 for assets and liabilities measured at fair value on a recurring basis:
 
Level I
 
Level II
 
Level III
 
Total
Interest rate swaps (included in other non-current liabilities)
$

 
$
40

 
$

 
$
40

Deferred compensation plan assets
(included in other non-current assets)
2

 

 

 
2

The following table summarizes the carrying amount of the Company’s indebtedness compared to the estimated fair value, primarily determined by quoted market values, at:
 
September 30, 2015
 
December 31, 2014
Debt
Carrying
Amount
 
Estimated
Fair Value (a)
 
Carrying
Amount
 
Estimated
Fair Value (a)
Senior Secured Credit Facility:
 
 
 
 
 
 
 
Revolving Credit Facility
$

 
$

 
$

 
$

Term Loan B Facility
1,858

 
1,854

 
1,871

 
1,834

7.625% First Lien Notes
593

 
622

 
593

 
633

9.00% First and a Half Lien Notes
196

 
207

 
196

 
215

3.375% Senior Notes
500

 
498

 
500

 
500

4.50% Senior Notes
450

 
447

 
450

 
449

5.25% Senior Notes
300

 
305

 
300

 
291

Securitization obligations
335

 
335

 
269

 
269

_______________
(a)
The fair value of the Company's indebtedness is categorized as Level I.


11


Investment in PHH Home Loans
The Company owns 49.9% of PHH Home Loans, which was created for the purpose of originating and selling mortgage loans primarily sourced through the Company’s real estate brokerage and relocation businesses. PHH Corporation ("PHH") owns the remaining percentage. In connection with the joint venture, the Company recorded equity earnings related to its investment in PHH Home Loans of $3 million and $11 million for the three and nine months ended September 30, 2015, respectively, and equity earnings related to its investment in PHH Home Loans of $4 million and $5 million for the three and nine months ended September 30, 2014, respectively. The Company received $5 million in cash dividends from PHH Home Loans during the nine months ended September 30, 2015 compared to no cash dividends during the same period in 2014. The Company's investment in PHH Home Loans is $60 million at September 30, 2015 and $54 million at December 31, 2014.
Income Taxes
The Company's provision for income taxes in interim periods is computed by applying its estimated annual effective tax rate against the income before income taxes for the period.  In addition, non-recurring or discrete items are recorded during the period in which they occur.  The provision for income taxes was an expense of $74 million and $71 million for the three months ended September 30, 2015 and September 30, 2014, respectively, and $116 million and $88 million for the nine months ended September 30, 2015 and September 30, 2014, respectively.
Derivative Instruments
The Company uses foreign currency forward contracts largely to manage its exposure to changes in foreign currency exchange rates associated with its foreign currency denominated receivables and payables.  The Company primarily manages its foreign currency exposure to the Euro, Swiss Franc, Canadian Dollar and British Pound. The Company has elected not to utilize hedge accounting for these forward contracts; therefore, any change in fair value is recorded in the Condensed Consolidated Statements of Operations. However, the fluctuations in the value of these forward contracts generally offset the impact of changes in the value of the underlying risk that they are intended to economically hedge. As of September 30, 2015, the Company had outstanding foreign currency forward contracts with a fair value of less than $1 million and a notional value of $31 million. As of December 31, 2014, the Company had outstanding foreign currency forward contracts with a fair value of less than $1 million and a notional value of $27 million.
The Company also enters into interest rate swaps to manage its exposure to changes in interest rates associated with its variable rate borrowings. The Company has five interest rate swaps with an aggregate notional value of $1,025 million to offset the variability in cash flows resulting from the term loan facility. The first swap, with a notional value of $225 million, commenced in July 2012 and expires in February 2018 and the second swap, with a notional value of $200 million, commenced in January 2013 and expires in February 2018. In the third quarter of 2013, the Company entered into three additional interest rate swaps, each with a notional value of $200 million, which commenced in August 2015 and expire in August 2020. The Company has not elected to utilize hedge accounting for these interest rate swaps; therefore, any change in fair value is recorded in the Condensed Consolidated Statements of Operations.
The fair value of derivative instruments was as follows:
Liability Derivatives
 
Fair Value
Not Designated as Hedging Instruments
 
Balance Sheet Location
 
September 30, 2015
 
December 31, 2014
Interest rate swap contracts
 
Other non-current liabilities
 
$
59

 
$
40

The effect of derivative instruments on earnings was as follows:
Derivative Instruments Not Designated as Hedging Instruments
 
Location of (Gain) or Loss Recognized for Derivative Instruments
 
(Gain) or Loss Recognized on Derivatives
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Interest rate swap contracts
 
Interest expense
 
$
16

 
$
(3
)
 
$
27

 
$
19

Foreign exchange contracts
 
Operating expense
 

 
(2
)
 
(1
)
 
(2
)


12


Restricted Cash
Restricted cash primarily relates to amounts specifically designated as collateral for the repayment of outstanding borrowings under the Company’s securitization facilities. Such amounts approximated $9 million and $10 million at September 30, 2015 and December 31, 2014, respectively, and are included within other current assets on the Company’s Condensed Consolidated Balance Sheets.
Supplemental Cash Flow Information
Significant non-cash transactions during the nine months ended September 30, 2015 and September 30, 2014 included $13 million and $6 million, respectively, in capital lease additions, which resulted in non-cash additions to property and equipment, net and other non-current liabilities.
Defined Benefit Pension Plan
The net periodic pension cost for the three months ended September 30, 2015 was less than $1 million and was comprised of interest cost and amortization of actuarial loss of $2 million mostly offset by a benefit of $2 million for the expected return on assets. The net periodic pension benefit for the three months ended September 30, 2014 was less than $1 million and was comprised of a benefit of $2 million for the expected return on assets mostly offset by interest cost and amortization of actuarial loss of $2 million.
The net periodic pension cost for the nine months ended September 30, 2015 was less than $1 million and was comprised of interest cost and amortization of actuarial loss of $6 million mostly offset by a benefit of $6 million for the expected return on assets. The net periodic pension benefit for the nine months ended September 30, 2014 was less than $1 million and was comprised of a benefit of $6 million for the expected return on assets mostly offset by interest cost and amortization of actuarial loss of $6 million.
Recently Issued Accounting Pronouncements
The Company considers the applicability and impact of all Accounting Standards Updates ("ASU"). ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial position or results of operations.
In April 2015, the Financial Accounting Standards Board (the “FASB”) issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Currently, debt issuance costs are recognized as deferred charges and recorded as other assets. The amendments in this ASU will be effective for the Company’s fiscal year beginning January 1, 2016 and subsequent interim periods, with earlier adoption permitted. Upon adoption, the Company must apply the new guidance retrospectively to all prior periods presented in the financial statements. The Company had debt issuance costs of $45 million and $55 million as of September 30, 2015 and December 31, 2014, respectively, included in other assets. The Company plans to early adopt this ASU for the year ended December 31, 2015 and will apply its provisions retrospectively. Adoption of the ASU will result in the reclassification of debt issuance costs from deferred financing costs in other assets to a reduction in the carrying amount of the related debt liability within the Company’s consolidated balance sheets. The debt issuance costs related to our revolving credit facilities, including securitization obligations, of $4 million and $5 million as of September 30, 2015 and December 31, 2014, respectively, will remain classified as a deferred asset within other assets as is permitted by the ASU.
In May 2014, the FASB and IASB issued a converged standard on revenue recognition that will have an effect on most companies to some extent. The objective of the revenue standard is to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability within industries, across industries, and across capital markets. The revenue standard contains principles that an entity will apply to determine the measurement of revenue and the timing of revenue recognition. The new standard, as initially released, would be effective for fiscal years, and interim periods within those years, beginning after December 15, 2016 and early adoption would not be permitted. In July 2015, the FASB deferred the effective date of the new revenue standard by one year resulting in the new revenue standard being effective for fiscal years and interim periods beginning after December 15, 2017 and allowing entities to adopt one year earlier if they so elect. The Company is currently evaluating the impact of the standard on its consolidated financial statements.


13


2.
ACQUISITIONS
2015 Acquisitions
During the nine months ended September 30, 2015, the Company acquired seven real estate brokerage related operations through its wholly owned subsidiary, NRT, including a large franchisee of the Real Estate Franchise segment, for aggregate cash consideration of $80 million and established $10 million of liabilities related to contingent consideration and other acquisition related liabilities. These acquisitions resulted in goodwill of $79 million, pendings and listings of $7 million, other intangibles of $1 million, other assets of $6 million and other liabilities of $3 million.
During the nine months ended September 30, 2015, the Company acquired two title and settlement operations through its wholly owned subsidiary, TRG, for cash consideration of $33 million and established $37 million of liabilities related to contingent consideration. These acquisitions resulted in goodwill of $47 million, trademarks of $9 million, pendings and listings of $7 million, other intangibles of $5 million, title plant shares of $1 million and other assets of $1 million.
None of the 2015 acquisitions were significant to the Company’s results of operations, financial position or cash flows individually or in the aggregate.
2014 Acquisitions
In August 2014, the Company acquired all of the outstanding shares of common stock of ZipRealty, Inc., (“ZipRealty”) for a cash purchase price of $167 million. The Company acquired ZipRealty's residential brokerage operations with 23 offices across the United States and its integrated real estate technology platform. The estimated fair values of the assets acquired and liabilities assumed resulted in goodwill of $92 million, software and fixed assets of $18 million, deferred tax assets of $46 million, customer relationships intangibles of $1 million, pendings and listings of $3 million, other intangibles of $7 million, other assets of $6 million and other liabilities of $6 million.
During the year ended December 31, 2014, in addition to the ZipRealty acquisition discussed above, NRT acquired sixteen real estate brokerage and property management operations, for cash consideration of $44 million and established $19 million of liabilities related to contingent consideration. These acquisitions resulted in goodwill of $45 million, trademarks of $4 million, pendings and listings of $4 million, other intangibles of $8 million, other assets of $3 million and other liabilities of $1 million.
During the year ended December 31, 2014, the Company acquired three title and settlement operations through its wholly owned subsidiary, TRG, for cash consideration of $6 million. These acquisitions resulted in goodwill of $5 million and pendings and listings of $1 million.
None of the 2014 acquisitions were significant to the Company’s results of operations, financial position or cash flows individually or in the aggregate.
3.
INTANGIBLE ASSETS
Goodwill by segment and changes in the carrying amount are as follows:
 
Real Estate
Franchise
Services
 
Company
Owned
Brokerage
Services
 
Relocation
Services
 
Title and
Settlement
Services
 
Total
Company
Gross goodwill as of December 31, 2014
$
3,315

 
$
905

 
$
641

 
$
402

 
$
5,263

Accumulated impairment losses
(1,023
)
 
(158
)
 
(281
)
 
(324
)
 
(1,786
)
Balance at December 31, 2014
2,292

 
747

 
360

 
78

 
3,477

Goodwill acquired

 
79

 

 
47

 
126

Balance at September 30, 2015
$
2,292

 
$
826

 
$
360

 
$
125

 
$
3,603



14


Intangible assets are as follows:
 
As of September 30, 2015
 
As of December 31, 2014
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Amortizable—Franchise agreements (a)
$
2,019

 
$
574

 
$
1,445

 
$
2,019

 
$
524

 
$
1,495

Unamortizable—Trademarks (b)
$
745

 
 
 
$
745

 
$
736

 
 
 
$
736

Other Intangibles
 
 
 
 
 
 
 
 
 
 
 
Amortizable—License agreements (c)
$
45

 
$
8

 
$
37

 
$
45

 
$
7

 
$
38

Amortizable—Customer relationships (d)
530

 
277

 
253

 
530

 
256

 
274

Unamortizable—Title plant shares (e)
11

 
 
 
11

 
10

 
 
 
10

Amortizable—Pendings and listings (f)
8

 
8

 

 
2

 
2

 

Amortizable—Other (g)
31

 
10

 
21

 
25

 
6

 
19

Total Other Intangibles
$
625

 
$
303

 
$
322

 
$
612

 
$
271

 
$
341

_______________
(a)    Generally amortized over a period of 30 years.
(b)
Primarily relates to the Century 21, Coldwell Banker, ERA, The Corcoran Group, Coldwell Banker Commercial and Cartus tradenames, which are expected to generate future cash flows for an indefinite period of time.
(c)
Relates to the Sotheby’s International Realty and Better Homes and Gardens Real Estate agreements which are being amortized over 50 years (the contractual term of the license agreements).
(d)
Relates to the customer relationships at the Relocation Services segment, the Title and Settlement Services segment and the Real Estate Franchise Services segment. These relationships are being amortized over a period of 2 to 20 years.
(e)
Primarily relates to the Texas American Title Company title plant shares. Ownership in a title plant is required to transact title insurance in certain states. The Company expects to generate future cash flows for an indefinite period of time.
(f)
Generally amortized over a period of 5 months.
(g)
Consists of covenants not to compete which are amortized over their contract lives and other intangibles which are generally amortized over periods ranging from 5 to 10 years.
Intangible asset amortization expense is as follows:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Franchise agreements
$
17

 
$
17

 
$
50

 
$
50

License agreements

 

 
1

 
1

Customer relationships
7

 
9

 
21

 
28

Pendings and listings
8

 
3

 
14

 
6

Other
1

 

 
4

 
1

Total
$
33

 
$
29

 
$
90

 
$
86

Based on the Company’s amortizable intangible assets as of September 30, 2015, the Company expects related amortization expense for the remainder of 2015, the four succeeding years and thereafter to be approximately $26 million, $99 million, $95 million, $94 million, $93 million and $1,349 million, respectively.


15


4.
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of:
 
September 30, 2015
 
December 31, 2014
Accrued payroll and related employee costs
$
125

 
$
120

Accrued volume incentives
32

 
32

Accrued commissions
41

 
21

Deferred income
66

 
73

Accrued interest
39

 
44

Contingent consideration for acquisitions
26

 
10

Other
131

 
111

 
$
460

 
$
411

5.    SHORT AND LONG-TERM DEBT
Total indebtedness is as follows:
 
September 30, 2015
 
December 31, 2014
Senior Secured Credit Facility:
 
 
 
Revolving Credit Facility
$

 
$

Term Loan B Facility
1,858

 
1,871

7.625% First Lien Notes
593

 
593

9.00% First and a Half Lien Notes
196

 
196

3.375% Senior Notes
500

 
500

4.50% Senior Notes
450

 
450

5.25% Senior Notes
300

 
300

Total Short & Long-Term Debt
$
3,897

 
$
3,910

Securitization Obligations:
 
 
 
Apple Ridge Funding LLC
$
325

 
$
255

Cartus Financing Limited
10

 
14

Total Securitization Obligations
$
335

 
$
269

Indebtedness Table
As of September 30, 2015, the total capacity, outstanding borrowings and available capacity under the Company’s borrowing arrangements were as follows:
 
Interest
Rate
 
Expiration
Date
 
Total
Capacity
 
Outstanding
Borrowings
 
Available
Capacity
Senior Secured Credit Facility:
 
 
 
 
 
 
 
 
 
Revolving Credit Facility (1)
(2)
 
March 2018
 
$
475

 
$

 
$
475

Term Loan B Facility
(3)
 
March 2020
 
1,872

 
1,858

 

First Lien Notes (1)
7.625%
 
January 2020
 
593

 
593

 

First and a Half Lien Notes
9.00%
 
January 2020
 
196

 
196

 

Senior Notes
3.375%
 
May 2016
 
500

 
500

 

Senior Notes
4.50%
 
April 2019
 
450

 
450

 

Senior Notes
5.25%
 
December 2021
 
300

 
300

 

Securitization obligations: (4)
 
 
 
 
 
 
 
 
 
        Apple Ridge Funding LLC (5)
 
 
June 2016
 
375

 
325

 
50

        Cartus Financing Limited (6)
 
 
August 2016
 
38

 
10

 
28

Total (7)
$
4,799

 
$
4,232

 
$
553

_______________
 
 
(1)
See Note 11, "Subsequent Events" for a description of the October 2015 amendment of the Senior Secured Revolving Credit Facility and entry into a new Senior Secured Term Loan A Facility. The net proceeds of the Term Loan A Facility together with revolver borrowings were used to discharge the First Lien Notes in October 2015. As of November 3, 2015, after giving effect to


16


the amendment of the facility, the Company had no outstanding borrowings on the Revolving Credit Facility, leaving $815 million of available capacity.
(2)
Interest rates with respect to revolving loans under the Senior Secured Credit Facility at September 30, 2015 were based on, at Realogy Group’s option, (a) adjusted LIBOR plus 2.75% or (b) JPMorgan Chase Bank, N.A.'s prime rate ("ABR") plus 1.75%.
(3)
Consists of a $1,872 million Term Loan B, less a discount of $14 million. There is 1% per annum amortization of principal. The interest rate with respect to the Term Loan B Facility is based on, at Realogy Group’s option, (a) adjusted LIBOR plus 3.00% (with a LIBOR floor of 0.75%) or (b) JPMorgan Chase Bank, N.A.’s prime rate ("ABR") plus 2.00% (with an ABR floor of 1.75%).
(4)
Available capacity is subject to maintaining sufficient relocation related assets to collateralize these securitization obligations.
(5)
In June 2015, Realogy Group amended the existing Apple Ridge Funding LLC securitization program utilized by Cartus. The capacity under the facility was temporarily increased from $325 million to $375 million from June 2015 until October 2015, at which time the capacity was reduced to $325 million.
(6)
Consists of a £20 million revolving loan facility and a £5 million working capital facility.
(7)
Not included in this table, the Company had $135 million of outstanding letters of credit at September 30, 2015, of which $53 million was under the synthetic letter of credit facility with a rate of 4.25% and $82 million was under the unsecured letter of credit facility with a rate of 2.98%.
Maturities Table
As of September 30, 2015, the combined aggregate amount of maturities for long-term borrowings, excluding securitizations, for the remainder of 2015 and each of the next four years is as follows:
Year
 
Amount
Remaining 2015
 
$
5

2016
 
519

2017
 
19

2018
 
19

2019
 
469

Senior Secured Credit Facility
The senior secured credit agreement, as amended and in effect as of September 30, 2015 (the "Amended and Restated Credit Agreement") provides for:
(a) 
a Term Loan B Facility initially issued in the aggregate principal amount of $1,905 million with a maturity date of March 5, 2020. The Term Loan B Facility has quarterly amortization payments totaling 1% per annum of the $1,905 million of Term Loan B principal. The interest rate with respect to the Term Loan B Facility is based on, at Realogy Group's option, adjusted LIBOR plus 3.00% (with a LIBOR floor of 0.75%) or ABR plus 2.00% (with an ABR floor of 1.75%); and
(b)
a $475 million Revolving Credit Facility with a maturity date of March 5, 2018, which includes (i) a $250 million letter of credit subfacility and (ii) a swingline loan subfacility. The interest rate with respect to revolving loans under the Revolving Credit Facility is based on, at Realogy Group's option, adjusted LIBOR plus 2.75% or ABR plus 1.75%.
The Amended and Restated Credit Agreement provides for a synthetic letter of credit facility which matures on October 10, 2016. The synthetic letter of credit facility may be utilized for general corporate purposes, including the support of Realogy Group’s obligations with respect to Cendant contingent and other liabilities assumed under the Separation and Distribution Agreement. The capacity of the synthetic letter of credit facility is reduced by 1% per annum. As of September 30, 2015, the capacity under the synthetic letter of credit facility was $54 million and the facility was being utilized for a $53 million letter of credit with Cendant for potential contingent obligations.
The Amended and Restated Credit Agreement permits the Company to obtain up to $500 million of additional credit facilities from lenders reasonably satisfactory to the administrative agent and us, without the consent of the existing lenders under the new senior secured credit facility, plus an unlimited amount if Realogy Group's senior secured leverage ratio is less than 3.50 to 1.00 on a pro forma basis. Subject to certain restrictions, the Amended and Restated Credit Agreement also permits us to issue senior secured or unsecured notes in lieu of any incremental facility.


17


The obligations under the Amended and Restated Credit Agreement are secured to the extent legally permissible by substantially all of the assets of Realogy Group, Realogy Intermediate and all of their domestic subsidiaries, other than certain excluded subsidiaries.
Realogy Group’s Amended and Restated Credit Agreement contains financial, affirmative and negative covenants and requires Realogy Group to maintain a senior secured leverage ratio, not to exceed 4.75 to 1.00, and pursuant to the October 2015 amendment discussed in Note 11, "Subsequent Events," the leverage ratio is tested quarterly, commencing with the period ended September 30, 2015, regardless of the amount of borrowings outstanding, and letters of credit issued, under the revolver at the testing date. In this report, the Company refers to the term "Adjusted EBITDA" to mean EBITDA as so defined for purposes of determining compliance with the senior secured leverage covenant. The senior secured leverage ratio measured at any applicable quarter end is Realogy Group's total senior secured net debt divided by the trailing twelve month adjusted EBITDA. Total senior secured net debt does not include the First and a Half Lien Notes, other indebtedness secured by a lien that is pari passu or junior in priority to the First and a Half Lien Notes, unsecured indebtedness, including the Unsecured Notes, as well as the securitization obligations. At September 30, 2015, Realogy Group’s senior secured leverage ratio was 2.36 to 1.00.
See Note 11, "Subsequent Events" for a description of the October 2015 amendment to the Amended and Restated Credit Agreement, pursuant to which the borrowing capacity under the Revolving Credit Facility was increased to $815 million. See Note 11, "Subsequent Events" for a description of the October 2015 Term Loan A Agreement, pursuant to which Realogy Group borrowed $435 million under a new Term Loan A Facility.
First Lien Notes
The First Lien Notes are senior secured obligations of Realogy Group and bore interest at a rate of 7.625% per annum. On October 23, 2015, Realogy Group issued a notice of redemption for all $593 million outstanding aggregate principal amount of the First Lien Notes and discharged its obligations under the related indenture. In connection with the redemption of the First Lien Notes and related discharge of the indenture, Realogy Group deposited a total of $638 million with the trustee, which included the applicable redemption premium and accrued and unpaid interest on the First Lien Notes.  The payment of the redemption price was funded with the net proceeds from the new Term Loan A Facility described above and revolver borrowings.
First and a Half Lien Notes
The First and a Half Lien Notes are senior secured obligations of Realogy Group and mature in January 2020. The First and a Half Lien Notes bear interest at a rate of 9.00% per annum and interest is payable semiannually on January 15 and July 15 of each year. The First and a Half Lien Notes are guaranteed on a senior secured basis by Realogy Intermediate and each domestic subsidiary of Realogy Group that is a guarantor under the Senior Secured Credit Facility and Realogy Group's outstanding debt securities. The First and a Half Lien Notes are also guaranteed by Realogy Holdings, on an unsecured senior subordinated basis. The First and a Half Lien Notes are secured by the same collateral as the Company’s existing secured obligations under its Senior Secured Credit Facility and the new Term Loan A Facility. The priority of the collateral liens securing the First and a Half Lien Notes is junior to the collateral liens securing the Company’s first lien obligations under its Senior Secured Credit Facility and Term Loan A Facility.
See Note 11, "Subsequent Events" for a discussion of the Company's issuance of a notice of redemption to use cash on hand and revolver borrowings to repay the First and a Half Lien Notes on November 30, 2015.
Unsecured Notes
The 3.375% Senior Notes, 4.50% Senior Notes and 5.25% Senior Notes (collectively the "Unsecured Notes") are unsecured senior obligations of Realogy Group that mature on May 1, 2016, April 15, 2019 and December 1, 2021, respectively. Interest on the Unsecured Notes is payable each year semiannually on May 1 and November 1 for the 3.375% Senior Notes, April 15 and October 15 for the 4.50% Senior Notes and June 1 and December 1 for the 5.25% Senior Notes. The Unsecured Notes are guaranteed on an unsecured senior basis by each domestic subsidiary of Realogy Group that is a guarantor under the Senior Secured Credit Facility and Realogy Group's outstanding debt securities. The Unsecured Notes are guaranteed by Realogy Holdings on an unsecured senior subordinated basis.
Other Debt Facilities
The Company has an Unsecured Letter of Credit Facility to provide for the issuance of letters of credit required for general corporate purposes by the Company. In August 2015, the Company increased the capacity of the facility by $7


18


million from $81 million as of December 31, 2014 to $88 million. $27 million of capacity of the unsecured letter of credit facility expires in June 2017, $54 million of capacity expires in August 2017 and the remaining $7 million of capacity expires in September 2018. The fixed pricing to the Company is based on a spread above the credit default swap rate for senior unsecured debt obligations of the Company over the applicable letter of credit period. Realogy Group's obligations under the Unsecured Letter of Credit Facility are guaranteed on an unsecured senior basis by each domestic subsidiary of Realogy Group that is a guarantor under the Senior Secured Credit Facility and Realogy Group's outstanding debt securities. As of September 30, 2015, $82 million of the Facility is being utilized.
Securitization Obligations
Realogy Group has secured obligations through Apple Ridge Funding LLC under a securitization program. In June 2015, Realogy Group extended the program until June 2016 and temporarily increased the capacity under the facility from $325 million to $375 million from June 2015 until October 2015, at which time the capacity was reduced to $325 million. At September 30, 2015, Realogy Group has $325 million of outstanding borrowings under the facility.
Realogy Group, through a special purpose entity known as Cartus Financing Limited, has agreements providing for a £20 million revolving loan facility and a £5 million working capital facility, both of which expire in August 2016. There are $10 million of outstanding borrowings on the facilities at September 30, 2015. These Cartus Financing Limited facilities are secured by the relocation assets of a U.K. government contract in this special purpose entity and are therefore classified as permitted securitization financings as defined in Realogy Group’s Senior Secured Credit Facility and the indentures governing the Unsecured Notes and the First and a Half Lien Notes.
The Apple Ridge entities and the Cartus Financing Limited entity are consolidated special purpose entities that are utilized to securitize relocation receivables and related assets. These assets are generated from advancing funds on behalf of clients of Realogy Group’s relocation business in order to facilitate the relocation of their employees. Assets of these special purpose entities are not available to pay Realogy Group’s general obligations. Under the Apple Ridge program, provided no termination or amortization event has occurred, any new receivables generated under the designated relocation management agreements are sold into the securitization program and as new eligible relocation management agreements are entered into, the new agreements are designated to the program. The Apple Ridge program has restrictive covenants and trigger events, including performance triggers linked to the age and quality of the underlying assets, foreign obligor limits, multicurrency limits, financial reporting requirements, restrictions on mergers and change of control, any uncured breach of Realogy Group’s senior secured leverage ratio under Realogy Group’s Senior Secured Credit Facility, and cross-defaults to Realogy Group’s material indebtedness. The occurrence of a trigger event under the Apple Ridge securitization facility could restrict our ability to access new or existing funding under this facility or result in termination of the facility, either of which would adversely affect the operation of our relocation business.
Certain of the funds that Realogy Group receives from relocation receivables and related assets must be utilized to repay securitization obligations. These obligations were collateralized by $338 million and $286 million of underlying relocation receivables and other related relocation assets at September 30, 2015 and December 31, 2014, respectively. Substantially all relocation related assets are realized in less than twelve months from the transaction date. Accordingly, all of Realogy Group’s securitization obligations are classified as current in the accompanying Condensed Consolidated Balance Sheets.
Interest incurred in connection with borrowings under these facilities amounted to $1 million and $4 million for the three and nine months ended September 30, 2015, respectively and $1 million and $4 million for the three and nine months ended September 30, 2014, respectively. This interest is recorded within net revenues in the accompanying Condensed Consolidated Statements of Operations as related borrowings are utilized to fund Realogy Group's relocation business where interest is generally earned on such assets. These securitization obligations represent floating rate debt for which the average weighted interest rate was 2.0% and 2.4% for the nine months ended September 30, 2015 and 2014, respectively.
Loss on the Early Extinguishment of Debt and Write-Off of Deferred Financing Costs
As a result of refinancing activity and repurchases of debt during the first half of 2014, the Company recorded a loss on the early extinguishment of debt of $27 million and wrote off deferred financing costs of $3 million to interest expense during the nine months ended September 30, 2014.


19


6.
STOCK-BASED COMPENSATION
The Company has stock-based compensation plans available under which incentive equity awards such as non-qualified stock options, rights to purchase shares of common stock, restricted stock, restricted stock units and performance share units may be issued to employees, consultants or directors of Realogy.
Consistent with the 2014 long-term incentive equity awards, the 2015 awards include a mix of performance share unit awards ("PSUs"), restricted stock units (performance restricted stock units for the CEO and direct reports) and options.
The 2015 PSUs are incentives that reward grantees based upon the Company's financial performance over a three-year performance period ending December 31, 2017. There are two PSU awards: one is based upon the total stockholder return of Realogy's common stock relative to the total stockholder return of the SPDR S&P Homebuilders Index ("XHB") (the "RTSR award"), and the other is based upon the achievement of cumulative free cash flow goals. The number of shares that may be issued under the PSUs is variable and based upon the extent to which the performance goals are achieved over the performance period (with a range of payout from 0% to 175% of target for the RTSR award and 0% to 200% of target for the achievement of cumulative free cash flow award). The shares earned will be distributed in early 2018.
The restricted stock units vest over three years, with 33.33% vesting on each anniversary of the grant date. Time-vesting of performance restricted stock units for the CEO and direct reports is conditioned upon achievement of a minimum EBITDA performance goal for 2015.
The stock options have a maximum term of ten years and vest over four years, with 25% vesting on each anniversary date of the grant date. The options have an exercise price equal to the closing sale price of the Company's common stock on the date of grant.
The total number of shares authorized for issuance under the plans is 9.6 million shares. As of September 30, 2015, the total number of shares available for future grants under the plans was 1.4 million shares.
The fair value of restricted stock, restricted stock units and performance share units without a market condition is equal to the closing sale price of the Company's common stock on the date of grant. The fair value of the RTSR PSU award was estimated on the date of grant using the Monte Carlo Simulation method utilizing the following assumptions. Expected volatility was based on historical volatilities of the Company and select comparable companies.
 
2015 RTSR PSU
Weighted average grant date fair value
$
41.08

Weighted average expected volatility
25.1
%
Weighted average volatility of XHB
21.1
%
Weighted average correlation coefficient
0.57

Weighted average risk-free interest rate
1.0
%
Weighted average dividend yield

A summary of restricted stock, restricted stock unit and performance share unit activities for the nine months ended September 30, 2015 is presented below (number of shares in millions):
 
Restricted
Stock
Weighted
Average
Grant Date
Fair Value
 
Restricted
Stock Units
Weighted
Average
Grant Date
Fair Value
 
Performance Share Units (b)
Weighted
Average
Grant Date
Fair Value
Unvested at January 1, 2015
0.09

$
27.14

 
0.74

$
45.83

 
0.37

$
46.63

Granted


 
0.62

46.52

 
0.43

44.69

Vested (a)


 
(0.30
)
45.83

 


Forfeited


 
(0.02
)
46.24

 


Unvested at September 30, 2015
0.09

$
27.14

 
1.04

$
46.21

 
0.80

$
45.59

______________
(a)
The total fair value of restricted stock units which vested during the nine months ended September 30, 2015 was $14 million.
(b)
The PSU amounts in the table are shown at the target amount of the award.


20


The fair value of the options was estimated on the date of grant using the Black-Scholes option-pricing model utilizing the following assumptions. Expected volatility was based on historical volatilities of the Company and select comparable companies. The expected term of the options granted represents the period of time that options were expected to be outstanding and is based on the "simplified method" in accordance with accounting guidance. The Company utilizes the simplified method to determine the expected life of options as the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the time of the grant, which corresponds to the expected term of the options.
 
2015 Options
Weighted average grant date fair value
$
17.66

Weighted average expected volatility
36.1
%
Weighted average expected term (years)
6.25

Weighted average risk-free interest rate
1.6
%
Weighted average dividend yield

A summary of stock option unit activity for the nine months ended September 30, 2015 is presented below (number of shares in millions):
 
Options
 
Weighted
Average
Exercise
Price
Outstanding at January 1, 2015
3.22

 
$
30.02

Granted
0.18

 
46.45

Exercised (a) (b)
(0.16
)
 
21.31

Forfeited/Expired
(0.03
)
 
34.33

Outstanding at September 30, 2015 (c)
3.21

 
$
31.31

______________
(a)
The intrinsic value of options exercised during the nine months ended September 30, 2015 was $4 million.
(b)
Cash received from options exercised during the nine months ended September 30, 2015 was $3 million.
(c)
Options outstanding at September 30, 2015 have an intrinsic value of $34 million and have a weighted average remaining contractual life of 6.9 years.
Stock-Based Compensation Expense
As of September 30, 2015, based on current performance achievement expectations, there was $53 million of unrecognized compensation cost related to incentive equity awards under the plans which will be recorded in future periods as compensation expense over a remaining weighted average period of 1.2 years. The Company recorded stock-based compensation expense related to the incentive equity awards of $14 million and $40 million for the three and nine months ended September 30, 2015, respectively, and $11 million and $32 million for the three and nine months ended September 30, 2014, respectively.
7.
TRANSACTIONS WITH FORMER PARENT AND SUBSIDIARIES
Transfer of Cendant Corporate Liabilities and Issuance of Guarantees to Cendant and Affiliates
Realogy Group (then Realogy Corporation) separated from Cendant on July 31, 2006 (the "Separation"), pursuant to a plan by Cendant (now known as Avis Budget Group, Inc.) to separate into four independent companies—one for each of Cendant's business units—real estate services (Realogy), travel distribution services ("Travelport"), hospitality services, including timeshare resorts ("Wyndham Worldwide"), and vehicle rental ("Avis Budget Group"). Realogy Group has certain guarantee commitments with Cendant (pursuant to the assumption of certain liabilities and the obligation to indemnify Cendant, Wyndham Worldwide and Travelport for such liabilities). These guarantee arrangements primarily relate to certain contingent litigation liabilities, contingent tax liabilities, and other corporate liabilities, of which Realogy Group assumed and is generally responsible for 62.5%. Upon separation from Cendant, the liabilities assumed by Realogy Group were comprised of certain Cendant corporate liabilities which were recorded on the historical books of Cendant as well as additional liabilities which were established for guarantees issued at the date of Separation related to certain unresolved contingent matters that could arise during the guarantee period. Regarding the guarantees, if any of the companies responsible for all or a portion of such liabilities were to default in its payment of costs or expenses related to any such


21


liability, Realogy Group would be responsible for a portion of the defaulting party or parties’ obligation. To the extent such recorded liabilities are in excess or are not adequate to cover the ultimate payment amounts, such excess or deficiency will be reflected in the results of operations in future periods.
The due to former parent balance was $32 million and $51 million at September 30, 2015 and December 31, 2014, respectively. The due to former parent balance was comprised of the Company’s portion of the following: (i) Cendant’s remaining state and foreign contingent tax liabilities, (ii) accrued interest on contingent tax liabilities, (iii) potential liabilities related to Cendant’s terminated or divested businesses, and (iv) potential liabilities related to the residual portion of accruals for Cendant operations.
8.     EARNINGS PER SHARE
Earnings per share attributable to Realogy Holdings
Basic earnings per share is computed based on net income attributable to Realogy Holdings stockholders divided by the basic weighted-average shares outstanding during the period. Dilutive earnings per share is computed consistently with the basic computation while giving effect to all dilutive potential common shares and common share equivalents that were outstanding during the period. Realogy Holdings uses the treasury stock method to reflect the potential dilutive effect of unvested stock awards and unexercised options. The following table sets forth the computation of basic and diluted earnings per share:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in millions, except per share data)
2015
 
2014
 
2015
 
2014
Net income attributable to Realogy Holdings shareholders
$
110

 
$
100

 
$
175

 
$
122

Basic weighted average shares
146.6

 
146.0

 
146.5

 
145.9

Stock options, restricted stock, restricted stock units and performance share units (a)
1.5

 
1.0

 
1.5

 
1.1

Weighted average diluted shares
148.1

 
147.0

 
148.0

 
147.0

Earnings Per Share:
 
 
 
 
 
 
 
Basic
$
0.75

 
$
0.68

 
$
1.19

 
$
0.84

Diluted
$
0.74

 
$
0.68

 
$
1.18

 
$
0.83

_______________
 
 
(a)
The three and nine months ended September 30, 2015, excludes 3.6 million and 3.7 million shares of common stock issuable for incentive equity awards, which includes performance share units based on the achievement of target amounts, respectively, that are anti-dilutive to the diluted earnings per share computation. The three and nine months ended September 30, 2014, excludes 3.7 million and 3.6 million shares of common stock issuable for incentive equity awards, which includes performance share units based on the achievement of target amounts, respectively, that are anti-dilutive to the diluted earnings per share computation.
9.
COMMITMENTS AND CONTINGENCIES
Litigation
The Company is involved in claims, legal proceedings, alternative dispute resolution and governmental inquiries related to alleged contract disputes, business practices, intellectual property and other commercial, employment, regulatory and tax matters. Examples of such matters include but are not limited to allegations:
that the Company is vicariously liable for the acts of franchisees under theories of actual or apparent agency;
by former franchisees that franchise agreements were breached including improper terminations;
that residential real estate sales associates engaged by NRT—under certain state or federal laws—are potentially employees instead of independent contractors, and they or regulators therefore may bring claims against NRT for breach of contract, wage and hour classification claims, wrongful discharge and unemployment and workers' compensation and obtain benefits, back wages, overtime, indemnification, penalties related to classification practices and expense reimbursement available to employees;
concerning claims for alleged RESPA or state real estate law violations including but not limited to claims challenging the validity of sales associates indemnification, and administrative fees;


22


concerning claims generally against the company owned brokerage operations for negligence, misrepresentation or breach of fiduciary duty in connection with the performance of real estate brokerage or other professional services; and
concerning claims generally against the title company contending that, as the escrow company, the company knew or should have known that a transaction was fraudulent or concerning other title defects or settlement errors.
Real Estate Business Litigation
Bararsani v. Coldwell Banker Residential Brokerage Company. On November 15, 2012, plaintiff Ali Bararsani filed a putative class action complaint in Los Angeles Superior Court, California, against Coldwell Banker Residential Brokerage Company ("CBRBC") alleging that CBRBC had misclassified current and former affiliated sales associates as independent contractors when they were actually employees.  The Company believes that CBRBC has properly classified the sales associates as independent contractors, would have significant defenses to the claims asserted in this action and continues to operate in a manner consistent with applicable law, and longstanding, widespread industry practice for many decades. To avoid further litigation expense, we entered into a settlement on May 5, 2015. The settlement requires court approval and was accrued for as of June 30, 2015. In entering into this settlement, CBRBC made no admission of wrongdoing or liability, and is not obligated to change its business structures. The court granted preliminary approval of the settlement in August 2015.
The Company is involved in certain other claims and legal actions arising in the ordinary course of our business. Such litigation, regulatory actions and other proceedings may include, but are not limited to, actions relating to intellectual property, commercial arrangements, franchising arrangements, actions against our title company alleging it knew or should have known that others were committing mortgage fraud, standard brokerage disputes like the failure to disclose hidden defects in the property such as mold, vicarious liability based upon conduct of individuals or entities outside of our control, including franchisees and independent sales associates, antitrust and anti-competition claims, general fraud claims, employment law claims, including claims challenging the classification of our sales associates as independent contractors, wage and hour classification claims and claims alleging violations of RESPA or state consumer fraud statutes. While the results of such claims and legal actions cannot be predicted with certainty, we do not believe based on information currently available to us that the final outcome of current proceedings against the Company will have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Cendant Corporate Litigation
Pursuant to the Separation and Distribution Agreement dated as of July 27, 2006 among Cendant, Realogy Group, Wyndham Worldwide and Travelport, each of Realogy Group, Wyndham Worldwide and Travelport have assumed certain contingent and other corporate liabilities (and related costs and expenses), which are primarily related to each of their respective businesses. In addition, Realogy Group has assumed 62.5% and Wyndham Worldwide has assumed 37.5% of certain contingent and other corporate liabilities (and related costs and expenses) of Cendant or its subsidiaries, which are not primarily related to any of the respective businesses of Realogy Group, Wyndham Worldwide, Travelport and/or Cendant’s vehicle rental operations, in each case incurred or allegedly incurred on or prior to the date of the separation of Travelport from Cendant.
* * *
The Company believes that it has adequately accrued for legal matters as appropriate. The Company records litigation accruals for legal matters which are both probable and estimable.
Litigation and other disputes are inherently unpredictable and subject to substantial uncertainties and unfavorable resolutions could occur. In addition, class action lawsuits can be costly to defend and, depending on the class size and claims, could be costly to settle.  As such, the Company could incur judgments or enter into settlements of claims with liability that are materially in excess of amounts accrued and these settlements could have a material adverse effect on the Company’s financial condition, results of operations or cash flows in any particular period.
Tax Matters
The Company is subject to income taxes in the United States and several foreign jurisdictions. Significant judgment is required in determining the worldwide provision for income taxes and recording related assets and liabilities. In the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is uncertain. The Company is regularly under audit by tax authorities whereby the outcome of the audits is uncertain. The Company


23


believes there is appropriate support for positions taken on its tax returns. The liabilities that have been recorded represent the best estimates of the probable loss on certain positions and are adequate for all open years based on an assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter. However, the outcomes of tax audits are inherently uncertain.
Under the Tax Sharing Agreement with Cendant, Wyndham Worldwide and Travelport, the Company is generally responsible for 62.5% of payments made to settle claims with respect to tax periods ending on or prior to December 31, 2006 that relate to income taxes imposed on Cendant and certain of its subsidiaries, the operations (or former operations) of which were determined by Cendant not to relate specifically to the respective businesses of Realogy, Wyndham Worldwide, Avis Budget or Travelport.
With respect to any remaining legacy Cendant tax liabilities, the Company and its former parent believe there is appropriate support for the positions taken on Cendant’s tax returns. However, tax audits and any related litigation, including disputes or litigation on the allocation of tax liabilities between parties under the Tax Sharing Agreement, could result in outcomes for the Company that are different from those reflected in the Company’s historical financial statements.
Contingent Liability Letter of Credit
In April 2007, the Company established a standby irrevocable letter of credit for the benefit of Avis Budget Group in accordance with the Separation and Distribution Agreement. The synthetic letter of credit was utilized to support the Company’s payment obligations with respect to its share of Cendant contingent and other corporate liabilities. The stated amount of the standby irrevocable letter of credit is subject to periodic adjustment to reflect the then current estimate of Cendant contingent and other liabilities. The letter of credit was $53 million at September 30, 2015 and December 31, 2014. The standby irrevocable letter of credit will be terminated if (i) the Company’s senior unsecured credit rating is raised to BB by Standard and Poor’s or Ba2 by Moody’s or (ii) the aggregate value of the former parent contingent liabilities falls below $30 million.
Escrow and Trust Deposits
As a service to its customers, the Company administers escrow and trust deposits which represent undisbursed amounts received for the settlement of real estate transactions. Deposits at FDIC-insured institutions are insured up to $250 thousand. These escrow and trust deposits totaled $354 million at September 30, 2015 and $251 million at December 31, 2014. These escrow and trust deposits are not assets of the Company and, therefore, are excluded from the accompanying Condensed Consolidated Balance Sheets. However, the Company remains contingently liable for the disposition of these deposits.
10.
SEGMENT INFORMATION
The reportable segments presented below represent the Company’s operating segments for which separate financial information is available and which is utilized on a regular basis by its chief operating decision maker to assess performance and to allocate resources. In identifying its reportable segments, the Company also considers the nature of services provided by its operating segments. Management evaluates the operating results of each of its reportable segments based upon revenue and EBITDA, which is defined as net income (loss) before depreciation and amortization, interest (income) expense, net (other than Relocation Services interest for relocation receivables and securitization obligations) and income taxes, each of which is presented in the Company’s Condensed Consolidated Statements of Operations. The Company’s presentation of EBITDA may not be comparable to similar measures used by other companies.
 
Revenues (a) (b)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Real Estate Franchise Services
$
214

 
$
199

 
$
578

 
$
539

Company Owned Real Estate Brokerage Services
1,267

 
1,175

 
3,352

 
3,107

Relocation Services
124

 
125

 
317

 
318

Title and Settlement Services
147

 
111

 
362

 
300

Corporate and Other (c)
(84
)
 
(79
)
 
(228
)
 
(214
)
Total Company
$
1,668

 
$
1,531

 
$
4,381

 
$
4,050



24


_______________
 
 
(a)
Transactions between segments are eliminated in consolidation. Revenues for the Real Estate Franchise Services segment include intercompany royalties and marketing fees paid by the Company Owned Real Estate Brokerage Services segment of $84 million and $228 million for the three and nine months ended September 30, 2015, respectively, and $79 million and $214 million for the three and nine months ended September 30, 2014, respectively. Such amounts are eliminated through the Corporate and Other line.
(b)
Revenues for the Relocation Services segment include intercompany referral commissions paid by the Company Owned Real Estate Brokerage Services segment of $16 million and $39 million for the three and nine months ended September 30, 2015, respectively, and $13 million and $32 million for the three and nine months ended September 30, 2014, respectively. Such amounts are recorded as contra-revenues by the Company Owned Real Estate Brokerage Services segment. There are no other material intersegment transactions.
(c)
Includes the elimination of transactions between segments.
 
EBITDA (a) (b)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Real Estate Franchise Services
$
152

 
$
136

 
$
384

 
$
352

Company Owned Real Estate Brokerage Services
96

 
93

 
177

 
164

Relocation Services
47

 
47

 
83

 
80

Title and Settlement Services
20

 
15

 
37

 
27

Corporate and Other (c)
(6
)
 
(18
)
 
(49
)
 
(76
)
Total Company
$
309

 
$
273

 
$
632

 
$
547

Less:
 
 
 
 
 
 
 
Depreciation and amortization
$
55

 
$
48

 
$
153

 
$
140

Interest expense, net
70

 
54

 
188

 
197

Income tax expense
74

 
71

 
116

 
88

Net income attributable to Realogy Holdings and Realogy Group
$
110

 
$
100

 
$
175

 
$
122

_______________
(a)
Includes a net benefit of $14 million of former parent legacy items for the three months ended September 30, 2015 compared to a net benefit of $2 million of former parent legacy items and the reversal of prior year restructuring of $1 million for the three months ended September 30, 2014.
(b)
Includes a net benefit of $15 million of former parent legacy items for the nine months ended September 30, 2015 compared to $27 million related to the loss on early extinguishment of debt, partially offset by a net benefit of $1 million of former parent legacy items and the reversal of prior year restructuring of $1 million for the nine months ended September 30, 2014.
(c)
Includes the elimination of transactions between segments.


25


11.
SUBSEQUENT EVENTS
October 2015 Amendment of the Senior Secured Revolving Credit Facility, Entry into a new Senior Secured Term Loan A Facility and the Redemption of First Lien Notes and First and a Half Lien Notes
In October 2015, Realogy Group amended its Revolving Credit Facility and entered into a new Term Loan A Agreement. The amendment to its Revolving Credit Facility increased the capacity from $475 million to $815 million and extended its maturity date from March 2018 to October 2020. The interest rates with respect to the new Revolving Credit Facility under the Term Loan A Facility are based on, at the Company's option, adjusted LIBOR plus 2.25% or ABR plus 1.25%, in each case subject to adjustment based on the then current senior secured leverage ratio. The new Term Loan A Facility was issued in the amount of $435 million with a maturity date of October 2020. The Term Loan A Facility provides for quarterly amortization payments, commencing March 31, 2016, totaling per annum 5%, 5%, 7.5%, 10.0% and 12.5% of the original principal amount of the Term Loan A Facility in 2016, 2017, 2018, 2019 and 2020, respectively. The interest rates with respect to term loans under the new Term Loan A Facility are based on, at the Company's option, adjusted LIBOR plus 2.25% or ABR plus 1.25%, in each case subject to adjustment based on the then current senior secured leverage ratio. The amendment to the senior secured Revolving Credit Facility and the senior secured Term Loan A Facility require the Company to maintain a maximum senior secured leverage ratio of 4.75 to 1.00, tested on a quarterly basis, commencing with the period ended September 30, 2015, regardless of the amount of borrowings outstanding, and letters of credit issued, under the revolver at the testing date.
The Company used the net proceeds from the Term Loan A Facility and revolver borrowings to redeem all of the outstanding $593 million of First Lien Notes and pay related premiums and accrued interest of $45 million. On October 30, 2015, the Company issued a notice of redemption to redeem all of the outstanding $196 million of First and a Half Lien Notes and pay related premiums and accrued interest of $17 million on November 30, 2015 with cash on hand and revolver borrowings.


26


Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations.
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 2014 Form 10-K. Unless otherwise noted, all dollar amounts in tables are in millions. Neither Realogy Holdings, the indirect parent of Realogy Group, nor Realogy Intermediate, the direct parent company of Realogy Group, conducts any operations other than with respect to its respective direct or indirect ownership of Realogy Group. As a result, the condensed consolidated financial positions, results of operations and cash flows of Realogy Holdings, Realogy Intermediate and Realogy Group are the same. This Management's Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements. See "Forward-Looking Statements" in this report and "Forward-Looking Statements" and "Risk Factors" in our 2014 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 are a global provider of real estate and relocation services and report our operations in the following four segments:
Real Estate Franchise Services (known as Realogy Franchise Group or RFG)—franchises the Century 21®, Coldwell Banker®, Coldwell Banker Commercial®, ERA®, Sotheby's International Realty® and Better Homes and Gardens® Real Estate brand names. As of September 30, 2015, our franchise systems had approximately 13,600 franchised and company owned offices and approximately 257,300 independent sales associates operating under our franchise and proprietary brands in the U.S. and 109 other countries and territories around the world, which included approximately 790 of our company owned and operated brokerage offices with approximately 47,300 independent sales associates. In August 2014, we acquired ZipRealty, an innovative residential real estate brokerage and developer of proprietary technology platforms for real estate brokerages, independent sales associates and customers. During 2015, we introduced ZipRealty's comprehensive, turnkey integrated ZAPTM technology platform to certain of our franchisees, ahead of a broader rollout of these tools, which we believe will increase the value proposition to our franchisees, their independent sales associates and their customers.
Company Owned Real Estate Brokerage Services (known as NRT)—operates a full-service real estate brokerage business principally under the Coldwell Banker®, Corcoran Group®, Sotheby’s International Realty®, Citi Habitats and ZipRealty® brand names in more than 50 of the 100 largest metropolitan areas in the U.S. This segment also includes the Company's share of earnings for our PHH Home Loans venture.
Relocation Services (known as Cartus)—primarily offers clients employee relocation services such as homesale assistance, providing home equity advances to transferees (generally guaranteed by the client), home finding and other destination services, expense processing, relocation policy counseling and consulting services, arranging household goods moving services, coordinating visa and immigration support, intercultural and language training and group move management services. In addition, we provide home buying and selling assistance to members of affinity clients.
Title and Settlement Services (known as Title Resource Group or TRG)—provides full-service title and settlement services to real estate companies, affinity groups, corporations and financial institutions with many of these services provided in connection with the Company's real estate brokerage and relocation services business.
RECENT DEVELOPMENTS
October 2015 Amendment of the Senior Secured Revolving Credit Facility, Entry into a new Senior Secured Term Loan A Facility and the Redemption of First Lien Notes and First and a Half Lien Notes
In October 2015, Realogy Group amended its Revolving Credit Facility and entered into a new Term Loan A Agreement. The amendment to its Revolving Credit Facility increased the capacity from $475 million to $815 million and extended its maturity date from March 2018 to October 2020. The interest rates with respect to the new Revolving Credit Facility under the Term Loan A Facility are based on, at the Company's option, adjusted LIBOR plus 2.25% or ABR plus 1.25%, in each case subject to adjustment based on the then current senior secured leverage ratio. The new Term Loan A Facility was issued in the amount of $435 million with a maturity date of October 2020. The Term Loan A Facility provides for quarterly amortization payments, commencing March 31, 2016, totaling per annum 5%, 5%, 7.5%, 10.0% and 12.5% of the original principal amount of the Term Loan A Facility in 2016, 2017, 2018, 2019 and 2020, respectively. The interest rates with respect to term loans under the new Term Loan A Facility are based on, at the Company's option, adjusted LIBOR plus 2.25% or ABR plus 1.25%, in each case subject to adjustment based on the then current senior secured leverage ratio.


27


The amendment to the senior secured Revolving Credit Facility and senior secured Term Loan A Facility require the Company to maintain a maximum senior secured leverage ratio of 4.75 to 1.00, tested on a quarterly basis, commencing with the period ended September 30, 2015, regardless of the amount of borrowings outstanding, and letters of credit issued, under the revolver at the testing date.
The Company used the net proceeds from the Term Loan A Facility and revolver borrowings to redeem all of the outstanding $593 million of First Lien Notes and pay related premiums and accrued interest of $45 million. On October 30, 2015, the Company issued a notice of redemption to redeem all of the outstanding $196 million of First and a Half Lien Notes and pay related premiums and accrued interest of $17 million on November 30, 2015 with cash on hand and revolver borrowings.
Acquisition of Independence Title
In July 2015, the Company completed its acquisition of Independence Title, which is headquartered in Austin and expands the Company's market presence throughout Texas.
CURRENT INDUSTRY TRENDS
Commencing in the second half of 2005 and continuing through 2011, the U.S. residential real estate industry was in a significant and lengthy downturn. Beginning in 2012, the U.S. residential real estate industry began its current recovery. According to NAR, in the first two years of the current housing recovery—2012 and 2013—homesale transaction volume (average homesale price multiplied by homesale transactions) improved 15% and 19%, respectively, and the industry experienced significant refinancing activity. We believe that the improvement in 2012 and 2013 was driven by high affordability of home ownership and demand that built up during an extended period of economic uncertainty, as well as historically low mortgage rates and lower home inventory levels leading to increases in homesale prices.
During 2014, homesale transaction volume growth slowed to 1% compared to 2013 according to NAR. The homesale transaction volume gain in 2014 was primarily driven by increasing average home prices, while the number of homesale transactions in 2014 declined year-over-year.
During the first nine months of 2015, according to NAR, homesale transaction volume increased 12% due to both an increase in homesale transactions and homesale price which was partially due to constrained inventory levels.
During the first nine months of 2015, we experienced an increase in homesale transaction volume of 9% primarily due to strong demand at the low to mid end of the housing market and more muted growth at the high-end, which particularly impacted NRT. NRT benefited from an increase in volume in 2014 in certain high-priced markets such as New York City and San Francisco. In 2015 we have seen a moderation of these markets as they return to a more normalized trend and NRT experiences a shift in the mix of homesale transactions from these high-priced markets to low and mid-priced markets in the geographic footprint served by NRT. In addition, NRT continues to experience inventory constraints in several markets which have led to a more modest level of organic growth.
According to NAR, the first-time homebuyers represented about 30% of all existing homesale transactions on average in the third quarter of 2015, which is up one percentage point from the 29% reported for the third quarter of 2014. The level of first-time homebuyers appears to be trending in a positive direction, but according to NAR is still below the historical norm of 33% for the period from August 2009 (when NAR began compiling this information) through December 2014.
According to NAR, the inventory of existing homes for sale in the U.S. was 2.2 million homes at the end of September 2015. The September 2015 inventory represents a national average supply of 4.8 months at the current homesales pace which is below the 6.4 month 25-year average.
As reported by NAR, the housing affordability index has continued to be at historically favorable levels. An 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. The composite housing affordability index was 158 for August 2015, 166 for 2014 and 177 for 2013. The housing affordability index, which has declined in 2015 as housing prices have increased, is still significantly higher than the average of 117 for the period from 1970 through 2005.
Mortgage rates continue to be at low levels by historical standards, which we believe has helped stimulate demand in the residential real estate market. According to Freddie Mac, mortgage rates on commitments for a 30-year, conventional, fixed-rate first mortgage averaged 6.5% for 2000 to 2005, 5.7% for 2006 to 2010 and 4.1% for 2011 through 2014. While the average mortgage rate increased during 2014 to an annual average of 4.2%, the average mortgage rate for the nine


28


months ended September 30, 2015 was 3.8%. In addition, consumers continue to have financing alternatives such as adjustable rate mortgages which can be utilized to obtain a lower mortgage rate than a 30-year fixed-rate mortgage.
Partially offsetting the positive impact of low mortgage rates are low housing inventory levels and the ongoing rise in home prices, conservative mortgage underwriting standards, increased down payment requirements and certain homeowners having limited or negative equity in homes. Mortgage credit conditions tightened significantly during the recent housing downturn, with banks limiting credit availability to more creditworthy borrowers and requiring larger down payments, stricter appraisal standards, and more extensive mortgage documentation. Although mortgage credit conditions appear to be easing, mortgages remain less available to some borrowers and it frequently takes longer to close a homesale transaction due to current mortgage and underwriting requirements.
Mortgage refinancing activity declined significantly in 2014 compared to levels experienced in 2013 and 2012. According to Fannie Mae, in 2012 refinancing originations totaled $1,540 billion and decreased to $1,123 billion in 2013. In 2014, refinancing originations significantly declined further to $508 billion resulting in a 55% decline from 2013 levels. The reduction in refinancing activity in 2014 adversely impacted our share of earnings from our PHH Home Loans venture as well as refinancing related revenue and profitability at our title and settlement services operations. According to Fannie Mae, during the first nine months of 2015, refinancing originations totaled $632 billion resulting in an increase of 62% from the first nine months of 2014 due to lower mortgage rates. These lower rates positively impacted our share of earnings from our PHH Home Loans venture, as well as refinancing related revenue at our title and settlement services operations in the first nine months of 2015.
Existing Homesales
According to NAR, existing homesale transactions for 2014 decreased to 4.9 million homes, down 3% compared to 2013. For the quarters ended March 31, 2015, June 30, 2015 and September 30, 2015 compared to the same periods in 2014, NAR homesale transactions increased 7%, 8% and 8%, respectively, and attained a seasonally adjusted annualized level of 5.4 million units in the third quarter of 2015. During the same periods, RFG and NRT homesale transactions on a combined basis increased 4%, 7% and 6%, respectively.
As a result of the acquisition of Coldwell Banker United in the second quarter of 2015, the Coldwell Banker United homesale transactions shifted from RFG to NRT. Closed homesale sides, including Coldwell Banker United, would have resulted in an increase in homesale transactions for RFG of 7% and 6% for the second and third quarter of 2015, respectively, compared to 2014. The 13% and 12% increase in homesale transactions for NRT for the quarters ended June 30, 2015 and September 30, 2015, respectively, both included 9 percentage points due to the inclusion of transactions from acquisitions with an individual purchase price of over $20 million (ZipRealty brokerage operations and Coldwell Banker United acquisitions). In addition, there are inventory constraints in several of NRT's higher priced markets which are causing homesale transactions in those markets to decline or be flat versus last year.
The quarterly and annual year-over-year trends in homesale transactions are as follows:
 
 
 
2015 vs. 2014
 
 
Full Year
2014 vs.
2013
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
Forecast
 
Full Year
Forecast
2015 vs. 2014
 
Number of Existing Homesales
 
 
 
 
 
 
 
 
 
 
 
 
Industry
 
 
 
 
 
 
 
 
 
 
 
 
NAR
(3
)%
(a)
7
%
(a)
8
%
(a)
8
%
(a)
7
%
(b)
7
%
(b)
Fannie Mae (c)
(3
)%
 
6
%
 
8
%
 
7
%
 
7
%
 
7
%
 
Realogy
 
 
 
 
 
 
 
 
 
 
 
 
Real Estate Franchise Services
(2
)%
 
4
%
 
5
%
(d)
4
%
(d)
 
 
 
 
Company Owned Real Estate Brokerage Services
(3
)%
 
6
%
 
13
%
(e)
12
%
(e)
 
 
 
 
_______________
 
 
(a)
Historical existing homesale data is as of the most recent NAR press release.
(b)
Forecasted existing homesale data, on a seasonally adjusted basis, is as of the most recent NAR forecast.
(c)  
Existing homesale data, on a seasonally adjusted basis, is as of the most recent Fannie Mae press release.


29


(d)
As a result of the acquisition of Coldwell Banker United, the Coldwell Banker United drivers shifted from RFG to NRT. Closed homesale sides, including the drivers of Coldwell Banker United, would have resulted in an increase in homesale transactions for RFG of 7% and 6% for the second and third quarter of 2015, respectively, compared to 2014.
(e)
Closed homesale sides for NRT, excluding the impact of larger acquisitions with an individual purchase price greater than $20 million, would have increased 4% and 3% for the second and third quarter of 2015, respectively, compared to 2014.
As of their most recent releases, NAR and Fannie Mae are both forecasting an increase of 3% in existing homesale transactions for 2016 compared to 2015. NAR believes that the improvement in the number of homesale transactions in 2015 will be due to a strengthening economy and solid job gains.
Existing Homesale Price
In 2014, the percentage change in the average price of homes brokered by RFG and NRT increased 7% and 6%, respectively, compared to 2013. For the quarters ended March 31, 2015, June 30, 2015 and September 30, 2015 compared to the same periods in 2014, NAR existing homesale average price increased 4%, 5% and 3%, respectively, while RFG and NRT average homesale price on a combined basis increased 5%, 3% and 2%, respectively. The decrease in average sales price for NRT for the second and third quarter of 2015 was due to (i) the impact of including transactions from acquisitions with purchase prices in excess of $20 million completed during or after the third quarter of 2014, which have a substantially lower average homesales prices than NRT's core operations and (ii) a modest shift in mix in transactions from high-priced markets to low and mid-priced markets in the geographic footprint served by NRT. Excluding the impact of (i) above, NRT's average homesale price would have remained flat year-over-year in the second and third quarters of 2015 compared to those same periods in 2014. The quarterly and annual year-over-year trends in the price of homes are as follows:
 
 
 
2015 vs. 2014
 
 
Full Year
2014 vs.
2013
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
Forecast
 
Full Year
Forecast
2015 vs. 2014
 
Price of Existing Homes
 
 
 
 
 
 
 
 
 
 
 
 
Industry
 
 
 
 
 
 
 
 
 
 
 
 
NAR
4
%
(a)
4
%
(a)
5
 %
(a)
3
 %
(a)
4
%
(b)
6
%
(b)
Fannie Mae (c)
6
%
 
6
%
 
8
 %
 
5
 %
 
4
%
 
5
%
 
Realogy
 
 
 
 
 
 
 
 
 
 
 
 
Real Estate Franchise Services
7
%
 
6
%
 
5
%
(d)
5
%
(d)
 
 
 
 
Company Owned Real Estate Brokerage Services
6
%
 
3
%
 
(4
%)
(e)
(4
%)
(e)
 
 
 
 
 
_______________
 
(a)
Historical 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.
(d)
The acquisition of Coldwell Banker United did not have a significant impact on the average homesale price for RFG.
(e)
Average homesale price for NRT, excluding the impact of larger acquisitions with an individual purchase price greater than $20 million, would have remained flat for both the second and third quarters of 2015 compared to 2014.
As of their most recent releases, NAR and Fannie Mae are both forecasting a 4% increase in median existing homesale price in 2016 compared to 2015.
Legislative and Regulatory Matters
In November 2013, the Consumer Financial Protection Bureau ("CFPB") issued a final rule, which became effective for new loan applications beginning October 3, 2015. The new rule integrates certain mortgage disclosure forms and outlines new requirements related to the closing of certain real estate transactions.  The new rule mandates use of a new Closing Disclosure and requires that the Closing Disclosure be delivered three business days before closing on the loan.  Implementing the rule required changes to multiple technology platforms within TRG as well as training for all TRG personnel involved in the closing process. The adoption may result in delayed homesale transaction closings that impact us or other industry participants.
RESPA and comparable state statutes prohibit providing or receiving payments, or other things of value, for the referral of business to certain types of providers in connection with the closing of real estate transactions involving federally-backed


30


mortgages.  RESPA and related regulations do, however, contain a number of provisions that allow for payments or fee splits between providers, including fee splits between brokers and agents and market-based fees for the provision of actual goods or services.  In addition, RESPA allows for referrals to affiliated entities, including joint ventures, when specific requirements have been met.  We rely on these provisions and comply with the new Closing Disclosure requirements in conducting our business activities and believe our arrangements comply with RESPA. 
With the passage of Dodd-Frank in 2010, primary responsibility for enforcement of RESPA has shifted to the CFPB.  The CFPB has taken a much stricter approach toward interpretation of RESPA and related regulations than the prior regulatory authority (the Department of Housing and Urban Development) and has significantly increased the use of enforcement proceedings.  In the face of this changing regulatory landscape, various industry participants, while disagreeing with the CFPB’s narrow interpretation of RESPA, have nevertheless decided to modify long-standing business arrangements to avoid the risk of protracted and costly litigation defending such arrangements.  While we anticipate making certain changes to our RESPA-related business practices, we do not expect these changes to have a material impact on our operations.
* * *
We believe that long-term demand for housing and the growth of our industry are primarily driven by the affordability of housing, the economic health of the U.S. economy, positive demographic trends such as population growth, the increase in household formation, mortgage rate levels and mortgage availability, job growth, the inherent attributes of homeownership vs. renting and the influence of local housing dynamics of supply vs. demand. At this time, these factors are generally trending favorably. Factors that may negatively affect a sustained housing recovery include:
higher mortgage rates due to increases in long-term interest rates as well as reduced availability of mortgage financing;
insufficient inventory levels leading to lower unit sales;
changing attitudes towards home ownership, particularly among potential first-time homebuyers who may delay, or decide not to, purchase homes;
the impact of limited or negative equity of current homeowners, as well as the lack of available inventory may limit their proclivity to purchase an alternative home;
reduced affordability of homes;
high levels of unemployment and associated lack of consumer confidence;
unsustainable economic recovery in the U.S. or a weak recovery resulting in only modest economic growth;
a decline in home ownership levels in the U.S.;
geopolitical and economic instability; and
legislative or regulatory reform, including but not limited to reform that adversely impacts the financing of the U.S. housing market or amends the Internal Revenue Code in a manner that negatively impacts home ownership such as reform that reduces the amount that certain taxpayers would be allowed to deduct for home mortgage interest.
Many of the trends impacting our businesses that derive revenue from homesales also impact our Relocation Services business, which is a global provider of outsourced employee relocation services. In addition to general residential housing trends, key drivers of our Relocation Services business are global corporate spending on relocation services, which has not returned to levels that existed prior to the most recent recession, as well as employment relocation trends. Our Relocation Services business is subject to a competitive pricing environment and lower average revenue per relocation as a result of a shift in the mix of services and number of services being delivered per move. These factors have, and may continue to, put pressure on the growth and profitability of this segment.
* * *
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.  In addition to the differences in calculation methodologies, there are geographical differences and concentrations in the markets in which we operate versus the national market. For instance, comparability is impaired due to NAR’s utilization of seasonally adjusted annualized rates whereas we report actual period-over-period changes and their use of median price for their forecasts compared to our average price. Additionally, NAR historical data is subject to


31


periodic review and revision and these revisions have been, and could be in the future, material.  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. While we believe that the industry data presented herein is derived from the most widely recognized sources for reporting U.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 our Real Estate Franchise Services segment and our Company Owned Real Estate Brokerage Services segment, we measure operating performance using the following key operating statistics: (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, (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 and (iv) net effective royalty rate which represents the average percentage of our franchisees’ commission revenues payable to our Real Estate Franchise Services segment, net of volume incentives achieved.
From 2007 through December 2013, the average homesale broker commission rate remained fairly stable; however, in 2014 we experienced a modest decline in the average broker commission rate. Although in 2015, the average broker commission rate has been stable at 2014 levels, we expect that over the long term the average brokerage commission rates could modestly decline as a result of increases in average homesale prices. This is particularly relevant in periods when there is constrained housing inventory. A continuing housing recovery should result in an increase in our revenues, although such increases could be offset by modestly declining brokerage commissions.
In general, most of our third-party franchisees are entitled to volume incentives.  These incentives decrease during times of declining homesale transaction volumes and increase during market recoveries when there is a corresponding increase in homesale transaction volume.  As a result, the net effective royalty rate may be impacted by the cyclical residential housing market.  In addition, these tiered volume incentives only impact the incremental revenues recorded and the calculation of the net effective royalty rate.  From 2009 to 2013, the net effective royalty rate declined due to several factors including a consolidation of distressed franchisees into viable affiliates and company owned operations, the termination of certain franchisees that generally were not sizable enough to earn significant rebates, and in 2012 and 2013 an increase in overall homesale transaction volume. In 2014, the net effective royalty rate remained at the 2013 level and in the first nine months of 2015 the net effective royalty rate remained relatively flat compared to the first nine months of 2014.
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. Non-standard incentives are sometimes used as consideration for new or renewing franchisees. Most of our franchisees do not receive these non-standard incentives and in contrast to royalties and volume incentives they are not homesale transaction based. We have accordingly excluded the non-standard incentives from the calculation of the net effective royalty rate. Had these non-standard incentives been included for the years ended December 31, 2014 and 2013 the net effective royalty rate would be lower by approximately 18 and 16 basis points, respectively.
Our Company Owned Real Estate Brokerage Services segment has a significant concentration of real estate brokerage offices and transactions in geographic regions where home prices are at the higher end of the U.S. real estate market, particularly the east and west coasts, while our Real Estate Franchise Services segment has franchised offices that are more widely dispersed across the United States. Accordingly, operating results and homesale statistics may differ between our Company Owned Real Estate Brokerage Services segment and our Real Estate Franchise Services segment based upon geographic presence and the corresponding homesale activity in each geographic region. In addition, the share of commissions earned by sales associates directly impacts the margin earned by our Company Owned Real Estate Brokerage Services segment. Such share of commissions earned by sales associates varies by region and commission schedules are generally progressive to incentivize sales associates to achieve higher levels of production. The level of commissions earned by sales associates are generally subject to review and reset on the anniversary of the sales associates' engagement with the broker. While competition has and will continue to put pressure on the commission splits necessary to attract and maintain relationships with highly productive sales associates, the lead generation and other initiatives implemented by our Company Owned Brokerage Services segment have enabled commission splits in the aggregate to remain relatively flat.
Within our Relocation Services segment, we measure operating performance using the following key operating statistics: (i) initiations, which represent the total number of new transferees and the total number of real estate closings for


32


affinity members and (ii) referrals, which represent the number of referrals from which we earn revenue from real estate brokers.
In our Title and Settlement Services segment, 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. An increase or decrease in homesale transactions will impact the financial results of our Title and Settlement Services segment; however, the financial results are not significantly impacted by a change in homesale price. In addition, although the average mortgage rate declined in the first nine months of 2015 compared to the first nine months of 2014 and refinancing transactions increased as a result, we believe that an increase in mortgage rates in the future will most likely have a negative impact on refinancing title and closing units.
A decline in the number of homesale transactions and 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 our title and settlement services, (iv) reducing the referral fees we earn in our relocation services business, and (v) 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 or greater commission payments to sales associates.
The following table presents our drivers for the three and nine months ended September 30, 2015 and 2014. See "Results of Operations" below for a discussion as to how these drivers affected our business for the periods presented.
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
% Change
 
2015
 
2014
 
% Change
Real Estate Franchise Services (a) (b)
 
 
 
 
 
 
 
 
 
 
 
Closed homesale sides
318,873

 
306,338

 
4
%
 
838,305

 
803,760

 
4
%
Average homesale price
$
267,296

 
$
255,780

 
5
%
 
$
262,959

 
$
249,782

 
5
%
Average homesale broker commission rate
2.52
%
 
2.51
%
 
1 bps

 
2.52
%
 
2.52
%
 

Net effective royalty rate
4.47
%
 
4.49
%
 
(2) bps

 
4.49
%
 
4.48
%
 
1 bps

Royalty per side
$
312

 
$
301

 
4
%
 
$
309

 
$
294

 
5
%
Company Owned Real Estate Brokerage Services