Realogy’s IPO Shows Real Estate Is Back

The operator of top brands like Century 21and ERA starts strong

   

Realogy (NYSE:RLGY), the No. 1 residential real-estate-services company in the U.S., had little trouble with its IPO today. The company priced 40 million shares at $27, which was at the top of the proposed $23 to $27 range. So far in today’s trading, the gain is an impressive 24%.

Realogy’s core brands include Century 21, Coldwell Banker, ERA, Sotheby’s International Realty and Better Homes & Gardens Real Estate (the market share in the U.S. is about 26%). They generally operate on the franchise model, which allows for much lower cost structures.

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But Realogy is more than just about helping consumers buy and sell homes. “Since 1996, we have built a model that we call the ‘value circle,’” said CEO Richard Smith, with whom I talked this morning.

“We want to capture the revenues from services around real estate transactions,” he said. For example, Realogy operates Cartus, which provides outsourced relocation services and has clients like GE (NYSE:GE), P&G (NYSE:PG) and Cisco (NASDAQ:CSCO). There’s also the TRG division, which helps with the title and settlement process for real estate transactions — with some tweaks. While Realogy provides mortgage services, this is done through a third party because the company simply doesn’t want to take the credit risks.

But perhaps the biggest boost for Realogy is the upturn in the real estate market. “The recovery began in late 2011,” Smith said. “However, we wanted to see a rise in prices. And we got that in the second quarter. There was a 5.4% increase nationwide.”

Going forward, Realogy will also benefit from its low-cost structure. Keep in mind that the company has reduced its annual operating expenses by about $500 million. Part of this has come from substantial reductions in headcount and office locations. But Realogy has also benefited from leveraging online marketing channels, such as Trulia (NYSE:TRLA) and Zillow (NASDAQ:Z).

Now, it’s usually a good idea to wait until the hype subsides on an IPO. And this should be no different for the Realogy offering. Yet when looking at the long term, the stock should be a great way to get exposure to the rebound in housing.

And the returns could be robust. Just look at this year’s performance of homebuilders like KB Home (NYSE:KBH), Lennar (NYSE:LEN) and Hovnanian (NYSE:HOV). They’ve clocked returns ranging from 80% to 150%.

Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “How to Create the Next Facebook.”  Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/ipo-playbook/realogys-ipo-shows-real-estate-is-back/.

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