The $4 Billion Dollar Company

It’s been an exciting fortnight since Errol Samuelson shook up the online portal competitive picture by hanging up his hat and cleats at Move/Realtor.com and accepting a senior management position at Zillow. Much has been reported, and even more speculated, about the motives for the change, both from Errol’s perspective and from Zillow’s.$4 Billion Company

Then, when things started to settle down a bit, Curt Beardsley added salt to Move’s wounds by doing the same thing. Then the lawsuit, more reporting, more speculation, and a substantial rumbling of “what’s next” and “what is the unspoken conspiracy?”

So who won and who lost and what’s next? I’ve been working on a response to Rob Hahn’s proposal that NAR pony up some substantial cash and buy Move, essentially taking a public corporation private and thereby recapturing total control over their corporate brand and flagship banner website. I think Rob’s idea has some entertainment value, but would not work for a couple of reasons. First (and foremost), it would rely on NAR levying a special assessment of $250 per member and borrowing another $200 million to have enough cash for a buyout, including a nice premium to current shareholders. Would NAR members, half of whom did not close one real estate deal last year, actually agree to such a levy or would many of them walk?

Second, the payback of the loan depends on continuing to operate Realtor.com as a profit making venture. That’s the biggest flaw I continue to see in the current business model. I continue to believe Realtor.com can be a huge asset to NAR and its million members but only if it’s a core service paid for by dues dollars (or perhaps be RPR revenue or NAR’s investment in Second Century initiatives, if any of them eventually starts to make money) and not an advertising medium that sells ad services to members. That is the singular loudest complaint from Realtors about Realtor.com – “It’s our website. They shouldn’t sell us advertising. It should be FREE, because it’s our website.”

So I began to look at how possible it might be to convince the current Move board of directors they needed to take my advice and give back Realtor.com to NAR and make Move.com their lead portal. These are reasonable people, experienced business people with a roster of companies they have either served, helped, or directed that would be enviable for any company. Four of the directors (a majority of the seven member board) are independent, so they would/should have no conflicts of interest in voting for a proposal, however radical, that was in the best interests of the shareholders. Three are a little biased toward NAR and therefore might oppose such a change – current CEO Steve Berkowitz, former REALTOR (Grubb/Ellis, Coldwell Banker) current Chairman Joe Hanauer, and former NAR President Cathy Whatley.

Alternatively, if no one was able to convince the board to make that change, what were the chances someone could raise enough interest and money to make a run at the company – a hostile takeover in true Carl Icahn style. Perhaps a large franchise (Berkshire-Hathaway or Realogy might have enough cash) would buy it and use it as a basis for changing their online presence. The Realty Alliance is already looking for proposals to create a large national infrastructure for their cooperating brokers – perhaps they could buy Move and save themselves a lot of development time. I even looked at the possibility of a grass-roots movement starting with a couple of progressive, pro-active Realtors who want to raise the bar of professionalism by raising money on Kickstarter. But alas, I doubt that a national real estate portal would qualify under Kickstarter’s Guidelines (seems they have a prohibition against funding websites focused on e-commerce and business).

So then the thought struck me that perhaps a couple of the current major shareholders might be interested in increasing their holdings, perhaps even demanding a couple of seats on the board. So I started digging around for the current list of institutional shareholders (who, it seems, hold over 95% of the stock in Move) and aside from FMC, LLC (Fidelity Investments) that owns about 15% of the company (as of 12/31) there were no other major players with more than 3.5%. (FMC’s 15% represents about $93 million in stock holdings, but when you compare that to the $4.2 Trillion — with a capital T — in assets they manage, their Move stock represents about .00221% of their portfolio. Something to sneeze at?)

“Achoo!!”  “Gesundheit!”

I was getting a little discouraged trying to think of other options, so I started fooling around with the stock reports and looked at the changing positions of Zillow and Move on the NASDAQ since the chair shuffling began back on March 5. Here’s what I found.

Z vs Move

First, Zillow closed above $100 last Friday (3/21) for only the second or third time in their history. They hit $100 last September and have drifted below the century mark since.

The chart above tracks the percent of change in stock price for Move (red) and Zillow (blue) since March 5. They stay reasonably close from the time Errol announced his move until March 13 when Curt followed. Then stuff happened. Zillow started upward on a near 45 degree slope while Move held steady for about a week and then dropped off. The net effect, Zillow is up about 20% and Move down about 10%.

Details (text for those who hate charts):

Date

Event

Zillow

Move

3/5/14 Errol made “the move” (after market close)

$83.20

$13.12

3/14/14 Friday before Curt made “the other move”

$87.10

$12.30

Net effect of Errol’s move

UP $3.90
(4.7%)

DN $0.82 (6.25%)

3/17/14 Day of Curt’s “other move” and Move/NAR lawsuit filed against Zillow

$91.68

$12.37

3/21/14 End of week of turmoil

$100.24

$11.84

Net change from 3/17 to 3/21

UP $8.56 (9.33%)

DN $0.53 (4.25%)

Net effect of turmoil, since 3/5

UP $17.04 (20.5%)

DN $1.28 (9.75%)

3/21/14 Market Cap as of 3/21/14

$3.96 Billion

$465 Million

Whoa! Stop for a minute and take a look at that bottom line. That’s really what this whole process has been about. These are publicly held companies, companies in which people (and institutions, which we know because Mitt Romney told us so, are people too) invest their money in order to make more money. Investors in Zillow earned 20% on their investment in less than 30 days. Investors in Move lost 10% of their money in the same period.

By my calculation, Zillow is just one dollar and eight cents short in its share price of being a Four Billion Dollar Company.

But even more telling is this figure. In the seventeen days between March 5 and 21, while the real estate blog-o-sphere was fixated on why Errol and Curt moved and what Zillow would do next, Zillow stock gained $691 million in value. That’s 50% more than the entire Move corporation is worth ($465 million).

I hate to keep being the guy pounding nails in the Realtor.com coffin, but the more I look at this situation the fewer reasons I can find for anyone to want to buy Move.  Even NAR – at least not right now. The sinister plot may not be one spun by either Zillow or Trulia but rather by NAR itself. Their continuing shackles on how Move can operate R.com might just be the smartest play in the game. They could soon buy back control of their website, and a company of people to operate it, for pennies on the dollar.

Much as I hate to admit it, I think Rob’s advice is right: NAR should take Move private. But I would advise NAR to hold off on that special assessment. It just might not be needed after all.

For this post:
Cause: If you can’t see the mark in the poker game, then it’s you.
Effect: The card sharp may be the player you least expect. 

Raise the Bar across the Industry

There’s an active group on Facebook called Raise the Bar which discusses (for the most part) ways that agents can improve the overall service levels in the real estate industry and thereby raise the professionalism practiced by each individual agent or broker. The goal is admirable and the efforts sincere even if they do get off track from time to time. But they seldom discuss items outside of their limited purview, i.e. the brokerage of real property.keys-title-insurance

Perhaps it’s time to expand that horizon because it’s clear from the following article that something needs to be done with bad players in other sectors of the business, in this case one major player in the title insurance industry.

In an article entitled A Trusting Couple Now Thrown for Two Loops published in Sunday’s New York Times (12/1/2013, Business Section, page 1) and written by assistant business and financial editor Gretchen Morgenson, Stewart Title is pressing a lawsuit against a retired Florida couple who were swindled out of millions of dollars by an employee of Stewart Title itself.

If the story is accurate, and considering the source is The New York Times I have no reason to believe otherwise, Stewart Title should not only be ashamed of its collective corporate self, but real estate agents everywhere should know what this behemoth is capable of and ask themselves if they want to expose and entrust their future escrow closings to a company that would behave as egregiously as has Stewart. (Remember, you have not only an ethical requirement but also a legal fiduciary responsibility to advise your clients in the best way possible, lest you, too, become the target of litigation should things go south.)

Here are the details:

Ivor Rose and Rita Starr have been married for 38 years.

They lived modestly in Miami Beach, buying and renting commercial and residential properties there. Mr. Rose, 79, a child the Depression, had a strong distaste for debt, so. The couple never borrowed money but was able to buy the six warehouses and eight homes with cash. Those properties were worth around $15 million in 2006.

Miami businessman Michael Stern rented space from Rose/Staff for a shoe store. He became friends with the couple to gain their trust and then started investing with them in other commercial properties. What they didn’t know was that Stern was busy mortgaging their other properties without their knowledge by falsifying signatures and forging documents with the help of Stewart employee Arlene Raijman. Ms. Raijman issued title policies on all of the Stern mortgages despite having improper documentation to back up the insurance because the documents were forgeries.

Here’s where the irony comes in.

Stern stopped paying on the mortgages and skipped to South America. The lenders started foreclosing on the properties and when Rose/Starr received delinquency notices the alarms started sounding. Lenders looked to Stewart to make good on their policies and return all of the loan capital. From the article:

“Stewart Title, the company that insured the fraudulent mortgage loans — and whose policies require it to cover all the losses on the loans arising from forgeries and other defects — has refused to make a settlement on most of the properties.

“And Stewart Title is doing this at the same time it is asserting, in another court venue, that one of its agents helped Mr. Stern secure bogus loans. It is suing that agent.

“According to a lawsuit that Stewart filed against her, Ms. Raijman breached her duties at more than two dozen loan closings, issuing title insurance even though loan documentation was improper. Fifteen of those closings were for properties belonging to Mr. Rose and Ms. Starr.

“Chief among the improprieties, the documents show, was her disbursement of loan proceeds to Mr. Stern rather than to the couple, as the loan documents required.”

As I said at the top, if these allegations are true, this could turn out to be a huge black eye for Stewart and a red flag to agents or brokers thinking of using them in the future. John Arcidiacono, chief marketing officer for Stewart who was contacted by the reporter, declined to comment on specifics, citing the litigation. On the Stewart Information Services website, among the duties ascribed to Mr. Arcidiacono is “crisis management” so it would appear he is the right person to address this situation.

But Stewart is managing this crisis out of both sides of its mouth. In the Florida case against Rose/Starr, Stewart contends Ms. Raijman was not one of its agents or employees and that the company, therefore, should not be held responsible for her dealings.

But in Texas Stewart has sued the Great American Insurance Company, a reinsurer from which Stewart bought a $15 million insurance bond. Stewart bought the bond in April 2009 to protect against losses resulting “directly from dishonest or fraudulent acts committed by an employee acting alone or in collusion with others,” its lawsuit says. Stewart says Ms. Raijman was indeed its agent. As such, it hopes to collect on the bond and to recoup roughly $10 million in losses it has incurred so far over her work.

So which way is it? Was she an employee in Texas, but not in Florida? Doubtful! Is Stewart walking a fine line between the cases in hopes of minimizing their financial exposure? For sure! But how much is that exposure? According to the article it’s in the vicinity of $10 to 15 million.

To put that into perspective, Stewart Information Services (STC: NYSE parent of Stewart Title) racked up over $2 billion in revenue last year, up 17% from the year before. Stewart carries a loss contingency fund on its balance sheet of $140 million. They could easily pay in full on these policies and tap that fund for less than 10% of its allocation, so they would not materially affect the balance sheet (or the shareholders).

And they would be off the hook in the arena of public opinion, and in the minds of the real estate agents and brokers upon whom they depend for a great majority of their revenues. As it stands now, Stewart looks like the greedy corporate giant stepping on the “little guy” or in this case, considering the age and stamina of the victims of this fraud, just waiting for them to give up.

That’s not a pretty picture, and certainly not one that Stewart Title officers would like to promote. Perhaps they’re hopeful that real estate professionals don’t read The New York Times. That would be misplaced optimism since Times articles are syndicated in hundreds of local papers across the country. Surely more industry observers than just I have seen the article somewhere.

Which leads me back to my original conjecture that by pursuing this case Stewart stands to make more enemies than friends, particularly among the thousand or more agents who funnel closing and title service business to them. I ask the Raise the Bar group, again – Would you want to expose your real estate clients to this kind of potential abuse? If not, Stewart customers, instead of raising the bar perhaps it’s time to lower the boom and take your next closing elsewhere.

For this post:
Cause: You’re never too small to be crushed.
Effect: You’re never too big to be scolded.