Cendant Starts Selling Spinoff
As Air Leaks Out of Market

Richard A. Smith's timing could be better.

The president of Cendant Corp.'s real-estate business, newly renamed Realogy Corp., began a three-week trip yesterday to introduce investors to his operation, scheduled to be spun off from Cendant in late June as part of a planned breakup of Cendant, a New York-based conglomerate.

Just as he was heading on the road, Cendant announced that it has revised downward its estimates for earnings at Realogy this year in light of slowing U.S. home sales. Cendant now forecasts that earnings before interest, taxes, depreciation and amortization will decline about 11% to $985 million. Earlier, it was projecting ebitda would be about flat this year.

Meanwhile, federal antitrust regulators are challenging brokerage-industry practices, and upstart discounters are nipping at the heels of traditional brokers, such as those using the Coldwell Banker and Century 21 brands franchised by Realogy.

Yet Mr. Smith says he expects strong interest from investors as he visits 11 cities in the U.S. and Europe.

The U.S. housing market is "very, very resilient," and sales are merely slowing to a more normal pace, says Mr. Smith, who is scheduled to become Realogy's chief executive, succeeding Henry R. Silverman, on Jan. 1, 2008.

Cendant shareholders will receive one share of Realogy for every four shares they hold in Cendant in a tax-free spinoff. Mr. Smith is hitting the road in the hopes that Realogy shares will be buoyant when they begin trading on the New York Stock Exchange in late June.

Realogy is pitching itself as a stock that will benefit from brisk long-term growth in the U.S. housing market without the risks of home building or the bigger capital requirements of mortgage lending.

For 2006, Realogy now is projecting net income of $380 million to $465 million, down from $497 million in 2005. For the longer term, the company projects earnings growth of 12% to 15% a year.

In 2005, about two-thirds of profit came from franchising of real-estate brands. The franchisees pay royalties and part of their commission income to Realogy. About a fifth of profit last year came from Realogy's NRT unit, which owns and operates local real-estate brokerages.

Realogy says it was involved in about a quarter of all U.S. homes sold by brokers last year. The company projects its stock-market value will be at least $8 billion.

Until now, investors haven't had a way to invest in a large, publicly traded residential real-estate brokerage business in the U.S. Shares of ZipRealty Inc., a discounter based in Emeryville, Calif., trade on the Nasdaq Stock Market, but that company's market value is about $175 million.

Realogy's long-term prospects are "very attractive," says Christopher Gutek, an analyst for Morgan Stanley. If the stock market puts a low value on the shares, he adds, Realogy eventually might attract takeover bids from private-equity firms.

The slowdown in home sales will be mild and brief, Mr. Smith predicts. But will home buyers continue to pay commissions of 5% to 6%? Mr. Smith predicts that commissions will continue to "erode," but that there won't be any drastic change.

Antitrust officials are trying to promote competition between Internet-based discounters and traditional brokers like those under Realogy's umbrella. Last year, the Justice Department filed an antitrust lawsuit against the National Association of Realtors, alleging that rules proposed by the dominant trade group discriminate against brokers that rely mainly on the Internet. The Realtors are fighting the suit.

Mr. Smith says the issues have become less important because Realogy and others have embraced the idea of making listings widely available on the Internet.

Likewise, Mr. Smith brushes off suggestions that discounters will undercut profitability. Many small firms now offer flat fees rather than charging a percentage of the home price; others rebate part of the commission to buyers. But Mr. Smith says these discounters will remain on the margins of the business. Realogy has its own tiny discount offshoot, Blue Edge Realty, with operations in Pittsburgh and Springfield, Ill. In six years, Blue Edge "hasn't made a dime," Mr. Smith says. "It's not profitable and never will be."

About 11% of sellers in 2005 used "alternative" brokers, up from less than 2% in 2002, according to surveys by Real Trends, a publishing and consulting firm.

Realogy aims to grow partly through acquisitions, particularly in the Midwest, Southeast and Southwest. Mr. Smith says many owners of local brokerages are nearing retirement age. "They're looking for an exit strategy," he says.

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