Real Estate IPOs
When the commission war starts, how will these guys survive? They are heavily in debt, and now that they are slaves to the shareholders they won’t be able to adjust. Why do you think they IPO’d?
Hat tip to daytrip for sending this in:
Realogy (NYSE: RLGY ) dared to challenge the choppy IPO waters by going public today.
Realogy may not ring a bell, but you may be familiar with many of its real estate services. This is the company behind Coldwell Banker, ERA, Century 21, Sotheby’s International Realty, and several other providers of real estate franchising, brokerage, relocation, and title services.
It’s been a well-received debut. Realogy was expecting to sell a whopping 40 million shares between $23 and $27 apiece. Underwriters were able to price the deal at the high end of that range last night, and that’s good news for Apollo Global Management, which took the company private in a leveraged buyout five years ago.
However, even $27 for Realogy wasn’t enough. The stock opened 22% higher at $32.85 this morning, moving even higher later in the day.
Realogy’s financials aren’t befitting of a hot IPO. Revenue clocked in flat last year at $4.1 billion and adjusted EBITDA declined by 11%.
For a company that generated 72% of its revenue last year from gross commission income, one would think that home prices inching higher this year and an inviting mortgage market given dirt cheap borrowing rates would be major growth catalysts.
Well, that is starting to play out this year, but perhaps not as vividly as housing bulls would expect. Revenue climbed 9% through the first six months of 2012, and adjusted EBITDA climbed 14%. However, Realogy is still posting losses, weighed down by the heavy interest expenses incurred given its highly leveraged ways. Today’s IPO will help Realogy pay down some of that burdensome debt, but this is still an offering that can quickly sour if interest rates start heading higher and the real estate resale market cools down.
Naturally, the market doesn’t see it that way. It has seen shares of leading homebuilders soar. It also only helps that dot-com real estate debutantes have also been scorching hot. Last month’s IPO of Trulia and last year’s public debut of Zillow have been winning deals at a time when many prolific Internet companies in areas outside of real estate have suffered. As a bonus, one of this year’s hottest stocks has been Ellie Mae. The mortgage industry software provider has seen its stock pop nearly fivefold this year on a boost in mortgage originations.
Realogy will bear watching, especially if the resale market stays hot. However, the market’s euphoric reaction to a company that has so much to prove — and so much red ink to shake — seems to suggest that the exuberance for fresh real estate plays may be problematically misplaced.