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

John Campbell - Stephens, Inc. Brandon B. Dobell - William Blair & Co. LLC Anthony Paolone - JPMorgan Securities LLC Jason S. Deleeuw - Piper Jaffray & Co. Stephen Kim - Evercore ISI Michael Dahl - Barclays Capital, Inc. Kevin McVeigh - Deutsche Bank Securities, Inc. Ryan McKeveny - Zelman & Associates David E. Ridley-Lane - Bank of America Merrill Lynch.

Good morning, and welcome to the Realogy Holdings Corp. Second Quarter 2017 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, Jennifer. Good morning, and welcome to Realogy's second quarter 2017 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 the 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'll listen to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, August 3, 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 our annual and quarterly SEC filings. Also, certain non-GAAP financial measures will be discussed on this call per SEC rules.

Important information regarding these non-GAAP financial measures is included in our earnings press release. Now, I will turn the call over to our Chairman, CEO and President, Richard Smith..

Thank you, Alicia, and good morning, everyone, and thank you for joining us today.

Commencing over a year ago, the company embarked on a series of initiatives focused on sales agents including targeted recruiting strategies, best-in-class agent retention practices, and organizational changes with new centers of excellence to enhance support for services such as marketing and education for our agents.

These initiatives became the foundation for broader strategy work in the fall during which we initiated a comprehensive review of strategy for our entire enterprise.

That body of work has led us to refined strategic plan that we believe will manifest itself in a variety of ways from improved lead generation capabilities to strengthen technology and marketing tools for agents to enhance coaching and training for agents to drive improved results, all of which are designed to increase the productivity of our existing agents and attract new agents.

In addition, our newly created in-staff strategy office will manage our strategic initiatives and enable innovations in our businesses that will help to strengthen our value proposition.

We are excited by the plans already underway with more to come and look forward to discussing our growth strategy and related initiatives with you in more detail on Investor Day which, as you know, we will host at our headquarters next week on August 10.

While it is still very early in the process, we're starting to see results which Tony and I will describe as we walk you through the quarter. So, let's turn to slide 4. Our residential real estate business outperformed our expectations for the quarter, primarily due to early progress on several key strategic initiatives and increased homesale pricing.

Home prices continue to increase due to low inventory levels and stronger demand in high-end markets. Our franchise and company-owned brokerage segments experienced a combined 9% year-over-year increase in homesale transaction volume. NRT, our company-owned brokerage segment, led the way with a 12% year-over-year gain in homesale volume.

This strong performance was attributable to accelerating strength at the high end of the housing market coupled with the success of NRT's agent recruiting and other organic growth initiatives.

RFG homesale volume increased 7% as compared to the second quarter of last year, again, driven marginally by price gains, achieving the high end of the range we had anticipated for our franchised operations.

At NRT, we continue to make meaningful progress on our growth initiatives, specifically our recruiting programs and the focus on strengthening the sales agent value proposition.

In addition to our core recruiting, the new targeted recruiting initiatives that we have discussed in each of the past two quarters have so far enabled us to add a significant number of agents.

These agents in the aggregate generated approximately $250 million in revenue over the past 12 months for their previous brokerage firms and that's averaging about 13 sides per agent. Our retention rate of NRTs first and second quartile sales agents has returned to levels approaching 94%, our historical high watermark.

While these recruiting and retention initiatives have increased our commission expense as expected and will result in near-term moderate pressure on margins, we're starting to see the positive impact on overall revenue and increases in EBITDA at RFG from royalties it receives from NRT.

The key strategic initiative we outlined on our last earnings call is the development of a comprehensive education platform for sales agents and sales office managers for both our franchisees and our company-owned operations, the purpose of which is to increase sales agent productivity and strengthen our value proposition.

We have made solid progress in a relatively short period of time and expect to begin rolling out the improved training programs later this year. On the franchise side of our business, our Zap technology platform continues to enhance the value proposition of our brands for our affiliated brokers and sales agents.

As we have previously discussed, Zap and its CRM technology use predictive analytics to help Realogy brand affiliated sales agents increase their productivity.

The Zap platform represents a significant investment in the success of our affiliated sales agents, and is at the forefront of our efforts to help our franchisees improve the performance of their companies.

Approximately 75% of our eligible franchisees have installed the Zap platform and we expect to complete the rollout to the majority of our remaining eligible franchisees this year. It will take time and effective training to fully capitalize on the benefits of this program.

At our Investor Day, we will report on a number of key metrics related to Zap, including agent productivity, increases in online traffic, and active users. Our focus on providing unrivaled service and support to sales agents continues to pay dividends.

According to a REAL Trends /Wall Street Journal report issued in June, Realogy brand-affiliated agents and teams led the nation with 26% of the top agents and teams as ranked by sales volume and homesale transaction sides and 36% of the top agents and teams ranked by average sales price.

Most notably, NRT accounted for 24% of the nation's top individual agents based on sales volume, including 11 of the top 30. In a separate report issued by the National Association of Hispanic Real Estate Professionals, Century 21 had the number one Latino agent in terms of sales volume and three agents in the top 10.

When ranked by total number of transactions in 2016, Century 21 had 31 of the top 250 Latino agents and teams nationwide. In early July, Title Resource Group established a commercial title division.

This included the acquisition of EAM Land Services, a prominent Manhattan-based title company offering a full range of title services which expands the scope of TRG's title operations in Manhattan and Long Island, key markets for us.

Our domestic franchise sales team continues to build our base of brokers and agents with RFG adding approximately $100 million in new franchisee and sales agent production gross commission income in the second quarter and $173 million in GCI year-to-date. Cartus is global leader in employee relocation for corporate clients.

It is also very integral to Realogy's emphasis on improving our sales agent's productivity. Last year, it provided referrals that resulted in approximately 80,000 homesale closing transactions for agents affiliated with NRT and RFG.

And last but certainly not least, we want to acknowledge that during the second quarter, Realogy was named to the Fortune 500 for the fourth consecutive year. Once again, we were the only residential real estate franchisor or brokerage firm recognized in this prestigious ranking of America's leading corporations. Let's move to the macro trends.

For the second consecutive quarter and only the second time in a decade, more new U.S. households chose to buy homes than to rent. Census Bureau data reports that there was a gain of 1.2 million owner occupied homes which was offset by a decrease of 700,000 renter occupied households during the quarter.

This resulted in 560,000 net new households formed during the quarter and reflects a positive trend for growth in owner occupied households. As a result, there was an increase in the home ownership rate in the second quarter to 63.7% over the prior year rate of 62.9%.

We believe this is a very positive sign for the housing market as more millennials begin to move from renting into home ownership. The inventory of existing homes for sale in the U.S. was 2.0 million units at the end of June this year. That's down 5% from a year ago.

The current inventory of homes for sale represents a 4.3 month national average supply which is well below the 25-year average of 6.1 months. This low level of supply along with continued challenging mortgage underwriting criteria remain two of the most challenging headwinds to the industry.

Related to inventory, the Commerce Department reported that housing starts increased 8.3% from May to June to a seasonally adjusted annual rate of 1.2 million which is 2% above the prior year.

Two encouraging notes in this data were that housing starts for single family residences rose 10% year-over-year and single family housing completions increased 5% from June of last year to June of this year. That said, the industry continues to benefit from attractive mortgage rates of approximately 4% as of today.

The outlook for rising wages and strong consumer confidence is also contributing to favorable demand and higher existing homesale volume growth. On the litigation front, in the quarter, we reached an agreement in principle to settle the outstanding Strader matter for $8 million which remains subject to court approval.

We elected to settle the matter to avoid the cost of continued litigation. We're proud to report on our efforts to return capital to our shareholders.

Since the inception of our share repurchase program in February of 2016, we have repurchased a total of 11.7 million of our outstanding shares for $334 million in the aggregate, bringing our total share count to 136 million shares as of today.

But company-wide, we are highly energized by our progress as we execute on our long-term strategic growth initiatives. As you will hear throughout the year, we have invested a great deal of time and resources sharpening our strategic focus and improving the operating performance of our business units.

We look forward to a robust discussion of these activities during next week's Investor Day. So, with that, I'll turn the call over to Tony, our CFO.

Tony?.

$66 million was due to higher organic homesale transaction volume; $22 million was due to higher split rates relative to last year, partially due to higher transaction volume in California; and $18 million related to acquisitions completed since last March.

Year-to-date earnings from our current mortgage origination joint venture with PHH declined $7 million compared to last year. The results were mainly due to lower origination volume, compressed industry margins, and the inevitable impact of the wind down process.

The first phase of the transition to our new mortgage JV with our partner, Guaranteed Rate, will begin in August and the remaining phases are expected to be completed by year-end 2017.

As we get further into the transition, there will be more PHH JV wind down cost reflected in NRT's numbers, offset by gains on the sale of venture's assets to our new joint venture.

Assuming the phases are completed in 2017, full year earnings from the joint venture, including the impact of wind down costs, gains on sale, of the venture and startup costs of the new JV are expected to total approximately $20 million.

The company also expects to receive approximately $20 million in net cash proceeds in early 2018, once the wind down of the old joint venture is completed. The Guaranteed Rate JV will be reported in the financial results of our TRG business segment rather than NRT.

Cartus revenue decreased $7 million in the second quarter of 2017, primarily due to a $5 million decrease in international revenue. Operating EBITDA decreased $3 million as a result of the decrease in revenues, partially offset by a $2 million decrease in employee-related costs.

TRG's revenues increased $8 million and operating EBITDA was flat year-over-year as purchase volume increases were offset by lower refinance volume.

Corporate expense before restructuring, legacy, and early extinguishment of debt in the second quarter of 2017 was $11 million higher than in Q2 of 2016 due to the Strader settlement reserve of $8 million as well as higher expenses relating to investments in technology development, professional fees supporting strategic initiatives, and higher employee incentive compensation accruals relative to last year.

Turning to slide 9, looking at our expectations for the third quarter of 2017, we forecast that Realogy's combined homesale transaction volume will increase in the range of 4% to 7% year-over-year, with sides contributing between 0% and 2% and 4% to 5% coming from price growth.

Broken down by business unit, we expect 4% to 7% transaction volume growth at RFG and 5% to 7% growth at NRT. On slide 10, for the full year, we currently expect that revenue will be between $6.1 billion and $6.2 billion. Operating EBITDA between $760 million and $770 million, and that is net of the $8 million Strader settlement.

And it also reflects management's current view of commission splits and the modest investment of strategic initiatives, along with anticipated gain on sale on the PHH mortgage JV.

Realogy's combined homesale transaction volume is forecast to increase in the range of 5% to 7% year-over-year and by business unit, we expect RFG to have 5% to 7% transaction volume growth and NRT to grow transaction volume between 6% and 8% in 2017. Slide 11 provides guidance for specific cash flow items below operating EBITDA.

In particular, corporate cash interest expense for the year is expected to be approximately $165 million. Cash taxes of $20 million to $25 million are forecasted for the year. Capital expenditures in 2017 are forecasted to be between $95 million and $100 million.

Finally, working capital is expected to be a contributor of cash between $25 million and $45 million. Based on the expected operating EBITDA range noted above, this is expected to result in the company generating free cash flow of between $500 million and $530 million in 2017.

As mentioned above, we expect to allocate the bulk of our free cash to repurchasing shares, paying quarterly dividends, and repaying debt. Ordinary course M&A investment is forecasted total approximately $50 million, of which half is for earnouts related to prior year acquisitions.

Through June 30, we have expended $8 million between acquisitions and earnouts. As the premier company for real estate agents, we intend to drive sustainable organic growth in each of our business units by strengthening the services we provide to affiliated agents.

Solid execution of these initiatives, together with the anticipated improvement in the high-end market is translating into higher volume and revenue across Realogy.

These factors, along with the benefits from our business optimization initiatives are expected to position us to generate more than $500 million of free cash flow, and between $760 million and $770 million of operating EBITDA in 2017. With that, we will open up the lines for Q&A..

And our first question comes from the line of John Campbell with Stephens..

Hey, guys. Good morning. Congrats on the continued success..

Thank you..

On the splits, I think there's a good bit of seasonality in that line. But I think you guys have said in the past that 2Q is typically the highest.

But how does that trend in 3Q and 4Q just for modeling purposes? Are we basically holding that flat at 70%?.

Well, for the year, we expect it to be 70%. So, it depends on how your model works. But certainly the increases in Q3 are expected to be less than the increases we saw in Q2 year-over-year.

And then they really drop off – the increase really drops off in Q4 because we started to have – some of the higher split numbers start to show in our numbers in Q4 of last year from some of our targeted recruiting efforts and retention efforts. So, it sort of trails off pretty significantly in Q4..

Okay. That's helpful. And you guys are putting up I mean I think very much improved results. So, I hate to shift the focus away from you. But Richard, I'm just dying to get your thoughts on Redfin. I'm sure you guys love the multiple those guys are getting.

But just curious about your views about the sustainability of that model and then whether they're putting much pressure on you guys today?.

Well, certainly, there's no pressure. We, as you know, we've been in the business a long time. We've seen any number of models come to market. We bought one – ZipRealty. Came to market in a very similar fashion. We followed it for number of years and acquired it for a fraction of its original evaluation. So, there's a lot of business out there.

There's a wealth of opportunity for new and innovative ideas. We can all argue about whether they're sustainable or not. We believe that our focus is the right focus.

We believe that an absolute focus on the productivity of the agent and the productivity of our franchisees at the end of the day, coupled with our fairly substantial investment in technology best positions us to capitalize on the market in ways small startups just can't possibly capitalize.

So, it's generally, how we feel about competing interest in our business..

Okay. That's helpful and look forward to seeing you guys next week. Thanks..

You're welcome..

Your next question comes from the line of Brandon Dobell with William Blair..

Thanks. Good morning.

Given what feels like some decent success so far in the agent recruiting in retention program, maybe the thought process around why you wouldn't accelerate that or why wouldn't push it harder or push it for longer, given what seems like recovery and retention rates et cetera, what's the thinking behind I guess to go forward in that initiative from here?.

You're absolutely right, it will be pushed harder and it will be pushed longer. We are well ahead of plan. We're very pleased with the results thus far. It's been exceptional actually and we expect that to continue. We're not slowing down at all.

We're using our size and scale, which nobody else in our business has, to substantially capitalize on that opportunity. So news at 11, but it's going quite well..

Okay.

And then maybe as a tangential question, you look at the NRT footprint across the country, how should we think about some of the cities that maybe 5 or 10 years ago didn't seem attractive, but now given either companies relocating there, population dynamic, et cetera, may seem like a more attractive market, but maybe can't support a full office footprint.

So, maybe taken up a pseudo-virtual model where you've got agents, but not the typical NRT office footprint.

How do you think about that as an option for the strategy?.

Well, as you appropriately point out, we're students of the business. So, we're very careful to watch any number of metrics that encourage us to move into markets we've ignored over the past decades. We particularly like the strength of the Southeast and Southwest. We think there is a wealth of opportunity.

We've moved into those markets in ways that well-establish us to be a meaningful competitor on those markets, and we think that will continue to be the case. So, the Southeast and Southwest are very appealing to us..

Okay. And then final one from me, the CapEx guide for the year, Tony, how much of that should we expect is going to be, let's call it, pure technology or capitalized R&D expense versus kind of traditional furniture and fixture kind of stuff? Thanks..

It's about half and half. There'll be a little more towards technology..

Okay. Thanks a lot..

Your next question comes from the line of Tony Paolone with JPMorgan..

First, on the splits. You mentioned 70% for the full year. And so, if you think back at kind of how this played out in 2016 and 2017, you talked about seeing the full impact of the initiatives in 2017, and then kind of that would be the new level.

Given that that has bumped up a little bit, does it go up further in 2018, given that you are continuing with these initiatives? Or is 70% kind of the level and we'll just keep it there?.

Well, first of all, I think the fact that we went from a range of 69.50% to 70% to just 70% is driven by the great success of our agents in California because California is an 80-20 market and it's a bad split market, but it's a great ancillary business market, so, that's good for TRG and other pieces of our business.

But that's really the change as the California and specifically Southern California really strengthened in the second quarter, and we expect that to continue. So, that's why we sort of went from a range to 70%. We've always said that this is a business that there's going to be pressure. We never said this would be the end.

There's going to be pressure on splits. It's just the nature of the market. It so happens that the pressure we saw in 2015 and 2016 was extreme and we're not seeing that right now, as much. It's sort of a normal pressure that we see.

But it's not the extreme competitive pressures that we saw in 2015 and 2016 from a couple of people coming into the market on economic levels. So, we sort of – we expect that to continue now because we don't see – we're just not seeing signs of that kind of extreme pressure anymore.

So, I think that's going to – so, I think will splits be under pressure? Yes. But do we have ways to offset that through more companies in our business? Yes. But certainly the rate of increase is going to be nowhere near what we saw in 2015 and 2016 and so far this year..

Okay. Got it. And then whether it's Redfin or any other competitor for that matter.

In markets where folks like that tried to cut commission rates and have some meaningful presence, do you see that as noticeable in your system and having to compete against that?.

No..

Yes. We haven't seen – if you look at the statistics for not just us, we play in 99.5% of the market. So, I think it's a pretty significant – that's not just us obviously, but the majority of the market, 99.5% is the reality of the market.

And that's what we focus on and that's where we're focusing our agent productivity and strategy on because they are the bulk of the market and they are the bulk of the market, they are the vast, vast majority of the market for the foreseeable future.

Commission rates have not moved 1 basis point if you compare what they were last year and this is not our data, this is the data from REAL Trends. They are exactly the same in 2002 as they were last year, 5.12%.

So, we just don't see any movement and we, in fact, see that the usage of agents from the buyer's perspective and the seller's perspective has increased during that same period from sort of mid- to high-70s to 88%. So, we think the model, the world we play, the real world we play in is very stable and sustainable for the foreseeable future..

And you showed in your slide deck how stable the commission rates have been really for the last 15-plus years you just mentioned.

In the 1990s, it dropped over the course of 10 years from six to five, what drove – what prompted that move?.

Yeah. That's why we overlay on that chart the average sales price, so, you can see that average sales price really bumped up during that period. So, there's an inverse relationship between average sales price and commission rate. And that's really the major driver of changes.

Again, we've always said that we think because average sales price is increasing, that there will be a point or two of deterioration in average broker commission rate. But again, in the 99.5% world that we play in, that's not a huge change. And it's what we sort of expect to happen..

Okay. And then just last question from me on the technology side.

Is there a way you can characterize or quantify just kind of where your total tax spend is these days? And also maybe add a little bit of color on kind of how you think of the capabilities you get from that? So, do you have the ability to incubate new products or new concepts or brands and so forth into the market and just how you're funding that?.

Well, Tony, that's why we organized ZapLabs as sort of innovation hub, if you will. Not only they're responsible for launching the Zap platform to all of our franchisees, they're also responsible for innovative products that are fundamentally focused on agent productivity and broker productivity.

We are going to go into a great deal of detail on Investor Day as to where we're spending and investing and why. So, I think you'll be very pleased with the focus of our technology spend..

Okay. Thank you..

Yeah. You bet..

Your next question comes from the line of Jason Deleeuw with Piper Jaffray..

Thanks, and good morning. Question on the RFG, NRT EBITDA margins combined. We got light moving parts here with the higher commission splits but the volume is ramping up and that's benefiting both segments.

So, how should we think about the EBITDA margins that combine RFG, NRT EBITDA margins going forward? It would seem at some point, the volume gains should outstrip kind of the higher commission split cost and we should start to get margin expansion again on the combined segments.

Is that a fair way to think about it or not?.

No. It's totally fair. I think we are – our objective that we've been talking about for the last two quarters is to increase absolute levels of revenue and EBITDA, less focus on the margin but get those numbers up and we did that in the second quarter on a combined basis obviously and we expect to continue to do that.

And I think as some of these – we really haven't seen the benefit of a lot of the target recruiting agents that we did in the last nine months really kick in terms of sides. So, I think as we get more of that flow through, it should be beneficial to the margins of those two combined..

Got it. And then on the unit sides growth, it seemed a little soft with the guidance in RFG for the franchises, it seemed a little soft in the quarter and then seems like the guide is a little soft too.

What are the drivers, anything to call out there on the sides?.

You know I think its inventory. It's funny because we have that discussion. But if you looks at NAR sides growth, which is probably the best benchmark for RFG because they're both national footprints, they were up 1.6% in the second quarter and not to get too much in the weeds, but RFG was up 1.4%. So, those were some hard rounds.

So, we think we certainly kept up with the NAR numbers in terms of overall transaction volume market share in the second quarter. And we were a little better because of our focus on the high-end even with Sotheby's within the RFG mix on price and we were again 0.2 points weaker on sides. So, it's just that market.

And I think that the inventory issue was reflected in our full year guidance on sides. We're definitely making up in price and we've seen this play out now for the last 18 months or so in terms of low inventory. So, we get paid on sides and price, so we'd rather be sides and price.

But right now, there's – presumably the way economics works, is if price continues to go up at the rate it's going up, then it's going to release some inventory because we'll get the prices that are interesting to sellers and obviously, there are 20 other things that have to happen.

But we think this is sort of where we are right now and that's why we gave the guidance for the rest of the year that sides are going to be I think we said 0 to 2% for the full year and that's reflective of that low inventory situation..

Got it. Thanks and then just last one. Thoughts on M&A going forward. Is M&A as a strategy, is the thesis still as strong as it used to be? Or have things changed on how you're kind of viewing M&A going forward? Just like to get your thoughts there. Thank you..

Jason, we'll continue tuck-in acquisitions. You're correct in pointing out that it seems a bit slower. We're being far more selective than we have been over the past say five or more years. So, we don't think that's going to change. We think there is still opportunity. There is still very attractive tuck-in acquisitions.

They're going to be principally in markets where we have high synergies. So, you could expect as Tony gave guidance as to the amount of capital that will be deployed for M&A. That's probably going to be about the case through the balance of this year and it may very well move into next year.

We have found that our agent recruiting is extraordinarily attractive and a good use of capital. Our shift to that is showing up in our results. So, a little bit of both, less M&A, very strong agent recruiting..

Great. Thank you..

Your next question comes from the line of Stephen Kim with Evercore ISI..

Yeah. Thanks very much, guys. Congratulations on a good quarter..

Thank you..

I guess, Richard and Tony, I guess you both sort of addressed the high-end being a contributor to your stronger results, particularly on the price side.

And I guess you alluded to some of the strength that you're seeing in California, but I was curious if you could get some hard numbers maybe? And how much you think the geographic split or geographic distribution contributed to your price performance? And then how much do you think, of the remainder do you think was just sort of market improving versus your strategy and actually positioning yourself or doing things to sort of go after that market in a more pointed way?.

Well, it's all of the above. I mean, I think – just the high-end was not just limited. The high-end strength was not limited to California. I mean, the strength of California was among, the entire market was strong. But the high-end in New York was up very similar to that overall 29%, I mentioned at $2.5 million and above.

Florida, at the high-end was very strong. So, it's really pervasive around the markets that NRT serves. It didn't stand out in one market or the other, so we're very encouraged by that and, obviously, we were seeing the exact opposite a year ago. So, we're very happy to be in the place we're in now.

I think the initiatives – I think the average sales price on some of the targeted recruiting was probably not dissimilar from our overall. It doesn't really move it that much. It's just rising with the overall average sales price rising as you'd expect. That's really driving more units given the agents that we brought on.

And again, we haven't seen – we've just seen sort of beginning of that trend. And we'll see more of that benefit on the sides side of the equation, NRT in the back half of the year..

Great. So, that's great. It sounds like it's really a lot of the market that is improving at the high-end kind of you alluded to last quarter. It sounds like it's beginning to expand here in 2Q. So, that's great. Talking – staying on geography a little bit, you mentioned that obviously in California you get higher splits and so forth.

But again, I just want to be clear, how much do you think that impacted your splits this quarter? If you can give us some sense, maybe the basis point impact of that..

Sure. So, well, I'll give you number.

How about if I give you a number?.

That will work..

Okay. The rate increase was $22 million – the impact of the rate increase. So, we separate rate from volume. It was $22 million of a headwind during the quarter. And about a third of that was from the mix shift in geography into California and the rest was just the overall retention and recruiting efforts that we've had at NRT..

Awesome. That's very helpful. Next question I had is regarding your new construction share. I know it's not super big important part of your business.

But I was curious, have we seen that rise at all over the last year? Or can you just talk about anything with respect to the new construction or the builder side of your business?.

We don't think there's any share gain there on our part....

Except the New York City mix....

Except New York which is, as you know, Corcoran Sunshine Onsite. That's gone remarkably well. We're very, very encouraged by what we see there and what it says about the market. We mentioned new construction because it's a very important contributor, the inventory gains.

So, we, over time, listen, marginally will increase our share along with everybody else. But we're just very encouraged that builders are building more inventory because, as you know, that's going to be an important factor in increasing inventory levels..

Sure, absolutely. And then last for me, in New York City, I think recently there were some efforts to create some version, some sort of retaliation against Zillow and I think I read that The Corcorans didn't participate in it.

I was just wondering to the degree you can just sort of comment on sort of how you think about initiatives like that? And maybe just reiterate how you position yourself relative to Zillow, I think that would be helpful..

Yes. No. I don't think it's necessarily a dispute with Zillow. Zillow is an important media channel for us and I don't expect that to change. I think the issue that you point out pertains to how listings are displayed and where and who pays for it? So, at the end of the day, it's an agent expense, doesn't have to be a broker expense.

And our job is to make sure the agents get the tools they need to be productive.

And if there is a certain approach in the New York City market that's unique to the balance of the country, which it is, because there's no MLS, you often have to go about the display of rental listings or for sale listings a little differently than you would the balance of the country.

But we think we and others are well-positioned to capitalize on the opportunity that Zillow represents to us in New York, and I don't expect that to change. We can argue about who pays for it, that's a different discussion altogether. But we think we're well positioned to capitalize on their unique marketing approach to the New York market..

Great. Thank you very much, guys. Appreciate it..

You're welcome..

Your next question comes from the line of Mike Dahl with Barclays..

Hi. Thanks for taking my questions and all the detail so far. Couple of questions to start on some of the recruitment efforts. And Tony, I'm curious to hear, I think commented, it's not quite the extreme environment that we saw even though there is still some pressure.

And I guess I would like to hear a little bit more about why you think that is because there certainly seems to be kind of a few larger platforms that are still making fairly aggressive pushes in either New York or California, One of your big competitors – one of your New York competitors just made an acquisition in California.

So, just curious to hear kind of why you think the competitive environment has started to stabilize?.

With respect to agent recruiting, it is probably increasingly difficult for people to compete against us on the same basis. This is where we're using our size, scale, and leverage to substantially enhance our agent recruiting and also agent retention. So, it's showing up in the numbers. I don't think that's making it easier for the competition.

So, I think that's probably part of it. We're very formidable in that regard, we get increasingly so, and I think that's probably tough to compete against..

Got it. And then I guess if we look at the quarter, kind of going back to your answer or to Steve Kim's question on kind of market versus your own efforts. If I look at a selection of, kind of your local MLS data from those markets. It looks like sides were up about 3% in a lot of these markets.

Do you think that's fair that you kind of kept pace with your markets in NRT in the second quarter? Or do you think these recruitment efforts have actually led you to already gain share? You may just have a more complete data set than we often have..

Yes. I think the results of the target recruiting have not yet shown up maybe a little bit in market share data, but there's a lot more to come on that. And I think the bottom line is, a year ago, we were concerned about two things, not to bring up the painful past. But we were concerned about the high-end being extremely soft last year.

So, it seems to be recovering. So, check. That's great. And then retention of our top two quartile agents which, as you know, generate 90% of NRT's revenue, because of the severe recruiting, was down in the 92% range and we're back to our targeted 94% range. So, we've made progress on that.

So, I think two things we were very focused on, one was in our control and one was out of our control, both they're both definitely moving in the right direction..

Got it. And then last couple of quick ones on the guidance for me.

Just as it relates to the third quarter, could you break down the NRT expectations, what sides and price are within that? And then I know it's early and you probably don't have a ton of backlog for fourth quarter, but if I look at your comments for transaction volume for the full year and take the midpoint of 3Q, it seems to suggest a very flat environment for 4Q.

So, just curious to get your thoughts on how much of that is, at this point, you're just being conservative versus something that you're seeing out there already and some of the opens that don't close until 4Q?.

The only thing I would say is again that the – I think we don't breakdown the business units by sides and price. But I think from the overall, you can see, since RFG is sort of the driver of that statistic because it has so much more volume related to it.

As I said earlier, the sides because of inventory, and that sort of thing, we think sides are going to be softer in the 0 to 2% as we said. You know I think at NRT again, it's going to be more balanced because we'll see the full inclusion of all the targeted recruiting efforts really kick in in the third and fourth quarter.

So, it's going to be little more balanced through them..

Okay. Thank you..

Your next question comes from the line of Kevin McVeigh with Deutsche Bank..

Great. Thank you very much. Hey, if I have it right, it looks like the agent production came in at about $250 million in Q2 versus $180 million in Q1.

Is there any way to think about how that should come in over the balance of 2017 into 2018?.

What do you mean by agent production?.

I think it's recruiting..

Oh, recruiting?.

The recruiting, yeah..

So, those are kind of apples and oranges numbers. The $180 million is a combination I think last year, especially normal recruiting. And the $250 million we mentioned was the revenue that the agents that we recruited on our targeted recruiting effort made in 12 months prior to joining us. So, it's a little bit of apples and oranges there.

But anyway – so that's one way to look at it. The other thing is maybe comparing where we were.

In the last quarter, we were at $180 million from those agents that we had targeted recruiting and now we're at $250 million, and that's really the result of – to someone's earlier question, we were so successful in the first effort that we did it again in the second quarter and it was very successful. So, that's going to continue.

If someone asked, obviously, this is working. So, we're going to continue to do it..

Kevin, the way to think about that, the $250 million is what they produced at their previous place of employment. We expect that they'll do that or better with us. It just takes time to mature it. So, that will be layered in over the next 12 months or so..

That's super helpful. And then just on the NRT, the 12% transactions, seems like price and sides both came in better than expected. On the pricing, is that – because I thought some of the higher income is down, you'd see more transactions.

Is it just that $2.5 million has been so strong that's helping offset maybe some of the lower price points at the super high-end? Or is there is any way to just put some context around that 9%?.

Well, I think the pricing increase was driven by obviously the $2.5 million and above being much stronger (53:56) but it is also, in the mainstream market, its lack of inventory. So, it's really – it's a combination of those two things. So, it's strong across the board. There is no real distinction between the two.

It's just very strong this year because again, at the low – at the mainstream market, it's because of low inventory and rest of the market because a pickup in the high-end..

Got it. Thank you..

Your next question comes from the line of Ryan McKeveny with Zelman..

Hi. Thank you, and good morning. Wanted to dig in a bit more on the high-end trends in NRT and certainly a lot of discussion on the call about the acceleration in the high-end demand which we agree with and the benefit that you're seeing from the recruiting efforts.

But when I look at the sides growth of 3% still relatively modest and fairly benefiting more so on the price side of things.

So, really trying to understand, when you think about NRTs market share today in terms of unit activity, is that 3% growth in sides that they're seeing, do you think that's what the market at high end it's up at this point in the year? Just really trying to think how you think about the market share where we are today? Thank you..

Well, again, in the mainstream market, there's an inventory constraint. So, that's hurting growth – it's actually probably negative at NRT. And then the high-end is very strong. So, the balance of those is 3%. So, we're very happy with that result..

And I guess just following up on market share dynamic.

Does that play into the commission split in the sense that when you look at things like how your market share is stacking up ultimately? How aggressive you want to be on splits? And if market share was to be maybe worse than you expected, then maybe splits would end up being higher? Or vice versa, if market share gains improve, then maybe the split pressure eases? Just wondering how you think about that dynamic.

Thank you..

Again, we look at the – what is the revenue and EBITDA impact to the company. So, whatever we can do to accelerate our revenue and that also accelerates – it increases our EBITDA is what we're going to do. It's obviously – it's a balance. If we think that the revenue is going to come to a higher cost, we're not going to go there.

So, it's really just a balance..

All right. Thank you..

You're welcome..

Our next question comes from the line of David Ridley-Lane with Bank of America..

Sure. I wanted to ask how you think the inventory situation will improve. NAR's traffic index suggest that while buyer traffic is up, the potential seller traffic is still taking down.

Do you have a sense on what level of price increase would be needed to get more listings?.

David, no, we do not. I mean, this is just an adjustment that's going to correct itself over time. It's going to be any number of variables you probably know them as well as I do.

Builders sort of contribute in a meaningful way, underwater equity has got to improve, and it is improving dramatically because the average sales price is increasing so dramatically. Listen, people will eventually discover that they're home is worth more than they thought previously.

And it will get to a point where it's attractive, the market has new inventory. There are early encouraging sign as the high-end market, which has robust inventory levels is finally starting to correct. So, we see that very positively. We think over time, the mainstream inventory levels will increase given any number of dynamics.

So, we don't see – this is not a permanent issue, this is a timing issue. And we're encouraged by the early indications that it is, in fact, starting to correct..

Understood. And then, wanted to ask on two potential risk here. One is that we've heard anecdotally that appraisal delays are coming a problem.

Are you seeing any delays within your open order book? And then secondly, given the hike in interest rates by the Fed, did you see any pull forward from people trying to close deals ahead of that?.

No. There's no indication of that as of yet. And as to the contract delays or cancellation rates, our cancellation rate is at an extremely low level, maybe even at historic levels. So, we're seeing no indication of that at all..

Thank you very much..

You're welcome..

And we have no further questions in the queue at this time. And I would like to turn the call back over to Alicia..

Great. Thank you for joining our call today, and we look forward to talking with you over the coming quarter..

Thank you for your participation. This does conclude today's conference call, and you may now disconnect..