Notorious R.O.B.

In my Top Nine Things I’ve Learned at BlogWorld post, I wrote:

Many social media professionals talk as if social media is the future of media, then act exactly the opposite when camera crews show up.

I can’t forget the moment.  Due to some deadlines, I excused myself from a session to get some work done while everyone else was attending a session or a keynote.  I found myself at the cafe near the Convention Center, setup the mobile office, and started working.  The TV on the wall was tuned to something I can’t recall, since i wasn’t paying attention to it.

Suddenly, a youngish gent walks in, instantly recognizable as a BlogWorld attendee: thick black plastic frame glasses, some witty geek-chic T-shirt (like, “I Twitter, therefore I am” or some such), jeans, and a backpack.  He asks the cafe staff if he can change the channel to CNN — and they say yes.  CNN comes on, and they’re doing a segment on BlogWorld.  Ah ha!  That’s why this guy was so interested.

Some nameless anchor who I couldn’t pick out at a lineup is interviewing a number of folks, including one of the founders of BlogWorld, and the talking heads are going on and on.  And I found myself wondering… if a blogger had contacted the organizer of the Annual Conference of the American Society of Newspaper Editors... would one of them have dropped everything in the middle of the conference to get on a videochat with him?

Would any attendee at ASNE’s Annual Conference have stopped whatever he was doing to rush to a laptop because he had heard that The Bloggess was going to post an interview with the editor of some newspaper?

Actions speak louder than words.  And this, frankly, is why I fear that social media might be hype after all.

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In the comments section of my post on Alex Perriello’s confidence in denying a bankruptcy for Realogy, a commenter by name of “Still Don’t Agree” raises several very interesting points.  And because SDA wasn’t a raving lunatic, but apparently a very smart, very logical, and a calm & measured commentator, I thought it worth using his comment as the springboard to challenge some of the conventional wisdom circulating out there.

[And just in case some non-regulars don't realize, I used to work at Realogy, but never in the corporate executive suites, and haven't since November of 2007.  I have no special access to anyone, no inside info (although I would love to get some *hint, hint*), blah blah blah.  These are just my opinions as an industry observer.]

So SDA raises three points worth countering: Unprofitability, Cut in Services –> Loss of Revenues, and the Apollo Factor.

Unprofitability

First, the whole unprofitability issue.  SDA writes:

But bottom line, Realogy has little to no cash reserves, is running out of credit and their revenue isn’t covering interest payments AFTER making $350 million in operational cuts.

Sure it’s a profitable company without that debt hanging over their heads, and kudos to their managers for that, but that debt IS there and it isn’t going to just go away- so looking at revenue before the interest is quite frankly irrelevant. Spin it anyway you or Realogy wants, THEY ARE OPERATING IN THE RED.

To survive, they either have to make more cuts that don’t hurt revenue, increase revenue, find a lender to extend them more credit until the market gets better or get their lenders to restructure debt and/or wave interest payments.

Now, to be fair, SDA makes a great point here.

It is an indisputable fact that Realogy is losing money; it is in fact operating $50M in the red.  In SDA’s view, the reason why they’re in the red is irrelevant, since Realogy doesn’t have cash reserves, and lenders don’t care.

In my view, it’s highly relevant why a company is in the red if I’m a lender.  If a company is in the red because their core operations suck ass, then my likelihood of seeing my money back decreases, and I’m going to freak out.  But if their core operations are profitable, and they’re throwing off cash in desperate economic times, and they are making interest payments… and because of said interest payments to me, they’re in the red, well, then I’ll be cautious and watchful but happy to cash their checks.

Why would I want to mess with someone making payments and bring lawyers and bankruptcy judges and special masters and such into the picture?  Because I like the idea of going a couple of years before a distribution is made in which I’ll get a few pennies on the dollar on my unsecured debt?  And that only after I’ve spent a couple of million bucks paying my own creditor counsel?  Yeah, okay.

Now, let’s examine this “Realogy has no cash reserves” statement.  During to the Q3, 2008 Earnings Call, which is the latest available, Tony Hull the CFO said this:

Turning to the balance sheet on page 7 of the 10-Q, we ended the third quarter
with a $280 million balance on our revolving credit facility along with a reported cash balance of $269 million. This total includes $226 million of available cash from a draw-down on our revolver. We elected to hold cash because of current market uncertainty.

So they’re holding $269M in cash, and $280M on the revolver of which $226M is available?

Since Realogy’s net loss after interest and depreciation was $50M in Q3, this would imply that Realogy can limp along under Q3 circumstances (the latest quarter for which we have data) for some ten quarters, or two-and-a-half years?  Geez — call the lawyers and get to the courthouse!  They’re going down!

So in brief, to survive, Realogy doesn’t have to make any cuts, doesn’t have to get any more loans (assuming that the revolver is appropriately papered by sophisticated lawyers and relatively ironclad), until Q3 of 2011.

Could business get worse and shorten that timeline?  Sure.  It could also get better.  But the “Realogy ain’t got no cash” argument rings hollow to me.  Then again, what do I know?  I’m not a Wall Street analyst….

Cut in Services –> Loss of Affiliates

The second point that SDA brings up — and others have brought this up as well — is that the $350M in cuts at Realogy, and the expectation of further cuts down the line, will lead to affiliates and agents leaving Realogy family:

After $350 million in operational cuts I question how they could make further cuts that wouldn’t impact revenue. The company’s customers aren’t people buying homes, rather it’s the agents and franchise brokers they service. At some point in time if services are cut too drastically, franchises will leave and agents, who are independent contractors, will find other brokers to work for.

With the market and economy as they are and all the negative media starting to swell around their company I doubt they can drastically increase revenue. That would mean recruiting successful agents away from other companies at a time when ever competitor is waving that US News report in front of the agents they already do have.

Okay, let’s take this at face value for now and agree, for the sake of discussion, that SDA is absolutely correct that the budget cuts lead to service cuts.

For those service cuts to lead to mass exodus of productive affiliates, Realogy has to be providing some set of franchisee/agent services that these cuts is impacting.

For the vast majority (and I mean well over 90%+) of franchisees, the reason they became franchisees in the first place was not because of some ill-defined service Realogy provides but simply because of the (perceived) power of the brands like Coldwell Banker and Century 21.

I’ve sat in on some of the “VIP meetings” where corporate staff try to sell a franchise to an affiliate.  I’ve even made presentations at those.  And you know what?  Despite all the goodies we dangle in front of them (“10% off at Staples!” and “Discounts on your cellphone plan!” and so on), at the end of the day, the decision to sign up is based on the principal broker’s feeling that the brand will bring them business they wouldn’t otherwise get.

The argument that service cuts will inevitably lead to loss of affiliates is somewhat like saying that folks aren’t going to buy Gulfstream G650′s because of the price of fuel.  It’s completely ancillary to the core decision.  Keep in mind that affiliates sign a ten-year agreement during which they fork over 6% of all commission income in exchange for use of the brand.  They’re going to jet because the Realogy field rep only comes once a quarter instead of once a month?  Come on now.

Further, to claim that even if the affiliate broker won’t leave, the agents will is to not understand agents very well.  And it is to be ignorant of the real revolution going on at the heart of real estate today.  If even a single agent really leaves his Coldwell Banker branded brokerage to go to some other franchise brand over the “cut in services”, I’ll print this blogpost out and eat it.  In fact, that the agent cares not at all about the services provided by the Realogy brand is the real problem here.

You can verify for yourself if you’d like — go grab your local Century 21 agent and ask her what services she’s afraid of losing when Realogy cuts another $20m in costs.  If her answer is anything other than “Nothing”, please come back and tell us.

Now, let’s actually examine that assertion for a moment.  Again, from that same earnings call transcript, here’s Richard Smith, Chairman of Realogy:

As to NRT management’s ability to attract and retain top-producing agents, as in prior periods, NRT retained approximately 92% of GCI from its top two quartiles of sales associates in the third quarter. The top two quartiles generate approximately 88% of NRT’s revenue.

Consider that the NRT is Realogy’s company owned stores (if you will).  If the budget cuts have a service impact, the NRT agents are the ones who will be most directly impacted.  Affiliates have their own budget, their own issues, but the NRT is directly tied to Realogy’s financial problems.

If cuts in services lead to mass defections, then the NRT should have been losing droves of these top producing agents.  They have not.  I have no idea whether 92% retention is good or bad for brokerages, but it certainly doesn’t smell like panic to me.

And one final piece of counter-evidence from the wider agent world.  This is from a Keller Williams agent in Boise ID speculating on the coming bankruptcy for Coldwell Banker and ERA (this is the “competitor waving that US News article” thing):

It seems a high debt load and low cash reserves may be signaling a likely default in a troubled market. Why am I surprised? Well mostly because the of number brokerages Coldwell Banker has been buying up in the Boise area. I’ll be watching this one closely in the weeks and months to come.

Here’s a hint: when someone is buying up competing brokerages, that someone ain’t hurting that bad.

The Apollo Factor

The final point that SDA raises is that lenders might want to push things to force Apollo to cough up some dough:

That means Realogy’s survival basically hangs on the charity of lenders who, at some point in time in the near future, will more than likely have to wave interest payments in order to allow the company to make payroll. Problem is, Carl Icahn, their largest lender, isn’t exactly known for his charity and other lenders have their back so far against the wall right now that you can’t be sure they will always do the logical thing.

More important, if you’re a lender in this situation, it’s pretty hard to forfeit the interest you are owed when equity holder Apollo has mighty deep pockets.

Okay.  Maybe this makes sense to someone on Wall Street, but as a former bankruptcy guy, I just don’t get it.

Unless Apollo signed a guarantee of some sort on Realogy’s debt that puts them on the hook in the event of a default or bankruptcy, that Apollo has deep pockets is completely irrelevant to bankruptcy.  Because Apollo presumably is the equity interest here.  With such a high debt load, in the event of even a Chapter 11, Apollo’s interest is likely to be extinguished completely.  That sucks for Apollo, but it isn’t as if Apollo is going to then be liable to the creditors.

An equity holder’s liability is limited to the amount of equity in the company.  That’s the whole premise of limited liability.

So all that a lender would achieve here is taking over Realogy’s equity from Apollo in some sort of satisfaction for the debt.  Think of it as a giant foreclosure.  But to do that, we’re talking about years — and I mean years — of litigation in bankruptcy court with Realogy, with Apollo, with other creditors, with the Trustee possibly, with vendors, with unions, with landlords and so on and so forth.  And during these years of litigation, no one gets paid a damn thing.

If you’re a lender — even a nasty one like Icahn — and you’re actually making a vulture play to take over Realogy via the credit path, you’d be far far better off just offering Apollo a private deal to swap equity for debt.  Everyone keeps getting paid, Icahn takes over Realogy, and Apollo goes away, and no one is much affected.

Anyhow, I have no earthly idea why I keep writing on this topic, but I do confess a weird sort of fun in it.   But then, I’m not a Wall Street guy, and those guys are financial experts who wouldn’t ever make a mistake on debt valuation or things like that now… would they?

-rsh

PS: Final parting thought.  Why is this robust defense of Realogy happening on my widdle WordPress blog and not on the Realogy corporate blog?  By people who know what the hell they’re talking about?  Mark (Panus) — call me, I can help you with a social media strategy.

Depending on who you ask, we are either headed for a recession or in one already. There seems to be some sort of a political angle to the whole question of recession, so who knows what the truth is in an election year? What everyone seems to agree on is that we’re certainly not in boom times.

Branding in a recession is something of an arcane art. How, exactly, do you continue to invest in something whose ROI you probably can’t prove at a time when your sales are looking dicey at best? Why would you do it?

Barry Silverstein has some thoughts on branding in a recession that people in real estate might want to check out and think about:

In a recent brandchannel debate, some readers weighed in with observations that generally align with experienced brand marketing practitioners. One reader said: “There is an opportunity here for all branding strategists, advocates of positioning and marketers to lead and guide by example. … branding carries those companies and products through even in the bad times…” Another wrote: “I agree with Alessandro Buffoni: a recession will force many companies to communicate about (or to find) their brand soul.”

A third reader summed it up this way: “Beyond quality and sheer market weight, brands must be ever more relevant, trustworthy and flexible. They must constantly be in tune with consumers’ values, evolving needs and lifestyles…”

A brand marketing paradox is that marketing expenditures are often slashed in recessionary times, so brands risk becoming less visible. This is not the best strategy. Harvard Business School professor John Quelch, writing in The Financial Times of London, says: “Instead of cutting the market research budget, you need to know more than ever how consumers are redefining value and responding to the recession.” Quelch also points out: “It is well documented that brands that increase advertising during a recession, when competitors are cutting back, can improve market share and return on investment at lower cost than during good economic times.”

How would this apply to real estate?

This is the industry where the recession started. One might even say that the recession (if there is one) was caused by real estate.  What should real estate companies think about and do in these hard times?

First, there is a real question as to whether the majority of real estate brands had a “brand soul” to begin with prior to the recession. Seems to me that for years now, the major real estate brands were completely focused on the property or the transaction from a branding standpoint.

Yes, Coldwell Banker had the “Your Perfect Partner” campaign for years, and Century 21 ran a bunch of ads depicting the human-service element of their agents.  Do the consumers really remember any of that?  Do they look at a Coldwell Banker yard sign and associate it with partnership or any actual emotional values?  I highly doubt it.  For the most part, real estate brands have been about homes, listings, and properties.  They have been branding themselves on things like, “We sell more homes than anybody else”.

Since a brand’s presence and a brand’s values are set not only by national advertising, but by every single touchpoint with the customer base, every single agent who carried a particular brand’s flag on her business card imparted a brand’s impression to the customer for the boom years.

What do we suppose that impression was?

At a minimum, I would challenge anyone to seriously claim that there was even a whit of differentiation between the major brands in real estate in the customer’s mind.  That the customer really saw a difference in the values between a Century 21 agent and a RE/Max agent.  Nevermind what the corporate marketing folks were trying to say — what did the customer really believe?  In my view, during the boom times, there wasn’t any differentiation from a brand perspective between the majors.

I suspect the same is true at the local level as well — although, I’m sure exceptions exist.  One set of agents working for one broker in a certain market was more or less the same as another set; just different colors on their business cards and yard signs.

Second, in the mist of the real estate bubble bursting, the real estate advertising and the brand messaging from everyone from NAR to the local brokerage were reminiscent of certain trio of primates: Hear No Evil, See No Evil, Speak No Evil.

Overall, I’d say (and I’ve been saying) that the brand image, brand value of most real estate companies has been an undifferentiated morass of badness.  That real estate agents rank below politicians in respect is just one piece of the evidence.

So here we are in or near a recession.

As I see it, this is an opportunity.  It’s a major opportunity for brand differentiation and brand correction.

Now is the time for major brands to rediscover their brand souls and recommit themselves to those values.

I agree with the commenter in the passage above: “Beyond quality and sheer market weight, brands must be ever more relevant, trustworthy and flexible. They must constantly be in tune with consumers’ values, evolving needs and lifestyles.…”

Nowhere is this more pertinent than in real estate.

If the undifferentiated mass of image of real estate people in the past has been one of grasping greed, uncaring, disrespectful, and unprofessional yahoos running around trying to make a quick buck, the company that manages to be in tune with consumers’ values, evolving needs and lifestyles will have the opportunity to distance itself from the pack of negativity.

The NY-NJ-CT Mercedes-Benz dealers ran a series of ads a few years back whose tagline was, “We live here too”.  They made fun of the huge cost of living in NYC, and made it clear that while they’re selling luxury cars, they understood the consumer, that they were one of them.

In this recession, real estate brands need to double down on market research, double down on brand spend, and take a careful close look at disciplining every single touchpoint with the consumer.  Yes, this means agents.  Now is the time.

In uncertain times, the brand that can truly establish itself, discover its brand soul, as the champion of the consumer on both buyer and seller side, and can communicate that effectively, will emerge stronger than ever.  The brand that can really live up to the promise that its professionals are dedicated to client success, dedicated to helping their American Dream of homeownership reality (instead of a nightmare), that brand will make enormous strides at the expense of the others.  That’s where the consumer’s at right now — uncertain, worried, scared.  A voice of reason, a voice of advice, a voice of assistance — if genuine and authentic — can transform the brand image and help a company rediscover its brand soul.

Those brands that keep on keeping on with the same old tired messages that didn’t resonate when the market was breaking records will find them not resonating now, and will eventually find that keepin’ on keepin’ on ain’t makin’ no forward progress.  And rightfully so.

-rsh