Realogy Reports Results for Third Quarter 2008

November 06, 2008 // Franchising.com // PARSIPPANY, N.J.- Realogy Corporation, a global provider of real estate and relocation services, today reported results for the third quarter of 2008. Specifically, the Company had third quarter 2008 net revenue of $1.3 billion, earnings before interest, income taxes, depreciation and amortization (EBITDA) of $129 million, and a net loss of $50 million.

Realogy's EBITDA for the period was negatively affected by $45 million of non-cash equity losses and impairment charges from its 49.9% investment in PHH Home Loans LLC, its loan origination joint venture with PHH Corporation, as well as $15 million of restructuring charges. The net loss is after $152 million of interest expense and $54 million of depreciation and amortization expense.

"The current economic conditions of this country are weighing heavily on consumer confidence and thus on the housing industry," said Richard A. Smith, Realogy's president and CEO. "We are not immune from the macroeconomic shocks to the credit and financial markets. In spite of these extraordinarily difficult circumstances, we have remained focused on reducing our operating costs and investing in the growth of our business. In the past two years alone, our management team has improved Realogy's profitability profile by more than $350 million through brokerage office consolidations, business optimization activities and other cost-saving measures."

In the third quarter, Realogy's real estate business drivers experienced declines that were directionally in line with the National Association of Realtors and Fannie Mae. During this period, Realogy's year-over-year home sale transaction sides declined by 15 percent at the Realogy Franchise Group (RFG) and were down by 10 percent at NRT, the Company's owned brokerage unit.

Likewise for the third quarter, RFG's average home sales price decreased 7 percent and NRT's average home sale price declined 12 percent compared to the same period in 2007. These price declines were driven by various factors, including high inventory levels, the increased prominence of short sale and foreclosure activity and, particularly as it relates to NRT, a relative shift in the mix of business from higher price ranges to lower- and middle-range homes.

Strategic and Operational Accomplishments

Realogy highlighted the following accomplishments from the third quarter of 2008:

  • Net domestic franchise sales for Realogy's leading brands -- Better Homes and Gardens® Real Estate, CENTURY 21®, Coldwell Banker®, Coldwell Banker Commercial®, ERA® and Sotheby's International Realty® -- totaled $100 million in gross commission income (GCI) during the third quarter. For the nine months ended September 30, 2008, Realogy's franchise sales reached $367 million in GCI, a 12 percent increase from the first three quarters of 2007.
  • Year-to-date since July, the newly launched Better Homes and Gardens® Real Estate franchise network has signed 40 franchised offices in six states.
  • Three of our brands were recognized by Franchise Times as being among the Top 100 U.S.-based franchise companies across all industries when ranked by worldwide sales as well as domestic and international office locations. This is the ninth consecutive year in which CENTURY 21®, Coldwell Banker® and ERA® earned this distinction.
  • NRT maintained a 92 percent retention rate for its top two quartiles of sales associates.
  • NRT's REO division, one of the largest independent Real Estate Owned asset management companies in the United States, saw its closed sales of foreclosed properties increase to 10,500 units in the third quarter of 2008 as compared to 5,600 in the same quarter in 2007. Although the price points of REO sales are much lower than the average NRT sales price, this is an important counter-cyclical business that capitalizes on the near-term growth of foreclosure sales.
  • Cartus, our relocation services firm, added 50 new clients and expanded services with several others in the third quarter. Among the new signings and expansions were The Coca-Cola Company, Houghton Mifflin and Textron. Year-to-date through September 30, 2008, Cartus has signed 135 new clients and expanded services it provides to an additional 55 existing clients.
  • TRG continues to roll out its Web-based transaction management software platform called HomeBase. This innovative system was piloted by approximately 210 NRT residential real estate brokerage offices and will be expanded to an additional 240 by year end.


Covenant Compliance

As of September 30, 2008, the Company's senior secured leverage ratio was 4.8 to 1. This is 0.6x below the maximum 5.35 to 1 ratio required for Realogy to be in compliance under its Credit Agreement. The senior secured leverage ratio is determined by taking Realogy's senior secured net debt of $3.2 billion at September 30, 2008 and dividing it by the Company's Adjusted EBITDA of $661 million for the 12 months ended September 30, 2008. (Please see Table 5 for a reconciliation of net loss to EBITDA, Table 6 for a reconciliation of net loss to Adjusted EBITDA and Table 7 for the definition of non-GAAP financial measures.)

Investor Webcast

Realogy will hold a Webcast to review its third quarter 2008 results at 11:00 a.m. (ET) on Friday, November 7. The call will be hosted by Richard A. Smith, president and CEO, and Tony Hull, executive vice president, CFO and treasurer. Questions to be answered on the call should be submitted in advance to Investor.Relations@Realogy.com by 5:00 p.m. (ET) on Thursday, November 6. The conference call will be made available live via Webcast on the Investor Information section of the Realogy.com Web site. A replay of the Webcast will be available at www.realogy.com from November 7 through November 21.

About Realogy Corporation

Realogy Corporation, a global provider of real estate and relocation services, has a diversified business model that includes real estate franchising, brokerage, relocation and title services. Realogy's world-renowned brands and business units include Better Homes and Gardens® Real Estate, CENTURY 21®, Coldwell Banker®, Coldwell Banker Commercial®, The Corcoran Group®, ERA®, Sotheby's International Realty®, NRT LLC, Cartus and Title Resource Group. Collectively, Realogy's franchise systems have approximately 16,000 offices and 300,000 sales associates doing business in 96 countries around the world. Headquartered in Parsippany, N.J., Realogy (www.realogy.com) has approximately 13,000 employees worldwide. Realogy is owned by affiliates of Apollo Management, L.P., a leading private equity and capital markets investor. To receive future Realogy news releases, you can sign up for an e-mail subscription or secure a link for your RSS reader at www.realogy.com/media.

Forward-Looking Statements

Certain statements in this press release constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Realogy Corporation ("Realogy") to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Statements preceded by, followed by or that otherwise include the words "believes", "expects", "anticipates", "intends", "projects", "estimates", "plans", "may increase", "may fluctuate" 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. Any statements that refer to expectations or other characterizations of future events, circumstances or results are forward-looking statements.

Various factors that could cause actual future results and other future events to differ materially from those estimated by management include, but are not limited to: our substantial debt leverage; continuing adverse developments in the residential real estate markets; continuing adverse developments in general business, economic and political conditions, including reduced availability of credit and the instability of financial markets in the U.S. and abroad, the recent substantial decline in the stock markets, changes in short-term or long-term interest rates or mortgage-lending practices, or any outbreak or escalation of hostilities on a national, regional or international basis; a continuing drop in consumer confidence and/or the impact of a recession or a prolonged period of slow economic growth in the U.S. economy; our ability to comply with the affirmative and negative covenants contained in our debt agreements; our failure to complete future acquisitions or to realize anticipated benefits from completed acquisitions; our failure to maintain or acquire franchisees and brands or the inability of franchisees to survive the current real estate downturn; and our inability to access capital and/or securitization markets.

Consideration should be given to the areas of risk described above, as well as those risks set forth under the headings "Forward-Looking Statements" and "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2007 and our Form 10-Q for the quarter ended September 30, 2008 and in our other periodic reports filed from time to time, in connection with considering any forward-looking statements that may be made by us and our businesses generally. Except for our ongoing obligations to disclose material information under the federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events unless we are required to do so by law.

The 2007 results for the nine months ended September 30, 2007, which are set forth in the tables that accompany this press release and in our third quarter 2008 Form 10-Q have been reported on a pro forma combined basis. They have been prepared to give effect to the Company's April 10, 2007 acquisition by Apollo Management, L.P. and the related financing transactions as if they had occurred on January 1, 2007 and combine the Company's financial results for the predecessor period from the beginning of the period -- January 1, 2007 through April 9, 2007, and the successor period, from April 10, 2007 through September 30, 2007.

This release includes certain non-GAAP financial measures as defined under SEC rules. As required by SEC rules, important information regarding such measures is contained in the Tables attached to this release.


Table 1

REALOGY CORPORATION AND THE PREDECESSOR
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions)

Successor Predecessor
--------------- -----------
Period
from
Three April Period
Months 10 from
Ended Through April 1
June June Through
30, 30, April 9,
2008 2007 2007
------- ------- -----------
Revenues
Gross commission income $1,040 $1,295 $ 83
Service revenue 208 201 20
Franchise fees 91 115 9
Other 51 46 7
------- ------- -----------
Net revenues 1,390 1,657 119
------- ------- -----------

Expenses
Commission and other agent-related costs 685 863 54
Operating 422 409 46
Marketing 60 60 10
General and administrative 55 67 51
Former parent legacy costs (benefit),
net (7) - 1
Separation costs - 1 -
Restructuring costs 14 3 1
Merger costs - 16 71
Depreciation and amortization 55 328 4
Interest expense 153 153 8
Interest income (1) (2) (1)
------- ------- -----------
Total expenses 1,436 1,898 245
------- ------- -----------

Loss before income taxes and minority
interest (46) (241) (126)
Provision for income taxes (19) (93) (49)
Minority interest, net of tax - 1 -
------- ------- -----------
Net loss $ (27) $ (149) $ (77)
======= ======= ===========



Table 2

Realogy Corporation and the Predecessor
Unaudited Pro Forma Combined Statement of Operations
For the Three Months Ended June 30, 2007
(In millions)


Predecessor Successor
----------- ---------
Period
Period from from
April 1 April 10
Through Through Pro
April 9, June 30, Forma
(In millions) 2007 2007 Transactions Combined
----------- --------- ------------ --------
Revenues
Gross commission
income $ 83 $1,295 $ - $1,378
Service Revenue 20 201 9 (a) 230
Franchise fee 9 115 - 124
Other 7 46 - 53
----------- --------- ------------ --------
Net revenues 119 1,657 9 1,785
----------- --------- ------------ --------
Expenses
Commission and
other agent
related costs 54 863 - 917
Operating 46 409 2 (a) 457
Marketing 10 60 - 70
General and
administrative 51 67 (45)(b) 73
Former parent
legacy costs
(benefit), net 1 - 6 (a) 7
Separation costs - 1 - 1
Restructuring
costs 1 3 - 4
Merger costs 71 16 (87)(c) -
Depreciation and
amortization 4 328 (278)(d) 54
Interest expense 8 153 - 161
Interest income (1) (2) - (3)
----------- --------- ------------ --------
Total expenses 245 1,898 (402) 1,741
----------- --------- ------------ --------
Income (loss) before
income taxes and
minority interest (126) (241) 411 44
Provision for income
taxes (49) (93) 156 (e) 14
Minority interest, net
of tax - 1 - 1
----------- --------- ------------ --------
Net income (loss) $ (77) $ (149) $ 255 $ 29
=========== ========= ============ ========

Successor
---------
Actual
Results
For the
Three
Months
Ended
June 30,
(In millions) 2008
---------
Revenues
Gross commission income $1,040
Service Revenue 208
Franchise fee 91
Other 51
---------
Net revenues 1,390
---------
Expenses
Commission and other agent related costs 685
Operating 422
Marketing 60
General and administrative 55
Former parent legacy costs (benefit), net (7)
Separation costs -
Restructuring costs 14
Merger costs -
Depreciation and amortization 55
Interest expense 153
Interest income (1)
---------
Total expenses 1,436
---------
Income (loss) before income taxes and minority interest (46)
Provision for income taxes (19)
Minority interest, net of tax -
---------
Net income (loss) $ (27)
=========



(a) Reflects the elimination of the negative impact of $9
million of revenue and $2 million of expense fair value
adjustments for purchase accounting at the operating
business segments primarily related to deferred revenue,
referral fees, insurance accruals and fair value
adjustments on at risk homes and $6 million of income
related to a fair value adjustment for a legacy asset
matter.
(b) Reflects the elimination of $45 million of separation
benefits payable to our former CEO upon retirement, the
amount of which was determined as a result of a change in
control provision in his employment agreement with the
Company.
(c) Reflects the elimination of $87 million of merger costs
which are comprised primarily of $56 million for the
accelerated vesting of stock based incentive awards granted
by the Company, $25 million of employee retention and
supplemental bonus payments incurred in connection with the
Transactions and $6 million of professional costs incurred
by the Company associated with the Merger.
(d) Reflects the elimination of the amortization of pendings and
listings of $278 million.
(e) Reflects the estimated tax effect resulting from the pro
forma adjustments at an estimated rate of 38%. We expect
our tax payments in future years, however, could vary from
this amount.



Table 3

REALOGY CORPORATION AND THE PREDECESSOR
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions)

Successor Predecessor
------------------- -----------
Period Period
Six from from
Months April 10 January 1
Ended Through Through
June 30, June 30, April 9,
2008 2007 2007
---------- -------- -----------
Revenues
Gross commission income $ 1,788 $1,295 $1,104
Service revenue 392 201 216
Franchise fees 164 115 106
Other 100 46 67
---------- -------- -----------
Net revenues 2,444 1,657 1,493
---------- -------- -----------

Expenses
Commission and other agent-related
costs 1,171 863 726
Operating 851 409 489
Marketing 115 60 84
General and administrative 118 67 123
Former parent legacy costs
(benefit), net (1) - (19)
Separation costs - 1 2
Restructuring costs 23 3 1
Merger costs 2 16 80
Depreciation and amortization 111 328 37
Interest expense 317 153 43
Interest income (1) (2) (6)
---------- -------- -----------
Total expenses 2,706 1,898 1,560
---------- -------- -----------

Loss before income taxes and minority
interest (262) (241) (67)
Provision for income taxes (102) (93) (23)
Minority interest, net of tax - 1 -
---------- -------- -----------
Net loss $ (160) $ (149) $ (44)
========== ======== ===========



Table 4

Realogy Corporation and the Predecessor
Unaudited Pro Forma Combined Statement of Operations
For the Six Months Ended June 30, 2007
(in millions)


Predecessor Successor
------------ ---------
Period
Period from from
January 1 April 10
Through Through Pro
April 9, June 30, Forma
(In millions) 2007 2007 Transactions Combined
------------ --------- ------------ --------
Revenues
Gross commission
income $1,104 $1,295 $ - $2,399
Service Revenue 216 201 9 (a) 426
Franchise fee 106 115 - 221
Other 67 46 (2)(b) 111
------------ --------- ------------ --------
Net revenues 1,493 1,657 7 3,157
------------ --------- ------------ --------
Expenses
Commission and
other agent
related costs 726 863 - 1,589
Operating 489 409 2 (a) 900
Marketing 84 60 - 144
General and
administrative 123 67 (42)(c) 148
Former parent
legacy costs
(benefit), net (19) - 6 (a) (13)
Separation costs 2 1 - 3
Restructuring
costs 1 3 - 4
Merger costs 80 16 (96)(d) -
Depreciation and
amortization 37 328 (260)(e) 105
Interest expense 43 153 126 (f) 322
Interest income (6) (2) - (8)
------------ --------- ------------ --------
Total expenses 1,560 1,898 (264) 3,194
------------ --------- ------------ --------
Income (loss) before
income taxes and
Minority interest (67) (241) 271 (37)
Provision for income
taxes (23) (93) 103 (g) (13)
Minority interest, net
of tax - 1 - 1
------------ --------- ------------ --------
Net Income (loss) $ (44) $ (149) $ 168 $ (25)
============ ========= ============ ========

Successor
---------
Actual
Results
For The
Six
Months
Ended
June 30,
(In millions) 2008
---------
Revenues
Gross commission income $1,788
Service Revenue 392
Franchise fee 164
Other 100
---------
Net revenues 2,444
---------
Expenses
Commission and other agent related costs 1,171
Operating 851
Marketing 115
General and administrative 118
Former parent legacy costs (benefit), net (1)
Separation costs -
Restructuring costs 23
Merger costs 2
Depreciation and amortization 111
Interest expense 317
Interest income (1)
---------
Total expenses 2,706
---------
Income (loss) before income taxes and Minority interest (262)
Provision for income taxes (102)
Minority interest, net of tax -
---------
Net Income (loss) $ (160)
=========



(a) Reflects the elimination of the negative impact of $9 million
of revenue and $2 million of expense fair value adjustments
for purchase accounting at the operating business segments
primarily related to deferred revenue, referral fees,
insurance accruals and fair value adjustments on at risk
homes and $6 million of income related to a fair value
adjustment for a legacy asset matter.
(b) Reflects the incremental borrowing costs for the period from
January 1, 2007 to April 9, 2007 of $2 million as a result
of the securitization facilities refinancings. The
borrowings under the securitization facilities are advanced
to customers of the relocation business and the Company
generally earns interest income on the advances, which are
recorded within other revenue net of the borrowing costs
under the securitization arrangement.
(c) Reflects (i) incremental expenses for the period from January
1, 2007 to April 9, 2007 in the amount of $3 million
representing the estimated annual management fee to be paid
by Realogy to Apollo, and (ii) the elimination of $45
million of separation benefits payable to our former CEO
upon retirement, the amount of which was determined as a
result of a change in control provision in his employment
agreement with the Company.
(d) Reflects the elimination of $96 million of merger costs which
are comprised primarily of $56 million for the accelerated
vesting of stock based incentive awards granted by the
Company, $25 million of employee retention and supplemental
bonus payments incurred in connection with the Transactions
and $15 million of professional costs incurred by the
Company associated with the Merger.
(e) Reflects an increase in amortization expenses for the period
from January 1, 2007 to April 9, 2007 resulting from the
values allocated on a preliminary basis to our identifiable
intangible assets, less the amortization of pendings and
listings. Amortization is computed using the straight-line
method over the asset's related useful life.

Estimated
fair Estimated
(In millions) value useful life Amortization
------------------------ --------- ------------- ------------
Real estate franchise
agreements $2,019 30 years $ 33
Customer relationships 467 10-20 years 13
------------

Estimated annual
amortization
expense 46
Less:
Amortization expense
recorded for the
items above (28)
Amortization expense
for non-recurring
pendings and
listings (278)
------------

Pro forma adjustment $(260)
============

(f) Reflects incremental interest expense for the period from
January 1, 2007 to April 9, 2007 in the amount of $126
million related to the indebtedness incurred in connection
with the Merger which includes $6 million of incremental
deferred financing costs amortization and $2 million of
incremental bond discount amortization relating to the
senior notes, senior toggle notes and senior subordinated
notes.

For pro forma purposes we have assumed a weighted average
interest rate of 8.32% for the variable interest rate debt
under the term loan facility and the revolving credit
facility, based on the 3-month LIBOR rate as of June 30,
2007. This variable interest rate debt is reduced to reflect
the $775 million of floating to fixed interest rate swap
agreements. The adjustment assumes straight-line
amortization of capitalized financing fees over the
respective maturities of the indebtedness.
(g) Reflects the estimated tax effect resulting from the pro
forma adjustments at an estimated rate of 38%. We expect our
tax payments in future years, however, could vary from this
amount.



Table 5

Q2 and YTD 2008 Recap of Key Business/Revenue Drivers and Operating
Statistics


Three Months Ended June 30,
------------------------------
2008 2007 % Change
-------- -------- ------------
Real Estate Franchise Services (a)
Closed homesale sides 282,333 355,331 (21%)
Average homesale price $221,351 $233,610 (5%)
Average homesale broker commission
rate 2.52% 2.49% 3 bps
Net effective royalty rate 5.10% 5.01% 9 bps
Royalty per side $ 294 $ 300 (2%)

Company Owned Real Estate Brokerage
Services
Closed homesale sides 79,823 98,574 (19%)
Average homesale price $497,203 $540,555 (8%)
Average homesale broker commission
rate 2.48% 2.48% -
Gross commission income per side $ 12,981 $ 13,925 (7%)

Relocation Services
Initiations 42,636 43,121 (1%)
Referrals 20,922 24,906 (16%)

Title and Settlement Services
Purchase title and closing units 32,938 40,384 (18%)
Refinance title and closing units 10,504 10,478 -
Average price per closing unit $ 1,535 $ 1,500 2%

Six Months Ended June 30,
---------------------------
2008 2007 % Change
--------- -------- --------
Real Estate Franchise Services (a)
Closed homesale sides 491,646 634,567 (23%)
Average homesale price $218,351 $232,121 (6%)
Average homesale broker commission rate 2.51% 2.49% 2 bps
Net effective royalty rate 5.08% 5.02% 6 bps
Royalty per side $ 289 $ 299 (3%)

Company Owned Real Estate Brokerage
Services
Closed homesale sides 133,871 172,445 (22%)
Average homesale price $509,059 $537,590 (5%)
Average homesale broker commission rate 2.47% 2.47% -
Gross commission income per side $ 13,322 $ 13,858 (4%)

Relocation Services
Initiations 75,469 73,958 2%
Referrals 34,854 42,705 (18%)

Title and Settlement Services
Purchase title and closing units 56,947 72,391 (21%)
Refinance title and closing units 21,775 20,159 8%
Average price per closing unit $ 1,485 $ 1,481 -



(a) Includes all franchisees except for our Company Owned Real
Estate Brokerage Services segment.



Table 6

Selected Quarterly Financial Data
(In millions)

For The Three For The Three
Months Ended Months Ended
March 31, 2008 June 30, 2008
---------------- ----------------
Revenue:
Real Estate Franchise
Services $ 152 $ 185
Company Owned Real
Estate Brokerage
Services 770 1,062
Relocation Services 108 124
Title and Settlement
Services 81 94
Corporate and Other
(c) (57) (75)

EBITDA (a) (b)
Real Estate Franchise
Services $ 80 $ 109
Company Owned Real
Estate Brokerage
Services (60) 26
Relocation Services - 23
Title and Settlement
Services (2) 5
Corporate and Other
(c) (14) (2)



(a) EBITDA is defined as net income before depreciation and
amortization, interest (income) expense, net (other than
Relocation Services interest for securitization assets and
securitization obligations), income taxes and minority
interest, each of which is presented on our Condensed
Consolidated Statements of Operations.
(b) EBITDA includes Former Parent Legacy Costs (Benefits),
Separation Costs (Benefits), Restructuring Costs, and Merger
Costs as follows ($ In Millions):

For The Three Months For The Three Months
Ended March 31, 2008 Ended June 30, 2008
---------------------- --------------------
Real Estate
Franchise Services $ - $ -
Company Owned Real
Estate Brokerage
Services 9 13
Relocation Services - -
Title and Settlement
Services - 1
Corporate and Other 7 (7)

(c) Includes unallocated corporate overhead and the elimination of
transactions between segments, which consists of intercompany
royalties and marketing fees paid by our Company Owned Real
Estate Brokerage Services segment of $75 million and $57
million during the three months ended June 30, 2008, and March
31, 2008, respectively.

Table 7
EBITDA and Adjusted EBITDA for the 12 months ended June 30, 2008
A reconciliation of net loss to Adjusted EBITDA for the twelve
months ended June 30, 2008 is set forth in the following table:

For the Twelve
Months Ended
June 30, 2008
--------------
Net loss (a) $ (807)
Minority interest, net of tax 1
Provision for income taxes (448)
--------------
Loss before income taxes and minority interest (1,254)
Interest expense (income), net 651
Depreciation and amortization 285
--------------
EBITDA (318)
Covenant calculation adjustments:
Merger costs, restructuring costs, separation
costs, and former parent legacy costs (benefit),
net (b) 99
2007 impairment of intangible assets and goodwill
(c) 667
Pro forma cost savings for 2007 restructuring
initiatives (d) 20
Pro forma cost savings for 2008 restructuring
initiatives (e) 20
Pro forma effect of business optimization
initiatives (f) 82
Non-cash charges (g) 45
Non-recurring fair value adjustments for purchase
accounting (h) 15
Pro forma effect of NRT acquisitions and RFG
acquisitions and new franchisees (i) 15
Apollo management fees (j) 14
Proceeds from WEX contingent asset (k) 11
Incremental securitization interest costs (l) 5
Better Homes and Gardens Real Estate start up
costs 4
--------------
Adjusted EBITDA $ 679
--------------
Total senior secured net debt (m) $ 3,328
Senior secured leverage ratio 4.9x



(a) Net loss consists of a loss of: (i) $55 million for the third
quarter of 2007; (ii) $593 million for the fourth quarter of
2007; (iii) $132 million for the first quarter of 2008 and
(iv) $27 million for the second quarter of 2008.
(b) Consists of $9 million of merger costs, $56 million of
restructuring costs, $5 million of separation benefits paid
to our former CEO upon retirement, $3 million of separation
costs and $25 million of former parent legacy costs.
(c) Represents the non-cash adjustment for the 2007 impairment of
goodwill and unamortized intangible assets.
(d) Represents actual costs incurred that are not expected to
recur in subsequent periods due to restructuring activities
initiated during the year ended December 31, 2007. From this
restructuring, we expect to reduce our operating costs by
approximately $58 million on a twelve month run-rate basis
and estimate that $38 million of such savings were realized
from the time they were put in place (primarily in the
fourth quarter of 2007) through June 30, 2008. The
adjustment shown represents the impact the savings would
have had on the period from July 1, 2007 through the time
they were put in place, had those actions been effected on
July 1, 2007.
(e) Represents actual costs incurred that are not expected to
recur in subsequent periods due to restructuring activities
initiated during the first six months of 2008. From this
restructuring, we expect to reduce our operating costs by
approximately $24 million on a twelve month run-rate basis
and estimate that $4 million of such savings were realized
from the time they were put in place. The adjustment shown
represents the impact the savings would have had on the
period from July 1, 2007 through the time they were put in
place, had those actions been effected on July 1, 2007.
(f) Represents the twelve month pro forma effect of business
optimization initiatives that have been completed to reduce
costs including: (i) $29 million related to the exit of the
government at-risk homesale business; (ii) $17 million
related to the elimination of the 401(k) employer match;
(iii) $17 million related to the renegotiation of NRT
contracts; and other initiatives
(g) Represents the elimination of non-cash expenses including $36
million for the change in the allowance for doubtful
accounts and reserve for development advance notes and
promissory notes from July 1, 2007 through June 30, 2008, $7
million of stock based compensation expense.
(h) Reflects the adjustment for the negative impact of $15
million of fair value adjustments for purchase accounting at
the operating business segments primarily related to
deferred revenue, referral fees, insurance accruals and at-
risk homes for the twelve months ended June 30, 2008.
(i) Represents the estimated impact of acquisitions made by NRT
and RFG acquisitions and new franchisees as if they had been
acquired or signed on July 1, 2007. We have made a number of
assumptions in calculating such estimate and there can be no
assurance that we would have generated the projected levels
of EBITDA had we owned the acquired entities or entered into
the franchise contracts as of July 1, 2007.
(j) Represents the elimination of annual management fees payable
to Apollo for the twelve months ended June 30, 2008.
(k) Wright Express Corporation ("WEX") was divested by Cendant in
February 2005 through an initial public offering ("IPO"). As
a result of such IPO, the tax basis of WEX's tangible and
intangible assets increased to their fair market value which
may reduce federal income tax that WEX might otherwise be
obligated to pay in future periods. WEX is required to pay
Cendant 85% of any tax savings related to the increase in
fair value utilized for a period of time that we expect will
be beyond the maturity of the notes. Cendant is required to
pay 62.5% of these tax savings payments received from WEX to
us.
(l) Incremental borrowing costs incurred as a result of the
securitization facilities refinancing for the twelve months
ended June 30, 2008.
(m) Represents total borrowings under the senior secured credit
facility, including the revolving credit facility, of $3,343
million plus $14 million of capital lease obligations less
$29 million of readily available cash as of June 30, 2008.
Table 8


Definitions

EBITDA is defined as net income before depreciation and amortization, interest (income) expense, net (other than relocation services interest for securitization assets and securitization obligations) and income taxes. Adjusted EBITDA is calculated by adjusting EBITDA by the items described above. We present EBITDA and Adjusted EBITDA because we believe EBITDA and Adjusted EBITDA are useful as supplemental measures in evaluating the performance of our operating businesses and provide greater transparency into our results of operations. EBITDA and Adjusted EBITDA are measures used by our management, including our chief operating decision maker, to perform such evaluation, and are factors in measuring compliance with debt covenants relating to certain of our borrowing arrangements. EBITDA and Adjusted EBITDA should not be considered in isolation or as a substitute for net income or other statement of operations data prepared in accordance with GAAP.

We believe EBITDA facilitates company-to-company operating performance comparisons by backing out potential differences caused by variations in capital structures (affecting net interest expense), taxation, the age and book depreciation of facilities (affecting relative depreciation expense) and the amortization of intangibles, which may vary for different companies for reasons unrelated to operating performance. We further believe that EBITDA is frequently used by securities analysts, investors and other interested parties in their evaluation of companies, many of which present an EBITDA measure when reporting their results. Adjusted EBITDA as presented in the table above corresponds to the definition of "EBITDA," calculated on a "pro forma basis," used in the senior secured credit facility to calculate the senior secured leverage ratio and substantially corresponds to the definition of "EBITDA" used in the indentures governing the notes to test the permissibility of certain types of transactions, including debt incurrence.

EBITDA has limitations as an analytical tool, and you should not consider EBITDA either in isolation or as a substitute for analyzing our results as reported under GAAP. Some of these limitations are:

  • EBITDA does not reflect changes in, or cash requirement for, our working capital needs;
  • EBITDA does not reflect our interest expense (except for interest related to our securitization obligations), or the cash requirements necessary to service interest or principal payments, on our debt;
  • EBITDA does not reflect our income tax expense or the cash requirements to pay our taxes;
  • EBITDA does not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments;
  • although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements; and
  • other companies in our industry may calculate EBITDA differently so they may not be comparable.

Like EBITDA, Adjusted EBITDA has limitations as an analytical tool, and you should not consider Adjusted EBITDA either in isolation or as a substitute for analyzing our results as reported under GAAP. In addition to the limitations described above with respect to EBITDA, Adjusted EBITDA includes pro forma cost savings and the pro forma full year effect of NRT acquisitions and RFG acquisitions/new franchisees. These adjustments may not reflect the actual cost savings or pro forma effect recognized in future periods.

EBITDA and Adjusted EBITDA are not necessarily comparable to other similarly titled financial measures of other companies due to the potential inconsistencies in the method of calculation.

SOURCE: Realogy Corporation

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