Refinancing through the Slump

Realogy’s Tony Hull makes sure growth opportunities have favorable returns.

Residential real estate brokerage leader Realogy Corp.’s lackluster results for the fourth quarter and full year 2011 reflect the housing market’s continuing slump. It may be most appropriate, however, to view the company’s flat net revenues and net earnings loss year-over-year from the perspective of the glass half full, given that its bonds traded for single-digit cents on the dollar in early 2009. Besides slashing expenses, Realogy, which is owned by investment firm Apollo Management, stayed afloat by revamping its capital structure to extend debt maturities and improve its leverage ratios.

Tony Hull, Realogy’s CFO and treasurer since it was spun off from Cendant Corp. in 2006, discusses the company’s ongoing moves to improve its capital structure and what a housing market recovery will mean for Realogy.

T&R: What has Realogy done recently to buttress its finances?

Hull: In early February, we were able to refinance $918 million in debt maturing in 2013 at very attractive rates. Those maturities were pushed out to 2020, so as a result we don’t have any corporate debt maturing until 2016. That gives us a lot of runway to wait for the housing market to improve. We’ve had some core investors since going private in 2007, and we really broadened the investor base with this transaction.

We also extended our Apple Ridge securitization financing until the end of 2013. We paid 100 basis points more than the previous deal, but given that the securitization market has shrunk dramatically since 2007, we were very happy with the outcome.

T&R: Realogy has $2.1 billion in convertible debt that can be converted to equity following a qualified equity issuance of $200 million or more. What could trigger that event?

Hull: The trigger will be an appetite for our equity in an IPO-type scenario. All the terms are pre-arranged, so it’s a question of Apollo, Paulson & Co. and a couple of other holders saying, “It’s time to go public,” or have this liquidity event, and all of a sudden our leverage and our interest-rate expense drop 30%. We’re really the only broad play on the U.S. housing market—our addressable market is 4.2 million existing homes sold, while homebuilders typically sell between 300,000 and 400,000 new homes on an annual basis.

So a stock investor gets not only the housing market recovery but the deleveraging story. When that appetite arrives is really the $64,000 question.

T&R: Did the financial crisis change the role of the CFO?

Hull: The focus of the company has been much more on cash and making sure growth opportunities we pursue have very favorable returns. There’s much more discipline on capital expenditures and that sort of thing. It’s probably made the role of a CFO more prominent, but it’s usually what the CFO does anyway.

T&R: What opportunities and risks do you foresee?

Hull: The first two months of the year were fairly strong, so despite what the pundits and the Case-Shillers of the world say, we had pretty good volume improvement, and the word we’re getting from our realtors is pretty positive. Rates are low, affordability is high, and so are rents. So people, especially first-time homebuyers, are looking at owning instead of renting.

Things look pretty good for the near term. If that continues for several quarters, it would present a good IPO scenario and debt conversion, leading to deleveraging and everything that goes with it. We’ll see how the year plays out.

 

 

For more on Realogy’s 2011 restructuring, read Debt Do-Over at Realogy.

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