Note: The following is a verbatim transcription of Realogy Corporation’s 8/23/06 Conference Call. It has been edited from its original version for transcription purposes.
August 23, 2006 Realogy Corporation Share Buyback Conference Call
Operator:
Welcome to the Realogy Corporation Conference Call. This conference is being recorded. If anyone has any objections, you may disconnect at this time. I would now like to introduce Mr. Hank Diamond, Senior Vice President of Investor Relations. Sir, you may begin.
Hank Diamond
Thank you. Good afternoon everyone and thank you all for joining us. On the call with me today are our Chairman and CEO, Henry Silverman; our Vice Chairman and President, Richard Smith; and Chief Financial Officer, Tony Hull. Before we discuss today's announcement, I would like to remind everyone of four things. First, the rebroadcast, reproduction and retransmission of this conference call and webcast without the express written consent of Realogy Corporation are strictly prohibited.
Second, if you did not receive a copy of our press release, it's available on our website at www.realogy.com or on the First Call system. Third, the company will be making statements about its future results and other forward-looking statements during this call. Statements about future results made during the call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements are based on current expectations and the current economic environment. Forward-looking statements and projections are inherently subject to significant economic, competitive and other uncertainties and contingencies, which are beyond the control of management. The company cautions that these statements are not guarantees of future performance. Actual results may differ materially from those expressed or implied in the forward-looking statements.
Important assumptions and other important factors that could cause actual results to differ materially from those in the forward-looking statements and projections are specified in the company's information statement dated July 13, 2006, quarterly report on Form 10-Q for the period ended June 30, 2006, including under headings such as "Risk Factors", and in our press release issued today and filed on Form 8-K.
Finally, during the call, the company will be using certain non-GAAP financial measures as defined under SEC rules. Where required, we have provided a reconciliation of those measures to the most directly comparable GAAP measures in the tables in the press release and on our website.
Note: The following is a verbatim transcription of Realogy Corporation’s 8/23/06 Conference Call. It has been edited from its original version for transcription purposes.
Before I turn the call over to our Chairman, let me briefly review the major points from today's press release. First, Realogy has announced that its Board of Directors has authorized a stock repurchase program for up to 48 million or approximately 19% of the Company's outstanding shares. Second, Realogy's share of the proceeds from the sale of Travelport by Cendant Corporation, which closed earlier today, will be used to fund the repurchase and to reduce Realogy's debt to approximately $2 billion.
And finally, the Company's updated projections for the remainder of 2006, Realogy's full-year 2006 revenue is now expected to be between $6.4 billion and $6.7 billion and EBITDA is expected to be between $800 million and $900 million. The new EBITDA range includes five months of Realogy's standalone corporate costs and excludes Cendant residual and separation costs, as well as restructuring costs in the businesses.
Now, I would like to turn the call over the Realogy's Chairman and CEO, Henry Silverman.
Henry Silverman
Thank you, Hank. I am going to briefly comment on our share repurchase program and then I will turn the call over to Richard and Tony to discuss our updated 2006 projections then, of course, we will be happy to take your questions. On Cendant earnings call a few weeks ago, I told you we believe that Realogy shares are being significantly mispriced by the market. Our company is principally a franchisor with a high-free cash flow business model, and our stock is trading at a deep discount to the multiples of our franchise or peers, and even to commercial real estate brokerage companies.
Our Board agreed, and as a result, we today announced the program to repurchase almost 20% of our stock. You will also recall, on the Cendant call's beginning a year ago, we told you that growth of the residential real estate market in 2004 and for most of 2005 was not sustainable. With interest rates at historic lows, cash became too expensive to hold, and real estate was one of the asset classes to benefit.
Since the fourth quarter of 2005, we have seen as we predicted a reversion to a more normalized macro market condition. In particular, we have seen the departure of speculative investors who had a very positive impact on 2004 and 2005 home sales. That said, as Richard and Tony will elaborate, we believe in the long-term secular growth of the US residential real estate market, driven by compelling demographic trends and a solid economic environment. We expect our company will outperform our markets through the strength of our leading national brands and our strategic initiatives. While earnings will be down in 2006, over the long-term, we believe we can generate consistent earnings growth.
Even in 2006, despite the slowdown from 2005's record levels, Realogy is highly profitable, and we expect to generate discretionary free cash flow of about $400 million. Given that free cash flow generation and long-term growth prospects, our Board of Directors has concluded that the best investment we can make with the Travelport proceeds is the repurchase of our own stock.
The 48 million share program is the maximum we can repurchase in the near-term due to our tax-free spin-off from Cendant. Depending on the exact timing of the Note: The following is a verbatim transcription of Realogy Corporation’s 8/23/06 Conference Call. It has been edited from its original version for transcription purposes. share price, we expect the total program to be accretive to 2007 EPS by 7% to 10%. From a mechanical standpoint, we will fund the repurchase with about $1 billion of the proceeds from the Travelport sale. This will still leave cash to be used for debt reduction. So, even with a significant share repurchase, our debt will be down to about $2 billion, allowing us to continue to be in a strong liquidity position.
We further expect that we will maintain our current investment-grade credit ratings. In order to buy in this magnitude of stock in a relatively short period of time, we are likely to launch a tender offer for the majority of the shares at a time deemed appropriate by our Board. We will then probably follow the tender by open market repurchases and similar methods if needed.
We will likely buy about two-thirds in the tender, so we will have some dry powder in the event that our shares don't perform as we anticipate after the tender is completed. As I said before, our Board and our management are committed to unlocking long-term value for our shareholders and the repurchase plan we announced today is an important part of that process.
With that, I will turn the call over to Richard and Tony to discuss our updated 2006 outlook.
Richard Smith
Thank you, Henry. I am going to discuss the recent trends we've been seeing the residential real estate market and our outlook for the remainder of the year. Tony Hull, our CFO, will review recent volume and pricing trends, and then I will discuss why we remain confident in the long-term growth of the business, and what may happen over the next year or so based on what has happened historically during other periods of moderating real estate trends.
As Henry mentioned on the last Cendant call, summer is our Christmas season with our July results finalized and a better look into August, we are now in a position to update our projections for the remainder of the year. As a result, we are lowering our forecast for 2006 as a disconnect between buyers' and sellers' expectations that we were seeing earlier in the year has not abated, resulting in lower than anticipated transaction volumes.
So, what do we know now that we didn't know in mid-July? One, our closed sides in July came in lower than expected. Two, July and August open contracts are also below forecast, which will impact our closed business in the remainder of the third quarter and predictably the balance of the year. Three, inventory levels which have been unsustainably low have continued to increase in most NRT markets to levels that are more consistent with a normal real estate environment. Four, national purchase mortgage applications fell about 15% in July.
And last and most recently, NAR announced today that July existing home sales were down about 11% year-over-year and about 4% versus June. So, while the market is clearly moderating in 2006, more quickly into a larger degree than we had anticipated, what we are seeing is as predicted a return to a more sustainable historically normal market. To put things in perspective, 2006 is still expected to be the third best year in the history of the US residential real estate market. Our Company remains highly profitable and free cash flow positive and as I will discuss in Note: The following is a verbatim transcription of Realogy Corporation’s 8/23/06 Conference Call. It has been edited from its original version for transcription purposes. more detail in a few minutes, our long-term growth prospects remain robust and intact.
Before I discuss the longer-term outlook, let me turn the call over to our CFO, Tony Hull, who will give you some more detail on what we are seeing in the current environment. Tony?
Tony Hull
Thanks, Richard. As we noted in our second quarter 10-Q, compared to 2005 home sales sides volume for the three months ended June 30, 2006, was down 16% for our franchise affiliates, 13% at our owned brokerage operations. This caused our EBITDA to decline about 20% during the period before separation and restructuring cost. With respect to the second half of the year, we have been closely watching the progression of NAR's and Fannie Mae's forecasts.
NAR's trimmed its back half [sides'] forecast from down 5% in February to down 8% in July, and Fannie Mae dropped its back half forecast from down 10% in March to down 13% in June. Based on these trends, our July results, and the July and August open contracts pipeline, we have revised our forecast accordingly. For the back half of the year, we are now forecasting that sides will be down about 19% at the mid- point compared to 14% in the first half.
Our updated guidance reflects a year-over-year EBITDA decline of about 30% at the mid-point the last six months of the year, compared to being down 20% in the first half, but we think we are forecasting appropriately. There are a number of silver linings to the weakness in units we are experiencing this year, that will position us as a stronger company when the market stabilizes. In particular, new franchise sales were up strongly in the second quarter as more independents affiliated with one of our brands strengthened their position in their markets.
This will enhance our royalty revenue in future periods. In addition, our broker commission rate has held steady for three consecutive quarters, compared to the four to eight basis point erosion we have seen over the prior three years. We expect commission rates to continue to stay flat for at least the next couple of years, as the value of full-service brokerage services is reinforced in stark contrast to the declining value of the limited service discounted brokers. None of this will offset the factors that are keeping consumers cautious and adversely impacting our earnings in 2006, but long-term, they will strengthen our already strong position in the residential real estate business.
On the cost side, we have taken steps to realign our expense run rate with the market we are facing this year. In that regard, we continue to maximize the efficiency of our storefront costs and have merged, consolidated or closed about 75 locations while preserving a productive agent population, and taking other actions that we expect will frame Realogy's run rate operating expenses by up to $60 million per year.
Finally, in the second quarter, we experienced particular weakness in California, where units were down 30% year-over-year for our franchise affiliates and NRT in aggregate and Florida, where units were down 44%. It is important to consider that although these regions are currently experiencing the most pain in our geographically diverse portfolio of areas served, it is also these regions that had Note: The following is a verbatim transcription of Realogy Corporation’s 8/23/06 Conference Call. It has been edited from its original version for transcription purposes. experienced the most gains over the past several years, which presents us with challenging comparison. Once we get through the current reversion to the mean, these reasons will continue to offer some of the best long-term growth opportunities for real estate, driven by continued population growth, immigration and other positive demographic and economic factors.
I will now turn the call back to Richard, who will discuss the longer-term outlook for residential real estate.
Richard Smith
Thank you, Tony. While it is too early to predict how the market will perform in 2007, we can at least look to history, specifically what has happened in other periods of moderation as a frame of reference for what might happen this time around. Since 1972, median existing home sale prices have grown at a CAGR of about 6.5% and existing home sale volumes have grown at a CAGR of about 3.5%. As a result, the total dollar volume of transactions, which is what drives our revenue, has grown at a CAGR of about 10%.
During these 34 years, there have been only two periods when dollar volumes of transactions have declined, 1980 to 1982 and 1989 to 1990. We believe that first period is largely inapplicable to what might happen now given that mortgage rates were over 16% in 1981 and 1982, and employment was much higher, and the economy was weak, a much different environment than we have today. 1989 to 1990 may present a more likely scenario. During 1989, the dollar volume of home sales declined by 8.5%, by less than 1% in 1990, and then resumed growing in 1991.
While I will again say that it is too early to tell whether a similar scenario will follow in 2007, I would note that the economic conditions today are still much better than at 1989 and in 1990, when mortgage rates were well over 10%. I would also note that this type of scenario is consistent with the projections made by NAR and Fannie Mae, who have projected the dollar volume of home sales to be flat to down slightly in 2007. Regardless however of what might happen over the next year or so, the long-term growth prospects for the US residential real estate market are very positive, driven by compelling demographic factors, a solid economic outlook and relatively low mortgage rates.
On the existing home turnover side, growth is expected to be driven by housing demand fueled by population growth, immigration, increasing minority home ownership, the baby boomers enduring appetite for real estate, the emergence of their children as substantive newer buyers of real estate. These factors will drive increased home ownership rates and increased turnover for many years to come.
On the pricing side, existing home prices should continue their uninterrupted long- term growth, [wherein] driven by increasing household income, continued GDP growth and mortgage rates, that according to economists are expected to stay below 8% for the foreseeable future. Given our unmatched scale, leading national brands and unique cross-selling value circle, we are well positioned to outperform the overall growth of the real estate market over the long-term, to remain high profitable and a strong generator of free cash flow.
With that, we would be pleased to take your questions. Note: The following is a verbatim transcription of Realogy Corporation’s 8/23/06 Conference Call. It has been edited from its original version for transcription purposes.
QUESTION AND ANSWER
Operator
Thank you.
Our first question is from Jeff Kessler of Lehman Brothers. Your line is open, sir.
Manav Patnaik:
Hi, this is actually Manav for Jeff. A couple of quick questions. Firstly, on the guidance side, you said, sides would be down 19%. Is that, I guess roughly both for RFG and NRT or is there a separate breakout for the two of those?
Tony Hull:
That is -- it's in the press release. We didn't break it out for the back half on the call. That's a combined number.
Manav Patnaik:
Okay. And, I guess, on home prices, do you have like a rough forecast for what you guys think will happen in the back half of this year and possibly in '07?
Tony Hull:
For '06, we expect the increase will be less than we saw in the first half of the year for both NRT and Real Estate Franchise Group, but overall for the year, that will be up year-over-year but less growth than we saw in the first half.
Manav Patnaik:
Okay. And I guess one final question, on the timing of the share buyback and your EPS I guess range of $1.42 to $1.75, what sort of timing are you estimating in terms when you -- announcing to complete the tender and whatever open market transaction?
Tony Hull:
As Henry said, we expect the majority of the shares; about two-thirds of the shares to be repurchased in the more near-term and then the rest will be purchased over the balance of the year.
Manav Patnaik:
All right. Thanks a lot. That's all for now.
Operator
Note: The following is a verbatim transcription of Realogy Corporation’s 8/23/06 Conference Call. It has been edited from its original version for transcription purposes.
Thank you. Our next question is from Lee Cooperman of Omega Advisors. Your line is open, sir.
Lee Cooperman:
Yes, thank you. Let me preface this question by saying that my mistake can be paraded off Fifth Avenue five abreast. In this business, if you don't make decisions, you don't make mistakes. Or I should say if you make decisions, you make mistakes. We have had a very undistinguished record; the predecessor corporation in repurchase decisions. And I really want to dwell on this decision to make sure that we have thought about this in great detail. It seems to me that they're two reasons a corporation buys back stock, two good reasons. One is, your budget and outlook differs substantially from the budget and outlook embedded in the stock price, and you think you are undervalued for good reasons.
Or alternatively, you think the private market value or the emerging market value of this business is substantially in excess to where the stock is trading and I guess, the question -- the first question, I have three questions. The first question I would ask you is, are you folks highly confident that this decision is the right decision, and that when we look back 12 to 18 months from now, with overwhelmingly high probability the decision to shrink the cap by 19% at present prices will have rendered to the benefit to the other 80% that remains outstanding?
Henry Silverman:
Yes. This is Henry, Lee. Yes, both we and our Board feel that, if you do the math, if you assume we had done a share buyback, and we are down to 205 million shares, and our debts back up to 2 billion, that's about $6 billion or $6.1 billion [TEV]. If you take the midpoint of the guidance Tony or Richard talked about, that means we are selling at seven times this year's EBITDA, and less than 15 times this year's free cash flow. We know that a private equity buyer would pay more than seven times, and we know that Evercore and JPMorgan, our advisors, felt that seven was well below the low-end of the range they expected our shares to sell at.
So, yes, we think that this is an opportune time to do it. And as I said in my portion of the call, if we bought back plus or minus two-thirds of the allocation through a tender, and let's say, we are wrong and the shares go down, we will still have a lot of dry powder to buy the remaining 16 or 17 million shares. So, God forbid, worst case, we could average down.
Lee Cooperman:
Second, is there anything you folks could be doing regarding your cost structure, to reduce cost, to help EBITDA in the slower period?
Tony Hull:
We have looked very carefully at our cost structure. As you know, the real estate franchise group has a 70% plus margin, so it's difficult to improve upon that. The biggest cost that we have is the storefront costs and corporate costs at NRT. And as we mentioned, we have taken over 50 million of cost out of that, we have consolidated 75 offices. So, we are looking very hard at cost cutting and we Note: The following is a verbatim transcription of Realogy Corporation’s 8/23/06 Conference Call. It has been edited from its original version for transcription purposes. continually look at cost-cutting opportunities and ways to minimize cost increases over time, that sort of thing.
Lee Cooperman:
Third, I know you are not making a forecast for 2007 and I am not asking for anything specific, but given your knowledge of the business and historical cycles, would you feel comfortable saying that this range of EBITDA for '06 would be a trough in that we ought to have somewhat better numbers in '07; but, who knows how much better, but better, or is that an open issue?
Henry Silverman:
Well, I think it is an open issue. We know our business model well. If the market, if the macro market is flat, we will be up. If the macro market is down marginally, we will be flat. But, if the macro market is down similarly to prior periods that Richard elaborated on, down another 20% or 30%, there is no way that our earnings will be up or even flat. We will be down less than the market but -- and we just don't know, Lee, where the macro real estate market will be. And with the kind of share we have, statistically, we are the market.
Lee Cooperman:
But implicitly, what you are doing by this buyback is you are saying that the stock is so undervalued relative to what we think we could sell it to a private equity player, that the market is giving us an edge?
Henry Silverman:
Well, yes, because we've done models that show even with a significantly down market next year, we are still highly profitable. We are very free cash flow generative. We increased franchise sales, we increased our broker commission rate, we increased the split to the agent, we increased our acquisitions at better multiples. We are not going bankrupt, but we will still be highly profitable and we'll grow off a lower base unfortunately, if that's the case and that's the worst case, in 2008.
Lee Cooperman:
Got you. Just explain to me if you could, let's assume hypothetically you bought a 19% this year, how long do you have to wait where you could then go back into the market and repurchase?
Henry Silverman:
Well, it's unknown. You can't get a tax lawyer to give you a good answer. You can't get a ruling. You can't get an opinion. It's all about facts and circumstances at the time. And so, obviously, it depends on what those facts and circumstances are. We don't -- we, obviously, had no plans to buy our stock back, and so that's a good thing, that's a good fact. But, we have to look again at some point in the future to see whether or not the facts and circumstances at that time would allow us to buy more stock.
Lee Cooperman: Note: The following is a verbatim transcription of Realogy Corporation’s 8/23/06 Conference Call. It has been edited from its original version for transcription purposes.
Okay. One last question, I promise this, and thank you for your answers. I assume that as it became apparent that we were going to be publicly traded company for the long-term and we could not do anything in stock repurchase, given the free cash flow nature of that business, that we would go to a substantial dividend.
Henry Silverman:
Well, I don't know that --
Lee Cooperman:
Well, let me rephrase it, Henry, before -- I apologize for interrupting you. I assume the preference to stock repurchase over a dividend for a recurring free cash model company is because the market is very much mispricing the paper in your view.
Henry Silverman:
That is correct.
Lee Cooperman:
If the stock was not undervalued, the dividend will be considered.
Henry Silverman:
Absolutely.
Lee Cooperman:
Okay, thank you. Good luck.
Henry Silverman:
Thank you.
Operator
Thank you, very much. Our next question is from Michael Millman of Soleil Securities. Your line is open.
Michael Millman:
Thank you. You may have talked about this. I missed the beginning. But, on the 50 or 60 million of savings, is that an annualized figure as of year-end, or put it in another way, how much savings do you expect in '06, how much in '07? And I have another broader question.
Tony Hull:
It's about 40 in '06 and 60 in '07.
Michael Millman: Note: The following is a verbatim transcription of Realogy Corporation’s 8/23/06 Conference Call. It has been edited from its original version for transcription purposes.
So, you will save 40. Is that 60 million additive to that 40?
Tony Hull:
No, no, no. It's 60 on an annual run ate basis starting in '07. And then 40, since we only took the expense reductions in part year, we will only get a benefit of about 40 million of them for 2006.
Michael Millman:
I see. And so, it sounds like you will get a full 30 million in the second half.
Tony Hull:
Yes, I think that's -- I think that's a good estimate, yes.
Michael Millman:
And you touched upon this, maybe you touched upon it earlier, sorry I apologize in advance. The bulk -- obviously, the bulk of your earnings comes from the franchise business. Is that basically purely at the mercy of the macro market? Are there things that you can do in the franchise business to outperform, maybe substantially outperform, or you are too big, don't have control, etcetera, etcetera?
Richard Smith:
Mike, this is Richard. We are not too big, but we are big and I think that's on the plus side. It is very much subject to the macroeconomics. In the franchise business, you grow the franchise business by selling new franchises, which we do quite well. You renew your existing franchisees, which we do extraordinarily well; continue to prove that value proposition and the other trigger if you can find it is you add a brand. But, you are right, you are very much subject to the macroeconomics.
There are other seemingly less tangible things you can do, and we do this well everyday. You assist your existing franchisees in growing in their respective markets through the expertise and the industry knowledge we have. We do that by helping them merge with other independents, other people who could prospectively be affiliated with our brands. We help them acquire other companies by giving them guidance and showing them the way. But, there are other less tangibles things, they all add up to growth. But, it is very difficult to overcome those macroeconomics on the franchise side.
Michael Millman:
And Richard, just -- about the [market], you probably spoke about this. But, I'll ask it, and please if you have -- are there any signs out there that the market is stabilizing?
Richard Smith:
Well, at this juncture, as you know, both NAR and Fannie Mae are forecasting '07 to be slightly down or flat to '06. Their guess is a guess at this point. We have not seen Note: The following is a verbatim transcription of Realogy Corporation’s 8/23/06 Conference Call. It has been edited from its original version for transcription purposes. sufficient information in the marketplace to be prepared to discuss what '07 might look like. So, we need more time, as you can imagine, and we will get more comfortable with whatever our position would be later in the year. But, it will probably not be as to just the marketplace in general, it would probably be more specific as to our drivers and how we feel about our drivers. But, that's going to come later in the year.
Michael Millman:
Thank you.
Henry Silverman:
Let me just add this. I mean, the notion of a market is really a misnomer. There is no market. This is not a national business, it's not like Coke and Pepsi. This is purely a local business. And so, to answer your question, there are some markets like parts of the Midwest where business is actually flat to up. They're other parts of the country like Florida and California, where it's getting worse and not better, and probably will not be better next year either. It won't be as bad, because the comparisons will be a lot easier, but it probably will be down marginally from 2006 based on what the local associations are saying.
We have a mix where a lot of our businesses in markets -- we've had a big bet on the Sunbelt, we think it was absolutely the right belt. We made a ton of dough the last six or seven years in those markets, and I think we will again. But, right now, we are looking at a market where there is a lot of inventory. I will just give you one market I am familiar with. In West Palm Beach, there are 6,000 condos for sale, and more being built. And you ask the developer, why you are building more? He says, my project is different, and it's better. So, give a developer money and they will build.
There are markets like that all over Florida and all over California, that will eventually stabilize, a lot of construction will be cancelled, and we will end up with a better supply-demand imbalance. Demand is growing very quickly because of the demographics that Richard and Tony alluded to, but it's going to take a while for that inventory to be sopped up.
Michael Millman:
Can I ask another question related to that?
Henry Silverman:
Sure.
Michael Millman:
Is our new house and existing homes, are they competitive or are they totally different markets, or generally different markets?
Henry Silverman:
Note: The following is a verbatim transcription of Realogy Corporation’s 8/23/06 Conference Call. It has been edited from its original version for transcription purposes.
Well, they are sold by -- we don't -- the existing homes sales are sold by real estate brokers and agents. New homes are typically sold by the builder, and they are basically sold and financed by the builders. So, they really are not competitive from the standpoint of our business model, which is based around commissions. But, yes, a buyer can buy a new home and/or can buy an existing home, and that could be a condo, or could be a single-family house, or it could be some combination of the two.
Michael Millman:
That was more of my -- I'm from the buyer's standpoint, if they look at both. Thank you.
Richard Smith:
And Mike, just -- you know this, the new home market represents a small percentage of our overall revenue. So, it's a distinctively different customer.
Michael Millman:
I was just thinking of all the deals -- the obvious deals that are being made by homebuilders if that's siphoning off some potential, or typical existing homebuyers.
Richard Smith:
No, we don't think so. The new home buyer is generally motivated for lifestyle reasons, differently than an existing home buyer.
Michael Millman:
Thank you.
Henry Silverman:
Also, Mike, just to finish the point. Only about 15% of the total turnover in the country are new homes, versus the 85% represented by existing home sales. So, if there is any impact, it's on the margin.
Operator
Thank you. Our next question then is from Jennifer Pinnick of Morgan Stanley and your line is open.
Jennifer Pinnick:
Good afternoon. I have a question. You talked about reversion to the mean. I was wondering if you have any sense nominally where existing home sales can come down to, or sides for your company can come down to? Where that mean is?
Henry Silverman:
Well, if you take my -- this is Henry, Jennifer, if you take my point that -- that we and the entire industry, starting with NAR and Fannie Mae and Realogy and the home builders, we all missed I think the degree of investment or what others call Note: The following is a verbatim transcription of Realogy Corporation’s 8/23/06 Conference Call. It has been edited from its original version for transcription purposes. speculation that really moved our markets in '04 and '05. If you look at the period before that, and said, "Okay, that's probably the worst case." That's existing home sales in the high fives, somewhere between 5.75 million and 6 million. So, I think that may be the mean.
And if you take this year's forecast, I think Fannie is about 6.2 million and assume that you have another 3% to 4% decline in '07, which is about what they are talking about, you get to like 5.9 million existing home sales. We think that our share of that will -- as a percent -- at least our share of commission dollars will continue to go up, both through NRT acquisitions and franchising. I think we told you on the Cendant conference call that franchise sales in the second quarter were 44% ahead of last year. So, in that environment, we will be fine. We will be -- we will be just fine.
Jennifer Pinnick:
Okay. And in terms of stabilization, since this market isn't -- this downturn isn't being driven economically by job losses or personal income pressures, what factors do you look for for stabilization?
Richard Smith:
Well, that's a great question. Mortgage rates are up about 100 basis points [for now], here in the past 30 days, are down about 34 basis points. So, they are not up materially. Affordability appears to be the issue in some markets. It really depends on the market. As Henry pointed out earlier, there are probably as many factors that one could point to as they are markets because there are -- this country is an assemblage of many markets not one. The media has certainly created a certain disconnect between the buyer and seller.
The media is convinced [that we] believe sellers that they are selling at the peak, and buyers that they are buying peak. So, that disconnect between the buyers' wants and sellers' needs continues to exist. I think what you have to remember is there is about 3.7 million homes in the inventory. If all of those are sold between now and the end of the year, this would be equal to or slightly better than 2005. So, there is a lot of inventory.
There is -- demand is there we believe. But the reconciliation between the sellers' needs and the buyers' wants has yet occur at the pace that many thought it would occur. So, those are some of the contributing factors, certainly not the economy. You have markets, as Henry pointed out, like Pittsburgh and in the State of Utah where they continue to be up in most markets year-over-year, and many of the economic trends that exist in those communities probably exist in others as well.
So, I think that there is just this big disconnect that has been created by the media. And I think that is part, probably a very material part of the problem right now. I also wouldn't discount affordability because you do have affordability issues in California and a few other states. So, that is also contributing to the issue.
Jennifer Pinnick:
Thank you.
Note: The following is a verbatim transcription of Realogy Corporation’s 8/23/06 Conference Call. It has been edited from its original version for transcription purposes.
Operator
Thank you. Our next question is from Adam Weinrich of Basswood Partners. Your line is open.
Adam Weinrich:
Thank you. I have two questions quickly please. The first is that you say that you plan to bring debt down to about $2 billion. I am curious what level of debt you think the company will be able to run at in 12 -- 24 from now? And what the most relevant measure is to look at your debt capacity, given where you want your ratings to be, whether that's an EBITDA multiple, or EBIT, or something else?
Tony Hull:
Our view is that the -- that our free cash flow after acquisitions, etcetera, is in the high 100s to about $200 million per year. So, we would expect to pay that kind of debt down every year.
Adam Weinrich:
But I mean, is 2 billion sort of on the high end of what you are comfortable with, or do you see that as leaving the Company under levered?
Henry Silverman:
Well, I think we would be under levered. But, there is no point in borrowing -- what will we do with the cash? Let's assume we borrowed more money, which would probably result in lower debt ratings, which doesn't impact our business model, but I can't understand what the benefit would be. As I said earlier, it's unlikely we can get a ruling -- well, we know we can get a ruling, it's unlikely that we get opinion. In fact, I am quite sure we wouldn't get an opinion from counsel that we could buy back more stock. So, short of making a major acquisition, which sounds highly unlikely as well, I am hard-pressed to think of what we do with the cash.
Adam Weinrich:
No, my question is understanding the company's debt capacity 12, 24, 36 from now. At some point, you will be able to buy back more stock. At some point, there may be a large acquisition. I am just trying to understand what level of debt you are comfortable running the company at, if you had a use for that cash?
Henry Silverman:
Well, let's discuss that in 12 or 24 months.
Adam Weinrich:
Okay. My second question just relates to the geographic concentration of the business. You mentioned the opportunity you saw in the Sunbelt States several years ago. Is there any material way that your -- the geographic split of your business differs from the market as a whole?
Note: The following is a verbatim transcription of Realogy Corporation’s 8/23/06 Conference Call. It has been edited from its original version for transcription purposes.
Henry Silverman:
Yes, we are concentrated on both coasts. We are really in every market you would want to be and if you look at -- we basically have built this company around demographics. So, we pick the markets we want to be and based on those same demographics, which Richard talked about, population growth, household formation, baby boomers, their kids, and immigration. And the markets we are in, like Florida and California, where we have very large positions, hit all five of those square on.
So, those are where we are more heavily concentrated than, for example, The National Association of Realtors, which is obviously everywhere. There are markets that we are not in like Philadelphia. We have probably a 0% share in Philadelphia. It's the fourth largest city in the country. So, there are opportunities for us in markets we are not in yet. But, the ones we are in are where the gains long-term will be the greatest, and right now, we are just going through some short-term pain.
Adam Weinrich:
Okay. Thank you, very much.
Operator:
Thank you. Our last question today is from Andy Topps of Vestor Capital. Your line is open now.
Andy Topps:
Yes. Thanks for taking my call. In terms of the unclarity or uncertainty of the marketplace, does that change your desire to do acquisitions?
Richard Smith:
Actually, it may represent an opportunity, as we are very efficient and we are very disappointed in our approach to acquisitions, we have been for many years and we will continue to be so. But, in a market that you suggest might be different than the market we are in today, it just represents acquisition opportunities that perhaps didn't exist in a stronger market. You are buying companies that are strategic. You are buying them at a lower multiple, and probably taking advantage of the same -- the same weaknesses in their markets that they see as operators. So, it represents opportunity, not a problem. We will be selective -- just as selective as we have always been.
Andy Topps:
And then on the brokerage side, obviously you did 250 million EBITDA last year, and the mid-point of the range is substantially less. Is it fair to say some of the markets are actually not -- basically losing money at this point?
Richard Smith:
Well, remember they are probably not losing money. The NRT operators are also franchisee, they're paying a franchise royalty fee to the franchise side of the house. If you look at after that -- in markets where we see no prospect of profitability, we Note: The following is a verbatim transcription of Realogy Corporation’s 8/23/06 Conference Call. It has been edited from its original version for transcription purposes. are taking out costs and improving the outlook for those operations. So, we are very comfortable with the markets in which we currently operate, and they are either short-term not where we would like them to be, but long-term will be. Or, they represent roll-in or acquisition opportunities. We are not going to abandon any of the markets we are in today.
Andy Topps:
And if you look at your sides for the year, roughly 1.5 million plus or minus on the franchise, [about] 400 on the NRT side, that's substantially less than '03 and '04, and obviously home sales were probably, if I remember it right, approximating '03 levels as '06. So, I am just trying to get a sense for why you are having a decline in sides relative to 2003, given that the NRT data -- or the National Association data [that's at] comparable levels?
Richard Smith:
Tony, I don't know if you want to address that. I don't know that that is necessarily accurate.
Richard Smith:
Let me just point to something real quick as to sides, before we address that. But, as Henry pointed out earlier, if things got much worse then you may be looking at a completely different perspective than we have today, 5.9, 6.2 million units and we would have our respective share of those units. But, we are not very -- we are not focused on share, we are focused on profitability and take that into account in your modeling. So, we -- that's not share at any cost, we focus on profits, not share.
Andy Topps:
And two more quick ones, excluding Florida and California, is it fair to say you guys are modestly down for the year in terms of sides?
Richard Smith:
We are sorry, we missed that – Can you repeat?
Andy Topps:
If you exclude Florida and California, what were the other 48 states -- what would the business be down -- year-over-year directionally?
Tony Hull:
In the second quarter, I believe it would have been down nine points instead of 16 if you exclude -- for the affiliate group, if you exclude Florida and California.
Andy Topps:
Got it. And the 2 billion of debt, that's both secured and unsecured?
Tony Hull: Note: The following is a verbatim transcription of Realogy Corporation’s 8/23/06 Conference Call. It has been edited from its original version for transcription purposes.
No, that's just our unsecured debt.
Andy Topps:
Got it. Okay.
Tony Hull:
It's not the secured debt that we have for Cartus.
Andy Topps:
Thanks for your time.
Operator:
Thank you, very much. I would like to turn the call back over to Realogy management.
Henry Silverman:
Okay. Thank you all, and we will look for you on the third quarter Realogy call this Fall. Thank you, very much.