This is a quick update for the purchasers of the Realogy Report. When I was researching that report, MidAmerican Energy Holdings had not filed its 2012 10-K. Which meant that we didn’t have any real information on the second largest brokerage in America: HomeServices of America. They did so on 3/1 but by then I was deep into other sections.
Well, I resurfaced and read the annual report and had a few thoughts.
So I thought I’d just give a quick update for the subscribers. This is free for everyone who is supposed to have access to the Realogy Report.
HomeServices of America Numbers, Such As They Are…
First of all, HomeServices is a division of MidAmerican Energy Holdings — which is not traded on a public exchange. It files with the SEC, however, as it owns public utilities. The real estate division does get a few mentions however, and something is better than nothing.
So, the topline numbers:
|All numbers are $milion.||2012||2011||2010||Y/Y%|
Because HomeServices is just a division of MidAmerican, it doesn’t go into much more detail beyond that.
We know that HomeServices had $19 million in depreciation and amortization, $32 million in income tax expenses, $8 million in capital expenses (offices? technology?), and $47 million in property, plant and equipment (which could also include websites, technology, etc.) expenses in 2012.
Beyond those numbers, we don’t get very much. Certainly, not the level of detail we get with Realogy. But we can say a couple of things here.
1. Kick Ass x 2
I wrote that Realogy kicked ass in 2012. Well, based on the above numbers, it looks as if HomeServices kicked Realogy’s ass at least in terms of percentage growth.
32.3% growth Y/Y is one helluva year for HomeServices. We can’t really compare operating income to operating income, since Realogy reported a loss, but if we compare HomeService’s operating income to Realogy’s “core operating income” (measure I made up), then we’re looking at 158.3% growth Y/Y for HomeServices vs. 26.6% for Realogy. Those are dotcom type numbers.
Granted, that’s in percentage terms. Realogy likely brought in $371 million in core operating income vs. $62 million — more than six times as much money. But at least in growth, HomeServices rocked Realogy’s world.
2. HomeServices and Realogy Identical In Per Agent Productivity?
Looking at just the company-owned brokerage — since the note from MidAmerican tells us that:
HomeServices closed over $42.1 billion of home sales in 2012, up 33.1% from 2011, with over 16,000 sales associates and continued to grow its business by acquiring five additional realty businesses in 2012. HomeServices also acquired a 66.7% interest in Prudential Real Estates Affiliates’ and Real Living’s franchise operations in October 2012. The franchise business operates in all 50 states with 544 brokerage companies throughout the country. Beginning in 2013, HomeServices will rebrand certain of its franchisees as Berkshire Hathaway HomeServices.
As a way of comparison, remember that the NRT did $108.5 billion in sales volume with 289,000 closed sides, average price of $444,638, and 41,300 agents. Since we don’t know precisely how many agents HomeServices had in 2012, nor do we know their average sales price, in order to compare the two, I devised this:
|NAR Avg Price||225,400||225,400|
Since we don’t know the average price, if we just take the total sales volume, and divide by the NAR’s Average Home Price, we get to the same 11.7 transactions per person.
I still feel that Realogy has major competitive advantages, but if HomeServices matched it step for step in terms of per-agent productivity (a big IF, I know, since we really have no real data), maybe those advantages are not as strong as I might believe at this point.
Furthermore, HomeServices is well-known to be no friend of the real estate portals such as Zillow, Trulia, and Realtor.com. The full story is far more complex, perhaps, but one of the flagship brokerages — Edina Realty — does not syndicate its listings at all.
Nonetheless, HomeServices posted identical productivity numbers (assuming above is true). It’s something to think about and investigate further.
Strategic Impact of Berkshire Hathaway
As most of you probably know by now, in his 2013 Trends Report, Stefan Swanepoel identified Berkshire Hathaway’s acquisition of the Prudential brand and Real Living as Trend #1. [Note: I was a contributor to the 2013 Trends Report, but obviously, I didn’t write that chapter.]
Stefan thought this was such a major development, partially because it would setup HomeServices (to be named Berkshire Hathaway HomeServices) as a major player in the franchising world, and partially because of the Warren Buffet halo factor. The thinking is that the Berkshire Hathaway brand is so amazingly powerful and stands for such quality that agents and consumers will flock to the new Berkshire Hathaway HomeServices.
But let’s not get too crazy just yet.
First of all, HomeServices might have had the mantle of the hallowed Berkshire Hathaway’s name bestowed upon it, but reality is that it is a division of MidAmerican Energy Holdings which mostly operates power plants and delivers natural gas. Maybe one day, they’ll spin off the real estate operations into its own publicly traded entity, but that isn’t today.
I do note, however, that in general, the real estate investments are way out of character of MidAmerican. One of its principles (see here) is “we invest in hard assets and focus on long-term opportunities that will contribute to the future strength of the company.” Natural gas pipelines and electricity plants are hard assets. Real estate brokerage, on the other hand, is the definition of soft-assets. We’ll see how this plays out.
Second, MidAmerican is a $11.2 billion per year conglomerate. Real estate makes up just over 10% of its revenues. None of the real estate people are on the Board of MidAmerican, nor are they considered “senior executives” within that corporate structure. Again, Berkshire Hathaway and/or MidAmerican may very well spin off HomeServices into its own public company (which would be great for HomeServices… and for analysts like me), but it is unclear the extent to which the real estate leaders will really control the company’s destiny.
Certainly, the idea that HomeServices will suddenly have Warren Buffet’s ear and pocketbook to start buying everybody up is not supported by the corporate structure it is under. It may, of course, but it’s at least one step removed from the Sage of Omaha.
Fantasizing here… a truly interesting play for Berkshire Hathaway might be to sell all of its real estate assets to Realogy…. They’re finance guys; it’s what they do: buy and sell companies and securities for a living. The real estate holdings don’t make much sense inside a giant energy company; they might make more sense as a part of Realogy, with Berkshire Hathaway acquiring say 20% of Realogy’s equity in exchange. An additional $1.3 billion in revenue and $62 million in operating income (more post-acquisition layoffs) would certainly help with debt repayment and make Warren Buffet’s equity stakes far more vaulable on a far faster timeline.
Wouldn’t that be a blockbuster merger?
It’s awfully hard to draw any solid conclusions based on such thin numbers. We can say for certain that HomeServices had a great year in terms of growth. It generated $62 million in operating income, which is solid. Growing its earnings by 158% is impressive. $42.1 billion in sales makes them about 40% of NRT, with 40% of the agents that NRT has.
I do think that the equivalence in agent productivity may be meaningful, especially for the syndication piece. But we can’t get too crazy with that either. Edina Realty might have pulled its listings, but not every company under the HomeServices umbrella has. It isn’t clear what HomeServices has that is similar to LeadRouter, although one imagines it has something.
Nonetheless, for brokers, agents, managers, tech vendors, and analysts like me… it’s interesting to know at least something about HomeServices. We’ll take what we can get in this not-so-transparent industry of ours.