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______________________________________________________________________________________________________________________________________________________________________

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 June 30, 2017
OR
¨    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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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
(Do not check if a smaller reporting company)
 
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
There were 136,328,300 shares of Common Stock, $0.01 par value, of Realogy Holdings Corp. outstanding as of August 1, 2017.
__________________________________________________________________________________________________________________


Table of Contents

TABLE OF CONTENTS
 
Page
 
 
 
PART I
FINANCIAL INFORMATION
 
Item 1.
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II
Item 1.
Item 2.
Item 6.




Table of Contents

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 Senior Secured Credit Facility and 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.
FORWARD-LOOKING STATEMENTS
Forward-looking statements included in this report and our other public filings or other public statements that we make from time to time are based on various facts and derived utilizing numerous important assumptions and are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements include the information concerning our future financial performance, business strategy, projected plans and objectives, as well as projections of macroeconomic and industry trends, which are inherently unreliable due to the multiple factors that impact economic trends, and any such variations may be material. Statements preceded by, followed by or that otherwise include the words "believes," "expects," "anticipates," "intends," "projects," "estimates," "plans," 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. You should understand that the following important factors could affect our future results and cause actual results to differ materially from those expressed in the forward-looking statements:
risks related to general business, economic, employment and political conditions and the U.S. residential real estate markets, either regionally or nationally, including but not limited to:
a lack of improvement or a decline in the number of homesales, stagnant or declining home prices and/or a deterioration in other economic factors that particularly impact the residential real estate market and the business segments in which we operate;
increasing mortgage rates and/or constraints on the availability of mortgage financing;
insufficient or excessive home inventory levels by market and price point;
a decrease in consumer confidence;
the impact of recessions, slow economic growth, disruptions in the U.S. government or banking system, disruptions in a major geoeconomic region, or equity or commodity markets and high levels of unemployment in the U.S. and abroad, which may impact all or a portion of the housing markets in which we and our franchisees operate;
legislative, tax or regulatory changes (including changes in regulatory interpretations or enforcement practices) that would adversely impact the residential real estate market, including changes relating to the Real Estate Settlement Procedures Act ("RESPA"), potential reforms of Fannie Mae and Freddie Mac, immigration reform, and potential tax code reform;
a decrease in housing affordability due to higher mortgage rates and increases in average homesale prices;
high levels of foreclosure activity;
changing attitudes towards home ownership, particularly among potential first-time homebuyers who may delay, or decide not to, purchase a home, as well as the potential impact of decisions to rent versus purchase a home; and


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the inability or unwillingness of current homeowners to purchase their next home due to various factors, including limited or negative equity in their current home, difficult mortgage underwriting standards, attractive rates on existing mortgages and the lack of available inventory in their market;
increased competition whether through traditional competitors or competitors with alternative business models (such as flat fee, capped fee or desk fee models) including companies employing technologies intended to disrupt the traditional brokerage model, as well as eliminating brokers or agents from, or minimizing the role they play in, the homesale transaction, such as reducing brokerage commissions;
competition for more productive sales associates, sales associate teams, and manager talent may continue to impact the ability of our company owned brokerage business and our affiliated franchisees to attract and retain independent sales associates, either individually or as members of a team, without significantly impacting the commission split rates currently paid by our company owned brokerages and our affiliated franchisees;
our geographic and high-end market concentration, particularly with respect to our company owned brokerage operations;
our inability to enter into franchise agreements with new franchisees at current net effective royalty rates, or to realize royalty revenue growth from them;
our inability to renew existing franchise agreements at current net effective royalty rates or without increasing the amount and prevalence of non-standard incentives, or to maintain or enhance our value proposition to franchisees;
the lack of revenue growth or declining profitability of our franchisees and company owned brokerage operations, including the impact of lower average broker commission rates;
disputes or issues with entities that license us their tradenames for use in our business that could impede our franchising of those brands;
actions by our franchisees that could harm our business or reputation, non-performance of our franchisees, controversies with our franchisees or actions against us by their independent sales associates or employees or third parties with which our franchisees have business relationships;
loss, attrition or changes among our senior executives, other key employees or our inability to recruit top talent;
our inability to achieve or maintain cost savings and other benefits from our restructuring activities;
our inability to realize the benefits from acquisitions due to the loss of key personnel or productive agents of the acquired companies, as well as the possibility that expected benefits and synergies of the transactions may not be achieved in a timely manner or at all;
our failure or alleged failure to comply with laws, regulations and regulatory interpretations and any changes in laws and regulations or stricter interpretations of regulatory requirements, including but not limited to (1) state or federal employment laws or regulations that would require reclassification of independent contractor sales associates to employee status, (2) RESPA or state consumer protection or similar laws and (3) privacy or data security laws and regulations;
any adverse resolution of litigation, governmental or regulatory proceedings or arbitration awards as well as any adverse impact of decisions to voluntarily modify business arrangements or enter into settlement agreements to avoid the risk of protracted and costly litigation or other proceedings;
our inability to obtain new technologies and systems, to replace or introduce new technologies and systems as quickly as our competitors and in a cost-effective manner or to achieve the benefits anticipated from new technologies or systems;
the failure or significant disruption of our operations from various causes related to our critical information technologies and systems including the increasing level of cybersecurity threats to our data and customer, franchisee and independent sales associate data as well as reputational or financial risks associated with a loss of any such data or diversion of homesale transaction closing funds;
risks related to our international operations, including compliance with the Foreign Corrupt Practices Act and similar anti-corruption laws as well as risks relating to the master franchisor model that we deploy internationally;
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;
risks relating to our ability to refinance or repay our indebtedness, incur additional indebtedness or return capital to stockholders;


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changes in corporate relocation practices resulting in fewer employee relocations, reduced relocation benefits or the loss of one or more significant affinity clients;
an increase in the claims rate of our title underwriter and an increase in mortgage rates could adversely impact the revenue of our title and settlement services segment;
our inability to securitize certain assets of our relocation business, which would require us to find an alternative source of liquidity that may not be available, or if available, may not be on favorable terms;
risks that could materially adversely impact our equity investment in our mortgage origination joint venture, including increases in mortgage rates, the impact of joint venture operational or liquidity risks, the impact of a transition from our current joint venture to our new joint venture, regulatory changes, litigation, investigations and inquiries or any termination of the venture;
any remaining resolutions or outcomes with respect to contingent liabilities of our former parent, Cendant Corporation ("Cendant"), under the Separation and Distribution Agreement and the Tax Sharing Agreement (each as described in our Annual Report on Form 10-K for the year ended December 31, 2016, the "2016 Form 10-K"), including any adverse impact on our future cash flows; and
new types of taxes or increases in state, local or federal taxes that could diminish profitability or liquidity.
Other factors not identified above, including those described under the headings "Forward-Looking Statements," "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 2016 Form 10-K, filed with the Securities and Exchange Commission ("SEC"), may also cause actual results to differ materially from those described in our forward-looking statements. 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.
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. 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.:
We have reviewed the accompanying condensed consolidated balance sheet of Realogy Holdings Corp. and its subsidiaries as of June 30, 2017, and the related condensed consolidated statements of operations and comprehensive income for the three-month and six-month periods ended June 30, 2017 and 2016 and the condensed consolidated statements of cash flows for the six-month periods ended June 30, 2017 and 2016. These interim financial statements are the responsibility of the Company's management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 Public Company Accounting Oversight Board (United States), 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.

Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial information for them to be in conformity with accounting principles generally accepted in the United States of America.

We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2016, and the related consolidated statements of operations, comprehensive income, equity, and cash flows for the year then ended (not presented herein), and in our report dated February 24, 2017, 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, 2016, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.


/s/ PricewaterhouseCoopers LLP
Florham Park, NJ
August 3, 2017





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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholder of Realogy Group LLC:
We have reviewed the accompanying condensed consolidated balance sheet of Realogy Group LLC and its subsidiaries as of June 30, 2017, and the related condensed consolidated statements of operations and comprehensive income for the three-month and six-month periods ended June 30, 2017 and 2016 and the condensed consolidated statements of cash flows for the six-month periods ended June 30, 2017 and 2016. These interim financial statements are the responsibility of the Company's management.

We conducted our review 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 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 Public Company Accounting Oversight Board (United States) 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.

Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial information for them to be in conformity with accounting principles generally accepted in the United States of America.

We 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 as of December 31, 2016, and the related consolidated statements of operations, comprehensive income, equity, and cash flows for the year then ended (not presented herein), and in our report dated February 24, 2017, 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, 2016, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.


/s/ PricewaterhouseCoopers LLP
Florham Park, NJ
August 3, 2017



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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
 
Six Months Ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
Revenues
 
 
 
 
 
 
 
Gross commission income
$
1,374

 
$
1,251

 
$
2,255

 
$
2,077

Service revenue
255

 
252

 
449

 
442

Franchise fees
110

 
104

 
185

 
173

Other
54

 
55

 
107

 
104

Net revenues
1,793

 
1,662

 
2,996

 
2,796

Expenses
 
 
 
 
 
 
 
Commission and other agent-related costs
970

 
864

 
1,575

 
1,422

Operating
385

 
391

 
768

 
758

Marketing
70

 
65

 
132

 
123

General and administrative
98

 
70

 
187

 
156

Former parent legacy (benefit) cost, net
(11
)
 

 
(11
)
 
1

Restructuring costs
2

 
12

 
7

 
21

Depreciation and amortization
49

 
48

 
99

 
96

Interest expense, net
47

 
59

 
86

 
132

Loss on the early extinguishment of debt

 

 
4

 

Total expenses
1,610

 
1,509

 
2,847

 
2,709

Income before income taxes, equity in (earnings) losses and noncontrolling interests
183

 
153

 
149

 
87

Income tax expense
73

 
64

 
64

 
40

Equity in (earnings) losses of unconsolidated entities

 
(5
)
 
3

 
(5
)
Net income
110

 
94

 
82

 
52

Less: Net income attributable to noncontrolling interests
(1
)
 
(2
)
 
(1
)
 
(2
)
Net income attributable to Realogy Holdings and Realogy Group
$
109

 
$
92

 
$
81

 
$
50

 
 
 
 
 
 
 
 
Earnings per share attributable to Realogy Holdings:
 
 
 
 
 
 
 
Basic earnings per share
$
0.79

 
$
0.63

 
$
0.58

 
$
0.34

Diluted earnings per share
$
0.78

 
$
0.63

 
$
0.58

 
$
0.34

Weighted average common and common equivalent shares of Realogy Holdings outstanding:
Basic
137.6

 
145.5

 
138.6

 
146.0

Diluted
138.9

 
146.7

 
139.9

 
147.2

 
 
 
 
 
 
 
 
Cash dividends declared per share (beginning in August 2016)
$
0.09

 
$

 
$
0.18

 
$




See Notes to Condensed Consolidated Financial Statements.
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REALOGY HOLDINGS CORP. AND REALOGY GROUP LLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
110

 
$
94

 
$
82

 
$
52

Currency translation adjustment
1

 
(3
)
 
2

 
(3
)
Defined benefit pension plan - amortization of actuarial loss to periodic pension cost

 
1

 

 
1

Other comprehensive income (loss), before tax
1

 
(2
)
 
2

 
(2
)
Income tax expense related to items of other comprehensive income

 

 

 

Other comprehensive income (loss), net of tax
1

 
(2
)
 
2

 
(2
)
Comprehensive income
111

 
92

 
84

 
50

Less: comprehensive income attributable to noncontrolling interests
(1
)
 
(2
)
 
(1
)
 
(2
)
Comprehensive income attributable to Realogy Holdings and Realogy Group
$
110

 
$
90

 
$
83

 
$
48





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)
 
June 30,
2017
 
December 31,
2016
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
219

 
$
274

Trade receivables (net of allowance for doubtful accounts of $11 and $13)
178

 
152

Relocation receivables
292

 
244

Other current assets
172

 
148

Total current assets
861

 
818

Property and equipment, net
267

 
267

Goodwill
3,694

 
3,690

Trademarks
748

 
748

Franchise agreements, net
1,327

 
1,361

Other intangibles, net
297

 
313

Other non-current assets
232

 
224

Total assets
$
7,426

 
$
7,421

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
170

 
$
140

Securitization obligations
223

 
205

Due to former parent
17

 
28

Current portion of long-term debt
237

 
242

Accrued expenses and other current liabilities
423

 
435

Total current liabilities
1,070

 
1,050

Long-term debt
3,246

 
3,265

Deferred income taxes
446

 
389

Other non-current liabilities
241

 
248

Total liabilities
5,003

 
4,952

Commitments and contingencies (Notes 8 and 10)
 
 
 
Equity:
 
 
 
Realogy Holdings preferred stock: $.01 par value; 50,000,000 shares authorized, none issued and outstanding at June 30, 2017 and December 31, 2016

 

Realogy Holdings common stock: $.01 par value; 400,000,000 shares authorized, 136,779,155 shares issued and outstanding at June 30, 2017 and 140,227,692 shares issued and outstanding at December 31, 2016
1

 
1

Additional paid-in capital
5,438

 
5,565

Accumulated deficit
(2,981
)
 
(3,062
)
Accumulated other comprehensive loss
(38
)
 
(40
)
Total stockholders' equity
2,420

 
2,464

Noncontrolling interests
3

 
5

Total equity
2,423

 
2,469

Total liabilities and equity
$
7,426

 
$
7,421



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)

 
Six Months Ended
June 30,
 
2017
 
2016
Operating Activities
 
 
 
Net income
$
82

 
$
52

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
99

 
96

Deferred income taxes
57

 
33

Amortization of deferred financing costs and discount
8

 
8

Loss on the early extinguishment of debt
4

 

Equity in (earnings) losses of unconsolidated entities
3

 
(5
)
Stock-based compensation
25

 
25

Mark-to-market adjustments on derivatives
5

 
45

Other adjustments to net income
(1
)
 
(3
)
Net change in assets and liabilities, excluding the impact of acquisitions and dispositions:
 
 
 
Trade receivables
(26
)
 
(33
)
Relocation receivables
(47
)
 
(79
)
Other assets
(29
)
 
(14
)
Accounts payable, accrued expenses and other liabilities
22

 
(18
)
Due to former parent
(11
)
 
1

Dividends received from unconsolidated entities
2

 
1

Other, net
(7
)
 
(6
)
Net cash provided by operating activities
186

 
103

Investing Activities
 
 
 
Property and equipment additions
(48
)
 
(40
)
Payments for acquisitions, net of cash acquired
(4
)
 
(15
)
Investment in unconsolidated entities
(3
)
 

Change in restricted cash

 
1

Other, net
(1
)
 
(4
)
Net cash used in investing activities
(56
)
 
(58
)
Financing Activities
 
 
 
Net change in revolving credit facility
(10
)
 
(200
)
Amortization payments on term loan facilities
(21
)
 
(20
)
Proceeds from issuance of Senior Notes

 
750

Redemption of Senior Notes

 
(500
)
Net change in securitization obligations
18

 
34

Debt issuance costs
(6
)
 
(7
)
Repurchase of common stock
(121
)
 
(67
)
Dividends paid on common stock
(25
)
 

Proceeds from exercise of stock options
3

 
1

Taxes paid related to net share settlement for stock-based compensation
(10
)
 
(5
)
Payments of contingent consideration related to acquisitions
(4
)
 
(10
)
Other, net
(10
)
 
(12
)
Net cash used in financing activities
(186
)
 
(36
)
Effect of changes in exchange rates on cash and cash equivalents
1

 
(1
)
Net (decrease) increase in cash and cash equivalents
(55
)
 
8

Cash and cash equivalents, beginning of period
274

 
415

Cash and cash equivalents, end of period
$
219

 
$
423

Supplemental Disclosure of Cash Flow Information
 
 
 
Interest payments (including securitization interest of $3 for both periods presented)
$
86

 
$
86

Income tax payments, net
8

 
7



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 June 30, 2017 and the results of operations and comprehensive income for the three and six months ended June 30, 2017 and 2016 and cash flows for the six months ended June 30, 2017 and 2016. The Consolidated Balance Sheet at December 31, 2016 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, 2016.
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.
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


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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 June 30, 2017 for assets and liabilities measured at fair value on a recurring basis:
 
Level I
 
Level II
 
Level III
 
Total
Interest rate swaps (included in other current and non-current liabilities)
$

 
$
28

 
$

 
$
28

Deferred compensation plan assets (included in other non-current assets)
3

 

 

 
3

Contingent consideration for acquisitions (included in accrued expenses and other current liabilities and non-current liabilities)

 

 
44

 
44

The following table summarizes fair value measurements by level at December 31, 2016 for assets and liabilities measured at fair value on a recurring basis:
 
Level I
 
Level II
 
Level III
 
Total
Interest rate swaps (included in other non-current liabilities)
$

 
$
33

 
$

 
$
33

Deferred compensation plan assets (included in other non-current assets)
3

 

 

 
3

Contingent consideration for acquisitions (included in accrued expenses and other current liabilities and non-current liabilities)

 

 
50

 
50

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, 2016
 
$
50

Additions: contingent consideration related to acquisitions completed during the period
 

Reductions: payments of contingent consideration (reflected in the financing section of the Consolidated Statement of Cash Flows)
 
(4
)
Changes in fair value (reflected in the Consolidated Statement of Operations)
 
(2
)
Fair value of contingent consideration at June 30, 2017
 
$
44



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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:
 
June 30, 2017
 
December 31, 2016
Debt
Principal Amount
 
Estimated
Fair Value (a)
 
Principal Amount
 
Estimated
Fair Value (a)
Senior Secured Credit Facility:
 
 
 
 
 
 
 
Revolving Credit Facility
$
190

 
$
190

 
$
200

 
$
200

Term Loan B
1,089

 
1,094

 
1,094

 
1,100

Term Loan A Facility:
 
 
 
 
 
 
 
Term Loan A
402

 
403

 
413

 
414

Term Loan A-1
346

 
347

 
351

 
351

4.50% Senior Notes
450

 
464

 
450

 
461

5.25% Senior Notes
550

 
576

 
550

 
562

4.875% Senior Notes
500

 
503

 
500

 
483

Securitization obligations
223

 
223

 
205

 
205

_______________
(a)
During the second quarter 2017, the Company reclassified its Indebtedness from Level 1 to Level 2 as transactions in these securities did not occur with sufficient frequency and volume to constitute an active market.
Investment in PHH Home Loans
The Company owns 49.9% of PHH Home Loans, a mortgage origination venture formed in 2005 created for the purpose of originating and selling mortgage loans primarily sourced through the Company’s real estate brokerage and relocation businesses. PHH Corporation ("PHH") owns the remaining percentage.
In connection with the joint venture, the Company recorded no earnings related to its equity investment in PHH Home Loans for the three months ended June 30, 2017 and $4 million in losses related to its equity investment in PHH Home Loans for the six months ended June 30, 2017. The Company recorded $3 million equity in earnings for both the three and six months ended June 30, 2016. The Company received no cash dividends from PHH Home Loans during both the six months ended June 30, 2017 and June 30, 2016. The Company's investment in PHH Home Loans was $55 million at June 30, 2017 and $59 million at December 31, 2016.
On February 15, 2017, Realogy announced that it and Guaranteed Rate, Inc. (“Guaranteed Rate”) agreed to form a new joint venture, Guaranteed Rate Affinity, LLC ("Guaranteed Rate Affinity"), which is expected to begin doing business in August 2017. Commencement of operations is subject to the closing of the transactions contemplated by an asset purchase agreement under which Guaranteed Rate Affinity will acquire certain assets of the mortgage operations of PHH Home Loans, the existing joint venture between Realogy and PHH Mortgage Corporation. The asset purchase agreement and the movement of employees from the existing joint venture to the new joint venture is expected to be completed in a series of phases, with the first phase expected to occur in August 2017 and the remaining phases expected to be completed by the end of 2017.
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 an expense of $73 million and $64 million for the three months ended June 30, 2017 and June 30, 2016, respectively, and an expense of $64 million and $40 million for the six months ended June 30, 2017 and June 30, 2016, 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 British Pound, Euro, Swiss Franc 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


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the impact of changes in the value of the underlying risk that they are intended to economically hedge. As of June 30, 2017, the Company had outstanding foreign currency forward contracts with a fair value of less than $1 million and a notional value of $30 million. As of December 31, 2016, the Company had outstanding foreign currency forward contracts with a fair value of $2 million and a notional value of $29 million.
The Company also enters into interest rate swaps to manage its exposure to changes in interest rates associated with its variable rate borrowings. The Company has interest rate swaps with an aggregate notional value of $1,475 million to offset the variability in cash flows resulting from the term loan facilities as follows:
Notional Value (in millions)
Commencement Date
Expiration Date
$225
July 2012
February 2018
$200
January 2013
February 2018
$600
August 2015
August 2020
$450
November 2017
November 2022
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:
Liability Derivatives
 
Fair Value
Not Designated as Hedging Instruments
 
Balance Sheet Location
 
June 30, 2017
 
December 31, 2016
Interest rate swap contracts
 
Other current and non-current liabilities
 
$
28

 
$
33

The effect of derivative instruments on earnings was as follows:
Derivative Instruments Not Designated as Hedging Instruments
 
Location of Loss Recognized for Derivative Instruments
 
Loss Recognized on Derivatives
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Interest rate swap contracts
 
Interest expense
 
$
5

 
$
14

 
$
4

 
$
45

Foreign exchange contracts
 
Operating expense
 
1

 

 
1

 

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 $7 million at both June 30, 2017 and December 31, 2016 and are primarily included within other current assets on the Company’s Condensed Consolidated Balance Sheets.
Supplemental Cash Flow Information
Significant non-cash transactions during the six months ended June 30, 2017 and June 30, 2016 included capital lease additions of $8 million and $7 million, respectively, which resulted in non-cash additions to property and equipment, net and other non-current liabilities.
Stock Repurchases
The Company may repurchase shares of its common stock under authorizations made from its Board of Directors. Shares repurchased are retired and not displayed separately as treasury stock on the consolidated financial statements. The par value of the shares repurchased and retired is deducted from common stock and the excess of the purchase price over par value is first charged against any available additional paid-in capital with the balance charged to retained earnings. Direct costs incurred to repurchase the shares are included in the total cost of the shares.
In February 2016, the Company's Board of Directors authorized a share repurchase program of up to $275 million of the Company's common stock. In February 2017, the Company's Board of Directors authorized a new share repurchase program of up to an additional $300 million of the Company's common stock.
As of June 30, 2017, the Company had repurchased and retired 11.2 million shares of common stock for an aggregate of $275 million under the February 2016 share repurchase program and $44 million under the February 2017 share repurchase


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program at a total weighted average market price of $28.33 per share, including 1.9 million shares of common stock repurchased during the second quarter of 2017 for $60 million at a weighted average market price of $30.22 per share. As of June 30, 2017, approximately $256 million of authorization remains available for the repurchase of shares under the February 2017 share repurchase program.
Dividend Policy
In August 2016, the Company’s Board of Directors approved the initiation of a quarterly cash dividend policy of $0.09 per share on its common stock. The Board declared and paid a quarterly cash dividend of $0.09 per share of the Company’s common stock during both the first and second quarter of 2017.
The declaration and payment of any future dividend will be subject to the discretion of the Board of Directors and will depend on a variety of factors, including the Company’s financial condition and results of operations, contractual restrictions, including restrictive covenants contained in the Company’s credit agreements, and the indentures governing the Company’s outstanding debt securities, capital requirements and other factors that the Board of Directors deems relevant.
Pursuant to the Company’s policy, the dividends payable in cash are treated as a reduction of additional paid-in capital since the Company is currently in a retained deficit position.
Recently Issued Accounting Pronouncements
The Company considers the applicability and impact of all Accounting Standards Updates. ASUs not listed below 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.
In August 2016, the FASB issued a new standard on classification of cash receipts and payments on the statement of cash flows intending to reduce diversity in practice on how certain transactions are classified. In addition, in November 2016, the FASB issued a new standard requiring that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The new standards are effective for annual periods beginning after December 15, 2017 and will require a retrospective application at the beginning of the earliest comparative period presented in the year of adoption. The Company plans to early adopt the new standard in the fourth quarter of 2017. The Company expects there to be reclassifications between cash flow categories, but no net cash impact to its Condensed Consolidated Statement of Cash Flows.
In February 2016, the FASB issued its new standard on leases which requires virtually all leases to be recognized on the balance sheet. Lessees will recognize a right-of-use asset and a lease liability for all leases (other than leases that meet the definition of a short-term lease). The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance leases. Operating leases will result in straight-line expense, similar to current operating leases, while finance leases will result in a front-loaded expense pattern, similar to current capital leases. Classification will be based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines. The new standard is effective for annual periods beginning after December 15, 2018. Early adoption is permitted. The new leasing standard requires modified retrospective transition, which requires application of the new guidance at the beginning of the earliest comparative period presented in the year of adoption. The Company is currently evaluating the impact of the standard on its consolidated financial statements and is in the process of implementing a new lease management system.
In May 2014, the FASB issued a standard on revenue recognition that will impact most companies to some extent. The objective of the revenue standard is to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability within industries, across industries, and across capital markets. The revenue standard contains principles that an entity will apply to determine the measurement of revenue and the timing of revenue recognition. The new standard permits for two alternative implementation methods, the use of either (1) full retrospective application to each prior reporting period presented or (2) modified retrospective application in which the cumulative effect of initially applying the revenue standard is recognized as an adjustment to the opening balance of retained earnings in the period of adoption. The Company plans to adopt the new standard in the first quarter of 2018 using the modified retrospective transition method. The Company has made progress on redrafting its revenue recognition accounting policies affected by


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the standard, assessing the redesign of internal controls, as well as evaluating the expanded disclosure requirements. After a review of the Company's revenue streams, the Company does not expect the new standard to have a material impact on financial results as the majority of the Company's revenue is recognized at the completion of a homesale transaction which will not result in a change in the timing of recognition of revenue transactions under the new revenue recognition guidance.
2.
ACQUISITIONS
2017 Acquisitions
During the six months ended June 30, 2017, the Company acquired seven real estate brokerage operations through its wholly owned subsidiary, NRT, for aggregate cash consideration of $4 million. These acquisitions resulted in goodwill of $3 million and other intangibles of $1 million.
None of the 2017 acquisitions were significant to the Company’s results of operations, financial position or cash flows individually or in the aggregate.
2016 Acquisitions
During the year ended December 31, 2016, the Company acquired eleven real estate brokerage and property management operations through its wholly owned subsidiary, NRT, for aggregate cash consideration of $74 million and established $9 million of contingent consideration. These acquisitions resulted in goodwill of $52 million, customer relationships of $20 million, pendings and listings of $6 million, other intangible assets of $3 million, other assets of $5 million and other liabilities of $3 million.
During the year ended December 31, 2016, the Company acquired one title and settlement operation through its wholly owned subsidiary, TRG, for cash consideration of $24 million and established $10 million of contingent consideration. This acquisition resulted in goodwill of $20 million, title plant of $7 million, pendings of $5 million, trademarks of $3 million, other intangible assets of $2 million, other assets of $6 million and other liabilities of $9 million.
None of the 2016 acquisitions were significant to the Company’s results of operations, financial position or cash flows individually or in the aggregate.
3.
INTANGIBLE ASSETS
Goodwill by segment and changes in the carrying amount are as follows:
 
Real Estate
Franchise
Services
 
Company
Owned
Brokerage
Services
 
Relocation
Services
 
Title and
Settlement
Services
 
Total
Company
Gross goodwill as of December 31, 2016
$
3,315

 
$
1,051

 
$
641

 
$
469

 
$
5,476

Accumulated impairment losses
(1,023
)
 
(158
)
 
(281
)
 
(324
)
 
(1,786
)
Balance at December 31, 2016
2,292

 
893

 
360

 
145

 
3,690

Goodwill acquired

 
4

 

 

 
4

Balance at June 30, 2017
$
2,292

 
$
897

 
$
360

 
$
145

 
$
3,694



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Intangible assets are as follows:
 
As of June 30, 2017
 
As of December 31, 2016
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Amortizable—Franchise agreements (a)
$
2,019

 
$
692

 
$
1,327

 
$
2,019

 
$
658

 
$
1,361

Indefinite life—Trademarks (b)
$
748

 
 
 
$
748

 
$
748

 
 
 
$
748

Other Intangibles
 
 
 
 
 
 
 
 
 
 
 
Amortizable—License agreements (c)
$
45

 
$
9

 
$
36

 
$
45

 
$
9

 
$
36

Amortizable—Customer relationships (d)
550

 
325

 
225

 
550

 
312

 
238

Indefinite life—Title plant shares (e)
18

 
 
 
18

 
18

 
 
 
18

Amortizable—Pendings and listings (f)
5

 
5

 

 
6

 
5

 
1

Amortizable—Other (g)
34

 
16

 
18

 
33

 
13

 
20

Total Other Intangibles
$
652

 
$
355

 
$
297

 
$
652

 
$
339

 
$
313

_______________
(a)    Generally amortized over a period of 30 years.
(b)
Primarily relates to the Century 21®, Coldwell Banker®, ERA®, Corcoran®, Coldwell Banker Commercial® and Cartus tradenames, which are expected to generate future cash flows for an indefinite period of time.
(c)
Relates to the Sotheby’s International Realty® and Better Homes and Gardens® Real Estate agreements which are being amortized over 50 years (the contractual term of the license agreements).
(d)
Relates to the customer relationships at the Relocation Services segment, the Title and Settlement Services segment, the Real Estate Franchise Services segment and our Company Owned Real Estate Brokerage Services segment. These relationships are being amortized over a period of 2 to 20 years.
(e)
Ownership in a title plant is required to transact title insurance in certain states. The Company expects to generate future cash flows for an indefinite period of time.
(f)
Generally amortized over a period of 5 months.
(g)
Consists of covenants not to compete which are amortized over their contract lives and other intangibles which are generally amortized over periods ranging from 5 to 10 years.
Intangible asset amortization expense is as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Franchise agreements
$
17

 
$
17

 
$
34

 
$
34

License agreements

 
1

 

 
1

Customer relationships
7

 
6

 
13

 
13

Pendings and listings

 
2

 
1

 
2

Other
1

 
1

 
3

 
3

Total
$
25

 
$
27

 
$
51

 
$
53

Based on the Company’s amortizable intangible assets as of June 30, 2017, the Company expects related amortization expense for the remainder of 2017, the four succeeding years and thereafter to be approximately $84 million, $80 million, $80 million, $93 million, $92 million and $1,177 million, respectively.


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4.
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of:
 
June 30, 2017
 
December 31, 2016
Accrued payroll and related employee costs
$
118

 
$
138

Accrued volume incentives
29

 
40

Accrued commissions
49

 
31

Restructuring accruals
8

 
14

Deferred income
66

 
69

Accrued interest
12

 
13

Contingent consideration for acquisitions
19

 
24

Other
122

 
106

Total accrued expenses and other current liabilities
$
423

 
$
435

5.    SHORT AND LONG-TERM DEBT
Total indebtedness is as follows:
 
June 30, 2017
 
December 31, 2016
Senior Secured Credit Facility:
 
 
 
Revolving Credit Facility
$
190

 
$
200

Term Loan B
1,067

 
1,069

Term Loan A Facility:
 
 
 
Term Loan A
401

 
411

Term Loan A-1
343

 
347

4.50% Senior Notes
441

 
439

5.25% Senior Notes
545

 
545

4.875% Senior Notes
496

 
496

Total Short-Term & Long-Term Debt
$
3,483

 
$
3,507

Securitization obligations:
 
 
 
Apple Ridge Funding LLC
$
211

 
$
192

Cartus Financing Limited
12

 
13

Total securitization obligations
$
223

 
$
205

Indebtedness Table
As of June 30, 2017, the Company’s borrowing arrangements were as follows:
 
Interest
Rate
 
Expiration
Date
 
Principal Amount
 
Unamortized Discount and Debt Issuance Costs
 
Net Amount
Senior Secured Credit Facility:
 
 
 
 
 
 
 
 
 
Revolving Credit Facility (1)
(2)
 
October 2020
 
$
190

 
$ *

 
$
190

Term Loan B
(3)
 
July 2022
 
1,089

 
22

 
1,067

Term Loan A Facility:
 
 
 
 
 
 
 
 
 
Term Loan A
(4)
 
October 2020
 
402

 
1

 
401

Term Loan A-1
(5)
 
July 2021
 
346

 
3

 
343

Senior Notes
4.50%
 
April 2019
 
450

 
9

 
441

Senior Notes
5.25%
 
December 2021
 
550

 
5

 
545

Senior Notes
4.875%
 
June 2023
 
500

 
4

 
496

Securitization obligations: (6)
 
 
 
 
 
 
 
 
 
        Apple Ridge Funding LLC (7)
 
 
June 2018
 
211

 
*

 
211

        Cartus Financing Limited (8)
 
 
August 2017
 
12

 
*

 
12

Total (9)
$
3,750

 
$
44

 
$
3,706



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_______________
*
The debt issuance costs related to our Revolving Credit Facility and securitization obligations are classified as a deferred financing asset within other assets.
 
 
(1)
As of June 30, 2017, the Company had $1,050 million of borrowing capacity under its Revolving Credit Facility, leaving $860 million of available capacity. The revolving credit facility expires in October 2020, but is classified on the balance sheet as current due to the revolving nature of the facility. On August 1, 2017, the Company had $140 million in outstanding borrowings under the Revolving Credit Facility, leaving $910 million of available capacity.
(2)
Interest rates with respect to revolving loans under the Senior Secured Credit Facility at June 30, 2017 are based on, at the Company's option, (a) adjusted LIBOR plus an additional margin or (b) ABR plus an additional margin, in each case subject to adjustment based on the then current senior secured leverage ratio. Based on the previous quarter senior secured leverage ratio, the LIBOR margin was 2.00% and the ABR margin was 1.00% for the three months ended June 30, 2017.
(3)
The Term Loan B provides for quarterly amortization payments totaling 1% per annum of the original principal amount. The interest rate with respect to term loans under the Term Loan B is based on, at the Company’s option, (a) adjusted LIBOR plus 2.25% (with a LIBOR floor of 0.75%) or (b) JPMorgan Chase Bank, N.A.’s prime rate ("ABR") plus 1.25% (with an ABR floor of 1.75%).
(4)
The Term Loan A provides for quarterly amortization payments, which commenced March 31, 2016, totaling per annum 5%, 5%, 7.5%, 10.0% and 12.5% of the original principal amount of the Term Loan A in 2016, 2017, 2018, 2019 and 2020, respectively. The interest rates with respect to term loans under the Term Loan A are based on, at the Company's option, (a) adjusted LIBOR plus an additional margin or (b) ABR plus an additional margin, in each case subject to adjustment based on the then current senior secured leverage ratio. Based on the previous quarter senior secured leverage ratio, the LIBOR margin was 2.00% and the ABR margin was 1.00% for the three months ended June 30, 2017.
(5)
The Term Loan A-1 provides for quarterly amortization payments, which commenced on September 30, 2016, totaling per annum 2.5%, 2.5%, 5%, 7.5% and 10.0% of the original principal amount of the Term Loan A-1, with the last amortization payment made on June 30, 2021. The interest rates with respect to term loans under the Term Loan A-1 are based on, at the Company's option, (a) adjusted LIBOR plus an additional margin or (b) ABR plus an additional margin, in each case subject to adjustment based on the then current senior secured leverage ratio. Based on the previous quarter senior secured leverage ratio, the LIBOR margin was 2.00% and the ABR margin was 1.00% for the three months ended June 30, 2017.
(6)
Available capacity is subject to maintaining sufficient relocation related assets to collateralize these securitization obligations.
(7)
In June 2017, Realogy Group extended the existing Apple Ridge Funding LLC securitization program utilized by Cartus until June 2018. As of June 30, 2017, the Company had $325 million of borrowing capacity under the Apple Ridge Funding LLC securitization program leaving $114 million of available capacity.
(8)
Consists of a £10 million revolving loan facility and a £5 million working capital facility. As of June 30, 2017, the Company had $20 million of borrowing capacity under the Cartus Financing Limited securitization program leaving $8 million of available capacity.
(9)
Not included in this table, the Company had $124 million of outstanding letters of credit at June 30, 2017 under the Unsecured Letter of Credit Facility with a weighted average rate of 2.93%. At June 30, 2017, the capacity of the facility was $131 million.
Maturities Table
As of June 30, 2017, the combined aggregate amount of maturities for long-term borrowings, excluding securitization obligations, for the remainder of 2017 and each of the next four years is as follows:
Year
 
Amount
Remaining 2017 (a)
 
$
211

2018
 
57

2019
 
527

2020
 
356

2021
 
837

_______________

 
(a)
The current portion of long-term debt consists of remaining 2017 amortization payments totaling $11 million, $4 million and $6 million for the Term Loan A, Term Loan A-1 and Term Loan B facilities, respectively, as well as $190 million of revolver borrowings under the revolving credit facility which expires in October 2020, but are classified on the balance sheet as current due to the revolving nature of the facility.
Senior Secured Credit Facility
In July 2016, the Company entered into a third amendment (the “Third Amendment”) to the Amended and Restated Credit Agreement, dated as of March 5, 2013, as amended. The Third Amendment replaced the $1,858 million Term Loan B due March 2020 with a new $1,100 million Term Loan B due July 20, 2022. In January 2017, the Company entered into a


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fourth amendment (the “Fourth Amendment” to the Amended and Restated Credit Agreement, as so amended, the "Senior Secured Credit Agreement") that repriced the Term Loan B through a refinancing of the existing term loan with a new Term Loan B. The Fourth Amendment reduced the interest rate by 75 basis points but did not change the maturity date for the Term Loan B. The Company also entered into an Incremental Assumption Agreement to the Senior Secured Credit Agreement pursuant to which the Company increased the borrowing capacity under its Revolving Credit Facility to $1,050 million from the existing $815 million.
The Senior Secured Credit Agreement provides for:
(a) 
a Term Loan B issued in the original aggregate principal amount of $1,100 million with a maturity date of July 2022. The Term Loan B has quarterly amortization payments totaling 1% per annum of the initial aggregate principal amount. The interest rate with respect to term loans under the Term Loan B is based on, at Realogy Group's option, adjusted LIBOR plus 2.25% (with a LIBOR floor of 0.75%) or ABR plus 1.25% (with an ABR floor of 1.75%); and
(b)
a $1,050 million Revolving Credit Facility with a maturity date of October 23, 2020, which includes (i) a $125 million letter of credit subfacility and (ii) a swingline loan subfacility. The interest rate with respect to revolving loans under the Revolving Credit Facility is based on, at Realogy Group's option, adjusted LIBOR or ABR plus an additional margin subject to the following adjustments based on the Company’s then current senior secured leverage ratio:
Senior Secured Leverage Ratio
 
Applicable LIBOR Margin
 
Applicable ABR Margin
Greater than 3.50 to 1.00
 
2.50%
 
1.50%
Less than or equal to 3.50 to 1.00 but greater than or equal to 2.50 to 1.00
 
2.25%
 
1.25%
Less than 2.50 to 1.00
 
2.00%
 
1.00%
The Senior Secured Credit Agreement permits the Company to obtain up to $500 million of additional credit facilities from lenders reasonably satisfactory to the administrative agent and us, without the consent of the existing lenders under the new senior secured credit facility, plus an unlimited amount if Realogy Group's senior secured leverage ratio is less than 3.50 to 1.00 on a pro forma basis. Subject to certain restrictions, the Senior Secured Credit Agreement also permits us to issue senior secured or unsecured notes in lieu of any incremental facility.
The obligations under the Senior Secured Credit Agreement are secured to the extent legally permissible by substantially all of the assets of Realogy Group, Realogy Intermediate and all of their domestic subsidiaries, other than certain excluded subsidiaries.
Realogy Group’s Senior Secured Credit Agreement contains financial, affirmative and negative covenants and requires Realogy Group to maintain a senior secured leverage ratio, not to exceed 4.75 to 1.00. The leverage ratio is tested quarterly regardless of the amount of borrowings outstanding and letters of credit issued under the revolver at the testing date. Total senior secured net debt does not include unsecured indebtedness, including the Unsecured Notes as well as the securitization obligations. At June 30, 2017, Realogy Group was in compliance with the senior secured leverage ratio covenant.
Term Loan A Facility
In October 2015, Realogy Group entered into the Term Loan A senior secured credit agreement which provides for a five-year, $435 million loan issued at par with a maturity date of October 23, 2020 (the “Term Loan A”) and has terms substantially similar to the Senior Secured Credit Agreement. The Term Loan A provides for quarterly amortization payments, which commenced March 31, 2016, totaling the amount per annum equal to the following percentages of the original principal amount of the Term Loan A: 5%, 5%, 7.5%, 10.0% and 12.5% for amortizations payable in 2016, 2017, 2018, 2019 and 2020, with the balance payable upon the final maturity date. The interest rates with respect to term loans under the Term Loan A are based on, at our option, adjusted LIBOR or ABR plus an additional margin subject to the following adjustments based on the Company’s then current senior secured leverage ratio:


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Senior Secured Leverage Ratio
 
Applicable LIBOR Margin
 
Applicable ABR Margin
Greater than 3.50 to 1.00
 
2.50%
 
1.50%
Less than or equal to 3.50 to 1.00 but greater than or equal to 2.50 to 1.00
 
2.25%
 
1.25%
Less than 2.50 to 1.00
 
2.00%
 
1.00%
In July 2016, Realogy Group entered into a first amendment to the Term Loan A senior secured credit agreement. Under the amendment, the Company issued the Term Loan A-1 in the amount of $355 million with a maturity date in July 2021 under its existing Term Loan A Facility and on terms substantially similar to its existing Term Loan A. The Term Loan A-1 provides for quarterly amortization payments totaling 2.5%, 2.5%, 5%, 7.5% and 10.0% of the original principal amount of the Term Loan A-1, which commenced September 30, 2016 continuing through June 30, 2021.
The interest rates with respect to term loans under the Term Loan A-1 are based on, at our option, adjusted LIBOR or ABR plus an additional margin subject to the following adjustments based on the Company’s then current senior secured leverage ratio:
Senior Secured Leverage Ratio
 
Applicable LIBOR Margin
 
Applicable ABR Margin
Greater than 3.50 to 1.00
 
2.50%
 
1.50%
Less than or equal to 3.50 to 1.00 but greater than or equal to 2.50 to 1.00
 
2.25%
 
1.25%
Less than 2.50 to 1.00 but greater than or equal to 2.00 to 1.00
 
2.00%
 
1.00%
Less than 2.00 to 1.00
 
1.75%
 
0.75%
Consistent with the Senior Secured Credit Agreement, the Term Loan A Facility permits the Company to obtain up to $500 million of additional credit facilities from lenders reasonably satisfactory to the administrative agent and the company, without the consent of the existing lenders under the Term Loan A, plus an unlimited amount if the Company's senior secured leverage ratio is less than 3.50 to 1.00 on a pro forma basis. Subject to certain restrictions, the Term Loan A Facility also permits us to issue senior secured or unsecured notes in lieu of any incremental facility.
Unsecured Notes
The 4.50% Senior Notes, 5.25% Senior Notes and 4.875% Senior Notes (each as defined below, collectively the "Unsecured Notes") are unsecured senior obligations of Realogy Group that mature on April 15, 2019, December 1, 2021 and June 1, 2023, respectively. Interest on the Unsecured Notes is payable each year semiannually on April 15 and October 15 for the 4.50% Senior Notes and June 1 and December 1 for both the 5.25% Senior Notes and 4.875% Senior Notes.
The Unsecured Notes are guaranteed on an unsecured senior basis by each domestic subsidiary of Realogy Group that is a guarantor under the Senior Secured Credit Facility and Realogy Group's outstanding debt securities and are guaranteed by Realogy Holdings on an unsecured senior subordinated basis.
Other Debt Facilities
The Company has an Unsecured Letter of Credit Facility to provide for the issuance of letters of credit required for general corporate purposes by the Company. At June 30, 2017, the capacity of the facility was $131 million. The facility's expiration dates are as follows:
Capacity (in millions)
Expiration Date
$65
September 2018
$66
December 2019
The fixed pricing to the Company is based on a spread above the credit default swap rate for senior unsecured debt obligations of the Company over the applicable letter of credit period. Realogy Group's obligations under the Unsecured Letter of Credit Facility are guaranteed on an unsecured senior basis by each domestic subsidiary of Realogy Group that is a guarantor under the Senior Secured Credit Facility and Realogy Group's outstanding debt securities. As of June 30, 2017, $124 million of the Unsecured Letter of Credit Facility was being utilized.


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Securitization Obligations
Realogy Group has secured obligations through Apple Ridge Funding LLC under a securitization program. In June 2017, Realogy Group extended the program until June 2018. The program has a capacity of $325 million. At June 30, 2017, Realogy Group had $211 million of outstanding borrowings under the facility.
Realogy Group, through a special purpose entity known as Cartus Financing Limited, has agreements providing for a £10 million revolving loan facility and a £5 million working capital facility, both of which expire on August 31, 2017. There were $12 million of outstanding borrowings on the facilities at June 30, 2017. These Cartus Financing Limited facilities are secured by the relocation assets of a U.K. government contract in this special purpose entity and are therefore classified as permitted securitization financings as defined in Realogy Group’s Senior Secured Credit Facility and the indentures governing the Unsecured Notes.
The Apple Ridge entities and the Cartus Financing Limited entity are consolidated special purpose entities that are utilized to securitize relocation receivables and related assets. These assets are generated from advancing funds on behalf of clients of Realogy Group’s relocation business in order to facilitate the relocation of their employees. Assets of these special purpose entities are not available to pay Realogy Group’s general obligations. Under the Apple Ridge program, provided no termination or amortization event has occurred, any new receivables generated under the designated relocation management agreements are sold into the securitization program and as new eligible relocation management agreements are entered into, the new agreements are designated to the program. The Apple Ridge program has restrictive covenants and trigger events, including performance triggers linked to the age and quality of the underlying assets, foreign obligor limits, multicurrency limits, financial reporting requirements, restrictions on mergers and change of control, any uncured breach of Realogy Group’s senior secured leverage ratio under Realogy Group’s Senior Secured Credit Facility, and cross-defaults to Realogy Group’s material indebtedness. The occurrence of a trigger event under the Apple Ridge securitization facility could restrict our ability to access new or existing funding under this facility or result in termination of the facility, either of which would adversely affect the operation of our relocation business.
Certain of the funds that Realogy Group receives from relocation receivables and related assets must be utilized to repay securitization obligations. These obligations were collateralized by $288 million and $238 million of underlying relocation receivables and other related relocation assets at June 30, 2017 and December 31, 2016, respectively. Substantially all relocation related assets are realized in less than twelve months from the transaction date. Accordingly, all of Realogy Group’s securitization obligations are classified as current in the accompanying Condensed Consolidated Balance Sheets.
Interest incurred in connection with borrowings under these facilities amounted to $2 million and $3 million for both the three and six months ended June 30, 2017 and 2016. This interest is recorded within net revenues in the accompanying Condensed Consolidated Statements of Operations as related borrowings are utilized to fund Realogy Group's relocation business where interest is generally earned on such assets. These securitization obligations represent floating rate debt for which the average weighted interest rate was 3.4% and 2.5% for the six months ended June 30, 2017 and 2016, respectively.
Loss on the Early Extinguishment of Debt
As a result of the refinancing transaction in January of 2017, the Company recorded a loss on the early extinguishment of debt of $4 million during the first half of 2017.
6.
RESTRUCTURING COSTS
Restructuring charges were $2 million and $7 million for the three and six months ended June 30, 2017, respectively, and $12 million and $21 million for the three and six months ended June 30, 2016, respectively. The components of the restructuring charges for the three and six months ended June 30, 2017 and 2016 were as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Personnel-related costs (1)
$
1

 
$
9

 
$
6

 
$
11

Facility-related costs (2)
1

 
3

 
1

 
5

Accelerated depreciation on asset disposals

 

 

 

Other restructuring costs (3)

 

 

 
5

Total restructuring charges
$
2

 
$
12

 
$
7

 
$
21



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_______________
(1)
Personnel-related costs consist of severance costs provided to employees who have been terminated and duplicate payroll costs during transition.
(2)
Facility-related costs consist of costs associated with planned facility closures such as contract termination costs, lease payments that will continue to be incurred under the contract for its remaining term without economic benefit to the Company and other facility and employee relocation related costs.
(3)
Other restructuring costs consist of costs related to professional fees, consulting fees and other costs associated with restructuring activities which are primarily included in the Corporate and Other business segment.
Business Optimization Initiative
During the fourth quarter of 2015, the Company began a business optimization initiative that focused on maximizing the efficiency and effectiveness of the cost structure of each of the Company's business units.  The action was designed to improve client service levels across each of the business units while enhancing the Company's profitability and incremental margins. The plan focused on several key areas of opportunity which include process improvement efficiencies, office footprint optimization, leveraging technology and media spend, centralized procurement, outsourcing administrative services and organizational design. The expected costs of activities undertaken in connection with the restructuring plan are largely complete.
The following is a reconciliation of the beginning and ending restructuring reserve balances for the Business Optimization Initiative:
 
Personnel-related costs
 
Facility-related costs
 
Accelerated depreciation on asset disposal
 
Other restructuring costs
 
Total
Balance at December 31, 2016
$
9

 
$
7

 
$

 
$

 
$
16

Restructuring charges
6

 
1

 

 

 
7

Costs paid or otherwise settled
(11
)
 
(3
)
 

 

 
(14
)
Balance at June 30, 2017
$
4

 
$
5

 
$

 
$

 
$
9

The following table shows the total restructuring costs expected to be incurred by type of cost for the Business Optimization Initiative:
 
Total amount expected to be incurred
 
Amount incurred to date
 
Total amount remaining to be incurred
Personnel-related costs
$
32

 
$
31

 
$
1

Facility-related costs
16

 
14

 
2

Accelerated depreciation related to asset disposals
2

 
1

 
1

Other restructuring costs
11

 
10

 
1

Total
$
61

 
$
56

 
$
5

The following table shows the total restructuring costs expected to be incurred by reportable segment for the Business Optimization Initiative:
 
Total amount expected to be incurred
 
Amount incurred to date
 
Total amount remaining to be incurred
Real Estate Franchise Services
$
5

 
$
5

 
$

Company Owned Real Estate Brokerage Services
35

 
33

 
2

Relocation Services
5

 
5

 

Title and Settlement Services
1

 
1

 

Corporate and Other
15

 
12

 
3

Total
$
61

 
$
56

 
$
5

7.
STOCK-BASED COMPENSATION
The Company has stock-based compensation plans (the 2007 Stock Incentive Plan and the 2012 Long-Term Incentive Plan) under which incentive equity awards such as non-qualified stock options, rights to purchase shares of common stock,


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restricted stock, restricted stock units ("RSUs"), performance restricted stock units and performance share units ("PSUs") may be issued to employees, consultants and directors of Realogy. The Company's stockholders approved the Amended and Restated 2012 Long-Term Incentive Plan at the 2016 Annual Meeting of Stockholders held on May 4, 2016 (the "Amended and Restated 2012 LTIP"). The Amended and Restated 2012 LTIP increases the number of shares authorized for issuance under that plan by 9.8 million shares. The total number of shares authorized for issuance under the plans is 19.4 million shares.
Awards granted under the Amended and Restated 2012 LTIP utilizing the additional 9.8 million share reserve, except options and stock appreciation rights, must be counted against the foregoing share limit on a 2.22 share to one basis for each share actually granted in connection with such award. As of June 30, 2017, the total number of shares available for future grants under the Amended and Restated 2012 LTIP was approximately 3 million shares. The Company does not expect to issue any additional awards under the 2007 Stock Incentive Plan.
Consistent with the 2016 long-term incentive equity awards, the 2017 awards include a mix of PSUs, RSUs (performance restricted stock units for the CEO and direct reports) and options. The 2017 PSUs are incentives that reward grantees based upon the Company's financial performance over a three-year performance period ending December 31, 2019. There are two PSU awards: one is based upon the total stockholder return of Realogy's common stock relative to the total stockholder return of the SPDR S&P Homebuilders Index ("XHB") (the "RTSR award"), and the other is based upon the achievement of cumulative free cash flow goals. The number of shares that may be issued under the PSU is variable and based upon the extent to which the performance goals are achieved over the performance period (with a range of payout from 0% to 175% of target for the RTSR award and 0% to 200% of target for the achievement of cumulative free cash flow award). The shares earned will be distributed in early 2020. The RSUs vest over three years, with 33.33% vesting on each anniversary of the grant date. Time-vesting of the 2017 performance RSUs for the CEO and direct reports is subject to achievement of a minimum EBITDA performance goal for 2017. The stock options have a maximum term of ten years and vest over four years, with 25% vesting on each anniversary date of the grant date. The options have an exercise price equal to the closing sale price of the Company's common stock on the date of grant.
In August 2016, the Company’s Board of Directors approved the initiation of a quarterly cash dividend policy on its common stock. The Board declared a cash dividend of $0.09 per share of the Company’s common stock per quarter. When payment of cash dividends occurs, the Company issues dividend equivalent units ("DEUs") to eligible holders of outstanding RSUs and PSUs. The number of DEUs granted for each RSU or PSU is calculated by dividing the amount of the cash dividend on the number of shares covered by the RSU or PSU at the time of the related dividend record date by the closing price of the Company's stock on the related dividend payment date. The DEUs are subject to the same vesting requirements, settlement provisions, and other terms and conditions as the original award to which they relate. The issuance of DEUs have an immaterial impact on the Company's stock-based compensation activity.
The fair value of RSUs and PSUs without a market condition is equal to the closing sale price of the Company's common stock on the date of grant. The fair value of the RTSR PSU award was estimated on the date of grant using the Monte Carlo Simulation method utilizing the following assumptions. Expected volatility was based on historical volatilities of the Company and select comparable companies.
 
2017 RTSR PSU
Weighted average grant date fair value
$
27.98

Weighted average expected volatility
29.0
%
Weighted average volatility of XHB
18.4
%
Weighted average correlation coefficient
0.53

Weighted average risk-free interest rate
1.5
%
Weighted average dividend yield



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A summary of RSU activity for the six months ended June 30, 2017 is presented below (number of shares in millions):
 
Restricted
Stock Units
 
Weighted Average Grant Date Fair Value
Unvested at January 1, 2017
1.4

 
$
37.53

Granted
1.1

 
28.19

Vested (a)
(0.6
)
 
39.58

Forfeited
(0.1
)
 
31.19

Unvested at June 30, 2017
1.8

 
$
31.36

______________
(a)
The total fair value of RSUs which vested during the six months ended June 30, 2017 was $25 million.
A summary of PSU activity for the six months ended June 30, 2017 is presented below (number of shares in millions):
 
Performance Share Units (a)
 
Weighted Average Grant Date Fair Value
Unvested at January 1, 2017
1.0

 
$
36.66

Granted
0.7

 
27.70

Vested

 

Forfeited

 

Unvested at June 30, 2017
1.7

 
$
32.71

______________
(a)
The PSU amounts in the table are shown at the target amount of the award.
The fair value of the options was estimated on the date of grant using the Black-Scholes option-pricing model. Expected volatility was based on historical volatilities of the Company and select comparable companies. The expected term of the options granted represents the period of time that options are expected to be outstanding and is based on the simplified method. The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the time of the grant, which corresponds to the expected term of the options.
 
2017 Options
Weighted average grant date fair value
$
8.00

Weighted average expected volatility
30.7
%
Weighted average expected term (years)
6.25

Weighted average risk-free interest rate
2.1
%
Weighted average dividend yield
1.3
%
A summary of stock option unit activity for the six months ended June 30, 2017 is presented below (number of shares in millions):
 
Options
 
Weighted Average
Exercise Price
Outstanding at January 1, 2017
3.3

 
$
31.71

Granted
0.4

 
27.56

Exercised (a) (b)
(0.2
)
 
23.89

Forfeited/Expired

 

Outstanding at June 30, 2017 (c)
3.5

 
$
31.50

______________
(a)
The intrinsic value of options exercised during the six months ended June 30, 2017 was $1 million.
(b)
Cash received from options exercised during the six months ended June 30, 2017 was $5 million.
(c)
Options outstanding at June 30, 2017 have an intrinsic value of $6 million and have a weighted average remaining contractual life of 6 years.


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Stock-Based Compensation Expense
As of June 30, 2017, based on current performance achievement expectations, there was $59 million of unrecognized compensation cost related to incentive equity awards under the plans which will be recorded in future periods as compensation expense over a remaining weighted average period of approximately 1.3 years. The Company recorded stock-based compensation expense related to the incentive equity awards of $14 million and $26 million for the three and six months ended June 30, 2017, respectively, and $13 million and $25 million for the three and six months ended June 30, 2016, respectively.
8.
TRANSACTIONS WITH FORMER PARENT AND SUBSIDIARIES
Transfer of Cendant Corporate Liabilities and Issuance of Guarantees to Cendant and Affiliates
Realogy Group (then Realogy Corporation) separated from Cendant on July 31, 2006 (the "Separation"), pursuant to a plan by Cendant (now known as Avis Budget Group, Inc.) to separate into four independent companies—one for each of Cendant's business units—real estate services (Realogy), travel distribution services ("Travelport"), hospitality services, including timeshare resorts ("Wyndham Worldwide"), and vehicle rental ("Avis Budget Group"). Realogy Group has certain guarantee commitments with Cendant (pursuant to the assumption of certain liabilities and the obligation to indemnify Cendant, Wyndham Worldwide and Travelport for such liabilities). These guarantee arrangements primarily relate to certain contingent litigation liabilities, contingent tax liabilities, and other corporate liabilities, of which Realogy Group assumed and is generally responsible for 62.5%. Upon separation from Cendant, the liabilities assumed by Realogy Group were comprised of certain Cendant corporate liabilities which were recorded on the historical books of Cendant as well as additional liabilities which were established for guarantees issued at the date of Separation related to certain unresolved contingent matters that could arise during the guarantee period. Regarding the guarantees, if any of the companies responsible for all or a portion of such liabilities were to default in its payment of costs or expenses related to any such liability, Realogy Group would be responsible for a portion of the defaulting party or parties’ obligation. To the extent such recorded liabilities are in excess or are not adequate to cover the ultimate payment amounts, such excess or deficiency will be reflected in the results of operations in future periods.
The due to former parent balance was $17 million and $28 million at June 30, 2017 and December 31, 2016, respectively. The due to former parent balance was comprised of the Company’s portion of the following: (i) Cendant’s remaining state and foreign contingent tax liabilities, (ii) accrued interest on contingent tax liabilities, (iii) potential liabilities related to Cendant’s terminated or divested businesses, and (iv) potential liabilities related to the residual portion of accruals for Cendant operations.
9.     EARNINGS PER SHARE
Earnings per share attributable to Realogy Holdings
Basic earnings per share is computed based on net income attributable to Realogy Holdings stockholders divided by the basic weighted-average shares outstanding during the period. Dilutive earnings per share is computed consistently with the basic computation while giving effect to all dilutive potential common shares and common share equivalents that were outstanding during the period. Realogy Holdings uses the treasury stock method to reflect the potential dilutive effect of unvested stock awards and unexercised options.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in millions, except per share data)
2017
 
2016
 
2017
 
2016
Net income attributable to Realogy Holdings shareholders
$
109

 
$
92

 
$
81

 
$
50

Basic weighted average shares
137.6

 
145.5

 
138.6

 
146.0

Stock options, restricted stock units and performance share units (a)
1.3

 
1.2

 
1.3

 
1.2

Weighted average diluted shares
138.9

 
146.7

 
139.9

 
147.2

Earnings Per Share:
 
 
 
 
 
 
 
Basic
$
0.79

 
$
0.63

 
$
0.58

 
$
0.34

Diluted
$
0.78

 
$
0.63

 
$
0.58

 
$
0.34



25

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_______________ 
(a)
The three and six months ended June 30, 2017, both exclude 5.8 million shares of common stock issuable for incentive equity awards, which includes performance share units based on the achievement of target amounts, that are anti-dilutive to the diluted earnings per share computation. The three and six months ended June 30, 2016, both exclude 5.3 million shares of common stock issuable for incentive equity awards, which includes performance share units based on the achievement of target amounts, that are anti-dilutive to the diluted earnings per share computation.
In the second quarter of 2017, the Company repurchased and retired 1.9 million shares of common stock for $60 million at a weighted average market price of $30.22 per share. In the first half of 2017, the Company repurchased and retired 4.1 million shares of common stock for $120 million at a weighted average market price of $28.97 per share. The shares repurchased include 88,320 shares for which the trade date occurred in late June 2017 while settlement occurred in July 2017. The purchase of shares under this plan reduces the weighted-average number of shares outstanding in the basic earnings per share calculation.
10.
COMMITMENTS AND CONTINGENCIES
Litigation
The Company is involved in claims, legal proceedings, alternative dispute resolution and governmental inquiries related to alleged contract disputes, business practices, intellectual property and other commercial, employment, regulatory and tax matters. Examples of such matters include but are not limited to allegations:
that the Company is vicariously liable for the acts of franchisees under theories of actual or apparent agency;
by former franchisees that franchise agreements were breached including improper terminations;
concerning claims for alleged RESPA or state real estate law violations including but not limited to claims challenging the validity of sales associates indemnification, and administrative fees;
that residential real estate sales associates engaged by NRT—under certain state or federal laws—are potentially employees instead of independent contractors, and they or regulators therefore may bring claims against NRT for breach of contract, wage and hour classification claims, wrongful discharge, unemployment and workers' compensation and could seek benefits, back wages, overtime, indemnification, penalties related to classification practices and expense reimbursement available to employees;
concerning claims generally against the company owned brokerage operations for negligence, misrepresentation or breach of fiduciary duty in connection with the performance of real estate brokerage or other professional services as well as other brokerage claims associated with listing information and property history;
concerning claims generally against the title company contending that, as the escrow company, the company knew or should have known that a transaction was fraudulent or concerning other title defects or settlement errors; and
concerning information security and cyber crime.
Real Estate Business Litigation
Strader, et al. and Hall v. PHH Corporation, et al. (U.S. District Court for the Central District of California). This is a purported class action brought by four California residents against 15 defendants, including Realogy and certain of its subsidiaries, PHH Corporation and PHH Home Loans, LLC (a joint venture between Realogy and PHH), alleging violations of Section 8(a) of RESPA.  Plaintiffs seek to represent two subclasses comprised of all persons in the United States who, since January 31, 2005, (1) obtained a RESPA-covered mortgage loan from either (a) PHH Home Loans, LLC or one of its subsidiaries, or (b) one of the mortgage services managed by PHH Corporation for other lenders, and (2) paid a fee for title insurance or settlement services to TRG or one of its subsidiaries.  Plaintiffs allege, among other things, that PHH Home Loans, LLC operates in violation of RESPA and that the other defendants violate RESPA by referring business to one another under agreements or arrangements.  Plaintiffs seek treble damages and an award of attorneys’ fees, costs and disbursements.  On February 5, 2016, the defendants filed a motion to dismiss the case claiming that not only do the claims lack merit, but they are time-barred under RESPA's one-year statute of limitations. On April 5, 2016, the court granted defendants' motion to dismiss with leave for the plaintiffs to amend their complaint. Plaintiffs filed a second amended complaint on April 21, 2016, and a third amended complaint on May 12, 2016.  Defendants filed a motion to dismiss the third amended complaint. The Court denied the motion on October 6, 2016, without prejudice to defendants’ ability to move for summary judgment after discovery. The parties are proceeding with discovery. On May 19, 2017, the parties held a second mediation session, at which they agreed in principle to a settlement of the action, pursuant to which the Company would pay approximately $8 million (or one-half of the settlement). The agreement in principle is subject to the parties


26

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resolving certain additional issues such as the allocation of settlement funds, the filing of a fourth amended complaint and completing confirmatory discovery. On July 31, 2017, the fourth amended complaint was filed changing the named plaintiffs. The plaintiffs must file their motion for preliminary approval of the settlement by August 25, 2017. There can be no assurance that the parties will reach a definitive settlement or that the Court will approve it.
The Company is involved in certain other claims and legal actions arising in the ordinary course of our business. Such litigation, regulatory actions and other proceedings may include, but are not limited to, actions relating to intellectual property, commercial arrangements, franchising arrangements, actions against our title company alleging it knew or should have known that others were committing mortgage fraud, standard brokerage disputes like the failure to disclose accurate square footage or hidden defects in the property such as mold, vicarious liability based upon conduct of individuals or entities outside of our control, including franchisees and independent sales associates, antitrust and anti-competition claims, general fraud claims, employment law claims, including claims challenging the classification of our sales associates as independent contractors, wage and hour classification claims, and claims alleging violations of RESPA or state consumer fraud statutes. While the results of such claims and legal actions cannot be predicted with certainty, we do not believe based on information currently available to us that the final outcome of current proceedings against the Company will have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Cendant Corporate Litigation
Pursuant to the Separation and Distribution Agreement dated as of July 27, 2006 among Cendant, Realogy Group, Wyndham Worldwide and Travelport, each of Realogy Group, Wyndham Worldwide and Travelport have assumed certain contingent and other corporate liabilities (and related costs and expenses), which are primarily related to each of their respective businesses. In addition, Realogy Group has assumed 62.5% and Wyndham Worldwide has assumed 37.5% of certain contingent and other corporate liabilities (and related costs and expenses) of Cendant or its subsidiaries, which are not primarily related to any of the respective businesses of Realogy Group, Wyndham Worldwide, Travelport and/or Cendant’s vehicle rental operations, in each case incurred or allegedly incurred on or prior to the date of the separation of Travelport from Cendant.
* * *
The Company believes that it has adequately accrued for legal matters as appropriate. The Company records litigation accruals for legal matters which are both probable and estimable.
Litigation and other disputes are inherently unpredictable and subject to substantial uncertainties and unfavorable resolutions could occur. In addition, class action lawsuits can be costly to defend and, depending on the class size and claims, could be costly to settle.  As such, the Company could incur judgments or enter into settlements of claims with liability that are materially in excess of amounts accrued and these settlements could have a material adverse effect on the Company’s financial condition, results of operations or cash flows in any particular period.
Tax Matters
The Company is subject to income taxes in the United States and several foreign jurisdictions. Significant judgment is required in determining the worldwide provision for income taxes and recording related assets and liabilities. In the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is uncertain. The Company is regularly under audit by tax authorities whereby the outcome of the audits is uncertain. The Company believes there is appropriate support for positions taken on its tax returns. The liabilities that have been recorded represent the best estimates of the probable loss on certain positions and are adequate for all open years based on an assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter. However, the outcomes of tax audits are inherently uncertain.
Under the Tax Sharing Agreement with Cendant, Wyndham Worldwide and Travelport, the Company is generally responsible for 62.5% of payments made to settle claims with respect to tax periods ending on or prior to December 31, 2006 that relate to income taxes imposed on Cendant and certain of its subsidiaries, the operations (or former operations) of which were determined by Cendant not to relate specifically to the respective businesses of Realogy, Wyndham Worldwide, Avis Budget or Travelport.
With respect to any remaining legacy Cendant tax liabilities, the Company and its former parent believe there is appropriate support for the positions taken on Cendant’s tax returns. However, tax audits and any related litigation,


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including disputes or litigation on the allocation of tax liabilities between parties under the Tax Sharing Agreement, could result in outcomes for the Company that are different from those reflected in the Company’s historical financial statements.
Contingent Liability Letter of Credit
In April 2007, the Company established a standby irrevocable letter of credit for the benefit of Avis Budget Group in accordance with the Separation and Distribution Agreement. The synthetic letter of credit was utilized to support the Company’s payment obligations with respect to its share of Cendant contingent and other corporate liabilities. The stated amount of the standby irrevocable letter of credit is subject to periodic adjustment to reflect the then current estimate of Cendant contingent and other liabilities. The letter of credit was $53 million at June 30, 2017 and December 31, 2016. The standby irrevocable letter of credit will be terminated if (i) the Company’s senior unsecured credit rating is raised to BB by Standard and Poor’s or Ba2 by Moody’s or (ii) the aggregate value of the former parent contingent liabilities falls below $30 million.
Escrow and Trust Deposits
As a service to its customers, the Company administers escrow and trust deposits which represent undisbursed amounts received for the settlement of real estate transactions. Deposits at FDIC-insured institutions are insured up to $250 thousand. These escrow and trust deposits totaled $650 million at June 30, 2017 and $415 million at December 31, 2016. These escrow and trust deposits are not assets of the Company and, therefore, are excluded from the accompanying Condensed Consolidated Balance Sheets. However, the Company remains contingently liable for the disposition of these deposits.
11.
SEGMENT INFORMATION
The reportable segments presented below represent the Company’s operating segments for which separate financial information is available and which is utilized on a regular basis by its chief operating decision maker to assess performance and to allocate resources. In identifying its reportable segments, the Company also considers the nature of services provided by its operating segments. Management evaluates the operating results of each of its reportable segments based upon revenue and EBITDA, which is defined as net income (loss) before depreciation and amortization, interest (income) expense, net (other than Relocation Services interest for relocation receivables and securitization obligations) and income taxes, each of which is presented in the Company’s Condensed Consolidated Statements of Operations. The Company’s presentation of EBITDA may not be comparable to similar measures used by other companies.
 
Revenues (a) (b)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Real Estate Franchise Services
$
237

 
$
221

 
$
407

 
$
378

Company Owned Real Estate Brokerage Services
1,392

 
1,268

 
2,289

 
2,109

Relocation Services
102

 
109

 
179

 
192

Title and Settlement Services
157

 
149

 
277

 
260

Corporate and Other (c)
(95
)
 
(85
)
 
(156
)
 
(143
)
Total Company
$
1,793

 
$
1,662

 
$
2,996

 
$
2,796

_______________
 
 
(a)
Transactions between segments are eliminated in consolidation. Revenues for the Real Estate Franchise Services segment include intercompany royalties and marketing fees paid by the Company Owned Real Estate Brokerage Services segment of $95 million and $156 million for the three and six months ended June 30, 2017, respectively, and $85 million and $143 million for the three and six months ended June 30, 2016, respectively. Such amounts are eliminated through the Corporate and Other line.
(b)
Revenues for the Relocation Services segment include intercompany referral commissions paid by the Company Owned Real Estate Brokerage Services segment of $12 million and $20 million for the three and six months ended June 30, 2017, respectively, and $13 million and $21 million for the three and six months ended June 30, 2016, respectively. Such amounts are recorded as contra-revenues by the Company Owned Real Estate Brokerage Services segment. There are no other material intersegment transactions.
(c)
Includes the elimination of transactions between segments.


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EBITDA
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017 (a)
 
2016 (b)
 
2017 (c)
 
2016 (d)
Real Estate Franchise Services
$
166

 
$
149

 
$
268

 
$
241

Company Owned Real Estate Brokerage Services
77

 
78

 
51

 
57

Relocation Services
27

 
29

 
28

 
34

Title and Settlement Services
26

 
26

 
28

 
26

Corporate and Other (e)
(18
)
 
(19
)
 
(45
)
 
(40
)
Total Company
$
278

 
$
263

 
$
330

 
$
318

Less:
 
 
 
 
 
 
 
Depreciation and amortization
$
49

 
$
48

 
$
99

 
$
96

Interest expense, net
47

 
59

 
86

 
132

Income tax expense
73

 
64

 
64

 
40

Net income attributable to Realogy Holdings and Realogy Group
$
109

 
$
92

 
$
81

 
$
50

_______________
(a)
Includes a net benefit of $11 million of former parent legacy items and an $8 million expense related to the settlement of the Strader legal matter in Corporate and Other, and $2 million of restructuring charges as follows: $1 million in the Company Owned Real Estate Brokerage Services segment and $1 million in the Real Estate Franchise Services segment for the three months ended June 30, 2017.
(b)
Includes $12 million of restructuring charges as follows: $3 million in the Real Estate Franchise Services segment, $7 million in the Company Owned Real Estate Brokerage Services segment, $1 million in the Relocation Services segment and $1 million in Corporate and Other for the three months ended June 30, 2016.
(c)
Includes a net benefit of $11 million of former parent legacy items, an $8 million expense related to the settlement of the Strader legal matter and $4 million related to the loss on the early extinguishment of debt in Corporate and Other, and $7 million of restructuring charges as follows: $6 million in the Company Owned Real Estate Brokerage Services segment and $1 million in the Real Estate Franchise Services segment for the six months ended June 30, 2017.
(d)
Includes $21 million of restructuring charges as follows: $3 million in the Real Estate Franchise Services segment, $9 million in the Company Owned Real Estate Brokerage Services segment, $3 million in the Relocation Services segment and $6 million in Corporate and Other, and a net cost of $1 million of former parent legacy items in Corporate and Other for the six months ended June 30, 2016.
(e)
Includes the elimination of transactions between segments.


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Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with our Condensed Consolidated Financial Statements and accompanying notes thereto included elsewhere herein and with our Consolidated Financial Statements and accompanying notes included in the 2016 Form 10-K. Unless otherwise noted, all dollar amounts in tables are in millions. 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 condensed consolidated financial positions, results of operations and cash flows of Realogy Holdings, Realogy Intermediate and Realogy Group are the same. This Management's Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements. See "Forward-Looking Statements" in this report and "Forward-Looking Statements" and "Risk Factors" in our 2016 Form 10-K for a discussion of the uncertainties, risks and assumptions associated with these statements. Actual results may differ materially from those contained in any forward-looking statements.
OVERVIEW
We are a global provider of real estate and relocation services and report our operations in the following four segments:
Real Estate Franchise Services (known as Realogy Franchise Group or RFG)—franchises the Century 21®, Coldwell Banker®, Coldwell Banker Commercial®, ERA®, Sotheby's International Realty® and Better Homes and Gardens® Real Estate brand names. As of June 30, 2017, our franchise systems had approximately 14,250 franchised and company owned offices and approximately 281,000 independent sales associates operating under our franchise and proprietary brands in the U.S. and 113 other countries and territories around the world, which included more than 780 of our company owned and operated brokerage offices with more than 49,100 independent sales associates.
Our wholly-owned subsidiary, ZapLabs LLC (which changed its name from ZipRealty LLC in 2016), is the developer of our proprietary technology platform for the real estate brokerages and independent sales associates in our franchise system as well as their customers. As of June 30, 2017, we had rolled out ZapLabs' comprehensive, integrated Zap® technology platform to approximately 75% of our eligible franchisees and anticipate completing this roll out to the majority of our remaining eligible franchisees this year. We believe the Zap technology platform will increase the value proposition to franchisees, independent sales associates and customers as well as improve the productivity of independent sales associates.
Company Owned Real Estate Brokerage Services (known as NRT)—operates a full-service real estate brokerage business with more than 780 owned and operated brokerage offices with more than 49,100 independent sales associates principally under the Coldwell Banker®, Corcoran®, Sotheby’s International Realty®, ZipRealty® and Citi HabitatsSM brand names in more than 50 of the 100 largest metropolitan areas in the U.S. This segment also includes the Company's share of earnings for our PHH Home Loans venture.
Relocation Services (known as Cartus®)—primarily offers clients employee relocation services such as homesale assistance, providing home equity advances to transferees (generally guaranteed by the client), home finding and other destination services, expense processing, relocation policy counseling and consulting services, arranging household goods moving services, coordinating visa and immigration support, intercultural and language training and group move management services. In addition, we provide home buying and selling assistance to members of affinity clients.
Title and Settlement Services (known as Title Resource Group or TRG)—provides full-service title and settlement services to real estate companies, affinity groups, corporations and financial institutions with many of these services provided in connection with the Company's real estate brokerage and relocation services business.
RECENT DEVELOPMENTS
Strategic Initiatives
Our strategic initiatives are focused on affiliated independent sales associates, including targeted recruiting strategies, best-in-class retention practices, and organizational changes with new centers of excellence to enhance support for services such as marketing and education for affiliated independent sales associates. We believe that this refined strategic plan will manifest itself in a variety of ways, including improved lead generation, education and performance coaching and strengthened technology and marketing services, all of which are designed to increase the productivity of our existing independent sales associates and attract new independent sales associates.


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Consistent with this strategy, NRT has been placing, and will continue to place, an even greater focus on the quality of our services, including the development of tools to increase sales associate productivity, and the use of financial incentives to strengthen our recruiting and retention of independent sales associates and teams. These actions include a focused strategy to recruit and retain top performing sales associates with the overall goal of sustaining or growing market share in various markets and ultimately improving the Company's overall profitability. In addition, there is an enhanced focus on the value proposition offered to independent sales associate teams. We expect near-term moderate pressure on costs and margin from these initiatives as the benefits from recruiting new independent sales associates relate mainly to new listings and not pending listings.
New Mortgage Origination Joint Venture
On February 15, 2017, Realogy announced that it and Guaranteed Rate, Inc. (“Guaranteed Rate”) agreed to form a new joint venture, Guaranteed Rate Affinity, LLC ("Guaranteed Rate Affinity"), which is expected to begin doing business in August 2017. Commencement of operations is subject to the closing of the transactions contemplated by an asset purchase agreement under which Guaranteed Rate Affinity will acquire certain assets of the mortgage operations of PHH Home Loans, the existing joint venture between Realogy and PHH Mortgage Corporation, including its four regional centers and employees across the United States, but not its mortgage assets.
Following completion of the transactions under the asset purchase agreement, Guaranteed Rate Affinity will originate and market its mortgage lending services to Realogy’s real estate brokerage and relocation subsidiaries as well as other real estate brokerage and relocation companies across the country. Guaranteed Rate will own a controlling 50.1% stake of Guaranteed Rate Affinity and Realogy will own 49.9%. Guaranteed Rate will have responsibility for the oversight of the officers and senior employees of Guaranteed Rate Affinity who are designated to manage Guaranteed Rate Affinity.
The asset purchase agreement and the movement of employees from the existing joint venture to the new joint venture is expected to be completed in a series of phases, with the first phase expected to occur in August 2017 and the remaining phases expected to be completed by the end of 2017. Once these transactions are complete together with the monetization of Realogy's stake in the old joint venture, the Company expects to realize approximately $20 million of net cash in early 2018. There can be no assurance that the transactions contemplated by the asset purchase agreement will be consummated, that Guaranteed Rate Affinity will commence operations in a timely manner or at all or that the Company will receive the cash it expects from the wind down of the existing joint venture and the establishment of the new joint venture. The Company also expects that operating results from the mortgage origination joint venture will be lower in 2017 compared to 2016 due to lower origination volume, compressed industry margins and the level of organizational change associated with the transition and start up of operations. The equity earnings related to Guaranteed Rate Affinity will be included in the financial results of our Title and Settlement Services segment.
Return of Capital to Stockholders
During the second quarter of 2017, the Company repurchased and retired 1.9 million shares of common stock for $60 million at a weighted average market price of $30.22 per share. Since beginning the repurchase of the Company's common stock in February 2016, the Company has repurchased a total of 11.2 million shares at a weighted average market price of $28.33 per share through June 30, 2017. As of June 30, 2017, approximately $256 million of authorization remains available for the repurchase of shares under the February 2017 share repurchase program.
Repurchases under these programs may be made at management's discretion from time to time on the open market, pursuant to Rule 10b5-1 trading plans or privately negotiated transactions. The size and timing of these repurchases will depend on price, market and economic conditions, legal and contractual requirements and other factors. The repurchase programs have no time limit and may be suspended or discontinued at any time.
Refer to "Part II—Other Information, Item 2. Unregistered Sales of Equity Securities and Use of Proceeds" for additional information on the Company's share repurchase programs.
During the second quarter of 2017, the Board declared and paid a quarterly cash dividend of $0.09 per share of the Company’s common stock, returning an additional $12 million to stockholders.


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CURRENT INDUSTRY TRENDS
During the first half of 2017, according to the National Association of Realtors ("NAR"), homesale transaction volume increased 8% due to a 3% increase in the number of homesale transactions and a 5% increase in the average homesale price. The increase in the average homesale price relative to the lower increase in homesale transactions is a function of high demand against a limited supply of homes for sale. RFG and NRT homesale transaction volume on a combined basis increased 9% in the first half of 2017. NRT experienced a 3% increase in existing homesale transactions and a 7% increase in average homesale price while RFG experienced a 2% increase in existing homesale transactions and a 6% increase in average homesale price. At NRT specifically, we have seen the positive impact of our recruiting efforts for independent sales associates and organic growth, as well as a shift from stabilization to growth in the high end of the housing market, defined as homes with a price of $2.5 million or greater, partially offset by the cumulative impact of market share attrition and inventory issues in the mid to lower priced homes in the major markets in which NRT operates.
Recruitment and retention of independent sales associates and independent sales associate teams are critical to the business and financial results of a brokerage, including our company owned brokerages and those operated by our affiliated franchisees. Most of a brokerage's real estate listings are sourced through the sphere of influence of their independent sales associates, notwithstanding the growing influence of internet-generated leads. Competition for independent sales associates in our industry is high, has intensified particularly with respect to more productive independent sales associates and has resulted in a decline of our market share at NRT, as well as at RFG to a lesser extent.  Competition for independent sales associates is generally subject to numerous factors, including remuneration (such as sales commission percentage and other financial incentives paid to independent sales associates), other expenses of independent sales associates, leads or business opportunities generated for the independent sales associate from the brokerage, independent sales associates' perception of the value of the broker's brand affiliation, marketing and advertising efforts by the brokerage, the office manager, staff and fellow independent sales associates with whom they collaborate daily and technology, continuing professional education, and other services provided by the brokerage. We believe that the influence of independent sales associates and independent sales associate teams has increased during the past five years and, together with the increasing competition from other brokerages, has negatively impacted the recruitment and retention of independent sales associates and put pressure on commission rate splits. These factors may also put pressure on RFG's net effective royalty rate as the economics for agents and agent teams change. In the second quarter at NRT, we continue to make progress on our recruiting programs and strengthening the agent value proposition, which we believe had a positive impact on our overall results for the quarter. In addition to our core recruiting, the new recruiting initiatives that we have discussed above have enabled us to add independent sales agents who, in aggregate, generated approximately $250 million in revenue over the past 12 months at their previous brokerage firms. While these recruiting and retention initiatives have increased our commission expense, we expect these initiatives will improve our operating results over the longer term and will continue to positively impact our market share trend on a year-over-year basis.
As reported by NAR, the housing affordability index has continued to be at historically favorable levels, despite the increases in the average homesale price over the past several years. An index above 100 signifies that a family earning the median income has sufficient income to purchase a median-priced home, assuming a 20 percent down payment and ability to qualify for a mortgage. The composite housing affordability index was 153 for May 2017 and 165 for 2016. The housing affordability index remains significantly higher than the average of 127 for the period from 1970 through 2016.
According to Freddie Mac, mortgage rates on commitments for a 30-year, conventional, fixed-rate first mortgages averaged 3.7% for 2016 and the rate at June 30, 2017 was 3.9%. Although mortgage rates have increased 30 basis points to 3.9% as of June 30, 2017 from 3.6% as of June 2016, they continue to be at low levels by historical standards. While this increase adversely impacts housing affordability, we believe that rising wages, improving consumer confidence and a continuation of low inventory levels for the mainstream housing market will result in continued favorable demand conditions and existing homesale volume growth. To the extent that mortgage rates increase, consumers continue to have financing alternatives such as adjustable rate mortgages or shorter term mortgages which can be utilized to obtain a lower mortgage rate than a 30-year fixed-rate mortgage.
Partially offsetting the positive impact of low mortgage rates are low housing inventory levels. According to NAR, the inventory of existing homes for sale in the U.S. was 2.0 million and 2.1 million at the end of June 2017 and June 2016, respectively. The June 2017 inventory represents a national average supply of 4.3 months at the current homesales pace which is below the 6.1 month 25-year average.
Additional factors offsetting the positive impact of low mortgage rates include the ongoing rise in home prices, conservative mortgage underwriting standards and certain homeowners having limited or negative equity in homes.


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Mortgage credit conditions tightened significantly during the recent housing downturn, with banks limiting credit availability to more creditworthy borrowers and requiring larger down payments, stricter appraisal standards, and more extensive mortgage documentation. Although mortgage credit conditions appear to be easing, mortgages remain less available to some borrowers and it frequently takes longer to close a homesale transaction due to current mortgage and underwriting requirements.
Existing Homesales
According to NAR, existing homesale transactions for 2016 increased to 5.5 million homes, or up 4% compared to 2015, while homesale transactions increased 2% on a combined basis for RFG and NRT.
For the quarters ended March 31, 2017 and June 30, 2017, compared to the same periods in 2016, NAR existing home homesale transactions increased to 1.1 million and 1.6 million homes, or up 5% and 2%, respectively. For the quarters ended March 31, 2017 and June 30, 2017, RFG and NRT homesale transactions on a combined basis increased 3% and 1%, respectively, compared to the same periods in 2016. During the first half of the year, the number of homesale transactions for RFG and NRT has continued to be challenged by inventory constraints, however for NRT there has been a shift from stabilization to growth in the high end of the housing market. The annual and quarterly year-over-year trends in homesale transactions are as follows:
 
 
 
2017 vs. 2016
 
Number of Existing Homesales
Full Year
2016 vs.
2015
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
Forecast
 
Fourth
Quarter
Forecast
 
Full Year
Forecast
2017 vs. 2016
 
Industry
 
 
 
 
 
 
 
 
 
 
 
 
NAR
4
 %
(a)
5
%
(a)
2
%
(a)
4
%
(b)
1
%
(b)
3
%
(b)
Fannie Mae (c)
4
 %
 
5
%
 
2
%