Bloomberg News

Berkshire Stakes Name on Realty Business Buffett Barely Noticed

January 07, 2014

Warren Buffett

While Buffett has invested for decades in companies with strong consumer brands -- from Geico to Dairy Queen -- few of his subsidiaries have adopted the name of his holding company. Photographer: Jeff Kowalsky/Bloomberg

Berkshire Hathaway Inc. (A:US)’s foray into the home-brokerage arena 14 years ago was almost an afterthought. Today, Warren Buffett’s company is staking its name on the business.

Signs are cropping up on front lawns from California to New Jersey bearing a new real estate franchise brand: Berkshire Hathaway HomeServices. The rollout is part of a strategy by the Omaha, Nebraska-based company to extend its reach as the U.S. housing market rebounds.

While Buffett has invested for decades in companies with strong consumer brands -- from Geico to Dairy Queen -- few of his subsidiaries have adopted the name of his holding company. The brokerage will test whether the “Berkshire” brand has broad appeal and can be used without tarnishing a reputation for financial strength and integrity.

“It’s always been used as an investment brand,” said Stefan Swanepoel, a consultant and author on real estate trends. “The question is: Can you position it as a consumer brand?”

Buffett’s track record building Berkshire from a failing textile maker in the mid-1960s through stock picks and takeovers into a $287 billion business has made him an investing legend. The company’s operations now span industries such as insurance, manufacturing, energy and retail.

Maintaining that reputation is a top concern for Ron Peltier, chief executive officer of Berkshire’s HomeServices of America unit, who’s responsible for the rollout. While the new brand could help brokers sell homes, the franchise network also allows thousands of new people to do business under the name that Buffett, 83, spent decades cultivating.

‘Innocent Strategy’

“It’s an innocent strategy until proven guilty,” said Jeff Matthews, a Berkshire shareholder and author of books about the company. “A bunch of bad actors could sully the brand.”

At a brokers’ open house last month, cabernet-and-white Berkshire Hathaway HomeServices signs ushered visitors into a four-bedroom home in Princeton, New Jersey, about a half-mile (0.8 kilometer) from Drumthwacket, the governor’s mansion.

Helen Sherman, the listing agent for the property, said after the event that the brand gives people confidence and a sense of stability. Catherine O’Connell, a sales associate, put it more succinctly: Buffett is “a big name drop,” she said, standing near a table set with pretzel chips, grapes and brie.

That kind of recognition is what Peltier had been seeking. In the past several years, he has spent almost $500 million on acquisitions, building the second-largest independent home real-estate brokerage businesses in the U.S.

Online Business

In 2012, he bought a majority stake in a venture that licensed the Prudential and Real Living brand names to more than 500 brokerages. That gave him an opportunity to create a national destination as more real estate shopping moves online.

“The market was in the early stages of correcting,” Peltier said in a phone interview. “We saw the franchise network available and we were in need of a great brand to build this national network.”

Such ambitions may have been lost on Buffett when he bought HomeServices in 2000. It was acquired as part of Berkshire’s buyout of MidAmerican Energy Holdings Co., an electric-and-gas utility.

Buffett has said he “barely noticed” the brokerage business at the time of the deal. Since then, however, he has championed growth at HomeServices. Operating profit for the business was $117 million in the first nine months of 2013, more than double a year earlier.

Housing Focus

Housing has long been a key area of investment for Buffett. Other Berkshire subsidiaries include brick, paint and carpet companies; Clayton Homes, a seller of manufactured and modular houses; and insulation maker Johns Manville. Berkshire also owns more than $20 billion in stock in Wells Fargo & Co. (WFC:US), the country’s largest mortgage lender.

Buffett hasn’t always been able to time the housing market. In February 2011, he forecast a rebound in a year or so -- a prediction he later called “dead wrong.”

Since then, housing has come back as dwindling inventory pushed up prices and spurred new construction. Buffett has often reiterated his commitment to investing in one of the main drivers of the U.S. economy.

At HomeServices, that’s meant takeovers. As larger competitor Realogy Holdings Corp. -- owner of brands including Century 21 and Coldwell Banker -- worked to service debt from its 2007 leveraged buyout by Apollo Global Management LLC, Peltier looked to buy. In the past two years, he purchased eight brokerages from Philadelphia to Seattle.

Adding Brokers

The deals helped the company’s agent force swell by more than 50 percent to about 22,000. Last year, HomeServices-owned brokerages participated in $55 billion worth of home sales, up from $42 billion in 2012.

Even with that growth, the industry could consolidate more, said Steve Murray, president of Real Trends Inc., a research and consulting firm. He estimates that the brokerages owned by HomeServices and NRT, the comparable business at Realogy, account for about 5 percent of closed transactions in the U.S. That’s given competitors solace as Peltier expands.

“Nobody’s worrying a whole lot,” said Murray, who has advised brokerages that sold to HomeServices. “We’re still such a fragmented industry.”

Realogy has been buying, too. It made four smaller, “tuck-in” acquisitions in the third quarter and added another brokerage in Northern California in October with $1.85 billion in annual sales volume.

Franchise Business

HomeServices still has room to grow in its franchise business. Re/Max Holdings Inc.’s network in the U.S. does more than twice the number of transactions as Peltier’s, according to Murray’s estimates.

Realogy CEO Richard Smith has said his approach to the business was affirmed by Peltier. HomeServices’s deals give the company a similar structure to Realogy, where one part owns brokerages and another licenses brands.

“It’s nice to see smart money trying to replicate what we’ve built over the past 20-some years,” Smith said on a November 2012 conference call.

Back in Princeton, BHHS Fox & Roach broker manager Gerri Grassi showed one way the culture in Omaha extended to her office. Shortly before the rebranding, she received a pamphlet with Buffett’s photo (A:US), exhorting workers to act ethically and report anything that might compromise the company’s reputation.

Whether that kind of message is a successful deterrent is an open question. Peltier said that not necessarily every franchise in the network will have access to the new brand. Eighteen had adopted it by the end of last year. Still, he said he sees a future for Berkshire Hathaway HomeServices beyond U.S. borders.

“We clearly see western Europe, we see Asia and we see South America” as places to expand, he said. “We will take this business to the key international markets.”

To contact the reporter on this story: Noah Buhayar in New York at nbuhayar@bloomberg.net

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net


Tim Cook's Reboot
LIMITED-TIME OFFER SUBSCRIBE NOW

Companies Mentioned

  • A
    (Agilent Technologies Inc)
    • $58.4 USD
    • -0.49
    • -0.84%
  • WFC
    (Wells Fargo & Co)
    • $53.24 USD
    • 0.73
    • 1.37%
Market data is delayed at least 15 minutes.
 
blog comments powered by Disqus