Good afternoon, and welcome to the Realogy Holdings Corp. Second Quarter 2020 Earnings Conference Call via Webcast. Today’s call is being recorded, and a written transcript will be made available in the Investor Information section of the company’s website tomorrow. A webcast replay will also be made available on the company’s website.

At this time, I’d like to turn the conference over to Realogy’s Senior Vice President, Alicia Swift. Please go ahead, Alicia..

Thank you, Chris. Good afternoon, and welcome to Realogy’s second quarter 2020 earnings conference call. On the call with me today are Realogy’s CEO and President, Ryan Schneider; and Chief Financial Officer, Charlotte Simonelli.

As shown on Slide 3 of the presentation, the company will be making statements about its future results and other forward-looking statements during this call. These statements are based on the current expectations and the current economic environment.

Forward-looking statements and projections are inherently subject to significant economic, competitive and other uncertainties and contingencies, many of which are beyond the control of management, including any statements we make related to expectations with respect to the ongoing COVID-19 crisis.

Actual results may differ materially from those expressed or implied in the forward-looking statements. For those who’ll listen to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, July 30, and have not been updated subsequent to the initial earnings call.

Important assumptions and other important factors that could cause actual results to differ materially from those in the forward-looking statements are specified in our earnings release issued today as well as in our annual and quarterly SEC filings.

Also, certain non-GAAP financial measures will be discussed on this call, and per SEC rules, important information regarding these non-GAAP financial measures is included in our earnings press release. Lastly, for the second quarter of 2020, the relocation business continued to be reported as discontinued operations.

Now I will turn the call over to our CEO and President, Ryan Schneider..

Thank you for joining us this afternoon. I want to start by thanking Realogy employees, affiliated agents and franchisees for their dedication and hard work, helping customers safely buy and sell houses during these challenging times.

I also want to thank our employees and agents for their openness sharing the different challenges COVID created in their local markets that openness helped us move quicker as a company to implement solutions to better support agents and customers.

And finally, thanks to all of our employees for their thoughtful dialogue on diversity and inclusion, especially those who shared experiences that help all of us better understand the unique challenges people face today. And for all of you joining our call today, I hope you and your loved ones remain safe and healthy.

Today’s discussion will be structured like last quarter. I will start with summary remarks and key takeaways. Then turn over to Charlotte for a brief overview of the financials. And I will come back to talk about what we’re seeing in the housing market, including early results from July.

So I’m excited to share our Q2 results and our continued strategic progress during this incredibly turbulent time. We demonstrated strong performance delivering a $172 million of operating EBITDA from continuing operations in Q2, even in the depths of the COVID crisis. Our operating EBITDA performance in the quarter was driven by three things.

First, closed transaction volume across both our franchise and owned brokerage businesses fell dramatically in April and May, but improve markedly in June.

We are seeing continued closed transaction volume improvement in July, and we are particularly excited by the very strong new open transaction volume we have seen in June and July, which I will share with you later in the call.

Second, we delivered substantial cost reduction in the quarter, both temporary reductions, we shared with you on our last call and permanent savings we implemented in 2019. And third, our mortgage business had a very strong quarter.

We made good strategic progress in this business in the past year, especially expanding our coverage in the market and greater integration with our brokerage business. This strategic progress combined with the obviously strong refinancing trends, help drive the quarter’s results.

And along with our operating EBITDA delivery, we continue to invest and drive our strategic agenda in the second quarter. So first, our technology focus and innovations are delivering results. We had substantial adoption acceleration of our products in the quarter.

We delivered real expansion of our virtual capabilities in the past four months, virtual staging, virtual open houses, virtual tours, virtual title closings, virtual mortgage closings. We also continue to deliver marketing lead generation and other products to help agents do more deals.

The combination of virtual capabilities, strong products and increased adoption helped agents drive volume successfully and safely during this crisis. And we are excited to virtualize and simplify the real estate transaction in the future. Second, we grew brokerage agents 2% year-over-year and our top two quartile agent retention improved a bit.

The Q2 competitive environment was overshadowed by COVID, but pretty much continued the trend from Q1 of 2020 of being more rational than a year ago. Third, we continue to expand our other strategic growth initiatives. We are growing our Corcoran franchise. More broadly, we like the pace of franchise sales, even during COVID.

We’ve been able to do franchise sales and onboarding of new franchisees in a purely virtual manner, which will serve us well in the future. And we are increasing our marketing for high-quality lead generation efforts, like our new AARP program. And forth, we seize the market opportunity to refinance $550 million of debt at an attractive price.

We retired our 2021 unsecured notes, improving our debt maturity profile and lengthening the term of the debt on our balance sheet. Putting this all together, we demonstrated resiliency in tough times. We feel good about our performance and trajectory.

And we really like our position for the future, especially given the improving volumes we are seeing in June and July. But we are closely watching the COVID and macro uncertainty.

I look forward to sharing more detail about what we are seeing in the housing market, what we’re seeing in consumer behavior and our thoughts on the future later in the call. So I will now turn over to Charlotte to briefly discuss the financials..

Thank you, Ryan. Good afternoon, everyone. Before getting into our financial performance, I would like to say, that I’m very pleased by both the swift actions we took across Realogy, as well as the progress delivering on our strategic priorities. We adapted new ways of working and remained focused on emerging stronger on the other side.

Amid this uncertain time, Realogy has become more agile and efficient and has effectively managed the areas of our business under our control. Now onto the second quarter performance. Q2 revenue was $1.2 billion, down 27% versus prior year due to lower closed transaction volume.

While the year-over-year decline was expected, we have now seen new open transaction volume rebounding, especially later in Q2 and in July. Operating EBITDA from continuing operations was $172 million.

We were pleased with this delivery in the midst of a crisis and benefited from strong cost management, exceptional performance from our GRA mortgage JV and improving closed transaction volume in the latter part of the quarter.

Despite the volume decline, we held operating margin flat at the Realogy level in the quarter with a strong focus on cost management. Q2 operating EBITDA was down $63 million versus prior year, primarily driven by the closed transaction volume decline and by a 164 basis points year-over-year increase in agent commissions split.

The higher commission splits year-over-year was primarily driven by upward pressure from retention efforts over the last 12 months and the mixed shift to higher performing agents in the quarter. We expect this pressure to continue in the second half of 2020. Our GRA mortgage JV contributed $35 million in operating EBITDA.

This strong result was the combination of the strategic progress we made expanding geographic coverage, growing loan officers and improving service quality over the past year, which enabled us to capture more business. We also benefited from a very attractive Q2 mortgage environment, which has been driving a refinance boom.

This demonstrates the power of our ancillary businesses, which is a strategic advantage, and we really liked the financials. We successfully reduced costs and reallocated spend. Collectively, operating marketing and G&A expenses declined $95 million in the quarter.

The permanent cost reductions, we worked hard to deliver, continued to come to fruition and contributed to the quarter along with the temporary action we executed and realized in Q2. Given the improved transaction volume, we are saying, we have pulled back many of the temporary cost actions.

We anticipate that approximately $30 million of the temporary cost savings will remain in the third quarter. We also expect nearly all temporary cost actions will be lifted by Q4. Finally, on cost, we are using learnings from this crisis to identify ways we can permanently lower our cost base across Realogy.

It’s too early to give you the overall numbers for 2021, and we still have work to do, but we are encouraged by our early findings. Just to give you one example, we expect to reduce administrative facilities by $10 million to $15 million in annual lease expense.

We ended the quarter with $686 million in cash, inclusive of revolver borrowings we proactively drew down at the onset of COVID and generated free cash flow from continuing operations of $106 million, including discontinued operations, free cash flow was $47 million, as we saw a use of working capital driven by our securitization facility.

We have been proactive with our balance sheet and remain committed to deleveraging. In early June, we executed an oversubscribed $550 million second lien notes offering maturing in 2025, thereby eliminating the 2021 notes overhang. The transaction lengthened our maturity profile while also supporting our near term liquidity.

Our total net leverage ratio was 5.6 times. And the senior secured leverage ratio was 3.29 times as of June 30, 2020, well within compliance with our financial covenant in the second quarter.

Finally, last week, we amended our credit agreement to ease the 4.75 times senior secured leverage ratio, financial covenant to 6.5 times commencing in Q3 2020 for four quarters, with a gradual return to the original level by mid 2022. This was accomplished for a minimal upfront cost with no change in pricing.

As our Q2 results show, we are well in and expect to remain in compliance with our original covenant, but took this proactive measure as tail risk insurance for the next four to eight quarters. Overall, I am very pleased with our performance in Q2.

Despite COVID related volume declines, we successfully managed costs to ensure operating EBITDA and free cash flow delivery in the quarter. We also continued delivering key strategic priorities during the quarter to ensure continued momentum. I will now turn the call back to Ryan to discuss what we are seeing more broadly across the business..

Thank you, Charlotte. What I want to do now is tell you what we’re seeing in the world and what we expect in the future. So let me start with our numbers. So in Q2, Realogy’s closed transaction volume was down 24%. Brokerage closed transaction volume is down 30% in the quarter, with June down 17%.

Franchise closed transaction volume is down 20% in the quarter, with June only down 2%. And the main difference between our brokerage and franchise closed transaction volume numbers is the same geographic variation that we referenced last quarter. For example, in Q2, New York City closed transaction volume was down more than 50%.

Now some of the delta is driven by price, since there were fewer Q2 transactions in the highest price ranges, e.g. million dollar plus homes where our brokerage business is just more heavily represent.

But closed volume trends continue to improve in July based on the preliminary data through most of July, franchise closed transaction volume, excuse me, is up about 10% versus 2019 and brokerage closed transaction volume is up about 5% versus 2019. On the franchise side, the improving closed transaction volume is driven by price.

And on the brokerage side, the improvement is from both units and price. More interesting for the future is what’s happening with open transaction volume, which remember is the new contracts getting signed. Open volume is showing very strong growth. In June, open volume was up 21% versus 2019, up 30% in franchise and up 9% in brokerage.

And again, most of the delta was driven by geographic variation. And based on the preliminary data through most of July, this trend continues to improve with both franchise and brokerage open volume up approximately 30% versus 2019. So what’s driving such strong, open volume growth across both our brokerage and franchise businesses.

So let’s first, there’s definitely some pent-up demand from the massive drop off we all saw in late March, April and May. And second there’s no doubt, the incredibly low mortgage rates are helping more and more people buy homes. But third, low inventory is really driving up price.

Today, we are seeing inventory down at least 15% or more in every price band compared to a year ago when inventory was already at historic lows. And that depth of inventory decline and especially the fact that the inventory is down across all price bands is something our most tenured industry leaders here, at Realogy, say they have not seen before.

And then finally, we are seeing both incremental housing transactions and people willing to pay more for a house because of the societal shift driven by the COVID crisis. We are seeing increased demand for suburban living in multiple geographies, driving more transactions and higher prices.

We are seeing increased rotation in homes within suburban markets as people’s needs are changing, e.g. greater home office needs, e.g. putting a premium on outdoor space, e.g. the ability to live in a different geography given virtual work. We’re seeing well-off consumers accelerate second home purchases.

And frankly, we’re seeing the already ongoing flights to attractive tax and weather destinations accelerated. And we see these four consumer shifts, I just mentioned, when we look across both the transaction data and the anecdotes we get – when we survey large numbers of consumers and agents across our brands.

So we’re really excited by what we’re seeing in June and July, right? The new open volume is incredibly strong. But we’re not running away too much with our excitement, and you shouldn’t either, right? The volume drop in March, April and May was unprecedented. In the increase in open volume, we’re seeing here in June and July is also unprecedented.

And how long this growth will continue is hard to predict, right? There’s macro and COVID uncertainty. And we just don’t know how long trends like pent-up demand and like the consumer behavior changes we are seeing will last. So because of that, uncertainty, we are very focused on what is actually happening today and sharing that with you.

We are not actually extrapolating too far into the future. So look, wrapping up, Q2 began with unprecedented challenges and an unprecedented drop in volume in our industry.

And even though there was a tremendous amount of uncertainty at the start of the quarter, we are excited to execute too with $170 million in operating EBITDA from continuing operations. We moved very rapidly in the crisis. We demonstrated strong results on cost.

We continue to drive strategic success like technology delivery, agent growth, corporate expansion, and mortgage. We strengthened our balance sheet and we’ve even launched efforts to re-imagine our business and re-imagine how we operate the company.

Putting all this together, especially coupled with the very strong and improving open volumes we’re seeing in June and July. We really like our position for the future. So Charlotte and I look forward to taking your questions today..

[Operator Instructions] Our first question comes from the line of Tommy McJoynt with KBW. Your line is now open..

Good evening, guys. Thank you. I appreciate the metrics on June and July trends.

Now squaring that all up, do you have expectations for what you think transaction volumes will look like in 3Q and how that would break down by size versus price?.

Well, look, we’re not giving guidance on 3Q transaction volume, but I basically just gave you, the actual closed volume for the month of July most of the month. And I gave you our open volume in both June for the whole month and July month to date. Now open volume typically takes 45 to 50 days to turn into close volume.

And look, there is a wide range around those numbers. Some deals closing one day. Some take six months. So there’s a wide range around them. And then we’ve got a little bit extra uncertainty here because with COVID restriction, you can – sometimes they can delay closings. And if there’s a big problem, we did see a cancellation spike back in March a bit.

So that could always change things. But look, the opens are kind of up 30-plus percent. And so you can do your own math on those things and your own assumptions about the distributions. We don’t think it’s helpful to give you prediction as much as to give you the actual numbers and let you decide how you think the world’s going to go.

And again, we really love the trends. We can’t exactly say what will happen with August and September because of COVID and macro. But boy, that we love the trends and we thought giving you as much detail as we could effectively up through last week would be the most helpful thing of what we’re seeing in the market and what applies for our future..

Okay. Got it, thank you. And switching gears, there’s a few moving pieces in the franchise business this quarter. Obviously, some less marketing spend and you had announced the termination and the listing fee contracts.

Could you just kind of walk through those moving pieces and have made an impact that segments bottom line?.

Yes. So on the franchise side of things, we did have lower marketing expenses. We also had a lower contribution into the brand marketing fund. And so those basically are more correlated the absence of the revenue, but also the absence of the spend. We actually recognize that in the P&L as it gets spent. So that’s more of an EBITDA neutral.

There were some minor impacts in the P&L. And I think, when we publish the Q, there’ll be more information available for you in that.

But the bigger driver on the franchise side was the absence of the brand marketing fund and then the marketing expense, and then the additional cost savings, the temporary cost savings that plowed through the P&L on a pro rata basis, sort of based on the number of employees we have. That’s impacts across our business..

Got it. Thank you..

Thank you. And our next question comes from the line of Anthony Paolone with JPMorgan. Your line is now open..

Thank you and good afternoon. I guess my first question is, as you think about stronger housing market, which seems a little bit different than maybe what we were here for a few months ago.

How do you think that ends impacting the competitive landscape and things like splits? Does that bring back the heated competition compared to maybe what things were working like a few months ago, or does that change that in some way? Any color there that’d be great..

Yes, I draw less. Look, the competitive environment, bluntly has not really been correlated with the housing market strength. 2018 and parts of 2019 were kind of flatten, in some cases, even down housing markets and the competitive environment at times with just incredible.

We’re happy to like Q2, like Q1, felt like a much more rational competitive environment the year before, still tough out there. And we’re part of that tough competition out there in the market. The bigger thing probably for splits is, remember the stronger the volume is on – out there. The more people can kind of work their way up the tables.

And so I think there may have been a hypothesis that going into COVID that we housing years. Maybe you won’t have to pay as much in split because people don’t do as much volume, but the stronger volume comes back, then the more bulk business people don’t do.

And, especially as the higher end agents like Charlotte talked about, you get kind of higher splits, kind of coming from that as people move up the tables. But look, we’d rather have the stronger volume and pay people to move up the tables then the reverse. So we’re okay with that.

But the market strengthened and the competitive environments have not been really correlated. And I don’t think that is, what’s ever really driven the competitive environment. But there is the relationship with just pure volume and splits that we have talked about before..

Got it. And then in the title and mortgage business, which did really well. Any senses to how much was just, the sheer amount of refinancing is quite strong, but just also, it sounded like maybe you all gained market share.

And so I guess, particularly something like the guaranteed rate joint venture doing $35 million versus it was like $7 million a year ago.

If you had this level of market share, what would last year been just trying to dissect those as we think about the future of these?.

It’s funny because of all the refi stuff, it’s a little bit harder to rip that apart.

But look, let me just tell you our story, right, which is, we started this new thing a couple of years ago and we lost money on it the first year we were building it up and, we started off with not the greatest position as we were building off something that had been kind of falling apart before.

But boy, over the last couple of years, the team’s worked really hard. We’ve expanded the number of loan officers substantially, the quality of loan officers gotten better. We’ve expanded our geographic coverage and guaranteed rate us on the mortgage title side.

Our brokerage business has done a lot of work to better integrate this thing into the brokerage business to improve how much of our owned business, we capture effectively through our mortgage or excuse me, through our brokerage business. And that would have taken last year’s number and definitely made it bigger all on its own.

And then there was clearly a big chunk that comes from just the market here. So we haven’t actually ripped it apart to get to the decimal points you’re talking about, but we really liked the trajectory. And we liked the financials.

And this shows the power of ancillary services and a lot of people talk about someday they’ll make money from ancillary services, but we’re doing it right now in this quarter was one of our better examples of it..

Okay.

Can I sneak one more in?.

Sure..

So one thing I’m curious about because you have a lot of people in the organization there that have been through pretty extreme ups and downs.

Any thoughts on just how to bridge high unemployment rate and maybe a recovery that seems to be stalling a little bit here with just a housing market that’s showing very strong trends and trying to think about how sustainable that might be?.

We don’t know. We’ve talked about it as we look, this is unprecedented. No one has seen the speech. No one at Realogy, that I’ve only been here a few years, but I talked to all of the veterans, no one has ever seen.

Even if you go back to the great recession, the speed of the drop that happened in late March, April, especially, and no one has ever seen the speed of the comeback that’s happened in June, July. Like we were talking to, we’re going to have our busiest closing day we’ve ever had since I’ve been here tomorrow.

And we were literally talking about taking people from other parts of our company to help our title team get closings done. And so it’s just an unprecedented thing. And just like the GDP numbers today, we’re way down or yesterday or whenever we’re way down, and the personal income numbers were like up.

There’s a bunch of things in the economy right now that has economist by training, but thankfully never practice seem very hard to square in this unique environment we’re in. You’ve just hit on another one. I don’t have an answer for you, but what I do have is the actual data that we’re seeing in the market.

And then what we’re worried about that could hurt that down the road. But also just what the momentum is this more like housing market and our company has. But I don’t think there’s an answer that squares the circle on your question, just like three or four other kind of big macro contradictions out there in our economy right now..

Okay. Fair enough. Thank you..

Thank you. And our next question comes from the line of Carter Trent with Stephens. Your line is open..

Hey guys, thanks for taking my question. So banks are getting stricter on who they lend to. So with credit kind of tightening the way it is.

Do you expect that to slow housing down any? And anecdotally, are you guys hearing about any transactions that are falling through, because buyers can’t get a kick in a mortgage?.

We are not seeing that yet. We’ve heard the same. There was a bit of noise in the jumbo market back in April, May. We may have even mentioned in our last call, if we got the question, I don’t even remember.

But it was – there was a bit of noise in the jumbo market about people tightening and a bit of a harder time getting mortgages, but we have not seen that playing out yet. Like the other factors that I listed that could be one of the things that slows down the party at some point here.

But when you’ve got macro uncertainty and COVID risk and some of the consumer trends and not knowing how long they’re going to run, I would just put that on the list of things that could be a headwind to housing. But we’re not seeing that be a headwind right now.

And other than that jumbo market anecdote from a few months ago, this topic has not come up for me, my team or our mortgage business in the last couple of months..

Got it. Thanks, Ryan. And one more on the cost saves. Charlotte, can you remind me how much is expected in the back half of this year? And should we think about the cost saves is kind of a net reduction.

Can you expend flight items? So basically what I’m getting at is, are you guys planning to reinvest some of the – kind of the gross, expected savings?.

Yes. So how you should think about it as in the two buckets, the first is the $70 million to $90 million that we talked about, which is pretty evenly, phased by quarter throughout the year. So those are the permanent cost reductions we had already announced.

And then from a temporary cost save, we had the $80 million to $100 million that we delivered in Q2. And then that drops down to $30 million in Q3, and next to nothing in Q4. As far as reinvesting back, there’s always other costs that hit the business. We do have slightly higher litigation right now, there’s other things going on.

But so it’s not a direct correlation. Like there’s some spend back in the business, but it’s relatively minor..

Okay. Got it. Thanks guys. I appreciate you taking my questions..

Thank you. And next question comes from the line of Matthew Bouley with Barclays. Your line is open..

Good afternoon. Hope everyone is doing well. Thanks for taking the questions. So with the brokerage business accelerating up 30% in July and open transactions, and as you mentioned, Ryan, we’re all trying to figure out kind of what’s sustainable versus what’s pushed out or pent-up.

Maybe it’d be helpful if you could talk through some of the geographies there, so trying to figure that out a little, I know you mentioned New York City being down 50% at one point.

What’s the recovery looks like there and in some of the other markets that were hit hardest versus, what did some of those markets that perhaps under the same level of lockdowns, et cetera. How did those trends versus to what degree have those markets accelerated? Thank you..

Yes, sure. That’s a great question. Let me just give you some detail. I’m only going to focus on the brokerage business and let me talk about open volume, which was kind of plus 30% through July. So look, New York City is still by far the toughest, just given the degree of lockdown and challenges there. It’s still pretty substantially negative.

It’s not negative 50% anymore, but it’s negative 30% to 40% still, when you look at July. The other one that was really tough, which is big for us was California was negative in terms of open volume through May, June was kind of breakeven. July is up 30%. But that’s the first month up from after a lot of decline.

Whereas, places like Florida were pretty good in June and very good in July way above 30%, Texas and Arizona even with the COVID situations there, plus 25%, 30%. New Jersey is one of those destination suburbs is up more than 50%. New England is up more than 30%.

And so it’s really, the geographies, the kind of did better through the April, May time, like, Florida and Texas, and maybe a New England have continued to be stronger than the average. The ones that were really tough, like in California, like in New York are improving. But are still out are kind of below the average.

And but then the overall, obviously looking pretty good, but so we’re watching it pretty closely at those local levels. And again, a lot of the things like New Jersey and New England is that suburban effect, I talk about.

Connecticut is on fire, right? New Jersey is on fire, Florida, which also includes that vacation home and that would you call it, attractive tax weather thing, acceleration on the consumer side.

So there’s a lot of things coming together to lead to some of the regional strengths, and some of the regional challenges, but that’s a little bit of local color what we’re seeing on the brokerage side and franchises in the same ballpark, a little the numbers are different, but the direction is often the same..

Got it. That’s very helpful, exactly, what I was looking for. And then I had a longer term question on splits as well, obviously up over 74% or so for the second consecutive quarter and gave some color around the drivers of that.

It sounded like there’s going to be a bit of mix in there, which may or not – may not normalize to some degree in the near term here.

And then the retention side, which seems a little more structural and the question is really, if the market is normalized a year from now, however we want to define that could splits actually step back a bit for the first time in a while, or is 74% kind of the starting point. And we’re just going to go from here. Thank you..

Yes. Thank you for the question. I think we’re taking it day by day here. And as far as the drivers for Q2, we definitely think part of that is driven by COVID. And part of that will continue throughout the rest of this year. As far as next year, we’re not giving guidance for next year on commission splits. We need to wait to see how it evolves right now.

As we sort of unwind from the crisis, as far as unwinding, I think we’d all like to see that, but at this point that’s not something that we would guide you too..

Okay. Understood. Thank you both..

Thank you. And our next question comes from the line of Stephen Kim with Evercore ISI. Your line is now open..

Yes. Thanks a lot guys. Exciting times. Wanted to ask a couple of clarifying questions if I could. Charlotte, you mentioned the temporary savings in a range for Q2. What was the actual number in 2Q? And then the brokerage commissions were up year-over-year, which was encouraging.

I was just wanting to make sure the lost USAA affinity business, we thought that that might push brokerage commissions down. Did that actually impact 2Q or not? We can start with those..

Sure. Yes. So we definitely were at the higher end of the range that we gave you. So you can use the higher end of the range from a temporary cost savings perspective in Q2. As far as USAA goes, it’s actually a negative to commission splits.

It’s an increase year-over-year, because those transactions came at a lower commission split because of the high-quality led….

I’m sorry, Charlotte. I meant the actual commission rate..

Sorry, what are you….

I meant the actual brokerage commission..

You mean the average broker commission rate?.

Correct?.

The ABCR was actually up in the quarter a few….

Right..

So yes, we were actually up, but you’re asking if that drove it. No, that’s….

I’m asking what are the – I guess, I’m just asking whether or not the USAA – the lost USAA affinity business had any impact – whether it had its impact in this quarter or whether there was some lingering business related to the USAA affinity relationship that actually….

It did have an impact – yes, it did have an impact in the quarter, but that was an increase in commission splits. That’s where you’re going to see the impact in the quarter, because the transactions that we did were weighted to higher commissions, not the lower ones that we would have paid on a USAA business, which was nonexistent this quarter..

Okay. Got it. That’s what I needed. Okay. And then the franchise business the margins there, I was thinking that you lost some – you had a listing fee relationship. I think that was going to impact, like, I think it got accelerated into Q2.

Did that actually hit 2Q, like you were thinking it was going to – I know initially you thought it would be not until 2022? That’s the one that I’m referring to. Did that actually have an impact in 2Q because we really couldn’t even see the impact of it..

Yes, exactly. There was an impact in Q2. And it was – it has been terminated, so it did get realized in the quarter..

Right. So the margins we’re looking include that. Yes. Great. And then lastly, Ryan, this is key question, right, that I want to try to figure out. The pent up demand or whatever, or is this actually tied to secular forces, which we actually think it’s the latter. But when you survey your customers, I know you’ve done that.

I’m curious as to whether or not you’re asking them when they decided to start their home purchase process, because I might give you a sense for whether you’re seeing some pent up action or whether you’re talking about people who’ve just – it’s like sort of just the demand has been created when COVID hit in the aftermath.

So have you asked that question? Are you getting any sense from that?.

The sense I get and I kind of ended with it, because I think the biggest one is there’s like pent up demand kind of is what it is, but that’s going to run out someday. And for all we know it’s already run out, possibly who knows.

The price thing, the upward price benefit, we’re all getting in volume on inventory that may run for a pretty long time because there’s just not that much inventory out there. And even when you look at the July new listings, there’s clearly a lot more demand than the new inventory coming to the market.

The real big question is how long do you kind of secular consumer changes are going to kind of go on.

And from the survey stuff and the agent anecdotes and franchisee anecdotes, I get, I think a lot of that – the decision, it was not pent up demand, it’s decisions people have made in months like May and June, for example, right? Hence more June and July kind of open volume strength.

And some of those have some natural ends to them, right? If people are accelerating their second home purchases, which isn’t that big of a – in the scheme of things, in my view, there’s still – you’re only going to do one second on purchase property. So, some of that’s going to run out.

The more secular shift to suburban living and some of the rotation within the suburban markets, that’s the one – those are the ones with both the big numbers associated with them, but also the big uncertainty of, is it a small group of people kind of rush into the accidents to do those things, or is that a really big secular trend that could go on for a long time.

And I just think we’re too early, right, to actually know the answer to that yet, because again, we’re kind of looking at seven weeks here, a very interesting kind of unprecedented volume acceleration.

And so that’s why we kind of focused on look, here’s what we’re seeing and even telling you what we’re seeing in the different local geographies for the previous question.

But there’s a real chance that this thing is got a lot of legs to it, but there’s also a real chance that whether it’s COVID, the macro or something else, you could – this thing could kind of like fall off a cliff pretty quickly and go back to kind of a normal housing market.

I think the low rates parts probably here with us for awhile and that’s very favorable. So those are my thoughts, but that’s also why we’ve probably gone more detail in this call than we usually do and how we’re thinking about the future..

If there’s one thing that as you think about managing your business longer term, that you would do differently, if that – if these secular trends are real versus if they are not, what comes to mind?.

Well, look, the easiest answer, but probably not the most important is, what you would do differently on your cost position, right? If we’re in just to kind of a volume bubble here, right? What you would do on the cost is different than if you’re in a much stronger housing market for multiple years, in terms of kind of how you’d want to kind of manage the margin and make sure you’re investing to support a much larger volume than your kind of you’ve been used to dealing with this industry for many years.

So that’s probably the easiest one. I think there’s some of the stuff on what we’re doing virtualizing the transaction that will be increasingly helpful if this is an ongoing trend. And then, I like our position in business mix.

People think we’re like the urban real estate company, but like ours – in every geography we’re in, we’re in like 50 of the biggest 100 metros in the U.S.

Our suburban business is bigger than our urban business, right? Even like a New York City, we love our business in Manhattan and Brooklyn, it’s huge, but go add up our business between Sotheby’s, Coldwell Banker and Corcoran on Long Island, Westchester, Connecticut and New Jersey.

And wow, like, we will be a beneficiary of this suburban thing if it continues. So, keeping that pretty high in people’s minds is important too if these secular trends to the suburban thing really do continue..

Great. Thanks very much, Ryan..

Thank you, Stephen..

Thank you. And our last question comes from the line of Jack Micenko with Susquehanna. Your line is now open..

Hi, good afternoon. First one for Charlotte clarification, you had said you learned some things from the temporary cost seasoning, and I think you had said potential facilities lease savings of $10 million to $15 million.

Am I right on the number? And is that – are you thinking of that as a 2021 time of reality? Or how do we think about that?.

Absolutely. You are right on the number. And that’s just the early stuff that we’ve been able to identify and start to execute on. Some of that could start hitting later in the year, but yes, I think the bigger piece of it will start heading next year..

And Jack, if I could just editorialize on that for a minute. Look, I think every good company is trying to reimagine themselves a bit with both what we’ve learned from virtual work and the COVID crisis and where the world may be going. I’m really excited that we started doing that work.

As we talked in our last call, that’s kind of the next generation of $70 million – $92 million of cost savings that we did last year and even some of the temporary stuff we did now. And to already have kind of one very tangible example that we made decisions on to kind of put in the books feels good.

But both on the transaction side and the company side, that’s just a really important thing. And I was really glad Charlotte was able to share something with you about it today. And we’re looking forward to what else we’re finding on that. It’s been an amazing learning experience.

Most of the learnings aren’t ready for public disclosure yet, but boy, are we excited about doing that work..

Yes, I think a lot of corporate America’s coming to the realization that maybe the real estate picture for them has changed maybe permanently..

But Jack, it goes – just not to editorialize, it goes far beyond real estate. It gets into employee productivity, in buildings versus at home, it gets into employee satisfaction, it gets into where you can recruit. It gets into all the stuff.

Again, I think, tons of companies are doing all that same kind of work, but we’re excited to be pushing pretty hard on it. And the facilities one was a great tangible dollar one you can kind of go at pretty quickly. And so, we’re having fun with it..

I’ll let you wrap up with a big picture question, Ryan. What shakes the tree on inventory? On one side we always hear, price appreciation, bring sellers to the market. On the other hand, you hear today, hey, I’d like to sell my house, but I don’t know where I’ve got to go.

And I don’t want to get caught in a situation where I sell my home in three days in a multiple bed and have nowhere to go.

So does this environment actually create somewhat of a more vicious cycle? Just curious how you were thinking about that?.

Yes. Well, we start with the worry that you’ve got. I mean, the inventory for the last, whatever two and a half years has been pretty historically low when you look at how many months inventory are out there, right? If six months is the historical average, it’s been like four months inventory for a couple years and it’s even less right now.

And all the things that have historically shaken a little bit of inventory, like the higher price thing have actually not done to your point. Look, I still believe there’s a huge new construction thing going on here, where as a society, we’re just not building enough homes period of any type.

And you can see it in the new construction numbers and where they are relative to like, even just the late 1990’s and stuff like that. And there’s all kind of reasons for that. So I think that’s a piece.

The thing that may do a little more unlocking though to me, if I was going to look for a positive is that thing we’re seeing of kind of rotation in the suburban market where people want to need different things.

But when we survey, thousands of customers and agents, what people want to need different isn’t the same thing, right? Some people are looking for more on the home office side or more on the external space side, others have those things, but don’t want or need them as much as before.

And that might be able to actually unlock some inventory if that suburban rotation is not a temporary thing and is a longer thing. But the tight inventory thing is a big worry as an industry. And I think even as a society that we don’t talk about enough. I wish, I had better answers on it.

But I do think we’re well positioned to capture, whether it comes in units or price. And because of that suburban massive presence we have, I talked about, I think, where the world is going is in our favor. But we would love more inventory out there too..

Got it. Appreciate the thoughts..

Thank you..

Thank you. And our last question comes from the line of Ryan McKeveny with Zelman & Associates. Your line is now open..

Thank you so much guys for squeezing me in. So two quick ones, one the commission rate, and I apologize if I missed this earlier. But the commission rate actually ticked up a bit in both the franchise and own side of the business. And I think that’s the first time in a while we’ve actually seen that tick higher.

I think in this industry, typically when inventory is very tight, you actually can see some compression on the commission rate, just given kind of the competition amongst agents.

So curious if you can just comment on kind of what drove that this quarter? And then second question on the Corcoran side of things, on the franchise we’ve seen some of the announcements. I’m just curious what you can say regarding kind of the pipeline and how things are going thus far relative to maybe how you expected things to go.

Obviously COVID throws a bit of a wrench into things. But just curious big picture how that’s going versus you anticipated. And ultimately what the pipeline is looking like in that side of things. Thank you..

Thanks, Ryan. I’ll take both of your questions. So look, on the average broker commission rate. Look, we were happy to see it tick up a little bit in franchise and brokerage. And that’s great. We don’t see a trend there, something that numbers kind of bounces around.

When you really look back at it over the last, not just a couple of years, but multiple years, those numbers are pretty stable. And a lot of times they move around because of mix. I don’t think this quarter was because of mix. But we’ll take the fact that it was a little bit better, but I don’t think there’s yet a macro trend there.

The part of the reason, I think it didn’t go down, you may want to keep in mind is actually the power of agents. I know you talked about agent competition, but there’s – agents earn this commission in my belief because they actually provide real value. And agents, I think provided even more value during the COVID kind of quarter that we just finished.

In terms of the work they were able to do to help customers set the right price, often a higher price, by the way, to the customer’s benefit and to get deals done in a much more uncertain and much more health and safety kind of time. So, the uses of agents in Q2, I bet is actually up versus normal.

That’s a guess, I don’t have the data, but that’s my guess. And I think you should remember, all of the eye buyers shut down and agents powered on and agents got hundreds of thousands of deals done, Realogy agents and other agents.

And so, you can see a little bit of a market dynamic there where, somebody has other price or other options kind of went away. So I don’t think there’s a lot of news in that other than it’s kind of continues to be a relatively stable thing out there.

But I do think that there’s – people are using agents and frankly, maybe even more during this crisis because agents are helping customers power through and get their homes bought and/or sold safely. So I’m a big fan. And I think they’re actually proved a lot of it in the quarter. Look on the Corcoran side, we’re excited about the franchise launch.

We’re excited that, we’re building a portfolio, we added a couple more – our first Corcoran franchisee just bought a great firm in Northern California to expand. That’s great. We’ve got a pipeline. We can’t publicly announce the – what’s already been signed and what’s going to be announced soon, hopefully. But we’ve got a good pipeline.

We feel good about it. Just like our Sotheby’s business that we launched, whatever it was, coming up on 15 years or more than 15 years ago or Better Homes and Gardens, it was a dozen years ago. You don’t build these franchise businesses overnight, but boy, we’re excited by the build we’ve had so far and what the pipeline looks.

And we really like obviously the economics of franchise real estate, especially at the high end where Corcoran plays. So thank you, Ryan, for both those good questions..

Very helpful. Thank you..

And ladies and gentlemen, this does conclude today’s question-and-answer session. And this does conclude today’s conference call. Thank you for your participation and you may now disconnect..