The typical industry rumor mill is fast at work, with all eyes on Cendant's plans to spin off its real estate unit. President Richard Smith speaks about the current real estate marketplace in an exclusive interview with Realty Times.
Like any publicly held company, Cendant has to offer some transparency to shareholders, but that information, taken out of context, can be misconstrued.
Take for example, Cendant's recent shareholder call to discuss the company's fourth-quarter earnings and full-year earnings for 2005.
In the call, CEO Henry Silverman discussed changing market conditions, such as 30 percent higher cancellation rates on contracts to purchase properties in December, and the volume of "sides" sliding by 19 percent in New England, California and Florida markets, which impacts the company-owned NRT brand, which showed a loss for the first quarter.
What may have gotten lost in the translation is that the company continuously responds to NRT's local market conditions.
"NRT always operates at a loss in the first quarter, it never has been the strongest quarter, but we are on forecast exactly," says Smith. "NRT is a collection of 300 acquisitions, so there is an ongoing process of merging offices, moving to new offices. With 1,100 offices, it's a daily event to flex, grow, consolidate, negotiate new leases."
Smith says its simply not smart to grow overhead at the same rate as revenues.
"We always model office closures as important to reducing overhead," he says. "We have a national footprint and we can collapse overhead, that's just smart management, and this year is no different from every year. This is a discipline that well managed companies always go through. You have to be attentive to the bottom line. We have always preached that we continue to improve margins by shrinking overhead.
Should consolidation be frightening to franchisees and others who watch NRT for signs of market strength? "It doesn't become a relationship issue when you do it every day, it becomes known that you are efficient. If you have a 6 percent margin, and you have to be attentive to those expense lines, and the biggest expense outside of commissions is space, and many brokers aren't as attentive to space as they should be. The successful models will shrink the space needs because a vast majority of space goes unused, and we are looking to merge shrink offices. Cutting $50,000,000 in costs is a drop in the bucket if you look at our overhead, so this is not a news story at all."
What else is important to the bottom line?
"What is important to us, the major shift that is occurring, is print media has long been the dominant form of marketing and it's losing its throne," says Smith. "The Web is more efficient and cost-effective and quantifiable. The quicker you can move from print to the Web, you'll be better off. We say that to all of our franchisees, and we are shifting more to the Web in a variety of means and we are saving money there. We are saving money on not inefficiently spending on print."
What about the real estate slowdown Silverman referenced? "We've never taken for granted that we have to react. The fall-through rate was up more than what's typical which is less than 10 percent, and now it is up 30 percent, so you are seeing three times the norm and you contemplate what the market is doing in those specific markets. If you look at that in line of comments that have been made by public builders, there is a cautious approach in the marketplace."
A national slowdown isn't material to NRT, says Smith. "In New England, Florida and California, we have a large presence and we pay close attention to that, but nothing indicates it's a long-term trend."
The media, says Smith, has a crushing influence on buyers and sellers and the effect of that can't really be calculated. "Local papers tout a housing bubble, but nothing has significantly changed over the past few years. ARM products will get you back to where we were three years ago. We believe there is enough hype that buyer sand sellers are becoming cautious, and sooner or later they will wonder, "Do I pay attention to media or what I see in front of me? Adjustments could take months or weeks, if they've been conditioned to be negative, they may realize they media doesn't know what it's talking about."
There are other ways to look at the health of a company. "We have always managed our division as stand alone; we stayed pure to the mission. I think our success in franchise retention rates, 97 to 98 percent of franchisees stay with us so we are doing something right.
What do you think of Zillow.com?
"Through the travel industry, we know Richard Barton rather well, and he's a very smart tech guy," says Smith, "but I'm always concerned when someone in the space has indicated in going direct to consumer in effect to bypass the broker or sales associate, I'm always cautious. It's something that this industry is relationship based, and that you can unbundle that relationship I view with some skepticism. We've seen a number of people who have decided that real estate is commodity-based and to create technology with that idea in mind. If Zillow is intended to serve as advertising model, it's not to change the real estate transaction. Real estate brokerage is a time-tested model, it's been tested by Paul Allen and AOL, and it's not going to change materially. Communication will change -- the print media is the real story. Millions are wasted on print media and it's throwing money out the window. The shift from print to web, and that shift will occur faster than anyone thinks."
"If Zillow is going to position themselves as a replacement for newspapers that's one thing, but as a replacement for agents, we will aggressively go about making their model unsuccessful. His position that agents are overpaid is an interesting position to take in a strong market, but when the market changes, you are worth every dime you are paid. Commissions have dropped for 20 years, I don't know who made them God to say pricing is too high -- then how did we have such a great 5-year run? If his intent is to somehow force the media to mandate that real estate commissions have to come down, then they have to find an alternative. The marketplace will determine commissions, it occurs across the kitchen table. If agents aren't worth it, don't pay it. If they are worth it, the market will pay them."
