North America Equity Research 20 November 2012

Initiation Overweight Realogy Holdings Corp. RLGY, RLGY US Initiating Coverage with an Overweight Rating, $42 PT Price: $37.06 Price Target: $42.00

We are initiating coverage on Realogy Holdings Corp. with an Overweight Real Estate Services rating and $42 year-end 2013 target price. We think the U.S. housing Anthony Paolone, CFA AC market has turned the corner and RLGY is a leveraged way to invest in (1-212) 622-6682 this recovery. [email protected]

J.P. Morgan Securities LLC  RLGY is the largest residential brokerage platform... The company owns and franchises out the most recognizable brands in the residential Michael W. Mueller, CFA (1-212) 622-6689 brokerage business, including Century 21, Coldwell Banker, ERA, [email protected] Better Homes and Gardens Real Estate, Sotheby’s International Realty, J.P. Morgan Securities LLC and The Corcoran Group. This network has over 238,000 brokers in 13,500 offices, and we estimate that in 2012 it will have been a part of Joseph Dazio, CFA (1-212) 622-6416 one-in-five existing home sales in the U.S. [email protected]  …with significant leverage to a U.S. housing recovery. We calculate J.P. Morgan Securities LLC that RLGY's EBITDA should increase by about $10 million for every Molly McCartin percentage point growth in either existing home sales or average home (1-212) 622-6615 [email protected] prices. Furthermore, given the company's NOLs and above-average financial leverage, incremental EBITDA should drop to bottom-line cash J.P. Morgan Securities LLC flow. We think this set of dynamics makes RLGY among the most direct Alpita Maheshwari (91 22) 6157-3273 equity trades on the broad U.S. housing market. [email protected]  We see 20% growth in home prices and 20% growth in sales over J.P. Morgan India Private Limited

the next five years. To estimate RLGY's earnings, we make forecasts Price Performance for U.S. home price appreciation and the number of existing home sales. 40

In summary, we think each of these measures should increase by a total 36 of 20% over the next five years, which would land the U.S. housing $ 32 market in 2017 with prices still 10% below peak levels and volumes 28 only back to pre-boom (i.e., 2002) levels. For RLGY, this backdrop 24 should afford it a five-year EBITDA CAGR of 12%. Nov-11 Feb-12 May-12 Aug-12 Nov-12 RLGY share price ($) RTY (rebased)  We are introducing a year-end 2013 target price of $42/share. We YTD 1m 3m 12m Abs 37.3% 0.4% 37.3% 37.3% use a discounted cash flow model to arrive at our target price. We Rel 30.3% 3.8% 40.6% 24.3% assume a discount rate of 10% and long-term growth rate of 4% after above-trend growth over the next five years.

Realogy Holdings Corp. (RLGY;RLGY US) FYE Dec 2012E 2013E 2014E Company Data EPS Reported ($) Price ($) 37.06 Q1 (Mar) - (0.65) (0.25) Date Of Price 19 Nov 12 Q2 (Jun) - 0.92 0.76 52-week Range ($) 39.77 - 27.00 Q3 (Sep) - 0.58 0.74 Mkt Cap ($ mn) 5,365.94 Q4 (Dec) (3.30) 0.16 0.28 Fiscal Year End Dec FY (9.82) 1.02 1.53 Shares O/S (mn) 145 Cash EPS FY ($) (9.82) 1.38 2.28 Price Target ($) 42.00 Source: Company data, Bloomberg, J.P. Morgan estimates. Price Target End Date 31 Dec 13 See page 62 for analyst certification and important disclosures, including non-US analyst disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

www.morganmarkets.com Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

Table of Contents Investment Thesis ...... 3 Risks to Rating and Price Target ...... 5 Company Description ...... 6 Financial Outlook ...... 7 A Brief Look at Realogy's History...... 8 Formation of the Company and Separation from Cendant...... 8 Apollo Acquisition and Subsequent Housing Downturn...... 8 Balance Sheet Restructuring and Cost Cuts...... 9 A Brief Look at the Company Today...... 10 Realogy Franchise Group (RFG) ...... 10 NRT LLC ...... 11 Cartus Corporation...... 11 Title Resource Group ...... 11 Realogy Franchise Group (RFG)...... 13 NRT LLC...... 21 Cartus Relocation Services ...... 27 Title Resource Group (TRG) ...... 30 The Number of Existing Home Sales Is Recovering...... 34 The Value Proposition: Affordability Is High and Rates Remain Low ...... 37 Distressed Situations Beginning to Resolve ...... 40 Balance Sheet: Business Improvement and Free Cash Flow (Especially Given the NOLs) Should Drive Leverage Down, but It Will Be a Long Process ...... 44 The Good News: NOLs, Free Cash Flow and Little Near-Term Maturities ...... 45 The Bad News: RLGY Faces a Long Road and Has High-Cost Debt It Can’t Pre-pay Without Penalties...... 46 Valuation ...... 48 Our DCF and $42 YE 2013 Price Target...... 48 Sum-of-the-Parts Valuation ...... 49 Comps Valuation – Not a Great Approach, in Our View ...... 51 Free Cash Flow Multiples...... 53 Management and Board of Directors...... 55 Board of Directors...... 56

2 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

Realogy Holdings Investment Thesis Corp (RLGY) Realogy is a leveraged way to invest in the U.S. housing market Rating (Overweight) RLGY is the largest owner and franchisor of residential brokerage operations in the U.S. and around the world (through master franchise agreements). It owns and franchises out some of the most recognizable brands in the business, including Century 21, Coldwell Banker, ERA, Better Homes and Gardens Real Estate, Sotheby’s International Realty, and The Corcoran Group. These brokerage networks have over 238,000 agents in 13,500 offices, and by our estimates will represent the buyer or seller in about one-in-five U.S. existing home sales in 2012. About 80% of RLGY’s EBITDA comes from its owned and franchised residential brokerage operations, with the balance coming from its corporate relocation business (Cartus) and its title insurance and closing services business (TRG). With residential brokerage profitability driven almost entirely by the volume and price of existing home sales, RLGY is squarely tied to the health of the U.S. housing market.

We think the U.S. housing market has turned the corner… 2012 represents a turning point in the U.S. housing market, in our view. After a roughly six-year downturn where home prices declined over 30% peak-to-trough and sales volumes were cut almost in half, all major indicators suggest both stabilization and improvement. There have been consistent positive home price changes in series published by S&P/Case-Schiller, CoreLogic, NAR, FHFA, Fannie, and Freddie. Home affordability is at a 25-year high, as measured against the cost of renting. The drop in the home ownership rate is slowing as the foreclosure backlog is worked through. Household formation is picking up compared to the depressed levels of the last couple of years, and surveys such as NAHB’s show markedly better sentiment. All of these items demonstrate an inflection point for the U.S. housing market.

…And we forecast 20% growth in prices and volumes over the next five years There are many forecasts for housing-related data. For purposes of estimating RLGY’s earnings, we estimate home price appreciation and existing home sales over the next five years. Specifically, we forecast home prices to rise about 20% between 2012 and 2017, bringing values to levels last seen in 2004/2005 and still about 10% off peak levels. As for existing home sales, we forecast a 20% rise, putting volumes at about 5.4 million in 2017 – back to roughly 2002 levels. To put our forecast into the context of other forecasts, our price appreciation estimates are higher than our structured products colleague John Sim’s base case estimates but lower than his “bull” case estimates. Our nearer-term forecasts are just inside of NAR’s projections and are more bullish than forecasts published by Fannie and Freddie.

Operating leverage should drive strong EBITDA growth in a housing recovery RLGY’s revenue and earnings are driven by the total value of the transactions in which it is involved. In other words, the company gets a percentage (either a royalty from franchisees or gross commission income from owned brokerages) of the number of homes sold whereby it represents the buyer or seller (a “side”) multiplied by the price of those homes sold. The more home transactions and/or the higher the price, the better the business – and vice-versa. We calculate that every percentage point increase in either volume (“sides”) or average home prices in RLGY’s brokerage businesses should result in about $10 million of EBITDA, or about

3 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

$0.07/share (3%) on our $2.20/share 2013 free cash flow estimate. Given that the company’s net operating loss carry-forwards (NOLs) should last through 2017, by our estimates, the EBITDA pick-up from an improving housing market should drop right to the bottom line for the next five years. Through 2017, we forecast an additional $465 million in EBITDA from the improvement in housing. When combined with some growth in RLGY’s other two smaller businesses (Cartus and TRG), we think EBITDA should grow at a 12% annual rate through 2017.

The recent IPO sets the path for reduced balance sheet leverage over time RLGY was taken private by Apollo in late 2006/early 2007 in a highly leveraged transaction. With a significant deterioration in EBITDA occurring after the take- private, RLGY operated with significant (and high cost) leverage – approximately 14x net-debt/EBITDA pre-IPO compared to the average service company at about 1x. The recent IPO netted the company $1.2 billion in proceeds that was used to pay down debt, $2.1 billion of convertible debt converted to equity, and EBITDA is growing. We estimate these items should drive year-end 2012 net-debt/EBITDA (trailing) down to 6.3x, subsequently dropping to 5.1x in 2013, 3.8x in 2014, and 2.7x in 2015, as free cash flow should be used primarily to pay down debt. We estimate that in 2015 the company could become an investment grade credit. We also think that at some point RLGY should have the ability to refinance almost $2 billion of term debt at a potentially better rate (not in our estimates), which should help cash flow.

Net operating loss carry-forwards have meaningful value Because of the sizable debt load RLGY carried as a private company and the decline in EBITDA, it operated at a loss for tax purposes. The company’s net operating loss carry-forwards (NOLs) total about $2.1 billion and should last over the next five years, by our estimates. We calculate that the net present value of these NOLs is $577 million, or about $4/share.

Cartus and TRG should also offer growth and are good businesses Outside of the residential brokerage business, RLGY owns Cartus and TRG. Cartus is the leading corporate relocation services business, where the company provides turnkey services to employees of major corporations. In the near term, this business is likely to be muted due to the sluggish job growth coming out of major companies and the global economy more broadly. However, we anticipate that growth in the customer base and some economic improvement should make Cartus additive to growth in 2013 and 2014. RLGY also provides title insurance and closing services through its TRG business. This business should finish 2012 with over 24% EBITDA growth as a result of low interest rates driving heavy refinancing volumes and the pick-up of new customers. We expect 2013 should have almost 22% growth before moderating into 2014 and beyond.

We expect RLGY to be a high beta and highly volatile stock RLGY is an asset-light service company tied to the health of the housing market and has above-average financial leverage. While we think the housing recovery is real and will unfold over a number of years, it is nonetheless likely to be uneven and have some rough patches. As such, we think RLGY will be a high beta stock and react to news and data releases that have some read-through to housing and the recovery. We think this is particularly exacerbated by the fact that direct trades on housing in the

4 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

equity markets are small in comparison to the size of the housing market and its related mortgage market (i.e., structured products, RMBS, etc.).

Risks to Rating and Price Target

The macro economic backdrop could weaken We believe the combination of higher affordability, record low interest rates, and an attractive own vs. rent spread drove much of the recent improvement in the housing market. The gains have come in spite of a choppy macro environment, with unemployment in the 8% range. Looking out to 2013 and beyond, as comps get more difficult, the macro environment will need to improve in order to drive meaningful incremental growth in the housing market, in our view.

Mortgage lending standards could restrict improving housing fundamentals The US Home Affordability Index, as measured by NAR, is at a 20-year high. However, bank lending standards remain strict. According to the most recent fed Senior Loan Officer Opinion Survey (July 2012), 91% of officers and large and middle market firms indicated that lending standards remain basically unchanged¸ with the other 9% indicating standards have only eased somewhat. We believe a loosening of credit standards is important to opening up the housing market to the “next leg” of borrowers and help drive incremental housing growth.

RLGY could lose share and not keep pace with the broader housing market We believe that in both the residential and commercial space, the larger brokerage companies tend to gain share in a downturn and lose share in an upturn. The rationale here is that in a downturn, many competitors either weaken/exit the business while in an upturn competition tends to increase as newer entrants hope to take advantage of a market opportunity. We also believe RLGY could be susceptible to Internet/discount brokers finding a successful business model in an improving real estate market.

The regulatory landscape could have an impact on the housing market There are many ways regulations can impact the housing market. For instance, any legal changes that could require banks to take back non-performing mortgages that were sold could inhibit their desire to lend. Agencies such as Fannie and Freddie could be overhauled in a way that makes borrowing more difficult for home buyers. Changes to the FHA could similarly impact the market. In addition, changes to the deductibility of mortgage interest for individuals could in essence raise the cost of home ownership.

Apollo retains significant control over the company RLGY’s board is essentially controlled by Apollo, and Apollo has a variety of rights and control so long as it continues to hold at least 25% of the company's common stock. The board is also staggered and has a variety of shareholder unfriendly characteristics.

5 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

Company Description Realogy Holdings Corp. is the leading global provider of residential real estate services, including real estate brokerage franchising (through its RFG business), owned brokerage (NRT), relocation services (Cartus), and title and settlement services (TRG). Realogy’s brands include Better Homes and Gardens Real Estate, Century 21, Coldwell Banker, Coldwell Banker Commercial, The Corcoran Group, ERA, and Sotheby’s International Realty. Realogy’s owned and franchised real estate brokerage businesses have approximately 13,500 offices and 238,500 sales associates doing business in 103 countries. The company is headquartered in Parsippany, New Jersey. On October 10, 2012, Realogy Holdings Corp. priced a 46 million share initial public offering (inclusive of the over-allotment), in which J.P. Morgan was a joint bookrunner, which resulted in net proceeds of $1.2 billion.

6 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

Financial Outlook

Our 2012, 2013 and 2014 EPS estimates are ($9.82), $1.02, and $1.53, respectively. Note that excluding non-recurring items and non-cash taxes, our estimates are ($9.82), $1.38, and $2.28, respectively – the key delta between the two estimates is our assumption that RLGY will book GAAP taxes at a 40% tax rate starting mid- year 2013, while it will only pay minimal cash taxes through 2017 due to its net operating loss carry-forwards (NOLs). We also estimate cash flow/share for 2013 and 2014 of $2.20 and $3.12, respectively; these estimates are after taking into account recurring cap ex and are essentially what’s available to pay down debt. The table below details our earnings estimates as well as key drivers underlying our assumptions by division.

Table 1: Key Assumptions/Drivers by Division

2012E 2013E 2014E 2015E 2016E 2017E

RFG Closed Homesale Sides 973,453 1,051,329 1,145,949 1,180,328 1,203,934 1,215,973 Growth 7.0% 8.0% 9.0% 3.0% 2.0% 1.0% Av erage Homesale Price $211,711 $220,179 $231,188 $242,747 $247,602 $252,554 Growth 6.8% 4.0% 5.0% 5.0% 2.0% 2.0%

NRT Closed Homesale Sides 284,791 304,727 326,057 348,881 359,348 366,535 Growth 11.9% 7.0% 7.0% 7.0% 3.0% 2.0% Av erage Homesale Price $431,061 $452,614 $475,245 $494,255 $509,082 $524,355 Growth 1.1% 5.0% 5.0% 4.0% 3.0% 3.0%

Cartus Revenue Growth 0.5% 5.0% 5.0% 4.0% 3.0% 2.0%

TRG Revenue Growth 16.8% 13.0% 4.6% 6.6% 3.3% 2.6%

EBITDA* $624,606 $716,459 $851,898 $983,591 $1,051,398 $1,112,906

Year-End Net Debt $3,957,462 $3,653,484 $3,210,751 $2,626,398 $1,940,687 $1,156,973 YE Net Debt/EBITDA 6.3x 5.1x 3.8x 2.7x 1.8x 1.0x

EPS ($9.82) $1.02 $1.53 $2.17 $2.61 $3.02 Growth NA NM 50.3% 41.6% 20.1% 15.5% EPS Ex . One-Time Items / Non-Cash Taxes ($9.82) $1.38 $2.28 $3.32 $3.99 $4.64 Growth NA NM 64.8% 45.6% 20.3% 16.3% Free Cash Flow/Share ($9.95) $2.20 $3.12 $4.07 $4.74 $5.39 Growth NA NM 64.8% 45.6% 20.3% 16.3% Source: J.P. Morgan estimates. * 2012E EBITDA refers to adjusted EBITDA; 2013E-2017E EBITDA refers to unadjusted EBITDA.

7 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

A Brief Look at Realogy's History

Formation of the Company and Separation from Cendant Realogy traces its roots back to Hospitality Franchise Systems (HFS), a vehicle founded by Henry Silverman to acquire hotel franchises in the early 1990s. Silverman purchased brands such as Ramada, Howard Johnson’s, and Days Inn and took HFS public in 1992. After a brief foray into the casino industry (subsequently spun out as National Gaming), HFS merged with CUC International, a direct marketing company that operated Shoppers Advantage and Travelers Advantage, in a $14 billion transaction in December 1997, forming Cendant Corporation. Cendant was a business and consumer services company, primarily within the real estate and travel industries.

HFS/Cendant built a significant portion of its portfolio of residential brokerage and real estate service brands via acquisitions. It acquired Century 21 in 1995, ERA and Coldwell Banker in 1996, Cartus in 1997, and NRT Incorporated in 2002. Additionally, Cendant created Title Resource Group in 2002, Sotheby’s International Realty was licensed/acquired in 2004, and the Better Homes and Gardens Real Estate franchise network launched in 2008.

Cendant announced in October 2005 it was splitting into four separate categories/companies – real estate (Realogy), travel distribution (Travelport), hospitality (Wyndham Worldwide), and vehicle rental (Avis Budget Group). The split was completed in 2006.

Following the separation from Cendant, Realogy was a publicly traded company (NYSE ticker H) from July 2006 through April 2007. Realogy's share price upon full separation from Cendant was $25.29 as of the close on 7/31/2006.

Apollo Acquisition and Subsequent Housing Downturn On December 15, 2006, Apollo Global Management acquired Realogy in a leveraged buyout (LBO) for $8.5 billion, or $30/share. The deal – which closed on April 10, 2007 – included $1.6 billion in assumed debt and $2 billion of equity from Apollo. The balance of the debt funding was provided by J.P. Morgan, Credit Suisse, and Bear Stearns and included a $3.2 billion term loan, a $750 million revolving credit facility, a $525 million synthetic letter of credit facility, and a $650 million accordion loan facility. Upon the deal’s announcement, S&P downgraded Realogy’s credit to junk status, from BBB to BB+.

Over the next several years, the housing market experienced a significant decline – with U.S. existing home sale transactions declining 52% from peak to trough, from approximately $1.9 trillion in 2005 to $912 trillion in 2011. Overall transactions declined 40%, while prices declined over 20%. Realogy’s adjusted EBITDA declined about 51% during that time, from $1.167 billion in 2005 to $571 million in 2011. Over the next two years, S&P cut Realogy’s corporate credit rating five more times, to CC with a negative watch (note that the current rating is CCC).

8 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

Also of note, during this timeframe Apollo essentially “doubled down” on its investment in Realogy by acquiring a portion of RLGY’s publicly traded unsecured bonds. These bonds were later converted into convertible notes, and these convertible notes were then converted into common equity upon IPO. These shares represent the vast majority of Apollo’s current equity stake in RLGY, as its original $2 billion equity investment was largely wiped out.

Balance Sheet Restructuring and Cost Cuts With the combination of the housing market downturn and freezing of the credit markets, Realogy undertook a significant balance sheet restructuring in order to push out debt maturities and improve its debt ratios and liquidity. In September 2009, Realogy closed on its $650 million Second Lien term loan, using the proceeds to reduce its outstanding credit facility and also refinance $220 million of notes due in 2014. In January 2011, Realogy converted $2.1 billion of existing notes into convertible notes – these were converted into Class A shares at IPO/shortly thereafter and are primarily held by Apollo and Paulson. In February 2011, Realogy extended $2.4 billion of extended term loans, $461 million of revolving loans, and $171 million of synthetic letter of credit commitments to 2016, and also converted $98 million of revolving loans to extended term loans. Also in February 2011, Realogy issued $700 million of First and a Half Lien Notes in a private offering, with the proceeds used to prepay $700 million of outstanding extended term loans.

Realogy also undertook a number of cost savings initiatives during the downturn, eliminating about $557 million of costs by reducing headcount from 15k to 10k employees (about $260 million in savings), consolidating offices by 33% (about $110 million of savings), converting to internet marketing in lieu of print advertising (about $110 million of savings), and also exiting unprofitable businesses (about $75 million of savings).

9 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

A Brief Look at the Company Today

Realogy Holdings Corp. is the world's largest and most integrated provider of residential real estate services. Realogy's business model includes real estate franchising (Realogy Franchise Group, or RFG), brokerage (NRT LLC), relocation (Cartus) services, and title services (Title Resource Group, or TRG). The company’s various lines of business allow Realogy to profit on essentially every aspect of a real estate transaction. Realogy also has the ability to cross-sell its various products/services (e.g., setting up TRG employees within an NRT office), which the company refers to as its “value circle.”

Figure 1: The Realogy "Value Circle"

Source: Company reports.

In 2011, Realogy participated in approximately 26% of U.S. broker-assisted existing home sales. Note that this equates to about 21% of all home sales in the U.S.; based on 2011 figures, existing home sales accounted for 93% of all homes sold (new home sales accounted for the remaining 7%), and 87% of all existing home sales were broker-assisted (“for sale by owner” transactions largely accounted for the remaining 13%). Including its owned and franchised brokerage network, Realogy has approximately 238,000 brokers and agents worldwide – more than 2.5x larger than its next largest competitor (RE/MAX).

Following is a brief look at each of Realogy’s divisions:

Realogy Franchise Group (RFG) RFG is the leading franchisor of real estate brokerages in the world. The division’s key brands include Better Homes and Gardens Real Estate, Century 21, Coldwell Banker, Coldwell Banker Commercial, ERA, and Sotheby’s International Realty. Realogy’s franchise systems have approximately 13,500 offices and 238,500 sales associates (including approximately 41,500 independent sales agents working within Realogy’s NRT division) doing business in 103 countries around the world. Realogy derives its real estate franchising revenues from royalty fees received under long- term (typically ten-year) franchise agreements with its franchisees. The royalty fee is based on a percentage of the franchisees’ gross commission income (GCI).

10 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

RFG is Realogy’s highest-margin business, and its relative stability is evidenced by its 97% franchise retention rate and 19-year average franchisee tenure. After adjusting for NRT royalties and deducting capex and G&A allocations, we estimate RFG produces 10-15% of Realogy’s total EBITDA. This is significantly lower than what is reported due to the impact of the NRT Royalties, which we will discuss in more detail later in the report.

NRT LLC NRT is the largest owner and operator of residential real estate brokerages in the United States. NRT has 41,500 sales associates operating in 723 offices operating under the Coldwell Banker, Corcoran, CitiHabitats, Sotheby’s International Realty, and ERA brands. NRT also operates a large independent real estate owned (“REO”) residential asset manager, which assists in selling bank-owned properties and has a home mortgage joint venture with PHH Corporation (“PHH”) – the exclusive recommended provider of mortgages for Realogy’s real estate brokerage and relocation service customers. In addition, NRT assists landlords and tenants through property management services.

Unlike RFG, which is a national player, NRT’s business is focused in 35 major metropolitan areas, with nearly two-thirds of its revenues derived from California (29%), the New York metropolitan area (24%) and Florida (11%) – this is based on the first six months of 2012.

After adjusting for the royalties that NRT pays to RFG, we estimate that NRT produces about 60-65% of Realogy’s total EBITDA. NRT’s margins, however, are lower than any of Realogy’s divisions and we believe it is Realogy’s highest risk/lowest multiple business line.

Cartus Corporation Cartus is a global provider of outsourced employee relocation services. The company is the largest provider of such services in the U.S. and also operates in key international relocation destinations. In total, Cartus has 2,900 employees worldwide and more than 20 offices on three continents.

Cartus essentially is designed to manage all aspects of an employee’s move – this includes policy counseling, homesale assistance, household goods shipments, expense processing, destination services, and cultural/language training. Cartus’s clients are large corporations, including over 64% of the Fortune 50 companies. In 2011, Cartus assisted in over 153,000 relocations in more than 165 countries for approximately 1,500 active clients. As of June 30, 2012, Cartus’s top 25 relocation clients had an average tenure of 17 years with the company.

We estimate Cartus produces about 15% of Realogy’s EBITDA. We view the business as deserving a more stable/higher multiple than NRT, but a lower multiple than RFG and TRG.

Title Resource Group TRG assists with the closing of real estate transactions by providing full-service title and settlement (i.e., closing and escrow) services to customers and real estate companies. In addition, TRG coordinates a nationwide network of attorneys, title

11 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

agents and notaries to service financial institution clients on a national basis. TRG also serves as an underwriter of title insurance policies in connection with residential and commercial real estate transactions (both purchases and refinancing), and has an average claim rate of 1.5% over the past three years – well below the industry average of 7% for the same period. TRG is headquartered in Mount Laurel, NJ and has more than 2,000 employees in approximately 360 offices across the United States, the majority of which are located in NRT brokerage offices.

We estimate TRG produces about 5-7% of Realogy’s EBITDA. We think the title business is a good one, and it deserves the second highest multiple (behind RFG) of Realogy’s four main business lines.

12 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

Realogy Franchise Group (RFG)

RFG is the leading global residential real estate franchisor, with approximately 13,500 offices and 238,500 brokers and agents worldwide (including 41,500 NRT agents). RFG’s franchised brands include Century 21, Coldwell Banker, ERA, Sotheby’s International Realty, and Better Homes and Gardens Real Estate. RFG generates royalty fees based on a percentage of the franchisees’ sales commission earned from real estate transactions – RFG’s net effective royalty rate generally averages 4.6-4.8%, or a 6% gross royalty rate prior to volume rebates paid to franchisees (i.e. a lower royalty fee charged to larger franchisees). These fees enable Realogy’s franchisees to operate under one of the trademarks and have access to dedicated national marketing and servicing programs, training, education, technology and a variety of shared services (administration/compliance, finance, HR, legal, IT, and franchise sales).

Realogy’s average tenure with its U.S. franchisees was approximately 19 years as of June 30, 2012; international franchise agreements are typically 25 years. Additionally, Realogy’s franchise retention rate through June 30, 2012 was 97% (1–2% of the “leakage” is actually due to Realogy terminating the franchise as opposed to a franchisee leaving the system by choice). This provides Realogy with a high-margin source of “recurring” revenues, and we think RFG warrants the highest multiple of any of Realogy’s business lines.

How RFG makes money The bulk of RFG’s reported revenues consist of royalties paid by franchisees totaling 6% of gross commission income, or GCI. Stepping back, the average brokerage commission on a home sale is approximately 5%, or 2.5% per “side” (the buyer’s and seller’s agents split the commission). In a typical transaction, 2.5% x the sale price is equal to the franchisee’s GCI. The franchisee is then required to pay out 6% of their gross commission income to Realogy, which RFG records as revenue (“franchise fees” on its income statement). An RFG executed home sale is illustrated on the left hand side of the diagram, while an NRT executed home sale is illustrated on the right hand side.

13 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

Figure 2: Economics of a Sample Real Estate Transaction

Source: Company reports. (1) Broker includes NRT-owned brokerage operations as well as third-party franchisees. (2) Gross royalty rate before volume rebates paid to franchisees, excluding NRT, which is not eligible to receive rebates.

Figure 3: RFG Revenue Drivers

Source: Company reports. (1) Includes non-sides related royalty fees. (2) Intercompany royalty is eliminated in consolidation. (3) Other revenue includes revenue from international royalties, marketing revenue, upfront international fees, and preferred alliance revenue.

Note that RFG’s reported segment revenue ($299 million for the first half of 2012 and $557 million for full year 2011) includes royalty fees paid by NRT to RFG. These intra-company transactions are eliminated in consolidation and essentially inflate RFG’s reported revenue and EBITDA and depress NRT’s reported EBITDA. In our view, it makes sense for RLGY to run its business and communicate segment financial information with NRT paying royalties to RFG. We say this because there are brands in the system that are both franchised out as well as company-owned. We think it could potentially demonstrate favoritism or conflicts if RLGY's owned brokerage offices were not operating under the same basis – it creates an even playing field for franchisees. However, for economic and valuation purposes, as we

14 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

detail later in this report, we adjust for the intra-company royalties, which serves to significantly reduce the amount of EBITDA that appears to come from RFG.

In addition to royalties from home sales, other key revenue sources for RFG include other domestic revenue (primarily from leasing), international revenue (RFG master franchises out its brands to franchisees in various countries), marketing costs (130 bps of GCI, but offset dollar for dollar in expenses as well), and other revenues.

Our key RFG estimates  Closed homesale sides. We assume 7% y/y growth in sides for full year 2012 (+7.0% in 4Q), 8% in 2013, and 9% in 2014.  Average homesale price. We assume 6.8% y/y growth in the average homesale price in 2012 (+10.5% in 4Q), 4% growth in 2013, and 5% growth in 2014.  Other domestic RFG revenue. We assume $10.2 million in 2012, $12 million in 2013, and $12.4 million in 2014.  International revenue. We assume $25 million annually in 2012-2014.  Other revenue. We assume $24.7 million in 2012 and $18 million in both 2013 and 2014.

15 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

Table 2: RFG Key Assumptions and Revenue Detail $ in thousands, except sides and price data 2012E 2013E 2014E

Closed Homesale Sides 973,453 1,051,329 1,145,949 Growth 7.0% 8.0% 9.0% Average Homesale Price $211,711 $220,179 $231,188 Growth 6.8% 4.0% 5.0% Total Real Estate Volume (in 000s) $206,090,376 $231,480,710 $264,929,673

Average Broker Commission Rate 2.54% 2.54% 2.54% Net Effective Roy alty Rate 4.66% 4.70% 4.68%

Domestic Franchise Royalties $244,131 $276,342 $314,927 Other Domestic RFG Rev enue (leasing, etc.) $10,171 $12,000 $12,360 Net Domestic Franchise Royalties $254,302 $288,342 $327,287

NRT Franchise Royalties (1) $225,661 $249,025 $274,839

International Revenue $25,000 $25,000 $25,000 Marketing - RFG $68,224 $76,435 $87,480 Marketing - NRT $13,147 $14,728 $16,427 Other $24,704 $18,000 $18,000

Total Revenue $611,039 $671,530 $749,033

Total Ex penses $261,004 $264,002 $284,602

EBITDA $350,035 $407,529 $464,430 Margin 57.3% 60.7% 62.0%

Source: Company reports and J.P. Morgan estimates. (1) NRT Franchise Royalties assumes a 6% royalty rate plus a $29 million annual service fee paid to RFG.

RFG’s cost structure We estimate that approximately 57% of RFG’s costs are fixed and 43% are variable. Fixed expenses consist of an overall corporate G&A allocation, non-reimbursed marketing costs, and other fixed operating expenditures. Variable costs consist of marketing fund costs (the 130 bps of GCI noted above that is also booked as revenues) and other variable operating expenditures. For modeling purposes, we grow fixed costs at a 2-3% inflation rate and variable costs at the rate of revenue growth in the RFG segment, taking into account any known one-time items.

Below is a rough look at RFG’s income statement/expense structure, based on our 2012 revenue estimate.

16 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

Table 3: RFG’s 2012E Income Statement $ in thousands Domestic Franchise Royalties $244,131 Other Domestic RFG Revenue (1) $10,171 Net Domestic Franchise Royalties $254,302

NRT Franchise Royalties $225,661

International Revenue $25,000 Marketing Fund Fees - RFG related (2) $68,224 Marketing Fund Fees - NRT related $13,147 Other $24,704 Total RFG Revenues $611,039

Variable Ex penses: Marketing Fund Costs $81,372 Operating Expenses $31,700

Fixed Ex penses: Operating Expenses $73,732 G&A Allocation $66,200 Non-Reimbursed Marketing Costs $8,000 RFG EBITDA $350,035

Source: Company reports and J.P. Morgan estimates. (1) Consists largely of leasing revenue. (2) Assumes 1.3% of gross commissions (sides x price x rate)

RFG is a national player… Unlike NRT, which is very concentrated in select high-income markets, RFG has a national footprint, albeit more concentrated in the South and West – each accounting for about 33% of RFG’s sales volume in 2011. Overall, though, RFG has some exposure to essentially every market across the country.

Figure 4: RFG 2011 Sales Volume by Geography Midwest 15% South 33%

West 33%

Northeast 19% Source: Company reports.

17 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

…with an average price point at a slight premium to the national average With respect to pricing, the average homesale price for RFG currently hovers around $200k. Interestingly, while the spread between average price within RFG and the overall national average was relatively tight in 2005 and 2006, this gap widened in subsequent years, as RFG pricing held up better (declined less) than the overall average. The RFG premium increased from 4% in 2006 to 22% in 2011, and our forecasts assume that this gap should continue to exist.

A look at RFG’s brands Century 21 and Coldwell Banker are RFG’s largest franchised brands, accounting for over 70% of RFG’s 2011 sales volume. In spite of having fewer brokers than ERA, Sotheby’s ranks as the third largest based on sales volume – this is a function of Sotheby’s specializing in luxury product.

Figure 5: RFG 2011 Sales Volume by Brand

BHGRE 4% Sotheby's 15% Century 21 35% ERA 9%

Coldwell Banker 37%

Source: Company reports.

Figure 6: RFG Worldwide Offices and Agents as of 6/30/2012 Worldwide Worldwide Offices Agents Century 21 7,000 100,100 Coldwell Banker 3,100 83,200 ERA 2,300 31,200 Sotheby 's International Realty 630 12,300 Coldwell Banker Commercial 230 7,600 Better Homes and Gardens Real Estate 165 1,900

Source: Company reports.

Following are some brief thoughts on each of RFG's major brands:

 Century 21: Century 21, which was founded in 1971, is the world’s largest residential real estate broker. The company tends to be more of a “rural” operator in the U.S., and also has a significant international footprint.

18 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

 Coldwell Banker: Coldwell Banker is the longest running national real estate brand in the U.S. – founded in 1906. Like Century 21, Coldwell Banker has a fairly substantial international presence, but unlike Century 21, it tends to operate more in urban markets. Note that Coldwell Banker is also part of Realogy’s owned brokerage unit, NRT; thus, there are both owned and franchised offices.  ERA: Like Century 21, ERA was founded in 1971. Relative to Century 21 and Coldwell Banker, Realogy management has described ERA as being “a little bit of both.” Like Coldwell Banker, ERA is also an NRT-owned brand.  Sotheby’s International Realty: Founded in 1976, Sotheby’s International Realty is a niche brand that offers luxury homes, estates, and properties worldwide. This is also an NRT-owned office brand. The company licenses the Sotheby’s name off Sotheby’s under a long-term agreement.  Coldwell Banker Commercial: Coldwell Banker Commercial is a commercial real estate brokerage firm that tends to focus on the sale of Class B and C commercial properties. Coldwell Banker Commercial is also an NRT-owned brand.  Better Homes and Gardens Real Estate: Realogy re-launched the Better Homes and Gardens Real Estate brand in July 2008 after reaching an agreement to license the brand from Meredith Corporation. The brand is growing, recently expanding into Canada, its international foray, about a year ago.

What we like about RFG The strength of RFG’s brands is its biggest asset, in our view. We believe Century 21, Coldwell Banker, and ERA are the top national residential real estate brands and Sotheby’s is one of the top brands in the luxury niche. Additionally, RFG has the highest margin and lowest operating risk of any of Realogy’s business lines – we estimate that margins are in the low-40% range when excluding NRT royalties and about 60% as reported by the company (including NRT royalties). About 57% of its costs are fixed, based on our 2012 estimates. Additionally, while revenues are obviously tied to homesale trends, the franchise agreement length – generally ten years for a typical agreement and 25 years for a master franchise agreement – and its 97% franchisee retention rate adds some form of stability to the income stream.

Key risks we see for RFG RFG will generally be tied to the overall trends in the national housing market – to the extent the housing recovery doesn’t unfold the way we project, our estimates for sides/price growth would likely decline. Additionally, while we assume some modest declines in our net effective royalty rate over the next several years in our model, to the extent that the larger brokers (who are receiving volume discounts) continue to garner the lion’s share of transaction activity and the smaller brokers don’t see as strong of a rebound, the net effective royalty rate could decline more than we assume. Lastly, to the extent that internet/discount brokers decide to enter the residential real estate market and/or expand aggressively, the increased competition could negatively impact RFG.

We estimate RFG is worth approximately $1.6 billion before debt Based on our earnings model (which projects EBITDA to 2017), we assume RFG is worth approximately $1.6 billion. This assumes a 9.0x terminal multiple on 2017 EBITDA and a 10.0% discount rate. The 9.0x terminal multiple is the highest we

19 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

assign to Realogy’s businesses and the 10.0% discount rate is the lowest – i.e. given the quality of its brands and the high margin, fee-based model, we believe RFG is Realogy’s most valuable business. The EBITDA/cash flow assumptions in our DCF analysis eliminate the intra-company revenues (i.e., NRT royalties) that Realogy includes within RFG for its segment reporting. Note that this valuation is essentially an NPV value for purposes of a roll-up/sum-of-the-parts value for the company – i.e. not how we derive our target price for the stock.

20 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

NRT LLC

NRT is the largest owner and operator of residential real estate brokerage offices in the United States. NRT has 41,500 sales associates in 723 offices operating under the Coldwell Banker, Corcoran, CitiHabitats, Sotheby’s International Realty, and ERA brands. At June 30, 2012, approximately 90% of NRT’s offices operated under the Coldwell Banker brand name, 5% under The Corcoran Group and CitiHabitats brand names, 4% under the Sotheby’s International Realty brand, and 1% under the ERA brand. Corcoran, the largest residential real estate brokerage in New York City, and CitiHabitats, a leading NYC apartment rental firm, are the only brands within NRT that are solely owned brands and not also franchised.

NRT also operates a large independent real estate owned (REO) residential asset manager, which assists in selling bank-owned properties, and has a home mortgage joint venture with PHH Corporation (“PHH”) – the exclusive recommended provider of mortgages for Realogy’s real estate brokerage and relocation service customers. In addition, NRT assists landlords and tenants through property management services. Unlike RFG, which is a broad national platform, NRT’s business is focused in 35 major metropolitan areas, with nearly two-thirds of its revenues derived from California (29%), the New York metropolitan area (24%) and Florida (11%) – this is based on the first six months of 2012.

After adjusting for the royalties that NRT pays to RFG (i.e., keeping them within NRT), we estimate that NRT produces about 60-65% of Realogy’s total EBITDA. NRT’s margins, however, are lower than any of Realogy’s divisions, and we believe it is Realogy’s highest risk/lowest multiple business line. That being said, given that it is the highest EBITDA contributor and Realogy owns the entire unit (i.e., it earns full commissions on homesales as opposed to just collecting franchise fees), NRT will be the key driver of Realogy’s growth over the next few years, in our view.

How NRT makes money In simplest terms, NRT earns commissions on the sale of a home. NRT’s gross commission income equals 2.5% per side (i.e. whether it is the buyer’s agent or the seller’s agent) in a homesale transaction. This is then recorded as gross commission income on RLGY’s income statement. Note that Realogy “charges itself” a 6% royalty fee, which is then taken out of the gross commission income and paid to RFG along with a $29 million annual fixed service fee – this payment is accounted for in RLGY’s reporting of segment EBITDA but is washed out in consolidation. From there, 65% of the commission is paid to the NRT broker as his/her compensation – this is recorded as “commission and other agent-related costs” on RLGY’s income statement. Additionally, NRT earns non-sides related commission income (via property management/leasing) and also produces other revenues/income (including its REO income). Lastly, Realogy also includes its share of the PHH venture net income in its calculation of NRT segment EBITDA – this is the equity in earnings of non-consolidated ventures on the income statement.

21 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

Figure 7: Economics of a Sample Real Estate Transaction

Source: Company reports. (1) Broker includes NRT-owned brokerage operations as well as third party franchisees. (2) Gross royalty rate before volume rebates paid to franchisees, excluding NRT, which is not eligible to receive rebates.

Figure 8: NRT Revenue Drivers

Source: Company reports.

Our key NRT estimates  Closed homesale sides. We assume 11.9% y/y growth in sides for full year 2012 (+14.0% in 4Q), 7% in 2013, and 7% in 2014.  Average homesale price. We assume 1.1% y/y growth in the average homesale price in 2012 (implies +4% in 4Q), 5% growth in 2013, and 5% growth in 2014.  Non-sides related income. We assume $210 million of non-sides related GCI (largely leasing and property management) in 2012, $219 million in 2013, and $223 million in 2014.  Other NRT revenue. We assume $48 million in 2012 and $60 million in both 2013 and 2014.

22 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

Table 4: NRT Key Assumptions and Revenue Detail $ in thousands except sides and price data 2012E 2013E 2014E

Closed Homesale Sides 284,791 304,727 326,057 Growth 11.9% 7.0% 7.0% Av erage Homesale Price $431,061 $452,614 $475,245 Growth 1.1% 5.0% 5.0% Total Real Estate Volume (in 000s) $122,762,416 $137,923,575 $154,957,136

Av erage Broker Commission Rate 2.50% 2.50% 2.50%

Sides Related Gross Commission Income $3,067,591 $3,448,089 $3,873,928 Non-Sides Related GCI $210,097 $219,000 $223,380 NRT Gross Commission Income $3,277,688 $3,667,089 $4,097,308

Other NRT Revenues $48,358 $60,000 $60,000

Total Revenue $3,326,045 $3,727,089 $4,157,308

Total Expenses $3,242,223 $3,561,959 $3,921,276

EBITDA $139,823 $205,130 $276,032 Margin 4.2% 5.5% 6.6%

Source: Company reports and J.P. Morgan estimates.

NRT’s cost structure is highly variable We estimate that approximately 21% of NRT’s costs are fixed and 79% are variable. Variable costs consist of agent commissions (we forecast this at 67% of GCI), the variable royalty paid to RFG (6% of GCI), marketing fees paid to RFG, NRT-related marketing costs, and variable operating expenses. Fixed expenses consist of fixed operating expenses (office occupancy costs are a big part of this), the $29 million annual service fee to RFG, and a G&A allocation.

Below is a look at NRT’s income statement/expense structure, based on our 2012 revenue estimate.

23 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

Table 5: NRT 2012E Income Statement $ in thousands Sides Related Gross Commission Income $3,067,591 Non-Sides Related GCI $210,097 NRT Gross Commission Income $3,277,688

Other NRT Revenues $48,358 Total NRT Revenues $3,326,045

PHHHL EBITDA $56,000

Variable Ex penses: Agent Commissions / Other Agent Related Costs $2,208,543 Royalty Paid To RFG (6% of GCI) $196,661 Marketing Fees Paid To RFG $13,147 Marketing Costs $106,378 Operating Expenditures $30,994

Fixed Ex penses: Operating Expenses $627,748 G&A Allocation $29,750 Annual RFG Service Fee $29,000 RFG EBITDA $139,823

Source: Company reports and J.P. Morgan estimates.

NRT’s geographic exposure is very concentrated… While RFG has more of a national footprint, NRT’s portfolio of brands is very concentrated in select high-income markets. Based on the first six months of 2012, NRT realized approximately 64% of its revenues from California (29%), the New York Metro area (24%), and Florida (11%). Realogy’s ownership of Corcoran is a significant driver of its New York metro (New York City plus the Hamptons) exposure, as well as a portion of its South Florida exposure.

24 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

Figure 9: NRT Office Breakdown

Source: Company reports.

…and has a price point that is over 2x the national average At current levels, the average home price point of $442k (3Q12) within Realogy’s NRT portfolio is over 2.5x the national average. Similar to RFG, the gap has widened since the downturn – increasing from 2.1-2.2x in 2005/2006 to about 2.6x currently.

A brief look at NRT’s PHH Home Loans venture PHH Home Loans is NRT’s joint venture with PHH Corporation (PHH – NC). PHH Home Loans is the exclusive recommended provider of mortgages for NRT. All mortgage loans originated by the venture are sold to PHH or other third-party investors after a hold period, and PHH Home Loans does not hold any mortgage loans for investment purposes or perform servicing functions for any loans it originates. Accordingly, NRT has no mortgage servicing rights asset risk. RLGY owns a 49.9% interest in the venture and the venture has a 50-year term, subject to earlier termination upon the occurrence of certain events or at RLGY’s election after January 31, 2015, as long as it provides two years’ notice. We estimate the venture will generate $50 million of net earnings (Realogy’s share) in 2012 and $40 million annually thereafter.

What we like about NRT As with RFG, the strength of NRT’s brands is its biggest asset, in our view. In addition to Coldwell Banker, ERA, and Sotheby’s, NRT also has significant exposure to New York City vis-à-vis the two marquee names in New York residential real estate sales and rentals – Corcoran and CitiHabitats. Given that its revenues are entirely based on homesale transactions and that it is Realogy’s largest EBITDA contributor (over 60%, by our estimates, when excluding the intra-company franchise fees), we believe NRT is where the most significant upside lies for Realogy over the next few years.

25 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

Key risks we see for NRT As noted previously, just under two-thirds of NRT’s revenues are derived from California, the New York metro, and Florida. To the extent these states experience a residential real estate downturn, NRT could be negatively impacted. Also, given its price point, NRT is tied to the fortunes of the higher-end consumer/higher-end real estate markets. We also believe these markets (particularly New York City) experienced a rebound in prices/volumes earlier than the overall national real estate market – in other words, there could be less incremental upside if the macro environment slows. One other item that could somewhat limit future upside is NRT's low operating leverage – we estimate that 79% of NRT’s costs are variable. Lastly, similar to RFG, to the extent that internet/discount brokers decide to enter the residential real estate market and/or expand aggressively, the increased competition could negatively impact NRT.

We estimate NRT is worth approximately $4.9 billion before debt Based on our earnings model (which projects EBITDA to 2017), we assume NRT is worth approximately $4.9 billion. This assumes a 7.0x terminal multiple on 2017E EBITDA and a 12.0% discount rate. These represent the lowest terminal multiple and highest discount rate we assume for Realogy’s four business lines, as we believe Realogy’s NRT business carries the highest risk due to its cyclicality and relatively low EBITDA margin. Note that this valuation is essentially an NPV value for purposes of a roll-up/sum-of-the-parts value for the company – i.e. not how we derive our target price for the stock.

26 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

Cartus Relocation Services

Realogy’s Relocation Services division – also known as Cartus – is a leading provider of employee relocation services to its clients. These services range from homesale assistance, providing home equity advances to transferees (generally guaranteed by the client), searching for a home and other destination services, expense processing, relocation policy counseling and consulting services, arranging household goods moving services, visa and immigration support, intercultural and language training, etc. Cartus provides these relocation services to corporate and affinity clients for the transfer of their employees. In 2011, Cartus assisted in over 153,000 relocations in more than 165 countries for approximately 1,500 active clients, including over 64% of the Fortune 50 companies as well as affinity organizations (affinity organizations provide real estate and relocation services to organizations such as insurance companies and credit unions that have established members; this accounted for about 6% of Cartus’s relocation revenue in 2011). Cartus has offices in the U.S. as well as internationally in the United Kingdom, Canada, Hong Kong, Singapore, China, Germany, France, Switzerland, and the Netherlands.

Importantly, Realogy does not take any home resale risk in the vast majority of relocation transactions – i.e., the gain or loss on the sale of a transferee’s home is generally borne by the client. Realogy’s total “at-risk exposure” in this business is approximately $10 million.

How Cartus makes money Realogy earns revenues from fees charged to clients for a variety of services/facilitation of services. These revenues include client transactional fees, commissions from real estate brokers and household goods moving companies that provide services to the transferee, referral fees from real estate brokers (i.e., a portion of the homesale commission), net interest income earned on the funds it advances on behalf of the transferring employee net of costs associated with the securitization obligations (a corresponding hit to interest expense is also recorded, although Realogy does earn a small spread on this each quarter), and other revenues.

The following chart illustrates the key drivers for revenue generated by Cartus:

Figure 10: Cartus Revenue Drivers

Source: Company reports.

Unlike its other divisions, Realogy does not disclose any of the individual revenue drivers in the overall Cartus revenue buildup – it only discloses initiations and referrals. As such, we forecast Cartus revenue by assuming a percentage year-over- year revenue growth rate.

27 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

Our key Cartus estimates  Revenue growth. We assume about 50 bps of full year revenue growth for Cartus (implying +4.0% in 4Q) in 2012, 5% growth in 2013, and 5% growth in 2014. We think the modest level of corporate hiring will dampen growth in 2013 but will be offset by Cartus picking up new customers. In 2014, our estimate is based on a more normalized recovery of corporate relocation activity.  Expense growth. We assume 4.3% expense growth for the full year 2012, 4.6% in 2013, and 4.6% in 2014.

Table 6: Cartus Key Assumptions and Revenue Detail $ in thousands 2011 2012E 2013E 2014E

Revenues $423,000 $425,000 $446,250 $468,563 Growth (1.6%) 5.0% 5.0% 5.0%

EBITDA $115,000 $103,820 $110,424 $117,423 Growth (10.0%) 5.8% 5.8% 6.4% Margin 36.3% 36.6% 36.8% 24.5%

Source: Company reports and J.P. Morgan estimates.

Cartus’s cost structure We estimate that approximately 78% of Cartus’ costs are variable and 22% are fixed. We assume 3% annual growth for fixed costs and grow variable costs in lockstep with revenues.

Below is a rough look at Cartus’s income statement/expense structure, based on our 2012 revenue estimate.

Table 7: Cartus Income Statement $ in thousands Revenues $425,000

Variable Ex penses: Operating Expenses $197,716 Marketing $2,301 G&A Allocation $50,503

Fixed Ex penses: Operating Expenses $55,766 Marketing $649 G&A Allocation $14,244 Cartus EBITDA $103,820

Source: Company reports and J.P. Morgan estimates.

Risk mitigation: at risk business limited to just $10 million of exposure Cartus classifies relocation services contracts into two types – “no risk” and “at risk.” In a “no risk” transaction, the client is responsible for reimbursement of all direct expenses associated with the homesale – appraisal, inspection, and real estate

28 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

brokerage commissions. The client is also responsible for direct costs associated with the relocation, including moving costs, mortgage origination points, temporary living, and travel expenses. Importantly, the client also bears the risk of loss on the re-sale of the transferee’s home. Realogy generally funds the direct expenses associated with the homesale as well as those associated with the relocation on behalf of the client and the client then reimburses Realogy for those costs plus interest charges on the advanced money. Thus, Realogy’s key exposure in the “no risk” homesale services lies in the credit risk of its clients rather than to the potential fluctuations in the real estate market or to the creditworthiness of the individual transferring employee. Due to the high credit quality of the clients, Realogy has historically had minimal losses in its “no risk” homesale services. It is essentially a fee service business.

In an “at risk” homesale service transaction, Realogy will actually purchase the home being sold by a relocating employee, pay for all expenses associated with the homesale (including carrying costs) and bear any loss on the sale of the home. Management estimates that the “at risk” exposure totals about $10 million on Realogy’s balance sheet. Clients with an “at risk” contract still do bear the non- homesale related direct costs associated with the relocation (though Realogy will generally advance these expenses and get re-paid with interest). Realogy’s “at risk” business relates almost entirely to certain government and corporate contracts assumed in conjunction with the acquisition of Primacy Relocation in 2010.

What we like about Cartus We believe Cartus is a lower-risk business than NRT (though higher risk than RFG and TRG) and should have less revenue and EBITDA sensitivity to swings in the housing market given the fee-based model as well as what is likely some level of ongoing relocation activity that will occur irrespective of housing conditions. Additionally, Cartus has a strong client base (more than 64% of the Fortune 50) and a good track record (its top 25 relocation clients have an average tenure of about 16 years). Lastly, as alluded to previously, Cartus has a fairly minimal “at risk” portfolio, totaling about $10 million currently.

Key risks we see for Cartus While we believe Cartus will have less top-line and EBITDA volatility than NRT, its results are still economically leveraged – the pace of corporate relocations is closely tied to job growth, in our view. Additionally, given the significant portion of variable operating expenses we estimate in our model (78% of total expenses), Cartus’ operating leverage is fairly minimal, in our view.

We estimate Cartus is worth approximately $970 million before debt Based on our earnings model (which projects EBITDA to 2017), we assume Cartus is worth approximately $970 million. This assumes a 7.5x terminal multiple on 2017E EBITDA and an 11.0% discount rate. The 7.5x terminal multiple is the second lowest we assign to Realogy’s businesses (higher only than NRT) and the 11.0% discount rate is in-line with the discount rate we use for TRG, 100 bps above RFG, and 100 bps below NRT. Note that this valuation is essentially an NPV value for purposes of a roll-up/sum of the parts value for the company – i.e. not how we derive our target price for the stock.

29 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

Title Resource Group (TRG)

TRG provides full-service title and settlement (i.e., closing and escrow) services to real estate companies and financial institutions. TRG also issues title insurance policies on behalf of large national underwriters as well as through its Title Resources Guaranty Company (TRGC) subsidiary, which it acquired in January 2006. TRG is licensed as a title agent in 42 states and Washington, D.C., and TRGC is a title insurance underwriter licensed in 27 states and Washington, D.C. TRG is headquartered in Mount Laurel, NJ and has more than 2,000 employees and 340 offices across the US, 200 of which are co-located within one of Realogy’s NRT offices.

How TRG makes money The bulk of TRG’s revenues are derived from purchase and refinancing (i.e. title premium/escrow) fees and the sale of title insurance. Realogy’s NRT business serves as a key source of TRG’s title and settlement services business revenue – in 2011, Realogy's TRG capture rate of NRT transactions was 38%. RFG and Cartus also serve as a source of title and settlement revenue. For refinancing transactions, PHH and other financial institutions throughout the mortgage lending industry serve as a feeder for TRG.

The figure below represents TRG’s revenue buildup. Note that each quarter Realogy discloses the inputs necessary to calculate the total purchase and refinance fees – total purchase and refinance title closing units and average closing fees per unit. We estimate that purchase and refinance fees plus title insurance underwriter fees account for about 95% of TRG’s total revenues, so an estimate for the latter can be “backed into” with a fair amount of accuracy.

Figure 11: TRG Revenue Drivers

Source: Company reports.

TRG’s cost structure We estimate that approximately 85% of TRG’s expenses are variable. The largest components of TRG’s variable expenses include agent retention (essentially commissions), variable compensation, and other direct variable costs. Fixed costs consist of facilities costs (primarily office rent), corporate G&A allocation, and what management classified as other fixed expenses.

Below is a look at TRG’s income statement/expense structure, based on our 2013 revenue estimate (note that we used 2013 as a baseline/run rate for the business given significant hiring in 2012 that skewed the 2012 expense ratios).

30 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

Table 8: TRG 2013E Income Statement $ in thousands Gross Revenue $473,720 Agent Retention $118,430 Variable; 25% of gross revenue Net Revenue $355,290

Variable Expenses: Compensation $159,881 45% of net revenue Di rect Variable Costs $53,294 15% of net revenue Claims $17,765 5% of net revenue Ov ernight Delivery $10,659 3% of net revenue Temporary Help $7,106 2% of net revenue

Fixed Ex penses: Facilities $28,423 8% of net revenue G&A Allocation $14,212 4% of net revenue Other Ex penses $20,076 EBITDA $43,876

Source: Company reports and J.P. Morgan estimates.

Our key TRG estimates  Purchase title and closing units. We assume purchase title and closing units are up 14% in 4Q 2012 (12% for full year), 7% in 2013, and 7% in 2014 – note that we tie this assumption to our assumed y/y growth in NRT closed homesale sides, as we believe this should be a good proxy for this variable. We assume $1,900 of fees on a per unit basis.  Refinance title and closing units. We assume refinance title and closing units are up 40% in 4Q 2012 (48% for full year), as record low interest rates have caused a surge in refinancing activity. In 2013, we assume an additional 20% growth in refinance title and closing units, as we believe additional refinancing activity will continue into 2013 given that rates remain low and lending standards/credit could loosen somewhat. In 2014, we assume a 10% decline, as we think the wave of refinancing activity will likely taper off at that point. We assume $830 of fees on a per-unit basis.  Title insurance underwriter fees. We use overall NRT revenue growth as a proxy for future growth in title insurance underwriter fees. This implies about 8% growth in 2012 and 12% growth in both 2013 and 2014.  Relocation service fees and title agency/other fees. We assume $14 million of annual relocation service fees and $13 million of title agency/other fees.

31 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

Table 9: TRG Key Assumptions and Revenue Detail $ in thousands 2012E 2013E 2014E Key Assumptions: Purchase Title and Closing Units 104,462 111,774 119,598 Refinance Title and Closing Units 93,280 111,936 100,742 Total Units 197,742 223,710 220,341

Price Per Closing Unit - Purchase $1,875 $1,900 $1,900 Price Per Closing Unit - Refinance $825 $830 $830

Total Purchase and Refinance Fees $266,125 $305,278 $310,853 Title Insurance Underwriter Fees $126,275 $141,443 $157,756 Relocation Service Fees $14,000 $14,000 $14,000 Title Agency/Other Fees $13,000 $13,000 $13,000 Total Revenues $419,401 $473,720 $495,609 Y/Y Growth 13.0% 4.6%

Total Operating Expenses $383,357 $429,845 $449,076

EBITDA $36,044 $43,876 $46,533 Margin 8.6% 9.3% 9.4%

Source: Company reports and J.P. Morgan estimates.

What we like about TRG TRG is Realogy’s least volatile segment, and, as a result, warrants one of the highest multiples, in our view. In recent years, the drop-off in purchase title and closing units has been offset by an increase in refinancing activity, which we believe will continue into 2013. As we noted in our assumptions above, we believe the wave of refinancing activity will slow in 2013 and then decline y/y in 2014, but we think this will be more than offset by a rebound in existing home sales – driving future growth in revenues and EBITDA.

Realogy also has done an excellent job of managing risk, in our view – TRG's average claims rate in the past three years is 1.5% compared to 7% for the industry average. Additionally, TRG’s title insurance policies will not exceed a $1.5 million home sales price – for policies exceeding $1.5 million, TRG will typically obtain a reinsurance policy from a national underwriter to reinsure the excess amount.

Key risks we see for TRG As noted above, Realogy has done an excellent job of managing risk in TRG by keeping claims low and obtaining reinsurance policies for title policies over $1.5 million. Thus, we think the primary downsides to this business are its longer-term lower growth profile (relative to Realogy’s other business lines) and lower margin profile. High refinancing activity drove double-digit revenue and EBITDA growth in 2011, and we forecast this to continue into 2012 and 2013, but we think that in a more normalized environment, TRG revenue growth will fall in the mid-single-digit range. With respect to margins, TRG has little operating leverage given that 85-90% of expenses are variable – hence, we see little margin upside from here (9-10%). We think the biggest opportunity/areas for growth at TRG are increasing its 38% NRT

32 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

capture rate by expanding into additional NRT offices and/or increasing its same store capture rate. Additionally, we expect TRG to continue building and expanding its lender channel and expanding its underwriting business.

We estimate TRG is worth approximately $387 million before debt Based on our earnings model (which projects EBITDA to 2017), we assume TRG is worth approximately $387 million. This assumes an 8.5x terminal multiple on 2017 EEBITDA and an 11.0% discount rate. The 8.5x terminal multiple is the second highest we assign to Realogy’s businesses (behind only RFG), and the 11.0% discount rate is in line with the discount rate we use for Cartus, 100 bps above RFG, and 100 bps below NRT. Note that this valuation is essentially an NPV value for purposes of a roll-up/sum-of-the-parts value for the company – i.e. not how we derive our target price for the stock.

33 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

Our View on Housing: We Expect 20% Price and Volume Growth over the Next Five Years

For purposes of estimating RLGY’s earnings and valuing the company, one needs to have a view on the direction of home prices and volume of existing home sales. There are many forecasts for home price appreciation (HPA) and existing home sales, not to mention a whole host of other housing datapoints. Our forecast specifically calls for 20% cumulative growth in HPA from 2012 to 2017 and just under 20% in existing home sales over the same time period. Our HPA assumptions are just inside of NAR's forecast (at least in the short run, as its forecast does not go out five years) and north of Fannie and Freddie’s forecasts. Our colleague John Sim in J.P. Morgan's structured products research group has detailed models on home price appreciation (HPA) and other datapoints. Our HPA forecast is north of his roughly 17% “base” case over five years and inside his 24% “bull” case. We go through our case for this below, as well as some color on our existing home sales forecast.

Important to note, though, is that we consider a housing recovery to be a multi-year trend. There is a good shot that it ebbs and flows, and it will be extremely difficult to predict the contour and split between volume and price that will set the stage for RLGY's growth in a recovery. Specific to HPA, we outline how it plays into our RLGY estimates below as we try to take into account company- and segment- specific factors.

Table 10: JPM Realogy Model Assumptions – Home Price Appreciation RFG NRT 2012E 6.8% 1.1% 2013E 4.0% 5.0% 2014E 5.0% 5.0% 2015E 5.0% 4.0% 2016E 2.0% 3.0% 2017E 2.0% 3.0% 2013-17E Cumulative Change 19.3% 21.6% Source: J.P. Morgan estimates.

The Number of Existing Home Sales Is Recovering After peaking at just under 7.1 million of annual units in 2005, existing home sales steadily declined to a low of 4.1 million units in 2008 and remained in that low 4 million area from 2008-2011. Through October 2012, existing home sales totaled about 3.9 million and were trending to end the year in the 4.5-4.6 million range – a 7% year-over-year increase. For the next five years, we assume just under 20% growth in existing home sales, which would equate to about 5.4 million existing home sales in 2017. To put this in perspective, our forecast for 2017 is roughly on par with the volume of homes sold pre-boom, in 2001/2002.

34 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

Figure 12: Existing Home Sales US home sale units (000s)

Source: NAR.

A normalization of the U.S. housing inventory turnover would provide an 8% boost to US homesales Based on the current number of U.S. households – approximately 120 million, according to the U.S. Census Bureau – and assuming 4.6 million of annual existing homesales for 2012, we estimate annual housing turnover is 3.8% – or about 30 bps below the 40-year average. We calculate a return to the historical average alone would add 360k of annual homesale transactions – or an 8% boost to current levels.

When factoring in the impact of annual household growth (about 1 million households typically added per year), assuming a 4.1% average turnover ratio, we estimate these factors alone would increase annual existing homesales to 5.1 million in 2017 – up 12% from current levels.

Furthermore, we believe the combination of baby boomers aging and looking for a new residence, the echo boomers being more mobile than previous generations and perhaps starting to contemplate home ownership in the next five years, and pent-up demand from the weak housing market of the past five years, should drive above- trend homes sales through 2017. We think these factors adding 1-2% annually to growth in the next five years is conservative.

35 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

Figure 13: Inventory Turnover as a % of Total U.S. Households

Source: U.S. Census Bureau, NAR, Bloomberg, and J.P. Morgan.

For Realogy, It Should Also Gain Share Specific to RLGY, we think its “sides” should grow at a level north of our base case for existing home sales. We think this should be the case for three reasons: 1) the company should move back into hiring mode at its owned brokerages as the housing market improves; 2) its franchise business should increase sales of franchise brands; and 3) the company makes a variety of tuck-in acquisitions each year in its NRT business, with high returns on invested capital. Overall, we estimate that the aforementioned items specific to RLGY afford it about 1-1.5% growth in sides irrespective of what we think macro backdrop will deliver in terms of existing home sales. As such, when we add RLGY-specific factors to our base case in existing home sales, we come up with the below "sides" forecasts for RLGY.

Table 11: JPM Realogy Model Assumptions – Sides Forecasts RFG NRT 2012E 7.0% 11.9% 2013E 8.0% 7.0% 2014E 9.0% 7.0% 2015E 3.0% 7.0% 2016E 2.0% 3.0% 2017E 1.0% 2.0% 2013-17E Cumulative Change 24.9% 28.7% Source: J.P. Morgan estimates.

36 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

The Value Proposition: Affordability Is High and Rates Remain Low We think home prices will rise 20% over the next five years. Interest rates remain at historic lows, the rent vs. own spread is very wide, and we think the macroeconomic picture will continue to improve – all of which should help drive home prices higher.

Stepping back, we think the combination of weak demand drivers (i.e., the job market), more stringent lending standards, a glut of distressed homes, and the “stigma” associated with owning a home as a result of the housing crisis has kept a lid on housing prices in recent years. Housing prices began to rebound in early 2012, with prices up about 7% y/y in 2Q and 8% in 3Q – a trend we expect to continue.

In terms of downside/risks, two items we cited above – stringent lending standards and the glut of shadow inventory from distressed homes – remain drags on home prices. However, we believe that while the lending environment remains difficult, it is not getting worse – an opinion that seems to be underscored by the Fed Senior Loan Officer Opinion Survey. Additionally, the level of distressed homes remains high, but it is beginning to tick down, an item we detail later in this report.

Home Affordability Index is just off all-time highs As of September, the Home Affordability Index (HAI) reading was 190 – indicating the median income family earns 90% more than the income needed to qualify to purchase the typical home that was sold in September. This metric peaked at over 200 in 1Q 2012, but remains well above the long-term average of about 132 (dating back to January 1989).

37 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

Figure 14: Home Affordability Index

Source: NAR, Bloomberg.

Mortgage rates are at historic lows... Based on data available from Freddie Mac, 30-year mortgage rates are currently 3.38% – an all-time low for this data series, which goes back to 1971. We expect mortgage rates will remain low for a protracted period of time – particularly in light of the Fed committing to keeping fed funds rates near zero through at least 2015 and purchasing $40 billion of MBS securities per month indefinitely via QE3.

38 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

Figure 15: Freddie Mac 30-Year Mortgage Rates 20.0

18.0

16.0

14.0

12.0

10.0

8.0

6.0

4.0

2.0

0.0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 7 7 7 7 7 7 7 7 7 8 8 8 8 8 8 8 8 8 8 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0 0 0 1 1 1 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 2

Source: Freddie Mac.

…Which helps drive an attractive rent vs. own spread We estimate that the monthly cost of owning a home is 17% below that of renting an apartment. While this is a bit below the all-time highs seen in 1Q 2012, when it reached 26%, the spread remains very wide, in our view. Specifically, the average monthly effective rent cost is $1,042 – this is based on data available from REIS, Inc. and represents the average institutional quality monthly apartment rents. We estimate the average monthly cost of owning a home is $864 – or 17% below the cost of renting an apartment. Note that we calculate the average monthly cost of owning a home using NAR’s average existing home sales prices, Freddie Mac’s average 30- year mortgage rates, assuming a 90% LTV (this is likely closer to 80% today, and actually would widen the rent vs. own spread further, though at the expense of a higher down payment), and also accounting for the tax deductibility of interest and taxes at an effective 25% tax rate.

What we would also stress in looking at this metric is that over the next five years, we expect apartment rents to increase about 15%. If home prices were to stay stagnant in that backdrop, the spread would get too far out of whack, in our view.

39 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

Figure 16: Rent vs. Own Spread

$1,300

$1,200

$1,100

$1,000

$900

$800

$700

Cost of Owning Cost o f Renting $600

$500

Source: REIS, Inc., Freddie Mac, NAR, and J.P. Morgan.

Distressed Situations Beginning to Resolve We believe that winding down the inventory of distressed homes is important to driving future home price increases. While this will likely be a multi-year process, it appears as if we are in the early stages of this occurring, as delinquency rates and the overall shadow inventory (i.e., pending REO/foreclosure inventory) is declining.

U.S. delinquency rates are beginning to decline… Based on data available from the Mortgage Bankers Association (MBA), U.S. loan delinquencies are on the decline – falling to the mid-7% range after peaking at 10% in March 2010. Note that current delinquency rates remain about 300 bps above the long-term average, and it may take another two to three years to get back to that point, in our view. That being said, we view the steady decline over the last two and a half years as a positive.

40 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

Figure 17: U.S. Delinquencies – Mortgage Bankers Association

12.0%

10.0%

8.0%

6.0%

4.0%

2.0%

0.0% 0 5 0 5 0 5 0 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 8 8 9 9 0 0 1 7 8 8 8 8 8 8 8 8 8 8 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0 0 0 1 1 1 9 9 9 9 0 0 0 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1 1 1 2 2 2 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 2 / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / 1 1 1 1 1 1 1 3 1 9 7 5 3 1 9 7 5 3 1 9 7 5 3 1 9 7 5 3 1 9 7 5 3 1 9 7 5 3 1 9 7 1 1 1 1 1 1 1

Source: MBA, Bloomberg.

… as is the shadow inventory… According to CoreLogic, the current residential shadow inventory as of July 2012 fell to 2.3 million units – about on par with 2008 levels. This is down 10% from July 2011, when the shadow inventory was 2.6 million units, and also remains well off the peak level of close to 3 million seen in late 2009/early 2010.

41 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

Figure 18: Shadow Inventory Detail Count in Millions, Not Seasonally Adjusted

Source: CoreLogic, July 2012.

…and distressed sales are comprising a smaller percentage of overall sales Distressed sales (defined as a combination of houses sold out of foreclosure and via short sales) have been on a steady decline since the beginning of 2012. Specifically, total distressed sales accounted for 24% of total existing home sales in October – down from 35% this past January. Note that this figure peaked in the 45-50% range at the height of the financial crisis in late 2008/early 2009, declined into the mid-30% area in the spring of 2009, but then hovered in the 30-40% range for over two and a half years.

42 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

Figure 19: Distressed Sales (Foreclosures and Short Sales) as a Percentage of Existing Home Sales

60%

50%

40%

30%

20%

10%

0%

Source: NAR, Bloomberg.

43 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

Balance Sheet: Business Improvement and Free Cash Flow (Especially Given the NOLs) Should Drive Leverage Down, but It Will Be a Long Process

Realogy’s balance sheet is highly leveraged. Pro forma the IPO – including the elimination of $2.1 billion of convertible debt and repayment of $755 million of other debt, as well as our 4Q forecast, we estimate RLGY’s net debt/TTM EBITDA ratio will approximate 6.3x at year-end. While this is well below the approximately 14x level pre-IPO (and nearly 16x from a year ago), management still has a significant amount of de-levering to do in order to hit its goal of becoming an investment grade borrower, which means net debt/EBITDA needs to approach the 2x area. We think Realogy will be able to get there – it should generate significant free cash flow in a recovery, and management’s stated goal is to use every dollar of free cash flow for debt reduction – but it will take a few years, in our view.

Stepping back, recall that when Apollo acquired Realogy for $8.5 billion in April 2007, the deal was financed with $6.5 billion of debt. When the housing market collapsed, Realogy essentially “pulled out all the stops” in order to avoid bankruptcy. This included everything from issuing Second Lien debt, First and a Half Lien debt, converting existing notes into convertible notes, pushing out debt maturities, and cutting over $500 million of costs.

Looking forward, RLGY is far better positioned than it was just 12 months ago – the combination of the housing recovery, a lower cost base, the NOLs, and significantly lower leverage puts the company in good position to generate strong near- and intermediate-term free cash flow/EBITDA growth.

Below is a breakdown of RLGY’s outstanding debt following the completion of the IPO and pro forma the conversion of the remaining converts (note that 100% of the convert-holders converted their debt into common shares):

Table 12: RLGY Debt Breakdown $ in thousands Other Bank Indebtedness (1) (2) $50,000 L + 1.50% 2013 12.375% Senior Subordinated Notes $188,000 12.375% 2015 Extended rev olving credit facility $20,000 L + 3.25% 2016 Extended term loan facility $1,822,000 L + 4.25% 2016 12.0% Senior Notes $129,000 12.0% 2017 11.5% Senior Notes $489,000 11.5% 2017 13.375% Senior Subordinated Notes $10,000 13.375% 2018 7.875% Existing First and a Half Lien Notes $700,000 7.875% 2019 9.0% New First and a Half Lien Notes $325,000 9.0% 2020 7.625% First Lien Notes $593,000 7.625% 2020 Total/Weighted Average $4,326,000 7.203%

Source: Company reports and J.P. Morgan. (1) Interest rate includes a LIBOR floor of 1.5%, plus a 300 bps facility fee, so all-in cost is 6%. (2) This debt will be paid off by the end of 4Q 2012.

44 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

The Good News: NOLs, Free Cash Flow and Little Near- Term Maturities $2.1 billion of NOLs should save about $800 million over the next five years… We estimate that at a 38% tax rate, RLGY’s $2.1 billion of NOLs will save the company about $800 million over the next five years. RLGY racked up about $2.1 billion of net operating loss carry forwards (NOLs) over the last several years as its revenue decline and high interest expense obligations caused the company to report significant income losses for tax purposes. As a result of these losses, we estimate that RLGY will not have to pay cash taxes (with the exception of some minimal AMT/local taxes) for about five years. More specifically, based on our forecasted net income, we think RLGY will burn through the $2.1 billion in 4Q 2017.

Table 13: Forecasted NOL Usage $ in thousands 2013E 2014E 2015E 2016E 2017E Pre-Tax Net Income $177,857 $315,612 $475,232 $584,590 $686,592

Starting NOL $2,100,000 $1,922,143 $1,606,531 $1,131,299 $546,708 Less: Usage $177,857 $315,612 $475,232 $584,590 $546,708 Ending NOL $1,922,143 $1,606,531 $1,131,299 $546,708 $0

Tax Savings (at 38%) $67,586 $119,932 $180,588 $222,144 $207,749

Source: J.P. Morgan estimates.

…and help drive significant free cash flow production We estimate Realogy will produce free cash flow (cash flow from operations less maintenance cap ex) of $324 million in 2013, $463 million in 2014, $604 million in 2015, $706 million in 2016, and $804 million in 2017. After deducing $30 million of annual investment capex, we estimate RLGY will generate $2.7 billion of cash with which to pay down debt over the next five years. We assume that between now and 2017 Realogy will pay down $1.8 billion of debt and increase its cash position by about $900 million.

Table 14: Forecasted Free Cash Flow $ in thousands 2013E 2014E 2015E 2016E 2017E Starting Cash Balance $318,538 $269,516 $437,249 $682,602 $929,313 Plus: Cash Flow From Operations $383,978 $532,733 $684,353 $785,711 $883,713 Less: Maintenance Capex ($60,000) ($70,000) ($80,000) ($80,000) ($80,000) Less: Inv estment Capex ($20,000) ($20,000) ($20,000) ($20,000) ($20,000) Cash Available for Debt Repay ment $622,516 $712,249 $1,021,602 $1,368,313 $1,713,027

Less: Assumed Debt Repayment ($353,000) ($275,000) ($339,000) ($439,000) ($475,000)

Ending Cash Balance $269,516 $437,249 $682,602 $929,313 $1,238,027

Free Cash Flow $323,978 $462,733 $604,353 $705,711 $803,713

Source: J.P. Morgan estimates.

45 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

No significant debt maturities until 2016 RLGY has very little debt slated to mature over the next three years – just $100 million in 2013 (other bank indebtedness – which should be paid off by year-end 2012, according to the company), and $188 million in 2015 (the 12.375% senior subordinated notes). The line of credit and term loan both mature in 2016 – the outstanding balance on these as of today is about $1.9 billion, and we estimate that by 2016 RLGY will have paid these down to about $1.5 billion. Additionally, we believe the company’s balance sheet should be positioned well enough such that when it looks to refinance the line (L+325) and the term loan (L+425), it should be able to reduce its borrowing spread. This could happen well in advance of maturity now that it is publicly traded and carries less leverage than just a few months ago.

Figure 20: Debt Maturity Schedule $ in millions

$2,500 $2,246

$2,000 $1,842

$1,500

$1,000

$500 $188 $0 $50 $0 $0 2012 2013 2014 2015 2016 Thereafter

Source: Company reports and J.P. Morgan estimates. Note: Pro forma IPO adjustments/debt paydowns; $50 million of remaining other bank indebtedness (2013 maturity) to be paid off by 12/31/12.

The Bad News: RLGY Faces a Long Road and Has High- Cost Debt It Can’t Pre-pay Without Penalties We estimate it could take RLGY four to five years to reach its investment grade target Because RLGY’s leverage is so high, we estimate the company will not reach its leverage goal (becoming investment grade) until 2015 or so, when it gets leverage below 3x.

46 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

Table 15: Forecasted Net Debt to EBITDA $ in thousands 2012E 2013E 2014E 2015E 2016E 2017E Gross Debt $4,586,000 $4,233,000 $3,958,000 $3,619,000 $3,180,000 $2,705,000 Recourse Debt $4,276,000 $3,923,000 $3,648,000 $3,309,000 $2,870,000 $2,395,000 Cash $318,538 $269,516 $437,249 $682,602 $929,313 $1,238,027 Net Debt $3,957,462 $3,653,484 $3,210,751 $2,626,398 $1,940,687 $1,156,973 Net Debt / TTM EBITDA (1) 6.3x 5.1x 3.8x 2.7x 1.8x 1.0x

Source: J.P. Morgan estimates. (1) 2012E EBITDA is based on adjusted EBITDA.

Much of RLGY’s high-cost debt is not pre-payable for several years Over the next two years, the only pieces of debt available for Realogy to repay are its line of credit, term loan, other bank indebtedness, and the $188 million 12.375% senior subordinated notes, which mature in April 2015. The line of credit and term loan have current costs of 3.5% and 4.5% today, and the other bank indebtedness has a 6% all-in cost. Meanwhile, the company is unable to pre-pay (without incurring significant prepayment penalties) its $489 million 11.5% notes, $129 million 12% notes, or $10 million 13.375% notes prior to 2015, its $700 million 7.875% existing first and a half lien notes prior to 2017, or its $593 million 7.625% first lien notes or 9% new first and a half lien notes prior to 2018.

Below is a table indicating when each piece of RLGY’s debt is pre-payable and how we model the debt pre-payment waterfall.

Table 16: Assumed RLGY Debt Paydown Waterfall $ in thousands Pro Forma 2013E 2014E 2015E 2016E 2017E Outstanding Prepayable Assumed Prepayable Assumed Prepayable Assumed Prepayable Assumed Prepayable Assumed Balance - YE 2012 Without Penalty? Draw / (Paydown) Without Penalty? Draw / (Paydown) Without Penalty? Draw / (Paydown) Without Penalty? Draw / (Paydown) Without Penalty? Draw / (Paydown) Ex tended revolv ing credit facility (L+3.25%) $20,000 Yes $35,000 Yes $0 Yes $0 Yes $0 Yes $0 Ex tended term loan facility (L+4.25%) $1,822,000 Yes ($200,000) Yes ($275,000) Yes $0 Yes ($150,000) Yes $0 7.625% First Lien Notes $593,000 No $0 No $0 No $0 No $0 No $0 7.875% Existing First and a Half Lien Notes $700,000 No $0 No $0 No $0 No $0 Yes ($475,000) 9.0% New First and a Half Lien Notes $325,000 No $0 No $0 No $0 No $0 No $0 11.5% Senior Notes $489,000 No $0 No $0 Yes ($200,000) Yes ($289,000) Yes $0 12.0% Senior Notes $129,000 No $0 No $0 Yes ($129,000) Yes $0 Yes $0 12.375% Senior Subordinated Notes $188,000 Yes ($188,000) Yes $0 Yes $0 Yes $0 Yes $0 13.375% Senior Subordinated Notes $10,000 No $0 No $0 Yes ($10,000) Yes $0 Yes $0 Total ($353,000) ($275,000) ($339,000) ($439,000) ($475,000) Source: J.P. Morgan estimates.

47 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

Valuation

We utilize a number of approaches to value RLGY, including a DCF model, a roll- up/sum-of-the-parts approach, EBITDA and EPS multiples/comps, and looking at cash flow in the stabilized/out-years of our model. Consistent with all of our other companies under coverage, we utilize a DCF model for purposes of establishing a forward target price for the stock – we think this best captures future growth prospects and values a company as a stock/going concern – as opposed to simply a sum-of-the-parts or EBITDA approach, which we think are more appropriate to use in ascertaining a current "fair value" such as in the price discovery phase of an IPO. We outline all of our approaches below.

Our DCF and $42 YE 2013 Price Target Our year-end 2013 target price for RLGY is $42/share. In arriving at this target, we utilized a DCF approach using our estimates for free cash flow/share through 2017, then applied a 4% long-term growth rate into perpetuity. Our 4% long-term growth rate assumes 1% annual increases in homesale sides and a 3% annual increase in homesale prices. Note that we assume no dividends are paid through 2017 and then a 100% payout ratio of free cash flow in 2018 and beyond. Also of note, our assumed free cash flow steps down meaningfully – by about 32% – in 2018 compared to 2017, because we assume the company will be paying a full 40% tax rate by then. We discounted these cash flows back at a 10% discount rate and arrived at a $42/share price target.

48 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

Table 17: RLGY DCF Model and Discount Rate Sensitivity 2013 2014 2015 2016 2017 2018 Terminal Value

Cash Flow (1) $2.20 $3.12 $4.07 $4.74 $5.39 $3.69 Payout 0.0% 0.0% 0.0% 0.0% 0.0% 100.0% Div idend $0.00 $0.00 $0.00 $0.00 $0.00 $3.69 Long Term Growth Rate 4.0%

Terminal Year-End Value At Discount Rate 2013 Value Discount Rate

8.00% $67.80 $95.94 8.25% $63.23 $90.29 8.50% $59.17 $85.28 8.75% $55.54 $80.79 9.00% $52.28 $76.75 9.25% $49.34 $73.09 9.50% $46.66 $69.77 9.75% $44.23 $66.74 10.00% $42.00 $63.96 10.25% $39.96 $61.40 10.50% $38.08 $59.04 10.75% $36.34 $56.85 11.00% $34.72 $54.82 11.25% $33.23 $52.93 11.50% $31.83 $51.17 11.75% $30.53 $49.51 12.00% $29.31 $47.97

Source: J.P. Morgan estimates. (1) Note that cash flow estimates through 2017 are based on our model; for 2018 and beyond, we assume a 4.0% long-term growth rate.

Sum-of-the-Parts Valuation In our sum-of-the-parts valuation approach, we forecasted EBITDA for each of Realogy’s divisions through 2017 – essentially taking the business through a housing recovery/up-cycle period for the next five years. We then deduced our annual cap-ex and unallocated corporate G&A to arrive at a true (distributable) cash flow before interest and taxes for each division. We then applied a normalized EBITDA multiple on each of the various business lines and discounted it back to today – recall that we detailed the respective TTM EBITDA multiples and discount rates we applied to each of the business lines in their respective sections previously. Lastly, in addition to valuing each of the business lines, we think the present value of Realogy’s $2.1 billion of net operating loss carry-forwards (NOLs) needs to be accounted for – we value these at approximately $577 million.

The tables below summarize our annual EBITDA and cash flow before interest and taxes estimates, along with the respective discount rates, terminal multiples, and NPVs.

49 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

Table 18: RLGY Roll-Up Valuation $ in thousands RFG 2013 2014 2015 2016 2017 RFG EBITDA - Our Estimates $407,529 $464,430 $508,437 $533,298 $554,210 RFG EBITDA - Excluding NRT Roy alties $158,503 $189,592 $207,112 $215,947 $222,695 Less: Maintenance Cap Ex Allocation $30,000 $35,000 $40,000 $40,000 $40,000 Less: Inv estment Cap Ex Allocation $2,000 $2,000 $2,000 $2,000 $2,000 Less: Unallocated G&A $20,200 $21,008 $21,638 $22,287 $22,733 Cash Flow Before Debt/Tax es For Valuation $106,303 $131,584 $143,473 $151,660 $157,962 To Discount… $106,303 $131,584 $143,473 $151,660 $1,957,621 16.8% 17.3% 16.3% 16.0% 15.6% Terminal Multiple (TTM EBITDA) 9.0x Discount Rate 10.0% RFG NPV $1,632,294

NRT 2013 2014 2015 2016 2017 NRT EBITDA - Our Estimates $205,130 $276,032 $355,442 $394,521 $433,347 NRT EBITDA - Including NRT Royalties $454,155 $550,870 $656,767 $711,872 $764,862 Less: Maintenance Cap Ex Allocation $30,000 $35,000 $40,000 $40,000 $40,000 Less: Inv estment Cap Ex Allocation $18,000 $18,000 $18,000 $18,000 $18,000 Less: Unallocated G&A $20,200 $21,008 $21,638 $22,287 $22,733 Cash Flow Before Debt/Tax es For Valuation $385,955 $476,862 $577,129 $631,585 $684,129 To Discount… $385,955 $476,862 $577,129 $631,585 $5,879,028 60.8% 62.8% 65.5% 66.5% 67.7% Terminal Multiple (TTM EBITDA) 7.0x Discount Rate 12.0% NRT NPV $4,872,846

Cartus 2013 2014 2015 2016 2017 Cartus EBITDA - Our Estimates $110,424 $117,423 $122,892 $126,579 $128,285 Less: Unallocated G&A $5,050 $5,252 $5,410 $5,572 $5,683 Cash Flow Before Debt/Tax es For Valuation $105,374 $112,171 $117,483 $121,007 $122,602 To Discount… $105,374 $112,171 $117,483 $121,007 $1,042,115 16.6% 14.8% 13.3% 12.7% 12.1% Terminal Multiple (TTM EBITDA) 7.5x Discount Rate 11.0% Cartus NPV $970,031

TRG 2013 2014 2015 2016 2017 TRG EBITDA - Our Estimates $43,876 $46,533 $50,915 $52,718 $53,896 Less: Unallocated G&A $5,050 $5,252 $5,410 $5,572 $5,683 Less: Non-Controlling Interests $2,000 $2,000 $2,000 $2,000 $2,000 Cash Flow Before Debt/Tax es For Valuation $36,826 $39,281 $43,506 $45,146 $46,213 To Discount… $36,826 $39,281 $43,506 $45,146 $439,025 5.8% 5.2% 4.9% 4.8% 4.6% Terminal Multiple (TTM EBITDA) 8.5x Discount Rate 11.0% TRG NPV $387,148

Value of NOLs 2013 2014 2015 2016 2017 Pre-Tax Net Income $177,857 $315,612 $475,232 $584,590 $686,592

Starting NOL $2,100,000 $1,922,143 $1,606,531 $1,131,299 $546,708 Usage $177,857 $315,612 $475,232 $584,590 $546,708 Ending NOL $2,100,000 $1,922,143 $1,606,531 $1,131,299 $546,708 $0

Taxes at 38% $67,586 $119,932 $180,588 $222,144 $207,749

Discount Rate 10.0% NPV of NOLs $576,961

Total Business Value $7,862,319 NOL Value $576,961 Total Enterprise Value $8,439,280 Source: J.P. Morgan estimates.

50 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

Table 19: RLGY Estimated Fair Value Today – NPV Basis $ in thousands, except per share data RFG $1,632,294 NRT $4,872,846 Cartus $970,031 TRG $387,148 Total Business Value $7,862,319

Value of NOLs $576,961 Total Enterprise Value $8,439,280

Secured/Unsecured Debt $4,326,000 Debt Mark-to-Market @ ~105 $221,300 Cash ($318,538) Net Debt $4,228,762 Implied Equity Value $4,210,518

Conv ert A & B Shares 63,000 Conv ert C Shares 27,772 Ex isting Shareholders 8,018 Public Shareholders 46,000 Total Shares 144,791

Equity Value/Share $29.08

Source: J.P. Morgan estimates.

Table 20: RLGY Estimated Fair Value at Year-End 2013 – NPV Basis $ in thousands, except per share data RFG $1,689,220 NRT $5,071,632 Cartus $971,360 TRG $392,908 Total Businesses Value $8,125,121

Value of NOLs $567,072 Total Enterprise Value $8,692,193

Year-End 2013 Debt $3,923,000 Debt Mark-To-Market @ 103 $117,690 Cash ($269,516) Net Debt @ Market Value $3,771,174 Equity Value $4,921,019

Shares Outstanding 145,624

Year-End 2013 Equity Value/Share $33.79 Source: J.P. Morgan estimates.

Comps Valuation – Not a Great Approach, in Our View There are no direct comps in the public market for RLGY, which we think makes valuing the company based on EPS and EBITDA multiples today a bit difficult. That said, we do have a list of companies that we compare RLGY’s valuation against – these include commercial real estate service companies and other publicly traded

51 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

franchisors. Like RLGY, the commercial real estate service companies have a sales brokerage division – however, the end markets are different (commercial vs. residential real estate). In addition, while RFG is a franchise business and does have a loose tie-in with the public franchisors we chose in or comp group, the end markets are also quite different (hotels and casual dining vs. residential real estate). We also looked at a number of other service and title companies that we think are good comps for RLGY’s Cartus and TRG businesses, but these business lines are a much smaller piece of the pie for RLGY and make these comps less relevant.

Realogy’s near-term EBITDA growth potential is another reason why we think comps are less relevant at this point. We believe looking at 2013 multiples makes little sense given that 1) while not at “trough” levels, Realogy’s 2013E EPS and EBITDA remain well off what we believe are “normalized” levels, and 2) we believe investors are looking for a multi-year growth story in RLGY’s earnings and EBITDA as the housing market continues to recover. This assumed five-year recovery/normalization period in the housing market is one of the key underpinnings to our sum-of-the-parts valuation approach. Over time, as Realogy’s earnings recover, we think multiples will become a more relevant valuation approach, but for now we don’t think it is particularly good.

Realogy trades at a 40-60% premium to what we believe are the closest comps In looking for the best comps for Realogy, we looked at the company’s four business units separately and found what we believed were the best comps for each business unit. We provide more detail below:

 Franchise comps. We chose a number of publicly traded hotel and casual dining franchisors given Realogy’s substantial franchise orientation. We believe the hotel and casual dining sectors were most closely correlated with the residential housing division with respect to its cyclicality and sensitivity to consumer sentiment. The hotel franchisors we chose are Marriot International (MAR), Choice Hotels (CHH), and Wyndham Hotel Group (WYN); the restaurant franchisors we used are DineEquity (DIN), Brinker International (EAT), Buffalo Wild Wings (BWLD), Ruby Tuesday’s (RT), and Red Robin (RRGB). On average, our franchisee comps trade at 9-9.5x 2013 and 2014 EBITDA and 16x and 15x 2013 and 2014 EPS, respectively.  Real estate broker comps. There are no other publicly traded residential housing brokers of size, so we believe CBRE Group (CBG – OW) and Jones Lang LaSalle (JLL – N) – the two largest commercial brokers in the world – are the best real estate broker comps. We note, however, that these comps also are not perfect – in addition to brokering commercial (and not residential) properties, CBG and JLL have diversified revenue streams – i.e., leasing brokerage, investment management, property management, development businesses, etc. The commercial real estate brokerage business accounts for about 15% of each company’s revenues. On average, the commercial brokers trade at 8x and 7x projected 2013 and 2014 EBITDA respectively, and 13x 2013E earnings and 11x 2014E earnings.  Staffing comps. We used a sampling of staffing companies given their service nature and the fact that there is some tie-in with what Cartus does. These include Adecco (ADEN), Randstad Holding (RAND), Robert Half (RHI), and Manpower, Inc. (MAN). On average, the staffing companies trade at 8x 2013E

52 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

EBITDA and 7x 2014E EBITDA, and 15x and 12x 2013 and 2014 projected EPS, respectively.  Title insurance comps. We looked at two publicly traded title providers as comps for TRG – Fidelity National Financial (FNF) and First American Financial (FAF). There are no consensus EBITDA estimates available for the title companies, so there are no EBITDA multiples we can point to; in terms of EPS, the title insurers trade at 13.0x 2013E earnings, on average (no data is available for 2014).  Other business services. Lastly, we look to two blue-chip publicly traded business services companies – Automatic Data Processing (ADP) and Accenture PLC (ACN) – to round out our comp group and compare to RLGY as a whole. These companies trade at 9x 2013E EBITDA and 8.5x 2014E EBITDA, and 17x and 15.5x 2013E and 2014E EPS, respectively. Table 21: Realogy Comps $ in thousands, except per share data Stock Net Debt Price Equity Enterprise To 2012E EBITDA EBITDA Growth EV/EBITDA Earnings Per Share EPS Growth P/E Ratio Company Ti cker 11/19/12 Market Cap Value EBITDA 2012E 2013E 2014E 2013E 2014E 2013E 2014E 2012E 2013E 2014E 2013E 2014E 2013E 2014E

Franchising Marriott International MAR $35.45 $11,131,300 $13,535,300 2.1 $1,139,545 $1,274,227 $1,445,462 11.8% 13.4% 10.6x 9.4x $1.70 $2.01 $2.39 17.9% 19.1% 17.7x 14.8x Choice Hotels CHH $31.36 $1,820,557 $2,520,801 3.5 $201,929 $215,714 $227,667 6.8% 5.5% 11.7x 11.1x $2.03 $1.92 $2.06 (5.2%) 7.3% 16.3x 15.2x Wy ndham Hotel Group WYN $49.12 $6,904,166 $11,123,166 4.0 $1,053,333 $1,140,917 $1,205,667 8.3% 5.7% 9.7x 9.2x $2.99 $3.58 NA 19.7% NA 13.7x NA DineEquity DIN $61.99 $1,141,788 $2,590,438 5.0 $283,200 $266,200 $274,667 (6.0%) 3.2% 9.7x 9.4x $5.67 $3.91 $4.48 (31.1%) 14.6% 15.9x 13.9x Brinker International EAT $29.30 $2,142,342 $2,776,460 1.7 $369,267 $408,500 $431,462 10.6% 5.6% 6.8x 6.4x $1.89 $2.31 $2.61 22.5% 13.1% 12.7x 11.2x Buffalo Wild Wings BWLD $72.01 $1,338,691 $1,254,858 (0.5) $155,600 $186,333 $215,833 19.8% 15.8% 6.7x 5.8x $3.13 $3.62 $4.44 15.4% 22.7% 19.9x 16.2x Ruby Tuesday's RT $7.50 $478,710 $735,333 2.3 $113,167 $102,000 $110,650 (9.9%) 8.5% 7.2x 6.6x $0.30 $0.30 $0.38 1.7% 26.0% 25.0x 19.8x Red Robin RRGB $31.86 $454,141 $559,246 1.1 $100,067 $102,891 $113,000 2.8% 9.8% 5.4x 4.9x $1.93 $1.99 $2.36 3.5% 18.2% 16.0x 13.5x Franchise Total/Wtd. Avg $25,411,695 $35,095,602 2.8 8.2% 8.9% 9.5x 8.7x 14.2% 17.4% 16.2x 14.6x

Brokers CBRE Group CBG $17.79 $5,855,778 $7,455,407 1.9 $861,550 $962,605 $1,105,048 11.7% 14.8% 7.7x 6.7x $1.15 $1.33 $1.62 15.0% 21.7% 13.4x 11.0x Jones Lang LaSale JLL $76.59 $3,373,258 $3,925,713 1.3 $429,043 $482,838 $533,721 12.5% 10.5% 8.1x 7.4x $5.45 $5.91 $6.78 8.4% 14.7% 13.0x 11.3x Broker Total/Wtd. Avg. $9,229,036 $11,381,120 1.7 12.0% 13.4% 7.9x 6.9x 12.6% 19.1% 13.2x 11.1x

Staffing Adecco SA ADEN $44.75 $8,471,175 $9,572,175 1.2 $909,286 $1,033,524 $1,205,389 13.7% 16.6% 9.3x 7.9x $2.39 $3.04 $3.74 26.9% 23.3% 14.7x 12.0x Randstad Holding NV RAND $24.91 $4,285,476 $5,722,876 2.3 $625,227 $691,409 $805,000 10.6% 16.4% 8.3x 7.1x $1.14 $1.49 $1.93 30.0% 29.7% 16.7x 12.9x Robert Half International RHI $27.06 $3,810,343 $3,522,490 (0.7) $397,091 $455,818 $518,200 14.8% 13.7% 7.7x 6.8x $1.52 $1.80 $2.15 17.9% 19.5% 15.1x 12.6x Manpower Inc. MAN $36.91 $2,917,184 $3,223,584 0.6 $547,667 $568,200 $659,833 3.7% 16.1% 5.7x 4.9x $2.68 $2.82 $3.54 5.2% 25.7% 13.1x 10.4x Staffing Total/Wtd. Avg. $19,484,178 $22,041,125 1.0 10.9% 16.0% 8.0x 6.9x 22.6% 24.3% 15.0x 12.1x

Title Insurers Fidelity National Financial FNF $22.90 $5,135,077 $5,178,977 NA NA NA NA NA NA NA NA $2.58 $1.82 NA (29.7%) NA 12.6x NA First American Financial FAF $23.20 $2,472,865 $1,999,990 NA NA NA NA NA NA NA NA $2.38 $1.75 NA (26.5%) NA 13.3x NA Title Insurers Total/Wtd. Avg. $7,607,942 $7,178,967 NA NA NA NA NA (28.6%) NA 12.8x NA

Other Business Services Automatic Data Processing ADP $55.22 $26,737,524 $25,521,024 (0.5) $2,242,500 $2,382,941 $2,572,941 6.3% 8.0% 10.7x 9.9x $2.76 $2.92 $3.19 5.7% 9.4% 18.9x 17.3x Accenture PLC ACN $67.06 $45,385,580 $38,742,826 (1.5) $4,372,286 $4,727,467 $5,031,231 8.1% 6.4% 8.2x 7.7x $3.84 $4.23 $4.62 10.0% 9.3% 15.9x 14.5x Other Business Services Total/Wtd. Avg. $72,123,104 $64,263,850 (1.2) 7.5% 6.9% 9.0x 8.5x 8.4% 9.3% 17.0x 15.5x

Realogy RLGY $37.06 $5,365,939 $9,594,701 21.9 $192,971 $716,459 $851,898 271.3% 18.9% 12.6x 10.6x NM $1.38 $2.28 NM 64.8% 26.8x 16.3x Source: Company reports, Bloomberg, and J.P. Morgan estimates.

Free Cash Flow Multiples We think one metric that should increase in importance with investors in valuing RLGY is cash flow multiples. RLGY’s EPS will have some noise over the next few years, as cash vs. GAAP taxes will vary widely (due to the NOLs) and it could also opt to make debt pre-payment penalties as part of its balance sheet repositioning and

53 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

de-leveraging that should occur. As such, a focus on what's available for debt paydown (or would in theory be distributable to shareholders after cap ex) is relevant.

Using our 2013 and 2014 free cash flow estimates, we calculate that RLGY is trading at 17x and 12x, respectively. We think that in a high-growth period of time (i.e., in a recovery scenario), RLGY should trade in the 10-15x cash flow multiple range. This tact would put RLGY in the high 30s by year-end 2013, but there would be, by our estimates, still substantial growth ahead given debt paydown and continued improvement in housing, perhaps warranting an even higher multiple. The offset is that cash flow/share will be inflated in the next five years due to the NOLs keeping RLGY from paying taxes.

54 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

Management and Board of Directors

We think RLGY’s management team is a very strong one. Richard Smith, the company's CEO, was a key architect in acquiring, building, and managing the brokerage brands that comprise the company today – this goes back to the HFS/Cendant days. In addition, the other key senior executives have been in their respective roles for many years. The management team at RLGY today is essentially the one that ran the business at Cendant, was spun out, taken private, and now public in the current form. They are battle tested, in our view, given the ownership changes that have occurred over time at RLGY, and, more importantly, they have seen the best and worst of the U.S. housing market.

Summaries of key senior officers follow:

Richard A. Smith, Chairman, President and CEO. Mr. Smith has served as Realogy’s President and Chief Executive Officer since November 2007, a director since the separation from Cendant in July 2006, a member of the Executive Committee since its formation in August 2009, and as Chairman since February 2012. Mr. Smith’s career with Realogy and its predecessor organizations spans 33 years, and previous roles within the organization include Senior Executive Vice President of Cendant from September 1998 through July 2006, Chairman and CEO of Cendant’s Real Estate Services Division from December 1997 through July 2006, President of the Real Estate Division of HFS from October 1996 to December 1997, and Executive Vice President of Operations for Hospitality Franchise Systems (a Cendant predecessor entity) from February 1992 to October 1996.

Anthony E. Hull, Executive Vice President, Chief Financial Officer and Treasurer. Mr. Hull has served as EVP, CFO, and Treasurer since July 2006. Mr. Hull was Executive Vice President, Finance of Cendant from October 2003 through July 2006. Prior to his time at Cendant, he served as CFO for DreamWorks. Prior to that, Mr. Hull worked in various capacities for Paramount Communications, from 1990-1994. From 1984 to 1990, Mr. Hull worked in investment banking at Morgan Stanley.

Alexander E. Perriello, III, President and Chief Executive Officer of Realogy Franchise Group. Mr. Perriello has served as President and CEO of RFG (formerly Cendant Real Estate Franchise Group) since April 2004. From 1997 through 2004, he was the President and CEO of Coldwell Banker Real Estate Corporation.

Bruce Zipf, President and Chief Executive Officer of NRT LLC. Mr. Zipf has served as President and CEO of NRT since March 2005 and was President and COO of NRT from February 2004 to March 2005. From January 2003 to February 2004, Mr. Zipf served as EVP and Chief Administrative Officer of NRT and from 1998 through December 2002 he served as NRT’s Senior Vice President for most of NRT’s Eastern Operations. Prior to that, Mr. Zipf served as President and Chief Operating Officer for Coldwell Banker Residential Brokerage - New York and was a senior audit manager for Ernst and Young.

Kevin J. Kelleher, President and Chief Executive Officer of Cartus. Mr. Kelleher has served as President and CEO of Cartus (which was formerly known as Cendant Mobility Services Corporation) since 1997. From 1993 to 1997, he served as SVP

55 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

and General Manager of Cendant Mobility’s destination services unit. Mr. Kelleher has also held various senior leadership positions in sales, client relations, network management and strategic planning.

Donald J. Casey, President and Chief Executive Officer of TRG. Mr. Casey served as President and CEO of TRG (formerly known as Cendant Settlement Services Group) since April 2002. From 1995 through April 2002, he served as SVP, Brands of PHH Mortgage. Prior to that, he served as VP, Government Operations of Cendant Mortgage and a secondary marketing analyst for PHH Mortgage Services (prior to its acquisition by Cendant).

Marilyn J. Wasser, Executive Vice President, General Counsel and Corporate Secretary. Ms. Wasser has served in her current role with Realogy since May 2007. From May 2005 through May 2007, Ms. Wasser was EVP, General Counsel and Corporate Secretary for Telcordia Technologies. Prior to that, from 1983 until 2005, Ms. Wasser served in several positions with AT&T Corporation and AT&T Wireless Services, including EVP, Associate General Counsel and Corporate Secretary, Secretary to the AT&T Board of Directors, and Chief Compliance Officer.

David J. Weaving, Executive Vice President and Chief Administrative Officer. Mr. Weaving served in this role since July 2006. Prior to that, Mr. Weaving was SVP and CFO of Cendant’s Real Estate Division from September 2001 until July 2006. He also served as Vice President and Divisional Controller for Cendant’s Real Estate Division and Vice President of Finance at Cendant. From 1995 to 1999, Mr. Weaving worked in various roles at Cambrex Corporation, a diversified chemical manufacturer.

Dea Benson, Senior Vice President, Chief Accounting Officer and Controller. Ms. Benson has served as Realogy’s SVP, Chief Accounting Office and Controller since February 2008. From September 2007 to January 2008, Ms. Benson served as Chief Accounting Officer of Genius Products, Inc. Prior to that, Ms. Benson held various financial and accounting positions with DreamWorks SKG/Paramount Pictures, most recently from November 2002 to January 2006 as Controller of DreamWorks SKG and from February 2006 to December 2006 as divisional CFO of the Worldwide Home Entertainment division of Paramount Pictures. Ms. Benson is a certified public accountant.

Board of Directors Realogy’s current Board of Directors consists of six members, four of whom are insiders – Richard Smith (CEO) and the three Apollo partners. Realogy is considered a “controlled company,” which exempts the company from the requirement to have a majority of independent directors. If RLGY ceased to be a controlled company by NYSE rules, the company would be required to appoint a majority of independent directors to the Board and also have a compensation committee and nominating/corporate governance committee composed entirely of independent directors.

Realogy recently appointed Michael J. Williams (most recently the President and CEO of Fannie Mae) to its Board of Directors as its second independent director and noted on its 3Q earnings call that it plans to add a third independent director in the very near future.

56 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

From a corporate governance perspective, Realogy scores below average, in our view. The company is approximately 56% owned by Apollo and Paulson, insider ownership is very low, four of the six current directors are insiders, and the board is staggered. Specific rights related to Apollo and Paulson are outlined in their respective Security holders Agreements. It is not clear at this point what Apollo’s “exit strategy” for its Realogy investment is, but to the extent that Apollo reduces its stake and Realogy is no longer considered a “controlled company” by NYSE standards, we would view this as a positive – not only because of a reduced overhang on the stock due to the ownership concentration declining, but also in terms of getting a more independent board and potentially more shareholder rights. The table below lists the members of RLGY’s Board of Directors.

Table 22: RLGY Board of Directors Director Age Positions/Affiliations Richard A. Smith 59 Chairman of the Board, President, and Chief Executive Officer Marc E. Becker 39 Director; Member of Audit Committee, Chair of Compensation and Executive Committee, and Partner at Apollo V. Ann Hailey 61 Director; Chair of Audit Committee; President, CEO, and CFO of Famous Yard Sale, nc.;I Former CFO of Gilt Groupe, Inc. Scott M. Kleinman 39 Director; Partner at Apollo M. Ali Rashid 36 Director; Partner at Apollo Michael J. Williams 55 Director; Former President and CEO of Fannie Mae; also served as EVP and COO of Fannie Mae

Source: Company reports.

The Board is staggered Realogy’s board is divided into three classes, with each class serving staggered three- year terms (other than the initial terms of the Class I and Class II directors, which will be one and two years, respectively, in order to properly stagger the board initially). From a corporate governance perspective, we view this as a negative. Staggered boards in general often prevent/delay changes in control and shareholders from materially changing the composition of the board in a single year.

In terms of classifications, Ms. Hailey and Mr. Rashid are Class I directors, with terms expiring at the end of 2013, Mr. Kleinman and a director to be appointed immediately following the completion of the offering are Class II directors, with terms expiring at the end of 2014, and Mr. Becker, Mr. Smith, and Mr. Williams are Class III directors, with terms expiring at the end of 2015. To the extent the Board expanded, the additional directors will be distributed such that each class will contain approximately one-third of all directors.

Apollo and Paulson own about 56% of common shares; insider ownership is low Following the IPO and the conversion of convertible debt into equity, Apollo and Paulson & Co. own approximately 47% and 9.5% of Realogy’s outstanding common shares, respectively. Both companies have a 180-day lockup following the IPO, after which point they are free to sell their shares into the market. It is unclear what Apollo's (or Paulson’s) exit strategy is for its investment in Realogy, and how quickly it could wind down its position. We believe this could act as an overhang on the stock until the position is wound down and/or Apollo’s intentions become clearer.

Realogy’s insider ownership is quite low – under 0.25% of Realogy's outstanding common shares. While this is largely a function of the Apollo buyout and subsequent ownership of the convertible debt, we believe it would be positive to see this increase over time.

57 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

Appendix I: Income Statement

$ in thousands, except per share data 2008 2009 2010 2011 1Q12 2Q12 3Q12 4Q12E 2012E 1Q13E 2Q13E 3Q13E 4Q13E 2013E 2014E 2015E 2016E 2017E Revenues Gross commission income $3,483,000 $2,886,000 $2,965,000 $2,926,000 $606,000 $983,000 $939,000 $755,045 $3,283,045 $672,828 $1,101,539 $1,048,987 $843,736 $3,667,089 $4,097,308 $4,538,755 $4,805,846 $5,041,911 Service revenue $737,000 $621,000 $700,000 $752,000 $172,000 $208,000 $231,000 $215,401 $826,401 $194,744 $233,560 $258,085 $233,580 $919,970 $964,172 $1,015,560 $1,047,602 $1,071,601 Franchise fees $323,000 $273,000 $263,000 $256,000 $54,000 $76,000 $76,000 $68,338 $274,338 $60,634 $88,009 $87,263 $77,436 $313,342 $352,287 $376,869 $390,195 $401,221 Other $182,000 $152,000 $162,000 $159,000 $43,000 $42,000 $35,000 $39,000 $159,000 $33,712 $41,284 $41,078 $38,360 $154,435 $165,480 $172,609 $176,432 $179,404 Net Revenues $4,725,000 $3,932,000 $4,090,000 $4,093,000 $875,000 $1,309,000 $1,281,000 $1,077,784 $4,542,784 $961,919 $1,464,392 $1,435,413 $1,193,112 $5,054,836 $5,579,247 $6,103,793 $6,420,075 $6,694,137

Ex penses Commission and other agent-related costs $2,275,000 $1,850,000 $1,932,000 $1,932,000 $402,000 $662,000 $633,000 $511,543 $2,208,543 $447,431 $735,277 $702,821 $567,412 $2,452,941 $2,740,722 $3,036,012 $3,214,674 $3,372,580 Operating $1,607,000 $1,263,000 $1,241,000 $1,270,000 $318,000 $325,000 $336,000 $338,585 $1,317,585 $370,494 $339,944 $357,211 $357,620 $1,425,269 $1,491,396 $1,557,202 $1,606,678 $1,644,511 Marketing $207,000 $161,000 $179,000 $185,000 $51,000 $52,000 $44,000 $58,798 $205,798 $42,155 $64,021 $59,135 $57,847 $223,159 $247,109 $267,502 $279,365 $289,426 General and administrative $236,000 $250,000 $238,000 $254,000 $77,000 $79,000 $74,000 $472,888 $702,888 $73,624 $70,506 $68,622 $64,256 $277,008 $288,122 $299,486 $307,960 $314,714 Former parent legacy costs (benefit), net ($20,000) ($34,000) ($323,000) ($15,000) ($3,000) $0 ($1,000) $0 ($4,000) $0 $0 $0 $0 $0 $0 $0 $0 $0 Restructuring costs $58,000 $70,000 $21,000 $11,000 $3,000 $2,000 $2,000 $0 $7,000 $0 $0 $0 $0 $0 $0 $0 $0 $0 Merger costs $2,000 $1,000 $1,000 $1,000 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Depreciation and amortization $219,000 $194,000 $197,000 $186,000 $45,000 $44,000 $42,000 $45,780 $176,780 $45,780 $45,780 $45,780 $45,780 $183,121 $183,121 $183,121 $183,121 $183,121 Interest expense, net $624,000 $583,000 $604,000 $666,000 $170,000 $176,000 $187,000 $93,188 $626,188 $82,497 $79,320 $76,405 $77,259 $315,480 $313,166 $285,238 $243,687 $203,192 Loss on the early extinguishment of debt $0 ($75,000) $0 $36,000 $6,000 $0 $0 $0 $6,000 $0 $0 $0 $0 $0 $0 $0 $0 $0 Other (income)/expense, net $1,780,000 $3,000 ($6,000) $0 $1,000 $0 $0 $0 $1,000 $0 $0 $0 $0 $0 $0 $0 $0 $0 Total Expenses $6,988,000 $4,266,000 $4,084,000 $4,526,000 $1,070,000 $1,340,000 $1,317,000 $1,520,782 $5,247,782 $1,061,981 $1,334,849 $1,309,975 $1,170,174 $4,876,979 $5,263,635 $5,628,561 $5,835,484 $6,007,544

Income before taxes, equity in earnings and noncontrolling int. ($2,263,000) ($334,000) $6,000 ($433,000) ($195,000) ($31,000) ($36,000) ($442,997) ($704,997) ($100,062) $129,543 $125,438 $22,938 $177,857 $315,612 $475,232 $584,590 $686,592

Income tax expense ($380,000) ($50,000) $133,000 $32,000 $7,000 $8,000 $18,000 $2,000 $35,000 $3,000 $3,000 $50,175 $9,175 $65,351 $126,245 $190,093 $233,836 $274,637 Equity in earnings of unconsolidated entities (income shown as negative) $28,000 ($24,000) ($30,000) ($26,000) ($10,000) ($15,000) ($21,000) ($10,000) ($56,000) ($8,000) ($10,000) ($12,000) ($10,000) ($40,000) ($40,000) ($40,000) ($40,000) ($40,000)

Net Income Before Noncontrolling Interests ($1,911,000) ($260,000) ($97,000) ($439,000) ($192,000) ($24,000) ($33,000) ($434,997) ($683,997) ($95,062) $136,543 $87,263 $23,763 $152,507 $229,367 $325,139 $390,754 $451,955

Net income attributable to noncontrolling interests ($1,000) ($2,000) ($2,000) ($2,000) $0 ($1,000) ($1,000) $0 ($2,000) $0 ($1,000) ($1,000) $0 ($2,000) ($2,000) ($2,000) ($2,000) ($2,000)

Net Income To Realogy (Including Unusual Items) ($1,912,000) ($262,000) ($99,000) ($441,000) ($192,000) ($25,000) ($34,000) ($434,997) ($685,997) ($95,062) $135,543 $86,263 $23,763 $150,507 $227,367 $323,139 $388,754 $449,955

Unusual Items/Non-Cash Taxes $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $47,175 $6,175 $53,351 $110,245 $170,093 $205,836 $242,637

Net Income To Realogy (Before Unusual Items/Non-Cash Taxes) ($1,912,000) ($262,000) ($99,000) ($441,000) ($192,000) ($25,000) ($34,000) ($434,997) ($685,997) ($95,062) $135,543 $133,438 $29,938 $203,857 $337,612 $493,232 $594,590 $692,592

Average Shares Outstanding - Basic NA NA NA NA NA NA 8,000 129,746 68,873 144,791 145,624 145,624 145,624 145,415 145,624 145,624 145,624 145,624 Average Shares Outstanding - Diluted NA NA NA NA NA NA 8,000 131,746 69,873 146,791 147,624 147,624 147,624 147,415 148,124 148,624 148,874 149,124

EPS - Basic NA NA NA NA NA NA ($4.24) ($3.35) ($9.96) ($0.66) $0.93 $0.59 $0.16 $1.04 $1.56 $2.22 $2.67 $3.09 EPS - Diluted NA NA NA NA NA NA ($4.24) ($3.30) ($9.82) ($0.65) $0.92 $0.58 $0.16 $1.02 $1.53 $2.17 $2.61 $3.02

EPS - Basic Ex. One-Time Items And Non-Cash Taxes NA NA NA NA NA NA ($4.25) ($3.35) ($9.96) ($0.66) $0.93 $0.92 $0.21 $1.40 $2.32 $3.39 $4.08 $4.76 EPS - Diluted Ex. One-Time Items And Non-Cash Taxes NA NA NA NA NA NA ($4.25) ($3.30) ($9.82) ($0.65) $0.92 $0.90 $0.20 $1.38 $2.28 $3.32 $3.99 $4.64

Common Dividends Per Share $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00

Total EBITDA $340,000 $471,000 $835,000 $443,000 $30,000 $203,000 $213,000 ($294,029) $151,971 $36,214 $264,643 $259,624 $155,977 $716,459 $851,898 $983,591 $1,051,398 $1,112,906 Adjusted EBITDA $657,000 $619,000 $633,000 $571,000 $35,279 $238,721 $235,885 $114,721 $624,606 $36,214 $264,643 $259,624 $155,977 $716,459 $851,898 $983,591 $1,051,398 $1,112,906 Free Cash Flow ($108,000) ($310,000) ($313,000) ($81,000) ($112,000) ($365,000) ($137,467) ($695,467) ($76,282) $169,323 $167,219 $63,718 $323,978 $462,733 $604,353 $705,711 $803,713 Free Cash Flow/Share ($45.63) ($1.04) ($9.95) ($0.52) $1.15 $1.13 $0.43 $2.20 $3.12 $4.07 $4.74 $5.39 Source: J.P. Morgan estimates.

58 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

Appendix II: Balance Sheet

$ in thousands 2008 2009 2010 2011 1Q12 2Q12 3Q12 4Q12E 2012E 1Q13E 2Q13E 3Q13E 4Q13E 2013E 2014E 2015E 2016E 2017E Assets Current Assets: Cash and cash equivalents $437,000 $255,000 $192,000 $143,000 $148,000 $138,000 $141,000 $318,538 $318,538 $297,256 $173,579 $260,798 $269,516 $269,516 $437,249 $682,602 $929,313 $1,238,027 Trade receivables (net of allowance for doubtful accounts) $140,000 $102,000 $114,000 $120,000 $122,000 $147,000 $145,000 $145,000 $145,000 $145,000 $145,000 $145,000 $145,000 $145,000 $145,000 $145,000 $145,000 $145,000 Relocation receivables $765,000 $334,000 $386,000 $378,000 $385,000 $419,000 $413,000 $413,000 $413,000 $413,000 $413,000 $413,000 $413,000 $413,000 $413,000 $413,000 $413,000 $413,000 Relocation properties held for sale $22,000 $0 $21,000 $11,000 $7,000 $10,000 $8,000 $8,000 $8,000 $8,000 $8,000 $8,000 $8,000 $8,000 $8,000 $8,000 $8,000 $8,000 Deferred income taxes $92,000 $85,000 $76,000 $66,000 $62,000 $59,000 $56,000 $56,000 $56,000 $56,000 $56,000 $56,000 $56,000 $56,000 $56,000 $56,000 $56,000 $56,000 Other current assets $115,000 $98,000 $109,000 $88,000 $101,000 $97,000 $105,000 $101,000 $101,000 $98,000 $95,000 $92,000 $89,000 $89,000 $77,000 $69,000 $61,000 $53,000 Total current assets $1,571,000 $874,000 $898,000 $806,000 $825,000 $870,000 $868,000 $1,041,538 $1,041,538 $1,017,256 $890,579 $974,798 $980,516 $980,516 $1,136,249 $1,373,602 $1,612,313 $1,913,027

Property and equipment, net $276,000 $211,000 $186,000 $165,000 $155,000 $151,000 $161,000 $155,220 $155,220 $153,440 $151,659 $149,879 $148,099 $148,099 $150,978 $163,857 $176,736 $189,615 Goodwill $2,572,000 $2,577,000 $2,611,000 $2,614,000 $2,617,000 $2,618,000 $3,304,000 $3,304,000 $3,304,000 $3,304,000 $3,304,000 $3,304,000 $3,304,000 $3,304,000 $3,304,000 $3,304,000 $3,304,000 $3,304,000 Trademarks $732,000 $732,000 $732,000 $732,000 $732,000 $732,000 $732,000 $732,000 $732,000 $732,000 $732,000 $732,000 $732,000 $732,000 $732,000 $732,000 $732,000 $732,000 Franchise agreements, net $3,043,000 $2,976,000 $2,909,000 $2,842,000 $2,825,000 $2,808,000 $1,646,000 $1,636,500 $1,636,500 $1,627,000 $1,617,500 $1,608,000 $1,598,500 $1,598,500 $1,560,500 $1,522,500 $1,484,500 $1,446,500 Other intangibles, net $480,000 $453,000 $478,000 $439,000 $428,000 $418,000 $408,000 $393,500 $393,500 $379,000 $364,500 $350,000 $335,500 $335,500 $277,500 $219,500 $161,500 $103,500 Other non-current assets $238,000 $218,000 $215,000 $212,000 $215,000 $225,000 $232,000 $232,000 $232,000 $232,000 $232,000 $232,000 $232,000 $232,000 $232,000 $232,000 $232,000 $232,000

Total Assets $8,912,000 $8,041,000 $8,029,000 $7,810,000 $7,797,000 $7,822,000 $7,351,000 $7,494,758 $7,494,758 $7,444,695 $7,292,238 $7,350,677 $7,330,615 $7,330,615 $7,393,227 $7,547,459 $7,703,049 $7,920,642

Liabilities Current liabilities: Accounts payable $133,000 $96,000 $203,000 $184,000 $180,000 $214,000 $201,000 $201,000 $201,000 $201,000 $201,000 $201,000 $201,000 $201,000 $201,000 $201,000 $201,000 $201,000 Securitization obligations $703,000 $305,000 $331,000 $327,000 $302,000 $267,000 $310,000 $310,000 $310,000 $310,000 $310,000 $310,000 $310,000 $310,000 $310,000 $310,000 $310,000 $310,000 Due to former parent $554,000 $505,000 $104,000 $80,000 $76,000 $76,000 $74,000 $74,000 $74,000 $74,000 $74,000 $74,000 $74,000 $74,000 $74,000 $74,000 $74,000 $74,000 Revolving credit facilities and current portion of long-term debt $547,000 $32,000 $194,000 $325,000 $111,000 $214,000 $120,000 $20,000 $20,000 $55,000 $55,000 $55,000 $55,000 $55,000 $55,000 $55,000 $55,000 $55,000 Accrued expenses and other current liabilities $513,000 $502,000 $525,000 $520,000 $641,000 $583,000 $647,000 $905,750 $905,750 $890,750 $890,750 $890,750 $890,750 $890,750 $890,750 $890,750 $890,750 $890,750 Total current liabilities $2,450,000 $1,440,000 $1,357,000 $1,436,000 $1,310,000 $1,354,000 $1,352,000 $1,510,750 $1,510,750 $1,530,750 $1,530,750 $1,530,750 $1,530,750 $1,530,750 $1,530,750 $1,530,750 $1,530,750 $1,530,750

Long-term debt $6,213,000 $6,674,000 $6,698,000 $6,825,000 $7,121,000 $7,121,000 $7,121,000 $4,256,000 $4,256,000 $4,256,000 $3,993,000 $3,918,000 $3,868,000 $3,868,000 $3,593,000 $3,254,000 $2,815,000 $2,340,000 Deferred income taxes $826,000 $760,000 $883,000 $890,000 $892,000 $895,000 $438,000 $438,000 $438,000 $438,000 $438,000 $485,175 $491,351 $491,351 $601,595 $771,688 $977,524 $1,220,161 Other non-current liabilities $163,000 $148,000 $163,000 $167,000 $172,000 $173,000 $182,000 $182,000 $182,000 $182,000 $182,000 $182,000 $182,000 $182,000 $182,000 $182,000 $182,000 $182,000

Total Liabilities $9,652,000 $9,022,000 $9,101,000 $9,318,000 $9,495,000 $9,543,000 $9,093,000 $6,386,750 $6,386,750 $6,406,750 $6,143,750 $6,115,925 $6,072,101 $6,072,101 $5,907,345 $5,738,438 $5,505,274 $5,272,911

Noncontrolling Interests and Stockholders' Equity ($740,000) ($981,000) ($1,072,000) ($1,508,000) ($1,698,000) ($1,721,000) ($1,742,000) $1,108,008 $1,108,008 $1,037,945 $1,148,488 $1,234,752 $1,258,514 $1,258,514 $1,485,881 $1,809,021 $2,197,775 $2,647,730

Liabilities & Stockholders' Equity $8,912,000 $8,041,000 $8,029,000 $7,810,000 $7,797,000 $7,822,000 $7,351,000 $7,494,758 $7,494,758 $7,444,695 $7,292,238 $7,350,677 $7,330,615 $7,330,615 $7,393,227 $7,547,459 $7,703,049 $7,920,642

Source: J.P. Morgan estimates.

59 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

Appendix III: Cash Flow Statement

$ in thousands 4Q12E 1Q13E 2Q13E 3Q13E 4Q13E 2013E 1Q14E 2Q14E 3Q14E 4Q14E 2014E 2015E 2016E 2017E

Operating Activity Net Income ($434,997) ($95,062) $135,543 $86,263 $23,763 $150,507 ($36,517) $112,253 $109,561 $42,070 $227,367 $323,139 $388,754 $449,955 Depreciation & Amortization $45,780 $45,780 $45,780 $45,780 $45,780 $183,121 $45,780 $45,780 $45,780 $45,780 $183,121 $183,121 $183,121 $183,121 Change In Other Assets $4,000 $3,000 $3,000 $3,000 $3,000 $12,000 $3,000 $3,000 $3,000 $3,000 $12,000 $8,000 $8,000 $8,000 Change In Other Liabilities $258,750 ($15,000) $0 $47,175 $6,175 $38,351 ($33,678) $64,835 $61,707 $17,380 $110,245 $170,093 $205,836 $242,637 Cash From Operations ($126,467) ($61,282) $184,323 $182,219 $78,718 $383,978 ($21,414) $225,868 $220,048 $108,230 $532,733 $684,353 $785,711 $883,713

Investing Activity Maintenance Capex ($11,000) ($15,000) ($15,000) ($15,000) ($15,000) ($60,000) ($17,500) ($17,500) ($17,500) ($17,500) ($70,000) ($80,000) ($80,000) ($80,000) Investment Capex ($5,000) ($5,000) ($5,000) ($5,000) ($5,000) ($20,000) ($5,000) ($5,000) ($5,000) ($5,000) ($20,000) ($20,000) ($20,000) ($20,000) Cash From Investments ($16,000) ($20,000) ($20,000) ($20,000) ($20,000) ($80,000) ($22,500) ($22,500) ($22,500) ($22,500) ($90,000) ($100,000) ($100,000) ($100,000)

Financing Transactions Total Dividends Paid $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Proceeds From New Debt ($855,000) $35,000 ($263,000) ($75,000) ($50,000) ($353,000) $0 ($100,000) ($100,000) ($75,000) ($275,000) ($339,000) ($439,000) ($475,000) Proceeds From Preferred Issuance $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Proceeds From Common/Unit Issuance $1,175,005 $25,000 ($25,000) $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Cash From Financing $320,005 $60,000 ($288,000) ($75,000) ($50,000) ($353,000) $0 ($100,000) ($100,000) ($75,000) ($275,000) ($339,000) ($439,000) ($475,000)

Net Change In Cash $177,538 ($21,282) ($123,677) $87,219 $8,718 ($49,022) ($43,914) $103,368 $97,548 $10,730 $167,733 $245,353 $246,711 $308,713 Source: J.P. Morgan estimates.

60 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

Realogy Holdings Corp.: Summary of Financials Income Statement - Annual FY11A FY12E FY13E FY14E Income Statement - Quarterly 1Q12A 2Q12A 3Q12A 4Q12E Revenues 4,093 4,543 5,055 5,579 Revenues 875A 1,309A 1,281A 1,078 Cost of goods sold 3,387 3,732 4,101 4,479 Cost of goods sold 771A 1,039A 1,013A 909 Gross profit 706 811 953 1,100 Gross profit 104A 270A 268A 169 SG&A 254 703 277 288 SG&A 77A 79A 74A 473 D&A 186 177 183 183 D&A 45A 44A 42A 46 Operating income 266 (69) 493 629 Operating income (18)A 147A 152A (350) EBITDA 443 152 716 852 EBITDA 30A 203A 213A (294) Net interest income / (expense) 666 626 315 313 Net interest income / (expense) 170A 176A 187A 93 Other income / (expense) 33 10 0 0 Other income / (expense) 7A 2A 1A 0 Pretax income (433) (705) 178 316 Pretax income (195)A (31)A (36)A (443) Income taxes 32 35 65 126 Income taxes 7A 8A 18A 2 Net income - GAAP (441) (686) 151 227 Net income - GAAP (192)A (25)A (34)A (435) Net income - recurring (441) (686) 204 338 Net income - recurring (192)A (25)A (34)A (435) Diluted shares outstanding - 70 147 148 Diluted shares outstanding - - - 132 EPS - GAAP - (9.82) 1.02 1.53 EPS - GAAP - - - (3.30) EPS - recurring - - - - EPS - recurring - - - - Balance Sheet and Cash Flow Data FY11A FY12E FY13E FY14E Ratio Analysis FY11A FY12E FY13E FY14E Cash and cash equivalents 143 319 270 437 Sales growth 0.1% 11.0% 11.3% 10.4% Accounts receivable 498 558 558 558 EBITDA growth (46.9%) (65.7%) 371.4% 18.9% Inventories 0 0 0 0 EPS growth - - (114.1%) 64.8% Other current assets 165 165 153 141 Current assets 806 1,042 981 1,136 Gross margin 17.2% 17.8% 18.9% 19.7% PP&E 165 155 148 151 EBIT margin 6.3% (0.5%) 10.6% 12.0% Total assets 7,810 7,495 7,331 7,393 EBITDA margin 10.8% 3.3% 14.2% 15.3% Tax rate - - - - Total debt 7,477 4,586 4,233 3,958 Net margin - - - - Total liabilities 9,318 6,387 6,072 5,907 Shareholders' equity (1,508) 1,108 1,259 1,486 Net debt / EBITDA 15.8 26.0 5.1 3.8 Net debt / capital (book) - - - - Net income (including charges) (441) (686) 151 227 D&A 186 177 183 183 Return on assets (ROA) (5.6%) (9.2%) 2.1% 3.1% Change in working capital 2 0 50 122 Return on equity (ROE) 29.2% (61.9%) 12.0% 15.3% Other Return on invested capital (ROIC) (5.6%) (9.2%) 2.1% 3.1% Cash flow from operations (253) (686) 384 533 Capex (60) 0 (60) (70) Free cash flow (313) (695) 324 463 Cash flow from investing activities (30) 0 (20) (20) Cash flow from financing activities 0 0 (353) (275) Dividends 0.00 0.00 0.00 0.00

Source: Company reports and J.P. Morgan estimates. Note: $ in millions (except per-share data).Fiscal year ends Dec

61 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. Important Disclosures

 Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for Realogy Holdings Corp. within the past 12 months.  Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: Realogy Holdings Corp..  Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as investment banking clients: Realogy Holdings Corp..  Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-investment-banking, securities-related: Realogy Holdings Corp..  Client/Non-Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-securities-related: Realogy Holdings Corp..  Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation for investment banking Realogy Holdings Corp..  Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking services in the next three months from Realogy Holdings Corp..  Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or services other than investment banking from Realogy Holdings Corp.. Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgan– covered companies by visiting https://mm.jpmorgan.com/disclosures/company, calling 1-800-477-0406, or emailing [email protected] with your request.

Realogy Holdings Corp. (RLGY, RLGY US) Price Chart

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Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.

The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire period. J.P. Morgan ratings or designations: OW = Overweight, N= Neutral, UW = Underweight, NR = Not Rated Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the

62 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a recommendation or a rating. In our Asia (ex-Australia) and U.K. small- and mid-cap equity research, each stock’s expected total return is compared to the expected total return of a benchmark country market index, not to those analysts’ coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analyst’s coverage universe can be found on J.P. Morgan’s research website, www.morganmarkets.com. Coverage Universe: Paolone, Anthony: AIMCO (AIV), Alexandria Real Estate Equities (ARE), American Campus Communities (ACC), AvalonBay Communities (AVB), Boston Properties (BXP), Brandywine Realty Trust (BDN), Brookfield Office Properties (BPO), CBRE Group, Inc (CBG), Camden Property Trust (CPT), Corporate Office Properties (OFC), Cousins Properties (CUZ), Douglas Emmett, Inc. (DEI), Duke Realty (DRE), Education Realty Trust (EDR), Entertainment Properties Trust (EPR), Equity Residential (EQR), Essex Property Trust (ESS), Getty Realty (GTY), Kilroy Realty (KRC), Lexington Realty Trust (LXP), Liberty Property Trust (LRY), Mack-Cali Realty (CLI), Mission West Properties (MSW), Piedmont Office Realty Trust (PDM), Post Properties (PPS), Realty Income (O), SL Green Realty Corp. (SLG), UDR, Inc. (UDR), Vornado Realty Trust (VNO), Washington Real Estate Investment Trust (WRE)

J.P. Morgan Equity Research Ratings Distribution, as of September 28, 2012 Overweight Neutral Underweight (buy) (hold) (sell) J.P. Morgan Global Equity Research Coverage 44% 44% 12% IB clients* 52% 46% 34% JPMS Equity Research Coverage 42% 48% 10% IB clients* 69% 61% 53% *Percentage of investment banking clients in each rating category. For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table above.

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63 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

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64 Anthony Paolone, CFA North America Equity Research (1-212) 622-6682 20 November 2012 [email protected]

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"Other Disclosures" last revised September 29, 2012. Copyright 2012 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan. #$J&098$#*P

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