Steve Mandel’s Lone Pine Capital just disclosed that it owns a 5.1% stake in realty group Realogy Holdings Corp (NYSE:RLGY). Realogy Holdings Corp (NYSE:RLGY) is the world’s largest franchiser of residential real estate brokerages. The company franchises the brands Century 21, Coldwell Banker, ERA, Sotheby’s International Realty, and Better Homes and Gardens.
The real estate franchise network has approximately 13,600 offices worldwide in more than 102 countries. Approximately 239,000 independent sales representatives work In these offices. Realogy Holdings Corp (NYSE:RLGY) also owns offices under the brands Coldwell Banker, Sotheby’s International Realty, ERA, Corcoran Group and CitiHabitats.
Lone Pine Capital is describing its stake as a passive one. The ownership stake of approximately 7.5 million shares is a 207% increase from the first quarter of this year. Obviously, Mandel sees a housing recovery and he has identified a good way to play the rebound with the leading residential real estate broker.
As more and more homes are sold, commissions and revenue rise at the independent offices and flow back to the parent company. The franchise system is a good business model because overall costs are minimal. Realogy Holdings Corp (NYSE:RLGY) doesn’t own land for building houses or have construction costs associated with building homes. Realogy Holdings Corp (NYSE:RLGY) is a pure bet on an increase in home sales and an increase in home prices.
Last year, Realogy Holdings Corp (NYSE:RLGY) had revenue of $4.7 billion. Of that, the gross profit was $1.0 billion. In the first quarter of this year, revenue increased 9% compared to last year and EBITDA was up 34%. This was a great quarter because typically it is the company’s weakest quarter due to seasonality.
In the first quarter, the cancellation rate for transactions was only 9%, which was the lowest rate in more than 10 years. Buyers were reluctant to walk away afraid they may not find another house. Almost half of the company’s transactions had multiple offers.
A problem for the industry is lack of inventory, though this will be alleviated in the coming quarters as long as home prices continue to increase. As home prices rise, homeowners that were previously underwater with their mortgages will now list their homes for sale. That will alleviate the inventory shortage and give brokerages like Realogy more listings and the chance to make more commissions.