10-Q 1 form10q.htm FORM 10-Q Realogy Q2 6.30.2013
______________________________________________________________________________________________________________________________________________________________________

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________ 
FORM 10-Q
þ     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2013
OR
¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File No. 001-35674
REALOGY HOLDINGS CORP
(Exact name of registrant as specified in its charter)
20-8050955
(I.R.S. Employer Identification Number)
Commission File No. 333-179896
REALOGY GROUP LLC
(Exact name of registrant as specified in its charter)
20-4381990
(I.R.S. Employer Identification Number)
Delaware
(State or other jurisdiction of incorporation or organization)
175 Park Avenue
Madison, NJ 07940
(Address of principal executive offices) (Zip Code)
(973) 407-2000
(Registrants' telephone number, including area code)
___________________________ 
Indicate by check mark whether the Registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.  
Realogy Holdings Corp. Yes þ  No ¨ Realogy Group LLC Yes ¨  No þ
Indicate by check mark whether the Registrants have submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrants were required to submit and post such files). 
Realogy Holdings Corp. Yes þ  No ¨ Realogy Group LLC Yes þ  No ¨
Indicate by check mark whether the Registrants are large accelerated filers, accelerated filers, non-accelerated filers, or smaller reporting companies. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
Accelerated filer
 
Non-accelerated filer
 
Smaller reporting company
 
 
 
 
(Do not check if a smaller reporting company)
 
Realogy Holdings Corp.
¨
 
¨
 
þ
 
¨
Realogy Group LLC
¨
 
¨
 
þ
 
¨
Indicate by check mark whether the Registrants are a shell company (as defined in Rule 12b-2 of the Exchange Act).  
Realogy Holdings Corp. Yes ¨  No þ Realogy Group LLC Yes ¨  No þ
There were 146,023,699 shares of Common Stock, $0.01 par value, of Realogy Holdings Corp. outstanding as of July 31, 2013.
______________________________________________________________________________________________________________________________________________________________________



TABLE OF CONTENTS
 
 
Page
 
 
 
PART I
FINANCIAL INFORMATION
 
Item 1.
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II
Item 1.
Item 2.
Item 5.
Item 6.





INTRODUCTORY NOTE
Except as otherwise indicated or unless the context otherwise requires, the terms “we,” “us,” “our,” “our company,” "Realogy," "Realogy Holdings" and the “Company” refer to Realogy Holdings Corp., a Delaware corporation, and its consolidated subsidiaries, including Realogy Intermediate Holdings LLC, a Delaware limited liability company (“Realogy Intermediate”), and Realogy Group LLC, a Delaware limited liability company (“Realogy Group”). Neither Realogy Holdings, the indirect parent of Realogy Group, nor Realogy Intermediate, the direct parent company of Realogy Group, conducts any operations other than with respect to its respective direct or indirect ownership of Realogy Group. As a result, the consolidated financial positions, results of operations and cash flows of Realogy Holdings, Realogy Intermediate and Realogy Group are the same.
Realogy Holdings is not a party to the senior secured credit facility and certain references in this report to our consolidated indebtedness exclude Realogy Holdings with respect to indebtedness under the senior secured credit facility. In addition, while Realogy Holdings is a guarantor of Realogy Group's obligations under its secured and unsecured notes, Realogy Holdings is not subject to the restrictive covenants in the indentures governing such indebtedness.

1


FORWARD-LOOKING STATEMENTS
Forward-looking statements included in this report and our other public filings or other public statements that we make from time to time are based on various facts and derived utilizing numerous important assumptions and are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements include the information concerning our future financial performance, business strategy, projected plans and objectives, as well as projections of macroeconomic and industry trends, which are inherently unreliable due to the multiple factors that impact economic trends, and any such variations may be material. Statements preceded by, followed by or that otherwise include the words "believes," "expects," "anticipates," "intends," "projects," "estimates," "plans," and similar expressions or future or conditional verbs such as "will," "should," "would," "may" and "could" are generally forward-looking in nature and not historical facts. You should understand that the following important factors could affect our future results and cause actual results to differ materially from those expressed in the forward-looking statements:
risks related to general business, economic, employment and political conditions and the U.S. residential real estate markets, either regionally or nationally, including but not limited to:
a lack of improvement in the number of homesales, stagnant or declining home prices and/or a deterioration in other economic factors that particularly impact the residential real estate market and the business segments in which we operate;
a lack of improvement in consumer confidence;
the impact of recessions, slow economic growth, disruptions in the banking system and high levels of unemployment in the U.S. and abroad;
increasing mortgage rates and down payment requirements and/or constraints on the availability of mortgage financing, including but not limited to the potential impact of changes in the policies and programs of the Federal Reserve Board, various provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and regulations that may be promulgated thereunder relating to mortgage financing as well as other factors that tighten underwriting standards;
legislative, tax or regulatory changes that would adversely impact the residential real estate market, including potential reforms of the Federal National Mortgage Association ("Fannie Mae"), the Federal Home Loan Mortgage Corporation (“Freddie Mac") and the Federal Housing Administration, and potential tax code reform, which could reduce the amount that taxpayers would be allowed to deduct for home mortgage interest;
negative trends and/or a negative perception of the market trends in value for residential real estate;
renewed high levels of foreclosure activity including but not limited to the release of homes already held for sale by financial institutions;
insufficient or excessive regional home inventory levels;
the inability or unwillingness of homeowners to enter into homesale transactions due to negative equity in their existing homes; and
lower homeownership rates or failure of homeownership rates to return to more typical levels;
our geographic and high-end market concentration, particularly with respect to our company owned brokerage operations;
our inability to enter into franchise agreements with new franchisees or to realize royalty revenue growth from them;
our inability to renew existing franchise agreements or maintain franchisee satisfaction with our brands;
existing franchisees may incur operating losses if sales volume decreases which may impede their ability to grow or continue operations.  Additionally, debt incurred by our franchisees during the downturn may hinder long-term growth and their ability to pay back indebtedness;
disputes or issues with entities that license us their trade names for use in our business that could impede our franchising of those brands;
actions by our franchisees that could harm our business or reputation, non-performance of our franchisees, controversies with our franchisees or actions against us by third parties with which our franchisees have business relationships;

2


competition in our existing and future lines of business whether through traditional competitors or competitors with alternative business models;
our failure to comply with laws, regulations and regulatory interpretations and any changes in laws, regulations and regulatory interpretations;
seasonal fluctuations in the residential real estate brokerage business which could adversely affect our business, financial condition and liquidity;
the loss of any of our senior management or key managers or employees or other significant labor or employment issues;
the failure or significant disruption of business from various causes related to our critical information technologies and systems;
adverse effects of natural disasters or environmental catastrophes;
risks related to our international operations;
risks associated with our substantial indebtedness and interest obligations, including risks related to having to dedicate a substantial portion of our cash flows from operations to service our debt, risks related to our ability to refinance our indebtedness and to incur additional indebtedness, risks associated with our ability to comply with our senior secured leverage ratio covenant under our senior secured credit facility, interest rate risk, and risks related to an event of default under our outstanding indebtedness;
changes in corporate relocation practices resulting in fewer employee relocations or reduced relocation benefits;
an increase in the claims rate of our title underwriter;
our inability to securitize certain assets of our relocation business, which would require us to find an alternative source of liquidity that may not be available, or if available, may not be on favorable terms;
limitations on flexibility in operating our business due to restrictions contained in our debt agreements;
risks that could materially adversely impact our equity investment in PHH Home Loans LLC, our joint venture with PHH Corporation, including increases in mortgage interest rates, decreases in operating margins, and the impact of regulatory changes, litigation, investigations and inquiries;
any remaining resolutions or outcomes with respect to Cendant's contingent liabilities under the Separation and Distribution Agreement and the Tax Sharing Agreement, including any adverse impact on our future cash flows;
any adverse resolution of litigation, governmental proceedings or arbitration awards; and
new types of taxes or increases in state, local or federal taxes that could diminish profitability or liquidity.
Other factors not identified above, including those described under the headings “Forward-Looking Statements,” “Risk Factors” and “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2012 (the “2012 Form 10-K”), filed with the Securities and Exchange Commission (“SEC”), may also cause actual results to differ materially from those described in our forward-looking statements. Most of these factors are difficult to anticipate and are generally beyond our control. You should consider these factors in connection with considering any forward-looking statements that may be made by us and our businesses generally.
Except for our ongoing obligations to disclose material information under the federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events unless we are required to do so by law. For any forward-looking statement contained in 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.

3


PART I - FINANCIAL INFORMATION
Item 1.    Financial Statements.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Realogy Holdings Corp.:
We have reviewed the accompanying condensed consolidated balance sheet of Realogy Holdings Corp. and its subsidiaries as of June 30, 2013, and the related condensed consolidated statements of operations and comprehensive income (loss) for the three and six-month periods ended June 30, 2013 and June 30, 2012 and the condensed consolidated statements of cash flows for the six-month periods ended June 30, 2013 and June 30, 2012. These interim financial statements are the responsibility of the Company's management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

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

We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2012, and the related consolidated statements of operations, comprehensive loss, equity (deficit), and cash flows for the year then ended (not presented herein), and in our report dated February 25, 2013, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2012, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.


/s/ PricewaterhouseCoopers LLP
Florham Park, New Jersey
August 2, 2013




4


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholder of Realogy Group LLC:
We have reviewed the accompanying condensed consolidated balance sheet of Realogy Group LLC and its subsidiaries as of June 30, 2013, and the related condensed consolidated statements of operations and comprehensive income (loss) for the three and six-month periods ended June 30, 2013 and June 30, 2012 and the condensed consolidated statements of cash flows for the six-month periods ended June 30, 2013 and June 30, 2012. These interim financial statements are the responsibility of the Company's management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

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

We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2012, and the related consolidated statements of operations, comprehensive loss, equity (deficit), and cash flows for the year then ended (not presented herein), and in our report dated February 25, 2013, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2012, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.


/s/ PricewaterhouseCoopers LLP
Florham Park, New Jersey
August 2, 2013


5


REALOGY HOLDINGS CORP. AND REALOGY GROUP LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
Revenues
 
 
 
 
 
 
 
Gross commission income
$
1,169

 
$
983

 
$
1,845

 
$
1,589

Service revenue
233

 
208

 
416

 
380

Franchise fees
91

 
76

 
148

 
130

Other
40

 
42

 
81

 
85

Net revenues
1,533

 
1,309

 
2,490

 
2,184

Expenses
 
 
 
 
 
 
 
Commission and other agent-related costs
800

 
662

 
1,254

 
1,064

Operating
353

 
325

 
680

 
643

Marketing
49

 
52

 
99

 
103

General and administrative
93

 
79

 
160

 
156

Former parent legacy costs (benefit), net
(2
)
 

 
(1
)
 
(3
)
Restructuring costs
4

 
2

 
4

 
5

Depreciation and amortization
44

 
44

 
86

 
89

Interest expense, net
67

 
176

 
156

 
346

Loss on the early extinguishment of debt
43

 

 
46

 
6

Other (income)/expense, net

 

 

 
1

Total expenses
1,451

 
1,340

 
2,484

 
2,410

Income (loss) before income taxes, equity in earnings and noncontrolling interests
82

 
(31
)
 
6

 
(226
)
Income tax expense
9

 
8

 
16

 
15

Equity in earnings of unconsolidated entities
(13
)
 
(15
)
 
(22
)
 
(25
)
Net income (loss)
86

 
(24
)
 
12

 
(216
)
Less: Net income attributable to noncontrolling interests
(2
)
 
(1
)
 
(3
)
 
(1
)
Net income (loss) attributable to Realogy Holdings and Realogy Group
$
84

 
$
(25
)
 
$
9

 
$
(217
)
 
 
 
 
 
 
 
 
Earnings (loss) per share attributable to Realogy Holdings:
 
 
 
 
 
 
 
Basic earnings (loss) per share:
$
0.58

 
$
(3.12
)
 
$
0.06

 
$
(27.07
)
Diluted earnings (loss) per share:
$
0.57

 
$
(3.12
)
 
$
0.06

 
$
(27.07
)
Weighted average common and common equivalent shares of Realogy Holdings outstanding:
Basic:
145.4

 
8.0

 
145.2

 
8.0

Diluted:
146.6

 
8.0

 
146.4

 
8.0




See Notes to Condensed Consolidated Financial Statements.
6


REALOGY HOLDINGS CORP. AND REALOGY GROUP LLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
Net income (loss)
$
86

 
$
(24
)
 
$
12

 
$
(216
)
Currency translation adjustment
(1
)
 
(1
)
 
(4
)
 
1

Defined benefit pension plan - amortization of actuarial loss to periodic pension cost
1

 
2

 
1

 
3

Other comprehensive income (loss), before tax

 
1

 
(3
)
 
4

Income tax expense related to other comprehensive income (loss) amounts

 

 

 
1

Other comprehensive income (loss), net of tax

 
1

 
(3
)
 
3

Comprehensive income (loss)
86

 
(23
)
 
9

 
(213
)
Less: comprehensive income attributable to noncontrolling interests
(2
)
 
(1
)
 
(3
)
 
(1
)
Comprehensive income (loss) attributable to Realogy Holdings and Realogy Group
$
84

 
$
(24
)
 
$
6

 
$
(214
)



See Notes to Condensed Consolidated Financial Statements.
7


REALOGY HOLDINGS CORP. AND REALOGY GROUP LLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
(Unaudited)
 
June 30,
2013
 
December 31, 2012
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
187

 
$
376

Trade receivables (net of allowance for doubtful accounts of $44 and $51)
134

 
122

Relocation receivables
406

 
324

Relocation properties held for sale
7

 
9

Deferred income taxes
52

 
54

Other current assets
93

 
93

Total current assets
879

 
978

Property and equipment, net
187

 
188

Goodwill
3,308

 
3,304

Trademarks
732

 
732

Franchise agreements, net
1,596

 
1,629

Other intangibles, net
382

 
399

Other non-current assets
215

 
215

Total assets
$
7,299

 
$
7,445

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
207

 
$
148

Securitization obligations
260

 
261

Due to former parent
67

 
69

Revolving credit facilities and current portion of long-term debt
161

 
110

Accrued expenses and other current liabilities
402

 
427

Total current liabilities
1,097

 
1,015

Long-term debt
3,995

 
4,256

Deferred income taxes
453

 
444

Other non-current liabilities
208

 
211

Total liabilities
5,753

 
5,926

Commitments and contingencies (Notes 8 and 10)


 


Equity:
 
 
 
Realogy Holdings preferred stock: $.01 par value; 50,000,000 shares authorized, none issued and outstanding at June 30, 2013 and December 31, 2012.

 

Realogy Holdings common stock: $.01 par value; 400,000,000 shares authorized, 145,787,068 shares outstanding at June 30, 2013 and 145,369,453 shares outstanding at December 31, 2012.
1

 
1

Additional paid-in capital
5,613

 
5,591

Accumulated deficit
(4,036
)
 
(4,045
)
Accumulated other comprehensive loss
(34
)
 
(31
)
Total stockholders' equity
1,544

 
1,516

Noncontrolling interests
2

 
3

Total equity
1,546

 
1,519

Total liabilities and equity
$
7,299

 
$
7,445


See Notes to Condensed Consolidated Financial Statements.
8


REALOGY HOLDINGS CORP. AND REALOGY GROUP LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
Six Months Ended June 30,
 
2013
 
2012
Operating Activities
 
 
 
Net income (loss)
$
12

 
$
(216
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
86

 
89

Deferred income taxes
10

 
12

Amortization of deferred financing costs and discount on unsecured notes
7

 
8

Non-cash portion of the loss on the early extinguishment of debt
10

 
6

Equity in earnings of unconsolidated entities
(22
)
 
(25
)
Stock-based compensation
32

 
2

Other adjustments to net income (loss)
(7
)
 
4

Net change in assets and liabilities, excluding the impact of acquisitions and dispositions:
 
 
 
Trade receivables
(14
)
 
(27
)
Relocation receivables and advances
(83
)
 
(41
)
Relocation properties held for sale
3

 
2

Other assets
2

 
1

Accounts payable, accrued expenses and other liabilities
39

 
82

Due (to) from former parent
(1
)
 
(5
)
Dividends received from unconsolidated entities
36

 
15

Taxes paid related to the net share settlement for stock based compensation
(12
)
 

Net cash provided by (used in) operating activities
98

 
(93
)
Investing Activities
 
 
 
Property and equipment additions
(22
)
 
(19
)
Net assets acquired (net of cash acquired) and acquisition-related payments
(3
)
 
(4
)
Change in restricted cash
(1
)
 
(3
)
Other, net
(3
)
 
(4
)
Net cash used in investing activities
(29
)
 
(30
)
Financing Activities
 
 
 
Net change in revolving credit facilities
32

 
(94
)
Proceeds from amended term loan facility
79

 

Repayments of term loan credit facility
(5
)
 
(640
)
Proceeds from issuance of First Lien Notes

 
593

Proceeds from issuance of First and a Half Lien Notes

 
325

Proceeds from issuance of Senior Notes
500

 

Redemption of Senior Notes and Senior Subordinated Notes
(821
)
 

Net change in securitization obligations
1

 
(61
)
Debt issuance costs
(28
)
 
(3
)
Proceeds from issuance of common stock for stock options
1

 

Other, net
(16
)
 
(2
)
Net cash (used in) provided by financing activities
(257
)
 
118

Effect of changes in exchange rates on cash and cash equivalents
(1
)
 

Net decrease in cash and cash equivalents
(189
)
 
(5
)
Cash and cash equivalents, beginning of period
376

 
143

Cash and cash equivalents, end of period
$
187

 
$
138

 
 
 
 
Supplemental Disclosure of Cash Flow Information
 
 
 
Interest payments (including securitization interest expense)
$
178

 
$
320

Income tax payments, net
7

 
4


See Notes to Condensed Consolidated Financial Statements.
9


REALOGY HOLDINGS CORP. AND REALOGY GROUP LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise noted, all amounts are in millions)
(Unaudited)
1.
BASIS OF PRESENTATION
Realogy Holdings Corp. (“Realogy Holdings”, "Realogy" or the "Company") is a holding company for its consolidated subsidiaries including Realogy Intermediate Holdings LLC (“Realogy Intermediate”) and Realogy Group LLC (“Realogy Group”). Neither Realogy Holdings, the indirect parent of Realogy Group, nor 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 was incorporated on December 14, 2006. On April 10, 2007, Realogy Holdings, then wholly owned by investment funds affiliated with, or co-investment vehicles managed by, Apollo Management VI, L.P., an entity affiliated with Apollo Management, L.P. (collectively referred to as “Apollo”), acquired the outstanding shares of Realogy Group (then known as Realogy Corporation, a Delaware corporation) pursuant to a merger of its wholly owned subsidiary Domus Acquisition Corp., with and into Realogy Group (the “Merger”) with Realogy Holdings becoming the indirect parent company of Realogy Group. Prior to the consummation of the Realogy Holdings' initial public offering and related transactions in October 2012, Realogy Holdings was owned by Apollo and members of the Company’s management.
On April 16, 2013, Apollo sold 40.25 million shares of Realogy Holdings' common stock at $44.00 per share in a public offering, leaving a balance of 25.13 million shares beneficially owned by Apollo, which as of June 30, 2013, represented approximately 17% of the outstanding shares of Realogy Holdings. On July 16, 2013, Apollo sold its remaining 25.13 million shares of Realogy Holdings' common stock at $47.57 per share in a public offering. See Note 12, "Subsequent Events" for additional information.
Realogy is a global provider of residential real estate services. Realogy Group (then Realogy Corporation) was incorporated in January 2006 to facilitate a plan by Cendant Corporation (now known as Avis Budget Group, Inc.) to separate into four independent companies—one for each of Cendant's business units—real estate services or Realogy, travel distribution services (“Travelport”), hospitality services, including timeshare resorts (“Wyndham Worldwide”), and vehicle rental (“Avis Budget Group”). On July 31, 2006, the separation (“Separation”) from Cendant became effective.
The accompanying Condensed Consolidated Financial Statements include the financial statements of Realogy Holdings and Realogy Group. Realogy Holdings' only asset is its investment in the common stock of Intermediate, and Intermediate's only asset is its investment in Realogy Group. Realogy Holdings' only obligations are its guarantees of certain borrowings and certain franchise obligations of Realogy Group. All expenses incurred by Realogy Holdings and Intermediate are for the benefit of Realogy Group and have been reflected in Realogy Group's consolidated financial statements. The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America and with Article 10 of Regulation S-X. Interim results may not be indicative of full year performance because of seasonal and short-term variations. The Company has eliminated all material intercompany transactions and balances between entities consolidated in these financial statements. In presenting the Condensed Consolidated Financial Statements, management makes estimates and assumptions that affect the amounts reported and the related disclosures. Estimates, by their nature, are based on judgment and available information. Accordingly, actual results could differ materially from those estimates.
In management's opinion, the accompanying Condensed Consolidated Financial Statements reflect all normal and recurring adjustments necessary to present fairly the Realogy Holdings and Realogy Group' financial position as of June 30, 2013 and the results of operations and comprehensive income (loss) for the three and six months ended June 30, 2013 and 2012 and cash flows for the six months ended June 30, 2013 and 2012.
As the interim Condensed Consolidated Financial Statements are prepared using the same accounting principles and policies used to prepare the annual financial statements, they should be read in conjunction with the Consolidated Financial Statements for the year ended December 31, 2012 included in the Annual Report on Form 10-K for the year ended December 31, 2012.

10


Financial Instruments
The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value.
Level Input:
 
Input Definitions:
 
 
 
Level I
 
Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.
 
 
Level II
 
Inputs other than quoted prices included in Level I that are observable for the asset or liability through corroboration with market data at the measurement date.
 
 
Level III
 
Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.
The availability of observable inputs can vary from asset to asset and is affected by a wide variety of factors, including, for example, the type of asset, whether the asset is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level III. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy.  In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
The fair value of financial instruments is generally determined by reference to quoted market values. In cases where quoted market prices are not available, fair value is based on estimates using present value or other valuation techniques, as appropriate. The fair value of interest rate swaps is determined based upon a discounted cash flow approach.
The following table summarizes fair value measurements by level at June 30, 2013 for assets/liabilities measured at fair value on a recurring basis:
 
Level I
 
Level II
 
Level III
 
Total
Interest rate swaps (included in other non-current liabilities)
$

 
$
19

 
$

 
$
19

Deferred compensation plan assets
(included in other non-current assets)
1

 

 

 
1

The following table summarizes fair value measurements by level at December 31, 2012 for assets/liabilities measured at fair value on a recurring basis:
 
Level I
 
Level II
 
Level III
 
Total
Interest rate swaps (included in other non-current liabilities)
$

 
$
29

 
$

 
$
29

Deferred compensation plan assets
(included in other non-current assets)
1

 

 

 
1


11


The following table summarizes the carrying amount of the Company’s indebtedness compared to the estimated fair value, primarily determined by quoted market values, at:
 
June 30, 2013
 
December 31, 2012
Debt
Carrying
Amount
 
Estimated
Fair Value (a)
 
Carrying
Amount
 
Estimated
Fair Value (a)
Senior Secured Credit Facility:
 
 
 
 
 
 
 
Revolving credit facility
$
140

 
$
140

 
$
110

 
$
110

Term loan facility
1,896

 
1,892

 
1,822

 
1,831

7.625% First Lien Notes
593

 
645

 
593

 
673

7.875% First and a Half Lien Notes
700

 
740

 
700

 
763

9.00% First and a Half Lien Notes
325

 
362

 
325

 
366

Other bank indebtedness
2

 
2

 

 

3.375% Senior Notes
500

 
484

 

 

11.50% Senior Notes

 

 
489

 
527

12.00% Senior Notes

 

 
129

 
140

12.375% Senior Subordinated Notes

 

 
188

 
192

13.375% Senior Subordinated Notes

 

 
10

 
11

Securitization obligations
260

 
260

 
261

 
261

_______________
(a)
The fair value of the Company's indebtedness is categorized as Level I.
Income Taxes
Income tax expense for the six months ended June 30, 2013 was $16 million.  This expense included $13 million for an increase in deferred tax liabilities associated with indefinite-lived intangible assets and $3 million was recognized for foreign and state income taxes for certain jurisdictions. The Company's provision for income taxes in interim periods is computed by applying its estimated annual effective tax rate against the income (loss) before income taxes for the period.  In addition, non-recurring or discrete items, including the increase in deferred tax liabilities associated with indefinite-lived intangibles, are recorded during the period in which they occur.  No federal income tax expense was recognized for the current period due to the recognition of a full valuation allowance for domestic operations. 
Management will continue to evaluate all available evidence, both positive and negative, to determine when it will be appropriate to release the valuation allowance for our domestic operations. The evidence we are considering includes the historical operating losses of the Company, the reduction in indebtedness and related interest expense as a result of the Company's initial public offering in late 2012 and the note redemptions in early 2013, as well as the ongoing recovery in the residential real estate market.
Derivative Instruments
The Company uses foreign currency forward contracts largely to manage its exposure to changes in foreign currency exchange rates associated with its foreign currency denominated receivables and payables.  The Company primarily manages its foreign currency exposure to the Euro, Canadian Dollar, Swiss Franc and British Pound. The Company has elected not to utilize hedge accounting for these forward contracts; therefore, any change in fair value is recorded in the Consolidated Statements of Operations. However, the fluctuations in the value of these forward contracts generally offset the impact of changes in the value of the underlying risk that they are intended to economically hedge. As of June 30, 2013, the Company had outstanding foreign currency forward contracts with a fair value of less than $1 million and a notional value of $21 million. As of December 31, 2012, the Company had outstanding foreign currency forward contracts with a fair value of less than $1 million and a notional value of $28 million.
The Company also enters into interest rate swaps to manage its exposure to changes in interest rates associated with its variable rate borrowings. The Company has two interest rate swaps with an aggregate notional value of $425 million to hedge the variability in cash flows resulting from the term loan facility. The first swap, with a notional value of $225 million, commenced in July 2012 and expires in February 2018 and the second swap, with a notional value of $200 million, commenced in January 2013 and expires in February 2018. The Company is utilizing pay fixed interest swaps (in exchange for floating LIBOR rate based payments) to perform this hedging strategy. The Company has elected not to utilize hedge

12


accounting for these interest rate swaps; therefore, any change in fair value is recorded in the Consolidated Statements of Operations.
The fair value of derivative instruments was as follows:
Liability Derivatives
 
Fair Value
Not Designated as Hedging Instruments
 
Balance Sheet Location
 
June 30, 2013
 
December 31, 2012
Interest rate swap contracts
 
Other non-current liabilities
 
$
19

 
$
29

The effect of derivative instruments on earnings is as follows:
Derivative Instruments Not
Designated as Hedging Instruments
 
Location of (Gain) or Loss Recognized
for Derivative Instruments
 
(Gain) or Loss Recognized on Derivatives
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Interest rate swap contracts
 
Interest expense
 
$
(8
)
 
$
7

 
$
(6
)
 
$
10

Foreign exchange contracts
 
Operating expense
 
$

 
$
(1
)
 
$
(1
)
 
$

Restricted Cash
Restricted cash primarily relates to amounts specifically designated as collateral for the repayment of outstanding borrowings under the Company’s securitization facilities. Such amounts approximated $10 million and $9 million at June 30, 2013 and December 31, 2012, respectively and are primarily included within Other current assets on the Company’s Condensed Consolidated Balance Sheets.
Supplemental Cash Flow Information
Significant non-cash transactions for the six months ended June 30, 2013 included the issuance of common stock of $13 million for stock-based compensation. In addition, during the six months ended June 30, 2013, the Company recorded $7 million in capital lease additions and $6 million in tenant improvements primarily related to the new corporate headquarters, both of which resulted in non-cash accruals to fixed assets and other long-term liabilities.
Defined Benefit Pension Plan
The net periodic pension cost for the three months ended June 30, 2013 was less than $1 million and was comprised of interest cost and amortization of actuarial loss of $2 million offset by a benefit of $2 million for the expected return on assets. The net periodic pension cost for the three months ended June 30, 2012 was $1 million and was comprised of interest cost and amortization of actuarial loss of $3 million offset by a benefit of $2 million for the expected return on assets.
The net periodic pension cost for the six months ended June 30, 2013 was less than $1 million and was comprised of interest cost and amortization of actuarial loss of $4 million offset by a benefit of $4 million for the expected return on assets. The net periodic pension cost for the six months ended June 30, 2012 was $3 million and was comprised of interest cost and amortization of actuarial loss of $6 million offset by a benefit of $3 million for the expected return on assets.
Reclassifications from Accumulated Other Comprehensive Income
The Company adopted FASB's amended guidance for comprehensive income, which requires new footnote disclosures related to reclassifications out of accumulated other comprehensive income to net income. These reclassifications include the amortization of actuarial loss to periodic pension cost of $1 million and $1 million for the three and six months ended June 30, 2013, respectively, and $2 million and $3 million for the three and six months ended June 30, 2012, respectively. These amounts were reclassified from accumulated other comprehensive income to the general and administrative expenses line on the statement of operations.
Recently Adopted Accounting Pronouncements
In July 2012, the FASB amended the guidance on impairment testing for indefinite-lived intangible assets that allows an entity to elect to qualitatively assess whether it is necessary to perform the current two step impairment test. If the qualitative assessment determines that it is not more-likely-than-not that the fair value of the indefinite-lived intangible asset is less than its carrying amount, then performing the two step test is unnecessary. If the entity elects to bypass the qualitative assessment for any indefinite-lived intangible asset and proceed directly to Step One of the test and validate the

13


conclusion by measuring fair value, it can resume performing the qualitative assessment in any subsequent period. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, however early adoption is permitted. The Company will consider utilizing the new qualitative analysis for its annual impairment test to be performed in the fourth quarter of 2013.
In February 2013, the FASB amended guidance requiring new footnote disclosures related to reclassifications out of accumulated other comprehensive income to net income. Companies are required to present either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by reclassification. A company would not need to show the income statement line item affected for certain components that are not required to be reclassified in their entirety to net income. If the component is not required to be reclassified to net income it its entirety, companies would instead cross reference that amount to the related footnote where additional details about the effect of the reclassification are disclosed. The Company disclosed the reclassifications for the three and six months ended June 30, 2013 and 2012.
2.
ACQUISITIONS
2013 ACQUISITIONS
During the six months ended June 30, 2013, the Company acquired five real estate brokerage operations through its wholly owned subsidiary, NRT, for cash consideration of $3 million and established $2 million of liabilities related to contingent consideration. These acquisitions resulted in goodwill of $4 million that was assigned to the Company Owned Brokerage Services segment.
None of the 2013 acquisitions were significant to the Company’s results of operations, financial position or cash flows individually or in the aggregate.
2012 ACQUISITIONS
During the year ended December 31, 2012, the Company acquired seven real estate brokerage operations through its wholly owned subsidiary, NRT, for cash consideration of $3 million and established $2 million of liabilities related to contingent consideration. These acquisitions resulted in goodwill of $5 million that was assigned to the Company Owned Brokerage Services segment.
None of the 2012 acquisitions were significant to the Company’s results of operations, financial position or cash flows individually or in the aggregate.
3.
INTANGIBLE ASSETS
Goodwill by segment and changes in the carrying amount are as follows:
 
Real Estate
Franchise
Services
 
Company
Owned
Brokerage
Services
 
Relocation
Services
 
Title and
Settlement
Services
 
Total
Company
Gross Goodwill as of December 31, 2012
$
3,264

 
$
788

 
$
641

 
$
397

 
$
5,090

Accumulated impairment losses
(1,023
)
 
(158
)
 
(281
)
 
(324
)
 
(1,786
)
Balance at December 31, 2012
2,241

 
630

 
360

 
73

 
3,304

Goodwill acquired

 
4

 

 

 
4

Balance at June 30, 2013
$
2,241

 
$
634

 
$
360

 
$
73

 
$
3,308


14


Intangible assets are as follows:
 
As of June 30, 2013
 
As of December 31, 2012
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Amortizable—Franchise agreements (a)
$
2,019

 
$
423

 
$
1,596

 
$
2,019

 
$
390

 
$
1,629

Unamortizable—Trademarks (b)
$
732

 
 
 
$
732

 
$
732

 
 
 
$
732

Other Intangibles
 
 
 
 
 
 
 
 
 
 
 
Amortizable—License agreements (c)
$
45

 
$
6

 
$
39

 
$
45

 
$
5

 
$
40

Amortizable—Customer relationships (d)
529

 
200

 
329

 
529

 
182

 
347

Unamortizable—Title plant shares (e)
10

 
 
 
10

 
10

 
 
 
10

Amortizable—Other (f) 
9

 
5

 
4

 
6

 
4

 
2

Total Other Intangibles
$
593

 
$
211

 
$
382

 
$
590

 
$
191

 
$
399

_______________
(a)    Generally amortized over a period of 30 years.
(b)
Relates to the Century 21, Coldwell Banker, ERA, The Corcoran Group, Coldwell Banker Commercial and Cartus tradenames, which are expected to generate future cash flows for an indefinite period of time.
(c)
Relates to the Sotheby’s International Realty and Better Homes and Gardens Real Estate agreements which are being amortized over 50 years (the contractual term of the license agreements).
(d)
Relates to the customer relationships at the Title and Settlement Services segment and the Relocation Services segment. These relationships are being amortized over a period of 5 to 20 years.
(e)
Primarily related to the Texas American Title Company title plant shares. Ownership in a title plant is required to transact title insurance in certain states. The Company expects to generate future cash flows for an indefinite period of time.
(f)
Generally amortized over periods ranging from 2 to 10 years.
Intangible asset amortization expense is as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Franchise agreements
$
17

 
$
17

 
$
33

 
$
34

License agreement
1

 

 
1

 
1

Customer relationships
9

 
9

 
18

 
19

Other
1

 

 
1

 
2

Total
$
28

 
$
26

 
$
53

 
$
56

Based on the Company’s amortizable intangible assets as of June 30, 2013, the Company expects related amortization expense for the remainder of 2013, the four succeeding years and thereafter to approximate $54 million, $106 million, $95 million, $95 million, $91 million and $1,527 million, respectively.
4.
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of:
 
June 30, 2013
 
December 31, 2012
Accrued payroll and related employee costs
$
93

 
$
80

Accrued volume incentives
19

 
22

Accrued commissions
24

 
22

Restructuring accruals
8

 
11

Deferred income
68

 
69

Accrued interest
70

 
87

Other
120

 
136

 
$
402

 
$
427


15


5.    SHORT AND LONG-TERM DEBT
Total indebtedness is as follows:
 
June 30, 2013
 
December 31, 2012
Senior Secured Credit Facility:
 
 
 
Revolving credit facility
$
140

 
$
110

Term loan facility
1,896

 
1,822

7.625% First Lien Notes
593

 
593

7.875% First and a Half Lien Notes
700

 
700

9.00% First and a Half Lien Notes
325

 
325

Other bank indebtedness
2

 

3.375% Senior Notes
500

 

11.50% Senior Notes

 
489

12.00% Senior Notes

 
129

12.375% Senior Subordinated Notes

 
188

13.375% Senior Subordinated Notes

 
10

Securitization Obligations:
 
 
 
Apple Ridge Funding LLC
234

 
235

Cartus Financing Limited
26

 
26

 
$
4,416

 
$
4,627

Indebtedness Table
As of June 30, 2013, the total capacity, outstanding borrowings and available capacity under the Company’s borrowing arrangements were as follows:
 
Interest
Rate
 
Expiration
Date
 
Total
Capacity
 
Outstanding
Borrowings
 
Available
Capacity
Senior Secured Credit Facility:
 
 
 
 
 
 
 
 
 
Revolving credit facility (1)
(2)
 
March 2018
 
$
475

 
$
140

 
$
335

Term loan facility
(3)
 
March 2020
 
1,915

 
1,896

 

First Lien Notes
7.625%
 
January 2020
 
593

 
593

 

First and a Half Lien Notes
7.875%
 
February 2019
 
700

 
700

 

First and a Half Lien Notes
9.00%
 
January 2020
 
325

 
325

 

Other bank indebtedness
(4)
 
August 2013
 
8

 
2

 
6

Senior Notes
3.375%
 
May 2016
 
500

 
500

 

Securitization obligations: (5)
 
 
 
 
 
 
 
 
 
        Apple Ridge Funding LLC
 
 
December 2013
 
325

 
234

 
91

        Cartus Financing Limited (6)
 
 
Various
 
61

 
26

 
35

 
 
 
 
 
$
4,902

 
$
4,416

 
$
467

_______________
 
 
(1)
On July 31, 2013, the Company had $55 million outstanding on the revolving credit facility and no outstanding letters of credit on such facility, leaving $420 million of available capacity.
(2)
Interest rates with respect to revolving loans under the senior secured credit facility are based on, at Realogy Group’s option, (a) adjusted LIBOR plus 2.75% or (b) JPMorgan Chase Bank, N.A., prime rate ("ABR") plus 1.75% in each case subject to reductions based on the attainment of certain leverage ratios.
(3)
Consists of a $1,915 million term loan, less a discount of $19 million. The interest rate with respect to the term loan under the senior secured credit facility is based on, at Realogy Group’s option, (a) adjusted LIBOR plus 3.50% (with a LIBOR floor of 1.00%) or (b) JPMorgan Chase Bank, N.A.’s prime rate (“ABR”) plus 2.50% (with an ABR floor of 2.0%).
(4)
A revolving credit facility in the U.K. with a capacity of £5 million ($8 million) which expires in August 2013. The facility has a one-year term with certain options for renewal. The interest rate with respect to the revolving credit facility is based on the bank's base rate plus 2.0%. This facility is supported by a letter of credit issued under the senior secured credit facility.
(5)
Available capacity is subject to maintaining sufficient relocation related assets to collateralize these securitization obligations.
(6)
Consists of a £35 million facility which expires in August 2015 and a £5 million annual working capital facility which expires in August 2013.

16


Senior Secured Credit Facility
On March 5, 2013, Realogy Group entered into an amended and restated senior secured credit agreement (the “Amended and Restated Credit Agreement”). The Amended and Restated Credit Agreement replaces the agreement that had been entered into on April 10, 2007 and refinances the prior term loan facility and prior revolving credit facility.
The Amended and Restated Credit Agreement provides for (a) a seven-year, $1,920 million term loan facility issued at 99% of par with a maturity date of March 5, 2020, the proceeds of which were utilized to pay off the $1,822 million principal amount of the existing term loan borrowings under the prior facility, plus accrued and unpaid interest, and to pay the fees and expenses incurred in connection with the refinancing and for general corporate purposes; and (b) a five-year, $475 million revolving credit facility with a maturity date of March 5, 2018, which includes (i) a $250 million letter of credit subfacility and (ii) a swingline loan subfacility. Initial borrowings under the new revolving credit facility were used to repay the outstanding indebtedness under the prior revolving credit facility. The interest rate with respect to the term loan is based on, at our option, adjusted LIBOR plus 3.50% (with a LIBOR floor of 1.00%) or ABR plus 2.50% (with an ABR floor of 2.0%). The interest rate with respect to revolving loans under the revolving credit facility is based on, at our option, adjusted LIBOR plus 2.75% or ABR plus 1.75%.
The Amended and Restated Credit Agreement also retains a $155 million synthetic letter of credit facility, approximately $36 million of which matures on October 10, 2013 and the balance of which matures on October 10, 2016.
The synthetic letter of credit facility may be utilized for general corporate purposes, including the support of Realogy Group’s obligations with respect to Cendant contingent and other liabilities assumed under the Separation and Distribution Agreement. As of June 30, 2013, the facility was being utilized for a $53 million letter of credit with Cendant for potential contingent obligations and $85 million of letters of credit for other general corporate purposes.
The Amended and Restated Credit Agreement permits the Company to obtain up to $500 million of additional credit facilities from lenders reasonably satisfactory to the administrative agent and us, without the consent of the existing lenders under the new senior secured credit facility, plus an unlimited amount if our senior secured leverage ratio is less than 3.50 to 1.0 on a pro forma basis. Subject to certain restrictions, the Amended and Restated Credit Agreement also permits us to issue senior secured or unsecured notes in lieu of any incremental facility.
The term loan facility provides for quarterly amortization payments totaling 1% per annum of the original principal amount of the term loan facility, commencing June 30, 2013, with the balance payable upon the final maturity date. The synthetic letter of credit facility provides for quarterly amortization payments totaling 1% per annum of the principal amount of the synthetic letter of credit facility outstanding with the balance payable upon the final maturity date.
The obligations under the Amended and Restated Agreement are secured to the extent legally permissible by substantially all of the assets of Realogy Group, Realogy Intermediate and all of their domestic subsidiaries, other than certain excluded subsidiaries, including but not limited to (a) a first-priority pledge of substantially all capital stock held by Realogy Group or any subsidiary guarantor (which pledge, with respect to obligations in respect of the borrowings secured by a pledge of the stock of any first-tier foreign subsidiary, is limited to 100% of the non-voting stock (if any) and 65% of the voting stock of such foreign subsidiary), and (b) perfected first-priority security interests in substantially all tangible and intangible assets of Realogy Group and each subsidiary guarantor, subject to certain exceptions.
Realogy Group’s senior secured credit facility contains financial, affirmative and negative covenants and requires Realogy Group to maintain a senior secured leverage ratio not to exceed 4.75 to 1.0 tested on a quarterly basis but only if the aggregate amount of borrowings outstanding under the revolving credit facility together with the aggregate amount of letters of credit issued under the letter of credit subfacility at the end of the applicable quarter, exceed 25% of the aggregate revolving credit facility commitments. In this report, the Company refers to the term “Adjusted EBITDA” to mean EBITDA as so defined for purposes of determining compliance with the senior secured leverage covenant. At June 30, 2013, Realogy Group’s aggregate borrowings and outstanding letters of credit issued under the revolving credit facility exceeded 25% of the aggregate revolving credit facility commitments and therefore the senior secured leverage ratio computation was required. At June 30, 2013, Realogy Group’s senior secured leverage ratio was 3.37 to 1.0 and it was in compliance with the senior secured leverage ratio covenant.
Realogy Group has the right to cure an event of default of the senior secured leverage ratio in three of any of the four consecutive quarters with additional equity infused as capital into Realogy Group. If Realogy Group is unable to maintain compliance with the senior secured leverage ratio and fails to remedy a default through an equity cure as described above, there would be an “event of default” under the senior secured credit facility. Other events of default under the senior

17


secured credit facility include, without limitation, nonpayment, material misrepresentations, insolvency, bankruptcy, certain material judgments, change of control and cross-events of default on material indebtedness.
If an event of default occurs under the senior secured credit facility, and Realogy Group fails to obtain a waiver from the lenders, Realogy Group’s financial condition, results of operations and business would be materially adversely affected. Upon the occurrence of an event of default under the senior secured credit facility, the lenders:
would not be required to lend any additional amounts to Realogy Group;
could elect to declare all borrowings outstanding, together with accrued and unpaid interest and fees, to be due and payable;
could require Realogy Group to apply all of its available cash to repay these borrowings; or
could prevent Realogy Group from making payments on the First Lien Notes, the First and a Half Lien Notes or the unsecured notes;
any of which could result in an event of default under the First Lien Notes, the First and a Half Lien Notes, the unsecured notes and the Company’s Apple Ridge Funding LLC securitization program.
If Realogy Group were unable to repay those amounts, the lenders under the senior secured credit facility could proceed against the collateral granted to secure the senior secured credit facility, which assets also secure its other secured indebtedness. Realogy Group has pledged the majority of its assets as collateral to secure such indebtedness. If the lenders under the senior secured credit facility were to accelerate the repayment of borrowings, then Realogy Group may not have sufficient assets to repay the senior secured credit facility and its other indebtedness, including the First Lien Notes, the First and a Half Lien Notes and the unsecured notes, or be able to borrow sufficient funds to refinance such indebtedness. Even if Realogy Group is able to obtain new financing, it may not be on commercially reasonable terms, or terms that are acceptable to Realogy Group.
First Lien Notes
The $593 million of First Lien Notes are senior secured obligations of Realogy Group and mature on January 15, 2020. The First Lien Notes bear interest at a rate of 7.625% per annum and interest is payable semiannually on January 15 and July 15 of each year. The First Lien Notes are guaranteed on a senior secured basis by Realogy Intermediate and each domestic subsidiary of Realogy Group that is a guarantor under the Senior Secured Credit Facility or certain of Realogy Group's outstanding debt securities. The First Lien Notes are also guaranteed by Realogy Holdings, on an unsecured senior subordinated basis. The First Lien Notes are secured by the same collateral as the Company’s existing secured obligations under its Senior Secured Credit Facility and the First and a Half Lien Notes. The priority of the collateral liens securing the First Lien Notes is (i) equal to the collateral liens securing the Company's first lien obligations under the Senior Secured Credit Facility and (ii) senior to the collateral liens securing the Company’s other secured obligations not secured by a first priority lien, including the First and a Half Lien Notes.
First and a Half Lien Notes
The First and a Half Lien Notes are senior secured obligations of Realogy Group. The $700 million of 7.875% First and a Half Lien Notes mature in February 2019 and interest is payable semiannually on February 15 and August 15 of each year. The $325 million of 9.0% First and a Half Lien Notes mature in January 2020 and interest is payable semiannually on January 15 and July 15 of each year. The First and a Half Lien Notes are guaranteed on a senior secured basis by Realogy Intermediate and each domestic subsidiary of Realogy Group that is a guarantor under the Senior Secured Credit Facility or certain of Realogy Group's outstanding debt securities. The First and a Half Lien Notes are also guaranteed by Realogy Holdings, on an unsecured senior subordinated basis. The First and a Half Lien Notes are secured by the same collateral as the Company’s existing secured obligations under its Senior Secured Credit Facility and the First Lien Notes. The priority of the collateral liens securing the First and a Half Lien Notes is junior to the collateral liens securing the Company’s first lien obligations under its Senior Secured Credit Facility and the First Lien Notes. The priority of the collateral liens securing each series of the First and a Half Lien Notes is equal to one another.
Unsecured Notes
On April 16, 2013, Realogy Group utilized approximately $201 million of the remaining $218 million of net proceeds from the Company's initial public offering to redeem all of the outstanding Senior Subordinated Notes. On April 23, 2013, the Company utilized the remaining net proceeds, cash on hand and borrowings under its revolving credit facility to redeem all of the $130 million of its 12.00% Senior Notes at a premium of 106%.

18


On April 26, 2013, Realogy Group issued $500 million of 3.375% senior notes due 2016 (the "3.375% Senior Notes"). The Company used the net proceeds from the offering of the 3.375% Senior Notes of approximately $494 million, along with borrowings under its revolving credit facility, to redeem all of the $492 million of its 11.50% Senior Notes at a redemption premium of 106%, plus accrued interest on the redemption date of May 28, 2013. The 3.375% Senior Notes are unsecured senior obligations of the Company that mature on May 1, 2016. Interest on the 3.375% Senior Notes will be payable semiannually on May 1 and November 1 of each year, commencing November 1, 2013. The 3.375% Senior Notes are guaranteed on an unsecured senior basis by each domestic subsidiary of Realogy Group that is a guarantor under the senior secured credit facility, the First Lien Notes and the First and a Half Lien Notes. The 3.375% Senior Notes are guaranteed by Realogy Holdings on an unsecured senior subordinated basis.
Securitization Obligations
Realogy Group has secured obligations through Apple Ridge Funding LLC, a securitization program with a borrowing capacity of $325 million and an expiration date of December 2013. On April 19, 2013, the Company elected to reduce the available capacity of the Apple Ridge securitization facility by $50 million from $375 million.
Realogy Group, through a special purpose entity known as Cartus Financing Limited, has agreements providing for a £35 million revolving loan facility which expires in August 2015 and a £5 million annual working capital facility which expires in August 2013. These Cartus Financing Limited facilities are secured by the relocation assets of a U.K. government contract in this special purpose entity and are therefore classified as permitted securitization financings as defined in Realogy Group’s senior secured credit facility and the indentures governing the Unsecured Notes.
The Apple Ridge entities and the Cartus Financing Limited entity are consolidated special purpose entities that are utilized to securitize relocation receivables and related assets. These assets are generated from advancing funds on behalf of clients of Realogy Group’s relocation business in order to facilitate the relocation of their employees. Assets of these special purpose entities are not available to pay Realogy Group’s general obligations. Under the Apple Ridge program, provided no termination or amortization event has occurred, any new receivables generated under the designated relocation management agreements are sold into the securitization program and as new eligible relocation management agreements are entered into, the new agreements are designated to the program. The Apple Ridge program has restrictive covenants and trigger events, including performance triggers linked to the age and quality of the underlying assets, foreign obligor limits, multicurrency limits, financial reporting requirements, restrictions on mergers and change of control, any uncured breach of Realogy Group’s senior secured leverage ratio under Realogy Group’s senior secured credit facility, and cross-defaults to Realogy Group’s material indebtedness. The occurrence of a trigger event under the Apple Ridge securitization facility could restrict our ability to access new or existing funding under this facility or result in termination of the facility, either of which would adversely affect the operation of our relocation business.
Certain of the funds that Realogy Group receives from relocation receivables and related assets must be utilized to repay securitization obligations. These obligations were collateralized by $382 million and $309 million of underlying relocation receivables and other related relocation assets at June 30, 2013 and December 31, 2012, respectively. Substantially all relocation related assets are realized in less than twelve months from the transaction date. Accordingly, all of Realogy Group's securitization obligations are classified as current in the accompanying Condensed Consolidated Balance Sheets.
Interest incurred in connection with borrowings under these facilities amounted to $2 million and $4 million for the three and six months ended June 30, 2013, respectively and $2 million and $4 million for the three and six months ended June 30, 2012, respectively. This interest is recorded within net revenues in the accompanying Condensed Consolidated Statements of Operations as related borrowings are utilized to fund Realogy Group's relocation business where interest is generally earned on such assets. These securitization obligations represent floating rate debt for which the average weighted interest rate was 3.1% and 3.5% for the six months ended June 30, 2013 and 2012, respectively.
Loss on the Early Extinguishment of Debt and Write-Off of Deferred Financing Costs
As a result of refinancing transactions and note redemptions, the Company recorded a loss on the early extinguishment of debt of $46 million and wrote off deferred financing costs of $2 million to interest expense during the six months ended June 30, 2013.
As a result of the 2012 Senior Secured Notes Offering and the use of proceeds to repay indebtedness, the Company recorded a loss on the early extinguishment of debt of $6 million during the six months ended June 30, 2012.

19


6.
RESTRUCTURING COSTS
2013 Corporate Headquarters Relocation
During the second quarter of 2013, the Company completed the relocation of its corporate headquarters from Parsippany, NJ to Madison, NJ. As a result of this relocation, the Company has recognized a $4 million restructuring charge for the three and six months ended June 30, 2013 which is primarily comprised of lease payments on the former corporate headquarters through October 2013. At June 30, 2013, the remaining liability is $2 million.
2012 Restructuring Program
During 2012, the Company committed to various initiatives targeted principally at reducing costs, enhancing organizational efficiencies and consolidating existing facilities.  The Company incurred restructuring charges of $12 million for the year ended December 31, 2012. The Company Owned Real Estate Brokerage Services segment recognized $3 million of facility related expenses, $3 million of personnel related expenses and $1 million of expenses related to asset impairments. The Relocation Services segment recognized $3 million of facility related expenses. The Title and Settlement Services segment recognized $2 million of facility related expenses. During the six months ended June 30, 2013, the Company utilized $2 million of the remaining accrual resulting in a remaining liability of $3 million at June 30, 2013.
Prior Restructuring Programs
The Company committed to restructuring activities targeted principally at reducing personnel related costs and consolidating facilities during 2006 through 2011. At December 31, 2012, the remaining liability was $11 million. During the six months ended June 30, 2013, the Company utilized $3 million of the remaining accrual resulting in a remaining liability of $8 million related to future lease payments.
7.
STOCK-BASED COMPENSATION
The Company has stock-based compensation plans available under which non-qualified stock options, rights to purchase shares of common stock, restricted stock, restricted stock units and other awards settleable in, or based upon, Realogy Holdings common stock may be issued to employees, consultants or directors of Realogy.
The number of shares authorized for issuance under the Realogy 2007 Stock Incentive Plan and the 2012 Long Term Incentive Plan are 2.8 million shares and 6.8 million shares, respectively. As of June 30, 2013, the total number of shares available for future grant under the 2007 Stock Incentive Plan and the 2012 LTIP was approximately 0.1 million shares and 4.7 million shares, respectively.
Incentive Equity Awards Granted by Realogy Holdings
A summary of option, restricted share, and restricted stock unit activity is presented below (number of shares in millions):
 
Time-vesting
Options
Weighted Average Exercise Price
 
Phantom / Other Performance Options
Weighted Average Exercise Price
 
Restricted
Stock
Weighted Average Grant Date Fair Value
 
Restricted
Stock Units
Weighted Average Grant Date Fair Value
Outstanding at January 1, 2013
3.10

$
26.61

 
0.16

$
20.61

 
0.29

$
27.09

 


Granted
0.01

44.30

 


 
0.09

44.00

 
0.04

34.14

Exercised
(0.06
)
18.37

 


 
 
 
 
 
 
Vested
 
 
 
 
 
 


 


Cancelled/Expired
(0.02
)
19.24

 


 
(0.03
)
27.00

 


Outstanding at June 30, 2013 (a)
3.03

$
26.86

 
0.16

$
20.61

 
0.35

$
31.27

 
0.04

$
34.14

_______________
(a)
Options outstanding at June 30, 2013 had an intrinsic value of $77 million and have a weighted average remaining contractual life of 8.7 years.
The fair value of the options was estimated on the date of grant using the Black-Scholes option-pricing model utilizing the following assumptions. Expected volatility was based on historical volatilities of comparable companies. The expected

20


term of the options granted represents the period of time that options were expected to be outstanding. The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the time of the grant, which corresponds to the expected term of the options.
 
2013 Options
Grant date fair value
$
19.27

Expected volatility
43.9
%
Expected term (years)
6.25

Risk-free interest rate
1.0
%
Dividend yield

Stock-Based Compensation Expense
As of June 30, 2013, there was approximately $34 million of unrecognized compensation cost related to options, restricted stock and restricted stock units under the plans. Unrecognized compensation costs for the options, restricted stock and restricted stock units will be recorded in future periods as compensation expense and have a remaining weighted average period of approximately 2.7 years. The Company recorded stock-based compensation expense related to the incentive equity awards of $4 million and $7 million for the three and six months ended June 30, 2013, respectively, and $1 million and $2 million related to incentive equity awards for the three and six months ended June 30, 2012, respectively.
Phantom Value Plan
On January 5, 2011, the Board of Directors of Realogy Holdings approved the Realogy Group LLC Phantom Value Plan (the “Phantom Value Plan”), which is intended to provide certain of Realogy’s executive officers, with an incentive (the “Incentive Award”) to remain in the service of Realogy, increase interest in the success of Realogy and create the opportunity to receive compensation based upon Realogy’s success. On January 5, 2011, the Board of Directors of the Company made initial grants of Incentive Awards in an aggregate amount of $22 million to certain executive officers of Realogy. The amount of the Incentive Awards granted to certain of Realogy's executive officers was determined by the sum of (1) the shares of common stock purchased by the executives at $250.00 per share in April 2007 (representing an aggregate purchase price of $19 million) and (2) the implied $250.00 per share grant date value in April 2007 of the executive's restricted stock grant (representing an aggregate of $3 million). Incentive Awards are immediately cancelable and forfeitable in the event of the termination of a participant’s employment for any reason. The Incentive Awards terminate 10 years from the date of grant.
Incentive Awards under the Phantom Value Plan
Under the Phantom Value Plan, each participant is eligible to receive a cash payment based upon the Company’s success and the cash received by RCIV Holdings ("RCIV"), an affiliate of Apollo, upon the transfer or sale of the 57.46 million shares of Common Stock (the "RCIV Shares") that RCIV received in connection with our initial public offering upon conversion of the $1.3 billion of Convertible Notes that had been purchased by RCIV in January 2011 (the "RCIV Notes"). Each participant is eligible to receive a payment with respect to his or her Incentive Award at such time and from time to time that RCIV receives cash upon the transfer or exchange of RCIV Shares, including any third party sale. A payment would be an amount which bears the same ratio to the dollar amount of the Incentive Award as (i) the aggregate amount of cash received by RCIV at such time for the transfer or exchange of all or a portion of the RCIV Shares bears to (ii) $1.3 billion, representing the amount of the RCIV Notes on the date of issuance. Any payments made under the Phantom Value Plan will be recorded as compensation expense when RCIV receives cash upon the discharge or third-party sale of the RCIV Shares.
In the event that a payment is to be made with respect to an Incentive Award, a participant may elect to receive, in lieu of the cash payment, unrestricted shares of common stock with a fair market value, as determined in good faith by the Compensation Committee, equal to the dollar amount then due on such Incentive Award, plus restricted shares of such common stock with a fair market value, as determined in good faith by the Compensation Committee, equal to the amount then due multiplied by 0.15. The restricted shares of common stock will vest based on continued employment, on the first anniversary of issuance. In addition, Incentive Awards are subject to acceleration and payment upon a change of control as specified in the Phantom Value Plan.
On April 16, 2013, Apollo sold 40.25 million shares of Realogy Holdings common stock at a public offering price of $44.00 per share in an underwritten public offering. RCIV Holdings sold 35.38 million shares in this offering which was approximately 62% of their prior ownership interest of 57.46 million shares.  The sale of shares by RCIV Holdings triggered

21


a payment under the Phantom Value Plan. All of the participants in the Phantom Value Plan elected to receive their payment in shares of common stock and therefore received unrestricted shares of common stock equal to the dollar amount then due, plus restricted shares of such common stock equal to the amount then due multiplied by 0.15. The restricted shares of common stock will vest based on the participants' continued employment, on the first anniversary of issuance. The Company issued 0.58 million shares of common stock and granted 0.09 million shares of restricted shares of common stock to such executive officers in April 2013 and recognized a charge of approximately $25 million related to the issuance of common stock and $1 million related to the issuance of restricted shares of common stock in the second quarter of 2013. The Company will recognize a charge of approximately $1 million in each of the next three quarters as the restricted shares vest.
On July 16, 2013, Apollo sold the remaining 25.13 million shares of Realogy Holdings common stock it owned at $47.57 per share in an underwritten public offering. RCIV Holdings sold 22.08 million shares in the July 2013 offering.  The sale of shares by RCIV Holdings triggered a second and final payment under the Phantom Value Plan. See Note 12, "Subsequent Events" for additional information.
8.
SEPARATION ADJUSTMENTS, TRANSACTIONS WITH FORMER PARENT AND SUBSIDIARIES AND RELATED PARTIES
Transfer of Cendant Corporate Liabilities and Issuance of Guarantees to Cendant and Affiliates
The Company has certain guarantee commitments with Cendant (pursuant to the assumption of certain liabilities and the obligation to indemnify Cendant, Wyndham Worldwide and Travelport for such liabilities). These guarantee arrangements primarily relate to certain contingent litigation liabilities, contingent tax liabilities, and other corporate liabilities, of which the Company assumed and is generally responsible for 62.5%. Upon separation from Cendant, the liabilities assumed by the Company were comprised of certain Cendant corporate liabilities which were recorded on the historical books of Cendant as well as additional liabilities which were established for guarantees issued at the date of Separation related to certain unresolved contingent matters that could arise during the guarantee period. Regarding the guarantees, if any of the companies responsible for all or a portion of such liabilities were to default in its payment of costs or expenses related to any such liability, the Company would be responsible for a portion of the defaulting party or parties’ obligation. To the extent such recorded liabilities are in excess or are not adequate to cover the ultimate payment amounts, such excess or deficiency will be reflected in the results of operations in future periods.
The due to former parent balance was $67 million and $69 million at June 30, 2013 and December 31, 2012, respectively. At June 30, 2013, the due to former parent balance was comprised of the Company’s portion of the following: (i) Cendant’s remaining state and foreign contingent tax liabilities, (ii) accrued interest on contingent tax liabilities, (iii) potential liabilities related to Cendant’s terminated or divested businesses, and (iv) potential liabilities related to the residual portion of accruals for Cendant operations.
Transactions with PHH Corporation
In January 2005, Cendant completed the spin-off of its former mortgage, fleet leasing and appraisal businesses in a tax free distribution of 100% of the common stock of PHH Corporation (PHH") to its stockholders. In connection with the spin-off, the Company entered into a venture, PHH Home Loans, with PHH for the purpose of originating and selling mortgage loans primarily sourced through the Company’s real estate brokerage and relocation businesses. The Company owns 49.9% of the venture. In connection with the venture, the Company entered into an agreement with PHH and PHH Home Loans regarding the operation of the venture and a marketing agreement with PHH whereby PHH is the recommended provider of mortgage products and services promoted by the Company to its independently owned and operated franchisees. The Company also entered into a license agreement with PHH whereby PHH Home Loans was granted a license to use certain of the Company’s real estate brand names. The Company also maintains a relocation agreement with PHH whereby PHH outsources its employee relocation function to the Company and the Company subleases office space to PHH Home Loans. In connection with these agreements, the Company recorded net revenues of $2 million and $3 million, for the three and six months ended June 30, 2013, respectively and $1 million and $3 million, for the three and six months ended June 30, 2012, respectively. In addition, the Company recorded equity earnings of $12 million and $21 million, for the three and six months ended June 30, 2013, respectively and $15 million and $25 million, for the three and six months ended June 30, 2012, respectively. The Company received cash dividends from PHH Home Loans of $35 million and $14 million during the six months ended June 30, 2013 and 2012, respectively.

22


The following presents the summarized financial information for PHH Home Loans:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
Statement of operations data:
 
 
 
 
 
 
 
Total revenues
$
92

 
$
92

 
$
171

 
$
166

Total expenses
69

 
62

 
129

 
117

Net income
23

 
30

 
42

 
49

Transactions with Related Parties
The Company has entered into certain transactions in the normal course of business with entities that are owned by affiliates of Apollo. For the three and six months ended June 30, 2013 and 2012, the Company has recognized revenue related to these transactions of less than $1 million in each of the periods.
9.     EARNINGS (LOSS) PER SHARE
Earnings (loss) per share attributable to Realogy Holdings
Basic earnings per share is computed based on net income available to Realogy Holdings stockholders divided by the basic weighted-average shares outstanding during the period. Dilutive earnings per share is computed consistently with the basic computation while giving effect to all dilutive potential common shares and common share equivalents that were outstanding during the period. Realogy uses the treasury stock method to reflect the potential dilutive effect of unvested stock awards and unexercised options.
The following table sets forth the computation of basic and diluted earnings (loss) per share:
 
Three Months Ended
 
Six Months Ended
(in millions, except share data)
June 30, 2013
 
June 30, 2012
 
June 30, 2013
 
June 30, 2012
Net income (loss) attributable to Realogy Holdings shareholders
$
84

 
$
(25
)
 
$
9

 
$
(217
)
Basic weighted average shares
145,355,293

 
8,017,080

 
145,215,984

 
8,017,080

Stock options, restricted stock and RSUs (a)
1,281,586

 

 
1,175,468

 

Weighted average diluted shares
146,636,879

 
8,017,080

 
146,391,452

 
8,017,080

 
 
 
 
 
 
 
 
Earnings (Loss) Per Share:
 
 
 
 
 
 
 
Basic
$
0.58

 
$
(3.12
)
 
$
0.06

 
$
(27.07
)
Diluted
$
0.57

 
$
(3.12
)
 
$
0.06

 
$
(27.07
)
_______________
 
 
(a)
Excludes 2.3 million and 2.4 million of stock options, restricted stock and restricted stock units ("RSUs") for the three and six months ended June 30, 2013, respectively, that are anti-dilutive to the diluted earnings per share computation.
10.
COMMITMENTS AND CONTINGENCIES
Litigation
The Company is involved in claims, legal proceedings and governmental inquiries related to alleged contract disputes, business practices, intellectual property and other commercial, employment, regulatory and tax matters. Examples of such matters include but are not limited to allegations:
that the Company is vicariously liable for the acts of franchisees under theories of actual or apparent agency;
by former franchisees that franchise agreements were breached including improper terminations;
that residential real estate agents engaged by NRT—in certain states—are potentially employees instead of independent contractors, and therefore may bring claims against NRT for breach of contract, wrongful discharge and negligent supervision and obtain benefits, indemnification and expense reimbursement available to employees;

23


concerning claims for alleged RESPA or state real estate law violations including but not limited to claims challenging the validity of sales associates indemnification and administrative fees;
concerning claims generally against the company owned brokerage operations for negligence or breach of fiduciary duty in connection with the performance of real estate brokerage or other professional services; and
concerning claims generally against the title company contending that, as the escrow company, the company knew or should have known that a transaction was fraudulent or concerning other title defects or settlement errors.
Real Estate Business Litigation
Barasani v. Coldwell Banker Residential Brokerage Company. On November 15, 2012, plaintiff Ali Barasani filed a putative class action complaint in Los Angeles Superior Court, California, against Coldwell Banker Residential Brokerage Company alleging that the Company had misclassified all of its sales associates as independent contractors when they were actually employees. The complaint further alleges that, because of the misclassification, the Company has violated several sections of the Labor Code including Section 2802 for failing to reimburse plaintiff and the class for business related expenses and Section 226 for failing to keep proper records. The complaint also asserts a Section 17200 Unfair Business Practices claim for misclassifying the sales agents.
Cendant Corporate Litigation
Pursuant to the Separation and Distribution Agreement dated as of July 27, 2006 among Cendant, Realogy, Wyndham Worldwide and Travelport, each of Realogy, Wyndham Worldwide and Travelport have assumed certain contingent and other corporate liabilities (and related costs and expenses), which are primarily related to each of their respective businesses. In addition, Realogy has assumed 62.5% and Wyndham Worldwide has assumed 37.5% of certain contingent and other corporate liabilities (and related costs and expenses) of Cendant or its subsidiaries, which are not primarily related to any of the respective businesses of Realogy, Wyndham Worldwide, Travelport and/or Cendant’s vehicle rental operations, in each case incurred or allegedly incurred on or prior to the date of the separation of Travelport from Cendant.
* * *
The Company believes that it has adequately accrued for legal matters as appropriate. The Company records litigation accruals for legal matters which are both probable and estimable. For legal proceedings for which (1) there is a reasonable possibility of loss (meaning those losses for which the likelihood is more than remote but less than probable) and (2) the Company is able to estimate a range of reasonably possible loss, the Company estimates the range of reasonably possible losses to be between zero and $10 million at June 30, 2013.
Litigation and other disputes are inherently unpredictable and subject to substantial uncertainties and unfavorable resolutions could occur. In addition, class action lawsuits can be costly to defend and, depending on the class size and claims, could be costly to settle.  As such, the Company could incur judgments or enter into settlements of claims with liability that are materially in excess of amounts accrued and these settlements could have a material adverse effect on the Company’s financial condition, results of operations or cash flows in any particular period.
Tax Matters
The Company is subject to income taxes in the United States and several foreign jurisdictions. Significant judgment is required in determining the worldwide provision for income taxes and recording related assets and liabilities. In the ordinary course of business, there are many transactions and calculations where the ultimate tax determination is uncertain. The Company is regularly under audit by tax authorities whereby the outcome of the audits is uncertain. The Company believes there is appropriate support for positions taken on its tax returns. The liabilities that have been recorded represent the best estimates of the probable loss on certain positions and are adequate for all open years based on an assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter. However, the outcomes of tax audits are inherently uncertain.
Under the Tax Sharing Agreement with Cendant, Wyndham Worldwide and Travelport, the Company is generally responsible for 62.5% of payments made to settle claims with respect to tax periods ending on or prior to December 31, 2006 that relate to income taxes imposed on Cendant and certain of its subsidiaries, the operations (or former operations) of which were determined by Cendant not to relate specifically to the respective businesses of Realogy, Wyndham Worldwide, Avis Budget or Travelport.

24


With respect to any remaining legacy Cendant tax liabilities, the Company and its former parent believe there is appropriate support for the positions taken on Cendant’s tax returns. However, tax audits and any related litigation, including disputes or litigation on the allocation of tax liabilities between parties under the Tax Sharing Agreement, could result in outcomes for the Company that are different from those reflected in the Company’s historical financial statements.
Contingent Liability Letter of Credit
In April 2007, the Company established a standby irrevocable letter of credit for the benefit of Avis Budget Group in accordance with the Separation and Distribution Agreement. The synthetic letter of credit was utilized to support the Company’s payment obligations with respect to its share of Cendant contingent and other corporate liabilities. The stated amount of the standby irrevocable letter of credit is subject to periodic adjustment to reflect the then current estimate of Cendant contingent and other liabilities. The letter of credit was $53 million at June 30, 2013 and $70 million at December 31, 2012. The standby irrevocable letter of credit will be terminated if (i) the Company’s senior unsecured credit rating is raised to BB by Standard and Poor’s or Ba2 by Moody’s or (ii) the aggregate value of the former parent contingent liabilities falls below $30 million.
Escrow and Trust Deposits
As a service to the Company’s customers, it administers escrow and trust deposits which represent undisbursed amounts received for the settlement of real estate transactions. With the passage of the Dodd-Frank Act in July 2010, deposits at FDIC-insured institutions are permanently insured up to $250 thousand. These escrow and trust deposits totaled approximately $495 million and $330 million at June 30, 2013 and December 31, 2012, respectively. These escrow and trust deposits are not assets of the Company and, therefore, are excluded from the accompanying Condensed Consolidated Balance Sheets. However, the Company remains contingently liable for the disposition of these deposits.
11.
SEGMENT INFORMATION
The reportable segments presented below represent the Company’s operating segments for which separate financial information is available and which is utilized on a regular basis by its chief operating decision maker to assess performance and to allocate resources. In identifying its reportable segments, the Company also considers the nature of services provided by its operating segments. Management evaluates the operating results of each of its reportable segments based upon revenue and EBITDA, which is defined as net income (loss) before depreciation and amortization, interest (income) expense, net (other than Relocation Services interest for secured assets and obligations) and income taxes, each of which is presented in the Company’s Condensed Consolidated Statements of Operations. The Company’s presentation of EBITDA may not be comparable to similar measures used by other companies.
 
Revenues (a) (b)
 
Three Months Ended June 30,
 
Six Months Ended
June 30,
 
2013
 
2012
 
2013
 
2012
Real Estate Franchise Services
$
193

 
$
170

 
$
328

 
$
299

Company Owned Real Estate Brokerage Services
1,182

 
994

 
1,868

 
1,611

Relocation Services
108

 
109

 
195

 
197

Title and Settlement Services
130

 
106

 
230

 
194

Corporate and Other (c)
(80
)
 
(70
)
 
(131
)
 
(117
)
Total Company
$
1,533

 
$
1,309

 
$
2,490

 
$
2,184

_______________
 
 
(a)
Revenues for the Real Estate Franchise Services segment include intercompany royalties and marketing fees paid by the Company Owned Real Estate Brokerage Services segment of $80 million and $131 million for the three and six months ended June 30, 2013, respectively, and $70 million and $117 million for the three and six months ended June 30, 2012, respectively. Transactions between segments are eliminated in consolidation. Such amounts are eliminated through the Corporate and Other line.
(b)
Revenues for the Relocation Services segment include intercompany referral and relocation fees paid by the Company Owned Real Estate Brokerage Services segment of $12 million and $20 million for the three and six months ended June 30, 2013, respectively, and $11 million and $18 million for the three and six months ended June 30, 2012, respectively. Such amounts are recorded as contra-revenues by the Company Owned Real Estate Brokerage Services segment. There are no other material inter-segment transactions.
(c)
Includes the elimination of transactions between segments.

25


 
EBITDA (a) (b)
 
Three Months Ended June 30,
 
Six Months Ended
June 30,
 
2013
 
2012
 
2013
 
2012
Real Estate Franchise Services
$
133

 
$
99

 
$
205

 
$
160

Company Owned Real Estate Brokerage Services
102

 
78

 
94

 
61

Relocation Services
27

 
30

 
37

 
34

Title and Settlement Services
20

 
14

 
24

 
16

Corporate and Other
(78
)
 
(18
)
 
(93
)
 
(38
)
Total Company
$
204

 
$
203

 
$
267

 
$
233

Less:
 
 
 
 
 
 
 
Depreciation and amortization
44

 
44

 
86

 
89

Interest expense, net
67

 
176

 
156

 
346

Income tax expense
9

 
8

 
16

 
15

Net income (loss) attributable to Holdings and Realogy
$
84

 
$
(25
)
 
$
9

 
$
(217
)
_______________
(a)
Includes $43 million related to the loss on early extinguishment of debt, $26 million related to the Phantom Value Plan and $4 million restructuring costs, partially offset by a net benefit of $2 million of former parent legacy items for the three months ended June 30, 2013 compared to $2 million of restructuring costs for the three months ended June 30, 2012.
(b) Includes $46 million related to the loss on the early extinguishment of debt, $26 million related to the Phantom Value Plan and $4 million of restructuring costs, partially offset by a net benefit of $1 million of former parent legacy items for the six months ended June 30, 2013 compared to $5 million of restructuring costs and a $6 million loss on the early extinguishment of debt, partially offset by a net benefit of $3 million of former parent legacy items for the six months ended June 30, 2012.
12.    SUBSEQUENT EVENTS
Secondary Offering
On July 16, 2013, Apollo sold the remaining 25.13 million shares of Realogy Holdings common stock it owned at $47.57 per share in an underwritten public offering. The Company did not receive any proceeds from the offering. The sale of shares by RCIV Holdings triggered a second and final payment under the Phantom Value Plan.
Pursuant to the terms of the Realogy Group Phantom Value Plan, certain of the Company's executive officers are eligible to receive cash payment, or at their election, shares of the Company's common stock, or a combination thereof, as a result of the sale of shares of common stock held by RCIV Holdings, (one of the selling stockholder in the offering and an affiliate of Apollo). RCIV Holdings sold 22.08 million shares in this offering which was approximately 38% of their original ownership interest of 57.46 million shares.  All of the participants' elected to receive their payment in shares of common stock and therefore will receive unrestricted shares of common stock equal to the dollar amount then due, plus restricted shares of such common stock equal to the amount then due multiplied by 0.15. The restricted shares of common stock will vest based on the participants' continued employment, on the first anniversary of issuance. The Company issued 0.36 million shares of common stock and granted 0.05 million shares of restricted shares of common stock to such executive officers in July 2013 and will recognize a charge of approximately $17 million related to the issuance of common stock and $1 million related to the issuance of restricted shares of common stock in the third quarter of 2013. The Company will recognize a charge of approximately $1 million in each of the next three quarters as the restricted shares vest.

26


Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with our Condensed Consolidated Financial Statements and accompanying notes thereto included elsewhere herein and with our Consolidated Financial Statements and accompanying notes included in the 2012 Form 10-K. Unless otherwise noted, all dollar amounts in tables are in millions. Neither Realogy Holdings, the indirect parent of Realogy Group, nor Realogy Intermediate, the direct parent company of Realogy Group, conducts any operations other than with respect to its respective direct or indirect ownership of Realogy Group. As a result, the condensed consolidated financial positions, results of operations and cash flows of Realogy Holdings, Realogy Intermediate and Realogy Group are the same. This Management's Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements. See “Forward-Looking Statements” in this report and “Forward-Looking Statements” and “Risk Factors” in our 2012 Form 10-K for a discussion of the uncertainties, risks and assumptions associated with these statements. Actual results may differ materially from those contained in any forward-looking statements.
OVERVIEW
We are a global provider of real estate and relocation services and report our operations in the following four segments:
Real Estate Franchise Services (known as Realogy Franchise Group or RFG)—franchises the Century 21®, Coldwell Banker®, Coldwell Banker Commercial®, ERA®, Sotheby's International Realty®, and Better Homes and Gardens® Real Estate brand names. As of June 30, 2013, our franchise systems had approximately 13,500 franchised and company owned offices and approximately 241,700 independent sales associates operating under our franchise and proprietary brands in the U.S. and 102 other countries and territories around the world, which included approximately 710 of our Company Owned and operated brokerage offices with approximately 41,500 independent sales associates.
Company Owned Real Estate Brokerage Services (known as NRT)—operates a full-service real estate brokerage business principally under the Coldwell Banker®, Corcoran Group®, Sotheby's International Realty®, ERA® and CitiHabitats brand names.
Relocation Services (known as Cartus)—primarily offers clients employee relocation services such as homesale assistance, providing home equity advances to transferees (generally guaranteed by the client), home finding and other destination services, expense processing, relocation policy counseling and consulting services, arranging household goods moving services, coordinating visa and immigration support, intercultural and language training and group move management services.
Title and Settlement Services (known as Title Resource Group or TRG)—provides full-service title, settlement and vendor management services to real estate companies, affinity groups, corporations and financial institutions with many of these services provided in connection with the Company's real estate brokerage and relocation services business.
RECENT DEVELOPMENTS
April 2013 and July 2013 Secondary Offerings
On April 16, 2013, Apollo sold 40.25 million shares of Realogy Holdings common stock at a public offering price of $44.00 per share in an underwritten public offering. On July 16, 2013, Apollo sold the remaining 25.13 million shares of Realogy Holdings common stock it owned at $47.57 per share in an underwritten public offering. The Company did not receive any proceeds from these offerings.
Pursuant to the terms of the Company's Phantom Value Plan, certain of our executive officers are eligible to receive cash payment, or at their election, shares of the Company's common stock, or a combination thereof, as a result of the sale of shares of common stock held by RCIV Holdings, (one of the selling stockholders in the offering and an affiliate of Apollo). RCIV Holdings sold 57.46 million shares in secondary offerings which represented all of their prior ownership interest.  All of the participants elected to receive their payment in shares of common stock and therefore will receive unrestricted shares of common stock equal to the dollar amount then due, plus restricted shares of such common stock equal to the amount then due multiplied by 0.15. The restricted shares of common stock will vest based on the participants' continued employment, on the first anniversary of issuance. The Company issued 0.94 million shares of common stock to such executive officers and recognized a charge of approximately $26 million in the second quarter of 2013 and will recognize approximately $19 million in the third quarter of 2013, $2 million in each of the next two quarters and $1 million in the subsequent quarter.

27


April 2013 Senior Subordinated Notes and 12.00% Senior Notes Redemptions
On April 16, 2013, Realogy Group utilized approximately $201 million of the remaining $218 million of net proceeds from the Company's initial public offering to redeem all of the outstanding Senior Subordinated Notes. On April 23, 2013, the Company utilized the remaining net proceeds, cash on hand and borrowings under its revolving credit facility to redeem all of the $130 million of its 12.00% Senior Notes at a redemption premium of 106% plus interest to the redemption date. The Company recognized a loss on the early extinguishment of debt of $12 million for the note repayments discussed above.
April 2013 Senior Notes Offering; May 2013 11.50% Senior Note Redemption
On April 26, 2013, Realogy Group issued $500 million of 3.375% Senior Notes. The Company used the net proceeds from the offering of the 3.375% Senior Notes of approximately $494 million, along with borrowings under its revolving credit facility, to redeem all of the $492 million of its 11.50% Senior Notes at a redemption premium of 106%, plus accrued interest to the redemption date of May 28, 2013. The Company recognized a loss on the early extinguishment of debt of $31 million for the extinguishment of the 11.50% Senior Notes.
The 3.375% Senior Notes are unsecured senior obligations of the Company that mature on May 1, 2016. Interest on the 3.375% Senior Notes will be payable semiannually on May 1 and November 1 of each year, commencing November 1, 2013.
* * *
Current Industry Trends
Beginning in 2012, the residential real estate industry began a recovery. We believe that the 2012 and 2013 year-to-date improvement in the residential real estate market is reflective of a continuing market recovery driven by high affordability of home ownership and demand that had built up during an extended period of economic uncertainty, as well as low interest rates and fewer foreclosures. This recovery follows a lengthy downturn which began in the second half of 2005 and continued through 2011. Based upon data published by NAR from 2005 to 2011, the number of annual U.S. existing homesale units declined by 40% and the median existing homesale price declined by 24%. The Case-Shiller homesale price index reflects a 34% homesale price decline from 2006 to 2011.
According to NAR, the housing industry improved with existing homesale transaction volume (i.e., the change in median homesale price plus the change in the number of existing homesale transactions) increasing 15% in 2012 compared to 2011. The most recent NAR forecast estimates that existing homesale transaction volume will increase 19% for 2013 compared to 2012 and increase a further 9% in 2014 compared to 2013.
According to NAR, the housing affordability index has continued to be at historically high levels as a result of the cumulative homesale price declines that began in 2007 and historically low interest rates. An index above 100 signifies that a family earning the median income has sufficient income to purchase a median-priced home, assuming a 20 percent down payment and ability to qualify for a mortgage. The annual composite housing affordability index was 173 as of May 2013 and 194 for 2012 compared to 186 for 2011 and 172 for 2010. The overall high level of this index could continue to favorably impact the housing recovery. In addition, as rental prices have recently continued to rise, the cost of owning a home is now lower than the rental of a comparable property in the vast majority of U.S. metropolitan areas.
According to NAR, the inventory of existing homes for sale in the U.S. was 2.2 million homes at the end of June 2013, which is 8% below June 2012, but 24% above the levels in January 2013. Inventory levels, which vary significantly across local housing markets, historically increase in the spring and summer months every year. The June 2013 inventory represents a national average supply of 5.2 months at the current homesales pace and the inventory supply is returning to a more typical level. In select areas of the country, however, there is a lack of inventory at certain price points, which generally has had a positive effect on home prices.
Mortgage rates continue to be at low levels by historical standards, which we believe has helped stimulate demand in the residential real estate market. According to Freddie Mac, mortgage rates on commitments for a 30-year, conventional, fixed-rate first mortgage averaged 6.5% for 2000 to 2005, 5.7% for 2006 to 2010 and 4.1% for 2011 through 2012. Although the average mortgage rate has increased 0.7% from January 2013 to June 2013, the mortgage rate of 4.1% at June 2013 is consistent with the average rate for 2011 and 2012 and continues to be historically low. Partially offsetting the positive impact of low mortgage rates are conservative mortgage underwriting standards, increased down payment requirements and homeowners having limited or negative equity in homes in certain markets. Mortgage credit conditions have tightened significantly during this housing downturn, with banks limiting credit availability to more creditworthy

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borrowers and requiring larger down payments, stricter appraisal standards, and more extensive mortgage documentation. As a result, mortgages are less available to some borrowers and it frequently takes longer to close a homesale transaction due to the enhanced mortgage and underwriting requirements.
Homesales
According to NAR, homesale transactions for 2012 increased to 4.7 million homes or 9% compared to 2011 despite challenging economic conditions during 2012. For the three months ended June 30, 2013, RFG and NRT homesale transactions increased 10% and 12%, respectively, due to an overall increase in homebuyer activity compared to the second quarter of 2012. The quarterly and annual year over year trends in homesale transactions is as follows:
 
 
 
2013 vs. 2012
 
 
Full Year 2012 vs. 2011
 
First Quarter
 
Second Quarter
 
Third Quarter Forecast
 
Fourth Quarter Forecast
 
Full Year
2013 vs. 2012 Forecast
 
Number of Homesales
 
 
 
 
 
 
 
 
 
 
 
 
Industry
 
 
 
 
 
 
 
 
 
 
 
 
NAR
9
%
(a) 
8
%
(a) 
12
%
(a) 
7
%
(b) 
4
%
(b) 
8
%
(b) 
Fannie Mae (c)
9
%
 
10
%
 
14
%
 
2
%
 
2
%
 
7
%
 
Realogy
 
 
 
 
 
 
 
 
 
 
 
 
Real Estate Franchise Services
9
%
 
6
%
 
10
%
 
 
 
 
 
 
 
Company Owned Real Estate Brokerage Services
14
%
 
5
%
 
12
%
 
 
 
 
 
 
 
_______________
 
 
(a)
Historical existing homesale data is as of the most recent NAR existing homesale press release.
(b)
Forecast existing homesale data, on a seasonally adjusted basis, is as of the most recent NAR forecast.
(c)  
Existing homesale data, on a seasonally adjusted basis, is as of the most recent Fannie Mae press release.
As of their most recent releases, NAR and Fannie Mae are each forecasting an increase in existing homesale transactions in 2013 of 8% and 7%, respectively, compared to 2012. For 2014, NAR and Fannie Mae are each forecasting an increase in existing homesale transactions of 3% and 6%, respectively, compared to 2013.
Homesale Price
In 2012, the percentage change in the average price of homes brokered by our franchisees outperformed the percentage change in median home price reported by NAR, due to the geographic areas they serve, as well as a greater impact from increased activity in the mid and higher price point segment of the housing market and less distressed homesale activity compared to the prior year. We also believe that the improvement in price in 2012 was due to the low level of home inventory in many markets as well as the increase in demand noted by the increase in the number of homesale transactions. For the three months ended June 30, 2013 compared to the same period in 2012, average homesale price was up 10% for RFG and 7% for NRT. The quarterly and annual year over year trend in the price of homes is as follows:
 
 
 
2013 vs. 2012
 
 
Full Year 2012 vs. 2011
 
First Quarter
 
Second Quarter
 
Third Quarter Forecast
 
Fourth Quarter Forecast
 
Full Year 2013 vs. 2012 Forecast
 
Price of Homes
 
 
 
 
 
 
 
 
 
 
 
 
Industry
 
 
 
 
 
 
 
 
 
 
 
 
NAR
5
%
(a) 
9
%
(a) 
9
%
(a) 
10
%
(b) 
9
%
(b) 
11
%
(b) 
Fannie Mae (c)
7
%
 
11
%
 
8
%
 
8
%
 
8
%
 
8
%
 
Realogy
 
 
 
 
 
 
 
 
 
 
 
 
Real Estate Franchise Services
8
%
 
9
%
 
10
%
 
 
 
 
 
 
 
Company Owned Real Estate Brokerage Services
4
%
 
6
%
 
7
%
 
 
 
 
 
 
 
 
_______________
 
(a)
Historical homesale price data is for average price and is as of the most recent NAR existing homesale press release.
(b)
Forecast homesale price data is for median price and is as of the most recent NAR forecast.
(c)  
Existing homesale price data is for median price and is as of the most recent Fannie Mae press release.

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As of their most recent releases, NAR and Fannie Mae are forecasting an increase in median existing homesale price in 2013 of 11% and 8%, respectively compared to 2012. For 2014, NAR and Fannie Mae are forecasting an increase of 6% and 5%, respectively, in median homesale prices compared to 2013.
Recent Legislative and Regulatory Matters
Dodd-Frank Act. On July 21, 2010, the Dodd-Frank Act was signed into law for the express purpose of regulating the financial services industry.  The Dodd-Frank Act establishes new standards and practices for mortgage originators, including determining a prospective borrower's ability to repay their mortgage, removing incentives for higher cost mortgages, prohibiting prepayment penalties for non-qualified mortgages, prohibiting mandatory arbitration clauses, requiring additional disclosures to potential borrowers and restricting the fees that mortgage originators may collect.  These standards and practices, and the regulations promulgated under the Dodd-Frank Act in early 2013, include limitations, which are scheduled to become effective in 2014, on the amount that a mortgage originator may receive in fees with respect to a "qualified mortgage," including fees received by affiliates of the mortgage originator.  If a loan is considered a “qualified mortgage” the lender is presumed to have made a good faith and reasonable determination of a borrower's ability to repay. To the extent a loan is not a "qualified mortgage," in any action against the lender, the lender will have to demonstrate it complied with all underwriting standards concerning a borrower's ability to repay. Such limitations on fees could adversely affect the fees received by TRG, as provider of title and settlement services, in transactions originated by our joint venture, PHH Home Loans. 
Certain provisions of the Dodd-Frank Act may impact the operation and practices of Fannie Mae and Freddie Mac and other government sponsored entities, ("GSEs") and require sponsors of securitizations to retain a portion of the economic interest in the credit risk associated with the assets securitized by them.  Substantial reduction in, or the elimination of, GSE demand for mortgage loans could have a material adverse effect on the mortgage industry and the housing industry in general and these provisions may reduce the availability of mortgages to certain individuals.
We are continuing to evaluate all aspects of the Dodd-Frank Act. Such legislation and regulations promulgated pursuant to such legislation could increase down payment requirements and increase mortgage costs, and, as a result, limit mortgage availability. Such legislation and regulations could also curtail affiliated business transactions. Legislation that may be enacted to reform the U.S. housing finance market, including legislation that curtails Freddie Mac and/or Fannie Mae's activities and/or results in the wind down of these entities, could materially and adversely affect the mortgage and housing industries, result in heightened federal regulation and oversight of the mortgage and housing industries, limit mortgage availability, and/or result in increased costs for housing market participants.
Other Housing Factors
Although there have been concerns about significant “shadow inventory” (i.e., properties where the homeowner is seriously delinquent in meeting its mortgage obligations or where the property is in some stage of foreclosure or already a real estate owned property (“REO”)), we do not believe that this will have a significant impact on our business, as the concentration of the shadow inventory is limited to a few regions of the country and the potential increase in unit sales activity should offset in whole or in part the adverse impact on home prices in these regions. Furthermore, according to NAR, the percentage of distressed properties has declined from 26% of sales in June 2012 to 15% of sales in June 2013, and institutions holding distressed mortgages have increasingly shifted activity away from REOs and focused on short sales, which are less disruptive to the market.
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, positive demographic trends such as population growth, increases in the number of U.S. households, low interest rates, increases in renters that qualify as homebuyers and locally based dynamics such as housing demand vs. supply. Factors that may negatively affect a sustained housing recovery include:
higher mortgage rates as well as reduced availability of mortgage financing;
lower unit sales, due to insufficient inventory levels in certain markets, the reluctance of first time homebuyers to purchase due to concerns about investing in a home or changing attitudes on home ownership and move-up buyers having limited or negative equity in homes;
lower average homesale price, particularly if banks and other mortgage servicers rapidly liquidate foreclosed properties that they are currently holding in certain concentrated affected markets;
continuing high levels of unemployment and associated lack of consumer confidence;
unsustainable economic recovery in the U.S. or a weak recovery resulting in only modest economic growth;

30


economic instability stemming from ongoing high levels of U.S. debt;
a lack of stability or improvement in home ownership levels in the U.S.; and
legislative or regulatory reform, including but not limited to reform that adversely impacts the financing of the U.S. housing market or amends the Internal Revenue Code in a manner that negatively impacts home ownership such as reform that reduces the amount that certain taxpayers would be allowed to deduct for home mortgage interest.
Many of the trends impacting our businesses that derive revenue from homesales also impact our Relocation Services business, which is a global provider of outsourced employee relocation services. In addition to general residential housing trends, key drivers of our Relocation Services business are corporate spending as well as employment trends which have recently shown evidence of a recovery; however, there can be no assurance that corporate spending on relocation services will return to previous levels following any economic recovery.
* * *
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 in their historical reports and forecasting models whereas we use data based on actual reported results.  In addition to the differences in calculation methodologies, there are geographical differences and concentrations in the markets in which we operate versus the national market. For instance, comparability is impaired 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. Additionally, NAR historical data is subject to periodic review and revision and these revisions could be material.  NAR and Fannie Mae generally update their forecasts on a monthly basis and subsequent forecasts may change materially from those previously issued. 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.  We also note that forecasts are inherently uncertain or speculative in nature and actual results for any period could materially differ. 
Key Drivers of Our Businesses
Within our Real Estate Franchise Services segment and our Company Owned Real Estate Brokerage Services segment, we measure operating performance using the following key operating statistics: (i) closed homesale sides, which represents either the “buy” side or the “sell” side of a homesale transaction, (ii) average homesale price, which represents the average selling price of closed homesale transactions, (iii) average homesale broker commission rate, which represents the average commission rate earned on either the “buy” side or “sell” side of a homesale transaction and (iv) net effective royalty rate which represents the average percentage of our franchisees’ commission revenues payable to our Real Estate Franchise Services segment, net of volume incentives achieved.
Prior to 2006, the average homesale broker commission rate was declining several basis points per year, the effect of which was more than offset by increases in homesale prices. From 2007 through June 2013, the average broker commission rate remained fairly stable; however, we expect that, over the long term, the average brokerage commission rates will modestly decline.
The net effective royalty rate has been declining over the past four years. We expect that, over the near term, the net effective royalty rate could continue to modestly decline due to, among other things, an increased concentration of business with larger franchisees which earn higher volume incentives and a shift or increase in volume amongst our brands which operate under different royalty rate arrangements. These factors could have the effect of increasing total net revenues notwithstanding the impact of the net effective royalty rate.
The net effective royalty rate does not include the effect of non-standard incentives granted to some franchisees. Royalty fees are charged to all franchisees pursuant to the terms of the relevant franchise agreements and are included in each of the real estate brands' franchise disclosure documents. Non-standard incentives are occasionally used as consideration for new or renewing franchisees. Due to the limited number of franchisees that receive these non-standard incentives, we believe excluding such incentives from the net effective royalty rate provides a more meaningful average for typical franchisees. We anticipate that as the housing market recovers and our franchise revenues increase, the impact of these non-standard incentives on the net effective royalty rate will decrease accordingly. The inclusion of these non-standard incentives would reduce the net effective royalty rate by approximately 16 basis points for the year ended December 31, 2012.

31


Our Company Owned Real Estate Brokerage Services segment has a significant concentration of real estate brokerage offices and transactions in geographic regions where home prices are at the higher end of the U.S. real estate market, particularly the east and west coasts, while our Real Estate Franchise Services segment has franchised offices that are more widely dispersed across the United States. Accordingly, operating results and homesale statistics may differ between our Company Owned Real Estate Brokerage Services segment and our Real Estate Franchise Services segment based upon geographic presence and the corresponding homesale activity in each geographic region.
Within our Relocation Services segment, we measure operating performance using the following key operating statistics: (i) initiations, which represent the total number of transferees we serve and (ii) referrals, which represent the number of referrals from which we earn revenue from real estate brokers. In our Title and Settlement Services segment, operating performance is evaluated using the following key metrics: (i) purchase title and closing units, which represent the number of title and closing units we process as a result of home purchases, (ii) refinance title and closing units, which represent the number of title and closing units we process as a result of homeowners refinancing their home loans, and (iii) average price per closing unit, which represents the average fee we earn on purchase title and refinancing title sides. An increase in mortgage rates could have a negative impact on refinancing title and closing units.
A decline in the number of homesale transactions and decline in homesale prices could adversely affect our results of operations by: (i) reducing the royalties we receive from our franchisees and company owned brokerages, (ii) reducing the commissions our company owned brokerage operations earn, (iii) reducing the demand for our title and settlement services, (iv) reducing the referral fees we earn in our relocation services business, and (v) increasing the risk of franchisee default due to lower homesale volume. Our results could also be negatively affected by a decline in commission rates charged by brokers.
The following table presents our drivers for the three and six months ended June 30, 2013 and 2012. See “Results of Operations” below for a discussion as to how these drivers affected our business for the periods presented.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2012
 
% Change
 
2013
 
2012
 
% Change
Real Estate Franchise Services (a)
 
 
 
 
 
 
 
 
 
 
 
Closed homesale sides (b)
302,420

 
273,771

 
10
%
 
512,200

 
471,229

 
9
%
Average homesale price
$
236,590

 
$
214,547

 
10
%
 
$
226,076

 
$
205,967

 
10
%
Average homesale broker commission rate
2.55
%
 
2.55
%
 

 
2.55
%
 
2.55
%
 

Net effective royalty rate
4.51
%
 
4.64
%
 
(13) bps

 
4.53
%
 
4.68
%
 
(15) bps

Royalty per side
$
281

 
$
263

 
7
%
 
$
272

 
$
256

 
6
%
Company Owned Real Estate Brokerage Services
 
 
 
 
 
 
 
 
 
 
Closed homesale sides (b)
92,878

 
82,768

 
12
%
 
150,938

 
138,041

 
9
%
Average homesale price
$