Priyanshu Bakshi, CFA Tyler Burkett Nick Demko, CFAalphachallenge.org/wp-content/uploads/2018/06/... · Students: Priyanshu Bakshi, CFA Tyler Burkett Nick Demko, CFA . Recommendations

November 20th & 21st, 2014

Students: Priyanshu Bakshi, CFA Tyler Burkett Nick Demko, CFA

Recommendations

Buy POOL; Sell RLGY

Sell RLGY Buy POOL

Current Price: $59.46 Target Price: $79.54 (33% upside) Long-term thesis 1. Underappreciated revenue

growth prospects 2. Very high operating leverage 3. Macro tailwinds from improving

new home sales and pent-up maintenance demand

Shorter-term catalysts 1. Share repurchase program in Q1-

Q2 2015 2. Accretive acquisitions, particularly

internationally 3. Q1 2015 positive earnings surprise

due to weather effects

Current Price:$42.97 Target Price: $29.60 (31% downside) Long-term thesis 1. Commoditized business with

unjustified price premium 2. Substantial Balance Sheet Risk 3. Weak Moat

Shorter-term catalysts 1. FY 2015 Earnings 2. ‘Bararsani vs. Coldwell Banker’, court

case against RLGY 3. $1.3B of debt due in first half of 2016

(33% of total debt) 4. Online brokerage competition 5. Hedge fund selling

Note: Closing prices as of EOD 11/14/2014 2

Pool: Company Overview

2,200 Industry Vendors (Suppliers)

80,000 Dealers

• Major Influence on customer product solution

• Product Training • Local Service

• Product Promotions • Supply Chain Management • Inventory Management • EPA Certification

• Product Availability • Credit • Sales/Marketing Programs • Business Training

• Technical Support • Warranty Service • Specialty Tools • Value Oriented O/S Sales Force

Value Chain POOL’s Value Add

1. Center of Fragmented Supply Chain

2. Price 3. Convenience 4. Distribution Value 5. Service

Source: Company Presentation 3

11%

13%

17%

18%

23%

11%

7%

Parts

Maintenance & Equipment

Pool Construction Materials

Chemicals

Heaters, Pumps, Filters,

Accessories

Lighting, Electrical & Plumbing

Other

6%

11%

83%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Sales

US Pool Products

International Pool Products

Landscape/Irrigation

US Pool Sales Breakdown

Pool: Company Overview

POOL distributes a wide array of pool related products

Pool’s Business Segments


POOL: Company Overview

Most of POOL’s sales are non-discretionary

13%

28%

29%

30%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Sales

Sales Breakdown

Minor Service and Repair

Replacement And Refurbishment

Pool Construction

Specialty Retail

Non-Discretionary Parts, Pumps, Filters,

Heaters, Lights

Non-Discretionary Pool Equipment and

Components

Some Discretion Cleaners, Chemicals and

other Maintenance items

Discretionary

Pool Equipment and Components; Concrete,

Plumbing & Electrical Components

Expense Type Types of Products Sold


POOL: Company Overview

Most of POOL’s sales are non-discretionary

While Pool Construction is only 13% of sales, growth in construction will grow non-discretionary cash flows as the installed pool base increases

13%

28%

29%

30%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Sales

Sales Breakdown

Minor Service and Repair

Replacement And Refurbishment

Pool Construction

Specialty Retail

Expense Type Types of Products Sold

Source: Company Presentation

Non-Discretionary Parts, Pumps, Filters,

Heaters, Lights

Non-Discretionary Pool Equipment and

Components

Some Discretion Cleaners, Chemicals and

other Maintenance items

Discretionary

Pool Equipment and Components; Concrete,

Plumbing & Electrical Components

6

0

50

100

150

200

250

Pool Corp Top 52 Competitors

Distributors 1-5Centers

Distributors 6-10Centers

Distributors with 10+Centers

# of Sales Centers

Pool: Industry Overview

POOL is larger than the top 52 competitors combined

Van Nuys, CA Distribution Center

Miami, FL Distribution Center

Top 52 Competitors Combined


Long Thesis: Pent-Up Demand

…and starts are far below historical norms due to economy and turnover

30 yr. Average

65% upside

Source: St. Louis Fed 8


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5,000

10,000

15,000

20,000

25,000

30,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Housing Starts vs. In-ground Pool Construction

Inground Pool Sales (right axis)

Housing Starts (left axis)

Rebounding housing starts will provide a tailwind for Pool Construction

Pool Construction ties closely to housing starts and is in cyclical lows

Source: St. Louis Fed, PK Data

(000s) (000s)

9

Northwest Nevada

Rocky Mountain

Non-Seasonal Markets -California -Florida -Texas -The South -Southwest

Seasonal Markets -Mid Atlantic -Mid West -Northeast -Northwest

Diversified Market

Diversified Geographic Markets insulate POOL from regional downturns

Long Thesis: Migration Trends

POOL’s sales are focused in California, Florida, Texas and the South

CA

FL

South Texas

Midwest

Mid Atlantic

Source: POOL 10K 10


…and the South, Florida and Texas contain the fastest growing markets

Source: Citylab.com 11

Statewide Temperature Ranks Impacts to Pool Corp

• Weather has a large impact on pool use and to a lesser extent, pool construction, in Seasonal areas

• Over the last two years, the temperature has been below historical norms in many states.

Long Thesis: Weather

The weather has negatively impacted industry growth the last two years

A reversion to normalized weather will provide a tailwind for growth, particularly in seasonal markets

Source: NOAA 12

Statewide Temperature Ranks Impacts to Pool Corp

• Weather has a large impact on pool use and to a lesser extent, pool construction, in Seasonal areas

• Over the last two years, the temperature has been below historical norms in many states.

Long Thesis: Weather

The weather has negatively impacted industry growth the last two years

“We love when the weather doesn’t cooperate briefly…as long term investors, it’s a great buying

opportunity for us“

Lamar Villere, Portfolio Manager at Villere & Co. Source: NOAA

A reversion to normalized weather will provide a tailwind for growth, particularly in seasonal markets

13

Long Thesis: Advantages Over Comparables

POOL has had higher profitability ratios and margins

17.4%

12.2% 10.3% 9.5%

5.9% 5.9% 5.1% 3.3%

0.0%

5.0%

10.0%

15.0%

20.0%12.4%

9.1% 7.7%

6.4% 4.7%

3.9% 2.8% 2.7%

0.0%

5.0%

10.0%

15.0%

36.7%

15.4% 15.0% 14.9% 14.7% 13.3%

7.5% 5.1%

0.0%

10.0%

20.0%

30.0%

40.0%

14.6% 12.8%

9.4% 8.9% 8.5% 8.2% 7.0%

5.4%

0.0%

5.0%

10.0%

15.0%

20.0%

Return on Invested Capital Return on Assets

Return on Equity EBITDA Margins

Source: Factset 14


… and more importantly POOL has been on a better trajectory



-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14

POOL

Comp Avg

0%

2%

4%

6%

8%

10%

12%

14%


POOL

Comp Avg

-5%

0%

5%

10%

15%

20%


POOL

Comp Avg

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%


POOL

Comp Avg

Source: Factset 15


Yet POOL’s stock price has not incorporated these advantages

Five Year Total Shareholder Return Index

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14

POOL Comp Avg

… Which should make POOL’s stock price relatively attractive In line In line

Name Market Cap EV Div Yield 1yr Sales Gr ROA ROE ROIC P/E EV/EBITDA

Pool 2,582.1 2,964.5 1.26% 8.1% 12.4% 36.7% 17.4% 24.98x 14.93x

Comp Average 3,842.4 5,348.9 0.59% 13.7% 5.3% 12.3% 7.4% 24.15x 18.07x

Comp Median 2,020.3 3,812.8 0.45% 6.7% 4.7% 14.7% 5.9% 23.56x 13.72x

Beacon Roofing Supply 1,408.4 1,697.4 0.00% 6.0% 3.9% 7.5% 5.9% 25.04x 12.58x

LKQ 8,782.0 10,435.4 0.00% 32.4% 7.7% 15.4% 9.5% 23.56x 13.58x

Watsco 3,555.7 4,179.3 1.20% 6.1% 6.4% 14.9% 10.3% 26.09x 13.72x

KB Home 1,563.5 3,812.8 0.57% 8.1% 2.7% 15.0% 3.3% 17.03x 27.52x

MarineMax 478.2 567.4 0.00% 6.7% 2.8% 5.1% 5.1% 40.94x 31.96x

Lennar A 9,089.1 14,457.8 0.45% 32.3% 4.7% 13.3% 5.9% 18.55x 15.91xApplied Industrial Techs 2,020.3 2,292.5 1.89% 4.1% 9.1% 14.7% 12.2% 17.86x 11.21x

Source: Factset 16


Based on street estimates alone POOL seems to be fairly valued

TotalCylical/Pool

Construction

Annuity/Pool

Maintenance

2015E EBITDA ($MM) 225.60$ 90.24$ 135.36$

EV/EBITDA 16.00x 13.00x

EV $3,203.52 $1,443.84 $1,759.68

Less: Debt -391.10

Plus: Cash 14.46

Equity Value 2826.88

Diluted Sh. Out. 47.53

Implied P/sh 59.48

Current Price 59.46

Implied upside $0.02 (3bps!)

So, what’s the street missing and why is our view differentiated?

17

Long Thesis: What’s the “street” missing?

… Growth and operating leverage

Over the last four years consensus estimates have underestimated revenue by an average of 3% Their models also inadequately account for operating leverage with resect to PP&E and SG&A expenses

Firm Sales 2011E (bn) Firm Sales 2011E (bn)William Blair 1.63 William Blair 1.69Wedbush 1.63 Wedbush 1.70SunTrust 1.56 SunTrust 1.67Hilliard Lyons 1.56 Hilliard Lyons 1.63Piper Jaffray 1.60 Piper Jaffray 1.69Morgan Keegan 1.64 Morgan Keegan 1.72Concensus 1.60 Concensus 1.68Actual 1.61 Actual 1.79Consensus underestimation -0.7% Consensus underestimation -6.3%

Firm Sales 2011E (bn) Firm Sales 2011E (bn)William Blair 1.90 William Blair 2.04Wedbush 1.90 Wedbush 2.06SunTrust 1.83 SunTrust 2.06Hilliard Lyons 1.84 KeyBanc* 2.03Piper Jaffray 1.92Morgan Keegan 1.91Concensus 1.88 Concensus 2.05Actual 1.95 Actual 2.08Consensus underestimation -3.8% Consensus underestimation -1.6%

Sales Estimates Consensus For 2010 Sales Estimates Consensus For 2011

Sales Estimates Consensus For 2012 Sales Estimates Consensus For 2013

*Piper Jaffray, Hilliard Lyons and Morgan Keegan suspended

coverage and Keybanc initiated

18

Long Thesis: Our revenue model

Regression Model Set Up

• POOL does not break out their sales by segment

• To estimate segment specific growth, we created a regression model with two industry variables:

1. Industry Pool Construction 2. Installed Pool Base

• This model fits well and was intuitive,

which gave us confidence in modeling these segments going forward

0

500

1000

1500

2000

2500

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Estimated

Actual

Estimated Revenue

Estimated Segment

0%

20%

40%

60%

80%

100%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Revenue from Installed Base

New Construction

Using the model with a variety of pool growth forecasts, we created bull and bear cases for POOL

19

Scenario Key Assumptions

All Scenarios • Gross margin of 28%, inline with recent cycle averages • Improvement to seasonal markets growth in 2015 due to weather (assumed average)

Baseline • Housing Starts and resulting pool growth on a conservative trend • Installed pools grow at 2% after starts hit 30 year average in 2023

Bull • Pent up demand causes acceleration of housing rebound • Starts grows at 15% until hitting 30 year average in 2016 • Installed pools grow at 4% thereafter

Bear • Housing starts and resulting pool growth flat • Assumed margins fall to 10 year low

Housing Start Projections

Bull

Base

Bear

MM Installed Pool Base Market

3000

3500

4000

4500

5000

5500

6000

6500

7000

7500

8000

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Bull

Bear

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000s


Base 30 yr average

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Growth Expected Growth

per Year Impact to POOLs

Revenue

Improved Pool Construction 8% +3.2%

Growth in Seasonal Growth (due to weather)

3% +1.3%

Pool Maintenance 4.5% +2.7%

Acquisition Growth 1.5% +1.5%

Total Revenue Growth +8.8%

Implied Earnings Growth +16.3%

Building block approach to 2015E sales growth

21


Based on proprietary research, industry reports and management estimates

2007 2008 2009 2010 2011 2012 2013 2014 (Q1-Q3)

Seasonal market sales growth: 1.5% Base business (organic) sales growth rates: -1.0% -9.0% -15.0% 2.0% 10.0% 7.0% 6.0% 5.1%

Year-round market sales growth: 10.7% Total sales growth: 1.0% -7.5% -13.7% 4.8% 11.1% 9.0% 6.4% 6.5%

2012 Revenue 1,954 Implied acquired sales growth: 2.0% 1.5% 1.3% 2.8% 1.1% 2.0% 0.4% 1.4%

2013 Revenue 2,080 Average acquired annual sales growth: 1.6% <-- Management has not indicated any change in acquisition strategy

Source: Company Fil ings

Revenue from seasonal markets: 903 <-- Solve: 1.02x + 1.11(1954-x) = 2080

Revenue from year-round markets 1,051 (approximately 43%/57%) Survey Data % responseBucket LB Bucket UB Avg Sales growth: Above Gd Below Gd

4.50% 10% inf 12% 2006 -5.1% 1.4%

2014 Seasonal market growth 5.0% 22.70% 5% 10% 8% 2007 -12.0% -8.1%

2014 Year-round market growth 8.0% 22.70% 1% 4% 3% 2008 12.2% -11.8%

2014E Revenue 2,236 31.80% 0% 0% 0% 2009 -58.1% -27.8%

2014 weather impact -29 13.60% -4% -1% -3% 2010 5.6% 9.2%

2014 weather normalized sales 2,266 Total: 95.30% 2011 -3.5% 9.2%

Source: Company Fil ings Non-disc impl grw: 2.59% 2012 -3.5% 10.3%

Source: PK data report Source: PK data report

Non-discretionary business 60.0% Management growth guidance: 4-7% growth for 4-7 years before decreasing to 3-4% per year

Our assumption: Trend growth closer to 4% now, we assume increase to 5% in 2 yrs, before declining 0.5% after 5 years to 3% steady state

Discretionary business 40.0% Growth assumption: industry data suggests 9-10% growth for 4-7 years

Our assumption: Growth to 10% for 4 years, l inear decline by 1.5% thereafter pre-crises steady state of 2% per year

Source: 2013 10K

2011A 2012A 2013A 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E

Discretionary business growth rate 6.0% 6.8% 7.0% 7.5% 8.0% 8.5% 9.0% 9.5% 8.0% 6.5% 5.0% 3.5% 2.0% 2.0%

Non discretionary business growth rate 3.0% 2.6% 3.5% 4.0% 4.5% 5.0% 5.0% 5.0% 4.5% 4.0% 3.5% 3.0% 3.0% 3.0%

Base business growth rate 10.0% 7.0% 6.5% 5.5% 5.9% 6.4% 6.6% 6.8% 5.9% 5.0% 4.1% 3.2% 2.6% 2.6%

Acquisition growth impact 1.0% 2.0% 0.0% 2.0% 1.6% 1.6% 1.6% 1.6% 1.6% 1.6% 1.6% 1.6% 1.6% 1.6%

Weather Adjustment: 1.3%

Total sales growth 11.0% 9.0% 6.5% 7.5% 8.8% 8.0% 8.2% 8.4% 7.5% 6.6% 5.7% 4.8% 4.2% 4.2%

Sales 1,793 1,954 2,080 2,236 2,465 2,662 2,880 3,122 3,357 3,578 3,782 3,964 4,130 4,304

Consens: 2,389

% Diff: 3.2%

Weather Adjustments

Product Mix

Acquisition strategy growth impact assumptions

Growth assumptions

Non discretionary business growth estimates Disretionary business growth estimates

22


Proprietary research and industry data confirm secular growth trends

73.6%

26.4%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

Yes No

Does a swimming pool add value to a residence in your area?

56.6%

43.4%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

Yes No

Would you like a swimming pool at your next home?

Source: PK Data (industry research report)

Source: PK Data (industry research report)

Source: Proprietary survey (200 respondents)

Source: Proprietary survey (200 respondents) 23


Proprietary research and industry data confirm secular growth trends

“Pool has everything we look for in terms of sustainable competitive advantage: good core business, management

team and financials ”

Tim Holland, portfolio manager at Astron/Tamron Funds

“There’s no question I have had increased requests for homes with in-ground pools”

- Prominent real estate broker, Washington DC

“Favorable demographic and socioeconomic trends have positively impacted our industry and we believe these

trends will continue in the long term” – POOL 2013 10K

“52% of pool builders, retailers and service firms expect industry improvement vs. only 13% expecting declines”

- PK Data (industry report)

“Swimming pools certainly enhance the vale of land, a swimming pool at my first home will be a must-have”

- Survey respondent, 28 year old Illinois resident

Source: Conducted Interviews, Barron’s for Tim Holland Interview, 10k, PK Data

24

Long Thesis: Our free cash flow model summary

Substantial upside with limited downside

Historic POOL TTM EV/EBITDA Multiple

0.0

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25.0

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LT avg: 12.4x (12x baseline used as terminal multiple)

Baseline: $79.54 = 19.3x TTM EV/EBITDA

Bull case: $95.97 = 22.9x TTM EV/EBITDA

Bear case: $54.13 = 13.8x TTM EV/EBITDA

Scenario Price Target Implied Upside

Implied EV/EBITDA

Baseline $79.54 +34% 19.3x

Bull $95.97 +61% 22.9x

Bear $54.13 -9% 13.8x

• Baseline scenario results in implied EV/EBITDA near high end of historic range which we believe is justified given where we are in the current pool cycle

• The bull case results in an EV/EBITDA well above historic highs, but could be justified if housing starts return to historic average levels

• The bear case is a very conservative estimate where sales, margins and operating leverage suffer but POOL’s share decline is only a modest -9%

25

Dec '15 Dec '16 Dec '17 Dec '18 Dec '19 Dec '20 Dec '21 Dec '22 Dec '23 Dec '24

Cash flow from operations 127.3 144.3 162.1 189.8 224.5 253.9 280.5 305.7 327.9 347.1

(+) Interest expense after tax 4.7 4.8 4.8 4.9 5.0 5.1 5.2 5.4 5.5 5.6

(-) Cash flow from Investing in PPE -32.0 -35.4 -40.9 -47.2 -53.2 -59.7 -66.6 -74.0 -74.3 -80.7

(-) Acquisitions, net of cash acquired -4.8 -8.4 -8.4 -9.9 -12.6 -15.2 -16.8 -17.8 -18.4 -19.7

Free Cash Flow 95.1 105.3 117.7 137.6 163.7 184.2 202.3 219.2 240.7 252.3

Present Value of FCF 87.8 89.7 92.5 99.8 109.6 113.8 115.4 115.4 116.9 113.1

Total PV FCF (years 1-10): 1,054

Terminal Value (12x EV/EBITDA 2024E) 3,103 79.5 10.0x 11.0x 12.0x 13.0x 14.0x

Implied Enterprise Value 4,157 6.85% $78.67 $84.93 $91.18 $97.44 $103.69

Less: current debt -391 7.35% $75.17 $81.14 $87.11 $93.08 $99.05

Plus: Cash 14.5 7.85% $71.83 $77.53 $83.23 $88.93 $94.63

Implied Equity value 3,780 8.35% $68.66 $74.10 $79.54 $84.98 $90.42

Fully diluted shares outstanding 47.5 8.85% $65.63 $70.82 $76.02 $81.21 $86.41

Implied price per share $79.54 9.35% $62.74 $67.70 $72.67 $77.63 $82.59

Implied upside (current price = 59.46) 33.8% 9.85% $59.99 $64.73 $69.47 $74.21 $78.96

WACC = [WD * RD * (1-t)] + [WE * RE] 8.35% Terminal EV/EBITDA multiple 12.0x

WD 12.9% Current MV debt/(MV debt + MV equity)

WE 87.1% Current MV equity/(MV debt + MV equity)

tax rate t 39.4% 5 year historical average

RD 3.00% <-- 3 year average interest expense / LT debt

(RM - Rf) 7.00% Conservative historical estimate

B=1 1.0 3 yr beta to S&P 500 as of 11/14/14

Rf 2.32% 10yr treasury as of 11/14/14

RE = RF + B*(RM-Rf) 9.32%

WACC

Terminal EV/EBITDA multiplePrice Target

Cost of Capital Terminal value assumptions

Long Thesis: Our free cash flow model

Base Case: Incorporates revenue estimates and operating leverage

Key operating leverage assumptions:

• SG&A expense growth 50% of sales growth (benefit decays over time by factor of .90)

• PP&E turnover decays over time from 40x to 25x (using a factor of .95)

26






Free Cash Flow 78.3 103.1 157.6 189.8 204.6 221.3 238.9 255.5 279.2 296.3






Plus: Cash 14.5 7.85% $86.78 $93.58 $100.38 $107.18 $113.98













RE = RF + B*(RM-Rf) 9.32%

WACC




Bull Case: Incorporates housing start normalization, gross margin expansion

Key assumptions:

• Gross margins increase toward top end of historic range at 29.4%

27






Free Cash Flow 102.7 103.4 109.7 115.2 125.0 135.1 144.5 153.4 161.8 169.9


Total PV FCF (years 1-10): 838




Plus: Cash 14.5 7.85% $48.92 $52.80 $56.67 $60.55 $64.43




Implied upside (current price = 59.46) -9.0% 9.85% $40.73 $43.96 $47.19 $50.41 $53.64









RE = RF + B*(RM-Rf) 9.32%

WACC




Bear Case: Housing starts flat, margin and operating leverage deterioration

Key assumptions:

• SG&A expense growth 85% of sales growth (benefit decays over time by factor of .90)

• PP&E turnover remains at 40x (i.e. no operating leverage)

• Gross margins decline to 27.4%, near lows 28

Long Thesis: Catalysts

In addition to long term undiscovered business value there are a number of shorter term potential catalysts that could benefit the share price: 1. Announcement of share repurchase program

• Current share repurchase program includes authorization to purchase only $64MM of shares while the firm has been purchasing on average $40MM per quarter

• With strong operating cash flow and debt levels at the low end of targets look for board approval of new repurchase program in Q1 or Q2 of 2015

2. Expansion Internationally

• In Q3 2014 POOL acquired a controlling interest in Australian pool distributor Pool Systems • With managements impressive acquisition history (see management slide) expect this to

add value to the bottom line in 2015 • Also look for additional acquisitions in 2015 as the CEO hinted at further expansion in areas

with “no presence, or a very limited presence”

3. Q1 2015 positive earnings surprise • Sell side estimates seem to underestimate negative weather impact on 2014 revenue • Should we see a normalization in weather patterns look for season market sales growth to

push Q1 2015 earning higher

Shorter term catalysts also provide an upside

29

Risk Mitigant

Mass Retailer increases focus on Pool Products; taking market share away from Specialty Shops

POOL carries 160,000 products, which decreases the attractiveness for a retailer to try to carry a much broader range of SKUs. Only 15% of small retailers viewed Mass Retailers as a top risk to their business.1

Pool construction may continue to lag We are currently at cycle lows for in-ground pool construction.

Regional distributor expansion

POOL has a history of nationwide distribution; a competitor will be reluctant to potentially engage in a pricing war with POOL.

Long Thesis: Risks and Mitigants

There are risks to the business that could impact value

1FROM PK DATA 30

53% 40%

15%

21%

15% 21%

15% 15%

President and CEO Other NEOS

Long Term Equity Incentive

Strategic Performance Incentive Package

Salary

Annual Bonus

Other

Executive Compensation Breakdown

Pool: Executive Compensation

Item Description

Annual Bonus Annual Bonus Determined Year End

Salary Base Salary (42% lower than peer group)

Long Term Equity Incentive

Annual Award that can be in the form of restricted stock or options (vest in 3 to 5 years)

Strategic Plan Incentive Program

Medium Term Cash Opportunity based on EPS growth over 3 year timeframe

60-70% of executive’s compensation is driven by long term growth

Longer Term Incentives

Source: SEC Filings

31

Pool: Management Discussion

POOL has a strong management with impressive history

Strong acquisition history over time

EPS growth has outpaces sales growth Margins have trended upward

0

5

10

15

20

25

30

35

40

45

50

0

50

100

150

200

250

300

350

400

450

1995 1998 2001 2004 2007 2010 2013

Cumulative value ofacquisitions ($MM, LHS)

Cumulative goodwillimpairment ($MM, LHS)

Cumulative acquisitions(quantity, RHS)

-80.00

-60.00

-40.00

-20.00

0.00

20.00

40.00

60.00

80.00

100.00

19

96

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

11

20

12

20

13

20

14

YoY sales growth (%)

YoY EPS growth (%)

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

Operating Margin (%)

Net Margin (%)

• Pool has made 44 acquisitions since going public in 1995 for a total of $405MM, accounting for a major portion of sales growth

• Goodwill has only been impaired significantly once in 2012

• EPS growth has trended above sales growth indicating quality acquisitions

• Margins have trended higher indicating margins have not been sacrificed for sales growth

Source: 10Ks & 10Qs

32

Recommendations

Buy POOL; Sell RLGY

Sell RLGY Buy POOL

Current Price: $59.46 Target Price: $79.54 (33% upside) Long-term thesis 1. Underappreciated revenue

growth prospects 2. Very high operating leverage 3. Macro tailwinds from improving

new home sales and pent-up maintenance demand

Shorter-term catalysts 1. Share repurchase program in Q1-

Q2 2015 2. Accretive acquisitions, particularly

internationally 3. Q1 2015 positive earnings surprise

due to weather effects

Current Price:$42.97 Target Price: $29.60 (31% downside) Long-term thesis 1. Commoditized business with

unjustified price premium 2. Substantial Balance Sheet Risk 3. Weak Moat

Shorter-term catalysts 1. FY 2015 Earnings 2. ‘Bararsani vs. Coldwell Banker’, court

case against RLGY 3. $1.3B of debt due in first half of 2016

(33% of total debt) 4. Online brokerage competition 5. Hedge fund selling

Note: Closing prices as of EOD 11/14/2014 33

Short Thesis: Company Overview

Realogy is organized into multiple business lines

RFG

NRT

Realogy Group is primarily a real estate brokerage business, with owned and franchised brokerages

• Largest US Residential Real Estate Franchisor

• Owned Brokerage Network

Relocation Services

Title Services

Business Units

• Provides Relocation Services

• Provides Title Services

Description

Sunnyvale, CA Franchise

Ottawa, IL Franchise

34

Owned Residential Brokerage

58%

Franchised Residential Brokerage

23%

Relocation Services

13%

Title & Settlement

Services6%


Revenue Contribution by Segment EBITDA* Contribution by Segment

Brokerage contributes 84% of the revenue and 81% of the EBITDA, so we focused our attention on the brokerage business

Real estate brokerage is RLGY’s primary revenue and EBITDA contributor

*EBITDA adjusted for intra-company transactions to better reflect true business value added of each segment

Source: SEC Filings 35


• Largest Residential Real Estate Franchisor

• Operate under all the brands shown above

• Operate in 103 countries with 13,738 offices worldwide

Overview How they make money

Homeowner sides (1.08M)

Average Home Sale Price (233K)

Average Broker Commission Rate (2.54%)

Net Effective Royalty Rate (4.49%)

Revenue ($299 MM)

x

x

=

x

RFG Business Line Overview

36

Short Thesis: Low Structural Growth

The volume of average monthly sales of existing homes has grown at a CAGR of only 1% over the last 25 years

Long term, existing home sale brokerage is not an attractive growth business

US Existing Home Sales Thousands Seasonally Adjusted Annual Rate

37 Source: National Association of Realtors; Trading Economics

Source: National Association of Realtors; Trading Economics

RGLY is focused on brokering existing homes sales and does not benefit from a resurgence in new home sales (while our long position POOL would benefit from growth in new home sales)

Monthly seasonally adjusted (annualized rate) existing home sales in thousands from 2007 to 2014

Short Thesis: housing opportunity is not in new home sales

Existing home sales have already rebounded; new home sales have not

38

Realogy: Leverage and bankruptcy

RLGY shows warning signs of bankruptcy in a housing slowdown

• High leverage and deteriorating working capital dynamics indicate a poor business model that may result in bankruptcy based on two bankruptcy models

• Altman Z-score of 1.75 is the average for CCC- rated firms, Realogy is even lower than that

• Ohlson bankruptcy probability above 3.8% correctly identified 88% of bankrupt firms, Realogy is well above this

Source: Factset for model variables

0.029 = 1.2 x Working Capital / Total assets 0.053 = 1.2 x Working Capital / Total assets

-0.638 = 1.4 x Retained earnings / total assets -1.166 = 1.4 x Retained earnings / total assets

0.227 = 3.3 x EBIT / total assets 0.416 = 3.3 x EBIT / total assets

0.688 = 0.6 x mkt value of equity / book value of total l iabilities 0.688 = 0.6 x mkt value of equity / book value of total l iabilities

0.693 = 1.0 x sales / total assets 1.266 = 1.0 x sales / total assets

1.00 <-- Altman's Z-score implies bankruptcy possibility 1.26 <-- Altman's Z-score implies bankruptcy possibility

Y = -1.3 + Y = -1.3 +

-6.710 = -0.4 x LN(total assets/price deflator) -6.465 = -0.4 x LN(total assets/price deflator)

4.373 = 6.03 x Total l iabilities / total assets 8.293 = 6.03 x Total l iabilities / total assets

-0.035 = -1.4 x Working capital / total assets -0.064 = -1.4 x Working capital / total assets

0.063 = 0.08 x Current l iabilities / current assets -0.031 = 0.08 x Current l iabilities / current assets

-0.137 = -2.4 x Net income / total assets -0.250 = -2.4 x Net income / total assets

0.033 = -1.8 x Working capital flow from operations / total l iabilities 0.033 = -1.8 x Working capital flow from operations / total l iabilities

0.000 = 0.29 x 1 if net income negative for last two years, 0 otherwise 0.000 = 0.29 x 1 if net income negative for last two years, 0 otherwise

0.000 = -1.7 x 1 if total l iabilities exceeds total assets, 0 otherwise 0.000 = -1.7 x 1 if total l iabilities exceeds total assets, 0 otherwise

-1.198 = -0.5 x Change in NI / sum of abs val current & prior yr NI -1.198 = -0.5 x Change in NI / sum of abs val current & prior yr NI

-4.93 0.7% <-- Low probability of bankruptcy -1.00 27% <-- Substantial bankruptcy possibility

Realogy Altman's Z - score Realogy Altman's Z - score - Excluding goodwill

Ohlson Bankruptcy prediction model Ohlson Bankruptcy prediction model - Excluding Goodwill

39

Realogy: Low margin, high leverage business

RLGY business model will collapse in a challenging environment

Low margins Highly levered

0.0

5.0

10.0

15.0

20.0

25.0

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

2008 2009 2010 2011 2012 2013 2014

Total Debt / Total Capital (LHS)Net Debt / EBITDA (RHS)

Comp average TD/TC = 24% vs. RLGY at 66%

Comp average ND/EBITDA = .91 vs. RLGY at 5.6

• High leverage will keep fixed costs of RLGY relatively high

• Low margins imply no room for top line misses

• As misses accumulate and fixed costs continue to rise RLGY will be forced to reduce commissions paid to brokers

• But in a commoditized industry where the brokers have the power they will leave to go to a competitor and RLGY will be left with no income and a load of debt

Commoditized brokerage industry with declining bargaining power of employers

Source: Factset

-60.0

-50.0

-40.0

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

2008 2009 2010 2011 2012 2013 2014

Gross Margin (%)

Net Margin (%)

Operating Margin (%)

40

Short Thesis: Significant Financial Leverage

Historically there has been a 23.1% movement into default by securities rates Caa-C within one year! Is the market correctly pricing in RLGY’s risk?

RLGYs debt is Caa-C, highlighting capital markets disregard for fundamentals

Source: Moody’s 41

Realogy: Underperformance relative to peers

RLGY has had lower profitability ratios and margins



44.6%

22.7% 17.9%

11.8% 10.0% 7.6% 3.1%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%19.5% 19.1%

12.6%

7.3% 6.0% 5.7%

1.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

50.5% 49.1%

36.7%

23.1% 20.1% 15.6%

5.9%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%40.1%

22.0%

13.5% 11.8% 10.2% 8.9%

1.8%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

Avg = 16.8% Avg = 10.2%

Avg = 15.5% Avg = 28.7%

Source: Factset

42

Realogy: Has consistently underperformed peers

Sales growth has lagged peers

Sales growth index (2006 = 100)

0

50

100

150

200

250

300

2006 2007 2008 2009 2010 2011 2012 2013 2014

RLGY RMAX* JLL BGCP

CBG MMI* HF

* RMAX and MMI data begins in 2010 at which point their sales index is set equal to RLGY at 63

Yet, RLGY is overpriced relative to its peers!

Source: Factset 43

Realogy: Has had weaker and more volatile EBITDA margins

RLGY EBITDA margins have been more volatile than closest peers

EBITDA Margins (2006-2013)

Yet, RLGY is overpriced relative to its peers!

Source: Factset

-40%

-30%

-20%

-10%

0%

10%

20%

30%

2006 2007 2008 2009 2010 2011 2012 2013

RLGY

JLL

CBG

44

Short Thesis: Comp Based Valuation

RLGY is at a trading at a significant premium to peers

LTM

TEV/EBITDA LTM

TEV/REV Forward

TEV/EBITDA

High 19.9x 3.2x 10.95x

Low 3.7x 1.3x 2.88x

Mean 12.3x 1.9x 9.07x

Median 11.9x 1.5x 10.54x

RLGY 14.2x 1.9x 12.24x

Median Implied Price Per Share for RLGY

30.8 27.0 33.2

% Downside 28% 37% 22%

Peers include: BGC Partners (BGCP), Jones Lang Lasalle Inc (JLL), CBRE Group (CBG), Marcus and Millichap (MMI), HFF (HF), RE/MAX (RMAX)

Based on comparables, RLGY is overvalued by 22%-37%

Source: Capital IQ, FactSet 11/17

Methodology

• We calculated what RLGYs enterprise value would be based on peer valuations (used median to reduce effect of outliers)

• Calculated implied equity value by adjusting for minority interest, cash, and debt

• Then we calculated Price Per Share

45

Company Price Mkt Cap EV FY 14E FY 15E FY 14E FY 15E FY 14E FY 15E FY 14E FY 15E

$ $M $M $M $M $ $ x x x x

RLGY 42.97 6,284 10,264 5,356 5,788 1.03 1.79 1.92 1.77 41.7 24.0

JLL 140.17 6,283 7,020 5,389 5,777 8.04 8.79 1.30 1.22 17.4 15.9

CBG 32.40 10,785 13,016 8,829 9,712 1.69 1.93 1.47 1.34 19.2 16.8

Sales EPS EV/Sales P/E

Short Thesis: History of surprising on the negative side

Source: Bloomberg

Revisions in consensus Adjusted EPS expectations for FY 14 & FY 15

Revisions in consensus Sales expectations for FY 14 & FY 15

As RLGY has consistently missed sales and earnings expectations. There have been significant revisions by research analysts on the downside: • Expected EPS for FY 14 has

been downgraded from $2.60 in Nov 2013 to $1.03 in Nov 2014

• Expected EPS for FY 15 has been downgraded from $3.50 in Nov 2013 to $1.80 in Nov 2014

• Expected Sales for FY 14 have been downgraded from $5,700M and to $5,350M and FY 15 expected Sales have been downgraded from $6,325M to $5,780M over the past one year

RLGY has consistently missed; our estimates are more conservative

46

Source: Credit Suisse

There has been recent weakness in demand in California (28% of owned brokerage revenue) and North-East (34% of owned brokerage revenue)

Short Thesis: Weakness in key markets will impact revenue

We expect declines in key markets to continue, reducing future revenue

47

Short Thesis: Sales agents drive business, not the company

Source: Company presentation, National Association of Realtors 2013 Profile of Home Buyers and Sellers

Referrals46%

Past Client12%

Open House or Prospecting

9%

Yard Signs6%

Internet9%

Walk-ins7%

Offline Ads1%

Other10%

FACTORS DRIVING BUYERS CHOICE OF SALES AGENT

Referrals42%

Past Client24%

Open House or Prospecting

8%

Yard Signs3%

Internet4%

Walk-ins5%

Offline Ads4%

Other10%

FACTORS DRIVING SELLERS CHOICE OF SALES AGENT

Firm specific factors account for only 17% of Buyer choice of sales agents

Firm specific factors account for only 13% of Seller choice of sales agents

We predict sales agent bargaining power will reduce RLGY’s margins

This gives bargaining power to sales agents,

who can drive up commissions,

reducing RLGY’s margins

48

Short Thesis: Margins will remain under pressure

Source: [ Company Filings ]

We expect commissions paid to sales agents to continue rising

• Rising contribution by top 250 franchises brokerages has increased franchisee bargaining power which has resulted in decreasing royalty rates and revenue to RFG segment

• NRT segment has been paying higher coming to sales agents which has been putting pressure on margins

5.0

3% 5.1

2%

5.1

0%

5.0

0%

4.8

4%

4.6

3%

4.4

9%

2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2 2 0 1 3

NET EFFECTIVE ROYALTY RATE TO RFG

45

% 47

% 48

% 50

%

54

%

57

%

60

%

2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2 2 0 1 3

REVENUE CONTRIBUTION TO RFG SEGMENT BY TOP 250 FRANCHISEES

69

.8%

69

.6%

68

.9%

70

.1%

71

.3%

72

.4%

72

.2%

2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2 2 0 1 3

NRT'S COMMISION TO SALES AGENTS

49

0.0

5.0

10.0

15.0

20.0

25.0

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Comp Group Average

RLGY EV/EBITDA

Short Thesis: Our free cash flow model summary

Substantial downside with limited upside potential

Historic RLGY TTM EV/EBITDA Multiple

LT avg: 12.2x

Baseline: $29.60 = 11.7x TTM EV/EBITDA

Bull case: $45.77= 15.4x TTM EV/EBITDA

Bear case: $17.79 = 9.3x TTM EV/EBITDA

Scenario Price Target Implied

Downside Implied

EV/EBITDA

Baseline $29.60 -31% 11.7x

Bull $45.77 +7% 15.4x

Bear $17.79 -59% 9.3x

• Baseline scenario results in implied EV/EBITDA near average of historic EV/EBITDA multiples for comparable companies

• The bull case results in an EV/EBITDA near high end of comparables history, a higher multiple would likely be unjustified by the historic range

• The bear case is a very conservative estimate of revenues and margins but would still put RLGY at an EV/EBITDA multiple within the historic range of comparables

50

Dec '15 Dec '16 Dec '17 Dec '18 Dec '19 Dec '20

Cash flow from operations 358.8 409.7 445.3 484.7 527.2 572.8

(+) Interest expense after tax 128.8 132.7 124.7 115.4 105.4 94.7

(-) Cash flow from Investing in PPE -99.7 -110.7 -122.9 -136.4 -151.4 -168.0

Free Cash Flow 387.9 431.8 447.1 463.7 481.3 499.4

Present Value of FCF 358.1 367.9 351.7 336.7 322.6 308.9


Terminal Value (10.5x 2020E EBITDA) 6,634 29.6 8.50 9.50 10.50 11.50 12.50


Less: current debt & minority interest (4,289) 7.33% $23.06 $27.56 $32.07 $36.57 $41.07

Plus: Cash 268.0 7.83% $22.02 $26.41 $30.81 $35.21 $39.61

Implied Equity value 4350.5 8.33% $21.00 $25.30 $29.60 $33.89 $38.19



Implied downside (current price = 42.97) -31.1% 9.83% $18.10 $22.12 $26.13 $30.14 $34.16

WACC = [WD * RD * (1-t)] + [WE * RE] 8.33% Terminal growth rate 10.50

WD 39.1% Current net debt/total capital

WE 60.9% Current equity/total capital

tax rate t 41.0% Management Guidance

RD 5.25% Latest offering of unsecured debt - Nov 14


B 1.3 beta to S&P 500 as of 11/14/14


RE = RF + B*(RM-Rf) 11.70%

Price Target Terminal Growth Rate

WACC

Cost of Capital Terminal EV/EBITDA (fwd) multiple

Short Thesis: Our free cash flow model

Base Case: Incorporates revenue and margin estimates

Key assumptions:

• Transaction volume and pricing projected to grow at 3%, per Freddie Mac estimates

• Revenue roughly 2.3% below street estimates for 2015

• Gross margin improvement less optimistic than the street

51





Free Cash Flow 371.3 382.8 394.2 397.4 400.5 403.3






Plus: Cash 268.0 7.83% $11.98 $15.36 $18.74 $22.12 $25.50




Implied downside (current price = 42.97) -58.6% 9.83% $8.91 $11.99 $15.08 $18.16 $21.25







B 1.3 beta to S&P 500 as of 11/14/14


RE = RF + B*(RM-Rf) 11.70%


WACC



Bear Case: Less optimistic revenue assumptions, margins reduced

Key assumptions:

• Sales increases and revenue increases move from 3% to 1% over 3 years resulting in ~2% revenue growth over time

• COGS margin increases to 78.5%, which is close to historic average

52





Free Cash Flow 390.2 433.6 473.7 518.2 592.1 651.3






Plus: Cash 268.0 7.83% $35.60 $41.48 $47.36 $53.25 $59.13











B 1.3 beta to S&P 500 as of 11/14/14


RE = RF + B*(RM-Rf) 11.70%


WACC



Bull Case: Aggressive revenue increases

Key assumptions:

• Sales increases and revenue increases move from 3% to 6% over 3 years resulting in ~11% revenue growth over time

• COGS margin decrease to 76.0%, which is a little below the historic average

53

Short Thesis: Catalysts

In addition to long term undiscovered business value there are a number of shorter term potential catalysts that could hurt the share price: FY 2015 Earnings Miss • We believe that RLGY will miss earnings in 2015, which will negatively impact the stock price • We think that RLGY will miss due to slowing top line growth; sell side predicts 8% revenue growth, we predict

5.7% revenue growth. Additionally, we project net income margins of 3.1% ($173MM net income) compared to the streets 4.5% ($260MM net income).

Bararsani vs. Coldwell Banker Real Estate Brokerage • Class action suit underway debating whether employees are classified as employees or as independent

contractors (typically agents choose to be classified as contractors) • Bararsani claims that Realogy has falsely been labeling agents as contractors, when they should count as

employees according to California State Law • If ruled in Bararsani’s favor, the suit will have a material effect on Realogy business in California that could

potentially extend to other states. Any settlement could materially hurt Realogy’s delicate financial situation.

Debt Structure • Realogy has a significant debt load, with debt that needs to be refinanced in 2015. • Given that Realogy is rated Junk, any increasing of spreads for Junk bonds today could materially increase

Realogy’s interest expense

Increase in online brokerage business • Zillow and other online services have been gaining market share, putting pressure on RLGY RLGY has significant ownership by Hedge funds • The top five hedge fund holders own an aggregate 27% of RLGY’s float, any selling would put

pressure on the share price and benefit a short position

Shorter term catalysts also provide an upside

54

Risk Mitigant

Stronger than forecast growth in volume existing home sales and/or higher home prices (which results in higher commission revenue to RLGY)

We believe Freddie Mac’s estimates of 3% growth in transaction volume and home prices is reasonable, which results in a revenue CAGR of 5.3% for RLGY which is in line with it’s best 3 year period of sales growth from 2003-2005 when sales increased at 5.5% annually.

Resurgence in RLGY’s bargaining power versus franchisees resulting in a halt in trend of decreasing royalty rates to RLGY

Based on primary research we believe the decline in franchisee revenue will continue as franchisee’s can always go off on their own

Decrease in commissions rate paid to sales agents resulting in higher margins

We believe the decline in commission revenue is a structural trend as sales agents have the mentality of “working for the highest bidder”, RLGY loses 6% of its top talent every year.

Long Thesis: Risks and Mitigants

There are risks to the upside that could negatively impact a short position

Including all the above risks in our “Bull” scenario gives a price target of $45.77 or only 6.5% above the current price. We believe this is due to overly optimistic assumptions already baked

into RLGY’s price.

55

85% 84%

4% 7% 11% 9%

President and CEO Other NEOS

Long Term 'Phantom'Incentive Plan

Salary

Annual Bonus

Executive Compensation Breakdown

RLGY: Executive Compensation

Item Description

Annual Incentive

Based on EBITDA Target Levels (varies from 25% to 150% of base) weighted across business units

Salary Salary is reviewed with consideration of peers1 and incentive based pay

Long Term Incentives Phantom Plan

Plan created in 2011 when controlled by Apollo, a Private Equity Firm, based on successful management of debts, successful IPO, and other incentives over multiple years. Largely paid in stock.

60-70% of executive’s compensation is driven by long term growth

Source: SEC Filings

1International, Inc., Iron Mountain Incorporated, Burger King Worldwide, Inc., Jones Lang LaSalle Incorporated, CBRE Group, Inc., Marriott International, Inc., Darden Restaurants, Inc., Starwood Hotels & Resorts Worldwide, Inc., Dunkin' Brands Group, Inc., The Western Union Company, H&R Block, Inc., Wyndham Worldwide Corporation, Hertz Global Holdings, Inc. 56

Long POOL: Appendix

57

Long POOL: Appendix – Key Financials

Cash Flow Priorities

1. Fund operations (trucks, equipment, etc.)

2. Acquisitions, particularly where there is limited to no presence

3. Dividends

4. Share repurchases, particularly in this environment

5. Debt repurchases, particularly if net debt/TTM EBITDA exceeds 2-2.5

- POOL Corp President & CEO Manuel Perez de la Mesa, Q3 2014 Earnings Call


58

Long POOL: Appendix – Key Financials


59

Long POOL: Appendix – Comparables Summary

Comparable Description Rationale

Beacon Roofing Supply (BECN)

Beacon Roofing Supply, Inc., is a distributor of residential and non-residential roofing materials in the United States and Canada. The Company also distributes other complementary building materials, including siding, windows, specialty lumber products and waterproofing systems for residential and nonresidential building exteriors.

Recurring distribution business that has a slightly cyclical component, similar to the pool maintenance market

LKQ Corporation (LKQ)

LKQ Corporation (LKQ) provides replacement parts, components and systems needed to repair vehicles (cars and trucks). The Company operates in four segments: Wholesale-North America, Wholesale-Europe, Self Service and Heavy-Duty Truck.


Watsco (WSO) Watsco, Inc.( Watsco) is the distributor of air conditioning, heating and refrigeration equipment and related parts and supplies (HVAC/R) in the HVAC/R distribution industry.

Recurring distribution business, POOL CEO was VP distribution at Watsco prior to joining POOL

KB Home (KBH)

KB Home is a builder of single-family residential homes, townhomes and condominiums. It constructs and sells homes through its operating divisions under the name KB Home. It operates homebuilding and financial services business serving homebuyers in various markets across the United States.

Highly cyclical business that is highly correlated to new pool construction, particularly in the warmer states

MarineMax (HZO)

MarineMax, Inc. is a recreational boat dealer in the United States. The Company sells new and used recreational boats, including pleasure and fishing boats. It also sells related marine products, including engines, trailers, parts, and accessories. In addition, the Company provides repair, maintenance, and slip and storage services.

Cyclical business that operating in a discretionary the leisure and luxury boat market which is similar to the new pool market

Lennar (LEN)

Lennar Corporation is a homebuilder and a provider of financial services and through its Rialto Investments (Rialto) segment. The Company's homebuilding operations include the construction and sale of single-family attached and detached homes, as well as the purchase, development and sale of residential land directly and through unconsolidated entities in which it has investments.

Highly cyclical business that is highly correlated to new pool construction, particularly in the states POOL operates in

Applied Industrial Technologies (AIT)

Applied Industrial Technologies, Inc. (Applied) is an industrial distributor in North America, supplying customers in a range of industries with products, including bearings, power transmission components, fluid power components and systems, industrial rubber products, linear motion components, tools, safety products, and general maintenance and mill supply products.


Source: SEC Filings

60

Long POOL: Appendix – US Swimming Pool Market Research

Total Contract Value – New Pools Service Firms – Change In Business Conditions (Survey)

Installed In-Ground Pool Base Pool Retailers view of Top Threats

Source: PK Data

61

Long POOL: Appendix – US Swimming Pool Market Research

Installed In-Ground Pool Installed Based Installed In-Ground Sales by State

Source: PK Data

62

200+ participants

Do you own an in-ground pool? Thought about refurbishing pool in last year?

Have you though about adding pool in last year? More likely to move to place with pool this year?

63

Long POOL: Appendix – Proprietary Survey Selected Results

25.0%

75.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

Yes No

25.0%

75.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

Yes No

25.0%

75.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

Yes No

25.0%

75.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

Yes No

Long POOL: Appendix – Pro Forma Income Statement

Assumptions Rationale

Sales: See revenue model page in the presentation

Gross Margins:

Depreciation (as % of prior year gross PPE): 13% Historical average

Amortization: 0.00 Negligable intangbile assets

SG&A growth as a % of sales growth 60.0%

SG&A initial as % of sales 20.0% Most recent

SG&A annual % improvemetn 1.00% Results in SG&A growth ~50% of sales growth in 2015, which is managements target

SG&A annual % improvement decay rate 0.90 We believe SG&A growth that is 50% of sales growth is unsustainable, thus decay the ratio so long term SG&A and sales have equal growth rates

Interest expense as % of LT debt 3.0% 3 year historical average

Income tax rate 39.4% 5yr average

<-- Historical Projected -->

Dec '11 Dec '12 Dec '13 Dec '14 Dec '15 Dec '16 Dec '17 Dec '18 Dec '19 Dec '20 Dec '21 Dec '22 Dec '23 Dec '24

Income Statement

Sales 1,793.32 1,953.97 2,079.70 2,236.48 2,435.53 2,630.37 2,846.06 3,085.13 3,316.52 3,535.41 3,736.92 3,916.30 4,080.78 4,252.17

Cost of Goods Sold (COGS) incl. D&A 1,261.73 1,386.57 1,488.42 1,598.34 1,748.71 1,899.13 2,066.24 2,227.46 2,381.26 2,538.42 2,683.11 2,811.90 2,930.00 3,053.06

COGS excluding D&A 1,250.42 1,373.69 1,473.83 1,581.65 1,726.21 1,873.18 2,036.31 2,192.94 2,341.57 2,492.98 2,631.27 2,752.99 2,864.17 2,979.75

Depreciation & Amortization Expense 11.31 12.88 14.60 16.68 22.50 25.95 29.93 34.53 39.69 45.45 51.84 58.92 65.83 73.31

Depreciation 9.75 11.59 13.36 15.61 22.50 25.95 29.93 34.53 39.69 45.45 51.84 58.92 65.83 73.31

Amortization of Intangibles 1.56 1.28 1.24 1.08 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Gross Income 531.59 567.41 591.28 638.1 686.8 731.2 779.8 857.7 935.3 997.0 1,053.8 1,104.4 1,150.8 1,199.1

SG&A Expense 404.92 415.59 425.79 446.74 465.19 483.46 506.97 536.06 565.38 594.35 622.27 648.39 673.87 702.17

EBIT (Operating Income) 126.67 151.82 165.49 191.4 221.6 247.8 272.9 321.6 369.9 402.6 431.5 456.0 476.9 496.9

Nonoperating Income - Net 0.00 0.00 -0.20 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Interest Expense 7.96 6.47 6.55 7.59 7.69 7.85 8.00 8.16 8.33 8.49 8.66 8.83 9.01 9.19

Unusual Expense - Net 1.60 6.95 -- 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Pretax Income 117.10 138.40 158.74 183.8 213.9 239.9 264.9 313.4 361.5 394.1 422.9 447.2 467.9 487.8

Income Taxes 45.32 56.74 61.59 71.07 84.29 94.53 104.35 123.50 142.45 155.29 166.62 176.18 184.35 192.17

Equity in Earnings of Affil iates 0.21 0.32 0.18 0.21 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Consolidated Net Income 71.99 81.97 97.33 112.95 129.65 145.40 160.50 189.95 219.10 238.85 256.27 270.98 283.55 295.58

Minority Interest 0.00 0.00 0.00 0.12 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Net Income 71.99 81.97 97.33 112.83 129.65 145.40 160.50 189.95 219.10 238.85 256.27 270.98 283.55 295.58

EBIT 126.67 151.82 165.49 191.40 221.63 247.78 272.85 321.61 369.87 402.63 431.54 456.00 476.91 496.94

Depreciation & Amortization Expense 11.31 12.88 14.60 16.68 22.50 25.95 29.93 34.53 39.69 45.45 51.84 58.92 65.83 73.31

EBITDA 137.97 164.69 180.08 208.09 244.14 273.73 302.79 356.13 409.56 448.08 483.39 514.92 542.74 570.25

Contract by 40bps/year for 4 years as product mix switches to lower margin products after which margins expand to average of 28% pre-crisis as consumers spend less on

discretionary (and/or POOL gets favorable distribution pricing on the discretionary products)

64

Long POOL: Appendix – Pro Forma Balance Sheet


Initial fixed asset turnover 40.00 Most recent value

Fixed asset turnover decay rate 0.95 Historical average decline rate (operating leverage)

Terminal fixed asset turnover 25.00 Estimated minimum

Increase in accum dep as % of prior year gross PPE 10% Historical average

A/R turnover 16.00 5yr historical average

Inventory turnover 5.25 Pre-crisis average (assumes immediate change from 4.85)

Change in other current, prepaid exp, misc current, other curr l iab, def tax l iab 0.0% No assumed change from 2013 (volatile numbers that are relatively small)

Goodwill growth rate (acquisition) 1.0% 5 yr historical average (excl 2012 writedown)

other intangible & tangible asset growth rate, LT debt level, other l iab 2.0% Estimate (inflation)

Deferred Tax asset, ST debt level, inc tax payable 0.00 current value

Accounts Payable Turnover 7.00 4 year historical avg (which has been stable)



Assets

Cash 17.49 12.46 8.01 30.24 34.32 42.90 55.98 81.64 126.91 186.55 257.57 338.19 431.28 527.83

Accounts Receivables, Net 110.56 113.86 125.29 139.78 152.22 164.40 177.88 192.82 207.28 220.96 233.56 244.77 255.05 265.76

Inventories 386.92 400.31 429.20 426.00 463.91 501.02 542.11 587.64 631.72 673.41 711.80 745.96 777.29 809.94

Other Current Assets 23.04 16.47 15.26 15.26 15.26 15.26 15.26 15.26 15.26 15.26 15.26 15.26 15.26 15.26

Total Current Assets 538.00 543.10 577.75 611.28 665.71 723.58 791.23 877.36 981.16 1,096.18 1,218.18 1,344.18 1,478.88 1,618.79

Net Property, Plant & Equipment 41.39 46.57 52.33 58.85 67.47 76.70 87.36 99.68 112.79 126.57 140.82 155.35 163.23 170.09

Property, Plant & Equipment - Gross 101.28 114.82 130.00 149.53 173.09 199.63 230.26 265.60 305.28 349.58 398.79 453.20 506.40 563.90

Accumulated Depreciation 59.88 68.26 77.67 90.67 105.63 122.94 142.90 165.93 192.49 223.01 257.97 297.85 343.17 393.81

Total Investments and Advances 0.98 1.16 1.24 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Intangible Assets 188.84 181.04 182.17 184.09 186.02 186.23 186.45 186.67 186.90 187.13 187.36 187.60 187.84 188.09

Net Goodwill 177.10 169.98 171.97 173.69 175.41 175.41 175.41 175.41 175.41 175.41 175.41 175.41 175.41 175.41

Net Other Intangibles 11.74 11.05 10.20 10.40 10.61 10.82 11.04 11.26 11.48 11.71 11.95 12.19 12.43 12.68

Deferred Tax assets 22.46 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Other Assets 6.95 8.72 10.27 10.48 10.69 10.90 11.12 11.34 11.57 11.80 12.03 12.27 12.52 12.77

Total Assets 798.62 780.58 823.76 864.7 929.9 997.4 1,076.2 1,175.0 1,292.4 1,421.7 1,558.4 1,699.4 1,842.5 1,989.7

Liabilities & Shareholders' Equity

ST Debt & Curr. Portion LT Debt 0.02 0.02 0.01 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Accounts Payable 177.44 199.79 214.60 227.88 255.23 276.61 301.05 324.71 346.48 368.59 388.79 406.58 423.05 440.82

Income Tax Payable 2.98 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Other Current Liabilities 50.42 48.19 49.30 49.30 49.30 49.30 49.30 49.30 49.30 49.30 49.30 49.30 49.30 49.30

Total Current Liabilities 230.86 248.00 263.91 277.18 304.53 325.91 350.35 374.02 395.78 417.89 438.09 455.88 472.35 490.12

Long-Term Debt 247.30 230.88 246.42 251.35 256.37 261.50 266.73 272.07 277.51 283.06 288.72 294.49 300.38 306.39

Deferred Tax Liabilities 32.99 13.45 19.11 19.11 19.11 19.11 19.11 19.11 19.11 19.11 19.11 19.11 19.11 19.11

Other Liabilities 7.73 6.62 8.15 8.31 8.48 8.65 8.82 8.99 9.17 9.36 9.55 9.74 9.93 10.13

Total Liabilities 518.88 498.95 537.58 555.94 588.49 615.16 645.00 674.18 701.57 729.41 755.46 779.22 801.77 825.74

Total Shareholders' Equity 279.75 281.62 286.18 308.76 341.40 382.25 431.15 500.86 590.85 692.26 802.93 920.18 1,040.71 1,163.99

Total Liabilities & Shareholders' Equity 798.62 780.58 823.76 864.7 929.9 997.4 1,076.2 1,175.0 1,292.4 1,421.7 1,558.4 1,699.4 1,842.5 1,989.7

65

Long POOL: Appendix – Pro Forma Cash Flow Statement


Deferred Taxes, other funds, other accuals 0.00 Small amounts and volatile

Acquisitions as percent of increase in assets 14.3% Over last 4 years acquisitions accounted for about 14% of sales growth, we assume 14% of the working capital growth is also due to acquisition

Cash dividend payment growth rate 7.0% 10 year compound annual average

2015 Cash used for share repurchases -50.00 10 year average

Share repurchase growth rate 5.0% Conservative estimate based on management desire to buyback more shares



Operating Activities

Net Income / Starting Line 71.99 81.97 97.33 112.83 123.01 132.49 141.64 165.41 189.43 204.69 218.36 230.12 240.43 250.65

Depreciation, Depletion & Amortization 11.31 12.88 14.60 16.68 22.50 25.95 29.93 34.53 39.69 45.45 51.84 58.92 65.83 73.31

Depreciation and Depletion 9.75 11.59 13.36 15.61 22.50 25.95 29.93 34.53 39.69 45.45 51.84 58.92 65.83 73.31

Amortization of Intangible Assets 1.56 1.28 1.24 1.08 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Deferred Taxes & Investment Tax Credit 2.61 3.17 0.71 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Other Funds 6.29 10.70 2.44 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Funds from Operations 92.20 108.72 115.07 129.51 145.51 158.44 171.57 199.94 229.11 250.14 270.20 289.04 306.27 323.96

Changes in Working Capital -17.09 10.36 -9.98 1.98 -23.00 -27.92 -30.12 -36.81 -36.77 -33.26 -30.78 -27.58 -25.14 -25.59

Receivables -5.89 -3.40 -10.09 -14.49 -12.44 -12.18 -13.48 -14.94 -14.46 -13.68 -12.59 -11.21 -10.28 -10.71

Inventories -35.34 -9.23 -27.29 3.20 -37.91 -37.11 -41.08 -45.54 -44.07 -41.69 -38.38 -34.17 -31.33 -32.65

Accounts Payable 6.40 20.25 14.01 13.28 27.36 21.37 24.44 23.67 21.76 22.11 20.20 17.80 16.47 17.77

Other Accruals 20.68 3.89 12.88 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Other Assets/Liabilities -2.95 -1.16 0.50 -0.01 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Net Operating Cash Flow 75.10 119.08 105.09 131.49 122.51 130.53 141.45 163.13 192.34 216.88 239.42 261.45 281.12 298.37

Investing Activities

Capital Expenditures (PP&E) -19.45 -16.27 -18.74 -23.21 -31.11 -35.18 -40.59 -46.85 -52.80 -59.22 -66.10 -73.44 -73.72 -80.16

Net Assets from Acquisitions -5.93 -4.70 -1.24 -4.79 -6.95 -6.65 -7.31 -9.24 -11.12 -12.16 -12.69 -12.89 -13.85 -14.37

Sale of Fixed Assets & Businesses 0.00 -- -- 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Purchase/Sale of Investments 0.00 -0.24 0.13 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Sale/Maturity of Investments 0.00 0.00 0.13 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Other Funds -0.19 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Net Investing Cash Flow -25.58 -21.21 -19.86 -28.00 -38.06 -41.84 -47.90 -56.09 -63.92 -71.38 -78.79 -86.33 -87.57 -94.53

Financing Activities

Cash Dividends Paid -26.47 -29.14 -33.81 -36.17 -38.71 -41.42 -44.32 -47.42 -50.74 -54.29 -58.09 -62.15 -66.51 -71.16

Repurchase of Common & Preferred Stk. -76.56 -81.76 -96.18 -50.00 -52.50 -55.13 -57.88 -60.78 -63.81 -67.00 -70.36 -73.87 -77.57 -81.44

Sale of Common & Preferred Stock 13.09 20.21 21.41 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Proceeds from Sale of Stock 0.00 20.21 21.41 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Proceeds from Stock Options 13.09 -- -- 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Issuance/Reduction of Debt, Net 46.78 -16.44 -36.47 4.92 5.03 5.13 5.23 5.33 5.44 5.55 5.66 5.77 5.89 6.01

Change in Current Debt 46.93 0.00 0.00 -0.01 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Change in Long-Term Debt -0.15 -16.44 -36.47 4.93 5.03 5.13 5.23 5.33 5.44 5.55 5.66 5.77 5.89 6.01

Other Funds 2.62 4.49 55.57 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Other Uses -0.50 0.00 -19.04 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Other Sources 3.12 4.49 74.61 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Net Financing Cash Flow -40.55 -102.64 -89.49 -81.26 -86.18 -91.41 -96.97 -102.86 -109.11 -115.74 -122.78 -130.25 -138.18 -146.60

Exchange Rate Effect -1.21 -0.25 -0.20 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Miscellaneous Funds 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Total Net Cash Flow 7.77 -5.02 -4.46 22.24 -1.73 -2.73 -3.42 4.19 19.31 29.75 37.85 44.87 55.37 57.24

Beginning Cash 9.72 17.49 12.46 8.01 30.24 28.51 25.79 22.37 26.56 45.87 75.62 113.47 158.34 213.71

Ending Cash 17.49 12.46 8.01 30.24 28.51 25.79 22.37 26.56 45.87 75.62 113.47 158.34 213.71 270.94

Net Change in Cash 7.77 -5.02 -4.46 22.24 -1.73 -2.73 -3.42 4.19 19.31 29.75 37.85 44.87 55.37 57.24

Free Cash Flow 55.65 102.81 86.35 111.60 91.27 93.15 99.06 113.92 135.35 151.68 166.41 180.68 199.98 209.92

66

Short Thesis: Appendix

67

RE/MAX

Holdings, Inc.

RE/MAX Holdings, Inc. operates as a franchisor for residential and commercial real estate brokerage

services in the United States and internationally. It operates in two segments, Real Estate Franchise

Services, and Brokerage..

BGC Partners,

Inc.

BGC Partners, Inc. operates as a brokerage company, primarily servicing the wholesale financial and

commercial real estate markets.

Jones Lang

LaSalle

Incorporated

Jones Lang LaSalle Incorporated, a financial and professional services company, provides

commercial real estate and investment management services worldwide.

CBRE Group,

Inc.

CBRE Group, Inc. operates as a commercial real estate services and investment company worldwide.

The company operates through Americas; Europe, Middle East and Africa; Asia Pacific; Global

Investment Management; and Development Services segments.

Marcus &

Millichap, Inc.

Marcus & Millichap, Inc., a brokerage firm, provides investment brokerage and financing services to

sellers and buyers of various types and sizes of commercial real estate assets in the United States

and Canada.

HFF, Inc. HFF, Inc. provides commercial real estate and capital market services to users and providers of

capital in the commercial real estate industry in the United States.

Short Thesis Appendix: Comp Based Valuation

We used a range of real estate companies for comparables

68

Short Thesis Appendix: Ownership by hedge funds

Source: [FactSet ]

Hedge Funds54%Mutual Funds

34%

Passive Funds12%

CATEGORIZATION OF TOP 10 HOLDERS BY STYLE

RLGY owned by shorter term hedge funds, selling would benefit a short

• Of the top 10 holders of RLGY, 54% are hedge funds which in aggregate own 27% of RLGY’s float

• Since hedge funds are shorter term in nature, selling would put pressure on the stock price and benefit a short position

69

Short RLGY: Appendix – Pro Forma Income Statement


Dec '06 Dec '07 Dec '08 Dec '09 Dec '10 Dec '11 Dec '12 Dec '13 Dec '14 Dec '15 Dec '16 Dec '17 Dec '18 Dec '19 Dec '20 CAGR

Income Statement

Sales 6,492 5,964 4,725 3,932 4,090 4,093 4,672 5,289 5,329 5,633 5,922 6,227 6,550 6,891 7,252 5.3%

Sales Growth % -8.1% -20.8% -16.8% 4.0% 0.1% 14.1% 13.2% 0.8% 5.7% 5.1% 5.2% 5.2% 5.2% 5.2%

Cost of Goods Sold (COGS) incl. D&A 5,217 5,343 4,085 3,293 3,356 3,388 3,804 4,238 4,333 4,551 4,756 4,998 5,257 5,534 5,827 5.1%

Gross Profit 1,275 621 640 639 734 705 868 1,051 996 1,082 1,166 1,230 1,293 1,357 1,425 6.1%

Gross Margin % 19.6% 10.4% 13.5% 16.3% 17.9% 17.2% 18.6% 19.9% 18.7% 19.2% 19.7% 19.7% 19.7% 19.7% 19.7%

SG&A Expense 625 569 443 411 417 439 517 526 533 563 592 623 655 689 725

EBIT (Operating Income) 650 52 197 228 317 266 351 524 464 519 574 607 638 668 700 7.1%

EBIT Margin % 10.0% 0.9% 4.2% 5.8% 7.8% 6.5% 7.5% 9.9% 8.7% 9.2% 9.7% 9.7% 9.7% 9.7% 9.7%

Nonoperating Income - Net 85 18 13 (3) (9) (2) 12 4 - - - - - - -

Interest Expense 57 538 627 560 585 635 512 283 218 225 211 196 179 160 141

Unusual Expense - Net 74 833 1,846 (1) (283) 62 414 70

Pretax Income 604 (1,301) (2,263) (334) 6 (433) (563) 175 245 294 363 411 459 508 559

Income Taxes 237 (462) (380) (50) 133 32 39 (242) 101 120 149 169 188 208 229

Tax Rate % 39.2% 35.5% 16.8% 15.0% 0.0% -7.4% -6.9% -138.3% 41.0% 41.0% 41.0% 41.0% 41.0% 41.0% 41.0%

Equity in Earnings of Affil iates - - (28) 24 30 26 62 26 7

Consolidated Net Income 367 (839) (1,911) (260) (97) (439) (540) 443 152 173 214 243 271 300 330

Minority Interest 2 2 1 2 2 2 3 5 3

Net Income 365 (841) (1,912) (262) (99) (441) (543) 438 149 173 214 243 271 300 330 14.2%

Net Income available to Common 365 (841) (1,912) (262) (99) (441) (543) 438 149 173 214 243 271 300 330

Net Income Margin % 5.6% -14.1% -40.5% -6.7% -2.4% -10.8% -11.6% 8.3% 2.8% 3.1% 3.6% 3.9% 4.1% 4.3% 4.6%

EPS (diluted, 147MM shares outstanding) n/a n/a n/a n/a n/a (2.20) (14.41) 2.99 1.01 1.18 1.46 1.65 1.84 2.04 2.25 14.2%

EBIT 650 52 197 228 317 266 351 524 464 519 574 607 638 668 700

Depreciation & Amortization Expense 142 539 219 194 197 186 173 176 176 186 196 203 214 228 243

EBITDA 792 591 416 422 514 452 524 700 640 704 770 810 851 896 943 6.7%

EBITDA Margin % 12.2% 9.9% 8.8% 10.7% 12.6% 11.0% 11.2% 13.2% 12.0% 12.5% 13.0% 13.0% 13.0% 13.0% 13.0%

70

Short RLGY: Appendix – Revenue model


Sales by Segment SummaryRE Franchise Services (RFG) 879 818 642 538 560 557 604 690 714 755 796 840 886 934 985 Owned RE Brokerage (NRT) 5,017 4,571 3,561 2,959 3,016 2,970 3,469 3,990 4,077 4,347 4,600 4,869 5,154 5,456 5,777 Relocation Services 509 522 451 320 405 423 423 419 423 427 432 436 440 445 449 Title & Settlement Services 405 372 322 328 325 359 421 467 402 410 418 426 435 443 452 Corporate & Other (318) (319) (251) (213) (216) (216) (245) (277) (286) (306) (324) (344) (365) (387) (411) Total Revenue 6,492 5,964 4,725 3,932 4,090 4,093 4,672 5,289 5,329 5,633 5,922 6,227 6,550 6,891 7,252 Growth % -8.1% -20.8% -16.8% 4.0% 0.1% 14.1% 13.2% 0.8% 5.7% 5.1% 5.2% 5.2% 5.2% 5.2%RE Franchise Services (RFG)Closed homesale sides - RFG 1,515,542 1,221,206 995,622 983,516 922,341 909,610 988,624 1,083,424 1,067,173 1,099,188 1,132,163 1,166,128 1,201,112 1,237,146 1,274,260 Average Homesale Price 231,664 230,346 214,271 190,406 198,076 198,268 213,575 233,011 246,992 254,401 262,033 269,894 277,991 286,331 294,921 Average Homesale Commission Rate 2.47% 2.49% 2.52% 2.55% 2.54% 2.55% 2.54% 2.54% 2.53% 2.53% 2.53% 2.53% 2.53% 2.53% 2.53%Franchise Royalty Rate 4.87% 5.03% 5.12% 5.10% 5.00% 4.84% 4.63% 4.49% 4.49% 4.45% 4.40% 4.36% 4.31% 4.27% 4.23%RFG Domestic Net Royalty Revenue 422 352 275 244 232 223 248 288 299 314 330 347 364 383 402 Royalty from Owned RE Brokerage / NRT 358 322 245 201 207 203 240 280 286 306 324 344 365 387 411 Effective Royalty Rate from NRT 7.50% 7.50% 7.50% 7.50% 7.50% 7.50% 7.50% 7.5% 7.50% 7.50% 7.50% 7.50% 7.50% 7.50% 7.50%RFG Other Revenue 99 143 122 93 121 131 115 122 128 135 142 149 156 164 172 Total RFG Revenue 879 818 642 538 560 557 604 690 714 755 796 840 886 934 985 Y/Y GrowthClosed homesale sides - RFG -19.4% -18.5% -1.2% -6.2% -1.4% 8.7% 9.6% -1.5% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%Average homesale price - RFG -0.6% -7.0% -11.1% 4.0% 0.1% 7.7% 9.1% 6.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%RFG Domestic Net Royalty Revenue 0.8% 1.2% 1.2% -0.4% 0.4% -0.4% 0.0% 4.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%NRT Domestic Royalty Revenue 3.3% 1.8% -0.4% -2.0% -3.2% -4.3% -3.0% 2.2% 6.9% 6.1% 6.1% 6.1% 6.1% 6.1%RFG Other Revenue 44.8% -15.3% -23.4% 30.2% 8.3% -12.1% 6.1% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%Total Real Estate Franchise Services Revenues -6.9% -21.5% -16.2% 4.1% -0.5% 8.4% 14.2% 3.4% 5.8% 5.5% 5.5% 5.5% 5.5% 5.5%Owned RE Brokerage (NRT)Closed homesale sides - NRT 390,222 325,719 275,090 273,817 255,287 254,522 289,409 316,640 311,890 321,247 330,885 340,811 351,035 361,566 372,413 Average homesale price - NRT 492,669 534,056 479,301 390,688 435,500 426,402 444,638 471,144 494,701 509,542 524,829 540,573 556,791 573,494 590,699 Average homesale broker commission rate - NRT 2.48% 2.47% 2.48% 2.51% 2.48% 2.50% 2.49% 2.50% 2.47% 2.49% 2.49% 2.49% 2.49% 2.49% 2.49%Side Related Gross Commission Income 4,768 4,297 3,270 2,685 2,757 2,709 3,204 3,730 3,811 4,076 4,324 4,587 4,867 5,163 5,478 NRT Other Revenue 249 274 291 274 259 261 265 260 266 271 276 282 288 293 299 Total Co, Owned RE Brokerage Services Revs 5,017 4,571 3,561 2,959 3,016 2,970 3,469 3,990 4,077 4,347 4,600 4,869 5,154 5,456 5,777 Y/Y GrowthClosed homesale sides - NRT -16.5% -15.5% -0.5% -6.8% -0.3% 13.7% 9.4% -1.5% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%Average homesale price - NRT 8.4% -10.3% -18.5% 11.5% -2.1% 4.3% 6.0% 5.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%Average homesale broker commission rate - NRT -0.4% 0.4% 1.2% -1.2% 0.7% -0.3% 0.4% 2.2% 0.8% 0.0% 0.0% 0.0% 0.0% 0.0%Side Related Gross Commission Income -9.9% -23.9% -17.9% 2.7% -1.7% 18.3% 16.4% 2.0% 6.9% 6.1% 6.1% 6.1% 6.1% 6.1%NRT Other Revenue 10.1% 6.1% -5.9% -5.5% 0.7% 1.6% -1.7% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%Total Co, Owned RE Brokerage Services Revs -8.9% -22.1% -16.9% 1.9% -1.5% 16.8% 15.0% 2.2% 6.6% 5.8% 5.8% 5.9% 5.9% 5.9%Cartus / Relocation ServicesRelocation Revenue 509 522 451 320 405 423 423 419 423 427 432 436 440 445 449Y/Y Growth % 2.6% -13.6% -29.0% 26.6% 4.4% 0.0% -0.9% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%Title & Settlement ServicesTRS Revenue 405 372 322 328 325 359 421 467 402 410 418 426 435 443 452Y/Y Growth % -8.1% -13.4% 1.9% -0.9% 10.5% 17.3% 10.9% -14.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%COGS DriversCOGA (excl D&A) 5,075 4,804 3,866 3,099 3,159 3,202 3,631 4,062 4,157 4,366 4,560 4,795 5,043 5,306 5,584 COGS Margin % 78.2% 80.5% 81.8% 78.8% 77.2% 78.2% 77.7% 76.8% 78.0% 77.5% 77.0% 77.0% 77.0% 77.0% 77.0%

Commission on NRT 3,509 3,189 2,478 2,039 2,113 2,118 2,511 2,879 2,874 3,130 3,312 3,506 3,711 3,929 4,159 as % of NRT Gross Commision Income 69.9% 69.8% 69.6% 68.9% 70.1% 71.3% 72.4% 72.2% 70.5% 72.0% 72.0% 72.0% 72.0% 72.0% 72.0%

Other COGS 1,566 1,615 1,388 1,060 1,046 1,084 1,120 1,183 1,283 1,236 1,248 1,289 1,332 1,378 1,425 Other COGS Margin % 24.1% 27.1% 29.4% 27.0% 25.6% 26.5% 24.0% 22.4% 24.1% 21.9% 21.1% 20.7% 20.3% 20.0% 19.6%

SG&A Expense 625 569 443 411 417 439 517 526 533 563 592 623 655 689 725 SG&A Margin % 9.6% 9.5% 9.4% 10.5% 10.2% 10.7% 11.1% 9.9% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%

71


Dec '06 Dec '07 Dec '08 Dec '09 Dec '10 Dec '11 Dec '12 Dec '13 Dec '14 Dec '15 Dec '16 Dec '17 Dec '18 Dec '19 Dec '20

AssetsCash & Short-Term Investments 399 173 448 268 205 150 385 250 268 268 268 268 268 268 268 Short-Term Receivables 1,240 1,258 987 517 585 498 446 391 530 530 530 530 530 530 530 Inventories 197 183 22 - 21 -- - - Other Current Assets -- -- -- -- -- 158 147 276 330 330 330 330 330 330 330 Total Current Assets -- -- -- -- -- 806 978 917 1,128 1,128 1,128 1,128 1,128 1,128 1,128 Net Property, Plant & Equipment 342 381 276 211 186 165 188 205 326 336 346 357 369 383 398 Total Investments and Advances - 122 30 45 48 54 73 57 Intangible Assets 3,748 8,673 6,827 6,738 6,730 6,627 6,064 5,994 6,045 5,950 5,855 5,764 5,674 5,584 5,494 Deferred Tax Assets 250 260 510 616 670 653 650 - Other Assets 2,328 565 344 262 275 158 142 153 231 231 231 231 231 231 231 Total Assets 6,668 11,432 9,422 8,657 8,699 8,463 8,095 7,326 7,730 7,645 7,560 7,480 7,402 7,326 7,251 Liabilities & Shareholders' EquityST Debt & Curr. Portion LT Debt 893 1,046 1,250 337 541 652 371 271 300 300 300 300 300 300 300 Accounts Payable -- -- -- -- -- 184 148 123 171 171 171 171 171 171 171 Other Current Liabilities -- -- -- -- -- 600 496 517 471 471 471 471 471 471 471 Total Current Liabilities -- -- -- -- -- 1,436 1,015 911 942 942 942 942 942 942 942 Long-Term Debt 1,800 6,207 6,213 6,674 6,698 6,825 4,256 3,886 3,985 3,726 3,427 3,104 2,756 2,380 1,975 Provision for Risks & Charges - 17 46 49 101 70 70 42 Deferred Tax Liabilities -- 1,509 1,336 1,376 1,553 1,543 1,094 337 405 405 405 405 405 405 405 Other Liabilities 2,385 2,499 2,569 1,539 1,419 97 141 137 207 207 207 207 207 207 207 Total Liabilities 4,185 10,232 10,164 9,638 9,771 9,971 6,576 5,313 5,539 5,280 4,981 4,658 4,310 3,934 3,529 Total Shareholders' Equity 2,483 1,200 (742) (983) (1,074) (1,510) 1,516 2,010 2,188 2,361 2,575 2,818 3,088 3,388 3,718 Accumulated Minority Interest - - - 2 2 2 3 3 4 4 4 4 4 4 4 Total Equity 2,483 1,200 (742) (981) (1,072) (1,508) 1,519 2,013 2,192 2,365 2,579 2,822 3,092 3,392 3,722 Total Liabilities & Shareholders' Equity 6,668 11,432 9,422 8,657 8,699 8,463 8,095 7,326 7,730 7,645 7,560 7,480 7,402 7,326 7,251

Depreciation WorkingGross PP&E 763 463 463 466 500 535 592 627 906 1,006 1,117 1,240 1,376 1,527 1,695 Depreciation 105 118 122 99 86 74 65 67 69 91 101 112 124 138 153 Rate % 15.5% 26.3% 21.4% 18.5% 14.8% 12.1% 11.3% 11.0% 10.0% 10.0% 10.0% 10.0% 10.0% 10.0%Amortization WorkingAmortization 599 -35 -205 -160 254 -160 -30 472 107 95 95 91 90 90 90 Capex WorkingGross PP&E 763 463 463 466 500 535 592 627 906 1,006 1,117 1,240 1,376 1,527 1,695 Capex (300) 0 3 34 35 57 35 330 100 111 123 136 151 168 Rate % -39.3% 0.0% 0.6% 7.3% 7.0% 10.7% 5.9% 52.7% 11.0% 11.0% 11.0% 11.0% 11.0% 11.0%InterestDebt (short term + long term) 2,693 7,253 7,463 7,011 7,239 7,477 4,627 4,157 4,285 4,026 3,727 3,404 3,056 2,680 2,275 Interest 57 538 627 560 585 635 512 283 218 225 211 196 179 160 141 Interest Rate % 8.6% 7.5% 8.3% 8.8% 6.8% 6.1% 5.3% 5.3% 5.3% 5.3% 5.3% 5.3% 5.3%

Short RLGY: Appendix – Pro Forma Balance Sheet

72

Short RLGY: Appendix – Pro Forma Cash Flow Statement


Dec '06 Dec '07 Dec '08 Dec '09 Dec '10 Dec '11 Dec '12 Dec '13 Dec '14 Dec '15 Dec '16 Dec '17 Dec '18 Dec '19 Dec '20

Operating Activities

Net Income / Starting Line 365.0 (841.0) (1,912.0) (260.0) (97.0) (439.0) (540.0) 443.0 148.7 173.2 214.1 242.6 270.7 299.6 330.0

Depreciation, Depletion & Amortization 142.0 539.0 219.0 194.0 197.0 186.0 173.0 176.0 176.0 185.6 195.6 202.7 214.0 227.6 242.7

Deferred Taxes & Investment Tax Credit 102.0 (475.0) (380.0) (59.0) 131.0 18.0 36.0 (249.0) 11.0 - - - - - -

Other Funds (10.0) 742.0 1,868.0 (35.0) 23.0 75.0 301.0 102.0 72.0 - - - - - -

Changes in Working Capital (354.0) 251.0 314.0 501.0 (372.0) (32.0) (73.0) 20.0 (191.0) - - - - - -

Net Operating Cash Flow 245.0 216.0 109.0 341.0 (118.0) (192.0) (103.0) 492.0 216.7 358.8 409.7 445.3 484.7 527.2 572.8

Investing Activities

Capital Expenditures & Acquisitions (298.0) (6,919.0) (64.0) (45.0) (66.0) (55.0) (57.0) (94.0) (330.4) (99.7) (110.7) (122.9) (136.4) (151.4) (168.0)

Purchase/Sale of Investments - (14.0) 8.0 - - 5.0 (7.0) - -

Other Uses (12.0) (11.0) - (2.0) (9.0) (5.0) (2.0) (8.0) (8.0) - - - - - -

Other Sources - 51.0 26.0 - - 6.0 - - -

Net Investing Cash Flow (310.0) (6,893.0) (30.0) (47.0) (75.0) (49.0) (66.0) (102.0) (338.4) (99.7) (110.7) (122.9) (136.4) (151.4) (168.0)

Financing Activities

Change in Capital Stock (838.0) 35.0 - - - - 1,176.0 5.0 283.5

Issuance/Reduction of Debt, Net 1,921.0 4,402.0 225.0 (468.0) 137.0 198.0 (759.0) (504.0) (127.7) (259.1) (299.0) (322.4) (348.3) (375.9) (404.8)

Other Funds (656.0) 1,993.0 (26.0) (11.0) (13.0) (6.0) (16.0) (31.0) (16.0)

Net Financing Cash Flow 427.0 6,430.0 199.0 (479.0) 124.0 192.0 401.0 (530.0) 139.8 (259.1) (299.0) (322.4) (348.3) (375.9) (404.8)

Exchange Rate Effect 1.0 1.0 (1.0) 3.0 1.0 - 1.0 -

Net Change in Cash 363.0 (246.0) 277.0 (182.0) (68.0) (49.0) 233.0 (140.0) 18.0 - - (0.0) 0.0 - -

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Priyanshu Bakshi, CFA Tyler Burkett Nick Demko, CFAalphachallenge.org/wp-content/uploads/2018/06/... · Students: Priyanshu Bakshi, CFA Tyler Burkett Nick Demko, CFA . Recommendations