Branding/Large Firms/Industry Disruption

[Michael Cohen]

Hi All-

By way of quick background, I have my own independent investment research firm and work with institutional investment managers (i.e., hedge funds) focusing on public equities in the financial services industry.  I tend to focus on Specialty Finance companies (think non-bank consumer/commercial lenders rather than traditional "financials" which typically means banks, broker/dealers, insurance, and asset management).  I also evaluate companies tangential to financials, which can include retailers, auto-related as well asreal estate related companies (i.e., REITs),  commercial brokers/mortgage originators/technology (CBG/JLL, CoStar, Walker Dunlop), etc. 

In full disclosure, I have never really spent much time looking at RLGY or RMAX, but in the wake of disappointing results recently and significant drops in their share prices, I am curious on either the long or short side from a fundamental long term perspective, but its possible perhaps there is simply "nothing to do".

On one hand, I am wondering what impact new entrants like Compass (and Redfin at the opposite end of the spectrum) are having on the large brand realtors in the eyes of brokers and agents.  Recognizing that most in your industry are quite entrepreneurial and "bet on themselves" regardless of the firm name on their business card, I was hoping some in your community would be kind enough to share your opinions on such.

If I boiled my questions down to a few they would be as follows:

1)Do agents view the technology and tools that their brokerage firm provides as a key reason to switch from one firm to the other (i.e., is that why Compass has grown as fast as they have)?  OR do agents move because the economics is better somewhere else?  which leads to.....

2)Realogy has talked openly about increasing their commission splits on its earnings conference calls over the past year.  Management noted that much of the increase (to roughly 70.5%) was to catch up to others in the industry over the past few years and they believe the bulk of that increase is behind them.  While geographic mix also played a role, they have been recruiting aggressively and like to cite the fact that more than 50% of the agents in the industry are not affiliated with big firms.  So my questions is....why should or should n't splits continue to rise for them?  Do they provide agents with better tools than the competition that makes them attractive to agent who would accept lower splits to be affiliated with their brands OR are they facing a secular problem to recruit, retain, and compensate their best agents?  

3)RLGY notes that increasing splits has improved retention from 92% to 94%.  When I first read that metric, I was a bit shocked that retention was as high as it is and the band was as narrow as it is given how entrepreneurial your industry seems.  Is retention in the industry really that high?  

Happy Holidays....and thanks in advance to all who are thoughtful enough to respond!