Edgar Filing: REALOGY HOLDINGS CORP.

Document

______________________________________________________________________________________________________________________________________________________________________

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 March 31, 2019

¨ 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 every Interactive Data File required to be submitted 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 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, smaller reporting companies, or emerging growth companies. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.



	Large accelerated filer	Accelerated filer	Non-accelerated filer	Smaller reporting company	Emerging growth company
Realogy Holdings Corp.	þ	¨	¨	¨	¨
Realogy Group LLC	¨	¨	þ	¨	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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



Securities registered pursuant to Section 12(b) of the Act:
	Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Realogy Holdings Corp.	Common Stock, par value $0.01 per share	RLGY	New York Stock Exchange
Realogy Group LLC	None	None	None

There were 114,213,121 shares of Common Stock, $0.01 par value, of Realogy Holdings Corp. outstanding as of April 30, 2019.

__________________________________________________________________________________________________________________

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TABLE OF CONTENTS



	Page
Introductory Note		1
Forward-Looking Statements		1

PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Report of Independent Registered Public Accounting Firm for Realogy Holdings Corp.	3
	Report of Independent Registered Public Accounting Firm for Realogy Group LLC	4
	Condensed Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018	5
	Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2019 and 2018	6
	Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018	7
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018	8
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.	Quantitative and Qualitative Disclosures about Market Risks	49
Item 4.	Controls and Procedures	50
PART II	OTHER INFORMATION	52
Item 1.	Legal Proceedings	52
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53
Item 6.	Exhibits	53
Signatures		54
Exhibit Index		55

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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 Amended and Restated Credit Agreement dated as of March 5, 2013, as amended, amended and restated, modified or supplemented from time to time (the "Senior Secured Credit Agreement") that governs our senior secured credit facility (the "Senior Secured Credit Facility", which includes our "Revolving Credit Facility" and our "Term Loan B") and the Term Loan A Agreement dated as of October 23, 2015, as amended from time to time (the "Term Loan A Agreement") that governs our senior secured term loan A credit facility (the "Term Loan A Facility") and certain references in this report to our consolidated indebtedness exclude Realogy Holdings with respect to indebtedness under the Senior Secured Credit Facility and Term Loan A Facility. In addition, while Realogy Holdings is a guarantor of Realogy Group's obligations under its unsecured notes, Realogy Holdings is not subject to the restrictive covenants in the indentures governing such indebtedness.

As used in this Quarterly Report on Form 10-Q, the terms "5.25% Senior Notes", "4.875% Senior Notes" and "9.375% Senior Notes" refer to our 5.25% Senior Notes due 2021, our 4.875% Senior Notes due 2023, and our 9.375% Senior Notes due 2027, respectively, and are referred to collectively as the "Unsecured Notes." The term "4.50% Senior Notes" refers to our 4.50% Senior Notes due 2019 (paid in full in February 2019).

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). Forward-looking statements include all statements that do not relate solely to historical or current facts, and can generally be identified by the use of words such as "believe," "expect," "anticipate," "intend," "project," "estimate," "plan," 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.

In particular, information appearing under "Management's Discussion and Analysis of Financial Condition and Results of Operations" includes forward-looking statements. Forward-looking statements inherently involve many risks and uncertainties that could cause actual results to differ materially from those projected in these statements. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, it is based on management's current plans and expectations, expressed in good faith and believed to have a reasonable basis. However, we can give no assurance that any such expectation or belief will result or will be achieved or accomplished.

The following include some, but not all, of the factors that could affect our future results and cause actual results to differ materially from those expressed in the forward-looking statements:


•	adverse developments or the absence of sustained improvement in general business, economic or political conditions or the U.S. residential real estate markets, either regionally or nationally, including but not limited to:


◦	a decline or a lack of improvement in the number of homesales;


◦	stagnant or declining home prices;


◦	a reduction in the affordability of housing;


◦	increasing mortgage rates and/or constraints on the availability of mortgage financing;


◦	insufficient or excessive home inventory levels by market and price point;


◦	a lack of improvement or deceleration in the building of new housing and/or irregular timing or volume of new development closings;


◦	the potential negative impact of certain provisions of the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) on (i) home values over time in states with high property, sales and state and local income taxes and (ii)

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homeownership rates; and/or


◦	the impact of recessions, slow economic growth, or a deterioration in other economic factors that particularly impact the residential real estate market and the business segments in which we operate whether broadly or by geography and price segments;


•	increased competition in the industry and for the affiliation of independent sales agents, including through:


◦	competing real estate brokerages, including those seeking to disrupt historic real estate brokerage models;


◦	competitors seeking to eliminate brokers or agents from, or minimize the role they play in, the homesale transaction; and


◦	other industry participants otherwise competing for a portion of gross commission income;


•	continuing pressure on the share of gross commission income paid by our company owned brokerages and affiliated franchisees to affiliated independent sales agents and independent sales agent teams;


•	our inability to successfully develop or procure technology that supports our strategy to grow the base of independent sales agents at our company owned and franchisee real estate brokerages;


•	our geographic and high-end market concentration, including the heightened competition for independent sales agents in those geographies and price points;


•	our inability to enter into franchise agreements with new franchisees or renew existing franchise agreements at current contractual royalty rates without increasing the amount and prevalence of sales incentives;


•	the lack of revenue growth or declining profitability of our franchisees and company owned brokerage operations or declines in other revenue streams, such as third-party listing fees;


•	the loss of a significant affinity client or multiple significant relocation clients or changes in corporate relocation practices resulting in fewer employee relocations, reduced relocation benefits and/or increasing competition in corporate relocation;


•	an increase in the experienced claims losses of our title underwriter;

•

our failure or alleged failure to comply with laws, regulations and regulatory interpretations and any changes or stricter interpretations of any of the foregoing (whether through private litigation or governmental action), including but not limited to (1) state or federal employment laws or regulations that would require reclassification of independent contractor sales agents to employee status, (2) privacy or data security laws and regulations, (3) RESPA or other federal or state consumer protection or similar laws and (4) antitrust laws and regulations;


•	risks relating to our ability to return capital to stockholders including, among other risks, the restrictions contained in our debt agreements, in particular the indenture governing the 9.375% Senior Notes;


•	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 and risks relating to our ability to refinance or repay our indebtedness or incur additional indebtedness; and


•	risks and growing costs related to both cybersecurity threats to our data and customer, franchisee, employee and independent sales agent data, as well as those related to our compliance with the growing number of laws, regulations and other requirements related to the protection of personal information.

More information on factors that could cause actual results or events to differ materially from those anticipated is included from time to time in our reports filed with the Securities and Exchange Commission ("SEC"), including our Annual Report on Form 10-K for the year ended December 31, 2018 (the "2018 Form 10-K"), particularly under the captions "Forward-Looking Statements," "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Most of these factors are difficult to anticipate and are generally beyond our control. You should consider these factors in connection with any forward-looking statements that may be made by us and our businesses generally.

All forward-looking statements herein speak only as of the date of this report and are expressly qualified in their entirety by the cautionary statements included in or incorporated by reference into this report. Except as is required by law, we expressly disclaim any obligation to publicly release any revisions to forward-looking statements to reflect events after the date of this report. For any forward-looking statement contained in this report, 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.

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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.

Results of Review of Interim Financial Statements

We have reviewed the accompanying condensed consolidated balance sheet of Realogy Holdings Corp. and its subsidiaries (the "Company") as of March 31, 2019, and the related condensed consolidated statements of operations, comprehensive loss and cash flows for the three-month periods ended March 31, 2019 and2018, including the related notes (collectively referred to as the “interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2018, and the related consolidated statements of operations, comprehensive income, equity, and of cash flows for the year then ended (not presented herein), and in our report dated February 26, 2019, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheetinformation as of December 31, 2018, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Basis for Review Results

These interim financial statements are the responsibility of the Company’s management. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our review in accordance with the standards of the PCAOB. 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 PCAOB, 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.

/s/ PricewaterhouseCoopers LLP

Florham Park, New Jersey

May 2, 2019

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholder of Realogy Group LLC

Results of Review of Interim Financial Statements

We have reviewed the accompanying condensed consolidated balance sheet of Realogy Group LLC and its subsidiaries (the "Company") as of March 31, 2019, and the related condensed consolidated statements of operations, comprehensive loss and cash flows for the three-month periods ended March 31, 2019 and 2018, including the related notes (collectively referred to as the "interim financial statements"). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) and in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of the Company as of December 31, 2018, and the related consolidated statements of operations, comprehensive income, and of cash flows for the year then ended (not presented herein), and in our report dated February 26, 2019, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet information as of December 31, 2018, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Basis for Review Results

These interim financial statements are the responsibility of the Company's management. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our reviews in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America applicable to reviews of interim financial information. 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 PCAOB or in accordance with auditing standards generally accepted in the United States of America, 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.

/s/ PricewaterhouseCoopers LLP

Florham Park, New Jersey

May 2, 2019

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REALOGY HOLDINGS CORP. AND REALOGY GROUP LLC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share data)

(Unaudited)



	Three Months Ended
	March 31,
	2019			2018
Revenues
Gross commission income	$	799		$	902
Service revenue	188			197
Franchise fees	70			79
Other	57			51
Net revenues	1,114			1,229
Expenses
Commission and other agent-related costs	575			645
Operating	380			392
Marketing	69			67
General and administrative	95			89
Restructuring costs, net	12			30
Lease asset impairment	1			—
Depreciation and amortization	49			48
Interest expense, net	63			33
Loss on the early extinguishment of debt	5			7
Total expenses	1,249			1,311
Loss before income taxes, equity in (earnings) losses and noncontrolling interests	(135		)	(82		)
Income tax benefit	(35		)	(19		)
Equity in (earnings) losses of unconsolidated entities	(1		)	4
Net loss	(99		)	(67		)
Less: Net income attributable to noncontrolling interests	—			—
Net loss attributable to Realogy Holdings and Realogy Group	$	(99	)	$	(67	)

Loss per share attributable to Realogy Holdings:
Basic loss per share	$	(0.87	)	$	(0.51	)
Diluted loss per share	$	(0.87	)	$	(0.51	)
Weighted average common and common equivalent shares of Realogy Holdings outstanding:
Basic	114.0			130.3
Diluted	114.0			130.3

See Notes to Condensed Consolidated Financial Statements.

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REALOGY HOLDINGS CORP. AND REALOGY GROUP LLC

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In millions)

(Unaudited)



	Three Months Ended
	March 31,
	2019			2018
Net loss	$	(99	)	$	(67	)
Currency translation adjustment	1			1
Defined benefit pension plan - amortization of actuarial loss to periodic pension cost	1			1
Other comprehensive income, before tax	2			2
Income tax expense (benefit) related to items of other comprehensive income amounts	—			—
Other comprehensive income, net of tax	2			2
Comprehensive loss	(97		)	(65		)
Less: comprehensive income attributable to noncontrolling interests	—			—
Comprehensive loss attributable to Realogy Holdings and Realogy Group	$	(97	)	$	(65	)

See Notes to Condensed Consolidated Financial Statements.

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REALOGY HOLDINGS CORP. AND REALOGY GROUP LLC

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except share data)

(Unaudited)



	March 31, 2019			December 31, 2018
	March 31, 2019			December 31, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	243		$	225
Restricted cash	3			13
Trade receivables (net of allowance for doubtful accounts of $11 and $9)	155			146
Relocation receivables	223			231
Other current assets	147			153
Total current assets	771			768
Property and equipment, net	302			304
Operating lease assets, net	544			—
Goodwill	3,712			3,712
Trademarks	749			749
Franchise agreements, net	1,210			1,227
Other intangibles, net	246			254
Other non-current assets	277			276
Total assets	$	7,811		$	7,290
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	154		$	147
Securitization obligations	187			231
Current portion of long-term debt	440			748
Current portion of operating lease liabilities	130			—
Accrued expenses and other current liabilities	346			401
Total current liabilities	1,257			1,527
Long-term debt	3,335			2,800
Long-term operating lease liabilities	473			—
Deferred income taxes	352			389
Other non-current liabilities	205			259
Total liabilities	5,622			4,975
Commitments and contingencies (Note 9)
Equity:
Realogy Holdings preferred stock: $.01 par value; 50,000,000 shares authorized, none issued and outstanding at March 31, 2019 and December 31, 2018	—			—
Realogy Holdings common stock: $.01 par value; 400,000,000 shares authorized, 114,205,678 shares issued and outstanding at March 31, 2019 and 114,620,499 shares issued and outstanding at December 31, 2018	1			1
Additional paid-in capital	4,841			4,869
Accumulated deficit	(2,606		)	(2,507		)
Accumulated other comprehensive loss	(50		)	(52		)
Total stockholders' equity	2,186			2,311
Noncontrolling interests	3			4
Total equity	2,189			2,315
Total liabilities and equity	$	7,811		$	7,290

See Notes to Condensed Consolidated Financial Statements.

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REALOGY HOLDINGS CORP. AND REALOGY GROUP LLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)



	Three Months Ended March 31,
	2019			2018
Operating Activities
Net loss	$	(99	)	$	(67	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	49			48
Deferred income taxes	(37		)	(28		)
Lease asset impairment	1			—
Amortization of deferred financing costs and discount	3			4
Loss on the early extinguishment of debt	5			7
Equity in (earnings) losses of unconsolidated entities	(1		)	4
Stock-based compensation	8			9
Mark-to-market adjustments on derivatives	14			(12		)
Other adjustments to net loss	—			4
Net change in assets and liabilities, excluding the impact of acquisitions and dispositions:
Trade receivables	(9		)	(8		)
Relocation receivables	8			(27		)
Other assets	(11		)	(17		)
Accounts payable, accrued expenses and other liabilities	(34		)	(45		)
Dividends received from unconsolidated entities	1			1
Other, net	(1		)	(3		)
Net cash used in operating activities	(103		)	(130		)
Investing Activities
Property and equipment additions	(24		)	(25		)
Investment in unconsolidated entities	(2		)	(4		)
Proceeds from investments in unconsolidated entities	—			19
Other, net	3			1
Net cash used in investing activities	(23		)	(9		)
Financing Activities
Net change in Revolving Credit Facility	140			232
Payments for refinancing of Term Loan B	—			(4		)
Proceeds from refinancing of Term Loan A & A-1	—			17
Proceeds from issuance of Senior Notes	550			—
Redemption of Senior Notes	(450		)	—
Amortization payments on term loan facilities	(7		)	(3		)
Net change in securitization obligations	(45		)	(11		)
Debt issuance costs	(7		)	(16		)
Cash paid for fees associated with early extinguishment of debt	(4		)	—
Repurchase of common stock	(20		)	(94		)
Dividends paid on common stock	(10		)	(12		)
Taxes paid related to net share settlement for stock-based compensation	(6		)	(9		)
Payments of contingent consideration related to acquisitions	(2		)	—
Other, net	(5		)	(7		)
Net cash provided by financing activities	134			93
Effect of changes in exchange rates on cash, cash equivalents and restricted cash	—			—
Net decrease in cash, cash equivalents and restricted cash	8			(46		)
Cash, cash equivalents and restricted cash, beginning of period	238			234
Cash, cash equivalents and restricted cash, end of period	$	246		$	188
Supplemental Disclosure of Cash Flow Information
Interest payments (including securitization interest of $2 for both periods presented)	$	40		$	21
Income tax payments, net	1			4

See Notes to Condensed Consolidated Financial Statements.

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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 unaudited Condensed Consolidated Financial Statements reflect all normal and recurring adjustments necessary for a fair statement of Realogy Holdings and Realogy Group's financial position as of March 31, 2019 and the results of operations and comprehensive loss for the three months ended March 31, 2019 and 2018 and cash flows for the three months ended March 31, 2019 and 2018. The Consolidated Balance Sheet at December 31, 2018 was derived from audited annual financial statements but does not contain all of the footnote disclosures from the annual financial statements. The Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2018.

As discussed in further detail below under Recently Adopted Accounting Pronouncements, effective January 1, 2019, the Company adopted Accounting Standard Update No. 2016-02 (Topic 842) "Leases". The adoption of this standard is reflected in the amounts and disclosures set forth in this Form 10-Q.

Fair Value Measurements

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.



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.

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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 Company measures financial instruments at fair value on a recurring basis and recognizes transfers within the fair value hierarchy at the end of the fiscal quarter in which the change in circumstances that caused the transfer occurred.

The following table summarizes fair value measurements by level at March 31, 2019 for assets and liabilities measured at fair value on a recurring basis:



	Level I		Level II		Level III		Total
Deferred compensation plan assets (included in other non-current assets)	$	2	$	—	$	—	$	2
Interest rate swaps (included in other non-current assets)	—		1		—		1
Interest rate swaps (included in other non-current liabilities)	—		26		—		26
Contingent consideration for acquisitions (included in accrued expenses and other current liabilities and other non-current liabilities)	—		—		7		7

The following table summarizes fair value measurements by level at December 31, 2018 for assets and liabilities measured at fair value on a recurring basis:



	Level I		Level II		Level III		Total
Deferred compensation plan assets (included in other non-current assets)	$	2	$	—	$	—	$	2
Interest rate swaps (included in other non-current assets)	—		6		—		6
Interest rate swaps (included in other non-current liabilities)	—		16		—		16
Contingent consideration for acquisitions (included in accrued expenses and other current liabilities and other non-current liabilities)	—		—		10		10

The fair value of the Company’s contingent consideration for acquisitions is measured using a probability weighted-average discount rate to estimate future cash flows based upon the likelihood of achieving future operating results for individual acquisitions. These assumptions are deemed to be unobservable inputs and as such the Company’s contingent consideration is classified within Level III of the valuation hierarchy. The Company reassesses the fair value of the contingent consideration liabilities on a quarterly basis.

The following table presents changes in Level III financial liabilities measured at fair value on a recurring basis:



	Level III
Fair value of contingent consideration at December 31, 2018	$	10
Additions: contingent consideration related to acquisitions completed during the period	—
Reductions: payments of contingent consideration	(3		)
Changes in fair value (reflected in the Condensed Consolidated Statement of Operations)	—
Fair value of contingent consideration at March 31, 2019	$	7

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The following table summarizes the principal amount of the Company’s indebtedness compared to the estimated fair value, primarily determined by quoted market values, at:



	March 31, 2019				December 31, 2018
Debt	Principal Amount		Estimated Fair Value (a)		Principal Amount		Estimated Fair Value (a)
Senior Secured Credit Facility:
Revolving Credit Facility	$	410	$	410	$	270	$	270
Term Loan B	1,067		1,035		1,069		1,010
Term Loan A Facility:
Term Loan A	731		721		736		707
4.50% Senior Notes	—		—		450		447
5.25% Senior Notes	550		554		550		524
4.875% Senior Notes	500		466		500		434
9.375% Senior Notes	550		565		—		—
Securitization obligations	187		187		231		231

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

Equity Method Investments

At March 31, 2019 and December 31, 2018, the Company had various equity method investments aggregating $54 million and $51 million, respectively, which are recorded within other non-current assets on the accompanying Condensed Consolidated Balance Sheets. The investment balances at March 31, 2019 and December 31, 2018 included $46 million and $43 million, respectively, for the Company's investment in Guaranteed Rate Affinity, LLC ("Guaranteed Rate Affinity").

For the first quarter of 2019, the Company recorded equity earnings of $1 million at the Title and Settlement Services segment primarily related to earnings from the operations of Guaranteed Rate Affinity. For the first quarter of 2018, the Company recorded equity losses of $4 million at the Title and Settlement Services segment primarily related to costs associated with the ramp up of operations of Guaranteed Rate Affinity, including $2 million of amortization of intangible assets recorded in purchase accounting.

The Company received $1 million in cash dividends from equity method investments during both the three months ended March 31, 2019 and 2018. The Company invested $2 million and $4 million of cash into Guaranteed Rate Affinity during the three months ended March 31, 2019 and 2018, respectively.

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 in the period in which they occur. The provision for income taxes was a benefit of $35 million and $19 million for the three months ended March 31, 2019 and 2018, respectively.

Derivative Instruments

The Company records derivatives and hedging activities on the balance sheet at their respective fair values. 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, British Pound and Canadian Dollar. The Company has not elected 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 March 31, 2019, the Company had outstanding foreign currency forward contracts in an asset position with a fair value of less than $1 million and a notional value of $25 million. As of December 31, 2018, the Company had outstanding foreign currency forward contracts in a liability position with a fair value of less than $1 million and a notional value of $27 million.

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The Company also enters into interest rate swaps to manage its exposure to changes in interest rates associated with its variable rate borrowings. As of March 31, 2019, the Company had interest rate swaps with an aggregate notional value of $1,600 million to offset the variability in cash flows resulting from the term loan facilities as follows:



Notional Value (in millions)	Commencement Date	Expiration Date
$600	August 2015	August 2020
$450	November 2017	November 2022
$400	August 2020	August 2025
$150	November 2022	November 2027

The swaps help to protect our outstanding variable rate borrowings from future interest rate volatility. 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:



Not Designated as Hedging Instruments	Balance Sheet Location	March 31, 2019		December 31, 2018
Interest rate swap contracts	Other non-current assets	$	1	$	6
Interest rate swap contracts	Other current and non-current liabilities	26		16

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 March 31,
		2019		2018
Interest rate swap contracts	Interest expense	$	14	$	(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 $3 million and $13 million at March 31, 2019 and December 31, 2018, respectively.

Revenue

Revenue is recognized upon the transfer of control of promised services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those services in accordance with the revenue standard. The Company's revenue is disaggregated by major revenue categories on our Condensed Consolidated Statements of Operations and further disaggregated by business segment as follows:



	Three Months Ended March 31,
	Real Estate Franchise Services				Company Owned Brokerage Services				Relocation Services				Title and Settlement Services				Corporate and Other						Total Company
	2019		2018		2019		2018		2019		2018		2019		2018		2019			2018			2019		2018
Gross commission income (a)	$	—	$	—	$	799	$	902	$	—	$	—	$	—	$	—	$	—		$	—		$	799	$	902
Service revenue (b)	—		—		2		2		75		78		111		117		—			—			188		197
Franchise fees (c)	123		139		—		—		—		—		—		—		(53		)	(60		)	70		79
Other (d)	40		37		15		13		1		1		3		3		(2		)	(3		)	57		51
Net revenues	$	163	$	176	$	816	$	917	$	76	$	79	$	114	$	120	$	(55	)	$	(63	)	$	1,114	$	1,229

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(a)	Consists primarily of revenues related to gross commission income at the Company Owned Brokerage Services segment which is recognized at a point in time at the closing of a homesale transaction.


(b)	Service revenue primarily consists of title and escrow fees at the Title and Settlement Services segment, which are recognized at a point in time at the closing of a homesale transaction, and relocation fees at the Relocation Services segment, which are recognized as revenue when or as the related performance obligation is satisfied, which is dependent on the type of service performed.


(c)	Franchise fees at the Real Estate Franchise Services segment primarily include domestic royalties which are recognized at a point in time when the underlying franchisee revenue is earned (upon close of the homesale transaction).

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(d)	Other revenue is comprised of brand marketing funds received at the Real Estate Franchise Services segment from franchisees, third-party listing fees and other miscellaneous revenues across all of the business segments.

The following table shows the change in the Company's contract liabilities (deferred revenue) related to revenue contracts by reportable segment for the period:



	Beginning Balance at January 1, 2019		Additions during the period		Recognized as Revenue during the period			Ending Balance at March 31, 2019
Real Estate Franchise Services:
Deferred area development fees (a)	$	54	$	—	$	(1	)	$	53
Deferred brand marketing fund fees (b)	12		23		(27		)	8
Other deferred income related to revenue contracts	12		10		(12		)	10
Total Real Estate Franchise Services	78		33		(40		)	71
Company Owned Real Estate Brokerage Services:
Advanced commissions relates to its development business (c)	10		—		—			10
Other deferred income related to revenue contracts	4		2		(2		)	4
Total Company Owned Real Estate Brokerage Services	14		2		(2		)	14
Relocation Services:
Deferred broker network fees (d)	—		8		(3		)	5
Deferred outsourcing fees (e)	4		16		(14		)	6
Other deferred income related to revenue contracts	5		5		(4		)	6
Total Relocation Services	9		29		(21		)	17
Total	$	101	$	64	$	(63	)	$	102

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(a)	The Company collects initial area development fees for international territory transactions, which are recorded as deferred revenue when received and recognized into franchise revenue over the average 25 year life of the related franchise agreement as consideration for the right to access and benefit from Realogy’s brands.


(b)	Revenues recognized include intercompany marketing fees paid by the Company Owned Real Estate Brokerage Services segment.


(c)	New development closings generally have a development period of between 18 and 24 months from contracted date to closing.


(d)	Network fees are generally billed annually and recognized into revenue on a straight-line basis each month during the membership period.


(e)	Outsourcing management fees are recorded as deferred revenue when billed (usually at the start of the relocation) and are recognized as revenue over the average time period required to complete the transferee's move, or a phase of the move that the fee covers, which is typically 3 to 6 months depending on the move type.

Recently Adopted Accounting Pronouncements

In August 2018, the SEC issued a final rule that amends certain disclosure requirements as part of the SEC’s overall project to improve disclosure effectiveness and simplify compliance. The final rule eliminates redundant, duplicative and overlapping requirements which are substantially similar to current GAAP or other SEC disclosure requirements, as well as amends or removes outdated and superseded requirements. However, in some situations, the amendments expanded disclosure requirements, such as an analysis of changes in stockholders’ equity will now be required for the current and comparative quarter and year-to-date interim periods. The Company applied the amendments in the final rule to its Annual Report on Form 10-K for the year ended December 31, 2018 and the interim disclosure requirements to this quarterly report on Form 10-Q.

Adoption of the New Leasing Standard

In February 2016, the FASB issued Accounting Standard Update No. 2016-02 (Topic 842) "Leases" (the "new leasing standard") which requires virtually all leases to be recognized on the balance sheet. Effective January 1, 2019, the Company adopted the new leasing standard using the modified retrospective transition approach with optional transition relief and recognized the cumulative effect of applying the new leasing standard to existing contracts on the balance sheet on January 1, 2019. Therefore, results for reporting periods beginning after January 1, 2019 are presented under the new leasing

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standard; however, the comparative prior period amounts have not been restated and continue to be reported in accordance with historic accounting under ASC Topic 840. The most significant effects of adoption of the new leasing standard relate to the recognition of new right-of-use assets and lease liabilities on the balance sheet for operating leases. The new leasing standard did not impact our Condensed Consolidated Statement of Operations and Condensed Consolidated Statement of Cash Flows. The impact of the changes to the Condensed Consolidated Balance Sheets for the adoption of the new leasing standard were as follows:



	Balance Sheet accounts prior to the new leasing standard adoption adjustments		Adjustments due to the adoption of the new leasing standard			Balance Sheet accounts after the new leasing standard adoption adjustments
ASSETS
Current assets:
Other current assets	$	153	$	(14	)	$	139
Total current assets	768		(14		)	754
Operating lease assets, net	—		567			567
Other non-current assets	276		(1		)	275
Total assets	$	7,290	$	552		$	7,842

LIABILITIES AND EQUITY
Current liabilities:
Current portion of operating lease liabilities	$	—	$	126		$	126
Accrued expenses and other current liabilities	401		(12		)	389
Total current liabilities	1,527		114			1,641
Long-term operating lease liabilities	—		500			500
Other non-current liabilities	259		(62		)	197
Total liabilities	4,975		552			5,527
Total equity	2,315		—			2,315
Total liabilities and equity	$	7,290	$	552		$	7,842

The Company elected a package of practical expedients that were consequently applied to all leases. The Company did not reassess whether expired or existing contracts contain leases under the new definition of a lease, lease classification for expired or existing leases, nor whether previously capitalized initial direct costs would qualify for capitalization under the new standard. Upon transition, the Company did not elect to use hindsight with respect to lease renewals and purchase options when accounting for existing leases, as well as assessing the impairment of right-of-use assets. Therefore, lease terms largely remained unchanged. In addition, the Company elected the short-term lease recognition exemption and did not recognize a lease obligation and right-of-use asset on its balance sheet for all leases with terms of 12 months or less. The Company elected the practical expedient to combine lease and non-lease components in total gross rent for all of its leases which resulted in a larger lease liability recorded on the balance sheet.

Recently Issued Accounting Pronouncements

The Company considers the applicability and impact of all Accounting Standards Updates ("ASUs"). Recently issued ASUs 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.


2.	LEASES

The Company's lease portfolio consists primarily of office space and equipment. The Company has approximately 1,000 real estate leases with lease terms ranging from less than 1 year to 17 years and includes the Company's brokerage sales offices, regional and branch offices for our title and relocation businesses, corporate headquarters, regional headquarters, and facilities serving as local administration, training and storage. The Company's brokerage sales offices are generally located in shopping centers and small office parks, typically with lease terms of 1 year to 5 years. In addition, the Company's has equipment leases which primarily consist of furniture, computers and other office equipment.

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Right-of-use assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. At lease commencement, the Company records a liability for its lease obligation measured at the present value of future lease payments and a right-of-use asset equal to the lease liability adjusted for prepayments and lease incentives. The Company uses its collateralized incremental borrowing rate to calculate the present value of lease liabilities as most of its leases do not provide an implicit rate that is readily determinable. The Company does not recognize a lease obligation and right-of-use asset on its balance sheet for any leases with terms of 12 months or less. Some real estate leases include one or more options to renew or terminate a lease. The exercise of a lease renewal or termination option is assessed at commencement of the lease and only reflected in the lease term if the Company is reasonably certain to exercise the option. The Company has lease agreements that contain both lease and non-lease components, such as common area maintenance fees, and has made a policy election to combine both fixed lease and non-lease components in total gross rent for all of its leases. Expense for operating leases is recognized a straight-line basis over the lease term.

Supplemental balance sheet information related to the Company's leases was as follows:



Lease Type	Balance Sheet Classification	March 31, 2019
Assets:
Operating lease assets	Operating lease assets, net	$	544
Finance lease assets (1)	Property and equipment, net	38
Total lease assets, net		$	582

Liabilities:
Current:
Operating lease liabilities	Current portion of operating lease liabilities	$	130
Finance lease liabilities	Accrued expenses and other current liabilities	12
Non-current:
Operating lease liabilities	Long-term operating lease liabilities	473
Finance lease liabilities	Other non-current liabilities	20
Total lease liabilities		$	635

Weighted Average Lease Term and Discount Rate
Weighted average remaining lease term (years):
Operating leases		5.7
Finance leases		3.3

Weighted average discount rate:
Operating leases		5.3		%
Finance leases		3.9		%

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