Alicia Swift - Realogy Holdings Corp. Richard A. Smith - Realogy Holdings Corp. Anthony E. Hull - Realogy Holdings Corp..

John Campbell - Stephens, Inc. Bose T. George - Keefe, Bruyette & Woods, Inc. Jason S. Deleeuw - Piper Jaffray & Co. Will Randow - Citigroup Global Markets, Inc. Anthony Paolone - JPMorgan Securities LLC David E. Ridley-Lane - Bank of America Merrill Lynch Ryan McKeveny - Zelman & Associates Kevin McVeigh - Deutsche Bank Securities, Inc. Brandon B.

Dobell - William Blair & Co. LLC Stephen Kim - Evercore ISI Anthony Trainor - Barclays Capital, Inc..

Good morning and welcome to the Realogy Holdings Corporation Full Year 2016 Earnings Conference Call via webcast. Today's call is being recorded and a written transcript will be made available in the Investor Information section of the company's website later today. A webcast replay will also be made available on the company's website.

At this time, I would like to turn the conference over to Realogy's Senior Vice President, Alicia Swift. Please go ahead, Alicia..

Thank you. Good morning and welcome to Realogy's full year 2016 earnings conference call. On the call with me today are Realogy's Chairman, CEO and President, Richard Smith; and Chief Financial Officer, Tony Hull.

As shown on slide 3 of the presentation, the company will be making statements about its future results and other forward-looking statements during this call. These statements are based on current expectations and the current economic environment.

Forward-looking statements and projections are inherently subject to significant economic, competitive, and other uncertainties and contingencies, many of which are beyond the control of management. Actual results may differ materially from those expressed or implied in the forward-looking statements.

For those who listen to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, February 24, and have not been updated subsequent to the initial earnings call.

Important assumptions and other important factors that could cause actual results to differ materially from those in the forward-looking statements are specified in our earnings release issued today as well as in our annual and quarterly SEC filings.

Also, certain non-GAAP financial measures will be discussed on this call, and per SEC rules, important information regarding these non-GAAP measures is included in our earnings press release. Now, I'll turn the call over to our Chairman, CEO and President, Richard Smith..

Thank you, Alicia, and good morning, everyone. Today, I'm going to highlight our important accomplishments in 2016 and provide you with an update on our strategic priorities for this year and beyond. So, turning to slide 4. In 2016, we achieved revenue of $5.8 billion and operating EBITDA of $770 million.

Our results continued to reflect the operating challenges of strong competition for sales agents and soft demand at the high end of the housing market for NRT. While we still have work to do, we are making good progress.

We continued to execute on our commitment to delivering value to shareholders, returning a total of $240 million through a combination of share repurchases and dividends as of yesterday. Thus far, we have repurchased 5% of our outstanding shares to date.

Based on the strong free cash flow characteristics of our business, our board has authorized a new share repurchase program of $300 million. This is in addition to the $61 million remaining under our existing $275 million share repurchase authorization which, as you know, we announced in February of last year.

Our strategic priorities are to continue strengthening our core businesses while further investing capital to drive future growth. We are confident that over the long-term, we are well-positioned to capitalize on favorable demand conditions and existing homesale volume growth. As we have previously indicated, U.S.

housing in 2016 was a tale of two markets, with the dividing line drawn between the lower and mid-priced home segments versus the high-end priced segment. Demand in entry and move-up levels continues to be healthy, and inventory continues to be low by historic standards.

By contrast, in higher priced markets in 2016, a pronounced gap developed between sellers' asking price and what buyers are willing to pay, leading to a softening of transaction volume and a growing inventory of unsold properties.

This presented some near-term challenges for Realogy during the year, particularly at NRT, because of its geographic concentration in the higher priced costal markets. And as we discussed over the last several quarters, it continues to be a very competitive market for productive agents.

As we look forward, we are focused on strengthening our core businesses, while making strategic investments to drive future growth. To that end, in the second half of 2016, we developed and launch new programs at NRT, designed to increase our recruitment of productive independent sales agents and to increase the productivity of its existing agents.

This new program is intended to complement NRT's existing agent retention and productivity initiatives. Peter Sobeck, our recently appointed Chief Recruiting Officer, and NRT management are executing on an aggressive campaign to increase our recruitment of productive independent sales agents and agent teams.

As a result of this new initiative, the program has recruited agents who generated about $120 million in revenue during the last 12 months or brokerage firms with which they were previously affiliated.

Based on the metrics we monitor to evaluate the effectiveness of these initiatives, we are seeing encouraging signs of improvement at NRT, specifically the stabilization of the first and second quartile agent retention rate which increased to 93%, an increase of 100 basis points through 2016.

And as indicated on prior calls, while our investments in these initiatives will result in near-term moderate pressure on margins, we anticipate that over the medium-term, this will be mitigated by revenue and earnings at NRT, as well as other Realogy business units that benefit directly from NRT's transaction volume.

To attract and retain the best talent in the industry, we are constantly evaluating and enhancing our agent value proposition. Earlier this year, we formalized plans for an integrated learning institute aimed at increasing sales agent, office manager and broker productivity.

This institute will offer customized learning opportunities to new and experienced sales agents, as well as brokerage managers, both at NRT and RFG. Last week, Realogy agreed to form a new mortgage origination joint venture with Guaranteed Rate, one of the largest independent retail mortgage companies in the United States.

Mortgage financing is a service that we have provided for more than 20 years, and we are delighted to embark on this new relationship that will enhance our NRT sales agent value proposition and strengthen our service offerings to our home buyers.

We believe Guaranteed Rate is the right strategic partner to help our Company Owned Brokerage business and its sales agents offer an innovative and streamlined mortgage process built on best-in-class technology.

As the franchisor, five of the most prominent brands in our industry, we are continually evaluating and enhancing our value proposition to both our franchisees and prospective franchisees. Our Zap technology platform is proving to be one of the strongest enhancements to our franchise value proposition.

By year-end 2016, RFG deployed our Zap technology platform to 1,500 franchisees, and we are well in our way to reaching the majority of our remaining franchisees this year. With respect to productivity gains related to Zap agents, who use the platform even moderately are outperforming our 4% existing homesales growth rate for 2016.

We are encouraged by these early results and look forward to reporting a relevant performance metrics later this year, when the platform is substantially deployed.

As a result of these and related efforts, RFG achieved a second straight year of strong franchise sales growth adding $378 million in new franchise and sales production gross commission income in 2016. Yesterday, we announced our leadership succession plans for RFG with the promotion of John Peyton to President and CEO, effective April of this year.

John joined RFG last October as President and Chief Operating Officer, and has brought a fresh perspective to our company, leveraging his tenure as a global branding leader in the hospitality industry.

During his nearly two decades with Starwood Hotels and Resorts Worldwide, where he most recently served as Chief Marketing Officer, he applied his expertise in global operations and brand building to drive innovation and build loyalty for the company's leading hotel brands.

We are confident that John is the right business leader to focus our efforts and execute our plans for continued strategic growth and innovation at RFG. Alex Perriello will now serve as – in a senior advisory capacity to the company his role as Chairman Emeritus of the Realogy Franchise Group.

Over the long-term, we maintain a positive view of the housing market. We believe that the housing recovery will continue as the demographics and characteristics of housing are compelling. The industry continues to benefit from attractive mortgage rates and healthy demand at the entry and move-up segments.

More importantly, we believe that the actions we are taking to improve our performance are on a very positive track. In 2017, we will continue to measure ourselves against our strategic objectives to improve our competitive position, optimize and streamline our business, and deploy our capital to the best and highest use to enhance shareholder value.

We're confident that as we continue to successfully execute our strategy, we are well-positioned to capitalize on the long-term strength of the housing market and of course with one primary objective, to create value for our shareholders. So, with that, I'll turn this call over to Tony.

Tony?.

Thanks, Richard. In 2016, Realogy generated strong free cash flow of $457 million or $14 million increase from full year 2015 and slightly above the guidance we gave in November.

We also reduced our run-rate annual corporate interest expense to $165 million in early 2017, pushed out the staging of the maturities on our debt to 2023, and increased our revolver capacity to $1.050 billion.

With strong cash flow generation and an optimized capital structure, we were able to commence a meaningful stock repurchase program in 2016 and commence paying dividend.

Our leverage at the end of the year was 3.8 times, and our goal remains to achieve a 3 times net debt-to-EBITDA leverage ratio, which we believe is the optimal long-term level to run the business based on our weighted average cost of capital and the cyclical nature of housing.

We continue to maintain a disciplined approach to capital allocation, balance between returning cash to shareholders, deleveraging and the ability to invest in strategic opportunities to drive growth. In 2016, we initiated a host of business optimization improvements targeted at savings across the organization.

In the end, we expect to realize approximately $70 million in annualized savings, of which about half is reflected in our 2016 results. We expect most of the remainder to be realized this year.

The initiatives include creating centers of excellence at both NRT and RFG, specifically at NRT, these actions were aimed at centralizing back office functions and enabling brokerage office managers to focus more on recruiting and retaining agents.

We also streamlined and consolidated a number of common functions across the organization to leverage our size and scale with the goal of achieving better customer service. With that backdrop, let's turn to slide 5 to review our full-year 2016 results in greater detail. Revenue of $5.8 billion, was up 2% compared to 2015.

Operating EBITDA was $770 million, a $1 million increase from the prior year, and at the high-end of the guidance range we gave in November. As a reminder, operating EBITDA is EBITDA before restructuring costs, early extinguishment of debt and former parent legacy items.

Adjusted basic earnings per share was $1.65, an increase of 9% over the prior year. Before the mark-to-market adjustments for our interest rate swaps, book interest expense decreased by $43 million to $168 million in 2016, as a result of a reduction in total outstanding indebtedness and a lower weighted average interest rate.

At year-end, our NOL, net operating loss was $1.3 billion, which we expect will allow us to continue to pay minimal cash taxes for 2018. Turning to slide 6 for a discussion of the drivers of our business.

Our overall homesale transaction volume growth was approximately 4% year-over-year, which was at the high-end of the guidance range of 3% to 4% that we provided in November. RFG's transaction volume increased by 6% with half of the increase coming from higher transaction side, and the remainder from greater average sales price.

NRT finished the year flat year-over-year on both sides and price, because of the macro high-end housing trends in some of its markets, as well as competitor pressures we experienced throughout the year, which Richard just reviewed, and that we are addressing it.

Average broker commission rate, ABCR at RFG was down 1-basis point to 2.50% and ABCR at NRT was flat at 2.46%. We are frequently asked about the resiliency of the average broker commission rate, the real estate transaction is complicated, inefficient from a price discovery and liquidity standpoint and highly emotional.

Human interaction and professional expertise is critical in a real estate transaction. As such, the ABCR has been remarkably strong and stable over time, and given the value the agents provide to their customers, we continue to believe that any decline will be limited to a few basis points per year.

We've added a slide in the appendix to show how steady this metric has been over time. The net effective royalty rate fluctuates by quarter at RFG on a quarter-on-quarter basis, but for the full year, this figure was 4.46%, down 2 basis points from 2015.

This is primarily due to the effect of the strength of our largest franchisees who earned larger volume rebates. Our aim is to maintain a relatively steady royalty rate on the franchisee portfolio.

NRT commission split increased 48 basis points in 2016, which is about 10 basis points higher than we expected during our last call, due to our ongoing campaign to more aggressively recruit and retain a select group of strong agents. The increase is the partial year impact of these efforts.

So, in 2017, aggregate splits will be higher than the 68.9% for the full year in 2016. Our current estimate for 2017 is that splits will be in the range of 69.5% to 70%.

While we expect this increase will put near-term pressure on NRT's margins, the benefit of these growth initiatives will be immediately realized in our achieved results due to the expected high resulting royalty revenue it will earn from NRT. Now, turning to slide 7, let's talk about performance by business unit for the year.

At RFG, revenue increased $26 million and was driven by a $19 million increase in domestic royalty revenue due to RFG's 6% increase in transaction volume. Excluding restructuring costs, RFG's operating EBITDA increased $25 million.

NRT revenue was flat in 2016 due to $109 million or 2.5% decrease in organic revenue that was offset by $109 million earned in revenues from acquisitions. Base revenues were negatively impacted by factors we discussed earlier, as well as inventory shortages in the mid and lower priced homes in many of the market served by NRT.

Excluding restructuring costs, NRT's operating EBITDA decreased $45 million, primarily due to the lower base revenue, I just mentioned, a net $14 million increase in commission expense, primarily driven by acquisitions.

The addition of $25 million of cost associated with acquisitions and a $6 million decrease in earnings from our mortgage joint venture. Getting more granular on NRT's revenue in 2016, total sales volume for transactions completed by NRT was down less than 1% from 2015.

In NRT's highest price segment, Sotheby's and Corcoran, total sales volume was down 7%. This decline was driven by softness at the high-end of the market.

Turning to our NRT Coldwell Banker operations in our Western region, which is heavily influenced by California, NRT experienced a 2% decline in sales volume, which was a combination of market share attrition and to a lesser degree high-end softness.

The Southeast, which is largely driven by Florida, saw a 2% reduction in sales volume in the same combination of factors. The NRT Coldwell Banker Midwest and Northeast regions saw a mid single-digit increases in sales volume. Cartus revenue decreased $10 million and operating EBITDA decreased $6 million in 2016.

The decline in revenue was due to fewer broker-to-broker referrals, the absence of a large group move, which occurred in 2015 and lower relocation referral volume. TRG's revenue increased $86 million and operating EBITDA increased $15 million in 2016.

Half of the operating EBITDA improvement was due to higher purchase refinancing and underwriting volume, and the remainder from its acquisitions of TitleOne and Independence Title.

Based on current market conditions, we expect a slowdown in refinance volume to be a headwind for TRG in 2017, but we should see overall growth in our Title and Settlement Services segment. Corporate expense in 2017 is expected to be approximately $22 million per quarter, compared to $18 million per quarter in 2016.

The 2016 quarterly corporate expense was lower than normal due to the company not achieving certain performance compensation goals during the year. In 2017, if performance goals are achieved, quarterly corporate expense is expected to be consistent with 2015 levels. As you are aware, since November, mortgage rates have increased about 75 basis points.

So far this year, however, we've not seen a discernible impact on homesales. While mortgage rate increases impact housing demand, overall home affordability remains at attractive levels relative to historical data, and based on industry forecast from NAR and others, 2017 homesale transaction volume is expected to increase between 5% and 7%.

Turning to slide 8, looking at our expectation for the first quarter of 2017, we forecast that Realogy's combined homesale transaction volume will increase in the range of 2% to 5% year-over-year, the sides contributing between 0% and 2% of that increase, and 2% to 3% of the increase coming from higher average sales price.

Broken down by business unit, we expect 4% to 6% transaction volume growth at RFG and 1% to 3% growth at NRT.

Despite higher revenue in the period, relative to last year, first quarter operating EBITDA is likely to be down year-over-year due to our actions at NRT, resulting in higher agent commission splits, and the impacts on operating costs of acquisitions completed after Q1 of last year, along with unfavorable comparisons at Cartus.

It is important to note that the first quarter results are not indicative of our full-year earnings, given that it is our smallest quarter in terms of revenue generation and transaction volume, against a fixed cost base that is spread ratably throughout the year.

On our next call, we'll have better visibility into the spring selling season, which will be reflected in our transaction volume guidance of the second quarter. Slide 9, provides guidance for specific cash flow items with low operating EBITDA for 2017.

In particular, corporate cash interest expense for the year is expected to be approximately $165 million, which incorporates the effect of lower interest costs due to our recent Term Loan B refinancing, and that our debt is approximately 85% protected against increases in LIBOR.

Capital expenditures for the year, our forecast to be between $90 million and $100 million. M&A investment is forecasted at approximately $75 million, which includes $25 million of expected earn-outs due in 2017 from prior year acquisitions.

In addition, once the mortgage JV transactions are complete, the company expects to realize approximately $30 million of net cash. In summary, in 2016, we continued to make progress on our key strategic initiatives and executed decisive actions to enhance our competitive position in the marketplace.

We also undertook a holistic and extensive review of our operations, implementing process improvements, while realizing significant savings. Ultimately, Realogy achieved important milestones as we return substantial capital to shareholders with the initiation of a share repurchase program and the establishment of a quarterly cash dividend.

With that, we will open up the lines for Q&A..

Your first question comes from John Campbell from Stephens. Please go ahead. Your line is open..

Hey, guys. Good morning, congrats on a great quarter..

Hey, John..

Good morning..

Just want to dig in a little bit on the retention efforts. I think you guys said 100 bps improvement in retention, and I think you might have said a mix between Tier 1 and Tier 2.

Can you kind of break that and give a little bit more color as to where you're seeing the better improvement across Tier 1 and Tier 2?.

Sure. It's literally across the board. I mean, as you know, Tier 1 and Tier 2, we call them quartile 1 and quartile 2, represent the lion's share of our revenue. So it was incumbent upon us to stabilize that group in its entirety, and we've done that fairly well. It continues to improve.

We don't think 100 basis points alone is the complete upside, we think there is a lot more there to be achieved. But again, our focus is on both the first quartile and second quartile..

Okay. And then we dug in a good deal on the – I guess some of the attrition that you guys have seen in some of the larger scale markets.

But can you help us kind of identify maybe what the run rate of attrition level (21:49) is going to be for 2017 versus kind of what you guys have already seen?.

I think, I would take our lead at 93% sort of range and we expect to improve that..

Okay. That's helpful.

And then, as you think about some M&A, it looks like you guys have done a handful, I guess, you had Climb from San Francisco, and then I saw the Del Mar acquisition you guys did, where you back in that market, but can you talk about kind of what you're expecting for the year, maybe to fill some of the holes or some of the attrition that you guys saw already?.

The size and scale of the company makes it very attractive to us to focus on tuck-in acquisitions. I would not expect that we're going to do anything sizable this year.

So, I think for your purposes, you should think about these very accretive, fairly small by comparison tuck-in acquisitions in the markets where we currently operate, a lot (22:54) they are very synergistic, very attractive and readily available. So the key is to be strategic in that regard and we are.

But I would not expect to see sizable acquisitions in 2017..

Okay. And then last one from me, it looks like January existing homesales were pretty good.

What have you guys seen thus far in February, is it kind of modestly up into the (23:17)?.

We very much appreciated what we heard from NAR, for January. And as you know, we're reluctant to say where we are now. Actually, February is not the month you should think about, when you think about the quarter. Most of the production occurs in March, most of their closings occur in March.

So, News at 11, as they say (23:41), but the NAR January data was very encouraging..

Okay. Excellent. Thanks again, guys..

Yes, sir..

Your next question comes from Bose George from KBW. Please go ahead..

Hey, good morning.

So, can you remind us of your target for leverage, and given the likely buybacks this year, do you see that number changing much from the 3.8 times at year end?.

Our goal is to get to 3 times leverage, even with returning capital to shareholders.

The timing of that is going to be depended on how much we do in terms of return on capital, how much debt we repay, and what our EBITDA growth looks like, which is obviously tough to predict all those things, but our goal is always to get to – has always been since the IPO to get to 3 times leverage.

The one thing that has definitely changed since the IPO is the interest coverage is much higher, because of all the refinancing we've been able to do, our interest coverage is much higher than we ever anticipated. So, although we could live with a higher leverage level, but our goal is still to get to 3 times..

Okay, it does make sense, thanks.

And then, Richard, just going back to the acquisition question, just a little more – can you give us color on trends there, are you seeing any increased competition in terms of acquisitions or pretty similar to what you've seen over the last year?.

This is Richard. No, it's fairly similar. I mean, we're very selective, as you know, we target markets that are attractive to us for a variety of reasons. We rarely enter a new market, where we have no presence, those are not as synergistic.

But listen, there's a wealth of opportunity, the key is to be strategic and selective and to buy them at our price, and we've been doing that for a longtime and we expect to continue doing that in 2017..

Okay. Great. Thanks..

Your next question comes from Jason Deleeuw from Piper Jaffray. Please go ahead..

Thank you, and good morning. Question with the commission splits expected to step up to 69.5% to 70%.

Just wondering, when can we see the volume growth at NRT improve? Is there any sense you can help us – you can give us on, when we think we're going to see kind of an inflection in the volume growth at NRT?.

Yeah. I mean, it really is going to depend on how the year shapes up, how volume for the year shapes up, so it's a little early to call that.

I do to the extent that we see the benefits of from the enhanced recruiting efforts and from better retention of the first and second quartile, I think we will immediately – as I said in the script, we will immediately see the benefits of that at RFG for the 6% that's paid over to, that is reflected in the RFG segment.

So for instance on the $120 million of production that Richard mentioned that we've gotten to-date on our enhanced recruiting program, there will be $7 million or $8 million of the benefit of that shown at RFG on the 6% of that gross number.

But whether it filters through to NRT in terms of margins and overall profitability improvement, it will depend on really the macro – what's going on in the macro, what's going on in the high-end, et cetera. So that's sort of out of our control, but I think we're well positioned to benefit immediately and you will see those results at RFG..

Got it.

And then, if you could just kind of breakout how much of the NRT performance versus the industry average right now is kind of the high-end market trends versus the agent retention? And then, last quarter you gave us high-end inventory days, if you could just kind of update us on some of the key metrics you're seeing on high-end homes, I think you have $2.5 million plus price point.

Just kind of any sense for our things really improving there, are there any metrics you can give us? It will be helpful..

The high-end inventory levels continue to be an issue. We pointed that out last year. The media routinely points that out this year.

It's too early to tell, certainly not in the first quarter, are you going to see much of a change in the high-end inventory, although I will say this, as the high – I mean, we don't think the high inventory levels are going to get worse. We think they get better and there're lot of reasons to believe that.

It has an outsized impact on NRT given its geographic concentration in the costal markets, which happened to be the highest price markets in the country, which would include Florida. So, we're watching it very carefully. We expected to improve over time, and again it has a pretty big impact on NRT's results.

I don't – it's too early now to say whether that $2.5 million price up inventory level is materially changing. So, once we get into the second quarter, which as you know, is beginning of our season, we'll have a better view of what's happening to the highest price markets..

I would just add to that that, the change we're saying and actually on the Wall Street Journal today, they highlight this, and this is more at the ultra high-end, not at the sort of everyday high-end. So you can see, one of the things that was slowing down the high-end last year was sellers not realizing that it was a buyer's market.

And I think, as it shows on the Wall Street Journal today, we're finally realizing that they're cutting their prices to be more realistic about the environment. So, I think that's probably the most positive thing that's starting to resonate within the high-end.

But, Jason just in terms of specific – for NRT at $2.5 million or above, for 2016, it was 17% of their volume and it was 19% in 2015. So that was kind of a high watermark. But we think – and on a quarterly basis it was only down one point. So in the fourth quarter of 2015, it was 18%. The fourth quarter of 2016, it was 17%.

So I think that it's narrowing. So we're feeling okay about the high-end, but it's still obviously with five years of inventory, it's still a buyer's market. So it's very different than the rest of the market..

Okay. Thank you very much..

Thanks..

Your next question comes from Will Randow from Citigroup. Please go ahead..

Hey, good morning, guys and thanks for taking my questions..

You're welcome..

Could you discuss some of the regional trends you are seeing, particularly in California, Florida and New York City, as well as whether you believe you're tracking, I'll call it in line from a share position, feeling like you're picking up a little bit overall and in those three markets in particular?.

Well, as I mentioned in the script, in terms of the high-end, which is Corcoran and Sotheby's that was obviously under pressure last year. Their volume was down 7%. For Corcoran, specifically they maintain a very – that was clearly market driven, they maintain a very strong market share, particularly in New York City and Long Island where they serve.

So, that's all about the high-end. Florida was soft last year for us from a Coldwell Banker standpoint, on the owned operations.

But, I think that was driven by a combination of attrition issues, which we're addressing and the high-end softness, and obviously the foreign buyer was sort of still shocked in 2016 by the dollar improvement that occurred at the end of 2015.

So, I think as that sort of – as that consumer gets used to where the dollar is, and we feel good that that will firm up the high-end there. And California is a combination of the two. But again, it's hard to predict where that's going – this early (32:04) in the year where that's going to go? But we're much better positioned than we were..

Thanks for that.

And then in terms of your guidance for 2% transaction volume growth for the first quarter 2017, I was hoping you provide a little bit more detail in terms of, you think with that level of growth you should see EBITDA flat or improve? And will that be the case for 2017 as well, if we get some level of transactional volume growth?.

You're talking about the first quarter guidance?.

Correct..

Yeah, again the first quarter is not going to be indicative of the year, we'll have much better visibility on that in May. So, it's really hard to speculate on that at this point..

But specifically, should we see EBITDA kind of flattish for the first quarter of 2017 with this type of transaction volume growth or improvement?.

Well, as we mentioned, we think revenue will be up, but there're some headwinds on expenses, so as I mentioned in the script, we think that first quarter EBITDA could be a little softer than last year..

Got it. Thanks..

But again, that's like very small percentage of our overall annual EBITDA, so it doesn't really move the needle..

I apologize, the implication for 2017, there is none is what you're saying?.

It'll be very difficult to extrapolate from the first quarter what the year is going to look like..

Okay. All right. Thanks, guys..

Yeah..

Your next question comes from Anthony Paolone from JPMorgan. Please go ahead..

Thanks. Good morning..

Good morning..

On the splits, the 69.5% to 70%, does that reflect like mostly having gone through and adjusted them already and just seeing the full year impact or is there still a lot to go in terms of working that through the system and the adjustments you all are making there?.

We've pretty much – I think we've pretty right-sized the commissions, and we are competitive in the markets that we serve. In terms of the recruiting efforts, that's going to put a little bit of pressure on splits, and that's built into that forecast..

Okay.

And then, in terms of just those recruiting initiatives, should we expect additional cost outside of the split impact, like whether it's in a marketing (34:29) or office cost or anything else you might be doing in 2017?.

No, I wouldn't view it that way. Hiring an agent and adding that agent to an office, there are de minimis with any incremental cost related to that, so. Our office space can be even more efficient than it is today. And so I wouldn't view it that way.

But then also I think that there is a start and finish to our recruiting efforts, this is going to continue. We're turning this company into a recruiting machine, and that's not going to stop. But Tony was right in his assessment of the splits and the impact on the year..

Okay. So, then outside of that, and just cost wise, I think there is like another $16 million left on your savings initiatives that I guess happen in 2017. And then is there anything else like on the learning offering that you are upping there. Just trying to understand....

No that....

...

(35:27) watching cost was?.

No, the learning is just a reprocessing or re-jiggering of what we have today. So the costs it will be – the money will be better spent than it was in the past..

Okay. Got it.

And then, Richard, with change in Washington, any items you are particularly watching as it relates to housing that we should be thinking about in the next 12 months?.

What I've learned anything recently is not to speculate about what may be happening in Washington D.C. That said, any change to the regulatory environment would be helpful to housing, we strongly support obviously the ones we pay attention to or generally Dodd-Frank related, but they also pertain to the governance of FHA, Fannie and Freddie.

But listen, well, we're actively involved and we look forward to a better regulatory environment for housing..

Okay. And then, last question, just more nuanced.

On interest expense, did something unwind or anything happened in the fourth quarter, if we just look at the prior three quarters reported interest expense versus the year, it would have seem to drop through?.

Yeah. The mark-to-market went way in our favor in the fourth quarter. So I think our net interest expense is like $5 million on the books.

But it was really the fact that 10-year treasury popped, whatever it was 50 basis points, 60 basis points caused the positive mark-to-market on our swap, so that reduced the interest expense on the GAAP savings (37:09), which is why we sort of negate those effects, when we show adjusted net income and that's why we do that, because we want to show without those fluctuations..

Got it. Okay. Thank you..

Your next question comes from David Ridley-Lane from Bank of America Merrill Lynch. Please go ahead..

Sure.

So, as you've gone through the process of adjusting commission splits market-by-market, and agent-by-agent, have you just moved to the current market rate for splits? And I guess it differently has market wide commission splits really increased about 200 basis points over the last two years?.

Yeah, I think it's not quite as black and white as that, it's much more nuanced, and it's based on local customs and practices, and it depends on what the broker offers.

I mean we offer a full service value proposition, whereas some of our competitors offer more à la carte pricing, so it's really what the agent is comfortable with and things they can be most productive, which program they can be most productive under. So, again, it's pretty nuanced in how it's managed by our 800 managers and senior management at NRT.

So, we're just very aware that we want to be competitive in the market and we want to encourage agents to take advantage of all that we offer, so they can be more productive..

Okay. And in the franchise segment, the $378 million of added gross commission income, I mean that's a pretty healthy increase overall, essentially most of your growth in the franchise segment is the hard work you're doing and adding franchisees.

If you look to 2017, would you expect the Zap rollout to start meaningfully increasing the underlying trends among your franchisees?.

We believe that has already begun. So it has proven to be a particularly attractive enhancement to prospective franchisees, and we expect that to continue. We believe it's a very important performance enhancement to our existing franchisees.

It's just little early to sort of look at those operating metrics in a public format, we're working hard to make sure that the metrics we follow will demonstrate the value that we have created through this platform.

So, as I indicated, sometime later this year, we're going to have a full set of metrics that we will start reporting on a public basis, but we're very encouraged by what we see right now and our franchisees are also very encouraged by what they are seeing..

All right. Thank you very much..

You're welcome..

Your next question comes from Ryan McKeveny from Zelman & Associates. Please go ahead..

Hi. Thank you and good morning. On the guidance, the RFG for 4% to 6% the slight deceleration from the 8% you did this quarter, and you mentioned you're not seeing much of an impact of rates thus far, which we're not seeing as well.

So, just curious, if you can give any color on the trends you're seeing there and maybe specifically the breakdown of what you're expecting for sides versus price within that piece of the business?.

Well, I think – forgetting RFG for a second, just looking at in our report (41:01), we were looking at this, we're analyzing this, and they were up 6%, the sides were up 6% in the January, actual sides were up 6% in January of 2017. We look back at what happened back in 2013 and 2014.

So, obviously, in 2013, rates went up about 100 basis points and turned out the January. 2014 was down like 5% on volume.

So, again, we're encouraged that because of overall favorable affordability metrics that the housing market is not being negatively impacted by higher mortgage rates this time around like it was back in 2013, and obviously 2014, which was a flat year for the industry.

But our guidance range is what we see today, based on our closes and our opens, and that's one factor.

The other thing is when you look back, we still had some TRID impact in the first quarter of 2016, which we don't have today, because there was a lot of catch up being played from stuff that didn't close in the fourth quarter because of TRID, over the last six weeks of the fourth quarter because of TRID.

So, I think those two things are impacting our volume range for RFG..

Got it. Thanks. And on the acquisition side, any breakdown you're thinking about between brokerage versus Title acquisitions? And it does seem like the kind of amount you've alluded to, the $75 million, it's a little below what you've been running at.

So, is that just a function of, Richard, what you are talking about or it's more tuck-ins and maybe less of the bigger guys out there? Any comments on that?.

Yeah. Nothing really enhances what I said previously. We'll continue to focus on tuck-in acquisitions where it makes sense. TRG has done a terrific job of acquiring very attractive companies.

They are really working hard to ensure that the acquisitions that have occurred up to this point are synergized, fully operating within the guidelines that we've established for that type of acquisition and they'll be very selective as well, but there is no particularly breakdown in that $75 million..

Okay. Thank you..

...between the two business units..

Got it. Thanks..

Yeah. You're welcome..

Your next question comes from Kevin McVeigh from Deutsche Bank. Please go ahead..

Great. Thank you.

Hey, is there any way to think about, on the higher end, as the shift in sentiment goes from kind of sellers to buyers kind of market, how quickly that price equilibrium should happen?.

This is a very nuanced discussion, and what's interesting and encouraging to us is that the buyers are there, but as Tony pointed out, it's a buyer's market. We know the sellers are there, given the inventory levels, it's just a disconnect between what the seller believe she needs and what the buyer believe she is willing to pay.

We do see, when they come together, the transactions are occurring. So, that's a good sign. The demand is there, but there is much discussion about the price. So, listen, over time that will – they'll figure that out and there will be a coming together of the price value proposition and we see that as an encouraging sign.

But we just don't know when it's actually going to break and become more robust..

Got it.

And kind of the market rally has that kind of spurred any demand as well?.

It's hard to say. Certainly, one would think that that's been helpful, and certainly is not a negative. It should be, by any standard, a positive..

Yeah. Definitely, (45:05) it helps confidence across the spectrum. So, it's not a bad – it's better than the alternative..

Yeah, for sure.

And then just real quick, on the buyback, the $300 million, any way to think about the cadence on that over the course of 2017?.

We're at a cadence of $60 million to $65 million a quarter..

Thank you..

You're welcome..

Your next question comes from Brandon Dobell from William Blair. Please go ahead..

Thanks. Focusing on NRT, the recruitment and retention efforts.

Any noticeable, I guess, gap between maybe people that are returning to one of the brands that you guys run versus people that have never been a part of NRT? I guess, I'm just trying to get a sense of how many people you're re-attracting versus recruiting kind of greenfield?.

It's a great question. The majority of the newly recruited agents through the NRT initiative are from independent brokers. They're literally from Richard Smith Realty (46:11) somewhere. Second to that would be competing brands, certainly not from our own brands.

So, just to be very straightforward, Volcker coming from independent brokers, that's a good sign. Then, the next level is from competing brands, and rarely does NRT recruit from our own franchisees, it's extremely rare..

Okay.

Is there any, I guess, regional concentration or kind of market type concentration where you're seeing more success or less success?.

No. The NRT program is, I won't call it ingenious, but it's very smart. We literally recruit individual agents we know, we know our production, we know how long she's been in the business, our access to data is terrific, so we use that to our advantage and it generally is across the board in every market..

Okay. And then just quick one on Cartus. I know it's been a little bit of a tough run here the last couple – three quarters.

How do you view the – I guess, the progress internally on getting that business to turn the corner, how should we think about the cadence of that for 2017?.

Well, Cartus earns about $100 million a year and is incredibly integral to the rest of the company in terms of feeding Title business to TRG, it's about 100,000 leads it feeds to the family at RFG and NRT. So, it's earning a lot of cash and EBITDA for us, at the same time is serving a very important purpose.

I think on a strategic basis, they've done a lot on the cost side, they've really done some reprocessing on cost that are going to be helpful over time. And I think they're starting to look at investments and technology that will make them a more compelling – competitive choice in the industry.

So, I think that will play out over the next several years. So, I think, a lot of potential there, but in the meantime, they're obviously serving a very critical purpose for the company..

And let me just add to Tony's comments. The Cartus lead generation, these are highly qualified real estate transaction leads that are generated to both NRT (48:39) company operations, and our franchisees are extremely important to the franchise community, very important to NRT. Now, that said, they have to be very good at relocation, which they are.

The corporate clients are tending to move fewer and fewer employees, we don't know if that's bottomed yet, but at some point it will. There are – the Affinity Program that Cartus is developing, that's one we've had for a number of years.

We're expanding it, that will increase the highly valued lead generation back to our franchisees as well as our NRT operation. So, as Tony points out, it consistently produced about $100 million in EBITDA, so it's good cash generator and it's a very important generator of incremental business to our franchisees and NRT..

Okay. And then final one for me.

With the new Guaranteed Rate agreement, how do we – I guess, more from a presentation accounting perspective, how is it going to look going forward relative to what you've presented historically with the PHH joint venture?.

Well, let me just emphasize one thing is, from the wind down of the PHH JV and reinvestment in the new JV, we expect to generate $30 million of net cash from that in 2017. So, that's very helpful for us. We can deploy that capital, obviously, to repurchase shares, et cetera. So, that's a great thing.

I think right now, it's a segment within – it's part of NRT's earnings, just the JV part of it, it's in their earnings. So, I don't – that could change in the future, but right now, I don't see that changing. I think 2017 is going to be a transition year.

This transition is going to take pretty much, it's going to be done region by region over the year, and it's going to take a while to execute. But we're highly confident that when the dust settles, it's going to be a great partnership for the next 10 years or longer, if we hit the milestones that are in our agreement.

So, we're really, really excited about being in business with Guaranteed Rate..

Okay. Great. Thank you..

You're welcome..

Your next question comes from Stephen Kim from Evercore ISI. Please go ahead. Mr.

Kim?.

Thank you very much, guys, and thanks for taking my question. I guess my first question was related to your productivity, your business optimization. I think you talked about $33 million realized in savings in 2016.

I was curious as to how those savings broke down over the year, so like how much was in the fourth quarter, for example? And is there a way of telling us roughly what the benefit was in RFG versus NRT from those business optimization programs?.

Well, most of the entire savings is in NRT. That's sort of number one, number two is Cartus, number three is RFG, and number four is TRG. And in the fourth quarter, I don't know specifically what the number was. But again, we expect about half of the savings were embedded in the 2016 results and another half will be in the 2017 results..

Is it fair to say there was probably a fair amount or maybe half of it was in the fourth quarter, would that be a crazy guess?.

No. It was probably – it wasn't, it was probably more like 30% or something like that..

30%? Okay, that's fine. It's still a good number.

And the reason that I was particularly interested in that was because, we noticed obviously that your splits picked up in the fourth quarter and yet it looked like the impact to adjusted EBITDA was insulated by the productivity you generated in the quarter and in some of these savings, which obviously was great to see.

And so, I'm thinking about your split range of 69.5% to 70% as you go forward, I'm curious as to how you're thinking about whether you see more potential to drive margin improvement or just greater profitability through cost cutting or if the productivity opportunities you see are more skewed towards programs that are about leveraging volume? So, in other words, if it turns out they got (53:14) to pay splits to get the agents or to retain the agents or to achieve the volume growth you're targeting, is it going to looking like you're going to have to pay a higher split level than your really wanted to.

Are you more inclined to stay within your split range, maybe have some lower revenue growth, but implement a more aggressive cost program or alternatively, would you see it as an investment you just have to make, but it would quickly pay you back, because you have all these productivity initiatives that are dependent on volume? Is that clear?.

We take (53:40) managing costs carefully, so – and I think the optimization programs, there are still some things that we have on the docket for that. I think they'll be less significant than what we did in 2016 going forward.

And I think where we're positioning the company is much more of sales focused organization where we want to up the number of agents and up the productivity of our agents, and invest whatever it takes to do that. So that, overall, our profitability will improve because of revenue, not because of cost savings in the future..

Yeah. That's exactly what I was thinking, particularly, since you did such a great job cutting costs several years back. Okay. And then your royalty rate, you mentioned that you expected to be stable going forward.

You talked about the fact that it was driven this quarter by the fact you had a fair amount of large franchisees who obviously pay a lower rate, but we really didn't see that number move a lot in the last few quarters. This was kind of the first quarter that we kind of saw particularly noticeable drop in that royalty rate.

And I was curious, if you could just tell us, was there anything unusual that happened this quarter or any kind of deferred payments or anything like that's drove that? And when you mean stable going forward, did you mean kind of the rate for the whole year that you averaged or did you mean kind of what you're doing in the fourth quarter?.

It's really hard to look at it on a quarterly basis. In the fourth quarter, there were some outperformance by our larger franchisees, so we have some catch up to do on – because of the mix of business. And so, that was kind of a one-time event in the quarter.

You got to look at it – you don't have to, but we look at it on an annual basis and make sure we're staying within the metrics so comfortably, and that's how we manage the business. It's not – in the fourth quarter, you're going to get some true-ups and that sort of thing, and you can't really predict those.

But we look at it for the year, because that's kind of how we manage that number..

Yeah. I agree with Tony. That's not really a – the quarter is not a good predictive index for that net effective royalty rate. It's better to look at it on the year..

Yeah. That make sense. And last question for me is on the RFG Zap commentary. You said that the agents were closing more than the agents that was kind of non-Zap or not using Zap.

I was curious as to if you could give us a sense for – as you've been rolling this out, did you see that the productivity improved with time? So, the ones that kind of were early adaptors, they kind of showed greater improvements than ones that have been picking it up more recently? And is it more productive in certain geographies, are there certain types of brokerages where it kind of works better than others as far as you can tell right now?.

It improves with usage..

Yeah. It's all about usage and engagement..

So, it's almost (56:29) engagement and – it's engagement, engagement, engagement. So, it's like any new productivity tool, because that's what this is. With usage you get more proficient and more productive. So, that's why we need more time to mature this, to prove our thesis, but literally it's all about engagement..

Got it. That's very helpful. Thanks very much, guys..

You're welcome. Thank you..

Your final question comes from Mike Dahl from Barclays. Please go ahead..

Hi. This is Anthony Trainor filling in for Mike this morning. Thanks for taking my question. So, first, a couple of quick follow-up questions on the NRT agent commission splits.

First, how does the incremental competition compare regionally or by price point?.

Recruiting an agent is often very nuance, it's very peculiar to the circumstances, to the geography, to the market. In New York City, it could be the distance between one block and another. So, our goal is not to go head-to-head with the competition. We don't believe the competition offers the value proposition we do.

Our very strong compelling value proposition is complemented by what we believe is a market sensitive rate discussion. So, it's – we take it agent by agent. So, the competition may or may not be able to compete against us based on our value proposition. We think in overwhelming instances, they can't.

If you're just throwing dollar at the agent relationship, that's not sustainable. We elected to do both. So, we're going to offer compensation that we think is in keeping with our goals and we also believe that's in keeping with the agents goals, but our value proposition is what's also most important..

Yeah. Appreciate that. And then second on the commission splits. I was wondering if you could comment on if the incremental agent costs are also being felt by your franchisees as well.

And to the extent, if – the broader thing I'm trying to understand is, was NRT trying to catch up to the market or is this a broader market issue and if competitors have been responding to your actions on the NRT side in recent quarters?.

Well, NRT is reacting to the markets in which it operates. Our franchisees have a much broader perspective. They also have to deal with similar issues in the markets in which they operate. They have a great deal and more flexibility. They can be far more nimble and reactive.

And we believe, they follow a very similar format, the strong value proposition with a competitive split relationship with the agent..

Great. Thanks. And then one last quick one.

In the past, I think you bucked it out, what part of – how much of your operating costs are going to be impacted by inflation? Do you have that figure for 2016? And how should we be thinking about the inflation here in 2017?.

Well, a good chunk of the inflationary cost pressures were offset by our cost improvements in 2016 and we expect that to occur in 2017, maybe to a little lesser degree, because of more the tail end of some of these savings, but we're looking at others that we're going to initiate.

But, overall, we mitigated a lot of the inflation in 2016 and we're going to keep looking for mitigation in the future..

Great. Thanks..

You're welcome..

And there are no further questions in the queue..

Thank you for joining us on the call today, and we look forward to talking with you over the quarter..

Thank you, everybody. Bye-bye..

This concludes today's conference call. You may now disconnect..