☑ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File No. 001-35674
Commission File No. 333-148153
REALOGY HOLDINGS CORP.
REALOGY GROUP LLC
(Exact name of registrant as specified in its charter)
(Exact name of registrant as specified in its charter)
(I.R.S. Employer Identification Number)
(I.R.S. Employer Identification Number)
(State or other jurisdiction of incorporation or organization)
175 Park Avenue
(Address of principal executive offices) (Zip Code)
(Registrants' telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Realogy Holdings Corp.
Common Stock, par value $0.01 per share
New York Stock Exchange
Realogy Group LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrants are a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Realogy Holdings Corp. Yesþ No ¨Realogy Group LLC Yes ¨Noþ
Indicate by check mark if the Registrants are not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Realogy Holdings Corp. Yes ¨NoþRealogy Group LLC Yesþ No ¨
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 Registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.
Realogy Holdings Corp. Yesþ No ¨Realogy Group LLC Yes¨ No þ
Indicate by check mark whether the Registrants have submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrants were required to submit such files).
Realogy Holdings Corp. Yesþ No ¨Realogy Group LLC Yesþ 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
Smaller reporting company
Emerging growth company
Realogy Holdings Corp.
Realogy Group LLC
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 þRealogy Group LLC Yes ☐ No þ
The aggregate market value of the voting and non-voting common equity of Realogy Holdings Corp. held by non-affiliates as of the close of business on June 30, 2019 was $824 million. There were 114,379,296 shares of Common Stock, $0.01 par value, of Realogy Holdings Corp. outstanding as of February 21, 2020.
Realogy Group LLC meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this Form with the reduced disclosure format applicable to Realogy Group LLC.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement prepared for the Annual Meeting of Stockholders to be held May 6, 2020 are incorporated by reference into Part III of this report.
Forward-looking statements included in this Annual Report on Form 10-K (this "Annual 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:
•adverse developments or the absence of sustained improvement in general business, economic or political conditions or the U.S. residential real estate markets, either regionally or nationally, including but not limited to:
◦a decline or a lack of improvement in the number of homesales;
◦insufficient or excessive home inventory levels by market and price point;
◦stagnant or declining home prices;
◦a reduction in the affordability of housing;
◦increasing mortgage rates and/or constraints on the availability of mortgage financing;
◦a lack of improvement or deceleration in the building of new housing and/or irregular timing or volume of new development closings;
◦the potential negative impact of certain provisions of the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) on (i) home values over time in states with high property, sales and state and local income taxes and (ii) homeownership rates, in particular in light of our market concentration in high-tax states; and/or
◦the impact of recessions, slow economic growth, or a deterioration in other economic factors that particularly impact the residential real estate market and the business segments in which we operate, whether broadly or by geography and price segments;
•the impact of increased competition in the industry for clients, for the affiliation of independent sales agents and for the affiliation of franchisees on our results of operations and market share, including competition from:
◦real estate brokerages, including those seeking to disrupt historical real estate brokerage models;
◦other industry participants seeking to eliminate brokers or agents from, or minimize the role they play in, the homesale transaction;
◦other industry participants otherwise competing for a portion of gross commission income; and
◦other residential real estate franchisors;
•the impact of disruption in the residential real estate brokerage industry, and on our results of operations and financial condition, as a result of listing aggregator concentration and market power;
•continuing pressure on the share of gross commission income paid by our company owned brokerages and affiliated franchisees to affiliated independent sales agents and independent sales agent teams;
•our inability to successfully develop products, technology and programs (including our company-directed affinity programs) that support our strategy to grow the base of independent sales agents at our company owned and franchisee real estate brokerages and the base of our franchisees;
•our geographic and high-end market concentration, including the heightened competition for independent sales agents in those geographies and price points;
•our inability to enter into franchise agreements with new franchisees or renew existing franchise agreements, without reducing contractual royalty rates or increasing the amount and prevalence of sales incentives;
•the lack of revenue growth or declining profitability of our franchisees and company owned brokerage operations or declines in other revenue streams, such as third-party listing fees;
•the potential impact of negative industry or business trends (including further declines in our market capitalization) on our valuation of goodwill and intangibles;
•the extent of the negative impact of the discontinuation of the USAA affinity program on the Company’s revenues and profits derived from affinity program referrals (including revenue to Realogy Leads, Realogy Brokerage, Realogy Franchise, and Realogy Title Groups);
•the loss of our next largest affinity client;
•risks related to the planned sale of Cartus Relocation Services to a subsidiary of SIRVA, Inc., including with respect to expected timing, anticipated benefits and the financial impact to our business;
•an increase in the experienced claims losses of our title underwriter;
•our failure or alleged failure to comply with laws, regulations and regulatory interpretations and any changes or stricter interpretations of any of the foregoing (whether through private litigation or governmental action), including but not limited to (1) state or federal employment laws or regulations that would require reclassification of independent contractor sales agents to employee status, (2) privacy or data security laws and regulations, (3) the Real Estate Settlement Procedures Act ("RESPA") or other federal or state consumer protection or similar laws, and (4) antitrust laws and regulations;
•risks related to the impact on our operations and financial results that may be caused by any future meaningful changes in industry operations or structure as a result of governmental pressures, the actions of certain competitors, the introduction or growth of certain competitive models, changes to the rules of the multiple listing services ("MLS"), or otherwise;
•risks relating to our ability to return capital to stockholders including, among other risks, the impact of restrictions contained in our debt agreements, in particular the indenture governing the 9.375% Senior Notes;
•risks associated with our substantial indebtedness and interest obligations and restrictions contained in our debt agreements, including risks relating to having to dedicate a significant portion of our cash flows from operations to service our debt and risks relating to our ability to refinance or repay our indebtedness or incur additional indebtedness; and
•risks and growing costs related to both cybersecurity threats to our data and customer, franchisee, employee and independent sales agent data, as well as those related to our compliance with the growing number of laws, regulations and other requirements related to the protection of personal information.
Other factors not identified above, including those described under "Item 1A.—Risk Factors" and "Item 7.—Management’s Discussion and Analysis of Financial Condition and Results of Operations" of this Annual Report, 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.
All forward-looking statements herein speak only as of the date of this report and are expressly qualified in their entirety by the cautionary statements included in or incorporated by reference into this report. Except as is required by law, we expressly disclaim any obligation to publicly release any revisions to forward-looking statements to reflect events after the date of this report. For any forward-looking statement contained in this Annual 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.
We own or have rights to use the trademarks, service marks and trade names that we use in conjunction with the operation of our business. Some of the more important trademarks that we own or have rights to use that appear in this Annual Report include the CENTURY 21®, COLDWELL BANKER®, ERA®, CORCORAN®, COLDWELL BANKER COMMERCIAL®, SOTHEBY’S INTERNATIONAL REALTY®, BETTER HOMES AND GARDENS® Real Estate, and CARTUS® marks, which are registered in the United States and/or registered or pending registration in other jurisdictions, as appropriate to the needs of our relevant business. Each trademark, trade name or service mark of any other company appearing in this Annual Report is owned by such company.
MARKET AND INDUSTRY DATA AND FORECASTS
This Annual Report includes data, forecasts and information obtained from independent trade associations, industry publications and surveys, and other information available to us. Some data is also based on our good faith estimates, which are derived from management’s knowledge of the industry and independent sources. As noted in this Annual Report, the National Association of Realtors ("NAR"), the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac") were the primary sources for third-party industry data and forecasts. While data provided by NAR and Fannie Mae are two indicators of the direction of the residential housing market, we believe that homesale statistics will continue to vary between us and NAR and Fannie Mae because:
•they use survey data and estimates in their historical reports and forecasting models, which are subject to sampling error, whereas we use data based on actual reported results;
•there are geographical differences and concentrations in the markets in which we operate versus the national market. For example, many of our company owned brokerage offices are geographically located where average homesale prices are generally higher than the national average and therefore NAR survey data will not correlate with Realogy Brokerage Group's results;
•comparability is also diminished due to NAR’s utilization of seasonally adjusted annualized rates whereas we report actual period-over-period changes and their use of median price for their forecasts compared to our average price;
•NAR historical data is subject to periodic review and revision and these revisions have been material in the past, and could be material in the future; and
•NAR and Fannie Mae generally update their forecasts on a monthly basis and a subsequent forecast may change materially from a forecast that was previously issued.
In addition, we base our estimate of the gross commission income generated in the United States in part on data from Real Trends, a provider of residential brokerage industry analysis, and we also base certain estimates on data from various MLS systems and the U.S. Census Bureau. While we believe that the industry data presented herein is derived from the most widely recognized sources for reporting U.S. residential housing market statistical data, we do not endorse or suggest reliance on this data alone.
Forecasts regarding rates of home ownership, median sales price, volume of homesales, and other metrics included in this Annual Report to describe the housing industry are inherently uncertain or speculative in nature and actual results for any period could materially differ. Industry publications, surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but such information may not be accurate or complete. We have not independently verified any of the data from third-party sources nor have we ascertained the underlying economic assumptions relied upon therein. Statements as to our market position are based on market data currently available to us. While we are not aware of any misstatements regarding industry data provided herein, our estimates involve risks and uncertainties and are subject to change based upon various factors, including those discussed under the headings "Risk Factors" and "Forward-Looking Statements." Similarly, we believe our internal research is reliable, even though such research has not been verified by any independent sources.
Except as otherwise indicated or unless the context otherwise requires, the terms "we," "us," "our," "our company," "Realogy," "Realogy Holdings" and the "Company" refer to Realogy Holdings Corp., a Delaware corporation, and its consolidated subsidiaries, including Realogy Intermediate Holdings LLC, a Delaware limited liability company ("Realogy Intermediate"), and Realogy Group LLC, a Delaware limited liability company ("Realogy Group"). Neither Realogy Holdings, the indirect parent of Realogy Group, nor Realogy Intermediate, the direct parent company of Realogy Group, conducts any operations other than with respect to its respective direct or indirect ownership of Realogy Group. As a result, the consolidated financial positions, results of operations and cash flows of Realogy Holdings, Realogy Intermediate and Realogy Group are the same.
Realogy Holdings is not a party to the Amended and Restated Credit Agreement dated as of March 5, 2013, as amended, amended and restated, modified or supplemented from time to time (the "Senior Secured Credit Agreement") that governs our senior secured credit facility (the "Senior Secured Credit Facility", which includes our "Revolving Credit Facility" and our "Term Loan B") and the Term Loan A Agreement dated as of October 23, 2015, as amended from time to time (the "Term Loan A Agreement") that governs our senior secured term loan A credit facility (the "Term Loan A Facility") and certain references in this Annual Report to our consolidated indebtedness exclude Realogy Holdings with respect to indebtedness under the Senior Secured Credit Facility and Term Loan A Facility. In addition, while Realogy Holdings is a guarantor of Realogy Group's obligations under its unsecured notes, Realogy Holdings is not subject to the restrictive covenants in the indentures governing such indebtedness.
As used in this Annual Report, the terms "5.25% Senior Notes", "4.875% Senior Notes" and "9.375% Senior Notes" refer to our 5.25% Senior Notes due 2021, our 4.875% Senior Notes due 2023, and our 9.375% Senior Notes due 2027, respectively, and are referred to collectively as the "Unsecured Notes." The term "4.50% Senior Notes" refers to our 4.50% Senior Notes due 2019 (paid in full in February 2019).
Item 1. Business.
We are the leading and most integrated provider of residential real estate services in the U.S. We are the world's largest franchisor of residential real estate brokerages with some of the most recognized brands in the real estate industry, the leading U.S. residential real estate brokerage (based upon transaction volume), and a significant provider of title and settlement services.
The core of our integrated business strategy is to grow the base of productive independent sales agents at our company owned and franchisee brokerages and provide them with compelling data and technology products and services, including high-quality lead generation programs, to make them more productive and their businesses more profitable.
Our revenue is derived on a fee-for-service basis, and given our breadth of complementary service offerings, we are able to generate fees from multiple aspects of a residential real estate transaction. Our operating platform is supported by our portfolio of industry leading franchise brokerage brands, including Century 21®, Coldwell Banker®, Coldwell Banker Commercial®, Corcoran®, ERA®, Sotheby's International Realty®and Better Homes and Gardens®Real Estate.
We also own and operate company owned brokerages primarily under the Coldwell Banker®, Corcoran® and Sotheby's International Realty® brands.
Our multiple brands and operations allow us to derive revenue from multiple segments of the residential real estate market, in many different geographies and at varying price points.
On November 6, 2019, the Company entered into a definitive Purchase and Sale Agreement (the "Purchase Agreement") with a subsidiary of SIRVA, Inc. ("SIRVA"), pursuant to which SIRVA will acquire our global employee relocation business, or "Cartus Relocation Services," held by Cartus Corporation, an indirect subsidiary of the Company (“Cartus”). The transaction is expected to close in the next couple of months, subject to the satisfaction or waiver of the closing conditions therein. The sale does not include our affinity and broker-to-broker businesses, nor does it include our broker network made up of agents and brokers from Realogy’s residential real estate brands and certain independent real estate brokers (which was formerly referred to as the Cartus Broker Network and is referred to herein as the "Realogy Broker Network"). In this report, we refer to this business that will be retained as "Realogy Leads Group."
We report our operations in four segments, each of which receives fees based upon services performed for our customers:
•Realogy Franchise Group (formerly referred to as Real Estate Franchise Services, or RFG);
•Realogy Brokerage Group (formerly referred to as Company Owned Real Estate Brokerage Services, or NRT);
•Realogy Title Group (formerly referred to as Title and Settlement Services, or TRG); and
•Realogy Leads Group (as noted above previously formed part of Cartus, which we formerly referred to as Relocation Services).
The assets and liabilities of Cartus Relocation Services are classified as held for sale in the Consolidated Balance Sheets and the results are reported in this Annual Report as discontinued operations. "Net (loss) income from discontinued operations" is reflected on the Consolidated Statements of Operations for all periods presented.
Realogy Franchise Group. We are the largest franchisor of residential real estate brokerages in the world through our portfolio of well-known brokerage brands, including Century 21®, Coldwell Banker®, Coldwell Banker Commercial®,Corcoran®, ERA®, Sotheby's International Realty® and Better Homes and Gardens®Real Estate.
As of December 31, 2019, our real estate franchise systems and proprietary brands had approximately 302,400 independent sales agents worldwide, including approximately 189,900 independent sales agents operating in the U.S. (which included approximately 52,200 company owned brokerage independent sales agents). As of December 31, 2019, our real estate franchise systems and proprietary brands had approximately 18,500 offices worldwide in 114 countries and territories, including approximately 5,900 brokerage offices in the U.S. (which included approximately 710 company owned brokerage offices).
The average tenure among our U.S. franchisees is approximately 22 years as of December 31, 2019. Our franchisees pay us fees for the right to operate under one of our trademarks and to enjoy the benefits of the systems and business enhancing tools provided by our real estate franchise operations. In addition to highly competitive brands that provide unique offerings to our franchisees, we support our franchisees with dedicated national marketing and servicing programs, technology, training, education, learning and development to facilitate our franchisees in growing their business and increasing their revenue and profitability.
Realogy Brokerage Group. We own and operate the leading residential real estate brokerage business (based upon transaction volume) in the U.S. primarily under the Coldwell Banker®, Corcoran® and Sotheby's International Realty®brand names. We offer full-service residential brokerage services in many of the largest metropolitan areas of the U.S. Realogy Brokerage Group, as the broker for a home buyer or seller, derives revenues primarily from gross commission income received at the closing of real estate transactions. Realogy Brokerage Group also has relationships with developers, primarily in major cities, to provide marketing and brokerage services in new developments.
Realogy Title Group. We assist with the closing of real estate transactions by providing full-service title and settlement (i.e., closing and escrow) services to customers, real estate companies, affinity groups, corporations and financial institutions with many of these services provided in connection with the Company's real estate brokerage. In 2019, Realogy Title Group was involved in the closing of approximately 173,000 transactions of which approximately 49,000 related to Realogy Brokerage Group. In addition to our own title and settlement services, we also coordinate a nationwide network of attorneys, title agents and notaries to service financial institution and relocation clients on a national basis. We also serve as an underwriter of title insurance policies in connection with residential and commercial real estate transactions. This segment also includes the Company's share of equity earnings and losses for our Guaranteed Rate Affinity mortgage origination joint venture.
Realogy Leads Group. Realogy Leads Group consists of affinity programs (both company- and client-directed) as well as broker-to-broker referrals. Through our highly concentrated affinity business, we have traditionally provided (and continue to provide) assistance with residential real estate transactions to members of affinity clients such as insurance companies and credit unions that provide our services to their members. Our launch of Realogy Military Rewards in September 2019 marked our entry into offering a home buying and selling assistance program to an affinity group through a Realogy-branded program. Realogy Military Rewards seeks to provide access to benefits similar to those offered under the Company's former USAA affinity program, which had been our largest affinity client and ceased new enrollments in the third quarter of 2019 (See Part II, Item 7. Management's Discussion and Analysis—Recent Developments for additional information). In addition, in 2019, we announced other affinity programs including our announcement in October 2019 of an agreement to create the first-ever real estate benefits program designed for the nearly 38 million AARP members, which is expected to launch nationally in early 2020.
Referrals from our affinity and broker-to-broker programs are handled by the Realogy Broker Network. Member brokers of the Realogy Broker Network, including certain franchisees and company owned brokerages, have traditionally received referrals from Realogy Leads Group in exchange for a referral fee. The Realogy Broker Network has historically been a key contributor to our lead generation strategy, with approximately 99% of the converted leads generated through the network being directed to independent sales agents affiliated with our franchisees and company owned brokerages in 2019.
Discontinued Operations—Cartus Relocation Services. Cartus Relocation Services is reported as held for sale in this Annual Report. As a provider of global relocation services that operates in key international relocation destinations, Cartus Relocation Services offers a broad range of world-class employee relocation services designed to manage all aspects of an employee's move to facilitate a smooth transition in what otherwise may be a complex and difficult process for the employee and employer. In 2019, Cartus Relocation Services served corporations, including 48% of the Fortune 50 companies. As of December 31, 2019, the top 25 relocation clients had an average tenure of approximately 20 years with Cartus Relocation Services.
Member brokers of the Realogy Broker Network have historically received referrals from Cartus Relocation Services generated by our relocation clients in exchange for a referral fee (that is reported in the financial results for Cartus Relocation Services). Realogy will enter into a non-exclusive five-year broker services agreement with SIRVA in connection with the planned sale of Cartus Relocation Services, pursuant to which Realogy Leads Group could, at the discretion of SIRVA, continue to provide high-quality brokerages services via the Realogy Broker Network to relocation clients of SIRVA. Realogy Leads Group will not receive a referral fee in connection with providing such services to SIRVA relocation clients.
Housing Market and Market Share
U.S. Gross Commission Income.Residential real estate brokerage companies typically realize revenues in the form of a sales commission earned from closed homesale sides (either the "buy" side and/or the "sell" side of a real estate transaction), which we refer to as gross commission income. We believe that the level of gross commission income generated in the U.S., which is generally estimated around $70 billion, represents a substantial addressable market. Our company owned brokerages and franchisees earned approximately $12 billion in gross commission income in 2019, as compared to $13 billion in gross commission income in 2018.
Market Share. As measured in a comparison to the volume of all existing homesale transactions in the U.S. as reported by NAR (regardless of whether an agent or broker was involved in the transaction), we estimate that our market share in 2019 decreased year-over-year to approximately 15.3% compared to 16.1% in 2018. Our estimated share of all U.S. existing homesale unit transactions in 2019 decreased from approximately 13.5% to approximately 13.0%.
Basis of Calculation
Market Share Calculation. We measure our market share transaction volume by the ratio of (a) homesale transaction volume (sides times average price) in which we and our franchisees participate to (b) NAR's existing homesale transaction volume (regardless of whether an agent or broker was involved in the transaction)—calculated by doubling the number of existing homesale transactions reported by NAR to account for both the buy and sell sides of a transaction multiplied by NAR's average sales price. Homesale unit transaction market share is calculated similarly but without including average sales price in either the numerator or denominator.
* * *
Our headquarters is located at 175 Park Avenue, Madison, New Jersey 07940. Our general telephone number is (973) 407-2000. We were incorporated on December 14, 2006 in the State of Delaware. The Company files electronically with the Securities and Exchange Commission (the "SEC") required reports on Form 8-K, Form 10-Q and Form 10-K; proxy materials; ownership reports for insiders as required by Section 16 of the Securities Exchange Act of 1934; registration statements and other forms or reports as required. Certain of the Company's officers and directors also file statements of changes in beneficial ownership on Form 4 with the SEC. Such materials may be accessed electronically on the SEC's Internet site (www.sec.gov). We maintain an Internet website at http://www.realogy.com and make available free of charge on or through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, Section 16 reports and any amendments to these reports in the Investor Relations section of our website as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. Our website address is provided as an inactive textual reference. The contents of our website are not incorporated by reference herein or otherwise a part of this Annual Report.
Industry definition. We primarily operate in the U.S. residential real estate industry, which is approximately a $1.9 trillion industry based on 2019 transaction volume (i.e. average homesale price times number of new and existing homesale transactions) and derive substantially all of our revenues from serving the needs of buyers and sellers of existing homes rather than new homes manufactured and sold by homebuilders. Residential real estate brokerage companies typically realize revenues in the form of a commission that is based on a percentage of the price of each home sold. As a result, the real estate industry generally benefits from rising home prices and increasing homesale transactions (and conversely is adversely impacted by falling prices and lower homesale transactions). We believe that existing homesale transactions and the services associated with these transactions, such as mortgage origination and title services, represent one of the most attractive segments of the residential real estate industry for the following reasons:
•the existing homesales segment represents a significantly larger addressable market than new homesales. Of the approximately 6.0 million homesales in the U.S. in 2019, NAR estimates that approximately 5.3 million were existing homesales, representing approximately 89% of the overall sales as measured in units;
•existing homesales afford us the opportunity to represent either the buyer or the seller and in some cases both the buyer and the seller; and
•we are able to generate revenues from ancillary services provided to our customers.
Our business model relies heavily on affiliated independent sales agents, who play a critical consumer-facing role in the home buying and selling experience for both our company owned and franchise brokerages. While substantially all homebuyers start their search for a home using the Internet, according to NAR, 89% of home buyers and home sellers used an agent or broker in 2019. We believe that agents or brokers will continue to be directly involved in most home purchases and sales, primarily because real estate transactions have certain characteristics that benefit from the service and value offered by an agent or broker, including the following:
•the average homesale transaction size is very high and generally is the largest transaction one does in a lifetime;
•homesale transactions occur infrequently;
•there is a compelling need for personal service as home preferences are unique to each buyer;
•a high level of support is required given the complexity associated with the process, including specific marketing and technology services;
•the consumer preference to visit properties for sale in person, notwithstanding the availability of on-line images and property tours; and
•there is a high variance in price, depending on neighborhood, floor plan, architecture, fixtures, and outdoor space.
Cyclical nature of industry. The U.S. residential real estate industry is cyclical but has historically shown strong growth over time. Based on information published by NAR, existing homesale units increased at a compound annual growth rate, or CAGR, of 1.6% over the past 30 years, with 19 annual increases, 10 annual decreases and 2019 being flat.
During that same period, median existing homesale prices increased at a CAGR of 3.6% (not adjusted for inflation) over the past 30 years, a period that included three economic recessions.
According to NAR, the existing homesale transaction volume (median homesale price times existing homesale transactions) grew at a CAGR of 5.3% over the past 30 years.
The U.S. residential real estate industry was in a significant and lengthy downturn from the second half of 2005 through 2011. Based upon data published by NAR from 2005 to 2011, the number of annual U.S. existing homesale transactions declined by 40% and the median existing homesale price declined by 24%. Beginning in 2012, the U.S. residential real estate industry began a recovery. Based upon data published by NAR from 2011 to 2019, the number of annual U.S. existing homesale units and the median existing homesale price improved by 25% and 64%, respectively.
Long-term demographics. We believe that long-term demand for housing and the growth of our industry is primarily driven by the affordability of housing, the economic health of the U.S. economy, demographic trends such as generational transitions, increases in U.S. household formation, mortgage rate levels and mortgage availability, certain tax benefits, job growth, increases in renters that qualify as homebuyers, the inherent attributes of homeownership versus renting and the availability of inventory in the consumer's desired location and within the consumer's price range. We believe that the residential real estate market will benefit over the long-term from expected positive fundamentals, including expected growth in the number of U.S. households over the next decade, in particular among the millennial generation.
Participation in Multiple Aspects of the Residential Real Estate Market
We participate in services associated with many aspects of the residential real estate market. Our complementary businesses and mortgage joint venture work together, allowing us to generate revenue at various points in a residential real estate transaction, including the purchase or sale of homes, affinity services, settlement and title services, and franchising of our brands. The businesses each benefit from our deep understanding of the industry, strong relationships with real estate brokers, sales agents and other real estate professionals and expertise across the transactional process. Unlike other industry participants who offer only one or two services, we can offer homeowners, our franchisees and our affinity clients ready access to numerous associated services that facilitate and simplify the home purchase and sale process. These services provide further revenue opportunities for our owned businesses and those of our franchisees. Specifically, our brokerage offices and those of our franchisees participate in purchases and sales of homes involving affinity members through Realogy Leads Group and we offer customers (purchasers and sellers) of both our owned and franchised brokerage businesses convenient title and settlement services. These services produce incremental revenues for our businesses and franchisees. In addition, we participate in the mortgage process through our 49.9% ownership of Guaranteed Rate Affinity. All of our businesses and our mortgage joint venture can derive revenue from the same real estate transaction.
Our brands are among the most well-known and established real estate brokerage brands in the real estate industry. Our real estate franchise brands are listed in the following chart, which includes information as of December 31, 2019 for both our franchised and company owned offices:
Franchise Brands(1) (2)
Worldwide Brokers and
Sales Agents (3)
U.S. Annual Sides
# of Countries with Owned or Franchised Operations
Aleader in brand awareness and the most recognized name in real estate
Significant international office footprint
The only real estate brand that has been guiding people home for 114 years
Driving performance through innovation, collaboration and shared accountability
Unique branding and products providing the flexibility of choice for our customer, community, agent, and brokerage
Synonymous with luxury
Strong ties to auction house established in 1744
Powerful global presence
Unique access to consumers, marketing channels and content through its brand licensing relationship with a leading media company
(1)As of December 31, 2019, does not include Corcoran®, a proprietary brand that we own and franchise and others that we do not franchise. We announced the Company's first Corcoran® franchise affiliate on February 5, 2020.
(2)Information presented for Coldwell Banker® includes Coldwell Banker Commercial®.
(3)Includes information reported to us by independently owned franchisees (including approximately 12,600 offices and approximately 112,500 related brokers and independent sales agents of non-U.S. franchisees and franchisors).
Our primary objectives as the largest franchisor of residential real estate brokerages in the world are to retain and expand existing franchises, sell new franchises, and most importantly, provide branding and support to our franchisees and their independent sales agents. At December 31, 2019, our real estate franchise systems and proprietary brands had approximately 18,500 offices worldwide in 114 countries and territories in North and South America, Europe, Asia, Africa, the Middle East and Australia, including approximately 5,900 brokerage offices in the U.S. (which included approximately 710 company owned brokerage offices).
We derive substantially all of our real estate franchising revenues from royalties and marketing fees received under long-term franchise agreements with our domestic franchisees and Realogy Brokerage Group. These royalties are based on a percentage of the franchisees' sales commission earned from closed homesale sides (either the "buy" side and/or the "sell" side of a real estate transaction), which we refer to as gross commission income. Our franchisees pay us royalties, net of volume incentives achieved (other than Realogy Brokerage Group), for the right to operate under one of our trademarks and to utilize the benefits of the franchise systems. We provide our franchisees with systems and tools that are designed to help our franchisees serve their customers, attract new and retain existing independent sales agents, and support our franchisees with servicing programs, technology and education, as well as branding-related marketing which is funded through contributions by our franchisees and us (including Realogy Brokerage Group). We operate and maintain an Internet-based reporting system for our domestic franchisees which generally allows them to electronically transmit listing information and other relevant reporting data to us. We also operate websites for each of our brands for the benefit of our franchisees and their independent sales agents.
Realogy Franchise Group's domestic annual net royalty revenues from franchisees other than our company owned brokerages can be represented by multiplying (1) that year's total number of closed homesale sides in which those franchisees participated by (2) the average sale price of those homesales by (3) the average brokerage commission rate charged by these franchisees by (4) Realogy Franchise Group's net contractual royalty rate. The net contractual royalty rate represents the average percentage of our franchisees' commission revenues paid to us as a royalty, net of volume incentives achieved (or for certain franchisees, flat fee royalties) and net of other incentives granted to franchisees. The domestic royalty revenue from Realogy Brokerage Group is calculated by multiplying homesale sides by average sale price by average brokerage commission rate by their contractual royalty rate. Realogy Brokerage Group does not receive volume incentives or other incentives. In addition to domestic royalty revenue, Realogy Franchise Group earns revenue from marketing fees, listing fees, the preferred alliance program, international affiliates and upfront international fees. The following chart illustrates the key drivers for revenue earned by Realogy Franchise Group:
On average, our domestic franchisees' tenure with our brands was approximately 22 years as of December 31, 2019. During 2019, none of our franchisees (other than Realogy Brokerage Group) generated more than 1% of the total revenue of our real estate franchise business.
The franchise agreements set forth guidelines on the business and operations of the franchisees and require them to comply with the mandatory identity standards set forth in each brand's policy and procedures manuals. A franchisee's failure to comply with these restrictions and standards could result in a termination of the franchise agreement. The franchisees generally are not permitted to terminate the franchise agreements prior to their expiration, and in those cases where termination rights do exist, they are limited (e.g., if the franchisee retires, becomes disabled or dies). Generally, new domestic franchise agreements have a term of ten years, although we may negotiate shorter extension agreements with existing franchisees.
These franchisee agreements generally require the franchisees to pay us an initial franchise fee for the franchisee's principal office plus, upon the receipt of any commission income, a royalty fee in most cases initially equal to 6% of their
commission income, subject to reduction based upon volume incentives. Under the volume incentive program, each franchisee is eligible to receive a refund of a portion of the royalties paid upon the satisfaction of certain conditions (or in the case of Corcoran®, a reduced royalty based upon volume). The volume incentive is calculated for each eligible franchisee as a progressive percentage of each franchisee's annual gross revenue (paid timely) for each calendar year. Under the current form of the franchise agreements, the volume incentive varies for each franchise system, and generally result in a net or effective royalty rate of 6% to 3% for each individual franchisee (prior to taking into account other incentives that may be applicable to the franchisee).
Certain franchisees (including some of our largest franchisees) have a flat fee royalty arrangement with us of less than 6% and are not eligible for volume incentives. In addition, the volume incentive program is not offered to Better Homes and Gardens® Real Estate capped model franchisees or Coldwell Banker Commercial® franchisees. Our Better Homes and Gardens® Real Estate franchise business launched a "capped fee model" in 2019 that applies to any new franchisee as well as preexisting franchisees who elect to switch from their current royalty fee structure to the capped fee model. Under this capped fee model, franchisees pay a royalty fee (generally equal to 5% of their commission income) capped at a set amount per independent sales agent per year, subject to our right to annually modify or increase the independent sales associate cap.
We provide a detailed table to each eligible franchisee that describes the gross revenue thresholds required to achieve a volume incentive and the corresponding incentive amounts. We reserve the right to increase or decrease the percentage and/or dollar amounts in the table on an annual basis, subject to certain limitations.
Other incentives may be used as consideration to attract new franchisees, grow franchisees (including through independent sales agent recruitment) or extend existing franchise agreements, although in contrast to volume incentives, the majority of other incentives are not homesale transaction based. Under certain circumstances, we extend conversion notes to eligible franchisees for the purpose of providing an incentive to join the brand, to renew their franchise agreements, or to facilitate their growth opportunities. Growth opportunities include the expansion of franchisees' existing businesses by opening additional offices, through the consolidation of operations of other franchisees, as well as through the acquisition of independent sales agents and offices operated by independent brokerages. Many franchisees use the proceeds from the conversion notes to update marketing materials, upgrade technology and websites, or to assist in acquiring companies or recruiting agents. The notes are not funded until appropriate credit checks and other due diligence matters are completed, and the business is opened and operating under one of our brands. Upon satisfaction of certain revenue performance-based thresholds, the notes are forgiven ratably over the term of the franchise agreement. If the revenue performance thresholds are not met, franchisees may be required to repay a portion of the outstanding notes.
Realogy Brokerage Group—our company owned brokerages—pays a contractual royalty rate of approximately 6% and does not participate in volume incentive or other incentive programs.
Each of our current franchise systems require franchisees and company owned offices to make monthly contributions to marketing funds maintained by each brand, which may decrease as certain financial thresholds are achieved in accordance with the applicable franchise agreement. These contributions are used primarily for the development, implementation, production, placement and payment of national and regional advertising, marketing, promotions, public relations and/or other marketing-related activities, such as lead generation, all to promote and further the recognition of each brand and its independent franchisees and their affiliated independent sales agents. In addition to the contributions from franchisees and company owned offices, Realogy Franchise Group may be, in certain instances, required to make contributions to certain marketing funds and may make discretionary contributions (at its option) to any of the marketing funds.
The Company also offers support services to its independent franchisees and their affiliated independent sales agents, including technology-enabled solutions such as customer relationship management (CRM), lead generation and productivity tools.
In addition to offices owned and operated by our franchisees, as of December 31, 2019, we, through Realogy Brokerage Group, own and operate approximately 705 offices under the Coldwell Banker®, Coldwell Banker Commercial®, Sotheby's International Realty® and Corcoran® brand names. Realogy Brokerage Group pays intercompany royalty fees and marketing fees to Realogy Franchise Group in connection with its operation of these offices. These fees are recognized as income or expense by the applicable segment level and eliminated in the consolidation of our businesses.
In the U.S., we employ a direct franchising model whereby we contract with and provide services directly to independent owner-operators. We also utilize a direct franchising model outside of the U.S. for Sotheby's International Realty® and Corcoran® and, in some cases, Better Homes and Gardens Real Estate®. For all other brands, we generally employ a master franchise model outside of the U.S., whereby we contract with a qualified third party to build a franchise
network in the country or region in which franchising rights have been granted. Under both the direct and the master franchise model outside of the U.S., we typically enter into long-term franchise agreements (often 25 years in duration) and receive an initial area development fee and ongoing royalties. Under the master franchise model, the ongoing royalties we receive are generally a percentage of the royalties received by the master franchisor from its franchisees with which it contracts. Under the direct franchise model, a royalty fee is paid to us on transactions conducted by our franchisees in the applicable country or region.
We also offer third-party service providers an opportunity to market their products to our franchisees and their independent sales agents and customers through our preferred alliance program. To participate in this program, service providers generally agree to provide preferred pricing to our franchisees and/or their customers or independent sales agents and to pay us a combination of an initial licensing or access fee, subsequent marketing fees and/or commissions based upon our franchisees' or independent sales agents' usage of the preferred alliance vendors. We also transmit listings to various platforms and services.
We own the trademarks Century 21®, Coldwell Banker®, Coldwell Banker Commercial®, Corcoran®, ERA® and related trademarks and logos, and such trademarks and logos are material to the businesses that are part of our real estate franchise segment. Our franchisees and our subsidiaries actively use these trademarks, and all of the material trademarks are registered (or have applications pending) with the United States Patent and Trademark Office as well as with corresponding trademark offices in major countries worldwide where these businesses have significant franchised operations.
We have an exclusive license to own, operate and franchise the Sotheby's International Realty®brand to qualified residential real estate brokerage offices and individuals operating in eligible markets pursuant to a license agreement with SPTC Delaware LLC, a subsidiary of Sotheby's ("Sotheby's"). Such license agreement has a 100-year term, which consists of an initial 50-year term ending February 16, 2054 and a 50-year renewal option. We pay a licensing fee to Sotheby's for the use of the Sotheby's International Realty® name equal to 9.5% of the net royalties earned by Realogy Franchise Group attributable to franchisees affiliated with the Sotheby's International Realty® brand, including our company owned offices.
In October 2007, we entered into a long-term license agreement to own, operate and franchise the Better Homes and Gardens®Real Estate brand from Meredith. The license agreement between Realogy and Meredith is for a 50-year term, with a renewal option for another 50 years at our option. We pay a licensing fee to Meredith for the use of the Better Homes and Gardens®Real Estate brand name equal to 9.0% of the net royalties earned by Realogy Franchise Group attributable to franchisees affiliated with the Better Homes and Gardens® Real Estate brand, subject to a minimum annual licensing fee.
Each of our franchised brands has a consumer website that offers real estate listings, contacts and services.
Realogy Brokerage Group
Through Realogy Brokerage Group we own and operate a full-service real estate brokerage business in many of the largest metropolitan areas in the U.S. Our company owned real estate brokerage business operates under the Coldwell Banker®, Sotheby's International Realty®and Corcoran® franchised brands.
As of December 31, 2019, we had approximately 710 company owned brokerage offices and approximately 52,200 independent sales agents working with these company owned offices.
Our company owned real estate brokerage business derives revenue primarily from gross commission income received serving as the broker at the closing of real estate transactions. For the year ended December 31, 2019, our average homesale broker commission rate was 2.41% which represents the average commission rate earned on either the "buy" side or the "sell" side of a homesale transaction. Gross commission income is also earned on non-sale transactions such as home rentals. Realogy Brokerage Group, as a franchisee of Realogy Franchise Group, pays a royalty fee of approximately 6% per transaction to Realogy Franchise Group from the commission earned on a real estate transaction. The remainder of gross commission income is split between the broker (Realogy Brokerage Group) and the independent sales agent in accordance with their applicable independent contractor agreement (which specifies the portion of the broker commission to be paid to the agent), which varies by agent.
The following chart illustrates the key drivers for revenue earned by Realogy Brokerage Group:
In addition, as a full-service real estate brokerage company, we promote the complementary services of our title and settlement services businesses. We believe we provide integrated services that enhance the customer experience.
When we assist the seller in a real estate transaction, independent sales agents generally provide the seller with a full-service marketing program, which may include developing a direct marketing plan for the property, assisting the seller in pricing the property and preparing it for sale, listing it on multiple listing services, advertising the property (including on websites), showing the property to prospective buyers, assisting the seller in sale negotiations, and assisting the seller in preparing for closing the transaction. When we assist the buyer in a real estate transaction, independent sales agents generally help the buyer in locating specific properties that meet the buyer's personal and financial specifications, show properties to the buyer, assist the buyer in negotiating (where permissible) and preparing for closing the transaction. In addition, Realogy Brokerage Group has relationships with developers, primarily in major cities, to provide marketing and brokerage services in new developments.
At December 31, 2019, we operated approximately 89% of our offices under the Coldwell Banker®brand name, approximately 5% of our offices under the Sotheby's International Realty®brand name and 6% of our offices primarily under the Corcoran® brand name. Our offices are geographically diverse with a strong presence in the east and west coast areas, primarily around large metropolitan areas in the U.S., where home prices are generally higher. We operate our Coldwell Banker®offices and Sotheby's International Realty®offices in numerous regions throughout the U.S., and Corcoran® offices in New York City, the Hamptons (New York), and Palm Beach and Miami Beach, Florida.
We intend to grow our business organically. To grow organically, we focus on working with office managers to attract and retain independent sales agents who can successfully engage and promote transactions from new and existing clients. To complement our residential brokerage services, Realogy Brokerage Group offers home ownership services that include comprehensive single-family residential property management in many of the nation's largest rental markets.
To a lesser extent, we may grow our business through strategic acquisitions focused primarily on expanding our existing markets. Following the completion of an acquisition, we tend to consolidate the newly acquired operations with our existing operations to reduce or eliminate duplicative costs and to leverage our existing infrastructure to support newly affiliated independent sales agents.
Realogy Brokerage Group is a broker within the Realogy Broker Network.
Realogy Title Group
Our title and settlement services business, Realogy Title Group, provides full-service title and settlement (i.e., closing and escrow) services to real estate companies and financial institutions. We act in the capacity of a title agent and sell title insurance to property buyers and mortgage lenders. We are licensed as a title agent in 42 states and Washington, D.C., and have physical locations in 21 states and Washington, D.C. We issue title insurance policies on behalf of large national underwriters as well as through our Dallas-based subsidiary, Title Resources Guaranty Company ("Title Resources"). Title Resources is a title insurance underwriter licensed in 37 states and Washington, D.C. We operate mostly in major metropolitan areas. As of December 31, 2019, we had approximately 380 offices, approximately 190 of which are co-located within one of our company owned brokerage offices.
Virtually all lenders require their borrowers to obtain title insurance policies at the time mortgage loans are made on real property. The terms and conditions upon which the real property will be insured are determined in accordance with the standard policies and procedures of the title underwriter. When our title agencies sell title insurance, the title search and examination function is performed by the agent. The title agent and underwriter split the premium. The amount of such premium "split" is determined by agreement between the agency and underwriter, or is promulgated by state law. We derive revenue through fees charged in real estate transactions for rendering the services described above, fees charged for escrow
and closing services, and a percentage of the title premium on each title insurance policy sold. We have entered into underwriting agreements with various underwriters, which state the conditions under which we may issue a title insurance policy on their behalf. For policies issued through our agency operations, assuming no negligence on our part, we are not typically liable for losses under those policies; rather the title insurer is typically liable for such losses.
Our company owned brokerage operations are the principal source of our title and settlement services business for homesale transactions. Other sources of our title and settlement services homesale business include our real estate franchise business and unaffiliated brokerage operations. For refinance transactions, we generate title and escrow revenues from financial institutions throughout the mortgage lending industry. Many of our offices have subleased space from and are co-located within our company owned brokerage offices. The capture rate of our title and settlement services business from company owned brokerage operations was approximately 36% in 2019.
We coordinate a national network of escrow and closing agents (some of whom are our employees, while others are attorneys in private practice and independent title companies) to provide full-service title and settlement services to a broad-based group that includes lenders, home buyers and sellers, developers and independent real estate sales agents. Our role is generally that of an intermediary managing the completion of all the necessary documentation and services required to complete a real estate transaction.
Our title and settlement services business measures operating performance based on purchase and refinance closing units and the related title premiums and escrow fees earned on such closings. In addition, we measure net title premiums earned for title policies issued by our underwriting operation.
The following chart illustrates the key drivers for revenue generated by our title and settlement services business:
We intend to grow our title and settlement services business by attracting title and escrow sales agents in existing markets. We will also continue to seek to increase our capture rate of title business from Realogy Brokerage Group homesale sides. In addition, we expect to continue to grow our underwriting business by increasing our agent base.
The equity earnings or losses related to Guaranteed Rate Affinity, our mortgage origination joint venture with Guaranteed Rate, are included in the financial results of Realogy Title Group. We own 49.9% of the home mortgage joint venture and Guaranteed Rate owns the remaining 50.1%.
Realogy Leads Group
Realogy Leads Group consists of affinity programs (both company- and client-directed) as well as broker-to-broker referrals. Referrals generated by Realogy Leads Group are handled by the Realogy Broker Network, a network of real estate brokers consisting of our company owned brokerage operations, select franchisees and independent real estate brokers who have been approved to become members.
Realogy requires that participating brokers and independent sales agents be experienced and obtains background checks on all members of the network. Member brokers of the Realogy Broker Network receive referrals in exchange for a referral fee paid to Realogy Leads Group for affinity and broker to broker transactions.
Member brokers of the Realogy Broker Network have also historically received referrals from Cartus Relocation Services generated by our relocation clients in exchange for a referral fee (that is reported in the financial results for Cartus Relocation Services). In connection with the planned sale of Cartus Relocation Services to SIRVA, we will enter into a non-exclusive five-year broker services agreement with SIRVA, pursuant to which Realogy Leads Group could, at the discretion of SIRVA, continue to provide high-quality brokerage services via the Realogy Broker Network to relocation clients of SIRVA. Realogy Leads Group, however, will not receive a referral fee in connection with providing such services.
The Realogy Broker Network has historically been a key contributor to our lead generation strategy, with 99% of the converted leads generated through the network (from Realogy Leads Group and Cartus Relocation Services) being directed to independent sales agents affiliated with our franchisees and company owned brokerages in 2019. As a result of referrals from Realogy Leads Group and Cartus Relocation Services, the Realogy Broker Network closed approximately 78,700 real estate transactions in 2019, with approximately 68,400 transactions attributable to affinity programs and broker-to-broker activity, and approximately 10,300 transactions attributable to relocation clients.
Affinity Services and Broker-to-Broker Overview
Under our affinity services program, Realogy Leads Group provides real estate services, including home buying and selling assistance to members of organizations such as insurance companies and credit unions that have established members who are buying or selling a home. Through a client-directed affinity program, the applicable affinity organization generally offers our affinity services to their members. Through a company-directed affinity program (such as Realogy Military Rewards or AARP), Realogy drives the marketing for the program. Where permitted by law, affinity members can receive a financial incentive for using these services (such as cash or a gift card, or commission credit based on the home purchase/sale price pursuant to the applicable program), with the financial incentive provided by the affinity client for affinity-directed programs or by the Company for company-directed affinity programs.
In 2019, we launched our first Realogy-branded affinity program with Realogy Military Rewards, a program for U.S. military personnel, veterans and their families that seeks to provide access to benefits from Realogy that are similar to those offered under the former USAA affinity program. In addition, in 2019, we announced other affinity programs in collaboration with partners including our announcement in October 2019 of an agreement to create the first-ever real estate benefits program designed for the nearly 38 million AARP members, which is expected to launch nationally in early 2020. We expect that significant time and effort and meaningful investment will be required to increase awareness of and affinity member participation in these new affinity programs.
Broker-to-broker business includes referrals generated by brokers affiliated with the Realogy Broker Network, inclusive of approximately 2,800 intra-company referrals within Realogy Brokerage Group in 2019. Realogy Leads Group does not receive a referral fee for such intra-company referrals.
Following the closing of the planned sale of Cartus Relocation Services, we expect to consolidate Realogy Leads Group, including the Realogy Broker Network, into Realogy Franchise Group.
Affinity Services Concentration and Discontinuation of USAA Affinity Program
Our affinity revenues are highly concentrated and our affinity relationships are non-exclusive and terminable at any time at the option of the client. In the third quarter of 2019, USAA, which had been our largest affinity client, ceased new enrollments in its long-term affinity program with us. In 2019, referrals generated by the USAA affinity program represented a significant portion of the 78,700 total homesale transactions closed from the Realogy Broker Network. See Part II, Item 7. Management's Discussion and Analysis—Recent Developments for additional information.
Cartus Relocation Services is reported as held for sale in this Annual Report. As provider of global relocation services, that operates in key international relocation destinations, Cartus Relocation Services offers a broad range of world-class employee relocation services designed to manage all aspects of an employee's move to facilitate a smooth transition in what otherwise may be a complex and difficult process for employee and employer. In 2019, Cartus Relocation Services served corporations, including 48% of the Fortune 50 companies. As of December 31, 2019, the top 25 relocation clients had an average tenure of approximately 20 years with Cartus.
Cartus Relocation Services provides services in 150 countries and has operations in the U.S., the United Kingdom, Canada, Hong Kong, Singapore, China, India, Brazil, Germany, France, Switzerland and the Netherlands.
◦closing on the sale of the old home, generally at the instruction of the client;
•expense processing, relocation policy counseling, relocation-related accounting, including international assignment compensation services, and other consulting services;
•arranging household goods moving services, over 46,000 domestic and international shipments in 2019, and providing support for all aspects of moving a transferee's household goods, including the handling of insurance and claim assistance, invoice auditing and quality control;
•coordinating visa and immigration support, intercultural and language training, and expatriation/repatriation counseling and destination services; and
•group move management services providing coordination for moves involving a large number of transferees to or from a specific regional area over a short period of time.
The wide range of services allows clients to outsource their entire relocation programs to Cartus Relocation Services.
Substantially all homesale service transactions for clients of Cartus Relocation Services are classified as "no risk." Under "no risk" business, the client is responsible for reimbursement of all direct expenses associated with the homesale. Such expenses include, but are not limited to, appraisal, inspection and real estate brokerage commissions. The client also bears the risk of loss on the resale of the transferee's home. Clients are responsible for reimbursement of all other direct costs associated with the relocation including, but not limited to, costs to move household goods, mortgage origination points, temporary living and travel expenses. Generally, we fund the direct expenses associated with the homesale as well as those associated with the relocation on behalf of the client and the client then reimburses us for these costs plus interest charges on the advanced funds. This limits our exposure on "no risk" homesale services to the credit risk of our clients rather than to the potential fluctuations in the real estate market or to the creditworthiness of the individual transferring employee. Historically, due to the credit quality of our clients, we have had minimal losses with respect to these "no risk" homesale services.
The "at risk" business that we conduct is minimal. In "at risk" homesale service transactions, we acquire the home being sold by the transferring employee, incur the cost for all direct expenses (acquisition, carrying and selling costs) associated with the homesale and bear any loss on the sale of the home.
Substantially all of our contracts with relocation clients of Cartus Relocation Services are terminable at any time at the option of the client and are non-exclusive. If a client ceases or reduces volume under its contract, we will be compensated for all services performed up to the time that volume ceases and reimbursed for all expenses incurred.
There are a number of different revenue streams associated with relocation services. We earn referral commissions primarily from real estate brokers and household goods moving companies that provide services to the transferee. Clients may also pay transactional fees for the services performed. We also earn net interest income which represents interest earned from clients on the funds we advance on behalf of the transferring employee net of costs associated with the securitization obligations used to finance these payments.
Products, Technology and Marketing
Our ability to provide independent sales agents at company owned and franchised brokerages with compelling data and technology products and services to make them more productive and their businesses more profitable is core to our integrated business strategy.
The marketing and technology services and support provided by independent sales agents to their customers are an important element of the value offered by an agent in the home purchase and sale process. Our commitment to continuously develop and improve our marketing and technology products and service is part of our value proposition to company owned and franchised real estate brokerages, affiliated independent sales agents and their customers as well as to our other businesses. Increasingly, these products and services are desired as an integrated set of tools, rather than stand-alone products and services.
Products and Technology
Since 2019, we have developed our product and marketing strategies against the backbone of an open-architecture technology strategy. Our open ecosystem is designed to support the continuous creation and delivery of both our proprietary
tools and third-party products to our agents in order to deliver a more comprehensive platform experience. Through this strategy, we are able to selectively enable qualified third-party vendors and products to access and interface with our products and services so that affiliated independent sales agents will be able to build their own customizable technology platform to drive their performance and productivity.
We have expended, and expect to continue to expend, substantial time, capital, and other resources to identify the needs of company owned brokerages, franchisees, independent sales agents and their customers and to develop marketing, technology and service offerings to meet the needs of affiliated independent sales agents.
In 2019, we delivered multiple new technology-driven products designed to improve independent sales agent productivity and enhance the customer experience for home buyers and sellers. For example:
•Social Ad Engine helps affiliated agents create an effective Facebook and Instagram ad in under three minutes via a marketing product launched in partnership with Facebook.
•Listing Concierge allows agents affiliated with Coldwell Banker company owned brokerages to create custom marketing with the support of specialists, resulting in high quality materials.
•Design Concierge provides innovative marketing strategies, custom design support, complete and custom rebranding and other marketing tools needed to promote an agent's personal brand to agents affiliated with Coldwell Banker company owned brokerages.
•RealVitalize enables consumer home sellers to make their property ready for sale by providing resources to fund staging and home improvements with no up-front cost via a consumer program from Coldwell Banker’s company owned operations and HomeAdvisor. RealVitalize is currently available in 27 U.S. states.
•RealSure strives to improve the consumer's home selling and buying experience through two core products, RealSure Sell and RealSure Mortgage. Under the RealSure Sell product, home sellers with qualifying properties receive a cash offer valid for 45 days immediately upon listing, and during this time frame have the opportunity to pursue a better price by marketing their property with an affiliated independent sales agent. Sellers who are enrolled in RealSure Sell can utilize RealSure Mortgage to make an offer on their next home without sale or financing contingencies before their current home is sold by leveraging their RealSure Sell cash offer. The programs, created in partnership with Home Partners of America, are currently available in 10 U.S. markets.
Our Realogy-provided platform is designed to increase the value proposition to our independent sales agents, franchisees (and their independent sales agents) and the consumer by:
•aiding in lead generation and obtaining additional homesale transactions;
•connecting affiliated agents and brokers to a CRM tool that allows for the cultivation of productive relationships with consumers at all stages of the transaction;
•enhancing access to listing distributions through mobile applications and websites;
•informing affiliated agents of valuable client insight to help those agents increase their productivity;
•providing consumers with a streamlined yet comprehensive user experience to facilitate the necessary steps for researching homes, communities and independent sales agents;
•providing key back office processes, including listing and transaction management, reporting, marketing, and agent profiles; and
•delivering business planning tools that enable our franchisees to track their progress against key business objectives in real time.
In January 2020, we announced that we plan to launch our next generation customer relationship management (CRM) tool as well as new consumer and agent-facing listing websites, both of which will be developed in partnership with a third-party, as well as other tools including a leads engine and transaction management tool. The new CRM is currently in its first pilot phase.
Each of our brands manages a comprehensive system of marketing tools, systems and sales information and data that can be accessed through freestanding brand intranet sites to assist independent sales agents in becoming the best marketer of their listings. Advertising is primarily used by the brands to drive leads to affiliated agents, increase brand awareness and perception, promote our network and offerings to the real estate industry and engage our customer base.
Each of our franchise brands operates a marketing fund that is funded principally by our franchisees (including company owned offices), although we may make discretionary contributions to any of the marketing funds and, in certain instances, are required to make contributions to certain marketing funds.
Likewise, our company owned brokerages sponsor a wide array of marketing programs, materials and opportunities to complement the sales work of our affiliated independent sales agents and increase brand awareness. The effectiveness and quality of marketing programs play a significant role in attracting and retaining independent sales agents.
Our marketing programs and initiatives primarily focus on attracting potential new home buyers and sellers to affiliated independent sales agents by:
•showcasing the inventory of our real estate listings and the affiliated independent sales agents who are the listing agents of these properties;
•building and maintaining brand awareness and preference for the brand; and
•increasing the local recognition of affiliated agents and brokerages.
Marketing programs are executed using a variety of media, including but not limited to social media, advertising, direct marketing and internet advertising. We also offer the independent sales agents broad-based advertising, mailings and other campaigns to generate leads, interest and recognition.
The Internet has become the primary advertising channel in our industry and we have sought to become a leader among full-service residential real estate brokerage firms in the use and application of marketing technology. We place our property listings on hundreds of real estate websites and we operate a variety of our own websites.
Our brand websites contain listing information on a regional and national market basis, independent sales agent information, community profiles, home buying and selling advice, relocation tips and mortgage financing information and unique property and neighborhood insights from local agents. Additionally, each brand website allows independent sales agents to market themselves to consumers.
Significant focus is placed on developing websites for each brand to create value to the real estate consumer. Each brand website focuses on streamlined, easy search processes for listing inventory and rich descriptive details, multiple photos, full motion videos and in some cases virtual reality tours to market the real estate listing. We also place significant emphasis on distributing our real estate listings with third-party websites to expand a homebuyer's access to such listings, at times enhancing the presentation of the listings on third-party websites to make the listings more attractive to consumers. Consumers seeking more detailed information about a particular listing on a third-party website are generally able to click through to a brand website or a company owned brokerage website or telephone the franchisee or company owned brokerage directly.
Each real estate brand provides learning and development materials and access to continuing education to its franchisees to assist them in building their real estate sales businesses. Each brand's engagement program contains different materials and delivery methods. The marketing materials include a detailed description of the services offered by our franchise systems (which will be available to the independent sales agent). Live instructors at conventions and orientation seminars deliver some engagement modules while other modules can be viewed by brokers anywhere in the world through virtual classrooms over the Internet. Most of the programs and materials are then made available in electronic form to franchisees over the respective system's private intranet site. Many of the materials are customizable to allow franchisees to achieve a personalized look and feel and make modifications to certain content as appropriate for their business and marketplace.
At December 31, 2019, we had approximately 10,150 employees, including approximately 730 employees outside of the U.S. Approximately 2,000 employees, including almost all of our employees outside of the U.S., are employed by Cartus Relocation Services. None of our employees are represented by a union.
The residential housing market is seasonal, with a higher level of homesale transactions typically occurring in the second and third quarter of each year. As a result, historically, operating results and revenues for all of our businesses have been strongest in the second and third quarters of the calendar year.
Real Estate Brokerage Industry. The ability of our real estate brokerage franchisees and our company owned brokerage businesses to successfully compete is important to our prospects for growth. Their ability to compete may be affected by the recruitment, retention and performance of independent sales agents, the economic relationship between the broker and the agent (including the share of commission income retained by the agent and fees charged to or paid by the agent for services provided by the broker), the location of offices and target markets, the services provided to independent sales agents, the number and nature of competing offices in the vicinity, affiliation with a recognized brand name, community reputation, technology and other factors, including macro-economic factors such as national, regional and local economic conditions.
We and affiliated franchisees compete for consumer business as well as for independent sales agents with national and regional independent real estate brokerages and franchisors, discount and limited service brokerages, and with franchisees of our brands. Our largest national competitors in this industry include, but are not limited to, HomeServices of America (a Berkshire Hathaway affiliate), Howard Hanna Holdings, EXP Realty, Compass and Weichert, Realtors and several large franchisors: RE/MAX International, Inc., Keller Williams Realty, Inc. and HSF Affiliates LLC (a joint venture controlled by HomeServices of America that operates Berkshire Hathaway HomeServices and Real Living Real Estate). We and affiliated franchisees also compete with leading listing aggregators, such as Zillow, Inc. and Realtor.com(R) (a listing aggregator held by News Corporation).
Competition for Independent Sales Agents. The successful recruitment and retention of independent sales agents and independent sales agent teams are critical to the business and financial results of a brokerage—whether or not it is affiliated with a franchisor. Most of a brokerage's real estate listings are sourced through the sphere of influence of its independent sales agents, notwithstanding the growing influence of internet-generated leads. Competition for independent sales agents in our industry is high and has intensified particularly with respect to more productive independent sales agents and in the densely populated metropolitan areas in which we operate. The successful recruitment and retention of independent sales agents is influenced by many factors, including remuneration (such as sales commission percentage and other financial incentives paid to independent sales agents), other expenses borne by independent sales agents, leads or business opportunities generated for independent sales agents from the brokerage, independent sales agents' perception of the value of the broker's brand affiliation, technology and data offerings as well as marketing and advertising efforts by the brokerage or franchisor, the quality of the office manager, staff and fellow independent sales agents with whom they collaborate daily, as well as continuing professional education, and other services provided by the brokerage or franchisor.
We believe that a variety of factors in recent years have negatively impacted the recruitment and retention of independent sales agents in the industry generally and have put upward pressure on the average share of commissions earned by affiliated independent sales agents, including increasing competition, such as from brokerages that offer a greater share of commission income to independent sales agents (and/or other compensation such as up-front bonuses and equity), changes in the spending patterns of independent sales agents (as more agents purchase services from third parties outside of their affiliated broker), and growth in independent sales agent teams. The recruitment and retention of independent sales agents has been and may continue to be further complicated by competitive models that do not prioritize traditional business objectives. For example, we believe that certain owned-brokerage competitors have investors that have historically allowed the pursuit of increases in market share over profitability, which exacerbates competition for independent sales agents and pressure on the share of commission income received by the agent, creating challenges to our and our franchisee’s margins and profitability. Whether and the extent to which this pattern will continue is not yet certain.
Commission Plan Competition Among Real Estate Brokerages.Some of the firms competing for sales agents use different commission plans, which may be appealing to certain sales agents. There are several different commission plan variations that have been historically utilized by real estate brokerages to compensate their independent sales agents. One of the most common variations has been the traditional graduated commission model where the independent sales agent receives a percentage of the brokerage commission that increases as the independent sales agent increases his or her volume of homesale transactions, and the brokerage frequently provides independent sales agents with a broad set of support offerings and promotion of properties. Other common plans include a desk rental or 100% commission plan, a fixed
transaction fee commission plan, and a capped commission plan. A capped commission plan generally blends aspects of the traditional graduated commission model with the 100% commission plan.
Although less common, some real estate brokerages employ their sales agents and, in such instances, employee agents may earn smaller brokerage commissions in exchange for other employee benefits or bonuses. Most brokerages focus primarily on one type of commission plan though some may offer one or more of commission plan variations to their sales agents.
In most of their markets, Realogy Brokerage Group offers affiliated independent sales agents and sales agent teams a choice between a traditional graduated commission model or a two-tiered commission model, both of which emphasize our value proposition.
Low Barriers to Entry and Influx of Traditional and Non-Traditional Competition as well as Industry Disrupters. The real estate brokerage industry has minimal barriers to entry for new participants, including participants utilizing historical real estate brokerage models and those pursuing alternative variations of those models as well as non-traditional methods of marketing real estate. The significant size of the U.S. real estate market, in particular the addressable market of commission revenues, has continued to attract outside capital investment in traditional and disruptive competitors that seek to access a portion of this market.
There are also market participants who differentiate themselves by offering consumers flat fees, rebates or lower commission rates on transactions (often coupled with fewer services). Although such competitors have yet to have a material impact on overall brokerage commission rates, this could change in the future if they use greater discounts as a means to increase their market share or improve their value proposition.
While real estate brokers using historical real estate brokerage models typically compete for business primarily on the basis of services offered, reputation, utilization of technology, personal contacts and brokerage commission, participants pursuing non-traditional methods of marketing real estate may compete in other ways, including companies that employ technologies intended to disrupt historical real estate brokerage models or minimize or eliminate the role brokers and sales agents perform in the homesale transaction process. A growing number of companies are competing in non-traditional ways for a portion of the gross commission income generated by homesale transactions. For example, listing aggregators and other web-based real estate service providers compete for our company owned brokerage business by establishing relationships with independent sales agents and/or buyers and sellers of homes and actions by such listing aggregators have and may continue to put pressure on our and other industry participant's revenues and profitability. Other business models that have emerged in recent years consist of companies (including certain listing aggregators) that leverage capital to purchase homes directly from sellers, commonly referred to as iBuying.
Franchise Competition. According to NAR, approximately 42% of individual brokers and independent sales agents are affiliated with a franchisor. Competition among the national real estate brokerage brand franchisors to grow their franchise systems is intense. We believe that competition for the sale of franchises in the real estate brokerage industry is based principally upon the perceived value that the franchisor provides to enhance the franchisee's ability to grow its business and improve the recruitment, retention and productivity of its independent sales agents. The value provided by a franchisor encompasses many different aspects including the quality of the brand, tools, technology, marketing and other services, the availability of financing provided to the franchisees, and the fees the franchisees must pay. Franchisee fees can be structured in numerous ways and can include flat royalty and marketing fees, capped royalty fees, and discounted royalty and marketing fees. We launched a capped fee model at one of our brands in 2019 as substantially all of our franchises are structured using a flat fee model and we have faced increasing competition from franchisors utilizing alternative models.
Title and Settlement Business. The title and settlement business is highly competitive. The number and size of competing companies vary in the different areas in which we conduct business. In certain parts of the country we compete with small title agents and attorneys while in other parts of the country our competition is the larger title underwriters and national vendor management companies. In addition, we compete with the various brands of national competitors including Fidelity National Title Insurance Company, First American Title Insurance Company, Stewart Title Guaranty Company and Old Republic Title Company.
Government and Other Regulations
RESPA. RESPA, state real estate brokerage laws and similar laws in countries in which we do business restrict payments which real estate brokers, title agencies, mortgage bankers, mortgage brokers and other settlement service providers may receive or pay in connection with the sales of residences and referral of settlement services (e.g., mortgages,
homeowners insurance and title insurance). Such laws may to some extent impose limitations on arrangements involving our real estate franchise, real estate brokerage, settlement services and relocation businesses or the business of our mortgage origination joint venture. In addition, with respect to our company owned real estate brokerage, relocation and title and settlement services businesses as well as our mortgage origination joint venture, RESPA and similar state laws generally require timely disclosure of certain relationships or financial interests with providers of real estate settlement services. Pursuant to the Dodd-Frank Act, the Consumer Financial Protection Bureau (the “CFPB”) administers RESPA. Some state authorities have also asserted enforcement rights.
RESPA and related regulations do, however, contain a number of provisions that allow for payments or fee splits between providers, including fee splits between title underwriters and agents, real estate brokers and agents and market-based fees for the provision of goods or services and marketing arrangements. In addition, RESPA allows for referrals to affiliated entities, including joint ventures, when specific requirements have been met. We rely on these provisions in conducting our business activities and believe our arrangements comply with RESPA. However, RESPA compliance may become a greater challenge under certain administrations for most industry participants offering settlement services, including mortgage companies, title companies and brokerages, because of expansive interpretations of RESPA or similar state statutes by certain courts and regulators. Permissible activities under state statutes similar to RESPA may be interpreted more narrowly and enforcement proceedings of those statutes by state regulatory authorities may also be aggressively pursued. RESPA also has been invoked by plaintiffs in private litigation for various purposes. Some regulators and other parties have advanced novel and stringent interpretations of RESPA including assertions that any provision of a thing of value in a separate, but contemporaneous transaction with a referral constitutes a breach of RESPA on the basis that all things of value exchanged should be deemed in exchange for the referral.
Franchise Regulation. In the U.S., the sale of franchises is regulated by various state laws, as well as by federal law under the jurisdiction of the Federal Trade Commission (the "FTC"). The FTC requires that franchisors make extensive disclosure to prospective franchisees but does not require registration. A number of states require registration and/or disclosure in connection with franchise offers and sales. In addition, several states have "franchise relationship laws" or "business opportunity laws" that limit the ability of franchisors to terminate franchise agreements or to withhold consent to the renewal or transfer of these agreements. The states with relationship or other statutes governing the termination of franchises include Alaska, Arkansas, California, Connecticut, Delaware, Hawaii, Idaho, Illinois, Indiana, Iowa, Kentucky, Maryland, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Jersey, Rhode Island, Virginia, Washington and Wisconsin. Puerto Rico and the Virgin Islands also have statutes governing termination of franchises. Some franchise relationship statutes require a mandated notice period for termination and some require a notice and cure period. In addition, some require that the franchisor demonstrate good cause for termination. These statutes do not have a substantial effect on our operations because our franchise agreements generally comport with the statutory requirements for cause for termination, and they provide notice and cure periods for most defaults. When state law grants a period longer than permitted under the franchise agreement, we extend our notice and/or cure periods to match the statutory requirements. In some states, case law requires a franchisor to renew a franchise agreement unless a franchisee has given cause for non-renewal. Failure to comply with these laws could result in civil liability to the franchisors. While our franchising operations have not been materially adversely affected by such existing regulation, we cannot predict the effect of any future federal or state legislation or regulation. Internationally, many countries have similar laws affecting franchising.
State Brokerage Laws. Our company owned real estate brokerage business is also subject to numerous federal, state and local laws and regulations that contain general standards for and limitations on the conduct of real estate brokers and sales agents, including those relating to the licensing of brokers and sales agents, fiduciary, and agency and statutory duties, consumer disclosure obligations, administration of trust funds, collection of commissions, restrictions on information sharing with affiliates, fair housing standards and advertising and consumer disclosures. Under state law, our company owned real estate brokers have certain duties to supervise and are responsible for the conduct of their brokerage businesses.
Worker Classification. Although the legal relationship between residential real estate brokers and licensed sales agents throughout most of the real estate industry historically has been that of independent contractor, newer rules and interpretations of state and federal employment laws and regulations, including those governing employee classification and wage and hour regulations, may impact industry practices, our company owned brokerage operations and our affiliated franchisees.
Real estate laws generally permit brokers to engage sales agents as independent contractors. Federal and state agencies have their own rules and tests for classification of independent contractors as well as to determine whether employees meet exemptions from minimum wages and overtime laws. These tests consider many factors that also vary from state to state. The tests continue to evolve based on state case law decisions, regulations and legislative changes. There is active worker
classification litigation in numerous jurisdictions against a variety of industries—including residential real estate brokerages—where the plaintiffs seek to reclassify independent contractors as employees or to challenge the use of federal and state minimum wage and overtime exemptions.
For additional information, see Part I, Item 3. Legal Proceedings and for a summary of certain legal proceedings initiated in California involving the Company that include worker misclassification allegations, see Note 15, "Commitments and Contingencies", in this Annual Report.
Multiple Listing Services Rules. We participate in many multiple listing services ("MLS") and are subject to each MLS' rules, policies, data licenses, and terms of service, which specify, among other things, how we may access and use MLS data and listings and how MLS data and listings must be displayed on our and our franchisees' websites and mobile applications. The rules of each MLS to which we belong can vary widely and are complex.
From time to time, certain industry practices, including MLS rules, have come under regulatory scrutiny. For example, in 2008, the Department of Justice ("DOJ") and the FTC entered into a consent decree with NAR related, in part, to the cooperative sharing of entries in traditional MLSs with online-only brokers, which expired in November 2018. In June 2018, the DOJ and the FTC held a joint public workshop to explore competition issues in the residential real estate brokerage industry since the publication of the FTC and DOJ’s 2007 Report on Competition in the Real Estate Brokerage Industry, including the impact of Internet-enabled technologies on the industry and potential barriers to competition.
In the workshop, there were various panels and participants submitted comments that raised a variety of issues, including: whether the current industry practice involving commission sharing by listing brokers was anti-competitive, whether offers of commission sharing—including commission rates—should be public, whether average broker commission rates were too high, whether industry platforms should have free access to listings and concerns around dual agency. There can be no assurances as to whether DOJ or the FTC will determine that any industry practices or developments have an anti-competitive effect on the industry. Any such determination by DOJ or the FTC could result in industry investigations, legislative or regulatory action or other actions, any of which could have the potential to disrupt our business.
For a summary of certain legal proceedings in which NAR, Realogy and other large real estate brokerage companies are named defendants see Note 15, "Commitments and Contingencies—Litigation—Real Estate Litigation", in this Annual Report.
Anti-Discrimination Laws. Our company owned and franchised brokerages, and agents affiliated with such brokerages, as well as our other businesses are subject to federal and state housing laws that generally make it illegal to discriminate against protected classes of individuals in housing or brokerage services. For example, the Fair Housing Act, its state and local law counterparts, and the regulations promulgated by the U.S. Department of Housing and Urban Development and various state agencies, all prohibit discrimination in housing on the basis of race or color, national origin, religion, sex, familial status, disability, and, in some states or locales, financial capability, sexual orientation, gender identity, or military status.
Antitrust and Competition Laws. Our business is subject to antitrust and competition laws in the various jurisdictions where we operate, including the Sherman Antitrust Act, the Federal Trade Commission Act and the Clayton Act and related federal and state antitrust and competition laws in the U.S. The penalties for violating antitrust and competition laws can be severe. These laws and regulations generally prohibit competitors from fixing prices, boycotting competitors, dividing markets, or engaging in other conduct that unreasonably restrains competition. Our company owned and franchised brokerages (and independent sales agents affiliated with such brokerages) are also required to comply with state and local laws related to dual agency (such as where the same brokerage represents both the buyer and seller of a home) and increased regulation of dual agency representation may restrict or reduce the ability of impacted brokerages to participate in certain real estate transactions.
Regulation of Title Insurance and Settlement Services. Nearly all states license and regulate title agencies/settlement service providers or certain employees and underwriters through their Departments of Insurance or other regulatory body. In many states, title insurance rates are either promulgated by the state or are required to be filed with each state by the agent or underwriter, and some states promulgate the split of title insurance premiums between the agent and underwriter. States sometimes unilaterally lower the insurance rates relative to loss experience and other relevant factors. States also require title agencies and title underwriters to meet certain minimum financial requirements for net worth and working capital. In addition, the insurance laws and regulations of Texas, the jurisdiction in which our title insurance underwriter subsidiary, Title Resources, is domiciled, generally provide that no person may acquire control, directly or indirectly, of a Texas domiciled insurer, unless the person has provided required information to, and the acquisition is approved or not
disapproved by, the Texas Department of Insurance. Generally, any person acquiring beneficial ownership of 10% or more of our voting securities would be presumed to have acquired indirect control of our title insurance underwriter subsidiary unless the Texas Department of Insurance, upon application, determines otherwise. Our insurance underwriter is also subject to a holding company act in its state of domicile, which regulates, among other matters, investment policies and the ability to pay dividends.
Certain states in which we operate have "controlled business" statutes which impose limitations on affiliations between providers of title and settlement services on the one hand, and real estate brokers, mortgage lenders and other real estate service providers on the other hand. We are aware of the states imposing such limits and monitor the others to ensure that if they implement such a limit that we will be prepared to comply with any such rule. "Controlled business" typically is defined as sources controlled by, or which control, directly or indirectly, the title insurer or agent. Pursuant to legislation enacted in the State of New York in late 2014 requiring the licensing of title agents, the New York Department of Insurance has issued regulations that provide that title agents with affiliated businesses must make a good faith effort to obtain and be open for title insurance business from all sources and not business only from affiliated persons, including actively competing in the marketplace. A company's failure to comply with such statutes could result in the payment of fines and penalties or the non-renewal of the Company's license to provide title and settlement services. We provide our services not only to our affiliates but also to third-party businesses in the geographic areas in which we operate. Accordingly, we manage our business in a manner to comply with any applicable "controlled business" statutes by ensuring that we generate sufficient business from sources we do not control. We have never been cited for failing to comply with a "controlled business" statute.
Regulation of the Mortgage Industry. We participate in the mortgage origination business through our 49.9% ownership of Guaranteed Rate Affinity. Private mortgage lenders operating in the U.S. are subject to comprehensive state and federal regulation and to significant oversight by government sponsored entities. Dodd-Frank endows the CFPB with rule making, examination and enforcement authority involving consumer financial products and services, including mortgage finance. The CFPB has issued a myriad of rules, including TILA-RESPA Integrated Disclosure rules, which impose significant obligations on Guaranteed Rate Affinity.
Cybersecurity and Data Privacy Regulations. To run our business, it is essential for us to store and transmit sensitive personal information about our customers, prospects, employees, independent agents, and relocation transferees in our systems and networks. At the same time, we are subject to numerous laws, regulations, and other requirements, domestically and globally, that require businesses like ours to protect the security of personal information, notify customers and other individuals about our privacy practices, and limit the use, disclosure, sale, or transfer of personal data. Regulators in the U.S. and abroad continue to enact comprehensive new laws or legislative reforms imposing significant privacy and cybersecurity restrictions. The result is that we are subject to increased regulatory scrutiny, additional contractual requirements from corporate customers, and heightened compliance costs. For example, in the U.S., we are required to comply with the Gramm-Leach-Bliley Act, which governs the disclosure and safeguarding of consumer financial information, as well as state statutes governing privacy and cybersecurity matters like the New York Department of Financial Services ("NYDFS") Cybersecurity Regulation, which went into effect in 2017, and the California Consumer Privacy Act ("CCPA"), which went into effect in 2020. The CCPA imposes new and comprehensive requirements on organizations that collect, sell and disclose personal information about California residents and employees. Other states, including New York and Massachusetts, are expected to implement their own privacy statutes in the near term.
Under the NYDFS cybersecurity regulation, regulated financial institutions, including Realogy Title Group, are required to establish a detailed cybersecurity program. Program requirements include corporate governance, incident planning, data management, system testing, vendor oversight, and regulator notification rules. Other state regulatory agencies have or are expected to enact similar requirements following the adoption of the Insurance Data Security Model Law by the National Association of Insurance Commissioners that is consistent with the New York regulation. For example, the South Carolina Insurance Data Security Act, effective January 1, 2019, is based on the Insurance Data Security Model Law and imposes new breach notification and information security requirements on insurers, agents, and other licensed entities authorized to operate under the state’s insurance laws, including Realogy Title Group. Finally, our security systems and IT infrastructure may not adequately protect against all potential security breaches, cyb